Why We Should Rejoice As Pensions Shun Stocks

Bloomberg has an article out noting that pension funds are slowly backing away from the stock market. Given last year's stock market collapse, these funds saw huge losses from seemingly safe bets, like highly valued bank stocks. As a result, no one should be too surprised that they still feel the sting and are a little wary about diving back into the stock market. The Wall Street might lament this trend, but I think it's a good thing.

Here's some detail from Bloomberg:

Funds overseeing money for California teachers and public workers, Dutch government retirees and South Korean private- sector employees reduced their target weightings for equities this year, data compiled by Bloomberg show. The rest of the 10 largest kept them the same. U.K. pensions have cut stock allocations to the lowest since 1974, according to Citigroup Inc. Managers handling Oxford and Cambridge University professors' assets have been selling shares as the MSCI World Index posted a five-month, 51 percent rally.

First off, the trend is rational. When the stock market does too well for too long, investors are lulled into a false sense of security. 2008 caused them to snap out of it. Pension funds need to be extremely safe, stable investments. While some stocks may fit this mold, most do not.

Second, this better fits their investment objectives. The purpose of a pension is to one day pay out a fixed income to its shareholders. What could fit that goal more appropriately than investing in fixed income securities? That's not to say that stocks have no place in pension funds. After all, some stocks pay relatively predictable dividends, which can act a little bit like fixed income. But those are probably one of the few kinds of stocks that pension funds should find acceptable, given their risk-tolerance level.

You could argue, of course, that bonds also have some risk. That's true, but in theory those income streams should still generally be more predictable than stock market returns. Investors in corporate debt have a much better chance of getting back their original investment if a company fails than equity holders. As for mortgage-backed securities, I would hope that this market, in particular, has learned its lesson and that in the future those bonds will be much safer. Of course, there's also Treasury and municipal bonds, the safest of all investments, and a great fit for a pension.