Public pension funds have been big investors in real estate over the past 25 years, but what’s the future for these pools of capital? Corporate pension plans are steadily getting replaced by 401K alternatives which reduce company expenses and put investment decision making into the hands of employees. Companies spin 401Ks as their pension plan, but let’s face it, they are poor substitute for beneficiaries, who don’t have the expertise to manage their investments and can’t protect themselves against losses when markets tank. The notion of a guaranteed pension for many corporate employees is disappearing.
Public employees, meanwhile, hold onto their defined benefit pensions (read that guaranteed) as long as their unions can bully state and local politicians into keeping them in place. Every time a contract negotiation takes place, the union approach is--You want our members’ support in the next election, don’t mess with our plan. For decades, politicians had been free and easy with giving the store away to unions on pensions since the bills wouldn’t come due until well after they left office. That’s why we have government workers still retiring in their mid 40s on full pensions.
The only problem with this tactic is time is running out as more baby boomers approach retirement, and the bills are coming due--now. Corporations have been eliminating their defined pension plans because the unfunded liabilities are budget busters. States, counties, and cities are facing the same reality, and taxpayer-voters will eventually come to terms with whether to support candidates who favor public employee pensions or those who call for balancing budgets and keeping taxes in check. The auto workers had to give in when their companies faced going out of business, public employees will relent too.
That doesn’t mean that public funds will stop investing in real estate, and that all public employee pensions will convert to some form of self managed 401Ks. But over time, public funds will become less of an investment force as their source of contributions diminishes.
Besides the unfriendly political realities, public funds have other troubles too—like other plan sponsors, they lost big in the recent market downturn, compounding their unfunded liability dilemma. In several states, “pay-to-play” scandals take down various board members and intermediaries.
The erosion of public fund clout isn’t great news. It points to the decline in the nation’s overall employer pension system, which provides each of us less and less retirement income and security. Public plans have been overly generous, but few Americans can feel good about the prospects of a 401K getting them through the golden years comfortably.
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