Asset management 26 pt. (6.5 mm) Fourth quarter 2012 Are voluntary contributions right for your corporate pension plan? White paper 22 pt. (5.5 mm) 18 pt. (4.5 mm)
Executive summary 3 Increasing corporate cash levels, with diminishing reward 3 New legislation affecting corporate pension plans 4 Pension Funding Stabilization, a zero-sum game? 5 Potential increased economic ROI due to voluntary contributions 6 Potential cost savings due to voluntary contributions 6 Potential accounting benefits of voluntary contributions 8 No cash? No problem (if you have debt capacity ) 8 Conclusion 10 Appendix 11
Executive summary As corporations continue to build their cash holdings amid uncertain market conditions, corporate chief financial officers and treasurers are faced with a dilemma: How should they invest their company s cash surplus, particularly when faced with ultra-low yields? One option for tax-paying corporations is to make additional voluntary contributions to their corporate defined benefit (DB) pension plans. In light of new legislation, which has reduced the minimum required contributions for many plans, some companies are decreasing or delaying investments in their pension plans, while others appear to be continuing with their regularly planned contributions. In this paper, we argue that despite lower minimum required contributions, this could be a compelling time for corporations to use voluntary contributions to strengthen their plan s funded status, while receiving an attractive economic return on investment compared with other uses of capital. 1 Increasing corporate cash levels, with diminishing reward Many companies have been able to stockpile cash over the past several years. According to FactSet research, US nonfinancial corporate cash holdings rose to $1.91 trillion at the beginning of 2012. The trend of growing short-term cash reserves has increased significantly in recent years. From 2007 to 2012, our estimates indicate that corporate cash and short-term holdings increased at a rate in excess of 11% per year. 2 Where corporations hold their cash has also shifted over time. In 2007, corporations held approximately 27% of their cash balances in bank deposits. By 2012, that amount had almost doubled to 51%. These numbers are even more striking when considering that the average yield on three-month Treasury bills a proxy for the average cash return for institutional investors plunged from 5.2% at the end of January 2007 to 0.08% at the end of May 2012, as shown in Exhibit 1. Clearly, many companies have not only survived the financial crisis, but have aimed to insulate themselves against future shocks through conservatively invested cash balances. While this approach appears prudent, the current challenge facing many companies is how to allocate their large cash balances in a productive way. With historically low yields, we have seen corporate finance officers take some creative steps, including shifting some of their cash holdings into higher-yielding strategies, including municipal bonds, high yield short Exhibit 1: Corporate cash yields and holdings, 2007 2012 6% Cash and short-term investments (3-month Treasury Bill yields annualized) Cash and short-term investments (in $ billions) 2,000 1,500 4 1,000 2 500 0 2007 2008 2009 2010 2011 0 Note: Holdings are as of December 31 of each year. Source: Jan. '07 Citigroup Three-Month Oct. '07 Treasury Bill (Local Jul. Currency), '08 FactSet research, Apr. '09 UBS Global Asset Management. Jan. '10 Oct. '10 Jul. '11 Apr. '12 1 Economic return on investment is used in this paper as opposed to traditional accounting return on investment. Economic return on investment relates to the fundamental return of a project from a cash flow standpoint. 2 Source: FactSet. 3
We believe that voluntary contributions can strengthen a plan s funded status, as well as offer an attractive return on economic investment compared with other uses of capital. duration bonds and even emerging markets debt (EMD). These moves suggest that at least some companies are not satisfied with the low or negative real returns from their cash holdings, and are willing to slightly increase the risk of their overall portfolio to gain higher yields. However, many companies still may feel uncomfortable increasing the risk profile of their cash holdings, even in this low-rate environment. With ongoing global uncertainty and the impending US fiscal cliff, many companies are also unwilling to invest in new capital expenditures, hire new employees or expand their current operations. At the same time, ultra-low interest rates have led to low or negative real returns. Within this context, what could corporations do? We argue that corporations should consider using part of their cash balances to make voluntary contributions to their pension plans. Although recent legislation has lowered the minimum required contributions for many corporate DB plan sponsors, we aim to show that voluntary contributions may provide many favorable economic and tax benefits. New legislation affecting corporate pension plans Although we believe that the current environment is a promising time for plan sponsors to increase the contributions to their pension plans, the US government recently passed legislation that appears to encourage plans to do just the opposite. On June 29, 2012, the US House of Representatives and the Senate passed the Moving Ahead for Progress in the 21st Century Act, which was signed into law on July 6, 2012. The new pension rules, referred to as Pension Funding Stabilization (PFS), result in significantly lower minimum required contributions for many corporate pension plans. For instance, UBS Global Equity Research estimates that the new legislation could reduce some major plan sponsors required contributions by more than $1 billion in 2012. 3 What are the mechanics behind these changes? The new legislation allows US corporate DB pension plan sponsors to use higher discount rates when calculating liabilities under the Pension Protection Act (PPA) rules. Discount rates are higher under the new legislation because they are now determined based on an averaging of rates over the past 25 years, as opposed to the past 24 months. Higher discount rates result in lower liabilities; therefore, for many plan sponsors, the legislation means an increase in 2012 PPA funding ratios of 15% to 20%. Because in this context, an improved funding ratio also means a lower deficit, the legislation translates into significantly lower minimum required contributions for many corporations. These savings allow corporations to reallocate capital for other corporate uses. For plan sponsors, these predicted savings may appear to be too good to be true, and in our opinion, that is exactly the case. The recent pension relief does nothing to change the promise made by sponsors to their current and former employees. The legislation merely allows for the use of higher discount rates, which in turn results in lower pension liabilities, as opposed to a potentially more realistic mark-to-market calculation. For example, if pension plans were publicly traded, the assessment of their surplus or deficit would certainly be done using mark-to-market assets and current discount rates without averaging. In addition, corporations that may be looking to annuitize their pension plans should follow mark-to-market accounting principles, as this method is how their plans would be valued in these circumstances. If we accept a mark-to-market funded status as a benchmark, we can assess how plan sponsors will find themselves after using the relief afforded by PFS. As an example, let s assume a plan has $850 million in assets and $1,000 million in mark-tomarket liabilities (i.e., liabilities using current, nonaveraged discount rates). Exhibit 2 shows how this plan s funding position differs under three reporting methods: 1) mark-to-market; 2) the PPA rules prior to the new legislation; and 3) the PPA rules after the new legislation. 4 3 Source: The 25-Year Solution: Proposed Pension Funding Stabilization, UBS Global Equity Research, April 26, 2012. 4 Based on actual January 1, 2012 PPA rates as estimated by UBS Global Asset Management. Liability model presumed to be based on a closed 4 and frozen plan.
Exhibit 2: Funding ratios under three reporting methods $ in millions $1,000 800 600 400 200 0-200 Assets Liabilities Surplus/(Deficit) Funding ratio = 85% Method 1: Mark-to-market Source: UBS Global Asset Management. Funding ratio = 92% Method 2: Prior to recent legislation Funding ratio = 111% Method 3: Post recent legislation While the plan is only 85% funded using mark-to-market assumptions (method one), this metric improves dramatically when using PPA discount averaging rules prior to the new legislation (method two). Using assumptions under the new legislation (method three), the funding ratio improves by 26 percentage points, to 111%, when compared with mark-tomarket. The bottom line is that while plan sponsors might want to take advantage of the contribution flexibility offered by the new legislation, we believe they should remain focused on their funding ratio s mark-to-market calculations, and manage their pension risk accordingly. Pension Funding Stabilization, a zero-sum game? Ironically, at a time when many corporations have significant cash on hand without obvious ways to invest it, the new legislation aims to free Surplus/(Deficit) up additional corporate cash. Many reasons have been cited Liabilities as to why the recent legislation was passed. For example, proponents in Washington claim that the legislation will save Assets and create jobs by allowing sponsors to preserve their cash and use it to retain and hire more workers. Others have pointed out that something had to be done in order to provide relief during this historically low-rate environment. The legislation could indeed benefit corporations particularly if they do not have significant cash balances but like anything else, there is no free lunch. As mentioned above, a change in the liability accounting method does not fundamentally alter a plan s responsibility to its participants. Moreover, corporations that contribute less to their pension plans may reduce the favorable tax treatments they would otherwise receive. For instance, because pension contributions and returns on pensions are tax deductible, lower contributions would very likely lead to reduced tax breaks as well. Therefore, corporations that opt to contribute less to their pension obligations should take into account the reduced levels of tax deductions they would receive. In fact, PFS is projected to generate in excess of $9 billion in revenue over the next 10 years for the US government. 5 This $9 billion would likely otherwise be returned to plan sponsors due to the tax-exempt status of plan contributions and accumulations within the plans. Simply put, we believe this is a In fact, mark-to-market pension funded status measurements are particularly important for plan sponsors who: (a) are planning to eliminate pension risk via plan terminations, or annuity purchases; (b) have adopted liability-driven investment (LDI) or any form of dynamic pension risk management; and (c) have adopted or plan to adopt, mark-to-market accounting. All of those sponsors should avoid being distracted by the potentially inflated funded ratios provided by the new legislation, as the success of the above strategies is fundamentally predicated upon assets and liabilities calculated on a mark-to-market basis. Overall, PFS can indeed make a plan s funded situation appear better, but it does not actually improve the underlying financial health of a plan. After all, just as taking a mulligan improves your golf scorecard, it does not fundamentally improve your game. 5 Federal Tax Weekly, Issue Number 28, July 12, 2012. 5
zero-sum game, as the increased revenue generated by PFS comes at the expense of corporate America leaving tax deductions on the table. Even so, we expect that many plans will choose to reduce their pension plan contributions, and that is not necessarily an unfavorable approach, depending on a company s circumstances. However, we believe that funding your plan now can be a smart investment and may be the right thing to do. The next sections attempt to illustrate why investing in your pension plan now could be a favorable choice. Potential increased economic ROI due to voluntary contributions 6 We believe that many plan sponsors could save money and increase the safety of the pension commitment made to plan participants by contributing more than the required minimum to their pension plans. In light of their current funding situations, many sponsors are facing a corporate finance dilemma: Should I contribute now, or contribute later? This dilemma exists because for most sponsors, PFS is merely a way to push their funding obligations into the future. As stated earlier, PFS does not improve the fundamental health of a pension plan. As a result, sponsors that are willing and able to accelerate contributions might want to do so in order to take advantage of the following benefits: Tax-free accumulation within the pension trust Tax deduction on contributions Reduction of annual Pension Benefit Guaranty Corporation (PBGC) variable premiums (currently 0.9% of pension deficit on a PBGC liability basis, increasing to over 1.8% by 2015) We believe that funding your plan now can be a smart investment, and the right thing to do. Improved operations of the plan under PPA through better funding levels, which may result in: Elimination of restrictions on lump sum payments (or other accelerated distributions) Avoidance of underfunding notices sent to participants Avoidance of restrictions on funding nonqualified deferred compensation plans, such as Supplemental Executive Retirement Plans (SERPs) Creation of credit balances, which can later be used as a contribution cushion Potential cost savings due to voluntary contributions The following is an example of a company facing two choices: (1) investing in the pension plan by making a voluntary contribution (i.e., a contribution in excess of the minimum set by the Pension Protection Act), or (2) investing cash in a corporate project that has a similar risk/return profile as the sponsor s pension plan assets, but is taxable. 7 This example is for illustrative purposes only and assumes that the sponsor is a tax-paying entity, and is eligible to receive a tax deduction for the contribution into the plan. Exhibit 3 shows how a voluntary plan contribution can increase a sponsor s economic return on investment (ROI) by 3.35%. In constructing this example, we looked to compare apples with apples by assuming that the corporate project had the same risk/return characteristics as the pension investments. Hence, in this example, the expected return assumption on pension assets, as well as the expected return on the corporate project is set at 7%. The excess return provided by the voluntary contribution is two-fold: First, just like contributions to personal 401(k) plans, contributions to pension plans grow tax-free. In this example, a contribution to the pension plan would be expected to return 7% after-tax. This is not true for the corporate project, which is expected to return 7% pre-tax, or only 4.55% after-tax. Second, the PBGC, which acts as an insurance company for pension plans when sponsors fall into bankruptcy and are no longer able to maintain their commitment to the plan, charges annual insurance premiums to the plans they cover. One component of the premiums is referred to as the variable premium, which is an assessment based on the plan s deficit. 8 For 2012, this annual 6 Economic return on investment is used in this paper as opposed to traditional accounting return on investment. Economic return on investment relates to the fundamental return of a project from a cash flow standpoint. 7 We recognize that other nonpension-related projects might benefit from favorable tax treatment (e.g., research and development projects). For the purpose of this example, we have assumed that the corporate project was fully taxable. Other tax-sheltered opportunities should be assessed before accelerating contributions to the pension plan. 8 PBGC variable premiums are based on a deficit, which is calculated using specific PBGC assumptions. 6
Exhibit 3: Potential economic ROI through a voluntary pension contribution compared with a capital investment Assumptions ($ in millions) Plan assets $850 Plan liabilities $1,000 Plan surplus/(deficit) ($150) Plan funded status 85% Corporate tax rate 35% Corprate project IRR 7.0% Expected return on plan assets 7.0% Investment to corporate project $65 Net contribution outlay after-tax $65 ($100 pre-tax) PBGC variable premium 0.9% of deficit $100 contribution to the pension plan (Net outlay of $65 after tax-deduction) $65 investment in Corporate project $100 contribution (tax-deductible) $100 contribution Sponsor Pension Plan Capital markets Sponsor 7.0% return (taxable) Corporate Project 35% tax deduction on $100 contribution 7.0% return (tax-exempt) $65 investment IRS PBGC Avoid 0.9% PBGC variable premium on $100 7.90% after-tax economic ROI* 4.55% after-tax economic ROI ** Result: 3.35% additional tax adjusted economic ROI by contributing to the plan*** Source: UBS Global Asset Management. * 7.0% + 0.90% = 7.90% ** 7.0% x (1-35%) = 4.55% *** 7.90% -4.55% = 3.35% premium is 0.9% of the plan s deficit. In other words, a plan with a deficit of $200 million for its 2012 plan year will pay $1.8 million in variable premiums to the PBGC. This payment provides sponsors with no value, economic or otherwise. In the end, as shown in Exhibit 3, the plan contribution increases the sponsor s economic ROI from 4.55% to 7.90%, a relative increase of almost 75%. Please refer to the appendix for a more detailed calculation of incremental economic ROI provided by accelerated pension contributions. Importantly, the additional economic ROI illustrated above compounds annually for each year by which the contributions are accelerated. Indeed, both the savings from the tax-exempt returns and from the PGBC variable premium reductions occur every year. In other words, a sponsor making a voluntary contribution today is expected to reap sizable economic benefits from that investment for many years to come. 9 In fact, because of Pension Funding Stabilization, the additional economic benefits of voluntary contributions are expected to grow in the future. This is because PFS calls for upcoming steep 9 This is true with regard to the PBGC variable premium reduction for as long as the plan is underfunded under PBGC assumptions. 7
increases in PBGC variable premiums (the current rate of 0.9% is expected to at least double by 2015). Using the data from the previous section, we estimated that the additional economic return on investment of voluntary contributions could escalate as shown in Exhibit 4. 10 Exhibit 4: Schedule of potential additional economic ROI over time Estimated additional economic ROI 2012 3.35% 2013 3.37 2014 3.79 2015 4.31 2016 4.35 2017 4.39 Source: UBS Global Asset Management. Additionally, the example above shows that because pension contributions are tax-deductible, the actual cost of a $100 million improvement in funded status is only $65 million. While we have not explicitly added this advantage to the ROI calculation above, since we assume that this tax deduction is merely accelerated (remember, we assume that the voluntary contributions would be required in the future regardless), we believe it is obviously better to receive a tax break sooner rather than later. Finally and importantly, we recognized that the return on contributions is not directly returned to the sponsor. Indeed, under US pension regulations, there are legal barriers preventing sponsors from accessing pension assets. We believe however, that from a holistic enterprise standpoint, the extra return provided is beneficial, as it will result in lower cash outlays at the firm level. Potential accounting benefits of voluntary contributions So far, we have focused on the economic benefits of voluntary contributions. Under the current pension accounting rules, voluntary contributions could also have a positive income statement impact by reducing a sponsor s pension expense (or increasing its pension income). This is because a main component of the pension expense/income is the expected return on assets, which is essentially the value of the pension assets multiplied by the expected rate of return on assets assumption (EROA). For example, a $100 million contribution for a sponsor with a 7% EROA would result in a reduction in annual pension expense (or increase in pension income) of $7 million. Simply put, additional cash contributions would likely have a positive earnings per share (EPS) impact for many sponsors, ceteris paribus. Naturally, before committing to accelerating pension contributions, sponsors should also consider other factors, such as alternate uses of company cash, eligibility for tax deductions and the risks of potential trapped pension surplus. No cash? No problem (if you have debt capacity ) The above example assumes that the sponsor has enough cash on hand to make a plan contribution. But what if that s not the case? For sponsors who have debt capacity, there might be an alternative way to reap the benefits of voluntary pension contributions. This section looks at the potential benefits of issuing debt to fund the pension deficit for an illustrative plan. In constructing this example, we looked to remove any arbitrage inherent in the cost of debt versus plan expected return on assets assumption. Hence, both the cost of debt, as well as the expected return on assets assumption, is set at 5%. Importantly, we are not suggesting that sponsors would have to lower their plan s expected rate of return assumptions to their cost of debt. We are simply assuming a conservative risk-free scenario where debt-financed contributions could add value to the plan sponsors and the plan participants. 10 Based on Stabilization Funding provisions and an estimated annual indexation of 2%. Note that the irregular pattern of additional economic ROI growth over time stems from the nonlinear schedule increase in future PBGC variable premium rates. 8
Exhibit 5 below illustrates how issuing debt to fund a pension plan can create additional economic return on investment. Let s review how this could work procedurally: First, the sponsor issues $100 million in debt at a cost of 5.0% (3.25% after-tax assuming a corporate tax rate of 35%). The sponsor in turn contributes the $100 million debt proceeds into the pension trust, immediately reducing the current plan deficit. Note that debt-financed contributions may have little impact on a sponsor s credit rating, since it essentially means swapping one type of debt for another. However, we recommend that any sponsor considering issuing debt to finance its pension plan should speak with a ratings specialist to better assess the attractiveness of this form of transaction. Upon contributing the $100 million, we assume the sponsor will receive a tax deduction of $35 million ($100 million contribution times 35% corporate tax rate), resulting in an economic contribution of approximately $65 million (we assume that the tax deduction is then used to retire or offset the debt issued). Once placed in the pension trust, we assume that the contribution is invested in assets with a similar risk/return profile as the debt issued by the sponsor (as mentioned to avoid any arbitrage assumptions). Then, it is assumed that the contribution will grow at a tax-exempt rate of 5%. Additionally, there is an immediate savings on PBGC variable premiums of $0.9 million (0.9% times $100 million) due to the reduction in the plan s funding deficit (assuming that the PBGC-based plan deficit is at least $100 million). As noted in an earlier section of this paper, variable premiums are expected to double by 2015, which means that the additional economic benefits illustrated herein are expected to increase, everything else being the same. In the end, as shown in Exhibit 5, borrowing to make a plan contribution increases the sponsor s economic ROI by 2.65%. Please refer to the appendix for a more detailed calculation of incremental economic return on investment provided by accelerated pension contributions achieved through debt issuance. It should be noted that actual economic costs or benefits of issuing debt to fund a pension plan deficit would depend on the facts and circumstances pertaining to the sponsor. Exhibit 5: Potential benefits of debt-financed pension contributions Assumptions ($ in millions) Plan assets $850 Plan liabilities $1,000 Plan surplus/(deficit) ($150) Plan funded status 85% Corporate tax rate 35% Sponsor s cost of debt 5.0% Expected return on plan assets 5.0% Immediate investment/contribution $100 PBGC variable premium 0.9% of deficit $100 proceeds $100 contribution Capital markets Sponsor Pension Plan Capital markets 5.0% coupons (tax-deductible) $100 contribution 5.0% return (tax-exempt) Debt issuance 35% tax deduction on $100 contribution Avoid 0.9% PBGC variable premium on $100 IRS PBGC Result: 2.65% tax-adjusted economic ROI on debt issuance Source: UBS Global Asset Management. 9
Conclusion Corporations, and corporate treasurers in particular, face many challenges in terms of providing positive retirement outcomes for their employees. For many companies, PFS may appear as a gift that alleviates the pressure of their obligations to their plan participants. We believe that if companies truly need to finance other parts of their business with the savings due to lower required contributions attributed to PFS, they should do so. However, we also believe that companies with excess cash on hand or the ability to access the debt markets at favorable rates should strongly consider making voluntary contributions to their pension plans. The positive, long-term benefits of voluntary contributions can be a differentiator for overall plan health, as well as a signal to their employees and retirees that corporations are thinking about their long-term interests even in these difficult economic times. Authors: François Pellerin, CFA, FSA, EA, CERA, MAAA Asset Liability Investment Solutions Jodan Ledford Asset Liability Investment Solutions About Asset Liability Investment Solutions (ALIS) Our ALIS team analyzes investment strategies for pension and post retirement plans, and then develops and implements investment solutions that focus on plans specific goals, constraints and objectives. To best serve our clients needs, ALIS offers a variety of solutions and products that range from individual components of plans to fully integrated solutions, where we assume fiduciary responsibility for a plan s risk management. ALIS draws upon a broad range of UBS Global Asset Management investment professionals with diverse experience and skill sets. This includes actuaries, former consultants, former pension plan sponsors, research analysts, risk managers, derivatives specialists and others with various professional and academic backgrounds. For more information, please contact your client advisor or your UBS representative. 10
Appendix Exhibit 6: Calculations of potential economic ROI through a voluntary pension contribution Benefit/(cost) $ millions Details Opportunity cost on contribution ($2.96) ($100 x (1-35%)) x (7.0% x (1-35%)) PBGC savings on avoided premiums $0.59 ($100 x 0.9%) x (1-35%) Expected annual tax-free benefits earned on contribution $4.55 ($100 x 7.0%) x (1-35%) Total benefits $2.18 Sum of benefits/(costs) Additional economic ROI 3.35% ($2.18/($100 x (1-35%))) Source: UBS Global Asset Management. Notes: Technically, the return earned on investment within the plan should be adjusted for the risk of default. We assumed that the entire contribution is tax deductible. Assumes liability used to calculate PBGC variable premiums exceeds $900 million. The opportunity cost, which is the return forfeited by investing in the pension plan instead of in the corporate project, is $2.96 million (return on net outlay of $65 million taxed at corporate rates). This cost is offset by both the returns on the invested capital inside the plan, as well as the avoidance of additional PBGC variable premium payments. In combination, this results in a $5.14 million gain to the employer ($0.59 million + $4.55 million). As a net result, the assumed gains/premium savings offset the opportunity cost, providing the sponsor with $2.18 million benefit from investing in the pension plan. This translates into a risk-free economic arbitrage of 3.35%. Exhibit 7: Calculations of additional economic ROI through a debt-financed pension contribution Benefit/(cost) $ millions Details Cost of debt ($2.11) ($100 x (1-35%)) x (5.0% x (1-35%)) PBGC savings on avoided premiums $0.59 ($100 x 0.9%) x (1-35%) Expected annual tax-free benefits earned on contribution $3.25 ($100 x 5.0%) x (1-35%) Total benefits $1.72 Sum of benefits/(costs) Additional economic ROI 2.65% ($1.72/($100 x (1-35%))) Source: UBS Global Asset Management. Notes: We assumed the tax deduction associated with the contribution is used to retire or offset the debt issued. Technically, the return earned on investment within the plan should be adjusted for the risk of default. We assumed the entire contribution is tax deductible. Under ERISA, a sponsor may be able to invest 10% of assets in its own securities. We purposely set the expected return on assets (EROA) as equal to the sponsor s cost of funds to enumerate the potential tax benefits and to avoid inflating results with a riskier allocation and a higher expected return. Assumes that the liability used to calculate PBGC variable premiums exceeds $900 million. Based on the tax deduction of the contribution into the pension plan, coupled with the assumed immediate retirement of debt as a result, the after-tax interest paid on the debt would be a $2.11 million cost to the sponsor. This cost is offset by both the returns on the invested capital inside the plan as well as the avoidance of additional PBGC variable premium payments. In combination, this results in a $3.84 million gain to the sponsor ($0.59 million + $3.25 million). As a net result, the assumed gains/premium savings offset the cost of debt, providing the sponsor with a $1.72 million benefit from issuing debt to the pension plan. This translates into a risk-free economic arbitrage of 2.65% on the debt issuance. 11
Views expressed are as of September 2012 and are a general guide to the views of UBS Global Asset Management. This document does not replace portfolio and fund-specific materials. Commentary is at a macro or strategy level and is not with reference to any registered or other mutual fund. This document is intended for limited distribution to the clients and associates of UBS Global Asset Management. Use or distribution by any other person is prohibited. Copying any part of this publication without the written permission of UBS Global Asset Management is prohibited. Care has been taken to ensure the accuracy of its content but no responsibility is accepted for any errors or omissions herein. Please note that past performance is not a guide to the future. Potential for profit is accompanied by the possibility of loss. The value of investments and the income from them may go down as well as up and investors may not get back the original amount invested. This document is a marketing communication. Any market or investment views expressed are not intended to be investment research. The document has not been prepared in line with the requirements of any jurisdiction designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The information contained in this document does not constitute a distribution, nor should it be considered a recommendation to purchase or sell any particular security or fund. The information and opinions contained in this document have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith. All such information and opinions are subject to change without notice. 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 document is compiled and any obligation to update or alter forward-looking statements as a result of new information, future events, or otherwise is disclaimed. Furthermore, these views are not intended to predict or guarantee the future performance of any individual security, asset class, markets generally, nor are they intended to predict the future performance of any UBS Global Asset Management account, portfolio or fund. Services to US persons are provided by UBS Global Asset Management (Americas) Inc. ( Americas ). Americas is registered as an investment adviser with the US Securities and Exchange Commission ( SEC ) under the Investment Advisers Act of 1940. From time to time, Americas non-us affiliates in the Asset Management Division who are not registered with the SEC ( Participating Affiliates ) provide investment advisory services to Americas US clients. Americas has adopted procedures to ensure that its Participating Affiliates are in compliance with SEC registration rules. IRS CIRCULAR 230 DISCLOSURE NOTICE. UBS AG and its affiliates do not provide tax advice. To the extent this document discusses tax matters, it is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding any tax-related penalties that may be imposed on you or any other person under the Internal Revenue Code or (2) promoting, marketing or recommending to any other person any transaction or matter discussed in this communication. Any taxation positions described in this document are general statements and should only be used as a guide. You should seek independent professional tax advice on any taxation matters. UBS 2012. All rights reserved. The key symbol and UBS are among the registered and unregistered trademarks of UBS. C12-0559 11/12 www.ubs.com/globalam-us 26 pt. (6.5 mm)