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Press Release

Fall in discount rates hits companies pension balance sheets

WTW Swiss Pension Finance Watch – Q4/2023

January 11, 2024

WTW’s Pension Index decreased by 5.7% during Q4/2023.

ZURICH / LAUSANNE / GENEVA, January 11, 2024 – WTW’s Pension Index decreased by 5.7% during Q4/2023. Despite the strongest asset returns of any quarter since Q2/2021, the decrease in bond yields led to a significant increase in liabilities. Company balance sheets at the end of 2023 have fallen back to a similar level to two years ago.

Discount rates decreased around 55 basis points during Q4, which resulted in liabilities increasing by 8.7%. The return on assets of 3.8%, the strongest return of any quarter since Q2/2021, only softened the impact slightly. WTW’s Pension Index decreased by 5.7% during Q4. The illustrative funded ratio index (i.e., ratio of pension assets to pension liabilities) was at 119.9%, as shown by WTW’s Pension Index per 31 December 2023, and down from 125.6% on 30 September 2023.

Decreasing bond yields

The development of company pension balance sheets over Q4, as indicated by the WTW Pension Index, will be a disappointment to companies. For most of 2023 balance sheets remained relatively stable with only small movements in the assets and liabilities. At 119.9%, the index indicates that company balance sheets have deteriorated quite a lot since the beginning of 2022 (when the index was at 128.2%). As market expectations that central banks will begin to cut interest rates in 2024 heighten, bond yields are falling correspondingly. Companies, especially those reporting quarterly, may want to monitor changes in the discount rates closer in 2024 than they have over the last two years.

2023 was a positive year for investment returns, with the Pictet LPP 2005-40 plus achieving a 7.45% return for the year. Local pension fund balance sheets will now be in a stronger position than at the end of 2022 due to the relatively stable liabilities. This is because local funding technical interest rates were stable or in some cases even increased during 2023 (due to higher yields). For mark to market company pension accounting the discount rates have reduced year on year by around 85 basis points which has significantly increased liabilities. “Companies will have to accept a weakening of their balance sheet from their pension arrangements since last year due to the rising liabilities. However, they can take relief in the fact that increases in the local pension fund coverage ratio over the last year means a reduced risk of additional contributions for underfunding now and in the future,” comments Adam Casey, Head of Corporate Retirement Consulting at WTW in Zurich.

However, they can take relief in the fact that increases in the local pension fund coverage ratio over the last year means a reduced risk of additional contributions for underfunding now and in the future.”

Adam Casey | Head of Corporate Retirement Consulting WTW Switzerland

Market optimism drives Q4 returns

Q4 started off bleakly with a downward market turn in October, driven by a reduced market appetite for riskier assets as bond yields continued to rise. To the contrary, November saw the strongest monthly returns of the year as optimism that there will be no further interest rate increases from central banks and that they will begin easing rates in 2024 rose. Market optimism continued to drive returns in December, with the quarter seeing Pension Funds more than double the return that they had achieved at the end of Q3, as indicated by the WTW Pension Index.

The optimism of rate cuts is currently outweighing the expectation of slowed economic growth forecasts in market pricing. “A significant recession is still not priced into the markets. When and if the expectation of recession does finally get priced into the market, higher risk assets, including the equity markets, could be significantly hit,” heeds Alexandra Tischendorf, Head of Investment at WTW Switzerland.

Market behaviour is always extremely difficult to predict. With continued geopolitical risks, market pricing based so strongly on expectations that may not come to fruition and higher interest rates making highly liquid assets attractive, Pension Funds will be monitoring their portfolios closely in 2024. “We expect to see Pension Funds continue to place emphasis on maintaining well diversified portfolios in the interest of their long-term investment horizons,” continues Alexandra Tischendorf.

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 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:

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

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.

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