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Press Release

Unfavourable market conditions for Pension index

Willis Towers Watson Swiss Pension Finance Watch – Q2/2019

Retirement|Investments
Risk Culture

August 9, 2019

ZURICH, 11 July 2019 – Swiss companies’ pension balance sheets started the year positively despite plunging discount rates, offsetting part of the large losses made at the end of 2018. Q2 saw a further reduction in discount rates to reach levels last seen in 2016 but this quarter’s positive asset returns were not a sufficient offset to improve the index. Overall the illustrative funded ratio index (i.e. ratio of pension assets to pension liabilities) decreased by around 0.6 percentage points, as shown by Willis Towers Watson’s Pension Index, which decreased from 104.1% as at 31 March 2019 to 103.5% as at 30 June 2019.

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.

Optimizing of risk exposure to be considered

Thanks to the offsetting effects of positive asset returns, particularly from equities, as the discount rate has continued to fall, the change in the Willis Towers Watson pension index over the second quarter in 2019 is not dramatic in itself. However Adam Casey, Head of Corporate Retirement Consulting at Willis Towers Watson in Zurich notes: “This demonstrates the importance of monitoring the ongoing impact of changes in the discount rate and assets, which can be volatile, on pension plan funding and corporate accounting. The continued reduction in discount rates is proving painful for companies’ accounting costs but having assets that at least partially move in tune with the liabilities provide some welcome relief on the balance sheet.”

Employers need to be aware of the potential impact of market risks on the costs associated with their pension plans and the direct impact on their own corporate accounts. Keeping an eye on these factors on a regular basis can help ensure that there are no shocks arising. Companies can also seek to optimise risk exposure by reviewing the design of their pension plans.

Pension funds can often use their long-term investment horizon to their competitive advantage, for example by exploiting the (albeit diminished) illiquidity risk premium.”

Michael Valentine
Investment Consultant

Importance of “future proof” investments

Whilst the overall effect last quarter was to see the asset markets rise, it was a shaky ride with May being particularly volatile. “Pension funds can often use their long-term investment horizon to their competitive advantage, for example by exploiting the (albeit diminished) illiquidity risk premium”, says Michael Valentine, Investment Consultant at Willis Towers Watson in Zurich. Other risk premia, which may well transcend the traditional “asset class” way of viewing investments can also be built in to create robust, diversified portfolios, able to withstand shorter term “noise” in the market movements. The ever-increasing buzz surrounding socially responsible investing, sits nicely with this perspective and should form an integral part of the strategic decision-making process. “Further sustainable investment approaches (ESG) should help to equip companies to adapt in this fast changing world”, adds Michael Valentine.

Increase in liability values partially offset by asset returns

Despite a fall in the asset markets in May, Q2 finished with many indices close to their all-time highs supplementing their “rebound gains” seen in Q1 2019, in the wake of the fraught end to 2018. The healthy but unremarkable return of 2.4%, as represented by Pictet’s 2005 BVG-40 plus Index, was welcomed by companies with significant balance sheet positions as corporate bond yields continued to tighten. As corporate bond yields reduced by a further 16 basis points to reach a new low since 2016, pension liabilities increased by 2.9%. The combined effect of the increase in pension liabilities and the partially offsetting positive asset returns over the quarter lead to a slight fall in the index in the wake of the strong rebound seen in Q1.

The Pension Index measures the movement in the ration of the assets to the defined benefit obligation of a sample pension plan with index level 100% on 31.12.2006. As per 30 June 2019 the index is at 105%.
Willis Towers Watson Pension Index - Switzerland

The Pension Index measures the movement in the ratio of the assets to the defined benefit obligation of a sample pension plan with index level 100% on 31/12/2006.

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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