Tuesday, February 26, 2013

Is Nashville's pension fund doubling down?

A Forbes blogger has singled out Nashville's city pension for betting on risky "alternative" investments with this lurid headline:

Nashville Pension Bails on Bonds, Piles on Risk

 If you participate in the Nashville pension, or are a taxpayer, I encourage you to pay attention to what’s going on in the investment portfolio. Rely upon your common sense and do not be swayed by financial alchemy. In my opinion, the Nashville public pension’s alternative fixed income and other gambles will, over time, prove to be ill-advised.      
I welcome this attention.  Anyone who has read this blog, or chapter 5 of our text book, knows that I have been worried about Nashville' unfunded pension liabilities for quite some time.  In fact, I was thrown out of a nice dinner party when I tried to "convince" the mayor that we should be discounting our future liabilities at a much lower rate than 7.5%.

Discounting at this rate is OK if we can earn 7.5% on our investments.  That way, when the future finally gets here, we will have enough to pay off the pensions.  However, if we earn less, then ...

Our city pension manager has put 15% of the pension fund into riskier investments to raise the return.  A former student, who manages pension money, agrees with the blogger and thinks this is a risky idea:

...our independent investment advisors have recommended we invest no more than 7.5% of our portfolio in these types of "opportunistic" real estate funds (or any real estate funds). But, I think the CIO does have a point that "pure" fixed income just won't get the job done for pension plans right now due to the low returns and the increasing liabilities due to the low discount rates (unless a plan was fully funded, then they could pursue a liability-driven investment strategy to match their investment goals with the direction of the liability).

Over a long enough horizon, the risk is supposed to average out.  But that kind of thinking led to the complacency that played a role in the financial crisis.
 Cross your fingers.  


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