America’s biggest private sector pension plans did so badly last year that they earned barely half as much as the traditional low-risk, low-fee balanced portfolio of stocks and bonds.
It says something about the usual performance of U.S. company pension plans that Milliman calls this 2021 result a “win.”
(On the bright side, though, company pensions still did much better than Social Security, whose investments effectively lost money.)
The 100 biggest private sector pension plans earned an average investment return on their assets of just 8.3% in 2021, Milliman calculates. This, during a year when the S&P 500
earned 29%, the Vanguard index fund of U.S. REITs
earned 41%, and the Vanguard Balanced Index Fund
which invests 60% of its money in U.S. stocks and 40% in low-risk bonds, managed 14%.
Balanced portfolios consisting of 60% stocks and 40% bonds are often considered the traditional “benchmark” portfolio for pension funds, endowments and other investment institutions. It’s not perfect and it’s not set in stone, but it’s a reasonable place to start when trying to measure the performance of institutional investors with their MBAs, CFAs, and armies of consultants, advisers and committees.
The 2021 performance “comes on the heels of 2020s strong investment gain,” reports Milliman, with no apparent sense of irony.
In 2020, too, these pension plans earned less than a simple balanced index fund.
A 60/40 portfolio, such as the Vanguard Balanced Index Fund, earned 16.4% in 2020. The S&P 500 earned 18%. The Milliman 100: Just 11.6%. This is nothing new. A look through Milliman’s data shows that the top corporate pension funds have earned lower returns than a simple balanced index fund in every single year going back at least to 2012. Over the past 10 years, big company pension funds have earned a total return on their assets of 114%, Milliman data show. That averages out at less than 8% a year compounded.
Meanwhile over the same period a simple balanced 60/40 fund has earned 180%, or more than half as much again, according to stock and bond market data.
(Meanwhile over the same period, by the way, the Social Security trust fund has earned a princely 21% total return on all your FICA dollars, averaging less than 2% per year. Oh, and that’s before counting the cost of inflation.)
Milliman data track company “defined benefit” pension plans, also known as “final salary” schemes. If a fund ends up short of money as a result of its meager investment performance, in theory the cost of making up the difference will fall on the company’s stockholders, not the retirees. In reality those costs can sometimes find their way onto the workers. Failing private sector pension plans can even, on occasion, shift their costs onto taxpayers.
There is, however, some good news for big private sector pension plans. Their dismal performance in the stock and bond markets is being offset by rising inflation and interest rates. Thanks to some financial tap-dancing known as discount rates, a pension fund that is in deep trouble can look like it is only in shallow trouble if interest rates go up. That’s because rising interest rates make future liabilities look less expensive — in today’s money, anyway.
This, combined with the (modest) investment returns, helped slash the funding deficit of the Milliman 100 by $183 billion last year, at least in accounting terms.
As a result the pension funds’ books now look in better shape than at any time since the collapse of Lehman Brothers nearly 14 years ago. In aggregate the funds have a 99.6% funding ratio, meaning they effectively look like they have enough money to meet their obligations.
But don’t get too excited. This comes after a massive decadelong boom on financial markets. And at the peaks of the last two booms, in 1999 and 2007, these funds thought they were in surplus. (Meanwhile, Social Security’s funded status last year went from bad to worse, and the 75-year forecast deficit hit 100% of annual gross domestic product.)
So, in summary: Private sector pension funds continue to do worse than a child could do with the most basic stock and bond portfolio, but never mind because inflation and interest rates are rising and that may save them.
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