Despite positive performance from “risky asset markets,” the typical U.S. corporate pension plan saw its funding ratio drop by 1% thanks to the drowning effects of high rising liabilities, a new study claims.
In a Friday analysis, UBS Global Asset Management (UBS GAM) said in its quarterly study “U.S. Pension Fund Fitness Tracker” that a 5% increase in assets, which were derived from a good September performance, was cancelled out by the more than 6% increase in liabilities.
The tracker is a ratio of the asset index over the liability index, which “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,” the Oct. 8 announcement said.
In its explanation, UBS Global Asset Management lists that liability levels increased “due to a strong rally in interest rates combined with a slight narrowing of credit spreads,” which in turn “led to a lower corporate bond yield curve and pension discount rate.”
With regards to investments, UBS’s money management arm explained that the S&P 500 index finished up about 11%, with “equity markets [being] traded in a wide and volatile range throughout the quarter,” the release stated.
The Zurich and Basel-based financial services firm’s division also states the plan sponsors should “explicitly” watch four key drivers of funding ratio risk in order to keep a hold on the problem. They include market, interest rate, credit spread, and active management risk, the report explained.
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Currently, UBS GAM offers equity, fixed-income, currency, hedge fund, real estate and infrastructure investment offerings to its clients. Invested assets totaled $528 billion as of June 30, the release said.
