US public pension funds face serious challenges that threaten the pension plans of millions of state and local government employees in the United States.
Pension plans remained severely underfunded during the 11 bull market years following the Great Recession. The slide to bankruptcy and high-yielding markets have prompted fund managers to take risky bets in hopes of staying afloat. Now, the recent sale has left the funds struggling to meet their future commitments.
The 100 largest public pension funds in the United States were funded at just 78.6% of their total obligations at the end of the second quarter, compared to 85.5% at the end of 2021, according to an analysis by Milliman, an actuarial firm. and advice. Between March and April alone, the funds lost $220 billion as Russia's invasion of Ukraine rattled markets.
Public pensions are borrowing more and more to meet their payment obligations. Nearly $13 billion worth of annuity bonds were sold in 2021, more than in the past five years combined. Now they are taking more risk by investing that leveraged money.
The California Public Employees' Retirement System (CalPERS), which runs the largest public pension fund in the United States, with about $440 billion in assets under management, began leveraging some of its debt this this month. "We need all the quiver arrows we can get, and private debt is one of the most critical," said Dan Welcome, deputy chief investment officer of CalPERS. "There is no choice without risk."
The Teacher Retirement System of Texas, the nation's fifth-largest state pension fund, has also been using leveraged funds since 2019.
Leverage can help multiply market gains in bull markets, but it can also magnify losses in bear markets.While most repos are still unleveraged, there has been a big increase over the past four years. Prior to 2018, none of the largest funds used leverage. The Texas Teacher Retirement System, the nation's fifth largest public retirement fund, has also been using leveraged funds since 2019.
Leverage can help multiply market gains in bull markets, but it can also amplify losses during bearish times.Although most pensions still do not use borrowed money, there has been a sharp increase over the past four years. Prior to 2018, none of the larger funds used leverage.
At the same time, the funds started taking on riskier assets during the bull run and low interest rates to offset some of the default. Rather than increasing fees or costs to compensate for the lack of funding, pension plan managers have chosen to increase their target annual growth rate and adopt riskier investment behaviors to achieve it. If many states' funds fail as a result of this strategy, the responsibility for meeting payment requirements will fall on taxpayers, according to research by the Boston Federal Reserve.
Analysts say pension funds now operate more like hedge funds and are on a risky basis. It is also generally the funds most in financial difficulty that take care of these transactions.
“Risk-taking is most pronounced in funds whose sponsors are least able to bear additional risk,” the Fed said. Some funds, such as the Houston Firefighters Relief and Retirement Fund, have started investing in cryptocurrency, according to a Reuters report. The lack of transparency makes it difficult to estimate how much money was lost in the cryptocurrency crash this spring. The funds will not report returns for the second quarter until the end of the summer.
As interest rates rise and market stability declines, such pensions may face further problems.
According to Pew research, of the roughly $ 4 trillion in assets managed by public pension funds in the United States, more than two-thirds go to risky assets such as stocks and alternative vehicles, including private equity, real estate and hedge funds. This means that the ability of pension systems to meet their obligations depends on stock market fluctuations.
"It's like the gambler who is on a losing streak but continues to bet hoping to recoup some of the losses," wrote Merrill Matthews, a researcher at the conservative-leaning Institute for Policy Innovation, "then that most public pension funds were already underfunded last year, what does that mean today when the market has been in a downtrend for six months?
But some researchers say the crisis seems bigger than it is. The pension funding gap is "often a huge and disheartening number," said Louise Sheiner, director of policy at the Hutchins Center on Fiscal and Monetary Policy. But "for most (certainly not all) plans, there is no impending crisis in the sense that plans are in danger of depleting their assets over the next two decades."