How bad is the pension crisis? In a recent , one of the nation’s largest pensions (CalPERS) is in for another strategy shift was outlined for Calpers. Check out my recent podcast on this.
How did this dilemma begin?
Aren’t pension promises to pensioners unbreakable? Well, it depends.
A pension has many qualities similar to most investments, in that, past results are no guarantee of future performance. Other notable shifts happened to be around (1) the deceleration of traditional asset class returns, (2) the rise of the defined contribution plan in the 1970s, and (3) the passive (let’s just call it lazy) investment policy of large pension funds. Let’s unpack all of these reasons as we look at the pension crisis.
Traditional Asset Returns Aren’t the Same
Well in the late 70s, companies shifted this burden to the employee. It did a couple of things (thus the double-edged sword reference). First, it removed the pension obligation from their financial statements. Pension obligations are liabilities and liabilities need to be in access of assets in order for the balance sheet to remain healthy-looking. This has a direct impact on how analysts view a company and thus rate a stock (for Wall Street’s purposes). Next, it forced employees like Bob Sr. to become investment savvy overnight by having to learn how to provide retirement income for himself through a disciplined savings strategy called the 401k. The result? Largely a win for the companies and a loss for Bob Sr. A found that 4 out of 5 people are at least somewhat concerned about their ability to save. You’re probably asking how does this drive down the returns of stocks? It does because your typical 401k has anywhere from 8-20 choices (mostly stocks) which everyone buys. With no other alternatives, everyone buys stocks pretty blindly because they have to save for retirement. This just creates a cycle of asset buying that pushes prices higher resulting in lower returns.
Why a Passive Strategy Doesn’t Always Work