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Press Release

Pension fund balance sheet recuperates despite ongoing Corona pandemic

Willis Towers Watson Swiss Pension Finance Watch – Q2/2020

July 14, 2020


ZURICH, 14 July 2020 – Swiss companies’ pension balance sheets realised a welcome improvement thanks to the market rally during Q2. The market rebound lead to the Willis Towers Watson Pension index returning to over 100%. The positive investment returns saw asset values return to a similar level to a year ago, but their effect on company pension balance sheets was somewhat dampened by the fall in discount rates for the quarter, which increased liability values. Overall the illustrative funded ratio index (i.e. ratio of pension assets to pension liabilities) rose by around 2.5%, as shown by Willis Towers Watson’s Pension Index, which increased from 98.3% as at 31 March 2020 to 100.7% as at 30 June 2020.

The pension fund index of Willis Towers Watson’s Swiss Pension Finance Watch is published quarterly by the consultancy and is based on the International Accounting Standard 19 (IAS19). The index gives an indication of how the general funding position under IAS19 has changed from quarter to quarter, as opposed to giving the typical funding ratio of Swiss pension plans.

Recovery in asset values eclipses increase in liabilities

The turbulence caused by the COVID-19 pandemic in the first half of 2020 has led many companies to monitor their balance sheets and future profitability prospects closely, including their company pension liabilities and costs. At the end of March, as many countries were just beginning to get a hold on spiralling COVID-19 outbreaks, few could have predicted the recovery in asset values that would occur during the second quarter. Owing to this bounce back in the markets, Pension Funds will have been relieved to realise a strong, positive return in Q2. The recent volatility in corporate bond yields continued, however, and the net fall resulted in an increase in liability values. Although to many counterintuitive in the current environment, companies’ balance sheets improved in comparison to the end of Q1, as the asset returns exceeded the increase in liabilities.

The current global situation, unparalleled in living memory, continues to remind us that we should expect the unexpected.”

Adam Casey,
Head of Corporate Retirement Consulting, Switzerland

“The current global situation, unparalleled in living memory, continues to remind us that we should expect the unexpected.” says Adam Casey, Head of Corporate Retirement Consulting at Willis Towers Watson in Zurich. “Many companies will not have previously faced the breadth and magnitude of challenges that have been thrown at them this year so far. We continue to offer advice to companies on options for managing their pension liabilities and current benefit designs, as they look to reduce the volatility and impact of their pension arrangements on the balance sheets.”

Market recovery doesn’t signify end of turbulence

The unexpectedly strong market recovery should not lull investors into a false sense of security. The effects of the COVID-19 crisis have by no means been fully realised. With the increases in unemployment in major economies such as the US, and with many companies globally being forced to scale back their operations, it is quite hard to comprehend the optimistic market sentiment that is valuing companies at levels seen one year ago. The concerted effort of central banks to mitigate the economic impact of the pandemic is arguably the main reason for the steady rise in asset values during Q2, despite the early signs emerging of a potential second wave of COVID-19 cases. Given the resulting huge increase in levels of national debt there is a big question mark about the rationality of investors’ behaviour and whether the current market levels can be sustained.

Was Q1 just a blip?

Unfortunately, it is unlikely that Q1 captured the full extent of the economic impact of COVID-19. “It would be premature to assume the financial fallout of the coronavirus is behind us, when so much remains uncertain, about the development of the virus and its effect on asset returns,” warns Michael Valentine, Investment Consultant at Willis Towers Watson in Zurich. “More than ever, it is crucial that Pension Fund Trustees remain calm and focus on the delivery of long-term, diversified investment returns”, he continues. Given the very significant downside risks and subdued prospects for asset returns, ensuring that the assets are diversified across different risk drivers will put pension funds in the best position to weather the uncertain economic future.

Strong returns from assets somewhat offset by growing liabilities

The Pension Index measures the movement in the ratio of the assets to the defined benefit obligation of a sample pension plan (index level 100% on 31.12.2006).
The Pension Index measures the movement in the ratio of the assets to the defined benefit obligation of a sample pension plan (index level 100% on 31.12.2006).

The continued unprecedented global situation seems to be full of surprises. The 7% market return in Q2, as represented by Pictet’s 2005 BVG-40 plus Index, has been welcomed by companies with significant balance sheet positions. Corporate bond yields fell back to their end of 2019 level, increasing pension liabilities by roughly 5%. The effect of the increase in liabilities over the quarter dampened the effect of the positive asset return. Nevertheless, the index rose to back over 100%.

Background information on the study

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 Willis Towers Watson 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:

  • Investment performance on fund assets
  • Changes in economic assumptions on plan liabilities (as measured by international accounting standards)

Willis Towers Watson'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.

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