Thanks to their long-term orientation and diversification into other investments besides stocks, the nation's pension funds seem to have emerged from last week's market collapse with relatively minor wounds.
Although they own nearly a quarter of all U.S. stocks, the nation's largest pension funds have protected themselves with substantial assets--sometimes more than half their investment--in bonds, money-market funds, real estate and other investments, pension experts say.
As a result, the bulk of the nation's workers need not be alarmed about the safety of their basic retirement benefits, fund managers said. In fact, they have weathered the storm with little of the emotion seen among individual investors and traders.
"We're long-term, disciplined investors; we expect to ride out fluctuations in the market," said Thomas E. Flanigan, chief investment officer for the California State Teachers Retirement System, one of nation's largest pension funds, which lost about 12.7% of its asset value in the past three weeks.
"To a large extent, this (stock fall) was anticipated" among pension fund managers, said Ellen Goldstein, director of public affairs for the Assn. of Private Pension and Welfare Plans in Washington.
While many fund managers are not immediately jumping back into the market, they nonetheless see little if any long-term changes in the proportion of their assets they allocate to stocks. That proportion has grown considerably in recent years.
Such calm among such large investors could be a stabilizing force on the market, moderating wild and volatile swings, experts said. And fund managers' confidence in the long-term attractiveness of stocks--and their plans to maintain high proportions of stocks in their total assets--could provide the buying power eventually to help fuel a new bull market.
Fund managers say they've stayed level-headed, despite the biggest market crash since 1929, because they don't try to time market swings, realizing that most experts have been unsuccessful at doing so.
Instead, they tend to be buy-and-hold investors, basing their investment plans on studies showing that stocks--despite their occasional volatility--have consistently outperformed bonds and many other investments over the past 25 years or so.
"The worst thing you can do is to get whipsawed with bad market timing decisions," said David P. Feldman, chief of the $27-billion pension fund at AT&T, which lost about 13% of its value in the market crash.
"We've been through tough periods before" when stocks declined sharply, said Roland M. Machold, director of investments for the state of New Jersey and its pension funds. But in the long run, he said, stocks will come out ahead.
Pension funds also buy stocks with cash, avoiding the risk associated with buying stock with borrowed funds, otherwise known as buying on margin. Margin calls--demands from brokers that investors put up more cash or sell their stock to replenish the declining value of the stock backing the loan--have plagued individual investors and professional traders since Black Monday.
The average corporate pension plan has only about 40% to 50% of its assets in equities, with the rest in bonds, money-market funds, real estate and other investments, said Dallas Salisbury, president of the Employee Benefit Research Institute in Washington. The average public pension plan has between 20% and 40% in equities, he said.
Thus, pension funds lost on average only between 10% and 15% of their $2 trillion in assets since the late August peak in stocks, Salibury said. And their stock portfolios are still way ahead of their levels of 1982, when the bull market began, he said.
Pension funds' ability to survive the crash relatively unscathed "is going to reinforce their traditional orientation toward diversification, long-term investing and patience," Salibury said.
While virtually no impact is expected on basic pension benefits, some workers may see smaller increases in future benefits or may not get extra checks this year, as pension surpluses--the assets above what is needed to provide benefits--have shrunk. But corporate pension funds are still overfunded by about $200 billion, compared to $350 billion at the end of last year, Salisbury said.
Still Within Range
The only workers who might see their basic benefits threatened are those at financially ailing companies in such troubled industries as steel, whose benefits were threatened even before the stock market decline.
Also, some employees' retirement savings plans, such as the popular 401(k) company savings plans, might decline in value to the extent that employees used the plans to invest in stocks or stock mutual funds.
Many pension plan managers say the market collapse--by making stocks worth less--reduced at least temporarily the proportion of their assets invested in equities. But those levels still remain well within long-term ranges that most fund managers have set.