Pension plans fall hard on 4th-quarter swoon

Participants in the 1,000 largest 401(k) and other defined-contribution plans took an estimated $70 billion hit in their equity portfolios in the fourth quarter of last year.

The $70 billion was calculated using the return of the Standard & Poor’s 500 stock index as a measure of the performance of the equity holdings of the largest funds.

The losses were almost $81 billion, based on the investment return of the Russell 3000 index.

The 1,000 largest defined-benefit pension funds lost an estimated $171 billion on their domestic and international stock portfolios, based on fourth-quarter declines in the S&P 500 and Morgan Stanley Capital International Europe Australasia Far East indexes.

Using the Russell 3000 index, the damage was even worse – an estimated $195 billion in losses in the quarter.

On the upside, $131 billion in gains in fixed income kept defined-benefit-plan losses from reaching a quarter of a trillion dollars.

Could have been worse

Participants in 401(k) plans didn’t have big fixed-income gains – only $4.5 billion in the fourth quarter – to offset their losses.

Among the large defined-benefit plans, the $78.6 billion New Jersey Division of Investments in Trenton lost about $6 billion in the last six months of 2000, says director Steven E. Kornrumpf.

In January, the fund gained back $2 billion. That’s an $8 billion swing – New Jersey lost and recouped more money in seven months than the total assets of 878 of the nation’s 1,000 largest pension funds.

The story was similar at other large pension funds.

The $85.5 billion New York State Teachers’ Retirement System in Albany lost $4.6 billion in value in the last quarter of 2000, thanks to a 6.8% drop in the value of its equity investments, says spokeswoman Candice Ronesi.

The Federal Retirement Thrift Savings Plan in Washington, which in July topped the $100 billion mark for the first time, lost nearly $5 billion from its largest fund, the Common Stock Fund, or C Fund. That fund tracks the S&P 500, says spokesman Tom Trabucco.

The $165 billion California Public Employees Retirement System in Sacramento lost $6 billion in the fourth quarter, and officials there say it could have been worse had the fund not diverted 2% from its domestic equity allocation in August.

In Texas, the $85.4 billion Teachers’ Retirement System in Austin lost nearly $2 billion in the fourth quarter, says spokesman Howard Goldman.

But none of those funds considered changing their investment strategies or using derivatives to hedge short-term losses.

“We track indexes. I don’t see how one gets fazed by that,” says Mr. Trabucco of the Federal Retirement Thrift plan. “When [the index] goes up, it goes up. When it goes down, it goes down.”

Sitting on hands

Until the second half of 2000, New Jersey enjoyed a 10-year run of positive returns that outperformed the S&P 500, Mr. Kornrumpf says. Its three-year return through Dec. 31 was 14.7%, and the five-year return was 19.3% compared with 12.3% and 18.3%, respectively, for the S&P 500.

Why did pension fund assets take a beating in the last quarter of 2000? Just look at the numbers.

The Russell 3000 fell 9% in the fourth quarter and was off 7.5% for the year. The S&P 500 fell 7.8% in the fourth quarter and 9.1% for the year.

The tech-heavy Nasdaq Composite Index was down nearly 33% in the fourth quarter and 39.3% for all of 2000.

“The losses in the second half of 2000 were related to problems in the Nasdaq,” Mr. Kornrumpf says. “We didn’t make any drastic changes to the investment policy in response to that.”

Although the New Jersey funds do use currency hedging from time to time to offset international equity exposure, no other derivatives are used to offset other potential short-term losses, Mr. Kornrumpf says. And to date, there hasn’t been a desire to explore using derivatives as risk management tools.

“In other words, we’re in a position as long-term investors to take the risks you have with long-term investment policies,” Mr. Kornrumpf says.

At the New York State Teachers’ Retirement System, where fourth-quarter 2000 losses were $4.6 billion, the view is much the same.

“We generally don’t react to short-term fluctuations in the market,” says Ms. Ronesi.

And, as with the New Jersey Division of Investment, the teachers’ retirement board did not consider using derivatives in the short term.

Fund consultants generally make recommendations for changes in asset allocations or strategies in July, and the board most likely will not consider making changes until then, Ms. Ronesi says.

At the Teacher Retirement System of Texas, Mr. Goldman says, the fund changed its asset allocation in June and has not discussed changes since.

Calpers spokeswoman Pat Macht says the fund’s board in August decided to lower its exposure to domestic equities to 39%, from 41%, and lower international equities to 19%, from 20%. That reduced the effects of the down market, particularly for technology stocks, in the last quarter, she says.

But once the true stock slide started late in the year, the Calpers board, like others, was content to stand pat, partly because the fund is a long-term investor, Ms. Macht says.

It is also partly because, for large funds, making quick decisions based on short-term markets is like trying to turn an aircraft carrier.

“But we don’t really worry when [short-term market fluctuation] happens,” says Ms. Macht.

“We don’t look at the one-year returns. We’re in it for the long haul, and we’re also well diversified.”