According to the UBS Global Asset Management U.S. Pension Fund Fitness Tracker, the funding ratio rose by about three percentage points during the fourth quarter of 2013. Tracker findings also reveal  2013 was a very strong year overall for corporate pension plans, with the average funding ratio rising by an estimated 17 percentage points.

Strong investment returns of 4.7% were the main contributor to the improvement in the funding ratio during the quarter, according to UBS. Liability values are estimated to have increased by 1.1%. 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.

Research from UBS also shows the U.S. equity market finished 2013 with a final surge upwards, as the S&P 500 Index recorded a 10.5% total return over the quarter. In October 2013, the prospect of a U.S. default had virtually no impact on the equity markets, which continued their rally once a deal was reached, UBS says. The rest of the quarter was dominated by investors' bets on the timing of the U.S. Federal Reserve reduction of its quantitative easing program.

In the U.S., the economic outlook remains positive, with the Chicago PMI level strongly above consensus, while employment data showed moderate, but stable growth, according to UBS. In Europe, the European Central Bank responded to deflationary pressures by cutting rates by 25 basis points (bps) to 0.25%. In U.S. dollar (USD) terms, the Euro Stoxx Index was up 9.6% over the quarter. In the last three months of 2013, China’s economic data met expectations, and the MSCI Emerging Markets Index was up 1.9% in USD terms.

After a volatile fourth quarter, UBS research finds that the yield on 10-year U.S. Treasury bonds increased by 42 bps, ending at 3.03%. The yield on 30-year US Treasury bonds increased 29 bps, ending at 3.97%. High-quality corporate bond credit spreads, as measured by the Barclays Capital Long Credit A+ option-adjusted spread, ended the quarter 27 bps tighter. As a result, pension discount rates (which are based on the yield of high-quality investment grade corporate bonds) were flat. 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 1.1% for the fourth quarter.

The U.S. Pension Fund Fitness Tracker is the ratio of the asset index over the liability index. Assuming all other factors remain constant, according to UBS, 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 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 UBS Global Asset Management Pension 500 Database is a proprietary database based on the analysis of 500 public companies sponsoring large defined benefit plans. The information was extracted from the companies' 10-K statements. The study may include figures for companies' nonqualified and foreign plans, both of which are not subject to the Employee Retirement Income Security Act.