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US Pension Fund Fitness Tracker: Funded Status of Plans Improves in First Quarter of 2013



  US Pension Fund Fitness Tracker: Funded Status of Plans Improves in First
  Quarter of 2013

Business Wire

CHICAGO -- April 04, 2013

The UBS Global Asset Management US Pension Fund Fitness Tracker found that the
typical US pension plan’s funding ratio increased by nearly five percentage
points during the first quarter of 2013, rising to 82%.

“Similar to the first quarters of the past two years, the first quarter of
2013 has been quite favorable for US pension plans," said Jodan Ledford, an
Executive Director within UBS’s Retirement and Advisory Solutions group.
“Sponsors that have already adopted pension risk management frameworks were
able to lock in funding ratio improvements over the quarter. Many sponsors
that have not adopted a risk management program may want to consider derisking
a portion of their plans to preserve the improvement in funding ratio
experienced over the first quarter.”

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

• Equity markets were strongly positive over the quarter. The fiscal
sequestration in the US and political uncertainty in Italy were not enough to
derail the strong upward move in equity markets. Fixed income assets were
mostly down, with slight decreases 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 4.7% on a typical US pension plan’s assets.

• Underperforming asset returns, liability values fell 1.6% over the quarter.
US Treasury yields increased, while credit spreads widened only 1 basis point
(bps); the net result led to discount rates increasing over the quarter,
which, in turn, led to declines in liabilities. For the quarter, pension
discount rates are estimated to have increased by approximately 10 to 15 bps.

For the quarter, a typical plan’s asset pool returned approximately 4.7%,
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 first quarter, global markets were mainly driven by activities
emanating from the US and Europe. Absent any overarching story, emerging
markets have been slightly more fragmented and directionless. Risky asset
classes, including lower-quality assets, have experienced an impressive rally
based on positive global sentiment and a sharp repricing of risk premia. US
stocks reached levels last seen in 2007, as the Chicago Board Options Exchange
Market Volatility Index (VIX) index also returned to 2007 levels. In a string
of positive news, US home sales expanded at their strongest pace since the
third quarter of 2009, and European banks repaid a larger-than-expected amount
of the European Central Bank’s (ECB) long-term refinancing operation (LTRO).

With the sequestration cuts in the US and following the inconclusive election
in Italy, political uncertainties emerged again, and will likely spur
volatility for some time. Nevertheless, there is some confidence in the
markets that the automatic spending cuts of $85 billion due to the
sequestration will not be able to derail the US economy from its current
trajectory of moderate growth. In our view, any steps to improve the budget
can be seen as positive, while at the same time, we believe the sequestration
will likely force the US Federal Reserve (Fed) to stay accommodative for
longer.

Macro data coming from the US in March was generally supportive, but also
mixed. While the outlook for the labor market improved, consumer sentiment
deteriorated, which on balance will likely keep the Fed from retrenching
prematurely. Toward the end of the quarter, developments in Europe weighed on
global equity markets, as Italy struggled to form a coalition government and
Cyprus was bailed out, though Cyprus ultimately avoided a sovereign default
and potential eurozone exit. In total, the S&P 500 Total Return Index finished
the quarter up 10.6%, while the MSCI EAFE Index ended the quarter up
approximately 9.8%.

Turning to fixed income markets, US Treasury bonds and US credit bonds
generally sold off throughout the quarter. Overall, the yield on 10-year US
Treasury bonds increased by 9 bps, ending the quarter at 1.85%, while the
yield on 30-year US Treasury bonds increased by 15 bps, ending at 3.10%.
High-quality corporate bond credit spreads, as measured by the Barclays
Capital Long Credit A+ option-adjusted spread, ended the quarter 1 bps wider.
As a result, pension discount rates (which are based on the yield of
high-quality investment grade corporate bonds) increased by approximately 10
to 15 bps. For the quarter, liabilities for a typical pension plan decreased
by 1.6%. (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
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. As of December
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 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.

Photos/Multimedia Gallery Available:
http://www.businesswire.com/multimedia/home/20130404005970/en/

Multimedia
Available:http://www.businesswire.com/cgi-bin/mmg.cgi?eid=50603493&lang=en

Contact:

UBS AG
Megan Stinson
Tel. +212 713 1302
Megan.Stinson@ubs.com
www.ubs.com
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