Wilshire Consulting estimates the ratio of pension assets-to-liabilities, or funding ratio, for the city and county pension plans it studied was 67% in fiscal 2016, down from 70% in fiscal 2015.
Aggregate pension liabilities grew by 4.9%, or $32.8 billion, from $664.5 billion in 2015 to $697.3 billion in 2016, while aggregate pension assets declined by 0.4%, or $1.8 billion, from $465.8 billion in 2015 to $464.0 billion in 2016. These plans saw their resulting aggregate shortfall increase $34.6 billion over fiscal 2016 from $198.7 billion to $233.3 billion.
“Despite relatively strong performance for U.S. stocks, institutional investors found their total portfolio performance dampened by a stronger U.S. dollar, hampering the performance of their non-dollar assets, as well as the United Kingdom’s vote to leave the European Union in June 2016,” says Ned McGuire, Managing Director and a member of the Pension Risk Solutions Group of Wilshire Consulting.
He notes that, “On average, city and county pension portfolios have a 63.0% allocation to equities, including real estate and private equity, a 24.5% allocation to fixed income, and a 12.5% allocation to other assets. This equity allocation is somewhat lower than the 66.3% equity allocation in 2006. However, asset allocation varies by retirement system. Twelve of the 107 retirement systems have allocations to equity that equal or exceed 75%, and eleven systems have an equity allocation below 50%.”
An Issue Brief from the Center for Retirement Research (CRR) at Boston College suggests that since 2001, the aggregate funded status of local pension plans has lagged behind that of state plans, but the gap has been closing recently. The CRR says this gap has been closing for two reasons. First, local plans continue to receive more of their required contributions than state plans and are a bit more likely to use stringent funding methods. Second, in recent years, local plans have earned stronger investment returns than state plans, perhaps partly due to a lower allocation to alternative investments.“Despite this progress, many local plans—like their state counterparts—still face significant funding challenges,” the CRR concludes.