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UBS Global Asset Management Reports 6% Increase in US Pension Fund Fitness in Fourth Quarter 2009
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 that measuring liabilities on a corporate bond basis, the typical US pension plan ended the fourth quarter with a 6% stronger funding ratio, as assets outperformed liabilities. Funding ratio performance in the fourth quarter was driven by two factors:
Strong performance across risky assets, which increased the value of the asset pool from which plan participants' benefits are paid.
Higher discount rates, which led to a lower present value of pension liabilities. Rising interest rates more than offset narrowing corporate credit spreads, which led to a higher corporate bond yield curve and pension discount rate.
Overall, the 3% increase in assets, coupled with the 3% decrease in liabilities, resulted in an improvement in a typical plan's funding ratio for the quarter.
"Risky assets, such as equities, continued to rally throughout the fourth quarter on the back of stronger than expected corporate earnings and continued improvement across the global economy," said Aaron Meder, UBS Global Asset Management's Head of Asset Liability Investment Solutions, Americas. "The S&P 500 Index finished the quarter higher, up approximately 6%."
The S&P 500 finished the year up almost 26%, rebounding significantly from the March lows. For the year, a typical plan's asset pool increased by approximately 14% year-to-date.
Interest rates rose approximately 50 basis points for the quarter as investors moved out of Treasuries and bought risky assets. High quality corporate bond credit spreads narrowed approximately 20 basis points during the quarter, as measured by the Barclays Capital Long Credit A+ option adjusted spread. As a result, pension discount rates (which are based on the yield of high quality investment grade corporate bonds) for a typical pension plan increased 30 basis points during the quarter, which decreased the present value of pension liabilities by approximately 3% for the quarter. For the year, liabilities rose approximately 5% but increased by almost 23% since March 30.
Overall, a typical plan's funding ratio return was 9% for the year, as asset return (14%) outpaced liability return (5%). Meder added, "From a pension risk management perspective, it is important to manage the key drivers of funding ratio risk - interest rate, credit spread, and market risk. In 2009, we saw unprecedented volatility in rates, credit spreads, and market levels, further emphasizing the importance of managing these key risk factors."
EXHIBIT 1: INCREASING ASSETS AND DECREASING LIABILITIES LEAD TO HIGHER TYPICAL FUNDING RATIO
Source: UBS Global Asset Management, Bear Stearns, International Index Company
The views expressed are those of UBS Global Asset Management as of December 31, 2009.
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.
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 a large scale asset manager with well diversified businesses across regions, capabilities and distribution channels. We offer 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 in multi-asset strategies.
Invested assets totalled some CHF 583 billion (EUR 384 billion, GBP 352 billion, USD 562 billion) at 30 September 2009. The firm is a leading fund house in Europe, the largest mutual fund manager in Switzerland and the largest global hedge fund of funds manager .
With around 3,500 employees, located in 25 countries, we are a truly global firm. Headquartered in London, our other main offices are in Chicago, Frankfurt, Hartford, Hong Kong, New York, Paris, Sydney, Tokyo, Toronto and Zurich.
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Kris Kagel +1-212-882-5691
New York , January 7, 2010
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