WTW Swiss Pension Finance Watch – Q1/2024
ZURICH / LAUSANNE / GENEVA, April 11, 2024 – A positive start to 2024 for company balance sheets in respect of Swiss pensions sees the losses in the last quarter of 2023 recuperated in the first quarter of 2024. Pension fund assets grew strongly by 5.0% over the quarter, whilst corporate bond yields remained fairly stable. The relatively healthy position of company’s pension balance sheets over the past 2 years continues despite the temporary dip at the end of 2023. The illustrative funded ratio index (i.e. ratio of pension assets to pension liabilities) increased by 6.2%, as shown by WTW’s Pension Index, which increased from 119.9% as at 31 December 2023 to 126.1% as at 31 March 2024.
Through the first quarter of 2024, discount rates and therefore liabilities experienced minimal change. The significant increase in WTW's Pension Index by 6.2% during this period was primarily driven by a strong return on assets of 5.0%, which is the highest quarterly performance since Q1/2021.
Under international pension accounting, the discount rates had their most stable quarter in the last 2.5 years, meaning that liabilities remained stable during Q1/2024. Companies will welcome some respite from the volatile discount rate environment of recent times.
We note a similar situation for the funding positions of Swiss pension funds themselves. The local funding discount rates are smoothed long term rates and therefore are more stable from year to year. In addition, most local funding discount rates are at appropriate levels relative to current bond yields so no imminent changes are expected to be needed. “Due to the positive investment returns of recent months and no significant changes to local funding technical interest rates expected given current bond yield levels, the fluctuation reserves of Swiss pension funds are typically at comfortable levels again, which further reduces the risk of underfunding and the resulting additional contributions by companies”, comments Adam Casey, Head of Corporate Retirement Consulting at WTW in Zurich.
Performance in Q1 saw strong growth figures, as resilient economic data and robust earnings reports were driving equity markets. Developed economy central bank policy rates have been a key focal point for markets and investors especially at the end of the quarter.
“A well diversified Portfolio, reflecting a balanced risk exposure to different economic sectors remains important ”
Alexandra Tischendorf | Head of Investment, WTW Switzerland
For 2024, the expectation dominates that inflation rates will settle back to their target values and that key interest rates will probably be lowered again. The Swiss National Bank has anticipated this and has already made an initial reduction with a first move to a more dovish 1.5% policy rate in March. Even though the warning signs of a global recession have weakened, geopolitical risks are clearly dominating. This uncertainty can again manifest itself in emerging inflation. So is the progression of de-globalization. “Consequently, we see that pension funds review their strategic asset allocation to reflect that increasing risk component”, heeds Alexandra Tischendorf, Head of Investment at WTW Switzerland. “A well diversified Portfolio, reflecting a balanced risk exposure to different economic sectors remains important “, 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 pension plan.
