Pension funds are buying more bonds and paring investments in stocks in the aftermath of the financial crisis as more baby boomers seek safer investments ahead of retirement.
The oldest of the baby boomers, the millions of Americans born between 1946 and 1964 in the population boom after World War II, will turn 65 next year.
Trends for 2009 and 2010 so far indicate that allocating 60 percent to equities — standard for pensions before the market collapse of 2008 — may never return, according to the author of an annual study on the subject.
Corporate pension plans are likely to trim exposure to stocks to about 50 percent and permanently raise allocations to bonds to roughly 35 percent — up from 30 percent before the global financial crisis, said John Ehrhardt, the study's main author. He is principal and consulting actuary in New York at Milliman Inc., an employee benefits consulting firm.
Even after U.S. stock markets rebounded last year, equity allocations rose by the end of 2009 to just 46 percent from 44 percent at the end of 2008, according to the annual Milliman Study of defined benefit pension plans at publicly traded companies, accounting for total assets of $1.088 trillion.
That's down from about 55 percent in 2007.
Pension plans are reluctant to increase equity holdings, fearing they could be caught on the wrong side of stock market volatility.
"The financial crisis from the end of 2008 through to 2009 brought home in spades that over a period of three to four months, these plans (could go) from over funded to underfunded," Ehrhardt said.
"Companies just don't want to see that happening to their balance sheets again," he said.
In a broad reflection of persistent caution about stocks, individual investors have been pouring most of their new investments into bonds.
From the start of January, 2009 through June 30, 2010, the bond funds tracked by EPFR Global have taken in a net $507 billion while inflows into all equity funds were just $26 billion.
"Retail investors, having been "blown up" twice in a decade, have shifted their allocations in favor of bonds — the more so since many baby boomers were already approaching the point when basic investment theory says you reduce your exposure to equities," said Cameron Brandt, senior analyst at EPFR Global in Cambridge, Mass.
"There has certainly been a marked shift toward fixed income," Brandt said.
In corporate pension plans, "there still is a lot of downward pressure on equity allocations," Ehrhardt said. "More and more companies are de-risking their portfolios, moving to liability-driven investing."
James Moore, pensions strategist and executive vice president with bond fund management company Pacific Investment Management Co., or Pimco, has seen the same trend: Pension plans are trying to reduce the volatility of their investments.
Pension fund allocations to equities are typically down to about 50 percent, while fixed income has risen to more than 35 percent and the rest is in cash and alternative investments, said Moore, who works in Pimco's Newport Beach, Calif., office. He expects these asset allocation levels to endure over the longer term.
The "other" category of investments, which includes alternative investments and hedges against risk, rose to 17 percent of allocations at the end of 2009 from 12 percent at the end of 2008, according to the Milliman Study.
Ehrhardt expects that allocation to stay near 17 percent at the end of this year, consolidating the trend of trying to lower investments' volatility.
"The many who have suffered massive wealth losses as a result of the crash in stocks, house prices, and pension fund assets simply cannot afford another major decline in net worth," investment manager J. Anthony Boeckh wrote, in "The Great Reflation," his recently published book.
The oldest baby boomers — in their late 50s and early 60s — are approaching retirement loath to embark on another chancy adventure with stocks, analysts say.
The drop of almost 58 percent in the U.S. benchmark Standard & Poor's 500 Index between October 2007 and March 2009 is still a painful memory.
"All of this means that fixed-income assets will be of much greater importance and concern to most investors in the future," Boeckh added.
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