WPF Risk Summit

How to solve Chicago’s pension pain

Moody’s recent downgrade of the City of Chicago was because of its pension liabilities, according to the city’s treasurer, Stephanie Neely, who says the current actions to fix the funding deficit problems are just “re-arranging the furniture”.

“The benefits and contributions are the problem: we cannot invest our way out of this,” she says, adding that the new lowered rates of expected return won’t help in a significant way.

On average, the city’s five retirement plans are 40 per cent funded, with the Firemen’s Annuity Benefit Fund the worst off at 20 per cent funded.

The city’s pensions are guaranteed and to change the state constitution would be very difficult, she says, making changes to the situation unlikely.

Neely says the funds are liquidated every 10 to 12 months in order to pay benefits, which means the portfolios are unable to take advantage of private equity and other illiquid, long-term assets.

The city treasurer was speaking as part of a panel discussion at the World Pension Forum Risk Summit, jointly convened by Conexus Financial, the publisher of

Compared to Australia

Her session saw the comparison of the Chicago funds and their dire predicament to the Australian defined contribution system and specifically MTAA Super, the fund chaired by former Victorian Premier, John Brumby.

Brumby outlined to the largely US public-pension fund audience that the Australian superannuation guarantee system was possible because of agreement between unions, government and business about a long-term vision for Australia’s retirement, and a compulsory superannuation guarantee was legislated in 1992.

Because of the mandated contributions, the $6-billion MTAA Super, like many Australian funds, is able to take a long-term view of investments without having to worry too much about liquidity.

This allows the fund to invest in unlisted investments, and it currently has about 30 per cent in those investments.

Brumby says the big debate in Australia is the privatisation of infrastructure, with the infrastructure deficit estimated to be between $250 and $700 billion.

“If the states privatised rail, electricity and port assets to institutional investors, it would make privatisation process politically more palatable,” he says.

An indication of the demise of the system in Chicago is that the Labourers’ and Retirement Board Employees’ Annuity and Benefit Fund of Chicago was 130 per cent funded in 2000. This year it is 55 per cent funded.

It is estimated that given current contribution levels and market conditions, Chicago will drain pension assets in 12 years.

The Australian system, on the other hand, is estimated to grow from $1.7 trillion now to $7 trillion by 2020, due to the guaranteed nature of the system and mandated contributions, now at 9 per cent.