Market rout sends state and city pension funds to worst year since 2009

Public pension schemes lost a median of 7.9% in the year ended June 30, according to data from Wilshire Trust’s Universal Comparison Service released on Tuesday, their worst annual performance since 2009 and a new sign of the chronic financial stress faced by governments and retirement savers.

Much of the damage occurred in April, May and June, when global markets came under intense pressure due to concerns about inflation, high equity valuations and a broad pullback from speculative investments, including cryptocurrencies. Funds that manage the retirement savings of teachers, firefighters and police officers returned a median of minus 8.9% for the three-month period, their worst quarterly performance since the early months of the global pandemic.

“It was a very, very bad quarter for investing, there’s no getting around it,” said Michael Rush, senior vice president at Wilshire.

The results underscore the pain felt by many investors in a year characterized by a rare combination: large simultaneous declines in both stocks, considered risky, and bonds, which are not and are therefore often bought by investment managers as hedges.

The punchline hit both households and institutional investors as the Federal Reserve pushed short-term interest rates higher to contain inflation. For state and local governments across the country, the losses will mean higher annual pension contributions in years to come, forcing many public servants to raise taxes or other revenues or cut services.

Public pension funds have hundreds of billions of dollars less than they will need to cover future benefit promises. A record run in stocks has given them a decade of relative leeway. But even after a hit median return of nearly 27% last year, many pension systems remained underfunded, with growth in expected benefit costs outpacing asset growth.

This shortfall, along with aggressive annual return targets of around 7%, has led pension funds to take on the investment risk, with a median equity allocation of 57% as of June 30, according to data from Wilshire. A larger allocation to equities increases the funds’ exposure to stock market fluctuations; a rally in stock and bond prices in recent weeks should ease some of the pain of the past year.

Larger public pension funds have held up better than smaller ones over the past year, with those managing over $1 billion reporting a median of minus 6.6% and plans over $5 billion. dollars yielding a median of minus 5.1%, according to the data.

Larger plans tend to attract more experienced investment professionals and keep less money in stocks. But the main reason for their comparatively lower losses is likely that these plans keep a fifth or more of their money in so-called alternative assets such as private equity and report the returns from these assets with a one-quarter lag.

One example is the minus 6.1% return reported by the nation’s largest pension fund, the California Public Employees Retirement System, for the year ended June 30. This figure reflects a 21.3% return on private equity and a 24.1% return on real estate, both of which cover the 12 months ended March 31 and do not include second quarter losses. 2022.


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Some of the most successful pension funds have nearly broken even on this basis.

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 minus 0.5%.

California’s state teachers’ retirement system, the nation’s second-largest pension fund, posted a return of minus 1.3%.

Some funds benefited from their portfolios of assets which should perform well in an inflationary environment. For the 12 months ended June 30, the Los Angeles County fund gained 3.2% on publicly traded infrastructure investments and 17.3% on publicly traded natural resources and commodities investments.

Pension fund managers are reminding their boards to focus on long-term returns, which in recent years have been good through 2022.

“A year is like the pace of a mile in a marathon,” Christopher Ailman, chief investment officer of the California Teachers’ Fund, said at a board meeting last month. “Last year was so positive, it gave us such a nice lead, we could be flat another year and still have a 7% three-year return.”

Write to Heather Gillers at [email protected]

Corrections & Amplifications
The Los Angeles County Employees Retirement Association gained 3.2% on investments in publicly traded infrastructure and 17.3% on investments in publicly traded natural resources and commodities for the 12 months ended 30 June. An earlier version of this article incorrectly stated that yields were 3.8%. and 3.2%, respectively. (Corrected August 9)

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