The “Wilshire 2013 Report on City & County Retirement Systems: Funding Levels and Asset Allocation” found the ratio of pension assets-to-liabilities, or funding ratio, for city and county pension plans Wilshire studied was 69% in 2012, significantly lower than the 80% for all plans in 2011.
For the 105 city and county retirement systems that reported actuarial data on or after June 30, 2012, pension assets were $387.0 billion, up 2%, or $6.1 billion, from $380.9 billion in 2011, while liabilities grew 16%, or $78.1 billion, from $482.5 billion to $560.6 billion. The continued steady growth in liabilities for these 105 city and county pension plans led to an increase in the plans’ aggregate shortfall, as the -$101.6 billion shortfall in 2011 grew to a -$173.6 billion shortfall in 2012.
“This deterioration in funding ratio was fueled by global stock market volatility in the 12 months ending June 30, 2012,” said Russ Walker, vice president, Wilshire Associates, and an author of the report. “Of the 105 city and county retirement systems which reported actuarial data for 2012, 92% have market value of assets less than pension liabilities, or are underfunded.”
Wilshire forecasts a long-term median return on city and county pension assets equal to 6.7% per annum. This 6.7% estimate, based on beta-only asset class assumptions and excluding active-management alpha, is below the median actuarial interest rate assumption of 7.75%. One should note that Wilshire’s assumptions range over a conservative 10-plus-year time horizon, while pension plan interest rate assumptions typically project over 20 to 30 years.
From fiscal year-end 2007 to fiscal year-end 2012, the average allocations to U.S. Equities decreased by 11.3% and allocations to U.S. Fixed Income decreased by 1.0%. Conversely, the average allocation to non-U.S. equities increased from 15.8% to 18.2%, continuing the trend toward reducing the home country bias in institutional portfolios.
In addition, allocations to real estate rose 0.6%, and private equity allocations increased 3.4%. Exposure to other assets such as hedge funds, other absolute return strategies, and inflation-hedging assets such as TIPS and commodities increased as well from 2006 to 2011, jumping from 6.2% to 11.8% of total fund assets. Institutional investors have increasingly embraced alternative asset strategies, given limited alpha opportunities in more efficient asset space such as U.S. public market equities, plan sponsor interest in proactively hedging inflation risk, and basic total fund risk diversification, the report says.
The “Wilshire 2013 Report on City & County Retirement Systems: Funding Levels and Asset Allocation” is based upon data gathered by Wilshire from the most recent financial and actuarial reports available and includes 106 city and county retirement systems. Of these 106 retirement systems, 105 systems reported actuarial values on or after June 30, 2012, and the remaining system last reported before June 30, 2012. This is Wilshire’s 11th report on the financial condition of city- and county-sponsored defined benefit (DB) retirement systems.