The Swiss occupational pension supervisory commission – OAK BV – expects that a number of pension funds will end up underfunded at the end of the year as a result of market volatility and negative returns.
Some pension funds may decide to ultimately trigger restructuring measures, depending on the specific situation of the scheme.
Funding ratios of Swiss pension schemes in fact continued to fall this year, from 103.4% at the end of June to 99.5% at the end of September, according to latest figures published by OAK BV.
Inflation, rising in interest rates, the war in Ukraine and the consequent energy crisis, disrupted supply chains and the COVID-19 pandemic in China have resulted in “strong fluctuations” on the capital markets for months, OAK-BV said, adding that this has had a negative impact on the financial situation of Swiss pension funds.
The pension supervisory commission underlined however that the negative financial situation of pension schemes might be overestimated as the significant rise in interest rates, close to 1.3 percentage points in Switzerland as of September, according to the Swiss National Bank (SNB), is not taken into account to assess obligations.
The country’s pension schemes have recorded an “exceptionally negative performance” of -15.3% on average as of the end of September, worse than the performance recorded during the financial crisis in 2008 (-12.7%), which in turn led to a further decline of funding ratios, OAK-BV added.
Swiss pension funds recorded average returns of -12.3% in the first half of this year, in contrast to average net returns on assets of 8% in 2021.
Market turmoil has hit practically all asset classes since the beginning of the year, showing how quickly and radically price slumps can affect the financial situation of pension funds, at least in the short-term, OAK-BV said.
Equities lost 21.9% so far this year, bonds 12.5%, real estate 11.4% and alternative investments 16.9%, it added.
The number of pension schemes that are currently underfunded in Switzerland, meaning not in a position to cover 100% of their obligations, has increased from 285 at the end of H1 to 480 at the end of September.
At the end of last year only 13 pension schemes were facing underfunding, it said.
The underfunding corresponds to a value of 55.6% of the pension funds’ weighed capital, compared with 39.9% in H1 and 0.1% at the end of 2021.
Swiss pension schemes are legally required to build up reserves to buffer the negative impact of volatility on the capital markets.
According to OAK BV, only 16.1% of pension funds, capital-weighted, had more than a third of the target size for volatility reserves at the end of September 2022. The target size of the reserves at the end of last year was 17.9%.
The latest digital edition of IPE’s magazine is now available
No comments yet