Pension Risk Study on the coverage ratio of SLI companies
ZURICH, July 11, 2022 – Following an exceptionally good investment year, the average coverage ratio of pension liabilities increased by 8% relative to the previous year. Nevertheless, developments in investment markets during the first half of 2022 have been a source of concern. At the same time, however, increased discount rates are also reducing pension liabilities.
Since 2010, the internationally-oriented study from WTW has been analysing Switzerland’s 30 leading SLI companies, examining the funding of pension liabilities on the balance sheets of all defined benefit pension plans according to the IFRS and US GAAP international accounting standards inside and outside Switzerland.
“For more than a decade, we have been observing annual market movements and what impact these have on the pension liabilities of Swiss companies. In addition to the role played by the capital markets, the plan design is a further important influencing factor. Occupational pension provision is not only an important topic for employers, but also for employees, with this being true for the staff of Swiss companies both here and abroad”, explains Stephan Wildner, Head of Switzerland at WTW in Zurich.
“For more than a decade, we have been observing annual market movements and what impact these have on the pension liabilities of Swiss companies.”
Stephan Wildner | Head of WTW Switzerland.
Compared to the previous year, the pension liabilities of the SLI companies in the analysis fell by CHF 7.8 billion in 2021 (-3.7%). During the same period, plan assets increased by CHF 9.4 billion (+4.8%). The average coverage ratio, in which all companies are equally weighted, also rose significantly between 2020 and 2021 from 84% to 92%.
Following 2021, which was an extremely positive year in capital markets on the whole, the equity markets have suffered a setback during the first half of 2022 due to rising interest rates and the impact of the Ukraine war. “The long-expected spike in inflation has now arrived and the first central bank interest rate hikes aimed at combating this development have already been seen in Europe and Switzerland. Together with a feared slump in the real economy, this will give rise to further distortions on the financial markets. On the other hand, considerably higher discount rates are already leading to a decline in pension liabilities”, emphasises Christian Heiniger, a pension fund expert and Senior Director at WTW in Zurich.
Between the end of 2021 and May 2022, discount rates in Switzerland already increased by about 1.5%. With a typical duration of pension obligations of 15 years, this results in a decrease in obligations of just over 20%. For this reason, and due to the slowdown in life-expectancy increases being observed in various countries, it is possible, despite the greater burden from pensioners, that the financing requirements of pension plans will increase less markedly in the medium term than previously feared. “These positive developments should not mean that we put our guard down in the face of the poor investment results we have seen in recent months. It remains important to consider taking measures to ensure that we are in a position to respond to unexpected crises in a flexible manner on our own at all times”, says Christian Heiniger. “The introduction of 1e plans as well as the adjustment of benefit parameters and financing are continuing to stabilise obligations. The optimisation of the investment strategy together with the obligations can, within the framework of an asset liability management study, lead to an increase in the expected return on assets while maintaining the same level of risk. This can thus create better conditions for both employees and the employer in meeting the challenges ahead”, adds Heiniger.
“The introduction of 1e plans as well as the adjustment of benefit parameters and financing are continuing to stabilise obligations”
Christian Heiniger | pension fund expert and Senior Director, WTW
The average coverage ratio in (American) companies, summarised in the WTW Pension 100 Index, has risen from 89% to 97% (2020 vs 2021). Plans in Switzerland (84% vs 92%) thus developed in step with the US plans, albeit at a lower level. The coverage ratio of DAX companies also increased significantly from 65% to 72%.
The Pension Risk Study by WTW examines the pension obligations as well as the amount and development of the pension costs of the companies in the Swiss Leader Index (SLI). This index is made up of the 20 SMI companies plus the 10 highest-valued companies of the 30 SMI Mid-Cap securities. The SLI thus contains the 30 most important stocks on the Swiss stock market and includes the country’s leading listed companies.
In 2021, WTW analysed the occupational pension liabilities disclosed by the SMI and SLI firms on the basis of the international accounting standards IFRS and US GAAP. The results therefore differ fundamentally from the data based on Swiss GAAP FER26 published by Swiss pension funds.
WTW’s Pension Risk Study aims to gain an overview of the situation of Swiss companies and thereby to establish a sound basis on which to propose the specific measures individual companies should adopt.
Q1 2022 saw Swiss pension liabilities on company balance sheets realise their largest reduction in any quarter since this index began.
