The bad year for pensions is about to get worse

“It’s a tough time,” said Jay Bowen, director of the Tampa Fire and Police Department Retirement Fund. “No one is immune.”

Simultaneous declines in stocks and bonds are inflicting hardship on households and institutional investors in 2022. The S&P 500 has returned minus 13.5% year-to-date through Friday, while the index Bloomberg US Bond Aggregate – primarily US Treasuries, highly rated corporate bonds and mortgage-backed securities – yielded minus 10.5%.

Pension funds maintain huge portfolios of stocks, bonds and other assets, wielding significant power on Wall Street, where their buying and selling can alter prices and where investment managers fight over their business . Their losses can increase costs for governments and workers, squeeze municipal budgets and raise taxes.

At the Tampa fund, one of the best performers in the country, Mr. Bowen waits for long-term opportunities, such as high-quality bonds with coupons of at least 6% or promising stocks whose prices have fallen enough to make it a bargain.

“Companies that have been unfairly punished, that have strong balance sheets, that have the freedom [after-expenses] cash flow, which has dividends,” he said. “Particularly in this environment, we like to find companies that not only have a solid history of increasing their dividends, but have relatively attractive dividends.”

The poor performance of pension plans puts the median pension fund return for the nine months ended March 31 at 0.82%, said Robert J. Waid, chief executive of Wilshire. That likely means higher retirement costs for many state and local government employers and employees who have to help make up the difference when those funds, which primarily have a June 30 year-end date, don’t reach their performance targets of approximately 7%.

North Carolina Retirement Systems, among the best-funded pension plans in the nation, with an investment return target of 6.5%, returned about minus 5.5% through May 6 of its fiscal year, which runs from July 1 to June 30.

“We have a lot of counties and cities that are currently struggling with inflationary costs, and every time the plan doesn’t work, they have to throw in more money,” North Carolina Treasurer Dale Folwell said. . “At the local level, they have nowhere to go except property taxes.”

Quarterly public pension yields last dipped into negative territory at the start of 2020, when they suffered their worst quarter on record, returning to a median of minus 13.2% after the onset of the Covid-19 pandemic. which plunged the markets into turmoil. But a federal stimulus effort quickly helped propel pension funds to seven straight quarters of gains, including their best quarter on record. Now, some fund managers fear that this slowdown is no longer sustainable.

Central bank efforts to contain inflation have led to lower stock and bond yields in 2022. Many funds rushed to react to Russia’s invasion of Ukraine in February, either by unmarking assets , or by selling them at a loss in response to public pressure. Oil and gas stocks, as well as commodities, provided a bright spot.

Equities drive public pension fund returns. They hold just over half of their assets in domestic equities, according to Wilshire, and almost another 7% in international equities. Pension funds with assets over $1 billion have 38% of their assets in domestic equities and nearly 10% in international equities.

“You have higher inflation, you have the war in Ukraine, the supply chain,” Waid said. “The market is really nervous about which shoe is going to drop next.”

Pension plans with assets over $1 billion posted a median return of minus 3.1% in the first quarter. These plans tend to hire larger teams and attract more sophisticated investment professionals.

But additional losses may be in store for these retirement funds. Larger funds allocate more money to alternative investments, such as private equity, which typically return returns one or more months later.

“It is difficult to say whether this [slightly better median return] was due to the performance lag,” Mr. Waid said. “Did they actually generate alpha?

Write to Heather Gillers at [email protected]