ZURICH, 12 May 2020 In the recent months, the world economy as well as the Swiss economy have been turned upside down. The support by central banks and government measures was unprecedented to support economies. In Switzerland, many regular activities have resumed since yesterday, but the long-term effects of the pandemic are unknown. Swiss pension funds are at the heart of our Swiss social system and those responsible for their management must continue to think long term while ensuring short term decisions are taken. Willis Towers Watson has analysed the situation of pension funds from various perspectives.
The analysis at a glance:
Swiss pension law provides many guarantees and protections for Swiss employees and their families - and this remains unchanged today. Each employee’s accumulated retirement capital is guaranteed and for most should not decrease even if the pension fund has negative returns in 2020. For those already in retirement, they also have protection for their pension in payment. For death or disability benefits – protecting the active population and their families - these continue at 100%.
Employees forced to work at reduced hours kept their protection at 100% within the Swiss pension fund, even if their salary is reduced. But in case of unemployment (i.e. loss of job), the loss or reduction in the employee’s benefits should be higher. Employees closer to retirement or buying a house should review their personal situation and all should ensure to use all flexibility and options from the plan rules.
“Looking medium term, this crisis will continue to apply pressure on Swiss pension funds and their cost structure.”
Urs Bannwart,
Director Pension Brokerage, Switzerland.
In regard to employee communication, there is no immediate mandatory communication about the Swiss pension fund, but we recommend all parties engage together as employees are feeling anxious about their retirement savings (including those in 1e plans). «Looking medium term, this crisis will continue to apply pressure on Swiss pension funds and their cost structure. On the future retirement pensions the key parameter is the pension conversion rate and it is expected to continue to decrease impacting future pensioners. Employees in 1e plans may also review their allocation strategy and their buy-back approach. Finally pension funds with shortfalls (i.e. below 100%) may start to request additional contributions from employers and employees and this trend may be more important this time around versus the last financial crisis», summarizes Urs Bannwart, Director Pension Brokerage at Willis Towers Watson Switzerland.
The recent crisis consists of a re-evaluation of assets starting from 2019 market highs which has helped Swiss pension fund close the year in favourable position and provide good level of interest credited to members in 2019. The crisis also showed that, after initially holding up well, government bonds have not fulfilled completely their intended role as safe havens in this crisis. «This may be a challenge in the future as credit risks may continue to increase modifying the traditional equity-bonds relationship», states Urs Bannwart. Although, the most recent impact on Swiss pension funds is negative for 2020 (depending on the portfolio in place), the high level of funding at the beginning of the year (115% on average) has really helped to mitigate the damage and most Swiss pension funds should still be over 100% funding level as of today.
Although the world will likely be different post pandemic with a higher return/higher risk regime and a slower global economy, the recent weeks have been positive and possibly the worst is behind us although many challenges remain ahead. For Swiss pension funds, the following should be readily assessed. Liquidity needs should be reviewed and investors should plan ahead to avoid being forced to sell undervalued assets at inopportune times. The different sources of cash and rebalancing needs need to be prioritized based on the funding ratio. In all cases, formal mechanistic processes are best left untouched to provide the best possible outcome on average. Finally, it should be ensured that any short-term investment opportunities (e.g. cash positions) are reviewed and addressed. Finally, those responsible for investment should ensure to review their readiness to similar future crisis and perhaps move away from reliance on lone individual decision making in favor of group-driven processes to improve decision making and results based on risk mitigation strategies.
For the employer, the short-term priority is to have a good understanding of the health of the pension solution by tracking the funding level and any likelihood of underfunding contributions. Employers must continue to pay all required contributions to the pension fund (no delay). In addition, employers should consider using any existing employer contribution reserve to pay either employer or employee related contributions or both. Finally, employers could review their pension solution and benchmark against their or peer group. Proper governance in the pension board helps the employer to have better view on future events and decisions. «For those impacted by international accounting we do expect discount rates to fluctuate rapidly up and down and tracking is mandated for most employers as per their disclosure date», says Urs Bannwart.
The first priority is to ensure continued operation at the Swiss pension fund as the pension law continues to apply as is. It is the responsibility of the pension fund board to ensure its ability to perform and to oversee the management of the pension fund - virtual meetings must be used to ensure safety and operations.
In the short term, basic functions such as pension payments, communication with members (especially those buying a home, retiring or being sick) and with the employer need to be maintained and reinforced. It is important to look at the financial stability and to understand the development of the FRP/DTA 4 which is a central parameter to the liabilities of the plan and its funding level.
Finally, pension funds should be using all tools available to them to manage this situation and to protect the pension fund if needed. In order to conduct such data driven decisions, some scenarios testing could be performed by changing key parameters (technical rate, asset level, conversion rate, demographic changes).
