When two tech-related US banks failed this month, among investors who lost millions were public sector pension funds responsible for guaranteeing the pensions of teachers, firefighters and other government workers.
Pension funds, like others, have benefited from bull markets and, like many investors, have suffered when their investments declined.
Last year, much of it lost value when investments in Russian assets became virtually worthless after much of the world froze the country’s economy following the invasion of Ukraine. Some hold stakes in cryptocurrency-related businesses that have sputtered amid the downfall of FTX and its founder, Sam Bankman-Fried.
Since the pension fund is a diversified investor whose holdings in Silicon Valley Bank and Signature Bank are a small part of the portfolio, experts are not worried about losses for relatively small holdings.
But the losses show how pensioners are exposed to risk when they try to reduce the funding gap.
Here’s a look at where the status of public pensions and the risks they take on.
WHICH FUNDS LOSE BY INVESTMENT IN BANK FAILURES?
Equable, a privately funded nonprofit that researches public pensions and supports security, has identified more than two dozen public sector pension funds with direct ownership in Silicon Valley or Signature Bank, or both.
In each case, the banks’ shares represented no more than a few dollars out of every $10,000 in assets in the fund.
Silicon Valley Bank’s largest shareholder is CalPERS, a fund for California’s public employees worth $443 billion. It is said to have $67 million in SVB shares and $11 million in Signature Bank. Combined, which amounts to .02% of the fund’s assets.
The State Teachers’ Retirement System of Ohio, the New York State General Fund and the State Teachers’ Retirement Fund and the Washington State Investment Board are among those that own shares in one or both banks.
Trading in both stocks was halted this month. Shares of SVB traded above $700 at the start of 2022 and Signature Bank around $300.
Of course many pension systems also have bank stocks as part of their index fund investments. It’s hard to tell because most funds don’t make full holdings in real time.
WHAT DOES LOSSES MEAN IN ENGLISH?
They don’t help retirees, but experts don’t see these investment losses as alarming.
Pension funds are large investors that seek to diversify their holdings. And while there are some signs of trouble for failed banks, they are still considered outstanding US banks.
“It’s a misconception that investing in Silicon Valley Bank stocks is risky,” said Anthony Randazzo, Equable’s chief executive officer.
HOW DOES THE PUBLIC RETIRE?
They have improved in recent years, but most still lack the assets to pay the promised benefits.
Most plans were fully funded in 2000. But during that time, many pension plans increased benefits, reduced contributions from the government — or both. The decision compounded the impact of the 2008 financial crisis on the fund, with market losses widening the funding gap. In 2016, the Pew Charitable Trusts found that state-run funds only had two-thirds of what they needed to cover their obligations.
With a generally strong market, larger government contributions and benefit changes — including reducing pension promises for newly hired workers and requiring employees to contribute more — the fund’s situation is improving. By 2021, after a year of massive market growth, Pew estimates that state pensions will be 84% funded, the highest level since before the Great Recession began in 2008.
David Draine, who studies public sector pension systems at Pew, said the funding gap is now where it was before the market shock wave during the coronavirus pandemic.
But it said larger government contributions — including higher than required in states including California and Connecticut — and other changes increase the chances of holding back future market declines.
“It’s a low bar,” Draine said, “but they’re better prepared than continuing the Great Recession.”
ARE RETIREMENT FUNDS A RISKY INVESTMENT?
Stocks and fixed asset investments still make up the majority of public sector pension fund holdings tracked by the Center for Retirement Research at Boston College.
But the share of assets in other – and often more volatile – investments such as real estate and hedge funds has grown over the last twenty years. Investment in private equity, for example, has almost quadrupled, from 2.3% of fund holdings in 2001 to 8.7% in 2021.
“They are being asked to earn somewhere between 6.5% and 7.5% per year on average,” said Randazzo Equable Institute. “And the only way to do that is to take significant risks.”
Randazzo said that if the government wants the pension fund to play more safely, they can raise their contributions. But the more taxpayer money goes into pension funds, the less there is for other priorities like schools, roads and tax cuts.
Keith Brainard, director of research for the National Association of State Retirement Administrators, noted the stock market crash of 2001 took a toll on retirees because their holdings were mostly stocks.
Investing in other assets can help mitigate the stock’s losses, he said.
“Some people cynically call it ‘return chasing,'” Brainard said. “I think ‘diversified’ is a better description.”