Pensioners are also feeling the effects of inflation, because pension funds – unlike old age and survivors’ insurance (OASI) – are not required to automatically compensate for inflation. Pensioners therefore have to sustain themselves with less income in real terms. Nevertheless, there was no adjustment to pension benefits. Given the poor investment year of 2022 and the resulting shrinkage of value fluctuation reserves, only very few pension funds had these options available to them.
Stock markets surprisingly positive
The good news is that based on current observations, 2022 is likely to be an outlier. Finally, inflation in Switzerland – already low by international standards – has weakened significantly again in the past six months. After rising to 3.4 percent in the first two months of 2023 due to higher electricity prices and air fares, it has fallen rapidly since then. According to the Federal Statistical Office, it reached 1.6 percent in July.
Just like the falling inflation rates, the trend on the markets is a good sign for the current year. Driven by the technology sector and the euphoria surrounding artificial intelligence, the equity markets in particular appeared surprisingly positive – even against the backdrop of a looming global recession. For pension funds invested in the “Swiss equities” asset class, this resulted in an increase of 8.2 percent up to 30 June, while “Global equities” even gained 10.6 percent. The development of the other asset classes was mixed. According to the Swisscanto Pension Funds Monitor, Swiss pension funds are likely to have generated cumulative returns (excluding costs) of 4.1 percent on average in the first half of 2023. The figures from the Pension Funds Monitor are projections based on market development and the asset allocation of participants in the Pension Funds Study reported at the end of 2022.
The positive signs must not hide the fact that the financial markets continue to fluctuate between fears of inflation and recession. Unexpected developments immediately trigger reactions on financial markets, with positive or negative impacts on the interest on pension assets. However, the higher interest rate level has laid a fundamental cornerstone for future performance improvements.