When two US technology-related banks failed this month, among the investors who lost millions were public sector pension funds responsible for securing the retirements of teachers, firefighters and other government employees.
Pension funds, like others, benefited from the bull market and, like many investors, suffered when investments soured.
Many lost value last year when their investments in Russian assets became almost worthless after much of the world froze that country’s economy following its invasion of Ukraine. Some held shares in cryptocurrency-related companies that went bankrupt amid the collapse of FTX and its founder, Sam Bankman-Freed.
Because pension funds are diversified investors whose holdings in Silicon Valley Bank and Signature Bank made up a small portion of their portfolios, pundits aren’t overly concerned about losses to relatively small holdings.
But the losses show just how risky pensions are as they try to narrow the funding gap.
Look at the status of state pensions and the risks they take. ___
WHAT FUNDS TAKE LOSS FROM INVESTING IN INSUFFICIENT BANKS?
Equable, a privately funded nonprofit that researches and advocates for public pension security, has identified more than two dozen public sector pension funds with direct assets in Silicon Valley or Signature Bank, or both.
In each case, the bank’s shares represented no more than a few dollars out of every $10,000 of assets in the fund.
The fund with the largest stake in Silicon Valley Bank was CalPERS, a fund that serves government employees in California and is valued at $443 billion. He revealed that he owns $67 million in SVB and $11 million in Signature Bank. Together, this amounts to 0.02% of the fund’s assets.
The Ohio Teachers’ Retirement System, the New York State General Fund and the State Teachers’ Retirement Fund, and the Washington State Investment Board were among those who held shares in one or both banks.
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Trading in both shares was halted this month. At the start of 2022, SVB shares were trading at over $700 per share, while Signature Bank was trading at around $300.
It is likely that many pension systems also had bank shares as part of their investment in index funds. It’s hard to say for sure because most funds don’t make their holdings public in real time.
WHAT DO LOSSES MEAN?
They do not help pensioners, but experts do not consider these investment losses alarming.
Pension funds are big investors looking to spread their assets. And while the failing banks showed some signs of trouble, they were still big US banks.
“It is a mistake to say that investing in Silicon Valley Bank shares is inherently risky,” said Anthony Randazzo, chief executive of Equable.
HOW ARE STATE PENSIONS MADE?
They have improved in recent years, but most still lack the assets to pay for the promised benefits.
Most of the plans were fully funded in 2000. But around the same time, many pension plans increased benefits, reduced government contributions, or both. These decisions added to the impact of the 2008 financial crisis on funds as market losses widened their funding gap. By 2016, Pew Charitable Trusts found that public funds only had two-thirds of what they needed to cover their obligations.
Thanks to largely strong markets, larger government contributions, and changes in benefits, including cuts to pension promises for newly hired workers and requiring workers to contribute more, the terms of the funds have improved. By 2021, after a year of significant market growth, Pew estimated that public pensions were 84% funded, the highest level since the Great Recession began in 2008.
David Drain, who studies public sector pension systems at Pew, said the funding gap is likely now at about the same level as it was before the market turmoil during the coronavirus pandemic.
But he said larger government contributions, including higher than required in states including California and Connecticut, and other changes have increased their likelihood to withstand future market drops.
“It’s a low bar,” Drin said, “but they’re better prepared than they were preparing for the Great Recession.”
DO PENSION FUNDS MAKE RISK INVESTMENTS?
Equities and equity investments still make up the majority of public sector pension fund assets tracked by Boston College’s Center for Retirement Research.
But the share of assets in other — and often more volatile — investments like real estate and hedge funds has risen over the past two decades. For example, investment in private equity has almost quadrupled, from 2.3% of fund investments in 2001 to 8.7% in 2021.
“They are asked to earn an average of 6.5% to 7.5% per year,” said Equable Institute’s Randazzo. “And the only possible way is to take significant risks.”
Randazzo said if governments want pension funds to play safer, they can increase their contributions. But the more taxpayer money goes into pension funds, the less is left for other priorities like schools, roads and tax cuts.
Keith Brainard, director of research for the National Association of Public Pension Administrators, notes that the stock market downturn in 2001 hit pensions hard because their assets were mostly stocks.
Investing in other assets could help mitigate stock losses, he said.
“Some people cynically call it ‘the pursuit of profit,'” Brainard said. “I think ‘diversification’ is the best description.” ___