What Pension Funds' Riskier Strategies Mean for Future Retirees
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Here's your money briefing for Wednesday, October 20th. I'm J.R. Whelan for The Wall Street Journal. Pension funds have benefited from the sharp stock market rally this year, but it hasn't been enough to help them fully dig out of the funding deficits that they've endured for years. As a way to jumpstart returns, many public pensions have veered off the beaten path of stocks and bonds and turned to riskier alternative investments.
Examples would be like private equity, where you're investing in private companies, not in publicly traded stocks, or infrastructure like roads and bridges.
Heather Gillers covers the pensions market for the WSJ. Coming up, we'll talk with her about the growing trend of pension funds adding in alternative investments and how it affects the retirement savings of workers. That's after the break.
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Pension funds holding the retirement savings of millions of Americans are in a bind.
What funding shortfalls are pushing public pension funds to change strategies?
They're facing down possible financial shortfalls, and now they're turning to riskier investments to juice returns. But that poses potential problems of its own. So what does all this mean for future waves of retirees? Wall Street Journal reporter Heather Gillers covers the pensions market, and she joins us now. Heather, thank you for coming on the show.
Sure, thanks for having me.
So Heather, let's start with the problems facing pensions. Why are they worried about a financial crunch?
Many state and local government pensions are facing a pretty big gap between the assets they have on hand and the cost of the benefits they've promised in the future to current and retired workers. And so they have to make up that gap somehow. And most of the ways of finding money are politically difficult, like raising taxes or taking money away from other stuff in the budget. So many of them have resorted to trying to get as high investment returns as possible.
And so one way they're looking to get those higher returns is through alternative investments. What do we mean by that? And what kind of alternative investments are we talking about?
So alternative investments are typically not assets that can be traded on the public market, like stocks and bonds, where you know the price, you can buy them and sell them anytime. They're fairly liquid, very liquid. Alternative assets, on the other hand, are private market assets. They're typically illiquid. So examples would be like private equity, where you're investing in private companies, not in publicly traded stocks. or infrastructure like roads and bridges or real estate, apartment buildings. Hedge funds was a longtime popular alternative asset that's lost some of its favor with public pensions. Private credit is one that's gaining steam. That's private loans to companies, not bonds that are traded on the public markets, but private loans.
So from an investment perspective, how are these alternatives different from traditional things like stocks and bonds?
So stocks and bonds are traded on public markets.
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