Press Release

Swiss companies' good performance counterbalances their increased pension liabilities

Pension Risk Study on the coverage ratios of SLI companies

July 4, 2017
| Switzerland

ZURICH, 4 July 2017 – In 2016, falling interest rates generally increased the value of the biggest Swiss listed companies' pension liabilities, according to the Pension Risk Study produced by Willis Towers Watson. However, due to good asset performance of most pension funds, the coverage ratio as measured according to international accounting standards remains constant. Other factors contributing to this were changes to the accounting methods used by pension funds and the de-risking measures taken by pension plans.

The Willis Towers Watson study has an international focus, looking at the leading exchange-listed firms in Switzerland and analysing the funding coverage of pension liabilities as shown in the balance sheets of all defined benefit pension plans both within Switzerland and abroad according to the international accounting standards IFRS and US GAAP.

“Willis Towers Watson has adopted this approach in order to improve the comparability of companies based in Switzerland on an international basis. This means the funding ratio illustrated differs considerably from the regulatory coverage ratio under Swiss GAAP”, explains Stephan Wildner, Head of Retirement at Willis Towers Watson in Zurich.

No changes to investment strategies; results remain stable

When compared with the previous year's figures, the pension liabilities of the SLI companies analysed increased by CHF 1.7 billion (+0.8%) and those of the SMI companies by CHF 1.2 billion (+0.6%). Over the same period, increases in the value of the plan assets allocated exclusively to cover these liabilities were able to compensate for these increases, so the average coverage ratios for both SMI and SLI companies remained stable. In 2016, then, as they had been in the preceding year, pension liabilities were 83% (SMI) and 80% (SLI) covered by the plan assets.

It is worth stressing that the investment strategy adopted for these plan assets over past years remained largely unchanged despite the prevailing low interest rates: SLI companies, for example, hold ~33% of their investments in equities, ~40% in bonds, and ~27% in real property and alternative asset classes.

“Despite a reduction of some 40 basis points in the average interest rate applied, which increases the value of the pension liabilities, pensions liabilities appear to have stabilised,” explains Peter Zanella, a pension fund actuary at Willis Towers Watson, He adds. “What we can conclude from this is that some firms have taken steps to manage their pension commitments. Among the typical examples of such de-risking measures are the reduction of conversion rates or limiting the amount that can be taken out as a pension at retirement.” In 2016, moreover, some companies adopted what are termed risk-sharing approaches to the reporting of pension liabilities in Switzerland, which likewise resulted in the companies’ pension liabilities being reduced.  

Falling discount rates increase liabilities in the first quarter

Even though interest rates were already very low, the average yield of corporate bonds in Switzerland again fell in the first three months of the current year by around 6 basis points, based on the duration of the individual pension plans.. Comparable declines were also recorded in the USA and the UK. Pension plans with a 15-year duration (as is typical of Swiss pension plans) would typically see their pension liabilities increase by around 1% in response to the fall in the discount rate. As market movements have been varied and hesitant, there is as of yet no evidence of definite trends. However, interest rates can be expected to remain low for the immediate future.   

More transparency, but also more volatility

As Eileen Long, a pensions actuary at Willis Towers Watson, explains, “Reporting on the basis of IAS 19 has exposed firms to greater volatility in their balance sheets over recent years, so it's worth looking for ways of understanding the financial risks associated with pension liabilities and keeping them in check.” And she stresses: “This will make it possible to implement investment strategies appropriate to the specific liability structure.”

Switzerland comes off well in an international comparison

Coverage ratios around the world remained stable in 2016. The average coverage ratio for (US) firms listed in the Willis Towers Watson Pension 100 Index remains unchanged at 82%. The coverage ratio for DAX companies fell from 65% in 2015 to 63% in 2016. That means that the SMI and SLI companies, with their unchanged figure of 80%, are still comparable with companies in the USA and well ahead of their German counterparts.

Background to the study

The Willis Towers Watson Pension Risk Study looks at the pension liabilities and the scale and development of pension costs for companies making up the Swiss Leader Index (SLI).  The SLI Index is made up of the 19 SMI companies plus the ten highest-valued of the 30 SMI Mid Cap securities. It therefore comprises the 29 most important names on the Swiss stock market and the country's leading listed companies.

In 2016, Willis Towers Watson analysed the occupational pension liabilities disclosed by the SMI and SLI firms on the basis of the international accounting standards IFRS and US GAAP. The results therefore differ fundamentally from the data based on Swiss GAAP FER26 published by Swiss pension funds. Willis Towers Watson's Pension Risk Study aims to gain an overview of the situations of Swiss companies and thereby to establish a sound basis on which to propose the specific measures individual companies should adopt.