Swiss and global pensions accounting trends

Update on trends at 31 December 2022

Maribel Flores
Manager, PwC Switzerland

2022 saw significant movements in financial markets both globally and in Switzerland. Falling asset values and increasing long-term interest rates impacted Swiss pension plans. This in turn had a significant effect on how these plans were accounted for under IFRS and US GAAP.

The war in Ukraine combined with high energy prices and high inflation triggered volatility in global financial markets and Switzerland was no exception to this. Long-term corporate bond yields increased significantly to reach levels not seen since the financial crisis of 2008/2009. Swiss corporate bond yields at the end of 2022 were almost 2% p.a. higher than at the start of the year. Central banks including the SNB raised interest rates and all asset classes except for commodities experienced negative returns during 2022. Typical pension funds saw negative returns of between 10% to 15%.

Swiss corporate bond yields have risen significantly, by around 2% during 2022, reaching levels not seen since the financial crisis of 2008/09.

What does this mean for the financial assumptions under IFRS or US GAAP?

Discount rates are a key assumption for the measurement of Swiss pension plans reporting under IFRS or US GAAP. These rates increased significantly leading to a dramatic drop in the value of these plans obligations on the balance sheet. At the same time most companies also increased their interest credit rate assumptions to reflect higher expected asset returns in the future.

Higher inflation has a significant impact on pensions in other countries such as the UK, but does not have an impact on most Swiss pension plans as benefits are typically not directly linked to inflation but do influence salary growth expectations.

Pull this altogether and the result is that obligations under IFRS and US GAAP typically fell by c.10% to 30% depending on the specifics of the plan. Overall, for most clients this led to an improvement in their balance sheet position for their Swiss pension plans despite the market turmoil. Some organisations also had to consider for the first time the impacts of a surplus in their Swiss plan including whether and how to account for this on the balance sheet – a complex subject for a future blog post.

Assumption	Observed market practice at 31 December 2022		Observed market practice at 31 December 2021
	Optimistic	Prudent	Optimistic	Prudent
Discount rate	2.45%	2.15%	0.40%	0.20%
Inflation	0.50%	1.50%	0.50%	1.00%

These ranges cover schemes of all commonly observed durations and do not represent PwC’s internal acceptable ranges.

How have the assets of Swiss pension plans performed and what is the impact for IFRS or US GAAP pensions accounting?

Assets performed very poorly over 2022. The performance of different pension plans can differ widely depending on how the assets are invested, but we would expect most pension plan asset returns would have been around -10% to -15% over the year.

This has impacted the IFRS or US GAAP funding levels in different ways depending on how plan assets are determined and how companies finance their pension plans, e.g. through a multi-employer foundation, an autonomous pension fund or a fully insured collective foundation.

Autonomous pension plans and multi-employer plans with segregated assets that are determined at a fair value are expected to see a reduction in assets which would partially offset the significant reduction in liabilities. Other pension plans whose assets are not directly linked to asset performance under IFRS or US GAAP are expected to see a small increase in asset returns as a result of interest granted to members savings accounts during the year.

What is the expected impact on the pension net balance sheet for companies reporting under IFRS or US GAAP?

Overall, we expect the net pension balance sheet of companies reporting under IFRS or US GAAP to have improved at 31 December 2022 compared to 31 December 2021. We also expect to see more companies reporting a surplus at 31 December 2022 for their Swiss pension plans versus previous years. This will bring interesting discussions on asset ceiling restrictions and how to calculate the future economic benefits that are available to the company under IFRIC 14.

Companies should engage with this topic early on in the process as different interpretations of IFRIC 14 are applied by different actuaries and auditors.

What is the impact of the trends in Swiss mortality rates over 2022?

In Switzerland, mortality rates in 2022 continued to be higher than they were before the emergence of COVID-19. However, for IFRS or US GAAP pension accounting valuations at 31 December 2022, we observe schemes adopting the latest mortality base tables (BVG 2020) with an allowance for future improvements in longevity (either the Swiss BFS projections or the UK CMI model calibrated with Swiss population data) which are based on data before the pandemic.

This means that the higher mortality rates since 2020 do not have an impact on Swiss pension accounting at 31 December 2022.

The mortality rates post pandemic are not expected to have an impact until the next BVG2025 mortality base tables are published (expected in December 2025) and adopted by actuaries.

Global pensions financial reporting trends

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