Pension Woes

Excerpts from Bloomberg:

Pension Funds Pare Stocks, Ignoring Economic Rebound (Update1)

By Alexis Xydias and Adam Haigh

Funds overseeing money for California teachers and public workers, Dutch government retirees and South Korean private- sector employees reduced their target weightings for equities this year, data compiled by Bloomberg show. The rest of the 10 largest kept them the same. U.K. pensions have cut stock allocations to the lowest since 1974, according to Citigroup Inc. Managers handling Oxford and Cambridge University professors' assets have been selling shares as the MSCI World Index posted a five-month, 53 percent rally.

"Given the storm in financial markets that we have seen, the name of the game is risk
management," said
Dirk Popielas, head of the Pension Advisory Group at JPMorgan Chase & Co. in Frankfurt. "The majority of pension funds have not finished taking risk off their portfolios. Some have not even started."

Losses suffered in the worst decade for stocks versus bonds since at least 1900 drove pension funds to pour more money into fixed income, commodities and derivatives just as signs the global recession is easing helped equities rebound from the MSCI World's biggest annual drop on record.

The average return for U.S. stocks has trailed government bonds by about 8.6 percentage points annually since 1999, after outperforming by 8.2 points last century, based on data compiled by the London Business School and Zurich-based Credit Suisse Group AG.

The following are the world's 10 largest pension funds as

ranked in September by Pensions & Investments and Watson Wyatt

Worldwide. The right column shows their equity target allocation

and whether they have cut or left it unchanged.

1. Government Pension Investment Japan Held at 20%

2. Government Pension Norway Held at 60%

3. ABP Netherlands Cut to 29% from 32%

4. California Public Employees U.S. Cut to 49% from 56%

5. National Pension Korea Cut to 15% from 17%@

6. Federal Retirement Thrift U.S. #

7. California State Teachers U.S. Cut *

8. New York State Common U.S. Held at 51%

9. Local Government Officials Japan Held at 25%

10. Florida State Board Held at 56%

@ Domestic equities.

# Doesn't maintain a target.

* Calstrs said on July 21 that it had shifted 10% from global

equities and would adopt a new asset allocation mix to further

diversify the portfolio and reduce its stake in stocks.


Pension funds are waking up to the fact that they have been playing roulette with contributors' money and have come up short. Rather than having a pay as you go scheme, many funds are relying on large stock returns to fulfill their longer term obligations. A pension fund I contribute to raised its contribution rate twice in the past 7 years. The rate I pay has doubled.

The troubling thing about pensions is that the majority of baby boomers have yet to retire. Who will replace them as contributors given our demographics? Smaller families lead to a smaller workforce and higher dependency ratios.

(More on this in a future post)