Running a pension fund used to be one of the easier jobs in finance. The money came in steadily and predictably from member contributions, and you invested it conservatively (in investment grade bonds and blue chip stocks) to meet a modest annual return target of around 8%. It was cook-book money management, nice and cushy and low-stress.
But today’s pension funds have, in effect, two sets of criminally incompetent bosses making incompatible demands. At the national level the US borrows too much and lets its banks run wild, causing a debt crisis to which it responds by lowering interest rates to levels where investment-grade bonds yield next to nothing. At the state and local level, governors and mayors – loath to raise taxes or cut benefits to bring pension plans into balance – pressure funds to keep making their traditional 8% even though, with interest rates way down, that is now wildly optimistic.
So pension fund managers, forced to meet unrealistic goals in an inhospitable environment, have begun acting like hedge funds by turning to dangerous, sure-to-eventually-blow-up strategies like the this:
Pensions Bet Big With Private Equity
AUSTIN, Texas—On the 13th floor of a sleek downtown office building here, the trading desks are manned overnight. The chief investment officer favors cowboy boots made of elephant skin. And when a bet pays off, even the secretaries can be entitled to bonuses.
The office’s occupant isn’t a highflying hedge fund but the Teacher Retirement System of Texas, a public pension fund with 1.3 million members including schoolteachers, bus drivers and cafeteria workers across the state.
It is a sign of the times. Numerous pension funds are still struggling to make up investment losses from the financial crisis. Rather than reduce risks in the wake of those declines, many are getting aggressive. They are loading up on private equity and other nontraditional investments that promise high, steady returns in the face of low interest rates and a volatile stock market.
Read More at dollarcollapse.com . By John Rubino.