21st Report Tracks 131 Retirement Systems
The Wilshire 2017 Report on State Retirement Systems: Funding Levels and Asset Allocation is based upon data gathered by Wilshire Consulting from the most recent financial and actuarial reports issued by 131 retirement systems sponsored by the 50 states and the District of Columbia. Of the 131 systems studied, 103 systems reported actuarial values on or after June 30, 2016 and the remaining 28 systems last reported prior to that date. It is Wilshire Consulting’s 21st report on the funding of state retirement systems.
“U.S. stock performance was low in the fiscal year ending June 30, 2016 while a strengthening U.S. dollar dampened already negative performance of non-U.S. dollar investments,” noted Ned McGuire, vice president and a member of the Pension Risk Solutions Group of Wilshire Consulting. “Ultimately, the net effect was that the difference between pension liabilities and pension assets grew during the fiscal year.”
He added that, “State pension portfolios have, on average, a 64.8 percent allocation to equities, including real estate and private equity, a 24.7 percent allocation to fixed income and a 10.5 percent allocation to other non-equity assets. The 64.8 percent equity allocation is somewhat lower than the 68.6 percent equity allocation from ten years prior in 2006. A more notable trend over the decade has been the rotation out of U.S. equities into other growth assets such as real estate and private equity.”
Assets vs. Liabilities
According to the report, for the 103 state retirement systems that reported actuarial data for 2016, pension assets shrank by -1.8 percent, or $42.8 billion, from $2,392.1 billion in 2015 to $2,349.3 billion in 2016 while liabilities grew 5.4 percent, or $179.6 billion, from $3,355.3 billion in 2015 to $3,534.9 billion in 2016. These 103 plans saw their aggregate shortfall, or net pension liability, increase $222.4 billion over fiscal 2016 from -$963.2 billion to -$1,185.6 billion.
For the 131 state retirement systems that reported actuarial data for 2015, pension assets and liabilities in that year were $3,074.7 billion and $4,188.2 billion, respectively. The funding ratio for these 131 state pension plans was 73 percent in 2015. For the 103 state retirement systems that reported actuarial data for 2016, pension assets and liabilities were $2,349.3 billion and $3,534.9 billion, respectively. The funding ratio for these 103 state pension plans was 66 percent in 2016, down from 71 percent for the same plans in 2015.
Of the 103 state retirement systems that reported actuarial data for 2016, 97 percent have market value of assets less than pension liabilities, or are underfunded. The average underfunded plan has a ratio of assets-to-liabilities equal to 66 percent. In comparison, of the 131 state retirement systems that reported actuarial data for 2015, 94 percent were underfunded. The average underfunded plan in FY2015 had a ratio of assets-to-liabilities equal to 72 percent.
Asset allocation varies greatly by retirement system. Sixteen of 131 retirement systems have allocations to equity that equal or exceed 75 percent, and 11 systems have an equity allocation below 50 percent. The 25th and 75th percentile range for equity allocation is 60.0 percent to 71.4 percent.
Wilshire forecasts a median expected 10-year plan return equal to 6.4 percent per annum, which is 1.1 percentage points below the median actuarial interest rate assumption of 7.5 percent. Wilshire’s assumptions range over a conservative 10+ year time horizon, while pension plan interest rate assumptions typically project over 20 to 30 years. Using Wilshire’s 30-year long-term asset class assumptions, the median expected return would be 7.4 percent.
Financial data on public retirement systems historically have lacked the timeliness and uniform disclosure governing pension plans sponsored by publicly traded companies, making it difficult to conduct a study with data that are both current and consistent across systems. For this reason, our study methodology involves collecting data during the first quarter of each calendar year with the objective of acquiring as many reports as possible with a June 30 valuation date from the previous year. Even for systems with the desire to report in a timely manner, it often takes six months to a year for actuaries to determine liability values.
Wilshire Consulting, the institutional investment advisory and outsourced-CIO (OCIO) business unit of Wilshire Associates, has provided custom investment consulting solutions to fund sponsors for 35 years. Through its investment consulting services to public and corporate clients, Wilshire Consulting assists in ensuring secure and safe retirements for millions of Americans including those participating in some of the nation’s largest public and corporate retirement plans. Combined with its endowment, foundation and major insurance company clients, it consults on combined total assets of nearly $1 trillion.
Wilshire consultants advise public and corporate clients on asset allocation, risk management, investment policy development, asset class structuring, investment manager evaluation and monitoring, and actuarial services. Wilshire OCIO Solutions offers clients a holistic option that includes full discretionary services or implemented services where plans outsource their back office.
Wilshire Associates, a leading global, independent investment consulting and services firm, provides consulting services, analytics solutions and customized investment products to plan sponsors, investment managers and financial intermediaries. Its business units include Wilshire Analytics, Wilshire Consulting, Wilshire Funds Management and Wilshire Private Markets.
The firm was founded in 1972, providing revolutionary technology and acting as an early innovator in the application of investment analytics and research to investment managers in the institutional marketplace. Wilshire also is credited with helping to develop the field of quantitative investment analysis that uses mathematical tools to analyze market risks. All other business units evolved from Wilshire’s strong analytics foundation. Wilshire developed the Wilshire 5000 Total Market IndexSM and became an early innovator in creating integrated asset/liability analysis/simulation models as well as practical models in risk budgeting through beta and active risk analysis. Wilshire has approximately 300 employees serving the needs of investors around the world.
Based in Santa Monica, California, Wilshire provides services to clients in more than 20 countries representing more than 500 organizations with assets totalling approximately US $7 trillion.* With ten offices worldwide, Wilshire Associates and its affiliates are dedicated to providing clients with the highest quality counsel, products and services. Wilshire® is a registered service mark of Wilshire Associates Incorporated. Wilshire 5000 Total Market Indexâ is a service mark of Wilshire Associates Incorporated.
*Client assets are as represented by Pensions and Investments, detailed in P&I’s “Largest Retirement Funds” and P&I’s “Largest Money Managers (U.S. institutional tax-exempt assets)” as of 9/30/15 and 12/31/15, and published 2/8/16 and 5/30/16, respectively.