After losing $1 trillion during the market downturn, U.S. pension funds for state and local government employees have completely missed their investment targets.
Pricewaterhouse Coopers believes that, even in fifteen years, public pension plans won’t even have half the money necessary to meet their future pension obligations.
One potential solution? We kid you not: Take more risk.
Washington Post: The urgent need for outsize returns by these vast public pension funds, which must hit high investment targets year after year to keep pace with rising retirement costs, is in turn fueling a renewed appetite for risk on Wall Street.
Before the crisis, many public pension funds had experimented with risky trading techniques or committed more of their money to hedge funds and other nontraditional firms, which in turn invested some of it in complex mortgage securities. When these melted down, pension funds got burned.
Now, facing an even bigger funding gap, some systems are investing in the same securities, betting that a rebound in their value will generate huge returns.
Once burned, twice aggressive?
If they aren’t able to meet their targets, or blow up again due to higher risk, the taxpayer will most likely be forced to make up the difference.