Public pension plans fell an average of 7.9% in the year ended June 30, according to data from the Wilshire Trust Universe Comparison Service released Tuesday, their worst annual performance since 2009 and a new sign of the chronic financial strain facing governments and pension savers .
Much of the damage occurred in April, May and June as global markets came under severe pressure from inflation concerns, high stock valuations and a broad pullback from speculative assets, including cryptocurrencies. Funds that manage the retirement plans of teachers, firefighters and police officers returned a median of -8.9% over the three-month period, their worst quarterly performance since the early months of the global pandemic.
“It’s been a really, really bad quarter for investing, there’s no getting around that,” said Michael Rush, Wilshire’s senior vice president.
The results underscore the pain felt by many investors in a year marked by a rare combination: simultaneous sharp declines in both stocks, considered risky, and bonds, which are not and are therefore often used as a hedge by investment managers be bought.
This double whammy has hit retail and institutional investors alike as the Federal Reserve hiked short-term interest rates to curb inflation. For state and local governments across the country, the losses will mean higher annual pension contributions for years to come, forcing many officials to increase taxes or other revenues or cut services.
Public pension funds have hundreds of billions of dollars less available than they need to meet future benefit commitments. A record run in stocks gave them a decade of relative leeway. But even after a blockbuster median return of nearly 27% last year, many pension schemes remained underfunded as expected benefit cost growth outpaced asset growth.
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That deficit, along with aggressive annual return targets of about 7%, has prompted pension funds to take investment risk with an average equity allocation of 57% as of June 30, according to data from Wilshire pension funds. A larger equity allocation increases the funds’ exposure to stock market movements; A rebound in stock and bond prices in recent weeks could ease some of the pain of the past year.
Larger public pension funds fared better than smaller ones over the past year, with those with more than $1 billion under management a median of -6.6% and plans over $5 billion with a median of -5.1% achieve % as shown by the data.
Bigger plans tend to attract more experienced investment professionals and hold less money in stocks. But probably the main reason for their comparatively smaller losses is that these plans keep a fifth or more of their money in so-called alternative assets like private equity and report returns on those assets with a one-fourth lag.
An example is the return of -6.1% reported by the nation’s largest pension fund, the California Public Employees’ Retirement System, for the year ended June 30. That figure reflects a 21.3% return on private equity and a 24.1% return on real estate. Both cover the 12 months ended March 31 and exclude losses in the second quarter of 2022.
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On this basis, some of the better-performing pension funds almost managed to break even.
The Los Angeles County Employees Retirement Association reported a return of 0.1% for the year ended June 30, while the School Employees Retirement System of Ohio returned -0.5%.
The California State Teachers’ Retirement System, the country’s second-largest pension fund, fell 1.3%.
Some funds benefited from their holdings in assets that are expected to hold up well amid inflation. For the 12-month period ended June 30, the Los Angeles County Fund earned 3.2% from publicly traded infrastructure investments and 17.3% from publicly traded natural resources and commodities investments.
Fixed income investment managers are reminding their boards to focus on long-term returns, which have been good for the past several years leading into 2022.
“A year is like the pace of a mile in a marathon,” Christopher Ailman, chief investment officer for the California Teachers’ Fund, said at a board meeting last month. “Last year was so positive, it gave us such a nice head start, we could be flat for another year and still have a 7% three-year return.”
Write to Heather Gillers at [email protected]
Corrections & Enhancements
The Los Angeles County Employees Retirement Association earned 3.2% on publicly traded infrastructure investments and 17.3% on publicly traded natural resources and commodity investments for the 12-month period ended June 30. A previous version of this article incorrectly said that the yield was 3.8%. or 3.2%. (Corrected on August 9th)
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