Pension Fiduciaries and Conflicts of Interest

In a September 26, 2006 press release from the Pennsylvania Department of the Auditor General, results of several special performance assessments are telling. State Auditor Jack Wagner encourages reforms, some of which are shown below:

1. Improve "how individual board members monitor and report conflicts of interest to improve transparency in governance"

2. Formalize "professional training for board members"

3. Make better the "structure of internal audit operations to improve independence"

4. Change "state law and fund policies to ensure that all board members are subject to a modern legal standard for judging their investment decisions."

Asking investment advisors to disclose campaign contributions whenever they present to the board is another suggestion. This is important since political appointees sit on the boards of the Public School Employees' Retirement System and the State Employees' Retirement System, respectively. Together, these two funds account for nearly $87 billion and 600,000 employees and retirees.

Given a reported funding gap in the neighborhood of $11 billion, a focus on conflicts of interest is noteworthy. The last thing any plan participant wants is an investment problem, whether it be an outright loss, sub-par performance, lack of suitability, excess fees or something else. Unfortunately, the absence of an independent review process leaves everyone guessing. (This applies to any fund.)

Was the right decision made for the right reason?

As a general rule, why aren't boards more independent in the first place? Is it really rocket science to recognize the importance of making decisions on the basis of solid investment analysis and not because money talks?

Editor's Note:
Other audits were performed by Independent Fiduciary Services, Inc. and looked at areas such as due diligence procedures, investment performance reporting, fiduciary liability insurance and costs and fees. For a copy of the two detailed reports, visit
http://www.independentfiduciary.com/resources. posted by Susan Mangiero at 9/30/2006 12:30:00 AM | 0 comments | links to this post   

Pension Accounting - Here It Comes

The long-awaited U.S. pension accounting overhaul is coming. According to their website, the Financial Accounting Standards Board ("FASB") will announce new rules tomorrow morning in the form of FASB Statement No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans.

Part of a multi-phase project to promote transparency as relates to post-retirement benefits accounting, companies will initially have to recognize the "overfunded or underfunded status of a defined benefit postretirement plan measured as the difference between the fair value of plan assets and the benefit obligation." Income statement adjustments are expected to follow thereafter.

Already, experts are predicting a dire impact for more than a few companies. According to the Center for Financial Research & Analysis, their survey of S&P 100 firms suggests a reduction to total equity of nearly eight percent. Their Portfolio Pension Monitor provides investors with details on a company by company basis.

What has most people worried is not only the direct impact of the new accounting rule but also the domino effect that is likely to occur. CFO.com earlier quoted John Ehrhardt, a principal with the actuarial consulting firm Milliman, as saying that new pension accounting requirements "could wipe out a company's entire net worth, forcing some to grapple with lenders on the terms of their loans or else fall into default. (See "FASB Pension Rule Could Spur Loan Woes" by David M. Katz, April 13, 2006.)

AltAsset.net just published summary results of a Grant Thornton survey that bears bad news for companies with defined benefit plans. They quote Mat Bhagrath, partner at Grant Thornton Corporate Finance as saying: "Following the introduction of new accounting rules, pension fund deficits have risen to the top of the corporate agenda. It is hardly surprising that private equity investors have become increasingly cautious about investing in companies with a defined pension shortfall." (See "Private equity investment in companies with a defined pension scheme deficit plummets", September 27, 2006)

Not one to underestimate the import of this brave new pension world, other accounting issues loom large. With little fanfare, FASB released its Statement of Financial Accounting Standards No. 157, Fair Value Measurements, a few weeks ago. Its potential impact is huge.

OPEB for public funds is right around the corner in the form of Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions and the Government Accounting Standards Board has announced its intention to create what I call a "FAS 133 look alike" for states, cities and other municipal users of derivative instruments.

Add other regulatory mandates for reporting and the picture is clear. Pension professionals everywhere are going to be very busy.

Are you ready? posted by Susan Mangiero at 9/28/2006 02:30:00 PM | 0 comments | links to this post   

ERISA and Derivatives

During a September 26, 2006 panel discussion about the use of derivatives by pensions, mention was made of a U.S. Department of Labor letter. Several people asked for more information. (The Pensions & Investments conference focused on liability-driven investing.)

Click here to read the letter. Excerpts are provided below. Several items are noteworthy, especially since liability-driven investing strategies often rely on the use of derivatives.

1. There is a clear focus on process.

2. Regulators cite the need to identify operational and legal risks.

3. Passing the baton to a money manager does not absolve plan decision-makers of oversight duties with respect to the use of derivatives by outside firms.

4. Methods used to assess market risk should be appropriate and could include stress testing and simulation.

<< Investments in derivatives are subject to the fiduciary responsibility rules in the same manner as are any other plan investments. Thus, plan fiduciaries must determine that an investment in derivatives is, among other things, prudent and made solely in the interest of the plan's participants and beneficiaries.

In determining whether to invest in a particular derivative, plan fiduciaries are required to engage in the same general procedures and undertake the same type of analysis that they would in making any other investment decision. This would include, but not be limited to, a consideration of how the investment fits within the plan's investment policy, what role the particular derivative plays in the plan's portfolio, and the plan's potential exposure to losses. While derivatives may be a useful tool for managing a variety of risks and for broadening investment alternatives in a plan's portfolio, investments in certain derivatives, such as structured notes and collateralized mortgage obligations, may require a higher degree of sophistication and understanding on the part of plan fiduciaries than other investments. Characteristics of such derivatives may include extreme price volatility, a high degree of leverage, limited testing by markets, and difficulty in determining the market value of the derivative due to illiquid market conditions.

As with any investment made by a plan, plan fiduciaries with the authority for investing in derivatives are responsible for securing sufficient information to understand the investment prior to making the investment. For example, plan fiduciaries should secure from dealers and other sellers of derivatives, among other things, sufficient information to allow an independent analysis of the credit risk and market risk being undertaken by the plan in making the investment in the particular derivative. The market risks presented by the derivatives purchased by the plan should be understood and evaluated in terms of the effects that they will have on the relevant segments of the plan's portfolio as well as the portfolio's overall risk.

Plan fiduciaries have a duty to determine the appropriate methodology used to evaluate market risk and the information which must be collected to do so. Among other things, this would include, where appropriate, stress simulation models showing the projected performance of the derivatives and of the plan's portfolio under various market conditions. Stress simulations are particularly important because assumptions which may be valid for normal markets may not be valid in abnormal markets, resulting in significant losses. To the extent that there may be little pricing information available with respect to some derivatives, reliable price comparisons may be necessary. After entering into an investment, a plan fiduciary should be able to obtain timely information from the derivatives dealer regarding the plan's credit exposure and the current market value of its derivatives positions, and, where appropriate, should obtain such information from third parties to determine the current market value of the plan's derivatives positions, with a frequency that is appropriate to the nature and extent of these positions.

If the plan is investing in a pooled fund which is managed by a party other than the plan fiduciary who has chosen the fund, then that plan fiduciary should obtain, among other things, sufficient information to determine the pooled fund's strategy with respect to use of derivatives in its portfolio, the extent of investment by the fund in derivatives, and such other information as would be appropriate under the circumstances.

As part of its evaluation of the investment, a fiduciary must analyze the operational risks being undertaken in making the investment. Among other things, the fiduciary should determine whether it possesses the requisite expertise, knowledge, and information to understand and analyze the nature of the risks and potential returns involved in a particular derivative investment. In particular, the fiduciary must determine whether the plan has adequate information and risk management systems in place given the nature, size and complexity of the plan's derivatives activity, and whether the plan fiduciary has personnel who are competent to manage these systems. If the investments are made by outside investment managers hired by the plan fiduciary, that fiduciary should consider whether the investment managers have such personnel and controls and whether the plan fiduciary has personnel who are competent to monitor the derivatives activities of the investment managers.

Plan fiduciaries have a duty to evaluate the legal risk related to the investment. This would include assuring proper documentation of the derivative transaction and, where the transaction is pursuant to a contract, assuring written documentation of the contract before entering into the contract.Also, as with any other investment, plan fiduciaries have a duty to properly monitor their investments in derivatives to determine whether they are still appropriately fulfilling their role in the portfolio. The frequency and degree of the monitoring will, of course, depend on the nature of such investments and their role in the plan's portfolio. >> posted by Susan Mangiero at 9/27/2006 12:02:00 AM | 0 comments | links to this post   

Pensions and Derivatives, the "D" Word

Are derivative instruments a recipe for disaster, an integral part of effective investment management or something in between? As explained in "Derivatives: The $270 Trillion Gorilla", meteoric growth around the world speaks volumes. At the same time, the incremental risks are real and cannot be dismissed.

Financial News reporter Renee Schultes writes that few fund managers "have the operational infrastructure and expertise to trade outside the listed and less-liquid listed derivatives market." (See "Managers struggle with OTC derivatives trading", Financial News, September 25, 2006.) Financial Times journalists Paul J. Davies, Gillian Tett and Saskia Scholtes chronicle efforts to address operational issues related to derivatives. (See "Derivatives dealers' tough match", Financial Times, September 25, 2006.)

New accounting rules and regulations encourage a paradigm shift that emphasizes risk analysis. Liability-driven investing is the new "it" topic and, by extension, derivatives are getting a serious look by public and ERISA pension fiduciaries alike. Money managers use derivative instruments as well for a variety of reasons such as transforming cash flows, leveraging exposure to a particular asset class or hedging. The Towers Group, a research and consulting firm, reports that "buy-side derivatives usage" is expected to "explode, bolstered by the shift to electronic trading, search for alpha, and more accommodating regulations (such as changes to ERISA and the adoption of the Prudent Investor Rule), which allows derivatives usage in pension funds and institutional money management." (See "Growth in Derivatives to Have Profound Impact on Wall Street Firms", September 18, 2006.)

The ultimate question is whether the expected benefits outweigh the costs. I wrote an entire book on this topic. Written for fiduciaries and related parties, Risk Management for Pension Funds, Endowments, and Foundations is a primer about the risks and benefits of derivatives and, more broadly, risk identification, measurement and control. I could easily write a second book about the topic. There is so much to say.

That is why subsequent posts will address the topic of derivatives, and the fiduciary implications of their use.

For those who want to read more, here are links to earlier blog posts and some articles I've written about risk management.

1. "Derivatives Get the Blame"

2. "Operational Risk and Derivatives"

3. "Derivatives Valuation: One Size Does Not Fit All"

4. "Pension Risk Management: What We Don't Know Can Hurt"

5. "Five Keys to Risk and Risk Management"

You can find lots more by going to our online library. You may also be interested in receiving our complimentary ezine about risk and valuation. Click here to sign up. (A link to our privacy policy is at the same URL.) posted by Susan Mangiero at 9/26/2006 12:02:00 AM | 0 comments | links to this post   

Impact of Pension Regulation

New pension regulation text tips the scale at over nine hundred pages. No wonder then that discussions abound with respect to who wins, who loses and how to take the next step to comply.

Part of a three day conference about liability-driven investing, sponsored by Pensions & Investments, Dr. Susan M. Mangiero joins a panel of esteemed pension professionals to address the impact of regulation. More information is provided below.

"The regulatory environment in the US is set to change in response to widespread pension plan underfunding. However, no one knows when (or if) a change will be made to the actuarial discount rate used by the federal government in calculating pension liabilities. Changes are expected to accounting rules regarding pensions, particularly FAS 87, which will affect actuarial smoothing. And the Pension Benefit Guaranty Corp. is likely to impose risk-based premiums on the funding level of a company's pension scheme. So how does LDI help offset the predicted effects of changes in pension regulation? This panel will discuss the pros and cons."

For more information about this invitation-only event, click here. posted by Susan Mangiero at 9/25/2006 12:12:00 AM | 0 comments | links to this post   

Fiduciary Liability Insurance in Pension Land

Travelers Canada announced a hard hat of sorts for money managers. According to the September 21, 2006 press release, the goal is to provide additional protection to "investment advisers, mutual funds and hedge funds for risks associated with providing asset management products and services to investors." Specific policy terms include coverage for incidents such as the ones listed below:

1. "Failure to adhere to investment guidelines and restrictions

2. Misrepresentations and failure to adequately disclose risks

3. Mismanagement of investments by an adviser on behalf of a pension fund

4. Breach of fiduciary duties to clients or pension plan participants

5. Unintentional errors committed in the course of performing regular investment adviser duties."

New pension laws, heightened scrutiny of fiduciary advisors and a surge in litigation would seem to make this type of enhanced coverage appealing to investment professionals in Canada, the U.S. and elsewhere.

Some interesting questions come to mind.

1. Should pension fiduciaries ask money managers for proof of insurance if they don't do so already?

2. Should pension fiduciaries eliminate a fund from consideration if they do not have this type of insurance?

3. Should the fund selection decision be tied to type and amount of insurance coverage? For example, would a fund with lots of liability protection be perceived as less of a risk-taker and perhaps more likely to deliver lower returns? Alternatively, would a money manager with ample coverage be seen as more of a risk-taker since insurance provides a safety net in the event that something goes awry?

4. Does the carrier matter? Specifically, do pension fiduciaries ask about the insurance underwriter and its financial capabilities to pay a claim?

5. Should a money manager ask pension fiduciaries if they are covered by liability insurance if they don't already inquire?

6. How would proof of plan fiduciary insurance be evaluated by the money manager? Is it an indication that a pension fund is inclined to have an established governance process that includes regular detailed assessments of money managers' risk controls? Would that discourage a more freewheeling money manager from doing business with that retirement plan?

It is our view that scant research has been done about the behavioral aspect of fiduciary insurance in pension land. Analysis of the insurance purchasing decision would be enlightening in several ways. First, it could shed light on process-related risks associated with pension plan investing. Second, it could (and probably already does) encourage a self-selection process that is directly tied to probability of loss on both sides of the fence. Few would argue that rational pension fiduciaries and investment professionals alike seek to avoid monetary losses and reputation-related harm.

Editor's Note: If you know of a study that examines these issues, please email pension@bvallc.com. Let us know if you would like to be credited for providing information. posted by Susan Mangiero at 9/24/2006 04:07:00 PM | 0 comments | links to this post   

Cheating and Pension Land

In "MBA students are 'biggest cheats'" Financial Times reporter Della Bradshaw conveys disappointing survey results that graduate students cheat. Business ranks first with fifty-six percent of those polled "admitting to misdemeanours such as using crib notes in exams, plagiarism and downloading essays from the web."

The news is not good elsewhere on campus. The survey, soon to be published in the Academy of Management Learning and Education journal, reveals that fifty-four percent of engineering students and fifty percent of science majors admit to cheating. Thirty-nine per cent of respondents in the humanities say "I do".

According to a report of the Ethics Education Task Force to the AACSB's International Board of Directors, "many schools have initiated new ethics instruction" but "more work must be done." (Note: The Association to Advance Collegiate Schools of Business is self-described as a "not-for-profit corporation of educational institutions, corporations and other organizations devoted to the promotion and improvement of higher education in business administration and management.")

Having taught the occasional MBA or executive MBA course, my experience has been positive (in fact extremely positive in terms of student motivation and integrity). That said, if the survey results hold true, some faculty members, somewhere, are either doing a lot of looking the other way or simply not catching the wrongdoers.

So why is this outcome something to ponder in pension land?

Pensions are set up as trusts. Stewards in charge of retirement plans are entrusted to make good decision on behalf of beneficiaries. Fiduciary duties speak to trust and loyalty. Employees trust that promises made will be kept.

Not every graduate student cheats and to imply otherwise would be grossly unjust. However, a culture of cheating does not bode well if future leaders are pulled from their ranks.

Who is responsible for ethical behavior and when does it start? How can we ensure that pension trustees and other fiduciaries are trustworthy, not just being honest but taking their responsibilities seriously?

Are there lots of capable and high integrity fiduciaries? Absolutely? Are there some who are ethically challenged? What do you think?

How can market participants self-police? How can we make good ethics the voluntary standard (assuming it is not already the case)? How can the system reward the good guys and gals and weed out the others? At the very least, what system best avoids penalizing fiduciaries when they try to do what they think is right, even if it means upsetting the apple cart? What is the role of regulation? What is the role of market structure in terms of transparency?

These and many other questions deserve a vigorous debate.

"What is left when honor is lost?"
Publilius Syrus posted by Susan Mangiero at 9/21/2006 12:30:00 AM | 0 comments | links to this post   

Amaranth, Hedge Fund Risk Management and Pensions

Yes, amaranth is a grain but it's the CT based hedge fund by the same name that is making headlines. If you haven't read by now, Amaranth Advisors L.L.C. has reportedly lost $4 billion by taking long natural gas trades in anticipation of rising prices. (See "Amaranth's Risky Business" by Matthew Goldstein, TheStreet.com, September 18, 2006.)

Notwithstanding some obvious questions about oversight, the issue of risk management is unavoidable.

What was the organization doing to identify, measure and manage risk?

With about an hour of web sleuthing, I found a handful of job postings for Amaranth, all focused on analysis, modeling, risk and valuation. For example, an August 6 post describes the need for a technology analytics developer whose responsibilities would include the "development of real time systems supporting valuation and risk analytics".

Top name schools list (or listed) Amaranth as a recruiter of risk and computational graduates. More than a few Amaranth alums list their experience there as involving hedging, model building and/or risk analysis.

Amaranth is listed as a client by a UK risk management technology company.

In May 2006, the Chief Financial Officer was part of a panel entitled "Leading multi-strategy & single strategy funds explain the controls they use to maintain independence of the pricing function and the role of their administrators in fund valuation for different categories of illiquids and thinly traded securities".

On the face of things, it seems there was some focus on risk. Perhaps a lot. It's impossible to say from the outside looking in. It will be enlightening to all of us as we learn more about the firm's internal controls and risk trading systems.

Then, there are the investors.

What responsibility do they have to ask questions about a particular fund manager's risk management policies and procedures? New York Times reporter Mary Walsh writes that the County of San Diego had $160 million invested with Amaranth. No doubt we'll learn about other institutional investors as time goes by. (See "Pension Fund Tallies Losses and Rethinks Its Strategy" by Mary Williams Walsh, New York Times, September 20, 2006.)

What discussions took place between pension fund investors and Amaranth and/or the referring consulting firms? Was there a thorough drill down before writing a check? Can interested members of the public obtain the due diligence meeting notes?

What was the role of regulators?

In its September 15, 2004 letter rejecting the notion of SEC registration, the General Counsel for Amaranth at the time wrote that "Amaranth does not 'operate in the shadows' outside of regulatory scrutiny. Amaranth is registered as a commodity pool operator with the Commodity Futures Trading Commission, is a member of the National Futures Association and counts among its affiliates two SEC-registered broker-dealers who are members of the National Association of Securities Dealers and one investment counsel and portfolio manager registered with the Ontario Securities Commission. As a result, Amaranth already devotes significant resources to regulatory compliance and is subject to many compliance obligations that are duplicative of those that would be required by the Proposed Rule."

Could any or all of the regulators have identified problem areas before now?

Only insiders know what transpired and it is virtually impossible to do anything more at this point than conjecture about good or bad practices.

However, there are real lessons to be learned here, not the least of which is the urgent need for a rigorous and independent assessment of a fund's risk management and valuation practices, policies and controls (if it is not already being done).

Let's be very clear. This notion is not specific to any particular fund but rather a prescription for investment decision-making in general. Is it true that some investments are considered ex ante riskier than others and thereby demand more scrutiny? Yes. Is it true that pension fiduciaries have ultimate oversight authority? Not speaking as an attorney (and urging readers to check with counsel), oversight is a critical task. Is there a possibility that real people could lose real money? Yes. Is revisiting the money manager selection and review process - emphasizing risk management and valuation issues - time well spent? Yes. Is there any reason not to get started right away? No. posted by Susan Mangiero at 9/20/2006 12:04:00 AM | 0 comments | links to this post   

Retirement Paradise

CNNMoney.com reports its 2006 picks for "best places to retire." Geographic lovelies such as Walla Walla, Washington and St. Simons Island, Georgia top the list. If your tastes run counter to editorial wisdom, you can find the best locale by clicking on favored attributes such as climate, job growth, commuting time and cultural activities and then pressing the Search button.

While I'm the first to say "have at it" and "enjoy", it strikes me that dreams of a halcyon retirement, especially one at a relatively young age, are simply not a reality for most folks.

Consider some recent headlines and ask yourself - "How ready am I?"

"Ford Offering 75,000 Employees Buyout Packages"
(New York Times, September 14, 2006)

"DuPont to cut pension contributions by two-thirds"
(CNNMoney.com, August 28, 2006)

"Tenneco Freezes Pension Plan"
(CFO.com, August 23, 2006)

If hammocks, hobbies and fun trips with friends await you, congratulations on a job well done with respect to planning.

Everyone else?

Working during the golden years may be unavoidable. Is there hope of catching up? Well, that depends on many things, not the least of which is how much time remains until the paycheck stops coming on a regular basis.

If you aren't saving yet, start giving it some thought right away. posted by Susan Mangiero at 9/18/2006 12:02:00 AM | 0 comments | links to this post   

Pension Treasure-Seeking in Portable Alpha

The topic of portable alpha pops up in conversation a lot these days as defined benefit plan managers contemplate ways to enhance return.

What is portable alpha?

According to www.freedictionary.com, portable alpha is the strategy of "portfolio managers separating alpha from beta by investing in securities that differ from the market index from which their beta is derived."

Alpha itself is usually defined as a measure of excess return above expected return, adjusted for market risk. If alpha is positive, a money manager is thought to have done a good job.

Like any other investment, risk and expected return considerations are paramount. However, unlike more traditional choices, portable alpha strategies may employ additional leverage and/or investing in securities for which there is not always a ready market.

Learn more by attending the "4th Annual Portable Alpha Conference" on September 18 in New York City. Dr. Susan M. Mangiero, CFA will moderate a 2:00 p.m. panel entitled "The Trustee Perspective: Taking Us Into the Boardroom - Crucial Trustee Issues Associated With Portable Alpha." Panelists include:

Mr. Carlos Resendez, Plan Trustee
San Antonio Fire & Police Pension Fund

Mr. Bradley Imamura, Former Trustee
San Jose Federated City Employees Retirement System

Attorney Anthony Abboud, Of Counsel
Greenberg Traurig, LLP
Former Trustee, Illinois Teachers Retirement System

According to the brochure for the 4th Annual Portable Alpha Conference: Critical Issues During a Period of Change, "This conference is geared to institutional investors and investment professionals and examines three key themes associated with portable alpha that investors face: First the challenges and opportunities portable alpha presents to plan sponsor trustees and institutional investment professionals as seen through their eyes. Second, the emerging intersection between 'liability-driven investment strategies' and portable alpha. Third, key implementation challenges and risk management issues associated with portable alpha usage. We will examine each of these areas through a series of informative panel discussions and lectures." posted by Susan Mangiero at 9/15/2006 12:06:00 AM | 0 comments | links to this post   

Does Pension Size Matter?

Pension size can be defined in a variety of ways such as assets under management (AUM), number of participants and so on. For investment analysis purposes, let's use AUM as the determinant of size and then discuss whether pension policies and practices vary across funds.

1. Are large funds more astute?

2. How does the available budget for larger funds impact their ability to hire specialists and engage in arguably more complex analyses?

3. Do governance practices improve or deteriorate as AUM grow?

4. Do plan participants expect more from a larger fund?

5. Can a fund be "too large" and lose the ability to respond quickly to new opportunities?

6. Are fees significantly lower for large funds, and if so, what threshhold constitutes "large"?

7. Do tiny funds struggle with transaction minimums? Can they afford to buy a comprehensive performance analysis technology system?

8. Is there a "too big to fail" doctrine for pensions, similar to what the banking industry has experienced?

9. Is the asset allocation mix materially different for big versus small funds?

10. Are larger funds more or less likely to examine alternative investments, and if so, why?

We could go on but you get the idea. While database vendors frequently categorize plans by assets under management, how many researchers examine the role of size with respect to pension best (worst) practices? What do they conclude?

There are published empirical answers to some of these questions.

We welcome your comments! posted by Susan Mangiero at 9/12/2006 12:37:00 AM | 0 comments | links to this post   

Managing Pension Yield Curve Risk

"A Different Strategy on Pensions" by New York Times reporter Mary Williams Walsh (September 9, 2006) showcases International Paper Company for its use of swaps as a way to hedge interest rate risk. She writes that "International Paper's $7 billion pension fund, which covers 175,000 people, is three years into a broad revamping, one that the company believes will protect it from the forces that wreaked havoc in the last few years."

Several points are worth mentioning.

First, the Pension Protection Act of 2006 makes a practice known as smoothing more difficult. The implication? It will be harder for companies to disguise funding problems going forward. Changes due out any day from the Financial Accounting Standards Board are likewise expected to put the kibosh on this type of illusory reporting mechanism. CFO.com reporter Helen Shaw writes that FASB Chairman Bob Herz opposes smoothing and favors a more accurate representation of funding status. (Click here to read her 2005 article.)

Second, defined benefit plans are affected by changes in interest rates (and related yield curve shifts). As rates drop, pension liabilities increase. (The extent to which they rise depends on a host of factors.) Moreover, a drop in rates (depending on the cause) could depress the return (assumed and realized) on some (not all) investments, thereby widening the pension gap and making things worse.

Third, the effectiveness of any interest rate hedging technique is influenced by current levels of interest rates, capital market conditions, the shape of the yield curve, the steepness of the yield curve, choice of instrument and so on. That's why Fed watching is such a popular activity.

Fourth, the pension situation is not hopeless. While some companies and municipalities are in dire straights (perhaps well on their way to financial distress or outright failure), other organizations can and should consider what works, what doesn't work and why.

Pension governance best practices are worth the time. Millions of people count on decision-makers to evaluate plausible solutions as a way to keep their word. posted by Susan Mangiero at 9/10/2006 05:26:00 PM | 1 comments | links to this post   

Celebrating 401(k) Day

Did you know that September 8, 2006 is 401(k) Day? "An annual celebration spotlighting the importance of employer-sponsored profit sharing and 401(k) plans," this holiday follows Labor Day "as retirement follows work."

You can try out several planning tools such as the 401(k) Day Retirement Checkup, a glossary and a 401(k) calculator.

Provided by the Profit Sharing/401(k) Council of America (PSCA), a nonprofit association, these tools and many other resources can be retrieved and used throughout the year. posted by Susan Mangiero at 9/08/2006 12:02:00 AM | 0 comments | links to this post   

Are HR Professionals the Key to Unlocking Shareholder Wealth?

Several days ago, I wrote about the link between employee happiness and the bottom line. I was pleasantly surprised therefore to read about a new study conducted by Auburn University professor, Dave Ketchen. Acknowledging the importance of incentives, his research results also suggest that "performance improvements are stronger when companies take a systematic approach to human resources rather than implementing one or two practices". He adds that "Executives need to adopt a strategic view of the human resource function and create sets of practices that reinforce each other."

In a related article, published in the August 2006 issue of Workforce Management, Dr. Theresa M. Welbourne echoes a similar sentiment about the strategic importance of the HR function. Author of "Human Resource Management: At the Table, or Under It?", Welbourne describes several of her studies which suggest that HR professionals are not given their proper due. This is a pity since "HR can, through various initiatives that reach out to employees, obtain employee insights and ideas about the business. HR can be the table because HR will have information about the business that no one else in the organization has at present. Employees are the stealth ingredient to creating a realignment culture. If you ask employees for information, and you use their input to realign, they are now part of the change, which means they are much more willing to move forward with the leadership team."

So what does this all mean in pension land? Plan design analysis should take into account immediate cash flow and earnings impact as well as trickle down effects that relate to employee productivity and retention. The expected demise of defined benefit plans may not come to pass if companies decide that attracting and keeping employees requires traditional benefits. Given today's article by New York Times reporter Jeremy W. Peters, labor shortages (and related cost pressurs) could nip defined benefit plan terminations in the bud. (See "Labor Costs Shake a Pillar of Fed Policy", September 7, 2006, New York Times.) posted by Susan Mangiero at 9/07/2006 01:33:00 AM | 0 comments | links to this post   

Pension Protection Act of 2006: Lawsuit Lollapalooza?

Dr. Susan M. Mangiero, CFA, Accredited Investment Fiduciary Analyst, and author of the book Risk Management for Pensions, Endowments, and Foundations, will join forensic professionals with the Center for Financial Research & Analysis (CFRA) on a September 6 conference call to talk about the Pension Protection Act of 2006.

CFRA team members will address the key components of the Pension Protection Act of 2006 and update their report of April 11, 2006 which discussed at-risk companies. Dr. Mangiero will touch on the fiduciary implications of the Pension Protection Act, litigation vulnerabilities and possible financial concerns for institutional investors, ERISA and D&O liability insurance underwriters and regulators.

There are currently no more openings for this event. However, if you would like to have a copy of the transcript, click here to request information. posted by Susan Mangiero at 9/06/2006 12:18:00 AM | 0 comments | links to this post   

Employee Happiness and the Bottom Line

Authors Dan Baker, Cathy Greenberg and Collins Hemingway write about successful organizations in What Happy Companies Know: How the New Science of Happiness Can Change Your Company for the Better. Using real-world case studies, their book "shows readers how to build a company where individuals at every level can apply their diverse strengths towards shared goals that are meaningful, positive, and profitable."

They offer that "motivated employees are the keystone to business success", suggesting that "companies built around people, positive mindsets and long-term goals consistently out-perform unhappy companies." (Click here for a short book review.)

Having just been interviewed by two journalists about significant changes to corporate pension plans and having met Dr. Dan Baker, author of What Happy People Know: How the New Science of Happiness Can Change Your Life for the Better, I started thinking about benefits and job satisfaction.

1. Has the flurry of headlines in recent months, chronicling frozen pension plans, layoffs, wage concessions, rescinded health care benefits and varying levels of job satisfaction, made it hard to implement a smiley face approach to work?

2. Accepting the book's premise that happy companies are profitable companies (something that makes sense to me), are they also generous companies in terms of new and/or continued benefits?

3. Do employees favor benefits that promote self-empowerment or prefer a more traditional, and arguably parental, approach?

4. How often do HR professionals break bread with C-level executives in order to design the optimal benefits mix that maximizes the happiness quotient while controlling costs?

5. Are certain types of workers happy even when the company's culture is sad sack central? (For example, there is interesting research that people who get more sleep are happier in their jobs.)

6. Can a company cherry pick happy individuals during the hiring process and thereby save (make) money in the long run?

7. Will rapidly changing demographics alter the way companies hire, train and retain and what role will benefits play?

8. Do employees react to news of rescinded benefits more negatively than never having had them in the first place?

9. Is happiness a function of how executives get paid versus everyone else, absolute dollars paid to executives, both or neither?

10. Are companies in certain industries happier, and if so, why?

I just ordered my copy of what looks like a very interesting book. If you know of research that addresses any or all of these questions, please let us know. posted by Susan Mangiero at 9/05/2006 12:02:00 AM | 0 comments | links to this post   

Labor Day Roots

1. According to the U.S. Department of Labor website, "The first Labor Day holiday was celebrated on Tuesday, September 5, 1882, in New York City, in accordance with the plans of the Central Labor Union."

2. The Public Broadcasting Service (PBS) website provides some additional insight with a variety of articles about this U.S. federal holiday. "Conceived by America's labor unions as a testament to their cause, the legislation sanctioning the holiday was shepherded through Congress amid labor unrest and signed by President Grover Cleveland as a reluctant election-year compromise." posted by Susan Mangiero at 9/04/2006 01:32:00 AM | 0 comments | links to this post