State Pensions’ Struggles to Meet Obligations Mount

Latest data shows funding ratios drop below 70% since 2010, posting two consecutive years of 4% losses.

The struggle by state-sponsored defined benefit retirement systems to meet their pension obligations became even more intense in  fiscal 2016, according to a new study by Wilshire Consulting.

The estimated funded ratio for 131 retirement systems sponsored by 50 states and the District of Columbia fell to 69% from 73% the prior year.

The drop marks the first time the funding ratio has dipped below 70% since 2010, when the US economy was recovering from a severe recession, and the second year in a row it has dropped by 4%, said Ned McGuire, vice president and a member of the Pension Risk Solutions Group of Wilshire Consulting. Funding levels totaled 77% in 2014 and 73% in 2015.

A weak US stock market and strong dollar over the period of the study, which ended June 30, 2016, weighed on assets. Poor domestic equity performance combined with weaker overseas returns due to currency fluctuations saw assets shrink.

However, a growth in liabilities as assets struggle to keep up has resulted in the significant drop over the past three years.

The study also found that state pension portfolios have, on average, a 64.8% allocation to equities, including real estate and private equity, a 24.7% allocation to fixed income, and a 10.5% allocation to other non-equity assets. The 64.8% allocation is lower than the 68.6% equity allocation from 10 years prior in 2006.

During the decade ending in 2016, the average allocation to US equity and fixed income declined significantly, from 42.3% to 27.4% and 27.2% to 22.3%, respectively. Flows from US equity and fixed income have moved primarily to real estate, private equity, and other assets, including cash, cash equivalents, commodities, hedge funds, and other absolute return strategies.

The study lists possible drivers as rotation out of the relatively efficient US stock and bond markets into less-efficient asset spaces, reducing the home-market bias in fund holdings, increasing asset diversification in an attempt to de-risk the Total Fund, and increasing exposure to more leveraged strategies, such as private market equity, in an effort to meet return targets.

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