Pension Plans Still Imperiled

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Pension Plans Still Imperiled

By Joseph N. DiStefano, The Philadelphia Inquirer

February 4, 2004

Like a sunny morning after a bleak February storm, the stock market's recovery has eased some of the strain on U.S. pension plans.

But corporations and taxpayers still face years of rising subsidies to fund the checks promised to those retirees who enjoy old-fashioned guaranteed pensions instead of personal retirement accounts.

The Pension Benefit Guaranty Corp., which bails out bankrupt corporate pension plans, faces a record $11 billion deficit.

In Pennsylvania and New Jersey, taxpayer subsidies to pension plans for government workers have risen in the last two years, and are projected to go higher as the gap between investment income and pension payments grows.

"The view isn't all rosy [for pension plans] just because the markets are rallying," said Kathleen Taylor, U.S. managing director of Barclays Global Investors. The London firm manages pensions and other investments worth $1 trillion.

Stock market gains will likely be swamped by "the pending huge change in demographics," Taylor said. She was referring to a wave of baby-boomer retirements that soon will force fewer active workers to help pay for more and more pensioners.

The nation's 1,000 largest pension plans gained 12 percent in value in the year ended Sept. 30, reversing two years of decline, Pensions & Investments magazine reported this week in its yearly review.

But pension managers are not betting that the market will keep rising. A growing number are taking money out of stocks and bonds and putting it into risky hedge funds, junk bonds, and other so-called alternative investments. Hedge funds are unregulated, often secretive investment pools.

The plans hope these investments will help bridge the growing gap between investment assets and pension liabilities.

For example:

The $24 billion Pennsylvania State Employees' Retirement System has invested $3 billion with four out-of-state firms that buy hedge funds, making it the biggest hedge investor among all U.S. pension funds, according to Pensions & Investments magazine. Chief investment officer Peter Gilbert said that most of the hedge money was in stocks, and that the funds were supposed to make money even when the market dropped.

The $44 billion Pennsylvania Public School Employees' Retirement System, which, like the state employees' fund, has more invested in private-equity and other "alternative" investments than many other plans, is also considering hedge funds, spokeswoman Evelyn Tatkovski said. The $64 billion New Jersey Division of Investments hired consultants last month to consider its first private equity and hedge investments.

Philadelphia's $4.3 billion plan, which faces the biggest deficit of any large local pension system, has also hired a hedge-fund consultant.

While the Pennsylvania, New Jersey and Philadelphia funds added assets last year to prepare for future pension payments, Delaware let its retirement plan stay at $4.9 billion, unchanged from the year before. The plan is living off its 1990s surplus, keeping worker contributions - ultimately funded by taxpayers - to about half what Pennsylvania charges, plan administrator David Craik said.

Unlike Pennsylvania's and New Jersey's pension boards, Delaware's is dominated by private-sector financiers instead of politicians who historically collect campaign funds from pension vendors; also, "our board is very hesitant about the hedge-fund concept," Craik said.

Taylor, the Barclays director, said she worried that too many pension plans were less careful. Although her firm bills itself as the world's largest hedge-fund manager, she said such funds were not for most investors - or many institutions.

"As you seek return, you also seek risk," she said. "There is no free lunch in the marketplace. These hedge funds are not transparent."
She added: "Hedge funds are the next fad. [Are they] the next fad that's going to blow up?"