UBS Global Asset Management Reports Increase in US Pension Funding Ratios in 1Q2009 Due to Higher Liability Discount Rates

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 increased by 6 percentage points in the first quarter of 2009.

According to the US Pension Fund Fitness Tracker, the typical US pension fund started 2009 with a funding ratio of approximately 78% and ended the quarter higher at approximately 84%.

This increase is attributable to higher discount rates which led to a lower present value of pension liabilities. Corporate credit spreads widened while interest rates rose, which led to a higher corporate bond yield curve and pension discount rate. The decrease in liabilities was partially offset by volatile equity markets that finished the quarter lower, which decreased the value of the asset pool from which plan participants' benefits are paid.

"Equity markets remained volatile throughout the first quarter and finished the quarter down 11% as investors balanced weak economic and corporate earnings reports against unprecedented fiscal and monetary policy response," said Aaron Meder, UBS Global Asset Management's Head of Asset Liability Investment Solutions in the Americas. "Overall, the decline in assets was more than offset by a large decrease in liabilities which led to an increase in the typical plan's funding ratio for the quarter."

For the quarter, pension discount rates (which are based on the yield of high quality investment grade corporate bonds) for a typical pension plan increased over 100 basis points during the quarter, which decreased the present value of pension liabilities. This decrease was offset slightly by interest cost. For the quarter, the overall liability return was -14%.

"As plan sponsors consider implementing an interest rate hedging approach, it is imperative that they have a strategy in place to implement the hedge as a function of interest rate, funding ratio and calendar triggers,” said Meder. "For example, as interest rates begin to increase, plan sponsors should add duration to their portfolios via long duration bonds and/or interest rate derivatives to lock in their funding ratio gains (as the present value of liabilities fall faster than the value of assets) while reducing funding ratio risk."

From a long-term policy perspective, sponsors should use caution when considering adding credit to the liability hedging component of an LDI solution. During periods of economic stress, bond defaults rise which will cause losses on the liability hedge, while pension liabilities are not subject to default risk. As a general rule, the greater the exposure to risky return generating assets, the less credit risk should be in the liability hedging assets.

The views expressed are those of UBS Global Asset Management as of March 31, 2009

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.

Additional information

The iBoxx US Pension Liability Indices include data provided by International Index Company (IIC). The information and opinions contained in this document have been complied or arrived at based upon information obtained from sources believe to be reliable and in good faith. All such information and opinions are subject to change without notice. IIC and its employees, suppliers, subcontractors and agents (collectively, IIC Associates) do not guarantee the veracity, completeness or accuracy of the index or other information furnished in connection with the index. No representation, warranty or condition, express or implied, statutory or otherwise, as to condition, satisfactory quality, performance, or fitness for purpose are given or assumed by IIC or any of the IIC Associates in respect of the index or any data included in it or the use by any person or entity of the index or that data and all those representations, warranties and conditions are excluded except to the extent that such exclusion is prohibited by law. IIC and the IIC Associates have no liability or responsibility to any person or entity for any loss, damages, costs, charges, expenses or other liabilities whether caused by the negligence of IIC or any of the IIC Associates or otherwise, arising in connection with the use of the index.

A number of the comments in this document are based on current expectations and are considered "forward-looking statements.” Actual future results, however, may prove to be different from expectations. The opinions expressed are a reflection of UBS Global Asset Management’s best judgment at the time this release is compiled, and any obligation to update or alter forward-looking statement as a result of new information, future events, or otherwise is disclaimed. Investors should also be aware that past performance is not necessarily a guide to future performance. Potential for profit is accompanied by the possibility of loss.

About UBS Global Asset Management

UBS Global Asset Management is one of the world’s leading asset managers, providing traditional, alternative, real estate, infrastructure and private equity investment management solutions to private clients, financial intermediaries and institutional investors worldwide. Invested assets totaled some CHF 575 billion (EUR 386 billion, GBP 370 billion, USD 539 billion) at 31 December 2008, making the firm one of the largest global institutional asset managers, a leading fund house in Europe and the largest mutual fund manager in Switzerland¹.

With around 3,800 employees, located in 25 countries, we are a truly global firm. Headquartered in London, our other main offices are in Chicago, Frankfurt, Hartford, Hong Kong, New York, Paris, Rio de Janeiro, Sydney, Tokyo, Toronto and Zurich.

¹ SOURCE: LIPPER FUNDFLOWS INSIGHT REPORT (AS AT 31 DECEMBER 2008)