"Despite relatively strong performance from U.S. stocks, both an increase in interest rates in the second quarter of 2015 and a stronger U.S. dollar weakened performance of fixed income and non-U.S. dollar investments during the year, allowing pension liabilities to outpace pension assets in 2015," noted Russ Walker, vice president, Wilshire Consulting, and an author of the report. "With that, we found that out of the 99 city and county retirement systems that reported actuarial data for 2015, 93% are underfunded with market value of assets less than pension liabilities."
For the 99 city and county retirement systems that reported actuarial data for 2015, pension assets grew by 0.4%, or $1.9 billion, from $451.1 billion in 2014 to $453.0 billion in fiscal 2015, while liabilities grew 5.9%, or $35.7 billion, from $600.5 billion in 2014 to $636.2 billion in 2015. These 99 plans saw their aggregate shortfall increase $33.7 billion over fiscal year 2015 from -$149.5 billion to -$183.2 billion.
"On average, city and county pension portfolios have a 63.9% average allocation to equities, including real estate and private equity, and a 36.1% allocation to fixed income and other non-equity assets," Walker added. "This equity allocation is slightly lower than the 67% equity allocation a decade prior in 2005. However, asset allocation varies by retirement system. Thirty-three of the 109 retirement systems have allocations to equity that equal or exceed 75%, and 9 systems have an equity allocation below 50%."
Wilshire forecasts a median return on city and county pension assets equal to 6% per annum. This 6% estimate is 1.5% below the median actuarial interest rate assumption of 7.5%. It's important to note that Wilshire's standard asset class assumptions range over a conservative 10+-year time horizon, while pension plan interest rate assumptions typically project over 20 to 30 years. Using Wilshire's 30-year long-term asset class assumptions, the median estimated return would be 7.3%.
About Wilshire Consulting
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.
As the institutional investment advisory and outsourced-CIO (OCIO) business unit of Wilshire Associates, Wilshire Consulting has provided custom investment consulting solutions to plan sponsors for 35 years. Wilshire consultants provide strategic advice on critical strategic advice including asset allocation, risk management, investment policy development, asset class structuring, investment manager evaluation and monitoring, and actuarial services.
Wilshire Consulting's OCIO practice offers clients a holistic option that is built on our culture of risk management and our expertise in all areas of investment strategy. Wilshire Consulting's customized OCIO services include full discretionary services or implemented services where plans outsource their back office.
Built on Wilshire Associates' foundation in investment analytics, Wilshire Consulting offers clients access to and use of innovative and proprietary risk management consulting, which provides us a meaningful competitive advantage. Consulting clients can benefit from ex-ante, forwarding looking risk analysis at the manager, asset class and total fund levels. Wilshire's global footprint and firm wide expertise in hedge funds, alternative risk premia and private markets allows our clients to effectively consider adding, expanding or modifying an alternatives investment program. 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, Calif., Wilshire serves over 500 clients across 20 countries with combined assets exceeding $7 trillion*. With 10 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 IndexSM is a service mark of Wilshire Associates Incorporated. Please visit http://www.wilshire.com.
*Client assets are as represented by Pensions and Investments, detailed in P&I's "Largest Retirement Funds" and P&I's "Largest Money Managers (U.S. institutional tax-exempt assets)" as of 9/30/15 and 12/31/15, and published 2/8/16 and 5/30/16, respectively.
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SOURCE Wilshire Associates