UBS said performance in the first quarter was driven by two factors:
- An increase in the value of the asset pool from which plan participants’ benefits are paid mainly due to stronger, yet volatile, equity markets; and
- Liability values increasing moderately due to interest cost with limited impact coming from market movement during the first quarter as interest rates and credit spreads were approximately unchanged for the quarter – leading to an unchanged corporate bond yield curve and pension discount rate.
Overall, a 2.5% increase in assets coupled with a 1.5% increase in liabilities resulted in an improvement in a typical plan’s funding ratio for the quarter.
According to a press release, risky assets rebounded and finished the quarter stronger. The S&P 500 Index finished the quarter up approximately 6% as sovereign debt concerns eased and the global growth outlook improved.
After fluctuating considerably throughout the quarter, the 10-year US Treasury rate ended the quarter approximately unchanged (decreasing by only 1 basis point for the quarter). The volatility was driven by repricing of growth and inflation expectations as well as Treasury auctions. For the first quarter, a typical plan’s asset pool increased by approximately 2.5%, UBS said.
Interest rates, as measured by the 10-year US Treasury, were approximately unchanged for the quarter, while high quality corporate bond credit spreads were approximately flat during the quarter, as measured by the Barclays Capital Long Credit A+ option adjusted spread. As a result, pension discount rates (which are based on the yield of high quality investment grade corporate bonds) for a typical pension plan were unchanged during the quarter. For the quarter, liabilities rose approximately 1.5%, driven primarily by interest cost.The US Pension Fund Fitness Tracker is a quarterly indicator highlighting the underlying health and volatility of a typical U.S. corporate defined benefit pension plan. 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.