Chief Investment Officers Fess Up on their Biggest Fears
An excerpt from an article by Markets Group Institutional Allocator featuring a quote from PEI’s Chief Investment Officer Marcia Peters, CFA.
“For me, it’s always the same answer, and that’s the level of underfunded state pension plans. Look at the data. The average funded status is about 50% for states, but depending on how they discount their liabilities many expect it’s actually lower than 50%. But that is pretty worrisome when most corporate plans that are not fully funded are probably in the 70% to 80% level.
At bottom of the list are Kentucky and Illinois. Kentucky has an underfunded status around 30%. New Jersey and Connecticut are not far behind at around 35%. So it raises the question: ‘What does the future hold for these states and the residents in these states, as the states are trying to meet their obligations to their plan participants?’
States got themselves into this problem because they underestimated longevity. In other words, how long participants would live and how long they would collect their benefits. Certainly, participants have generally exceeded the expectations that were built into the calculations. But they also underestimated the demographic population shift, where there are fewer younger workers contributing to the system to support the payments for those retirees.
Another issue is the expected returns for their assets were over estimated. Plans also experienced setbacks during the “dot.com bubble” in 2000 and also in 2008. So, while since 2009 they have recouped some of those loses, they have not really kept pace with contributions, and in some cases states have shifted assets out of the pension plans to other needs that they have. A combination of all of these things really has worked against the funded status, and I get especially concerned, because I don’t really see anything that states are doing in terms of developing strategies to try to fix the problem.
As a resident of New Jersey, which is a state with a very low funded status, it means state taxes may have to be raised, and/or benefits to retirees could be cut. There will be less money to spend on the essential services. Also, [speaking] as an investment professional, some of the things that got them into trouble were risky investments back in the early 2000s and in 2008, and I get concerned that investment boards are going to take on more risky investments going forward, which doesn’t always help the situation.”
To read the full article, as originally published on Markets Group website on April 22, 2019, click here.