Senior's Couple Walking On The Beach

The Reckoning in Pension Funds Draws Closer

The comments below are an edited and abridged synopsis of an article by Clint Siegner, Money Metals

The outlook for pension systems is growing increasingly dire. Promises made to retirees have been generous and they can only be kept if prices for all kinds of assets move consistently higher.

The Reckoning in Pension Funds Draws Closer - bullionBuzz - BMG
Senior’s couple walking on the beach

But the past three years don’t look like the first twenty years of the century.

The 40-year bull market in bonds ended. Commercial real estate is in deep trouble. And there are many indications that a recession is coming, which should translate to lower stock prices.

Now some pension programs are borrowing money to meet their obligations. The California State Teachers’ Retirement System (CalSTRS) announced plans to borrow $30 billion to avoid selling distressed real estate and bonds.

The CalSTRS move to borrow roughly 10% of its total asset value smells of desperation. It is a gamble that will pay off if there is a big recovery in commercial real estate and bond prices.

But the outlook for commercial real estate remains gloomy. Demand for office space has been in decline. Working from home is a phenomenon that is on the rise.

The most likely scenario for a recovery in bond prices involves a decline in stock prices.

The Fed isn’t likely to start dropping interest rates until stock market weakness signals recession or, worse, economic malaise.

If markets fall, it will get harder and more expensive for pensions to borrow next time.

The alternatives to borrowing will be a fire sale of assets, or a bailout from either the state or federal government.

Given that California is facing a record $68 billion deficit and federal deficits are also skyrocketing, bailouts could be a difficult sell. California’s politicians will likely want to rescue pensions, but they will have to borrow to do it. The state’s creditworthiness could be an issue.

Few state pension systems allocate any of their assets to precious metals to protect retirees from inflation and credit risk. One exception is the Ohio Police and Firefighters Pension Fund, which has acquired a physical gold holding.

Now pension systems that are hitched entirely to financial assets must navigate potential bear markets and tighter borrowing conditions. Many of them may not succeed.

In the face of a growing economic crisis and the challenging landscape for pension systems, the inclusion of gold in a pension fund emerges as a strategic opportunity. With traditional assets facing uncertainties and the risk of a bear market, gold stands out as a reliable hedge against inflation and credit risk. The move by the Ohio Police and Firefighters Pension Fund to acquire physical gold reflects a forward-thinking approach to safeguarding retiree interests. As pension systems grapple with the possibility of borrowing, a well-diversified portfolio that includes gold can provide stability and resilience. In times of economic turbulence, the intrinsic value and historical stability of gold make it a valuable asset to consider for ensuring the long-term security of pension funds