Press Release

Good year for Swiss companies’ pension plans with a lot of uncertainty to come

Pension Risk Study on the coverage ratios of SLI companies

July 11, 2018
| Switzerland

ZURICH, 11 July 2018 – With another year of high asset returns and interest rates staying level, the coverage ratio has increased in 2017 around 5% for the SLI companies. With interest rates slowly rising in the US and potentially also in the Eurozone as well as protectionism clearly on the go, the future economic development is hard to predict. However, the decision of the Swiss legislature about 1e plans has notable impact on de-risking strategies.

The internationally-focused Willis Towers Watson study looks at the top 30 SLI firms in Switzerland and analyses 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.

"Each year we look at how the markets have moved and the impact on pension liabilities of Swiss companies worldwide. It is good to see that Swiss companies are currently well-placed. From our experience, pensions matter to employees and should be a matter of importance for employers," explains Stephan Wildner, Head of Retirement at Willis Towers Watson in Zurich.

Results improve; but important to remain vigilant

When compared with the previous year's figures, the pension liabilities of the SLI companies analysed decreased by CHF 3.6 billion (-1.7%). Over the same period, plan assets increased by CHF 0.9 billion (+0.4%), so the average coverage ratios for the SLI companies increased by 5%. Changes to the accounting methods used by pension funds and the de-risking measures taken by pension plans were some of the contributing factors. In 2017, pension liabilities were 85% covered by the plan assets, up from 80% in 2016.

Assets return around 7.8% during 2017, with the asset allocation remaining largely unchanged despite the prevailing low interest rates. SLI companies, for example, hold ~35% of their investments in equities, ~40% in bonds, and ~25% in real property and alternative asset classes.

"With interest rates stabilizing in Switzerland and increasing in other regions, and high asset returns, coverage ratios of pension liabilities increased during 2017, based on international accounting standards. Despite the last few years' of good asset returns, it is important to pay attention to the increased market risks due to surging protectionism and its potential inflationary consequences. It is therefore highly recommended to look at the asset allocation and how it aligns with the expected timing of pension payments," explains Peter Zanella, a pension fund actuary at Willis Towers Watson in Zurich.

He adds, "When interest rates increase, as seen in many global markets, asset returns tend to fall, all other things being equal. Diversifying portfolios and looking for innovative asset classes now by performing asset liability studies can be a great way of securing future funding."

Increasing discount rates and declining assets in the first quarter

Even though interest rates have remained steady during 2017, the average yield of corporate bonds in Switzerland have increased in the first three months of 2018 by around 15 basis points. In the USA, increases of around 35 basis points and in the UK approximately 8 basis points have been seen. Pension plans with a 15-year duration (as is usual of Swiss pension plans) would typically see their pension liabilities decrease by around 2% in response to the increase in the Swiss discount rate. However, pension plan assets in Switzerland have generally decreased over the first quarter as well, roughly 1-2%. This is likely in response to the increasing interest rates, with no corresponding change in asset allocation

Companies looking at ways to decrease balance sheet

As Eileen Long, a senior pensions actuary at Willis Towers Watson in Zurich, explains, "In fall 2017, the Swiss legislature passed a law removing a legal minimum from the so-called 1e plans. These plans can more easily be treated as defined contribution (DC) under international accounting standards. Many companies, if not already providing these plans, are looking at implementing them, which will help remove some liability from their balance sheet." And she stresses: "This helps stabilize pension liability volatility and is a de-risking strategy, which removes some of the long-term risk facing pension funds today. It also provides flexibility and choice to many plan members."

Switzerland comes off well in an international comparison

Coverage ratios around the world increased in 2017. The average coverage ratio for (US) firms listed in the Willis Towers Watson Pension 100 Index increased from 82% to 87%. The coverage ratio for DAX companies increased from 63% in 2016 to 68%. That means that the SLI companies at 85% 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 2017, 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.