Market rout sends state and city pension funds to worst year since 2009

Public pension plans lost a median 7.9% in the year ended June 30, according to Wilshire Trust Universe Comparison Service data released Tuesday, marking the worst annual performance since 2009. The chronic financial stress is pressuring governments and retirement savers.

Much of the damage occurred in April, May and June, when global markets were challenged by concerns about inflation, high stock valuations, and a broad retreat from speculative investments, including cryptocurrencies.

Funds that manage the retirement savings of teachers, firefighters and police officers have seen their worst quarterly performance since the early months of the global pandemic, with a median return of minus 8.9% for that three-month period.

The pain felt by many investors in a year was characterized by a rare combination: simultaneous sharp declines in both stocks and bonds. It also affected the epic 60/40 portfolio, where you invest 60% of your long-term assets in stocks, typically a diversified index portfolio, and the remaining 40% in bonds.

For state and local governments around the country, the losses will mean higher annual retirement contributions in the coming years, forcing many public officials to raise taxes or other revenues or to cut services. Public pension funds have hundreds of billions of dollars less on hand than they will need to cover future benefit promises.

Pension investment managers are reminding their governing boards to focus on long-term returns, which in recent years have been good until 2022.