Pension Risk Study 2023 on the coverage ratios of SLI companies
ZURICH, July 4, 2023 – Despite significant negative returns, the average coverage ratio of pension liabilities increased by 7% relative to the previous year. This increase came about due to the fact that liabilities declined more markedly than plan assets against the backdrop of the hike in interest rates. Developments in the investment markets during the first half of 2023 have been positive thus far. These are the conclusions of WTW's current Pension Risk Study on the coverage ratios of SLI companies in Switzerland.
Since 2010, the internationally oriented study from WTW has been analysing Switzerland’s 30 leading companies in the Swiss Leader Index (SLI), 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 design is not only an important topic for companies providing employment, 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. In addition to the role played by the capital markets, the plan design is a further important influencing factor.”
Stephan Wildner | Head of WTW Switzerland
Compared to the previous year, the pension liabilities of the SLI companies in the analysis fell by CHF 47.8 billion in 2022 (-23.7%). During the same period, plan assets fell by CHF 37.6 billion (-18.3%). The average coverage ratio, in which all companies are equally weighted, therefore once again rose significantly between 2021 and 2022 from 92% to 99%.
After a difficult 2022, with significant negative returns over the year overall, the equity markets have recovered during the first half of 2023. “The initial sharp rise in inflation has now flattened out somewhat or even declined due to the measures taken by the central banks, while the real economy is also proving to be robust. We are therefore now seeing a countermovement. However, further interest rate steps are expected”, emphasises Christian Heiniger, pension fund expert and Senior Director at WTW in Zurich.
“The initial sharp rise in inflation has now flattened out somewhat or even declined due to the measures taken by the central banks, while the real economy is also proving to be robust.”
Christian Heiniger | pension fund expert and Senior Director, WTW Switzerland
Between the end of 2022 and May 2023, discount rates in Switzerland declined once more by about 0.25%. With a typical duration of pension liabilities of 15 years, this results in an increase in liabilities of just under 4%. However, should the national banks decide to take further interest rate steps, the discount rates will also rise again.
To date, an easing of the pressure on balance sheets has primarily been observed, as liabilities have decreased considerably as a result of the higher discount rates. Nevertheless, due to inflation, it is to be expected in future that more wage and pension increases will be granted and taken into account in the valuations via corresponding actuarial assumptions. This is likely to offset some of the decrease in liabilities. In the new interest rate environment, it has now possible that pension plan conversion rates will no longer continue to fall in the future to the same extent as seen in recent years and may possibly even rise again.
The slowdown in the increase in life expectancy being observed in various countries continues to have a relieving effect, while the trend towards an increase in the proportion of pensioners is adding strain.
“It remains important to consider relieving measures to ensure that we are in a position to respond to unexpected crises in a flexible manner and under our own steam 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 liabilities. The optimisation of the investment strategy together with the liabilities 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 average coverage ratio in (American) companies, summarised in the WTW Pension 100 Index, has remained at 95% based on estimates from earlier this year. This means that the plans in Switzerland (92% vs 99%; 2021 vs 2022) performed better than the American plans and have overtaken them. The coverage ratio of DAX companies also increased significantly from 92% to 98%.
The Pension Risk Study by WTW examines the pension liabilities 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 2022, 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.
