US State Pension Funding Rebounds on Stock Gains, Wilshire Says

US state pension funding levels have rebounded, boosted by a rally in domestic and international stocks in the first half of 2023.

(Bloomberg) — US state pension funding levels have rebounded, boosted by a rally in domestic and international stocks in the first half of 2023.

The gains left state pensions with assets sufficient to cover 78.2% of promised benefits as of June 30 — when most states end their fiscal year —- up from 75.4% a year ago, pension consulting firm Wilshire estimated.

Stocks surged in the first six months of 2023, as US job growth remained solid and inflation moderated. The FT Wilshire 5000 Index, which tracks the broad US stock market, returned 19% for fiscal 2023. Global stocks, as measured by the MSCI ACWI, rose 16.5%. The gains should power US public pension’s fiscal year returns to as much as about 10%, according to June 27 report from Moody’s Investors Service.

That performance marks a turnaround from last year, when public pensions lost a median 7.9% before fees for the year ending June 30, the worst since 2009, when recession fears and surging inflation hammered both bonds and stocks.

Government retirement systems, which count on annual gains of 7% on average to cover all the benefits promised to retirees, allocate most of their assets to riskier investments that promise higher returns but also expose them to more volatility.

Wilshire assumed state funds allocated 31% of assets to U.S. stocks, 14% to international equities, 23% to US investment grade bonds, 15% to real estate, 13% to private equity and 4% to US high yield bonds.

In addition to favorable stock markets, some states with historically weak pension contributions such as Connecticut, Kentucky and New Jersey have bolstered payments to their retirement systems, Moody’s said.

Connecticut expects to transfer $2.1 billion of reserves into its pensions at the end of the current fiscal year, bringing extra payments to its underfunded pension to $7.8 billion under Governor Ned Lamont.

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