Pandemic Squeezes Pension Funds
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How is the pandemic squeezing public pension funds and why does it matter?
Here's your money briefing for Thursday, December 10th. I'm J.R. Whalen for The Wall Street Journal. The retirement savings of millions of public employees are held in pension funds. In order to continue paying out to retirees, these funds depend on steady growth. That's been hard to achieve in recent years because of low interest rates. Now the pandemic is making it even harder.
When pensions can't rely as much on bonds for income, they have to take on maybe more risk or add more money from government budgets. They have to look at other options that maybe are not their first choice.
Coming up, our pensions reporter Heather Gillers will explain the kinds of risky bets many pension funds are taking on and the effect that all this can have on even current workers. That's after the break.
The pension funds holding the retirement savings of millions of public employees are getting squeezed by the pandemic. The economic downturn has many fund managers struggling to boost investment returns to maintain payouts to retirees. But even ordinary taxpayers, including those without pensions, could get caught up in the fray as well. For more on this, let's bring in our pensions reporter, Heather Gillers.
What dual challenges of 2020—uncertainty and low bond rates—are pension funds facing?
Heather, thanks for joining us.
Sure, happy to be here.
So, Heather, the pandemic has created a lot of economic uncertainty in all corners of the economy. What's been the effect on pensions?
That's actually sort of the double challenge of 2020 is uncertainty and low long-term bond rates. So, you know, you had the Fed intervention early in the pandemic. You had rate cuts. You now have this expectation that in order to stimulate growth, interest rates will remain low for the foreseeable future. And And that's one type of challenge for pension funds. And then you just also have the fact that we're in a really uncertain environment. In the first quarter, pensions had their worst quarter in decades. And then in the second quarter, they had their best quarter in decades.
Why can strong stock-market returns mask pension funding problems?
So when you're trying to do long-term planning, that level of volatility can be a little bit difficult to
Sure, but it seems like all we hear about these days is the stock market hitting new records. How could pensions be in trouble?
Well, pensions have benefited a lot from the stock market. And for the year ended September 30th, they hit their median target of around 7%.
Could retirees’ checks be cut or are pension promises legally protected?
But looking forward, the picture is a little bit more challenging. The biggest reason is expectation that bond rates will remain low for a long time and and fixed income is kind of like the bread and butter of old age retirement savings. So, you know, you know, it's a safe asset, a fairly safe asset. It's stable, it's predictable. So when pensions can't rely as much on bonds for income, they have to take on maybe more risk or add more money from government budgets. They have to look at other options that maybe are not their first choice.
Well, let's talk about the fund managers.
How might taxpayers, current workers, and government budgets bear the cost of pension shortfalls?
How difficult of a position are they in?
It's a challenge. It's definitely a challenge. And so you are starting to see discussions and deliberations around stuff like, should we lower our expected rate of return, which would mean asking for more money from government employers and or employees? Or should we add more alternative types of investments, which might bring in higher returns, but also add risk?
How are low long-term bond rates changing pension investment strategies?
You've seen them move further into alternative types of investments like private equity and real estate and infrastructure, and those can be very profitable and lucrative for pension funds. Certainly there have been examples of funds faltering along the way. It's maybe you might call it like a more varsity level type of investing than maybe your typical county pension fund is used to. But some of the bigger funds have had a lot of success in those areas as well.
But we've been in a low interest rate environment for a while now, even before COVID. So this shouldn't be coming as a surprise to pension managers, right?
That's right. This is not a new problem. Pensions have been grappling with whether they can earn the returns they expected for quite a while.
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Chapters
7 chapters
1
How is the pandemic squeezing public pension funds and why does it matter?
0:05–1:18
2
What dual challenges of 2020—uncertainty and low bond rates—are pension funds facing?
1:18–2:06
3
Why can strong stock-market returns mask pension funding problems?
2:06–2:30
4
Could retirees’ checks be cut or are pension promises legally protected?
2:30–3:08
5
How might taxpayers, current workers, and government budgets bear the cost of pension shortfalls?
3:08–3:38
6
How are low long-term bond rates changing pension investment strategies?
3:38–6:33
7
What risky alternatives are pension managers moving into and what are the downsides?
6:33–8:01
Speakers
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