Swiss pension liabilities on company balance sheets fell by over 12% in the first three months of 2022, according to the latest quarterly Swiss Pension Finance Watch from WTW.
The fall – the biggest in any quarter since WTW’s Swiss Pension Index began in 2000 – was caused by the significant jump in bond yields underlying the discount rate: corporate bond yields increased by around 90 basis points over the quarter.
This had a positive impact on company balance sheets, despite pension fund assets decreasing by 5.2% over Q1.
The ratio of pension assets to pension liabilities shown by the index was 127.2% at 31 March 2022, up from 118.0% at 31 December 2021.
Swiss Pension Finance Watch reviews how capital market performance affects pension plan financing in Switzerland.
Over the past 18 years, the overriding trend in discount rates has been downwards, resulting in higher company balance sheet liabilities for pensions.
The consultancy said that as a new macroeconomic phase starts and interest rates begin to rise, companies will be relieved that the corresponding increase in bond yields, and hence discount rates, will have a positive impact on pension liabilities.
Adam Casey, head of corporate retirement consulting at WTW in Zurich, said that increasing discount rates also reduce the employer service cost booked in the operating costs of the company.
“It’s anyone’s guess whether the extended period of discount rates wavering between 0% and 0.5% is over, but this is certainly a reminder that corporate bond yields, and discount rates, can be very volatile at certain times,” he added.
The consultancy is continuing to encourage clients to review ways of constraining their defined benefit pension liabilities in Switzerland, such as by implementing pure defined contribution (1e) top-up plans.
WTW said the negative (-5.2%) return during the first quarter of 2022 began at the end of January with the rise in corporate bond yields, as investors sold high-yield and investment grade bonds.
In addition, equities fell by around 6% in Q1 because of concerns about the economic consequences of the Ukraine crisis.