Have We Stolen Future Return?

We hope that you had a wonderful Memorial Day weekend with family and friends, while remembering all those that gave the ultimate sacrifice to preserve and protect our freedoms.

It was during this past weekend that a couple of industry colleagues passed along a very interesting article written by John Hussman, who is one of the best financial analysts in the nation. Here is a link to his latest piece on the looming disaster of pension funds and what caused it:


John has a very interesting take on the ZIRP enacted by the U.S. Federal Reserve, and its potential impact on defined benefit pension plans.  John posits that equity and bond returns have been dramatically altered and accelerated due to near zero interest rates. As a result, we are paying much more now for the higher valuations that have occurred, which will lead to much lower returns during the next 10-12 years.

Furthermore, the “artificially” higher equity and bond returns in the most recent past (last 7 years) have kept pension contributions lower than they should have been under more normal returns.  As a result, pension plans (particularly public and Taft-Hartley plans) will incur greater funding risk in the coming decade when returns are low and the contribution expense escalates.

We can see John’s point, especially if we can’t get GASB moving closer to FASB  / IASB in marking-to-market pension liabilities.

In a WSJ article today “Pension Funds Pile on Risk Just to Get a Reasonable Return”, Christopher Ailman, CIO, California State Teachers Retirement System, laments the difficulty of building an asset allocation framework in this environment that will generate a return close to the funds 7.5% ROA.  Well, if we can’t get the return in this environment, just imagine how difficult it will be if John Hussman is proven correct!

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