The Northern Mariana Islands pension has filed for bankruptcy protection. Since it’s a U.S. territory, it technically is the first U.S. public pension to seek bankruptcy protection. The fund reached this point by offering exceedingly generous benefits and not receiving adequate contributions from employees or the government.
The fund suffered huge losses in 2007. It had 75% of its assets invested in stocks. Most pensions have around 60% in stocks. If it were my pension, I’d have even less in stocks. The fund got into this position because it started reaching for better performance. Too much risk was taken on.
A spokesman for the management firm said the retirement fund “worked to meet the financial demands of the promised benefits by pursuing a strategy to increase its rate of return.” In other words, the investment board put the pressure on its managers to improve performance. Money was lost when the risk was increased by managers working with other people’s money.
State and local pension plans are increasingly under pressure to perform. They are vastly underfunded, meaning there’s not enough money to go around. A pension plan should not be investing 75% in stocks. And it shouldn’t be pressured by promises it can’t meet.
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