Market Volatility Creates Short-Term Declines, Long-Term Opportunity for Public Pensions

(August 10, 2011) — While pension funds in the United States have enjoyed a strong year as they slowly return to pre-crisis levels, the recent  market slump has contributed to short-term declines and long-term opportunity.

“In the near term, it’s not good; in the long term it’s an opportunity,” Joseph Dear, the chief investment officer of the California Public Employees’ Retirement System (CalPERS), told CNBC, describing the recent market volatility.

CalPERS, the nation’s largest public pension fund, lost about $18 billion off the value of its stock portfolio from July 1 until Tuesday’s market rebound.

The large decline comes just weeks after both CalPERS and the California Teachers’ Retirement System (CalSTRS) — posted annual investment gains of more than 20% in the fiscal year that ended June 3, fueled largely by stock values. While CalPERS’ assets grew by $37 billion to $237.5 billion, CalSTRS added $29 billion to reach $154.3 billion.

The market turmoil has also plagued international pension funds. The Netherlands’ ABP, one of the world’s biggest schemes, told the Wall Street Journal that the market slump is having a substantial impact on its funding ratio, which fell below 100% in the beginning of August from 106% at the end of July.

A study by Mercer has revealed that market volatility in the first six trading days of August has dealt a severe blow to pension plans sponsored by S&P 1500 companies, with the aggregate funded status decreasing by $191 billion to a funding deficit of $496 billion and an aggregate funded ratio of 73% as of the market close on August 8.

“What we are seeing is yet another “perfect storm” of equity losses combined with a drop in interest rates, similar to what we saw in 2000/2001 and 2008.” said Jonathan Barry, a partner in Mercer’s Retirement Risk and Finance group, in a statement. “The 73% funded ratio we saw at the end of the day on Monday is the lowest level since August, 2010.”

Last month, a report by the Organisation for Economic Co-Operation and Development (OECD) warned that while pension fund asset levels in most countries continue to show strong growth and are on the way to returning to pre-crisis levels, the outlook for future economic growth is still in question. Andre Laboul, head of the OECD’s financial affairs division, stated: “Having weathered the financial crisis, pension fund asset levels in most countries continue to show strong growth and are on the way to returning to pre-crisis levels. During 2010, both economic and financial indicators showed signs of further recovery. However, the outlook for future economic growth in developed economies remains uncertain and sluggish.”