Human Capital & Careers

Rocky Markets Hit Pension Funds Hard

Last year's gains have been wiped out by a rough start to 2008.
Alan RappeportJanuary 30, 2008

It looks like Christina Wood knew what she was doing. The senior investment officer of the California Public Employees’ Retirement System (Calpers), America’s biggest pension fund, Wood announced this week that she would soon be leaving to become chief executive of a new hedge fund. With equity markets roiling and pension funds bearing their share of the brunt, it looks like a good time to move on.

During the first month of 2008 American pension funds have lost $110 billion, shedding up to 8 percent of their value, according to Mercer, a human resources consultancy. Although pension funds gained strength last year, the last few weeks have wiped out those gains.

“For many if not most plan sponsors, any improvement due to market conditions in 2007 has been more than wiped out in the past few weeks, as equity markets have declined significantly,” said Jonathan Barry, of Mercer’s financial strategy group.

The fate of pension plans and companies are more intertwined than ever, according to Mercer, as new accounting rules require that changes to the value of equities and the yields on bonds be reflected on corporate balance sheets. “Corporate earnings will be lower as the impact feeds through into the pension plan accounting requirements,” said Mercer’s Adrian Hartshorn.

American pension funds are not alone in their recent struggles. Watson Wyatt, another consultancy, found that assets of global pension funds have dropped by $1.5 trillion since the beginning of the year. The biggest pension funds allocate more than 50 percent of their investments to equities and have been especially punished by the slumping markets.

“Events of this month will serve to remind investors of the value of risk management and the benefits of diversification,” said Roger Urwin, global head of investment consulting at Watson Wyatt. Last year assets in the top 11 pension markets grew by 9 percent to more than $25 trillion. The increase was healthy, but still below the five-year average of 12 percent growth.

To curb losses in the event of a further economic downturn or a recession, pension funds are expected to hedge more carefully. In a recent survey of 100 pension fund managers by Hewitt Associates, another human resources firm, 65 percent said they would increase their hedged positions. Strategies would include directing more attention to hedge funds, currency funds, and long/short strategies, according to Lennox Hartman, head of fixed income research at Hewitt.

As for Calpers, its fund’s chief investment officer said last week that the $240 billion fund was bullish on investments in commodities and emerging markets while America’s economy slows.

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