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Pension-Fund Swings Make Case for Cutting Risk: Chart of the Day

Companies offering pension plans in the U.S. are increasingly seeking to reduce the risk of failing to meet their obligations, according to Erin Lyons, a Citigroup Inc. strategist.

As the CHART OF THE DAY illustrates, swings in pension-fund returns may give them an incentive to act. The chart tracks the iBoxx U.S. Pension Index, designed to mirror the performance of a typical plan with defined benefits.

The index had a 6.1 percent loss for the year as of two days ago, when Lyons wrote her report. The decline followed a 0.2 percent gain for all of last year -- and a 31 percent surge the year before.

Volatility in funds’ asset value and relatively low interest rates “have made managing pensions increasingly difficult,” the New York-based strategist wrote. “Corporate managers are evaluating whether or not they want to be in the asset-management business.”

One possibility is switching to defined-contribution programs, especially 401(k) plans, the report said. Another is shifting into bonds and away from stocks. Ford Motor Co. (F) will “walk toward” raising fixed-income investments to 80 percent of pension assets from 55 percent at the end of last year, Treasurer Neil Schloss said in March.

Ford and General Motors Co. (GM) offered pension buyouts to retirees last year, and Lyons cited the lump-sum payments as a third option for “de-risking.” GM also used a fourth approach, transferring obligations to an insurance company through the purchase of a group annuity.

To contact the reporter on this story: David Wilson in New York at dwilson@bloomberg.net

To contact the editor responsible for this story: Chris Nagi at chrisnagi@bloomberg.net

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