The UBS Global Asset Management US Pension Fund Fitness Tracker saw the funding ratio of the typical corporate US pension plan drop by approximately two percentage points to 87% in the fourth quarter of 2014.
“Overall, 2014 was a negative year for US corporate pension plans, as we estimate that the average funding ratio declined by about 8 percentage points. After a 17% funding ratio improvement in 2013, the 8% decline in 2014 highlights the importance of plan sponsors adhering to their de-risking program and thereby minimizing the volatility of their funded status ge points. After a 17% funding ratio improvement in 2013, the 8% decline in 2014 highlights the importance of plan sponsors adhering to their de-risking program and thereby minimizing the volatility of their funded status”, says UBS Global AM.
Investment returns of 2.5% could not keep pace with the 5% increase in liability values over the quarter, causing funding ratios to decrease. In 2014, funding ratios decreased approximately eight percentage points. 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.
The sharp decline in oil prices dominated the last quarter of 2014. This is seen as a net positive by the chair of the US Federal Reserve (Fed) Janet Yellen; however, it also has damaging economic consequences for oil exporting countries. Russia in particular has been hit by the combination of falling oil prices, economic sanctions and the fall of its currency. OPEC decided not to cut production at this stage, despite oil prices reaching a 5-year low.
In the U.S., the Fed updated its commitment to keeping rates low from “considerable time” to “patient in beginning to normalize the stance of monetary policy”, as expected by market participants. The fall in oil prices contributed to the decrease in inflation expectations.
The economic slowdown continued in China while snap elections were called in Japan and Greece. The political uncertainty in Greece remained cause for concerns in Europe, which translated into increased volatility of the European market indices at the end of the year.
Further to a correction in the first half of October, the S&P 500 Index went on to end the quarter up with a total return of 4.93%. In US dollar (USD) terms, the Euro Stoxx Total Return Index was down 4.54% over the quarter. The MSCI Emerging Markets Total Return Index ended the quarter down 4.44% in USD terms.
The yield on 10-year US Treasury Notes ended the quarter down 32 basis points (bps) at 2.17%. The yield on 30-year US Treasury Notes decreased 45 bps, ending at 2.75%. High-quality corporate bond credit spreads, as measured by the Barclays Long Credit A+ option-adjusted spread, ended the quarter 16 bps wider. 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 5.0% for the quarter.
Funding ratios decreased approximately eight percentage points in 2014. US Pension Fund Fitness Tracker of the typical US corporate plan’s funding ratio. Source: UBS Global Asset Management, Barclays, Markit.