In a press release, UBS said the assets of the typical large U.S. corporate defined benefit plan outperformed liabilities, with assets seeing a 2% gain and liabilities mostly falling flat, according to the iBoxx US Pension Liability indices.
“While the overall numbers were positive, the first quarter of 2007 points out an area of concern for pension managers: namely, significant funding ratio volatility due to interest rate swings, and plans’ over-reliance on equity market risk,” said Aaron Meder, UBS Global Asset Management’s Head of Asset Liability Investment Solutions in the Americas, in the release.
However, UBS suggests that interest rate volatility had a greater effect on funding ratios than equity market volatility. For example, liabilities were down 2% in January as interest rates moved higher, but regained all and more of that decline, increasing by almost 4% in February as rates reversed course.
On February 27, equity markets gave up about 2% with interest rates falling at the same time, which caused funding ratios to decline 4% in a single day.
UBS suggests that plans take advantage of alternative investments to help to better align assets and liabilities. “Plans can implement liability-driven strategies that may significantly reduce the uncertainty in their future pension contributions – often without reducing expected plan returns,” Meder said.