Pension Risk Matters : Pension Risk News & Analysis : Investment Governance, Inc. : Pension Risk & Investment

On March 29, Reuters reported that  Judge David Herndon of the U.S. District Court for the Southern District of Illinois had given the green light for a 401(k) fee case to proceed. One of about a dozen lawsuits brought by St. Louis firm Schlicter, Bogard & Denton, plaintiffs allege that plan consultants were paid an "unreasonable" amount for record-keeping services rendered in 2004.

Coincidentally, on that same date, I listened to a lively discussion about fees, revenue-sharing and the state of 401(k) fee litigation. Moderated by Nell Hennessy, Fiduciary Counselors Inc. and sponsored by the American Bar Association, other speakers - Lynn Sarko (Keller Rohrbach LLP), Chris J. Rillo (Groom Law Group) and Kristen L. Zarenko (Office of Regulations and Interpretations, EBSA, US Department of Labor) - parried back and forth about procedural prudence, proper fee-related disclosure and new enforcement initiatives in the form of the Consultant/Advisor Program (CAP). Click here to read the program description. 

Always important, the topic of fee economics is arguably more so now since countless organizations are switching from traditional plans to defined contribution plans.

2007 looks to be an active year in terms of court-watching!

• Email This
• Print
• Comments
• Trackbacks
• Share Link

According to its May 12, 2006 press release, Fidelity Investments expands its offering to deliver "defined benefit plan sponsors increased investment flexibility and greater access to and control of plan data to help them identify and mitigate financial and fiduciary risks."

In today's Investment News, reporter Kathie O'Donnell writes that Fidelity Investments will replace its traditional pension plan for over 30,000 participants and instead offer them a "retiree health reimbursement plan and a beefed up profit-sharing plan." O'Donnell adds that Fidelity's in-house studies suggest the need to address the health care gap, the company match will increase to 7% from 5% and profit-sharing contributions will continue.

For some reason, today's headline stood out, causing me to wonder. Might it make sense to ask pension advisors, consultants and money managers what plan(s) they offer to their employees and why?

• Email This
• Print
• Comments (2)
• Trackbacks
• Share Link

Creator of this pension blog, Dr. Susan M. Mangiero, CFA and Accredited Investment Fiduciary Analyst, joins a terrific roster of speakers at the FI 360 2007 Conference.

Being held in San Diego this year, the "Conference offers attendees the opportunity to learn from the foremost minds in the fiduciary world, gain knowledge and skills to better serve clients, and network with their peers. In addition, it offers the opportunity to participate in demonstrations and hands-on workshops for the Fiduciary Analytics tools."

Click here to read the FI 360 2007 Conference agenda.

Click here for more information about the Accredited Investment Fiduciary Analyst designation.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

                                                  
Regulation of financial service companies has long been a catalyst for pro-active risk management. Banks, for example, are obliged to address risk controls and measurement of risk as they ready themselves for Basel II compliance and related capital charge calculations. (The Bank for International Settlements describes the Basel II Framework as a "more comprehensive measure and minimum standard for capital adequacy that national supervisory authorities are now working to implement through domestic rule-making and adoption procedures.")

So results from a recent Deloitte survey of global financial institutions are surprising and a bit worrisome. Interviewing Chief Risk Officers at more than 130 global financial institutions, the "Accelerating Risk Management Practices" report finds that only 47 percent of respondents describe their institution as "extremely or very effective in managing risks associated with business continuity/information technology (IT) security, 43 percent each for operational and vendor risk, and 35 percent for geopolitical risk." This is in contrast to more than 70 percent who report good standing in the areas of market, credit and liquidity risk. The survey results also suggest a need for additional work in the area of credit products and commodity derivatives, including energy.

Noteworthy is the migration of risk issues to the board level, something we think makes sense for pension plans as well. While the Deloitte survey finds that 84 percent of reporting institutions have a Chief Risk Officer in place, little information is available about this role at plan sponsors. (The just released survey, co-sponsored by Pension Governance, LLC and the Society of Actuaries, asks about the existence and responsibilities of a Chief Risk Officer.)

Surveys like this are good reminders that a risk manager's work is never done!

Editor's Notes:

1. Click here to read the March 26, 2007 press release issued by Deloitte.

2. Click here to read an article about the job of Chief Risk Officer entitled "Life in Financial Risk Management: Shrinking Violets Need Not Apply" by Susan M. Mangiero

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Our March 9, 2007 post about real estate derivatives created a buzz, at a time when the financial industry grapples with the usual fits and starts of developing a new product. This post looks at where things stand. Expect more news in the aftermath of the upcoming March 28-29 conference of the Pension Real Estate Association (PREA) in Boston.

Creating a new market for any financial instrument requires sufficient interest. People have to be willing to buy and sell in large enough numbers to keep the bid-ask spread somewhat "low". Otherwise, participants will likely struggle to unwind a position. Additionally, too few actors result in excessively "high" costs that could destroy the economic rationale for trading in the first place. The burgeoning market for commercial property derivatives is no exception. According to Jim Clayton, PREA's Director of Research, there are two types of swaps being developed. The total return swap takes a LIBOR versus real estate index structure. The second version is a swap of total returns on two respective NCREIF (National Council of Real Estate Investment Fiduciaries) property sectors. Carter adds that "index return swaps allow investors to adjust exposure to real estate without buying or selling properties, thereby creating flexibility for portfolio management while eliminating the required physical delivery of the asset."

While true that more than a few pension funds now invest in commercial properties outright, obstacles remain. Valuation challenges, relatively high transaction costs, long lead times, difficulties in selling short and oft-encountered illiquidity are a few factors that influence the asset allocation decision. For a review of market development activities in the UK and US, click here to read "Commercial Real Estate Derivatives: They're Here ... Well, Almost" by Jim Clayton (PREA Quarterly, Winter 2007, pages 28-31).


Continue Reading...

• Email This
• Print
• Comments
• Trackbacks (1)
• Share Link

                                                    
Just one year ago, Pension Risk Matters(SM) launched as a labor of love and an attempt to create a conversation about pension investment, risk and valuation issues with real economic impact. We've been overwhelmed by the positive feedback and continue to work hard on your behalf. Thank you for making our pension blog a reality!

• Email This
• Print
• Comments
• Trackbacks
• Share Link

News ReleaseContact:Kim McKeown
For Immediate ReleaseMarketing/PR Program Manager
March 22, 2007847-706-3528 (kmckeown@soa.org)

New Survey Looks at Pension Risk Management and Impact on Funding Gap

Pension Governance, LLC and the Society of Actuaries (SOA) are proud to join forces to research current pension risk management practices. In what is believed to be a unique large-scale assessment of this critical topic area since research was done in 1998, the jointly developed survey investigates the use of derivatives and related risk and valuation policies by pension funds and their external money managers. Questions address other topics such as the role of the pension consultant, involvement of the plan actuary, new pension rules and regulations and an increased emphasis on enterprise risk management.

Global growth in futures, options and swaps dwarfs all other financial markets. According to the Bank for International Settlements, over-the-counter and exchange-traded derivatives market activity in 2006 grew to more than $400 trillion. Public and private pension plans, a second giant force, control over $10 trillion in assets. Their risk management decisions affect millions of people around the world, compelling the need to understand pension risk management as never before.

Different than even a few years ago, markets are now more volatile, increased longevity is worsening the funding gap and pension fiduciaries seek higher returns in the form of hedge funds, private equity investments and portable alpha strategies, all of which frequently involve derivative instruments. Derivatives show up in countless liability-driven investing strategies as well, making it impossible to ignore their economic impact.

Adding to the complexity of the investment decision-making process, board members, policy-makers, taxpayers, shareholders, actuaries, fiduciary liability underwriters, debt rating analysts and plan participants need and want to understand what fiduciaries are doing in the area of pension risk management. Unfortunately, a dearth of information about plan sponsors and their money managers makes it extremely difficult to head off trouble before it starts. The primary goal of this survey is to make it easier for relevant parties to identify existing risk control practices and, by extension, encourage a long overdue discussion about best practices. While this survey emphasizes defined benefit plans, risk management applies to defined contribution plans as well. When financial controls are absent or implemented poorly, fiduciaries are unable to select appropriate 401(k) investments and evaluate service providers’ fees, possibly leaving themselves exposed to lawsuits.

Author of Risk Management for Pensions, Endowments and Foundations, Dr. Susan M. Mangiero, CFA, FRM, Accredited Valuation Analyst, Accredited Investment Fiduciary Analyst and her team are responsible for survey design and statistical analysis with ongoing input from an oversight group of pension professionals assembled by the SOA. According to SOA Research Actuary Steve Siegel, "we are all very excited about the prospect of providing our members invaluable insight about this important area.”

Invitations have been sent to nearly 6,000 pension fiduciaries in the United States and Canada. Interested plan sponsors who have not received an invitation are encouraged to participate by contacting either Dr. Susan M. Mangiero at 203-261-5519 or PG-Info@pensiongovernance.com or Steve Siegel at 847-706-3578 or ssiegel@soa.org.

Participation is limited to plan sponsors only. Preliminary results will be released to attendees of the SOA's Investment Symposium in New York, April 18-20.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

We're delighted to have a new blog home with Lex Blog. We hope you enjoy the improved functionality. If you currently have us included as part of your RSS (Really Simple Syndication) feed (and we hope you do), please don't forget to change the URL. Otherwise, you will no longer receive new feeds and it will look like we've stopped adding items to our blog. Nothing is further from the truth. We have lots more to say!

Let me share some history with you. When we started the blog last year, we used Blogger.com to build a customized blog template. We hosted the resulting blog on our sister company's website. Until last week, when you typed www.pensionriskmatters.com, the display line immediately changed to www.bvallc.com/pensionblog. For a few more weeks, you may come across BVA links (i.e. older blog post URLS embedded in newer blog posts). They still work so click away. However,  we are changing everything over so that all Pension Risk Matter links (old and new blog posts) have a URL that includes www.pensionriskmatters.com as part of the address. (Note that BVA, LLC is still a viable valuation company but no longer the owner of the blog, Pension Risk Matters.)

To change your feed address for Pension Risk Matters, click here to access the appropriate code. To learn more about RSS, click here for an overview.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

A few months ago, California Governor Schwarzenegger created the Public Employee Post-Employment Benefits Commission. Tasked with identifying the nature of their $49 billion unfunded liability for state retirement programs, this group must submit a report to the Governor and state legislators by January 1, 2008 that (a) quantifies unfunded post-employment health care and dental benefits for which the state is obliged to pay (b) assesses and compares possible solutions to address unfunded liabilities and (c) recommends which course of action makes sense. Click here to read the official press release about the Commission. Click here to access the names, titles and affiliations of the original appointees.

A few weeks ago, San Francisco Chronicle reporter Greg Lucas wrote that two of the dozen members, including the head of the commission, have business ties with California pension funds. Not surprisingly, eyebrows raised. In response, "Schwarzenegger administration officials and CalPERS -- the nation's largest institutional investor -- say there is no conflict between the two commission members' private business ties and their role on the commission, but some independent observers say the connection could harm the credibility of the panel's recommendations." Click here to read "Pension reform panelists' ties to firms questioned" (San Francisco Chronicle - March 8, 2007).

Call me crazy but doesn't it make sense to remove any doubt about the ability for commission members to render an impartial analysis? The persons in question may be the most honest of men. I don't know them personally. What I do know is that this type of news is likely to be yet another nail in the coffin of uncomplicated pension reform. I've spoken to countless taxpayers across this great country who are starting to wake up and smell the cappuccino. They are not happy about the prospect of soaring taxes to fund these benefits and even less satisfied with the way change is proceeding.

Kudos to Governor Schwarzenegger for creating the Commission in the first place. However, for a task so important -- huge dollars at stake and millions of plan participants  -- why keep dreaming that no one will mind a few conflicts of interest, perceived or actual? Continue Reading...

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Pension Governance, LLC is pleased to announce the sponsorship of two sections of the Social Science Research Network. Check them out and see for yourself. You'll find interesting research papers and announcements about forthcoming events in the areas of employee benefits law and corporate governance, respectively.  At a time when so much is happening in these two areas, we're delighted to encourage cutting edge analysis by top scholars. Click here to learn more.

Section One: Employee Benefits, Compensation & Pension Law
Edited by Pamela Perun with the Urban Institute, "Employee Benefits, Compensation and Pension Law Abstracts is a forum for the exchange of ideas by policy makers, practitioners and researchers on current employee benefits issues. It publishes abstracts of working papers and recently published and forthcoming articles on the full spectrum of employee benefits, both in the U.S. and abroad, such as healthcare, pension and savings arrangements, cash and equity compensation, and Social Security."

Section Two: Corporate Governance Law
Edited by Bernard S. Black with the University of Texas at Austin Law School, "Corporate Governance Law publishes abstracts of working papers as well as articles accepted for publication in corporate governance law, and related fields of scholarship.."

• Email This
• Print
• Comments
• Trackbacks
• Share Link

We are going offline for a few days and will be back in business late next week. With users in mind, a newly designed www.pensionriskmatters.com will feature archived posts by both topic and date. If a reader wants only posts written about hedge funds let's say, he or she clicks on the hedge fund folder instead of having to comb through hundreds of archived items. Commenting on blog posts will likewise be much easier. As always, we welcome your feedback.

We continue to make the blog available for no charge. Steady growth in readership tells us we are on the right track. Our goal is to provide transparency about critical topics such as fees, risk management, valuation, accounting, disclosure and hedge funds. Always important but especially now, defined benefit and defined contribution plan sponsors are under significant pressure to demonstrate procedural prudence. Regulators in the U.S. and abroad, legislators, shareholders, plan participants and taxpayers are asking tough questions about the management of plans. The spotlight is not going away and is arguably shining more brightly than ever before.

For more information about the blog, please email Dr. Susan M. Mangiero, CFA, Accredited Valuation Analyst, Accredited Investment Fiduciary Analyst and certified Financial Risk Manager.

Here's to full sunshine about pension governance!

• Email This
• Print
• Comments
• Trackbacks
• Share Link

David Oakley reports the imminent launch of a U.S. commercial property derivatives market trading platform as early as this week. (See "Property derivatives poised for US launch", Financial Times, March 5, 2007.) Estimated at $26 trillion in value, Oakley writes that "property is one of the few major asset classes without a developed derivatives market in the U.S."

Four banks have signed with the National Council of Real Estate Investment Fiduciaries to license their index data for three years - Bank of America, Credit Suisse, Goldman Sachs, and Merrill Lynch. Click here to read the NCREIF press release.

This type of financial instrument has already taken hold in the UK with a property derivatives market that has grown to nearly $10 billion in the two years since inception. No surprise then that US banks will plan to follow suit, especially with respect to the use of good data (cited as a driving factor behind the UK experience).

Note that the NCREIF Property Index (NPI) is self-described as "a unique property valuation and performance metric. It is the largest, oldest, and most recognized measure of institutional quality, privately owned commercial real estate in the U.S. The benchmark represents (as of Fourth Quarter 2006) marked-to-market valuations on 5333 U.S. properties reported quarterly by a large number of institutional owners and fiduciaries. It has a total market value of $247 billion. The NPI includes sub-indices by property type, and location."

Structured as a type of interest rate swap, one counterparty receives a cash flow tied to real estate market performance. A second counterparty receives a variable rate-driven cash flow every few months, tied to LIBOR (London Interbank Offered Rate).

For a pension fund unable to buy property and/or allocate monies to a real estate investment trust or real estate private equity fund, this new derivative may be a good workaround. Suitability will depend of course on many factors such as terms specific to the derivative instrument contract, what the plan is seeking to achieve and whether exposure to real estate makes sense.

The Baltimore Sun reports continued good performance as recently as two months ago. (See "Commercial real estate funds continue to thrive" by Andrew Leckey, originally published January 7, 2007.) On the other hand, valuation and liquidity must be taken into account. Future expected risk-adjusted returns and correlation patterns with other assets are similarly important.

• Email This
• Print
• Comments
• Trackbacks (1)
• Share Link

In case you missed it, Citizens Against Government Waste (CAGW) released their 2007 Pig Book on March 7. Reminding us all that insane spending of tax dollars DOES occur, a companion report rightly points out that waste likewise diminishes the competitiveness of the U.S. marketplace. Given the work of the Paulson Committee and other advocates of deregulation, excessive outlays should make news beyond CSPAN.

CAGW president Tom Schatz applauded some restraint but urged lawmakers to keep tightening their belts before spending other people's money. Here are a few of the goodies he cites as part of the "2,658 pork projects at a cost of $13.2 billion" included in the Defense and Homeland Security Appropriations Acts for fiscal 2007.

1. $1,190,000,000 for full funding of 20 F-22A fighter jets, which the Government Accountability Office criticized as unnecessary and out of date;

2. $5,500,000 for the Gallo Center to study the effects of alcohol and drug abuse on the brain;

3. $1,650,000 to improve the shelf life of vegetables;

4. $1,350,000 for the Obesity in the Military Research Program; and

5. $1,000,000 for a telescope searching for extra-terrestrial intelligence. >>

Click here to download the 2007 Pig Book in its entirety. As you read, don't forget the words of British historian Lord Acton - "Power tends to corrupt; absolute power corrupts absolutely."

At a time when programs like Social Security and Medicare represent behemoth unfunded liabilities to taxpayers (not to mention more than a few state and municipal pension and health care programs), do we really need a space alien telescope or vegetable research? Decide for yourself next election cycle.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Before I realized the importance of being a fiduciary, work was fun. I have a fondness for the good old days when I had more financial freedom. That was before the failure of our high risk portfolio. What folly! Now the lawyers tell me our strategy is not a good fit, our process is feeble and breach may be a felony with personal liability not far behind. I wish I could flee! >>

Perhaps a bit too gimmicky, my goal was to get the audience to think about the ultimate F word - FIDUCIARY - and the related consequences associated with a job poorly done. My contention? We're all risk managers now.

Think about what's happened in the last few days. Volatility is up. Assets that typically move inversely with one another are moving in the same direction - down, more than a few investors are liquidating positions to meet margin calls, credit problems are rearing their ugly head in the form of sub-prime loan losses and there is overall nervousness about how risk is priced.

Is this the tipping point that compels pension fiduciaries to examine their risk management policies and procedures - and those of their appointed money managers - or do they instead shrug off bad times as short-term and likely to reverse? If not market turbulence, what will get fiduciaries to focus on risk-adjusted return in a more meaningful way?

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Former U.S. Senator Alan Simpson is said to have claimed "If you have integrity, nothing else matters. If you don't have integrity, nothing else matters."

After reading the SEC's March 1 press release about insider trading, these words ring loud and clear.

If you haven't seen it yet, click here for details about charges against fourteen individuals "in connection with two related insider trading schemes in which Wall Street professionals serially traded on material, nonpublic information tipped, in exchange for cash kickbacks."

Efficient markets are crucial for the pension funds which invest over $10 trillion in global assets. Trust, integrity and internal controls are the lifeblood of a system that works.

If there is a silver lining attached to these allegations, it is to remind fiduciaries of the importance of a due diligence process that goes beyond financial risk management. Credit checks, questions about oversight of traders and continued verification of trades are just the beginning.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

According to David Hammerstein of Yanni Partners, ("Fewer Second Chances For Failed Fundies" - Hedge Fund Daily, February 27, 2007), "There is an extra standard of caution and care that has to be demonstrated among institutional investors" when it comes to giving failed hedge funds another chance. Noting the significant amount of pension dollars going into alternatives, Hammerstein emphasizes the need to assess risk controls.

He's not alone. Next week, I will join other speakers at the 23rd Annual Risk Management Conference to wax and wane about all sorts of investment-related risks. Hosted by the Chicago Board Options Exchange, Chicago Board of Trade, Chicago Mercantile Exchange and OneChicago LLC, the conference brings together a variety of researchers, investors and consultants.

My presentation is entitled "What Every Institutional Investor Fiduciary Must Know About Derivatives" and will cover investment fiduciary practices related to risk control. (Click here to view the agenda.

Can the risk lion be tamed?

Absolutely - but only if one is willing to open the cage door and acknowledge its presence!

• Email This
• Print
• Comments
• Trackbacks
• Share Link

On February 22, 2007, the President's Working Group on Financial Markets (PWG) released a set of principles and guidelines concerning "private pools of capital, including hedge funds." In concert with various U.S. agencies, the PWG report urges investors, creditors, counterparties, pool managers and supervisors to identify and understand fund-specific risks or walk away.

For fiduciaries, the guidelines (some of which are excerpted below) are clear. Individuals who are unable to demonstrate that a rigorous investigation of risk has taken place, BEFORE investing, put themselves in the line of fire with respect to personal and professional liability.

<< 1. Fiduciaries should consider the suitability of an investment in a private pool within the context of the overall portfolio and in light of the investment objectives and risk tolerances.

2. Fiduciary evaluation should include the investment objectives, strategies, risks, fees, liquidity, performance history, and other relevant characteristics of a private pool.

3. Fiduciaries should evaluate the pool’s manager and personnel, including background, experience, and disciplinary history. Fiduciaries also should assess the pool’s service providers and evaluate their independence from the pool’s managers.

4. Fiduciaries should consider the private pool’s manager’s conflicts-of-interest and whether the manager has appropriate controls in place to manage those conflicts.

5. Fiduciaries should conduct the appropriate due diligence regarding valuation methodology and performance calculation processes and business and operational risk management systems employed by a private pool, including the extent of independent audit evaluation of such processes and systems. >>

It will be interesting to watch what happens. Will some pension decision-makers forego investing in alternatives because the risks are considered too difficult to understand, let alone accept? Who will embrace the challenge and recognize the reality that risk management is an integral part of investment management? You simply cannot select funds without understanding how managers address financial and operational risk. When a fund invests in less liquid and/or complex instruments, the plot thickens.

Click here to read Agreement Among PWG and U.S. Agency Principals on Principles and Guidelines Regarding Private Pools of Capital.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

February 18, 2007 marks the Chinese New Year (the Year of the Boar). Also known as the Spring Festival or Lunar New Year, it is the "most important of the traditional Chinese holidays." Interestingly, Chinese New Year's Eve is known as the eve of change and indeed, China is on the verge of significant change.

According to a new study, co-authored by Reuters and KMPG, the demographics are compelling. "By 2050 the number of people aged 60 or over is expected to rise to more than 430 million, or 31 percent of the population, from just 147.8 million, or 11 percent today. This would put it well above the projected world average. More worryingly, the percentage of China’s population that is working is expected to peak in 2010, with the ratio of workers to retirees declining from six to one in 2000 to two to one by 2040." Click here for a copy of the study.

"The heavenly mandate: Winning a piece of China’s pensions market" describes a 401(k) look-alike known as enterprise annuities. Fixed fees and a local investment requirement are two notable features. Asset allocation constraints are another. Equity investments are limited to no more than 30 percent of assets under management, 20 percent in money market instruments, and up to one half to be invested in fixed-income securities "but at least 20 percent must be kept in government bonds."

Asset allocation is touted by many experts as THE most important of all investment decisions, leading one to ponder. Will an arguably "conservative" mix require yet additional change? People can't pay bills with rates of returns and depend instead on having sufficient cash on hand. What happens if (when) people come up short?

From the "glass is half full" camp, reform comes none too soon. As an anonymous Chinese sage suggests: "Do not fear going forward slowly; fear only to stand still."

• Email This
• Print
• Comments
• Trackbacks
• Share Link

How do we need you? Let us count the ways.
We need you from the depth and breadth and height
Our portfolio statements will allow
We need you to the level of everyday's
Most urgent wants, for food and shelter

With apologies to Elizabeth Barrett Browning, it's true that pension fiduciaries often stand between a comfortable retirement and a financial struggle. Their job, if done properly, can make a real difference in the lives of individuals, still working or now retired.

This blog primarily addresses pension financial risk issues from a fiduciary perspective. Yet we've received more than a few emails from persons seeking assistance to recover lost or diminished pensions. Descriptions of tough economic times are poignant. They serve as a constant reminder that what pension fiduciaries decide has consequences.

Happy Valentine's Day!

• Email This
• Print
• Comments
• Trackbacks
• Share Link