Market crash threatens pensions of millions of Americans
Pension plans remained severely underfunded during the 11-year bull market that followed the Great Recession. The slide into insolvency and high-yielding markets has led fund managers to take risky bets in hopes of staying afloat. Now, the recent liquidation has left the funds struggling to meet their future obligations.
Public pensions are borrowing increasing amounts to meet their payment obligations. Nearly $13 billion worth of pension bonds were sold in 2021, more than in the past five years combined. Now they are taking more risk by investing that leveraged money.
“We need all the arrows in the quiver we can get, and private debt is one of the most critical,” said Dan Welcome, deputy chief investment officer of CalPERS. “There is no choice without risk.”
The Teacher Retirement System of Texas, the nation’s fifth-largest public pension fund, has also been using leveraged funds since 2019.
Leverage can help multiply market gains in bull markets, but it can also increase losses during down periods.
While the majority of pensions still do not use borrowed funds, there has been a sharp increase over the past four years. Prior to 2018, none of the largest funds used leverage.
At the same time, funds began to acquire riskier assets during the bull run and low rate environment to compensate for some insolvency.
“Risk-taking behavior is most pronounced among funds whose sponsors have the least capacity to bear additional risk,” the Fed said.
As interest rates rise and market stability declines, these repos could face more problems.