WTW expects Swiss corporate pension funds to increase technical interest rates at the end of the year, as a result of rising interest rates, a move that will have a positive impact on the schemes’ funding ratios, it said in a note.
Increasing technical interest rates would reduce the need to top up corporate pension funds’ assets with additional contributions because of underfunding, or because of another year of low or negative returns, according to Adam Casey, head of corporate retirement consulting at WTW in Zurich.
“If pension increases are granted [instead], this will have a direct adverse effect on the pension balance sheet of the respective company, as well as on the funding level of the pension fund itself,” he explained.
The technical Interest rate used to discount future benefits is directly linked to the return on assets invested.
In the third quarter this year, returns of -0.9% recorded by Swiss corporate pension funds outweighed a small reduction in liabilities driven by the slight increase in bond yields, according to the quarterly WTW Swiss Pension Finance Watch.
Discount rates increased during the third quarter of this year, pushing down liabilities by 0.5%, WTW added.
The funding ratios of corporate pension schemes decreased quarter-on-quarter, from 126.1% at end of June to 125.6% at the end of September this year, the consultancy added in the quarterly report.
Alexandra Tischendorf, head of investment at WTW Switzerland, underlined that in an uncertain market environment even bonds, considered as a low-risk investment, do not guarantee returns.
Aggressive policy tightening by central banks seen in the last 18 months, with associated higher borrowing costs, has tamed inflation but at the cost of slowing down the economy.
“Equity markets are starting to suffer as the economic slowdown translates to lower economic growth forecasts,” she said, adding that when expectations of recession will be priced into the markets, riskers assets like equities will be significantly hit.
“We expect pension funds with well diversified portfolios to weather the next phase of the market cycle best,” Tischendorf added.
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