WTW Swiss Pension Finance Watch – Q2/2024
ZURICH / LAUSANNE / GENEVA, July 11, 2024 – After a robust start in the first quarter of 2024, where companies recovered all losses from the end of 2023, the company balance sheets regarding Swiss pensions have seen a slight correction in Q2 2024.
Pension fund assets grew modestly by 0.8%, while liabilities increased by 1.8% due to the reduction of the discount rate. Consequently, there has been a decline in the illustrative funded ratio index (i.e., the ratio of pension assets to pension liabilities) by 1.3% in Q2, as shown by WTW’s Pension Index, which decreased from 126.1% as of 31 March 2024 to 124.8% as of 30 June 2024.
The adjustment in the discount rate from 1.36% to 1.27% during the second quarter of 2024 has had a notable impact on the financial position of company pension plan balance sheets. This reduction has resulted in a 1.8% increase in the Projected Benefit Obligation (PBO), indicating that the present value of future pension liabilities has grown due to the lower discount rate applied to them. Despite the reduction in corporate bond yields, the return on assets experienced an increase of 0.8% in Q2 2024. As a result of these two factors, the funding status of the pension plan has deteriorated by 1.3% compared to the previous quarter.
The trend towards a reduction in the discount rate from an international accounting perspective continued in the second quarter of 2024. The lowest discount rate in the last two years is currently being observed. In contrast to international accounting standards, the funding ratios of most pension funds have not deteriorated, as they are likely to have generated the expected returns in the second quarter. They were therefore largely in a position to cover their obligations. Most local funding discount rates are at an appropriate level in relation to current bond yields, meaning that no immediate changes should be necessary.
“The Swiss pension landscape in the second quarter of 2024 has been marked by two trends that have lasted for more than a year. Firstly, the continued reduction of the discount rate under international accounting standards has modestly increased the liabilities recorded on company balance sheets. This adjustment reflects the present value of future obligations, which grows as the discount rate falls. Secondly, there has been a notable stabilization in pension fund financial positions, accompanied by a recovery in investment fluctuation reserves “, comments Adam Casey, Head of Corporate Retirement Consulting at WTW in Zurich.
“The Swiss pension landscape in the second quarter of 2024 has been marked by two trends that have lasted for more than a year. Firstly, the continued reduction of the discount rate under international accounting standards has modestly increased the liabilities recorded on company balance sheets.”
Adam Casey | Head of Corporate Retirement Consulting, WTW Switzerland
In a strategic move to address the uncertain global economic landscape, the Swiss National Bank (SNB) reduced the key interest rate to 1.25% in June 2024. This decision followed a previous reduction in March and reflects efforts to ensure economic stability in Switzerland in the face of global challenges. WTW does not expect further rate cuts this year.
The economy outlook globally is still quite heterogeny. As US macroeconomic data shows some weaking signals, the Eurozone economic momentum seems to have bottomed out and GDP growth estimates for 2024 have been revised upwards recently. “Interest rate cuts are expected in the US in 2024. Until end of 2024 the markets might react to political news, with the upcoming US election and France snap elections. Overall equities might be neutral by second half of the year as high valuation; geopolitical risks might be bottomed out by the growth expectation. Consequently, we see that pension funds review their strategic asset allocation to reflect that uncertain environment,” heeds Alexandra Tischendorf, Head of Investment at WTW Switzerland. “A well-diversified Portfolio, reflecting a balanced risk exposure to different economic sectors remains important “, she continues.
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.
Pension fund assets grew strongly by 5.0% over the quarter, whilst corporate bond yields remained fairly stable.
