Link to original article: PE could impact public pension plans’ funding status this year

Private equity returns are a major threat to pension plans’ ability to pay retirees in 2023.

The reporting lag for private equity returns data means that public pension plans’ 2023 portfolio numbers will reflect losses in the asset class, marking a major “warning sign” for the institutions in the year ahead, Equable Institute, a nonprofit that works with public retirement system stakeholders, noted in its update to its state of pensions 2022 report released Tuesday.

The 2022 fiscal year saw an average investment return of -6.1%, and when 2022 numbers are finalized, Equable expects the national funded ratio average to decline from 83.9% in 2021 to 77.3% in 2022. This funded status—or the percentage of assets needed to pay future beneficiaries—is lower than the funded ratios in 2007 and 2008, just before the global financial crisis.

In 2022, private equity returns saw consistent declines. From Q1 to Q2 2022, total global PE fund returns declined from 2.1% to an estimated -3.2%, according to PitchBook’s 2022 Global Fund Performance Report. For public pension plans that aim to be fully funded—have enough money to be able to make payments to their beneficiaries—declining private equity asset values could lead to more unfunded liabilities. What’s more, the reporting lag for private equity return data means that pensions’ 2023 portfolio numbers will reflect the asset class’s losses from 2022.

“We’ve definitely heard from investors that they’re wondering what marks are going to look like,” said Dimitri Stathopoulos, Nuveen‘s head of institutional advisory services for the Americas. “[In private equity] historically, if the volatility and pricing is relatively short-lived, you can almost hide PE, because it gives you time to snap back.”

Global PE funds quarterly return 

In 2022, inflation, geopolitical turmoil and a volatile public market made for a difficult investment environment, one in which many public pension plans saw negative or flat returns, driving down funded ratios.

“[Negative returns] are going to hurt a funded ratio any day,” said Anthony Randazzo, executive director of Equable. The bottom line: Beneficiaries should brace themselves for dramatic declines in public pension plans’ private equity returns in 2023, Randazzo added.

Still, Stathopoulos noted that because of PE’s diversification strategies and illiquidity premium, most investors don’t expect private equity returns to drop as low as public equities did in 2022.

“The general consensus is that returns aren’t going to be as low as what you’re seeing in public equity markets,” he said.

Equable published initial projections in the original report in July; the updates reflect all data reported through the end of 2022.