UBS said this result was driven by two factors:
- Strong performance across most risky asset markets throughout the quarter which led to an increase in the value of the asset pool from which plan participants’ benefits are paid; and
- Lower liability values due to a sharp selloff in interest rates, particularly in the latter part of the quarter, which more than offset a slight narrowing of credit spreads. This led to a higher corporate bond yield curve and pension discount rate.
According to a UBS press release, overall, an increase of more than 4% in assets, coupled with an approximate 4% decrease in liabilities, resulted in a significant improvement in a typical U.S. pension plan’s funding ratio for the fourth quarter. However, for the year, assets increased by approximately 10% while liabilities increased by about the same percentage, resulting in no material funding ratio improvement for the typical pension plan.
Risky asset markets performed strongly throughout the fourth quarter, as improving economic data coupled with additional monetary and fiscal stimulus provided support for markets, the press release noted. The S&P 500 Index finished the quarter up approximately 11%, as the extension of the Bush tax cuts, further quantitative easing from the Federal Reserve, and reasonable valuations helped fuel the strong rally. For the fourth quarter, a typical plan’s asset pool returned over 4%, based on the average corporate plan’s reported asset allocation weightings and publicly available benchmark information.Interest rates increased sharply during the quarter, as the extension of the Bush tax cuts stymied the efforts of the Federal Reserve to keep rates low through additional rounds of quantitative easing. The 10-year U.S. Treasury yield increased by 78 basis points, finishing the quarter at 3.29% as compared to the September 30 yield of 2.51%. High-quality corporate bond credit spreads, as measured by the Barclays Capital Long Credit A+ option-adjusted spread, ended the quarter approximately 24 basis points narrower. As a result, pension discount rates (which are based on the yield of high-quality investment grade corporate bonds) increased during the quarter. For the quarter, liabilities for a typical pension plan declined approximately 4%.