RISKY BUSINESS: Pension Managers Risking Clients' Money to Plug Deficits

By ninefotostudio @ Shutterstock.com

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.”

If you’re looking to be a member of my Survive & Thrive club, click here.

Gillers continues:

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.

Bio
Latest Posts

E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.