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Wilshire Consulting reports 74 per cent funding ratio for state-sponsored defined benefit retirement systems

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The ratio of pension assets-to-liabilities, or funding ratio, for 131 state-sponsored defined benefit retirement systems was 74 per cent in 2015, dropping three points from 77 per cent in 2014, according to a report issued by Wilshire Consulting.

The Wilshire 2016 Report on State Retirement Systems: Funding Levels and Asset Allocation is based upon data gathered by Wilshire Consulting from the most recent financial and actuarial reports issued by 131 retirement systems sponsored by the 50 states and the District of Columbia. Of the 131 systems studied, 98 systems reported actuarial values on or after 30 June, 2015 and the remaining 33 systems last reported prior to that date. It is Wilshire Consulting’s 20th report on the funding of state retirement systems.
 
“Despite relatively strong performance from U.S. stocks in the fiscal year ending June 30, 2015, an increase in US interest rates in the second quarter of 2015 combined with a stronger US dollar to dampen performance of fixed income and non-U.S. dollar investments for fiscal 2015,” says Russ Walker, vice president and a member of the Investment Research Group of Wilshire Consulting. “This resulted in pension liabilities outgrowing pension assets over the fiscal year.
 
“State pension portfolios have, on average, a 65.5 per cent allocation to equities, including real estate and private equity, and a 34.5 per cent allocation to fixed income and other non-equity assets. The 65.5 per cent equity allocation is somewhat lower than the 67.6 per cent equity allocation in 2005; a more notable trend over the ten-year period has been the rotation out of US equities into other growth assets such as non-US equities, real estate and private equity.”
 
Walker notes that asset allocation varies by retirement system. “Twenty-three of 131 retirement systems have allocations to equity that equal or exceed 75 per cent, and 11 systems have an equity allocation below 50 per cent. The 25th and 75th percentile range for equity allocation is 60.5 per cent to 72.8 per cent.”
 
According to the report, for the 98 state retirement systems that reported actuarial data for 2015, pension assets grew by 0.4 per cent, or USD7.5 billion, from USD2,130.9 billion in 2014 to USD2,138.4 billion in 2015 while liabilities grew 4.3 per cent, or USD122.2 billion, from USD2,818.4 billion in 2014 to USD2,940.7 billion in 2015. These 98 plans saw their aggregate shortfall, or net pension liability, increase USD114.7 billion over fiscal 2015 from USD687.6 billion to USD802.3 billion.
 
Of the 98 state retirement systems that reported actuarial data for 2015, 92 per cent have market value of assets less than pension liabilities, or are underfunded, up from 88 per cent in 2014. The average underfunded plan has a ratio of assets-to-liabilities equal to 73 per cent. In comparison, of the 131 state retirement systems that reported actuarial data for 2014, 93 per cent were underfunded. The average underfunded plan in FY2014 had a ratio of assets-to-liabilities equal to 74 per cent.
 
For the 131 state retirement systems that reported actuarial data for 2014, pension assets and liabilities in that year were USD3,040.5 billion and USD3,951.2 billion, respectively. The funding ratio for these 131 state pension plans was 77 per cent in 2014. For the 98 state retirement systems that reported actuarial data for 2015, pension assets and liabilities were USD2,138.4 billion and USD2,940.7 billion, respectively. The funding ratio for these 98 state pension plans was 73 per cent in 2015, down from 76 per cent for the same plans in 2014.
 
Wilshire forecasts a median plan return equal to 6.24 per cent per annum, which is 1.26 per centage points below the median actuarial interest rate assumption of 7.50 per cent. Wilshire’s assumptions range over a conservative 10+-year time horizon, 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 estimated return would be 8.3 per cent.
 
Financial data on public retirement systems historically have lacked the timeliness and uniform disclosure governing pension plans sponsored by publicly traded companies, making it difficult to conclude a study with data that are both current and consistent across systems. For this reason, our study methodology involves collecting data during the first one and a half months of each calendar year with the objective of acquiring as many reports as possible with a June 30 valuation date from the previous year. Even for systems with the desire to report in a timely manner, it often takes six months to a year for actuaries to determine liability values.
 

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