Mar 30, 2011 8:53 PM GMT
So, in response to poor(er) historical returns as a result of risks they did not anticipate and underfunding, public union pensions are looking to increase their risk in hopes of a better return. How can they possibly expect this to end well?
Hedge fund returns won't save public pensions
State pension funds are putting more of their money into higher risk investments like hedge funds, private equity, real estate, and commodities. But it won't fix their problems.
As most everyone knows (and as politicians and public workers in Wisconsin, New Jersey, and New York are acutely aware) state and local pension funds could use some big investment paydays. The funds have pension and retiree healthcare obligations that they can't afford to pay.
Pension fund managers have been pushing to allocate more to alternatives since 2005, hoping that the new strategy would generate higher returns. Academics and public worker unions voiced concern, but hedge funds and private equity seemed too lucrative to ignore as markets rose through 2007.
With markets rising again, the number of public pension funds that have allocated money to hedge funds has increased by 51% since 2007, according to a study by Preqin; the mean allocation to hedge funds, meanwhile, nearly doubled over the same period to 6.6%.
The San Diego County Employees' Retirement Association (SDCERA) may increase allocations to approved alternative asset managers, without getting additional authorization, reports HFMWeek. It follows a similar move made last year by the Arizona Public Safety Personnel Retirement System (PSPRS).
The New Jersey State Investment Council is also jumping in -- it recently voted 8-3 to invest up to 38% of the state's pension funds in an array of alternative investments, up from its current allocation of about 15%. The change could be approved in May.
But these investment moves don't solve the real problem facing the pension system, says Douglas Forrester, who served as director of pensions in New Jersey in the 1980s. "The current problem is not a result of lower than average investment returns, so higher than average returns won't really make things better," he says.