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US Pension Fund Fitness Tracker: Funding Ratios Drop Further in Third Quarter of 2014

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The UBS Global Asset Management US Pension Fund Fitness Tracker saw the funding ratio of the typical corporate US pension plan drop by approximately one percentage point to 89% in the third quarter of 2014.

“Funding ratios have continued to decline, albeit at a slower pace, decreasing on average about six percentage points year-to-date” said Robert Guzman, Head of Pension Risk Management at UBS Global Asset Management. “Despite the consensus view that rates would rise in 2014, the yield on 10-year US Treasury Notes has dropped a little over 50 basis points year-to-date. We continue to recommend that pension plans stick to their derisking strategies and follow their glide path.”

Flat investment returns over the quarter, combined with a slight increase in liability values, caused funding ratios to decrease again in the third quarter of 2014. These estimates are 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 US Federal Reserve (Fed) made progress on its path toward policy normalization by continuing to taper its quantitative easing (QE) program, driving the asset purchase program down to USD 15 billion. In the eurozone, responding to challenging economic conditions, the European Central Bank (ECB) lowered its main rate and announced details on the ECB asset buyback program. Addressing growth and deflationary concerns, ECB President Mario Draghi said he did not see the risk of recession or deflation. The debate about Scotland leaving the UK is now closed, as the Scots voted to remain in the UK. Bank of England (BoE) Governor Mark Carney said the first rate hike was getting closer, and that the timing would depend on data. In the rest of the world, the quarter was dominated by the situation in the Middle East, sanctions imposed on Russia over the conflict in Ukraine and Argentina’s default.

After a negative start in July, the S&P 500 Index finished the quarter up with a total return of 1.13%. In US dollar (USD) terms, the Euro Stoxx Total Return Index was down 8.64% over the quarter, on the back of a weaker euro. The MSCI Emerging Markets Total Return Index ended the quarter down 3.36% in USD terms.

The yield on 10-year US Treasury Notes ended the quarter down four basis points (bps) at 2.49%. The yield on 30-year US Treasury Notes decreased 16 bps, ending at 3.20%. High-quality corporate bond credit spreads, as measured by the Barclays Long Credit A+ option-adjusted spread, ended the quarter 12 bps wider. As a result, pension discount rates (which are based on the yield of high-quality investment grade corporate bonds) rose slightly over the quarter. The passage of time caused liabilities for a typical pension plan to increase by about one percentage point over the quarter. Together, these effects caused liabilities to increase 0.6% for the quarter. (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
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.

Notes to Editors

About UBS Global Asset Management

UBS Global Asset Management is a large-scale asset manager with well-diversified businesses across regions, capabilities and distribution channels. It offers investment capabilities and investment styles across all major traditional and alternative asset classes. These include equity, fixed income, currency, hedge fund, real estate, infrastructure and private equity investment capabilities that can also be combined into multi-asset strategies. The Fund Services unit provides professional services including legal fund set-up, accounting and reporting for traditional investment funds and alternative funds.

Invested assets worldwide totalled some CHF 596 billion (EUR 489 billion, GBP 404 billion, USD 674 billion) at 31 March 2014. The firm is a leading fund house in Europe, the largest mutual fund manager in Switzerland and one of the largest fund of hedge funds and real estate investment managers in the world.

With around 3,800 employees, located in 24 countries, we are a truly global firm. Our principal offices are in London, Chicago, Frankfurt, Hartford, Hong Kong, New York, Paris, Singapore, Sydney, Tokyo and Zurich.

The information and opinions contained herein are a reflection of UBS Global Asset Management’s best judgment based on current market assumptions and are considered forward-looking statements. Any obligation to update or alter forward-looking statement as a result of new information, future events, or otherwise is disclaimed. There is no assurance that these projections will ultimately be realized. Actual future results may prove to be different from expectations.

About UBS

UBS draws on its 150-year heritage to serve private, institutional and corporate clients worldwide, as well as retail clients in Switzerland. Its business strategy is centered on its pre-eminent global wealth management businesses and its leading universal bank in Switzerland. Together with a client-focused Investment Bank and a strong, well-diversified Global Asset Management business, UBS will expand its premier wealth management franchise and drive further growth across the Group.

UBS is present in all major financial centers worldwide. It has offices in more than 50 countries, with about 35% of its employees working in the Americas, 36% in Switzerland, 17% in the rest of Europe, the Middle East and Africa and 12% in Asia Pacific. UBS employs about 60,000 people around the world. Its shares are listed on the SIX Swiss Exchange and the New York Stock Exchange (NYSE).

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