So sure enough, WSJ posted this brief write up yesterday evening regarding declining pension returns, brought about by recent market volatility and declining rates. Pension plans are still benchmarking themselves to a 7.47% 20 year average return, under the reasoning that “one or two bad years” don’t matter. Unfortunately, this might not account for the shift into a low interest rate regime, that could decrease real returns for many years.
The article states a couple of likely implications: 1) a burden to state governments (that will probably increase your future taxes), and 2) pressure for employers to move away from defined benefit plans. However, I think one important potential implication is unmentioned - that as pensions struggle to meet target returns, they could stretch into high yield instruments or sell tail risk in other ways. This would increase their correlation with one another and exacerbate market volatility.
Alternately, adding pensions as investors to high risk assets would likely reduce technical volatility as they manage to book yield and tend to be more sticky sources of capital. But yes, overall the low rate environment vs the expected pension return is a time bomb on already strained state and municipal balance sheets.
This shift is already present. The ‘Yale Model’ is the new norm among most pensions and their allocations shifted away from stable IG fixed income to private equity
Hahaha, try 4%. So I guess they move up the security market line now (note fancy CFA term!), pump the bubble up further…then when it pops we can have another rescue package. Oh wait, but the USgov doesn’t have any money/tools left for a rescue…
I don’t know what I enjoy more… that institutional investors are projecting 5.5% returns from their fixed income positions over the next 5 years… or the fact that they expect their portfolios to earn a rate of return (10.9% ave over next 5 years) which is greater than their projections for every asset class’ returns over that time period.
Let me see…stocks are going to go up 10, bonds are going to go up 5… yeah my portfolio will probably be up 11…