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Pension funds, taking on more risk just when they should be playing it safe

Friday, March 12, 2010 22:31

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Companies are quietly and gradually moving their pension funds out of stocks. They want to reduce their investment risk and are buying more long-term bonds. But states and other bodies of government are seeking higher returns for their pension funds, to make up for ground lost in the last couple of years and to pay all the benefits promised to present and future retirees. Higher returns come with more risk.

“In effect, they’re going to Las Vegas,” said Frederick E. Rowe, a Dallas investor and the former chairman of the Texas Pension Review Board, which oversees public plans in that state. “Double up to catch up.” Though they generally say that their strategies are aimed at diversification and are not riskier, public pension funds are trying a wide range of investments: commodity futures, junk bonds, foreign stocks, deeply discounted mortgage-backed securities and margin investing. And some states that previously shunned hedge funds are trying them now.

The Texas teachers’ pension fund recently paid Chicago to receive a stream of payments from the money going into the city’s parking meters in the coming years. The deal gave Chicago an upfront payment that it could use to help balance its budget. Alas, Chicago did not have enough money to contribute to its own pension fund, which has been stung by real estate deals that fizzled when the city lost out in the bidding for the 2016 Olympics.

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The geniuses finally decide that it’s time to take on extra risk just when they should be exercising caution. If they wanted to take on extra risk, would not it have been best to do so during boom times? Instead when times were good they played it safe and now when times are bad they decide to take on more risk.

Pay close attention to the mass mindset at work. It always leads you to make the wrong decision precisely when you should be playing it safe. In this way, you are triggered into taking on extra risk and vice versa. Pension funds are going to take a severe beating as they are betting in the wrong direction and playing the wrong trend. Net result is that many pensioners are going to find out that their so called guaranteed pensions are not as safe as they once presumed them to be.

In the years to come, expect payments to drop and some funds will completely bankrupt themselves as a result of this stupid new ploy to try to achieve higher returns. One cannot squeeze water out of a rock no matter how hard one tries.

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