In the past year the funds, whose collective $2,000bn-plus in assets make them key investors in every asset class, have lost about 40 per cent of their value through investment losses reports the Financial Times.
The 2,600 pension plans provide retirement savings for 22m public employees in towns and cities across the US, and range in size from the giant Calpers, with $120bn (€91bn, £81bn) in assets, to tiny small town funds which pay pensions for local garbage collectors and police.
Phillip Silitschanu, a senior analyst at Aite Group, a consultancy, says the pensions “could face a cash flow collapse, they are liquidating assets to meet their monthly cash flow needs?.?.?.?instead of selling positions that are down 10 per cent, they are being forced to liquidate positions down 40 per cent. It is a firesale liquidation of assets to have the cash on hand to meet obligations”.
Bill Atwood, the executive director of the Illinois State Board of Investments, says: “Right now it’s very bad. For the full year 2009 (ending in June) we will have $270m negative cash flow on $8.5bn in assets.”
State pension benefits are protected by law, and must be paid even if the fund is making a loss. Calpers, the largest fund, has lost $70bn in value in the past eight months, but still has to pay $11bn in benefits this year. Unless the fund starts recouping its losses soon, the California state government, which is already mired in a huge deficit, will have to lift contributions to Calpers starting from next year.
Bad as the cashflow crisis is, the accompanying collapse in funding levels – an issue largely outside the control of the pension managers – is considered by most in the industry to be of greater significance.
US pension plans are in generally worse shape than those in Europe. They were more underfunded, meaning they did not have the money to meet future pension commitments, even before the financial crisis hit, and their losses over the past year have been greater because they had larger allocations to equities. Funding has now fallen to about 50 per cent, according to industry estimates.
Read more here: Double blow for US pensions as values crash