With the prospect of higher interest rates looming over financial markets, pension funds must chase higher returns—and take on greater risks, the Texas Teachers' Fund's former managing director told CNBC on Friday.
CapRidge Partners' founder Steve LeBlanc said pension funds have been moving away from a 60-40 allocation between stocks and bonds. As underfunded pensions chase better returns to meet their obligations, managers have moved money from stocks to private equity and from fixed income into real estate, he said.
"Most pension plans are under-risk," LeBlanc said on "Squawk Box." "They don't have enough risk in their books.
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Pension funds are also moving into high yield bonds and emerging market debt, LeBlanc told CNBC. If they don't add more risk, they'll never be able to meet the 8 percent returns needed for actuarial costs, LeBlanc said.
David Rubenstein, co-founder of private equity firm The Carlyle Group, told CNBC the biggest problem among pensions across the country remains under-funding by about $3 trillion. And politicians don't want to raise taxes to meet the gaps, he added, which leads to riskier portfolios and higher fees associated with alternative investments.
"We're not going to be able to honor all the commitments we have made with all the teachers and firemen and policemen unless we get higher rates of return," Rubenstein said. "If we were to tax people more we wouldn't have to do this. But we don't want to tax people to pay for these benefits."
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