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Public pension plans are reporting dismal investment returns this year, a development that will likely mean governments will have to pony up more money in the coming years.
So far, no major pension plan has reported a preliminary annual investment return of more than 1.5 percent. That’s thanks to a volatile stock market that’s seen wild swings spurred mainly by political and economic events abroad. Some smaller plans, such as the New Mexico Educational Retirement Board, have reported earnings as high as 2.6 percent. Still for many, this year marked their worst earnings year since the Great Recession.
The slim earnings for fiscal 2016, which ended June 30 for most plans, is well below the average earnings target of about 7.5 percent. It also marks the second year in a row that plans have missed the assumed rate of return: Most reported an investment gain between 2 percent and 4 percent in fiscal 2015.
Plans rely heavily on investment earnings — roughly 80 cents on every dollar paid out to retirees is from investments. When plans don’t meet their earnings target in any given year, it negatively impacts their assets because annual payments from current employees and governments aren’t enough to cover the annual payouts to retirees.
* Bloomberg…
Illinois’s largest public pension agrees with Bill Gross’s admonishment that it’s time to face up to the reality of lower returns and reduce assumptions about what funds can make off stocks and bonds.
Fund managers that have been counting on returns of 7 percent to 8 percent may need to adjust that to around 4 percent, Gross, who runs the $1.5 billion Janus Global Unconstrained Bond Fund, said during an Aug. 5 interview on Bloomberg TV. Public pensions, including the California Public Employees’ Retirement System, the largest in the U.S., are reporting gains of less than 1 percent for the fiscal year ended June 30.
Illinois’s largest state pension, the $43.8 billion Teachers’ Retirement System, plans to take another look at how much it assumes it will make in the coming year as part of an asset allocation study, said Richard Ingram, executive director. Currently it assumes 7.5 percent, lowered from 8 percent in June 2014. Plans for the study were in place before Gross made his remarks.
“Anybody that doesn’t consider revisiting what their assumed rate of return is would be ignoring reality,” Ingram, whose pension is 41.5 percent funded, said in a phone interview. The fund has yet to report its June 30 return.
posted by Rich Miller
Tuesday, Aug 9, 16 @ 1:37 pm
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My 401k had a bad year, too…but has averaged 9% returns including the beating it took during the Great Recession. Plan accordingly for the long term and don’t let a bad year throw you.
Comment by Six Degrees of Separation Tuesday, Aug 9, 16 @ 1:46 pm
No real surprise to anyone paying attention. Get ready for another round of increased big, scary numbers … and lots of finger pointing on whose fault it is.
Comment by RNUG Tuesday, Aug 9, 16 @ 1:47 pm
Six Degrees I need you to manage my investments. the best I did was 4%
Comment by illinifan Tuesday, Aug 9, 16 @ 1:57 pm
A part of this is unlucky timing with the Brexit vote occurring a week before the end of the fiscal year. There was some temporary volatility that occurred right after the vote, but by now most of the losses suffered as a result of the Brexit panic have been recovered.
Comment by Anonymouth Tuesday, Aug 9, 16 @ 1:59 pm
Gross’ bond fund is yielding low because fed rates are low. Pension funds invest in a variety of instruments, in addition to bonds. The problem is that a lot of the “blue-chip” type companies that pensions are invested in are reporting “flat” performances. Contrary to what you might here on at a political campaign event, corporate profits are stagnant. Corporate investments in themselves raw materials is low.
This would be may more interesting if Illinois allowed muni bk. Pension funds could short muni funds in the State. Some serious irony there!
Comment by BK Bro Tuesday, Aug 9, 16 @ 2:03 pm
We have a financial super genius at the helm and returns are down? How can that be?
Comment by Daniel Plainview Tuesday, Aug 9, 16 @ 2:24 pm
The other shoe to drop. Despite hispanic women seeing a decrease in life expectancy, old Blue expects to see another overall increase after 2020 census. The whole pension thing can only be resolved via a change to the constitution. Sorry.
Comment by blue dog dem Tuesday, Aug 9, 16 @ 2:47 pm
==The whole pension thing can only be resolved via a change to the constitution==
That only fixes the future. It doesn’t change the benefits due to current members.
Comment by Demoralized Tuesday, Aug 9, 16 @ 2:51 pm
This should make us all want to take all our money out of SS and let us invest it into the stock market. SNARK
thankfully the GOP plans to privatize social security has never happened.
Comment by Publius Tuesday, Aug 9, 16 @ 2:52 pm
Bruce charges too many fees.
Should have just stuck with Vanguard S&P 500.
Comment by TinyDancer(FKA Sue) Tuesday, Aug 9, 16 @ 2:52 pm
Gross has been screaming this same thing for a decade. Yet the markets are at or near all time highs. Pension funds are incredibly conservative with investments. No wonder why 8% annual returns is an extremely high metric.
Comment by Jorge Tuesday, Aug 9, 16 @ 3:56 pm
I’m not trying to brag, but I’ve managed a 17% return since December. There was a hit in February and a couple of low days following the Brexit, but 17% is weathering those both. I’m investing in only blue chip, well known companies. As for my state offered deferred comp plan, its down 3% year to date. I’ll admit that its aggravating that my professionally managed plan is so much less than my pick of 12 different stocks. Maybe the state should look into better management of their investments?
Comment by Anonymous Tuesday, Aug 9, 16 @ 4:17 pm
==Public pension plans are reporting dismal investment returns this year…==
With the dow jones average at or near an all time high it takes a hopeless pessimist to be worried about pension investments.
Comment by Enviro Tuesday, Aug 9, 16 @ 4:29 pm
The YTD return on S&P 500 index funds is 8%.
I agree that the state should look into better management.
Comment by Enviro Tuesday, Aug 9, 16 @ 4:42 pm
Public pensions are more restricted on their investments. Local police and fire is being hit hard too. Get ready for the pension levies to continue skyrocketing this fall.
Comment by Shemp Tuesday, Aug 9, 16 @ 4:59 pm
And remember, this is not just an Illinois thing. Check out the actual articles.
Comment by Shemp Tuesday, Aug 9, 16 @ 5:00 pm
Why are taxpayers guaranteeing investment returns for public workers?
Comment by Ron Tuesday, Aug 9, 16 @ 6:17 pm
To answer your question Ron is because I spent a large part of my life keeping you and my other fellow Illinoians safe accepting lower pay than my corporate equivalent with the acknowledgment that I would in turn have a stable retirement. Now you and others like you think it is ok to break a contract with me. In my opinion the pension crises is the result of voter ignorance and politicians knowing which side of their bread is buttered and not standing up to do what was the right thing to do in order to keep their position.
Comment by Illinoian Tuesday, Aug 9, 16 @ 7:03 pm
Seems to me that a couple of months ago someone was bragging about all of the unnecessary fees they were saving us. Must be on par with Rauner’s claim that he wants us to keep more of our money rather than paying Union dues .
Comment by Triple fat Tuesday, Aug 9, 16 @ 7:11 pm
SURS suffered a loss of 1.3% on their investment portfolio for the first 9 months of FY 2016
Comment by CapnCrunch Tuesday, Aug 9, 16 @ 7:22 pm
=Why are taxpayers guaranteeing investment returns for public workers?=
It’s hard to earn returns on money that was never invested.
The taxpayers have been skating - no contributions to the pension funds. No contributions to social security, either.
Comment by TinyDancer(FKA Sue) Tuesday, Aug 9, 16 @ 7:40 pm
Lot of hyperbolic posting here, friends.
I really don’t know where to start, but please consider the following:
-The bulk of the positive return in the S&P has occurred since July 1. That doesn’t help FY16 returns.
-Bond prices and yields are inversely correlated; in other words, if yields go up, prices go down and vice versa. Gross is staring at the possible end of a 15-year plus bond bull market.
-Institutional investors don’t have the ability to pick 12 stocks and try to beat the market-the risk is too great. A blend of index funds and active managed strategies usually provides the highest equity returns.
-The taxpayers are not guaranteeing investment returns for public workers, but the Constitution says public pensions must be paid. Not the same thing.
Comment by Arthur Andersen Tuesday, Aug 9, 16 @ 9:25 pm
All we need is to get Greenspan or Bernanke back
in to print up a bunch more $ and put interest
rates back where they were the FED chairman.
The Exchange Stabilization Fund (ESF) can help
with that too.
Comment by Term Limits, LIKE ONE! Tuesday, Aug 9, 16 @ 11:17 pm
This problem will get bigger and the current people in charge have no solution. Compound the fact that all these plans are grossly unfunded and and the near zero interest rate all funds (not just government) have issues. Stack on the debt and the issue increases more.
Comment by cannon649 Tuesday, Aug 9, 16 @ 11:34 pm
Of course the taxpayers are guaranteeing investment returns due to the abomination of a Constitution that we have in Illinois. If the market doesn’t provide a necessary return I get to pay. Lunacy.
Comment by Ron Wednesday, Aug 10, 16 @ 2:09 am
Cannon, the only real solution is to give all teaching or soon obligations back to municipalities and allow them to go BK.
Comment by Ron Wednesday, Aug 10, 16 @ 2:10 am
The assumed pension returns are wildly optimistic? It gets more attention coming from a billionaire fund manager than a CF commenter.
Anyway, Gross is right of course. During the 1980s, the yield on the 10-year Treasury averaged over 10%. During the ’90s it averaged nearly 7%. The current yield is less than 1.6%. The small adjustments that have been made to the assumed pension returns are nowhere near reflecting the current environment of lower interest rates and nominal GDP growth.
The underperformance relative to projections of TRS in the past two years leaves it billions (more) short. And it’s obvious where some expect those billions to come from.
It’s misleading to say that TRS agrees with Gross. TRS hasn’t done anything; they just said they’re considering taking action. They’ll agree with Gross when they lower their assumed return to 5% or less.
And this points out the absurdity of Rahm’s statement that his “reverse Robin Hood” tax hikes on the middle and working classes to replenish the pension coffers will permanently solve Chicago’s pension issue. Expect it to keep coming back.
Comment by Anon Wednesday, Aug 10, 16 @ 6:44 am
Ron
Taxpayers pay for those who provide services for them. I cannot for the life of me, figure out who else should pay for those services if not those who receive them. DUH.
I don’t know…….do you stiff your doctor for services provided because you don’t like the bill? Do you stiff your lawyer? Grow up, ROn.
Comment by Anonymous Wednesday, Aug 10, 16 @ 7:06 am
Test. My comments aren’t posting.
Comment by Demoralized Wednesday, Aug 10, 16 @ 8:34 am
== allow them to go BK==
So basically your goal is to not pay the pensions at all.
Comment by Demoralized Wednesday, Aug 10, 16 @ 8:34 am