US Pension Fund Fitness Tracker

Pension Funding Ratios Slightly Decrease in First Quarter 2015

 Two year trend tallies a 9% decline overall

April 03, 2015 – CHICAGO–(BUSINESS WIRE)–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 86% in the first quarter of 2015.

"Funding ratios have continued to decline, decreasing on average about nine percentage points since year- end 2013. Rates have continued to decline, the yield on the long end of the Treasury market has dropped a little over 20 basis points over the first quarter. We reiterate our strongly held view that plans need to adhere to their de-risking program as the timing/direction of movements in long-term interest rates is uncertain," said Robert Guzman, head of Pension Risk Management at UBS Global Asset Management.

In the first quarter of 2015, liability values increased about 3.2%, mainly driven by the downward move in Treasury yields. Investment returns were also positive, but at 1.9% could not fully offset the increase in liabilities, resulting in approximately a one percentage point decrease in funding ratios. 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.

Eurozone QE

In the Eurozone, the European Central Bank (ECB) began its quantitative easing at a pace of EUR 60 billion of asset purchases per month, while leaving its policy rate unchanged at 0.05%. The start of the asset-buying program was followed by a weaker euro, and even more negative sovereign yields.

Earlier in January, the Swiss National Bank surprised the market by removing the cap on the value of its currency versus the euro, and by cutting its interest rate further into negative territory to -0.75%. Negative sovereign yields are no longer a rarity. As the euro was selling off, the US dollar rose to its highest level since 2003. As widely anticipated, the US Federal Reserve (Fed) dropped the word "patient" from its most recent statement.

This seems to have been somewhat priced in already, and investors shifted their attention to the pace of the rate hikes, which is expected to be slower than initially anticipated. The S&P 500 Index started the year with a negative return in January, but went on to end the quarter up with a total return of 0.95%. In US dollar (USD) terms, the Euro Stoxx Total Return Index was up 5.26% over the quarter.

The MSCI Emerging Markets Total Return Index ended the quarter 2.28% higher in USD terms. The yield on 10-year US Treasury Notes ended the quarter down 25 basis points (bps) at 1.92%. The yield on 30-year US Treasury Notes decreased 21 bps, ending at 2.54%. High-quality corporate bond credit spreads, as measured by the Barclays Long Credit A+ option-adjusted spread, ended the quarter unchanged.

As a result, pension discount rates (which are based on the yield of high-quality investment grade corporate bonds) decreased 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 3.2% for the quarter. (Please see disclosures for assumptions and methodology.)

We reiterate our strongly held view that plans need to adhere to their de-risking program as the timing/direction of movements in long-term interest rates is uncertain

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. 


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