"Continuing the downward trend seen in the first quarter of 2014, funding ratios have decreased on average about five percentage points year-to-date," said
Liability values increased 4.6% over the quarter, outpacing the positive investment returns of 3.5%. As a result, funding ratios decreased for the second consecutive quarter. 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.
Building on generally positive economic data in the US over the quarter, the total return of the S&P 500 Index was up 5.23%. Inflation came in slightly higher than forecasted in the US, but this has not yet been viewed as a headwind by the US Federal Reserve (Fed). In the eurozone, deflationary risks led the European Central bank (ECB) to ease monetary policy, using a set of measures that included cutting the deposit rate to -0.10% and extending the Long-Term Refinancing Operation (LTRO).
Continuing its downward trend, the yield on 10-year US Treasury bonds decreased by 19 basis points (bps), ending at 2.53%. The yield on 30-year US Treasury bonds decreased 20 bps, ending at 3.36%. High-quality corporate bond credit spreads, as measured by the Barclays Long Credit A+ option-adjusted spread, ended the quarter two bps tighter. 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 4.6% for the quarter. (Please see disclosures for assumptions and methodology.)
Disclosures and methodology
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
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.
Invested assets worldwide totalled some
With around 3,800 employees, located in 24 countries, we are a truly global firm. Our principal offices are in
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.
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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
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