State plans to fall short of assumed returns, Wilshire says

None of the state retirement systems studied by Wilshire Associates will be able to meet its actuarial assumed rates of return over the next 10 years.

Among 126 systems studied, the median plan will return an estimated annualized 6.5% on assets over the next 10 years, 1.5 percentage points short of the median actuarial long-term assumed rate of 8%, according to a forecast in the “2011 Wilshire Report on State Retirement Systems: Funding Levels and Asset Allocations.”

Wilshire’s long-term expected annualized returns over the next 10 years ranked private equity as the best-performing asset class at a projected 9.7%, followed by 7.25% each for domestic equity and non-U.S. equity, 5.5% for real estate, 3.75% for U.S. bonds and 3.4% for non-U.S. bonds. The report did not provide an expected return for hedge funds.

Wilshire’s estimate represents only beta, or market, returns, with no projection of alpha, or above market, returns from active management, the report said.

If returns fall short of assumptions, plans will have to compensate with increased contributions, Steven J. Foresti, Wilshire managing director and one of the authors of the report, said in an interview.

“What the markets can’t provide, contributions will have to provide,” Mr. Foresti said.

The funding ratio of the 99 state retirement systems that reported actuarial values as of or after June 30 rose to 66% in 2010 from 62% in 2009, according to the report, also written by Julia K. Bonafede, president, and Russell J. Walker, vice president.

Among the 99 state retirement systems, combined assets rose 8.3% to a market value of $1.67 trillion, while their combined liabilities rose 2.4% to $2.53 trillion in liabilities. The systems’ asse44ts on an actuarial basis totaled $1.93. trillion.

Only one of the 99 systems — the Washington (State) Law Enforcement & Firefighters Plan 1 — was overfunded in 2010 on the basis of the market value of its assets, with a funding ratio of up to 110%, according to Kim Shepherd, Wilshire spokeswoman. On an actuarial value basis, four systems were overfunded, with a funding ratio as high as 130%.

Some 13% of the 99 systems had a funding ratio of 50% or less in 2010 based on market value of their assets. On an actuarial valuation basis, only eight of the systems were funded at 50% or less.