Despite assets owned by sovereign investors reaching historic levels amid the 2021 equities market boom, US public pension funds will likely have to adapt to more aggressive investing methods in the next few years to cover financing shortages, according to a new analysis.
According to a report by sovereign investment expert Global SWF, the difference between assets and liabilities at US public pension funds, known as the “funded ratio,” is “unsatisfactory” at less than 75%.
Investors likely to focus on private equity, credit
Diego Lopez of Global SWF said many investors would have to focus on alternative assets such as private equity and private credit to increase returns.
Global SWF reported in recent research that assets owned by sovereign wealth and public pension funds surged to a record $31.9 trillion in 2021, owing to surging US stock and oil prices, and investments rose to their greatest levels in some years.
Per Reuters via Yahoo, this implies that pension funds will have greater assets to pay future commitments. According to its 2020-21 financial report, the California Public Employees’ Retirement System (CalPERS), which oversees the largest US public pension fund, boosted its assets by more than $92 billion in the fiscal year ending in June 2021.
The working population might exacerbate the financial deficit
As a result of this rise, the Public Employees’ Retirement Fund’s funded ratio increased to an anticipated 80 percent at the end of June last year, up from 70 percent a year earlier. CalPERS did not respond to a request for comment.
However, the US national average for funded ratios – a measure of public pension funds’ actuarial appraisal of their assets and obligations – remains below 75%, with a $1.3 trillion gap.
To make matters worse, the working population is predicted to decline from 64 percent to 57 percent by the end of the twenty-first century, exacerbating the financial deficit, according to the report.