Aug 4, 2022 - Economy

Pension funds inch into crypto investments

Illustration of an 8-bit gold coin attached to a balloon that reads "Happy Retirement!"

Illustration: Sarah Grillo/Axios

Pension funds are beginning to dabble in crypto investing, opening the door for a broader discussion about whether investment managers should embrace the risk profile of digital assets.

Driving the news: The Fairfax County Board of Trustees in northern Virginia recently authorized its $6.8 billion pension funds to begin investing in the area of crypto lending, the Financial Times reports.

Why it matters: The success or failure of pension funds enables them to distribute checks to retirees and affects the budgets of cities, counties, school districts and states that are on the hook to make pension contributions.

  • Cryptocurrency investments offer the promise of eye-popping returns but also present the risk of the exact opposite.

Reality check: For now, crypto does not represent a meaningful slice of pension assets.

  • In Fairfax, managers have placed more than $55 million in crypto ventures so far, representing less than 1% of their assets.
  • "If the numbers were much, much larger, that would be a concern," Tom Kozlik, managing director and head of municipal research and analytics for HilltopSecurities, tells Axios.
  • But "right now" it's best categorized as part of a broader chunk of alternative investments.

The big picture: Pension funds throughout the country are feeling pressure to bolster their returns as they face declining asset values due to the stock market selloff of 2022 and unrealistically optimistic investment return expectations.

  • State and local pension plans are 77.9% funded, down from 84.8% in 2021, according to estimates published in July by Equable, a nonprofit with Republicans and Democrats on its board that advises governments on pension issues.
  • "They’ve had to begin to look at (investments) that are more aggressive and riskier," Kozlik says. "They're reaching for yield."

Of note: Several crypto lending companies have recently tumbled into bankruptcy, including Celsius Network and Voyager.

What we're watching: Whether more pension funds get the crypto bug and how their initial investments perform.

  • The value of Fairfax's total crypto investments — which started in 2019 — has fallen by about 50% "from this year’s market turmoil, but that would still leave the investment up" 350% in the long run, the Financial Times reports.
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