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Pension funding status improves in Q2

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The funding ratio of the typical U.S. pension plan increased sharply during the second quarter of 2013, new research shows.

UBS Global Asset Management discloses this finding in its latest U.S. Pension Fund Fitness Tracker. The industry benchmark 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, but excludes unique plan factors, such as service cost and benefit payments.

The Tracker rose 6 percentage points to 88 percent during the second quarter. Combined with gains in the first quarter, the estimated year-to-date total improvement in funding ratio is close to 11 percentage points.

“The improvement in funding ratio for the second quarter was driven primarily by a 6.1 percent drop in liability values,” the report states. “Asset values are estimated to have increased by a modest 0.4 percent, 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.”

The S&P 500 Total Return Index finished the quarter up 2.9 percent, and the MSCI EAFE Index rose approximately 1.5 percent.

“Volatility dominated throughout the quarter amid anticipation that the U.S. Federal Reserve (Fed) would begin tapering its quantitative easing (QE) program sooner than previously anticipate,” the report states.

The yield on 10-year U.S. Treasury bonds increased by 64 basis points (bps), ending at 2.49 percent, while the yield on 30-year U.S. Treasury bonds increased by 40 bps, ending at 3.50 percent, the report adds. High-quality corporate bond credit spreads, as measured by the Barclays Capital Long Credit A+ option-adjusted spread, ended the quarter 11 bps wider.

As a result, the report notes, pension discount rates (which are based on the yield of high-quality investment grade corporate bonds) increased, causing liabilities for a typical pension plan to decrease by 6.1 percent.


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