Pension Fund Losses: To Infinity And Beyond!

Public Employee Pension Funds will need to cut benefits in the near future. They are bleeding billions of dollars and are left with few options other than doubling-down commercial real estate and other bad bets that they’ve already made. Make no mistake, pension funds are throwing a “hail-mary” passes to avoid either a taxpayer bailout or massively cutting benefits.

This story will get much more interesting in a few years, when direct bailouts are needed to maintain benefits.

This will be after a 2nd Stimulus, FHA Bailout, State of California Bailout, another Fannie/Freddie Bailout, and a 3rd Stimulus…but probably before the introduction a new world currency.

Given, that Public Pensions are already Drawing More Scrutiny, the public will probably not be too interested in paying for public employees’ cushy retirements. Especially when many workers have no real retirement options at all.

The Washington Post reports Steep Losses Pose Crisis for Pensions

The upheaval on Wall Street has deluged public pension systems with losses that government officials and consultants increasingly say are insurmountable unless pension managers fundamentally rethink how they pay out benefits or make money or both.

Within 15 years, public systems on average will have less half the money they need to pay pension benefits, according to an analysis by Pricewaterhouse Coopers. Other analysts say funding levels could hit that low within a decade.

After losing about $1 trillion in the markets, state and local governments are facing a devil’s choice: Either slash retirement benefits or pursue high-return investments that come with high risk.

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Before the crisis, many public pension funds had experimented with risky trading techniques or committed more of their money to hedge funds and other nontraditional firms, which in turn invested some of it in complex mortgage securities. When these melted down, pension funds got burned.

Now, facing an even bigger funding gap, some systems are investing in the same securities, betting that a rebound in their value will generate huge returns.

“The amount that needs to be made up is enormous,” said Peter Austin, executive director of BNY Mellon Pension Services. “Frankly, they are forced to continue their allocation in these high-return asset classes because that’s their only hope.”

Some pension experts say the funding gap has become so great that no investment strategy can close it and that taxpayers will have to cover the massive bill.

The problem isn’t limited to public pension funds; many corporate pension funds have lost so much ground that they are also pursuing riskier investments. And they, too, could end up a taxpayer burden if they cannot meet their obligations and are taken over by the federal Pension Benefit Guarantee Corp.

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Pension funds have also been aggressively pushing into real estate and troubled mortgage securities that were crushed in the crisis. California’s pension fund is putting $2 billion into buying these toxic bank assets. Financial analysts say the prices for these assets have fallen so far that they may be a better bet than in the past. But the crisis showed how unreliable these investments can be. And their prices may not yet have hit bottom.

In August, California’s pension fund took a similar gamble by investing $463 million in shopping centers across 17 states and the District of Columbia, though many experts forecast a prolonged slump in commercial real estate.

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In Ohio, for instance, the teachers pension system reported that it would take 41 years for its investments to catch up with the costs of meeting its obligations to retirees. That was before the worst of the financial crisis.

During the last fiscal year, Ohio’s fund lost 31 percent. Its most recent annual report detailed how long it would now take for its investments to put the fund back on track. Officials simply said: “Infinity.”

There is much more detail in this article, discussing problems in Virginia, Maryland, New Mexico, Philadelphia, and Montgomery County (Alabama).