Pension "Death Spiral" Crisis Reaching Fever-Pitch In The US
Pensions
across the U.S. are falling deeper into a crisis, as the gap between
their assets and liabilities widens at the same time that investment
returns are falling, according to Bloomberg.
Chief Investment Officer Ben Meng told the board of the California Public Employees’ Retirement System last week: “For the next 10 years, our expected returns are 6.1%, not 7%.” And if you think you've seen panic now, just wait until he finds out that Calpers' target of 7% - lowered in 2016 - is still a pipe dream.
Put simply: the record, decade long bull market hasn't been enough to
save pensions. The average U.S. plan has only 72.5% of its future
obligations in 2018, compared to more than 100% in 2001. The Center for
Retirement Research at Boston College attributes the deficit to
"recessions, insufficient government contributions and generous benefit
guarantees."
Jean-Pierre Aubry, associate director said: “The really bad plans went heavily out of equities after the financial crisis.”
Pensions that aggressive bet on stock outperformed funds that moved
money into alternative investment vehicles, like hedge funds.
Andrew Junkin, president of Wilshire Consulting, said: “Sometimes diversification, while it’s the right strategy, makes you look dumb.”
And this success isn't a guarantee in the future, either.
Phillip Nelson, asset-allocation director at pension advisory firm
NEPC said: “The discussion we have internally is over the next ten years
is do you see an equal amount of Fed support and profit margins
increasing by another 50% from this level? Both seem really unlikely to
us.”
Public pensions have increased their exposure to PE to 10.2% on
average in 2018. This is up from 5.6% in 2008, a trend that will
probably continue. Many pension funds, like the Texas Teachers’
Retirement System, are hiring new staff to manage private equity. Their
fund invests 40% of its portfolio in alternatives.
Mohan Balachandran, senior managing director of asset allocation at
Texas Teachers said: “Our pension liability duration is 20-plus years.
We felt that we could invest for the long-term in some of these vehicles
where your money’s locked up for seven to 12 years.”
Now, about 85% of the 129 public pensions in the U.S. have cut return assumptions since 2014. These targets are expected to continue moving lower.
Keith Brainard, research director at the National Association of
State Retirement Administrators said: “Each month and each quarter that
goes by with low inflation and interest rates remaining low provides
more ammunition to justify lower investment returns.”
And lower assumptions aren't always well received by taxpayers,
despite lowering the risk for pension funds. Often, they lead to money
out of the pockets of taxpayers to cover the difference.
The Kentucky Retirement Systems’ plan for 123,000 employees in
non-emergency jobs could be one of the worst off systems in the U.S. It
currently only has $2 billion in assets for $15.6 billion in
liabilities. The burden has resulted in government service cuts, pay
freezes and a falling headcount.
Executive Director David Eager said: “We call it the death spiral. You can’t earn your way out of this.”
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