Pandemic Squeezes Pension Funds

Summary

WSJ Your Money Briefing – "Pandemic Squeezes Pension Funds"

Date: December 10, 2020
Host: J.R. Whalen (Wall Street Journal)
Guest: Heather Gillers (WSJ Pensions Reporter)

---

Episode Overview

This episode examines how the COVID-19 pandemic has intensified challenges for public pension funds in the U.S. These funds, which hold retirement savings for millions of public employees, have long struggled with low bond yields but are now facing even greater pressure due to economic uncertainty and budgets rocked by the pandemic. The conversation explores the strategies pension funds are turning to, the risks involved, and the wider impact on public employees, retirees, and taxpayers.

---

Key Discussion Points & Insights

1. Double Challenge: Economic Uncertainty and Low Interest Rates

• The pandemic created two major issues for pensions:
  • Unprecedented economic volatility
  • Persistently low long-term bond rates
• Federal Reserve interventions and rate cuts in early 2020 lowered expectations for future bond yields (01:58).
  • Heather Gillers:

    "You had the Fed intervention early in the pandemic. You had rate cuts. You now have this expectation that in order to stimulate growth, interest rates will remain low for the foreseeable future." (02:00)

2. Volatility Complicating Long-Term Planning

• 2020 saw wild fluctuations:
  • Worst quarter in decades during Q1
  • Best quarter in decades during Q2
• Creating long-term strategies is harder amidst such volatility (01:58).

3. Impact of Low Bond Yields on Pensions

• Fixed income (especially bonds) is a traditional, safe source of returns for pensions.
• With bond yields so low, pensions can no longer count on this stable income.
  • Heather Gillers:

    "Fixed income is kind of like the bread and butter of old age retirement savings... So when pensions can't rely as much on bonds for income, they have to take on maybe more risk or add more money from government budgets." (03:05)

4. Riskier Investments and Alternative Strategies

• Pension funds are considering or adopting riskier investments to meet return targets:
  • Private equity, real estate, infrastructure
• These investments "can be very profitable and lucrative" but also increase the risk profile.
• There’s internal debate about lowering expected rates of return vs. taking on greater risk (03:41).
  • Heather Gillers:

    "It's maybe you might call it like a more varsity level type of investing than maybe your typical county pension fund is used to." (04:21)

5. The Challenge is Not New, but Intensifying

• Low interest rates and return assumptions have been a concern for decades.
• Assumed rates of return have dropped—about 8% in 2000, now closer to 7% (04:48).
  • Heather Gillers:

    "Pensions have been grappling with whether they can earn the returns they expected for quite a while... they've adjusted their expectations somewhat in large part in response to that drop in bond rates." (04:49)

• Early 2020 made it clear that low rates would persist well into the future.

6. Effects on Retirees, Current Workers, and Governments

• Pension payouts are "pretty ironclad"—protected by U.S. courts (06:09).
• Retirees are unlikely to lose benefits, but:
  • Governments may need to increase contributions—from budgets, workers’ pay, or taxpayers.
  • Potential strain on services if money is diverted to pensions.
• Current employees may be required to contribute more to maintain fund solvency.
  • Heather Gillers:

    "It is a potential strain on the governments that would have to contribute more money if retirement fund managers... determine we're not going to be able to... continue to hit 7 or 7.5% over the long term." (06:27)

7. Broader Implications for All Taxpayers

• Pension fund shortfalls can result in:
  • Increased taxes
  • Reduced government services
• The pandemic has already slashed government revenues (from sales and income taxes), compounding the pressure (07:10).
  • Heather Gillers:

    "The government could take it from the paychecks of existing workers, it could increase their pension contributions, it could raise taxes and get the money from taxpayers, or it could take it from some other service that the government is currently providing and spend less on that and more on pensions." (07:28)

---

Notable Quotes & Memorable Moments

• On volatility:

  "In the first quarter, pensions had their worst quarter in, in decades. And then in the second quarter, they had their best quarter in decades." – Heather Gillers (02:19)

• On alternatives to bond income:

  "...They have to look at other options that maybe are not their first choice." – Heather Gillers (03:22)

• On the trade-off with riskier investments:

  "It's maybe you might call it like a more varsity level type of investing than maybe your typical county pension fund is used to." – Heather Gillers (04:21)

• On who pays if returns fall short:

  "That promise is pretty ironclad, which means that if the pension managers no longer expect that they could earn the investment return... they now have to get the money from somewhere else. And practically what that means is somewhere else in the government budget." – Heather Gillers (07:12)

---

Key Timestamps

• 00:35 – Show begins, introduction to pandemic’s effect on pension funds.
• 01:58 – Heather Gillers outlines the "double challenge" of 2020 for pensions.
• 02:45 – Volatility in pension fund returns discussed.
• 03:41 – Pension fund managers' strategic dilemmas (lowering expectations vs. riskier investments).
• 04:48 – History of pension fund challenges and adjustment of expected returns.
• 06:09 – Explanation of beneficiary protections and strain on governments.
• 07:10 – How pension funding problems affect all taxpayers and public services.
• 08:22 – Episode wraps up.

---

Conclusion

The episode makes clear that while pension checks for retirees are likely safe due to longstanding legal guarantees, the financial pressures on government employers are set to increase. With traditional safe investments no longer generating needed returns, pension funds are turning to riskier strategies, and the resulting budget pressures could affect not only public employees but taxpayers and public services at large. The pandemic has aggravated longstanding issues and put more strain on already-stretched government budgets.

---

Transcript

[A]

This podcast is brought to you by relioQuest. Cybercriminals are constantly attacking. They want your data. They want your identity. They want your innovation. RelioQuest fortifies your business with agentic defense AI that detects, contains and eliminates cyber threats in minutes. It helps your security team move faster at the work that matters most to protect the business now and delivers insights to help them predict what's next. ReliaQuest agentic defense for the enterprise. Learn more at reliaquest.com that's R E L I A Q U E-S-T.com.

[B]

Here's your money briefing for Thursday, December 10th. I'm J.R. whalen for the Wall Street Journal. The retirement savings of millions of public employees are held in pension funds. In order to continue paying out to retirees, these funds depend on steady growth. That's been hard to achieve in recent years because of low interest rates. Now the pandemic is making it even harder.

[C]

When pensions can't rely as much on bonds for income, they have to take on maybe more risk or add more money from government budgets. They have to look at other options that maybe are not their first choice.

[B]

Coming up, our pensions reporter Heather Gillers will explain the kinds of risky bets many pension funds are taking on and the effect that all this can have on even current workers. That's after the break. The pension funds holding the retirement savings of millions of public employees are getting squeezed by the pandemic. The economic downturn has many fund managers struggling to boost investment returns to maintain payouts to retirees. But even ordinary taxpayers, including those without pensions, could get caught up in the fray as well. For more on this, let's bring in our pensions reporter, Heather Gillers. Heather, thanks for joining us.

[C]

Sure. Happy to be here.

[B]

So, Heather, the pandemic has created a lot of economic uncertainty in all corners of the economy. What's been the effect on pensions that's

[C]

actually sort of the double challenge of 2020 is uncertainty and low long term bond rates. So you know, you had the Fed intervention early in the pandemic. You had rate cuts. You now have this expectation that in order to stimulate growth, interest rates will remain low for the foreseeable future. And, and that's one type of challenge for pension funds. And then you just also have the fact that we're in a really uncertain environment. In the first quarter, pensions had their worst quarter in, in decades. And then in the second quarter, they had their best quarter in decades. So when you're trying to do long term planning, that level of volatility can be a little bit difficult, sure.

[B]

But it seems like all we hear about these days is the stock market hitting new records. How could pensions be in trouble?

[C]

Well, pensions have benefited a lot from the stock market, and for the year ended September 30, they hit their median target of around 7%. But looking forward, the picture is a little bit more challenging. The biggest reason is expectation that bond rates will remain low for a long time. And, and fixed income is kind of like the bread and butter of old age retirement savings. So, you know, you know, it's a safe asset, a fairly safe asset. It's stable, it's predictable. So when pensions can't rely as much on bonds for income, they have to take on maybe more risk or add more money from government budgets. They have to look at other options that maybe are not their first choice.

[B]

Well, let's talk about the fund managers. How difficult of a position are they in?

[C]

It's a challenge. It's definitely a challenge. And so you were starting to see discussions and deliberations around stuff like should we lower our expected rate of return, which would mean asking for more money from government employers and or employees, or should we add more alternative types of investments, which might bring in higher returns but also add risk? You've seen them move further into alternative types of investments like private equity and real estate and infrastructure. And those can be very profitable and lucrative for pension funds. Certainly there have been examples of funds faltering along the way. It's maybe you might call it like a more varsity level type of investing than maybe your typical county pension fund is used to. But some of the bigger funds have had a lot of success in those areas as well.

[B]

But we've been in a low interest rate environment for a while now, even before COVID So this shouldn't be coming as a surprise to pension managers, right?

[C]

That's right. This is not a new problem. Pensions have been grappling with whether they can earn the returns they expected for quite a while. And pension expectations have gradually come down over the past couple decades. Around 2000 they were at about 8. Now they're closer to about 7. Median assumed return of 7 over a multi decade period, 7%. So pensions have adjusted their expectations somewhat in large part in response to that drop in bond rates. I think what happened in the first quarter was that you really saw an expectation that rates would stay low years out. And so you saw the various pension managers and consultants who try to forecast what will happen with bond rates over the next decade lowering their projections. Because While in December 2019, it looked like maybe bond rates will pick up a little bit by April 2020. That really didn't seem like a short term likelihood.

[B]

Okay, so let's talk about the retirees. I know that there are cushions in place that the money that gets paid out to them is safe, but I imagine all this uncertainty still probably isn't sitting very well with them.

[C]

So pensions are a pretty ironclad guarantee in the view of US Courts. They've protected pension promises to workers repeatedly. So I don't see any reason for pension beneficiaries, you know, to think that their, their checks are, you know, going to stop arriving, you know, as we, as we make our way through this pandemic. That doesn't really seem likely, but it is a potential strain on the governments that would have to contribute more money if retirement fund managers, you know, determine we're not going to be able to, to continue to hit 7 or 7.5% over the long term. And it can also be a strain on current employees who have to contribute some of their paychecks toward shoring up pension funds in many places.

[B]

Interesting. So how else could this extend beyond just the people that are involved directly with the pension funds?

[C]

So the city or state or county has promised these retirement benefits to, you know, workers, be they police or firefighters or teachers. And, and that promise is pretty ironclad, which means that if the pension managers no longer expect that they could earn the investment return on their money that they thought they could when they made these promises, they now have to get the money from somewhere else. And practically what that means is somewhere else in the government budget. So the government could take it from the paychecks of existing workers, it could increase their pension contributions, it could raise taxes and get the money from taxpayers, or it could take it from some other service that the government is currently providing and, you know, spend less on that and more on pensions. And this is an especially fraught time for governments to be facing those issues because as a result of the pandemic, they have dramatically lowered sales tax revenues, dramatically lowered income tax revenues, increase strain in terms of services. And so government budgets are already really crunched right now.

[B]

All right, that's Wall Street Journal reporter Heather Gillers. Heather, thanks for coming on the show.

[C]

Sure, thanks for having me.

[B]

And that's your Money briefing. I'm J.R. whalen for the Wall Street Journal.

[A]

This podcast is brought to you by reliaQuest. Cybercriminals are constantly attacking. They want your data, they want your identity, they want your innovation. ReliaQuest fortifies your business with Agentic Defense AI that detects, contains, and eliminates cyber threats in minutes. It helps your security team move faster at the work that matters most to protect the business now, and delivers insights to help them predict what's next. ReliaQuest agentic defense for the enterprise learn more at reliaquest.com that's R E L I A Q U E-S-T dot com.