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

According to the U.S. Government Accountability Office, nearly 4 out of 10 surveyed pension plans say they allocate monies to private equity. Allowing that some managers have turned in acceptable returns, respondents also cited numerous "challenges and risks beyond those posed by traditional investments." Valuation and limited transparency are two issues cited in "Defined Benefit Pension Plans: Guidance Needed to Better Information Plans of the Challenges and Risks of Investing in Hedge Funds and Private Equity" (GAO-08-692, August 14, 2008).

To shed light on some of the intricacies associated with private equity investments, I authored a case study for the February 2009 issue of PEI Manager, a private equity and venture capital focused publication. The bottom line is that institutions that invest in private equity funds are directly impacted by their portfolio companies' use of derivatives.

"Swapping out" by Dr. Susan Mangiero, an Accredited Valuation Analyst and CFA charterholder, is reproduced below. Email Ms. Jennifer Harris, Associate Editor - PEI Manager, for permission to reprint the case study.

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THE CHALLENGE:

Private Equity Holdings (“PEH”) is required by its charter to avoid companies that use derivative financial instruments to speculate. In reviewing numbers for FAS 157 reporting purposes, a PEH managing partner notices that one of its portfolio companies, ABC Incorporated (“ABC”), recently included a FAS 133 entry for a $20 million interest rate swap hedge. During a call to the company to query about how the swap is being used, the PEH managing partner is informed that its counterparty is Global Bank Limited (“Global”). Not only has Global just reported a $30 billion loss due to poor valuation of its structured product portfolio, it posted no collateral in favor of ABC while ABC was required to pledge $2 million in U.S. Treasury Bills in order to protect Global in the event that ABC could not make its contractual swap payments to Global. Not being too familiar with derivative instrument pricing and default risk analysis, PEH hires an expert to investigate whether the swaps reflect a hedge versus a market bet and to further assess how PEH should adjust the valuation of its equity stake in ABC. What does the expert need to look at and how should she arrive at an appropriate conclusion?

SUSAN MANGIERO'S ANSWER:

This fact situation, ripped from the headlines, raises several important valuation questions, including, but not limited to the following:

• Notwithstanding FAS 133 numbers, is the company exposed to changes in interest rates that could adversely impact cash flow, liquidity and net income?
• Was the swap correctly valued?
• How might ABC be impacted by Global’s deteriorating health?
• What adjustments, if any, should PEH make to its initial valuation of ABC equity?

There are several critical issues here, all of which could seriously hamper the fortunes of both ABC shareholders and PEH investors. An inaccurate valuation of the swap leads to a flawed accounting representation for ABC and may lull treasury staff into thinking that the hedge offers full protection against unexpected moves in interest rates. PEH may report a bad FAS 157 number which in turn could lead to flawed asset allocation decisions made by institutional limited partners or the overpayment of performance fees to PEH. A poorly constructed hedge (in economic versus accounting terms) that exposes ABC to negative market conditions could force PEH to violate its prohibition against speculative trades being executed by portfolio companies. If Global does not meet its swap obligations and/or files for bankruptcy protection, ABC may not be able to recover its collateral quickly or could lose it altogether, depending on its standing vis-à-vis other creditors.

Swap pricing models can differ depending on the complexity of the transaction. However, for standard fixed to LIBOR swaps, the secondary market is large ($111 trillion, according to the Bank for International Settlements). Active trading makes it easy to readily obtain prices for various maturity interest rate swaps with quotes reflecting the discounting of future projected fixed and floating swap payment amounts. In contrast, the assessment of credit worthiness varies, sometimes considerably, across banks. Unfortunately for ABC, even if they posted more collateral than should have been required, the fact remains that they have no immediate recourse in the event that Global’s distress prevents the bank from paying what it owes to ABC. If Global defaults, ABC will then have to decide on a course of action that could include any or all of the following:

• Enter into a second interest rate swap to replace Global at a now higher fixed rate
• Attempt to sell the initial swap in the open market and consider another way to hedge against rising interest rates though few will be willing to accept the Global risk
• Take legal action to reclaim its collateral
• Write down the value of the swap on its books

There is no ideal situation. The expert will necessarily have to ask ABC what they plan to do in the event of swap non-performance and how it is expected to impact its cash flow, cost of money (which in turn affects capital budget decisions), balance sheet, dividend payments and interest coverage. Once that scenario analysis is conducted, both the expert and PEH will be able to quantify how much of an adjustment downward they will need to make for both accounting and performance reporting purposes.

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As I stated during my September 11, 2008 "hard-to-value asset" testimony before the ERISA Advisory Council, there are some stellar examples of pension risk management and there is everyone else. Given the dearth of publicly available information about pension financial best practices, one can only guess at the size of each of the two buckets, “great” and “not so great” except for occasional studies that offer empirical validation. In October 2008, Pension Governance, LLC (now Pension Governance, Inc.) released a unique study about the use of derivatives by plan sponsors. Sponsored by the Society of Actuaries, “Pension Risk Management: Derivatives, Fiduciary Duty and Process” found that the “everyone else” bucket is rather large, hinting at future problems if poor process is left unchecked. (Click to read my hard-to-value asset testimony. Click to download "Pension Risk Management: Derivatives, Fiduciary Duty and Process.")

Now, a new report offers additional and troublesome evidence that the “everyone else” bucket remains large. Hot off the press, the MetLife U.S. Pension Risk Behavior Index^SM (“PRBI”) considers investment, liability and business risk management among the largest U.S. defined benefit pension plan sponsors. (Pension Governance, Incorporated is proud to have assisted with what we think is path-breaking research.)

Designed to measure both the aptitude and attitude of employee benefit decision-makers, the research creates a base case gauge as to the current state of pension risk management. Not surprisingly, respondents ranked the following risk factors as “Most Important,” in part it is believed because they are the simplest to model and measure:

• Asset Allocation
• Meeting Return Goals
• Underfunding of Liabilities
• Asset and Liability Mismatch

Given radically changing demographic patterns and the related, oft material economic impact on plan sponsors, it is surprising that the following risk factors were identified as relatively unimportant (and in some cases ignored altogether):

• Early Retirement Risk
• Mortality Risk
• Longevity Risk
• Quality of Participant Data.

Also disturbing is what appears to be a disconnect between the importance attached to prudent process by plan sponsors and the regulatory and legal reality that PRUDENT PROCESS IS IMPORTANT. Not only can plan participants suffer untold harm in the absence of a good process or the presence of a bad process, fiduciaries are professionally and personally on the hook. (As this blog has urged many times before, questions about prudent process and fiduciary duty are best answered by plan counsel.)  

According to the MetLife press release, dated January 26, 3009, “While respondents ascribe a particularly high rating to the quality of their Plan Governance, they do not seem to carefully consider the effectiveness of their decision making methods or how to improve the way they make decisions. This suggests that many respondents don’t perceive decision making process as an integral element of plan governance, when recent ERISA litigation would suggest just the opposite. In addition, plan sponsors report that they routinely review liability valuations and understand the drivers that contribute to their plan's liabilities. However, at the same time, they indicate that they do not actively implement or regularly review procedures to manage either mortality, longevity or early retirement risk, which are major determinants of both the timing and level of future liabilities. These inconsistencies may indicate that plan sponsors tend not to systematically consider the interrelationships among risk items and plan their implementation of risk management measures to maximize effectiveness across all items. Over time, a lack of holistic risk management may have serious repercussions, including unnecessary volatility in earnings and/or cash flow or potential plan failure. “

Unlike other studies, this research sought to quantify attitudes and aptitudes, in essence creating a unique score card against which subsequent results can be compared. The news is not great. On a scale of 0 to 100%, the PRBI level is 76. Roughly translated, defined benefit managers earn an average grade of C with respect to how they manage defined benefit plan risk.

These results beg a hugely important question. Is “mediocre” performance acceptable or does the MetLife study sound a warning that someone needs to stay after school for extra help? This blogger thinks it is the latter and welcomes your suggestions about how to fix a wobbly system. (Email PG-Info@pensiongovernance.com with comments.)

As I’ve said many times, reward good process and make life difficult for those who do sub-par work. With trillions of dollars at stake, how can we accept anything less?

Editor's Note: Click to read the MetLife press release, dated January 26, 2009, about this new study. Click to download "MetLife U.S. Pension Risk Behavior Index^SM: Study of Risk Management Attitudes and Aptitude Among Defined Benefit Pension Plan Sponsors."

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Several readers have offered comments about signals they deem could have and should have been indicators of trouble. Adding to our January 13, 2009 list ("Madoff Red Flags" How Many Can You Count?"), the tally now includes:

• Regularity of returns despite market volatility
• Complex strategy
• Poor transparency about performance reporting standards
• Unknown audit firm
• Seemingly limited due diligence by some parties
• Unclear assignment of investigation-related duties (knowing who does what)
• Questionable diversification
• Few questions asked about risks
• Limited internal controls, if any
• Lure of "movie star" reputation
• Limited attention paid to hedging efficacy
• Limited knowledge of rebalancing techniques
• Limited knowledge of trading limits and stop loss points
• Limited knowledge of collateral risk
• Unclear understanding as to who played the role of fiduciary
• Limited knowledge about asset valuations and related valuation process
• Absence of an independent custodian to safe keep assets
• Analysis of option open interest and trading volume activity that would have shown "bad math" (reality versus alleged activity on the part of Madoff affiliates).

According to "Risk test study of Madoff claims" by Anuj Gangahar (Financial Times, January 21, 2009), a bias ratio computation could have likewise shed light on what is now accepted by most as the largest financial scandal in modern times. Believed to be akin to a test for randomness, the bias ratio is "a mathematical technique that identifies abnormalities in the distribution of investment returns." (I wrote about the bias ratio in "Hedge Fund Returns - Illusion or Fact?" on July 15, 2007. Riskdata is releasing a study today on their findings.)

Gangahar likewise mentions something called Benford's Law, a comparable method that is used by forensic specialists to detect accounting fraud. According to "I've Got Your Number" by Mark J. Nigrini (Journal of Accountancy, May 1999), a physicist named Benford discovered that "numbers with low first digits occurred more frequently in the world." Applied to Madoff, observations made by this 1920's GE employee could infer that sustained steady growth would have been highly improbable. (Paul Kedrosky, author of "Infectious Greed" seems to debunk the value of Benford's Law as applied to Madoff returns. See "Bernie vs. Benford's Law: Madoff Wasn't That Dumb," December 19, 2008.)

Editor's Note: Keep in mind that underlying assumptions for any mathematical technique that is used to detect fraud and/or lack of randomness must comport with reality. In the Madoff situation, an option strategy referred to as a "split strike conversion" was heavily relied upon. It would be helpful to know if any Madoff-related risk analyses took into account the asymmetry of historical statistical returns for this option collar technique.

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According to PE Week Wire (January 15, 2009), the Los Angeles City Employees' Retirement System ("LACERS") has rescinded its authorization to invest in Cityfront Capital Partners, L.P. ("Cityfront") since said fund has yet to raise a "minimum of $50 million in committed capital, which was to include LACERS' commitment." Part of this California pension fund's allocation to "Specialized, Non-Traditional Alternative Investment Programs," an agreement was reached on August 14, 2007 to invest $5 million in this "small and middle market buyout fund of funds investment vehicle." According to a January 13, 2009 "Report to Board of Administration," LACERS' Chief Investment Officer explains that the buyout fund has "only been able to raise $7 million in 'hard commitments' with no near-term expectations of achieving the $50 million minimum level."

Cityfront is not alone in feeling the pinch. According to "VCs Feeling the Pain of Newly Poor LPs" (January 16, 2009), PEHUB writer Connie Loizos writes that some institutional investor limited partners are strapped for cash, having lost money in the market of late. For those for which the problems are dire, they are simply failing to meet a capital call(s) when the venture capital or private equity  fund comes calling for more money.

On January 17, 2009, Wall Street Journal reporter Pui-Wing Tam wrote that, not surprisingly, venture capital investment has "dropped 30% in the fourth quarter to its lowest level since 2005." Traditional exit strategies such as issuing equity via an IPO (initial public offering) or being merged or acquired are currently seen as unlikely options for many VC-backed companies. See "Venture Funding Falls 30%." (A subscription may be required to read this article.) A few weeks earlier, fellow Wall Street Journal reporter Craig Karmin wrote that pension funds are rethinking how much money should remain in private equity, hedge funds "and other nontraditional investments." Karmin describes a capital call "crunch" with private equity funds demanding cash but pension funds expecting to "offset the payments with returns from other private-equity investments." Elusive gains create a double whammy for both limited and general partners alike. See "Once Burned, Twice Shy: Pension Funds" (January 3, 2009).

Business Week Executive Editor John Byrne and writer Steve Hamm tackle the topic of increasing risk aversion on the part of venture capitalists in a December 30, 2008 video entitled "Is Silicon Valley Losing Its Magic?" Citing Andy Grove, author of Only the Paranoid Survive, Hamm avers that the ability for young companies to innovate is being curtailed as venture capitalists and private equity bankers scale back. Institutional investors that do not make capital calls and/or step up to the plate to allocate fresh monies may prevent venture capital and private equity funds from generating robust returns. On the other hand, institutions which are not enjoying attractive, risk-adjusted returns from venture capital and private equity funds could be reluctant to make capital calls.

It is a veritable catch-22.

Editor's Note: 

• Click to read the August 14, 2007 LACERS' authorization memo.
• Click to read the January 13, 2009 LACERS' recission recommendation memo.

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According to the Wall Street Journal video "Connecticut Town Loses Millions With Madoff" (January 14, 2009), Fairfield is the first municipality to "go after" Madoff. In an attempt to recover $42 million or 15% of the this Connecticut town's pension plan, an arrest warrant has been issued for Mr. Madoff. The town is pursuing civil action as well. Click to watch the video.

What would be interesting is if Fairfield law officials succeed in jailing Madoff after several failed attempts by the U.S. government to do the same.

Editor's Note: In 2006, Money Magazine ranked Fairfield, CT as #9 on its list of "Best Places to Live."

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With losses estimated at $50 billion, “l’affaire Madoff” is deemed the largest financial fraud in world history. Not since Charles Ponzi scammed millions from investors in the 1920’s have world financial markets seen such a systemic breakdown of what should have and could have been done to prevent fraud. Institutions and individuals alike bear the pain, forcing some organizations to shut their doors, declare bankruptcy, withdraw charitable donations, offer fewer scholarships or go back to work, long after retiring. Litigators and regulators are busy filing lawsuits and enforcement actions that could take years to settle. Questions abound. Who was responsible for due diligence? What could have been done before the fact to preempt financial ruin? What can be done now to avoid subsequent losses?

Based on research of publicly available information, I count well over a dozen red flags, including but not limited to the following:

• Regularity of returns despite market volatility
• Complex strategy
• Poor transparency about performance reporting standards
• Unknown audit firm
• Seemingly limited due diligence by some parties
• Unclear assigment of investigation-related duties (knowing who does what)
• Questionable diversification
• Few questions asked about risks
• Limited internal controls, if any
• Lure of "movie star" reputation
• Limited attention paid to hedging efficacy
• Limited knowledge of rebalancing techniques
• Limited knowledge of trading limits and stop loss points
• Limited knowledge of collateral risk
• Unclear understanding as to who played the role of fiduciary
• Limited knowledge about asset valuations and related valuation process.

It goes without saying that much remains to be learned about the Madoff situation. The good news is that more attention, at least for some organizations, will now be paid to due diligence and prudent process.

What did I leave off the list that should be added? Email me and let me know.

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According to John Gapper, funds of funds ("FOFs") are significant players, accounting for nearly one-half of all hedge fund assets. This Financial Times chief business commentator connects growing institutional interest to a rise in demand for intermediaries who offer due diligence services. Post-Madoff, he paints a grim picture for the industry unless good players are able to differentiate themselves from those who are now being scrutinized.

Whether certain organizations could have detected fraud is unknown at this time though Grabber suggests that "funds of funds need to work harder and show that they actually contribute something valuable." I am quoted as saying “It is not as if this stuff is really complicated. A lot of the risk of fraud can be mitigated by measures that are low-cost and not very time-intensive.”

I certainly agree with Gapper that there is a "role for the good funds of funds." I'd go further to say that it is unfortunate indeed for those funds of funds that exercised care and discipline in researching  financial and operational risks on behalf of pensions, foundations and endowments. They are unfairly being painted with a dirty brush.

For institutional investors, a key question remain. Will pensions, endowments and foundations continue to reach out to funds of funds or decide instead to hire in-house experts? If they have already hired one of the funds of funds that turns out to be tied to large Madoff-related losses, to what extent might investment fiduciaries be asked to explain their FOF choice and subsequent oversight of said FOF? These are important questions, yet to be answered.

Click to read "Funds of funds have to work harder," Financial Times, January 7, 2009. (Access may be limited to subscribers only.)

Editor's Note: Click to read "Hedging Your Bets: A Heads Up on Hedge Funds and Funds of Hedge Funds," published by the U.S. Securities and Exchange Commission. Click to read "Report on Funds of Hedge Funds," published by the International Organization of Securities Commissions, June 2008.

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In a January 5, 2009 press release, the Federal Bureau of Investigation ("FBI") announces its intent to hire "over 2,100 professional staff employees and 850 special agents" in "one of the largest hiring blitzes" in the agency's 100-year history. Mathematicians and computer scientists are in demand, along with finance and accounting experts who can assist with investigations of corporate malfeasance. See "Wanted by the FBI: Talented Professionals to Serve the Nation."

Is this a harbinger of more financial fraud to come or a way to address cases already being investigated?

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I am delighted to announce that www.pensionriskmatters.com will soon be available to Kindle readers, courtesy of Newstex and Amazon.com. According to a recent announcement by Newstex, "Kindle blogs are downloaded onto Kindle so you can read them even when you're not wirelessly connected." I will announce more details as they become available.

Editor's Note: Click to read more about Kindle, an electronic reading device that is produced and sold by Amazon.

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In case you missed it, Joe Nocera wrote a user-friendly and quite interesting article about Value at Risk and the role of mathematical models in dealing with uncertainty. In "Risk Mismanagement" (January 2, 2009), this New York Times business columnist intimates that financial professionals may have relied too much on a single number, no matter how often it is updated.

This blogger wholeheartedly agrees with the premise that risk, in its totality, cannot be succinctly captured with one number, one metric, one tool, one time period and so on. While Value at Risk, a statistical measure of likely loss during a given business time interval such as a trading day, can be helpful as ONE gauge of financial exposure, it can also be of limited use if underlying assumptions do not accurately capture "typical" price behavior for a particular financial instrument. Expressed as a single number, VaR is often measured in dollars (Euros, etc) and is deemed by some as an easy way to compare trading risk across banks/companies/portfolios. It can be calculated in several ways and is provided as part of company SEC filings and bank regulatory reports.

Alas, reality intervenes.

I won't repeat what Mr. Nocera so eloquently wrote in his lengthy piece but will add the following:

• Numbers can guide but not replace solid decision-making by rational human beings.
• No single number can measure the many types of risks that investors and traders face.
• Even a collection of numbers can lead to bad decisions if not supplanted with common sense and a key understanding of qualitative and quantitative portfolio risk drivers, both in isolation and in conjunction with one another. We need look no further than market outcomes in 2008 to know that bad news can beget bad news (i.e. the notion of contagion and compounding of risk factors).
• Longer term investors such as pensions, endowments and foundations should acknowledge that Value at Risk is designed more as a tool for short-term (trading) decisions.

An important area not addressed by the article is the nature and extent of due diligence being conducted by institutional investors and their consultants before allocating monies to various asset managers. I've yet to see too many institutional investors publish a comprehensive Risk Management Policy that is separate and distinct from an Investment Policy Statement (assuming that even an IPS exists). Besides Value at Risk, Sharpe Ratio, Standard Deviation, Correlation Coefficient(s) and maybe an Information Ratio and Tracking Error(s), how much risk management analysis is being conducted before institutions say "here's my money?" The current state of pension disclosure reporting leaves us mainly in the dark about how plan sponsors drill money managers on the topic of risk identification, measurement and management. Unless you're a mushroom, too little sunlight is not necessarily a good thing.

Editor's Note: Check out www.gloriamundi.org for a broad array of papers on the topic of Value at Risk. I've also written a book entitled Risk Management for Pensions, Endowments and Foundations (John Wiley & Sons). While some of the statistics are dated, it includes some good case studies and checklists. (I am in the process of updating the book.)

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Following his user-friendly book entitled "Fixing the 401(k)," independent fiduciary Josh Itzoe is now a dedicated blogger. While I've added a link to this new blog on the left hand side of www.pensionriskmatters.com, you can check it for yourself now by visiting www.fixingthe401k.com. Pension Governance, Inc. applauds Mr. Itzoe for his continued commimtent to the "repair and transformation" of the U.S. retirement system.

On a personal note, I encouraged Josh to blog but warned that it is hard work. His decision to go ahead tells me that he believes, as do I, that getting the word out is serious stuff.

Best of luck Josh!

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Given repeated headlines of late about the role of leverage, it may be surprising to learn that there is no universal metric that captures the likely economic impact of its use. Ask ten asset managers how they measure the use of other people's money and you are likely to get ten different answers. This is a big deal since investment leverage is a key driver of performance which in turn relates to fees paid by institutional investors. While leverage can be a boon to return-hungry pensions, endowments and foundations, misused or miscalculated, leverage can result in massive and unanticipated losses. Prudent investors need to ask managers if their funds are levered, to what extent they are levered, what strategies were used to lever the portfolio and whether stop loss mechanisms have been put in place to contain things, as market conditions sour.

According to "Overview of Leverage," published by AIMA Canada, one calculation (referred to as Net Market Exposure or Net Leverage) takes the dollar difference between long and short positions and divides by a hedge fund's capital base and then multiplies the ratio by 100%. However, as Virginia Reynolds Parker, CFA rightly points out, balance sheet inputs can limit the usefulness of leverage ratios, especially if there is a big disconnect between where an instrument is likely to trade versus its stated value for financial statement reporting purposes.  (It is too soon to know whether FAS 157 compliance will close any economic-accounting gap and therefore render point in time ratios more effective as a risk gauge.)

While not all funds employ leverage, it is not uncommon for a portfolio manager to employ derivatives, margin and/or outright borrowing in order to effect a disproportionate exposure to a particular asset or liability class. Leverage can vary by strategy as documented in "The L Word" (Investment Review, Spring 2008). As author Peter Klein shows, hedge fund strategies such as convertible arbitrage employ higher leverage levels than a "less risky" market neutral strategy. However, he warns readers to take care in relying on leverage ratios alone, adding that correlations and overal riskiness of portfolios must also be considered. This blogger agrees with the notion of looking at multiple metrics but encourages investors to go way beyond numbers and look at the asset manager's process with respect to all things leverage.

Hedge funds are not the only entities to employ leverage. Wikipedia reports that leverage, measured as total debt divided by stockholders' equity, for five major investment banks (Lehman Brothers, Bear Stearns, Merrill Lynch, Goldman Sachs, Morgan Stanley) steadily rose between 2003 and 2007 to more than 25. Click here to access the source data to verify for yourself. Institutions are well familiar with 130/30 funds and variations thereof. Mutual funds use leverage as do exchange-traded funds ("ETFs'). In "Read the Fine Print on Leveraged Funds," Wall Street Journal reporter Tom Lauricella warns about the new math that can roil investment value quickly, adding that these vehicles are not for everyone.

Investors need to decide for themselves after (hopefully) doing the requisite homework about how leverage is being managed, if at all.

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Philosopher George Santayana once said that "Those who cannot remember the past are condemned to repeat it." If Nikolai Kondratiev were still alive, he might agree. An advocate of  long duration boom-bust periods, this Russian economist is credited for giving life to what is oft-described as a Kondratieff wave. His study of  American, English and French prices and interest rates from the 18th century led him to believe that an economic cycle is likely to repeat every 60 years, occuring as four distinct phases (inflationary growth, recessionary stagflation, mild growth and then depression). Click here and here for an interesting overview of Kondratieff's theories, applied to modern times.

As we launch into a new year, full of hope for a respite from what can only be described as a roller-coaster horrible, one wonders what lessons will be learned and acted upon. The Pension Governance team, not surprisingly, votes for a renewed (or for some organizations, a de novo) emphasis on enterprise risk management wherein plan sponsors hunker down to identify and properly measure the alphabet soup of nasties that can roil either a defined contribution or defined benefit plan. As I wrote several years ago, "Risk comes in many forms and ignoring it, while emphasizing returns, makes little sense." Click to read "Pension Risk Management: Necessary and Desirable" (Journal of Compensation Benefits, March/April 2006),

Importantly, a holistic risk management process must go well beyond benchmarking against point-in-time numbers alone. A June 9, 2008 article proves this point with respect to traditional pension plans. In "Surplus hits $111 billion," Pensions & Investments writer Rob Kozlowski chronicles a two-year rise in excess funding for the top 100 U.S. corporate schemes. Just six months later, Barrons reporter Dimitra Defotis cites a Credit Suisse report that has S&P 500 companies facing a "pension deficit of at least $200 billion," the "largest shortfall since 2002, when pension liabilities exceeded assets by a record-setting $218 billion in the aftermath of the dot-com bust." See "The Math Doesn't Add Up" (December 8, 2008). Owners of defined contribution plans are taking it on the chin as well. As USA Today reporter Christine Dugas lays out, more companies are dropping the 401(k) match at the same that plan participants have been hit with large negative returns. See "401(k) losses: Older investors' retirement funds hit hard" (October 31, 2008).

Questions abound, though not directed to any particular plan or organization. What could have been done differently to minimize the ill-effects of a systemic meltdown? What was the role of intermediaries in terms of advice-giving? Was there proper diversification? Was too much latitude given to asset managers? Was scant attention paid to risks relating to internal controls, valuation and restrictions on being able to liquidate particular holdings? Were investments in some cases not truly suitable for beneficiaries?

If New Year's Day marks an opportunity for a fresh look at life, why not make 2009 the year of the comprehensive pension risk manager?

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