While the U.S. Federal Reserve’s low-interest rate policies have given a huge boost to the stock market, not everyone is having a good time. For instance, with near-record-low bond yields, pension funds are not doing very well.
According to Wilshire Trust Universe Comparison Service, as workers retire, pensions need gains of seven percent or more to cover the benefits. But for the year ended June 30, public pension plans in the U.S. had a median increase of just one percent, the smallest return since 2009. (Source: “Pension Funds Face Day of Reckoning as Investment Returns Lag,” Newsmax, September 21, 2016.)
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Just this year so far, pensions in Illinois, Missouri, and Hawaii have rolled back the assumed rate of return on their investments. Over the past two years, dozens of pension funds have taken that step.
Most recently, the California State Teacher’s Retirement System (CalSTRS)—the second-largest public pension in the U.S.—said it would probably miss its annual return target of 7.5% this year. This would be the third year in a row for the fund to miss its target. (Source: “Calstrs Probably Will Miss 7.5% Return Target for Third Year,” Bloomberg, September 20, 2016.)
Christopher Ailman, chief investment officer of CalSTRS, said that the fund is reducing its exposure to fixed-income investments to increase returns in the low-interest-rate environment. Moreover, the fund is looking at long-short equity funds.
Missing target returns is not the only problem facing the pension system today. For public pensions in the U.S., there is a problem of increasing unfunded liabilities. For pension funds, unfunded liabilities represent the amount of money needed to cover all the benefits that have already been promised. By the end of June, the unfunded liabilities stood at $1.95 trillion, which is an increase of $510.0 billion since the end of 2013.
On September 21, the U.S. Federal Reserve announced that it is holding the benchmark interest rate at the current level. This is the latest bad news for investors of fixed-income securities.
Dan Heckman, a senior fixed-income strategist at U.S. Bank Wealth Management, said, “If there’s a real storm cloud on the horizon, then this is it.”
“The municipal-bond market at some point in time down the road will suffer from concerns over this level of underfunding. This is going to continue to be a source of problems for many municipalities, both at the state and local level.” (Source: Newsmax, op. cit.)
