For years, many pension funds assumed they would earn an average 8 percent annually from their investments. It was a reasonable expectation for a while. But times have changed. Now, the question isn’t whether return expectations should be lower, but by how much. The average target has fallen toward 7.5 percent, but that’s still probably difficult to meet without taking excessive risk.
We’ve been hearing it for years: America’s public pensions are a ticking time bomb. Well, at long last, the state of Illinois is about to expose just how big this blowup could be. As of the 2015 fiscal year, Illinois had promised its employees $199 billion in retirement benefits. Right now, it’s $119.1 billion short. That gap lies at the center of a years-in-the-making fiscal mess that’s threatening to drop the state’s credit rating to junk-bond status. But Illinois is hardly alone. Connecticut and New Jersey—states that, to most of the world, seem like oases of prosperity—are under growing financial strain, too.
We’ve ranked the states by the size of their funding gap. The lower the funding ratio, the more money the state has to come up with to meet its pension obligations.
Pension funds show the biggest increase in their combined stake in the quintet, which comprises Facebook Inc., Apple Inc., Amazon.com Inc., Netflix Inc. and Google parent Alphabet Inc., according to data compiled by Bloomberg. The group raised its share of holdings by about a fifth of a percentage point this year, while hedge funds sold.
Owning these five stocks could make the difference between beating a benchmark or trailing it in 2017, after the shares returned four times the S&P 500 Index. The foray into the high-flying names reflects the urge by pension funds to boost returns at a time when fixed-income yields are stuck near record lows and underfunded plans are growing.
According to academic research shared exclusively with FTfm, US public pension funds lack $3.85tn that they need to pay the retirement benefits of current and retired workers.
Joshua Rauh, author of the research and a professor of finance at Stanford Graduate School of Business, said: “[The large deficit in US public pensions] is a looming crisis. It is particularly a near-term issue for a number of cities.”
The situation is especially difficult for cities such as Chicago, which Mr Rauh estimates has unfunded pension liabilities that equal 19 years of the city’s tax revenues.
After 8 years and a 230% stock market advance the pension funds of Dallas, Chicago, and Houston are in severe trouble. But it isn’t just these municipalities that are in trouble, but also most of the public and private pensions that still operate in the country today.
Currently, many pension funds, like the one in Houston, are scrambling to slightly lower return rates, issue debt, raise taxes or increase contribution limits to fill some of the gaping holes of underfunded liabilities in their plans. The hope is such measures combined with an ongoing bull market, and increased participant contributions, will heal the plans in the future. This is not likely to be the case.
This problem is not something born of the last “financial crisis,” but rather the culmination of 20-plus years of financial mismanagement.
An April 2016 Moody’s analysis pegged the total 75-year unfunded liability for all state and local pension plans at $3.5 trillion. That’s the amount not covered by current fund assets, future expected contributions, and investment returns at assumed rates ranging from 3.7% to 4.1%. Another calculation from the American Enterprise Institute comes up with $5.2 trillion, presuming that long-term bond yields average 2.6%.
With employee contribution requirements extremely low, averaging about 15% of payroll, the need to stretch for higher rates of return have put pensions in a precarious position and increases the underfunded status of pensions.
Relativ wenig von der Öffentlichkeit wahrgenommen wird die Tatsache, dass die FED für ihre Mitarbeiter eine Pensionskasse besitzt, deren Positionierung publiziert wird. Dort hat man jedenfalls Aktien leicht untergewichtet, Staatsanleihen jedoch übergewichtet. Diese Anti-Trump-Aufstellung mag auch daran liegen, dass nach acht Jahren Obama die Demokraten in der FED in der Überzahl sind.
Thomas Costerg, Ökonom bei der Standard Chartered Bak, sah sich die letzten Geschäftsberichte an und veröffenltichte am 24.03.2017 seinen Kommentar dazu, aus dem der „Business Insider“ fünf Tage später zitierte. Wie die veröffentlichten Daten zeigen, setzt sich das Pensions-Portfolio aus 50 Prozent Renten und lediglich 45,6 Prozent Aktien zum Jahresultimo 2016 zusammen (siehe Grafik).
Billionaire Warren Buffett, whose stock picks over several decades have enriched generations of Berkshire Hathaway Inc (BRKa.N) shareholders, delivered a black eye to the investment industry on Saturday, urging ordinary investors to buy plain-vanilla index funds.
„When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients,“ Buffett said in his annual letter to shareholders. „Both large and small investors should stick with low-cost index funds,“ he added.
The health of public pension funds in the US has improved markedly, according to new research. This will reduce fears that ailing retirement plans could push cities across the US into Detroit-style bankruptcies.
According to figures from the National Conference on Public Employee Retirement Systems, a trade body for public pensions, US state and city retirement systems are closing a huge funding hole that has emerged since the financial crisis.
The average funding ratio — a measure of assets to liabilities — of US public pensions increased to 76 per cent in 2016, up from 74 per cent in 2015.
A combination of lower costs, stronger returns and rising bond yields have helped increase the cash levels of pension funds, although they remain a long way from the 95 per cent funding level reported in 2007.
The funding deficits of public pension funds jumped after the financial crisis, putting enormous pressure on cities and states to cut spending or raise taxes. This led to concerns that some retirement funds might not be able to pay out in future.
The latest, best guesses for U.S. lifespans come from a study (PDF) released this month by the Society of Actuaries: The average 65-year-old American man should die a few months short of his 86th birthday, while the average 65-year-old woman gets an additional two years, barely missing age 88.
This new data turns out to be a disappointment. Over the past several years, the health of Americans has deteriorated—particularly that of middle-aged non-Hispanic whites. Among the culprits are drug overdoses, suicide, alcohol poisoning, and liver disease, according to a Princeton University study issued in December.
Partly as a result, the life expectancy for 65-year-olds is now six months shorter than in last year’s actuarial study. Longevity for younger Americans was also affected: A 25-year-old woman last year had a 50/50 chance of reaching age 90. This year, she is projected to fall about six months short. (The average 25-year-old man is expected to live to 86 years and 11 months, down from 87 years and 8 months in last year’s estimates.) Baby boomers, Generation X, and yes, millennials, are all doing worse.
Harvard University’s money managers collected tens of millions in bonuses by exceeding “easy-to-beat” investment goals even as the college’s endowment languished, employees complained in an internal review.
The consulting firm McKinsey & Co., in a wide-ranging examination, zeroed in on the endowment’s benchmarks, or investment targets. Some of those surveyed said Harvard allowed a kind of grade inflation when it came to evaluating its money managers.
“This is the only place I’ve seen where people can negotiate the benchmark they get compensated on,” read a “representative quote“ in the McKinsey report.
The McKinsey assessment offered an explanation of what it called the “performance paradox” at Harvard’s $35.7 billion endowment, the largest in higher education. Year after year, Harvard would report benchmark-beating performance while falling further behind rivals such as Yale, Princeton, Columbia and the Massachusetts Institute of Technology.
The April 2015 report, which has never been made public, spells out why the fund paid more than peers for lagging performance, as well as its management’s strategy for shifting course. Harvard said it has since revamped its compensation.