ZURICH, 14 July 2015 – The second quarter of this year brings an end to the continuing decrease in discount rates, which had reached an all-time low in the previous quarter. With the discount rate increasing by almost 30 basis points, the pension fund liabilities decreased accordingly. However, this good news for companies is somewhat offset by the negative asset return of the benchmark portfolio over the period. Overall the illustrative funded ratio index (i.e. ratio of pension assets to pension liabilities) increased by 2.0 percentage points, as shown by Towers Watson’s Pension Index, which increased from 95.0 as at 31 March 2015 to 97.0 as at 30 June 2015.
Towers Watson’s Swiss Pension Finance Watch's pension fund index is published quarterly by the consultancy and is based on the International Accounting Standards (IAS). The index gives an indication of how the general funding position has changed from quarter to quarter, as opposed to giving the typical funding ratio of Swiss pension plans.
Short respite for Swiss pension plans – future development uncertain
“The current development of increasing discount rates is a well overdue, promising development for pension plans and company sponsors alike”, comments Peter Zanella, Head of Retirement Solutions at Towers Watson in Zurich, “But this potentially may only be a short respite. With the ongoing negotiations between the European Union and Greece, there is still tremendous uncertainty about the future development of equity and bond markets and, equally importantly for Switzerland, the development of the EUR/CHF exchange rate.” Zanella continues “During these times of market turmoil companies and pension plans should not be complacent about short term good news but should closely monitor the situation to avoid exposing their pension plan to unnecessary risks.”
Decrease of liabilities outweigh poor asset performance
The pattern observed during the preceding quarters was reversed, as this quarter saw increasing bond yields and negative asset returns. On average, across different durations the Swiss yield curve increased by about 20 bps. That meant a decrease in the value of pension liabilities, with these being discounted by a higher interest rate. This decrease in the pension liabilities was partly offset by a decrease in the asset value of the benchmark portfolio, as the return from the asset classes held by typical Swiss pension schemes was negative (as represented by Pictet’s BVG-40 plus Index, which decreased by 2.4% over the quarter). Overall, the decrease in the pension liabilities outweighs the poor asset performance and as a consequence, the latest quarter saw an increase in the illustrative funding ratio. If this short term trend of rising interest rates continues until the end of the year then companies may be looking at lower balance sheet pension liabilities on their financial statements.
“Somewhat unexpectedly the news about a potential ‘Grexit’ - has been good news for pension plans due the corresponding increase in interest rates which appears to have come from increasing fears of contagion in the Eurozone. Contagion meaning that Greece’s debt problems spread to other countries and this prospect has seen investors start to dump bonds from many European countries.”, says Adam Casey, Senior Consultant at Towers Watson.
Towers Watson Pension Index for Switzerland
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 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)
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.
About Towers Watson
Towers Watson is a leading global professional services company that helps organizations improve performance through effective people, financial and risk management. With some 16,000 associates around the world, the company offers solutions in the areas of occupational pensions and benefits, HR and compensation management, and risk and capital management, including advising insurers and reinsurers. In Switzerland, Towers Watson has offices in Zurich and Lausanne.