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Pension fund assets crash with global Corona virus turmoil

Willis Towers Watson Swiss Pension Finance Watch – Q1/2020

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March 16, 2020

Swiss companies’ pension balance sheets deteriorated significantly from COVID-19’s effect on the markets during the first quarter 2020.

Zurich, 16 March 2020 – Swiss companies’ pension balance sheets deteriorated significantly from COVID-19’s effect on the markets during the first quarter 2020. The crash in the value of assets lead to the Willis Towers Watson Pension index falling below 100% for only the second time in three years. The negative return on assets in Q1 wiped out most of the great asset performance realised in 2019, but some relief was offered by the increase in discount rates which helped partially offset the decline in the balance sheet position. Overall the illustrative funded ratio index (i.e. ratio of pension assets to pension liabilities) fell by around 7%, as shown by Willis Towers Watson’s Pension Index, which decreased from 105.2% as at 31 December 2019 to 98.3% as at 31 March 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.

Decrease in liabilities alleviates impact of crash in asset values

The first quarter 2020 has left most companies conscious of their balance sheets and future profitability prospects and this includes their company pension liabilities and costs. Pension funds started the year in a strong position, following an excellent year for asset returns in 2019. However, the market crash during Q1 has wiped out around 75% of those returns realised during the previous year. An overly painful hit to company books was avoided as companies’ balance sheets found some relief in the simultaneous reduction in liabilities thanks to the increase in corporate bond yields, stemming from the risk of companies defaulting on their debt increasing in the current unpredictable economic environment.

We expect to see an increased interest from companies in actively managing their pension arrangements.”

Adam Casey,
Head of Corporate Retirement, Zurich

“As we have all realised over the last month, this is a unique and unprecedented global crisis that we are currently experiencing” says Adam Casey, Head of Corporate Retirement Consulting at Willis Towers Watson in Zurich. “Whilst the focus clearly must be on the humanitarian side of this crisis, companies will also have a multitude of financial challenges to overcome in the near future including meeting their obligation to pay their employer contributions to the pension fund. With a recession now almost certain, companies are likely to be more conscious than ever about their pension arrangements. We expect to see an increased interest from companies in actively managing their pension arrangements – whether that be managing the current liabilities or reviewing the current benefit design and pension vehicle to ensure it is fit for purpose for the future.”

Market turbulence in later half of Q1

After the strong returns seen during 2019, the market sentiment as we entered 2020 was still positive, with indices spending January at a similar level to the end of Q4 2019. It wasn’t until the final week of February that the markets began to show a significant reaction to the global events that were emerging. Markets started to turn in early March when Saudi Arabia and Russia tussled over oil production and pricing and then the COVID-19 pandemic emerged to cause ever increasing damage. Oil prices, which had already fallen this year, have since plummeted to a third of their price at the beginning of 2020. By the time the WHO announced a global pandemic in mid-March, uncertainty had already gained a stranglehold on market sentiment. Despite the concerted action taken by central banks that introduced further, significant measures to support markets, the direct impact of the pandemic on commercial activity across the globe has caused investors to de-risk in favour of more stable assets such as government bonds. Not even high- quality corporate bonds were seen to offer adequate protection against default, as all types of organisation and industry suffered from the lockdowns and closures. This has resulted in the increases seen in credit spreads and the corresponding decline in pricing for risky assets.

How should pension funds react?

There is one very clear recommendation for Pension fund Trustee Boards under these circumstances, according to Michael Valentine, Investment Consultant at Willis Towers Watson in Zurich:

Don’t panic. Pension Funds have the luxury of a long-term investment horizon.”

Michael Valentine,
Investment Consultant, Zurich

“Don’t panic. Pension Funds have the luxury of a long-term investment horizon and therefore the strategic asset allocations should be focussed on the long-term, designed to weather economic downturns.” Nevertheless, with a revised, recessionary future now revealing itself, it is advisable to revisit both the economic and demographic assumptions underlying the existing investment strategy, especially if there has been a significant change to the scheme’s risk capacity. Broadly diversifying across multiple return drivers remains as important as ever. “More immediately individual schemes will need to assess their liquidity needs, which, ideally, will not mean needing to sell undervalued assets. Further, assuming no fundamental changes to the structure and risk-capacity of the pension scheme, we generally recommend leaving existing rebalancing mechanisms untouched, rather than making calls on market timing,” he advises. On a more positive note, the change in economic prospects does also present investment opportunities, as different assets reach new pricing levels. “These opportunities should be explored within the scheme’s long-term, forward-looking risk framework,” Michael Valentine concludes.

Willis Towers Watson Pension Index for Switzerland
Willis Towers Watson Pension Index for Switzerland

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 unprecedented global events paved the way for the shocking start to the year that asset markets had, with many indices falling back to levels of several years ago. The return of -10.4% in Q1, as represented by Pictet’s 2005 BVG-40 plus Index, has been unpalatable for companies with significant balance sheet positions. Corporate bond yields increased for the second consecutive quarter, by a further 25 basis points, decreasing pension liabilities by roughly 4.0%. The effect of the negative asset returns over the quarter offset partially by a decrease in pension liabilities lead to the index falling below 100% for only the second time in three years.

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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