Pension plans remained severely underfunded during the 11-year bull market that followed the Great Recession. The plunge toward insolvency and high-return markets led fund managers to take on risky bets in hope of staying afloat. Now, the recent selloff has left funds struggling to keep up with their future obligations.
Public pensions are borrowing increasing sums to meet their payout obligations. Nearly $13 billion in pension obligation bonds were sold in 2021, more than in the past five years combined. Now, they’re taking on more risk by investing that leveraged money.
“We need every arrow in the quiver we can get, and private debt is one of the critical ones,” said Dan Bienvenue, CalPERS’ deputy chief investment officer. “There isn’t a no-risk choice.”
The Teacher Retirement System of Texas, the country’s fifth-largest public pension fund, has also used leverage funds since 2019.
Leveraging can help multiply market gains in bull markets, but it can also increase losses during the bear times.
While the majority of pensions still don’t use borrowed funds, there has been a sharp increase over the last four years. Before 2018, none of the largest funds used leverage.
Taking on risk
At the same time, funds began taking on riskier assets during the bull run and low-interest environment to make up for some insolvency.
“Risk-taking behavior is most pronounced among funds with sponsors with the least ability to bear additional risk,” the Fed said.
As interest rates increase and market stability decreases, those pensions could face more trouble.
Read More:The market meltdown threatening pensions for millions of Americans
2022-07-14 14:29:00