The full impact of the current global financial crisis on US pension funds is not yet clear. The first estimates are already bad, but the damage could be even worse given increased diversification to real estate in recent years and the difficulty in valuing these assets.

One estimate comes from the Congressional Budget Office (CBO): last month, in a statement before the committee on education and labour of the House of Representatives, CBO director Peter  Orszag said that almost $2trn (€1.5bn) in US retirement assets had been lost over the 15 months to 30 September.

The losses were roughly $1trn - almost 10% of assets - from Q2 2007 to Q2 2008, the latest period for which Federal Reserve data is available. This covers defined benefit plans in the private and public sector.

But some warn that the picture is not yet clear. "What is lost in this crisis is that accounting rules (GASB, ASOP 27) allow for smoothing of assets over five years. This would greatly overvalue many pension assets, especially equities," warns Ron Ryan, CEO of Ryan ALM and adviser on asset/liability management. "We have not seen the real damage hit the books of US pensions yet."

CalPERS, the US pension funds bellwether, is a good example of the troubles the industry is facing. Its assets shrank by $4bn, from $239.1bn at the end of the last fiscal year (to 30 June) to $193.7bn on 9 October this year - a drop of 19% in just 40 days. "We are dealing with the current financial turmoil as we have with other downturns in the past, counting on our diversified asset allocation and long-term investment strategy to carry us through," CalPERS information officer Clark McKinley stated. "We started underweighting global equity [public stocks] about a year ago, before the market peaked in late October.

"Last December, the CalPERS board set new three-year asset allocation targets and ranges for our five asset classes, reducing public stocks from 60% to 56%, increasing private equity and real estate, reducing fixed income, and carving out a range of 0-5% of total market assets for our new inflation-linked asset class - commodities, infrastructure, forestry, inflation-linked bonds. While we've lost value, gains in non-public stock asset classes have helped to mitigate them somewhat".

However, diversification into real estate, which now accounts for 10% of assets, may be the source of further problems.

In June a joint venture between the fund and a California developer filed for bankruptcy: CalPERS had invested almost $1bn into virgin land outside Los Angeles at the height of the real estate boom and it may lose its entire investment. Another problematic joint venture was signed by CalPERS last November with the New York developer Tishman Speyer and BlackRock Realty Advisors. It concerned the $5.4bn purchase of a huge apartment property portfolio in Manhattan whose value has fallen by 10%. CalPERS had invested $500m and it may have to put up more cash to save the debt-burdened deal or face the possibility of foreclosure.

McKinley emphasises that Cal­PERS' funding ratio is sound. "We don't have a to-date calculation, but a 15-year smoothing mechanism will even out contribution rates of contracting public employers in the retirement fund. There may be a slight increase in employer contribution rates at the end of the current fiscal year [ending 30 June 2009], but we've had some good carry-over from four really good fiscal years through 30 June 2007, and a 2.6% loss for the fund as of 30 June 2008 for the past fiscal year. The fat and lean years are evened out somewhat."

Jon Coupal, president of the Howard Jarvis Taxpayers Association in California, does not agree and says that CalPERS losses are "Exhibit A"  in why state lawmakers should have decided a few years ago to shift new state employees into 401(k)-type retirement plans. "So not only are private employees seeing their own 401(k) retirement accounts shrinking, they are now also on the hook to pay additional costs for public sector pensions that are unfunded,"  Coupal adds.

Pension funds' direct investments in equities have also suffered. Particularly hard hit is the $76bn New Jersey state retirement system that in January invested $300m in Merrill Lynch preferred stocks. The managers have not explained yet what the stake is worth after the Wall Street bank almost collapsed.