State pension plans’ funding ratio drops 4% in fiscal year 2016

The funding ratio of U.S. state pension plans dropped to 69 percent in fiscal year 2016, according to Wilshire Consulting. It is a 4 percent decrease from last year when Wilshire Consulting’s annual state funding report uncovered a funding ratio of 73 percent.

“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,” said Ned McGuire, vice president and a member of the Pension Risk Solutions Group of Wilshire Consulting. “The 64.8 percent equity allocation is somewhat lower than the 68.6 percent equity allocation from 10 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.”

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 fiscal year 2015 had a ratio of assets-to-liabilities equal to 72 percent.

In addition, 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.

Asset allocation varies greatly by retirement system as well. 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. Using Wilshire’s 30-year long-term asset class assumptions, the median expected return would be 7.4 percent.