Pension obligations for the 30 largest Swiss companies fell by 0.1%, or CHF1bn (€921.7m), year-on-year in 2020, according to a study conducted by Willis Towers Watson.
Assets set aside by companies to specifically cover pension obligations grew during the period by 1.4% or CHF3bn, bringing the aggregate funding ratio up by 1%, from 92% in 2019 to 93% in 2020.
The average funding ratio, however, fell from 85% in 2019 to 84% last year as new companies included in the Swiss Leader Index (SLI) had a lower funding ratio compared with those that had been exc.uded from the index, it said.
Pension fund expert and senior director at Willis Towers Watson in Zurich Peter Zanella said that 1e plans, adjustment of benefit parameters and financing continue to help stabilise pension obligations.
“The optimisation of the investment strategy, taking into account further criteria such as sustainability and ESG trends, can serve to increase the expected returns on assets while maintaining the same level of risk,” he said.
The stock market continued to offer a ground for returns on investments in the first half of 2021.
“This development reflects the still record-low interest rate environment, the lack of alternatives to equity investments as well as the recovery of the real economy after easing of measures to combat the pandemic,” Zanella said.
It also brings up the issue of “what will happen when central banks have to step off the gas to prevent the rise in inflation that is on the horizon,” he added.
WTW considers the Swiss National Bank’s negative interest rate policy the cause for poor performance in terms of average funding ratio in Switzerland compared to other countries.
The average funding ratio for US companies, in fact, rose from 88% in 2019 to 90% in 2020, while the coverage ratio of DAX companies declined from 66% in 2019 to 65% in 2020, according to the WTW Pension 100 Index.
The consultancy expects the discount rate to remain low due to inflation trends and low interest rates, at least in the short term, to rise again in the medium term.
This, coupled with positive development of life expectancy, would slow down the increase in financing requirements of pension plans in the medium term.
“It remains important to consider relieving measures in order to be able to react flexibly to unexpected crises,” Zanella said.
WTW calculated the pension obligations and costs of the companies listed on the SLI, which includes the 30 most liquid and largest stocks on the Swiss equity market.
It used International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP) to calculate occupational pension liabilities.
1e plans
1e plans are a type of retirement arrangement giving employees the flexibility to choose how to invest their pension assets. Employees can choose between different investment strategies.
The 1e plans can be chosen by people with a minimum annual salary of CHF126,900. The pension arrangement is named after Article 1e of Ordinance on Occupational Retirement, Survivors’ and Disability Pension Plans (BVV 2).
The take-up of 1e plans has been slow. A PwC survey showed that assets under management of Swiss providers of second pillar 1e plans grew by 31% year-on-year to reach CHF5bn (€4.6bn) at the beginning of 2020.
A reason for the slow take-up is that the pool of legible people for the plans is limited.
Another reason laid in the law to transfer pension assets, Freizügigkeitsgesetz. The law foresaw that losses resulting from investment strategies chosen by insured people had to be bore by the pension fund when an insured leaves employment.
The Federal Council called on parliament in 2015 to eliminate minimum guarantees (“Motion Stahl”). Thus, insured poeple receive the effective value of their pension assets and would also bear the losses when leaving a pension institution.
The parliament approved the changes and the law entered into force in 2017.
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