Pension Officers Insist Funds Sound Despite Market’s Wild Roller Ride

By William Montague — October 28, 1987 8 min read
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Despite a week of panic on Wall Street that saw the stock market take the wildest of roller-coaster rides, teachers and other school employees should not fear for the safety of their hard-earned pension benefits, plan administrators, investment managers, and other fiscal experts said last week.

The state and local retirement systems that support some 1.5 million retired education employees are fully capable of meeting their obligations, they said, even in the wake of last week’s record drop in stock prices.

In fact, some pension administrators were moving aggressively to add shares to their stock holdings, despite the continuing mar6ket gyrations that began on Monday, Oct. 19.

On that day, in what has become known as the “Monday Massacre,” financial exchanges around the world plunged into a sickening dive, wiping out billions of dollars in assets within a few hours.

On Wall Street, the New York Stock Exchange saw its worst crash in history, as the Dow Jones Index fell 508 points, about 23 percent of its total at the beginning of the day. Other exchanges suffered similar losses, triggering fears of an economic recession.

Although prices rallied strongly in subsequent days, there were outbreaks of renewed panic at week’s end, both on Wall Street and in the international markets.

But pension administrators around the country moved quickly to reassure nervous retirees that the current market fireworks will have no affect on their monthly checks.

“There is absolutely no danger to any of our beneficiaries,” said Bruce Hineman, executive secretary of the Texas State Teachers Retirement System. “They are not going to lose a dollar from all of this.”

According to Mr. Hineman, the Texas system lost $1 billion in what he called “unrealized capital gains” during the frenzied trading on Oct. 19. “We’re down on paper but we’ve suffered no real losses,” he said.

Other pension officials echoed that remark, saying the decline of the Monday Massacre was more than offset by the tremendous gains they have made in the market over the past five years.

Between the summer of 1982 and last August, the strongest bull market in history sent the Dow Jones Index soaring nearly 1900 points, enriching millions of stockholders, including the pension funds. So far, the crash has only cut into those gains somewhat, Mr. Hineman noted.

Fate Unclear for Some

Prospects are less certain, however, for school employees who purchased stocks with the savings they placed in tax-deferred retirement plans, such as the popular Individual Retirement Accounts and the so-called 403(b) annuities.

Lured by the market’s steady climb, some employees transferred money from other, more secure investments into mutual funds that hold stocks, analysts noted. Those who bought near the peak of the market this summer have probably suffered sizable real losses.

This could be a particular problem for employees who are nearing retirement age, one annuity manager said. Many 403(b) plans require an investor to choose a repayment plan shortly after retirement. But retirees who shift assets now may “lock in” their recent losses.

Retirees who have already chosen variable annuity contracts that are based on stock values may also see reductions in their monthly checks, although probably not right away.

However, fund administrators and other analysts stressed that for most employees any reductions are likely to be relatively small.

“There’s certainly a lot of concern but I don’t think anybody here is ready to jump out of the window,” said an official at one annuity-insurance corporation.

Analysts pointed out that most retirement accounts are in bonds, short-term Treasury notes, and other secure assets. Many of these holdings actually gained value last week, as panicky investors sought a haven from the stock market’s upheaval.

“Most of our participants were not that exposed [on the stock market] going into the crash,” said John Richards, senior investment officer for the Variable Annuity Life Insurance Corporation. varic is the leading sponsor of tax-deferred plans for public-school employees.

At the beginning of last week, Mr. Richards said, stock investments accounted for only 12 percent of varic’s total assets of $8 billion. The firm’s investment managers, he said, began moving money out of the stock market after the Dow Jones Index hit its peak in late August.

During the crash, he added, losses to the corporation’s remaining stock holdings were considerably less than those suffered by the market as a whole.

Employees getting ready to retire, Mr. Richard said, may want to talk to their plan managers if they have suffered losses. Some firms allow new retirees to wait a period of time before choosing their payment plan.

No Change in Payments

Officials at the Teachers Insurance Annuity Association and College Retirement Equities Fund, the largest pension system outside the federal goverment, also downplayed the extent of their damages.

“The income payments currently received by the 150,000 current cref recipients are not going to change today or tomorrow as a result of this market shock,” said a tiaa-cref spokesman, Clair Sheahan.

Benefits for cref annuity holders, however, are adjusted on an annual basis, Ms. Sheahan noted. Poor market performance, she said, could lead to benefit reductions next year.

Prior to the crash, cref stock investments were valued at more than $33 billion, up nearly $10 billion from a year before. Last May, beneficiaries received a record 23 percent increase in the size of their monthly checks.

Some Managers ‘Hedged’

According to pension officials,8many fund managers attempted to limit their losses through hedging techniques, such as selling stock futures, designed to protect their assets against the sudden crash.

But opinions were mixed on whether such “portfolio insurance” actually worked, with some critics charging that massive selling on the futures markets contributed to the collapse in stock prices.

Still, some plans managed to escape relatively unharmed.

New York City’s public pension funds, for example, lost only 5 percent of their total value during last Monday’s panic, city officials said. The five funds, which include one for teachers, are highly diversified, noted a spokesman for Harrison Goldin, the city comptroller, who manages the plans.

“Even modest increases in the stock market will make us whole,” Mr. Goldin said in a statement.

But while existing pension benefits are guaranteed, some retired city employees may still see reductions in their monthly checks, the spokesman warned.

Retirees with variable annuities, he explained, receive those payments and their regular pension allotments in one check. Unless the market recovers, those with stock-based annuities will receive a lower total.

One Winner, One Loser

Pension managers in Maryland avoided nearly all loss when they sold $2.3 billion in stocks--virtually their entire portfolio--several weeks before the crash. The move was one of the largest pension asset shifts in history.

Some plans were not so fortunate. California’s State Teachers Retirement System had more than half of its assets invested in the stock market on the day of the crash, according to a spokesman for the state education department. The plan racked up more than $3.6 billion in paper losses.

In general, public pension funds have long tended to restrict their investments in the stock market. Eighteen states have laws--many of them prompted by the 1929 stock market crash--that either forbid or sharply limit equity holdings.

In recent years, however, some states have relaxed those provisions. Voters in California, for instance, approved a ballot measure in 1982 that allows plan trustees to set their own investment limits.

In 1986, state and local pension plans held a total of $146 billion in assets, according to the Employee Benefit Research Institute. About 32 percent of those assets were held in stocks, while 55 percent were in U.S. bonds and other securities.

Returning to the Market

Like other institutional investors, a number of pension-plan managers were talking last week of getting back into the market.

“We still think the market offers great opportunities,” said Mr. Hineman, who directs the teachers’ pension plan in Texas. “We view this as a good buying opportunity.”

Last week’s sudden collapse, analysts said, drastically improved the relationship between share prices and dividend earnings--a key attraction to large institutional funds that are more interested in income than in short-term capital gains.

Ms. Sheahan of tiaa-cref said fund managers there were looking at a number of investment opportunities, not just in the United States but in foreign stock markets as well.

Pension planners were not the only interested buyers. Jim Hooks, chief investment officer for the Texas Permanant School Fund, said he viewed the current situation as an excellent chance to guard against inflation by locking in high earnings.

Income from the $7.5-billion endowment helps fund the state’s education budget.

“We would like to wait until things settle out a little bit,” Mr. Hooks said. “But we expect to be doing a lot of buying in the next month or two.”

But while the market crash does not threaten current benefits, some analysts are concerned that a persistent slump may hurt the many public pension plans that are already carrying significant unfunded liabilities.

Such liabilities, which represent the difference between plan assets and the projected claims of future retirees, totaled more than $206 billion last year, according to a recent study by Greenwich Associates.

A long-term bear market, one union analyst said, could make it more difficult for employees to win pension increases in the future. State and local officials may also seek to increase employee contributions to the plans, he said.

“It will definitely be a bargaining issue,” said a spokesman for the National Education Association.

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A version of this article appeared in the October 28, 1987 edition of Education Week as Pension Officers Insist Funds Sound Despite Market’s Wild Roller Ride


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