Global Asset Management

In the past, running a pension fund seemed like a relatively straightforward proposition. Contributions were invested in the equity and bond markets and then dutifully administered. After thirty years or so, when an employee retired, the money had grown sufficiently to finance the promised benefits. When market volatility caused asset and liability values to diverge, it was assumed that the passage of time would help to narrow any gaps. In rising equity markets, the pension fund might even have earned some additional money above and beyond its obligations to retirees.

Now, declining interest rates, increasing life expectancy and the growing cost of servicing pension funds have resulted in the value of the liabilities of many corporate pension plans significantly increasing in relative size. In some cases, they even dwarf the market value of the companies themselves. Also, regulatory changes in many countries have increased the focus on the short-term financial health of plans, increasingly imposing corrective actions if a plan's funding ratio (the ratio of plan assets to its liabilities) deteriorates significantly. Compounding matters, the relatively low level of interest rates in the past five years has raised liability valuations (liability values move inversely to interest rates), while the equity market volatility of the late 1990s and early 2000s has created widespread awareness that many plans are overly reliant on equity market returns.

Of course, corporations always have the option to place more money into the plan whenever needed to improve the funding ratio. But this approach can be expensive and, for some com-panies, simply not financially viable. As a result, pension funds are looking for ways to better manage their funding ratios and the associated risk. UBS has recognized and responded to this by developing a sophisticated investment approach to help clients meet the current challenges. In simple terms, this means buying assets that generate the returns needed to pay out employee retirement benefits while still carefully managing the risks of shorter-term fluctuations in plan funding ratios. Pension strategies need to be designed and managed in conjunction with plan liabilities, taking into account the plan's structure, its projected outflows, and the valuation of liabilities under changing accounting rules.

Understanding the specific objectives and risk tolerance of each plan is critical. These are affected by the funding ratio, as well as other factors, such as the maturity of the plan or the corporation's ability and willingness to contribute additional money. Based on these factors, the next step is to design solutions that better meet the plan's goal by efficiently taking risks relative to the plan's liabilities. Typically this is done by utilizing sophisticated interest rate and inflation management techniques to better align asset and liability returns, while at the same time improving the structure and diversification of the asset portfolio. The asset management business calls this approach Asset Liability Investment Solutions (ALIS). The ALIS team is staffed by former pension plan representatives, pension consultants, actuaries, derivatives experts as well as a broad group of investment specialists. It is one of many components of the collaborative, cross-functional global pension initiative that UBS currently has in place, allowing it to bring to bear a wealth of expertise and resources to help sponsors and trustees measure, analyze, manage and implement a variety of pension solutions – and to adapt to the changing environment in which they operate.