UBS said the result was driven by two factors:
- A decline in the value of the asset pool from which plan participants’ benefits are paid, particularly equities, on rising fears of a double-dip recession stemming from the sovereign debt crisis in Europe and generally unimpressive economic news.
- Liability values increasing due to a strong rally in interest rates that more than offset the widening of credit spreads. This led to a lower corporate bond yield curve and lower pension discount rates.
Overall, a 5% decline in assets coupled with a 7% increase in liabilities resulted in a deterioration in a typical US plan’s funding ratio for the quarter, according to a press release.
Risky asset markets weakened during the second quarter, particularly in May and June, as sovereign debt concerns in Europe and the prospect of lower global growth gripped the market. The S&P 500 Index finished the quarter down almost 12% as it began to price in the potential for a double-dip recession. Global equity and fixed income markets traded in a wide and volatile range during the quarter as growth expectations faltered.
Interest rates, as measured by the 10-year US Treasury, decreased by approximately 91 basis points for the quarter, while high quality corporate bond credit spreads, as measured by the Barclays Capital Long Credit A+ option adjusted spread, widened approximately 39 basis points during the quarter. As a result, pension discount rates for a typical pension plan decreased during the quarter, causing liabilities to rise approximately 7%.
The 10-year US Treasury rate rallied as the quarter progressed. This reflected a flight to quality as risk aversion spiked, as well as a repricing of growth and inflation expectations. The benchmark yield finished the quarter below 3% for the first time since April 2009, settling at 2.93%. Overall, a typical plan’s asset pool decreased by approximately 5% as the typical plan has a higher allocation to risky assets compared to government bonds.The US Pension Funds Fitness Tracker is the ratio of the asset index over the liability index. 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 U.S. due to interest rollup, change in interest rates and typical asset performance.