The funding positions of corporate pension schemes in Switzerland has deteriorated dramatically last year, a situation that could force plan sponsonrs to take recovery measures to bring funding ratios back to a healthy level, according to WTW.
Swiss firms have seen liabilities falling in 2022, but not as much as the value of their assets, due to the methodology used to calculate pension obligations of local companies, and a challenging year for pension investors, according to WTW’s Pension Finance Watch for the fourth quarter of 2022.
The funding level of local corporate pension funds has dropped significantly over the year, WTW said, adding that if positions deteriorate further to less than 100%, recovery measures must be considered to bring the funding level back up.
Adam Casey, head of corporate retirement consulting at WTW in Zurich, said: “If asset values continue to decline, eventually it may be necessary for companies and their employees to make additional contributions into the funds.”
He added: “Companies should certainly keep the local funding position in mind and also consider engaging with the pension fund to consider any asset liability matching strategies that may be appropriate for the plan, while bond yields are closer to or even higher than the local discount rate for liabilities being used.”
Rising discount rates, instead, had a positive impact on companies’ international balance sheets, pushing WTW’s Pension Index up by 2.9% in the fourth quarter of last year. This can result in companies’ international balance sheets ending in surplus at the end of 2022.
Liabilities of corporate pension funds under international accounting standards fell by 20% compared with the beginning of the year, offsetting the -15% index return, it added.
“2022 brought a strong and rapid reversal of the sustained trend of reducing and persistently low bond yields over the past 10+ years. Despite falling asset values in 2022, this has resulted in a positive year for companies’ international balance sheets,” Casey said.
Corporate pension funds retuned 1.5% on assets invested in the last three months of 2022, the only positive quarter for returns in 2022, WTW said.
Corporate bond yields increased by a further 10 basis points, contributing to reduce pension funds’ liabilities in the last quarter, it added.
Uncertainties will persist this year, that can be still challenging for pension investors facing geopolitical crisis, and having to gauge the trajectory of inflation, interest rates and prospects for economic growth.
“It seems that we may have turned the corner on the highest inflation figures, but the inflation problem itself is not yet solved,” said Alexandra Tischendorf, head of investment at WTW.
She added: “It is important for pension funds to recognise long-term drivers of return and risk, and implement changes to their long-term strategy if necessary.”
The latest digital edition of IPE’s magazine is now available
No comments yet