The recently released report by Fidelity and PLANSPONSOR found that just 54% of corporate pension plan respondents were underfunded in 2003, compared with 69% the year before. However, in 2003, 75% of public pension plan respondents were underfunded, compared with just 48% the year before. In total, 36% of some 250 pension plan respondents (both public and corporate) with more than $200 million in plan assets reported funding levels of 100% or better, down slightly from 39% the year before.
Overall, the plans with funding levels of less than 80% (13% of the total) and those above 110% (15% of the total) remained unchanged.
Over the one-year period ended December 2003, the median plan sponsor returned 23.10%, and over the five-year period ended on that date, the median plan sponsor returned 4.88%, according to the report. The report noted that the median corporate plan return was 24.10% for the one-year period, compared with 22.98% for public plans. For the five-year period, the corporate plan median return was 5.10% versus 4.60% for public plans. Larger plans outperformed smaller plans during the one-year period, while over the five-year period ended December 31, 2003, smaller plans turned in a better median performance.
Despite the shifts in funded status, and a general finding that overfunded plans outperform both underfunded plans and the broader universe, the report found no perceivable difference in asset allocation between the plans. The typical allocation was 47% to equities, 15% to non-US equities, 30% to fixed income, 4% to real estate, and 4% to alternatives. Programs that were overfunded by 120% or greater had a somewhat lighter allocation to fixed income (28%) and domestic equities (43%), and a higher allocation to alternatives (8%) and non-US equities (17%). Indeed, the report suggests that overfunded plans will be more active allocators over the next 12 months.
More than half (53%) of survey respondents plan to make a change to their asset allocation over the next 12 months. In considering the major changes in asset allocation from 2003 to 2004, the survey found most significant a 250 basis point decrease in fixed income, with half going to increase hedge fund and private equity allocations, and the rest split between domestic equity, non-US equity, and real estate.
More than a third (40%) of plans expect to increase their allocation to hedge funds and/or private equity, compared with less than a quarter (23%) in 2003. The report also noted a rotation from investment-grade to non-investment grade and emerging market debt, although just 9% of survey respondents are looking to increase their fixed-income allocation. In fact, by a 5-to-1 margin, plans are expecting to increase their allocation to emerging market debt, according to the report.
However, those asset allocation shifts are strategic, not tactical. Three-quarters of survey respondents expect no change to their asset allocation even if their plan becomes significantly more underfunded. Additionally, across all market segments, more plans spend the bulk of their time on manager selection, rather than asset allocation. The vast majority (81%) of those programs with greater-than-median performance spend the majority of their time on manager selection, compared with just 56% of those with less than median performance.
Larger plan sponsors interested in more information about the research are encouraged to register for a series of free regional seminars about the topic. Information is available at http://institutional.fidelity.com/researchroundtableseries