The funding ratio of 131 state defined benefit plans rose 6 percentage points to 80% in fiscal year 2014, said a report from Wilshire Consulting.
Wilshire attributed the funding increase to strong global equity and fixed-income performance, which outdistanced the growth in pension liabilities.
For the 92 state retirement systems that reported actuarial data on or after June 30, pension assets grew to $2.05 trillion, a 13.7% increase over the previous year. Liabilities for the plans totaled $2.67 trillion, an increase of 4.7%. On how 2014 funding levels compare to other years, Russell J. Walker, Wilshire vice president and co-author of the report, said state pension plans have “covered a lot of ground” and “are doing well.”
Mr. Walker called an aggregate 80% funding ratio “fairly healthy … considering where we have come from.” In 2009, the plans had an aggregate funding ratio of 64%, down from 81% the previous year.
That being said, “We’re now entering an environment where it’s going to be challenging for these institutions to manage assets in what is looking like a lower-return environment,” Mr. Walker said in a telephone interview, adding that bond yields are near “historic lows” and interest rates are essentially zero.
On asset allocation, the report showed a continued movement out of U.S. equities and into other growth assets like non-U.S. equities, real estate and private equity, Mr. Walker said.
The average allocation to U.S. equities in 2014 was 27.9%, compared to 44.5% in 2004, while the average non-U.S. equity allocation was 21% in 2014, up from 14.4% in 2004. During the same period, the average allocation to private equity increased to 10.1% from 4.3% and real estate increased to 7.2% from 3.8%. The average allocation to domestic fixed income during the period fell to 21.4% from 29.1%, while the average non-U.S. fixed income allocation rose to 2.1% from 1.3% in 2004.
In 2009, the plans reported an average asset allocation of 34.7% U.S. equity, 27.1% U.S. fixed-income, 18.2% non-U.S., equity, 7.4% private equity and the remainder in other debt strategies.
The “Wilshire 2014 Report on State Retirement Systems: Funding Levels and Asset Allocation” also used data from 39 state retirement systems reporting actuarial data before June 30, 2014.