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Following positive investment returns in 2023, pension fund coffers were boosted further by even better investment returns in 2024, while inflation levels returned to more normal levels seen in the Swiss market prior to the last 5 years. On the regulatory front, Swiss voters rejected proposed reforms to the 2nd pillar pension system in a September 2024 referendum, but general pension reform continues to be a prominent topic for the industry. The issues that drove the impetus to put forward the reform have not changed so it is unlikely this topic will disappear in the coming years. Bond yields continued their gradual fall following the dramatic increases seen in 2022 (falling yields mean increases in bond values) although have stabilized somewhat in the first quarter of 2025. Equity markets continued their recent boom during 2024 which was the primary driver for Swiss pension funds having another stellar investment return year (returns typically in the range 8-10%) resulting in an improvement in Swiss pension fund coverage ratios. The OAK estimated that the number of Swiss pension funds with underfunding (below 100% coverage ratio) reduced back below 1% already by mid-2024 and the average pension fund coverage ratio increased to 115.6%. Positive returns in the 2nd half of 2024 will have only improved these funding levels. This means pension funds were end of 2024 much more likely to be in the more positive situation of worrying about distribution of free reserves to actives and pensioners rather than worrying about underfunding measures.
In this News we provide some commentary on the various market elements and developments affecting pension funds currently.
2024 saw the gains in financial markets from 2023 accelerate further off the back of optimism about the uses of artificial intelligence and the gradual easing of interest rates by central banks as inflation pressures subsided. Geopolitical macro events and higher energy prices from recent years remained prominent although the immediate impact on markets of those events have stabilised. The main global political event was the re-election of President Trump in the US and this buoyed markets further initially. In Switzerland, with inflation back under control at more normal levels already in late 2023 and falling below the national bank’s target range during 2024, the national bank has aggressively reduced interest rates from 1.5% at the beginning of 2024 to 0.25% in March 2025. This has had an impact on the bond market with reduced bond yields. Figure 1 shows the development of cumulative pension fund investments, annual inflation and 10-year government bond yields over the last 10 years. It shows that:
In the first quarter of 2025, the Swiss National Bank (SNB) was the only major western central bank to proceed with another rate cut. On March 20, 2025, it lowered its key interest rate by an additional 0.25 percentage points to 0.25%, further emphasizing its accommodative stance. In contrast, the European Central Bank (ECB) and the Federal Reserve (Fed) kept their interest rates unchanged during this period. The Fed maintained its target range at 4.25% to 4.50%, despite political pressure, citing ongoing economic uncertainties and inflation risks.
Central banks aim to stimulate economic growth and stabilize financial conditions by lowering borrowing costs. As accommodative policies persist, pension funds and investors are advised to remain flexible and adjust strategies to respond to a dynamic market.
The recent decisions by President Trump to impose extensive import tariffs on a range of goods from various countries have caused significant turbulence in the global capital markets. While these measures aim to correct trade imbalances and bolster domestic production, equity markets anticipate the long-term negative impacts of tariffs on the global economy.
Pension funds are directly affected by these market fluctuations. Since the U.S. stock market holds a dominant share in the global MSCI World Index, recent losses in equity markets could impact the performance of Swiss pension funds, especially if markets remain volatile or recover slowly.
The ongoing uncertainty regarding U.S. trade policy could further increase volatility in capital markets. Pension funds and other institutional investors are therefore advised to regularly review their portfolios and adjust as necessary to diversify risks and mitigate potential negative impacts. Careful monitoring of political developments and their economic consequences remains essential.
Most pension fund coverage ratios improved further over the 2024 year. According to the OAK less than 1% were estimated to be below the key 100% coverage ratio at 30 June 2024 (compared to 7% at the end of 2023). That means there are very few pension funds below 100% where they are required to take additional actions and have further supervisory authority oversight. The average coverage ratio of Swiss pension funds increased from 110% at end 2023 to 115.6% in mid-2024 and would have increased further by the end of 2024. Typical target coverage ratios of Swiss pension funds are in the range of 115% to 120% so it can now be said that the average Swiss pension fund is in a very strong position. This buffer above 100% (the investment fluctuation reserve) is aimed to ensure that reasonable interest credits can be granted to member accounts even when there are poor investment years like in 2022. The average Swiss pension fund is in a strong position and well placed to handle any further investment market corrections including the correction that has already occurred in early 2025.
The regulatory set-up of Swiss BVG pension funds is based a lot on smoothing volatility in key elements of pension parameters. Some key examples of this include:
This system came under some pressure over the last 20 years or so because for the first 15 or so years of that period there was persistent gradual reductions in bond yields but most pension funds did not reduce their technical interest rates as significantly as bond yields decreased (due to the smoothing approach). In many senses Swiss pension funds were playing catch-up for a large portion of this period with their technical interest rate (and typically also conversion rate) lagging above the reducing bond yields. Nevertheless, slowly but surely and particularly over the last 5-10 years foundation boards have had to react to the persistently lower bond yield environment by decreasing their technical interest rates (thus increasing their statutory liability for pensions). This increase in liabilities led to pressures on funding coverage ratios except when strong returns were simultaneously being achieved.
The prolonged period of gradual bond yield decreases ended around the time the Covid-19 pandemic took hold during 2021 and Swiss 10-year government bond yields increased suddenly from those lows at around -0.5% to fluctuate between +0.5% and +1.5% since then. Due to the extended period of negative bond yields most pension funds had reduced their technical interest rates to between 1% and 2% before the increase in yields from 2021 and they typically remain at those levels now even after the volatility of the last few years. It is a good example of the advantages of the smoothing approach because there has not been a premature reaction to the short-term spike in bond yields which occurred around the end of 2022 and beginning of 2023. With the smoothed approach, liabilities have remained relatively stable over the last 5 years and perhaps more importantly conversion rates which directly impact member pension benefits have also remained stable.
It now feels like average pension fund technical interest rates (and conversion rates) are broadly reasonable considering bond yields of recent years. Technical interest rates (the long term expected return of pension fund used to value liabilities) of 1.5% to 2% seem broadly reasonable with 10-year government yields currently between 0.5% and 1.0%. So Swiss pension funds are no longer playing catch-up with the persistent period of reducing bond yields and may have reached a more stable equilibrium with their parameters, relative to the “new normal” for bond yields. Of course, we don’t know if this is the “new normal” for bond yields and there are plenty of uncertainties that could drive yields up or down in the future but for now Swiss pension funds seem almost in balance. As a further bonus, the last couple of years have seen strong asset returns so most pension funds are in very strong financial positions. Does this mean Swiss pension funds are finally back in balance from all perspectives including liabilities, conversion rates and asset buffers (investment fluctuation reserves) to deal with asset shocks like what has happened after Trump’s “liberation day”? The answer is probably a cautious yes because you never know what market shocks are around the corner. It is fair to say that most pension funds are in as strong a position as they have been for the past 20 years to weather such potential future shocks.
As noted above, pension fund financial positions were generally very strong at the end of 2024 with many funds close or already at their target investment fluctuation reserve (ideal asset fluctuation buffer). The recent 2025 asset market shock will have deteriorated those positions somewhat, but most pension funds would remain in strong positions. This has occurred a few times in the past 20 years but there is a significant difference currently: while cumulative inflation was practically zero from 2008 to 2021, prices have increased by nearly 7% over the past four years. This means many funds are both in a financial position to make an adjustment to pension and also there is more of a need to make an adjustment because there has been significant recent cost of living price increases.
A disadvantage of the smoothed parameter pension system referred to above is that when there is a fundamental market shift like has occurred over the last 20 years of bond yield decreases (which eventually reduced conversion rates for new retirees), there are significant differences in the value of pensions given to retirees depending on when they retired. Conversion rates have dropped by nearly 15% on average over 10 years, and thus even within the group of retirees over this period, retirement pension levels have been significantly different. For example, active members retiring recently received an implicit average implicit return for their entire retirement slightly above 2% pa, while retirees who retired 10 years or more ago benefited from above 3% pa implicit interest for retirement. This means there are 10+ years of pensioners who retired prior to 5-10 years ago on significantly higher pensions than those who retired in the last 5 years and now pension funds are considering giving pension increases to all pensioners.
The question is what approach these pension funds should take to ensure fair treatment between active members and different groups of retirees, knowing that the interest credited to active members has often been lower than that effectively passed onto older retirees. Until now, the solutions often adopted were relatively simple: either not granting inflation adjustments or paying a one-time amount, often a lump sum, as a gesture towards retirees. These had a marginal financial impact, incomparable to the lifetime increase of ongoing pensions. In the current environment of strong coverage ratios, pension funds will be more likely to be considering providing more significant adjustments to current pensioners. These funds would be well advised to document their decision with a model allowing for the distribution of effective returns provided between active members and retirees, but also within groups of retirees. To provide fair treatment following the “generational change” in conversion rates (due to bond yields being persistently lower) the goal is to avoid creating "super loser" groups, i.e. new retirees who received lower interest as actives in the growth phase before retirement, converted to pension at a new lower conversion rate and receive the same pension increases as other earlier retirees.
Some pension funds in the market have started applying distribution models like this for pension increases, for example to give less or no pension increases to pensioners who retired further in the past on higher conversion rates. However, these pension funds that have implemented an approach like this are in the minority, the majority have not implemented any distribution model strategy. Defining a distribution strategy is not a simple process and it should be tested considering different scenarios to see how sustainable it will be in the future. Keeping track of such distribution models will be complex depending on the accuracy of the approach chosen and pension fund boards will need to balance practicality with fairness when deciding on their distribution model (if any). This is a challenge facing potentially all Swiss pension funds in the coming years while the industry has not yet found a workable straight forward solution that can be easily communicated to employees and pensioners. It will likely become more of an issue if inflation remains at modest levels of recent years and could become critical if there is period of higher inflation like other Western countries experienced over the last 5-6 years (Switzerland only experienced modest inflation over this period).
Another consideration in the new market environment is how it will influence the current trends in the market on the type of pension vehicle used by companies including:
One of the main reasons for AXA exiting the fully insured market and many companies moving away from fully insured funds was the sustained period of low bond yields (insurers must invest heavily in bonds). While we expect the trend away to continue, albeit at a slower pace, it is now clear for most that over longer-term horizons an asset portfolio including shares, property and other alternative asset classes perform better than bond only portfolios, also to the benefit of the insured members. We would suggest that members (and their employers) will remain awake to this reality over the longer term and employers wishing to maintain the best value for money pension solution for employees will generally continue to identify the best solutions for their employees.
The gain in prominence from DC (1e) pension plans has partly been due to companies wishing to de-risk their pension balance sheets under IFRS and US GAAP (companies must report regular Swiss cash balance plans as DB plans while 1e plans do not impact the balance sheet). Due to the strong position of pension funds and relatively higher corporate bond yields in recent years, company pension balance sheets have improved significantly, and many Swiss company pension balance sheets are in surplus which has relieved a lot of pressure. One contention could be that companies will have less interest in implementing DC (1e) pension plans as a result. On the contrary, we don’t think this will be the case because there were other reasons for companies implementing DC (1e) plans such as:
There has been an uncertain start to the 2025 year after initial positive returns early in the year were offset by a shock to the markets with the Trump administration’s sudden introduction of import tariffs. Pension fund asset returns were returns typically between around 0% and -1% for the first quarter of 2025 with further market downturn following the tariff announcements. This puts a dampener on the strong financial positions of pension funds from the beginning of the year, but it is hardly a disaster. Afterall, market downturns are expected, and most Swiss pension funds have built up solid investment fluctuation reserve buffers to prepare for exactly such downturns so will remain in reasonable positions even if this market downturn ends up being a more significant, extended downturn. Nevertheless, there remains many challenges for pension funds to maintain and improve the financial security for their members including managing their asset liability risks, navigating the complexities of the new ESG investment world, considering potential mechanisms for generational pension adjustments and increased governance requirements. We plan to update this NEWS in the coming year to provide again a sense of direction for Swiss pension funds.”
