Pension Funds Boosted By Oil

The increase in commodity prices has been so sharp that some pension managers are worried about a possible crash. Partly for that reason, the Virginia Retirement System has decided to stay away.

"It's hard to know which commodities are in a bubble and which aren't," said Bob Schultze, director of the Virginia Retirement System.

Whether pension funds and other investors are behind the rise in food and fuel prices has sparked a heated debate on Capitol Hill and pitted powerful interest groups against one another. The airlines and other industry associations say the influx of investment money is creating a bidding war for commodity contracts and contributing to higher gas and food prices, hindering companies that need the goods for their businesses.

"The financial health and security of the United States depends, in part, on a commodities market that is stable, rational and predictable," Douglas Streenland, chief executive of Northwest Airlines told a House oversight subcommittee recently. "If the current pricing dynamic does not change, our industry will be severely challenged and will continue shrinking -- to the detriment of customers and the communities we serve."

Even as rising prices translate into staggering increases at the grocery store and at the pump, some regulators, including Treasury Secretary Henry M. Paulson Jr., say investors are not to blame. He has argued that the markets need them because they expand trading volume, allowing goods to change hands more easily.

Walter Lukken, acting chairman of the Commodity Futures Trading Commission, said the price of oil and other goods is going up simply because demand is outstripping supply. "It's our proposition that strong fundamentals are at play, driving higher commodity prices across the board," he said. "There are obviously powerful economic forces in play here: the falling dollar, political unrest in the Middle East, flat global production, rising demand from emerging world economies."

Lukken said his agency would study the issue nonetheless. He said he has formed a task force involving staff from the CFTC, Treasury and the Federal Reserve. Its report will be out in mid-September, he said.

But critics question whether long-term investors such as pension funds should bet on oil and other critical commodities.

"They were never designed for that. When you are buying food and energy commodities, it's affecting people's lives. There are social-justice issues," said Michael Masters, a hedge fund manager who has testified before Congress on the subject several times.

Pension managers counter that the public also has a stake in making sure retirement accounts are healthy. Commodities are one of the few investments that can perform well when inflation is rising.

In Fairfax County's case, no other investment came close to the returns of its commodity investment. Overall, its pension fund, which has about $5 billion in assets and serves 18,400 active county employees and 7,000 retirees, may show a very slight gain for the fiscal year ended June 1, officials said.

"Our job is to minimize our risks on the taxpayer," said Mears, the county's pension executive director. "If you can do that, why wouldn't you?"