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Risk-on pays for public pension plans

Public pension plans that were more than 75% funded at the end of 2017 saw their funding ratios increase on average 5.1% since 2012; those less than 75% declined 1.2%. Over that period, the over-75% cohort saw their average equity allocation increase 3% and their fixed-income allocation decline 12.6%, while the under-75% group saw changes of 2% and -8% same to their equity and fixed-income allocations, respectively.

Over that period, global equities, as measured by the MSCI World index, were up 11.6% on an annualized total return basis. That would account for some of the increase, but the drop in fixed income suggests that policy allocations also turned in favor of equities as periodic rebalancing would have muted the declines in fixed-income allocations. The Bloomberg Barclays Global Aggregate Bond index was up about 3% over the period.

Also notable were the growth numbers of the groups’ respective private equity allocations: for plans above 75% funded, the average private equity allocation rose 127% in the five years since 2012, while those under 75% increased their allocations about 25%.