Monday, April 14, 2014

More Hyperbole Unsupported by Facts about the Future Health of Pensions

Ray Dalio, founder and co-chief investment officer of the Bridgewater Associates hedge fund, has produced the latest attack on public employee pensions. Falio is reportedly worth $14 billion, according to Forbes. Why are so many billionaires targeting public pension systems these days?

But we digress.

Dalio’s group is reported as estimating that public pensions will require $10 trillion for public pensions to meet their financial obligations 30 years from now, but their $3 trillion in investible assets today won’t allow them to reach that goal. Bridgewater Associates projects that pensions would need to earn 9 percent annually to cover their expenses. We’re not going to dig into their numbers, because we have better things to do with our time, but here a couple of observations:

First, pensions themselves don’t even project out 30 years. Twenty years is the more common standard by people in the business of running pensions. Thirty years is a reach from the get-go. Anything dire can be projected out 30 years. In our eyes, their projections were dubious from the beginning.

Second, 8 percent average annual returns are indeed possible over 20-year periods, despite the Bridgewater Associates forecast that pensions might more realistically achieve four percent or less.

We beg to differ with their forecast.

We have only to look at several TEXPERS member systems who proved in TEXPERS annual Asset Allocation Report that they can achieve outstanding results over 20-year periods. Here are the standout performers for the 20-year period in Texas:

Big Spring Firemen's Relief & Retirement Fund 9.87%
Dallas Police and Fire Pension System 9.04%
El Paso Firemen and Policemen's Pension Fund 8.91%
Amarillo Firemen's Relief and Retirement Fund 8.73%
Lubbock Fire Pension Fund 8.66%
Houston Municipal Employees Pension System 8.64%
Austin Police Retirement System 8.39%

The reason that Texas pensions have been successful is that they are flexible. The pensions of yesterday might have had an investment ratio of 60 percent U.S. stocks and 40% U.S. bonds. Today’s pensions are much more diversified, as our latest report also uncovered. 

Sixty survey respondents representing approximately $170.3 billion in total assets allocated their investments in much different fashion in 2013. The report showed that 32% were using alternative strategies (real estate, private equity, energy, etc.), while 25% were invested in international equities, 22% were in domestic equities, 20% were invested in fixed income, and 1% held short-term securities/cash.

We agree that billionaires must have special insights to achieve their wealth, but they should stick to what they know and leave pensions alone. They should recognize that public employee pension plans have different liabilities when compared to private, corporate and foundation pensions. These differences greatly affect how each one invests. We would suggest to Mr. Dalio that unless he sits on a public fund board or is a consultant to public funds, he should focus on his business and not speculate or draw conclusions from mathematical equations. – Max Patterson

1 comment:

  1. Max

    I support Pensions. My mother still enjoys financial independence and security because of the pension earned by father, a now-deceased firefighter.

    I do think, however, that the pension industry does need to take a hard look at what our 40 year experiment with Modern Portfolio Theory has really delivered.

    Are we getting equity returns without speculative risk, as promised?

    Or, are we getting erratic returns, inadequate returns and the illusion of returns that are described more diplomatically as systemic risk?

    Is there another choice?

    Pensions are large. They are purposeful. They (should be) perpetual. That makes them very powerful.

    What are the ways in which pensions can use their power as large, purposeful, perpetual investors?

    Is hiring people like Ray Dalio to trade securities on our behalf really our only choice?

    That is a question Ray Dalio will never ask. He does not want you to know the answer.

    It is, however, a key question that pensions must begin asking.

    ReplyDelete