The long-term ability of pension funds, foundations, endowments and other asset owners to meet their commitments depends on strong, stable capital markets. Likewise, participants in 401(k) and other defined contribution plans, which put all the investment risk on the participants, depend on such conditions to have a chance of building enough assets over their working lives to provide a reasonable income in retirement.
Without steady returns sufficient to meet their investment return assumptions, asset owners have to step up contributions to levels that become unsustainable to their sponsors. Those contributions come ultimately from shareholders, taxpayers and donors. Without increased contributions or investment returns, they face having to reduce benefits or spending levels, or some combination of the two. Defined contribution participants likewise face the necessity of stepping up contributions to make up for weak markets in a time when economic forces put more pressure on their jobs and limit wage growth and hence the ability to contribute.
Good investment performance from strong markets makes pension funds, and the commitments of other asset owners, affordable.
The November presidential and congressional elections will bring changes to the economy and markets, and the shape of those changes will depend on the candidates elected and their ability to enact new policies.
The next administration must make a priority of reawakening economic growth that has been weak since the financial market crisis of 2008 and the markets that have produced low returns over the past year.
Pension funds, foundations and endowments are fundamental components of the economic and social fabric of the country. A new administration must embrace their significance.
Pension funds serve an immense economic and social purpose. They take pressure off social programs for senior citizens in need, while endowments and foundations serve as independent sources of financing for educational and economic development and other programs.
Pension funds, endowments and foundations also serve as sources of long-term stable capital for existing business expansion and entrepreneurial ideas that improve productivity and economic growth. These are the reasons they receive some tax concessions.
Asset owners face increasing challenges in meeting expectations and objectives. Asset owners in 2015 had to take three times the risk they did in 1995 to achieve a 7.5% assumed rate of return, according to a Callan Associates Inc. report.
They have to remain optimistic about investing and seek out returns in major markets and unconventional places. To do so, asset owners need to strengthen their governance structures, investment policy statements, risk management and resources to be able to use new investment tools, instruments and strategies to manage risk and take advantage of opportunities in the markets. They also have to better manage investment expectations. In a low-return economy, they have to reduce their investment assumptions and seek a step-up in contributions.
While they can try to invest their way out of the challenges, investments already bear a large part of the burden of funding.
For example, investment gains for public pension plans in aggregate — whether from dividends, interest, capital appreciation or other sources — from 1985 through 2014 provided an estimated 64% of their total revenue, while employer contributions provided 25% and employee contributions 11%, according to a February 2016 analysis from the National Association of State Retirement Administrators.
Aggregate corporate pension funding levels were 76% at the end of September, worse than the 79% level at the end of 2008 during the financial crisis, and far down from the 108% overfunded levels enjoyed at the end of 2007.
Asset owners must let a new administration know the policies that lead to a strong economy will help them and serve an important economic and social purpose. The administration must work with Congress on stimulus policies to take the burden off the Federal Reserve.
