A UBS news release said the typical U.S. pension fund started the quarter with a funding ratio of approximately 109% and ended at approximately 101% – mostly attributable to an 8% November decline.
The quarter’s performance was driven by volatile equity markets that ended the quarter down, decreasing the value of the asset pool from which plan participants’ benefits are paid, and lower interest rates, which increased the present value of pension liabilities, the release said.
“Volatility was the theme not only for the fourth quarter, but for 2007 in its entirety, as corporate pension plans felt the impact of dramatic swings in the equity markets combined with volatility in the fixed income markets,” said Aaron Meder, UBS Global Asset Management’s Head of Asset Liability Investment Solutions in the Americas, in the news release.
The 10-year US LIBOR swap rate hit an intra-quarter high of 5.31% on October 16 and touched a low of 4.57% on November 29. This decrease in interest rates increased the value of pension liabilities and pushed it further away from its fair value estimate.
“We believe that the volatility experienced throughout 2007 should encourage plan sponsors to develop hedging strategies designed to reduce liability risk,” said Meder.