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Financial markets have been volatile in the first half of 2022, with extreme changes not seen since the financial crisis of 2008/2009. Companies reporting Swiss pension liabilities under IFRS or US GAAP can expect significant changes in the liabilities and assets since the end of 2021. Companies may therefore wish to review their interim disclosure processes and take a more active role than usual.
Since the end of 2021, financial markets have seen more significant changes than any time since the financial crisis of 2008/2009. Investment markets have seen substantial downturns in most asset classes, with Swiss pension fund return indices showing first half year returns of -11% to -14%. At the same time, discount rates (based on Swiss corporate bond yields) have sky-rocketed over the past six months, with more significant changes than we have seen in the past 15 years. Based on the WTW discount rate model, typical discount rates have increased from around 0.20% on 31 December 2021 to 2.10% on 30 June 2022 (depending on plan duration).
For pension fund accounting under the IFRS and US GAAP standards, these changes have offsetting impacts on the balance sheet liability. While negative returns reduce the pension fund assets , the increases in discount rates will significantly reduce the pension fund liability. In most cases, through the half year we expect an overall positive net impact of these changes for both the balance sheet and the P&L (Profit & Loss) for the following year.
(Source: SIX Swiss Exchange Ltd)
(Source: Pictet Asset Management)
After an extended period of virtually no price increases the previous 15 or so years in Switzerland, consumer prices have also started to increase with price inflation over the year to June 2022 in Switzerland at 3.4%. This has limited (if any) direct short-term impact on Swiss pension funds and their liabilities, unless the future long-term assumptions for price inflation (and the related pension increase and salary increase assumptions) also increase. Currently there is little evidence to suggest that long-term (10-15+ years) price inflation should be greater than the current assumption of 1.00% to 1.25% p.a. commonly used by companies for pension fund accounting, but these expectations should continue to be monitored.
For companies that manage interim disclosures internally, there may be additional complications to consider when determining the estimated mid-year position. For example, higher discount rates result in lower durations, so using the year end 2021 duration might lead to higher discount rates and hence underestimate the liabilities. Sensitivities are often based on relatively small changes to assumptions, and therefore might be less accurate when extrapolated for larger changes. Finally, Swiss interest credit rate assumptions are typically affected by expected return assumptions and bond yields, so adjustments to this assumption may also be appropriate.
Companies reporting under IFRS will need to consider an additional complication, namely whether an asset ceiling restriction will now apply. Under IAS 19, a company can only recognise a surplus for a Swiss pension scheme if it is expected to benefit from that surplus. This may be the case if an employer contribution reserve exists, or the future costs under IAS 19 are greater than the plan’s regular employer contributions. Companies should contact their pension fund actuaries to determine whether an asset ceiling restriction may apply under the current conditions in their situation.
The current financial situation is extraordinary, which means current interim disclosure processes may not be appropriate given the significant market movements this year. Also, budgeting requirements for the upcoming year may need to be revised. We recommend you contact your actuary or auditor if you have concerns about whether your existing approach is fit-for-purpose.
Q1 2022 saw Swiss pension liabilities on company balance sheets realise their largest reduction in any quarter since this index began.
