The funding deficit of New Jersey’s public pension system climbed to $34.4 billion as of June 30, from $28.4 billion in mid-2007.
The pensions were 72.6 percent funded as of June 30. That compares to a funded ratio in June 2007 of 76 percent, according to state Treasury Department officials.
New Jersey’s largest pension fund, the Public Employees’ Retirement System, had an
unfunded liability of $10.82 billion as of June 30, up from $9.07 billion as of mid-2007. That combines state and local systems. The state PERS had a funded ratio of 65.6 percent, compared with 68.8 percent in June 2007.The state has less money than it owes for anticipated pension obligations because of
investment losses earlier this decade, a lowering of the retirement eligibility age and a failure by past governors to make annual contributions. The value of the pension system’s assets dropped to $56.3 billion as of February, from more than $82 billion as of June 2007, after losses on investments.Governor Jon Corzine, a first-term Democrat seeking re- election in November, has tried to slow the deficit’s growth by making regular pension payments. His administration has contributed about $3 billion into the system since he took office, compared with $3.2 billion contributed in the previous 14 years, according to the treasurer’s office.
Pension Reform
Corzine’s administration also has enacted pension and benefit changes that are projected to reduce costs to the systems by more than $6 billion over the next 10 years. These include raising the retirement age and requiring newly appointed and elected officials to enroll in a less costly, defined- contribution plan, treasury spokesman Tom Vincz said.
Around the U.S., many state plans are experiencing increases in unfunded liability, Vincz said. A recent report from Wilshire Consulting showed that 59 other state retirement systems reporting actuarial data from fiscal 2007 to fiscal 2008 had sharply reduced funding ratios, with the average state ratio falling by 11 percentage points, from 88 percent to 77 percent, he said.
“All of this said, there are multiple factors that influence the liabilities of the system, not the least of which is investment returns, which have not kept pace with rising liabilities,” Vincz said in an e-mail.
Helping the Cash-Strapped
Corzine, the former chairman of Goldman, Sachs & Co., last month proposed reducing the state’s annual pension payment by $500 million, to $400 million, to help close a $7 billion state budget deficit for fiscal 2010, which begins July 1. The governor signed legislation allowing cash-strapped municipalities and school districts to defer half of their $1.1 billion in pension contributions due this month.
The funding gap for the teachers’ and the police and firefighters’ funds also increased between 2007 and 2008, reports released this month show. The overall state pension system operates on behalf of more than 700,000 current and retired employees.
Global Pensions reports that CalPERS assets are down 6% in Q1:
CalPERS assets under management dipped 6.4% to $171.6bn in the first quarter of 2009 on the back of weak equity returns and write downs in the pension fund’s real estate and private equity investments.
In a staff memo to the board, chief investment officer Joe Dear said the drop in value could also be attributed to the drops in the domestic and international equity markets.
As of March 31, the California Public Employees Retirement System invested 41.3% in global equity, 13.8% in private equity, 24.9% in global fixed income, 12.1% in real estate, 2.5% in inflation-linked asset class and 5.4% in cash.
CalPERS staff also announced the finalists up for a private equity consulting slot and plans to renew the contracts of its emerging managers if the move is approved at an April 20 investment committee meeting.
CalPERS named Aldus Equity; BrockCapital Group; Ennis, Knupp & Associates and Pension Consulting Alliance as the firms being considered for a private equity consulting slot, according to staff a memo to the committee.
The firm will serve as a consultant to the board and will advise on strategy and policy Analysis, general investment analysis and research, and performance monitoring. All four finalists are existing CalPERS consultants.
Separately, staff recommends renewing the contracts for emerging managers of managers FIS Group and LEIA one year.
Since inception on 1 February 2008 through 28 February 2009, the US$359.9m portfolio was down 41.45%, but outperformed its benchmark by 87 basis points.
And now CalPERS is seeking to buy TARP holdings and Citigroup assets:
The California Public Employees’ Retirement System said it’s seeking opportunities to buy assets of Citigroup Inc. and other financial companies tied to the U.S. government’s $700 billion Troubled Asset Relief Program.
Calpers, as the largest U.S. public pension manager is known, said today it’s setting aside “billions of dollars” amid the credit crunch and is ready to deploy capital. It added that there’s a “glimmer of hope” in the stock market.
The pension fund is seeking to buy “some of the assets of these financial companies such as Citi and the others, assets that they’re trying to get off their balance sheets,” Henry Jones, a Calpers board of administration member, said in an interview after a speech in Seoul.
Calpers’s cost of managing its investments declined to the lowest level since 2004 after the value of fund holdings fell 27 percent this fiscal year, and it projects its investment costs will fall to $817 million in the 12 months that begin July 1, down from $1.04 billion last year, according to a report that will be presented to the fund’s governing board.
That is the lowest since the fund spent $523 million in the fiscal year that ended June 30, 2004. Calpers has broadened its asset allocation ranges to ensure more flexibility and plans to hold its investment review in May, about 18 months ahead of schedule, Jones said in the speech.
‘Toxic Debt’
“The assumptions that we used 18 months ago no longer fit the present market,” he said. “There’s still a tremendous ocean of toxic debt out there. Even if we didn’t buy it, it’s done enough damage to our banks to affect all of us on Wall Street.” The pension fund lost more than a quarter of its value in the first seven months of its current fiscal year, led down by stocks, real estate and commodities, according to its most recent investment activity report.
The MSCI World Index jumped 12 percent in the past one month as governments around the world stepped up efforts to stimulate their economies. The gauge has pared losses this year to 6.6 percent after last year’s 42 percent slump when the global economy sank into recession.
Calpers, with $175 billion in assets as of April 13, reached a recordhigh of $260 billion in October 2007. The fund provides pension and health benefits to 1.6 million government workers, retirees and their families.
Tight Credit
“Credit is still tight in the markets, but we’re able to raise enough cash to still make good deals and position ourselves for an eventual market turnaround,” Jones added.
The Sacramento, California-based fund invests 7.6 percent of its funds in cash, a category that calls for no allocation under targets established in December 2007, according to its Web site. The fund’s bond investments represent 24.8 percent of the total, more than the 19 percent target. It’s underinvested in equities, with 53.5 percent allocated there compared with a target of 66 percent.
Calpers has $500 million invested in South Korea, including a $100 million nvestment with Lazard Asset Management Plc last year, Jones said.
CalPERS is making a risky bet here and I hope it pays off for them. But I fear it will likely backfire as that “glimmer of hope” evaporates very quickly.
Finally, the BBC asks whether it’s the end of final-salary pensions?:
If you are one of the lucky few still in a final-salary, defined benefit (DB), plan, you need to know what this will mean for you and your plans for retirement.
Closing a scheme to current members is a big step for employers. Many smaller companies have already done this. So far, larger ones have typically made modifications to their DB scheme, and probably stopped people joining it some years ago.
Someone wrote me that defined-contributions are the future and that “people must assume responsibility for their financial health as well as their physical health. We cannot expect the government to take on such responsibilities because that is not the way evolution (real world) works.”
But as I have written before, the shift to define-contribution (DC) plans is not the solution. Most people cannot deal with the stress of investing their own money or selecting between funds that are offered to them. It is important that people start doing their own due diligence and build up some knowledge on investments, but the reality is that most individuals cannot handle these responsibilities.
This is why I recommend we scrap private pensions altogether and create several large public defined-benefit plans that are capped at a certain size. These funds would follow the highest standards of governance and they would be managed by professional money managers whose interests are aligned with their stakeholders and pension beneficiaries.
One thing is for sure, the end of final-salary pensions won’t solve anything and we should stop pretending otherwise.
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So we should all run to the public sector before it’s too late!
“This is why I recommend we scrap private pensions altogether and create several large public defined-benefit plans that are capped at a certain size. These funds would follow the highest standards of governance and they would be managed by professional money managers whose interests are aligned with their stakeholders and pension beneficiaries.”
This sounds like a pipe dream. And Hasn’t this basically already been tried with Social Security?
I say forget about pensions altogether. Any time you let someone else manage your money it’s going to lead to problems.
The only realistic solution in my opinion is some type of welfare for the elderly. Those who have saved enough and can afford to do so get to retire. Those who didn’t save enough and can’t retire work until they are unable to at which time they basically get a subsistence type welfare payment until the end of their days.
Terms like ‘high standards of governance’ and ‘aligning professional money managers with stakeholders/beneficiaries’ sound nice in theory but that’s never the way it works in practice. Any time you have a large sum of OPM (Other People’s Money) managed by a small group, that small group will either become corrupted or will attract the corrupted. There’s no way to stop it. That’s the way it’s always been and that’s the way it will always be.
Sounds like a way to dump Treasuries once the Chinese find an alternative asset class, and inflate away the national debt on the backs of people who lack the means or sophistication to hedge.
As one from a younger generation, this sickens me. Generally speaking, very generous, perhaps too generous, pensions were promised to boomers and older generations. Those generations then failed to make the necessary contributions (whether personally or through government funding, or via overly optimistic investing projections) leaving the pensions short. That leaves my generation and those younger than me responsible for paying retirement benefits of those who 1) promised themselves the moon; and 2) did not contribute enough on their own.
Leo,
Did you read about the California request for $13B from the TARP funds?
“Did you read about the California request for $13B from the TARP funds?”
tyaresun,
Thanks I edited my post to include this article. They are basically taking a leveraged bet on the “recovery”. I hope it pans out for them because if it doesn’t, California taxpayers are in big, big trouble.
Cheers,
Leo
“Final salary pensions,” what an abomination. My wife finished almost three decades of college teaching and was left with a PITTANCE, a goddamn fraction of her already-low salary, for all the years of selfless service to hundreds of students who’ve gone on to lead productive lives based on large part on the foundation she provided.
This country is sick, sick, sick. Sick with greed and craziness. There’s only one end solution possible, and it’s unfolding as we speak.
Someone wrote me that defined-contributions are the future and that “people must assume responsibility for their financial health as well as their physical health. We cannot expect the government to take on such responsibilities because that is not the way evolution (real world) works.”Ugh. IOW get rid of the government because it’s “not the way evolution/real world works”.
Once and for all let’s be clear, however unnatural government may be (I’m not saying it necessarily is), the right wing “property” fetish would have to be vastly more so, since proprety can never be anything other than derivative from government.
Let’s see how “evolution” would treat these fat parasitic thugs in a truly anarchic wasteland (as opposed to the fascist “free trade” anarchy they favor).
Most of all I’d love to see how evolution would treat the “corporation”, by far the most unnatural, unreal, fraudulent, absurd construct in the history of man.
The promotion of “evolution” (that thing that didn’t actually happen, so the same people tell us) here is kind of odd. Shouldn’t a conservative value civilization over the state of nature?
Yes government pensions are the answer, especially since the government has demonstrated such WONDERFUL financial judgment. Especially look at how well funded the future obligations of Social Security are!!
So you think the “little people” are too scared, stupid, or ignorant to actually take charge of their own retirement.
Are you REALLY that elitist and dismissive of the general population?
Wolf,
Voters have expressed their approval for the Social Security program that ensures subsistence funds for the elderly and disabled.
Voters permit salary deductions for setting aside funds for this program. The funds that have been deducted from worker salaries have been squandered (borrowed and not repaid) by government while $billions in sacks in Iraq were tossed and spent for military toys -not protective gear or sufficiently armored vehicles for young men on the battle field nor for the care of the maimed until Democrats were voted into a majority.
Budget limits have repeatedly been raised over the will of the people. (no voting on this).
Waging wars for this kind of ‘democracy’ is as fraudulent as that committed by knuckle-dragging banksters who created casinos without rules and continue to squander American workers’ life savings.
Saying the average person can’t manage their retirement assumes that retirement funds are to be invested. If banks offered a savings account that returned a reasonable rate, there wouldn’t be a problem. The problem is that savings rates are abysmal, which forces anyone looking for a worthwhile return into riskier vehicles. Retirement funds shouldn’t have to take that risk — one of the oldest rules is that “you don’t gamble with the rent money.”
The fraud of things like 401k’s is the risk. Investment entails risk, retirement funds should not entail such risk.
“Are you REALLY that elitist and dismissive of the general population?”
I am the furthest thing from “elitist”, but I also recognize that the majority of the people cannot properly manage their pension monies.
There have been countless studies showing DC plans are heavily exposed to stocks and they have underperformed DB plans.
Moreover, behavioral finance has demonstrated that people are not good money managers (not that the “experts” are that much better).
I do agree that as it stands, DB plans are not in great shape and we need to review governance and risk managment at these large funds.
But leaving everyone to “fend for themselves” is simply wrong and inhumane.
cheers,
Leo
Leo, I think the only workable long-term solution is the one which has already been tried and is known to work: have children support their parents. The parents support their children in the vast majority of cases, and there is no reason it cannot work the other way around.
The problem with any kind of retirement plan is that there will always be a temptation to over-commit and under-prepare. Either the company will skimp on contributions to try and save money, or money managers will gear up for short-term profits at the expense of long-term stability, or the government will become over-committed to massive entitlement programs that it later cannot afford, or some combination of the above. Having family members care for their own is the only solution that ensures that the elderly are cared for in a consistent, reliable way.
The contention to that approach–and the reason that Social Security was instituted in the first place–is that some do not have children, and some families cannot afford to support their parents. But those are exceptions, not the rule; for virtually every family that I know, the children would be capable of supporting the parents, albeit with some sacrifice involved. We should not be letting the exceptions dictate the rule. It may be necessary to have some sort of bare-minimum government support for the elderly who have no other resources, but the most viable solution is a culture shift where expectations are set that the younger generation will care for the previous generation, as it has always been.
LEO,
What you are saying IS elitist. Assuming it doesn’t go bankrupt also, SS does provide a minimum safety net for folks. The whole point about being an adult and citizen is that WE ARE SUPPOSED to be responsible for ourselves. This attitude that the average person is incapable of taking care of himself or herself is absurd.
Are there folks who demonstrate a lack of ability here – absolutely. If they are truly incapable, then they should be wards of the state (and no longer able to vote, as they have demonstrated that they are not adults and not responsible citizens). If they are capable but refuse to act wisely (the majority of folks in this area) then they deserve what they get.
We need to ensure that education is available, so that the average citizen can make an informed decision, and then apply the “big-boy” principle (they are responsible for their choices).
I’m in the “Final-Salary” program, and it is fully guaranteed, regardless of economic conditions. In other words, my final salary is guaranteed to coincide with my final month of life. However, I saw no mention of the word “pension” in the 3-point type prospectus I received just before I sent the nice people at AIG my entire life savings…
Vinny GOLDberg
Leo’s right. And so is Lee Anne. If the gov’t is by, for and of the people, Leo’s plan can work.
If we continue the way we’re doing, with the banksters in charge, nothing will be left by ashes for any of us.
LeeAnne, I voted for Oh’bama, but now I’m losing faith in him. He’s part of the establishment too, and the banksters own his soul.
The third party solution seems to draw nearer every day — the Pitchfork Party, that is.
Vinny
"We need to ensure that education is available, so that the average citizen can make an informed decision, and then apply the "big-boy" principle (they are responsible for their choices)."
>>I have been studying financial markets for over 12 years now. I have sat with the best hedge fund managers in the world and I have also seen anonymous prop traders that you never hear about who have made millions eating what they kill.
It would be nice if we can teach everyone to be like Jim Simons, George Soros, and Monroe Trout, but this is a pipe dream.
The markets are too difficult nowadays, even for professional money managers. Do you really expect Joe & Jane Retail to handle their own retirement fund?
Some have done well because they used common sense and remembered the basic tenets of asset allocation, investing in both stocks and bonds, but most people got slaughtered.
These markets are ruthless and unless you have tried making money solely by trading for a living (I have and it was the hardest and most rewarding experience), you will never understand how difficult it is to consistently make money.
I can teach people technical analysis, fundamental analysis, economic basics, but I can't teach them intuition and when to go for the kill in the stock market. That is either in you or it isn't. For most people, it isn't.
That is why safety nets exist and that is why we need to revamp our defined-benefit pension plans so that they benefit the many, not the few.
We need to ask some tough questions about pensions and the first one is why do they exists in the first place? For pension fund managers? For hedge fund managers? For private equity managers? Or for those hard working people who contribute to them?
Pensions are a reflection of our society. If you dismantle DB plans, we mind as well live in a state of total anarchy where the weakest members of society, such as the poor and disabled, are left to fend for themselves.
That is not a society that I want to live in.
Leo
“Some have done well because they used common sense and remembered the basic tenets of asset allocation, investing in both stocks and bonds, but most people got slaughtered.”
So did most ‘professional’ money managers.
‘Pensions are a reflection of our society. If you dismantle DB plans, we mind as well live in a state of total anarchy where the weakest members of society, such as the poor and disabled, are left to fend for themselves.’
Pensions currently only benefit the ‘professionals’ managing them. Is the sum total of assets in pensions today even worth the contributions that have been put in them? Society would be better off if pensions were eliminated.
This is the biggest crisis all the people alive today have ever seen and also the extent of the rescue program is unprecedented.
What is Team-Obama exactly doing ?
Pump in massive amount of funds in these toxic assets and do it without having any accountability or transparency.
Why?
1. The assests are really cheap at the moment
2. Help their friends in wall-street who provide the money for running and winning elections
How to make the plan work?
People have lost the hope in the system … just add oil to the fire
by getting all the leading economists and traders to bash the government programs and make people believe that the programs are unfair,unjustified and ineffective. In short term it will create even more negativity and maybe more bailout funds or some mini-bubbles or mini-rallies as we are experiencing right now !
and very slowly and discretly these economists will start making statements which would approve these programs partially and one day one of the mini-rallies will form the next big rally and very slowly the US govt will offload everything bought during this period with a huge margin.
The end result, NULL fiscal deficit and govt liabilities which has mounted for quite a few years because of the wars and indiscriminate spending …
Why is US govt playing this game ?
Was there any other option … other than insider TRADING and market manupulation at the macro-economic level !
who gains and who losses?
gainers: US treasury, wall street, central banks and offcourse these economists who are bashing these plans!
loosers: China, India and all the third world countries, retail investors in equity,real estate the world over …
why no one would complain: because the looses are already done, jobs are already lost and when things improve in a few months/yrs no one would complain
In the UK 90% of defined benefit pension schemes are in deficit. The total deficit is over £250bn and we have a woefully inadequate pension protection fund to cover that of just a few £bn. If some big schemes go bust then either the government will have to bail them out, which it can ill afford to do, or people will lose their pensions.
There certainly needs to be tighter rules in place over what sort of investment strategy is appropriate for pension funds but we also need to recognise that defined benefit pensions are like blank cheques. We have no idea how long people will be living in 10 years time. Actuarial predictions are just guesses. Even being out by a few years adds huge costs to your scheme and there is simply no way to calculate this in advance.
One thing is certain, we need to contribute much more and work for longer.
essentially all of these discussions are completely wrong, from both sides, because they are framed (quite deliberately) as defined mbenefit from employers vs. defined contribution from individuals.
That is a qualitatively different, but it is almost insignificant compared to the quantitative difference.
Which is that defined benefit pensions were funded with something like 20-25% on top of wages, paid by employers, and defined contribution pensions often get 1/4 from the employer (4-5%) as defined contribution pensions did.
The enormously reduced cost to employers is 90% of the matter, and only morons and cheats discuss side issues as the change of funding source when the big deal is the change in the amount of funding.
If defined contribution pensions were funded as much as defined benefit ones they would not be too bad; but we are not comparing a 20-25% employer contribution to a defined benefit pension with a 20-25% employer contribution to a defined contribution one, but to a 4-5% one in the latter case.
That is both the big problem with defined benefit pensions (for employers) and at the same time with defined contribution pensions (for employees). That DB ones are very expensive for the employers to fund, and the DC ones are very expensive for the employees to fund.
Because it is easy for the losers (employees) to see how much a DB pension is worth (k% x final salary x years of service) but it is easy for employers to conceal how little a DC pension in (because employees don’t know usually how much the DB pensions costs in present terms).
In the end good pensions are for the few winners, and the many losers will spend their retirement in unheated sheds eating bread and milk.