US Pension Fund Fitness Tracker: Funded Status of Plans Marginally Improves in Fourth Quarter of 2012

  US Pension Fund Fitness Tracker: Funded Status of Plans Marginally Improves
  in Fourth Quarter of 2012

Business Wire

CHICAGO -- January 4, 2013

The UBS Global Asset Management US Pension Fund Fitness Tracker found that the
typical US pension plan’s funding ratio increased by less than one percentage
point during the fourth quarter of 2012, remaining flat at 77%. Year to date,
it is estimated that the funded status of plans has declined by one percentage
point, in spite of tremendous volatility in both assets and liabilities.

The slight increase in funding ratio for the quarter was primarily driven by
two factors:

• Equity markets were modestly positive over the quarter, reflecting both
global central bank stimulus policies and generally improved economic
sentiments; however, uncertainty in the US political arena due to both the US
presidential election as well as the “fiscal cliff” negotiations weighed
heavily on market sentiment. Fixed income assets showed mixed results, with
increases across credit bonds outperforming declines in both the US government
bond markets and international government bonds. Cumulatively, aggregate
performance of the capital markets led to an increase of nearly 1% on a
typical US pension plan’s assets.

• Slightly underperforming asset returns, liability values were marginally
higher over the quarter. US Treasury yields increased, while credit spreads
tightened; the tightening in credit spreads offset the majority of the
increases in yields, and subsequent declines in US Treasuries. The net result
led to discount rates remaining flat to slightly up for the quarter, with
liabilities gaining mainly due to the passage of time. For the quarter,
pension discount rates are estimated to have increased by 1 to 5 basis points

For the quarter, a typical plan’s asset pool returned approximately 0.7%,
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 the fourth quarter, global markets were mainly driven by activities
emanating from inside the United States. Unlike previous months, which were
dominated by headlines pertaining to the longstanding European sovereign debt
crisis, the US presidential election, as well as the impending US fiscal cliff
negotiations, pervaded the economic landscape. In the US, the focus in October
was directed toward the US presidential election and the impacts of Superstorm
Sandy in the Northeast, while the focus in November and December was squarely
placed on the status of congressional negotiations over progress on the fiscal
cliff. Meanwhile, during the quarter, the US also saw generally mixed economic
signals across leading indicators, the Federal Reserve’s Federal Open Market
Committee (FOMC) meetings and company earnings reports. Generally, the Fed
remained committed to ongoing, open-ended, monetary stimulus, confirming both
their commitment on stimulus as well as to keeping interest rates low until
certain unemployment levels were attained.

Leading US economic indicators vacillated over the quarter, as the
much-watched US employment reports indicated expansion in the employment
market, but at a pace that generally would not help in reducing current
unemployment levels in the US. However, on the bright side, GDP, while still
tepid at 2% annualized growth, came in better than anticipated, and consumer
confidence, as well as the US housing market, appears to be gaining strength.
Furthering the economic uncertainty, the US earnings season turned out to be
rather disappointing, as businesses appeared to be postponing investments on
the back of regulatory uncertainty and the prospects of weaker demand.

Closing out the quarter in grand and dramatic style, leaders appeared to have
reached a deal to avert the fiscal cliff on New Year’s Eve, sending equity
markets soaring to close out the year. In the eurozone, economic indicators
surprised on the downside, with generally weaker-than-anticipated readings in
GDP and consumer confidence. The bright spot economically came in the form of
an agreement among European leaders to extend the support program for Greece,
conditional on agreed reform measures and including concessions to Greece
regarding longer long-term debt. The agreement led to further diminished tail
risks from the European debt crisis.

Outside of the US and Europe, fears of a slowdown in the emerging markets,
especially in the Far East, were alleviated when China’s economy posted a
19-month high in manufacturing activity in December, as the Purchasing
Managers’ Index (PMI) rolled back to an expansionary reading, reversing course
from the prior few months. Overall, the fourth quarter was far less volatile
than previous quarters, as investors moved out of the “risk on/risk off”
environment dominated by tail risks of the prior months and into an
environment of general uncertainty largely precipitated by the US political
process. In total, the S&P 500 Total Return Index finished the quarter down by
less than 1%, while the MSCI EAFE Index ended the quarter up approximately 7%.

Turning to fixed income markets, US Treasury bonds generally sold off
throughout the quarter, bouncing back and forth as the fiscal cliff
negotiations were assessed. However, US credit bonds rallied throughout the
quarter, continuing the theme from the prior quarter as investors reached for
extra yield. In Europe, despite the appearance of alleviating tail risk with
respect to Greece, government bonds declined on the heels of disappointing
economic indicators across the member countries. Overall, the 10-year US
Treasury bond yield increased by 13 bps, ending the quarter at 1.76%, while
the 30-year US Treasury bond yield increased by 13 bps, ending at 2.95%.
High-quality corporate bond credit spreads, as measured by the Barclays
Capital Long Credit A+ option-adjusted spread, ended the quarter approximately
7 bps tighter. As a result, pension discount rates (which are based on the
yield of high-quality investment grade corporate bonds) increased by
approximately 1 to 5 bps. For the quarter, liabilities for a typical pension
plan increased by less than 1%, as increases in discount rates were offset by
liability growth attributed to the passage of time. (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

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.

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

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. As of
12/31/2011, the asset index has been recalibrated based on the aggregate
funding level of the participating plans in the UBS Global Asset Management
Pension 500 Database, reflecting plan sponsor contributions over 2011.

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, but
excludes unique plan factors, such as service cost and benefit payments.

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. 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 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.

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Megan Stinson, +212-713-1302
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