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Pensions, Unsurprisingly, Miss Their Mark

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I have warned for years that public pensions are overestimating their future returns, and therefore are a giant source of debt for future taxpayers who will be forced to pick up the deficit.

At the end of the fiscal year in June, median public pensions had missed their expected returns by 1.1 percentage points. Bloomberg’s Martin Z. Braun reports:

U.S. public pensions posted their weakest performance in three years, falling a percentage point short of their investment targets, and the prospect of rock-bottom interest rates and a trade-war induced recession could put a greater strain on state and city retirement plans.

The median U.S. public pension returned 6.2% in the fiscal year ending in June 30 after paying fees to investment managers, according to Norwalk, Connecticut-based InvestmentMetrics, which provides analytics to institutional investors. Pensions assume a median annual investment return of 7.3% to cover promised benefits.

“The market is challenged,” said Farouki Majeed, chief investment officer of the $14.7 billion School Employees Retirement System of Ohio, which returned 6.6%, short of its assumed 7.5% return. Over a 10-year period, the fund has returned an annualized 9.4%. “We certainly don’t expect that over the next 10 years.”

The Ohio pension, like other government retirement systems, have increased their allocations to riskier investments in stocks and private equity as a decades-long decline in interest rates and slow global economic growth made it harder for them to meet long term targets.

Not only are pensions failing to reach their expected returns, but they are investing in ever riskier classes of assets in an attempt to keep up. Does that sound like the sort of sound policy you want to rely on in your retirement?

Read some of what I have written in the past on pensions, and you’ll begin to get an understanding of just how dangerous this situation is:

I encourage anyone who has been promised a public pension to have a plan B. Save as much as you can in case the rosy estimates of your pension’s planners don’t come to be.

Originally posted on Your Survival Guy. 

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E.J. Smith

Editor-in-Chief
E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@youngresearch.com.