Vanguard's Bogle Sees Pension Pain in Decade of 3% Bond Returns

(Bloomberg) -- Jack Bogle isn't optimistic about the state of U.S. pensions over the next decade.

The founder of Vanguard Group thinks a conservative portfolio of bonds will only return about 3 percent a year over the next decade, and stocks won't do much better, with a 4 percent annual gain over a similar period. This is “totally defeating” for pensions, which “are not going to be able to meet their 7.5 percent or 8 percent obligations,” Bogle said in a Bloomberg Radio interview that aired Thursday.

Bogle is well known for first conceiving of low-fee funds for individual investors, pegging strategies to indexes rather than giving managers free reign to buy what they wanted. This philosophy has helped Vanguard grow into a $4.5 trillion behemoth that will likely reach $10 trillion in assets within the next 10 years.

Bogle, 88, also has a self-professed knack for making accurate market calls. His prognostications on stocks have had about an 81 percent correlation to what actually happens, while his bond predictions have been accurate 95 percent of the time, he said.

“The only return you get on a bond is from the interest coupon,” with fluctuations in prices eventually evening out and becoming relatively negligible over the longer term, he said. Given a portfolio of about half corporate bonds and half U.S. Treasuries, the blended yield is about 3 percent today.

“So that's what you get over the next decade,” he said.

This is a huge problem for pensions, which rely on bonds to provide steady, reliable income needed to cover benefit payments to plan participants. For example, the largest U.S. pension, California Public Employees' Retirement System, is considering more than doubling its bond allocation to reduce risk and volatility as the bull market in stocks approaches nine years. 

Pensions have generally lowered their returns targets over the past few years, but they're still aiming for annual gains of more than 7 percent on average. To Bogle, that's an unlikely scenario.

“It is almost a given that it will end badly,” he said.

To contact the reporter on this story: Lisa Abramowicz in New York at labramowicz@bloomberg.net.

To contact the editors responsible for this story: Daniel Niemi at dniemi1@bloomberg.net, Eric J. Weiner, Andrew Dunn

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