Public pension plans swing for the fence

Andrew Willis of The Globe & Mail picked an interesting report from an analyst, dealing with the behaviour of private/corporate pension plans and public pension plans. Apparently the public pensions decided to take on greater risk while the private ones have shed risk. The article points out that public pension plans tend to hold less riskier assets so the increase in risk-taking doesn't necessarily mean they are, all of a sudden, more risky than the private ones. All we know is that they appear to increase their risk tolerance.

Corporations that run pension plans for their employees are revisiting portfolio strategy with an eye to shedding risk and are “preparing for the inevitability of much higher cash contribution requirements,” according to a report released Tuesday from consulting firm Greenwich Associates.


Public sector funds, on the other hand, “are shifting money into riskier asset classes in what is looking like a swing-for-the-fences attempt to close shortfalls with future investment returns that far outpace those of the broad market,” said Greenwich pension experts.

“Corporate funds have traditionally invested much larger portions of their assets in equities, while public funds took a more conservative stance with bigger allocations to fixed income,” explains Greenwich Associates consultant Dev Clifford.

“As a result of their differing strategies in the wake of the crisis, public pension funds and corporate funds are approaching parity in their U.S. equity allocations, and public funds are making and planning meaningful investments in private equity, international stocks, hedge funds and real estate.”

Greenwich found the typical pension plan lost 19 per cent of assets between the start of 2008 and the market’s lowest levels in March, 2009. Those losses left most plans massively under-funded, with a pension promise to employees that cannot be paid with current assets.

Unfortunately this analyst report appears to rely on survey responses rather than hard data. In any case, given the huge rally in nearly all assets in the last year, I think we can safely say the public pension funds profitted hansomely with their 'swing for the fences' tactic. But it remains to be seen if their strategy will continue to pay off or if they will be stuck with big losses and illiquid assets that are hard to sell.