WTW Swiss Pension Finance Watch – Q4/2024
ZURICH / LAUSANNE / GENEVA, January 15, 2025 – WTW’s Pension Index experienced a 0.2% decline in Q4 2024. The decrease in bond yields led to a rise in liabilities, and the positive asset returns nearly fully offset this increase, resulting in very small changes in the index.
WTW’s Pension Index was largely flat in Q4 2024, with minimal changes observed. The discount rate decreased by 0.08%, from 0.95% to 0.87%. This led to a modest increase in the Projected Benefit Obligation (PBO), which rose by 1.7%. Assets saw an increase of 1.5%, resulting in a minimal change in the funded status of pension plans.
The discount rate has been gradually declining since the recent high point above 2% around the end of 2022 as bond yields continue to decrease, exerting pressure on liabilities. The PBO’s rise reflects this adjustment in discount rates, while the modest increase in assets helped offset the rising liabilities. Due to the offsetting, the pension index remained broadly stable over the last quarter 2024. The illustrative funded ratio index (i.e. ratio of pension assets to pension liabilities) was at 120.9%, as shown by WTW’s Pension Index per 31 December 2024, and down from 121.1% on 30 September 2024.
The further interest rate cut by the Swiss National Bank (SNB) in December 2024 indicates that the period of low interest rates could persist again for some time. This decision reflects the SNB’s ongoing efforts to support the economy now that inflation is back at more long-term levels. However, despite these measures aimed at economic stability, the challenge for companies remains: low interest rates will continue to put pressure on pension liabilities.
As interest rates remain low, companies’ future pension liabilities continue to rise. Even if pension fund assets achieve stable to modest returns, the low interest rate environment will increase their balance sheet burdens, making financial obligations harder to manage.
“Many companies may need to further refine their financial and pension strategies considering these developments. To ensure long-term stability, companies should engage with their pension funds to consider reviewing the pension fund asset allocation strategies to ensure they are appropriate for the shifting market conditions ", comments Adam Casey, Head of Corporate Retirement Consulting at WTW in Zurich.
In December 2024, the Swiss National Bank (SNB) and the European Central Bank (ECB) implemented further interest rate cuts to counter global economic pressures. The SNB reduced its key interest rate to 0.50%, while the ECB's rate was lowered to 3.00%. The Federal Reserve also hinted at potential further rate reductions. Central banks aim to bolster economic growth and stabilize financial conditions through lower borrowing costs. As central banks continue their accommodative policies, pension funds and investors are advised to remain agile and adjust strategies for a dynamic market.
"With inflation concerns waning and economic growth still fragile, the SNB's actions are aimed at further supporting the domestic economy," says Alexandra Tischendorf, Head of Investment at WTW Switzerland. "However, maintaining this accommodative stance for too long could risk overheating other sectors, including the housing market, which has already shown signs of excess liquidity."
For pension funds and investors, these latest cuts signal that central banks remain highly focused on safeguarding economic stability. Portfolio adjustments are becoming increasingly critical as prolonged low rates favour equities, high-yield assets, and certain sectors such as technology and green energy, while discouraging traditional fixed-income investments.
“Given the liquidity environment and expectations for extended low rates, institutional investors are advised to focus on diversified strategies,” recommends Alexandra Tischendorf. “It is a time for active management to navigate this protracted low-rate period, especially as we approach potential shifts in the global monetary cycle, which may begin to signal tightening in the late part of 2025.”
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.
