Swiss Pensions Accounting Survey 2019 - assets.kpmg€¦ · Swiss Pensions Accounting Survey – 31...

Swiss Pensions Accounting Survey 2019

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An analysis of market trends in pensions accounting

Contents

Key trends

Companies surveyed

Discount rate

Mortality

Lump sum proportion

Risk sharing

Interest credit rate

Pension increases

Employee turnover

Disability

Inflation and salary increases

5 6

8 9

10 12

13 14

KPMG‘s Swiss Pensions Accounting Survey 2019 | 3

Swiss Pensions Accounting Survey – 31 December 2018This edition of KPMG’s Swiss pensions accounting survey looks at trends in accounting assumptions based on the experience of 94 Swiss companies reporting under IFRS, US GAAP or UK GAAP as at 31 December 2018. The survey covers companies advised by a range of actuarial consultancies and includes both domestic Swiss companies and subsidiaries of overseas parents.

4 | KPMG‘s Swiss Pensions Accounting Survey 20194 | KPMG‘s Swiss Pensions Accounting Survey 2019

This survey is based on data gathered from publicly listed companies, KPMG clients and other entities where KPMG has been provided with pensions accounting information.

While the majority of companies included within our survey reported under IFRS, we did not observe any significant differences in the assumptions used across different accounting standards.

Companies surveyed

Overview of entities included in survey

Type of company IFRS US GAAP UK GAAP Total

SIX listed 31 5 – 36

Swiss subsidiary 36 12 1 49

Privately held / other 9 – – 9

Total 76 17 1 94

Source: KPMG Analysis

The main themes in accounting for Swiss pension arrangements for the 2018 year-end were:

1. Around one in three companies now use “CMI” mortality projections (increasing to around three quarters of companies when looking only at those listed in the SMI index).

2. Almost half of companies now apply an adjustment to the standard BVG/LPP disability table.

3. Allowance for “risk sharing” has not increased markedly, with around 10% of companies reporting under IFRS included within our survey allowing for it.

4. Median asset portfolio returns were negative with a typical 3% reduction over the year (sources: UBS Pensionskassen-Performance; Credit Suisse Schweizer Pensionskassen Index) while discount rates increased by around 25bps on average. Hence many entities will have seen their net pensions balance sheet position remain fairly level.

Key trends for 31 December 2018 reporting

The key issues that we expect to be a focus of pensions accounting in 2019 are:

Remeasurement of pension expense after a special event

– Following an amendment to IAS19 (the section of IFRS specific to employee benefits), for accounting periods beginning on or after 1 January 2019, components of the ongoing pension cost (service cost and net interest cost) will need to be remeasured after a special event, based on assumptions at the date of the event. When accounting for a special event, an entity now needs to consider whether the impact of the special event plus the remeasurement is material, and not just the impact of the special event itself.

IFRIC 14 under review

– The ongoing review of IFRIC 14 by the International Accounting Standards Board (IASB) may lead to a further Exposure Draft sometime in 2019/20.

– Our view is that the direction of travel appears to be towards greater restriction of balance sheet surpluses in the future.

Looking ahead


Risk sharing

Technical background The IAS19 concept of “risk sharing” is commonly used to refer to:

– “Risk Sharing 1” – valuing benefits which differ to those currently set out in the plan’s governing documentation on the basis that, in current market conditions, there is a constructive obligation to reduce benefits below their current level at some point in the future.

– “Risk Sharing 2” – recognising that, after applying Risk Sharing 1, there is still a structural deficit in the pension plan and reducing the liability to reflect that this will be partly financed by employees.

Market practice

Despite the revised wording in IAS19 (2011) which allowed risk sharing to be included from 2011, these interpretations were first reflected in Switzerland at the 2016 year-end.

While the appropriateness of risk sharing in principle is now widely accepted, the additional complexity and need for subjective judgement and assessment by actuaries and auditors means that it is far from being in universal use – applied by only 9% of the companies surveyed (IFRS reporters only). Of these, the majority only applied Risk Sharing 1, as the threshold of audit evidence required in order to demonstrate the appropriateness of Risk Sharing 2 is considerably higher (and there is still not full consensus in the actuarial and auditor community regarding its application).

While we expect the number of companies applying risk sharing to increase over time, it does not currently appear that it will become widespread in the short term.

9%

91%

Risk sharing

Traditional approach

Source: 68 companies; IFRS reporters only

6 | KPMG‘s Swiss Pensions Accounting Survey 2019


0.4%

0.5%

0.6%

0.7%

0.8%

0.9%

1.0%

1.1%

1.2%

Less than 12 12 to 13.9 14 to 15.9 16 to 17.9 18 to 19.9 Higher than 20

Duration (years)

Discount rate

Discount rates increased on average by 25bps over 2018.

The range of discount rates used by companies is relatively large, with the lowest in our survey being 0.60% and the highest being 1.15%.

IFRS and US GAAP require discount rates to be set based on the duration of a plan’s liabilities and the observed range is partially explainable by the differing durations of the respective plans.

However, discount rates still vary for plans with similar durations due to differences in actuarial consultancies’ approaches to setting their recommended discount rates. In our experience, such differences tend to occur from:

– the bond selection criteria (specifically how ”high quality corporate bond” is interpreted in the Swiss market); and

– the curve-fitting and extrapolation methodologies used to fit a curve to the data.

Increase in discount rates from 31 December 2017 to 31 December 2018

Discount rates

31 December 2017 median: 0.65% 31 December 2018 median: 0.90%

Source: 94 companies

Less than 0.70%

11%

16%

33%35%

0.70% - 0.79% 0.80% - 0.89% 0.90% - 0.99% 1.00% - 1.09% 1.10% - 1.19%

3% 2%

Median increase: 25bps


Less than 0 bps

20%

47%

22%

0 - 9 bps 10 - 19 bps 20 - 29 bps 30 - 39 bps 40 - 49 bps

7%2%2%

Distribution of discount rate by duration



Interest credit rate

Observed median assumptions for future interest credit rates (the rate at which employee savings capital is assumed to be credited with interest each year) have risen by around 25bps from 31 December 2017 to 31 December 2018. The range of assumptions used has narrowed over the period such that around 85% of companies assume a rate within the range 0.75%-1.25%.

Our observations are that this range is driven by: – around 40% of companies using a rate of 1.00% (this

being the legal minimum rate which must be granted on mandatory account balances); and

– around a further 40% setting the interest credit rate equal to the discount rate (an approach taken to simplify the actuarial modelling and reduce the volatility in the balance sheet position).

Pension increases

At 31 December 2018, only 6% of companies made an assumption for future pension increases being granted, down from 14% at the prior year end. Of those assuming pension increases will be granted in future, only a modest assumption, of less than 0.30%, is made.

Pension increases are not mandatory in Switzerland and are generally only granted when a plan is in a very comfortable financial position. In response to the persistent low interest rate environment, few Swiss plans are granting pension increases currently or expect to do so in the medium term.

Interest credit rates

Pension increases



5%

42%


0.75% - 0.99%

44%

1.00% - 1.24% 1.25% - 1.49% 1.50% - 1.74% 1.75% or more

4%5%

94%


Nil 0.10% - 0.19% 0.20% - 0.29%

3%3%


Mortality Background Mortality assumptions comprise two elements: – a “base table” which determines probabilities of an individual dying at a certain age, based upon recent mortality observations; and

– an allowance for anticipated mortality improvements beyond the effective date of the underlying base table observation data.

Construction of assumptions The BVG/LPP 2015 base tables were constructed in a collaborative effort by two Swiss actuarial consultancies based on the experience of 15 of the largest Swiss pension plans over the period 2010 to 2014. The mortality improvement factors, which are published with the table, are “generational” (in that life expectancies are projected to change by different rates in the future) and are based on a model created by Jacques Menthonnex for the Swiss Federal Statistical Office.

Beginning in 2016 some Swiss actuarial consultancies began to use an alternative set of mortality improvement factors constructed using the “CMI model” created by the UK’s Continuous Mortality Investigation Bureau, recalibrated using Swiss population data. Since then, the model has become increasingly accepted due to its higher level of sophistication.The CMI model requires a user to specify the long-term rate of mortality improvement. The model trends (smoothed)

recent mortality improvement rates towards the long-term rate for all but the highest ages. The standard approach is to set a single long-term improvement rate (X.XX%) with the resultant mortality table described as “CMI 2016 X.XX%” (where 2016 refers to the version of the CMI model being used).

Market practice The BVG/LPP 2015 base tables were used by all of the surveyed companies. In 2018, around 30% of companies surveyed used the CMI model, increasing from around 10% and 20% in 2016 and 2017 respectively. The majority of companies adopting a standard CMI model assumed a long-term rate of either 1.25% or 1.50%.

A CMI approach was particularly common amongst large Swiss listed companies (SMI index) where it was used in three quarters of observed cases (up from around half of cases in 2017).

Historically, a small number of companies have assumed that longevity improvements will only continue for a fixed term and then cease entirely. In 2018 no companies were observed to use this methodology.

We understand that production of the BVG/LPP 2020 tables is at the planning stage. At this stage it is not clear whether a CMI projection model will be used.


Longevity improvements – all companies

Projection model Long-term improvement rate


Gen

erat

ion

al 6

8%

CM

I 32%

57%Adopted a standard CMI model and assumed a long-term rate of 1.25%

Adopted a standard CMI model but the long-term rate used is not known


Adopted a standard CMI model and assumed a long-term rate of 1.75% 7%

7%



Over the six years that we have been producing our pensions accounting survey, the median life expectancies used by companies in our survey have developed due to three primary factors:

At 31 December 2012 some companies made no allowance for future improvements in life expectancy beyond the balance sheet date when measuring their pension liability. When IAS19 (2011) became effective in 2013, companies were explicitly required to consider future anticipated improvements in longevity. Hence we observed a modest increase in median assumed life expectancy in 2013 as all companies made some allowance for future improvements in longevity.

Between 31 December 2015 and 31 December 2016, the new version of the BVG/LLP base tables (“commonly referred to as BVG/LLP 2015”) were universally adopted by companies within our sample. These tables showed an increase in life expectancies compared to the previous version. Hence we observed a step-up in median assumed life expectancies as the new tables came into use.

Since 31 December 2015, companies have increasingly been using the CMI model for future longevity improvements in place of the generational projections, which has moderately decreased median assumed life expectancies.

1

2

3

20

21

22

23

24

25

26

2012 2013 2014 2015 2016 2017 2018

Movement in median life expectancies

Current male pensioner (currently aged 65) Future male pensioner (currently aged 45)

Current female pensioner (currently aged 65) Future female pensioner (currently aged 45)

1 2 3

Longevity improvements – listed companies (SMI index)

Projection model Long-term improvement rate



Adopted a standard CMI model but the long-term rate used is not known


Adopted a standard CMI model and assumed a long-term rate of 1.75% 10%

CM

I 77%

Gen

erat

iona

l 23%

20%

Development of average life expectancies over recent years

Life

exp

ecta

ncy

at a

ge 6

5


No adjustment of the assumed disability rate

Adjusted the assumed disability rate at more than 100%

Employee turnover

The majority (79%) of companies used the standard BVG/LPP 2015 employee turnover scale. Most of the remaining companies applied a fixed percentage increase/decrease to the BVG/LPP 2015 standard tables.

Disability

The valuation of disability benefits is typically binary (i.e. an individual is either disabled or not) whereas in reality individuals may become partially disabled (and therefore only receive part of the disability benefit from their pension fund).

The BVG/LPP 2015 standard disability rates include all cases in which individuals have a high enough degree of disability to receive a disability benefit (commonly a degree of disability of 40% or higher).

A number of companies have therefore adjusted the assumed disability rate downwards as a proxy for the fact that some individuals will only receive part of the

Making an allowance for higher (lower) employee turnover generally reduces (increases) measured liabilities as, when an employee leaves, their accumulated account balance transfers to another arrangement and there is no longer a requirement to provide interest credits and conversion to pension.

disability benefit. Around 40% of companies made such an adjustment, and of those that did, the median adjustment was to multiply the standard rates by a factor of 80%.

As disability benefits are generally more costly to a plan than the benefits an individual would receive if they were not disabled, reducing the assumed disability rates generally reduces the calculated liability.

However, no allowance is typically made for the probability of an employee returning to work from disability.

Adjustment applied to BVG / LLP 2015 disability rates

Adjusted the assumed disability rate at less than 70%

Adjusted the assumed disability rate at between 70% and 79%



7%

0%

11%

21%

57%

4%

31 December 2017 median: 100% 31 December 2018 median: 100%


Lump sum proportion


The median assumption in our survey was that employees would take 25% of their account balance as a lump sum on reaching retirement age, although some companies used a significantly higher assumption (as high as 60%), while others made no allowance.

Making an allowance for employees to take a lump sum at retirement generally reduces the IFRS/US GAAP measured liability as conversion rates are currently determined using a local technical interest rate which is higher than an accounting discount rate.

Many pension plans have reduced the generosity of their conversion rates in recent years in response to the persistent Swiss low interest rate environment.

The interaction between low interest rates on personal savings and lower conversion rates may impact individual preferences for pension over cash going forward. Behavioral changes may materialise quickly and companies may wish to monitor their experience closely.


Between 50% and 59%

60% or more

Proportion of benefits taken as a lump sum

Less than 20%

Between 20% and 29%

Between 30% and 39%

Between 40% and 49%

14%

17%

14%

6%

31 December 2017 median: 25% 31 December 2018 median: 25%

38%

11%

18%

9%

1.50% - 1.74% 1.75% - 1.99% 2.00% or more

17%

Salary increases

0.50% - 0.74%

38%

11%

0.75% - 0.99% 1.00% - 1.24% 1.25% - 1.49%

Inflation is not generally a significant assumption for the measurement of Swiss pension liabilities. However, it is often used as a basis for setting the salary increase assumption (though this is also not particularly significant for typical Swiss cash balance plans).

As there are no CHF-denominated inflation-linked bonds it is not possible to set the inflation assumption using a “mutually compatible” (i.e. market neutral) approach (IAS19.75). Hence this assumption is set as “best estimate” and we see a wide range of assumptions being used from year to year.

Inflation and salary increases

One public source of future inflation expectations is the Swiss National Bank’s quarterly bulletin. However, this is only a relatively short-term forecast.

Our survey shows that there has been only minimal movement in typical inflation and salary increase assumptions during the year.

1%



6%


15

We are a network of KPMG pensions consultants who work together to service the needs of our national and multinational clients.

Our global pension practice has over 400 professional staff based in territories where defined benefit pensions and other long-term employee benefits are common, with our team in Zürich being a centre of excellence for international pensions.

As part of a wide professional services firm, KPMG Pensions frequently works alongside other parts of the business (Audit, Tax and Advisory) on multi-disciplinary projects. On pensions-led projects we are able to leverage this wider familiarity with the commercial environment to bring a more holistic business perspective to pensions issues.

This understanding of corporate processes is particularly key in times of change e.g. around legislative and regulatory developments, in commercial transaction situations, in internal reorganisations or restructurings. This is a key pillar of our service lines.

KPMG’s Pensions practice

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Contacts

Graham MiddletonPartnerPensions+41 58 249 34 [email protected]

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received, or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. The scope of any potential collaboration with audit clients is defined by regulatory requirements governing auditor independence. If you would like to know more about how KPMG AG processes personal data, please read our Privacy Policy, which you can find on our homepage at www.kpmg.ch.

© 2019 KPMG AG is a subsidiary of KPMG Holding AG, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved.

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For further information, please contact:

Funda SekerManagerPensions+41 58 249 31 [email protected]

Leeanne O'CallaghanManagerPensions+41 58 249 31 [email protected]

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