US pension funds haemorrhage US$249bn

The 25 largest state and local pension investment funds in the US have lost an estimated US$249 billion in public equities, according to the Equable Institute.

The institute, which is a bipartisan nonprofit, said most of the damage occurred over the four days following the Trump administration's announcement of sweeping global tariffs, which were put on ice today.

Equable also warned that pension funds' losses are likely to extend into private capital and fixed income assets, while the outlook for real estate investments remains unclear.

The funds in Equable's analysis account for around two-thirds of public pension assets in the US. If total losses across all US public retirement systems were considered, total losses are expected to be "significantly higher."

Equable noted the initial market reaction to the new tariff regime, a universal minimum rate on imports and higher rates on select countries, has hit public markets the hardest, however, losses have occurred in all asset classes.

Notably, the Bloomberg US Aggregate Bond Index, a common benchmark for fixed income investments, has fallen 1.3% since the changes to US tax and trade policies. Since then, share prices of leading private equity firms, including KKR, Apollo Global Management, and Carlyle Group have also dropped between around 18% to 22%.

Equable said the declines reflected a widespread concern that the economic value of privately held companies has been "severely affected" by the new trade restrictions.

"We have not yet estimated how the losses to other asset classes have affected pension funds, but as of fiscal year 2024, state and local pension funds had 58% of their assets in non-public equities - e.g. fixed income, private capital, real estate, commodities, etc.," Equitable said.

It said "we know" the losses pension funds have experienced are deeper than the initial public equity declines.

Equable also cautioned that in addition to investment losses, pension funds may face future cash flow constraints if the tariffs contribute to a sustained economic downturn, whether that's driven by economic uncertainty, prices increases, tightening liquidity, or a combination of all three.

Equable said if the US economy goes into a recession later in 2025, and if that leads to a decline in state and local government revenues, this will likely reduce the ability to increase contribution rates as necessary to respond to investment losses and lead to cuts in the public sector workforce.

"If both of these occur, it could reduce cash flow for public retirement systems while their investment returns are minimal or negative," it said.

"A reduction in cash flow would be a particular concern for pension funds with high retiree-to-active member ratios e.g., plans with high benefit payment outflows), and pension funds with low funded status levels."