A decrease in Swiss discount rates last year caused funding levels for the country’s pension funds to fall by 640 basis points, according to Towers Watson’s latest ‘Swiss Pension Finance Watch’.
Every quarter, the consultancy puts together an index based on the ratio of assets to liabilities in Swiss Pensionskassen, which dropped to 96.5% as of the end of December 2014 from 102.9% as of the end of 2013 – which had been a record high since the financial crisis.
Over the course of last year, the index dropped to around 100% in Q1 and slightly recovered in Q2 but then dropped back to 99.5% at the end of September.
Peter Zanella, head of retirement solutions at Towers Watson in Zurich, said the increase in liabilities triggered by continually falling discount rates had been offset by strong returns, albeit “only to a certain extent”.
Towers Watson, as part an annual report on the Swiss pension fund association’s members, had calculated a 10% median return for 2014.
Discount rates dropped, along with corporate bonds, yielding 100-125bps less in Q4.
Bond yields were further strained by the Swiss National Bank’s announcement that it would introduce a negative base rate.
Adam Casey, senior consultant at Towers Watson in Zurich, said: “This directly affected the yields of Swiss bonds.”
At Publica, Switzerland’s largest public pension fund, director Dieter Stohler pointed to another effect resulting from the SNB’s policy.
“On the international currency markets, the forward discounts for Swiss francs have widened slightly, increasing costs for FX-hedging,” he said.
He told IPE he did not think Swiss institutions would start introducing negative rates on savings any time soon, adding that the SNB would have to continue to make the Swiss franc “less attractive” as long as it wanted to continue to uphold the minimum exchange rate of 1.20CHF per euro.