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US Pension Fund Fitness Tracker: No Reversal in Q4, Funding Ratios Decline for Fourth Consecutive Quarter

UBS | January 7, 2015

The UBS Global Asset Management US Pension Fund Fitness Tracker saw the funding ratio of the typical corporate US pension plan drop by approximately two percentage points to 87% in the fourth quarter of 2014.

"Overall, 2014 was a negative year for US corporate pension plans, as we estimate that the average funding ratio declined by about 8 percent. Overall, 2014 was a negative year for US corporate pension plans, as we estimate that the average funding ratio declined by about 8 percentage points. After a 17% funding ratio improvement in 2013, the 8% decline in 2014 highlights the importance of plan sponsors adhering to their de-risking program and thereby minimizing the volatility of their funded status ge points. After a 17% funding ratio improvement in 2013, the 8% decline in 2014 highlights the importance of plan sponsors adhering to their de-risking program and thereby minimizing the volatility of their funded status"

Investment returns of 2.5% could not keep pace with the 5% increase in liability values over the quarter, causing funding ratios to decrease. In 2014, funding ratios decreased approximately eight percentage points. 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.

The sharp decline in oil prices dominated the last quarter of 2014. This is seen as a net positive by the chair of the US Federal Reserve (Fed) Janet Yellen; however, it also has damaging economic consequences for oil exporting countries. Russia in particular has been hit by the combination of falling oil prices, economic sanctions and the fall of its currency. OPEC decided not to cut production at this stage, despite oil prices reaching a 5-year low.

In the U.S., the Fed updated its commitment to keeping rates low from "considerable time" to "patient in beginning to normalize the stance of monetary policy", as expected by market participants. The fall in oil prices contributed to the decrease in inflation expectations.

The economic slowdown continued in China while snap elections were called in Japan and Greece. The political uncertainty in Greece remained cause for concerns in Europe, which translated into increased volatility of the European market indices at the end of the year.

Further to a correction in the first half of October, the S&P 500 Index went on to end the quarter up with a total return of 4.93%. In US dollar (USD) terms, the Euro Stoxx Total Return Index was down 4.54% over the quarter. The MSCI Emerging Markets Total Return Index ended the quarter down 4.44% in USD terms.

The yield on 10-year US Treasury Notes ended the quarter down 32 basis points (bps) at 2.17%. The yield on 30-year US Treasury Notes decreased 45 bps, ending at 2.75%. High-quality corporate bond credit spreads, as measured by the Barclays Long Credit A+ option-adjusted spread, ended the quarter 16 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 5.0% 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 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.

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 draws on its 150-year heritage to serve private, institutional and corporate clients worldwide, as well as retail clients in Switzerland. Its business strategy is centered on its pre-eminent global wealth management businesses and its leading universal bank in Switzerland. Together with a client-focused Investment Bank and a strong, well-diversified Global Asset Management business, UBS will expand its premier wealth management franchise and drive further growth across the Group.

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 employs about 60,000 people around the world. Its shares are listed on the SIX Swiss Exchange and the New York Stock Exchange (NYSE).