Fragile Retirement Funds Tested by Market Volatility, Bond Yields Pension funds likely shrank about 3% to 5% over the past few weeks, by one estimate ‘Investing is a really easy business until you go through a correction,’ a county retirement-fund executive said. A New York Stock Exchange trader on Tuesday. Photo: Michael Nagle/Zuma Press By Heather Gillers March 5, 2020 7:00 am ET The list of institutions challenged by the impact of the coronavirus now includes America’s pension funds. State and local government retirement systems face the difficult task of trying to plug funding gaps while protecting against investment losses. The past two weeks of falling bond yields and heightened stock-market volatility have made that job even more complicated. Stocking UpPublic pension stockholdings surpassedprecrisis levels for the first time last year.Median share of assetsSource: Wilshire Trust Universe Comparison ServiceNote: Data reflect holdings as of Dec. 31.%Equity Fixed income2008’10’12’14’16’182030405060 Pension funds have for years been piling into stocks to try to reduce shortfalls after a decadeslong slide in bond yields slashed the returns they could expect from their fixed-income portfolios. Today, stocks make up nearly 60% of pension fund assets, a 13-year high, according to database Wilshire Trust Universe Comparison Service. Blockbuster returns from the decadelong bull market have helped mitigate deep recession-era losses. But this week, fears about how the novel coronavirus will affect the economy drove the yield on the 10-year Treasury below 1% just as stock volatility shot up on the heels of a massive selloff. Now pension funds are faced with even lower bond yields and no assurance that the equity market will rescue them. The funds, which serve police officers, teachers and other public workers, likely shrank by a ballpark figure of 3% to 5% over the past few weeks, said Steve Foresti, chief investment officer for Wilshire Consulting. “Investing is a really easy business until you go through a correction,” said Jonathan Grabel, chief investment officer of the Los Angeles County Employees Retirement Association. A sustained drop in pension-fund returns can strain the budgets of states and cities, since many are already stretching to shore up retirement funds. Public pension funds held about $4.5 trillion as of Sept. 30, according to the Federal Reserve. That is $4.3 trillion less than the value of promised future benefits. Why Fed's Surprise Rate Cut Is No Miracle Cure You may also like Up Next Why Fed's Surprise Rate Cut Is No Miracle Cure The Federal Reserve cut interest rates by half a percentage point Tuesday in an effort to stem the economic impact of the coronavirus. WSJ’s Justin Lahart explains why the central bank can support the economy in the fight against coronavirus but can’t lead it. Photo: Andrew Harrer/Bloomberg The past few weeks of volatility have affected even one of the nation’s better-funded pension plans, the New York State Common Retirement Fund. The fund manages about $226 billion on a fiscal calendar that ends March 31. “We felt pretty good about reaching our target,” Chief Investment Officer Anastasia Titarchuk said in an interview Tuesday. “Now it’s more dubious.” The current market environment also creates particular problems for corporate pension funds, which operate under stricter rules than public funds about how to assess their liabilities. Pension funds managed by public companies use a corporate-bond rate to calculate the value of their future obligations so those obligations become more expensive as fixed-income rates fall. On top of any stock losses, corporate plans could also be looking at higher liability figures. Pension PlungeAt the nation's largest pension fund, lastweek's stock-market slide erased three weeksof gains in just two days.Market value of CalpersSource: California Public Employees' RetirementSystem.billion Feb. 3Feb. 17March 2380385390395400405$410 “The combination translates to the company writing bigger checks to the pension plan over the next few years and to higher pension expense charges,” said Dave Suchsland, an actuary at Willis Towers Watson. U.S. corporate pension plans’ aggregate funded ratio fell to 81.7% in February, according to Wilshire Consulting, meaning the pension funds have 81.7 cents on hand for every dollar of liabilities, almost 4 cents less than a month ago. Public funds calculate their liabilities using a higher rate than corporate plans, averaging around 7%. That pressures funds to pile on risk in order to deliver returns high enough to bring assets in line with liabilities. As the bull market ground on, many public pension funds took steps aimed at protecting themselves in a downturn. They rolled back assumptions about how much they would earn on investments, shifted money out of some riskier assets and tried to preserve their access to cash for whenever bargains materialize. The Los Angeles county fund, which has a funding level of nearly 81%, reduced its target public-equity holdings by more than 10% in 2018, shifting some of the money into credit investments such as bank loans and emerging-market bonds, Mr. Grabel said. MARKETS IN YOUR INBOX Get our Markets newsletter, a pre-markets primer packed with news, trends and ideas. Plus, up-to-the-minute market data. Sign up. The California Public Employees’ Retirement System, the nation’s largest pension fund whose funding level is around 70%, has tweaked its stock portfolio in an effort to mitigate the impact of a downturn and added interest-rate sensitive Treasurys in the past several years, a spokesman said. “When the crisis happens, first let’s make sure that we can pay all our bills’’ and then also have cash accessible to take advantage of falling prices, Chief Investment Officer Yu Ben Meng told board members in June. But as bond yields have fallen steadily over decades, trying to limit market losses without sacrificing returns has become a tightrope walk for public investment officials. “We’re in that bind,” said Sandy Matheson, executive director of the Maine Public Employees Retirement System, which has a funding level of 82%. “You can’t earn 40% or 50% of your expected return off fixed income.” SHARE YOUR THOUGHTS How might pension plan investment losses affect your company or your town? Join the conversation below. Ms. Matheson said that as markets plunged last week she began revising her forecasts for government pension contributions and fielding questions from state workers. After the last recession, Maine cut pension cost-of-living increases for retired and working state employees and teachers, who earn a median pension of $28,000 and $34,000, respectively, after 25 or more years’ service and don’t receive Social Security. One pension fund seems unfazed by the market turmoil. The South Dakota Retirement System keeps more than 30% of its assets in cash. “We are 100% funded,” said State Investment Officer Matt Clark, “and will remain so even if markets decline somewhat further.” Write to Heather Gillers at heather.gillers@wsj.com https://www.wsj.com/articles/fragil...-by-market-volatility-bond-yields-11583368836
%% Most buy to big a %% of bonds; +NY needs to cut taxes= too many Ichan types moving south. ILL + NJ are among the worst[WSJ chart, past 52 or 104 weeks...................................................................