Public
pension funds in US states are facing their worst year of losses in
history, exacerbating existing funding shortfalls and putting pressure
on state governments to shore them up.
In the nine months to the
end of September, the average state pension fund lost 14.8 per cent,
according to Northern Trust, a fund company. The loss has grown since,
as financial markets slumped further in October. The previous highest
loss for state funds was 7.9 per cent for the full year in 2002.
California’s
Calpers, the US’s biggest pension fund, last week reported a loss of 20
per cent of its assets, or more than $40bn, between July 1 and October
20 this year.
State and local pension funds comprise a patchwork
of 2,700 funds that manage $1,400bn on behalf of 21m employees,
including teachers, firefighters and other municipal workers.
About
40 per cent are underfunded, meaning that they would not be able to pay
the future pensions that employees have been promised. State
governments have lifted pension benefits – a move that is politically
popular – but have often failed to put in more money to pay for them.
Richard
Daley, mayor of Chicago, this year convened a taskforce to address the
shortfalls in Illinois funds. For example, funding for the Police Fund
has fallen to less than 50 per cent.
A Chicago police officer
told the Financial Times: “We are risking our lives here every day, but
we have no idea if the pension we have been guaranteed will be there
when we retire.” The officer called on the city to start contributing
more to the fund.
Susan Uhran, managing director of the Pew
Center on the states, said: “They [the states] will have to increase
their annual contributions, and they may also ask employees to lift
their contributions too.”
“This is going to be a vicious cycle of
pressure on pension funds,” said Greg Pai, managing director of
Paradigm, a money manager. “They have previously looked to state and
corporate subsidies, but
. . . [state governments] have lower tax revenue and are under pressure
to cut costs.”
Many
states face their own budget crunches, and members of Congress are
pushing for a second fiscal stimulus package, in part to alleviate some
of the pressures on state funding. Nancy Pelosi, speaker of the House
of Representatives, cited money lost from pension funds in her push
this month for the $150bn second stimulus.
But the funds
themselves have limited options, said Mr Pai. Many are under pressure
to move away from shares into less risky investments, but that would
mean reducing returns.
Critics say the underfunding is worse than official data show.
The calculation is based on an assumption of annual returns of 8 per
cent, but few funds will reach that in the next few years.
Commodities/Futures, Strategy/Allocation | MacroMan | 
October 31, 2008 4:49 pm | 
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