In May 2023, the Swiss Federal Commission for Occupational Retirement, Survivors' and Disability Pension Plans published the latest figures of the financial situation of Swiss pension funds. According to these figures, several pension funds are underfunded. Will this remain the case?

The return of inflation and the associated sharp rise in interest rates, the Ukraine war, the energy crisis, and disrupted supply chains caused considerable uncertainty and corresponding distortions on the markets last year. This led to a strongly negative performance in the central asset classes equities and bonds, but also in almost all other asset classes. The average net return on assets generated by pension plans was strongly negative in 2022: It was -9.2% for institutions without a state guarantee and without a full insurance solution (previous year: 8.0%) and -8.2% for institutions with a state guarantee (previous year: 8.3%). The individually reported funding ratios therefore fell to 107.0% on average for pension plans without a state guarantee and without a full insurance solution (compared with 118.5% at the end of 2021) and to 81.3% for public pension plans with a state guarantee (compared with 89.3% at the end of 2021). At the end of 2022, 84% of the pension funds without a state guarantee and without a full insurance solution still had a funding ratio of at least 100% (compared with more than 99% in the previous year). This is shown in the activity report of the Supervisory Commission for Occupational Pensions (OAK BV) 2022.

Real interest rate is clearly positive in the long term

Due to the negative average performance in 2022, the average interest rate on the retirement assets of active insured persons also fell from 3.69% at the end of 2021 to 1.90% at the end of 2022. In comparison, annual inflation in Switzerland in 2022 was 2.8% (previous year: 0.6%) according to the Swiss Federal Statistical Office. This means that many active insured persons suffered a negative real return on their occupational pension assets for 2022. According to OAK BV, however, the analyses carried out show that, viewed over the longer term, investment returns have on average met or even exceeded expectations.

Pension obligations have also decreased in value

Regarding to the obligations of the pension funds, OAK BV emphasizes that the rise in interest rates also has a positive side in the medium term. From a market value perspective, the long-term pension obligations would also have lost value, i.e. with the rise in interest rates, the pension promises would be financeable with less risk in the future.

A large part of the fluctuation reserves had been used up by the end of 2022

As OAK BV further explains, pension funds, as long-term investors, must be able to deal with market fluctuations. The good stock market years up to and including 2021 allowed many pension funds to fully build up their fluctuation reserves. As a result, they were able to bear the negative consequences of developments on the capital markets. «By contrast, pension funds that had insufficiently built up their fluctuation reserves by the end of 2021 are now underfunded or have only low fluctuation reserves», says OAK BV. And it knows that a large part of the fluctuation reserves had been used up by the end of 2022. In fact, only 58% of pension funds still had a fluctuation reserve of at least 25% of their target value at the end of the reporting year.

Active insured persons could be confronted with reorganization measures

But the supervisors play down the idea: «Periodic underfunding of pension funds is permitted by law. Current pensions are guaranteed in the second pillar, and this also applies to pension funds in underfunding.» However, the OAK BV admits that the active insured members of a pension fund in underfunding could be confronted with restructuring measures such as lower interest rates or restructuring contributions. However, this would depend on the individual situation of the pension fund. And the supervisors continue: «Underfunding does not automatically result in restructuring measures. However, it will be examined individually by the regional supervisory authority in each case. At the present time, it can be assumed that restructuring contributions will only be necessary in a very small number of cases.»