How Secure is Your Pension?

The answer to that question may rest on whether your pension is paid by a public or private pension fund.  Pension funds pay benefits to retirees through a combination of investment gains, and contributions from employers and workers.  For private pension funds, shortfalls in investment returns are typically made up through increased contributions from employers.  This safety net is not generally available to public pension fund managers.  Consequently, under-funded public pension funds are left with a choice between reducing benefits for existing workers, cutting back public services and/or raising taxes.

Since these are all difficult political choices, and courts tend to block any effort to reduce benefits, public pension fund managers are seeking to increase investment returns.  Some underfunded pensions are pushing to invest a larger percentage of assets in private equity, real estate and other riskier alternative assets.  Other managers have successfully taken advantage of recent, exceptional opportunities in the more traditional equity markets. This has given rise to suggestions that aggressive investment strategies may be a solution to chronic public pension fund under-funding.  History suggests that the very strong demand for equities, since the March 2020 Covid-19 driven market rally, is unsustainable.  Over the last 90 some years, the S&P 500 average has grown at a 10.2% compound average return.

The problem of underfunded public pension funds is not just going to go away.  Some solution has to be found, but the repercussions, costs, and who pays, are hard to predict.

All comments and suggestions are welcome. Walter J. Kirchberger, CFA