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Press Release

Unfavourable investment year 2018 lowers coverage ratio of pension liabilities

Pension Risk Study on the coverage ratio of SLI companies

IFRS 17 Solutions|Risk Culture

By Peter Zanella , Michael Gossmann and Stephan Wildner | July 2, 2019

Following a year of negative investment returns and continued global uncertainty on the investment markets, the coverage ratio of pension liabilities for SLI companies fell by around 4% in 2018.

ZURICH, 2 July 2019 – Following a year of negative investment returns and continued global uncertainty on the investment markets, the coverage ratio of pension liabilities for SLI companies fell by around 4% in 2018. There were strong corrections to pension commitments and increased tightening of disclosure requirements and valuation methods for pension liabilities.

The internationally oriented Willis Towers Watson study casts an analytical eye over Switzerland's 30 leading SLI companies, considering the funding of pension liabilities on the balance sheets of all defined benefit pension plans according to the IFRS and US GAAP international accounting standards inside and outside Switzerland.

"Every year, we analyse how the markets are moving and what impact this has had on the pension liabilities of Swiss companies worldwide. At present, the companies are still well positioned. Since the issue of retirement provision is of considerable importance to employees, it should also be a major concern for employers", explains Stephan Wildner, Head of Retirement at Willis Towers Watson in Zurich.

Medium-term expectations gloomy

In comparison with the previous year, the pension liabilities of the analysed SLI companies decreased by CHF 4.4 billion (-2.2%) while plan assets to cover these obligations decreased by CHF 4.0 billion (-4.0%) over the same period.

According to international accounting standards, the average coverage ratio for SLI companies therefore fell by 4%. Thus in 2018, only 81% of pension liabilities were covered by the corresponding plan assets (2017: 85%).

"If interest rates remain low or even fall further, as can currently be observed worldwide, this will lead to further increases in liabilities. This increases the need for financing and may require changes to the investment strategy and benefit adjustments", explains Peter Zanella, pension expert at Willis Towers Watson in Zurich.

It is therefore still highly advisable to optimise the asset allocations of pension funds and to continue to consider de-risking measures such as conversion rate adjustments or correct financing of pensioner portfolios. This will enable the challenges of the low-interest environment to be met. Such de-risking measures by companies resulted in a fall in total liabilities in 2018.

Given that AXA, one of the largest providers of group full insurance solutions, has left this market, Michael Gossmann, pension expert at Willis Towers Watson, notes: "It is becoming more difficult to guarantee the longevity risk of pension funds through the market."

Switzerland drops back compared with other countries

Globally, coverage ratios fell in 2018. The average coverage ratio of (US) companies, combined in the Willis Towers Watson Pension 100 Index, decreased from 87% to 86%. The coverage ratio of DAX companies declined from 68% (2017) to 67%. Switzerland's poorer performance compared with other countries is primarily attributable to the much lower interest rate in Switzerland as a result of the National Bank's negative interest rate policy.

Background to the study

The Willis Towers Watson Pension Risk Study looks at the pension liabilities and the scale and development of pension costs for companies making up the Swiss Leader Index (SLI). The SLI Index is made up of the 20 SMI companies plus the ten highest-valued of the 30 SMI Mid Cap securities. It therefore comprises the 30 most important names on the Swiss stock market and the country's leading listed companies.

In 2018, Willis Towers Watson analysed the occupational pension liabilities disclosed by the SMI and SLI firms on the basis of the international accounting standards IFRS and US GAAP. The results therefore differ fundamentally from the data based on Swiss GAAP FER26 published by Swiss pension funds.

Willis Towers Watson's Pension Risk Study aims to gain an overview of the situations of Swiss companies and thereby to establish a sound basis on which to propose the specific measures individual companies should adopt.

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