USA

(WSJ) After three years of roller-coaster returns, state and local government pension funds are reporting a little more normalcy. For the year ended June 30, the funds‘ median return was 8.3%, according to Wilshire Trust Universe Comparison Service. That’s about the average return for the past decade and above pension plans‘ long-term targets of around 7% per year.

This year’s stock performance drove the gains. Private equity, meanwhile, lost money for the first time since the 2008-09 financial crisis, according to a Burgiss Group index that excludes venture capital. Private equity is typically reported on a one-quarter lag. That means pension funds‘ June 30 figures reflected private equity performance for the twelve months ended March 31 and included poor performance in early 2022.

That contributed to missed targets at some of the largest plans. The California Public Employees‘ Retirement System, the nation’s biggest pension fund, reported a preliminary return of 5.8% for the year ended June 30. The second-largest, the California State Teachers‘ Retirement System, returned 6.3%.

  WSJ

As the name implies, defined-benefit pensions promise to pay a set amount to retirees. While corporate America has largely moved away from this structure in favor of 401(k) options (or “defined contribution” plans), virtually all state and local governments still offer these reliable retirement payouts. And they’ve been falling behind in a big way: In the 2019 fiscal year, states had $1.48 trillion in unfunded pension liabilities, while the 50 largest local governments faced $478 billion in adjusted net pension liabilities, according to calculations from Moody’s Investors Service. The 100 largest corporate defined-benefit plans had a deficit of $285 billion in November, according to Milliman data.

That $2 trillion hole is only going to get deeper as the Federal Reserve pledges to keep interest rates near record-low levels for years to come as the U.S. emerges from the Covid-19 pandemic. Moody’s, unlike many states and cities, uses a market-based discount rate to determine the present value of a pension’s future liabilities. The lower the rate, the larger the current value. Analysts expect to apply a 2.7% rate to local governments’ fiscal 2021 reporting, down from 4.14% in fiscal 2018 and about the same as Milliman’s current discount rate for corporate pensions. It will likely cause pension shortfalls “to increase by double-digit percentages” in the next two years, Moody’s says.

  Bloomberg

The weak financial condition of seven US public pension plans threatens to deplete their assets by 2028, leading to severe risks for the living standards of thousands of American employees and retired workers.

Many US public pension plans had not fully recovered from the 2007/08 financial crisis before coronavirus struck, triggering turmoil across financial markets. The correction in the US stock market has increased the long-term structural problems across the entire US public pension system, particularly for the weakest funds.

“Public plans with extremely low funded ratios in 2020 may face the risk of running out of assets in the foreseeable future if markets are slow to recover,” said Jean-Pierre Aubry of the Center for Retirement Research at Boston College, which carried out a detailed study on the plight of US public pensions.

  FT

The American Legislative Exchange Council (ALEC) releases today, Unaccountable and Unaffordable 2018 – its newest publication in an annual series illustrating the growing pension crisis facing public employees and taxpayers. To understand the scope of the crisis, state pensions across the country are funded at an average of 35% of what they should be. This translates into an average of $18,300 in unfunded pension liabilities for every man, woman and child across the United States. The new report measures nearly 300 state-administered pension plans and in total, they have unfunded liabilities of  nearly $6 trillion.

  ALEC

Drei US-Pensionsfonds haben sechs Grossbanken angeklagt mit dem Vorwurf einer missbräuchlichen Kreditvergabe. Betroffen sind neben Bank of America, Goldman Sachs, J.P. Morgan Chase und Morgan Stanley auch die Schweizer Institute Credit Suisse und UBS, wie das «Wall Street Journal» schreibt.

Den Banken werde vorgeworfen, seit 2009 zusammengearbeitet zu haben, um Wettbewerb zu verhindern. Die Sammelklage von Iowa Public Employees‘ Retirement System, Orange County Employees Retirement System und Sonoma County Employees‘ Retirement System sei am Mittwoch am Bundesgerichtshof für den südlichen Bezirk von New York eingereicht worden.  Die Banken wollten dies gegenüber der Handelszeitung nicht kommentieren oder waren für ein Statement nicht erreichbar.

  Handelszeitung

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.

  Bloomberg