Assets of top funds up 6.2% to $9.4 trillion

Positive market returns for all major asset classes helped boost assets for the 1,000 largest U.S. retirement plans to $9.39 trillion as of Sept. 30, up 6.2% from 12 months earlier, Pensions & Investments' annual survey found.

During the survey period, defined benefit plans in the top 1,000 saw assets rise 4.9% to an aggregate $6.12 trillion, while defined contribution assets rose 8.6% to $3.28 trillion.

Among the 200 largest retirement plans, assets totaled $6.79 trillion as of Sept. 30, up 6.2% from the year earlier. Of this, $4.83 trillion belonged to DB plans (up 5.5%) and $1.96 trillion to DC plans (up 8%).

The current survey showed a large gap between the number of corporate and public funds reporting double-digit asset growth. Twenty-five of the 100 corporations in the top 200 saw their assets grow by 10% or more, while only four of the 77 public plans did. (The remaining funds are union or miscellaneous plans.) Consultants cited the generally longer duration of corporate pension funds' fixed-income programs as the reason for that outperformance.

For the 12 months ended Sept. 30, the Bloomberg Barclays U.S. Long Government/Credit Bond index returned 14.66%, almost 10 percentage points above the Bloomberg Barclays U.S. Aggregate Bond index, which returned 5.19%.

“Public plans work under a different regulatory environment where essentially (they) are focused on total return in a portfolio,” said Sona Menon, Boston-based head of North American pensions at Cambridge Associates LLC. Public pension funds are more likely to invest in fixed income through core bonds, while corporate plans, which tend to follow a liability-driven investing approach, would hold more longer-duration bonds, she said.

Corporate funds in Callan Associates Inc.'s database returned a median 10.22% for the year ended Sept. 30, and public pension funds, a median 9.63%, said Jay V. Kloepfer, executive vice president and director of capital markets at Callan Associates Inc. in San Francisco.

While long-duration fixed income was a strong performer during the survey period, it was surpassed by the Russell 3000, up 14.96% for the 12 months ended Sept. 30.

Other market returns for the year ended Sept. 30 included the MSCI EAFE index at 3.48%; MSCI Emerging Markets index, 14.07%; Bloomberg Barclays Global Aggregate ex-U.S. bond index, 11.67%; NCREIF Property index, 9.23%; Cambridge Private Equity index, 8.8%; and the HFRI Fund Weighted Composite index, 4.95%.

Had P&I's survey included the fourth quarter of 2016, the difference between corporate and public funds' performance might not have been as stark, consultants said. Dragged down by rising interest rates, the Bloomberg Barclays U.S. Long Government/Credit index returned -2.98% in the quarter ended Dec. 31, and the Bloomberg Barclays U.S. Aggregate, -7.84%.

The average asset allocation of the 200 largest plans showed the continued divergence between corporate and public pension plans' domestic fixed-income allocations.

As of Sept. 30, corporate defined benefit plans within the top 200 had an average domestic fixed-income allocation of 38.8% and public funds, 20.5%. A year earlier, the allocations were 34.6% for corporate and 21.3% for public funds.

The rest of the average asset allocation for corporate pension funds in the top 200 showed a slight decline in growth-oriented assets: 19.7% domestic stock (from 21.6%); 13.2% international stock (vs. 13.7%); 7.5% alternatives (8.5%); 5.8% private equity (6.6%); 5.4% global equity (4.7%); 5% real estate equity (5.3%); 3.1% cash (2.3%); 0.8% global/international fixed income (1.2%); and 0.7% other (1.5%).

Jon Pliner, New York-based director at Willis Towers Watson PLC, cited LDI glidepaths as a possible reason for this decrease. The public equity decrease could also be reflection of increased focus on diversifying risk away from public equities in the growth portion of their portfolios, he said.

Defined benefit plans in the top 200 overall reported $97.1 billion in LDI investments as of Sept. 30, up 18.8% from a year earlier.

Russell Ivinjack, a senior partner at Aon Hewitt Investment Consulting in Chicago, added that fixed income's strong performance over the period also could be why corporate plans showed a boost in their fixed-income allocations.

For public funds, the remainder of the average asset allocation for DB plans in the top 200 was 27.9% domestic stock (unchanged from 2015); 19.1% international stock (18.5%); 9% private equity (9.4%); 8.3% real estate equity (8.5%); 6.5% alternatives (6.1%); 2.7% global equity (2.8%); 2.4% other (1.8%); 2% global international/fixed income (unchanged); and 1.6% cash (1.7%).

Aside from the increased focus on liability-driven investing, another trend among corporate DB plans has been moving toward more globally focused equity portfolios by hiring dedicated global equity managers or reducing overweights to domestic equity, Mr. Pliner said.

According to Callan's Mr. Kloepfer, both corporate and public pension funds have been moving toward a more global footprint over the past three years. DB plans in the top 200 reported an average global equity allocation of 4.6% in 2016, up from 3.3% in 2013.

Another area that has seen increased interest from both corporate and public pension funds in the past three to five years has been private credit, consultants said. “In this environment, investors are looking for current income ... but fixed income is not as attractive a source as it used to be, because of where rates are,” Ms. Menon said.

Mr. Ivinjack added the current low interest-rate environment has public pension funds looking at alternative investments. “Public pension plans are total return investors trying to earn returns of 6.5%, 7.5%, 8% (or more) over the long term, and with interest rates so low, they have to moveinto new areas to meet those return expectations. And instead of adding money into equities, they are moving into an array of alternative investments,” he said.

On the defined contribution side, DC plans are continuing to gain ground among the top 200 and 1,000. Defined contribution assets accounted for 28.9% of the total top 200 assets in this year's survey, up from 28.4% in 2015. Among the top 1,000, DC assets accounted for 34.93% of the total, up from 34.16% in 2015 and 30.4% in 2012.

Consultants said the increase in DC assets was unsurprising given many corporations are closing or freezing their DB plans and moving workers into DC plans.

Corporate DB and DC assets in the top 200 totaled $1.2 trillion and $1.82 trillion, respectively, in 2016, up from $1.14 trillion and $1.1 trillion in 2015. Mr. Ivinjack said strong U.S. equity performance over the survey period could also have contributed to the increase, as target-date funds and U.S. equity fund options “have a majority of DC participant assets.”

The ranking of the 10 largest retirement plans remained unchanged from last year.

The Federal Retirement Thrift Savings Plan, Washington, continued to occupy the No. 1 spot with $485.58 billion in assets as of Sept. 30, up 9.5% from the year earlier. It has ranked first since 2009, when it outpaced CalPERS.

The California Public Employees' Retirement System, Sacramento, came in second with $306.63 billion in assets, up 7.3% from the previous year.

Rounding out the top five were the California State Teachers' Retirement System, West Sacramento, up 6.6% to $193.87 billion; New York State Common Retirement Fund, Albany, increasing 6.3% to $184.46 billion; and the New York City Retirement Systems, at $171.57 billion, up 10.6%.

The largest corporate retirement plan remains Chicago-based The Boeing Co. with $107.38 billion in total assets, up 5.3%, and ranking eighth overall.

The largest union plan remains the $37.24 billion Western Conference of Teamsters Pension Trust, Seattle, holding relatively steady from its $36.91 billion in assets a year earlier. It ranks 45th overall.

Other findings from P&I's survey, focusing on defined benefit assets in the top 200, include:

• Employer contributions declined 5.6% to $107.1 billion total, while benefits paid fell 5.1% to $231.4 billion total. Broken out by employer type, corporate employer contributions totaled $10.6 billion, down from $14.8 billion in last year's survey. Public employer contributions totaled $85.4 billion, down from $89.5 billion.


• DB plans in the top 200 reported $783.5 billion in passive indexed equity as of Sept. 30, down 3.7% from 2015; while enhanced equity rose 9.1%.


• In fixed income, defined benefit assets in both passive and enhanced index strategies fell, 10.3% and 6.2%, respectively.
  


• Among active strategies, active domestic equity assets fell 3%; active domestic bonds dropped 2.7% and active international equity dipped 1.4%. Defined benefit assets in active global/international bond strategies increased 16.5%.
  


• Defined benefit plans within the top 200 reported $1.09 trillion in internally managed assets as of Sept. 30, a 5.7% increase from 2015.
  


• The majority of the assets continue to be invested in separate accounts (72.2% vs. 72.1% in 2015), followed by commingled vehicles, 26.2% (26.3%); mutual funds, 1.4% (1.3%); and exchange-traded funds at 0.2% (0.3%).