The funding ratio of pension plans of Swiss companies increased by 4.4% in the second quarter of this year, according to Willis Towers Watson’s Pension Finance Watch report.
Liabilities stabilised during the period thanks to a less volatile discount rate, while pension assets continued to grow following a similar path seen in Q1.
The rise in pension assets was a result of positive returns on investment of 4%, WTW said, adding that Swiss Pensionskassen recorded a 3-4% increase in assets in the second quarter of 2021.
Corporate bond yields remained stable, it added.
As a result, WTW’s pension index improved from 112.6% at the en of March to 117.0% at the end of June, it said. The index shows changes in the general funding position of pension plans under IAS19 accounting standard quarter-on-quarter.
The situation relating to returns, assets and liabilities of pension plans has had a positive impact on companies’ balance sheets, which ended Q2 this year in the most robust shape seen since the introduction of the WTW Pension Fund Index, it said.
Furthermore, the decision-making process for investments is increasing in complexity. It has to take into account sudden developments in different regions or industries, and ESG factors that are now mainstream.
“The nature of investing in a complex world is that changes often happen slowly and then all at once,” said Michael Valentine, investment consultant at WTW in Zurich.
He added: “Strong governance, based on a coherent set of investment beliefs – and these must also capture ESG aspects – is therefore a vital ingredient in the construction of robust investment portfolios.”
Institutional investors should endorse coherent governance structures and practices at the level of the organisation throughout the decision-making process, he noted.
WTW underlined that institutional investors should rely on a “strong investment discipline combined with a long-term mind-set”.
Companies may face challenges in international accounting at the end of the year after restructuring their business because of the pandemic.
Adam Casey, WTW’s head of corporate retirement consulting in Zurich, said that restructuring, with a consequent workforce reduction, can result in a “significant one-off profits and losses impact” that can in turn hit “profitability as well as bonus allocations”.
He added: “Such pension impacts can come as an additional shock to companies in an already fragile business environment.”
WTW recommended therefore to companies that have cut over 5% of their workforce that they discuss pension accounting impacts with corporate pensions actuaries.
Swiss Pension Finance Watch reviews the capital market performance on a quarterly basis and how it affects pension plan financing in Switzerland.