WTW Swiss Pension Finance Watch – Q4/2022
ZURICH / LAUSANNE / GENEVA, January 12, 2023 – WTW’s Pension Index increased by 2.9% in Q4 due to further increases in discount rates. The latter resulted in a positive year for companies’ international balance sheets but the situation for local pension funding positions looks rather different. Some local pension funds might even have to consider recovery measures. In 2023, the markets stay risk averse.
Discount rates have risen throughout 2022, more than offsetting the decline in asset values over the year. Companies’ pension balance sheets end the year significantly stronger than at the end of 2021 with the WTW Pension Index up 10% over the year. During Q4, corporate bond yields, which dictate discount rates, increased by a further 10 basis points. As a result, there was a modest reduction in pension fund liabilities over the quarter. Q4 was the only positive quarter in 2022 for returns on pension fund assets, although the small positive return of 1.5% was eclipsed by the negative returns that were experienced during the first three quarters. WTW’s Pension Index increased by 2.9% during Q4. The illustrative funded ratio index (i.e. ratio of pension assets to pension liabilities) was at 128.2%, as shown by WTW’s Pension Index per 31 December 2022 and up from 125.3% on 30 September 2022.Pension fund liabilities under company international accounting standards end the year broadly 20% lower than at the beginning of the year which more than offset the -15% index return as indicated by WTW’s Swiss Pension Finance Watch.
2022 has been a dramatic year for companies’ pension balance sheets. Corporate bond yields experienced a steep rise during the first half of 2022. The rise continued, albeit at a slower pace during the second half of the year. The total increase during 2022 resulted in the greatest change in companies’ pension liabilities that has been seen over a single year since the beginning of the WTW Swiss Pension Finance Watch.
The fall in liabilities will be a relief to companies’ as they have watched the value of pension assets fall steadily over the year. Despite this, many companies may find their international balance sheets in surplus at the end of 2022.
“2022 brought a strong and rapid reversal of the sustained trend of reducing and persistently low bond yields over the past 10+ years.”
Adam Casey | Head of Corporate Retirement Consulting, Switzerland
“2022 brought a strong and rapid reversal of the sustained trend of reducing and persistently low bond yields over the past 10+ years. Despite falling asset values in 2022 this has resulted in a positive year for companies’ international balance sheets but the situation for local pension funding positions looks rather different due to the liabilities not decreasing with the assets” comments Adam Casey, Head of Corporate Retirement Consulting at WTW in Zurich.
Due to the methodology for local funding liabilities and the smoothed discount rate used (which effectively assumed a return to these higher bond yields) local liabilities have not typically reduced as much as assets, which has resulted in significant local funding level reductions over the year. When pension funds local funding positions deteriorate to less than 100%, they must consider recovery measures to bring the funding level back up.
“Whilst local underfunding will not affect companies’ international balance sheets, if asset values continue to decline eventually it may be necessary for companies and their employees to make additional contributions into the fund. Companies should certainly keep the local funding position in mind and also consider engaging with the pension fund to consider any asset liability matching strategies that may be appropriate for the plan while bond yields are closer to or even higher than the local discount rate for liabilities being used,” Adam Casey explains.
Pension funds posted their first positive return quarter of the year in Q4. Strong asset returns in October and November were somewhat offset by the particularly poor December. Typical Swiss pension fund assets rebounded by around 1.5% for the quarter.
Annual inflation figures have stabilized a little in the 4th quarter but at a relatively high level compared to the last 5+ years. In the USA, inflation has continued to decline but was still at 7.1% in November. In Switzerland inflation also slowed down and was at 2.8% in December. In contrast, the EU inflation grew to a new high of 11.1%. As a result, central banks have added additional interest rate hikes in Q4. “It seems that we may have turned the corner on the highest inflation figures, but the inflation problem itself is not yet solved”, says Alexandra Tischendorf, Head of Investment at WTW.
2023 is expected to be a very challenging year for investors. The geopolitical environment remains very complex and identifying turning points in inflation, interest rates and economic growth will be key. With this insecurity in mind, markets are still very risk averse at the beginning of the year. However, this may change as soon as the national banks stop with their interest rate hikes. For pension funds, long-term thinking is key. “It is important for pension funds to recognise long-term drivers of return and risk and implement changes to their long-term strategy, if necessary,” Alexandra Tischendorf advises.
“It is important for pension funds to recognise long-term drivers of return and risk and implement changes to their long-term strategy, if necessary.”
Alexandra Tischendorf | Head of Investment, Switzerland
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.
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