Funded Status of Pensions Improved in Q2

According to UBS’ U.S. Pension Fund Fitness Tracker, the funding ratio of the typical U.S. pension plan increased by six percentage points to 88%. Combined with gains in the first quarter, the estimated year-to-date total improvement in funding ratio is close to 11 percentage points.

The improvement in funding ratio for the second quarter was driven primarily by a 6.1% drop in liability values, according to UBS. Asset values are estimated to have increased by a modest 0.4%, 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 S&P 500 Total Return Index finished the quarter up 2.9% and the MSCI EAFE Index rose approximately 1.5%. Volatility dominated throughout the quarter amid anticipation that the U.S. Federal Reserve (Fed) would begin tapering its quantitative easing program sooner than previously anticipated. After Fed Chairman Ben Bernanke’s comments during a June 19 press conference, bond yields rose significantly. As a result, a wide range of fixed-income assets lost value. In particular, U.S. Treasury bonds and U.S. credit bonds sold off sharply late in the quarter.

UBS also commented that the yield on 10-year U.S. Treasury bonds increased by 64 basis points (bps), ending at 2.49%, while the yield on 30-year U.S. Treasury bonds increased by 40 bps, ending at 3.50%. High-quality corporate bond credit spreads, as measured by the Barclays Capital Long Credit A+ option-adjusted spread, ended the quarter 11 bps wider. As a result, pension discount rates (based on the yield of high-quality investment grade corporate bonds) increased, causing liabilities for a typical pension plan to decrease by 6.1%.