Swiss Company Pension Balance Sheets Boosted by Asset Returns
Swiss companies' balance sheets surged during the second quarter of 2018 on largely on account of strong asset returns. This development was also supported by discount rates increasing about 5 bps compared to the end of Q1. Overall the illustrative funded ratio index (i.e. ratio of pension assets to pension liabilities) increased by around 2.5 percentage points, as shown by
The pension fund index of
Assets increase and liabilities decline in Q2 2018
The second quarter saw further improvement in the pension balance sheets under IAS19 of Swiss companies. This is due to the slight increase in corporate bond yields over the quarter reducing liabilities whilst the asset returns were positive over the same period. The discount rate used for the index has reached its highest quarter end level in almost 3 years.
In addition companies can now benefit from making use of the developing regulatory environment in order to better secure the financial position of their pension plans for the future. "The change in Swiss legislation for so-called 1e plans in 2017 is increasingly attracting interest from Swiss companies. Companies can take advantage of this risk-mitigating option when designing their retirement plans. During the implementation the treatment under international accounting has to be considered. Experience has shown that the early involvement of all stakeholders and the clarification of requirements bring benefits to all parties involved," comments
From April to June, corporate bond yields increased by about 5 bps compared to the end of the last quarter, which resulted in a 0.7 percent decrease in pension liabilities. For the asset classes held by a typical Swiss pension scheme the asset return equated to 1.7 percent over the previous quarter (as represented by Pictet's 2005 BVG-40 plus Index). This return came despite the volatility in the markets throughout the second quarter. The effect of the positive asset returns over the quarter was complemented by the reduction in pension liabilities, leading to the largest jump in the index over a quarter since 2016, Q4.
Changing market conditions challenge pension funds
The return to positive performance in Q2 was welcomed by investors after the difficult first quarter, which saw falls in the equity markets. However, the fundamentals of the capital markets and the corresponding outlook remain broadly unchanged. "Central banks are generally tightening the monetary screws. Over the coming years Swiss pension funds need to gear themselves for meagre investment returns coupled with greater volatility and the real possibility of a recession," says
This necessitates more frequent reviews of a scheme's strategic asset allocation, including the risk exposures across asset classes, such as equity, credit, or interest rate sensitivity. At the same time, it is important to recall that risk creates opportunities and rewarded risks, such as the illiquidity risk premium, need to be sought and exploited. Add to the mix broader trends such as disruptive technologies, tectonic shifts in the geopolitical landscape, climate change, and the need to consider "future proof" investment solutions as well as the more traditional approaches, becomes compelling.
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Background information to the study
Swiss Pension Finance Watch reviews quarterly how capital market performance affects pension plan financing in
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)
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