“Everything Is Overvalued”: Public Pensions Face Dangerous Dilemma In 2018
by Tyler Durden
ZeroHedge.com
Tue, 01/02/2018
As we discussed a few weeks ago, being a pension investor these days has absolutely nothing to do with “investing” in the traditional sense of the word and everything to do with gaming discount rates to make their insolvent ponzi schemes look more stable than they actually are. Here was our recent take on CalPERS’ decision to hike their equity allocation to 50%:
CalPERS’ decision to hike their equity allocation had absolutely nothing to do with their opinion of relative value between assets classes and nothing to do with traditional valuation metrics that a rational investor might like to see before buying a stake in a business but rather had everything to do with gaming pension accounting rules to make their insolvent fund look a bit better. You see, making the rational decision to lower their exposure to the massive equity bubble could have resulted in CalPERS having to also lower their discount rate for future liabilities…a move which would require more contributions from cities, towns, school districts, etc. and could bring the whole ponzi crashing down.
The new allocation, which goes into effect July 1, 2018, supports CalPERS’ 7% annualized assumed rate of return. The investment committee was considering four options, including one that lowered the rate of return to 6.5% by slashing equity exposure and another that increased it to 7.25% by increasing the exposure to almost 60% of the portfolio.
The lower the rate of rate means more contributions from cities, towns and school districts to CalPERS. Those governmental units are already facing large contribution increases — and have complained loudly at CalPERS meetings — because a decision by the $345.1 billion pension fund’s board in December 2016 to lower the rate of return over three years to 7% from 7.5% by July, 1, 2019.
Overnight the Wall Street Journal poses an interesting question: what happens when real world fundamentals don’t line up with pension boards’ artificial goal seeking exercises on discount rates? The answer, of course, is that pensions, and therefore taxpayers, are forced to take on more and more risk as they stretch for returns…
Retirement systems that manage money for firefighters, police officers, teachers and other public workers aren’t pulling back on costly bets at a time when markets are rising around the world.
Some public pension funds are adding to traditional allocations of stocks and bonds while both are expensive.
Others are loading up on more private-equity or real-estate holdings that are less liquid and sometimes carry high fees.
“Everything is overvalued,” said Wilshire Consulting President Andrew Junkin, who advises public pension funds. “There’s no magic option out there.”
The Rest…HERE
