Swiss pension funds struggle with the investment environment

The financial situation of pension funds deteriorated significantly in the first half of 2022. Rising interest rates and geopolitical uncertainties caused declines in almost all asset classes. The Coverage ratios have dropped significantly.

Swiss pension plans faced a very difficult investment environment in the first half of the year: Inflationary pressure, rising interest rates, disrupted supply chains, the energy crisis, the Ukraine war, and the Covid 19 pandemic in China led to a significant deterioration in their financial situation. This is shown by the projections of the Higher Supervisory Commission for Occupational Pension Plans (OAK BV). While the pension funds were in a very good financial position at the end of 2021 with an average funding ratio of 118.5%, this figure fell to 103.4% as of June 30, 2022.

In mathematical terms, 285 pension plans are currently underfunded (compared with 13 at the end of 2021). For these institutions, the pension liabilities would currently not be 100% covered. In capital-weighted terms, this underfunding corresponds to a value of 39.9% of the pension plans (compared with 0.1% at the end of December 31, 2021).

Negative returns resulted in almost all asset classes

After a very high average net asset return of 8.0% in 2021, negative returns have been seen in almost all asset classes since the beginning of the year. The average return in the first half of 2022 is -12.3%. This shows how quickly and drastically price falls can affect the financial situation of pension funds, at least in the short term. The sharpest declines were seen in the investment categories equities (-17.4%), bonds (-10.1%), real estate (-9.5%) and alternative investments (-15.4%). In contrast, the asset classes liquidity (-0.4%) and infrastructure (+1.2%) were able to more or less maintain their level.

Fluctuation reserves shrink

In order for pension funds to be able to bear fluctuations, they are required by law to build up fluctuation reserves. As of the end of 2021, the average target size of the fluctuation reserves was 17.9% of the pension capital. In order to continue to guarantee their obligations, many pension funds had to tap into these reserves in the first half of the year. On a capital-weighted basis, only one in three pension funds (32.9%) still has more than one-third of its fluctuation reserves.

Pension plans accept periodic shortfalls in coverage

If necessary, pension funds accept periodic shortfalls in coverage. This is provided for by law, and experience from the 2008 financial crisis confirms the correctness of this approach. In view of the current challenges on the capital markets, it is particularly valuable that the pension funds were able to start this year with sufficient fluctuation reserves on average, i.e. with a high funding ratio. As a result, many pension funds are in a position to fully or at least partially cushion distortions on the capital markets. However, future developments on the financial markets are difficult to predict.

Financial situation of the pension funds is being monitored

The OAK BV estimates the financial situation of pension funds in Switzerland on a timely basis. Based on the annual survey on the financial situation of the pension funds, monthly projections are prepared, which are based on the individual investment strategies of the pension funds and the effective development of the investment markets. In total, data from 1,324 pension funds with total assets of around CHF 831 billion was included in the projection as of the end of June 2022. The monitoring is limited to pension funds without a state guarantee and without a full insurance solution.

About the Supervisory Commission

The OAK BV is an independent authority commission. It is financed entirely by levies and fees. The eight regional supervisory authorities at the headquarters of the respective institution are responsible for the direct supervision of the pension institutions. Their overall supervision by OAK BV is independent of instructions from Parliament and the Federal Council. However, the OAK BV directly supervises the investment foundations as well as the Substitute Occupational Benefit Institution and Guarantee Fund. In addition, OAK BV is the licensing authority for occupational benefits experts.