The average Swiss corporate pension fund has returned 10% on assets last year, leading to an improved overall funding level, according to the Swiss Pension Finance Watch for Q4 2021 published by Willis Towers Watson (WTW).
Corporate pension funds returned on average 2.5% in the fourth quarter of last year, swinging back to positive performance after a negative Q3, it said.
The increase in liabilities on the back of a slump in corporate bond yields only partially offset returns in Q4, bringing companies’ balance sheet positions to reach an all-time-high.
The ratio between pension assets to pension liabilities went up quarter-on-quarter to 118.0% as of the end of December last year, according to WTW’s Pension Index, from 117.0% as of the end of September 2021.
An increase in the discount rate by around 20 basis points and the release of the BVG demographic table for 2020 are counted as important factors leading to a rise in the funding level of Swiss corporate pension funds, WTW said, adding, however, that the benefits of pension assets “noticeably exceeding the liabilities” may be limited.
“Whilst companies reporting under US GAAP [accounting standard] recognise the full surplus on their balance sheets, under IFRS [accounting standard] the recognition of the surplus may be limited,” said Adam Casey, head of corporate retirement consulting at WTW in Zurich.
He added: “Surplus assets in pension funds cannot be returned to the company and for companies that are not expected to benefit from the surplus, the IFRS standard limits the amount of surplus the company can recognise.”
According to WTW, behind rising market valuations there are “underlying shifts” in behaviour particularly with regards to inflation, on top issues including “massive levels of global debt,” the transition to sustainable energy sources and the management of the pandemic.
“Given the difficulty in forecasting the outcome of these complex, multi-layered developments, long-term oriented investors need to have particularly well-structured decision-making processes, that is strong governance,” said Michael Valentine, investment consultant at WTW in Zurich.
The consultancy is pointing to incorporating stress tests and scenario analysis into asset liability models to address complex issues and improve an understanding of their potential impacts on portfolio behaviour, it said.
In terms of asset classes, in an inflationary scenario insurance-linked securities and real assets such as infrastructure and property offer a degree of hedge that can boost “portfolio resilience”, while investors should consider cutting down the fixed income component their portfolios, it added.