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Swiss pensions and COVID-19: funds are affected, but can also help employers

Adrian Jones Partner, Leader Pension Consulting, People in Deals, PwC Switzerland 30 Mar 2020

Many of our clients have been asking for, or are concerned about, the impact of COVID-19 on their Swiss pension funds. In our view, other than some tactical asset allocation decisions, there’s no need for panic. The short-term will bring some pain through investment returns and lower interest rates, but the challenge for Swiss pension funds remains one for the long-term.

Swiss pension funds are generally set up to manage volatile investment markets. They typically have diverse investment strategies and, by international standards, relatively low exposure to volatile asset classes compared to other countries. Pension fund management will have to engage their business continuity plans to keep operating just like any other business.

We see the following impacts and considerations:

Impact of COVID-19 Situation Possible actions
Volatile financial markets affecting asset values and funding levels
  • Pension funds have lost about 8%-15% of their asset values in 2020, not just due to COVID-19. 
  • 2020 losses are broadly the same as the gains made in 2019, so there should be no “panic”. 
  • Market prices for equities remain volatile.
The investment strategy should already be set for the long-term and designed to ride out difficult markets. There may be some adjustments needed to the invest-ment mix, sometimes due to breaches of limits caused by changing values.
Pension benefits can support workforce management
  • Pensions are ultimately an employment benefit, so something to support employees in the crisis. 
  • Employee health and financial well-being will be a priority for employers.
If the crisis means you need to make changes to your workforce, the pension fund’s benefits and options may help. Any welfare fund could also be used today to support employees through hardship.
Pension funds as a source of corporate liquidity
  • Pension funds could be a source of short-term cashflow for employers.
  • The Swiss government has introduced a new ordinance temporarily allowing companies to use an employer contribution reserve for employee contributions as well as employer. This allows reserves to be used faster.
  • The pension fund could be willing and able to loan capital to the employer.
Employer contribution reserves (pre-payments of pension contributions) can help reduce cash outflows and now may be a good time to use them. Temporarily lowering regular payments may also ease demands on employees and employer. In some cases, the pension fund may be an option, but balancing this with fund security and relations are critical.
Continuity of pension fund management
  • Pension fund governance and management teams are affected by the pandemic like any other individuals.
  • Staff shortages and logistical challenges will be inevitable.  
Is the Pension Fund Board organised to take decisions? Does the pension fund management have the staff they need to get through their workload in a remote and digital working environment? Some contingency plans and extra support may be needed.
Growing concern about global recession
  • There are already short-term hits to economic growth prospects.
  • Longer-term we may see fundamental changes, whether that’s mobility of people, the way we spend and consume, the prices of real estate prices or interest rates.
  • Negative outlooks will affect the prospects of pension funds to earn returns in years to come.
Swiss pension funds came through the 2008 financial crisis damaged but intact, so may be ready for a difficult economic environment. Once the initial crisis has calmed, pension funds and employers may be in a position to do scenario planning to make sure they’re “future proof”.
Conclusion: the same long-term questions of affordability and risk remain

For most pension funds and employers, there’s no urgent need to make major changes. Some short-term tactical measures might be required. Later there will be time and a need to reflect again on what are in our view the 2 fundamental questions for swiss pension funds:

  1. How are retirement outcomes provided that are affordable and meet the needs of an employer and its employees in a low interest world and unpredictable economic and demographic circumstances; 
  2. Who bears the risks and upsides related to these outcomes, the employer through additional funding or the employees through their outcomes? 

These questions are not new, but a changed world will bring this into a new focus.

Summary
  • COVID-19 might trigger some actions for Swiss pension fund, but they should not panic.
  • Pension funds can be a support for company liquidity.
  • The benefits provided by pension funds can support workforce management.
  • The same long-term questions of affordability and risk remain.


 

Contact us

Adrian Jones

Adrian Jones

Partner, Leader Pension Consulting, People in Deals, PwC Switzerland

Tel: +41 58 792 40 13

Richard Köppel

Richard Köppel

Senior Manager, People & Organisation, Zürich, PwC Switzerland

Tel: +41 58 792 11 72

Roger Ehrensberger

Roger Ehrensberger

Senior Manager, People & Organisation, Zürich, PwC Switzerland

Tel: +41 58 792 45 79