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Public Pension and Endowment Funds Have a “Serious Performance Problem”

The 2020 edition of Robert Prechter's Conquer the Crash provided this warning:

You might think that you are safe because you are in a government-run pension plan. According to the Center for Retirement Research, state and local pension funds were 78% funded ten years ago. In August 2019, Barron's reported that state and local government pension plans "have $8.8 trillion of liabilities, of which only 52% is funded after a decade long bull market." If shrinkage is occurring in this expansive environment, one can only imagine the pace of implosion when stocks fall and credit and the economy contract.

Here in June 2021, public pension funds continue to grapple with problems even though the "expansive environment" persists.

Here's some insight from a June 8 Marketwatch article excerpt:

Public pension funds are among the largest concentration of financial assets in the United States. They cover 26 million active- and retired government employees, and in the second quarter of 2019 comprised more than $4.5 trillion in assets (increasing in 2020 to more than $5 trillion). These funds provide the retirement benefits of municipal, county, state and federal government employees including police, firefighters, teachers, maintenance workers and many others.

Another large pool of assets, about $600 billion, comprises the endowment funds of U.S. universities including Harvard, Yale, Stanford and numerous others...

Evaluation of performance

Richard M. Ennis, a prominent institutional investment consultant who was previously CEO of the respected consulting firm EnnisKnupp and edited the prestigious Financial Analysts Journal , has carefully studied the investment performance of [public pension and university endowment] funds.

Ennis's results are startling. His latest article on the subject, which caps and summarizes the findings of a series of previous articles, finds that, in Ennis's words: "Public employee pension funds, endowment funds and other nonprofit institutional investors in the U.S. have a serious performance problem. They have underperformed properly-constructed, passively-investable benchmarks by a wide margin since the Global Financial Crisis (GFC) of 2008 some 13 years ago."

Ennis concludes, addressing the performance of public pension funds specifically: "The bottom line on public fund performance is that underperformance of 152 bps [1.52%] per year on $4.5 trillion in assets [for the 12 years ending June 30, 2020] translates to an outright waste of stakeholder value of $68 billion annually, a figure I find astonishing."

To put it another way, this waste costs the average U.S. taxpayer, who pays to fund public pensions, around $500 a year (the result of dividing the 1.52% times $4.5 trillion cost to taxpayers by the 141 million U.S. taxpayers in 2019).