SANTA MONICA, Calif. — The funded status of state retirement systems improved seven percentage points in 2007, according to Wilshire Associates’ annual state pension plan funding and asset allocation report expected to be released March 6.
Wilshire estimated the aggregate asset-to-liability ratio of the 125 plans studied at 95% as of June 30, 2007, up from 88% a year earlier.
The same plans were 95% funded in 2001 before slipping to 81% in 2002 and 2003, according to the report.
It remains to be seen whether funding ratio increases in 2007 will hold, because fiscal years ended June 30, just before equity returns began falling. “If we had the luxury of having instantaneous information … I don’t think there’s any question we’d see a deterioration of the 95% level of ’07,” said Steven J. Foresti, managing director at Wilshire and one of the study’s authors.
State pension plan portfolios allocated 68.9% to equities (including real estate and private equity) and 31.1% to fixed income on average in 2007, the report says. Wilshire estimated a median long-term annual return of 7.6% on assets, 40 basis points behind the median actuarial interest rate assumption of 8%.
Of the 125 plans tracked, 56 were analyzed using 2007 data, 60 with 2006 data and nine using 2005 data.
Aggregate assets of the 56 plans rose 14.7%, or $118.3 billion, to $924.2 billion in 2007. Liabilities increased 6.8%, or $64.3 billion, to $1.01 trillion.
Three-fourths of the 56 plans with current were underfunded using market-value assets, with an aggregate funding ratio at 82%. Almost 68% of those plans were at least 80% funded, with just three plans less than 60% funded. The 14 plans with assets greater than liabilities had an aggregate funding ratio of 113%.
Using actuarial-value assets, 87.5% of plans were underfunded.
State plans have seen a “fairly dramatic shift in asset allocation” in the past five years, Mr. Foresti said. Overall equity allocations rose 7.9 percentage points in the average state pension plan to 68.9% of total assets from 61% in 2002; non-U.S. equity grew 5.5 points, to 18.2% of total assets in the same period. Domestic bond allocations lost 5.1 points, dropping to 26.4% in 2007 from 31.6% of assets in 2002.
Other allocations were: 41% U.S. equity, 5.2% real estate, 4.6% private equity, 0.9% non-U.S. bonds and 3.7% “other.”
Asset allocations varied widely among the plans. Thirty-eight of the 125 pension systems allocated at least 75% to equities, while three allocated less than half of their assets to equities. The 25th to 75th percentile range for equity allocations was 63.8% to 75%.
The move toward greater equity allocations increased risk more than it did rewards, according to the report. Returns increased 30 basis points, from 7.3% in 2002 to 7.6% in 2007, while risk — a measure calculated by Wilshire — rose 1.2 percentage points, to 11.1% in 2007.
“Only time will show” whether the decisions to increase risk in state pension investments will pay off, Mr. Foresti said. “All things being equal … you’d expect (future) returns to be more volatile than in the past.” The same goes for funding ratios, he said. However, most plans have diversified their equity allocations with private equity, real estate and non-U.S. equity exposures.
Wilshire forecasts that just 21 of the 125 state pension systems, or 16.8%, will meet or exceed their actuarial interest rate assumptions. “This is down noticeably from the 30 state retirement systems” expected in the 2006 report, the report states.
Predicted returns ranged from 5% for the lowest state plan to 8.2% for the highest.
