Public defined benefit plans had some good news in the latest Federal Reserve report, but muted numbers for corporate retirement plans — especially defined contribution plans — raised more questions than answers.
According to the Federal Reserve's Financial Accounts of the United States report issued June 6 — formerly known as Flow of Funds Accounts — state and local government pension assets rose 6.81% in the first quarter to reach $3.41 trillion. The report now excludes public defined contribution plans; they will be included in the future.
U.S. corporate retirement plan assets rose just 2.78% in the quarter, to $6.82 trillion. Defined benefit plan assets totaled $2.57 trillion, up 0.73% from the previous quarter, and defined contribution plans had $4.26 trillion in assets, an increase of 4.06%.
The real story, according to plan experts, was the level of net asset flows. A modest $4.4 billion in net asset inflows for defined contribution plans was a surprise in light of strong market returns. “I would expect that to be a lot bigger,” said Tim Barron, chief investment officer of investment consultant Segal Rogerscasey, Darien, Conn.
Comparing the 4.06% increase in defined contribution assets to a typical return of 5% based on a composite portfolio tracked by J.P. Morgan Asset Management, “it appears that they underperformed the market,” said Mr. Barron. “If that is a trend, it would be disappointing. If defined contribution is going to replace defined benefit, this pattern has to be continuously on the upswing.”
“That number jumped out at me,” said Bob Collie, chief research strategist for Russell Investments' Americas institutional unit, Seattle. By contrast, the $195.3 billion decrease in corporate defined benefit assets for the quarter was expected, as plan sponsors freeze or close their plans or adopt derisking strategies. “This is strongly pointing to defined benefit peaking,” said Mr. Collie. “At some point, it's going to start going down.”
Equities in corporate pension plans stood at $2.28 trillion, up 5.17% from the previous quarter and an increase of 7.7% from the first quarter of 2012. Bonds decreased 5.79% in the latest quarter to $339.7 billion, a drop of 16.15 % from a year earlier.
On the public plan side, the latest Federal Reserve data “show that state and local government retirement fund assets have rebounded since the financial crisis,” said Paul Zorn, director of governmental research for actuarial firm Gabriel, Roeder, Smith & Co., Southfield, Mich. The $3.41 trillion recorded for the quarter was the highest ever reported by the Federal Reserve. Of that, $2.19 trillion came from corporate equities, which increased 10% in the first quarter and 72% from the end of 2008. “While the past does not predict the future, these numbers are currently good news for state and local retirement plans,” said Mr. Zorn.
State and local government defined benefit fund assets in the first quarter rose 6.81% from the previous quarter and 9.02% over the first quarter of 2012. Federal government retirement fund assets were $1.61 trillion in the first quarter, up 18.26% from the previous quarter and 6.47% higher than the year-earlier number.
Combining public plan outflows and net asset increases “would mean they had a return around 8%,” said Mr. Barron of Segal Rogerscasey. “They seemed to have outperformed the market.” But cash flow is down $63.2 billion for the quarter, meaning “they're not putting money in that they're supposed to,” he said.
Keith Brainard, research director for the National Association of State Retirement Administrators, Georgetown, Texas, said the data show public pension funds “continue to recover. Since roughly half of public pension fund assets are invested in equities, we're likely to see an increase in public pension fund asset values. While we are gratified to see the increase in the first quarter, our focus always remains on the long term. The report provides a 50,000-foot view of what we're seeing on the ground.”
The most interesting number to David J. Ordoobadi, managing director at investment outsourcing firm Strategic Investment Group, Arlington, Va., is the $70.3 trillion net worth of households.
“In the course of the last five years, it's gone from $67.4 trillion in the third quarter of 2007 and then fell to a low of $51.4 trillion in the crisis. We're back to a pre-crisis peak,” largely because of gains in equities and, to a lesser extent, real estate, he said.
“The best news is that we're making progress in deleveraging. We hope that spending will encourage corporations to invest and hire, and hopefully lead the recovery,” said Mr. Ordoobadi. “That tells us what we can expect for growth.”