The “pensions timebomb” keeps on ticking and as societies we become less prepared by the day.
Yet another report shows that the U.S. public pension system is in dire straits. This one comes from renowned hedge fund manager Bridgewater Associates.
The study estimates that public pension funds will earn an annual return of 4% or less in coming years due to near zero percent interest rates and financial repression. That, in turn, would cause bankruptcy for 85% of the pension funds within 30 years, the study warns.
Public pension plans now have only $3 trillion in assets to invest so that they can pay out $10 trillion of retirement benefits in coming decades, according to Bridgewater. The funds would need an annual investment return of about 9% to meet those obligations, the report says.
Many pension plans assume they will earn 7% to 8% annual returns, an assumption which is far too high. But even in the best case scenario of the pension plans achieving those returns, they will face a 20% shortfall, Bridgewater notes.
Bridgewater looked at a range of different market conditions, and in 80% of the scenarios, the pension funds become insolvent within 50 years.
A report issued earlier this year by the Rockefeller Institute of Government says state and local government pension systems have very significant problems.
“Bad incentives and inadequate rules allowed public sector pension underfunding to develop,” the study says. “They mask the true costs of pension benefits and encourage underfunding, under-contributing, and excessive risk-taking, trapping pension administrators and government funders in potentially destructive myths and misunderstanding.”
It is likely that many pension funds will go bust in the medium term and this may be a crisis that looms large sooner than the Bridgewater research suggests.
Pension funds traditional mix of equities and bonds may underperform in the coming years as many stock markets appear overvalued after liquidity-driven surges in recent years and bonds offer all time record low yields and are at all time record highs in price and can only fall in value in the coming years.
Pensions allocations to gold are exceptionally low internationally and yet gold has an important role to play in preserving and growing pension wealth over the long term.
Pension funds’ overexposure solely to paper assets and lack of diversification has cost pension holders dearly in recent years. This will almost certainly continue in the coming years.
http://www.resourceinvestor.com/2014/04/15/pension-funds–85-will-go-bust-within-30-years