Vanguard’s Bogle sees pension pain in low bond returns

Conservative bond portfolio will return only about 3% annually over the next decade, making it hard for pensions to meet their targets.

Jack Bogle isn’t optimistic about the state of U.S. pensions over the next decade.

The founder of Vanguard Group thinks a conservative portfolio of bonds will only return about 3% a year over the next decade, and stocks won’t do much better, with a 4% annual gain over a similar period. This is “totally defeating” for pensions, which “are not going to be able to meet their 7.5% or 8% obligations,” he said in a Bloomberg Radio interview.

Mr. Bogle is well known for first conceiving of low-fee funds for individual investors, pegging strategies to indexes rather than giving managers free reign to buy what they wanted. This philosophy has helped Vanguard grow into a $4.5 trillion behemoth that will likely reach $10 trillion in assets within the next 10 years.

Mr. Bogle, 88, also has a self-professed knack for making accurate market calls. His prognostications on stocks have had about an 81% correlation to what actually has happened, while his bond predictions have been accurate 95% of the time, he said.

“The only return you get on a bond is from the interest coupon,” with fluctuations in prices eventually evening out and becoming relatively negligible over the longer term, he said. Given a portfolio of about half corporate bonds and half U.S. Treasuries, the blended yield is about 3% today.

“So that’s what you get over the next decade,” he said.

This is a huge problem for pensions, which rely on bonds to provide steady, reliable income needed to cover benefit payments to plan participants. For example, the largest U.S. pension, the California Public Employees’ Retirement System, is considering more than doubling its bond allocation to reduce risk and volatility as the bull market in stocks approaches nine years.

Pensions have generally lowered their return targets over the past few years, but they’re still aiming for annual gains of more than 7% on average. To Mr. Bogle, that’s an unlikely scenario.

“It is almost a given that it will end badly,” he said.