Information and Pension Investing

Having read more than a few blog posts about a company called Monitor110, I decided to spend some time at their website. While I know nothing about the company other than what I read, their graphic of the "New Information Dissemination Cycle" fascinates. If true that blog content, local news and other types of non-traditional venues offer a competitive edge to investors, capital markets could be turned upside down.

Just in the last ten or so years, rocket speed transmission of data - aided in part by advanced technology developments and cross-border deregulation - has improved efficiencies, thereby reducing costs and shrinking diversification potential. Some posit this is a good thing. Others complain that it makes it difficult to "beat" the market by accessing and analyzing information not widely known by others. This is a topic that is near and dear to my heart, having spent several years writing a doctoral dissertation about market microstructure. (I looked at information economics in the form of bid-ask spreads for NYSE-traded stocks across levels of institutional investor ownership and analyst following. Send an email if you would like a copy.)

According to their website, Monitor110 envisions revolutionizing "financial services by enabling Institutional Investors to turn Internet information into alpha generation." At a time when countless pensions, endowments and foundations are scrambling for returns, potential wins have great appeal. (This is not an endorsement of any particular company or strategy. Readers are responsible for their own analysis.)

The role of information in making investment decisions is a topic of great interest to us all. Debating the economic value of information deserves far more space than can be provided here. However, the notion that blogs - and other "non main stream" sources of information - contain pearls of wisdom not yet assimilated by the market certainly merits discussion. One question that arises. Do blogs lead or lag major news announcements? Journalist Chris Nolan has an interesting take on the power of blogs in an article for EWeek.com, writing that, beyond politics, "their value as forums for collective knowledge is becoming known in other areas as well."

What did people do before the Internet came along? posted by Susan Mangiero at 10/31/2006 12:10:00 AM | 0 comments | links to this post   

Protesting Pension Contributions - Who Should Pay?

According to a recent article in the Press-Enterprise, University of California workers expressed their outrage at being asked to contribute to their pension plans. Likely to impact 18,000 workers, "UC officials maintain that employees must contribute to the pensions to preserve them." A university spokesman, Mr. Brad Hayward, said that this sharing of responsibility is nothing new. "UC employees did contribute to their pensions until the early 1990s." He added that employee contributions wil occur gradually with no expected impact on take-home pay during the first post-reform year.

Critics argue that clerical and other lower-wage workers are already in a financial pickle without adding additional burdens.

This story caught my eye for several reasons, not the least of which is what I believe is the beginning of a heated (perhaps incendiary) debate about the rights of taxpayers versus municipal workers. This would include public universities such as the University of California, self-described as among the best in the world.

(In case you missed it, click here to read about the modern day version of the Boston Tea Party.)

An oft-cited position is that municipal workers agree to accept relatively lower wages in exchange for generous benefits. Accepting this point as reality (and ignoring for a moment that some do not accept that view), does a public employer's proposed rule change suggest a violation of an implicit work arrangement with employees? (The situation is arguably different when a labor-negotiated contract exists.)

What are the rights of the taxpayers who fund these benefits? Do they ever get a chance to approve or veto benefit payments or are they simply expected to pony up when benefits are due?

Moreover, this event illustrates the undeniable trend towards shifting post-retirement financial responsibility to employees and away from employers. Low-wage workers are not the only ones affected. Even middle managers know that the array of post-employment benefits is dwindling. Many companies no longer offer a defined benefit plan or, in some cases, any type of defined contribution plan.

Then there is the issue of fiduciary responsibility with respect to oversight of a growing net unfunded liability. Returning to the article, Hayward is quoted as saying "We need to be in a position where employees who retire actually receive the benefit that has been promised to them."

On the outside looking in, this statement is disturbing. It seems to suggest that there are insufficient funds to make current retirees whole without getting monies from those who still draw a regular paycheck.

This sounds familiar, doesn't it?

Think Social Security and any other "pay as you go" scheme that cannot survive without cash from current payrolls. posted by Susan Mangiero at 10/30/2006 12:14:00 AM | 0 comments | links to this post   

Pensions, Hedge Funds and Disclosure

According to Bloomberg reporter Jenny Strasburg ("Goldstein Asks SEC for Hedge-Fund Filing Exemption", October 24, 2006), Phillip Goldstein, "the investment manager who successfully blocked the U.S. Securities and Exchange Commission from requiring hedge funds to register, asked the agency to exempt him from stock disclosure rules." Ms. Strasburg reports his claim that mandated disclosure of holdings on Form 13-F would create economic harm as they constitute "valuable trade secrets." (It does not appear that his letter to the SEC has yet to be published. I will keep searching and post, if and once it is available.)

At the same time, Institutional Investor reports Paul Myners, chairman of the Ermitrage Group, as telling UK conference attendees that hedge funds provide protection against otherwise low returns. "Myners is pressing pension plans to pump up their allocation to 10 times the current level, to 30%."

Stateside, a new study by the Bank of New York and Casey, Quirk & Associates predicts a trend upwards in hedge fund investments by pension funds. Entitled "Institutional Demand for Hedge Funds 2: A Global Perspective," the authors predict that retirement plans around the world will triple their current hedge fund holdings to over one trillion dollars.

If Mr. Goldstein is successful in preserving confidentiality on behalf of his investors, more power to him. However, as a pension fiduciary, prudence would be difficult to justify in the absence of "sufficient and necessary" disclosure. (U.S. Code Title 29, Chapter 18 mandates "the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.")

While reasonable people can disagree about what constitutes "necessary and sufficient" information, certain questions come to mind with respect to hedge fund disclosure. (This is far from an exhaustive list.)

1. Is the hedge fund deviating from the stated strategy? If so, how does that affect asset allocation decisions for the pension fund investor?

2. How do holdings of the hedge fund change over time? What is the impact on transaction costs and, by extension, reported performance?

3. Do hedge fund holdings pose any problem for a pension fund with respect to liquidity?

4. Are the hedge fund's particular holdings difficult to value?

5. In the case of Form 13F, reported information reflects holdings of at least $100,000, a non-trivial amount by most accounts. If a hedge fund holds a large stake in a particular company, how is that likely to affect company policies and, by extension, how shares perform? (See the September 2006 issue of Chief Executive for an interesting article entitled "Do Hedge Fund Activists Have You in Their Sights?")

The list is long but the takeaway is simple. If investors plunk down millions of dollars, they should know enough to make an informed decision. posted by Susan Mangiero at 10/27/2006 12:10:00 AM | 0 comments | links to this post   

Bad Boy Syndrome and Governance

Ever have a sleepless night? You find yourself watching late night television and pondering whether to call overseas clients in their time zone as a way to score points. If so, you may have come across a police reality show known simply as COPS. According to the Fox Television website, COPS is "still one of the most popular television shows on the air," leading one to wonder about the national fascination with crime and disgrace.

Unfortunately, there never seems to be a shortage of bad boys and gals who flaunt the law. The temptation of easy money is too intoxicating for some, ensuring that the saga will likely continue for a long time to come.

Just recently, former Enron CEO Jeffrey Skilling was sentenced to twenty-four years over a corporate scandal that has received significant press attention and prompted a new wave of governance standards and rules. New York Times reporter Alexei Barrionuevo describes Skilling's sentence as slightly shorter than the twenty-five years metered out to Bernie J. Ebbers, former head of WorldCom "who was sentenced to 25 years last year for his role in the $11 billion fraud that led to that company’s collapse." (In the spirit of full disclosure, let me confess to owning some two hundred shares of Enron common stock.)

Financial Times reporter Kevin Allison writes that David Kreinberg, former CFO of voicemail software company Converse, "became the first top executive to plead guilty to conspiracy and securities fraud in connection with options backdating." Rumour has it that others are in the hot seat and have hired criminal lawyers.

Financial wrongdoing accounts for an entire industry of specialists. Benchmark Financial Services bills itself as an expert "in investigations of pension fraud, money management abuses and wrongdoing involving securities brokerages and pension investment consultants," adding that their "investigations frequently focus upon illegal or unethical business practices that are commonplace in the securities brokerage, asset management and consulting industries, as well as hidden or poorly disclosed financial arrangements between vendors to pensions."

Another organization, Corporate Resolutions, focuses on fraud, money laundering, risk management and competitive intelligence. President Ken Springer, a Certified Fraud Examiner and former special agent of the Federal Bureau of Investigation, provides an interesting update in the company's monthly newsletter about security issues.

Notwithstanding their efforts, some interesting questions come to mind with respect to how people respond to problems in pension land and elsewhere.

1. Does news about white collar criminal punishments deter others from misdeeds?

2. What type and magnitude of loss roils people to the point of lobbying for changes in the system, with the goal of minimizing future mishaps?

3. Does the avoidance of shame play a role in keeping financial abuses to a minimum? (How many rogue traders are now making a nice living as commentators, security consultants or well-published writers?)

4. What is the fine line between fraud and unethical practices?

5. Who is responsible for early detection of fraud within an organization?

6. What can investors and/or plan beneficiaries do to protect themselves from fraud and "ethically challenged" decision-makers?

Taking a pro-active approach can go a long way to calming jitters. For pension fiduciaries, providing transparency about the investment process, including choice of money managers and related vendors, is huge.

Why then is it often difficult to get meaningful information about a plan and how it is being managed? Why do we pay attention to the bad boys and gals instead of more emphatically rewarding all the good players? posted by Susan Mangiero at 10/25/2006 12:12:00 AM | 1 comments | links to this post   

Pensions, Foreign Owners and the Power of the Investor

In response to "Retirement for Three Hundred People", a colleague wrote the following. I publish it here because it is (a) thought-provoking and (b) reminds us that global integration of capital is here to stay.

<< The interesting thing will be the cross-border wealth transfer. As we in the US begin to liquidate investments after retirement, there will be an upsurge in demand from India and China, where the general level of wealth is rising rapidly and the population is growing. Combine that with a probable higher marginal propensity to save and you will see more and more US companies taken over by Chinese and Indian companies. >>

What happens in one country necessarily influences what occurs elsewhere. Migration of capital across borders is a snap in an era of lightning speed information transmission, consolidation of global exchanges and continued deregulation of financial rules.

In the spirit of this notion about one global marketplace, a 2006 book entitled The New Capitalists: How Citizen Investors Are Reshaping the Corporate Agenda makes a compelling case for the power of the institutional investor. Authors Stephen Davis, Jon Lukomnik and David Pitt-Watson chronicle "milestones in the owner revolution", in the United States and abroad. While they concede that shares alone do not guarantee a particular outcome, the trend is unmistakable. Investor clout is on the rise.

Consider these examples.

1. "In 2002 three U.S. state pension funds took steps to squeeze conflicts and misalignments out of the investment chain. The 'Investment Protection Principles' commit funds to require money managers to report on conflicts, how they pay their portfolio managers, and what they do to act as real owners of citizen capital."

2. "In October 2004 a group of big European funds founded the Enhanced Analytics Initiative (EAI), which commits each member to steer 5 percent of broker commission fees to stock research firms that analyze extra-financial factors affecting corporations."

3. "Coalitions of funds are forming within and across national frontiers to address overlooked long-term investment risks. Forums in the United Kingdom, North America, Australia, and New Zealand now focus on climate change as a portfolio issue."

Spending and saving patterns around the world influence what goes on in corporate boardrooms. Regardless of your view about nationalism versus globalization, one fact is undeniable.

Investors reign supreme. posted by Susan Mangiero at 10/24/2006 02:21:00 AM | 0 comments | links to this post   

Retirement for Three Hundred Million People

According to the Census Bureau, U.S. population now exceeds three hundred million people. In contrast, the headcount was roughly two hundred million in 1968.

Additional numbers are noteworthy. With one birth every seven seconds, a death every thirteen seconds and one net international migration occurring every thirty-one seconds, it's easy to see that population will continue to grow.

Shades of Thomas Malthus, the English economist who warned that more mouths would deplete the available food supply, or an opportunity for innovation due to additional brainpower?

It likely depends on whether you see the glass as half full or half empty. However, one thing is clear. The population is graying at a rapid rate and there is real concern about the economic well-being of seniors who exit the workforce and younger persons who will be called upon to support them.

According to William Poole, president of the Federal Reserve Bank of St. Louis, "Changing demographics make it impossible both to maintain that traditional retirement age, with the level of benefits defined in current law, and to maintain the current level of taxation on the working population to support the retirement system." Global Action on Aging provides a vast collection of country reports about pensions. The message is the same sobering sentiment. Fewer and fewer people are going to have sufficient funds for their later years.

News from the federal front is equally grim. In "Status of the Social Security and Medicare Programs, A Summary of the 2006 Annual Reports", the Social Security and Medicare Boards of Trustees report that "The fundamentals of the financial status of Social Security and Medicare remain problematic under the intermediate economic and demographic assumptions. Social Security's current annual surpluses of tax income over expenditures will soon begin to decline, and will be followed by deficits that begin to grow rapidly toward the end of the next decade as the baby-boom generation retires."

My friends and I have this discussion often. Our conclusions?

1. We will work for a long time, perhaps well beyond the "typical" retirement age.

2. An increasing number of people will move into poverty as national benefits are cut, taxes are raised and private pensions are reduced or terminated altogether.

3. Taxpayers will struggle to fund troubled municipal plans while trying to save for themselves.

4. Fewer companies will offer benefits to new employees, forcing a lifestyle change that requires diminished spending, increased use of debt or both.

5. Health care problems will soon dwarf the pension crisis.

6. There is a perverse incentive for politicians to ignore making unpopular changes that might help in the long-run but hurt voters now. (Besides which, when is the last time a legislator had to worry about his or her retirement account?)

7. Individuals must get smarter and better about taking responsibility for their financial well-being.

8. Effective financial education is paramount.

9. Many individuals favor immediate consumption in lieu of systematic saving.

10. No particular individual or organization seems to "own" the issue.

You get the picture. It's a veritable challenge to be upbeat about what is fast becoming a global retirement crisis.

Is there a sunny side?

Yes but only if one is receptive to making changes. There will be winners and clever investors who identify them early on will do well. Some industries are already showing continued robust growth as our population ages in both absolute and relative terms. Health care is an example. Some see the forced move towards economic individualism as a return to the "get up and go" attitude of our forefathers. (Self-employed persons are already familiar with paying for their own benefits.)

According to an ancient Chinese proverb, "Many grains of sand piled up will make a pagoda."

It's time to get started on a serious savings plan. posted by Susan Mangiero at 10/22/2006 12:22:00 AM | 0 comments | links to this post   

The 401(k) Fee Blame Game: Who's Next?

Chances are you've read about the flurry of cases recently filed against nearly a dozen 401(k) plan sponsors, alleging fiduciary breach by allowing plans to levy unreasonably high fees. Regardless of the legal outcome, the complaints are creating a buzz while encouraging plan sponsors everywhere to reassess their own situation.

In a recent client alert, law firm Dechert LLP wrote that "Under ERISA, an employer that provides a 401(k) plan to its employees is a "Plan Sponsor" and may also serve as "Plan Administrator." Both the Sponsor and Administrator are fiduciaries of the 401(k) plan. ERISA requires that that the Sponsor and Administrator ensure that fees borne by the plans be reasonable, and be incurred solely for the benefit of plan participants. In addition, 401(k) plans generally provide for participant-directed investment and are designed to comply with the rules under ERISA Section 404(c) which permit Plan Sponsors and Administrators to avail themselves, under certain circumstances, of a statutory safe harbor from fiduciary liability for the results of such investment elections. The safe harbor under ERISA Section 404(c) is available only where the fiduciaries allow the participants "the opportunity to obtain sufficient information to make informed decisions with regard to investment alternatives available under the plan."

More recently, Mr. Robert J. Grassi (Director, Pensions & Investments - Corning Inc.) and Attorney Michael J. Prame (Principal, The Groom Law Group) addressed this important issue as part of the Association for Financial Professionals Annual Conference - "401(k) Plan Fees: What You Need to Know and What You Need to Do." Citing concerns such as lack of fee transparency, hidden costs and potential conflicts of interest, Grassi and Prame provided audience members with a laundry list of types of direct and indirect compensation, respectively.

Both gentlemen talked about "the other shoe still to drop", adding that the U.S. Department of Labor is "formulating guidance that would essentially require plan fiduciaries, before contracting with a service provider, to consider the indirect compensation to be received by the service provider." They described a basis for imposing this obligation on fiduciaries in the form of the Frost/Aetna letters whereby "fiduciaries have a duty to obtain 'sufficient information' about the compensation that service providers receive from third-parties so that plan fiduciaries can make 'informed decisions' about whether the amounts that the plan pays are reasonable." Expected U.S. Department of Labor initiatives to amend 408(b)(2) regulations are likely to accelerate additional disclosure about plan fees.

Regulatory and policy-making scrutiny is on the rise. As we wrote in an earlier post, the U.S. Department of Labor wants to amend Form 5500, Schedule C, to include more stringent information about fee arrangements with service providers beyond what is currently required. U.S. Congressman George Miller has requested a report from the General Accounting Office about pension fees and the SEC reported on the relationship between pension consultants and fees in 2005.

Noteworthy is the sentiment that company decision-makers in the hot seat today will likely be followed by external plan fiduciaries next. According to attorney Stephen D. Rosenberg, author of the Boston ERISA & Insurance Litigation Blog, "Given the number of different advisors and other players involved in the operations of these types of retirement vehicles, there are bound to be plenty of fiduciaries - as that term is understood in the context of ERISA - involved in almost any 401(k) plan, making for plenty of targets for such suits."

One thing is certain. The spotlight will not dim on the fee issue any time soon.


Editor's Note:
The paper about fees by banker Ed Lynch, attorney Fred Reish and Dr. Susan M. Mangiero, Accredited Investment Fiduciary Analyst will be completed soon. We have created a list of recipients who requested our paper. posted by Susan Mangiero at 10/20/2006 12:20:00 AM | 0 comments | links to this post   

Pension Fund Risk Management: Act Before the Fact

I've been in sunny Las Vegas the last few days, courtesy of the Association for Financial Professionals (AFP). Part of AFP's concerted effort to provide its members with additional risk management resources, I led a Sunday workshop on getting started, creating an effective process and choosing an appropriate risk metric.

During my talk, I cited the importance of having a risk culture in place, without which (in my view) it is virtually impossible to make meaningful changes.

So what is a risk culture? How does it reflect an organization's willingness to act before the fact? Can some organizations differentiate themselves by taking a prescriptive approach to minimize litigation, reputation and non-compliance risk? What are some characteristics of a company with a risk culture?

Here are a few thoughts.

1. A company described as having a risk culture is one for which risk management is embedded in every aspect of the company's operations and not seen as a separate, stand alone activity. It is integral to each policy, procedure, strategy and tactic adoped by the firm.

2. By acting before the fact, a company can save money and time by anticipating problems and determining appropriate solutions now, avoid unwanted stress from outside investigators - regulators, litigators, watchdog groups - and maximize shareholder wealth by identifying oportunities for improvement.

3. Studies increasingly suggest that shareholders and consumers favor companies that do the right thing on their own rather than being forced into good behavior. This implies that effective risk management has an economic value beyond the obvious loss avoidance potential.

4. When evaluating whether a company has a risk culture, consider the following questions.

(a) Do senior level executives and board members "talk up" the company's commitment to a risk culture?

(b) Are risk management policies and procedures made public? At a minimum, employees and shareholders need to know.

(c) Are risk issues communicated clearly and with sufficient detail?

(d) Are employees reviewed and/or promoted on the basis of their adherence to risk management objectives? By extension, are they demoted or otherwise penalized for not wearing the risk badge of honor?

(e) Have ample systems and staff been provided to support a meaningful risk management effort?

(f) Does the company have a Chief Risk Officer? If so, does that person report to the board and enjoy adequate independence to make exceptions to the rule, as needed?

Applied to pension funds, the issue of a risk culture and taking steps to act before the fact is huge. ERISA fiduciary breach litigation is skyrocketing as are ERISA liability insurance costs, not to mention the economic urgency for mitigating risk in the presence of large and growing liabilities.

What better way to convey a message to shareholders and plan participants alike than to say "We recognize risk and actively manage it. It does not manage us."

Here are some things that companies (and public plans) can do to get started.

1. Create a table that lists various types of pension fund risk drivers, estimated probability of occurrence and financial impact.

2. Create, and publicize, a risk management policy for each plan. It should include the vetting process for money managers with respect to their risk management policies and procedures. In addition, it should address alternative strategies for controlling risks identified in step 1. (The list is long. Write us if you want to know more.)

3. Hire a Chief Risk Officer (CRO) who has responsibility for retirement plans. In most companies, it is simply not feasible to have a benefits CRO. However, a CRO with responsibility for enterprise value creation and/or protection should be asked to consider all benefit plans when building a storm-proof risk shelter.

4. Get the team onboard by including risk issues in performance reviews. For example, someone with pension investment responsibilities should be rewarded on the basis of risk-adjusted performance.

5. Recognize that a process is ongoing and requires care and feeding.

It's never too late to get started. To do otherwise invites trouble. Gambling is great in Las Vegas but do you really want to explain losses or sub-par performance to the inquiring public, let alone a regulator or opposing side attorney? posted by Susan Mangiero at 10/17/2006 02:32:00 AM | 0 comments | links to this post   

Hedge Fund Regulation Redux

In the aftermath of losses incurred by several Connecticut-based hedge funds and a recent court case that no longer requires hedge funds to register with the U.S. SEC, Attorney General Richard Blumenthal has convened a state-level Hedge Fund Task Force. Fortune writer Ellen Florian Kratz quotes Blumenthal as saying: "The facts about mammoth losses by Amaranth offer additional powerful and compelling evidence about the need to reform disclosure and oversight requirements [for hedge funds]."

According to a Reuters release on September 27, 2006, the U.S. House of Representatives has now passed a bill that mandates a federal study of hedge funds. "The bill, written by Delaware Republican Rep. Michael Castle, would require a wide-ranging study of hedge funds, their risks and regulation by the President's Working Group on Financial Markets, a multi-agency committee."

These two regulatory initiatives come around the same time that a new study augurs favorably for significant growth in the hedge fund industry. Just released by the Bank of New York and consulting firm Casey, Quirk & Associates LLC, the study concludes that "by 2010 institutions investing in hedge funds will increase to nearly 25% of all institutions, up from 15% today, representing a more than 60% increase. Retirement plans globally will account for the vast majority of asset flows, with corporate and public pension plans in the United States accounting for the largest percentage increase overall."

As with any investment, procedural prudence is paramount before committing funds. In the case of those hedge funds that purchase and sell complex securities that trade in thin markets, decision-makers absolutely must ask tough questions about risk management and valuation. Moreover, they need to feel comfortable with answers provided and understand how the oversight process changes over time and why.

If you are in the neighborhood, join us for a complimentary breakfast meeting on November 7 in midtown Manhattan from 8:30 to 9:30. Co-sponsored by valuation and risk company BVA, LLC, law firm Alston Bird LLP and ING Investment Management, we'll talk about hedge fund risk management and valuation issues that simply cannot be ignored by pension fiduciaries. Click here to have an invitation sent to you and/or to receive information about other upcoming events. posted by Susan Mangiero at 10/12/2006 12:55:00 AM | 0 comments | links to this post   

Focus on 401(k) Plan Fees

A flurry of lawsuits and investigations about 401(k) plan fees is moving center stage. Wall Street Journal reporter Tom Lauricella writes that New York State Attorney General Elliot Spitzer is close to concluding a settlement with a large insurance company "over allegations that it took undisclosed fees to promote certain funds in a retirement plan for New York State teachers." (See "Spitzer Aims At Another Mark: Fee Disclosure," Wall Street Journal, October 10, 2006.)

In "Suits Claim Excessive 401(k) Fees at 7 Firms", LA Times reporter Kathy M. Kristof describes allegations of excessive fees being borne by 401(k) plan participants at some of this country's largest businesses. Seeking class action status, the cases focus on whether "employees were charged millions of dollars in excessive management fees, which often were hidden in obscure agreements and not disclosed to the workers."

According to the U.S. Department of Labor website page entitled "Meeting Your Fiduciary Responsibilities", decision-makers are urged to analyze whether fees are "reasonable" when deciding on a money manager. In addition, fiduciaries should "compare all services to be provided with the total cost for each provider", "ask prospective providers for a detailed explanation of all fees associated with their investment options" and "specify how fees are paid."

New regulation is a factor too. ERISA attorney Fred Reish offers that the selection of a fiduciary advisor, pursuant to the Pension Protection Act of 2006, requires employers to "satisfy a fairly complex set of requirements that they did not need to satisfy in the past". One possible effect is that participants are harmed because of higher fees, "due to increased compliance burdens."

In the interest of full disclosure, I am writing an article with senior banker Ed Lynch and attorney Fred Reish about the rigorous process of comparing fees on an "apples-to-apples" basis. Send an email if you would like a copy of the paper when it is published. posted by Susan Mangiero at 10/10/2006 12:30:00 AM | 0 comments | links to this post   

Pensions, Class Action Litigation and Oversight Role

Lest anyone think that pension plans are shrinking violets when it comes to corporate scandals, think again. During the recent two-day Institutional Investor Forum, public pension trustees learned about a variety of tools and techniques to preserve the capital invested in Corporate America. Topics ranged from hedge fund activism to settlement amounts and attorneys' fees, electronic discovery, the fiduciary mandate, investor recoveries in the case of bankruptcy and early detection of corporate fraud.

Billed as an educational event for fund trustees, administrators, executive directors, general counsel and other representatives of public funds, law firm Bernstein Litowitz Berger & Grossmann LLP has played host for a dozen years. Past speakers have included New York Attorney General Eliot Spitzer, New York Times financial columnist Gretchen Morgenson and SEC Commissioner Harvey Goldschmid.

Since the passage of the Private Securities Litigation Act in 1995, institutional investors continue to garner attention for their more active role in the class action process. Whether that has improved things is a point of debate.

In 2002, law professor Michael A. Perino published results of his examination of nearly 1,500 class action cases. In "Did the Private Securities Litigation Reform Act Work?", Perino questioned whether a greater number of filings reflected more corporate fraud or relaxed rules for filing.
More recently, Perino cited lower attorney fees as a result of public pension fund participation. (Click here to read "Markets and Monitors: The Impact of Competition and Experience on Attorneys' Fees in Securities Class Actions", St. John's Legal Studies Research Paper No. 06-0034, 2005.)

At a time when corporate scandals related to compensation loom large, pension trustees are unwilling to take a back seat. One questionable practice, option backdating, is causing real problems for some companies. As of late last week, the Wall Street Journal listed the investigative status of 115 organizations on its "Option Scorecard". In "Next Step in Stock Option Probes: 'Backdate' Lawsuits", reporter Amanda Bronstad, describes the billions of dollars at stake for pension fund plaintiffs. Many of the cases are filed as derivative suits, "allege breach of fiduciary duty and are filed by institutional shareholders on behalf of the company as a whole. They seek the return of the stock options."

No doubt we'll hear more about pension plaintiffs and class actions. Good, bad or indifferent, their size makes them real players, too big to ignore.


Note:
Legal professionals such as attorney Christopher J. Rillo write: "Backdating is not an illegal practice per se, provided that the disclosure, tax and accounting requirements are met. Companies have for legitimate reasons backdated stock options to provide additional incentive compensation to officers and employees. What has changed is that the disclosure, tax and accounting requirements were radically altered to require disclosure of back dating and additional taxation to both the grantor and the recipient." (Click here to read his September 2006 remarks as part of the symposium about D&O insurance.) posted by Susan Mangiero at 10/09/2006 12:02:00 AM | 0 comments | links to this post   

Employee Benefits and Captive Insurer

As things change in pension land with respect to rules, regulations and funding issues, industry participants are getting creative about risk management. In September 2006, the Insurance Information Institute (III) wrote, "An increasing number of corporations are using captives to fund their employee benefits programs." One type of Alternative Risk Transfer (ART) mechanism, captives are a response to keeping a lid on commercial insurance costs. (For a primer on captives, visit Captive.com, a self-described "Business-to-Business Risk and Insurance Exchange.")

One wonders if this trend portends an increased emphasis on enterprise risk management (ERM) and, by extension, a strategic focus on benefits as an integral part of a corporation's assets and liabilities. According to a recent overview of ERM by Towers Perrin, "More than half of respondents - 57% in the U.S. and 72% in the U.K. - believe their company's pension related risk is significant relative to other financial and operational risks."

Reprinted with permission from the Association for Financial Professionals (AFP), the article below highlights one company's experience.

"The Latest to Place Employee Benefits Risk with Captive" by Kraig Conrad, CTP, September 27, 2006

<< The H.J. Heinz Co. earlier this month became the latest company to receive US Department of Labor (DOL) approval to cover employee benefits risks through their captive insurance company.

In the slowly growing trend to take advantage of program costs-savings with captives, the Pittsburgh-based company became the tenth company to receive DOL approval. DOL established EXPRO, or the standardized and expedited procedure, six years ago in order to grant advance approval of certain types of standard transactions-such as the use of captives to fund certain employee benefits- effectively removing roadblocks that prevented such transactions.

Heinz will use Heinz-Noble Inc., its Vermont captive, to reinsure employee and retiree group term life insurance policies, according to Business Insurance. Their Vermont-based captive is also used to cover a variety of property and casualty risks for the company.

In addition to group life insurance, the other nine companies with DOL approval have covered long-term disability and accidental death and dismemberment policies through their company's captive.

As a licensed insurance carrier a captive is under the control of its parent corporation with the primary purpose of insuring or reinsuring portions of the entire risk exposures of the parent and related companies. Though risks covered by captives typically have been related to property and casualty and workers' compensation, companies are looking to place other risks with their captives to help reduce risk management costs. >>

Copyright @ 2006 Association for Financial Professionals. All Rights Reserved. posted by Susan Mangiero at 10/05/2006 12:02:00 PM | 0 comments | links to this post   

General Counsel in the Hot Seat - Who's Next?

I can't tell you how many conversations I've had on the topic of governance and what motivates behavior, good or bad. Is it the proverbial carrot or stick? What is that one event (or series of events) that changes the collective mindset and spurs organizations to take action?

The answer I get most of the time is that people will act when they are forced to do so, either because of regulation, litigation, liability insurance hikes, regulatory investigation, losses that lead to headlines and so on.

Does that imply that bad news is a harbinger of corporate governance activity (and by extension, pension governance)?

If so, then a recent article about corporate counsel liability is a must read. According to "Gatekeeper GCs Increasingly Becoming Targets for Liability" by Sheri Qualters, gatekeepers like corporate attorneys are under "escalating government scrutiny" for failing to protect shareholders' interests. As a result, "in-house counsel and their law firm advisers say they're increasingly concerned about potential liability faced by in-house lawyers, who are stepping up their documentation of advice and even taking on additional professional liability insurance as precautionary measures."

Securities litigation lawyer William Schuman with McDermott Will & Emery's Chicago office offers that "The current mindset at enforcement agencies is that general counsel need to protect the shareholders' best interests, not just do the management team's bidding."

So how does this relate to life in pension land?

Let me count the ways.

1. There is increasing recognition that ERISA and Sarbanes-Oxley go hand in hand and that anyone involved in corporate governance is necessarily on the hook for pension governance. (In case you missed it, click here to read "Can Poor Pension Governance Land You in Jail?")

2. The first of several major accounting rule changes announced last week have the potential to wreak financial havoc for companies with underfunded plans. There is some talk that even companies with "healthy" plans may find the heightened scrutiny by investors a bit tough to take. Similar to stock drop cases, one wonders if adverse financial statement impact could lead to shareholder suits.

3. In the aftermath of several hedge fund blow-ups, do some ERISA plan fiduciaries leave themselves exposed if their selection process is anything but robust?

4. Will 401(k) plan providers be accused of selecting an inappropriate default investment option (pursuant to the Pension Protection Act of 2006) and have to quell participants' concerns in court?

5. How many more complaints will be filed on the basis of fiduciary breach with respect to the payment of investment fees? (See "Employers Face Suits Over 401(k) Fees" by Arden Dale and Jilian Mincer, Dow Jones Newswires, October 3, 2006.)

These are just a few of the many outcomes we think could lead shareholders to cry foul, sue and put the general counsel, board members and other parties in the liability hot seat.

Drop us a line if you want to talk further. posted by Susan Mangiero at 10/04/2006 12:36:00 AM | 0 comments | links to this post   

Got Pension Governance?

Advertising executives in moo moo land must be deliriously happy. Who would have thought that Hollywood stars donning a calcium mustache would get such good press? Maybe it's time to recruit them to this side of the fence. With headlines dominated by stories about pension malaise, couldn't an ad campaign help to allay any fears about a possible funding meltdown and make pension governance seem cool, hip and happening?

Growing interest in knowing what works best for defined benefit and contribution plans alike is terrific news indeed but there's more work ahead.

How should good behavior be monetized? We know how to calculate damages associated with alleged misdeeds that get adjudicated in court or via liability insurance claims. Why then is it so hard to quantify adherence to high standards?

What motivates some organizations to stop at minimum compliance versus others who go the extra mile? Is it because we're accustomed to measuring explicit costs instead of foregone opportunities? Is it because knowing who owns the retirement issue is anyone's guess? (As I wrote in "Searching for Hidden Treasure", identifying names of pension fiduciaries is often a Herculean task.)

Is pension governance seen as nerdy, unimportant or too hard to understand? Do pension decision-makers feel that time and money spent on best practices is unappreciated and therefore not worthwhile? Do they feel protected by anonymity and/or fiduciary insurance policies with a hefty face value? Are they overwhelmed with their full-time jobs and not able to focus on the "extra" pension work? (This applies to the large number of individuals for whom playing the role of pension fiduciary is a job duty add-on.)

At the very least, transparency is a step in the right direction towards good pension governance, yet something that eludes many of those not directly involved with a particular plan.

Anecdotally, when I was writing Risk Management for Pensions, Endowments and Foundations, getting information about institutional investors was often like pulling teeth. Three years of research later, I was still hard pressed to get more than a few people to go on record about their policies and procedures.

One of several exceptions was Mr. Gary Findlay, now Executive Director of the Missouri State Employees' Retirement System. He freely shared information about governance, organizational structure and investment policy. The website is worth a visit for what appears to be a bounty of information. As Findlay offers, once a legal framework exists, "well developed governance policies that establish objectives, identify roles and responsibilities, and align interests are critical to the pursuit of excellence."

Shouldn't good policies be boldly announced to the public as a badge of honor? What is there to hide? At the very least, publicizing a fund's best practices could go a long way to demonstrating procedural prudence. Additionally, it could possibly minimize the chances of unhappy parties seeking redress later on, rather than allowing for the benefit of doubt.

So the question remains.

Got pension governance?

If not, why not?


Editor's Note: A few references to disclosure articles are provided below.

1. "Form 5500 Revisions" (explanation of what still remains unknown)

2. "Pension Risk: What We Don't Know Can Hurt" (first published in Mann on the Street, 2006)

3. "Deciphering Risk Management Disclosures" (first published in AFP Exchange, March/April 2004) posted by Susan Mangiero at 10/02/2006 12:02:00 AM | 0 comments | links to this post