(July 10, 2013) — Swiss companies’ pension funds benefitted from strong corporate bond returns over the second quarter of 2013, helping to lower their deficits.
Data from Towers Watson’s latest Swiss Pension Finance Watch’s report showed an increase in the discount rate used by Swiss pension funds–calculated using corporate bond returns–helped to lower their liabilities and deficits.
In the second quarter, the benchmark rate used in Towers Watson’s study increased by around 30 basis points (0.3%). As a result, total liabilities decreased by almost 4%.
This followed an earlier rate increase in the first quarter of 2013, where it rose from 1.62% at the end of 2012 to 1.74% at the end of March 2013.
The liabilities improvement was despite a small drop in the pension fund assets.
By mid-May the typical Swiss pension fund assets had increased 4% since the end of March, but the market then fell, resulting in overall returns of negative 1.2% over the second quarter. Year-to-date returns have been positive at 3.8%.
The discount rate increase translated into an overall improvement in the funding ratio of around two percentage points.
Peter Zanella, head of retirement solutions at Towers Watson in Zurich, warned income from pension assets will probably remain volatile in the coming weeks.
“The fluctuations seen on equity markets during the last quarter have provided pension plan sponsors with a reality check following the stellar returns in the first quarter. Companies need to carefully monitor their pension plans and be ready to react to adverse market conditions if needed.”
Adam Casey, a senior consultant at the consultancy, added that the discount rate for the next quarter will also be heavily dependent on monetary policy decisions.
“Global bond yields rose sharply in June following the US Federal Reserve’s comments that its bond purchase program may soon be wound down, and stopped altogether during 2014,” he said.
“As further comments from US and other key monetary policy makers come out in the coming months we can expect some further fluctuations in yields.”
Related News: Swiss Pension Funding: Still a Mountain to Climb