People may say it's no big deal, but the Dow Jones industrial average's march across the 10,000 mark is loaded with symbolism for the nation's pension executives.
Thanks to the stock market's meteoric climb from 2,000 in 1982, pension funds that made big commitments to equities in the 1980s and even in the early '90s have grown far beyond what anyone imagined.
Indeed, assets of some equity-heavy pension funds doubled or tripled in just a few years.
And employer contributions, which once accounted for a big part of pension fund growth, were slashed or halted thanks to the bull market's role in helping defined benefit plans become fully funded.
But it wasn't always easy.
Maryland Treasurer Richard Dixon, who oversees the $25.4 billion State Retirement and Pension System of Maryland, Baltimore, said he has "had problems convincing people (in state government) who think the market's going to crash." He keeps a chart from Ibbotson Associates in his office showing the ups and downs of the market since 1925.
"It's had blips but it always goes up again," he said.
The fund has achieved a 24.7% annual growth rate since 1982 -- the highest of any public fund, according to Pensions & Investments' data. He's been treasurer since 1996.
Predicting 10,000
Much of the fund's growth occurred because of the booming equity market. "I was predicting that the Dow would reach 10,000 before the year 2000 two years ago," Mr. Dixon said.
The fund's equity allocation now stands at 65%, up from 45% in 1982.
A big equity allocation also was responsible for the 19.3% compound annual growth rate since 1982 at the State Board of Administration of Florida, Tallahassee, according to Tom Herndon, executive director.
The pension fund's growth accelerated in the late '80s, after a decision was made to invest more in equities.
"We have had a sizable equity exposure for the last decade, and especially in the last seven years," he said.
Florida raised its equity exposure to the 60%-plus range in the early '90s from 52% in 1987. The pension fund has been successful recently because it overweighted domestic equities and underweighted non-U.S. equities.
Partly as a result, the Florida fund grew to $90 billion today from $37 billion in just four years, and is fully funded.
In interviews, executives of pension funds whose assets have increased the most since the bull market started in 1982 attribute the phenomenal growth to their commitments to equities.
Corporations blaze the trail
In general, corporate funds were first in line to increase equity allocations, which helped many of them become fully funded and helped propel the market ever higher. By the late 1980s, public pension funds joined in. By the 1990s, 401(k) plans -- which gave individuals easy access to the stock market -- led the bull to roar ever louder, said Ron Jones, principal of Hewitt Associates, Lincolnshire, Ill.
Data calculated by P&I show that in 1982, the average public pension fund had 23% of its assets in stocks, while the average corporate fund had 47.5% in stocks. By 1998, the typical allocation for stocks was 56.8% at public funds and 60.6% at corporate funds.
The California Public Employees' Retirement System, Sacramento, was among the first public pension fund to invest in stocks, starting in 1967.
"We invested in stocks because of the historically higher rates of return compared with fixed-income investments," said Brad Pacheco, a spokesman at the $153 billion fund.
Until 1984, the fund invested 30% in domestic equities; by 1997, stock exposure grew to its current level of 61% of assets.
In 1986, CalPERS began international investing, allocating 5% of assets to foreign stocks. Today, international equities account for 20% of the pension fund's assets.
Since 1982, the fund has had a compound annual growth rate of 15.4%.
On the corporate side, the $11 billion American Airlines pension fund has enjoyed a 13.3% annualized growth rate since 1982. It has been fully funded for 15 years, thanks in large part to a 50% equity allocation since 1982. (In the early 1990s, the exposure was lowered briefly to 40% to 45%; this year, American raised it to 60%.)
At Citigroup Inc., New York, where the pension fund assets of Citicorp and The Travelers Group were merged Jan. 1, there is a 55% equity allocation for the $13 billion in assets. The Citicorp fund itself had an equity allocation of 75% to 80% in 1991.
Ron Walter, director of benefit investments for Citigroup, said, "as the plan became better funded and richer, it became more conservative.
"In the first quarter of 1991 we were positioned for a positive correction and enjoyed it. Since then we've been slowly reducing the equity allocation."
Citigroup announced last week it is moving the 36,000 eligible U.S. employees in its Citibank unit to a cash balance pension plan.
The new plan aims to bring Citibank's benefits in line with those of Travelers Group Inc. Mr. Walter said that in conjunction with the change, "we'll do an asset-liability study. Typically a cash balance plan (has investments) of a somewhat shorter duration because the liabilities are shorter."
He added, however, "My guess is it (the change to a cash balance plan) won't have a major impact on our investment strategy."
"I have the advantage of having an internal consulting group (part of Smith Barney), so we'll do the study in-house," he said.
Late to the party
But many public pension funds, restrained by law from fully enjoying the stock party, developed their equity strategies over time as restrictions eased.
The $63 billion New Jersey Division of Investment, Trenton, was allowed to have only 10% of its assets in equities in the early 1960s, said Steven Kornrumpf, director. Half the equity allocation had to be in utilities.
Its equity allocation began to rise in 1972; by 1982, New Jersey's equity exposure was about 50%. It moved to 51% by 1988 and to 60% by the early 1990s.
"Equities have been an important part of our fund's return over the last five years," Mr. Kornrumpf said.
Because of the strong equity market, the fund now has an allocation range of 60% to 70% equities. "Before, the market kept taking us over the 60% threshold. Now we have more flexibility," The New Jersey pension fund is fully funded and has grown an annualized 15.7% since 1982.
