WTW Swiss Pension Finance Watch – Q3/2024
ZURICH / LAUSANNE / GENEVA, October 15, 2024 – WTW’s Pension Index experienced a 3.7% decline in Q3 2024. The decrease in bond yields led to a rise in liabilities, and the positive asset returns were insufficient to offset this increase. As new economic realities settle companies to adjust their strategic asset allocation.
The discount rate fell by more than 30 basis points, from 1.27% to 0.95% during the third quarter of 2024, further impacting the financial position of company pension plan balance sheets. This adjustment in the discount rate contributed to an increase in the Projected Benefit Obligation (PBO) by 5.6%, indicating that the present value of future pension liabilities has grown considerably due to the lower discount rate applied to them. Meanwhile, assets returned 2.5%, which was insufficient to offset the increase in liabilities. As a result, the funding status of the pension plan deteriorated by 3.7% compared to the previous quarter. The illustrative funded ratio index (i.e., ratio of pension assets to pension liabilities) was at 121.1%, as shown by WTW’s Pension Index per 30 September 2024, and down from 124.8% on 30 June 2024.
The gradual reduction in discount rates continued during the third quarter of 2024 as a result of Swiss corporate bond yields falling. The discount rate reached a low not seen for more than 2 years and has been in steady decline since the highpoint seen towards the end of 2022. Reduced discount rates increase the liability companies must report for their pension funds putting pressure on the balance sheets. Despite these increasing liabilities the last 2 years, the majority of Swiss pension plans reported for company accounting purposes remain relatively stable due to strong asset returns over the same period.
In the 7 years leading up to 2022 the Swiss market saw an unprecedented period of low interest rates where the discount rate remained mostly below 1% and for large periods close to 0%. While the recent drop-in discount rates from highs in 2022 above 2% are significant, discount rates are still at the top end of the range seen in the prior 7 years. “With inflation now seemingly under control and central banks reducing interest rates again, the question is whether we can expect another period of really low bond yields and discount rates that also coincides with poorer asset returns stemming from weaker economic growth. This would put more significant pressure on company pension balance sheets." comments Adam Casey, Head of Corporate Retirement Consulting at WTW in Zurich.
In September 2024, the Swiss National Bank (SNB) and the European Central Bank (ECB) made significant interest rate cuts to respond to the escalating global economic challenges. The SNB lowered its key interest rate to 1.00%, while the ECB reduced its rate to 3.50%. The Federal Reserve (FED) in the United States also followed suit, decreasing its rate to 5.00%. These measures are part of a broader strategy to stabilize the economy and promote growth in an uncertain global environment.
The decision to lower interest rates aims to boost investment and encourage consumer spending. By reducing borrowing costs, central banks hope to stimulate economic activity in the affected regions. “In times of economic uncertainty, such adjustments are crucial to restoring confidence among businesses and consumers,” explains Alexandra Tischendorf, Head of Investment at WTW Switzerland.
Despite these positive measures, the economic landscape remains complex. In the U.S., recent data has shown signs of weakening, while the Eurozone is gradually experiencing a recovery. GDP growth forecasts for the Eurozone have been revised upwards, indicating a stabilization of the economic environment. “The differences in economic conditions worldwide require a nuanced approach to monetary policy,” Tischendorf adds.
Pension funds must also strategically adjust their asset allocation to align with the new economic realities. In an era of changing yields and increasing market volatility, proactive measures are vital to secure long-term financial objectives.
“The coming months will reveal how effective these interest rate cuts will be,” emphasizes Tischendorf. “Investors need to stay vigilant and be prepared to respond to changes in the global economy.”
Overall, the current developments highlight the necessity of a flexible and strategic approach to monetary policy and investment strategies to navigate the challenges of a dynamic and rapidly changing economic landscape.
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.
