SWITZERLAND - The burden of pension liabilities could negatively impact the credit rating of several Swiss local governments, a new report by Standard & Poor's has warned.
S&P views the off-balance sheet liability arising from public pension funds as a burden for the guaranteeing government, says the report “Swiss Cantonal and Municipal Pension Liabilities Cloud Credit Quality”.
“In some cases – such as for the City of Lausanne (A+/Negative/) – the pension fund has already been a constraining factor for the credit rating on the government,” said S&P credit analyst Christian Esters, author of the report.
From a rating perspective, S&P said it considers the cash flow impact of the pension fund on the sponsoring government’s fiscal flexibility to be particularly important.
However with coverage ratios below 100%, the cash flow impact and the risk that the sponsoring government might need to step in to plug the deficit can be overcome by taking “appropriate measures”, the report notes. The burden of these measures can be borne either by the government or plan participants, the report states.
“Standard & Poor’s believes that a pension fund may increasingly become a constraining factor for the government’s credit rating, however, if imbalances are overwhelmingly addressed by capital injections or growing contribution rates that weighs on the government’s ongoing budgetary performance,” Esters said.
“Similarly, we are concerned when structural imbalances are not addressed by consolidation measures, so that coverage ratio decreases over time, thereby possibly making a cash injection by the sponsoring government inevitable at some stage to meet the promises made by the pension scheme.”
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