In Saturday’s WSJ, Jason Zweig discussed the unrealistic investment assumptions in the nation’s public pensions, which includes Mississippi’s PERS. The opening:
With U.S. stocks at all-time highs, it’s more important than ever that investors be brutally realistic about future returns.
Some of the most purportedly sophisticated investors in the world, the managers of giant pension funds for state and local government employees, might not have absorbed that lesson yet. You can learn a lot from these folks — if you listen to them and then do the opposite.
Zweig dissects each asset class held by public pensions and explains why the assumptions for each class are based on hope rather than reality. As to why public pensions use unrealistic assumptions, he explains:
Why do expectations among pension plans run so high? Because they have to, the chief investment officer of a large public pension plan tells me. State laws guarantee generous retirement benefits for millions of current and former government employees. To appear as if they can meet those obligations, the pension plans have no choice but to set their expected returns higher than reality is likely to deliver.
If I was running an insurance company, I would refuse to insure any actuarial or other company with a hand in generating public pensions’ underlying actuarial assumptions and reports.
My reasoning would be based on fear that the companies are giving pensions what they want in exchange for the work. If a public pension blows up, governmental entities will be looking for someone to sue to help cover shortfalls. Why wouldn’t the actuaries who certified unrealistic investment assumptions be a prime target?
If lawsuits like that are filed, insurers will be tempted to deny coverage. Insurers don’t like to cover intentional acts. Also, insurers might argue that the companies should have put them on notice of a potential claim no later than the time that it became public knowledge that the underlying assumptions are not realistic.
On the plus side, it could generate some much needed work for litigation attorneys.