Public pension fund managers like to argue that the reason they can use aggressive estimates of future investment returns to 
calculate their unfunded liabilities is because they have a long-term investment horizon and can offset short term losses by waiting for the market to turn up. And so while private sector pension managers often invest for modest returns of 4 percent or more annually, public pension funds now typically estimate annual market gains of 8 percent or more. But a new academic paper argues that the nation's largest defined benefit pension fund, the California Public Employees' Pension Retirement System, shifted to riskier investments and then essentially panicked when the market tanked in 2008, resulting in an investment strategy that locked in losses. Taxpayers will have to make up the difference.
calculate their unfunded liabilities is because they have a long-term investment horizon and can offset short term losses by waiting for the market to turn up. And so while private sector pension managers often invest for modest returns of 4 percent or more annually, public pension funds now typically estimate annual market gains of 8 percent or more. But a new academic paper argues that the nation's largest defined benefit pension fund, the California Public Employees' Pension Retirement System, shifted to riskier investments and then essentially panicked when the market tanked in 2008, resulting in an investment strategy that locked in losses. Taxpayers will have to make up the difference.
The new paper, by
Andrew Ang, a professor at Columbia University's business school, and
Knut N. Kjaer, an investment manager, argues that the aggressive investment returns used by public pension managers might work better in theory than in practice. They point to a number of investment miscalculations by Calpers.
The fund's real estate investments, undertaken as part of the fund's move into riskier investments, got into big trouble as the housing bubble burst, for instance, and required injections of capital. To raise money for that, Calpers sold stocks into the market's decline, locking in losses and missing the subsequent rebound. One example that the authors offer: Apple stock. In April of 2008 Calpers sold 2.3 million shares of the stock to raise $370 million. Today those shares are worth about $930 million.
Calpers lost big (or rather, California taxpayers did), with its real estate investments. The fund lost nearly $1 billion in the bankruptcy of Landsource, which owned land it planned to develop in and around Los Angeles. Another $500 million investment disappeared when lenders took control of Stuyvesant Town (shown above), the New York City residential housing complex, from its owners and investors, including Calpers. That's money that will not 'bounce back', so to speak, as the housing market returns. It has evaporated.
As the nation's biggest defined benefit plan, Calpers has been a leader in investment strategies. Its decision to venture into riskier investments prompted other public pensions to imitate it. Only now are taxpayers understanding what the pension funds got them into. All around California, Calpers has been sending bigger and bigger annual bills to local governments to make up for its steep investment losses.
Pension reform should include better systems to protect taxpayers against those who would gamble like Calpers with other people's money.
The fund's real estate investments, undertaken as part of the fund's move into riskier investments, got into big trouble as the housing bubble burst, for instance, and required injections of capital. To raise money for that, Calpers sold stocks into the market's decline, locking in losses and missing the subsequent rebound. One example that the authors offer: Apple stock. In April of 2008 Calpers sold 2.3 million shares of the stock to raise $370 million. Today those shares are worth about $930 million.
Calpers lost big (or rather, California taxpayers did), with its real estate investments. The fund lost nearly $1 billion in the bankruptcy of Landsource, which owned land it planned to develop in and around Los Angeles. Another $500 million investment disappeared when lenders took control of Stuyvesant Town (shown above), the New York City residential housing complex, from its owners and investors, including Calpers. That's money that will not 'bounce back', so to speak, as the housing market returns. It has evaporated.
As the nation's biggest defined benefit plan, Calpers has been a leader in investment strategies. Its decision to venture into riskier investments prompted other public pensions to imitate it. Only now are taxpayers understanding what the pension funds got them into. All around California, Calpers has been sending bigger and bigger annual bills to local governments to make up for its steep investment losses.
Pension reform should include better systems to protect taxpayers against those who would gamble like Calpers with other people's money.
Great market timing. Maybe they are a new market indicator. Buy when they sell and sell when they buy. :-)