Swiss company pension balance sheets dip in Q2

ZURICH / LAUSANNE / GENEVA, July 13, 2023 – WTW’s Pension Index realised a 2.7% decrease during Q2/2023. Liabilities increased somewhat due to a reduction in bond yields and the positive return on assets was not enough to compensate. Looking ahead, companies should keep an eye on additional liability arising from inflation-driven pension increases. Pension funds would be wise to remain vigilant of the potential risks to their assets from market adjustments.

Discount rates fell around 25 basis points during Q2, which resulted in liabilities increasing by 3.9%. Meanwhile, assets returned 1.7%, which was not enough to offset the increase in liabilities. WTW’s Pension Index decreased by 2.7% during Q2. The illustrative funded ratio index (i.e., ratio of pension assets to pension liabilities) was at 126.1%, as shown by WTW’s Pension Index per 30 June 2023, and down from 128.8% on 31 March 2023.

Pension increases on the horizon

The WTW Pension Index shows a deterioration in company pension balance sheets over Q2, but this should be taken in the context of the overall position of the index compared to the past. The index remains relatively close to its highest point of 129.7% a year ago and has remained in the 125% to 130% range for more than a year now. This compares to the index being mostly in the range between 90% and 110% for the 10 years prior to 2021. Overall, largely due to higher interest rate environment companies can be assured that their net pension liability remains in a relatively good position when compared to the more distant past.

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As inflation persists, we expect to see considerations about increases to pensions in payment becoming a topic for discussion in pension foundation board meetings in the second half of the year.”

Adam Casey | Head of Corporate Retirement Consulting, WTW Switzerland

“As inflation persists, we expect to see considerations about increases to pensions in payment becoming a topic for discussion in pension foundation board meetings in the second half of the year”, comments Adam Casey, Head of Corporate Retirement Consulting at WTW in Zurich. “Any pension increases that are granted will have a direct effect on the pension balance sheet of the respective company, as well as on the funding level of the pension fund itself. This is a further variable on top of asset and bond yield movements that could create additional liability. Companies with high proportions of pensioners should be especially aware”, he continues.

Potential recession and future pressure on equity markets

With central banks continuing to increase interest rates to combat inflation (including the SNB in the month of June), the longer-term rates have been falling in recent weeks and are showing higher volatility. This is due to the market anticipating a highly probable recession/slow-down and the end of interest rate rises by central banks. “These expectations are not yet reflected in the equity market fundamentals. As such, when these expectations do get priced into the market, higher risk assets could be significantly hit”, explains Alexandra Tischendorf, Head of Investment at WTW Switzerland. There has also been a decrease in longer-term bond rates. This is a result of the recent interest rate increases by central banks which have led to an expectation of unsustainably high interest rates by central banks in the long term. “With the current uncertainty surrounding the markets, it is a time where pension fund investment committees and their asset managers should remain especially vigilant”, Alexandra Tischendorf cautions.

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With the current uncertainty surrounding the markets, it is a time where pension fund investment committees and their asset managers should remain especially vigilant.”

Alexandra Tischendorf | Head of Investment, WTW Switzerland

Graph: Asset returns and decreasing discount rates lead to little change in pension index

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.