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Companies Need to Strengthen Risk Controls on Their Pension Liabilities

Source: Towers Watson

Posted on 25 Jun 13 by Annie George

The new Towers Watson Pension Risk Study 2013 carefully examines the pension liabilities of the 30 most important companies on the Swiss stock exchange. It reveals that the negative spiral in interest rates had a major impact on pension plans in 2012. The average funding ratio fell further and is now below 2008 levels. What's more, the revised IAS 19 accounting standards which took effect on January 1, 2013 and interest rate fluctuations resulting from central bank monetary policies will cause increasing balance sheet volatility. But there is some good news, too: In an international comparison, the pension funds of Swiss companies continue to be in a better position than those of foreign companies. In addition, there was a slight recovery in the financial situation in the first half of 2013.

In the future, companies will have to take appropriate measures to further minimize the risk in their pension plans. The average funding ratio of the 20 SMI companies fell from 86 to 83 percent. Among the SLI companies (the 30 most important securities on the Swiss stock exchange), it remained at 79 percent. The three companies with the highest coverage of pension liabilities are currently Credit Suisse (101%), Syngenta (96%) and UBS (96%), with Roche (67%), Geberit (68%) and Transocean (68%) ranking much lower. When interpreting these results, it is important to bear in mind that this funding ratio differs substantially from the regulatory funding ratio reported by Swiss pension funds, which requires among other things to refinancing measures in the case of underfunding.

Liabilities increase more rapidly than assets

"The negative performance is mostly down to the current low-interest-rate environment," says Peter Zanella, Head of Benefits & Retirement Solutions at Towers Watson in Zurich. "In addition, the new reporting regulations applicable since January and the interest rate fluctuations resulting from central bank monetary policies will cause greater balance sheet volatility in the future. The new regulations will also lead to an increase in pension expenses." Driven by the negative spiral in interest rates, pension liabilities grew significantly in 2012 to CHF 194 billion, an increase of 10.8 percent. "Thanks to the positive market trend in 2012, plan assets rose above expectations from CHF 148 billion to CHF 161 billion. However, this excellent result was not enough to offset the negative effect of the actuarial interest rate," explains Pascal Wyer, Pension Fund Expert at Towers Watson.

Better risk control needed

The revised IAS 19 will apply to company pension plan reporting for fiscal years beginning on or after January 1, 2013. The most significant reforms include the elimination of the corridor method, and the associated full recognition of funding shortfalls and surpluses in a company's accounts, which leads to greater balance sheet volatility. "The positive side of this is the increased transparency," says Peter Zanella. "Now, companies will have to take appropriate measures to minimize the risks in their pension plans. However, there is no fool proof way of doing this – each company's situation has to be examined on an individual basis. Important questions to be answered include which guarantees, such as the conversion rate, can continue to be maintained and how much the desired pension level can cost."

Continuing good performance in an international comparison

Nevertheless, in comparison with companies in the US and Germany, the funding ratio of SLI companies is higher than average. Fortune 1000 companies report a funding ratio of 75 percent for their pension liabilities, and DAX companies only around 61 percent. In addition, funding ratios experienced a recovery in the first half of 2013; a fact that is also confirmed by Towers Watson's quarterly pension fund index, the Swiss Pension Finance Watch.

The study

The Towers Watson Pension Risk Study 2013 looks at the pension liabilities and the scale and development of pension costs for companies making up the Swiss Leader Index (SLI). This index comprises the 20 SMI companies plus the ten biggest of the thirty companies in the SMI Mid Cap Index. The SLI thus boasts the 30 most important companies on the Swiss stock exchange, and comprises Switzerland's leading listed companies. As in 2011, Towers Watson has analyzed the disclosed occupational pension liabilities of SMI and SLI companies according to the IFRS and US GAAP international accounting standards. The results thus differ fundamentally from the data published by the Swiss pension funds. The aim of the study is to gain an overview of the situation of Swiss companies, thereby creating a sound basis for individual companies to develop specific measures.


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