False assumptions

Wilshire report: State plans to fall short of assumed returns

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 last June 30 rose to 66% in 2010 from 62% in 2009, according to the report, also authored 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.

For the 125 systems that reported actuarial data for 2009, their combined assets, on a market-value basis, were $2.01 trillion with total liabilities of $3.11 trillion, for a funding ratio of 65% in 2009, down from 81% in 2008. On an actuarial-value basis, with $2.45 trillion in assets, the 125 systems had a combined 79% funding ratio in 2009. The latest funding details for one of the 126 plans in the study were for 2008.

For all 126 systems, Wilshire estimates the funding ratio was 69% in 2010, up from an estimated 65% in 2009.

“This improvement in funding ratio reflects the U.S. economy's ongoing recovery from the global market dislocation events of 2007 and 2008, and the resultant recession that economists declared ended in June 2009,” according to a Wilshire statement about the report. “Growth in fund assets managed to outpace growth in plan liabilities over fiscal 2010.”

The average asset allocation for the 126 systems last year was 31.1% in U.S. equity, down from 44% in 2005, the latest data available; 17.5% in non-U.S. equity, up from 15%; 6.2% in real estate, up from 4.2%; 8.8% in private equity, up from 4.4%; 27% in U.S. fixed income, down from 28.6%; 1.5% in non-U.S. fixed income, up from 1.2%; and 7.9% in other asset classes, including hedge funds, up from 2.6%. The report didn't break out the hedge fund allocation.

The median allocation in 2010 was 31.6% for U.S. equity, 17.4% for non-U.S. equity, 7.8% for private equity, 5.2% for real estate, 25% for U.S. fixed income and 4.6% for other. There was no median allocation for non-U.S. fixed income or hedge funds. The median represents the median for each asset class and does not add up to 100%.

Allocations for individual systems ranged widely. One system has a 46.1% allocation to private equity, the highest of any system in the study. Mr. Foresti declined to identify the system.

The highest allocation by any of the 126 systems for U.S. equity was 65%; for non-U.S. equity, 52.2%; for real estate, 18.7%; for U.S. bonds, 65.4%; non-U.S. bonds, 12.5%; hedge funds, 15%; and other asset classes, 29.9%.

The lowest allocation by any of the systems to U.S. bonds was 11.2%, and none for U.S. equity, non-U.S. equity, private equity, real estate, hedge funds and other.

Nine of the 126 retirement systems have combined allocations to U.S. and non-U.S. equity that equal or exceed 75%, while 12 systems have an equity allocation below 50%.