Assets of the 1,000 largest U.S. employee benefit funds climbed 11.8% to $2.666 trillion for the year ended Sept. 30, spurred by double-digit market returns in the United States and abroad.
For the first time in several years, defined benefit plans for the Top 1,000 pension plans in the survey grew more than defined contribution plans.
In fact, defined benefit plans eclipsed $2 trillion for the first time in Pensions & Investments' annual survey, increasing 11.6% to $2.022 trillion. Defined contribution assets grew just 6.7% to $610 billion. After adjusting for market-related growth, assets of the largest 1,000 defined benefit plans grew 1.05%, while assets of the largest 1,000 defined contribution plans fell 0.03%.
The largest 200 employee benefit funds, which represent about 76% of the largest 1,000 funds' assets, grew 12.5% to $2.033 trillion for the same period, also benefiting from strong investment returns.
Indexes used as benchmarks for the domestic equity and fixed-income markets gained considerably during the period. The Standard & Poor's 500 Stock Index grew 13%, while the Salomon Broad Bond Index rose 10.17%. After adjusting the assets of the 1,000 largest funds for market returns, assets grew just 1.43%. The market-adjusted growth of the Top 200 funds' assets was 1.93%.
After adjusting for market moves, growth among the Top 200 defined benefit plans was flat, while defined contribution assets rose 7.1%.
Consultants said the pace of defined benefit plans among the Top 1,000 contained few surprises, given the strong market returns and the increase in contributions sponsors made to their plans.
Sponsors that already were contributing to their funds are adding even more than before, and funds enjoying pension holidays have seen those vacations end, said Jim Klein, national practice leader for Towers Perrin, New York.
Indeed, the value of employer contributions to defined benefit plans in the Top 200 funds rose 15.7% to $36.9 billion from $31.9 billion the previous year. Employer contributions to defined contribution plans among the Top 200 rose 8.3% to $9.1 billion.
But consultants said the relatively lesser growth in defined contribution plans among the Top 1,000 is a surprise, given strong market returns and the growth seen in defined contribution plans in previous years. Although the continued presence of early retirement programs and company layoffs - both of which often lead to lump-sum distributions for plan participants - might have limited growth in defined contribution assets, consultants expected greater growth.
Survey results were more in line with expectations among the Top 200 funds, where defined contribution assets rose 17.3% to $429.2 billion, or a market-adjusted 7.1%.
Although layoffs and job changes may limit the growth of the plans, their popularity and usage continue to grow, Mr. Klein said.
One area of explosive growth in both defined benefit and defined contribution plans was in the international sector. Defined benefit assets invested abroad by the largest 200 plans grew 49.6% to $126.9 billion, fueled by both high market returns and increases in allocations to that class, consultants say. On a market-adjusted basis, overseas investments rose 22.8% in the year ended Sept. 30, down from the 26.5% rise of the previous 12 months.
International assets now represent just more than 8% of the Top 200 funds' defined benefit assets, compared with the previous year's survey, when they represented just less than 6% of total assets.
Much of the growth in international was in equities, where assets reported by plan sponsors rose 59.5% to $98.6 billion. At the same time, non-U.S. equity returns rose 26.8%, as measured by the Morgan Stanley Capital International Europe Australasia Far East Index. On a market-adjusted basis, investments in non-U.S. equities rose 25.9%. International fixed-income assets climbed 22.1% to $26.5 billion. Market returns fueled much of that, as seen in the Salomon World Bond index, which rose 14.93%. Market adjusted, investment in bonds rose 11.7%.
Defined contribution assets invested internationally among the largest 200 funds experienced even greater growth, rising 88.5% to $16.4 billion. The bulk of that growth came in equities, which rose 73.1% (36.5% when adjusted for the market) to $13.5 billion.
"We've talked about globalization for years. Nobody really did it until 1993," said Ron Peyton, president and chief executive of Callan Associates Inc., San Francisco.
The move overseas was broad-based, with both corporate and public pension funds moving abroad, consultants say.
Consequently, international money management skills became very sought after, Mr. Peyton said. Emerging markets managers with established track records are rare.
William F. Brock, director of consulting for Evaluation Associates Inc., Westport, Conn,, said few plan sponsors terminated an international manager, while those who added an international allocation often gave the mandate to existing domestic managers.
"It does seem to be an opportunity for the large, major resource firms" that can invest the capital to build an international business, he said.
But some consultants speculate U.S. investment flows shifting overseas may be boosting, in part, the strong returns seen there in 1993. The higher relative returns seen in non-U.S. markets made it more appealing for pension executives to move money overseas, which in turn helped move markets higher as assets flowed there, consultants say.
U.S. cash flow into international markets is viewed as "a major driver" of international returns, said Drew Demakis, a director for Rogers, Casey & Associates, Darien, Conn. He noted 1993 was the first time in five years the EAFE beat the S&P 500, which might have given an added signal to pension executives.
One of the brighter spots in the domestic pension management area was in the midcapitalization range of the domestic equity market, consultants said. Whether pension executives were disenchanted with large- and small-cap stocks, or were looking to round out their asset classes, midcap searches were relatively more numerous than they had been, Evaluation Associates' Mr. Brock said.
Also, he said midcap was one of the few areas where sponsors asked for searches of index fund managers. That contrasts with survey results, which show index fund assets growing considerably for both equity and fixed-income management. Equity index fund assets grew 20.1% to $264.5 billion among the largest 200 defined benefit plans, while fixed-income indexing rose 35% to $89.1 billion. On a market-adjusted basis, equity index fund assets grew 6.3%, and fixed-income indexing assets grew 22.3%.
Similarly, Callan Associates performed only a few index fund searches in 1993, and those were for enhanced index managers, Mr. Peyton said. He said growth of indexed assets is probably coming from two areas. For one, some of the larger plan sponsors with well-developed staffs don't use a consultant for manager searches. A second source of growth would come from added allocations, he said, because it is very simple to increase an index fund allocation.
Although allocations to the so-called alternative asset classes remain a relatively small piece of the total pension fund pie, some classes experienced significant percentage increases in assets.
For example, venture capital assets rose 34.3% to $9.444 billion from $7 billion in the previous survey. But some consultants expect a good portion of venture capital funds to fall short of their asset goals.
Mr. Peyton said that except for a few "top-tier firms" that can "write their own ticket," buyers dominate the venture capital market. An estimated $23 billion of funds are trying to be raised in a market where only about $10 billion will be invested, he said.
Another alternative class, oil and gas, experienced asset growth of 57%, to $1.1 billion, from $700 million in the previous survey.
Conversely, real estate equity assets among the largest 200 funds continued to slide, falling a market-adjusted 2.5% to $47.1 billion. The Russell-NCREIF Property Index returned -1.97% for the period.
Consultants said the drop was not surprising, given some funds were still writing down the value of their real estate assets in 1993.