WTW Swiss Pension Finance Watch – Q4/2021
ZURICH / LAUSANNE / GENEVA, January 15, 2022 – Company balance sheet positions for reporting their Swiss pensions finished the year in the strongest position since this index began. The positive return on pension fund assets during the quarter was only partially offset by a fall in the discount rate meaning the pension fund index realised a 1% increase to see the year out. Assets increased by 2.5% for the quarter whilst corporate bond yields ended the year around 7 basis points lower than at the end of Q3. The illustrative funded ratio index (i.e. ratio of pension assets to pension liabilities), as shown by WTW’s Pension Index per 31 December 2021 was at 118.0%, up from 117.0% at 30 September 2021.
The pension fund index of WTW’s Swiss Pension Finance Watch is published quarterly by the consultancy and is based on the International Accounting Standard 19 (IAS19) and US GAAP FASB ASC 715. 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.
A number of factors have played a role in the increase in the funding level on company balance sheets during 2021: the asset returns of around 10% for a typical Swiss Pension Fund, the rise in discount rate by around 20 basis points and the release of the BVG demographic table for 2020. Some companies will be seeing their pension assets noticeably exceeding the liabilities, but the benefits of this may be limited.
“It has been a number of years since we have seen so many companies reporting pension fund assets that are greater than the liabilities.”
Adam Casey,
Head Corporate Retirement, Switzerland
“It has been a number of years since we have seen so many companies reporting pension fund assets that are greater than the liabilities and whilst companies reporting under US GAAP recognise the full surplus on their balance sheets, under IFRS the recognition of the surplus may be limited. Surplus assets in pension funds cannot be returned to the company and for companies that are not expected to benefit from the surplus, the IFRS standard limits the amount of surplus the company can recognise” explains Adam Casey, Head of Corporate Retirement Consulting at WTW in Zurich.
After an ever so slight dip into negative territory over the 3 months to 30th September, the last quarter of 2021 saw a return to the positive performance otherwise seen since the COVID virus hit the markets in March 2020. The return achieved by a typical Swiss pension fund was 2.5% in the fourth quarter of 2021. The apparently inexorable upward trend in market valuations belies the significance of some underlying shifts in behaviour, notably regarding inflation. In the most recent meetings of the US Federal Reserve the language has become increasingly hawkish as US inflation levels have soared to around 7%. The resulting more imminent prospect of rising base rates has significant implications for institutional investment portfolios, especially in terms of fixed income investment returns although there are arguments to suggest that inflationary pressures will subside once the spike in energy prices subsides. Further, related issues include the massive levels of global debt, the gathering momentum of the transition to lower-carbon energy sources and how effectively the pandemic is managed.
“Certain asset classes, such as insurance-linked securities tend to fair well under most inflation scenarios.”
Michael Valentine,
Investment Consultant, Switzerland
Michael Valentine, Investment Consultant at WTW in Zurich comments: “Given the difficulty in forecasting the outcome of these complex, multi-layered developments, long-term oriented investors need to have particularly well-structured decision-making processes, that is strong governance. We recommend incorporating stress testing and scenario analysis into the asset-liability modelling framework in order to address these complex issues and improve understanding of their potential impacts on portfolio behaviour.” The next question concerns implementing the resulting findings in terms of choice of asset class. “Certain asset classes, such as insurance-linked securities tend to fair well under most inflation scenarios. In addition, real assets such as infrastructure and property offer a degree of inflation hedging and should also bolster portfolio resilience, while the fixed income component might need to be trimmed down. In terms of addressing the energy transition, we have developed simple indexed based solutions that are highly effective in managing the related risks to help our clients reduce their portfolio’s carbon footprint while offering strong return potential”, Valentine expands.
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 2.5% market return in Q4, as represented by Pictet’s 2005 BVG-40 plus Index, was only partially offset by the reduction in liabilities due to a decrease in corporate bond yields, which allowed company balance sheet positions, as illustrated by this index, to reach a new 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 WTW 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:
WTW'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.
