Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

It's hard to turn nothing into something. 

So it goes for pension plans, which are finding it increasingly difficult to mint big returns on their investments when benchmark bond yields are at record lows. They face a dilemma of falling short of the returns they rely on or taking perilous risks that could prove catastrophic.

A prime example is the California Public Employees' Retirement System, which is the biggest U.S. public pension fund with about $300 billion of assets. Calpers just posted its worst performance since the credit crisis, gaining a paltry 0.6 percent in the 12 months ended June 30. That's nowhere close to the 7.5 percent return that the system expects to pay its bills.

On the one hand, it's just one year. On the other, it’s the second disappointment in a row and has brought the system's average investment returns to 7 percent a year over the past two decades, below its target, according to the Los Angeles Times.

Falling Returns
Calpers, the biggest U.S. public pension system, reported a second year of disappointing returns
Source: Calpers

The path only gets harder from here. Pensions generally recognize that and have ratcheted back their expected annual returns in recent years.

The problem is that Calpers, like many other funds, still have pretty high expectations for future returns. In general, private U.S. pensions rely on a 6.9 percent annualized return on investments to send out checks to retirees and meet other obligations, according to median figures tallied by Mercer. About 60 percent of pensions assumed a return of 6 percent to 7.5 percent, the company's data show. Without the expected investment returns over the long run, pensions either need to promise less or get more money through contributions, either from workers or, potentially, taxpayers. 

Fading Expectations
Pensions have steadily reduced their expected annual return targets in recent years
Source: Mercer

It's increasingly difficult to meet such high targets with any reliability because interest rates around the world are stuck near record lows and trillions of dollars of sovereign debt yield less than nothing.

No-Yield World
Sovereign bond yields have plunged in the wake of stimulus efforts by central banks globally
Source: Bloomberg

Just think: None of the hedge fund managers surveyed by Preqin in June expected industrywide returns of 8 percent or more in 2016, and only 6 percent expected broad gains of 6 percent or more. While hedge funds make up a small proportion of pensions' overall investments, this statistic is telling, especially because it marks a sea change in investor sentiment.

In this era of central bank stimulus, investors are mainly just hoping to get their money back rather than win big returns. Most economists expect global growth to slow, which would imply lower returns for riskier assets over time. Meanwhile, the average yield on developed-market sovereign bonds has fallen to 0.5 percent from 2.4 percent in 2011, Bloomberg data show.

Despite this backdrop, some significant gains were available in the 12 months ended June 30 across different asset classes. 

Not Quite a Desert
Many asset classes performed well in the year ended June 30, even as global stocks suffered
Source: Bank of America Merrill Lynch indexes, S&P, MSCI

Calpers was able to capitalize on some of them, with its fixed-income allocation gaining more than 9 percent, but it lost 3.4 percent on its public equity portfolio and its real estate holdings underperformed their benchmark indexes. While Calpers, like many other pension funds, has rightly sought to diversify its investments, it gives up some of the gains that it needs to generate a 7.5 percent return. And if it were to make more concentrated, riskier bets, it would risk losing money that it's counting on.

This is the conundrum that Calpers and other pension plans find themselves in. Without an adequate investment return over the long term, they could have trouble meeting their obligations to retirees. But achieving that return with a carefully diversified strategy is going to be incredibly difficult as central banks continue to suppress borrowing costs globally. That leaves the sort of high-risk, high-reward swashbuckling that can end in disaster. Or a reality check on true returns and what that means for workers and retirees.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at

To contact the editor responsible for this story:
Daniel Niemi at