July 14, 2023

Public Equities Spur Rise in State Pensions’ Funded Status

Funded levels for US public pension funds rose nearly 2 percentage points to 78.2% during the second quarter.

Reported by Michael Katz

U.S. state pension plans’ aggregate funded ratio increased to 78.2% at the end of the second quarter from 76.3% at the end of the first quarter and 73.6% at the end of 2022, according to financial services firm Wilshire. The ratio is also up from 75.4% at the same time last year.

The quarterly change in funding was the result of a 3.4% rise in asset value, which was partially offset by a 0.8% increase in liability value.

“The aggregate funded status increased for a third consecutive quarter, with an asset value increase of over 13% during this period,” said Wilshire’s managing director, Ned McGuire. “The strong performance of the FT Wilshire 5000 contributed significantly to the increase in asset value, marking its strongest performance in the first six months of a calendar year since 2019.”

The firm attributed the funding improvement to the “robust total portfolio return, nearly reaching double digits, primarily driven by the performance of public equities.”

Global equities led the performance with returns of 6.53% over the 12 months ending June 30, as measured by the MSCI ACWI Index, with U.S. equity returns up 19.03%, as measured by the FT Wilshire 5000 index.

Wilshire’s figures represent an estimate of the combined assets and liabilities of state pension plans included in its 2023 state funding study. The funded ratio is based on liabilities, service cost, benefit payments and contributions, in line with the funding study.

The assumed asset allocation for the study is 31% in U.S. equities, as measured by the FT Wilshire 5000 Index; 23% in core fixed income, measured by the Bloomberg Barclays U.S. Aggregate index; 15% in real assets, measured by the Wilshire U.S. Real Estate Securities Index; 14% in non-U.S. equities, measured by the MSCI AC World ex U.S. index; 13% in private equity, measured by the smoothing average of the trailing three months of the FT Wilshire 5000 Index; and 4% in high-yield bonds, measured by the Bloomberg Barclays U.S. Corporate High Yield Index.