The capriciousness of the capital markets has taken its toll on Swiss pension funds. Hundreds now have a funding ratio of less than 100 percent.
Inflation and related interest rate hikes, the Ukraine war, the energy crisis, disrupted supply chains and the coronavirus pandemic in China have been causing sharp fluctuations in the capital markets for months.
This is now also having a negative impact on the financial situation of the pension funds, as the OAK BV (Oberaufsichtskommission für Berufliche Vorsorge/ Superintendence Commission for Occupational Pension Plans) announced on Friday.
The average capital-weighted funding ratio fell sharply from 118.5 percent at the end of 2021 to a shortfall of 99.5 percent as of Sept. 30, 2022, according to OAK BV projections, it said.
From 13 to 480 facilities
However, it should be noted that the projection overestimates the deterioration in the financial situation of the pension funds, as the significant increase in interest rates is not reflected in the valuation of the obligations, the pension experts explained further.
As of the end of 2021, only 13 pension funds were underfunded. Currently, however, 480 pension funds are not in a position to cover 100 percent of their pension obligations.
According to an additional analysis, 3.6 percent of the pension funds are already less than 90 percent covered.
In capital-weighted terms this corresponds to a shortfall of 55.6 percent of Swiss pension funds, compared with 0.1 percent at the end of 2021, it said.
Only minus signs
OAK BV cites the distortions on the capital markets as the main reason for the rapid negative development. As of the end of September 2022, pension funds are facing an exceptionally negative performance of -15.3 percent on average, the pension watchdogs explained.
In contrast to previous slumps, this time the poor performance affects all asset classes, according to the communiqué. Equities (-21.9 percent) and alternative investments (-16.9 percent) were particularly affected.
But the categories of bonds (-12.5 percent), real estate (-11.4 percent) and infrastructure investments (-8.7 percent) also showed significant negative development.
Reserves tapped
All pension funds are required by law to build up reserves to compensate for fluctuations in the capital markets. These are known as fluctuation reserves. The target size of these reserves as of the end of 2021 was 17.9 percent of pension assets on average.
Due to those negative market developments, fluctuation reserves are now being dissolved – in accordance with their purpose. According to OAK BV’s projections, only 16.1 percent of pension funds will still have more than one-third of the target value of their fluctuation reserves in capital-weighted terms at the end of September 2022.
Saving in good times
A funded system such as the second pillar must be able to cope with high volatility on the financial markets. As long-term investors, pension funds accept periodic shortfalls, if necessary, which is also permitted by law.
The good stock market year of 2021 enabled many pension funds to further build up their fluctuation reserves.
Restructuring ahead
Based on the current projections it is therefore foreseeable that some of the pension funds will be underfunded at the end of the year. This may result in restructuring measures depending upon the situation of the individual institution.
The annual survey is based on data from 1,324 pension funds with pension assets of around 831 billion Swiss francs. The monitoring is limited to pension institutions without a state guarantee and without a full insurance solution.
21.10.2022/kut./ena.