Swiss Company Pension Balance Sheets Boosted by Asset Returns

ZURICH, Switzerland, July 18 -- Willis Towers Watson, an advisory, broking and solutions company, issued the following news release:

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 Willis Towers Watson's Pension Index, which increased from 104.7 percent as at 31 March 2018 to 107.1 percent as at 30 June 2018.

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.

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 Adam Casey, Head of Corporate Retirement Consulting at Willis Towers Watson in Zurich.

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.

Elena Selivanova, Senior Contributor at Willis Towers Watson in Zurich, says: "Noteworthy is the fact that our index is at the same high level as mid-2007 but during the subsequent 1.5 years it dropped 25 percent. It has since taken more than 10 years to recover to the same level. This underlines the current importance of risk management actions for Swiss pension plans such as optimizing and protecting investments and considering changes to plan designs and structures."

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 Michael Valentine, Investment Consultant at Willis Towers Watson in Zurich.

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 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.