Willis Towers Watson Swiss Pension Finance Watch – Q4/2020
ZURICH / LAUSANNE / GENEVA, January 14, 2021 – Swiss companies’ pension balance sheets received an unexpected uplift in Q4. Despite the turbulent year, pension fund assets’ actually ended the year with a modest but healthy positive annual return of over 3% although bond yields continued their gradual downward path. Overall, this allowed company balance sheets to end the year close to where they were a year ago. The illustrative funded ratio index (i.e. ratio of pension assets to pension liabilities) increased by 4.6%, as shown by Willis Towers Watson’s Pension Index, which increased from 100.1% as at 30 September 2020 to 104.7% as at 31 December 2020.
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.
Discount rates continued their downward trend but the possible scenario of having negative discount rates for calendar year 2020 IAS 19 valuations did not eventuate. Despite discount rates being negative for durations of 10 years or less and c.0.05% for remaining durations, the fall in Q4 was minimal and therefore did not trigger a significant increase in companies’ pension liabilities.
“There are longer term economic repercussions from the COVID-19 pandemic that await us and then in addition there are likely unknown further impacts from the pandemic on actuarial assumptions (e.g. death rates) that will affect liability calculations”
Adam Casey
Head of Corporate Retirement Consulting, Willis Towers Watson, Switzerland
Both elements of companies’ balance sheets have experienced a turbulent year, but the relative stability of the liability value in Q4 allowed the solid positive asset returns to be the dominating effect. “The persistently decreasing discount rate environment continues to push us into uncharted territory and despite the 2020 year being neutral to positive for pension funds overall it is hard to ignore the prospect that troubled waters could be just around the corner,” says Adam Casey, Head of Corporate Retirement Consulting at Willis Towers Watson in Zurich. “There are longer term economic repercussions from the COVID-19 pandemic that await us and then in addition there are likely unknown further impacts from the pandemic on actuarial assumptions (e.g. death rates) that will affect liability calculations”, he continues.
Q4 saw a number of events that reinstalled optimism in the markets, notably the election of Joe Biden as president in America, continued quantitative easing, the roll out of COVID-19 vaccination programmes and a last-minute Brexit trade deal. This optimism lead to an increase of 3-4% for the year for a typical pension fund and market levels reached an all-time high. Michael Valentine, Investment Consultant at Willis Towers Watson in Zurich, warns that the markets may not be as resilient as they currently appear.
“The shock of the pandemic that caused a sharp fall in equity market valuations in Q1 seems to be long-forgotten.”
Michael Valentine,
Investment Consultant, Willis Towers Watson, Switzerland
“The shock of the pandemic that caused a sharp fall in equity market valuations in Q1 seems to be long-forgotten. With the first vaccinations being administered in December making a return to a level of normality in the near future more realistic, investors found it easy to overlook the significant challenges that the pandemic still poses and the considerable damage that it has caused, indirectly or directly, to global economic growth prospects” he says. The mounting burden of national debt worldwide, resulting from the extensive quantitative easing measures taken by central banks alone poses massive challenges to global economic health.
The events of 2020 have highlighted the need for pension fund trustees to be focussed on the long-term time horizon on both sides of the balance sheet. The importance of a diversified asset allocation that can meet its obligations and weather shock scenarios is crucial for the financial health of pension funds. Furthermore, the current pandemic is forcing extra-financial issues to the forefront as people reassess their values and priorities. In particular the Social component of ESG investing has experienced a revival, as awareness of issues such as gender, racial and social inequality increases.
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).
The 5.3% market return in Q4, as represented by Pictet’s 2005 BVG-40 plus Index, has been welcomed by companies with significant balance sheet positions. Corporate bond yields fell slightly, increasing pension liabilities by roughly 0.6%. The effect of the increase in liabilities had only a small impact in contrast to the positive asset return and the index realised a healthy increase, almost back to its level at the end of 2019.
