Pension Funds Suffer Record Losses in First Quarter

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The Journal is your daily deep dive into the biggest stories and money business power for a wider look at today's news the Wall Street Journal's got you covered our what's news podcast. It's concise comprehensive with context and analysis twice a day on the go. It's the news that shapes your world so you can take on the world subscribe to what's News From The Wall Street Journal. Wherever you get your podcasts. Debriefing for Tuesday may twelfth. I'm JR Waylon for the Wall Street Journal. Stock market declines in the first quarter had a devastating effect on stocks 401k investments and pensions and for public pension specifically. It was their worst quarter on record. These funds have been struggling for years to make up these deep funding holes and in an effort to do so. They've taken on more risk and tried to meet very aggressive. Investment targets and this past quarter was a real blow to them. That's Wall Street Journal reporter. Heather gillers coming up. She'll explain why we won't know the full extent of the damage for several weeks and how governments are trying to make up for their losses. Robotics artificial intelligence augmented reality. The future is here. Listen to tomorrow today with the Wall Street. Journal's future of everything the podcast that takes you to the frontlines of science and tech and shows you. What's coming next? Look ahead what do you hear? The future of everything from the Wall Street Journal. Subscribe wherever you get your podcasts. It's been a struggle for governments to maintain their public pension obligations over the past several years and the pandemic has made it a lot worse. Pensions just suffered their worst decline on record and Wall Street Journal reporter. Heather Gillers joins us to explain what comes next so heather. How bad were the losses for pension funds? When the virus was spreading rapidly in the markets were plummeting as it turned out public pension funds lost immediate and thirteen point two percent of their holdings in the quarter that ended. March thirty first. But we still don't know the full extent of the pension losses. Well that's true because as pensions especially large. Pensions have branched out into sort of an alternative investments like infrastructure private equity real estate. It's been harder to measure in real time. The value of those holdings they're not like stocks and bonds where you can get a price any minute almost so often when you get a report on the value of a public pensions private. Equity Holdings say what you're really seeing is the value of those holdings one quarter ago so some of those returns in the portfolio that are beaked into that total return actually reflect quarters and we'll have to wait until next quarter to find out what happened this quarter but even before the PIN DEMOC pension funds struggle to balance their obligations in their cash inflows. Right that's right. There are some very well funded pension funds. New York state is a good example but there are also some very poorly funded pension funds Illinois. New Jersey Kentucky California is probably has probably around seventy percent of the assets it needs to pay future benefits even before this hand. Emmett so these funds have been struggling for years to make up these deep funding holes and in an effort to do so. They've taken on more risk and tried to meet very aggressive. Investment targets and this past quarter was a real blow to them. Because when you say your expectations that high anytime the markets disappoint you. The impact is going to be big these benefits. A lot of them were set a long time ago. When market returns on stocks and bonds were much higher particularly on bonds and it was possible to invest with fairly low risk and get fairly high returns and that has changed a lot but these are thirty year promises and courts have protected them very rigorously in made it difficult to change these benefits so public. Pensions are now often stuck in a place where they have promised benefits but their investments are not growing at a rate that would help them afford those benefits. Another problem is that a lot of governments have used their pension fund kind of like a bank to borrow from when they have encountered other budget problems so governments are supposed to be making yearly contributions to their pension funds but in places like Illinois for example one year when it's a little tight instead of cutting spending they've just decided not to make their full pension payment and that happened for a long time year after year governments lost out on any investment returns. They could have earned on that money. So through a mix of underfunding paying insufficient pension contributions making over optimistic investment return assumptions. And frankly people are living longer. You have these very significant benefit obligations and not enough money to pay for them in the pension fund so our city and state government's going to have to make up for their losses because courts have protected benefits to current workers and retirees very rigorously. Governments usually have three of how to address shortfalls in their pension. Funding one is by earning a lot of money in the markets. That didn't go very well. Last quarter another is by putting more money into the pension funds which is going to be really difficult for governments who are faced with these all these other revenue losses as a result of the pandemic and the third way is cutting benefits for new workers who are not protected by courts. And you saw that happen. Really across the country after the recession the two thousand and eight recession and that may happen again the head of the losses that we know of in the first quarter compared to the last recession. They're not as bad. This quarter is the worst quarter on record worse than the worst quarter of two thousand eight but in two thousand and eight you had losses quarter after quarter and that just hammered pension funds. And if that happens again they will get hammered again. So a lot depends. You know we've already seen the stock market improve a fair amount since the end of March if that continues. Pensions could escape this year. They're gonNA fall short of their investment targets. No matter almost definitely but we'll know by June thirty s and even more by December thirty first whether these investment losses are catastrophic or just difficult or Earth Wall Street Journal reporter hither Gillers Heather. Thanks for coming on the show. And that's your money briefing. Im Jr Waylon for the Wall Street Journal.

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