If markets continue to be volatile after Standard & Poor's downgrade of U.S. debt to Double-A+, pension funds will attempt to "minimize their losses and buy bonds," says Brett Goldstein, president of The Pension Department in Plainview, N.Y.
On news of the S&P downgrade, there was a lot of speculation that public and private pension plans would be forced to sell their U.S. bonds because they were no longer Triple-A-rated, sparking a sell-off in the market, Goldstein says. However, this sell-off didn't occur, Goldstein explains, because most pension funds have an investment policy statement (IPS) which allows for the new Double-A+ rating on U.S. bonds.
Goldstein adds that the Employee Retirement Income Security Act (ERISA) "does not require that public and private pension plans hold U.S. bonds or Triple-A rated bonds, although many do." If the stock market continues to respond negatively to the downgrade, he says, "public and private pension plans may have to buy U.S. bonds to avoid losing money and causing underfunding."
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The investment policy statement defines what types of investments a pension plan can and can't invest in. When it comes to bonds, the IPS gives a minimum credit rating, Goldstein explains. Some larger pension plans, like Calpers, "can afford to take more risk" when investing in bonds, however, the smaller pension funds "may have to sell or revise" what they can invest in.
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Melanie Waddell
Melanie is senior editor and Washington bureau chief of ThinkAdvisor. Her ThinkAdvisor coverage zeros in on how politics, policy, legislation and regulations affect the investment advisory space. Melanie’s coverage has been cited in various lawmakers’ reports, letters and bills, and in the Labor Department’s fiduciary rule in 2024. In 2019, Melanie received an Honorable Mention, Range of Work by a Single Author award from @Folio. Melanie joined Investment Advisor magazine as New York bureau chief in 2000. She has been a columnist since 2002. She started her career in Washington in 1994, covering financial issues at American Banker. Since 1997, Melanie has been covering investment-related issues, holding senior editorial positions at American Banker publications in both Washington and New York. Briefly, she was content chief for Internet Capital Group’s EFinancialWorld in New York and wrote freelance articles for Institutional Investor. Melanie holds a bachelor’s degree in English from Towson University. She interned at The Baltimore Sun and its suburban edition.
