A UBS media release said the drop was due in large part to falling interest rates, which increased the present value of pension liabilities. The increase in liabilities was partially offset by a modest increase in equity markets for the quarter.
The S&P 500 index finished July down over 3% and international equity markets finished down close to 1.5%, as measured by the MSCI EAFE Equity Index. By September, the domestic equity markets recouped much of their losses and finished the month up approximately 4%, while the international equity markets ended September up over 5%, UBS said.
“With so many plans currently exposed to interest rate risk, it is critical to explore alternative investment approaches that better align assets and liabilities,” said Aaron Meder, UBS Global Asset Management’s Head of Asset Liability Investment Solutions in the Americas, in the news release. “Plans can implement liability-driven strategies to significantly reduce the uncertainty in their future pension contributions, often without reducing expected plan returns. We anticipate the volatility experienced throughout 2007 will encourage plan sponsors to develop hedging strategies that reduce liability risk.”
The US Pension Funds Fitness Tracker is the ratio of the asset index over the iBoxx US Pension Liability Index. For the asset index, UBS approximates the return for the typical U.S. defined benefit plan using the reported asset allocation of the corporate plan subset of the Pension & Investments 1000. The series is constructed using the reported asset allocation weightings and publicly available benchmark information, with geometrically linked monthly total returns.
The Fitness Tracker combines asset and liability returns and measures the impact of a typical investment strategy on the funding ratio of a model defined benefit plan in the U.S. due to interest rollup, change in interest rates, and typical asset performance.