CHICAGO — Corporate pension funding levels are moving into the black for the first time since the beginning of the decade, according to UBS Global Asset Management's U.S. Pension Fund Fitness Tracker.
The typical corporate pension fund that started 2006 with a funded ratio around 90% closed the year nearly 103% funded, according to the fitness tracker, a new report that estimates the overall health of the typical U.S. pension plan. It will be issued quarterly.
Assets of the average large corporate pension plan — derived from Pensions & Investments' annual survey of the top 1,000 pension funds — increased almost 14% for the year while liabilities were roughly flat. The liabilities are measured by the iBoxx U.S. Pension Liability index, which mimics the overall performance of a defined benefit plan in the U.S., taking into consideration the passage of time and changes in the term structure of interest rates.
Aaron Meder, UBS Global Asset Management's head of asset-liability investment, attributed the boost in funding levels to strong equity returns and a "modest increase in interest rates" during the year, which would lower liabilities.
Pension funds could be more likely to implement liability-driven strategies as a result of the more robust funding, Mr. Meder said. "Plans can implement liability-driven strategies that significantly reduce the uncertainty in their future pension contributions — often without reducing expected plan returns. This improvement in overall pension health provides many with an excellent opportunity to do so."
Jay Kloepfer, director of capital markets and alternatives research for Callan Associates Inc., San Francisco, said that just as many corporate plans may find that better funding brings a sense of greater investment freedom.
"If you told a lot of these plans a year before that they'd be overfunded, most would look to liability-driven investing. But now that they're at the top of the pile, the view is different up there," Mr. Kloepfer said. "The memory of the pain is receding.,"
The UBS index uses benchmark returns and asset allocation data reported in the corporate plan subset of P&I's top 1,000 funds. UBS determined liability profiles based on cash flow data and used the LIBOR interest rate swap curve as the discount curve, making it a more accurate picture of pension funding ratios than indexes that use the Treasury curve to look at liabilities, Mr. Meder said.
