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Follow Up: BlackRock’s TIPS Call Looks Prescient

Expecting higher inflation, the asset manager has called for investing in the security that shields investors.

By Larry Light


Recently, we reported that BlackRock expects inflation to move up. So the nation’s largest asset manager advocated buying Treasury inflation-protected securities (TIPS) as a remedy.

One easy way to invest in these is via the largest exchange-traded fund (ETF) that tracks inflation, the iShares TIPS Bond ETF. Since our story, this has risen 0.75%. Equally as important is the so-called breakeven rate, which shows what bond traders are projecting for inflation up ahead. (The rate is the difference between Treasury bonds and TIPS.) Namely, it foresees a 2.1% annual inflation rise for the next decade.

Considering that the latest increase in the Consumer Price Index (CPI), year-over year for December, was 1.4%, that 2.1% call is a pretty decent indication of how inflation expectations are heading. Now, the Federal Reserve is targeting 2% as the ideal level for inflation, and even will let it run above that point for a while without clamping on the monetary brakes, for fear of kneecapping the economy.

Yes, there’s no guarantee that inflation actually will oblige by moving higher. The Financial Forecast Center thinks the CPI will break 2% annually by March, and stay around 3% through the summer. But Goldman Sachs believes that the Federal Reserve’s preferred inflation gauge, the personal consumption expenditures, will top 2% sometime this spring, as the pandemic weakens and economic prospects brighten, then fall back.

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Peter Boockvar, CIO of Bleakley Advisory Group, pointed out that, while prices for goods are flat or dropping, service costs are on the way up. Hospital services, for instance, increased 3% over the previous 12 months. That should feed into higher inflation down the line, he predicted.

After the Fed’s most recent meeting, Chairman Jerome Powell indicated that the economy could see some price pressures, in particular from rising energy costs. Indeed, oil prices have ascended to $53 most recently, after slumping to less than zero last spring. (The most recent top, at the end of 2019, was $63.) Climbing oil prices, he said, could “send a shock through the economy.”

Certainly, additional federal spending would test the proposition, which up to now has proven valid, that government stimulus doesn’t move the inflation needle. President Joe Biden has proposed a third aid package, to the tune of $1.9 trillion. Whether he gets that or not—and GOP lawmakers are balking at the price tag—Washington oddsmakers expect he will manage to push some kind of stimulus through, given the severity of the pandemic’s winter surge.

Related Stories:

With Inflation Expected to Edge Higher, BlackRock Says Buy TIPS

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Home > News > Pensions > Vermont Treasurer Calls for Pension Cuts for State Employees, Teachers
Pensions

Vermont Treasurer Calls for Pension Cuts for State Employees, Teachers

Workers would take on up to 78% of the increase in liabilities and 88% of the contribution increases.

By Michael Katz


Vermont’s treasurer is recommending cutting pension benefits for state employees and teachers in a move intended to reduce the state’s unfunded actuarial accrued liabilities (UAAL) by nearly $500 million. However, her office acknowledged that the cuts would be “painful” for workers.

Vermont Treasurer Beth Pearce released a report containing recommendations that she said could reduce pension UAAL for the Vermont State Employees’ Retirement System (VSERS) and the Vermont State Teachers’ Retirement System (VSTRS) by $474 million and reduce the actuarial determined employer contribution (ADEC) by $85 million.

“While shy of the total target of $604 million in the UAAL and $96.6 million for the ADEC, it is a significant reduction to the existing liabilities and costs to the taxpayer,” said the report, which added that the net other post-employment liabilities could be reduced by $1.68 billion by directing a “minimal amount” of funds for prefunding. “All in, these recommendations will reduce the state’s post-employment liabilities by $2.2 billion.”

But the cuts would be painful for employees, as the report says the implementation of the proposals will significantly reduce benefits while also raising employee contributions. The report said employees are taking on a “substantially greater” portion of the actuarial losses, and, if all recommendations are accepted, workers will be responsible for as much as 78% of the increase in liabilities and 88% of the contribution increases.

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“These recommendations are painful, and this report is not submitted lightly, but action is needed to continue to provide retirement security for all our employees,” the treasurer’s office said in a statement.

The report provided a series of recommendations to reduce pension liabilities and other post-employment benefit liabilities for both VSERS and VSTRS. These include reducing or eliminating cost of living adjustments (COLA) for active employees upon retirement; increasing the years used to calculate the average final compensation; combining years of service and age for the purposes of eligibility for normal retirement; and increasing employee contributions. 

“Eliminating or reducing a COLA significantly reduces the lifetime benefits of a retiree as purchasing power is diminished over time,” the report said. “The treasurer’s office, however, reluctantly, sees some level of COLA reduction as the only viable option to make a significant reduction to approach the targeted savings.”

At the same time, the report recommended maintaining a defined benefit (DB) system for current and future retirees, and said that any benefit changes to the retirement systems should not be made for the 17,000 existing retirees. It also suggested the system continue to fund the ADEC.

The report also suggested possibly using excess revenues or federal Coronavirus Aid, Relief, and Economic Security (CARES) Act money to establish a reserve that gradually reduces the ADEC requirements and eases some pressure off operating budgets. Despite the grim assessment of the situation, the state treasurer’s office said it is hopeful the state would benefit from a change in power in the federal government.

“With the new administration in Washington and changes to both houses of Congress, there is a possibility of additional revenues without strings/restrictions,” said the report. “Paying down the state’s debts with a portion of these funds should be a priority.”

However, state teacher’s union Vermont-NEA voiced its disapproval with Pearce’s proposal.

 “We think that would be unfair to our teachers, who have held up their end of the bargain and paid every single dollar that they’ve been asked to pay,” Don Tinney, president of Vermont-NEA, told Vermont Public Radio. “That [cost-of-living-adjustment] has been part of the bargain—that as they retire, they know their pensions would keep up with the rate of inflation.”

Related Stories:

Sanders, Van Hollen Introduce Bill to Cut Executive Tax Break to Shore Up Pensions

Northeastern State Treasurers, Asset Managers Form Corporate Diversity Coalition

State Pension Unfunded Liabilities Nearly $6 Trillion

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