Lower interest rates and volatile equity markets pushed pension funding ratios down in the fourth quarter.
According to UBS Global Asset Management’s U.S. Pension Fund Fitness Tracker, the typical defined benefit (DB) pension fund in the United States ended the quarter at approximately 101%, down from 109% at the beginning of the quarter.
“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,” says Aaron Meder, UBS Global Asset Management’s head of asset liability solutions in the Americas.
“The typical U.S. pension plan began the year with a funding ratio of 102%, which rose steadily throughout the first half of 2007 to 113%,” he adds. “However, the second half of 2007 gave back many of the funding ratio gains. It is also worth noting that November was the worst month of the year for funding ratios, with an 8% drop.”
November witnessed, in essence, a “perfect storm,” with falling equity markets and lower interest rates. The S&P 500 Index was down more than 4% while the MSCI EAFE Index declined more than 3% during the month.
“Investors looked for safety in fixed income markets, in anticipation of a potential economic slowdown,” says Meder. “This sent yields dramatically lower.”
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