WASHINGTON - Total U.S. pension assets reached $6.397 trillion at the end of the first quarter of 1997, an increase of 1.8% from the end of 1996 and an increase of 11.3% from the year earlier period, Federal Reserve data show.
Pension fund assets - both defined benefit and defined contribution - stood at $6.285 trillion as of Dec. 31, 1996, and $5.748 trillion as of March 31, 1996, according to the Fed's latest Flow of Funds report.
Private pension funds, the biggest chunk of pension assets, were valued at $3.084 trillion March 31, $3.053 trillion at year-end 1996, and $2.759 on March 31, 1996.
State and local government retirement fund assets were worth $1.786 trillion, $1.725 trillion and $1.584 trillion for the same respective periods.
Pension fund reserves at life insurance companies totaled $1.113 trillion March 31, up from $1.089 a quarter earlier, and $1.022 a year earlier.
Federal government insurance and pension reserves were $413 billion March 31, down from $419 billion as of year-end 1996, but up from $383 billion March 31, 1996. The numbers are not seasonally adjusted, and might not total because of rounding.
The increase in total assets reflects rising markets, as well as increased investment in equity markets.
Pension funds - private plans and state and local government plans only - held $2.464 trillion worth of stocks as of March 31, according to the Flow of Funds report.
Pension funds' share of equity ownership rose to 24.4% of the $10.099 trillion in U.S. corporate equities, up from a 23.7% share of the $10.09 trillion equity market as of year-end, according to the report. Pension funds held 22.9% of the $8.875 trillion stock market, as of March 31, 1996. (Because of revisions, the Fed data might not be consistent with earlier Flow of Funds reports).
As a percentage of pension assets, equity allocations among private, state and local funds also rose, climbing to 50.8%. As of year-end 1996, pension funds had 50.4% of their assets invested in equities, while as of March 31, 1996, 47% of assets were invested in equities.
The increase in equity investment did not surprise pension consultants, who said equity investment is on the rise among both defined benefit and defined contribution plans.
Rob Brown, managing director, research, SEI Capital Resources, Chicago, said SEI's experience shows pension equity allocations to be rising in "a significant fashion."
He cited these reasons:
Plan sponsors are hesitant to rebalance in strongly rising market.
Plans that have been underallocated relative to peers are feeling competitive pressures to raise allocations.
People are becoming less risk averse, a trend that is "disturbing, just a bit."
While he said it might be smart in the long term for a pension plan to raise its policy allocation to equities from a relatively low amount, the timing could be bad.
If a plan lagged its peers because of an underallocation to equities the last 10 years, an overallocation to equities going forward also could lead to underperformance, if equity markets lag or fall, he said.
"It's the old problem of chasing past performance," he said.
Defined contribution plans also are contributing to the rising equity allocations. Steve Case, managing director in sponsor services for RogersCasey & Associates, Darien, Conn., said he believes defined contribution plans are fueling the increase in equities. And he doesn't see any signs of that flow slowing.
Indeed, a recent survey of pension plan sponsors conducted by Greenwich Associates Inc., Greenwich, Conn., showed corporate defined contribution plan allocations to U.S. equities - excluding company stock - to be growing every year in the past three years.
The dollar-weighted allocation to U.S. common stocks as of late 1996 stood at 29%, an increase from 24.8% in 1995, 22.3% in 1994 and 20.3% in 1993, the Greenwich study shows. Greenwich surveyed officials for 1,022 corporate pension funds in September and October 1996.
Of course the increase in stock ownership by pension funds comes when the U.S. equity market was rising: the Standard & Poor's 500 Stock Index returned 2.2% in the first quarter of this year, and 19.8% in the 12 months ended March 31. The Russell 3000 returned 0.9% in the first quarter, and 16.5% in the one-year period.
Other data in the Fed report reflect increasing assets at pension funds and in the market overall.
Mutual fund ownership by private pension funds - which includes defined benefit and defined contribution plans but not state and local government funds - rose to $2.5 trillion at the end of the first quarter from $2.3 trillion at year end, and $2 trillion as of a year earlier.
Credit market securities (fixed-income and short-term securities) owned by public, state, and local pension funds were worth $1.293 trillion as of March 31, up slightly from the previous quarter and from the previous year, when credit market assets totaled $1.28 trillion and $1.232 trillion, respectively, according to the Fed.
Assets of private pension funds held at life insurance companies in insurance contracts stood at $238.3 billion, a slight increase from the total at the end of 1996, $235.5 billion. As of March 31, 1996, the total was $219.1 billion.
Total mutual fund and money market assets also climbed in the period, the Fed data show. Mutual fund assets reached $2.41 trillion as of March 31, an increase from $2.342 trillion as of year end, and $1.997 trillion as of a year earlier.
The high returns enticing investors into stock mutual funds didn't prevent money market funds from drawing their share of assets, and from growing faster than mutual funds. Money market fund assets were $950 billion on March 31, compared with $891 billion at year end, and $817 billion on March 31, 1996.
Mr. Case of RogersCasey said the flow of assets into defined contribution plans is affecting all types of funds, including money market funds.
The Federal Reserve used the Labor Department's information from the 1992 Form 5500 reports as a benchmark. Then, it calculated more accurate quarterly flow levels with data from the Independent Consultants Cooperative Universe as compiled by Bankers Trust Co., New York, on returns from different types of assets owned by pension funds.