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.
Wilshire Consulting is the institutional investment consulting and outsourced CIO unit of Wilshire Associates.
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.