Willis Towers Watson Swiss Pension Finance Watch – Q3/2021
ZURICH / LAUSANNE / GENEVA, October 12, 2021 – Company balance sheet positions for reporting their Swiss pensions maintained their relatively strong position during Q3. Pension fund assets and liabilities both marginally decreased during the quarter meaning the pension fund index remained stable. Assets were down 0.1% for the quarter but corporate bond yields increased marginally so liabilities broadly matched the fall in assets. The illustrative funded ratio index (i.e. ratio of pension assets to pension liabilities) remained unchanged, as shown by Willis Towers Watson’s Pension Index, which was at 117.0% at both 30 June 2021 and 30 September 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 increased by around 4 bp during Q3 which caused a small fall in the liabilities which was matched by a similar reduction in assets.
“Afterall, pension liabilities are not the core business of most companies.”
Adam Casey,
Head of Corporate Retirement Consulting, Willis Towers Watson, Schweiz
“The continued improvement in company pension balance sheets since September last year has been clearly welcome news for Swiss companies but I expect a consolidating 3rd quarter would not have been disappointing either,” explains Adam Casey, Head of Corporate Retirement Consulting at Willis Towers Watson in Zurich. “Afterall, pension liabilities are not the core business of most companies so they would prefer not to have pensions creating unnecessary volatility on their balance sheet. A timely reminder that it is important to manage the pension liabilities and attempt to match assets with the pension liabilities wherever possible,” he advises.
For the first quarter since the COVID virus hit the markets in March 2020, the return achieved by a typical Swiss pension fund was not strongly positive, but rather much closer to 0.0%. This was in stark contrast to the highly bullish intervening period, where markets were almost unerringly buoyed by the highly stimulative central banks’ measures, by strong economic fundamentals and by the sense that answers are being found to the pandemic. It seems to be a change in the first of these points that has spooked the markets, notably the clear signals by the US Federal Reserve towards the end of September that the first steps in a reduction to the asset purchases are expected in the near future i.e. the start of the end of quantitative easing is in sight. Bond yields subsequently spiked upwards and Swiss pension fund assets lost ca. 2% in value in September.
Michael Valentine, Investment Consultant at Willis Towers Watson in Zurich comments: “As we entered 2021 we identified three stand-out market-related themes that pension fund investors should focus on – policy shifts (as illustrated above), the rise of China, and sustainability. These all remain highly current, each with material potential impacts on future economic and financial growth, and so their development should be tracked and monitored.”
“To reiterate a comment made previously, strong governance, based on a coherent set of investment beliefs, is essential for the construction of robust investment portfolios.”
Michael Valentine | Investment Consultant, Switzerland
The different themes, with different relevance according to geography, market segment, risk budget and time horizon highlight quite how diverse and complex decision-making framework long-term investors are faced with. “To reiterate a comment made previously, strong governance, based on a coherent set of investment beliefs, is essential for the construction of robust investment portfolios, with the corresponding decision-making structures and practices needing to be adopted throughout the entire organisation”, Valentine expands.
The -0.1% market return in Q3, as represented by Pictet’s 2005 BVG-40 plus Index, was broadly tracked by a similar reduction in liabilities due to a small increase in corporate bond yields so company balance sheet positions as illustrated by this index remain at their highest point.
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.
