The UBS Global Asset Management US Pension Fund Fitness Tracker
saw the funding ratio of the typical corporate US pension plan rise
to about 87% in the second quarter of 2015. We recalibrated our
model plan further to the adoption of new mortality tables at the
last fiscal year-end.
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"The introduction of the new mortality tables had the net effect
of reducing the funding ratio by approximately six percentage
points. Factoring in the strong decrease in liabilities, the
average funding ratio rebounded in the second quarter, increasing
on average by about one percentage point. It is worth noting that
in the absence of the mortality adjustment, the average funding
ratio would stand close to 92%, the same level it was in the last
quarter of 2013. Interest rates reversed their decline with the
yield on the long end of the Treasury market increasing 58 basis
points over the second quarter. We continue to advise our clients
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.
The strong rise in Treasury yields, coupled with the widening of
credit spreads, caused liability values to decrease about 7.3% in
the second quarter of 2015. Investment returns over the quarter
were -0.6%. 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.
In Europe, Greece once again dominated the headlines. Halfway
through the quarter, it became increasingly clear that Greece would
need more funding to meet its June payment to the IMF. Stalled
negotiations resulted in Greece's Prime Minister Tsipras's surprise
announcement of a referendum that would decide whether to accept
the terms of the most recent bailout offer. After Cyprus being the
first in 2013, Greece became the second Eurozone country to impose
capital controls. Despite a last-minute attempt to renegotiate the
terms of the bailout, Greece went on to miss its June 30th payment
to the IMF. In the UK, Prime Minister David Cameron was re-elected
by a much wider margin than UK pollsters had predicted.
In the US, despite mixed data, the economy still appears to be
on a slowly improving trend. While first quarter GDP was revised
down, showing a contraction, initial jobless claims fell to their
lowest level in 15 years during the second quarter. Analysts
pointed to the weather and strikes on the West Coast to help
alleviate concerns about softer first quarter results. The Federal
Reserve reiterated its data-dependent approach to monetary policy
normalization. From the most recent FOMC meeting, investors took
away that the path to rate normalization will be even slower than
initially anticipated.
The S&P 500 Index ended the quarter slightly up with a total
return of 0.28%. In US dollar (USD) terms, the Euro Stoxx Total
Return Index was down at -0.63% over the quarter. The MSCI Emerging
Markets Total Return Index ended the quarter 0.82% higher in USD
terms.
The yield on 10-year US Treasury Notes ended the quarter up 43
basis points (bps) at 2.35%. The yield on 30-year US Treasury bonds
increased 58 bps, ending at 3.12%. High-quality corporate bond
credit spreads, as measured by the Barclays Long Credit A+
option-adjusted spread, ended the quarter 11 bps wider. As a
result, pension discount rates (which are based on the yield of
high-quality investment grade corporate bonds) increased 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 decrease
7.3% for the quarter. (Please see disclosures for assumptions and
methodology.)
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
impact of changes in mortality tables in 2014 was estimated to be a
6% increase in liabilities and was reflected in Q2 2015.
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, and therefore
represents generally accepted accounting principles (GAAP)
information. 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.
Notes to Editors
About UBS Global Asset Management
Global Asset Management is a large-scale asset manager with
diversified businesses across investment capabilities, regions and
distribution channels. It offers investment capabilities and styles
across all major traditional and alternative asset classes
including equities, fixed income, currencies, hedge funds, real
estate, infrastructure and private equity that can also be combined
into multi-asset strategies. The fund services unit provides
professional services including fund set-up, accounting and
reporting for both traditional investment funds and alternative
funds.
About UBS
UBS is committed to providing private, institutional and
corporate clients worldwide, as well as retail clients in
Switzerland, with superior financial advice and solutions while
generating attractive and sustainable returns for shareholders. Its
strategy centers on its Wealth Management and Wealth Management
Americas businesses and its leading universal bank in Switzerland,
complemented by its Global Asset Management business and its
Investment Bank. These businesses share three key characteristics:
they benefit from a strong competitive position in their targeted
markets, are capital-efficient, and offer a superior structural
growth and profitability outlook. UBS's strategy builds on the
strengths of all of its businesses and focuses its efforts on areas
in which it excels, while seeking to capitalize on the compelling
growth prospects in the businesses and regions in which it
operates. Capital strength is the foundation of its success.
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 Americas, 36% in Switzerland, 17% in the rest of
Europe, the Middle East and Africa and 12% in Asia Pacific. UBS
Group AG employs about 60,000 people around the world. Its shares
are listed on the SIX Swiss Exchange and the New York Stock
Exchange (NYSE).
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