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Tackling America's Public-Pension Time Bomb

The nation's coming public-pension crisis is more a matter of underfunding than generous benefits and poor money management, according to a diverse group of panels at the CNBC-Institutional Investor2012 Delivering Alphainvestment conference in New York.

An MTA worker lockes up a gate at Union Square station.
Timothy A. Clary | AFP | Getty Images
An MTA worker lockes up a gate at Union Square station.

Alarm bells have been sounding for years, as cash-strapped state and local governments cut or withheld contributions to employee pension funds, which happened to coincide with the aging of the enormous baby boom generation and a volatile investing environment.

For instance, a recent Pew report, cited by moderator Michael Peltz, editor of Institutional Investor Magazine group, concluded that states had a $1.3 trillion shortfall in funding retirement programs as of 2010.

"If it's properly managed and you make the contributions when you're supposed to, you can ride through the tough times," said Damon Silvers, director of policy and special counsel for the AFL-CIO. "In terms of putting up the money, we're a little late, but better late than never. With underfunded pensions, you can't manage your way out of it, you just can't climb that wall."

"It's about responsible funding and prudent investing," added Ashbel Williams,executive director and CIO of the Florida State Board of Administration. Williams said it's possible for the funds to achieve high single-digit, low single-digit returns over an extended period. "We've done it."

Part of the apparent pension crisis is also a lack of understanding in judging investment returns, according to the panelists.

"Can you make 7 percent with this money," asked Lawrence Schloss, New York City deputy comptroller for asset management, who manages the city's pension fund.

He answered his own question by saying the fund had averaged 6.8 percent over 10 years and 8 percent over 20 years, but analysts and critics tend to judge performance on a short-term basis, clouding the issue. Schloss' fund is up only 1.7 percent in the past 12 months.

Williams, whose fund has also struggled in the current environment, achieved returns of 23 percent and 14 percent in the two previous years.

"Looking at one year or three-year periods is silly," said CliffordAsness, co-founder of AQR Capital Management, who described himself as the "most depressing person on the panel."

Asness said part of problem with pension-funds returns is that too much money is invested in stocks, and investment management fees are too high, particularly those firms that employ simple strategies.

"There's still room to diversify," he said. "They're too equities focused."

"I don think we can close the whole gap," he said, perhaps living up to his self-assessment.

Delivering Alpha 2012 Advisory Board

  • Afsaneh Mashayekhi Beschloss, President and CEO, The Rock Greek Group

    After a long and successful career on Wall Street, Schloss now works for New York City, where he is deputy comptroller for asset management and chief investment officer for the New York City Retirement System.

  • Ashbel Williams, Executive Director and Chief Investment Officer, Florida State Board of Administration (SBA)

    Williams, executive director and CIO of the Florida State Board of Administration, has spent much of his career in state government, but he's also worked in the hedge fund business in New York.   

  • Jennifer Vaccaro, Director of Institutional Sales, Investec Asset Management

    Vaccaro is director of institutional sales at Investec Asset Management, overseeing new business development in the North America institutional market. She has held senior sales positions at several other firms.

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