There is no connection between asset allocation and the funding level of US state retirement systems, according to Wilshire’s 16th annual survey of the funds, which reported a dire funding situation for 99 per cent of plans.
The consultant’s 2011 Report on State Retirement Systems: Funding Levels and Asset Allocation, estimates that the median fund has an expected return of 6.5 per cent, which is 1.5 per cent less than the current median actuarial interest rate of 8 per cent.
“Using Wilshire’s return forecasts, none of the 126 state retirements systems are expected to earn long-term asset returns that equal or exceed their actuarial interest rate assumption. It is important to note that Wilshire return assumptions represent beta only, with no projection of alpha from active management.”
Wilshire plotted the asset allocation and actuarial funding of the plans it measured and found “no pattern connecting funded ratio to equity exposure”.
“There is almost no correlation between the equity allocation and a plan’s funding ratio when taking into account the effect of outliers. In summary, there is no discernible relationship between asset allocation and funding. State retirement systems show a broad spectrum of asset allocations that appear to be unrelated to the size of their funded liabilities.”
Further, the report found that 99 per cent of the 99 plans with 2010 actuarial data are underfunded. It measured 126 state retirement systems, and estimates the funding ratio for those funds to be 69 per cent, and while that is up from 65 per cent a year earlier, some funds (39) reported the extreme position of having assets less than 60 per cent of liabilities.
Over the past 10 years, there has been a fall in the average exposure to US equity (by 13.9 per cent) and US bonds (by 4 per cent), while exposures to non-US equity and private equity in particular have increased.
“The redeployment of assets over the past decade out of US public markets and into offshore and alternative assets has caused the average state pension plan to move towards a slightly higher expected return and slightly lower risk profile along the efficient frontier,” the report says.
There is a large disparity in the asset allocations between the individual state systems, for example the lowest allocation to US equities is 0 per cent and the highest is 65 per cent. The median allocation to US equities was 31.6 per cent and the median allocation to non-US equities was 17.4 per cent.
Average asset allocation for US state pension plans
| equity | 2000 | 2010 |
| US equity | 45.0% | 31.1% |
| non US equity | 13.0 | 17.5 |
| Real estate | 4.0 | 6.2 |
| Private equity | 3.0 | 8.8 |
| Equity sub total | 65.0 | 63.6 |
| Debt | ||
| US fixed | 31.0 | 27.0 |
| Non-US fixed | 2.0 | 1.5 |
| Other | 2.0 | 2.6 |
| Debt subtotal | 35.0 | 36.4 |
| Return | 6.3 | 6.5 |
| Risk | 10.4 | 10.3 |
