Katy Burne of Dow Jones Newswires reports that pension funds have a bit of a problem. They are falling further and further behind on their obligations. They don’t want the volatility of stocks and they don’t like the yields offered by bonds. The ugly details are summarized below:
The median expected return on assets in U.S. pension plans:
Last year’s median expected return on assets among U.S. pension plans of the Standard & Poor’s 1,500 index was around 8%, according to consultancy Mercer.
The problem:
Pension funds are in a bind over how to achieve the sorts of returns they have been used to, given the pummeling stocks suffered during the financial crisis and expectations that interest rates will languish near zero for a protracted period.
Their solution:
Companies that recently set about de-risking their portfolios include retailer J.C. Penney Co. (JCP) and technology company NCR Corp. (NCR). In April, NCR announced it would change its 40% allocation into bonds to 100% by the end of 2012.
This makes perfect sense, right? After all, there is no risk in longer-duration bonds…
Milliman’s annual pensions study shows the average equity allocation has fallen more than 15% over the past three years. “This represents the movement into longer-duration bonds and hedging instruments to de-risk their investment portfolios,” explained John Ehrhardt, principal and consulting actuary at Milliman.
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Posted by Andy Hyer 
