“The Wilshire 2014 Report on State Retirement Systems: Funding Levels and Asset Allocation,” released by institutional investment advisory firm Wilshire Consulting, shows that the ratio of pension assets-to-liabilities, or funding level, for all of the plans included in the study was 75% in 2013, up from 72% in 2012.
“Global stock markets rallied strongly over the 12 months ended June 30, 2013, offsetting weaker performance by global fixed income and allowing pension asset growth to outdistance the growth in pension liabilities over fiscal 2013,” says Russ Walker, a vice president at Wilshire Associates and an author of the report, based in Santa Monica, California. “When we look at the 111 state retirement systems that reported actuarial data for 2013, we see that pension assets and liabilities were $2,117.7 billion and $2,897.4 billion, respectively. The funding ratio for these 111 state pension plans was 73% in 2013, up from 6% for the same plans in 2012.”
According to the study, for the 111 state retirement systems that reported actuarial data for 2013, pension assets grew by 8%, or $156.7 billion, from $1,961.0 billion in 2012 to $2,117.7 billion in 2013. Liabilities grew 2.6%, or $73.2 billion, from $2,824.3 billion in 2012 to $2,897.4 billion in 2013. These 111 plans saw their aggregate shortfall decrease $83.5 billion over fiscal 2013, from $863.3 billion to $779.8 billion.
Additionally, of these plans, 92% have market value of assets less than pension liabilities, or are underfunded. The average underfunded plan has a ratio of assets to liabilities of 70%.
“For the state retirement systems that reported actuarial data for 2012, pension assets and liabilities in that year were $2,508.5 billion and $3,496.0 billion, respectively,” says Walker. “The funding ratio for these state pension plans was 72% in 2012. Of these same plans, 96% have market value of assets less than pension liabilities, or are underfunded. The average underfunded plan has a ratio of assets-to-liabilities equal to 70%.”
The study finds that state pension portfolios have, on average, a 65% allocation to equities—including real estate and private equity—and a 35% allocation to fixed-income and other non-equity assets.
“The 65% equity allocation is in line with the 64.9% equity allocation in 2003. A more notable trend over the 10-year period has been the rotation out of U.S. equities into other growth assets such as non-U.S. equities, real estate and private equity,” says Walker. “It’s important to note that asset allocation varies by retirement system. Sixteen of 134 retirement systems have allocations to equity that equal or exceed 75%, and 16 systems have an equity allocation below 50%. The 25th and 75th percentile range for equity allocation is 61.3% to 72.7%.”
Wilshire forecasts a long-term median plan return equal to 6.63% per annum, which is 1.12 percentage points below the median actuarial interest rate assumption of 7.75%. Wilshire’s return assumptions represent beta only, with no projection of alpha from active management, and may differ in time horizon (10-plus years) from the methodologies underlying actuarial interest rate assumptions, which are typically 20 to 30 years.
The study is based on data gathered by Wilshire from the most recent financial and actuarial reports provided by 134 retirement systems sponsored by the 50 states and the District of Columbia with 111 systems reporting actuarial values on or after June 30, 2013 and 23 systems last reporting prior to that date.
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