US Pension Fund Fitness Tracker: Still No Improvement in Funding Ratio in Second Quarter of 2014
The UBS Global Asset Management US Pension Fund Fitness Tracker saw the funding ratio of the typical corporate US pension plan drop by approximately one percentage point to 90% in the second quarter of 2014.
"Continuing the downward trend seen in the first quarter of 2014, funding ratios have decreased on average about five percentage points year-to-date," said Robert Guzman, Head of Pension Risk Management at UBS Global Asset Management. "With many equities at all-time highs, we believe it may be prudent for plan sponsors to consider implementing downside protection in their equity portfolios."
Liability values increased 4.6% over the quarter, outpacing the positive investment returns of 3.5%. As a result, funding ratios decreased for the second consecutive quarter. 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.
Building on generally positive economic data in the US over the quarter, the total return of the S&P 500 Index was up 5.23%. Inflation came in slightly higher than forecasted in the US, but this has not yet been viewed as a headwind by the US Federal Reserve (Fed). In the eurozone, deflationary risks led the European Central bank (ECB) to ease monetary policy, using a set of measures that included cutting the deposit rate to -0.10% and extending the Long-Term Refinancing Operation (LTRO). The Monetary Policy Committee of the Bank of England (BoE) voted unanimously to maintain the existing benchmark interest rate, as well as the size of its asset purchase program. It is worth noting the comment made by the BoE Governor, Mark Carney, that rate hikes could happen "sooner than markets currently expect." Geopolitical risks still include instability in Ukraine (although to a lesser extent) and the political violence unfolding in Iraq. In US dollar (USD) terms, the Euro Stoxx Total Return Index was up 2.36% over the quarter. The MSCI Emerging Markets Total Return Index ended the quarter up 6.71% in USD terms.
Continuing its downward trend, the yield on 10-year US Treasury bonds decreased by 19 basis points (bps), ending at 2.53%. The yield on 30-year US Treasury bonds decreased 20 bps, ending at 3.36%. High-quality corporate bond credit spreads, as measured by the Barclays Long Credit A+ option-adjusted spread, ended the quarter two bps tighter. 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 4.6% for the quarter. (Please see disclosures for assumptions and methodology.)
Disclosures and methodology
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.