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Press Release

Pension fund index fights to maintain level over quarter

Willis Towers Watson Swiss Pension Finance Watch – Q1/2020

October 14, 2020


ZURICH / LAUSANNE / GENEVA, 14 October 2020

Swiss companies’ pension balance sheets fought to maintain their level during another volatile quarter. Despite a fall in bond yields for the third successive quarter, the Willis Towers Watson Pension index remained just over 100%. The positive investment returns saw asset values stay at a similar level to a year ago, but the effect of the fall in discount rates, which increased liability values, caused an overall slight fall in companies’ balance sheets. Overall the illustrative funded ratio index (i.e. ratio of pension assets to pension liabilities) fell by around 0.6%, as shown by Willis Towers Watson’s Pension Index, which decreased from 100.7% as at 30 June 2020 to 100.1% as at 30 September 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 doesn’t quite match increase in liabilities

As we enter Q4, companies begin to focus on their year-end accounting, which includes the valuation of their pension plans. With discount rates having become negative at the lowest durations and around 0.1% at remaining durations, once again companies will be grappling with the risk of increased liabilities at year end. Furthermore, the rally in the asset markets seen in Q2 following the beginning of the COVID-19 pandemic has slowed and in Q3 the returns were not enough to offset the fall in the discount rates. “Swiss corporate bond yields have been extremely volatile below the 1.0% level for more than 5 years and below 0.5% level for the last 2 years, with them now hovering close to 0% again,” says Adam Casey, Head of Corporate Retirement Consulting at Willis Towers Watson in Zurich. Whilst discount rates have briefly dropped below 0% a couple of times there has been no sustained period with negative discount rates. With the current Q3 discount rate level, it looks like the 0% barrier could be about to be tested again soon. “Similar to a year ago, companies need to be braced for the possibility of negative discount rates for 2020 calendar year end IAS 19 valuations”, he adds.

Similar to a year ago, companies need to be braced for the possibility of negative discount rates for 2020 calendar year end IAS 19 valuations.”

Adam Casey | Head of Corporate Retirement Consulting, Willis Towers Watson Zurich

Negative discount rates mean that future liabilities are no longer being discounted to calculate their value in today’s terms but are instead being inflated and their potential effect on the year-end accounting adds another layer of concern for companies who are closely monitoring their liabilities given the challenges that have been thrown at them this year so far.

Market effect of the second wave

Despite the second wave of the pandemic now taking hold in many countries, the markets remain remarkably resilient. Whilst the returns in Q3 were positive, at a little less than 2% for a typical pension fund, overall market levels are not yet back up to pre-crisis levels. Nevertheless, Michael Valentine, Investment Consultant at Willis Towers Watson in Zurich, finds that markets on the whole are at best neutrally priced and certainly not cheap given the economic effects of the COVID-19 crisis, including the risks brought by an uncomfortably large second wave. “Developed equity market valuations remain at the upper end of historical ranges, as investors do not expect medium term earnings potential to be affected by the significant downside risks,” he says. Central banks have continued to take aggressive measures to support the economy, but the resulting huge increase in levels of national debt also threatens the stability of the markets.

Asset allocations during uncertain times

COVID-19 is only one of many risks that pension fund trustees should have in mind when thinking about their investments. Although this is the crisis dominating our news, climate change and its economic impacts have by no means disappeared. In fact, “sustainable investing, for example reflecting considerations of climate change, broader societal issues and governance (together ‘ESG’), was seen by many as a luxury, ‘soft’ or non-financial viewpoint, relevant only in buoyant markets. However, this year’s pandemic has caused many investors to rethink and take the potential financial impact of ESG factors on their portfolios more seriously”, notes Michael Valentine.

Growing liabilities trigger fall in pension index

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 1.9% market return in Q3, 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 2.5%. The effect of the increase in liabilities over the quarter slightly outweighed the effect of the positive asset return. Nevertheless, the index stayed positive at just 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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