Public Pensions Are Adding Risk to Raise Returns

States and companies have started investing very differently when it comes to the billions of dollars they are safeguarding for workers’ retirement.

Frederick E. Rowe, a Dallas investor and the former chairman of the Texas Pension Review Board, said states were looking at riskier investments in an effort to meet pension obligations.

Trent May, chief of Wyoming's pension fund, said states were âmoving away from the perceived safety and liquidity of the investment-grade market.â

Companies are quietly and gradually moving their pension funds out of stocks. They want to reduce their investment risk and are buying more long-term bonds.

But states and other bodies of government are seeking higher returns for their pension funds, to make up for ground lost in the last couple of years and to pay all the benefits promised to present and future retirees. Higher returns come with more risk.

“In effect, they’re going to Las Vegas,” said Frederick E. Rowe, a Dallas investor and the former chairman of the Texas Pension Review Board, which oversees public plans in that state. “Double up to catch up.”

Though they generally say that their strategies are aimed at diversification and are not riskier, public pension funds are trying a wide range of investments: commodity futures, junk bonds, foreign stocks, deeply discounted mortgage-backed securities and margin investing. And some states that previously shunned hedge funds are trying them now.

The Texas teachers’ pension fund recently paid Chicago to receive a stream of payments from the money going into the city’s parking meters in the coming years. The deal gave Chicago an upfront payment that it could use to help balance its budget. Alas, Chicago did not have enough money to contribute to its own pension fund, which has been stung by real estate deals that fizzled when the city lost out in the bidding for the 2016 Olympics.

A spokeswoman for the Texas teachers’ fund said plan administrators believed that such alternative investments were the likeliest way to earn 8 percent average annual returns over time.

Pension funds rarely trumpet their intentions, partly to keep other big investors from trading against them. But some big corporations are unloading the stocks that have dominated pension portfolios for decades. General Motors, Hewlett-Packard, J. C. Penney, Boeing, Federal Express and Ashland are among those that have been shifting significant amounts of pension money out of stocks.

Other companies say they plan to follow suit, though more slowly. A poll of pension funds conducted by Pyramis Global Advisors last November found that more than half of corporate funds were reducing the portion they invested in United States equities.

Laggards tend to be companies with big shortfalls in their pension funds. Those moving the fastest are often mature companies with large pension funds, and who fear a big bear market could decimate the funds and the companies’ own finances.

“The larger the pension plan, the lower-risk strategy you would like to employ,” said Andrew T. Ward, the chief investment officer of Boeing, which shifted a big block of pension money out of stocks in 2007. That helped cushion Boeing’s pension fund against the big losses of 2008.

Shedding stocks gave Boeing “material protection right when we needed it most,” Mr. Ward said. By the time the markets had bottomed out last March, Boeing’s pension fund had lost 14 percent of its value, while those of its equity-laden peers had lost 25 to 30 percent, he said.

“We estimated that the strategy saved our company in the short term right around $4 or $5 billion of funded status,” he said.

Boeing and other companies seeking to reduce their investment risk are moving into fixed-income instruments, like bonds — but not just any bonds. They are buying and holding bonds scheduled to pay many years in the future, when their retirees expect their money.

The value of the bonds may fall in the meantime, just like the value of stocks. But declining bond prices are not such a worry, because the companies plan to hold the bonds for the accompanying interest payments that will in turn go to retirees, not sell them in the interim.

Towers Watson, a big benefits consulting firm, surveyed senior financial executives last year and found that two-thirds planned to decrease the stock portion of their companies’ pension funds by the end of 2010. They typically said their stock allocations would shrink by 10 percentage points.

“That’s 10 times the shift we might see in any given year,” said Carl Hess, head of Towers Watson’s investment consulting business. Economists have speculated that a truly seismic shift in pension investing away from stocks could be a drag on the market, but they say it would not be long-lasting.

Corporate America’s change of heart is notable all on its own, after decades of resistance to anything other than returns like those of the stock markets. But it’s even more startling when compared with governments’ continued loyalty to stocks. When governments scale back on the domestic stocks in their pension portfolios these days, it is often just to make way for more foreign stocks or private equities, which are not publicly traded.

summary: Even as big companies are moving their pension funds out of stocks, state governments are chasing higher returns by making riskier investments.

Dwain Chambers in Brit relay team for first time since Euro gold

The lifting of the 34-year-old’s lifetime Olympic ban means he is back in the frame for a 4x100m place in London this summer.

Chambers said: “I never thought this time would come. No chance.

“I was resigned in my mind. Things have turned around and I’m very grateful for that.”

Chambers won European 4x100m gold in 2006 but team-mate Darren Campbell refused to do a lap of honour, claiming the medal was tarnished. That followed Chambers’ two-year ban for testing positive for the steroid THG in 2003.

After the Euro win, UK athletics chiefs opted to drop him from relay squads as he could not compete in Beijing four years ago due to the Olympic exile.

But now Chambers is free to compete in London, he has been welcomed back into the relay set-up.

The Diamond League meeting here in Rome tonight, will give some much-needed practise ahead of the Olympics.

Blunders by our boys cost Britain medals at the European Championships in 2010 and last summer’s World Championships.

Chambers insisted: “I have got no preference about which leg I run.

“If you’re looking at the Jamaicans and the Americans, we’ve got to make sure we’re strong on the first three legs.”

CHRIS ADCOCK and Imogen Bankier are the Team GB mixed doubles pick for London 2012.

They pip 2004 Olympic silver medallist Nathan Robertson and partner Jenny Wallwork.

Adcock said: “I’ve achieved a life’s goal.”

OSCAR PISTORIUS has three races to clock the 400m qualifying time of 45.30sec and become the first amputee to run at the Olympics.

South Africa’s 25-year-old ‘Blade Runner’ competes in Oregon, New York and at the African Championships in Benin.

DAI GREENE insists he will do his talking on the track tonight after a spat with American Bershawn Jackson.

World 400m hurdles champ Greene faces his rival in Rome’s Diamond League meeting.

Last month Jackson accused the Team GB star of bad-mouthing the American hurdlers after winning in Daegu.

Greene, 26, insisted: “All I said was that it was a change not to see the Americans on the podium — I didn’t slag them off.

“If Bershawn wants to speaks to me or not doesn’t really bother me. I didn’t come here to make friends.”

summary:

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DRUG-CHEAT sprinter is back in relay four for first time since 2006, eyeing an Olympic spot