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.

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 and real estate investment management solutions to private clients, financial intermediaries and institutional investors worldwide. Invested assets totalled some CHF 765 billion (EUR 488 billion, GBP 388 billion, USD 770 billion) at 31 March 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 over 3,900 employees, located in 25 countries, UBS Global Asset Management is a truly global firm. The main offices are in Basel, Chicago, Frankfurt, Grand Cayman, Hartford, Hong Kong, London, Luxembourg, New York, Paris, Rio de Janeiro, Sydney, Tokyo, Toronto and Zurich.

Copyright 2008 UBS Global Asset Management (Americas) Inc.

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

UBS AG
Kris Kagel, +1-212-882-5691
kris.kagel@ubs.com
www.ubs.com