Asset AllocationMarch 5, 2014

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.

Reported by Featured Author

(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%.

“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%.