How to Prevent The Pension Fund Crisis What We Should Be Asking
In all the news about Wisconsin's pension funds, one important item is missing. It relates directly to the cost of the Wisconsin pension fund. It relates directly to recent mortgage collapse and loan defaults. What are the Wisconsin pension funds investing in? What mortgage back securities are they purchasing? Where are the underlying assets of their fixed income portfolios located?
In Illinois, the local governments invest in fixed income securities such as Treasuries and GNMAs. Additionally, there are state run pension funds such as IMRF that invests in fixed income securities.
For the State of Wisconsin, all local government pension funds are held only at the state level. This leaves the State of Wisconsin with a great deal more control and responsibility.
If Wisconsin wishes to be the leader in this new public finance world then it should not just look at the benefits but also look at the investments.
What am I talking about exactly?
As my readers will recall we walked through a couple of websites that now provide a visual map of the mortgage foreclosures. These maps showcase the location and specific neighborhoods affected by high defaults.
Pension funds invest in these mortgage backed securities usually under the guidelines of the GNMA and FNMA. These investment pools are located in geographic regions of the United States.
Pension funds such as the Wisconsin pension funds have the ability to choose where they invest in their money.
Investing in California can be more risky and can return a higher profit.
Investing in the Midwest prior to 2008 was a relatively safe investment.
Investing locally in your own state and having policy guidelines that directs the pension boards to track what geographic region they are investing in is a prudent measure.
Reporting to the public where these investments are located is an act of transparency that can only help the pension returns of the State of Wisconsin.
Transparency of Fees
Fees paid take away from profits. If fees are higher, returns are lower. Watching the fees truly paid is the job of the investment board and the stakeholders - the tax payers
Pension Fund Expenses and ROI
Sample Heat Map
When I am abroad, I always make it a rule never to
criticize or attack the government of my own country. I make up for lost
time when I come home.
Annual Audit - Heat Map for Locations of GNMAs and FNMAs
Within the annual audit of every public pension fund is an actuarial study. Within this review, I challenge there should be a heat map of the geographic location of the investments or the location of the underlying mortgages for the fixed income/mortgage back portfolio of every pension fund across the country. Not just Wisconsin but California, Illinois and all 50 states in our union.
Guidelines to invest in geographic regions will affect the supply and demand of this securities. Yes, if California invests primarily in their own mortgages and they are the least stable in the market place their pension portfolio could be the most volatile.
However, this volatility could be noted by financial experts and tracked and discussed in a more open manner that may serve to thwart unstable market activity.
Actuarial Report Needs Heat Map of Location of Investments
Tax payers and governors alike need to know where they are investing their long-term assets. A simple heat map of where the investments are located is key to understanding a pension fund's portfolio.
A higher return is great but the real question should be what is the risk I am taking on to support this high return? Is this risk worth the return?
Is the board of directors given the information to make this decision.
Is the governor given this information?
The actuarial reports are not mandating.
This is an important risk management tool that could be readily implemented.
A nation that is afraid to let its people judge the
truth and falsehood in an open market is a nation that is afraid of its
John F. Kennedy
Residential Mortgages - Largest Investment
We have essentially lost the community financial institution here in America. We will always have pension funds and those pension funds will always hold investment - no matter how small that portfolio may be. The question is how do we manage those investments? How do we fully disclose the true value of those investments? A heat map of the location of the largest investments by geographic region is needed to help better manage the largest driving force in our American marketplace - our residential mortgages.
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