Report: Virus' Effect on NYC Teachers’ Pension Fund Poses Risk to City

New York University (NYU) has issued a report saying the New York City Teachers’ Retirement System’s (TRS) funding concerns, which are being amplified through the economic distress caused by the COVID-19 pandemic, threaten to become a significant stimulant to a “fiscal and political crisis” in the city.

NYU claims that two distinct attributes of the TRS—a relatively conservative contribution policy, whose rates rise when the pension’s funding ratio falls, and a Tax-Deferred Annuity program—pose a great risk to the city.

The basis for the report was the extreme volatility in public exchanges caused by the pandemic, the effects of which would be magnified by the two aforementioned qualities of the pension, which was last reported to be approximately 74% funded.

TRS’ Tax-Deferred Annuity program pays out a fixed rate of return, typically set at 7% by the state legislature, backed by the defined benefit pension fund and subsequently taxpayers and the city budget. If, in any given year, the pension’s actual return profile exceeds the 7% target, the excess funds above the rate are housed within the pension system.

However, if the return profile falls short of 7%, as can be expected after the recent market downturn, the pension fund is responsible for shoring up the difference, meaning more strain on the city budget.

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“The TDA fixed-return fund had $24 billion in assets in 2018, so a shortfall of 5%, for example, would require the defined benefit pension fund to make up approximately $1.2 billion to the TDA,” the report said.

“The guarantee provides valuable benefits to plan members but creates special risks to the city,” the report said. “It does not have the constitutional protection that the regular retirement benefit has and therefore is more directly under the control of state and city policymakers.”

The university conducted a few studies using the pension’s 7% return baseline scenario, and found that the TRS poses substantial contribution risks to the city budget. The university estimated there’s a 20% chance the contributions will rise above 60% of payroll within the next 30 years, citing that there’s almost a 50% chance of severe underfunding to the pension within that timeframe.

The university said if the system did away with the Tax-Deferred Annuity program, the risk of it becoming severely underfunded within the next 30 years drops to just 2%.

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Tags: Contributions, Funding, New York City Teachers’ Retirement System (TRS), New York University, NYU, TRS, unfunded

When a sovereign wealth fund, pension fund, or endowment has a bad quarter, it always claims it’s not rattled by short-term losses and reminds everyone that it’s investing for the long term.

However, the global stock market crash brought on by the coronavirus pandemic during the first quarter was so severe that it has put a dent into the long-term returns of Norway’s Government Pension Fund Global (GPFG), the world’s second largest pension fund.

The fund lost 14.6% in the first quarter of 2020, or 1.171 trillion kroner ($112.4 billon). The fund’s portfolio was weighed down by its equity investments, which tumbled 21.1% during the quarter. The fund’s average holding in the world’s listed companies, measured as its share of the FTSE Global All Cap stock index, was 1.5% at the end of the year. The index was down 20.3% for the quarter.

Fixed-income was the top-performing asset class for the fund, returning 1.3% for the quarter. The return for the fund’s unlisted real estate investments was not available and will be released later in April.

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“We have seen a substantial decline in the world’s equity markets in the first quarter, with considerable fluctuations from one day to the next,” Yngve Slyngstad, CEO of Norges Bank Investment Management, said in a statement. “The market situation is very challenging. However, the fund has a long-term horizon.”

Unfortunately for Slyngstad, the fund’s long-term horizon was also affected by the historically bad quarter as its annualized returns over the last 10 years fell to 5.7% at the end of March from 7.83% just three months earlier. And since its inception in 1998, the fund’s returns were 5.3% at the end of the first quarter, down from 6.09% at the end of December.

The net real returns over the last 10 years dropped to 4% at the end of March from 5.98% and the end of 2019, while the net real returns since inception fell to 3.5% in March from 4.17% at year-end 2019.

The performance was an abrupt reversal from last year when the fund returned 19.9%, which was the second highest return in percentage terms and the highest in terms of krone.

“The strong return in 2019 provides a reminder that the fund’s market value could also fluctuate substantially in the future,” the fund said in its annual report earlier this year. “In isolation, a global stock market downturn equivalent to that in 2008 would reduce the value of the fund by almost 3 trillion kroner.”

The krone depreciated against several of the main currencies during the quarter, which is why the fund’s market value only fell 90 billion kroner from the end of the previous quarter despite the large investment loss.

The fund recently named Nicolai Tangen, chief executive of London-based AKO Capital, as its new CEO to replace Slyngstad, who said in October that he is stepping down after 12 years heading the fund.

Report: Virus’ Effect on NYC Teachers’ Pension Fund Poses Risk to City

Short-Term Losses Dent Norway’s Long-Term Returns