October 23, 2008
Turmoil in the US Pension Funds Sector
Two disturbing news reached us today. Two major players in the Pension Funds Sector have lost ( notionally, as of yet) billions of US dollars as a result of the current financial turmoil.
First came the news that the Pension Benefit Guarantee Corp (PBGC )lost $3.1 billion in stock investments in its trust fund in the 11 months ended Aug. 31, House Education and Labor Committee Chairman George Miller announced today.Mr. Miller, D-Calif., announced the loss at a hearing in San Francisco, according to the committee’s website. He also said the Pension Benefit Guaranty Corp. invested a significant portion of its funds in mortgage-backed securities, according to the release.
The other news involved the California Pension fund with an investment portfolio of USD 233.4 billion has approximately lost 20 per cent of its investment value.
The news reads
The funded status of the California Public Employees’ Retirement System (CalPERS) could fall to as low as 68% by the middle of next year unless the scheme is able to turnaround a 20% loss on its value since 1 July, its actuaries have warned. And if returns do not improve in the 2008-09 fiscal year, employee contributions will have to go up.
This is indeed serious news. There are about 200 pension funds in the US with assets size of more than USD 5 billion. The top ten Pension Funds assets amount to USD 1.2 trillion. The 100th Pension Fund in January this year was of National electric at USD 13 billion. Most of these Pension Funds have invested heavility in US and International Stocks, and equity investments routinely outnumber the fixed income investments. It is very common to see 60 per cent of the investments in the stock market. To quote a few New York State Commons PF invests 60 per cent, Calpers -62 per cent, California teachers PF- 64 percent in stocks, Florida State Board-66 percent , City Retirement- New York - 70 per cent and Texas Teachers PF 66 per cent. These are
pention funds in the top decile in terms of size. Therefore, one can easily guess given the market trends, these entities must have at this point a notional loss of USD 200 billion in aggregate, if not more.
Luckily for the Pension Funds, the contributors cannot just ask the money back, these funds are locked in, committed contractual savings.
If the market improves, the negative mark to market losses will reduce and before the year end, which in many cases are September 2009, there is a chance for recovery.
But the Asset- Liability Management framework in the Pension Funds are already under stress and to recover from the loss, there are talks about raising the contributions.
Here we are in a tricky terrain.The growing fiscal deficit in the US with slowing growth rates have already put considerable pressure on American middle class and their purchasing powers. Joblessness in on the rise- and this is not limited to the Banking sector. Billions have been literally taken out of the pockets of the masses to salvage the US pride in the wars in Iraq and Afghanistan. The masses are pushes to the corner and additional savings burden for the late life can only accentuate procyclical behaviour in the growth rate already heading southward.
The Pension Funds are typically challanged by the demographic profile, The addition to the workforce cannot match the addition to the retirement beneficieries. the present economic situation can only aggravate the asset liability mismatch in the pension fund sector struggling to fight out demographic disadvantage.
The impact on the Pension Fund sector is likely to be long drawn. We will not see sudden collapses , but a very painful process of adjustment. Risk based contributions will be reviewed and raised due to the compulsions of pure economic logic. The pressures will have economy wide ramification and this certainly is not good news for an economy in a near recessionary state.
Posted by sunandoroy at 02:26 PM
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