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

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According to reporter Doug Halonen, Beantown regulators have launched an inquiry into how corporate plan sponsors value their alternative fund investments. Upset with plans that have no process in place to verify mark-to-model or mark-to-market numbers from general partners, the head of the U.S. Department of Labor, Boston office, offers a warning. "It is incumbent on the Plan Administrator to establish a process to evaluate the fair market value of any hard to value assets held by the Plan." An absence of good process could be a violation of ERISA (Employee Retirement Income Security Act). The July 1, 2008 letter references parts of this federal law such as sections 402(a)(1), 103(b, 3(26), 404(a)(1)(B), 502(1) and 504(a). Invitation to scrutiny by the Internal Revenue Service might likewise occur if identical book values and market values show up on Form 5500s. (We've already seen this occur and puzzle over why plan sponsors think this is an appropriate way to disclose positions in alternative investments.)

Click to read "DOL targets plan valuation of alts" by Doug Halonen, Pensions & Investments, August 8, 2008.

This admonition is hardly news to this blogger. I've long been advocating (a) the use of an independent third party pricing professional and (b) the need for fiduciary training in this area. (Note: Email Pension Governance, LLC if you want to learn more about our pension risk management and valuation training programs and/or our abilities to assist plans with risk management/valuation process creation and review).

Several things come to mind.

• How many pension fiduciaries feel comfortable doing a second check on the valuation of complex financial instruments, especially those that seldom trade? (As an Accredited Valuation Analyst, I can say firsthand that certification requires hours of specialized training  and case work.)
•  If an alternative fund manager (hedge fund, private equity, commodities, real estate, etc) refuses to provide full transparency about its holdings, won't plan sponsors find themselves in the uncomfortable position of being unable to properly vet values?
• How will pension consulting firms respond, especially if their teams do not include valuation savvy experts?
• Will ERISA plan fiduciaries remain vulnerable to allegations of breach if they employ outside service providers such as consultants, appraisers and so on and do not conduct their own review?
• If a plan sponsor conducts its own review, might they still be liable if they fail to do so regularly?
• For positions that infrequently trade, how often should such a review take place?
• Will valuation mandates (and the possible dire consequences of not having a "good" valuation process in place) discourage pensions from investing in alternatives?

Check out some of this blog's many posts about valuation, authored by Dr. Susan Mangiero, AIFA, AVA, CFA, FRM.

• "SEC Issues Compliance Alert About Sloppy Valuation Process" (July 25, 2008)
• "Hedge Fund Liquidity - Maybe..." (June 12, 2008)
• "Can You Spell 'Bad Valuation Practices'?" (June 3, 2008)
• "Valuation - Getting on Track" (April 17, 2008)
• "Money House of Cards or Disciplined Approach?" (April 17, 2008)
• "Hedge Fund Investing: Change is Good, You Go First" (March 3, 2008)
• "Hedge Fund Valuation Goes Global" (February 24, 2008)
• "Investing in Hedge Funds? Check Out Valuation Process" (January 18, 2008)
• "Private Equity Returns Appeal to Pensions" (January 16, 2008)
• "Private Equity Valuation - Discount Dilemmas" (January 16,2008)
• "4P's - Pensions, Private Equity, Performance and Placement" (December 31, 2007)
• "FAS 157 is Heeeeere!" (November 19, 2007)
• "Can Banks and Pension Clients be Friends When It Comes to Valuation?" (November 13, 2007)
• "Will Auditors Become the Next Dismal Scientists?" (November 7, 2007)
• "FAS 157 and FAS 159 - Day of Reckoning for Pension Investors?" (November 4, 2007)
• "You Say Potato - I Say Potahtoe - Valuation Terms Differ" (November 4, 2007)
• "The Abracadabra of Valuation - Pension Fiduciaries Beware" (October 12, 2007)
• "Pension Risk and Hedge Fund Cherry Picking" (October 9, 2007)
• "Valuation Problems Are Going to Cost Plan Sponsors Big Time" (September 17, 2007)
• "Model Risk - Great Unknown for Pension Plans" (August 9, 2007)
• "Valuation Awakening - Does the Emperor Have Clothes" (July 25, 2007)
• "SEC Announces Investigation of Hedge Funds' Valuation Methodologies" (June 27, 2007)
• "Survey Shows That Pensions Worry About Risk Management and Valuation" (May 20, 2007)
• "Pensions and Hedge Funds and Private Equity - Assessing Risks" (May 18, 2007)

Send an email if you would like articles about valuation issues.