Pensions likely have some risks tied to FTX, given the crypto exchange’s long list of partners and more than a millon creditors. While the New Jersey Department of Treasury told Bloomberg it does not actively seek to invest in crypto, its system has holdings in Coinbase and MicroStrategy Inc. as well as companies including BlackRock Inc. and Signature Bank, which have indirect exposure to crypto.
Funds are seeing some red with Bitcoin, the world’s largest cryptocurrency by market value, down over 71% since its high in November 2021, coupled with historically high inflation and volatility in equity and bond markets. Public pensions funded ratio declined to 74% from 78%, as of June 30, according to Center for Retirement Research.
Seeking Higher Returns
David John, a senior policy adviser within AARP’s Public Policy Institute, said most pension funds will be largely shielded from the latest crypto winter. But he expects a number of retirees may see great losses from individual crypto investments in the coming years.
According to Anthony Randazzo, executive director at Equable Institute, 14 pensions invested a small fraction in FTX either through hedge fund Tiger Global or private equity firm Institutional Venture Partners. Calpers, for instance, invested $300 million of its now $400 billion pension system in a Tiger Global fund that invested some money into FTX.
The overall exposure is minuscule in a system of roughly 6,000 public sector plans, whose total assets hover around $4.5 trillion.
“This is not going to make or break any of these pension funds,” Randazzo said.
But Randazzo said a number of pensions are beginning to dabble more in crypto because they have unrealistically high assumed rates of return. Houston Firefighters is among them with an ARR of 8.5%, substantially higher than the national average of 6.9%.
“Pension funds are famously yield chasers,” said Gil Luria, a strategist at D.A. Davidson. “The significant returns to crypto compelled institutional investors including public pension funds to start looking at allocation to crypto.”
Over the last decade or so, US pension funds have increasingly funneled money into risky asset classes to achieve desired return targets, said Offerman. That may become a problem since unlike funds and retail investors, systems are working with retiree money and any losses can be detrimental to the finances of local and state municipalities.
“They’re going to get some big wins and big losses,” said Randazzo. “But the downside of those losses are going to be felt by individuals in towns who don’t have the resources to pave roads or school districts” because of the higher contributions.
--With assistance from Fola Akinnibi, Allison Nicole Smith, Martin Z. Braun, Romy Varghese, Felipe Marques, Elise Young, Brett Pulley, Shelly Hagan, Vincent Del Giudice, Shruti Date Singh and Natalia Lenkiewicz.
This article was provided by Bloomberg News.