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

With the news of Towers Perrin and Watson Wyatt merging to form Towers Watson, tongues are wagging about what this means for the employee benefits consulting business in general. According to the June 28, 2009 press release, the all stock deal "will create one of the world's leading professional services firms."

The combination comes at an interesting time. Besides the economic rollercoaster we've been riding, there is a real debate about the role of consultants, particularly whether they will wear the hat of pension fiduciary, functional or otherwise. Additionally, many of the decisions that challenge pension executives are increasingly specialized, making it difficult for generalists to assist. Then there is the issue of fees and whether "traditional" firms can prosper as competition mounts. The offering of asset management services by select consultative organizations illustrates their respective desire to juice up revenue, despite the possible conflicts of interest that ensue.

Whether the Watson Wyatt - Towers Perrin deal is a harbinger of things to come remains to be seen. One thing is sure. The advice and consulting business is changing rapidly.

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  Photo Source: University of Michigan

Pension risk management has always been important but is arguably receiving more focus now than ever before. The reason for that is straightforward. Lose billions of dollars and people pay attention. In "An Interview With Susan Mangiero" (Journal of Indexes, July/August 2009), I talk about (a) redemptions (b) correlation patterns (c) interest rate impact (d) leverage (e) hard to value investing and so much more. Click to read "An Interview With Susan Mangiero."

The take away points from the interview are several:

• Everyone is a risk manager. There is no escape from reality.
• Effective risk management is an ongoing process. There is no "buy and hold" equivalent.
• Ask questions as to whom is doing what along the service provider food chain because ultimately pension decision-makers are responsible for what is or isn't done.
• Creating an index for a strategy like Liability-Driven Investing requires thought. There is no universally accepted "perfect" way to benchmark manager performance but there are certainly good possibilities from which to choose.
• Life for a plan sponsor is challenging but exciting. What better time to embrace the opportunity to implement a robust and holistic risk management process?

Kudos to those who have already recognized the need to identify, measure and manage the continuum of retirement plan risks. Beware of complacency however. I'm reminded of a recent risk management snafu in my life. In trying to stave off colds, I'd been using zinc swabs. To my nasty surprise, last week's newspapers suggested incremental risks associated with a strategy I took to be prudent.

Bottom line: Be diligent and active when it comes to mitigating risks. Try to plug the leaks in the bucket. Better yet, get a new bucket when you need one. Don't shortcut the future of your plan participants.

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According to "Detroit pension trustees take flight on funds' tab" (June 14, 2009), Detroit Free Press journalist Jennifer Dixon ponders how much is too much when it comes to trustee travel. I agreed to speak on the record about general best practices and want to add that I am not familiar with the situation in Detroit. I have excerpted my comments below:

"Susan Mangiero, president of Pension Governance Inc., an independent research, analysis and training company in Trumbull, Conn., said public pension plans need 'a clear policy about travel...It's public money, and taxpayers and plan participants would like to know the money is being properly spent.'"

I further suggested that an effective policy should address whether vendors are allowed to pay for trips, adding that "It's important to have policies on what is deemed to be a legitimate and reasonable expense, from a governance aspect and budget aspect."

Given the current environment of cutbacks and layoffs, a review of what constitutes prudent and necessary travel is a no brainer. An effective policy should also lay out rules for travel, conference attendance and so on when the fund has hired an outside consultant or fund of funds manager who is supposed to be doing some of the legwork along the way.

We've heard anecdotally that many pension decision-makers are being discouraged if not outright banned from taking trips right now, urged to fly coach, share hotel rooms and/or otherwise drastically reduce cash outlays.

For those who have yet to adopt a comprehensive travel policy for investment fiduciaries, bon voyage!

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According to "Blogs Falling in an Empty Forest" by Douglas Quenqua (New York Times, June 5, 2009), statistics suggest that blogging might be considered a passing fancy for many individuals. Citing a 2008 survey, put out by Technorati, "only 7.4 million out of the 133 million blogs the company tracks had been updated in the past 120 days." 

Lest you think that I am one of the soon to be defunct bloggers, let me disabuse you of that notion. Our team has been busily builidng what we think are superb tools for pension decision-makers and their service providers. Look for more news in the coming weeks.

In the meantime, I'll try to get back to my regular pattern of posting. Writing is a passion and I thank all of you who have sent so many terrific comments and suggestions. Please keep them coming.

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Talk about a blast from the past. As I prepared dinner this weekend, I caught bits and pieces of Wall Street. According to this film that won Michael Douglas an Oscar for his portrayal of Gordon Gekko, "Greed is Good," bad companies deserve to be destroyed and employees are collateral damage. What particularly caught my attention was the reference to an overfunded pension that., post corporate break up, would net this arbitrageur over $60 million in cash.

Wow - have things changed.

In "5 years of corporate funding gains gone" (June 1, 2009), Pensions & Investments reporter Rob Kozlowski reports that the "top 100 U.S. corporate pension plans saw their funded status drop by nearly 30 percentage points in 2008." In dollar terms, the plans reported a deficit of nearly $200 billion compared to a surplus in excess of $111 billion in 2007.

The fallout is no doubt painful for plan sponsors and participants alike. What will be interesting to watch is the plethora of new products being developed to help address funding gaps and better manage plan risk.

Editor's Note: A sequel to Wall Street is under way. I'll buy the popcorn for that movie! Sounds intriguing. Click to read more.

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