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Retirement Planning > Retirement Investing

State Pensions Reverse 2-Year Decline in Funded Status

By Michael S. Fischer

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The funding ratio of state pension plans increased to 70.2% in the 2017 fiscal year, ended June 30, up 2.8 percentage points from the previous fiscal year, Wilshire Consulting reported Monday.

The increase reversed two consecutive years of aggregate funded ratio declines, according to the report.

“A primary driver of the improvement in the funding ratio was the increase in global equity values for the 12-month period ending June 30, 2017,” Ned McGuire, managing director and a member of the pension risk solutions group at Wilshire Consulting, said in a statement. “In fact, the estimated aggregate asset value is the highest since Wilshire began reporting on state retirement system funding levels” — 22 years ago.

On a more somber note, a recent report predicted that within the next decade, some states would face insolvency because of their pensions, absent significant changes.

The Wilshire Consulting report said pension assets for the 71 state retirement systems that reported actuarial data for fiscal 2017 (out of 130 systems from which data were gathered) grew to $3.2 trillion, up more than 9% from $2.9 trillion in 2016. The key drivers of higher asset values were robust investment returns and contributions, it said.

Aggregate total pension liability increased by nearly 5% to $4.5 trillion from $4.3 trillion. The three main contributors in aggregate TPL were interest cost, changes in assumptions used to determine TPL (Other) and continued annual service cost, the report found.

Wilshire pointed out that despite the increase in aggregate TPL, the aggregate shortfall decreased by an estimated $54 billion to $1.3 trillion from $1.4 trillion, the result of the significant increase in aggregate assets.

According to the report, discount rates have trended lower over the past several years, and the trend continued in fiscal 2017. The discount rate represents the expected long-term rate of return on invested plan assets used to calculate the liability value (present value of a stream of projected benefit payments).

The range for discount rates in 2017 was 4.2% to 8%, with a median of 7.25%, down 25 basis points from 2016.

The report noted that asset allocation varied greatly by retirement system. In fiscal 2017, state pension plans had aggregate allocations to equity, including private equity, equal to 57.6%. Other allocations:

  • Fixed income – 22.8%
  • Real assets – 13.9%
  • Alternatives – 4.8%
  • Cash – 1%

— Check out Gen Xers Are Really Worried About Retirement, and Advisors Can Help on ThinkAdvisor.

Michael S. Fischer

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