Current study on the coverage ratio of SLI companies

The internationally oriented study analyzes, among other things, the coverage situation of the pension obligations in the balance sheets of all defined benefit pension plans of the leading listed companies in Switzerland in accordance with the international accounting standards in and outside Switzerland.

The evaluation of the data published in the annual reports is carried out in accordance with the international accounting standards IFRS and US-GAAP.

"Willis Towers Watson chooses this approach in order to make the internationally active companies based in Switzerland more comparable. Consequently, the funding ratio presented in our report differs significantly from the regulatory funding ratio reported by Swiss pension funds in accordance with Swiss GAAP as per Art. 44 BVV2," explains Peter Zanella, Head of Retirement at Willis Towers Watson in Zurich. The international standards can be used to calculate a meaningful benchmark for analyzing a company's overall pension situation.

Discount rate historically low

Although plan assets changed only moderately, the funding ratio, as defined by international accounting standards, fell slightly to 83 percent for SMI companies and remained constant at 80 percent for SLI companies, the SLI study by Willis Towers underscores.

For companies, the historically low discount rate makes it even more important to review their current pension plans and consider implementing de-risking processes.

Stable results in 2015

Compared to the previous year, the pension liabilities of the SLI companies analysed fell by CHF 3.4 billion (-1.6%) and by CHF 0.7 billion (-0.3%) for the SMI companies, which is partly due to movements within the index and the reduction in the pension liabilities of individual companies. As plan assets developed below expectation over the same period, the average funding ratio decreased by 1 percentage point for SMI companies and remained stable for SLI companies. Accordingly, in 2015, 83 percent (SMI) and 80 percent (SLI) of the pension obligations were covered by the corresponding separately funded plan assets.

De-risking measures

Apparently, companies have taken measures to better control pension liabilities. Typical examples of such de-risking measures are the reduction of conversion rates or the limitation of the amount that can be drawn as a pension.

The yields on their bonds with a maturity of 10 years or more fell by 35 to 48 basis points in the first quarter of 2016. For plans with a 15-year duration (such as a typical Swiss pension plan), the pension liabilities may have increased by around 5-6 percent as a result of the decline in the discount rate. This would lead to a reduction in funding ratios to 78-79 percent for SMI companies and to 75-76 percent for SLI companies.

In Switzerland, the updated BVG 2015 technical bases have been available since December 2010. These take into account the mortality experience of 15 of the largest pension funds in Switzerland over a period of 5 years.

Willis Towers Watson expects to apply these principles for valuations under international accounting standards in the current year. A slight increase in pension liabilities is observed for Swiss pension plans. The actual impact on companies will also depend in particular on the proportion of Swiss policyholders in the global pension obligations.

Given the further decline in interest rates and the growing challenge of finding traditional investment vehicles that generate adequate returns in the short and medium term, the focus on pension liabilities is all the more important.

More details about the latest Pension Risk Study by Willis Towers Watson at www.towerswatson.com