The California state pension plan, CalPERS, just announced it will take on more leverage in order to increase its investment in private equity. Taking this extra risk will enable to them to justify their projected 6.8% return. But this follows a long-running trend. According to data on about 200 plans from the Center for Retirement Research, twenty years ago almost no state or municipal pensions were invested in private equity, now the median allocation is nearly 8%. Some plans have as much as 40% of their portfolio in private equity. The change was driven by decades of low interest rates, underfunded liabilities, and undefendable accounting standards. Private equity offers the potential for higher returns, but also more risk to the tax-payer if the funds don't pay off.
Source: Public Plans Data
Allison Schrager is a senior fellow at the Manhattan Institute. Follow her on Twitter here.
Interested in real economic insights? Want to stay ahead of the competition? Every Wednesday, e21 delivers a short email that includes e21 exclusive commentary and the latest market news and updates from around the Web. Sign up for the e21 Weekly eBrief.
Photo by DustyPixel/iStock