UBS Global Asset Management today announced that its US Pension Fund Fitness Tracker, a quarterly estimate of the overall health of a typical US defined benefit pension plan, shows pension funding ratios decreased by one percentage point in the third quarter of 2009, as liabilities outperformed assets.
Overall, the 10% increase in liabilities more than offset the 9% increase in assets which resulted in a slight decrease in a typical plan’s funding ratio for the quarter.
Funding ratio performance in the third quarter was driven by two factors:
• A broad-based rally across risky assets, which increased the value of the asset pool from which plan participants’ benefits are paid.
• Lower discount rates, which led to a higher present value of pension liabilities. Corporate credit spreads narrowed significantly in addition to declining interest rates, which led to a lower corporate bond yield curve and pension discount rate.
Risky assets rallied throughout the third quarter as consumer confidence rebounded and the health of the global economy showed signs of improvement. The S&P 500 Index finished the quarter significantly higher, up approximately 15%. The S&P 500 is now up almost 20% year-to-date through the third quarter; a stark contrast to 2008. For the quarter, a typical plan’s asset pool increased by approximately 9% and is now up almost 11% year-to-date.
“Despite one of the best quarterly performances for the US equity market, funded status for the typical plan weakened for the quarter as credit spread compression and lower interest rates drove liabilities higher; more than erasing the gains in risky assets,” said Aaron Meder, UBS Global Asset Management's Head of Asset Liability Investment Solutions in the Americas. The 10-year Treasury rate decreased 21 basis points and high quality corporate bond credit spreads narrowed approximately 60 basis points during the quarter. As a result, pension discount rates (which are based on the yield of high quality investment grade corporate bonds) for a typical pension plan decreased over 80 basis points during the quarter, which increased the present value of pension liabilities by 10% for the quarter. On a year-to-date basis, liabilities are up approximately 9% but have increased over 26% since March 31.
“This quarter highlights the importance of managing the key drivers of funding ratio risk - interest rate, credit spread, and market risk,” said Meder. “Even though risky assets rallied for the quarter, plans that were exposed to interest rate risk or avoided credit suffered.”
EXHIBIT 1: INCREASING LIABILITIES OFFSET INCREASE IN ASSETS, LEADING TO LOWER TYPICAL FUNDING RATIO
US Pension Fund Fitness Tracker of the Typical US Corporate Plan’s Funding Ratio
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US Pension Fund Fitness Tracker of the Typical US Corporate Plan’s Funding Ratio as of 9/30/09: | |
Sources: UBS Global Asset Management, Bear Stearns, International Index Company.
The views expressed are those of UBS Global Asset Management as of September 30, 2009
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Notes
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.
Asset Index: Methodology
UBS Global Asset Management approximates the return for the ”typical” US defined benefit plan using the reported asset allocation of the corporate plan subset of the Pension & Investments 1000. The series is constructed using the reported asset allocation weightings and publicly available benchmark information, with geometrically linked monthly total returns.
Pension Fund Fitness Tracker: Methodology
The US Pension Funds 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.
Additional information
The iBoxx US Pension Liability Indices include data provided by International Index Company (IIC). The information and opinions contained in this document have been complied or arrived at based upon information obtained from sources believe to be reliable and in good faith. All such information and opinions are subject to change without notice. IIC and its employees, suppliers, subcontractors and agents (collectively, IIC Associates) do not guarantee the veracity, completeness or accuracy of the index or other information furnished in connection with the index. No representation, warranty or condition, express or implied, statutory or otherwise, as to condition, satisfactory quality, performance, or fitness for purpose are given or assumed by IIC or any of the IIC Associates in respect of the index or any data included in it or the use by any person or entity of the index or that data and all those representations, warranties and conditions are excluded except to the extent that such exclusion is prohibited by law. IIC and the IIC Associates have no liability or responsibility to any person or entity for any loss, damages, costs, charges, expenses or other liabilities whether caused by the negligence of IIC or any of the IIC Associates or otherwise, arising in connection with the use of the index.
A number of the comments in this document are based on current expectations and are considered “forward-looking statements.” Actual future results, however, may prove to be different from expectations. The opinions expressed are a reflection of UBS Global Asset Management’s best judgment at the time this release is compiled, and any obligation to update or alter forward-looking statement as a result of new information, future events, or otherwise is disclaimed. Investors should also be aware that past performance is not necessarily a guide to future performance. Potential for profit is accompanied by the possibility of loss.
About UBS Global Asset Management
UBS Global Asset Management is one of the world’s leading asset managers, providing traditional, alternative, real estate, infrastructure and private equity investment management solutions to private clients, financial intermediaries and institutional investors worldwide. Invested assets totaled USD 547 billion (CHF 593 billion, EUR 389 billion, GBP 332 billion) as of June 30, 2009, making the firm one of the largest global institutional asset managers, a leading fund house in Europe and the largest mutual fund manager in Switzerland .
With around 3,600 employees, located in 26 countries, we are a truly global firm. Headquartered in London, our other main offices are in Chicago, Frankfurt, Hartford, Hong Kong, New York, Paris, Rio de Janeiro, Sydney, Tokyo, Toronto and Zurich.
SOURCE: LIPPER FUNDFLOWS INSIGHT REPORT (AS OF JUNE 30, 2009)
Contact:
Kris Kagel +1-212-882-5691
New York , October 5, 2009
UBS
