Willis Towers Watson Swiss Pension Finance Watch – Q2/2021
ZURICH / LAUSANNE / GENEVA, July 14, 2021 – The healthy position of company balance sheets in respect of Swiss pensions continued to improve steadily through Q2. Pension fund assets continued to grow with a positive return of almost 4%, similar to Q1, whilst corporate bond yields remained fairly stable. Company balance sheets at the end of Q2 2021 are once again the strongest they have been since the Willis Towers Watson Pension Fund Index began. The illustrative funded ratio index (i.e. ratio of pension assets to pension liabilities) increased by 4.4%, as shown by Willis Towers Watson’s Pension Index, which increased from 112.6% as at 31 March 2021 to 117.0% as at 30 June 2021.
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 had their most stable quarter in the last four years, meaning that liabilities remained fairly stable during Q2. Whilst companies will welcome some respite from the volatile discount rate environment of recent times, many are likely to already be considering potential complexities of international accounting at year-end.
The COVID-19 pandemic has led to many companies being forced to consider undertaking restructurings, with some having restructurings already underway. This has primarily been driven by Government restrictions changing companies’ ability to operate as they previously did and changes in consumer habits altering the demand for their products and services.
“We strongly recommend any companies that have restructured more than around 5% of their work-force discuss the pension accounting impact with their corporate pensions actuary.”
Adam Casey | Head of Corporate Retirement, Switzerland
“Under international pension accounting, the effect of a restructuring and workforce reduction can lead to significant one-off P&L impacts which, for many companies, can impact country and business profitability as well as bonus allocations. Such pension impacts can come as an additional shock to companies in an already fragile business environment, especially if they have not budgeted for the impact,” explains Adam Casey, Head of Corporate Retirement Consulting at Willis Towers Watson in Zurich. “We strongly recommend any companies that have restructured more than around 5% of their work-force discuss the pension accounting impact with their corporate pensions actuary,” he advises.
As in the previous quarter, global financial markets, on the whole, have continued to experience very positive growth with only slight changes in underlying interest rates. The global (and now Swiss) emergence of the delta variant of the COVID virus has led to a rapid resurgence of infections. Despite this negative news, markets have not reacted negatively so far, perhaps based on the assumption that only limited government restrictions will apply thanks to higher vaccination penetration which is leading to a less serious impact on society than the pre-vaccination infection waves. As a result, and alongside correspondingly good economic fundamentals, a typical Swiss pension fund could realize a 3-4% increase in its assets even in the second quarter of 2021.
Of course, this positive outcome hides a wealth of complexity and variation in underlying regions, industries, and economic factors. Michael Valentine, Investment Consultant at Willis Towers Watson in Zurich expands: “Policy makers, including both central banks and health authorities, face difficult choices, but so far seem to be finding the right balance between easing and restricting. In the major western economies, a steady loosening of virus-related constraints, combined with the prospect of very gradual increases in base interest rates, is aimed at allowing the underlying economic recovery to continue, without triggering dangerous inflationary pressures over the medium to longer term.”
“The nature of investing in a complex world is that change often happens slowly and then all at once.”
Michael Valentine,
Investment Consultant, Switzerland
Furthermore, with sustainability (ESG) arguments now effectively classed as mainstream, decision-making for institutional investors has become more challenging than ever. “The nature of investing in a complex world is that change often happens slowly and then all at once. Strong governance, based on a coherent set of investment beliefs - and these must also capture ESG aspects - is therefore a vital ingredient in the construction of robust investment portfolios. The relevant governance structures and practices need to be adopted by the entire organisation and apply throughout the decision-making process”, Valentine adds. Strong investment discipline, combined with a long-term mind-set is a valuable characteristic of effective institutional investors.
The 3.7% market return in Q2, as represented by Pictet’s 2005 BVG-40 plus Index, has been welcomed by companies with significant balance sheet positions. Corporate bond yields remained fairly stable, meaning that the increase in the index to a new high was driven primarily by the asset return.
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.
The development of the investment markets in the first half of the year is positive for 2021.
Company balance sheets in respect of Swiss pensions started 2021 strongly.
Swiss companies’ pension balance sheets received an unexpected uplift in Q4.
