When two tech-related US banks collapsed this month, among the investors who lost millions were public-sector pension funds responsible for ensuring the retirements of teachers, firefighters and other government employees.
Retirement funds, like others, have reaped the rewards of bull markets and, like many investors, suffered when investment soured.
Last year, many lost value as their investments in Russian assets became nearly worthless after most of the world froze that nation’s economy following the invasion of Ukraine. Some held shares in cryptocurrency-related businesses that plummeted during the downfall of FTX and its founder, Sam Bankman-Fried.
Because pension funds are diversified investors whose holdings in Silicon Valley Bank and Signature Bank were small portions of their portfolios, experts aren’t overly concerned about losses for relatively small holdings.
But the losses show how pensioners are exposed to risk as they seek to reduce funding gaps.
Here’s a look at the state of public pensions and the risks they take.
WHICH FUNDS HAVE TAKEN LOSSES BY INVESTMENTS IN FAILED BANKS?
Equable, a privately funded nonprofit that researches public pensions and advocates for their safety, has identified more than two dozen public-sector pension funds with direct stakes in Silicon Valley or Signature Bank, or both.
In any case, the banks’ shares represented no more than a few dollars out of every $10,000 of assets in the fund.
The fund with the largest stake in Silicon Valley Bank was CalPERS, a fund serving public employees in California that is valued at $443 billion. He reportedly owns $67 million in SVB stock and $11 million in Signature Bank. Together, this equates to 0.02% of the fund’s assets.
The Ohio State Teachers’ Retirement System, the New York State Common Fund and the State Teachers’ Retirement Fund and the Washington State Investment Board were among those that had shares in one or both banks.
Trading on both stocks was halted this month. SVB’s shares were trading at more than $700 in early 2022, and Signature Bank’s were around $300.
It is likely that many pension schemes also held shares in banks as part of their index fund investments. It’s hard to know for sure because most funds don’t disclose their full holdings in real time.
WHAT DO THE LEAKS MEAN?
They aren’t helping retirements, but experts don’t see these investment losses as alarming.
Pension funds are large investors looking to spread their holdings. And while there were some signs of trouble for the banks that failed, they were still considered major US banks.
“It is a mistake to say that an investment in Silicon Valley Bank stock alone is risky,” said Anthony Randazzo, executive director of Equable.
HOW ARE THE PUBLIC PENSIONS?
They have improved in recent years, but most still lack enough resources to pay for the promised benefits.
Most plans were fully funded in 2000. But in that time, many pension plans have increased benefits, reduced government contributions, or both. Such decisions magnified the impact of the 2008 financial crisis on funds, with market losses widening their funding gaps. By 2016, Pew Charitable Trusts found that state funds only had two-thirds of what they needed to cover their obligations.
With mostly strong markets, higher government contributions and changes to benefits, including reducing retirement pledges for newly hired workers and requiring employees to contribute more, fund conditions have improved. By 2021, after a year of massive market growth, Pew estimated state pensions were 84% funded, the highest level since before the Great Recession began in 2008.
David Draine, who studies public sector pension systems at Pew, said funding gaps are likely now roughly where they were before the market shockwaves during the coronavirus pandemic.
But he said higher government subsidies — even higher than those required in states including California and Connecticut — and other changes have increased their likelihood of weathering future market declines.
“It’s a low level,” Draine said, “but they’re better prepared than they were for the Great Recession.”
DO PENSION FUNDS MAKE RISKY INVESTMENTS?
Stocks and fixed asset investments still make up the majority of public sector pension fund holdings tracked by Boston College’s Center for Retirement Research.
But the share of assets in other, often more volatile investments, such as real estate and hedge funds has grown over the past two decades. Private equity investments, for example, have nearly quadrupled, from 2.3% of fund holdings in 2001 to 8.7% in 2021.
“They are asked to earn an average of 6.5% to 7.5% a year,” said Randazzo of the Equable Institute. “And the only possible way is to take a significant risk.”
Randazzo said that if governments want pension funds to play it safe, they can increase their contributions. But the more taxpayer money goes into pension funds, the less there is for other priorities like schools, roads and tax breaks.
Keith Brainard, the director of research for the National Association of State Retirement Administrators, notes that the stock market downturn in 2001 hit pensions hard because their holdings were mostly stocks.
Investing in other assets can help mitigate stock losses, he said.
“Some people call it cynically ‘chasing returns,'” Brainard said. “I think ‘diversify’ is a better description.” ___