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The World's Biggest Pension Fund Just Made a Huge Bet

Personal_Finance / Pensions & Retirement Apr 28, 2014 - 11:03 AM GMT

By: Money_Morning


Peter Krauth writes: On numerous occasions, I've told you to remain on lookout for threats to your savings, including the proposed new MyRA account.

If you've been counting on your pension, whether from work or even Social Security, you may want to revise those plans, as most are way underfunded.

Research by Bridgewater Associates, the world's largest hedge fund, estimates that 85% of public pensions could go bust within 30 years.

Public pension funds currently have about $3 trillion in assets, but will need to pay out nearly $10 trillion over the next several decades.

That would require average annual returns around 9%, but Bridgewater estimates they'll only earn about 4%, leaving pensions severely underfunded as paid benefits exceed contributions and returns.

Here and elsewhere, governments have bought votes by overpromising benefits that will never be honored...

The World's Biggest Pension Fund Just Made a Huge Bet

A recent announcement by the world's largest public pension fund, the $1.26 trillion Japanese Government Pension Investment Fund (GPIF), is very telling.

Prime Minister Abe has made good on his promise to reform the GPIF. The Japanese government just reorganized the pension fund's Investment Committee, with the ultimate goal of taking on riskier investments.

Clearly, Japanese officials recognize the lack of returns from low-yield government bonds, and the growing requirements of paying benefits to the world's second-oldest population.

But that's created a serious dilemma in Japan, and well beyond.

If one of the country's largest sources of demand for its own government bonds dries up, who will buy them?

It's enough to cause one to suspect that Japan's massive $1.4 trillion, two-year QE program to buy government bonds is in large part to compensate for GPIF's decreasing demand.

The World Pensions Council has warned that QE-prompted artificially low government bond yields would hurt pension funds, saying "without returns that outstrip inflation, pension investors face the real value of their savings declining rather than ratcheting up over the next few years."

The Problem's Not Just Abroad

I've been studying the struggles and failures of public pensions for years.

And I've long since concluded that these would face serious challenges, with a majority eventually unable to meet their promised commitments. It's not rocket science to realize that, for the most part, contributions + returns will never = obligations.

We all know about Detroit's $3.9 billion pension deficit, and how overly generous promises eventually led to its dubious distinction as the largest public bankruptcy in U.S. history.

What you may not know is that pension benefits to retirees, responsible for half the city's liabilities, aren't sacrosanct like most thought.

And it's starting to play out pretty much as I'd expected...

Detroit bankruptcy judge Steven Rhodes finally ruled: "Pension benefits are a contractual obligation of a municipality and not entitled to any heightened protection in bankruptcy."

Now a mediator has announced that a deal with the association of 6,500 retired policemen and firefighters will see their pension checks frozen at current levels. Along with that, cost of living adjustments were reduced from 2.25% to 1%, and health care payments ended.

That's setting the scene for upcoming negotiations with the remaining 23,500 Detroit municipal retirees. Emergency Manager Kevyn Orr is proposing non-uniformed pensioners prepare for 26% cuts, or accept a 34% slash if they refuse to accept a deal.

Keep in mind that Detroit's bankruptcy may have, at least in part, been precipitated by the 2008-2009 financial crisis. Yet the sweeping reduction in benefits is happening with an anemic economic recovery as backdrop.

I'd hate to think what future negotiations would look like in the wake of an eventual "Greater Recession," which would make the last financial crisis look like a cakewalk. Expect the Detroit debacle to become the rule, rather than the exception.

The marked trend of pension plans moving from defined benefit to defined contributions over the last few decades has been a clear warning sign of what's to come.

But alternatives being promoted, like the new MyRA account, and even long-standing IRAs and 401(k)s are not necessarily the panacea they're touted to be. I warned you about this back in February, when I said:

Eventually, the need to fund a mushrooming debt could lead to compulsory government bond buying in retirement accounts. At first, it might be 10% to 20% of all new contributions, then perhaps 10% to 20% of existing balances. With over $5 trillion in U.S. retirement accounts, it's easy to see how a mandate for 20% (or more) directed into Treasuries will help extend and pretend.

Eventually, retirement accounts could even be at risk of partial or even outright confiscation as debt levels become increasingly unsustainable. A desperate government will look to take desperate actions.

Detroit 9-1-1

Back in Detroit, the few public services still in existence have become, for all practical purposes, useless.

Police now take 58 minutes on average to answer a 911 call, for high-priority crimes. So naturally, citizens have developed their own emergency response strategies, calling instead on friends or relatives.

When it comes to your retirement, I suggest you take your cue from them.

Develop your own "independent retirement plan" by building up holdings in cash, real estate, physical precious metals, and other hard assets outside of retirement accounts.

For subscribers to my service Real Asset Returns, I've recommended a number of hard asset-based investments which run the gamut from natural gas to copper to uranium and even real estate.

Many of these have not only provided attractive capitals gains (and the potential for lots more), but also pay a generous yield to shareholders in the meantime.

Remember, if you're planning to rely on pension benefits, whether from your company and/or Social Security, expect that they could be drastically reduced when it's time to collect.

Those promises are unlikely to be honored.

It's time to take the Boy Scout motto to heart. Be prepared.

Source :

Money Morning/The Money Map Report

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