It's time to give pension funds their due. The nation's pension funds have contributed mightily to the bull market since 1982 that has lifted the Dow Jones industrial average to 10,000.
In fact, they have been one of the engines powering the market and the resurgence of the U.S. economy. And they, in turn, have profited from the market's rise.
The corporations and public entities sponsoring the nation's defined benefit pension funds helped spark the bull market by stepping up their funding of pension benefits in the early 1980s, and by investing more of the assets in stocks.
In 1982 alone, the nation's top 200 pension funds, then primarily defined benefit funds, received contributions of $36.8 billion from their sponsors. Corporate funds invested 47.5% of that in equities, mostly domestic equities, and 28.5% in bonds.
Public employee plans invested 23% of their contributions in stocks and 57% in bonds, while Taft-Hartley plans invested 23% in stocks and 33% in bonds. In all cases, the remainder was invested in cash equivalents, real estate equity and other asset classes.
In the following 16 years, the allocation to stocks increased dramatically. By 1990, the equity allocation of corporate funds in the top 200 had climbed to 54.5%; that of public funds in the top 200 had climbed to 41.6%; and that of Taft-Hartley plans to 42%.
All of those allocations have continued to climb since then, and by the end of 1998, the average corporate fund equity allocation was 61.5% while the public fund allocation was 56.9%.
That is, corporate plans increased the percentage of their growing asset base committed to equities almost 30%, while public plans increased theirs almost 150%. These moves provided a powerful lift to the stock market.
In addition, during this period participants in defined contribution plans shifted their allocations more heavily into equities, even as their fund balances grew. By the end of 1998, participants in corporate defined contribution plans were 61.7% in equities, and public fund participants were 50.9% in equities.
Between Sept. 30, 1982, and Sept. 30, 1998, the nation's pension assets climbed to $8.7 trillion from $1.1 trillion, a compound annual growth rate of 13.5%.
The money flowing into pension funds, and from pension funds into equities, helped lift the stock market to record levels. That in turn reduced the cost of capital, stimulating corporate investment that helped make the U.S. economy the most efficient and productive in the world.
Unfortunately, short-sighted legislation by Congress in the late 1980s and early 1990s wounded, probably mortally, defined benefit pension plans.
The growth of defined contribution plans has hidden the awful effects of that legislation, but at some point, the negative impact on U.S. corporate performance, and hence the markets, will be felt.