SLI Pension Benchmarking Study 2023
ZURICH, 4 July, 2023 – Positive news for SLI company employees and perhaps the Swiss retirement system overall: projected retirement pension levels from pension funds have stabilised further. Despite challenging and volatile market conditions over the past few years, the unprecedented period of interest rate reductions that resulted in lower expected pension levels seems to be over for the time being. This means that the problem of younger generations cross-subsidising older ones that retired on higher conversion rates was maybe only temporary and criticism of the Swiss system was perhaps unfounded longer term. Another key finding of the latest benchmarking study by WTW, which examines the pension plans of the companies included in the SLI, is that many pension funds seem to be unprepared for the apparently unstoppable Environmental, Social and Governance theme that is dominating the investment and broader world.
With the aim of comparing pension plans and the resulting benefits, WTW regularly conducts this SLI Benchmarking Study. It analyses the main features of the Swiss pension plans of the companies included in the Swiss Leader Index (SLI) and compares the effective level of benefits. In 2023, 26 of the 30 companies included in the index are included in the study.
The return of inflation and increase in bond yields has been significant in the last year and it raises several questions and potential challenges for pension funds and their sponsors. The rising bond yields (falling bond values) combined unusually with falling equity values during 2022 have led to significant reductions in Swiss pension fund coverage ratios wiping out gains from previous years. As a result of the changing market conditions, pension funds have seen volatile investment returns the last 5 years or so – the chart below shows the last 5 years of returns of this year’s participant group.
The 15 years or so of low bond yields have had a significant influence on the Swiss pension market. Slowly but surely and particularly over the last 5 to 10 years foundation boards have had to react by decreasing their technical interest rates (thus increasing their statutory liability for pensions) because of future lower investment return expectations. In addition, this period has brought about a corresponding gradual but steady reduction across the market in the conversion rates offered to employees to convert their lump sum to a pension at retirement.
WTW reported already in its 2021 benchmarking study that maybe this trend had been broken finally, likely because of bond yields having stabilised somewhat (albeit at very low levels). That study reported relatively stable average conversion rates between the 2019 and 2021 studies. This is in line with the present study where WTW observed that average conversion rates remain at a very similar level. Nevertheless, conversion rates are only one piece of the retirement puzzle and it is only after looking at this combined with contribution levels that one gets an indication of the overall expected pension levels.
The good news for current SLI company employees from this study is that average pension levels have remained broadly stable over all 4 of the last 4 studies dating back to 2017. This means that despite market turmoil and volatile investments resulting in changing funding levels, these SLI pension funds are generally managing to stabilise the pensions they are offering to employees. After all, the general aim of the Swiss 2nd pillar occupational pension system is to smooth market volatility across generations and provide stable pension outcomes.
During the persistent 10 to 15 year period of reducing interest rates and bond yields which resulted in the reducing conversion rates, one of the main criticisms of the Swiss system was that current active employees were subsidising the generous pensions that current pensioners had been granted in the past. With interest rates and bond yields closer to “normal” longer term average levels again now, one could say that a “short-term” low interest phase has now been passed where active employees were somewhat subsidising pensioners. In this sense, the cross-subsidies were temporary and short-term (10 to 15 years) in the context of the lifespan of members in pension funds so arguably the Swiss system has worked as intended (volatility in market conditions and lower and higher interest rate periods are to be expected).
The results of this study show that the SLI pension funds have already adjusted themselves (technical rates and conversion rates) to the lower interest rate environment (even though it was possibly temporary). The difficulty now may be what happens if the recent jump in interest rates and bond yields that occurred during 2022 persists or if yields increase even further. This is the new generational challenge for pension funds WTW sees on the horizon. Namely, if conversion rates are to go up again, what happens to the unlucky employee group that retired in the last 5+ years or so on historically low conversion rates? Further for this group, with inflation having returned (at least temporarily), they could be adversely affected by losing purchasing power from their already lower pensions if their pensions are not increased with rising inflation. Something for pension funds to consider and for WTW to analyse in the coming studies.
Some new information collected in this year’s study was the current status of where pension funds stand with their Environmental, Social and Government (ESG) investments. There were some interesting results. Despite the high profile of this topic in recent years, close to 40% of pension funds had either taken no action at all or were only in initial discussions on this topic. In addition, only some 28% of pension funds were more actively managing their ESG investments with either the portfolio adapted with benchmarks or their investment policy completely rewritten to allow for ESG considerations. ESG investment considerations are a topic which is not likely to go away. As a consequence, WTW expects pension funds to need support in this area in the coming years. Pension funds will also likely need to coordinate with the ESG policies of their company sponsor.
The study by WTW examined the pension plans of 26 of the 30 companies included in the SLI (Swiss Leader Index) in 2023. Since 2009, the pension fund benefits of the companies included in the SMI and SLI have been examined every two years. Both the previous and the new analysis focused on the structure of the pension plans of the individual companies and the resulting benefits. All pension plans of the companies (basic and any supplementary plans) were considered in their entirety for the performance comparison, insofar as they were made available to WTW.
