Please replace the release dated April 4, 2016 with the
following corrected version due to changes in the headline and body
of the release. The multimedia asset has also been corrected.
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View the full release here:
http://www.businesswire.com/news/home/20160404006388/en/
Source: UBS Asset Management, Barclays,
Markit.
The corrected release reads:
US PENSION FUND FITNESS TRACKER: FUNDING
RATIOS DROP 4% IN Q1 AS LIABILITIES SURGE AMID FALLING
RATES
The UBS Asset Management US Pension Fund Fitness Tracker saw the
funding ratio of the typical corporate US pension plan drop by
approximately four percentage points to 83% in the first quarter of
2016.
"Markets continue to show high volatility across asset classes.
Plans implementing downside protection strategies, including LDI
and equity collars, have benefitted from the ability to tactically
adjust market exposures," said Frank van Etten, head of Investment
Solutions at UBS Asset Management.
The large decrease in Treasury yields caused liability values to
surge in the first quarter of 2016. Investment returns of 1.5% were
dwarfed by the return on liabilities over the quarter, causing
funding ratios to decrease. These estimates are based on the
average corporate plan’s reported asset allocation weightings from
the UBS Asset Management Pension 500 Database and publicly
available benchmark information.
Exhibit 1: Funding ratios drop on poor asset returns and
higher liabilities in Q1 2016
US Pension Fund Fitness Tracker of the typical US corporate
plan’s funding ratio
Source: UBS Asset Management, Barclays, Markit.
The economic picture evolved in the first quarter of 2016 with
continued growth and no real surprises in the US, but with a
heightened sense of concern about low inflation in both the
Eurozone and Japan. Specifically, both the European Central Bank
and the Bank of Japan scaled up their unconventional monetary
policies, with more negative interest rates and higher asset
purchases, given that the respective inflation rates have been
hovering around zero since late 2014 for the Eurozone and since
last summer for Japan. Negative interest rates are a concern
because they depress aggregate demand since buyers, particularly of
big-ticket items, have an incentive to delay their purchases
waiting for lower prices.
Low inflation is an issue also because it shows that producers
have limited pricing power and therefore cannot increase their
margins. This does not bode well for equity prices, despite the
recent rally.
Emerging markets have continued on a rather dismal trend, with
Latin America (except Argentina) more and more affected by
political instability that has been triggered by a commodity price
fall, and by economic policies that have been based on the
assumption that commodity prices could only go up. Asia has been
dragged by India, which has been growing fast, but is seeing
significant political unrest, and by China, which has been trying
to square the circle by introducing economic and political reforms
that could increase both GDP and population well-being without
loosening the power of the Communist Party.
During the first quarter, equity markets saw mixed performance.
The S&P 500 Index ended the quarter slightly up, with a total
return of 1.35%. The Euro Stoxx Total Return Index was down 1.96%,
in US dollar (USD) terms, over the quarter. The MSCI Emerging
Markets Total Return Index ended the quarter 5.75% higher in USD
terms.
The yield on 10-year US Treasury notes ended the quarter down 50
basis points (bps) at 1.77%. The yield on 30-year US Treasury bonds
decreased 41 bps, ending at 2.61%. High-quality corporate bond
credit spreads, as measured by the Barclays Long Credit A+
option-adjusted spread, ended the quarter 3 bps wider. 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
6.6% 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 Asset Management approximates the return for the ”typical”
US defined benefit plan using the reported asset allocation of the
UBS 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 on liabilities in 2014 and
2015 was estimated to be +6% and -2%, respectively.
The UBS Asset Management Pension 500 Database
The UBS 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.
View source
version on businesswire.com: http://www.businesswire.com/news/home/20160404006388/en/
UBS Asset ManagementGregg Rosenberg, + 1
212-713-8842Gregg.rosenberg@ubs.comwww.ubs.com
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