Pension Funding Slowly Recovering

Wilshire Consulting estimates that the ratio of pension assets-to-liabilities for all 126 state pension plans in its analysis was 69% in 2010, up from an estimated 65% in 2009 (see Wilshire Study Paints Picture of Recession’s Effect on Pension Funding). Wilshire says this improvement in funding ratio reflects the U.S. economy’s ongoing recovery from the global market dislocation events of 2007 and 2008, and the resultant recession that economists declared ended in June 2009.  

For the 99 state retirement systems that reported actuarial data for 2010, pension assets and liabilities were $1,671.4 billion and $2,538.4 billion, respectively. The funding ratio for these 99 state pension plans was 66% in 2010, up from 62% for the same plans in 2009.   

For these systems, pension assets grew by 9.3%, or $141.8 billion, from $1,529.6 billion in 2009 to $1,671.4 billion in 2010 while liabilities grew 2.4%, or $59.6 billion, from $2,478.8 billion in 2009 to $2,538.4 billion in 2010. The increase in asset values offset the continued steady growth in liabilities for the 99 state pension plans and led to a drop in the aggregate shortfall, as the -$949.2 billion shortfall in 2009 narrowed to a -$867.0 billion shortfall in 2010.   

The report said 99% of these plans are underfunded. The average underfunded plan has a ratio of assets-to-liabilities equal to 65%.   

For the 125 state retirement systems that reported actuarial data for 2009, pension assets and liabilities were $2,014.4 billion and $3,113.3 billion, respectively. The funding ratio for these 125 state pension plans was 65% in 2009.   

Of these plans, 100% are underfunded. The average plan has a ratio of assets-to-liabilities equal to 66%.   

State pension portfolios have, on average, a 63.6% allocation to equities – including real estate and private equity – and a 36.4% allocation to fixed income. The 63.6% equity allocation is lower than the 65.0% equity allocation in 2000 and largely reflects a rotation out of U.S. public equities.   

Asset allocation varies by retirement system. Nine of 126 retirement systems have allocations to equity that equal or exceed 75%, and 12 systems have an equity allocation below 50%. The 25th and 75th percentile range for equity allocation is 57.3% to 70.7%.   

Wilshire forecasts a long-term median plan return equal to 6.5% per annum, which is 1.5 percentage points below the median actuarial interest rate assumption of 8.0%.