According to the UBS Global Asset Management U.S. Pension Fund Fitness Tracker, the funding ratio rose to 82%.
“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 de-risking a portion of their plans to preserve the improvement in funding ratio experienced over the first quarter,” said Jodan Ledford, an executive director within UBS’s Retirement and Advisory Solutions group.
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 U.S. 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 U.S. 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 U.S. pension plan’s assets.
- Underperforming asset returns, liability values fell 1.6% over the quarter. U.S. Treasury yields increased, while credit spreads widened only one 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 U.S. 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. U.S. stocks reached levels last seen in 2007, as the Chicago Board Options Exchange Market Volatility Index (VIX) also returned to 2007 levels. In a string of positive news, U.S. 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 U.S. 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 U.S. economy from its current trajectory of moderate growth. In UBS’s view, any steps to improve the budget can be seen as positive, while at the same time, it believes the sequestration will likely force the U.S. Federal Reserve (Fed) to stay accommodative for longer.
Macro data coming from the U.S. 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, U.S. Treasury bonds and U.S. credit bonds generally sold off throughout the quarter. Overall, the yield on 10-year U.S. Treasury bonds increased by nine bps, ending the quarter at 1.85%, while the yield on 30-year U.S. 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 one 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%.