After why San Diego County fired its outside pension fund manager Barry Ritholz concludes:
A city, county or municipality that fails to appropriately fund its pension plan isn’t honoring its fiduciary obligation to its employees and retirees. Not saving enough to meet its retirement obligations shouldn’t be an excuse for risky behavior or using additional leverage.
There is no free lunch. Instead, pension funds should keep it simple, manage a basic global allocation of assets, and watch costs. There simply is no reason to try to reinvent investing when there is a perfectly viable and preferable option.
But there is a reason. Undercapitalized pension funds assume higher risks chasing higher yields. When a pension fund has been constructed assuming an 8% yield, as many have, and instead they’re realizing 4% or even 2% yields, as many are, they’ve got to do something and assuming higher risks is what many public pension fund managers have decided to do.
The question is who assumes what risks. Increasing the amount of money paid from the public purse to the voters is the path of least resistance for politicians. It’s certainly less risky for them than increasing taxes to pay for the benefits they’ve already promised. It’s the taxpayers who are assuming the risks and as the roster of taxpayers dwindles relative to the number of benefit recipients there aren’t enough taxpayers squawking to make a difference. As Shaw said, when you rob Peter to pay Paul you can always depend on the support of Paul.
Yes. And more technically and less politically, those managers are only getting a fair risk adjusted return for chasing yield in those asset classes. There is no free lunch.