US Pension Fund Fitness Tracker: Funded Status of Plans Improves Sharply in Second Quarter of 2013

US Pension Fund Fitness Tracker:
Funded Status of Plans Improves Sharply in Second Quarter of 2013

CHICAGO--(BUSINESS WIRE)-- The funding ratio of the typical US pension plan increased sharply during the second quarter of 2013, rising by six percentage points to 88%, according to the UBS Global Asset Management US Pension Fund Fitness Tracker. Combined with gains in the first quarter, the estimated year-to-date total improvement in funding ratio is close to 11 percentage points.

The improvement in funding ratio for the second quarter was driven primarily by a 6.1% drop in liability values. Asset values are estimated to have increased by a modest 0.4%, based on the average corporate plan's reported asset allocation weightings from the UBS Global Asset Management Pension 500 Database and publicly available benchmark information.

The S&P 500 Total Return Index finished the quarter up 2.9% and the MSCI EAFE Index rose approximately 1.5%. Volatility dominated throughout the quarter amid anticipation that the US Federal Reserve (Fed) would begin tapering its quantitative easing (QE) program sooner than previously anticipated.

After Fed Chairman Ben Bernanke's comments during a press conference on June 19, bond yields rose significantly. As a result, a wide range of fixed income assets lost value. In particular, US Treasury bonds and US credit bonds sold off sharply late in the quarter.

Overall, the yield on 10-year US Treasury bonds increased by 64 basis points (bps), ending at 2.49%, while the yield on 30-year US Treasury bonds increased by 40 bps, ending at 3.50%. High-quality corporate bond credit spreads, as measured by the Barclays Capital Long Credit A+ option-adjusted spread, ended the quarter 11 bps wider. As a result, pension discount rates (which are based on the yield of high-quality investment grade corporate bonds) increased, causing liabilities for a typical pension plan to decrease by 6.1%. (Please see disclosures for assumptions and methodology.)

Disclosures and methodology

Funding ratio

Funding ratios measure a pension fund's ability to meet future payout obligations to plan participants. The main factors impacting the funding ratio of a typical US defined benefit plan are equity market returns, which grow (or shrink) the asset pool from which plan participants' benefits are paid, and liability returns, which move inversely to interest rates.

Liability indices: Methodology

The iBoxx US Pension Liability Index - Aggregate mimics the overall performance of a model defined benefit plan in the US, taking into consideration the passage of time and changes in the term structure of interest rates. The index is based on actual liability profiles, and mimics the investment grade yield curve. It is therefore more appropriate than most existing indices for measuring the performance of defined benefit plans. This index (along with its related active member and retired member indices) is published daily, using the LIBOR interest rate swap curve as the discount curve, a highly liquid universe. This provides the flexibility to use combinations of the indices in order to accurately represent customized liability profiles based on a plan's specific participant population.

Pension Protection Act (PPA) liability returns are approximated by the Barclays Capital US Long Credit A-AAA Index. This index broadly reflects the duration and credit characteristics of the PPA discount curve that is used to discount expected pension benefit payments for US defined benefit pension plans.

Asset index: Methodology

UBS Global Asset Management approximates the return for the "typical" US defined benefit plan using the reported asset allocation of the UBS Global Asset Management Pension 500 Database. The series is constructed using the aggregate asset allocation weightings and publicly available benchmark information, with geometrically linked monthly total returns.

Pension Fund Fitness Tracker: Methodology

The US Pension Fund Fitness Tracker is the ratio of the asset index over the liability index. Assuming all other factors remain constant, it combines asset and liability returns and measures the impact of a "typical" investment strategy on the funding ratio of a model defined benefit plan in the US due to interest rollup, change in interest rates and typical asset performance, but excludes unique plan factors, such as service cost and benefit payments.

The UBS Global Asset Management Pension 500 Database

The UBS Global Asset Management Pension 500 Database is a proprietary database that is based on the analysis of 500 public companies sponsoring large defined benefit plans. The information was extracted from the companies' 10-K statements. The study may include figures for companies' nonqualified and foreign plans, both of which are not subject to ERISA.

The aggregate asset allocation is based on an equally weighted average of the 500 companies included in the database. The aggregate asset allocation includes equities, fixed income, hedge funds, private equity, real estate and cash.

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UBS
Karina Byrne, +212-882-5692
Karina.byrne@ubs.com
www.ubs.com

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