Pension Pulse

Keith Ambachtsheer, Director Emeritus, International Center for Pension Management , Rotman School of Management, University of Toronto and author of The Future of Pension Management , wrote an op-ed for the Financial Times, Pension solution lies in long-term thinking : If low investment returns are here to stay, those responsible for pension plans have a choice: wring their hands or fulfill their fiduciary duty by rethinking what it means for the design of their schemes. Doing nothing is not an option. From 1871 to 2014 US equities produced an investment return, after inflation, of 6.7 per cent a year. Treasury bonds were good for 3 per cent. In contrast, the Gordon Model — which calculates prospective returns from assumptions about growth and yields — suggests much lower returns are in prospect, a real equity return of 3.6 per cent and 0.6 per cent from Treasury bonds . A recent Bank of England report, Secular Drivers of the Global Real Interest Rate , also supports this

Ron Rimkus, CFA, wrote a comment for the CFA Institute, Is There a Bond Market Bubble? : What is a financial bubble? A financial bubble occurs when the market price of a security or a group of securities increases well beyond the point where the long-term benefits of ownership fail to compensate the investor for the costs — market price, trading costs, liquidity, etc. — and risks of ownership. Which brings us to the bond market. If the results of a recent CFA Institute Financial NewsBrief poll are any indication, at least some of the global fixed-income market is in bubble territory. So if respondents agree with the above definition, then 87% of the 815 participants believe that owning at least some types of fixed income no longer makes sense . Yet clearly many investors do own these bonds. What explains this dissonance? The global policy response since the financial crisis of 2008 has been massive and unrelenting. While the US Federal Reserve has (at least for

Nicole Bullock of the Financial Times reports, The crumbling assumptions of US public pension plans : The governor’s office for Illinois, a state with notoriously weak finances, this week issued a stark warning about what might happen if it reduced the assumed rate of return for its Teachers’ Retirement System. “If the board were to approve a lower assumed rate of return taxpayers will be automatically and immediately on the hook for potentially hundreds of millions of dollars in higher taxes or reduced services,” the state’s senior adviser for revenue and pensions wrote in a memo . Unlike corporate pensions, US public pensions discount their liabilities using the rate of return they expect to generate on their investments . Some experts complain that these rates have been set unrealistically high. Lower return expectations would push up the cost of liabilities on their balance sheet, and force Illinois to make higher contributions. If costs to the pension were to increase by

John W. Schoen of CNBC reports, States face pension fund gap approaching $1 trillion : After years of not setting aside enough money, state pension funds are looking at a $1 trillion shortfall in what they owe workers in benefits, according to to a new analysis from The Pew Charitable Trusts. State retirement systems caught a break with strong investment returns in fiscal 2014, but the gap is expected to top $1 trillion in fiscal 2015, the last fiscal year with full results (click on image) . "The lesson here is that state and local policymakers cannot count solely on investment returns to close the pension funding gap over the long term," the report said . While many states have cut benefits for new workers and frozen plans for current staff, they cannot cut benefits that have already been earned by public employees. That means they have to find money to make up the shortfall by cutting other programs, raising taxes or both. The report is based on the most