Pension plans remain severely underfunded during the bull market that lasted 11 years after the Great Recession. The plunge in the default market and high returns led fund managers to bet riskily in the hope of staying afloat. For now, the recent sell-off has left funds struggling to keep up with future obligations.
The 100 largest public pension funds in the US had funded just 78.6% of their total obligations at the end of the second quarter, down from 85.5% at the end of 2021.
According to Milliman’s analysis, a consulting and calculation company. Funds lost a whopping $220 billion between March and April alone when Russia invaded the Ukrainian market.
Public pensions are borrowing increasing amounts to meet their payment obligations. Nearly $13 billion in pension obligation bonds were sold in 2021, more than in the past five years combined. Now, they are taking on more risk by investing that leveraged amount.
“We need every arrow in sight we can get, and private debt is one of the key issues,” said Dan Bienvenue, vice president of investments at CalPERS. “No choice is without risk.”
The Texas Teachers Retirement System, the country’s fifth-largest public pension fund, has also used leveraged funds since 2019.
Leverage can help multiply bulls in bull markets, but it can also increase losses during down times.
While the majority of pensions are still non-borrowed, there has been a sharp increase over the past four years. Prior to 2018, none of the largest funds used leverage.
Take risks
At the same time, funds began to use riskier assets during a bull run and low interest rate environment to cover some of the defaults.
Instead of increasing fees or expenses to make up for a lack of funding, retirement managers have chosen to increase their target annual growth rates and engage in more risky investing behaviors to meet their goals. that. In many states, if funds end up going bankrupt because of that strategy, the chances of meeting claims fall on taxpayers’ shoulders, a study by
Boston Federal Reserve.
Analysts say Pension funds are now operating more like hedge funds and are on a risky path. It is also often the funds that have the most financial difficulty making these transactions.
“Risk-taking behavior is most evident among funds with the lowest risk-taking sponsor,” the Fed said.
Some funds, like the Houston Firefighters Retirement and Relief Fund, have already started investing in cryptocurrencies, according to a report.
Reuters report. The lack of transparency makes the assessment of the amount lost in
crypto crash this spring. Funds don’t report second-quarter profits until late summer.
As interest rates rise and market stability declines, those pensions could be in more trouble.
Out of about 4 trillion dollars Of assets managed by public pension funds in the United States, more than two-thirds are allocated to risky investments such as stocks and alternative vehicles, including private equity, real estate, real estate and hedge funds,
According to Pew’s research. That means the pension system’s ability to meet its commitments depends on stock market volatility.
“It’s like a gambler on a losing streak but keeps betting in the hope of making a portion of the loss,”
Merrill Matthews wrotea scholar at the conservative Institute for Policy Innovation “If most public pensions were fully funded last year, what does that mean today, when the market has slipped in six months?”
But some researchers say the crisis looks bigger than it is. Louise Sheiner, policy director at The Hutchins Center for Money and Finance at the Hutchins Center for Monetary and Financial Policy. But “for most (certainly not all) plans, there is no imminent crisis in the sense that the plans are likely to deplete their assets within the next two decades.”
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