Q310 Pension Funding Down 1%

October 8, 2010 (PLANSPONSOR.com) – The UBS Global Asset Management U.S. Pension Fund Fitness Tracker found that the typical pension plan’s funding ratio dropped by approximately 1% during the third quarter.

A UBS news release said this result was driven by positive, yet volatile performance across most risky asset markets, particularly during September, which led to an increase in the value of the asset pool from which plan participants’ benefits are paid.

It was also affected by liability values increasing due to a strong rally in interest rates combined with a slight narrowing of credit spreads. This led to a lower corporate bond yield curve and pension discount rate. Overall, a 5%-increase in assets coupled with a 6%-increase in liabilities resulted in a small deterioration in a typical U.S. pension plan’s funding ratio for the quarter.

Risky asset markets remained volatile during the quarter but concluded with a strong month of September. The S&P 500 Index finished the quarter up approximately 11% as the prospect for further quantitative easing, a solid corporate profit outlook, and reasonable valuations provided support for stocks.

Meanwhile, according to the news release, equity markets traded in a wide and volatile range throughout the quarter as investors remained focused on macro data and sought confirmation of a sustained recovery. For the third quarter, a typical plan’s asset pool increased by approximately 5%.

The 10-year U.S. Treasury rate rallied 42 basis points during the quarter, aided by expectations for additional quantitative easing and continued low inflation forecasts. The benchmark yield finished the quarter at 2.51%, down from the June 30th yield of 2.93%. High-quality corporate bond credit spreads, as measured by the Barclays Capital Long Credit A+ option adjusted spread, showed less movement, ending the quarter approximately 4 basis points narrower.

As a result, pension discount rates decreased during the quarter while liabilities for a typical pension plan rose approximately 6%, according to the news release.