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UBS Global Asset Management Reports Continued Improvement in US Pension Fund Fitness
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 plan funding ratios improving steadily over the quarter. However, despite this funding ratio improvement, volatility in pension plan funding ratios remains high and should be a concern for many plan sponsors and fund managers.
According to the US Pension Fund Fitness Tracker, the typical pension fund started the quarter with a funding ratio of approximately 105 percent and ended the quarter at an improved funding ratio of approximately 115 percent. Strength in both the domestic and international equity markets coupled with negative liability returns, due to rising interest rates, led to the funding ratio improvement in the second quarter.
"Despite the generally positive performance overall for the second quarter, there was never a dull moment due to continued funding ratio volatility stemming from both interest rate and equity market volatility," said Aaron Meder, UBS Global Asset Management's Head of Asset Liability Investment Solutions in the Americas.
The value of liabilities in the month of April, as measured by the iBoxx US Pension Liability indices, rose approximately 50 basis points. Then, from the end of April to the end of June, the discount rate applied to pension liabilities increased substantially, driving the value of liabilities downward by over four percent for the entire quarter. Domestic and international equity markets were volatile as well, increasing by about 8% in total for April and May, followed by a 2% drop in June, as measured by the S&P 500 Index and the MSCI EAFE Free Net Index, respectively.
"The primary catalyst behind the volatility in funding ratios continues to be interest rate violatility and equity market volatility," said Meder. However, Meder points out that liability-driven investment strategies can dramatically reduce the amount of uncertainty that surrounds future funding ratios and plan contributions without necessarily reducing expected plan returns.
"This is an opportune time to implement an LDI strategy focused on managing liability risk and generating efficient returns," contends Meder. "We believe that the funding ratio improvement seen during 2006 that has carried into the first and second quarters of 2007 presents an outstanding opportunity to hedge some liability risk. Ideally, this is combined with a shift to more of an absolute return generation focus."
Strong funding ratio returns due to favorable market conditions
Typical US corporate plan funding ratio
Sources: UBS Global Asset Management, Bear Stearns, International Index Company
The funding ratio measures 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.
The views expressed are those of UBS Global Asset Management as of June 30, 2007.
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.
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. 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 and real estate investment management solutions to private clients, financial intermediaries and institutional investors worldwide. Invested assets totaled USD 726 billion as of March 31, 2007, making the firm one of the largest global institutional asset managers and a leading fund house in Europe.
With around 3,500 employees, located in 23 countries, UBS Global Asset Management is a truly global firm. The main offices are in Basel, Chicago, Frankfurt, Grand Cayman, Hartford, Hong Kong, London, Luxembourg, New York, Rio de Janeiro, Sydney, Tokyo, Toronto and Zurich.
Copyright 2007 UBS Global Asset Management (Americas) Inc.
Kris Kagel : +1-212-882-5691
New York, July 12, 2007