Tags: Public | Pensions | Risk | Returns

Public Pensions Adding Risk to Increase Returns

Tuesday, 09 Mar 2010 02:13 PM

By Dan Weil

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While corporate pension funds are reining in risk to protect workers’ retirement money, public pension funds are doing the opposite.

They’re reportedly dipping into everything from commodity futures, to junk bonds, foreign stocks, deeply discounted mortgage-backed securities and margin investing.

Some are even investing in hedge funds.

“In effect, they’re going to Las Vegas,” Frederick Rowe, a Dallas investor and former chairman of the Texas Pension Review Board, told The New York Times. “Double up to catch up.”

State and local governments are trying to recoup the money their pension funds lost in the financial crisis.

But corporations are taking a much more conservative approach, shifting from stocks to long-term bonds to prevent losses.

Part of the problem is that state and local governments project 8 percent returns on their pension investments as part of their financial planning.

Many funds have been averaging only 3 percent during the last 10 years, but they’re reluctant to change their forecasts, the Times reports.

“Nobody wants to adjust the rate, because liabilities would explode,” Trent May, chief investment officer of Wyoming’s state pension fund, told the Times.

Warren Buffett warned of the problems in his 2008 letter to shareholders. “Public pension promises are huge, and, in many cases, funding is woefully inadequate,” he wrote.

“Because the fuse on this time bomb is long, politicians flinch from inflicting tax pain, given that the problems will only become apparent long after these officials have departed.”

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