UBS Finds Pension Funding Ratios Take a Dive

October 6, 2008 ( - UBS Global Asset Management announced that its 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 seven percentage points in the third quarter of 2008.

According to a UBS press release, when measuring liabilities on a PPA basis, the typical pension plan started the quarter with a funding ratio of approximately 108% and ended the third quarter with a funding ratio of 101%.  Plans continue to face strong headwinds as UBS says funding ratios are now off by 12 percentage points from the beginning of 2008. 

The announcement said the quarter’s funding ratio performance was driven by the following two themes:

  • Volatile equity markets that ended the quarter lower, which decreased the value of the asset pool from which participants’ benefits are paid, and
  • Slightly higher corporate bond yields, which led to a modestly lower present value of pension liabilities.  While interest rates fell significantly, corporate spreads widened even more so, which led to a higher corporate bond yield curve.

“Overall, the drop in assets more than offset the decrease in liabilities, which led to the large decrease in a typical plan’s funding ratio,” said Aaron Meder, UBS Global Asset Management’s Head of Asset Liability Investment Solutions in the Americas, in the announcement.

The US Pension Funds Fitness Tracker is the ratio of the asset index over the liability index. Assuming all other factors remain constant; it 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.