The gap between what many U.S. public and private pension funds have in assets and what they’ll need to cover their pension obligations is like a “heart attack waiting to happen.”
That’s the news according to a recent article in Finalternatives. U.S. public pension funds are $500 billion to $3 trillion short in the amount needed to cover promised benefits. And private sector pension funds have roughly a $450 billion deficit, according to figures from Mercer.
The recent financial downturn in the markets, plus pension funds using out-dated return assumptions and governments dealing with growing budget deficits all make it unlikely that pension funds will be able to make up the difference, if they continue the same course. The problem isn’t acute right now; but as millions more Americans hit retirement age, the pain will begin.
Hedge funds may be the solution, according to Don Steinbrugge, managing partner and founder of Agecroft Partners, a hedge fund consulting and third-party marketing firm. Right now U.S. pension funds allocate roughly 3% of their investments to hedge funds. While that translates into a hefty $180 billion out of a $5 to $6 trillion defined benefit plan marketplace, Steinbrugge feels that pension funds could erase the shortfall by allocating more of their assets to hedge funds.
He believes the average allocation will rise to between 10% and 20% over the next decade, driving growth in the hedge fund industry.
Pension funds are relative newcomers to the hedge fund market, versus university endowments and foundations, which began to increase their allocations to hedge funds back in the 1980s. Some now allocate as much as 50% to hedge funds.
Hedge funds could help insulate pension plans from the kind of shocks that rocked the equity markets in 2008. And they could provide a counterbalance to fixed-income volatility that investors saw in 2001 and 2002.
“When they’re run properly, [hedge funds] are conservative vehicles that offer better risk-adjusted return for investors. That’s something that pension investors – in the U.S., Europe and elsewhere – desperately need because they’re underfunded,” said Steinbrugge.
The lengthy Finalternatives article also discusses what hedge funds need to do to attract the conservative and risk-averse pension fund managers to their funds.
What’s your opinion? Do you think the major pension funds can head off disaster? Will hedge funds play a larger role in this rescue? Add your comments below.