February 10, 2019
There’s a specific reason the world’s largest fund lost so much money, and the United States is in the same predicament. Here are the details…
by Simon Black of Sovereign Man
Things keep getting worse for pensions…
If you’ve read Notes recently, you know the pension fund crisis is one of our major themes. Simply put, these giant pools of capital responsible for paying out retirement benefits to workers are BROKE.
According to the World Economic Forum, pension funds around the world are short around $70 TRILLION. State, federal and local pensions in the US are $7 trillion short… and a recent report by Boston College estimates 25% of private US pensions will go broke in the next decade.
This is all happening because investment returns have been too low.
Pension funds need to earn about 8% per year to meet their obligations. And they traditionally do that with a conservative mix of bonds and stocks.
But with interest rates near the lowest levels ever, it’s impossible for pension funds to achieve that 8% with their usual tools (over the past year, they’ve only been earning around 5.5%).
So they’re getting desperate…
Illinois, one of the brokest states in the US, actually wants to issue billions of dollars in bonds to plug the hole in its pensions.
And, across the board, pensions are taking on WAY more risk in hopes of breaking even…
Since 2008, public pensions have increased their allocation to risky assets by 10%.
10% may not sound like much, but it’s a huge move by these conservative funds.
It translates into TRILLIONS more invested in exotic speculative investments.
So while the teachers and firefighters of the world are counting on pensions to conservatively invest their retirement savings, they’re trying to flip speculative real estate to juice returns (that strategy has actually increased sixfold).
Pensions are broke. They know that they will not earn enough money to pay their obligations. So they’re swinging for the fences. They don’t have another choice.