State Pensions’ Shortfall Grew in Fiscal 2016

Over 10-year period, state pensions rotated out of U.S. equities into other growth assets

State pension plans’ funding ratio fell to 69% in fiscal year 2016, down four percentage points from a year earlier, Wilshire Consulting reported Monday.

“U.S. stock performance was low in the fiscal year ending June 30, 2016, while a strengthening U.S. dollar dampened already negative performance of non-U.S. dollar investments,” Ned McGuire, vice president and a member of the pension risk solutions group at Wilshire Consulting, said in a statement.

“Ultimately, the net effect was that the difference between pension liabilities and pension assets grew during the fiscal year.”

Wilshire Consulting’s annual state funding report was based on data gathered from 131 retirement systems sponsored by the 50 states and the District of Columbia. Of these, 103 systems reported actuarial values on or after June 30, 2016, and the remaining 28 systems last reported before that date.

The report found that for the 103 state retirement systems that reported actuarial data for 2016, pension assets shrank by 1.8% to some $2.3 trillion, while liabilities grew by 5.4% to $3.5 trillion.

Those plans’ aggregate shortfall, or net pension liability, increased by $222.4 billion over fiscal 2016 from $963.2 billion to $1.2 trillion.

Ninety-seven percent of the 103 state retirement systems that reported actuarial data for 2016 were underfunded. The average underfunded plan had a ratio of assets to liabilities equal to 66%.

By comparison, of the 131 state retirement systems that reported actuarial data for fiscal 2015, 94% were underfunded. The average underfunded plan in 2015 had a ratio of assets to liabilities equal to 72%.

Asset Allocation

According to the report, state pension portfolios had a 64.8% allocation to equities, on average, including real estate and private equity, a 24.7% allocation to fixed income and a 10.5% allocation to other non-equity assets.

The equity allocation was four percentage points lower than in 2006. More notable, the report said, the 10-year period saw rotation out of U.S. equities into other growth assets, such as non-U.S. equities, real estate and private equity.

Asset allocation varied considerably by retirement system, according to the report.

Sixteen of 131 retirement systems had allocations to equity that equaled or exceeded 75%, and 11 systems had an equity allocation below 50%. The 25th and 75th percentile range for equity allocation was 60% to 71.4%.

The report forecasts a median expected 10-year plan return of 6.4% per annum, 1.1 percentage points below the median actuarial interest rate assumption of 7.5%.

Wilshire said its assumptions ranged over a time horizon of more than 10 years, while pension plan interest rate assumptions typically project over 20 to 30 years.

Using Wilshire’s 30-year long-term asset class assumptions, the median expected return would be 7.4%, it said.

--- Check out Public Sector Workers Need More Financial Security: Survey on ThinkAdvisor.

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