The UBS Global Asset Management US Pension Fund Fitness Tracker saw the funding ratio of the typical corporate US pension plan drop by approximately four percentage points to 91% in the first quarter of 2014.

“After a 17% funding ratio improvement in 2013, we believe that the 4% decline in the first quarter of 2014 should serve as a catalyst for plan sponsors to proactively protect their gains by adding to their hedging/de-risking program” said Robert Guzman, Head of Pension Risk Management at UBS Global Asset Management.

Investment returns of 2.1% could not offset the 6.1% increase in liability values, causing pension plans to give back some of the gains made in 2013. These estimates are 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.

During the first quarter, the S&P 500 Index recorded a 1.81% total return. In January, currency weakness in several emerging markets dominated the headlines, prompting the central banks of Turkey, South Africa and India to hike their interest rates. The situation in Ukraine deteriorated, but has not weighted on equity markets yet. In the US, Janet Yellen, the new Chair of the US Federal Reserve (Fed), held her first press conference and signaled the potential for earlier-than-expected interest rate hikes. The European Central Bank (ECB) decided to keep the policy rate at 0.25%, surprising many market participants that expected a rate cut given the price inflation level below its stated medium-term target of 2%. In US dollar (USD) terms, the Euro Stoxx Total Return Index was up 3.25% over the quarter. After a strong negative return in January, the MSCI Emerging Markets Total Return Index rebounded slightly, ending the quarter down 0.37% in USD terms.

After a volatile quarter, the yield on 10-year US Treasury bonds decreased by 31 basis points (bps), ending at 2.72%. The yield on 30-year US Treasury bonds decreased 41 bps, ending at 3.56%. High-quality corporate bond credit spreads, as measured by the Barclays Capital Long Credit A+ option-adjusted spread, ended the quarter 2 bps tighter. As a result, pension discount rates (which are based on the yield of high-quality investment grade corporate bonds) decreased over the quarter. The passage of time caused liabilities for a typical pension plan to increase by about one percentage point over the quarter. Together, these effects caused liabilities to increase 6.1% for the quarter.

Source: The Wall Street Journal