Pensions Got a Market-Rally Boost, But Still Struggle
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Here's your Money Briefing for Wednesday, August 5th. I'm J.R. Whelan for The Wall Street Journal. After suffering record losses in the first quarter, public pension funds came roaring back in the last quarter. Their best performance in 22 years, thanks to the stock market rally. But they're not out of the woods yet.
Right now, there's close to $9 billion in pension benefits owed by state and local governments, but there's only about $4 billion on hand to cover those promised future benefits.
State and local governments whose coffers have been battered by the pandemic will have to step in and make up the difference, if they can. Wall Street Journal reporter Heather Gillers will be here to explain, after the break.
Millions of workers in the public sector rely on pension funds, not 401ks, to build a retirement nest egg.
What happened to public pension funds during Q1 and Q2 market swings?
Last quarter's market rally gave pension funds a much-needed boost, but many of the nation's largest funds are still far short of their investment return goals. Heather Gillers covers pensions for The Wall Street Journal, and she's here to discuss. Now, Heather, you know, as much as the market rally helped pensions last quarter, tell me about how crafty fund managers helped capitalize on that rally.
When we had these record losses in the first quarter, you saw prices drop really significantly on a lot of stocks, including a lot of stocks that had been like previously pretty coveted types of investments and some. pension managers were able to swoop in and scoop up those stocks. And they then saw those stocks rebound in the second quarter. So the Tampa Firefighters and Police Officers Pension Fund, the manager there was able to get some tech stocks like NVIDIA and Amazon and PayPal. and other kinds of investments that really have done well since, you know, this fund was able to buy them at pretty cheap prices back in March and late February when everyone was kind of freaking out about coronavirus and everything sort of crashed at once.
You've been on the show before telling us about the struggles that pension funds face. How much ground were they able to make up in the second quarter?
Well, not a lot, despite having really incredible returns thanks to the stock market. The issue is that the first quarter was really, really bad. Both were sort of record-setting in opposite ways. The way math works, if you lose, in this case it was around 13%, and then the gain was about 11%, but even if it had been equivalent to the loss, you still wouldn't have made up the same amount of ground because... if you have $100 and you lose 50% of it, and then you gain 50%, you're only back at $75.
So these funds aren't even close to being out of the red.
No, not at all. I mean, this is a longstanding problem that comes from years of governments paying less into pension funds than they would have needed to in order to have the money available to pay the benefits that they've promised in the future. So Right now, there's close to $9 billion in pension benefits owed by state and local governments, but there's only about $4 billion on hand to cover those promised future benefits. Now, they're not running out of money right now, but that means that down the road, there are likely going to have to be some difficult choices in terms of taxpayers paying more or employees paying more into their pensions or, you know, finding some other way to make the math work.
Now, who are the pension fund recipients affected by this?
It's generally state and local government workers who still have pensions. So police, firefighters, teachers, those are probably the main groups, other public employees, the people who work at the DMV and that sort of thing.
Now, state and local governments were facing devastating financial effects of the coronavirus in the first and second quarters, and now they've got to step in and fill the gaps.
Right. So governments have had their own financial problems, and that is likely to become an issue for pensions down the road because however good a job pension managers do of earning money on their investments, they still need that initial nut.
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