US retirement funds heavy on stocks, ready for losses

According to the Wilshire Trust Universe Comparison Service, public pension funds held an average of 61% of their assets in stocks as of December 31, up from 54% 10 years ago. Since then, the Russo-Ukraine war and hopes the Federal Reserve will raise interest rates this month have plunged equity prices, reducing holdings by billions of dollars.

In the nation’s largest pension fund, the California Public Employees Retirement System, total reported holdings have fallen to $475 billion as of March 2, from $482 billion at the end of January. The S&P 500’s total return was minus 2.71% during the same period. About half of the California Worker Fund is in stock.

The situation highlights the public retirement fund’s enduring dependence on the stock market and the potential impact on local government services and municipal-bond prices if losses continue. Smaller retirement systems rely more heavily on stocks than large ones, which are more likely to generate returns from private-market assets such as infrastructure and private equity.

U.S. state and local government pension funds control more than $4 trillion in public-worker retirement savings, but hundreds of billions of additional dollars will be needed to cover future benefits. Over the past 12 years, blockbuster stock performance has increased pension coffers, brought state and local governments closer to being able to cover those liabilities and relieved some of the pressure from taxpayers already burdened with high pension costs. has done.

However, a recession could eventually squeeze state and local budgets. That’s because when pension-fund returns are short, employees and the government employers who pay them end up helping make up the shortfall. Annual pension contributions are already a strain on the finances of some cities and states, leaving less money for operations and loan payments and credit-rating downgrades.

Research firm Municipal Market Analytics considers a sustained market correction to be the biggest threat to state and local general-liability bond prices.

“State pensions often have allocations for equity that are larger than the size of [the states’] annual budgets, so a correction in equity prices could ultimately have a major impact on the state,” said municipal market analytics partner Matt Fabian.

States and cities cut services, laid off employees and withdrew benefits for new employees when the recession of 2007–09 drastically cut US public-pension-fund holdings.

Government finance today is far from the kind of austerity landscape. With double-digit gains in the S&P 500 in nine of the past 12 calendar years, pension funds have built back their holdings. Over the past two years, rising tax revenues from federal COVID-19 aid and stimulus-fueled economic booms have hit municipal budgets.

Pension managers and trustees routinely focus on market projections to attempt to distribute the money in a way that both protects their funds against recessions and delivers ambitious long-term gains.

Rolling back stock allocation in the years before the pandemic caused some pension funds to miss out on benefits. Many saw big returns from the stimulus-fueled economic boom that followed. Now many retirement systems are lowering equity targets in response to projections of diminishing stock-market returns.

When Angela Miller-May took over as investment chief of the $57 billion Illinois Municipal Retirement Fund in August, US stocks accounted for 44% of the portfolio, well above the fund’s 39% target. His team worked by November to rebalance the portfolio, move funds to other asset classes, and reduce holdings by about 42.4%.

“Uncertainty and market volatility have affected almost every fund and this continues to be a concern, as well as muted returns expectations,” said Ms. Miller-May.