[quote=livinincali][quote=CA renter]
Because of their long-term horizon, they’re able to get into long-term bonds. They have the flexibility to buy longer-term bonds when rates are higher, and shorter-term bonds when rates are lower. Only fools would be buying long-term bonds right now, IMHO.
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I don’t think they have that much flexibility. In the past 5 years CalPRES has probably received about $25 billion in net contributions which makes up about 15-20% of their total portfolio. They obviously can’t have 20% of their portfolio tied up in short term bonds earning close to zero and also assume a 7.5% rate of return. They can’t just wait for better days if they assume 7.5% returns. They have to invest so they are investing out on the risk curve.

Remember the people making the decisions aren’t really worried about bad investment decisions because it’s somebody else’s money. You personally wouldn’t make that choice but they don’t care. Wouldn’t you rather have control over your money then a promise that somebody else is going to manage a pool of money so that you can get paid someday.

[quote=CA renter]
Of course, this is also where the Fed manipulation comes into play. If not for the Fed keeping interest rates well below where they would be without the interference, returns would be much higher and asset prices would be less volatile, IMHO. Less volatile booms and busts are far more preferable for institutions like pension funds (and people who prefer investing based on fundamentals instead of trying to time the next bubble).
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The fed’s manipulation has actually been good for the total asset value calculation for CalPRES. Remember as rates go lower, older bonds with better yields go up in price. The 30 year bonds that CalPRES bought back in 2000 or 1990 are being held at values far greater than the face value on the bond. So when CalPRES says they have 150 billion in assets with maybe 50 billion in treasuries the face value of those treasuries might be 40 billion.[/quote]

Absolutely, today’s lower rates would artificially (IMHO) inflate the “funded” status of the pension funds. Of course, that’s assuming that they are using fair market values, and not “held to maturity” values, but that might not be totally correct (haven’t checked into that).

And you are also correct about them having to move out on the risk curve because of the **artificially suppressed** interest rate environment. And when/if interest rates rise, I expect the bond funds to be hit, yet again. This is precisely why I detest the Federal Reserve’s excessive manipulation of various markets. They are reducing risk premiums and forcing institutions and individuals to take on far too much risk, and these are often entities that cannot afford to do so.

And no, I’m not at all a fan of DC pension plans. IMHO, DB pension plans can absolutely work, but you have to keep everything in-house (no privatization!!!!), and use extremely conservative assumptions for both expenditures and returns. If that means that employees have to pay more/get less, so be it; but I want that to be decided only after the system is allowed to cleanse and heal itself…which will require a period of rather painful deflation, a shrinking wealth/income gap, and a more efficient/productive (and egalitarian, IMO) reallocation of resources.