Are Pensions Plans The Next Thing About To Be Decimated By These Markets?
Spoiler Alert: Few.
Amid all the turmoil being caused right now by soaring interest rates, pension funds might be the next big financial “institution” to feel the pressure. Much in the same way that we saw Silicon Valley Bank and Signature Bank fall earlier this year by getting a little too cavalier with their interest rate exposure in the pursuit of higher yields, pension funds may soon find themselves in a similar pickle. Years of ultra-low interest rates led many money managers to drift dangerously far out on the yield curve and now many of them are starting to pay the price.
To briefly recap what happened with the failed regional banks, SVB and Signature decided to swap out their typically short duration fixed income positions for longer duration bonds. The yield advantage for doing so was relatively minor in the big picture, but years of razor-thin income levels made these banks change course. The problem is that the extra income generated came at the expense of much higher interest rate risk exposure. When interest rates started really taking off at the beginning of 2022, those long duration bond positions started taking on heavy paper losses. By the beginning of this year, those losses became large enough that the banks became effectively insolvent and failed completely shortly thereafter.
Today, there’s evidence that pension funds might be walking down the same path. Most workers aren’t covered by pension plans anymore, but the amount of money invested in pension plans is still in the trillions of dollars, including those balances currently invested in Treasuries.
Currently, there’s more than $3.5 trillion invested in Treasuries within pension plans. Even as pension plans were going away in corporate America, that number has still been steadily rising for decades. On the plus side, pension plans are relatively well-diversified and they’re not necessarily overexposed to fixed income in the way that, say, the U.S. Social Security trust fund is, but it’s far from insignificant.
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