Huge Loss in Pension Funds Globally affecting stock market

 11 March 2019
https://tinyurl.com/y3mfs8en


The Organisation for Economic Co-operation and Development (OECD) that tracks Pension funds activities all over the World reported that the Pension funds lost about US$5.4 Trillion in 2008 due to the stock market crash during the “the Great Recession”. 

This year,  there were reports that many Pension Funds all over the World suffered much losses in the last 3 months ended December 2018 when US stock market crashed over 20%.  Although OECD's Pension Fund's  report is only due mid 2019,  one can expect that report will not look pretty.

What was Reported Recently?

1.  Japan’s Government Pension Investment Fund (GPIF)

GPIF reported that it lost about 9% or US$136 billions in the last 3 months ended Dec 31,  2018.  It was their biggest losses since April 2008.   GPIF put-in about half of the USS$1.5 Trillions in Domestic stocks and foreign equities.
  

2  US Public Pension

The US Public Funds was reported to have lost about US$ 900 billions or 7.5% of its  US$12 Trillions assets.  The Country's Pension Funds expected to have a shortfall exceeding US$2 trillions in 2019 unless the Government can  make up the differences.

3.  Ford Motor Co’s Pension

Ford Motor was expected to report US$1.27 billion income in 4Q 2018;  instead,   they reported a loss of $116 million.  This was all because it has recorded a Pension fund losses of US$877 million in the 4th Quarter.

Why so much losses?

Pension funds have to be attractive or looked to be attractive in order to attract pensioners to part with their money.  Most Pension funds will look for investments that could bring in enough earnings to satisfy their "hungry" members.  Naturally, one place where they would first look at is their Treasury Department or the Government related finance companies or establishment.

After Ben Bernanke started the Quantitative Easing (QEs) with other countries followed suit,  Pension funds do not find their investments in  the usual and traditional places attractive.  They must have looked for alternative investment grounds.   Many of them put more money instead in stocks and equities as the investment return was the best.  Some put more than  half of their assets "in that basket".  Therefore,  it is not difficult  to understand why there was such huge loss in terms of  billions or trillions when there is a market crash.

Why Market has not Crash?

Market will not crash unless the investors especially the Funds have all given up or there are some better places  that the Funds can earn enough money to satisfy their "hungry" customers.  At present,  the interest rates all over the World were so low;  some even went negative like Japan, France,  Germany and many other European countries.   The Funds were not quite interested in the Bonds nor other investments except in stocks and equities.  So long as there are hopes that the stock market can recover,  one should expect these “hungry” Funds to continue maintaining their investments in stocks and equities.  They might even try to uplift the stock market to recover all their previous losses.

Why Can’t the Government help?

The Governments all over must have noticed this unhealthy development in their Pension Funds but they could not do much because they themselves are in bigger trouble. Many US Municipals are in serious financial trouble.  So far, there were over 70 defaults in Municipal bonds reported since 2017, involving a sum of not less than US$ 4.0 billions.   2019 is expected to see more Municipal bond defaults as the default sum has already reached US$1.0 billion in the last 2 months
 

How Pension Funds make their Investment?

Pension Funds do not normally involve directly  in  tradings,  such as stock tradings.  They would employ Fund Managers to do these jobs for them. However,  some Pension Funds, especially those in Canada, would carry out their work much like any private equity firms and hedge funds.

What to Expect?

It is expected that the Global stock markets will be volatile in the coming months when the Funds are sorting out their losses.   The loan market will be very active especially in leverage loan market when these Funds cannot get the usual lending from their traditional sources.

The Funds will try to “kill” each other in the stock markets;  some will completely disappear from the horizon.  In the end,  we should expect a “bloody” market unless the Governments can step in to stop the “killing”.