Pension Funding Ratios Continue to Slip

October 5, 2009 ( - UBS Global Asset Management's US Pension Fund Fitness Tracker shows pension funding ratios decreased by one percentage point in the third quarter of 2009, as liabilities outperformed assets.

Overall, UBS said, the 10% increase in liabilities more than offset the 9% increase in assets which resulted in a slight decrease in a typical plan’s funding ratio for the quarter.

According to a press release, funding ratio performance in the third quarter was driven by two factors:

  • A broad-based rally across risky assets, which increased the value of the asset pool from which plan participants’ benefits are paid.
  • Lower discount rates, which led to a higher present value of pension liabilities. Corporate credit spreads narrowed significantly in addition to declining interest rates, which led to a lower corporate bond yield curve and pension discount rate.

UBS said risky assets rallied throughout the third quarter as consumer confidence rebounded and the health of the global economy showed signs of improvement. The S&P 500 Index finished the quarter significantly higher, up approximately 15%. The S&P 500 is now up almost 20% year-to-date through the third quarter; a stark contrast to 2008. For the quarter, a typical plan’s asset pool increased by approximately 9% and is now up almost 11% year-to-date.

However, the 10-year Treasury rate decreased 21 basis points and high quality corporate bond credit spreads narrowed approximately 60 basis points during the quarter, so pension discount rates (which are based on the yield of high quality investment grade corporate bonds) for a typical pension plan decreased over 80 basis points during the quarter, which increased the present value of pension liabilities by 10%. On a year-to-date basis, liabilities are up approximately 9% but have increased over 26% since March 31.

“Despite one of the best quarterly performances for the US equity market, funded status for the typical plan weakened for the quarter as credit spread compression and lower interest rates drove liabilities higher; more than erasing the gains in risky assets,” said Aaron Meder, UBS Global Asset Management’s Head of Asset Liability Investment Solutions in the Americas, in the press release.