Pensions: Gauging Risk, California's Prop 13 and Corporate Pensions

From Pensions and Investments we get some news on how states are hiring chief risk officers:

Connecticut is joining a growing number of major public pension funds that have appointed chief risk officers since last decade's financial crisis to evaluate volatility, liquidity, leverage, the impact of rock-bottom interest rates and new risks like global warming.

. . . BNY Mellon's Risk View allows clients like pensions and endowments to see how their current portfolio would have performed during periods like the Asian "flu" in 1997, the Russian debt crisis in 1998, the bursting of the dot-com bubble in the early 2000s and the 2008 financial crisis.

. . . Connecticut lowered the rate on the teachers' pension to 6.9% from 8% while extending the amortization period for its unfunded liabilities to 30 years.



I half suspect that if I did some research I would find that the lower rate of 6.9% and the extending of amortization to 30 years off-set.

Personally, I think the BNY concept is stupid. Why would any bear market or economic crisis be similar to the other.

The Las Vegas Review-Journal goes after public unions:

The unions, including the California Teachers’ Association and Service Employee International Union, have filed a ballot initiative to increase commercial property taxes. They argue the hikes are necessary because of a “funding shortfall” in education and to help local governments. 

. . . The push by California labor outfits to raise property taxes is just the latest gimmick to cover the skyrocketing costs of the generous public pensions that private-sector workers must cover.

There's nothing new here that hasn't been discussed before, but hopefully more and more voters are stating to realize where tax increases are going.

Bloomberg has an article that shifts from public pensions to corporate pensions:

The retirement funds for U.S. corporations had just 82% of the money they expect to need over time for pensioners as of August, down four percentage points from July, according to a statement from consulting firm Mercer on Monday.

. . . When companies have more than about 80% of the funding they expect to need for pensions, they tend to cut their investments in riskier assets like stocks and increase safer holdings like bonds to lock in gains and reduce risk. Companies closer to that level or below it are less likely to make those shifts, and more likely to contribute more of their cash flow toward their pensions, JPMorgan Chase & Co. strategists wrote last month. 

It is interesting that in just 1 month, pension funding dropped four percentage points. The market did take a dip in August. It is currently back near the highs. So that four percentage point drop has likely been made up.

I think what is specifically interesting is the last sentence. Companies below 80% are more likely to make contributions from cash flow. To me, this indicates that in a future bear market, the cost of pensions will result a drop in capital investments. A bear market that might be driven more by valuation versus an economic recession could very well lead to a recession due to corporate pension needs.