States Borrow to Cover Pension Fund Shortfalls

Debt-burdened U.S. states and municipalities were grappling with about $900 billion in long-term unfunded pension liabilities as of 2011, according to a Boston College analysis of 126 plans. The solution for some local governments from California to Florida: Take on more debt.

State financial authorities are betting the pension assets they now manage will get better returns as the U.S. economy recovers and stock and bond markets improve. If so, states can take advantage of today’s ultralow borrowing costs to strengthen their retirement plans now—and pay off the debt later when pension funds generate returns robust enough to more than cover their annual payouts. Local governments sold $4.96 billion of pension bonds in 2011, the most since 2008, according to data compiled by Bloomberg. In California, Pasadena issued pension bonds in March. Oakland, Calif., and Fort Lauderdale are among issuers considering a bond sale later this year. Illinois, which has one of the country’s most poorly funded public pension funds, borrowed a total of $7.2 billion in 2010 and 2011.

This strategy could backfire if state retirement fund returns don’t rebound. Recent history isn’t encouraging: In the decade through June 2010, the nation’s biggest state retirement systems earned less than half of what they needed to keep up with pension obligations, according to a Bloomberg survey. Borrowing to pay pension benefits “is risky for a government,” says Douglas Wood, Fort Lauderdale’s director of finance. “If the market stays down and the pension systems don’t earn their fair share on their return, then over time the city has to make that up” from its general budget.

Pension fund managers are still trying to recover from the 18-month recession that pulverized stock and real estate markets. The California Public Employees’ Retirement System, the largest U.S. pension, voted in March to lower its assumed annual rate of return to 7.5 percent from 7.75 percent, matching its 20-year average gain. “The pension problem creeps closer and has gotten bigger partially because of investment returns and partially because states haven’t contributed all that they were supposed to,” says Peter Hayes, a managing director at BlackRock (BLK), which oversees about $105 billion of municipal bond investments.

Pasadena, a city of 137,000, is betting it will earn more from its retirement fund investments than the 1.76 percent yield it must pay on the $47 million of pension bonds it issued in March. That yield will change after three years. The city projects a 6 percent annual return rate for its Fire and Police Retirement System. By issuing the pension debt, Pasadena will avoid paying an additional $15 million annually from its general budget for at least the next three years to keep the system funded at 85 percent of its liabilities, says Andrew Green, Pasadena’s finance director. “The determination was made that this was the best route to go and the least impactful on service levels,” he says.

If the markets do not cooperate, states will have compounded their current troubles, says Jean-Pierre Aubry, assistant director at the Center for Retirement Research at Boston College. Pension bonds represent “a risk like any other in terms of investing in the market—but the additional risk is that you have a hard debt on your books that must be paid,” he says.

The bottom line: States are issuing pension bonds to cover an estimated $900 billion retirement fund shortfall, a risky move if markets don’t recover.

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Europe’s $39 Trillion Pension Threat Grows as Economies Sputter

January 11, 2012, 1:48 AM EST By Rebecca Christie and Peter Woodifield

(See EXT4 for more on the sovereign debt crisis.)

Jan. 11 (Bloomberg) -- Even before the euro crisis, people were worried about Europe’s pension bomb.

State-funded pension obligations in 19 of the European Union nations were about five times higher than their combined gross debt, according to a study commissioned by the European Central Bank. The countries in the report compiled by the Research Center for Generational Contracts at Freiburg University in 2009 had almost 30 trillion euros ($39.3 trillion) of projected obligations to their existing populations.

Germany accounted for 7.6 trillion euros and France 6.7 trillion euros of the liabilities, authors Christoph Mueller, Bernd Raffelhueschen and Olaf Weddige said in the report.

“This is a totally unsustainable situation that quite clearly has to be reversed,” Jacob Funk Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington, said in a telephone interview.

A recession threatening the world’s second-biggest economic bloc, along with efforts to reduce debt across Europe, is exacerbating the financial risks. Stable or falling birthrates, plus rising life expectancies, are adding to pressures, with the proportion of economic output devoted to spending on retirement benefits projected to rise by a quarter to 14 percent by 2060, according to the ECB report.

Increased retirement ages and lower benefits must be part of any package to hold the 17-nation euro area together, according to analysts, including Fergal McGuinness, the Zurich- based head of Marsh & McLennan Cos.’s Mercer’s pensions consulting unit for central and eastern Europe.

Ageing Populations

Europe has the highest proportion of people aged over 60 of any region in the world, and that is forecast to rise to almost 35 percent by 2050 from 22 percent in 2009, according to a report from the United Nations. That compares with a global estimate of 22 percent by 2050, up from 11 percent in 2009.

The number of people aged over 65 in the 34 countries in the Organization for Economic Cooperation and Development is forecast to more than quadruple to 350 million in 2050 from 85 million in 1970. Life expectancy in Europe is increasing at the rate of five hours a day, according to Charles Cowling, managing director of JLT Pension Capital Strategies Ltd. in London.

In so-called developed countries, the average lifespan will reach almost 83 by 2050, up from about 75 in 2009, the UN said.

Cutting Costs

Governments and companies have taken steps to reduce future costs with policy makers having increased retirement ages in countries, including France, Germany, Greece, Italy and the U.K.

“Irrespective of whether you’re inside or outside the euro or anything else, raising retirement ages is one of the structural reforms that all of Europe has to do,” Kirkegaard said. “The crisis has forced them to address this. This is actually a positive thing in many ways.”

By 2060, the average French pension benefit will be 48 percent of the national average wage, compared with 63 percent now, said Stefan Moog, a researcher at Freiburg University in Freiburg, Germany.

Pension managers and governments are relying on economic growth to safeguard the promises they make. If the euro zone grows too slowly to bolster public and private coffers, the retirement plans may become unaffordable, according to Mercer’s McGuinness.

Benefits’ Squeeze

“The amount of money countries are going to spend on social security and long-term care is going to go up,” McGuinness said in an interview. “Governments with more generous social-security systems will have difficulty affording them. They will have to recognize these costs will impact their ability to reduce borrowings.”

State pension obligations in France and Germany are three times the size of their economies, according to data compiled by Mercer. It’s more sustainable in France than Germany because of France’s higher birthrate.

Last year, there were 4.2 people of working age for every pensioner in France. The ratio will fall to 1.9 by 2050, according to a report by Economist magazine in March. In Germany, the proportion will decline to 1.6 from 4.1 in the same period.

“That is going to put a lot of pressure on Germany’s ability to meet their promises,” McGuinness said. “What they are more likely to do is cut back benefits. Governments face a lot of longevity risks.”

Private pension funds are under pressure too with benchmark euro-area interest rates at the lowest level since the 13-year- old currency was introduced. Low rates mean pension plans have to hold more assets to back their long-term payout projections.

Add to Risks

Unless growth returns, fund managers will effectively be forced to take on more risk, said Phil Suttle, chief economist of the Washington-based Institute of International Finance.

“That creates problems because they all head into sectors that seem a great idea now, and then they blow up, whether it’s commodities or equities or whatever,” Suttle said. “You’re going to intensify the boom-bust cycle.”

The growing doubts facing the euro area is another planning hurdle as companies reconsider investment strategies amid concerns that Greece may default on its debt and spark a broader euro breakup.

The implied probability of one country leaving the euro by the end of 2013 rose to 53 percent on Jan. 9 from 45 percent a week earlier, based on wagers at InTrade.com, an Internet betting market. The probability of one country departing by the end of 2014 is 59 percent.

Pension plans in countries such as Greece or Portugal may benefit from exiting the euro as higher interest rates that would likely accompany a return to their national currencies would cut the cost of liabilities, while assets invested abroad would almost certainly gain in value, according to Mercer, a unit of Marsh & McLennan Cos.

U.K. Plan

In Britain, which has refused to join the euro, occupational pension funds have moved the risk of ensuring adequate retirement income to the employee from the employer in the past decade to curb pension-fund shortfalls.

Unfunded public-sector U.K. pension obligations across 1,500 public bodies totaled 1 trillion pounds ($1.57 trillion) in March 2010, the Treasury said Nov. 29 in the first set of audited Whole of Government Accounts. That compares with a total of 808 billion pounds of outstanding U.K. government bonds and accounts for 90 percent of all public-sector pension liabilities.

Royal Dutch Shell Plc, Europe’s largest oil company, was the last member of the benchmark FTSE 100 Index to close its defined-benefit pension plan to new entrants when it made the decision last month to do so. The company plans to introduce a fund for new employees next year that makes them responsible for ensuring they have enough to live on in old age.

Governments may have to follow the same path for their own employees as well as increasing the retirement age to at least 70 and possibly 75 to make the pensions affordable, Cowling wrote in an article published in July by Public Service Europe.

--Editors: James Hertling, Tim Quinson

To contact the reporters on this story: Rebecca Christie in Brussels at rchristie4@bloomberg.net; Peter Woodifield in Edinburgh at pwoodifield@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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Blackstone May Get Up to $1.8 Billion From New Jersey Pension

December 09, 2011, 11:09 AM EST By Elise Young and Devin Banerjee

Dec. 8 (Bloomberg) -- Blackstone Group LP, the world’s largest private-equity firm, may receive as much as $1.8 billion in commitments from the New Jersey Division of Investment.

The state pension system proposes investing $1.5 billion in four separate accounts to be managed by Blackstone and $300 million in three traditional funds, according to documents prepared for a public meeting today.

--Editors: Josh Friedman, Christian Baumgaertel

To contact the reporters on this story: Elise Young in Trenton at eyoung30@bloomberg.net; Devin Banerjee in New York at dbanerjee2@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net -0- Dec/08/2011 17:22 GMT

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NYC Pension Funds Rose Most in 13 Years in Fiscal 2011, Liu Says

July 05, 2011, 11:01 AM EDT By Sarah Frier

July 5 (Bloomberg) -- New York City’s pension funds gained the most in 13 years last fiscal year after the hiring of new asset managers and improved stock and bond markets, Comptroller John Liu said.

The funds were valued at about $119 billion in the year that ended June 30, up more than 20 percent from $97.8 billion a year earlier, according to preliminary estimates released today by Liu, whose office oversees the pensions.

“While the markets remain volatile, we have vigorously pursued a diversification strategy to enhance our returns while lowering pension costs to the city,” Liu said in a news release. The office hired people to target asset classes such as stocks, hedge funds, fixed income, private equity and real estate, he said.

U.S. public pension-fund assets rose 3.6 percent during the first three months of the year, the U.S. Census Bureau said June 30. Assets of the 100 largest plans grew by $93.9 billion in the first quarter to $2.73 trillion, up from $2.64 trillion on Dec. 31.

Pensions have benefited from the stock market’s rebound since March 2009. The Standard & Poor’s 500 Index gained 5.4 percent in the first quarter after climbing almost 13 percent last year and 23 percent in 2009. Pension holdings of stocks rose 3.4 percent, or $29.3 billion, to $896.4 billion in the first quarter, the Census Bureau said.

--With assistance from William Selway in Washington. Editors: Jerry Hart, Stephen Merelman

To contact the reporter on this story: Sarah Frier in New York at Sfrier1@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net.

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