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Coronavirus Is the Tipping Point That Just Upended Pensions
They bet big, they lost, and if they don’t get bailed out, checks to retirees will start bouncing soon
A pension is designed to be the most boring investment imaginable. Here’s how it’s supposed to work: Every paycheck, some of your money gets automatically invested in a fund. When you retire, you’re entitled to a fixed stream of benefits for the rest of your life. You never see the money that gets invested, and you never wonder about the money that comes back. Simple enough.
Unfortunately — if the coronavirus crisis is any indication — finance is allergic to “boring”: Every dramatic event in the markets starts with a risk that is so close to zero that everyone rounds it down to zero, at which point the risk is a lot bigger because nobody’s hedging.
That’s exactly what’s happening with pensions.
Since the 2008 financial crisis, U.S. pension funds have been making a big, bold gamble: that they can make up the gap between their obligations and their assets by taking bigger, riskier bets. For a while, it looked like this was paying off. Pensions moved more of their money into stocks and juicier asset classes like private equity and venture capital. Those outperformed.
