Tag Archives: Underfunded pensions

Central Banks Bailed Out Markets To Avoid Trillions In Pension Losses, by Tyler Durden

Posted on June 15, 2020 | 2 comments

The last thing that the world’s many underfunded pensions need is bear markets in either stocks or bonds. Can central banks save their bacon? From Tyler Durden at zerohedge.com:

The Organization for Economic Co-operation and Development (OECD) recently published a report showing how pension funds in OECD countries recorded a massive loss of approximately $2.5 trillion during the stock market meltdown in February through late March. Shortly, after that, central banks intervened with monetary cannons to rescue stock markets and other financial assets to avoid pension returns from going negative.

The spread of COVID-19 worldwide and its knock-on effects on financial markets during the first quarter of 2020 are likely to have reversed some of these gains. Early estimates suggest that pension fund assets at the end of Q1 2020 could have dropped to USD 29.8 trillion, down 8% compared to end-2019 [or about a $2.5 trillion loss].

The drop in pension fund assets is forecast to stem from the decline in equity markets in the first quarter of 2020. Returns, inclusive of dividends and price appreciation, were negative on the MSCI World Index in the first quarter of 2020 (-20%), and between -11% and -24% on the MSCI Index for Australia, Canada, Japan, the Netherlands, Switzerland, the United Kingdom, the United States.

An increase in the price of government bonds that pension funds own could partly offset some of the losses that pension funds experienced on equity markets in Q1 2020. Some Central Banks, such as the Federal Reserve in the United States, cut interest rates in 2020 to support the economy. The fall in interest rates may lead to an increase in the price of government bonds in the portfolios of pension funds as the yields of newly issued bonds decline. – OECD

Bloomberg’s Lisa Abramowicz pointed out in a tweet, “this report [referring to the OECD report] shows the massiveness of pension assets & points to why central banks are tethered to bailing out markets: social infrastructures depend on their not going down too much.”

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Posted in Banking, Business, Economy, Financial markets, Investing, Pensions

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“We Are Going Up In Flames”: New Jersey In “Worse Shape Than Any Other State” Senate President Admits, by Tyler Durden

Posted on August 28, 2019 | Leave a comment

It looks like New Jersey, rather than Illinois, may be winning the race to the fiscal bottom. From Tyler Durden at zerohedge.com:

For years, it was conventional wisdom that the most financially-challenged state in the US – whether it comes to overall debt burden, outlays, tax collections, underfunded pension and retirement obligations, or simply credit rating – was Illinois, followed closely by New Jersey in second place.

However, according to New Jersey’s Senate president, conventional wisdom is wrong. In an interview with Bloomberg, Senator Stephen Sweeney, a Democrat, said that that credit-rating companies may be underestimating the severity of the state’s financial strains by giving it the second-lowest grade after Illinois.

“We are in worse shape than Illinois,” Sweeney said. “We are not investing in education, we are not investing in the areas that we want because all the money is going to pensions and health care.”

As Bloomberg notes, these comments underscore the persistent fiscal pressure on New Jersey, a high-tax state contending with massive debts to employee pension funds after years of failing to set aside enough to cover the $212 billion of benefits that have been promised. As extensively discussed in the past, New Jersey’s retirement system had about $82 billion of assets in 2018, only 38% of what it needs to cover checks that are owed in the decades ahead. That’s lower than any other state system in the U.S., according to data compiled by Bloomberg. The state’s obligation for retirees’ health care benefits adds another $90.5 billion. The state’s solution? Raise expected pension fund returns from 7.0% to 7.5%!

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Posted in Business, Debt, Government, Labor, Law, Pensions, Politics

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An Open Letter on the Next Great Crisis wrought by the Fed, by Stephanie Pomboy

Posted on January 8, 2019 | Leave a comment

Stock markets have staged a vigorous rally and the economy has expanded since the financial crisis of 2008-2009. Paradoxically, pension funds have become more underfunded. From Stephanie Pompoy of Macro Mavens at nebula.wsimg.com:

Actions have consequences. Even for the Fed.

That’s not a reference to the market’s grumpy reaction to the central bank’s continued rate hikes and quantitative tightening. No. The impact of both on financial assets were as obvious as they were inexorable. To be sure, Wall Street’s resident soothsayers had a good run spinning tales that ‘this time’ was different. A tightening Fed, we were assured, was a good thing—a ringing endorsement of the economy’s indefatigable strength. But, in the end, there was simply no way around the basic fact: Just as rate cuts and QE were designed to expand the pool of credit and incent the embrace of risk, so would rate hikes and QT necessarily beget the reverse. And so they have.

But while the impact of receding liquidity and the reduced reward for reckless speculation and risk-taking have finally begun to play out on Bloomberg screens everywhere, the real devastation has yet to be revealed. In the ensuing weeks and months the full and lugubrious legacy of the Fed’s great monetary experiment of the last decade will finally come into view. Beyond inflating and bursting a bubble in corporate debt (with leveraged loans acting as posterchild), the Fed’s decade-long financial repression has had a far larger and more sinister impact. It has silently bankrupted the US pension system.

Sound overly-dramatic??

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The only options for Illinois millennials: fight or flight, by Ted Dabrowski and John Klingner

Posted on November 21, 2018 | Leave a comment

We are going to be seeing a lot of stories like this in the not very distant future. From Ted Dabrowski and John Klingner at wirepoints.com:

Don’t expect Illinois millennials to ignore the state’s collapsing finances for long. They’ll soon be asked to bear more and more of the financial and economic costs, from higher taxes to diminishing job prospects to cuts in funding for their kids’ schools. That’s when Illinois’ millennials will either fight back, as they’ve done on many national issues, or they’ll simply leave the state. It’s that simple.

A first sign of that fight came in a recent Crain’s opinion piece – A millennial’s call for fiscal sanity in Illinois. The author Thomas Dowling says “Our generation’s economic future will largely depend on Gov.-elect Pritzker’s ability to balance the state budget, which means solving the state’s pension crisis.”

Dowling seems to get how bad things are. He realizes that even the best-case pension scenario will still be painful for everyone. “Even with reform, residents under the age of 30 – my peers and the children of many of Pritzker’s transition team members – will pay for their parent’s unfunded liabilities for the rest of their lives. We will face the consequences of higher taxes and reduced government services. We are the ones that will shoulder the $129 billion for the foreseeable future.”

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Posted in Business, Collapse, Debt, Economy, Government, Pensions, Politics, Taxes

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The Unavoidable Pension Crisis, by Lance Roberts

Posted on April 7, 2017 | Leave a comment

As SLL has been saying for some time, the writing’s on the wall for pensions. Lance Roberts details the numbers and reaches the same conclusion: math is math and pensions are in trouble. From Roberts at realinvestmentadvice.com:

There is a really big crisis coming.

Think about it this way.

After 8 years and a 230% stock market advance the pension funds of Dallas, Chicago, and Houston are in severe trouble. But it isn’t just these municipalities that are in trouble, but also most of the public and private pensions that still operate in the country today.

Currently, many pension funds, like the one in Houston, are scrambling to slightly lower return rates, issue debt, raise taxes or increase contribution limits to fill some of the gaping holes of underfunded liabilities in their plans. The hope is such measures combined with an ongoing bull market, and increased participant contributions, will heal the plans in the future.

This is not likely to be the case.

This problem is not something born of the last “financial crisis,” but rather the culmination of 20-plus years of financial mismanagement.

An April 2016 Moody’s analysis pegged the total 75-year unfunded liability for all state and local pension plans at $3.5 trillion. That’s the amount not covered by current fund assets, future expected contributions, and investment returns at assumed rates ranging from 3.7% to 4.1%. Another calculation from the American Enterprise Institute comes up with $5.2 trillion, presuming that long-term bond yields average 2.6%.

With employee contribution requirements extremely low, averaging about 15% of payroll, the need to stretch for higher rates of return have put pensions in a precarious position and increases the underfunded status of pensions.

With pension funds already wrestling with largely underfunded liabilities, the shifting demographics are further complicating funding problems.

One of the primary problems continues to be the decline in the ratio of workers per retiree as retirees are living longer (increasing the relative number of retirees), and lower birth rates (decreasing the relative number of workers.) However, this “support ratio” is not only declining in the U.S. but also in much of the developed world. This is due to two demographic factors: increased life expectancy coupled with a fixed retirement age, and a decrease in the fertility rate.

To continue reading: The Unavoidable Pension Crisis

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