(April 1, 2014) — The average funding ratio of US corporate defined benefit plans has dropped 4% to 91% in the first quarter of 2014, according to UBS Global Asset Management.
The decline was especially distinctive after a 17% improvement in funding ratio last year, the UBS report said.
“We believe that the 4% decline in the first quarter of 2014 should serve as a catalyst for plan sponsors to proactively protect their gains by adding to their hedging/de-risking program,” said Robert Guzman, head of pension risk management at UBS Global Asset Management, in a statement.
According to UBS data, investment returns were just 2.1%, not high enough to offset the 6.1% rise in liabilities.
“We’ve already taken back a quarter of 2013’s gain,” Guzman told aiCIO. “These are warning signals. For investors who are on the fence about an investment decision, they should be careful. They should look to hold onto as much as they can and do all they can to decrease downside volatility.”
Legal & General Investment Management America (LGIMA) reported similar findings.
“Despite slight positive returns in equity markets, volatility again returned to the markets and provided a bit of wake-up call for plan sponsors who have primarily experienced a one-way ride in funding ratios over the past year,” said Jodan Ledford, LGIMA’s head of US solutions, in a statement.
During the first quarter this year, the US equity market was flat, with the S&P 500 recording a 1.81% total return. 10-year US treasury bond yields decreased 41 basis points (bps) to 2.72% while the 30-year US treasury bond yields fell 41 bps to 3.56%.
These drops in treasury rates led plan discount rates to fall more than 30 bps, LGIMA said, as average plan assets rose just over 1%.
“It should be noted that many plans who participated in de-risking their plans as funding ratios improved enjoyed a much less volatile quarter, with little to no funding ratio drawdowns,” said LGIMA’s Ledford.
UBS’ Guzman said corporate pensions should make investment decisions focused on further de-risking and sustaining their current funding ratio as much as possible.
“While it’s a hard game to make predictions on how things will pan out the rest of the year for corporate pensions, these figures could help investors look to take some chips off the table,” he said. “If they want to de-risk, they should do it sooner than later.”
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