Pension Fund Profitability
Pension fund’s assets in the United States amounted to $15.6 million (USD) in 2018, with these assets being bought with the contributions made to the pension plan and for the exclusive purpose of financing pension benefits. (Pension Funds in Figures,OECD). While the total dollar amount of assets and the number of beneficiaries and contributors has risen in both public pensions and private pensions there is a growing concern about these funds’ ability to deliver adequate returns. (Funded Pension Indicators, OECD). Delivering returns on investment to satisfy the pension obligations remains an issue because of the balancing between profit creation and the long-term sustainability of these funds.
All types of pension funds took a major hit in the 2008 financial crisis and have been recovering ever since. A potent example of this is the California Public Employees’ Retirement System, or CalPERS, the largest public pension program in the United States. Until recently, it remained vastly underfunded and is just now starting to become stable enough to be able to continue to meet its obligations. Overall, pensions funds in California only have 71% of the assets they need to pay all the benefits they owe to public employees and retirees. (Adam Ashton, The Sacramento To Bee). The path to the stability of this fund and others has come with a tradeoff: either new workers are expected to receive fewer benefits, or the state governments and employers have to raise their contribution rates, which ends up crowding out funding for public services or other projects. (The Sacramento To Bee). When public pension funds and cities ask new workers and taxpayers to put more money in, those funds are being used to pay the current retirees, rather than invest for future benefit. With this model, those putting money into the fund now may not see their full benefit when it is their turn to collect. (Simon Black, Sovereign Man). Regardless of which of these two paths is taken, the end goal is to reduce the underfunding and to enable the pension fund to be able to pay out all of the pensions as fully promised.
While increasing minimum investments or decreasing benefits is a solution, another avenue is changing the type of investing to make larger investment returns. This can be seen in the shift to defined contribution plans, which are retirement assets owned by the employees who, therefore, also bear the responsibility for their own financial security. (Social Security Bulletin, SSA). The 401(k) is a well-known example of a defined contribution plan and they are made to create profit while simultaneously benefitting the contributor’s social goals to achieve sustainable investment, overall, a better way to save for the future. (Maurie Beckman, The Motley Fool). After all, forty-four public pensions in the United States failed to meet or exceed investment returns over the 10-period ending in 2016. (State Public Pension Funds’ Investment, PEW Trusts). While 401(k) contributors are in control of their own investment decisions, a downside is that they don’t have the same market power that public pensions, like CalPERS, do. (David Webber, LA Times). This is because 401(k) contributors are divided as compared to public pension beneficiaries and only pooled together into mutual funds, which funds have the shareholder voting power that may or may not coincide with how the individual contributor might vote. (David Webber, LA Times).
Another recent development is that public pensions are more alert and staying away from negative investment schemes than in the past. (Hamilton Nolan, Splinter News). In order to make sustainable long-term investments, public pensions try to favorably impact shareholder engagement, executive compensation, financial reporting, and diversity of the boardroom. Strong corporate governance is the building block for sound investment schemes that are socially and monetarily beneficial. Public pension funds recognize this and are more involved with the corporate governance surrounding their investment. These funds have this power because of their funds’ long-term investment horizon and the significant size of their investment portfolios. (Luis Aguilar, SEC). Public pension funds also have the ability to reflect the interests and views of their workforces. After the mass school shooting in Newton, Connecticut, in 2012, CalPERS divested its shares in gun manufacturer Remington, which made the rifle used to kill twenty elementary school students and six adults. (David Webber, LA Times). The ability for CalPERS to take this action results from the fact that the California pension’s stock holdings are centrally and collectively managed. (David Webber, LA Times).
It is important to note, however, that this central and collective management may come to an end in the future. There is a constant threat to divide a public pension’s defined benefits in a way to make them similar to a defined contribution plan.
This threat may be seen as a negative, but for some, this alternative is a way of making more money. As of 2018, defined contribution plans are outpacing defined benefit plans 8.9% to 4.6% over the last ten years, with defined contribution plans accounting for over 50% of total assets in the largest 7 countries in the global pension market (Australia, Canada, Japan, Netherlands, Switzerland, UK and, the US). Despite this growth in defined contribution plans, however, they remain weakly designed, untidily executed, and poorly appreciated. (Thinking Ahead Institute,WillisTowersWatson). Both defined public and private pensions have their positives and their drawbacks. Whereas the investments in private pensions and defined contributions tend to be more successful, there is less of an ability to mindfully invest. On the other hand, public pension funds are still underfunded, and therefore need more profit-oriented investing to close the gap.