Bringing you live news and features since 2013
Bringing you news, views and analysis since 2013

12284

Funded status of US pension plans improves in Q1 2013

RELATED TOPICS​

The typical US pension plan’s funding ratio increased by nearly five percentage points during the first quarter of 2013, rising to 82 per cent, according to the UBS Global Asset Management US Pension Fund Fitness Tracker.

“Similar to the first quarters of the past two years, the first quarter of 2013 has been quite favourable for US pension plans," says Jodan Ledford, an executive director within UBS’s retirement and advisory solutions group. “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 derisking a portion of their plans to preserve the improvement in funding ratio experienced over the first quarter.”
 
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 US 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 US government bond markets and international government bonds. Cumulatively, aggregate performance of the capital markets led to an increase of nearly 4.7 per cent on a typical US pension plan’s assets.
 
• Underperforming asset returns, liability values fell 1.6 per cent over the quarter. US Treasury yields increased, while credit spreads widened only 1 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 per cent, 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 US 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. US stocks reached levels last seen in 2007, as the Chicago Board Options Exchange Market Volatility Index (VIX) index also returned to 2007 levels. In a string of positive news, US 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 US 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 USD85bn due to the sequestration will not be able to derail the US economy from its current trajectory of moderate growth. In our view, any steps to improve the budget can be seen as positive, while at the same time, we believe the sequestration will likely force the US Federal Reserve (Fed) to stay accommodative for longer.
 
Macro data coming from the US in March was generally supportive, but also mixed. While the outlook for the labour 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 per cent, while the MSCI EAFE Index ended the quarter up approximately 9.8 per cent.
 
Turning to fixed income markets, US Treasury bonds and US credit bonds generally sold off throughout the quarter. Overall, the yield on 10-year US Treasury bonds increased by nine bps, ending the quarter at 1.85 per cent, while the yield on 30-year US Treasury bonds increased by 15 bps, ending at 3.10 per cent. 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 per cent.
 

Latest News

The trading and investment platform eToro has extended its proxy voting feature to all stocks..
C8 Technologies, the London-based fintech founded by former BlueCrest Capital Management partners Mattias Eriksson and..
DWS has announced the latest development in its strategic growth push in Alternative Credit with..

Related Articles

The trend of private equity firms acquiring businesses in the professional services sector continues with CVC Capital Partners eyeing a possible buyout of EY’s Italian consulting branch...
The trend of private equity firms acquiring businesses in the professional services sector continues with CVC Capital Partners eyeing a..
Pension funds
UK defined benefit (DB) pension plan sponsors could have access to GBP 1.2 trillion in surplus assets over the next decade, industry research reveals...
UK defined benefit (DB) pension plan sponsors could have access to GBP 1.2 trillion in surplus assets over the next..
Tim Crawmer, Payden & Rygel
Tim Crawmer and Frasat Shah of Payden & Rygel write that higher yields are attracting more demand from investors. Also, given that equities had a strong year last year, big funds have taken some chips off the table in equities and put them into fixed income...
Tim Crawmer and Frasat Shah of Payden & Rygel write that higher yields are attracting more demand from investors. Also,..
Lady justice
Top marks for the Pensions Regulator (TPR) whose efforts to improve resilience in the UK pension funds’ liability-driven investment (LDI) strategies received glowing commendations from the Bank of England in its March report...
Top marks for the Pensions Regulator (TPR) whose efforts to improve resilience in the UK pension funds’ liability-driven investment (LDI)..
Subscribe to the Institutional Asset Manager newsletter

Subscribe for access to our weekly newsletter, newsletter archive, updates on the site and exclusive email content.

Marketing by