U.S. Officials Hope Alternatives Will Save Public Pension Funds

It should come as no surprise that America’s public pension funds are in trouble. It seems that no matter how quickly pension funds grow, payments to pensioners appear to grow considerably faster. In an effort to try and gain back some lost ground, public pension funds in the United States have been flocking to alternative investments, in a frantic search for a higher rate of return.

Between 1984 and 1994, U.S. public pension funds held just 5 percent of their assets in alternatives and 50 percent in fixed income. By 2007, alternative investments had doubled to comprise 10 percent of all pension fund holdings. Since the introduction of the global financial crisis in 2008-2009, alternatives have nearly doubled again to 19 percent of total assets. In contrast, fixed income holdings have dropped nearly in half, to 27 percent of total assets.

The fact of the matter is that investment brokers and money managers want to sell alternative investments to pension funds. And, with the promise of higher returns, pension funds are often eager to invest. The underlying problem is that most public pension funds across the United States were on an unsustainable course, long before the global financial crisis hit. Unfortunately, public pension advisers and many plan actuaries made investing recommendations based on faulty assumptions about: the nature of pension promises, the inherent risks in global financial markets, the challenge of funding pensions in down markets, and politicians’ incentives for following through on all those generous pension promises. In short, pension fund managers and actuaries have been getting the wrong investment figures for years, and now they are hoping that big returns from alternative investment offerings, will help them balance the books.