Administration March 5, 2014

State DB Plans Better Funded in 2013

March 5, 2014 (PLANSPONSOR.com) – Funding for state-sponsored defined benefit (DB) retirement plans increased 3% between 2012 and 2013, says a new study.
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“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.”

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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.

Administration March 5, 2014

Corporate Pension Funding Rises to 92.6%

March 5, 2014 (PLANSPONSOR.com) – The funded status of the typical U.S. corporate pension plan improved 1.7% in February to reach 92.6%, as most asset classes gained during the month.
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The BNY Mellon Investment Strategy & Solutions Group (ISSG) notes that for February the gains in asset values outpaced the rise in liabilities, which resulted from falling interest rates. Year to date, the funded status of the corporate plans is down 2.6%, according to ISSG’s Institutional Scorecard.

”The financial status of pensions, endowments and foundations in February recovered a significant amount of the ground they lost in January, as most asset classes recovered,” says Andrew D. Wozniak, director of portfolio management and investment strategy for ISSG, based in New York. “Concerns about global growth fundamentals that had surfaced in January appeared to abate somewhat in February.  Commodities were the best performing asset class in February, rising 6.24%.”

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For U.S. corporate plans, assets increased 3.3% and liabilities increased 1.4% during the month, according to ISSG. The increase in liabilities in February was due to an eight-basis-point decline in the Aa corporate discount rate to 4.58%. Plan liabilities are calculated using the yields of long-term investment grade bonds. Lower yields on these bonds result in higher liabilities.

On the public side, assets at the typical defined benefit plan in February rose 3.5%, producing excess return of 2.9% above the monthly goal of positive 0.6% returns, says ISSG. Year over year, public plans are ahead of their target by 4.9%, says ISSG.

For endowments and foundations, the real return was 3%, which exceeded the target for spending plus inflation, says ISSG. Investments in commodities and real estate helped endowments and foundations to strong performance in February.

Mellon Capital Management, BNY Mellon’s San Francisco-based multi-asset manager, attributed the spike in commodities to unusual weather conditions in the U.S. and abroad, setting off concerns about potential grain shortages.

“We do not view the rise in commodities as a signal of future excessive inflation,” says Suzanne Ly, vice president, asset allocation portfolio management, Mellon Capital. “The strength in the commodity markets should abate as the weather normalizes and inflationary pressures remain low.”

Wozniak concludes that plan sponsors continue to show interest in strategies to hedge their portfolios against market volatility. “Many sponsors view the continuing financial strength of corporate pensions as an opportunity to lower the risks they face,” he says.

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