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P&I 1000

Assets of largest retirement funds tumble 2.3% for year

Mark Ruloff sees continued movement into LDI strategies for DB funds.

Growth flat for top DC funds; increase seen in public DC assets only

Assets of the largest 1,000 U.S. retirement plans totaled $8.84 trillion on Sept. 30, a dip of 2.3% from a year earlier.

Asset movement among defined contribution plans in the top 1,000 was relatively flat, down 0.3% to $3.01 trillion, while defined benefit plans decreased 3.3%, to $5.83 trillion.

Among the 200 largest plans, DC plan assets inched up 1.5% to $1.81 trillion while DB plans dropped 3.6% to $4.58 trillion. Top 200 assets overall declined 2.2%, to $6.39 trillion.

When broken out by type of plan, only public defined contribution plans in the top 200 showed an increase. Corporate DC plans were flat for the year, while public defined benefit plans dropped 3% and corporate DB plans fell 4.2%.

Growth in total assets of the top 1,000 funds

Part of the reason corporate defined benefit plans fell more than their public peers is because corporations, in their move to derisk their plans, have been increasing allocations to fixed income and extending the duration of their fixed-income portfolios.

Mark Brubaker, a managing director at Wilshire Consulting's Pittsburgh office, noted that fixed income didn't do particularly well last year.

In addition, corporate DB plans had lower allocations to real estate and private equity than public DB plans. Both of these asset classes performed well relative to public equities and fixed income in 2015.

Among defined benefit plans in the top 200, the aggregate allocation to domestic fixed income rose to 23.2% as of Sept. 30, from 22.9% a year earlier. By plan type, the change was even greater. Among corporate plans, domestic fixed income rose to 34.6% from 33.2%, while public plans' allocation grew only 50 basis points, to 21.3%.

Corporate plans among the top 200 had 6.6% and 5.3%, respectively, in private equity and real estate, compared with public plans' 9.4% and 8.5%, respectively.

Change in total assets by category

Mr. Brubaker added that because public pension plans also didn't gain in assets, many “are looking long and hard at their return assumptions to see if they're realistic.”

“It's hard to justify more than a 6.5% or 7% rate of return on equities,” Mr. Brubaker said. “Fixed income is probably half of that. So, public funds are considering lowering their return expectations, which can be a painful thing to do.”

One example of this is the $278.4 billion California Public Employees' Retirement System. Officials at the Sacramento-based fund in November approved a risk-reduction plan that will shift investments away from equities and could reduce the expected rate of return of the nation's largest pension fund to 6.5% from 7.5% over time.

As a means of boosting returns, Mr. Brubaker said he's noticed that interest in private credit strategies has been a big trend among public and corporate funds. He noted that private equity is also seeing a bit of a renewed interest at the margin.

Diversification didn't help

Russell Ivinjack, a senior partner at Aon Hewitt Investment Consulting in Chicago, told Pensions & Investments that one theme he noticed last year was that diversification into asset classes outside of U.S. stock and core fixed income — such as emerging market debt, international equity or anything with the potential to look like Treasury inflation-protected securities — didn't help most institutional investors' performance.

What aided performance, however, were real estate and private equity. In particular, public pension plans' investments in private equity and real estate generally did well in 2015, relative to corporate DB plans, he said.

Mr. Ivinjack also noted that in 2015, corporate DB plans that focused on hedging their liabilities suffered a bit more because credit, particularly long credit, produced negative results.

“We joked that diversification 'de-worsified' results because 2015 was a very concentrated year,” he said.

The market returns for the 12 months ended Sept. 30 were as follows: Russell 3000, -0.49%; MSCI All Country World index Investible Market index, ex-US, -11.63%; Barclays Capital Aggregate bond index, 2.94%; BarCap Global Aggregate, -3.26%; NCREIF Property index, 13.5%; the Cambridge Private Equity index, 2.55%; and the HFRI Fund Weighted Composite index, -1.68%.

For corporate plans, Mark Ruloff, director of asset allocation at Willis Towers Watson Investment Services, said he continues to see more movement into liability-driven strategies, with more bonds and fewer equities.

“I would believe that trend might continue, with DB plans freezing, those are the ones more inclined to move toward fixed income,” Mr. Ruloff said.

He added: “I don't think there are a lot more plans freezing than there were before. I suspect we'll continue to see DC plans picking up asset value relative to DB plans.”

The ranking of the very largest retirement plans did not change as of Sept. 30 from the year-earlier period. The Federal Retirement Thrift Savings Plan, Washington, remained at the top of the list, reporting $443.33 billion in assets as of Sept. 30, up 5%. It has been the top-ranked U.S. plan since it overtook CalPERS in 2009.

The remaining plans in the top 10 — in fact, the top 20 — reported drops in assets on a year-over-year basis.

Sacramento-based CalPERS remained at the No. 2 spot, reporting $285.77 billion as of Sept. 30, down 3.7% from the year-earlier period. Rounding out the top five: the California State Teachers' Retirement System, West Sacramento, reported $181.88 billion, a 2.7% drop; New York State Common Retirement Fund, Albany, $173.54 billion, down 2.6%; and the New York City Retirement Systems, $155.12 billion, down 2.3%.

The largest corporate plan is that of Chicago-based Boeing Co., whose combined DB and DC assets placed it eighth overall.

As of Sept. 30, Boeing had $101.9 billion, of which $57.2 billion was in defined benefit and $44.7 billion in defined contribution plans.

The largest union plan, the $36.91 billion Western Conference of Teamsters Pension Trust, Seattle, moved up one spot to rank 44th overall.

The largest defined contribution plan belonged to the Federal Thrift Savings Plan; all of its $443.33 billion plan assets are defined contribution. Boeing had the largest corporate defined contribution plan, with $44.71 billion in assets as of Sept. 30, while the New York State Deferred Compensation Plan, Albany, was the largest public DC plan, with $17.83 billion.

Other findings of the survey:

• Defined benefit plan assets accounted for 71.6% of the assets of the top 200 plans, compared to 28.3% for defined contribution plans. A year earlier, the split was 72.6% vs. 27.4%.

• Separate accounts represented 72% of the assets in DB plans among the top 200, a dip from the 72.8% a year earlier, while commingled vehicles represented 26.4%, up from 25.8%; mutual funds held steady at 1.3%; and exchange-traded funds, were 0.3% up from 0.1%.

• Of the top 200 funds' defined benefit assets, $1.033 trillion was internally managed, up 2.1% from a year earlier. Of that, $30.6 billion was in alternatives, up 55.3% from the year before.

• The majority of top 200 assets as of Sept. 30 were in public funds (51.6%). Assets in corporate plans accounted for 35% of the top 200; miscellaneous, 11.4%; and union, 2%. Those numbers are virtually unchanged from the year-earlier data.

• Employer contributions to defined benefit plans in the top 200 were up 8.5%, to $113.5 billion, and benefits paid rose 4.8% to $243.9 billion.

This article originally appeared in the February 8, 2016 print issue as, "Assets of largest funds tumble 2.3% for year".