Low Interest Rates Push Pension Funds to Seek Profits in New Places

TOM HUDSON: That successful Federal Reserve effort to keep interest
rates low has pushed pension funds to look for profits in places other than
bonds. Public pension funds, like those for teachers, have more than $100
billion invested in private equity firms. Those firms have come under
intense fire in the Republican presidential nomination race. We spoke today
with Ronnie Jung. He’s the former executive director of the Teacher
Retirement System of Texas. We began with what role private equity plays
with public pension investments.

the long run we think private equity helps us diversify our overall
portfolio and makes us a little bit less dependent totally on the flow of
public markets.

HUDSON: Twelve percent of the assets of Texas teachers’ retirements
are in private equities. Do you expect that to grow in the years ahead?

JUNG: I think the private equity allocations is probably going to be
stable for a while. We are increasing our allocation in real estate and
hedge funds.

HUDSON: Ronnie, how does a fund as large as the teachers’ retirement
system in Texas, $100 billion plus, balance its financial obligations to
its retirees to any moral obligations it may have to local economies?

JUNG: We’re aware of it. We will monitor them. But we generally try
to look at it from the economic impact to the local economy and to the
system as a whole. So but we don’t actually get involved in the day-to-day
management of the partnerships. To extend it, it fits in our portfolio we
can add value, I think we would do it, but it’s not the overarching driving
thing. Our number one priority is to our members.

HUDSON: Ronnie, what’s been the impact of the low-interest rate
environment we’ve seen for the past several years and with the Federal
Reserve pledging to keep interest rates low to the middle of next year had
on public pensions?

JUNG: I think the low interest environment has forced everybody to
look at their allocations differently because they are always trying to
maximize it. So you kind of have to — you can’t control the markets so you
have to deal with them. So I think the default is that there is more
increase and looking for ways to add value other than public markets. And
pretty much everybody has tried to reduce their dependency on public

HUDSON: Are we moving toward a day when public pensions in the U.S.
are having less invested with American companies?

JUNG: I think more and more pension funds will go to global equity
versus U.S. and international. And you know, emerging markets might still
be separate. But I think this is becoming a global economy and despite a
lot of the talks about jobs, I think the reality is that we’re all going to
have to earn money and figure out where to do it. So I think global equity
will become a more traditional allocation rather than U.S. equity versus

HUDSON: Some critics have pointed out big concerns with pension
obligations in the years ahead. How concerned are you about any coming dark
days for U.S. pensions?

JUNG: I think some of the pension funds will need major revisions.
Others will need tweaking. We all have challenge when the economy is bad.
If inflation does pick up, that normally helps out the pension funds
although it reduces the value of our liabilities but benefits our members.

HUDSON: Ronnie Jung, the former director of the Teachers’ Retirement
System in Texas. Thank you very much.

JUNG: Thank very much, appreciate it. Enjoyed it. Thank you.

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