Commentary by Beth Almeida, Executive Director of the National Institute on Retirement Security (NIRS), says the Federal Reserve’s newly-released Flow of Funds data for 2009 shows the stock market recovery of 2009 helped both public sector and corporate pension plans, but public pensions fared better with gains of 16% compared to gains of 13% for corporate pensions. Almeida says the difference can be attributed to changes private sector pensions have made in their investment portfolios over the past few years.
The Federal Reserve’s data indicates that by the end of 2009, corporate pension plans, as a group, had significantly reduced their equity holdings to just 38% of their portfolio, while public plans’ equity shares at the end of 2009 stood at about 57%. Almeida notes that through 2006, pensions in the corporate and public sectors invested similarly – each held about 60% of their assets in stocks.
Equity holdings in both public plans and corporate plans dropped from the market downturn between October 2007 and the first quarter of 2009, but corporate plans’ equity holdings dropped faster, and Almeida suggests this is because changes in federal pension law and accounting standards place heavy burdens on companies that offer pensions. “Changes to federal pension law passed in 2006 required that pension shortfalls arising from investment losses be paid for over seven years or less. At the same time, accounting regulations that would require pension assets and liabilities to be valued as though the plan were terminating immediately would introduce considerable volatility to the financial statements of companies that offer pensions,” Almeida says.
She suggests that in response, companies have attempted to reduce the volatility of the investments in their plans by turning away from equities and embracing “fixed income” investments, and many have closed or frozen their plans, which also causes a shift from equities as frozen plans require greater liquidity and a move from long-term investments.“This imposes a significant cost in the foregone opportunity to earn better returns that could have come with a better balanced portfolio,” Almeida concludes.