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Extraordinary start to 2021 for pension fund index

Willis Towers Watson Swiss Pension Finance Watch – Q1/2021

Retirement|Investments
N/A

April 20, 2021

Company balance sheets in respect of Swiss pensions started 2021 strongly.

ZURICH / LAUSANNE / GENEVA, April 14, 2021 – Pension fund assets continued to grow with a positive return of almost 4% whilst corporate bond yields also bounced up away from the 0% mark. The result of these two favourable movements means that company balance sheets at the end of Q1 2021 are the strongest they have been since the Willis Towers Watson Pension Fund Index began. The illustrative funded ratio index (i.e. ratio of pension assets to pension liabilities) increased by 7.9%, as shown by Willis Towers Watson’s Pension Index, which increased from 104.7% as at 31 December 2020 to 112.6% as at 31 March 2021.

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.

Reduction in companies’ pension liabilities

Discount rates broke their downward trend of the last 9 months and jumped in the first quarter of 2021. During Q1 the discount rate curve steepened somewhat, with the 20 basis point increase at a duration of 18 years meaning companies will see relief from the corresponding fall in their liabilities by around 3.5%. However, it must be remembered that discount rates remain in a historically low range and it is clearly too soon to assume that they have changed direction.

Typical pension fund asset returns over the year to 31 March 2021 have been in the region of a whopping +20%.”

Adam Casey
Head of Corporate Retirement Consulting, Zurich

“The main reason for the strong overall improvement in company pension balance sheets over the last year is the truly remarkable rebound in asset values since the doom and gloom of the COVID-19 pandemic outbreak and resultant asset drops at the beginning of 2020,” remarks Adam Casey, Head of Corporate Retirement Consulting at Willis Towers Watson in Zurich. “Typical pension fund asset returns over the year to 31 March 2021 have been in the region of a whopping +20%”, he continues.

The release of the BVG technical bases for 2020 will be a further relief to companies’ liabilities at their next fiscal year-end for those adopting them, with the latest tables showing lower mortality improvements than expected as well as a decrease in disability incidences and generally higher turnover within companies. A reduction in liabilities of around 4-6% due to adopting the updated tables will be likely for most companies.

Pandemic resilience of the markets

As the third wave of the COVID-19 pandemic knocks on Europe’s doors and the vaccine roll-out is inhibited by one setback after the other, the asset markets continue to behave as if they were naturally immune to the virus, with a typical pension fund realising a 3-4% increase in their asset values over the first quarter of 2021.

Of course, there is no vaccination for markets and there are formidable challenges ahead, which will test their true resilience. Michael Valentine, Investment Consultant at Willis Towers Watson in Zurich expands: “The pandemic has not just pressed the pause button on certain economic activity but has catalysed or accelerated changes in the way we work, think and invest. Key material themes that we have identified going into 2021 are the shift in monetary and fiscal policy, the rise of China and the increased awareness that sustainability, notably climate change, is a financial matter”.

As investors realise that there are financial consequences to their stance (or non-stance) on ESG matters, they will need to address the resulting increase in complexity in their decision-making. “Whether embarking on a carbon-journey plan for the entire portfolio or simply initiating a dialogue with the global equity manager about climate risk, pension funds first need to define a clear set of related beliefs.” Valentine ventures. For pension plan trustees a diversified asset allocation that can meet its obligations with sufficient certainty and weather shock scenarios is crucial for the ongoing financial health of the plan.

Positive asset returns result in pension index improvement

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).
Willis Towers Watson Pension Index - Switzerland

The 3.7% market return in Q1, as represented by Pictet’s 2005 BVG-40 plus Index, has been welcomed by companies with significant balance sheet positions. Corporate bond yields also increased, reducing pension liabilities by roughly 3.6%. The effect of the reduction in liabilities complemented the positive asset return and the index realised an extraordinary increase to its highest level since its beginning.

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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