Coronavirus Fears Push Pension Funds Lower
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What is the main topic discussed in this episode?
Here's your money briefing. I'm J.R. Whalen for The Wall Street Journal in New York. Coronavirus fears have sent the stock market on a roller coaster, and Treasury yields to record lows. And they've also shaved off significant value from pension funds.
This volatility gets in the way of the pension funds being able to project their investment returns, how much their portfolios are going to grow in a big way. And it also interferes with something that's been happening for the past decade or so, which is that pension funds have been gradually climbing out of the hole that they fell into in 2009.
That's Wall Street Journal reporter Heather Gillers.
How much have U.S. pension funds fallen because of coronavirus market turmoil?
Coming up, she'll also explain how during the bull market, some pension funds prepared for a market downturn to curb their declines.
It's not just the stock market and treasury yields that have taken a beating during the coronavirus scare. America's pension funds are also seeing significant declines. And Wall Street Journal reporter Heather Gillers is on the line to discuss. So, Heather, what are estimates as to how much pension funds have declined as a result of market instability over the coronavirus fears?
A consultant I spoke with estimated that there's been about between 3% and 5% drop in the total holdings of U.S. public pension funds, which is pretty significant if you consider the fact that they're usually seeking to earn, you know, to grow by 6% or 7%. You know, that could be more than half of their entire yearly growth.
And how have falling bond yields contributed to that?
Several ways. For all pensions, bonds have long been almost a kind of meat and potatoes, sort of bread and butter investment. They're safe. You know what you're gonna get every year with fixed income.
How do falling Treasury and corporate bond yields reduce pension fund income?
And so that's why people turn to bonds for all kinds of sort of long-term security investments, you know, insurance funds, people's own retirement accounts often contain municipal bonds. And it's the same thing for pensions. What's happened over the past several decades is that fixed income yields have been falling and falling and falling. and public pension funds and corporate pension funds haven't been able to get the kind of income from bonds that they once got and that they often expected to be able to get for a long time. So they were expecting to be able to earn this income, but all of a sudden, these safe, fixed income investments, these stable, steady investments are not giving them that kind of income.
This is played out a little bit differently in the corporate pension world versus in the public pension world. In the public pension world, funds expect to return around 7%. every year, which is a pretty aggressive return and may have been a little bit more realistic when bond yields were much higher 20 or 30 years ago. But assuming such a high return allows these pension funds to contribute less money from the government's annual budgets, you know, the state of... nevada or maine or the city of new york doesn't have to put as much in its annual but in its pension fund every year because it's expecting to earn this extra income from investments now once upon a time they could get that money from bonds and they really didn't have to worry it was kind of a set it and forget it type of situation but as bond yields
have fallen, they've had to turn to other riskier investments to try and hit that 7% target.
Why have public pension funds increased stock allocations over the last decade?
And for the past decade, that's really been stocks. So over the past 10 years, public pensions have ramped up their stock allocations. They're now at a 13-year high. And the issue with that, as we saw over the past couple weeks, is that stocks can be volatile and stocks can fall. On the private pension side, there's an additional consideration. Corporate pension funds, pension funds run by public companies, don't get to assume they're going to earn 7%.
What de‑risking strategies have pension funds used to limit coronavirus losses?
They have to be more conservative about what they assume they're going to earn. the rules about how they estimate their liabilities require them to use a corporate bond rate when they forecast what they'll owe in the future.
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Chapters
7 chapters
1
What is the main topic discussed in this episode?
0:05–0:49
2
How much have U.S. pension funds fallen because of coronavirus market turmoil?
0:49–2:09
3
How do falling Treasury and corporate bond yields reduce pension fund income?
2:09–4:03
4
Why have public pension funds increased stock allocations over the last decade?
4:03–4:33
5
What de‑risking strategies have pension funds used to limit coronavirus losses?
4:33–6:25
6
How do corporate pension liabilities grow as bond rates drop?
6:25–7:08
7
Will current market instability immediately reduce retirees’ pension payments?
7:08–8:11
Speakers
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