Alternative Investments in the 2nd Pillar: Opportunities and Limits

Occupational pensions are under pressure. Rising life expectancy, falling conversion rates and years of low interest rates have increased the returns required by pension funds. At the same time, regulation allows far more diversification than most pension funds make use of. This article shows what alternative investments can achieve in the 2nd pillar and where the limits lie.

The most important facts at a glance

• BVV2 allows up to 30% in alternative categories: 15% alternative investments, 10% infrastructure, 5% Swiss private equity; in practice, the total is usually less than 10%.
• Private equity ratio is growing: Swiss pension funds invest an average of 1.7% in private equity (2013: 0.7%), an international comparison shows great potential to catch up.
• Illiquidity premium as real added value: funds with a high proportion of illiquid investments have survived the difficult investment year 2022 with above-average performance.
• New asset class since 2022 : Private equity in Swiss SMEs is independent from a regulatory perspective, a political signal towards opening up.
• Risks are real: illiquidity, valuation complexity and fee structures require clear governance and expertise.

What is an “alternative investment” anyway?

In common parlance, “alternative investment” refers to anything that is not a share or bond. In the BVG context, the definition is more precise and sometimes surprising.

The Ordinance on Occupational Retirement, Survivors’ and Disability Pension Plans (BVV2) distinguishes between traditional and alternative investments primarily according to the way an investment is structured, not according to its actual risk. In practice, this leads to a paradoxical situation: a collateralized bond with the highest credit rating from a special purpose entity is considered an alternative investment, while a high-yield bond from a debtor with a dubious credit rating passes as a traditional investment. Classification is based on form, not substance.

The recognized alternative asset classes according to BVV2 include

Asset class	BVV2 category	Max. Share
Hedge funds	Alternative investments	Part of the 15% limit
Private equity	Alternative investments / separate CH class since 2022	15% or 5% CH
Private debt	Alternative investments	Part of the 15% limit
Commodities	Alternative investments	Part of the 15% limit
Infrastructure	Own category (since 2020)	10%

A special rule applies to index-oriented mandates: if an asset management mandate contains only bonds from a broadly diversified, commonly used index, it is always considered a traditional investment, regardless of the structure of the securities it contains.

The legal limits at a glance

The legislator has deliberately defined the investment limits as a framework, not as targets. Anyone who knows the limits quickly realizes that there is more leeway than is generally assumed.

Investment category	Maximum share	Special feature
Equities	50%	Global diversification
Alternative investments	15%	Hedge funds, PE, private debt, commodities
Infrastructure	10%	Separate class since 2020; direct investments possible
Swiss private equity	5%	Separate category since 2022
Foreign real estate	10%	-

Funds that have to exceed these limits for justifiable reasons can make use of an exemption clause , provided that the investment diligence is documented and the governance is set up accordingly.

Important: Since the 2020 BVV2 revision, direct investments are also permitted for infrastructure investments, provided that no single counterparty accounts for more than 1% of the pension assets. However, the use of debt capital at fund level remains severely restricted, which limits the practical feasibility of some infrastructure strategies.

The reality: Why does so much potential remain untapped?

Permitted is one thing. Implementation is another. Although BVV2 allows up to 30% for alternative categories, the long-term average for Swiss pension funds has been below 10% across all fund sizes.

Why is that? Several factors work together:

• Illiquidity: Small funds with short-term liabilities shy away from tied-up capital
• Expertise: Manager selection for private equity or private debt requires specialist expertise that not every fund has in-house
• Liability : In case of doubt, boards of trustees prefer to act conservatively, as the need to explain losses in alternative investments is higher
• Fees: Double fees for fund-in-fund structures eat up part of the additional return
• Classification uncertainty: The complex BVV2 regulations are unsettling, especially for bond portfolios

The restraint is striking in an international comparison. In the USA and Canada, large pension funds regularly achieve double-digit private equity ratios and thus achieve measurably better returns in the long term. Swiss pension funds invested an average of just 1.7% in private equity in 2023. in 2013 it was still 0.7%.

Opportunities: what alternative investments really achieve

Those who think long-term are rewarded. This is not a truism, but the basic principle behind the illiquidity premium : investors who tie up capital for several years receive a return compensation. In the case of private equity and private debt, this premium over listed investments is historically well documented.

What the individual classes actually offer:

• Private equity: access to corporate growth outside the stock market; historically higher returns than listed shares with a correspondingly longer commitment period
• Private debt: Direct loans to companies; attractive interest premium compared to traditional bonds, often backed by collateral
• Infrastructure: Stable, predictable cash flows; natural inflation protection through indexed revenue structures (tolls, energy prices, etc.)

The 2022 investment year provided impressive practical evidence. While listed equities and bonds came under pressure at the same time - a classic diversification failure of mixed portfolios - funds with a high proportion of illiquid investments survived the year above average. The lack of daily market valuation became a strength.

Added to this is the diversification effect: alternative investments often have a low correlation with traditional asset classes, a valuable buffer especially in times of stress.

Risks: What advisors and boards of trustees need to know

Anyone incorporating alternative investments into their investment strategy must understand and manage four core risks:

Illiquidity risk: capital is tied up for years. For funds with a high pensioner ratio or unforeseen liquidity requirements, this can become a serious burden. Careful liquidity planning is a must.

Valuation complexity: Private markets are not valued on a daily basis. Accounting stability is no proof of real value stability; valuation models require specialist knowledge and critical scrutiny.

Manager selection: In the case of private equity and private debt, the choice of fund manager is decisive for the result. The spread between top and bottom quartile managers is much greater in these classes than in listed investments. This is not an area in which you should go for the first offer that comes along.

Fee structure: Management fees, carried interest and fund-in-fund costs can add up. A transparent fee analysis is part of due diligence and an important component.

Outlook: Where is regulation heading?

The question of whether the Swiss pension system is on the verge of fundamental investment reform is being openly discussed in parliament. Several proposals aim in the same direction: more personal responsibility, less rigid category boundaries.

The so-called “prudent investor rule” has been established in Anglo-Saxon countries for decades and would replace category limits with a principle-based due diligence principle. The decisive factor would then no longer be whether an investment fits into a particular category, but whether it is responsible in the overall context of the portfolio.

At the same time, ESG is gaining in importance as an investment criterion. The Swiss Pension Fund Association ASIP published guidelines on ESG integration in 2022, including reporting standards that have been in force since the start of 2023. Sustainable infrastructure investments could thus become the intersection of return requirements and regulatory expectations.

The trend is clear: the legislator is gradually opening doors: from the infrastructure proprietary class in 2020 to the Swiss PE class in 2022. Those who understand these signals are positioning themselves early.

What this means for financial advisors and their clients

Not every pension fund can or wants to enter private markets. For insured persons with vested benefits or extra-mandatory capital, however, the question arises very directly: How can I benefit from these asset classes without having to go through the time-consuming selection process myself?

This is precisely where Everon comes in. Everon’s private markets strategy works exclusively with so-called semi-liquid evergreen products (funds without a fixed term and with regular redemption options). This addresses the central obstacle for many investors: the fear of fully committed capital.

Everon actively reviews each provider according to investment approach, historical performance and fee transparency. For financial advisors, this means that they can offer their clients access to private equity, private debt and private real estate - secured from a regulatory perspective by Everon’s FINMA approval and easily handled technically via the advisor platform. Anyone who would like to integrate this option into their advisory services can find all the information they need on collaboration, including technical infrastructure, legal protection and training opportunities, at everon.swiss/partnership.