Pensions across the U.S. are now less liquid in their reserves as their levels of cash have fallen to seven-year lows.
Millions of workers such as teachers, state and local government employees and firefighters receive pensions to fund $44.5 trillion in retirement funds.
Pensions have reduced their cash levels to 0.8% and have opted to invest in more illiquid assets in the private market that require longer investing periods and generate higher returns, according to data from the Boston College Center for Retirement Research.
The news was first reported by the Wall Street Journal.
Pension fund managers are facing a trifecta of issues, including a larger number of people retiring, increased inflation concerns and placing more emphasis on greater returns from assets in the private market.
The funds could risk not having enough cash to pay retirees and would be forced to sell assets at a steep discount to fund their monthly stipends.
The funds need to stay liquid to meet their obligations, said Jonathan Grabel, investment chief of the Los Angeles County Employees Retirement Association, which manages $75 billion.
His current goal is to keep 1% funds in cash in case the markets “seize up,” he said.
The National Association of State Retirement Administrators said the average annual return is 7% for state and local government retirement funds.
To maintain 7% in annual returns, the Los Angeles County Employees Retirement Association lowered its allocation to investment-grade bonds to 12% from 19% in May and increased its assets in private equity, infrastructure and illiquid credit to a total of 29% from 16%.
In the past, pension funds could turn to a mix of bonds and sell them for liquidity. As fixed income returns have decreased, fund managers lowered their allocations of fixed income to 24% from 33%, according to data from Boston College.
Assets in private markets can typically generate higher returns and meet the demands that pension funds are facing as the number of employees who are eligible to retire are higher than its current workforce in some funds.
Over 25% of Connecticut’s employees could retire between June 2020 and June 2022, according to data from the Boston Consulting Group.
The California Public Employees’ Retirement System, known as Calpers, manages $496 billion in assets and has a goal for an annual 6.8% return. The fund said its investment strategy includes allocating more money into private markets, borrowing against a maximum of 5% of the fund and lowering its cash levels.
Other smaller pension funds in the Midwest that are providing retirement benefits for city workers in Illinois and Ohio’s school employees are following the same strategy and allocating money into private equity, private debt or real estate.
Current public pension funds are working with less money than their predecessors and are likely hundreds of billions of dollars short of meeting their obligations to their retirees.
That is largely because of underfunding over the last 20 years, demands from unions and steep losses from the Great Recession in 2007 to 2009.