UBS Global Asset Management Reports Funding Ratios for Defined Benefit Pension Plans Improve as Interest Rates Rise

Business Wire,  July 8, 2008  

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CHICAGO -- UBS Global Asset Management today announced that its US Pension Fund Fitness Tracker, a quarterly estimate of the overall health of a typical US defined benefit pension plan, shows pension funding ratios rose 3% in the second quarter of 2008. After a painful start to the new year, pension plans recouped some of their first quarter losses during the second quarter.

According to the US Pension Fund Fitness Tracker, the typical US pension fund started the second quarter with a funding ratio of approximately 90% and ended the quarter stronger at approximately 93%, reversing some of the 11% drop witnessed in the first quarter. Although funding ratios have recovered from their lows, they are still off by almost 20% from the highs they hit in mid-2007. Overall, plans have experienced extreme volatility from their peak in 2007 until now.

The quarter's funding ratio performance was driven by two factors which affected the funding ratio in opposite ways:

* Equity markets remained volatile and ended the quarter down slightly which decreased the value of the asset pool from which plan participants' benefits are paid.

* Higher interest rates, which decreased the present value of pension liabilities that more than offset the drop in assets causing the funding ratio to rise.

"Markets remained volatile throughout the second quarter as investors reacted to higher energy prices and inflation concerns," said Aaron Meder, UBS Global Asset Management's Head of Asset Liability Investment Solutions in the Americas. "Investor sentiment picked up in the beginning of the quarter as the 'doom and gloom' scenario for the economy seemed to be overblown. However, a higher than expected May unemployment number and a pick up in inflation, driven by surging commodity prices, caused an increase in investor risk aversion during June."

The S&P 500 Index snapped a five-month losing streak and posted positive returns for April and May. The index was up as much as 8% during the quarter, however all of those gains were erased later on in the quarter and the index finished the quarter down 2%, due to the poor performance in June (-8%). On average, developed equity markets outside of the US, as measured by the MSCI EAFE Index, were down more than 1% for the quarter.

"Mounting inflation concerns and hawkish Fed comments caused interest rates to rise in the second quarter," said Meder. "For the quarter, interest rates (10-year US LIBOR swap rate) rose 60 basis points to 4.68%, driving the present value of liabilities down by approximately 4%."

While many plans are currently exposed to interest rate risk, there are alternative investment approaches that can help to better align assets and liabilities. Plans can implement liability-driven strategies that significantly reduce the uncertainty in their future pension contributions, often without reducing expected plan returns. We believe that the volatility experienced throughout 2007 and 2008 should encourage plan sponsors to develop both a hedging strategy that reduces liability risk and a well diversified return generation strategy with less equity benchmark orientation.

The views expressed are those of UBS Global Asset Management as of June 30, 2008.

Notes

Funding ratio

Funding ratios measure a pension fund's ability to meet future payout obligations to plan participants. The main factors impacting the funding ratio of a typical US defined benefit plan are equity market returns, which grow (or shrink) the asset pool from which plan participants' benefits are paid, and liability returns, which move inversely to interest rates.

Liability indices: Methodology

The iBoxx US Pension Liability Index - Aggregate mimics the overall performance of a model defined benefit plan in the US, taking into consideration the passage of time and changes in the term structure of interest rates. The index is based on actual liability profiles, and mimics the investment grade yield curve. It is therefore more appropriate than most existing indices for measuring the performance of defined benefit plans. This index, (along with its related active member and retired member indices) is published daily, using the LIBOR interest rate swap curve as the discount curve, a highly liquid universe. This provides the flexibility to use combinations of the indices in order to accurately represent customized liability profiles based on a plan's specific participant population.

Asset Index: Methodology

UBS Global Asset Management approximates the return for the "typical" US defined benefit plan using the reported asset allocation of the corporate plan subset of the Pension & Investments 1000. The series is constructed using the reported asset allocation weightings and publicly available benchmark information, with geometrically linked monthly total returns.

Pension Fund Fitness Tracker: Methodology

The US Pension Funds Fitness Tracker is the ratio of the asset index over the liability index. Assuming all other factors remain constant; it 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 US due to interest rollup, change in interest rates and typical asset performance.