The average funding ratio of state defined benefit plans has fallen to its lowest level in two decades, according to a new report by Wilshire Consulting.
The report, which examined data from 125 plans, estimates the asset-to-liability ratio dropped to 65% in 2009, the lowest since Santa Monica, Calif.-based Wilshire began analyzing the data in 1990. Fifty-seven of the plans examined by Wilshire had reported data as of June 30, 2009, or later, while 68 plans last reported their financial status prior to that date.
The 65% ratio is down 20 percentage points from 2008, when Wilshire estimated the average funding ratio at 85%.
The Wilshire report is bound to add fuel to the debate over state pension funding, with states already saddled with revenue shortfalls.
Steve Foresti, managing director with Wilshire Associates, said even with future robust results on their investments, it is unrealistic to expect state plans to significantly improve their funding ratio to make up for bear markets at the beginning and end of the decade.
The report noted that it was important to view the data in the context of the depressed market level of June 30, 2009, when many plans reported their data. Global equity markets have rallied 19% in the eight months through Feb. 28, so funding ratios would have been higher if the expanded period had been considered.
However, Mr. Foresti said there would still be a significant funding ratio deficit even if the rally were taken into account. He said his crude estimate would put the ratio for public defined benefit plans around 72% as of Jan. 31.
Given that estimate, he says public defined benefit plans would need to add about $1 trillion to the current $2 trillion in total assets to achieve full funding.
“This gives you a sense of the size of the deficit,” he said.
The Wilshire report forecasts a long-term median plan return of 6.9% annually, 1.1 percentage points below the median actuarial interest rate assumption of 8%.
“There is a big hole that needs to be made up,” said Mr. Foresti, one of the report's authors. “The prudent and least disruptive way to get back to fully funded status is to increase the level of funding over time.”
The report found none of the 125 state retirement systems studied was expected to earn long-term asset returns equal to or exceeding their actuarial interest rate assumptions.
“This is a dramatic change compared to the 23 state retirement systems that were expected to earn long-term returns that equaled or exceeded their actuarial rate assumption” last year, the Wilshire report said.
For the 57 retirement plans that reported actuarial data as of June 30 or later, pension assets declined by 21.4% to $643.3 billion from $818.6 billion as of June 30, 2008. During the same period, liabilities jumped to $446.9 billion for the 57 plans from $214 billion, the report said.
All of those 57 plans were underfunded, the report said. Of the 57, four plans had funding ratios less than 50%; nine plans had funding ratios of 50% to 60%; 14 plans, 60% to 70%; 11 plans, 70% to 80%; 15 plans, 80% to 90%; and four plans, 90% to 100%.
The Wilshire report also examined asset allocation. It found that plans on average had a 66.8% allocation to equities — including real estate and private equity — and a 33.2% allocation to fixed income. The 66.8% equity allocation was slightly lower than the 67% allocation in 2004, when Wilshire previously examined asset allocation data, the report noted.
But the report also found that asset allocations varied widely, with 13 of the 125 retirement systems holding at least 75% in equities while five systems had less than 50% in equities.
Wilshire used the asset allocation to calculate the potential returns for pension plans.
