2014 was a good year for US state pension plans as their funding ratios reached an estimated average of 80%, up from 74% the previous year, according to Wilshire Associates.
The consulting firm concluded strong global equities and fixed income performance in the 12 months ending June 30, 2014 pushed “pension asset growth to outdistance the growth in pension liabilities.”
While the 2014 funding ratio was still far below the 95% peak in 2007, it represented a strong recovery from the low of 64% in 2009.
Of the 131 state retirement system studied by Wilshire, 92 reported values for 2014 and saw the funding ratio also rise to 77% from 70% in 2013.
Their assets jumped by 13.7%, or $247 billion, while their liabilities only grew 4.7%, or $118.8 billion. As a result, the aggregate shortfall dropped $128.2 billion over the fiscal year to $625.6 billion.
Despite a bump in funding ratio, 87% of the 92 defined benefit plans were underfunded, according to the data. The average underfunded plan was just 73% funded for the fiscal year.
For the 2013 fiscal year, the 131 pension plans’ assets and liabilities reached $2.7 trillion and $3.7 trillion, respectively, with a funding ratio of 74%. Of these plans, 93% were underfunded, with the average funding level at 71%.
The study also concluded 11 of the 92 plans were fully funded in 2014, while just 5 of 131 systems hit or beat the 100% funding ratio in 2013.
However, despite good news for public plans, Wilshire forecasted they would not meet their target return of 7.65%. The consulting firm estimated the long-term median plan returns to be 5.99% over the next 10 years.
Last year, Wilshire predicted the median plan return to be 6.63% per annum, 1.12% less than then-median actuarial interest rate of 7.75%.
Wilshire also found over the past 10 years, state pension plans have rotated out of US equities into other growth assets.
Exposure to US equity declined 16.6% since 2004 to 27.9% in 2014, the report said, while allocations to private equity increased 5.8% to 10.1%. Total allocations to US and non-US fixed income, and other debt assets increased less than 1% over the past 10 years.
Source: Wilshire Associates
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