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Wilshire paints dire picture for state retirement systems

Wilshire Consulting’s annual report on US state retirement systems reveals near-universal underfunding, leavened only slightly by the 19.5 per cent rally in global equity markets in the eight months since its cut-off date.

Of the 57 state retirement systems that reported actuarial data to June 30, 2009, every single one had a market value of assets less than their pension liabilities. The average of these underfunded plans had a ratio of assets-to-liabilities of just 58 per cent.

Wilshire estimated that the pension asset-to-liabilities ratio of all 125 state pension plans in its survey was 65 per cent in 2009, down “sharply” from an estimated 85 per cent in 2008.

However the consultancy stressed that the lag caused by the time it took actuaries to calculate a plan’s liabilities made the situation look worse than it would now be.

“It is important to view the latest published funding ratios in the context of depressed market levels as of June 30, 2009. Since then, global equity markets have rallied 19.5 per cent in the eight months through February 26, 2010, which we would expect to result in higher funding ratios today if the funding data were available in real-time.”

A gradual reduction in the state systems’ home country bias was affirmed by the Wilshire report.

During the last nine years, the average allocation to non-US equities increased from 13 per cent to 18.2 per cent, while allocations to US bonds decreased from 31 per cent to 27.1 per cent.

Average allocation to both real estate and private equity increased slightly. An average 4 per cent allocation to real estate in 2000 rose to 6.5 per cent across the 125 plans by 2009, while the average private equity exposure more than doubled from 3 per cent to 7.4 per cent.

“As expected, the increased allocation to equities and away from debt from 2000 to 2009 has caused the average state pension plan to move towards a slightly higher expected return and risk allocation along the efficient frontier,” the Wilshire report authors wrote.

“Increased allocations to real estate and private equity from 2004 to 2009 provided slightly increased return and lower risk for the average state plan.”

Wilshire found that the median state pension fund had an expected long-term return of 6.9 per cent, which is 1.1 per cent less than the current median actuarial interest rate used to determine ongoing liabilities.

“Under Wilshire’s return forecasts, none of the 125 state retirement systems are expected to earn long-term asset returns that equal or exceed their actuarial interest rate assumption. This is a dramatic change compared to the 23 state retirement systems that were expected to earn long-term returns that equalled or exceeded their actuarial interest rate assumption in last year’s report,” the authors wrote.

The report did point out that Wilshire’s assumed returns for each asset class gave no consideration to the potential value added by successful active management.

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