WTW Swiss Pension Finance Watch – Q1/2023
ZURICH / LAUSANNE / GENEVA, April 13, 2023 – WTW’s Pension Index finished Q1 with a slight increase of 0.6% since the beginning of the year. The simultaneous positive asset returns and increasing liabilities, due to decreasing bond yields, worked to largely offset each other.
The fall in discount rates during Q1 resulted in liabilities increasing by 2.3%. Meanwhile assets returned 2.8% which outweighed the increase in liabilities. WTW’s Pension Index increased by 0.6% during Q1. The illustrative funded ratio index (i.e. ratio of pension assets to pension liabilities) was at 128.8%, as shown by WTW’s Pension Index per 31 March 2023 and up from 128.2% on 31 December 2022.
After the turbulent year that companies’ pension balance sheets experienced in 2022, the calm start to 2023 will have been welcomed by key players in the market. Despite swings in both discount rates and asset values during the quarter, companies’ pension balance sheets at the end of Q1 differed only slightly compared to the beginning of 2023.
“Given the current market uncertainty from issues with US and Swiss banks and potential contagion to the wider banking sector, companies need to remain alert regarding their pension balance sheets”, comments Adam Casey, Head of Corporate Retirement Consulting at WTW in Zurich. “As we have seen in the past, there is no guarantee that assets and liabilities will move in the same direction, especially during turbulent times. In addition, another challenge lies ahead in the future with the potential to further increase company pension liabilities, because for the first time in more than 20 years pension funds across the whole market may need to consider increases to pensions in payment, due to the return of inflation”, he continues.
The fall in local funding levels of pension funds during 2022 mean that companies may also need to more keenly monitor the financial health of pension funds on a local funding basis.
Pension fund assets started somewhat positive into 2023, even though the negative February slightly dampened returns.
The turbulences surrounding the banking sector moved the markets in March and significantly increased volatility. The major central banks continued to raise their policy interest rates to fight inflation. The emerging tensions in the financial sector led to a noticeable tightening of financing conditions, and additional rate hikes are less likely to be expected.
Inflation figures have fallen steadily over the first quarter and were still 6% for the US (February) and 6.9% for the Eurozone and 2.9% for Switzerland in March 2023.
“It is increasingly likely that interest rate-sensitive investment demand will come under strong pressure, triggering recession.”
Alexandra Tischendorf | Head of Investment, Switzerland
”It is increasingly likely that interest rate-sensitive investment demand will come under strong pressure, triggering recession. Uncertainty in the banking sector will accelerate this process”, says Alexandra Tischendorf, Head of Investment at WTW.
The Swiss banking sector has received much publicity during Q1 due to the significance of its role in the pension markets. The commotion in Q1 has unsettled many private and institutional investors who hold investments and accounts with banks in Switzerland.
“Pension Fund boards should review their current asset managers and custodians under the advice of their independent investment consultant and make any changes deemed necessary", Alexandra advises.
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 WTW 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:
WTW’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.
