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State Pensions Keep Lowering Their Return Expectations

The benefit from rising equity markets last year hasn't alleviated pensions' long-term concerns about funding levels, according to Wilshire Associates.

After two straight years of worsening finances, the collective ability of state retirement funds to make good on promised pension payments improved last year as equity markets delivered double-digit returns globally. But over the longer term, they remain worried about delivering high enough returns to meet their needs.

The funded status of state pensions stood at 70.2 percent at the end of June 2017 – a 2.8 percent increase from the prior fiscal year, according to report Monday from Wilshire Consulting, the investment advisory and outsourced chief investment officer business of Wilshire Associates.

Stock market returns were a “primary driver” of the improvement in funding, explained Ned McGuire, a managing director at Wilshire Associates and member of the consulting unit’s pension risk solutions group, in the firm's statement. Strong investment performance helped boost total assets across the 130 retirement systems included in the study to nearly $3.2 trillion – the highest level recorded in the 22 years that the firm has reported on state pension funding, McGuire said.

In spite of these short-term gains, Wilshire analysis showed that state retirement systems remain concerned about their ability to deliver high investment returns in the future. Nearly half of the pensions in the study lowered their discount rates, or long-term return expectations, during the year ending on June 30.

As a result, the median discount rate fell to 7.25 percent, a 25 basis point decline from the end of the 2016 fiscal year.

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The report also detailed asset allocation trends across state retirement systems.

At the end of June, these pension funds had just under half of their portfolios invested in public equities, including an almost 30 percent allocation to U.S. stocks – positions that were relatively the same in 2012. Private equity commitments also remained fairly similar over the five year period, falling slightly to 9 percent in 2017, from 9.8 percent in 2012, according to the report.

Elsewhere, there were fluctuations in pension fund allocations. Real estate investments grew sharply, rising from 7.3 percent to 13.9 percent, Wilshire found. Meanwhile, fixed income allocations fell to 22.8 percent from 26 percent.

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