Health-care plan performance falls in 2004

WILTON, Conn. — Returns of the pension plans and operating funds of U.S. non-profit health-care organizations were significantly lower in 2004 than in 2003, according to a new survey by Commonfund, Wilton.

The average defined benefit plan return of the 120 non-profit health-care entities that provided return information was 10% in 2004, compared with 18.1% in 2003, according to Commonfund. The average three-year annualized return of defined benefit plans was 6.9% as of Dec. 31 and 4% for the five-year period. The average actuarial assumption of sponsors of non-profit health-care companies defined benefit plans is 7.7% for 2005, a drop from 8.1% for 2004.

The average asset allocation of health-care defined benefit plans changed very little from 2003 to 2004. The average domestic equity allocation dropped to 47% in 2004 from 48% in 2003; fixed income dropped to 28% from 29%; international equity grew to an average of 15% from 13%; and alternative investments and cash/short-term securities remained constant at 9% and 1%, respectively.

But changes within individual asset classes were more marked. For example, for domestic equity, the average allocation to active large-cap stocks rose 10 percentage points to 65% in 2004, compared with the previous year, according to Commonfund data. The average allocation to midcap stocks rose to 18% from 10%, while the average investment in small-cap stocks dropped to 6% from 10%. The average allocation to indexed equities dropped to 11% from 20%.

While the overall allocation to alternatives, on average, didn't change from 2003 to 2004, Commonfund researchers found that sponsors moved assets around quite a bit within the broad category, especially from private equity into hedge funds.

The average allocation to marketable alternatives/hedge funds, for example, rose to an average of 68% in 2004, up from 63% in 2003, as the average allocation to private equity dropped to 5% from 10%. Venture capital allocations also dropped an average of three percentage points to 2%. Equity real estate allocations rose to an average 11% from 9%; REITs dropped to 5% from 7%; energy and natural resource allocations rose to 8% from 5%; and distressed debt investments remained constant at 1%.

About one-third (31%) of those health-care organizations interviewed by Commonfund said they invest in hedge funds via funds of funds. Entities with assets of more than $1 billion invest about 82% of their hedge fund allocation through funds of funds, compared with 100% for funds with assets between $50 million and $100 million. About three-quarters (72%) of survey respondents said they invest in multistrategy hedge funds, 51% invest in absolute-return strategies, and 49% said they invest in long-short equity strategies.

About one-third of larger defined benefit plan sponsors (those with more than $1 billion in assets) also said they expect to further increase their allocations to alternatives in 2005.

The average international equity allocation changed little between 2003 and 2004 for defined benefit plans of the organizations surveyed. The average allocation to actively managed mandates was static at 86%; the average allocation to passive mandates based on the Morgan Stanley Capital International Europe Australasia Far East ex-U.S. index dropped to 7% from 8%; and the allocation to emerging markets rose to 7% from 6%.

As for the companies' $91 billion in operating funds, 8.2% was the average 2004 return, compared with 14.1% in 2003. Average three- and five-year annualized returns as of Dec. 31 were 6.3% and 4%, respectively. The average actuarial assumption for 2005 is 5.5%.

The 2005 Commonfund Benchmarks Study surveyed 197 non-profit health-care entities domiciled in the United States with $37 billion in defined benefit plan assets and $91 billion in operating funds.