It never ceases to amaze me how fiduciaries take risks with other people’s money. A case in point is Farouki Majeed, an Ohio pension manager overseeing the investments responsible for the benefits to over 80,000 retired librarians, bus drivers, cafeteria workers, and other former employees. How is he doing it? By adding risk. Not good. “The solution for Mr. Majeed—as well as other pension managers across the country—is to take on more investment risk,” reports Heather Gillers at The Wall Street Journal. “His fund and many other retirement systems are loading up on illiquid assets such as private equity, private loans to companies and real estate.”
This public-pension predicament is the result of decades of underfunding, benefit overpromises, unrealistic demands from public-employee unions, government austerity measures and three recessions that left many retirement systems with deep funding holes. Not even the 11-year bull market that ended with the pandemic or a quick U.S. recovery in 2021 was enough to help pensions dig out of their funding deficits completely.
Demographics didn’t help, either. Extended lifespans caused costs to soar. Rich early-retirement arrangements and a wave of retirees world-wide also left fewer active workers to contribute, widening the difference between the amount owed to retirees and assets on hand.
Low interest rates made the pension-funding problem even more difficult to solve because they changed long-held assumptions about where a public system could place its money. Pension funds pay benefits to retirees through a combination of investment gains and contributions from employers and workers. To ensure enough is saved, plans adopt long-term annual return assumptions to project how much of their costs will be paid from earnings. Those assumptions are currently around 7% for most funds.
Action Line: Unfortunately for those stuck in these plans, they have little say in how their retirement savings are invested. I bet if you asked them if they feel that taking on more portfolio risk in their golden years sounds like a good idea, they’ll give you a resounding NO.
E.J. Smith - Your Survival Guy
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