WASHINGTON -- Pension fund assets crossed the $10 trillion mark in 1999, more than doubling in just five years.
Total pension fund assets hit $10.4 trillion at the end of 1999, a spectacular 112.2% increase from the end of 1994, when they reached $4.9 trillion, according to the latest Federal Reserve Board flow of funds data.
The increase in pension fund assets mirrors the spectacular rise in the stock market in the five years -- a handsome 199.84% increase in the Dow Jones industrial average and an even more startling 219.9% increase -- or 28.56% annualized total return -- in the Standard & Poor's 500 index.
A large chunk of pension fund assets -- $6.6 trillion -- is attributable to the private pension system, although the Federal Reserve includes assets of the Federal Thrift Savings Plan, the defined contribution plan that covers most federal government workers, in its calculation.
The Federal Thrift Savings Plan had $94.7 billion in assets at the end of 1999, according to a spokesman for the Federal Retirement Thrift Investment Board, which manages the fund.
The Federal Reserve's pension fund data include assets held by life insurance companies, as well as 401(k) assets held by mutual funds.
This is not the first time pension fund assets have more than doubled in a five-year period. They recorded a similar growth between 1980 and 1984, from $801 billion to $1.7 trillion.
But what is unusual this time is that most of the growth in the assets is attributable to the appreciation in pension investments, rather than to employer and employee contributions.
Appreciation of pension assets accounted for 74% of the rise in pension assets in the past five years, while contributions to pension funds accounted for only the remaining 26% of the rise, noted Julia Coronado, an economist in the Federal Reserve's flow of funds section.
In the early 1980s, 78% of the gain in pension fund assets was attributable to contributions, and only 22% was a result of the appreciation in pension assets, she said.
Not surprisingly then, assets of traditional pension plans, which tend to be more heavily invested in equities than do the newer do-it-yourself 401(k) retirement plans, are continuing to outstrip the growth in assets of defined contribution plans.
While equity investments by traditional pension plans grew 16.7% last year, from $1.2 trillion in 1998, equity investments by defined contribution retirement plans barely budged last year -- from $1.05 trillion in 1998 to $1.14 trillion last year, according to the Federal Reserve data. The defined contribution holdings include sponsoring company stock.
Despite the much ballyhooed decline of the traditional pension system, assets of private defined benefit pension plans grew 19% to $2.5 trillion at the end of 1999, while assets of private defined contribution plans also reached the $2.5 trillion mark, but grew only 13.6% last year, according to the Federal Reserve data.
That growth in defined benefit assets comes even as traditional pension plans, typically supporting an older work force, are paying out more in benefits than they are taking in, while defined contribution retirement systems are garnering more assets than they are paying out.
The reason for this disparity in growth is quite simple. Because of the stock market's runup in the past five years, defined benefit plans have earned a higher return than defined contribution plans.
What's more, traditional pension plans continue to hold more in stocks than do defined contribution plans, even though defined benefit pension plans have been net sellers of equities since the mid-1980s, perhaps in part due to benefit payouts.
Even after a net selloff of $82.1 billion in equities in 1999, defined benefit pension plans held 56% of their total assets, or $1.4 trillion, in stocks at the end of last year. Defined contribution plans, meanwhile, held $1.1 trillion in equities at the end of 1999, or 44% of their total assets, even after buying $1.8 billion in equities more than they sold last year, the Federal Reserve's data show.
At the same time, state and local government defined benefit pension plans also have been heavily investing in stocks, the data show. Stock ownership by these plans hit $2 trillion in 1999, representing almost two-thirds of total assets, up 11.1% from $1.8 trillion the previous year.
"The implication from these numbers is that defined benefit plans have realized a significantly higher rate of return . . . so even though defined contribution plans are taking in more money, the value of their assets is not outstripping defined benefit plans," Ms. Coronado pointed out.
Augustus Cheh, global director of investment consulting at PricewaterhouseCoopers LLP, New York, concurred.
"There is definitely more attention to defined benefit plans in terms of asset management, although on the defined contribution side more and more people are looking at asset allocation vs. maybe five years ago," he said.