DB Plans Suffer Sharp Funding Decline in Q408

January 5, 2009 (PLANSPONSOR.com) - UBS Global Asset Management's US Pension Fund Fitness Tracker, a quarterly estimate of the overall health of a typical U.S. defined benefit pension plan, shows pension funding ratios fell significantly by 24 percentage points in the fourth quarter of 2008.

The fourth quarter drop is more than three times the drop shown for the third quarter of 2008 (see UBS Finds Pension Funding Ratios Take a Dive ). Funding ratios are now off by 36 percentage points from the beginning of 2008, according to a UBS press release.

The US Pension Fund Fitness Tracker showed the typical U.S. pension fund started the quarter with a funding ratio of approximately 101% and ended the quarter at approximately 77%. UBS says “the decrease is mostly attributable to massive waves of risk aversion that drove the equity markets lower, which decreased the value of the asset pool from which plan participant’s benefits are paid, combined with a significant flight to quality that drove interest rates lower, which led to a higher present value of pension liabilities.”

While corporate credit spreads widened, interest rates fell even more so, leading to a lower corporate bond yield curve used for valuing pension liabilities.

“Forced liquidations and panic selling across equity markets throughout the fourth quarter, particularly in October, attributed to the violent sell-off across global equity markets and the flight to safety across high-quality fixed income markets,” said Aaron Meder, UBS Global Asset Management’s Head of Asset Liability Investment Solutions in the Americas, in the announcement. “For the typical pension fund investment strategy, this type of economic scenario leads to very painful funded status outcomes. As pension discount rates fell, liabilities increased by approximately 14%, and, at the same time, equity markets falling caused assets to drop by approximately 13%. Putting these two together resulted in a very painful funded status drop of 24%.”