FTX collapse is a reminder that public pension systems should avoid high-risk investments

Link: https://reason.org/commentary/ftx-collapse-is-a-reminder-that-public-pension-systems-should-avoid-high-risk-investments/

Excerpt:

Public pension plans have mostly avoided direct investments into cryptocurrencies, and for good reason. Public pension benefits are constitutionally protected, meaning taxpayers are on the hook for paying for unfunded liabilities. If a highly volatile investment, such as crypto, were to go sour, the public pension fund—thus, taxpayers—would be on the hook to make up for the shortfall and pay for the retirement benefits promised to public workers. Even though there is a potential upside in generating significant returns by investing in cryptocurrency at the right times, the risks and market swings far outweigh the potential benefits for public pension systems. 

But some U.S. public pension systems are already reporting minor financial losses related to FTX, including the Kansas Public Employee Retirement System, according to the Topeka Capital-Journal:

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Similarly, “The Missouri State Employees’ Retirement System lost roughly $1 million because a private equity firm it invested in was invested in FTX, the embattled cryptocurrency exchange that filed for bankruptcy last week,” the Kansas City Star reported.

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Overall, the story of FTX is a cautionary tale for all investors. When it comes to public pension systems, which have largely steered clear of making direct investments in crypto, pension funds should resist the growing pressures to seek higher returns and take on risks that could expose taxpayers to major financial losses and more public pension debt.

Author(s): Swaroop Bhagavatula
Quantitative Analyst

Publication Date: 2 Dec 2022

Publication Site: Reason