Pension Fund Shortfalls Hitting Home In NYC

New York City (NYC), with a $101 Billion yearly budget, will now need to chip in $6 billion over the next three years to shore up the pension fund return shortfalls of five NYC pension funds, totaling $239 in assets, Pensions & Investments reports.

Debacles Galore

A small portion of taxes paid by the people of New York City will now need to make up for the slippage below the expected aggregate assumed rate of return at 7%. A redistribution of funds away from other public services provided to the people of NYC will likely need to occur.

CalPERS is doing the same. On July 20th of this year, California’s $400 billion public employee pension fund reported its first loss since the global financial crisis of 2009, with a negative(!) 6.1% net return over twelve months. Yearly dips in performance are only impactful once they drag down the 10, 20, and 30-year benchmark return of 7%.

CalPERS’ 5-year return stands at 6.7%, below the policy benchmark, and the 20-year performance is also below the benchmark—the ten and 30-year performance stand at 7.7%.


To quench any undue fears, California public employees are not in danger of losing their pensions, for the State of California, just as NYC is doing now, will need to make up for any long-term shortfalls.

CalPERSS&P 500
10-year return7.7%13.20%
20-year return6.9%5.9%
30-year return7.7%9.89%

The question that arises is why the asset managers of pension funds, with all their supposed domain expertise of risk spread across many asset classes, each with their specialized manager, cannot seem to outperform a public index fund.

Risk Unmanaged

The first significant reason I highlighted over ten years ago is that asset allocators and managers confound risk with distribution, a confounding of cause and consequence, leading, in the words of Friedrich Nietzsche, to grave depravity of reason.

The second primary reason is asset allocators deploy an embedded diversification of bottom-heavy risk of no less than ten levels. No critical path to risk/return expectations can be established across this Babylonian Tower of diversification. The obfuscation of enormous embedded risk cannot produce the consistent returns of well-defined risk.

Cyclical Investing

I previously described how asset management must be reinvented not to chase returns but to expand the efficacy of humanity to produce consistent returns—the subject of a separate article.

Apart from returns, I would want to see the total contribution by pension members, their drawdown on the fund, and the speed at which they contribute and withdraw to make more intelligent investment allocation decisions. Returns alone do not matter if you cannot trace the pension fund’s money-in versus money-out rate.

For example, if I run the pension fund of California school teachers, and I do not invest in or influence the investment in schools, the risk that those members will atrophy is high and thus reduces the money coming into the fund to produce consistent returns.

You must have a renewable investment allocation strategy, not just an allocation strategy that produces returns from thin air. The investment principles of all pension funds need a fundamental revision based on the actual investment risk and return pathways.

You do not have a viable long-term investment strategy if you must adjust your asset allocation yearly in a desperate ploy to meet the benchmark. The theory determines what returns you can discover, in the words of Albert Einstein. And when the theory of investment strategy is broken, so are the returns.

Know Risk

In the same way, you should only invest in a company with an understanding of their products. A pension fund should not invest in allocation and asset management games they do not comprehend.

Based on my outside-in analysis of the asset management business through to the investible assets, most allocators and managers have yet to learn what risk they engage in. They assume a form of distribution identifies risk. They are flat-out wrong.

The one thing you learn when you get rich is to keep writing and signing your own checks. This a lesson most asset allocators and managers managing the riches of pooled money still need to remember.

Nature Of The Asset

Asset allocation and investment strategies must begin to follow and adhere to the first-principles of nature to produce the consistency of renewal only nature can provide. Chasing your own tail, or the index of self, in the case of the S&P 500, yields infinite regression and is unsustainable.

A couple of years back, I provided advice to the board of CalPERS, and so did Warren Buffett. Neither I or Warren had the effect of fundamentally changing how pension funds operate. Both of us were attempting to dislodge the stifling refuge of consensus by the board.

Hence, your best bet is to invest in your future, with the market mechanisms available to you generally outperforming pension funds and leaving you in control of your destiny. But please, unlike asset managers today, know the risk and your appetite before investing.

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The sign of a vibrant, innovative nation is its willingness to pursue the ever-unfolding discovery of nature's truth and reinvent itself continually against those proven new normalizations upstream. Let’s inspire the world with new rigors of excellence we first and successfully apply to ourselves.

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