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

With all the brouhaha about pension problems around the world, it is worth noting who is being held accountable for the woes and who is identified as being able to implement solutions. The results to date are intriguing to say the least and showcased below. Click to take the pension survey and add your voice. We will run the survey for awhile longer and then report final numbers.

• Nearly 70 percent of respondents strongly agree that a pension crisis looms.
• U.S. Congress (57 percent), board members (50 percent), Chief Executive Officers (43 percent), regulators (36 percent) and plan fiduciaries (36 percent) are identified as responsible for the pension crisis. Write-in answers point blame to lobbyists, Wall Street executives and those "who pushed the 401k lie."
• When asked who can fix things, respondents express faith in U.S. Congress (36 percent), plan fiduciaries (36 percent), regulators (36 percent), governors and other state officials (29 percent), Chief Executive Officers (29 percent) and board members (21 percent). Write-in answers include a preference for a national solution, new regulation, ethical people and the securities industry to step up to the plate. 
• Nearly 70 percent of respondents fear a Social Security crisis. One respondent suggests the removal of the Social Security cap so that FICA contributions increase as taxable income goes up.
• Eight out of ten respondents agree that "most people are ill-equipped to invest their own money for retirement planning purposes."
• Only 14 percent of respondents support "generous pension packages" for corporate and government leaders during hard economic times. One person questions the use of the word "generous," adding that "decent pensions for time served" make sense. Another person writes that executives often get paid for failure. Yet another survey-taker said that lumping together corporate and government executives is not a good idea.

My first reaction is one of puzzlement. If certain decision-maker categories are identified as pension "culprits" and then subsequently classified by survey-takers as those likely to solve problems, what is preventing action now and why aren't people upset about supposed inaction? 

In a related survey conducted by KPMG, analysts document a loss of purchasing power for many pensioners and a painful hit to the bottom line for UK sponsors. "The lost decade for pensions? " cites "growing life expectancies, disappointing equity returns and higher demands for cash" as some of the reasons that have led to almost a doubling of British defined benefit plans being closed or frozen when comparing 2000 to 2008. Authors of the study conclude that regulations can "help to ensure adequate future private sector benefit provision." While other studies suggest a similar panacea, I only invite readers to ponder whether excess regulation got us into this mess in the first place. Think perverse incentives, subsidized costs and compliance mandates that do not map back to economic reality.

Retirement plans, properly structured and managed, offer a lifeline to employees around the world. In contrast, poor governance could pit Jack against the giant but with no hope of a fairy tale ending.

Once again, let us know what you think. Click here to take this six question survey.

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Seeking a fun film over the holidays, I persuaded my husband to join me at a viewing of "Up In the Air" with George Clooney.This modern Cary Grant did not disappoint, doing a great job of conveying his own search for the meaning of life as he travels the United States, laying off workers at various companies. In an interesting twist, many of the actors are "real people" who had at one time apparently sat across the desk from a non-Hollywood version of a jobs terminator. 

I recommend the movie but don't expect a romantic comedy. In fact, don't expect to laugh more than once or twice. It is a serious montage of human angst at a time of when unemployment is high and only the adventurous are popping champagne corks to celebrate the end of the recession.

I would however like to offer a counter to this Tinseltown intimation that management is always bad and labor is nothing but pure at heart. In today's mobile, global and less than long-term workplace, it is imperative for everyone to continuously evaluate their skill set, make sure they are adding value and can quickly adapt to change. Be part of the solution, not the problem. This is not to say that layoffs of hard-working individuals, due to incompetent leadership, are less than tragic. It's only to suggest that there are countless opportunities to retool and taking responsibility for one's ability to earn a living is paramount.

A former manager urged me to think of myself as a box of cereal and periodically ask whether I'm "new and improved" enough to compete with the other brands. 

• Are you doing enough to encourage your team to grow and learn?
• Are you focused on being the best you can be in terms of wealth creation on behalf of shareholders and, by extension, yourself?

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This year has been tough for many investment professionals so it's no suprise that more than a few folks are hungering for January 1. Either 2010 is going to be "their year" or they figure that things just couldn't get any worse. Unfortunately, depending on Lady Luck, after months of tumult, is a high risk proposition and ill-advised. Add the fact that the governance benchmarking movement is gaining momentum around the world. Those who rely on a rabbit's foot or magic crystals are likely to be forced into action, regardless of their desires.

So what's on the governance "to do" list for coming months?

• In its December 16, 2009 press release, the U.S.Securities Exchange Commission describes a new rule "that would help investors determine whether a company has incentivized excessive or inappropriate risk-taking by employees. Among other things, it would require a narrative disclosure about the company's compensation policies and practices for all employees, not just executive officers, if the compensation policies and practices create risks that are reasonably likely to have a material adverse effect on the company. Smaller reporting companies will not be required to provide the new disclosure." For more information, click to read "SEC Approves Enhanced Disclosure About Risk, Compensation and Corporate Governance."
• Wall Street Journal writer Dennis K. Berman predicts that 2010 will usher in the "most significant regulation in 75 years" in order to "reset the financial industry's profitability, core oversight and connection to Main Street investors." (See "In 2010, Year of the Regulator" - December 22, 2009.) His view that "politics, populism and profits" are about to collide in the halls of the U.S. Congress is one that I share. When Joe Worker struggles to pay bills, let alone save for retirement, he becomes a vote-killer and that spurs lawmakers into action to create new mandates. (Whether "one size fits all" regulations work - and I contend that they induce their own set of problems - is a different discussion altogether.)
• On December 15, 2009, the American Federation of State, County and Municipal Employees, AFL-CIO released what it describes as a "first of its kind report" entitled "Enhancing Public Retiree Pension Plan Security: Best Practice Policies for Trustees and Pension Systems" by Attorney Christopher W. Waddell. Focused on pay to play, insider trading, fiduciary duty, ethics and board assessment, the 40+ page file is worth a read. The fact that this document exists is yet another indication of the movement towards a nuts and bolts approach to staying out of trouble.

With these and countless other indications that the paradigm is shifting towards the documentation of accountability, one wonders if it is possible to be too cautious when it comes to risk management. This is not the same as asking whether someone can be too risk-averse with respect to investment management and thereby incur opportunity costs.

Frame your answer by asking yourself any of the following questions:

• "Is there anything I could do now that would mitigate my risks in 2010 and help me avoid time-consuming and costly problems if I have to explain why I didn't do X, Y and Z?
• Will I regret not taking the extra steps to notate my strategy, related internal controls and the general decision-making process?
• What are the reputation-related consequences of inaction or undertaking an incomplete process with respect to enterprise risk management?
• Will my personal and/or professional liability exposure go up if a problem arises and I am unable to explain why I did what I did?"

Will this new year be one of undue caution or simply a matter of committing to smart best practices because it is good prevention, not to mention a way to garner invaluable information and increase peace of mind?

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I sometimes forget that not everyone is familiar with my favorite idioms. For example, in speaking to one of our legal research consultants today, I told her that I would be "out of pocket" for a few days around the holidays. When she queried as to what I meant, I explained to her my use of the term and then, being curious, took two minutes to search the web as to where the expression originated. According to a blog entitled "the hubbub: Language, behavior, technology," this term had once only referred to tax deductible expenses but has morphed into meaning that an individual is unavailable. Indeed, in its October 7, 2006 blog post entitled "Office Talk: 'Out of Pocket'," the authors suggest that something more sinister may be afoot. Not only unavailable, "out of pocket" is a possible diss, a warning not to bother ... "you can use email, phone, IM, SMS, carrier pidgeon -  there's nothing you can do to reach me at that time."

This got me to thinking about the implications overall for investment professionals for whom information is arguably the lifeblood of money flows.

• Can we be over exposed to individuals or is there always room for more?
• Is there such a thing as too much information?
• How should we be sorting "good" information from "bad?"

In 1997, I published a doctoral dissertation about the information economics associated with high frequency trading. Entitled "Are Institutional Investors and Analysts Informed Traders? An Empirical Examination," I investigated trading volume and costs for "visible" exchange-traded stocks on one end of the spectrum in terms of institutional ownership and analyst following and "neglected" equity securities at the other extreme. As expected, I was able to document informational inefficiencies, leading to the conclusion that there might be "gold in them thar hills" if one is to pay close attention to micro data trends.

Expect more from me on the topic of information arbitrage. It is both mysterious and puzzling but certainly worth further investigation.

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