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

According to the U.S. Department of Labor's website, plan sponsors will soon have a fiduciary checklist about how to evaluate and select target date funds as part of the 401(k) plan mix. Given that nearly one out of two plans offer target date funds as an investment choice and that there are numerous questions about related investment best practices, the guidance comes none too soon. Click here to read more about the Spring Regulatory Agenda of 2010.

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Law scholar, author and derivatives pundit Frank Partnoy had an interesting piece in the Financial Times on April 19, 2010. In "Wall Street beware: the lawyers are coming," Mr. Partnoy warns that the floodgates of litigation are about to open with the SEC's filing of a fraud lawsuit against Goldman, Sachs & Co. He asserts that the regulatory enforcement takes complex financial alchemy and spins a "morality tale." A second take is that litigation picks up where regulations stop with Wall Street heretofore having interpreted "detailed rules as a shield from liability."

Leaving the Goldman case aside (as only those involved can opine with the clarity of full information), Professor Partnoy provides food for thought. Indeed, as I have written lo these last four years since the inception of this blog, Main Street pain invites legal and regulatory action. Investment losses are vote killers for elected officials who turn a deaf ear to calls for change.

I agree emphatically with the notion that regulations can only do so much.Worse yet, regulations could lull market participants into having a false sense of security. Post implementation of new rules and regulations, investors might think that all is good with the world when the truth could be the polar opposite, i.e. "compliance" having masked a host of bad practice nasties. I've often made the point in print and at the podium that onerous mandates induce the Law of Unintended Consequences, leading to a costly and counterproductive outcome that is antithetical to the original problem. Pick any accounting rule or regulation and it's possible to show the costs and benefits in terms of changed behavior.

There are noble-minded regulators and attorneys alike who really want to make a difference on behalf of the ultimate beneficiaries - retirees, shareholders, taxpayers, working families and so on. They are going to be beyond busy in the coming months and years unless, and until, investment stewards in need of improvement snap to. The wagons are circling. Count on luck or hunker down and get a good fiduciary risk management process in place ASAP. Otherwise, start preparing for deposition.

Editor's Note: Click here to read "Tips From the Experts: Working Effectively With A Financial Expert Witness" by Susan Mangiero (Expert Alert, Summer 2008, American Bar Association). While we prefer by far to help asset owners and their advisors before the fact, call us if you need help with "after the fact" analysis.

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I had the great pleasure of attending a dinner the other night to honor university professors who have been working at Iona College for more than 20 years. My husband's tally is 30 (teaching finance). One gentleman came in at 50 years, inspiring young minds with the written word as a professor of english. Somewhat curious, I asked attendees over dinner why they stayed in one place. The response was pretty much the same across the board with answers that referenced colleagues as a second family or the satisfaction of helping students come into their intellectual own.

At a time when some employees at various organizations are treated as temporary visitors, rather than partners in building a better mousetrap, something as seemingly simple as a celebratory dinner of service, past and future, touches the heart. While teaching is often thought to have its own intrinsic value, it is worth noting that any job well done is likewise worth a round of applause. As I've said many times, the notion of service applies to the many men and women who take their jobs as investment stewards seriously. They understand that their every action makes a difference. Bravo!

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To learn more about over-the-counter derivatives and related topical issues, visit  https://www2.gotomeeting.com/register/773492546 .

We hope you can join Investment Governance, Inc. CEO - Dr. Susan Mangiero on April 20, 2010 from Noon to 1:00 PM EST for a timely discussion with executives from Northern Trust, Numerix and Sapient to discuss the current regulatory environment, OTC (over-the-counter) derivative instrument valuation and collateral management.

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If you missed "Will negative swap spreads be our coal mine canaries?" by Gillian Tett (Financial Times, March 30, 2010), it's a worthwhile read, especially given the pervasive use of triple A-rated sovereign bond yields as a proxy for the "risk-free" rate of return. A writer known as Bond Girl makes a similar observation in "10-year swap spread turns negative" (self-evident.com, March 23, 2010), adding that plausible explanations take the form of temporary and structural, respectively.

Consider the following:

• Pension funds and other long-term investors are driving up demand to receive swap fixed payments as part of their asset-liability management strategies.
• Some investors worry about the viability of governments to pay interest and debt on time.
• Corporate debt issuers seek to hedge these liabilities.
• Mortgage risk techniques are in flux, especially as the Federal Reserve Bank is no longer an active buyer of mortgage-backed securities. Read "Large-Scale Asset Purchases by the Federal Reserve: Did They Work?" (Federal Reserve Bank of New York, March 2010).

As if risk managers were not already challenged to deal with moving regulatory targets and market volatility, a negative swap curve adds to their concerns.

Editor's Note: On the topic of sovereign debt, a summary of Dr. Lucjan Orlowski's analysis of the Greek debt crisis and the likely impact on the U.S. dollar and euro will be posted shortly.

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According to "Offshore hedge fund is trouble for Seattle's pension fund" by Rami Grunbaum (Seattle Times, April 11, 2010), the Seattle City Employees' Retirement System ("SCERS") got a nasty surprise when they asked again for overdue financial information about a hedge fund in which it had invested. According to various records, the U.S. Securities and Exchange Commission has similar questions about "true" value versus reported performance numbers. Contacted by deputy news editor Grunbaum for a general comment about hedge fund valuation and performance reporting, I stated that "Pension trustees shouldn't allow hedge funds to hide behind a veil of secrecy" and that "If a hedge-fund manager is unwilling to explain their valuation process - and related procedures and internal controls - run, do not walk for the nearest door."

If you missed some of my earlier writings on the important topic of valuation, I've included several items below:

• "September 11, 2008 Testimony - Presented to the U.S. Department of Labor, ERISA Advisory Council Working Group on Hard to Value ("HTV") Assets" - Note that Pension Governance, LLC is now part of Investment Governance, Inc.
• "Hedge Fund Valuation: What Pension Fiduciaries Need to Know" (Journal of Compensation and Benefits, July/August 2006).

Email Editors@InvestmentGovernance.com if you would like more information about hedge fund risk management and valuation productivity tools from an institutional investor perspective.

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In a recent interview with Pittsburgh Tribune-Review journalist Debra Erdley, I pointed out the folly of relying solely on point in time actuarial numbers. As I state (below), no single metric is a substitute for a robust risk management process.

Susan Mangiero, CEO of Investment Governance, Inc., a group that advises pensions on best practices and risk management, said pension reports can be misleading - even when numbers are quoted accurately. "A one-point-in-time number is not very helpful. It says nothing about the riskiness of the investment portfolio. It says nothing about whether there is good due diligence in place - the vetting of the consultants, asset managers and investment managers. and it says little about the plan's ability to write checks every month," she said, adding that a pension plan with a high funding ratio could be heavily loaded with assets that are hard to convert to cash."

Others in the article (entitled "Onorato's boast about pension fund solvency raises eyebrows" - April 6, 2010) impugn politicians for their knowledge (or lack thereof) of arcane actuarial methodologies. Ouch!

I'm reminded of my finance teaching days when students were asked to rank capital projects by Net Present Value, Internal Rate of Return, Payback Period and so on. Consider Investment A with a calculated IRR of 50% and a NPV of $1,000 versus Investment B with expectations of 25% per annum and a dollar reward of $500,000. I'd rather have the cash than the cold comfort of a number that doesn't mean much.

Cash is king which is why an ongoing holistic risk management process is EVERYTHING!

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Dr. Susan Mangiero joins a panel of senior-level insurance executives and attorneys for a discussion about ERISA best practices. Sponsored by the Risk and Insurance Management Society (RIMS), the April 28 discussion takes place in Boston and addresses financial, legal and operations challenges, along with suggested "must do" items. The program description is provided below or you can read more about "Coping Mechanisms: ERISA Best Practices."

Learn how to best to protect directors and officers in the event of plan-related litigation in this critical era of new litigation theories, legislation and aggressive enforcement. Employee Retirement Income Security Act (ERISA) litigation has spiked in the last year, spurred by plan investment losses, mass layoffs, benefit cutbacks and an invigorated plaintiff’s bar. New types of litigation, such as suits related to qualified default investments in 401(k) plans, are on the upswing. At the same time, leadership at the Department of Labor is spurring new enforcement strategies. Join this panel discussion of methods to avoid litigation and establish a record of procedural prudence, a critically important component in the defense of any ERISA litigation.

Presenters include:

• Ms. Tara Cronin of Chartis Insurance (Coordinator)
• Ms. Charlotte Peedin of Golden Corral Corporation (CPC)
• Ms. Pamela Britt Schneider of Avon Products, Inc. (Speaker)
• Dr. Susan Mangiero of Investment Governance, Inc. (Speaker)
• Ms. Rhonda Prussack of Chartis Insurance (Speaker)
• Attorney Rene Thorne of Jackson Lewis (Speaker).

Investment Governance, Inc. recently interviewed leading fiduciary liability insurance underwriters about their concerns for covered organizations to improve policies and procedures. Email Editors@InvestmentGovernance.com for a copy of the two-part interview series.

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According to Attorney Fred  Reish, Managing Director at Reish & Reicher, the "word on the street" is that the new 408(b)(2) regulation - sent from the U.S. Department of Labor to the Office of Management and Budget on March 3 - will be an "interim final regulation and will have a delayed effective date." He adds that "effective" refers to the date on which people must begin complying with its terms. ERISA attorney Reish adds that:

My sense is that the delayed effective date will be somewhere between January 1, 2011 and 12 months after the regulation is issued. However, that is just a guess. That effective date would probably apply only to new plan clients. That is, there would probably be a transition period for existing  plan clients. Also, it is not yet clear whether the regulation will apply to individual retirement accounts, but it could."

For background on this important disclosure rule, see "The DOL's Proposed 408(b)(2) Regulation: Impact of the Mandated Disclosures on Registered Investment Advisers (RIAs)" by Fred Reish, Bruce Ashton and Debra Davis (February 2008).

Also see "Private Pensions: Additional Changes Could Improve Employee Benefit Plan Financial Reporting" (United States Government Accountability Office, December 2009).

I will post further information about fees paid to plan service providers in coming weeks.

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