Private-equity and pension funds were once considered a match made in heaven, but now the honeymoon period seems to be over, writes Heather Gillers for The Wall Street Journal.

When companies and states in the U.S. first started handing over control of some worker retirement savings, they received a promise of high returns after 10 years. They also often received healthy cash payouts throughout those years.

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However, the payouts have now dried up, creating an expensive problem for many investment managers overseeing the savings of retired workers from big corporations and state and city governments.

A Coller Capital survey found that almost half of private-equity investors had money tied up in so-called zombie funds, or private-equity funds not making payments on the expected timetable, leaving investors in limbo.

To ensure that retirees receive their benefits checks on time, investment managers are now unloading investments on the cheap or even turning to borrowing, which is a costly measure that reduces returns.

For example, California’s worker pension, the largest in the nation, will spend more on its private-equity portfolio than it earns from those investments for eight consecutive years. Similarly, Cummins, the engine maker, saw its U.K. pension shrink by 4.4 percent, mostly due to having to sell private assets at a discount.

This is the latest cash crunch to happen to retirement funds that have poured money into hard-to-sell investments looking for high returns and showcases all the risks of such investments as Wall Street now attempts to sell them to wealthy households.

“You’ve got a lot more money out and going out than is coming back, and I think that’s causing a lot of angst,” said Allen Waldrop, private-equity director at Alaska Permanent Fund Corp.

Read more about private-equity and pension funds in The Wall Street Journal.

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