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

Back from several speaking engagements (governance is a hot topic these days), I'll be chairing a session about pension litigation at the Harvard Law School on Friday, May 1. Part of the "Capital Matters: Managing Labor's Capital Conference" that spans several days, "Litigation to Remedy Meltdown Damage: What Can Be Gained, What Can Be Learned?" will include comments from Attorney Jeffrey C. Block, Partner, Berman DeValerio and Professor of Law Allen Ferrell, Harvard Law School. 

I will have much more to say about pension litigation trends in the next few days. In case you missed it, our ERISA litigation study may be of interest. Click here to access "ERISA Litigation Study: April 15, 2009."

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When my nephew was a little boy, he used to ask his mom (my sister) and dad about going to the grocery store to get money. What he wanted was a trip to the ATM machine (by the veggies counter). Type a few numbers and voila - lots of green things to buy toys. How amazing!

Alas, young men and women grow into adults who work, pay taxes and hopefully save for vacation, a new home and retirement. Unfortunately, mounting per capita debt makes it harder to plump the coin jar, regardless of discipline. According to Owen and Payne, we each owe $184,000. Ouch!

Looking on the bright side, getting started early is a good idea. Kudos to the ABA Education Foundation for creating National Teach Children to Save Day - April 21, 2009 this year. The goal is to teach youngsters about "four important money choices: SAVE, SPEND, DONATE and INVEST."

Kiddies - just remember. Too much government pork robs you little ones of enough disposable income to add to Mr. Piggy Bank (but that's a topic for another day).               

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In "Airline investment turns sour for pension boards," Free Detroit Press reporters Tina Lam and Jennifer Dixon chronicle what some may interpret as a parade of horribles. Intrigue enough for a Hollywood thriller but possibly too much excitement for plan participants, the case in point is a series of alleged faux pas. Besides alleged conflicts of interest, there are questions about suitability, liquidity, due diligence and other investment risks. I am quoted on the topic of key person risk, an issue that is far from trivial when control and monies are in the hands of a select few.

"Susan Mangiero, president of Pension Governance Inc. in Connecticut and author of a book on risk management for pension funds and endowments, said it's crucial to thoroughly investigate individuals involved in small private firms before a pension fund invests, since the managers' backgrounds and finances are critical to the firm's success.

"If a key player has a financial issue, or they're deeply in debt, how can they make good decisions about other people's money?" she said."

I did not comment about this particular situation but about concentration of power in general and the need for arms length negotiations (not to mention access to sufficient information).

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Hot off the presses, the U.S. Government Accountability Office has just released "Proposed Plan Buyouts by Financial Firms Pose Potential Risks and Benefits" (March 2009). You may recall that the IRS put the kabosh on defined benefit liability trading on August 6, 2008, leaving it up to Congress to approve of disprove. See IRS Revenue Ruling 2008-45.

I've always been intrigued by the concept of a secondary trading market in pension liabilities but wondered how one might identify and manage the many risks. Essentially, the authors of this new study assert the same concerns.

"The troubling aspects of DB plan buyouts involve risks that may be difficult to foresee or quantify now or at the time of any particular transaction. It is unclear to what extent buyouts would cost less than standard plan terminations simply because of differences in regulations facing financial institutions and insurance companies providing similar services to plan sponsors instead of from economic efficiency. Further the current economic downturn has laid bare the current weaknesses and imperfections of financial regulation, with banks and insurance companies previously considered to be sound and well capitalized suffering catastrophic losses." 

From a fiduciary perspective, is there clear and present danger in the form of conflicts of interest or concerns about choosing a "proper" trading entity? (Refer to 29 CFR 2509.95-1 - "Interpretative bulletin relating to the fiduciary standard under ERISA when selecting an annuity provider " for possibly analogous guidance.)

As a plan participant, I'd want to know much more about who will ultimately sign and send my check. As a plan fiduciary, absent explicit guidance, I'd need to know more about how to discharge my duties on behalf of retirees when passing the baton to a major bank or insurance company.

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According to "Calpers Weighs Expanding Own Hedge-Fund Investments" by Jenny Strasburg and Craig Karmin (Wall Street Journal, April 16, 2009), the giant California pension fund may be the first stop for fledgling hedge fund managers who seek start-up resources. Described as a way to have "more control over its money," incubating hedgies would "mirror an approach the $175 billion pension fund has taken with private-equity managers."

 Interestingly, news accounts have Calpers losing a senior investment officer in late January 2008. Credited for helping "CalPERS pioneer many new investments," including hedge funds, Christianna Wood has joined Capital Z Asset Management as CEO. Their website describes Capital Z Asset Management and its affiliates as providing "sponsorship capital to hedge funds and structured products while assuming a meaningful minority interest in their management companies and general partners." Refer to "CalPERS Manager Leaves for Hedge Fund" by Murray Coleman, IndexUniverse.com, January 29, 2008.)

The role of CalPERS and other potential "angels" raises a host of interesting questions, some of which follow:

• Will large retirement plan incubators displace high net worth investors?
•  Will large retirement plan incubators displace fund of funds and/or pension consultants?
•  How will pension fiduciaries properly discharge their oversight duties if they are taking management positions in hedge funds that in turn receive plan assets? (Recall that CalPERS acquired a 9.9% ownership stake in Silver Lake Partners, a private equity firm that invests in technology and technology-enabled companies. CalPERS has a seat on Silver Lake's Advisory Board as a result. If CalPERS is allocating monies to Silver Lake Partners, has their due diligence process changed? See "Silver Lake Announces Long-Term Strategic Partnership with CalPERS," January 9, 2008, Reuters.com).
• Might venture capital firms be adversely impacted if pensions decide on a "do it yourself approach instead of plunking down money with Silicon Alley or Valley or international equivalents? (Dan Primack, editor of PEHub.com, aggregates national and regional venture capital data. See "Q1 VC Numbers: Oh, The Horror," April 18, 2009).

 As the capital markets reconfigure, there are opportunities aplenty for everyone. Will the economic crisis beget a brave new world wherein retirement plan assets are used to grow small companies? Who will win? Who will lose? Interesting food for thought.

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As part of its ongoing commitment to independent research, analysis and training, Pension Governance, Incorporated and its PensionLitigationData.com partner, The Michel-Shaked Group, are proud to debut a new study about pension litigation statistics for plan sponsors, their service providers, legal counsel and policy-makers, respectively.

Based on over 2,400 ERISA cases filed between January 1, 2005 and August 31, 2008, "ERISA Litigation Study - April 15, 2009" is a statistical overview of pension lawsuits by category, court and case disposition.

The study's findings include the following:

• ERISA lawsuits are increasing in number and complexity in terms of combinations of allegations.
• Nearly every case in the PensionLitigationData.com database is categorized as including an allegation of fiduciary breach.
• ERISA litigation volume was highest for the 2nd, 3rd and 6th federal circuit courts.
• A majority of ERISA-related lawsuits settled out of court.
• Numerous cases examined reflect an ERISA Section 502 claim. (ERISA Section 502 relates to civil enforcements.)
• Some legal venues favored plaintiffs in terms of the reported outcome.

PensionLitigationData.com ("PLD") is a subscription searchable database of pension litigation events. Focused on finance and investment issues, PLD includes cases posted since January 1, 2005. New cases are added on an ongoing basis. Over 100 various identifier codes are used to cross-classify cases, enabling subscribers to search by keyword, circuit, plaintiff, defendant and a host of other relevant attributes. Recognizing the need to simplify an otherwise complex process, PensionLitigationData.com provides litigators, regulators, policy-makers, plan sponsors and their financial advisors and consultants with a user-friendly interface and the wherewithal to gather critical intelligence about litigation activity. Interested parties can email Support@PensionLitigationData.com for more information about customized research projects.

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In case you missed it, April is National Humor Month. Created by "best-selling humorist Larry Wilde, Director of The Carmel Institute of Humor," 2009 marks the 33rd anniversary of this celebration of fun and merriment.

For those who live in Nebraska, they must really be rolling in the aisles. What? You didn't hear?

According to a survey conducted by MainStreet.com, the home of Cliff Notes ranks top for its low number of foreclosures, low unemployment rate and low percentage of non-mortgage debt by income. Not surprisingly, Connecticut, where I call home, is number 28 out of 50 on the Happiness Index (not a good thing by the way). Being close to Wall Street, we are feeling the pinch of financial layoffs and plummeting portfolio values. California, Florida and Oregon rank 48, 49 and 50, respectively.

Along the lines of "feel good" action, I read an interesting article in the May 2009 issue of Reader's Digest in which Stanford University psychologist Carol Dweck advocates the benefits of failure. According to "How Failure Makes Us Stronger," psychology and neuroscience professor Antoine Bechara has identified two parts of the brain that are responsible for the "fear of failure" and the "lure of success." For certain individuals, the physiological response to failure is a chance to learn.

At a time when many professionals feel under siege for economic losses or sub-par performance or both, one silver lining may be new math, i.e. Failure = Second Chance.

Unfortunately, recent research suggests that not every one is ready to act anew. According to "Managers fail to control hazards" (April 6, 2009), Financial Times reporter Sophia Greene says "not so fast." Citing results of a new risk management study, certain factors such as liquidity risk have not yet "been built into risk models," possibly leaving portfolio managers (and therefore pensions, endowments and foundations) unduly exposed. In contrast, investors are described as committed to asking asset managers about risk management policies, with 10 pages of a typical Request for Proposal ("RFP") being dedicated to "risk of all sorts." In its press release, survey sponsor SimCorp describes "the lack of monitoring of strategic risk" as a concern, along with a less than robust commitment by senior management as reflected in its analysis. For an overview of other findings, read "Global survey reveals that risk function has lost status despite financial crisis" (April 1, 2009).

Recall that Pension Governance, LLC (now Pension Governance, Incorporated) and the Society of Actuaries discovered a similar lack of enthusiasm about risk management and fiduciary duties in its research. Click to access the 69-page study entitled "Pension Risk Management: Derivatives, Fiduciary Duty and Process" by Susan Mangiero. For an overview of that research, read "New Study Addresses Pension Risk Management Gaps" (October 13, 2008).

Can looking the other way make for a happy institutional investor or asset manager? Hopefully, the final answer is "no" and "open to improvement" wins the day.

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In response to "Quandary of Transparency" (April 7, 2009) by guest blogger Doug Miles, Ms. Maryls Appleton agrees that the past can be a good teacher, but only if we are open to learning. Read what governance professional Marlys Appleton has to say:

<< Doug, thanks for the reminders of these past events, particularly the Penn Central bankruptcy. Transparency and disclosure are sure to be the guide-phrases and values that will be operational as a result of this crisis. However, disclosure and transparency do not necessarily lead to accountability. A massive failure of governance has contributed to the current situation. I am interested in any thoughts you have as to how we can help assure that in a world of better transparency and increased disclosure, we also get better governance and accountability. What is that link between transparency and accountability? I am in total agreement that FASB's "bending" makes more less transparency, not more. It is the politicians, not just the executives, who have bullied the FASB into rethinking mark-to-market issues. This is akin to us looking at our 401(k) statements and saying, 'Well, they really are at par or 95, not where our statement puts them.' The lack of liquidity needs to be part of the pricing process. It is also necessary to acknowledge the dismal state of both the residential and commercial real estate markets, as well as the availability of credit. >>

Without a desire and willingness to improve when warranted, we are destined to go around and around, rather than moving forward.

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Transparency and disclosure seem to be the sine qua non of regulatory reform these days. What this means exactly is yet unknown but certainly worth a lively debate. After all, new mandates for more information will require someone, somewhere to do more work. Our guest blogger, Mr. Doug Miles, provides some interesting insight. CEO of GlobalPrivateequity.com, Miles leads a team of independent pricing experts. Here are Doug's remarks:

Almost two years into the global credit crisis, we all yearn for it to be over. Piercing the 8.5% unemployment level last week, not seen for 25 years in the United States, represents one of many aftershocks in a chain reaction throughout 2008. This is a realized metric, unthinkable by any respected economist, as recently as two years ago.

Trillion dollar stimulus packages commit us to years of obscene budget deficits. When combined with the already committed bailout monies, the result is an unfathomable sense of dread and gloom. We wistfully pretend that all of the hot spots of balance sheet and leverage quicksand have now been identified and are being addressed. Sadly, we await the other shoe to drop in the form of additional larger losses. Can we learn from history or are we destined to repeat it?

Recall the bankruptcy of Penn Central. Triggered by the default of its AAA commercial paper in 1970, ensuing problems badly damaged investors' confidence. Not a single Initial Public Offering ("IPO") came to market for seven years. The financial world was smaller then and capitalism in places like China, Brazil, Russia and India did not really exist. There were no derivative markets. Yet market psychology and human reaction remain little changed 38 years later. Balance sheet surprises in the form of imprecisely measured liabilities wreak havoc on cash flow for large and small companies alike, accelerating their need for credit when ready money is a memory of the past.

One remedy is an open asset pricing system, recognized by corporate management as a way to stabilize, if not reverse, a slide in equity levels. Just as it did a century ago with the Panic of 1907, true transparency has the power to calm and heal. Then JP Morgan and his syndicate openly embraced and bolstered the balance sheet investments of a half dozen or more banks as their respective share prices more than halved 52 week highs. Two years later, as asset prices recovered, those financial stocks returned to within 10 to 15 percent of pre-panic highs. The same restoration of confidence and transparency may be achieved in today’s climate but only if corporate executives acknowledge financial measurement problems (rather than blame accounting rule-makers) and busy themselves with economic solutions.

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According to the Stanford Law School Securities Class Action Clearinghouse, several cases against Washington Mutual, Inc. were consolidated in May 2008. Ontario Teachers' Pension Plan Board was designated lead plaintiff. The "complaint alleges that, during the Class Period, defendants issued materially false and misleading statements regarding the Company's business and financial results....On September 30, 2008, defendant Washington Mutual Inc. filed a notice of bankruptcy."

According to "Suing a Broken Bank" (CNN Money, March 30, 2009) and other sources, a motion to dismiss has since been filed.

Elsewhere in this video, I am asked by CNN Money anchor Poppy Harlow to comment on financial reporting as an element of risk management. (I agreed to discuss transparency in general but told producers upfront that I possessed no information about this particular case, other than what I had read as a member of the general public.) About allegations that material information was withheld from shareholders (whether this case or others), I stated that "It's essentially the same thing that we saw a couple years ago with Enron and WorldCom - Who knew what, when and on what basis and what was the obligation of senior management to disclose information to the shareholders?" Click to view "Suing a Broken Bank." In terms of full disclosure, I own 212 shares of Enron common (worth about a penny per share).

I wrote about Washington Mutual on September 26, 2008 when I posited whether better disclosure would have helped WaMu shareholders. At the time, the U.S. Securities Exchange Commission had just released a statement urging more "transparent disclosure for investors." I countered that "sufficient" news is always welcome but wondered (and still do) if numbers alone are meaningful. I think not. Let me repeat what I said then.

<< What exact type of disclosure can really make a difference? I vote for information about process and accountability. Otherwise, financial statement users end up with snapshot assessments of mandated metrics. While these numbers could be potentially helpful, they are made less so without an understanding as to how they are derived, why they change and the extent to which an organization is exposed to economic danger. A few of the countless questions on the minds of inquiring individuals are shown below. (This is by no means an exhaustive list.)

• Who has the authority to effect change for all things financial management?
• Who oversees authorized persons and the latitude they enjoy to make decisions?
• How are risk drivers identified, measured and managed on an ongoing basis?
• What creates "stop loss" threshholds?
• How are functional risk managers compensated? >>

In addition to their already long "to do" list regarding asset allocation, plan design and so forth, countless pension fiduciaries are charged with corporate governance related duties such as monitoring. After all, they are frequently large shareholders in public companies stateside and abroad. It is interesting to note that most securities litigation leads are either public pension funds (U.S. and non-U.S.) or Taft-Hartley plans but not ERISA funds. Why this is true is one of the questions that will be discussed during our April 27, 2009 webinar entitled "Pension Plans as Plaintiffs - 800 Pound Gorilla of Litigation." Click here to register.

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Pension Governance, Incorporated, an independent research, analysis and training company, is pleased to announce a top-notch roster of legal and fiduciary experts, each of whom will address the changing landscape of litigation as relates to plan sponsors. Click http://www.pensiongovernance.com/webinars.php?PageId=58&PageSubId=59 to learn more about “Pension Fiduciaries in the Hot Seat – What to Avoid & How to React if Sued” to be held on April 14, 2009 from 2:00 PM to 3:30 PM EST and “Pension Plans as Plaintiffs – 800 Pound Gorilla of Litigation” to be held on April 27, 2009 from 11:00 AM to 12:30 PM EST.

Learn why pension plans are a force in the legal arena, how both corporate governance and investment governance practices are fast-changing as a result, what can be done to manage litigation exposure and the link between litigation and fiduciary liability risk.

Who Should Attend: Public pension plan trustees, ERISA fiduciaries, pension analysts, asset managers, financial advisors, actuaries, consultants, securities litigation attorneys, pension attorneys, board members

Speakers for “Pension Fiduciaries in the Hot Seat – What to Avoid & How to React if Sued,” scheduled for April 14, 2009 (2:00 PM to 3:30 PM EST):

• Dr. Susan Mangiero, AIFA, AVA, CFA, FRM - Moderator and President, Pension Governance, Incorporated
• Mr. Richard Haran, Jr. - Speaker and Vice President, Chubb & Son
• Attorney Marla J. Kreindler - Speaker and Partner, Winston & Strawn LLP
• Attorney Stephen Rosenberg - Speaker and Partner, The McCormack Firm, LLC
• Attorney Joshua Sternoff - Speaker and Partner, Paul, Hastings, Janofsky & Walker, LLP

Speakers for “Pension Plans as Plaintiffs – 800 Pound Gorilla of Litigation,” scheduled for April 27, 2009 (11:00 AM to 12:30 PM EST):

• Dr. Susan M. Mangiero, AIFA, AVA, CFA, FRM - Moderator and President, Pension Governance, Incorporated
• Attorney James Baker - Speaker and Partner, Jones Day
• Attorney Daniel Berger - Speaker and Partner, The Pomerantz Law Firm
• Attorney Jay McElligott - Speaker and Partner, McGuire Woods LLP

Email PG-Webinars@pensiongovernance.com or visit  http://www.pensiongovernance.com/webinars.php?PageId=58&PageSubId=59 to register for one or both of these exciting webinars. Additionally, registrants are entitled to a 10% discount off a subscription to www.pensionlitigationdata.com.

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We've gone native (technology-wise that is) and decided to try our hand at micro-blogging. If you'd like to follow me or Pension Governance, Incorporated or both, check out http://twitter.com/PensionInvestor or http://twitter.com/SusanMangiero. With only 140 characters, you'll need to economize your communications. I hope you'll decide to follow me.

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Excited to watch handsome Clive Owen and Tom Wilkinson (a favorite actor), I paid my $10+ for a ticket to see just released "Duplicity." From an entertainment perspective, I was not disappointed. Footage of fashionable Julia Roberts and lovely backdrops from London, Zurich, Rome and New York is fun eye candy for viewers everywhere. The film's writer and director is the same Tony Gilroy who directed "Michael Clayton" (a great thriller if you haven't seen it). I don't want to give away too much about the film. Part of its appeal is a surprise ending.

What does bother me however is the almost swarmy glamorization of corporate ethics gone awry. No matter how much lipstick you put on a pig, it still oinks. Theft of intellectual property is made to seem "cool" and "hip." For those inventors and entrepreneurs who toil long hours  for little pay, and those investors (like pensions, foundations and endowments) who support them with allocations to venture capital and private equity, I found the movie disturbing to say the least. Adding insult to injury, the oft-repeated "deny everything," "make counteraccusations" and "admit nothing" seems like a page ripped from the headlines.

For a light respite after a long work week, Duplicity is worth the price of a ticket. If you are expecting to see honorable business actions being imortalized on celluloid, look elsewhere.

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Spring brings flowers, rain and April Fool's Day. Different from other topics, April 1 doesn't seem to be a laughing matter anywhere around the world when it comes to retirement issues.

• The Pension Fund Regulatory and Development Authority in India sets April 1, 2009 as a date to expand pension plan products to citizens other than government workers. See "New pension scheme for MFs from April 1," Economic Times, March 18, 2009.
• Contributions increase for British Columbia Public Service Pension Plan participants as of April 1, 2009. See "B.C. pension contribution increase set for April 1."
• Russian pensioners saw contributions rise on April 1, 2008. See "Pensions to increase 250 rubles from April - minister 1," Russian News & Information Agency, March 26, 2007.
• Certain Canadian pension liabilities will be valued differently after April 1, 2009. See "Determination and Transfer of Commuted Values," Office of the Superintendent - Pension Commission, Manitoba, February 2009.
• National Football League retirement plan participants saw benefits drop, effective April 1, 2007. See "NFL Retirement Plan Amendment Reduces Pension Payout to Participants," RetiredPlayers.Org, March 31, 2008.
• The Texas Pension Review Board meets on April 1, 2009. Click to read the agenda.
• New UK tax laws permit expanded contributions for self-directed plans as of April 1, 2009. See "Pensions: 10 ways to boost your retirement income, Part 1" by John Lawson, Standard Life, March 26,2009.
• New Jersey municipalities must pay at least half of their annual pension bill by April 1, 2009. See "Pension Bills to Surge Nationwide" by Craig Karmin, Wall Street Journal, March 16, 2009.

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