Strong start to 2022, despite global events

ZURICH / LAUSANNE / GENEVA, April 12, 2022 – Q1 2022 saw Swiss pension liabilities on company balance sheets realise their largest reduction in any quarter since this index began. The significant jump in bond yields underlying the discount rate led to a reduction in liabilities of more than 12%, resulting in a positive impact on company balance sheets despite assets decreasing by 5.2% for the quarter. Corporate bond yields increased by around 90 basis points over the quarter. The illustrative funded ratio index (i.e. ratio of pension assets to pension liabilities), as shown by WTW’s Pension Index per 31 March 2022 was at 127.2%, up from 118.0% at 31 December 2021.

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We continue to encourage our clients to review ways of constraining their Defined Benefit pension liabilities in Switzerland, such as by implementing pure Defined Contribution (1e) top-up plans”

Adam Casey | Head of Corporate Retirement Consulting, Switzerland

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 these accounting standards has changed from quarter to quarter, as opposed to giving the typical funding ratio of Swiss pension plans.

Discount rates, a new upward trend?

Over the last 18 years, the overriding trend in discount rates has been of them decreasing, meaning that companies have seen the liability they hold on their balance sheet grow. As the world enters a new macroeconomic phase and interest rates begin to rise, despite all the other issues this may bring, companies will be relieved that the corresponding increase in bond yields, and hence discount rates, will have a positive impact on their pension liabilities.

“Bonds held by pension funds provide some asset liability matching because increasing yields (and discount rates) not only reduce the liabilities but also reduce the assets, which dampens the volatility on the balance sheet. In addition, increasing discount rates also reduce the employer service cost booked in the operating costs of the company. The pension cost can be important for companies and whilst the discount rates are not in their control, they will welcome the relief to the operating costs that increasing discount rates bring.” explains Adam Casey, Head of Corporate Retirement Consulting at WTW in Zurich.

“It’s anyone’s guess whether the extended period of discount rates wavering between 0% and 0.5% over the last few years is over, but this is certainly a reminder that corporate bond yields (and discount rates) can be very volatile at certain times. We continue to encourage our clients to review ways of constraining their Defined Benefit pension liabilities in Switzerland, such as by implementing pure Defined Contribution (1e) top-up plans”, he concludes.

Market resilience challenged

Asset markets have shown great resilience throughout the COVID-19 pandemic although arguably markets are not yet fully pricing in the complex combination of risks that include pandemic and armed conflict in Europe. The repercussions of the war in Ukraine have in some cases amplified, and in others masked, tendencies in the asset markets and policies governing them that occurred as a result of the pandemic.

The return achieved by a typical Swiss pension fund was -5.2% in the first quarter of 2022 as represented by Pictet’s 2005 BVG-40 Plus Index. The downward trend began at the end of January with the rise in corporate bond yields, as investors sold high-yield and investment grade bonds. These moves were in step with the weakness in equity markets and indicated risk aversion regarding the expected series of interest rate hikes. In addition, equities fell approximately 6% in the first quarter due to concerns about the economic consequences of the Ukraine crisis.

Alexandra Tischendorf, Head of Investment at WTW in Zurich, comments, "Pension fund boards’ fiduciary duty to ensure the safety and long-term returns of their plans remains challenging given the current geopolitical situation and the potential economic fall-out. The last two years have once again brought to light the need for stress-resistant, robust portfolios. We therefore continue to advise our clients to integrate various elements of risk management into their long-term investment strategy decision-making.”

Increasing bond yields drive pension index improvement

obligation of a sample pension plan (index level 100% on 31.12.2006).

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).

Background information on the study

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:

• Investment performance on fund assets
• Changes in economic assumptions on plan liabilities (as measured by international accounting standards)

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.