US Pension Funds Face Catstrophe With Even A Minor Market Dip

Cracks among many state US pension funds continues below – last updated 9/14/2017 at 9:15AM EST]

The deteriorating global pensions situation is something we’ve been following closely here at ValueWalk. Rising pension liabilities, falling fund returns, and high management fees have eaten into pension funds’ fiscal reserves. Many corporates, as well as municipal fund, are now struggling to fill a widening gap between assets and liabilities.

As we reported at the end of August, analysis by Willis Towers Watson, which evaluated pension plan data for 410 of the Fortune 1000 companies with defined-benefit pension schemes, had an aggregate pension funded status of 80% at the end of 2016, down from 99% in 2006.

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Pension Funds: Trying To Meet Obligations 

Trying to fill this gap is draining company coffers. According to the Towers Watson report, companies contributed $35 billion their pension plans during the year and benefited from an average investment return of 6.7%. However, a 28 basis point decline in discount rates pushed liability values up 3.4%.

Companies are not facing pension problems alone. US pension funds are chronically underfunded with the shortfall between assets and liabilities estimated at just under $3.9 trillion. The gap jumped by $434 billion last year alone. Chicago estimates that underfunded pension liabilities equal 19 years of city tax revenues. Meanwhile, CalPERS projects average government contributions to public safety plans will peak at 40% of payroll in fiscal 2020, up from approximately 32% in fiscal 2015. San Diego’s pension assets amount to 259% of its revenues.

Who is to blame for these issues? Well, there are many contributing factors. For a start, people are living longer, which means funds have to pay out more over time than initially planned for.

Second, US pension funds are far too generous to scheme members. As an example, the New York Times’ DealBook reported on a study earlier this year which claims that more than three-fourths of all American teachers hired at age 25 will end up paying more into pension plans than they ever get back. Puerto Rico is a prime example. The state owes retired public workers more than $40 billion that it has no immediate way of paying. The Chicago Teachers’ Pension Fund has roughly $10 billion in assets to cover $21 billion in future payment obligations. To fill the gap, the fund is currently borrowing nearly a billion dollars a year from taxpayers.

Third, pension fund trustees are terrible investors. A report from The Pew Charitable Trusts published at the beginning of 2017 laid out just how much the poor investment performance of schemes really is. As ValueWalk reported at the time:

“10-year total investment returns for the 41 funds Pew looked at reporting net of fees as of June 30, 2015, ranged from 4.7% to 8.1%, with an average yield of 6.6%. The average return target for these plans was 7.7%. Only one plan met or exceeded investment return targets over the ten-year period ending 2015.” 

Fees on investment products ate up a huge portion of returns:

“In total, the US state pension system paid $10 billion in fees during 2014 this figure does not include unreported fees, such as unreported carried interest for private equity. Pew’s analysts estimate that these unreported fees could total over $4 billion annually on the $255 billion private equity assets held by state retirement systems.”

US pension funds – Dismal Returns with higher risk

According to a new report from

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