US State Pensions Inch Towards Solvency

A study of 134 state pension plans revealed a growth in funding ratio and assets outrunning a rise in liabilities in 2013.

(March 5, 2014) — US state retirement systems were better funded and saw a surge in assets in 2013, according to new data released by consulting firm Wilshire Associates.

A study by the firm estimated the aggregate funding ratio to have reached 75% last year, up from 72% in 2012, based on reported actuarial values from a selection of US retirement systems.

“Global stock markets rallied strongly over the twelve 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,” said Russ Walker, vice president at Wilshire.

For the 111 pension plans that reported data for 2013, assets grew by 8%, from $1.96 trillion in 2012 to $2.12 trillion in 2013. Liabilities rose only 2.6%—or $73.2 billion—from $2.82 trillion to $2.9 billion, based on a median discount rate of 7.75%. Annualized over 10 years, this group saw asset growth of 4.2%.

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“Pension liabilities have also steadily risen over the last ten years; many plans have lowered the assumed rate of return on assets used to value their liabilities, which may partially explain the overall increase in the accumulated pension liability,” the report said.

These pension plans even managed to shave off some of their deficits. The 111 plans’ aggregate shortfall decreased from $863.3 billion to $779.8 billion.

Despite these strong figures, 92% of the 111 state retirement systems were underfunded, with an average assets-to-liabilities ratio of 70%. Of these underfunded plans, eight had assets worth less than 50% of liabilities, according to Wilshire.

The report also found very little change in equity allocation since 2003—the plans, on average, recorded a 65% allocation to equities last year, just 0.1% increase in the last decade. The 25th and 75th percentile range was 61.3% to 72.7% for equity allocation.

Exposures to US public markets as a whole did fall in the last decade, according to Wilshire, pushing the average state pension to “move towards a slightly higher expected risk profile along the efficient frontier, with the expected return staying constant.”

The Santa Monica-based consultancy also predicted the long-term median plan return to be 6.63% per annum, 1.12% less than the current median actuarial interest rate of 7.75%.

Home > News > Newsmakers > Larry Fink’s Top Four Questions for Pension CIOs

Newsmakers March 5, 2014

Larry Fink’s Top Four Questions for Pension CIOs

BlackRock’s CEO highlights his top concerns for pension fund investing in 2014.

(March 5, 2014) — Larry Fink has urged CIOs of pension funds to consider the impact of rising longevity as one of their key concerns for 2014.

In a wide-ranging speech in Edinburgh, UK, at the National Association of Pension Funds’ Investment Conference—sporting a BlackRock tartan tie for the occasion—the CEO of the world’s largest asset manager laid down a number of core questions he would be asking himself were he a pension CIO—and longevity was at the top of his list.

“I’d be asking ‘Have I adequately considered the impact of longevity on my liabilities?’” he said. “I was speaking in the US recently and asked this question; the chair of a large US pension fund said he’d just finished a review and concluded that their duration was too short. So now they’re going to take a writedown, extended their liabilities, and are reviewing their assets.”

Much of Fink’s speech was taken up with his concern that pension funds around the world were not taking longevity risk seriously enough.

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Fink also advocated for the UK and the US to move to a compulsory saving model, as adopted in Australia, to help increase savings. He also berated the “far too many” defined benefit schemes he saw with “20%-30% in cash and 10%-20% in short bonds—how will that help individuals? They won’t earn enough”.

Fink also stressed the need for CIOs to ask how their assets would perform relative to liabilities under different scenarios, and whether they were getting good value in relation to their assets.

Looking at asset management more broadly, Fink claimed the way that pension funds would consider emerging markets in future would fundamentally change.

“[Emerging markets have] good examples, and some real garbage,” he said. “The future of investing in emerging markets will change: I believe we’ll see much more granularity and we’ll stop talking about emerging markets as an asset class.”

Fink went on to warn that pension fund managers would need to take a much bolder approach and have a greater willingness to look at alternatives, hedge funds, and more esoteric bonds.

Finally, CIOs should continue to refine the mix of active and index-driven strategies, and working our which strategies are best served by which approach.

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