The American Interest
Analysis by Walter Russell Mead & Staff
Texas Pension Fund Gambles With Teachers' Retirement Money

Today’s WSJ profiles the Teacher Retirement System of Texas, which has been making particularly large, high-risk/high-reward investments to cover flagging investment returns during the financial crisis. Since 2008, the fund has moved more than a quarter of its money into “alternative” investments, more than any other large fund in the country. The operation now “looks and feels more like a hedge fund than a government agency”:

The office lobby buzzes with a flat-screen television that hangs next to photos of school children. Two of the fund’s traders work into the night from a windowless room, following the markets in Asia and Europe. Staff—including secretaries—can score annual bonuses provided the pension beats its peers by just a small fraction.

Returns have averaged 15.6 percent over the past three years, which is far above the average for pension funds nationally. Fund representatives are now optimistic that returns will stay above 8 percent for the long term. But many industry experts disagree:

Sticking to a return of 8% or more is “taking a big risk with one’s ability to pay for benefits,” says Richard Ravitch, co-chair of the State Budget Crisis Task Force, a nonpartisan research group. Since 2009, one-third of state pension plans have scaled back their return goals, according to the National Association of State Retirement Administrators.

The reason: In some states, like California, failure to hit the target return puts taxpayers on the line to make up the difference.

California’s giant public employee pension fund, Calpers, had made an aggressive push into alternative investments such as real estate, representing about one-tenth of its assets. But many of those real-estate holdings, particularly in housing, suffered big losses during the financial crisis.

We see the move as a sign of desperation. Pension funds don’t turn to these exotic Wall Street investment tools unless something is seriously wrong. And while Texas is riding high right now, a quick look at California or Louisiana shows how bad things can get when these risky investments fail. Over the long term, these failures are nearly impossible to avoid.

We wish these funds well, as we think retired people need money to live on. But pension funds should be funded well enough to meet their goals with conservative investment strategies.

Published on January 25, 2013 3:20 pm