Willis Towers Watson Swiss Pension Finance Watch – Q4/2019
Zurich, 15 January 2020 – Swiss companies’ pension balance sheets had a strong finish to the decade thanks to a small rebound in discount rates and a year of extremely good asset returns. This leads to the Willis Towers Watson Pension index showing the third highest quarter end balance sheet surplus of the last ten years. Although the return on assets in Q4 was the lowest of the year, the combined effect with the modest increase in discount rates led to further strengthening of the balance sheet position. Overall the illustrative funded ratio index (i.e. ratio of pension assets to pension liabilities) increased by around 6%, as shown by Willis Towers Watson’s Pension Index, which increased from 99.6% as at 30 September 2019 to 105.2% as at 31 December 2019.
The pension fund index of Willis Towers Watson’s Swiss Pension Finance Watch is published quarterly by the consultancy and is based on the International Accounting Standard 19 (IAS19). The index gives an indication of how the general funding position under IAS19 has changed from quarter to quarter, as opposed to giving the typical funding ratio of Swiss pension plans.
Whilst companies will be thankful that their pension funds have achieved extremely good asset returns over 2019 (typically in the range 13-14%) they should also be mindful that IA19 liability increases were not far behind (10-11%) due to an overall decrease in corporate bond yields over the same period. “Overall, it was a net positive year for company pension balance sheets. However, if the awaited correction in equity markets occurs without a corresponding increase in corporate bond yields, a large hit to company books could be just around the corner.” comments Adam Casey, Head of Corporate Retirement Consulting at Willis Towers Watson in Zurich. With the persisting low interest rate and bond yield environment, companies need to be aware that there is still the risk that discount rates could move into negative territory again over the next year. “With many Swiss pension funds focused more on nominal returns to finance interest credits for their active members and meet their pensioner obligations, the lack of asset-liability matching strategies could impact company balances severely. We continue to work with companies to find ways to minimise the impact of such an unfavourable turn”, he adds.
It is important that companies are aware of the current market conditions and how they impact the pension plans in their own corporate accounts. This can help companies prepare for any significant changes in international accounting results ahead of time.
During 2019 central banks’ looser monetary policy proved successful in stimulating confidence in the markets and in prolonging the equity bull run. The asset returns over the year, the strongest seen this decade according to some indices, are evidence that the tactic worked, despite continued uncertainties. The broad investor consensus is that the strong asset returns cannot continue indefinitely, but there is little agreement as to when and how the correction will happen.
Pension fund Trustee Boards have a fiduciary responsibility for the long-term financial health of the pension fund. With a recession of some kind a distinct possibility in the near future, Boards should focus on their longer-term, strategic positioning across different return drivers. As Michael Valentine, Investment Consultant at Willis Towers Watson in Zurich advises: “Most pension funds were able to enjoy double-digit returns over 2019. By far the biggest contributing factor was the renewed surge in global and Swiss equity markets. The result may be stronger funding levels, but also an ever-greater dependence on equity risk. This concentration of risk extends well beyond the equity markets themselves, and into much of the rest of the portfolio e.g. in the form of companies’ credit risk. Ensuring that portfolios are diversified across different risk drivers such as illiquidity, manager skill and insurance, is therefore critically important given where we are in this protracted economic cycle.”
It was a strong year for the asset market which finished 2019 with many indices close to their all-time high. The return of 13.8% in 2019, as represented by Pictet’s 2005 BVG-40 plus Index, has been welcomed by companies with significant balance sheet positions. Corporate bond yields bounced back by 25 basis points, decreasing pension liabilities by 4.0%. The combined effect of the decrease in pension liabilities and the positive asset returns over the quarter lead to the index climbing to its second highest value over the last decade.
The Pension Index measures the movement in the ratio of the assets to the defined benefit obligation of a sample pension plan (index level 100% on 31.12.2006).
Swiss Pension Finance Watch reviews quarterly how capital market performance affects pension plan financing in Switzerland. The study is part of the Global Pension Finance Watch from Willis Towers Watson which includes results back to 2000 for major retirement markets worldwide. The results are published quarterly with a focus on linked asset/liability results. It covers pension plans in Brazil, Canada, the Euro-zone, Japan, Switzerland, the U.K. and the U.S.
The impact of capital markets on these pension plans is two-fold:
Willis Towers Watson's model defines a benchmark pension plan that is intended to be representative of the pension liabilities and plan assets (including asset mix) that are typically found in each global market. The impact of movements in capital markets on assets and liabilities is combined to produce a Pension Index which reflects the movement in the funding level of the benchmark pension plan.
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