WTW Swiss Pension Finance Watch – Q3/2023
ZURICH / LAUSANNE / GENEVA, October 12, 2023 – WTW’s Pension Index decreased by 0.5% during Q3/2023. The negative return on assets during the quarter outweighed the small reduction in liabilities, which was driven by the slight increase in bond yields. As we enter Q4, companies should remain informed of relevant decisions by pension fund boards, such as inflation-driven pension increases.
Discount rates increased around 10 basis points during Q3, which resulted in liabilities decreasing by 0.5%. Meanwhile, assets lost 0.9%, which outweighed the decrease in liabilities. WTW’s Pension Index decreased by 0.5% during Q3. The illustrative funded ratio index (i.e., ratio of pension assets to pension liabilities) was at 125.6%, as shown by WTW’s Pension Index per 30 September 2023, and down from 126.1% on 30 June 2023.
The WTW Pension Index shows a further deterioration in company pension balance sheets over Q3, bringing them back to a similar level as a year ago. At 125.6%, the index indicates that company balance sheets remain in a healthy position. The rise in interest rates and inflation will result in the consideration of several topics for pension fund boards before the year-end. These include the technical interest rate upon which the pension funds determine their local liabilities and considering potential inflationary increases for pensioners.
“The increase in the strength of the pension fund’s balance sheet resulting from the change in technical interest rate has no direct impact on the net pension liability that the company reports at year-end.x”
Adam Casey | Head of Corporate Retirement Consulting, WTW Switzerland
At the end of 2022, after a year of significantly negative asset returns, many pension funds ended the year with their investment fluctuation reserve not being fully funded. The increase in interest rates during 2023 will likely lead to many pension funds increasing their technical interest rate this year-end. An increase in technical interest rate will lower the pension fund’s liability and hence increase the coverage ratio. “The increase in the strength of the pension fund’s balance sheet resulting from the change in technical interest rate has no direct impact on the net pension liability that the company reports at year-end. However, it does mean that the risk of additional contributions due to underfunding in the case of another year of low or negative asset returns is reduced,” comments Adam Casey, Head of Corporate Retirement Consulting at WTW in Zurich. “Conversely, if pension increases are granted, these will have a direct adverse effect on the pension balance sheet of the respective company, as well as on the funding level of the pension fund itself,” he continues.
Market expectation is that the aggressive period of central bank interest rate rises of the last 18 months is over, as the intense period has started to curb inflation. The interest rate rises have also slowed down the economy due the higher cost of borrowing. “Equity markets are starting to suffer as the economic slowdown translates to lower economic growth forecasts,” explains Alexandra Tischendorf, Head of Investment at WTW Switzerland. A significant recession is still not priced into the markets. When the expectation of recession does finally get priced into the market, higher risk assets, including the equity markets, could be significantly hit.
“Equity markets are starting to suffer as the economic slowdown translates to lower economic growth forecasts.”
Alexandra Tischendorf | Head of Investment, WTW Switzerland
The interest rate increases are also associated with higher default risk. “Pension funds typically allocate a portion of their investments to bonds, which are considered as a low-risk investment. In the current unpredictable environment, even these traditionally low-risk investments offer less certainty on return. We expect pension funds with well diversified portfolios to weather the next phase of the market cycle best,” continues Alexandra Tischendorf.
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.
