Public pension funds set a 22-year performance record in the
second quarter, recovering some but not all of their losses from the first
Double-digit stock gains pushed pension returns to a median
11.1% for the second quarter, according to Wilshire Trust Universe Comparison
Even with the rebound, median annual returns for the public
pensions whose fiscal years ended June 30 were 3.2%, far short of the funds’
long-term investment-return target of around 7%.
“That’s the funny thing with math, if you go down 20%, a 20%
return does not make it up.” said Robert J. Waid, managing director at Wilshire
Before the pandemic, public pensions were already trying to
plug large funding holes by pursuing aggressive returns to make up for
insufficient government funding in past years and decades. State and local
pension funds in the U.S. held $4.05 trillion in aggregate as of March 31—$4.93
trillion less than the cost of promised future obligations, according to
Federal Reserve data.
Investment shortfalls drive up the amount state and local
governments have to pay in. Funds are also bracing for coronavirus-related
The second quarter’s returns, the best since 1998, provided
a welcome boost.
Jay Bowen, manager of the Tampa Firefighters and Police
Officers Pension Fund, said the market was treating the pandemic more like a
“You get the plunge but it doesn’t last for a protracted
period and then there’s a sharp rebound,” said Mr. Bowen.
“That could change,” he said. “It’s a very fluid situation.”
Some of pensions’ second-quarter gains reflected quick thinking
during the record losses of the first quarter.
Mr. Bowen credits his fund’s 17.1% return in the second
quarter in part to stocks bought on the cheap while the market was crashing.
During the four-week period ending March 24, the police and fire fund bought
and sold $500 million in stocks, compared with $180 million during the previous
“Normally we’re very buy-and-hold, but when this presented
itself we moved pretty fast,” said Mr. Bowen of Bowen Hanes & Co., the
fund’s sole manager. “The moves that we made then set us up for why were having
a very good fiscal year now.”
The $2.2 billion fund took the opportunity to add to
holdings in technology stocks including Nvidia Corp., Adobe Inc. and Microsoft
Corp., pharmaceutical stocks including Johnson & Johnson, Zoetis Inc. and
Thermo Fisher Scientific Inc., and stocks that mix tech and finance such as
PayPa Inc., Visa Inc. and S&P Global Inc.
Tech stocks have bolstered equity markets, rallying as
reliance on virtual communication rises.
The Tampa fund, one of the nation’s best-performing public
pensions, is up 7% for the 12 months ended June 30.
Record second-quarter returns likely saved many pension
funds from having to report year-end losses.
The $194.3 billion New York State Common Retirement Fund,
whose fiscal year ended on March 31 in the middle of market volatility,
suffered an annual loss of 2.7%.
The California Public Employees’ Retirement System, the
nation’s largest pension fund, returned 4.7% for its fiscal year ended June 30
while the California State Teachers’ Retirement System returned 3.9%.
With local governments hemorrhaging tax dollars as a result
of the pandemic, pension managers have to worry about governments adjusting
budgets midyear, said Keith Brainard, research director of the National
Association of State Retirement Administrators.
“They are likely to find, ‘Oh boy—our revenues are short by
X amount and we’re just going to have to contribute less to the pension plan.’”
The problem is already playing out in Oklahoma, where
Teachers’ Retirement System Executive Director Tom Spencer expects to lose out
on about $70 million in state sales and income taxes in fiscal year 2021 and
$75 million to $80 million in fiscal 2022.
The roughly $17 billion fund has more than 70% of what it
needs to cover future pension promises to K-12 and college teachers, its
highest funding level ever, Mr. Spencer said. Though the state expects to pay
extra over the following five years, he estimates the fund will lose the
opportunity to earn about $40 million in investment returns.
“If we don’t have that money we can’t earn income off it,”
Mr. Spencer said. “You can’t make money out of thin air.”
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