At the end of 2021, Swiss employment-based pensions fund in aggregate held assets worth 18.5% more than what they owed. By 30 September 2022, they owed 0.5% more than they held in assets, according to government data published recently.
Switzerland has a three layered pension system. The first layer is a state pension, known as AVS/AHV, which is funded by social security taxes on earnings. The second, known as the second pillar, is a private pension pot funded by compulsory salary deductions. Second pillar pension deductions are invested by regulated pension funds that operate within rules specified by government. However, most are not guaranteed by the government. The third and final layer is an optional tax deductible sum that can be invested more flexibly by its owner.
Data published on 21 October 2021 show how rapidly the financial fortunes of Switzerland’s second pillar pension funds can deteriorate. At the end of 2021, the average assets held by these funds was equivalent to 118.5% of current and future pension payments. By 30 September 2022, the same percentage had slumped to 99.5%. However, the report did note that the figures do not yet include the positive boost that will come from the Swiss National Bank (SNB) raising its policy rate by 1.25 percentage points since early June 2022.
In addition, not all second pillar pension funds were in negative territory at the end of September. 44.3% had coverage of more than 100%. And only 3.6% had coverage below 90%.
Unlike past market movements the recent one has hit a wide range of assets held by these pension funds. Shares were down 21.9%, bonds were down 12.5% and real estate assets were down by 11.4%. Exchange rates have moved significantly as well, affecting the value of holdings in foreign currencies.
Market turmoil and movements in exchange rates have also hit the value of assets held by the SNB. During the first six months of 2022, the SNB booked a loss of CHF 95 billion. Another six months like this would leave Switzerland’s central bank with almost no equity, which is made up of reserves used to pay out profits – over the first six months of 2022 total equity, which is largely made up mainly of these reserves, went from CHF 204 billion to CHF 103 billion. Another CHF 95 billion hit would reduce it to CHF 8 billion.
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Paul Dodd says
I have never seen any comments published. Does your comment system work? The SNB has enough reserves in foreign assets to last another five years.
Le News says
The term reserves is confusing in this context. Apologies. Here it refers to the provisions for currency reserves and distribution reserves making up SNB equity on its balance sheet. They were CHF 204 billion at the end of 2021. By the end of June 2022, they were CHF 103 billion. Another loss of CHF 95 billion, like the one from the first half of 2022, would reduce equity, which is made up primarily of these reserves, to CHF 8 billion. Of course a central bank can run with negative equity and can always create money to avoid insolvency. In Australia the central bank recently went into negative equity. It does however put the brakes on central bank profit distributions and calls into question the wisdom of paying out profits in the first place.
At the end of June 2022, the SNB had foreign currency investments (also known as foreign currency reserves) of CHF 884 billion. This is a large number positioning Switzerland third in the world after China and Japan on this measure.
Apologies for the confusion.