SANTA MONICA, Calif.--(BUSINESS WIRE)--The funding ratio of state pension plans rose 2.8 percentage points to 70.2 percent in fiscal year 2017, according to Wilshire Consulting, the institutional investment advisory and outsourced-CIO (OCIO) business unit of Wilshire Associates Incorporated (Wilshire®), a diversified global financial services firm. A year ago, Wilshire Consulting’s annual state funding report uncovered a funding ratio of 67.4 percent, and this year’s increase notably reverses two consecutive years of aggregate funded ratio declines.
The Wilshire 2018 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 130 retirement systems sponsored by the 50 states and the District of Columbia. Of the 130 systems studied, 71 systems reported actuarial values on or after June 30, 2017 and the remaining 59 systems last reported prior to that date. It is Wilshire Consulting’s 22nd report on the funding of state retirement systems.
“A primary driver of the improvement in the funding ratio was the increase in global equity values for the twelve-month period ending June 30, 2017,” noted Ned McGuire, managing director and a member of the Pension Risk Solutions Group of Wilshire Consulting. “In fact, the estimated aggregate asset value is the highest since Wilshire began reporting on state retirement system funding levels.”
Assets vs. Liabilities
According to the report, for the 71 state retirement systems that reported actuarial data for 2017, pension assets grew by over 9 percent to reach $3,170 billion, from $2,901.7 billion in 2016 while the aggregate Total Pension Liability (TPL) increased nearly 5 percent to $4,518 billion, from $4,304 billion in 2017.
Despite the increase in aggregate TPL, the aggregate shortfall is estimated to have decreased by $54 billion to $1,348 billion from $1,402. This decline in the aggregate shortfall is the result of the significant increase in aggregate assets to $3,170 billion from $2,901.7 billion.
Discount rates have trended lower over the past several years. This trend continued this year as nearly half of the plans studied lowered their discount rate. The range for discount rates in 2017 was 4.21% to 8.00% with a median of 7.25%, which is down 25 basis points from 2016.
Asset allocation varies greatly by retirement system. In aggregate, state pension plans had allocations to equity, including private equity, equal to 57.6% in 2017. Allocations to fixed income were equal to 22.8%, with the remaining 19.8% allocated to real assets, alternatives and cash.
The median expected rate of return is estimated to have declined by 25 basis points from 7.50% to 7.25%.
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 conclude a study with data that are both current and consistent across systems. For this reason, our study methodology involves collecting data during the first one and a half months 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.
This study reports on the aggregate Total Pension Liability (TPL) values used for financial reporting under the accounting and financial reporting standards for state and local governments: Governmental Accounting Standards Board Statements No. 67 and 68 (GASB 67/68). Through these Statements, GASB and the financial industry have taken major steps to increase transparency and comparability of pension plan accounting. GASB’s Statement 67, “Financial Reporting for Pension Plans”, impacts the annual pension reporting for plans as of June 2014; Statement 68, “Accounting and Financial Reporting for Pensions”, impacts the annual pension reporting for the employers contributing into government agency-sponsored pensions, and applies to employers’ financial reporting starting in June 2015.
About Wilshire Consulting
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 approximately 49 million 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. Follow Wilshire Consulting on Twitter: @WilshireConsult.
About Wilshire Associates
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 totaling 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 Index℠ is a service mark of Wilshire Associates Incorporated. Please visit http://www.wilshire.com.