Institutional Asset Allocation

My comments about institutional asset allocation, along with those made by Mr. Ron Ryan (CEO, Ryan ALM) and Lynn Connolly (Principal, Harbor Peak, LLC), were well received on January 8, 2014. Part of a joint program that was sponsored by the Quantitative Work Alliance for Applied Finance, Education and Wisdom ("QWAFAFEW") and the Professional Risk Managers' International Association ("PRMIA"), our audience of investment professionals added to the lively debate about topics such as strategic versus tactical asset allocation, fees, role of the pension consultant and the likely capital market impact due to the implementation of strategies such as liability-driven investing ("LDI") and/or pension risk transfers ("PRT"). 

With the size of the U.S. retirement market at $20 trillion and counting, big money is at stake. Bad asset allocation decisions can lead to a cascade of economic woes. It is no surprise that fiduciary breach allegations in the form of ERISA lawsuits are increasingly focused on questions about the appropriateness of a given asset allocation mix and whether an investment consultant or financial advisor has helped or hindered the way that pension monies are allocated. Noteworthy is that scrutiny about the efficacy of the asset allocation process and resulting money mix can, and has been, applied to both defined benefit and defined contribution plans. Keep in mind that asset allocation decisions are likewise central to assessing popular financially engineered products such as target date funds. Accounting issues and how changing rules influence asset allocation decisions are yet another topic that we will tackle in coming months.

Click to access Susan Mangiero's asset allocation slides, distributed to members of the January 8 audience, and meant to peturb a discussion about this always essential topic. Interested readers can check out "Frequently Asked Questions About Target Date or Lifecycle Funds" (Investment Company Institute) and "Annual Survey of Large Pension Funds and Public Pension Reserve Funds: Report on pension funds' long-term investments" (OECD, October 2013).

If you have a specific question about asset allocation and/or the procedural process associated with asset-liability management, send an email to me.

CFO Magazine Article About Pension De-Risking

In case you missed the launch of "Applied to Pensions, Risk is a Four-Letter Word" by Dr. Susan Mangiero and ERISA attorney Nancy Ross (CFO Magazine, November 8, 2012), experts conclude that Chief Financial Officers need to do their homework before entering into a particular deal. "Beyond the obvious number-crunching needed to vet what's often a large dollar transaction, the decision to de-risk should minimally include:

  • A thorough evaluation of the financial, operational, and legal strength of the annuity provider as required by the U.S. Department of Labor Interpretative Bulletin 95-1.
  • Independent pricing of any hard-to-value assets that will be contributed as part of a de-risking deal.
  • Economic assessment of opportunity costs in a low interest rate environment and whether it is better to delay a transaction or close immediately.
  • Review of vendor and counterparty contracts that may need to be unwound in the event of a full transfer of pension assets and liabilities to a third party.
  • Review of direct and indirect fee amounts to be paid by a plan sponsor as the result of a de-risking transaction.
  • Assessment of litigation risk associated with plan participants asserting that they've been unfairly treated as the result of a pension de-risking arrangement.
  • Creation of a strategic communications action plan to ensure that plan participants, shareholders, and other relevant constituencies are provided with adequate information."

In a related commentary, ERISA Stephen Rosenberg describes the chaos in the defined benefit plan market that continues to give plan sponsors pause about staying with the status quo. Click to read "On Getting Out of the Pension Business."

Public Pension Plans and Private Equity

 Reporter Michael Corkery paints a grim picture of what lies ahead for government workers. In “Pension Crisis Looms Despite Cuts by Nearly Every State” (Wall Street Journal, September 22-23, 2012), steps taken to reduce costs “have fallen well short of bridging a nearly $1 trillion funding gap.” Besides reduced benefits for new hires, increased contributions required of both new and existing workers, suspended cost-of-living adjustments and lower benefits for current workers, governments are starting to implement defined contribution plans such as 401(k) arrangements. No doubt the debate about constitutionality will rage on but the fact remains that the status quo is nearly impossible to maintain.

For some plans, a solution is to alter assets and invest more in alternatives such as private equity and hedge funds. According to the Private Equity Growth Capital Counsel, private equity and some pension funds have done well by each other. Its map of state-by-state performance shows positive returns for public pension funds such as the California State Teachers’ Retirement System. Whether the relationship between the two groups will continue is uncertain. As Kate D. Mitchell, Managing Director with Scale Venture Partners and a speaker at the 2012 Dow Jones Private Equity Analyst Conference observed, a shift from defined benefit plans to defined contribution plans for countless state and local employers will likely mean fewer dollars for the private equity industry. What happens then will depend on whether new monies will be available from other sources or instead cause a contraction in long-term deployment of assets by general partners ("GP").

In addition, political pressures are a reality, especially with respect to how capital gains are currently taxed. Should rates increase at the same time that fewer dollars are available from public pension plan coffers, the private equity industry could find itself under pressure in terms of growth potential and profitability. Other speakers at the Dow Jones Private Equity Analyst Conference were extremely upbeat about the outlook for uber growth in certain geographic sectors and industries. If they are right, investors in private equity will want to look carefully at the make-up of a GP's portfolio.

Pension Rate of Return Reality

According to its March 15, 2011 press release, the Board of Administration for the California Public Employees' Retirement System ("CalPERS") votes to maintain its current per annum discount rate assumption of 7.75 percent. Citing its actuary's take that maintaining the "discount rate at its current level is prudent and reasonable" and its long-term investment posture, this giant pension system justifies the status quo.

A few months ago, CalPERS "slightly decreased the allocation for traditional bonds and shifted the funds to inflation-protected bonds and commodities to reduce volatility risk." Its historical and projected analysis suggests an average gross (net) annual return of 7.95 (7.80) percent for the next several decades. Prior to 2004, CalPERS states that it had assumed an annual discount rate of 8.25 percent.

Not everyone agrees that defined benefit plan rates of returns should hover around the magic eight percent that has been long used for determining funding status. St. Petersburg Times reporter Sydney P. Freedberg describes the dilemma in "Experts say Florida overstates future pension returns" (March 21, 2011). If states assume a rate that is overly optimistic, reported IOUs will be smaller as a result on paper but not in reality. At some point, real money will be required to write checks to beneficiaries. On the flip side, the use of a more likely rate of return will balloon unfunded liabilities, forcing economic and political change right away.

The larger the funding gap (and assuming no changes in contributions), the more likely it is that traditional pension plan decision-makers will steer money towards higher risk investments, in anticipation of higher returns. This may be a valid strategy AS LONG AS new risks are properly identified, measured and managed. Otherwise, the situation could become even worse as out of control risk-taking leads to more and larger portfolio losses down the road.

As described in "Will the Real Pension Deficit Please Stand Up?" by Dr. Susan Mangiero, CFA, FRM (June 22, 2006), the American Academy of Actuaries writes in its July 2004 primer on pension fund accounting and funding that "Amounts calculated under pension funding rules are completely different than those calculated for pension accounting, and one must be careful not to mix the two topics."

The important issue continues to be how long it will take before plan participants, sponsors, shareholders and taxpayers get the real scoop on what is owed, when and by whom.

Congress Wants Public Plan Transparency

According to a press release dated February 9, 2011, U.S. Congressman Devin Nunes and U.S. Senator Richard Burr are about to force their peers to focus on public pension fund finances. While the House gets the Public Employees Pension Transparency Act this week, a version for the United States Senate is expected in a few days. The goals of this proposed legislation are several:

  • Provide one set of financial statements (and underlying assumptions) for state and municipal plans to the U.S. Secretary of the Treasury that are based on prevailing accounting methods, even if flawed.
  • Report a second set of financial statements that reflect the level of liabilities for each reporting entity as determined according to a uniform set of rules. "These guidelines will include more realistic discount rates, as well as controls to assure assets are counted using a reasonable estimate of fair market value."
  • Penalize non-compliant government units by withholding federal subsidies of state and local debt and nixing federal tax-exempt status for their bonds.

According to "US House Republicans Rule Out Federal Bailouts For States" by Andrew Ackerman (Wall Street Journal, February 9, 2011), today's Congressional discussion about the state of public employee benefit plans made it clear that states and/or municipalities seeking refuge from their funding problems will not get a federal bailout.

Unless struggling government plan sponsors rescind benefits and/or increase local tax revenue and/or take on a lot more investment risk, they are going to feel immense pain in the coming years. The bad news is not spread out equally. A table that describes the "Public Pension Crisis" and is based on "Public Pension Promises: How Big Are They and What Are They Worth" by Professors Robert Novy-Marx and Joshua D. Rauh projects that Oklahoma, Louisiana, Illinois, New Jersey, Connecticut, Arkansas, West Virginia, Kentucky, Hawaii and Indiana will exhaust their funding first.

The vicious cycle begins. If municipal bond investors view these issuers as higher risk, their respective cost of money will go up. More expensive debt service will exacerbate the overall problems, irregardless of which accounting rules are used for reporting. Taxpayers will get more upset and possibly vote with their feet, moving to what they perceive as fiscally sound cities, towns and states. Yet another falling domino, a shrinking tax base will mean fewer available dollars to pay bills, widening the money gap.

According to "Bond Rating Drop Ignites Pension Fight" by Lisa Fleisher and Jeannette Neumann (Wall Street Journal, February 9, 2011), the Garden State is now on the receiving end of a ratings downgrade and "is one of the seven lowest-rated states in the country." They report that New Jersey missed a $3.1 billion pension payment and could well have been a factor in the drop from AA to AA-.

I hate to say "I told you so" AGAIN but I wrote about the political impact of pension funding in the mid 2000's since it was obvious even then that there were large problems afoot. If you missed it, read "Tea Party Redux" State Pensions in Turmoil" by Susan Mangiero (July 27, 2006) and note that the term "tea party" has nothing to do with the party or movement of late.

Watch carefully as to how these plans change their asset allocations. Already there is a significant move towards investing in funds and instruments with an expectation of higher returns. That's not a problem as long as a robust risk management process in put in place or improved upon if it exists already. My forthcoming book on this topic will elaborate on the potential dangers of taking on too much risk.

Pension Funding Relief Passed Into Law

Signed on June 25, 2010 by President Obama, the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act (H.R. 3692) allows plan sponsors to amortize funding gaps over a longer period of time than is currently allowed. In addition, this legislation enables funding relief for up to two years.

While the financial markets have not been kind to more than a few defined benefit plans, new rules are going to make it even more difficult for financial statement users to assess the true economic health of any given retirement arrangement. This is not a good thing. Beneficiaries and shareholders alike deserve user-friendly information, especially if a plan is in trouble. The new law will make things even more challenging in terms of deciphering reported numbers and that's saying something.

As I wrote in "The Plan That Didn't Bark" (CFA Magazine, March-April 2008), financial analysts and other interested parties must learn to think like detectives. The current state of pension accounting is far from perfect. Taking into account the likely impact of H.R. 3692, published funding information is going to be clear as mud.

Click here to access the full legislation. Clear to read "The Plan That Didn't Bark" by Dr. Susan Mangiero. (Editor's Note: Pension Governance, LLC is now part of Investment Governance, Inc.)

Old Age Can Be a Bonus With a Price Tag

Enjoy this interview about longevity and pension risk management with Dr. David Blake, Director of the Pensions Institute. Professor Blake explains why understanding life expectancy trends across age, gender and socioeconomic groupings is so critical. He comments on new valuation rules that relate to financial statement transparency and share prices of plan sponsors. He differentiates between pension buy outs from pension buy ins and offers reasons why longevity swaps can be beneficial.

Click here to read "Longevity and Pension Risk Management," an interview with Professor David Blake, May 2010.

For other articles about longevity and pension risk management, visit http://portal.fiduciaryx.com/register/ for a complimentary subscription to best practices website, FiduciaryX.com.

Negative Swap Spreads - Trouble On the Way?

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.

Are Pension Performance Numbers Upside Down?

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!

More Focus on Pension Risk Management or Not Enough?

According to an October 2009 study entitled "Reactions to an EDHEC Study on the Impact of Regulatory Constraints on the ALM of Pension Funds" by researcher Samuel Sender, regulations discourage European retirement plan managers from focusing on long-term risk management objectives. The study further suggests that risk management is far superior to risk measurement if a focus on funding ratios steals resources better spent on ensuring the long-term viability of the plan. The 142 respondents cite a fear of tighter accounting rules and concern that regulators need to "provide incentives" to build internal models. Nearly eighty percent of survey-takers "report that dynamic strategies are difficult to implement because management agreement is needed to rebalance a portfolio." Click here to access the study.

In contrast, a new poll conducted by SEI suggests that pension risk management is a top priority for executives in Canada, Netherlands, UK and the United States. According to the November 18, 2009 press release released by SEI, "the percentage of pensions employing a Liability Driven Investing strategy has nearly triped over the past three years from 20 percents in 2007 to 54 percent in 2009. Queries about pension benchmarks sugges that decision-makers are veering away from absolute return in favor of "improved funded status." Click to read "SEI Global Poll: 3rd Annual Liability Driven Investing Poll Finds A Significant Increase in Adoption" (November 18, 2009).

A 2008 survey created by Pension Governance, Incorporated (now rebranded as Investment Governance, Inc.) supports the notion that more work remains to be done, by far. Click to read "Pension Risk Management: Derivatives, Fiduciary Duty and Process."

Each survey-taker was asked to self-identify as a USER if he/she works for a plan that trades derivatives in its own name. A NON-USER works for a plan that does not trade derivatives directly but may nevertheless be exposed indirectly if any of the plan's asset managers trade derivatives.

  • Plan size seems to be one factor that distinguishes USERS from NON-USERS, with 39% of USERS managing plans in excess of $5 billion versus 14% of NON-USERS associated with plans larger than $5 billion.
  • Pension decision-making appears to vary considerably by job function, with 48% (37%) of USERS (NON-USERS) choosing "Other" rather than selecting from given titles such as Actuary, Benefits Committee Member, CFO or Human Resources Officer.
  • Time allocation varies considerably with 64% (40%) of USERS (NON-USERS) saying they devote 75 to 100 percent of their work week on pension issues. In contrast, 37% of NON-USERS say they spend 0 to 24% of their work week on pension issues.
  • A majority of USERS (64%) and NON-USERS (48%) have had discussions about the concept of a fiduciary duty to hedge asset-related risks. A smaller number say they have discussed the concept of a fiduciary duty to hedge liability-related risks.
  • Few plans currently embrace an enterprise risk management approach with 59% (57%) of USERS (NON-USERS) responding that their organization does not use a risk budget. When asked if their organization has or is planning to hire a Chief Risk Officer, 57% (64%) of USERS (NON-USERS) answered "No."
  • NON-USERS cite numerous reasons for not using derivatives directly, including, but not limited to, "Lack of Fiduciary Understanding" (25%), "Perception of Excess Risk" (31%), "Considered Too Complex" (23%), "Prohibition Against Possible Leverage" (19%) and/or "Defined Benefit Plan Risk Not Considered Significant" (28%).
  • A query about whether survey-takers review external money managers' risk management policies results in 70% (58%) of USERS (NON-USERS) responding "Yes." Fifty-two percent (57%) of USERS (NON-USERS) say they review external money managers' valuation policies. This survey did not drill down with respect to the rigor of questions being asked.
  • Survey respondents seem to rely mainly on elementary tools to measure risk. Eighty-three percent (64%) of USERS (NON-USERS) rank Standard Deviation first in importance. Seventy-nine percent (63%) of USERS (NON-USERS) rank Correlation second. Only one-third (38%) of NON-USERS cite Stress Testing (Simulation). Four out of 10 USERS cite Value at Risk in contrast to 23% of NON-USERS who do the same.
  • Survey respondents worry about the future with 58% (60%) of USERS (NON-USERS) ranking "Accounting Impact" as a concern. Other concerns were also noted to include "Regulation," "Longevity of Plan Participants" and "Fiduciary Pressure."

U.S. GAO Addresses Pension Buyouts by Financial Firms

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.

Pensions for Sale?



According to "Now Wall Street Wants Your Pension, Too" by Matthew Goldstein (Business Week, August 5, 2008), troubled banks have no business fiddling around with pension caretaking.  Citing a $2.3 trillion "pension honey pot" that could grow to $7+ trillion in a few years, Goldstein says pension buyouts would be a great prize for investment banks, hedge funds, private equity funds and insurers. (Editor's Note: I've seen estimates of much larger numbers but the message is the same. There is thought to be "gold in them thar hills.)

What motivates advocates of the pension transfer movement? Let me count the ways. More than a few corporations may seize the opportunity to clean up their balance sheets and income statements as new accounting rules kick in, making "problems" more visible to shareholders. Some posit that taxpayers benefit if certain plans are transferred to stronger financial buyers, giving these plan sponsors a fighting chance to steer clear of bankruptcy court. As a result, the Pension Benefit Guaranty Corporation ("PBGC"), could arguably stablilize or even reduce its $14+ billion deficit. (Though the PBGC is technically funded by insurance premiums paid by plan sponsors, experts suggest that mounting IOUs could potentially result in a bailout by Uncle Sam.)

This trend to take over pension liabilities by third parties, popular in the UK, seems to have hit a snag in the U.S. According to an August 6, 2008 press release ("Treasury, IRS Issue Ruling Preventing Certain Pension Transfers"), newly issued Revenue Ruling 2008-45 states that "a transfer of a tax-qualified pension plan from an employer to an unrelated taxpayer when the transfer is not connected with a transfer of significant business assets, operations, or employees, is not permissible under current law. This is clearly a big disappointment to Wall Street as banks have been busy at work, assembling teams to value pension liabilities and trade them, in anticipation of developing a lucrative transfer business.

Accompanying this somewhat rare tax promulgation, readers are told of legislative preferences on the part of the current Administration (IRS, U.S. Department of Labor, U.S. Department of Commerce and the Pension Benefit Guaranty Corporation) that might eventually open the door to pension liability sales. Relevant text is excerpted below:

"Under the legislative framework, a pension plan (or portion of a plan) under which benefits are no longer accruing (i.e. a frozen plan) could be transferred to an entity unrelated to the employer (or former employer) of the participants in the plan, provided that certain conditions are met. The conditions would reflect the following fundamental requirements:

  • Plan participants, their representatives, and ERISA regulators would be required to receive advance notice of a plan transfer, and the parties to the transaction would be required to provide regulators information necessary to review and approve the proposed transaction.
  • Only financially strong entities in well-regulated sectors would be permitted to acquire a pension plan in a plan transfer transaction.
  • The parties to the transaction would be required to demonstrate that participants' benefits and the pension insurance system would be exposed to less risk as a result of the transfer, and that the transfer would be in the best interests of the participants and beneficiaries.
  • Limitations on transfers would be imposed to limit undue concentration of risk.
  • Transferees and members of their controlled groups would assume full responsibility for the liabilities of transferred plan and would comply with post-transaction reporting and fiduciary requirements.
  • Subsequent transfer transactions would be subject to the rules applicable to original transfer transactions."

Don't count the financial institutions out yet. No doubt the next Congress is likely to receive a lot of inquiries from the bank lobby to initiate legislation in favor of pension buyouts. On the positive side, well-capitalized and properly managed banks and other types of money powerhouses could draw on sophisticated risk analytics to strengthen plans. In contrast, poor risk management practices could worsen things. (See "Bank Risk Managers - Missing in Action," November 26, 2007.)

The fiduciary question is of course a big one. Is there a  possibility that a financial institution takes over a pension plan and finds itself in the uncomfortable position of being loyal to plan participants at the expense of shareholders or vice versa? Cynthia Mallett, Vice President, Corporate Benefit Funding, Met Life adds that "Stranger-owned pension plans raise both philosophical and public policy issues, none more telling than the potential for placing plan participants' interests in the hands of unrelated investors who are not regulated in the same fashion as insurers." 

ERISA Attorney Dan Wintz, partner with Fraser Stryker PC, offers the following insight. "While the practice of 'selling' pension plans and transferring their sponsorship to unrelated companies (that is, speculator or investment companies that do not employ the participants covered by the plan) has not yet become widespread, it is heartening to see that the Internal Revenue Service intervened early. However, the Ruling may be overly broad in its application and could prohibit or impede some plan transfers in legitimate re-organizations or other transactions that do not involve the direct transfer of business assets, operations, or employees from the employer to the unrelated taxpayer which will maintain the plan. We will have to see whether this is an absolute prohibition (as appears to be stated in the Ruling) or if it can be applied on a 'facts and circumstances' basis where there is a legitimate business purpose for the arrangement and there are protections for the plan's participants."

A fellow of the Society of Actuaries, David Godofsky, partner with Alston + Bird LLP and leader of the Employee Benefits and Executive Compensation Group, concurs that buyouts may serve a vital function. His comments are provided below.

"As for the meaning, the ruling was rather narrowly tailored to a specific fact pattern, which has been widely discussed and known as "selling" pension plans. Here is a very simplified version of the basic idea:

  • Company X has a frozen pension plan with assets of $100 million and liabilities of $100 million. The liabilities are measured by reference to mortality tables and interest rates that are intended to approximate the cost of buying annuities, or the cost of funding those pension benefits when very safe investments are used. In other words, the assumed rate of return on the $100 million of assets is very low, reflecting investments that are nearly risk free.
  • However, Company Y believes it can invest the assets of the plan to achieve a higher rate of return. If it does so successfully, there will be money left over when all benefits are satisfied... possibly a LOT of money.
  • So Company Y offers to buy the pension plan from Company X. A shell corporation ("ShellCo") is formed as a sub of Company X, and then ShellCo assumes the pension plan from Company X. Company X sells ShellCo to Company Y for $2 million.
  • Company Y has no employees and no other assets. Company Y invests the $100 million in investments designed to beat the low assumed rate of return. The assets grow to $120.
  • Company Y then buys annuities to cover the liability for $100 million, and is left with a pension plan with no liabilities and $20 million. It then finds a company with an underfunded plan - Company Z.
  • Company Z is willing to buy ShellCo for $20 million, and merges the pension plan into its own. So, everyone comes out ahead. X is ahead by $2 million and Y is ahead by $18 million.
  • BUT, suppose that Company Y doesn't do so well. It invests the money aggressively, and the assets drop to $80 million instead of increasing to $120 million. Now, the owner of Company Y is insulated, and the PBGC steps in to cover the $20 million underfunding. X is now ahead by $2 million, Y has lost its $2 million investment. As you can see, if Y invests aggressively enough, it has a great upside and a limited downside. This is what is known as "heads I win, tails you lose."

The IRS ruling focused on whether Company Y has an relationship with the employees - that was the way they chose to get to this transaction. However, what is really going on is whether you can take over pension liabilities from another company and try to make a profit by investing the assets to "beat" the actuarially assumed rate of return. Obviously Company X can do that, but so can Company Y. The difference is that X is a real company with real employees and presumably assets at risk. With Company Y, you don't quite know what you have. There is a way of selling pension liabilities - it is to buy annuities. Insurance companies sell annuities and they have to maintain reserves and invest their assets in a way that avoids losses. Basically, the Company Y's of the world wanted to do the same thing without having to comply with all those pesky insurance regulations.

Bottom line - the transaction that the IRS prohibited has the potential for an increased risk to the PBGC and a corresponding gain to the buyer (reward without risk). Now, the challenge for the investment firms that wanted to do this is to come up with a regulatory approach that has financial protections that are as strong as the insurance regulations."

Editor's Notes: There are numerous articles about the UK buyout experience. A few of them are listed below, along with the link to the July 21, 2008 report about plan freezes, published by the U.S. Government Accountability Office ("GAO").

Expect more news on the topic of pension buyouts and transfers.

This blog welcomes a chance to publish the pension buyer perspective. Send us an email if you want to comment.

Not Everyone Agrees What Liability-Driven Investing Means

Besides the fact that Liability-Driven Investing ("LDI") takes multiple forms (each of which should be fully evaluated in a risk-return context), there is no universal consent about relevant action steps. As described in "Why LDI is Stuck in Neutral" by Dr. Susan Mangiero, a "roll your shirtsleeves up" approach to gathering and assimilating information makes sense.

The full text of the June 12, 2008 MoneyVoices column, published by Fundfire.com/Money-Media, a Financial Times Company, is presented below, with permission.

                                                                               * * * * * *

Why LDI is Stuck in Neutral

Guest Columnist: Susan Mangiero is president and CEO of Pension Governance, an independent research and analysis company.

Despite the hoopla, pension fund fiduciaries have yet to recognize liability-driven investing (“LDI”) as the ultimate in asset-liability management. No doubt a disappointment to the banking set, there are some legitimate reasons for its slow adoption. For starters, there is no consensus on what the term truly means, tempting one to use “loosely defined investing” as a more apt moniker.

Questions abound. When are derivatives used in lieu of cash assets only? Is a portable alpha engine an integral part of an LDI focus, or is it optional? Can LDI results be meaningfully benchmarked across plans? How does the use of LDI impact the determination of an optimal asset allocation mix? What must fiduciaries consider when assessing whether LDI-related fees are “reasonable?”

Even if everyone agrees on what LDI means, there is never a free lunch. What a plan gains in terms of risk mitigation, it will lose by assuming incremental risk. For example, using an interest rate swap introduces new uncertainties tied to counterparty default, settlement, legal standing and/or operations. A retirement plan that shifts money out of equity into typically lower yielding fixed income securities confronts opportunity cost. Add-ons in the form of alternative investments potentially juice up returns, but could wreak havoc with an existing risk budget. LDI makes sense when expected benefits exceed likely costs (direct and indirect).

Fiduciary literacy is yet another factor. Just as folks begin to ease into “new fangled” offerings, LDI forces decision-makers to take a sophisticated look at the economic funding gap. Understanding the dynamic behavior of asset and liability risk drivers is tough enough. Add a derivative instrument or hedge fund overlay and some decision-makers may dismiss LDI as complex and therefore “too risky.” More education is needed.

Deciding on the appropriateness of liability-driven investing is like anything else. Context and good process count for a lot. In some circumstances, an LDI strategy (however defined) may be a no-brainer. In other situations, its adoption could exacerbate existing problems. Regardless of outcome (“to LDI or not”), pension fiduciaries cannot escape their duty to ask questions, examine its likely risk-return impact (now and under various market scenarios) and oversee external managers’ risk controls (either as counterparties or potential alpha generators).


Disclaimer: The information provided by this article should not be construed as financial or legal advice. The reader should consult with his or her own advisors.

Measuring Pension Liabilities: Atlas Had It Easy

According to New York Times reporter Mary Walsh, some defined benefit plan liability measurements are being called into question. Pressure to pretty up numbers or the use of older methods that don't reflect economic reality are two potential pitfalls. According to "Actuaries Scrutinized on Pensions" (May 21, 2007), New York actuary Jeremy Gold is credited for encouraging a reality check. If true that defined benefit liabilities are routinely undervalued (as some believe), the inevitable result is an added burden on taxpayers and/or recipients of municipal largesse when bills come due.

Making matters worse, lowball estimates of retirement plan IOUs can lead to expensive new benefits and/or an inappropriate investment policy. Walsh cites Alaska, New York and Texas as a few of the states with actuarial "issues." Unlike private plans, critics suggest that lax rules for public plans open the door to potential abuse.

This blog's author adds that a disconnect between actuarial numbers and economic assessments of promises to keep is no more disturbing than a gap between artificial accounting reports and the  "real" liability. This is not to say that actuarial or accounting numbers are inherently skewed. Such a statement would be a gross and unfair indictment of hard-working actuaries and CPAs who are careful to avoid relying on unrealistic assumptions or refuse to succumb to political pressures.

The main message is that investment fiduciaries have no chance of realizing a "good" outcome if they start with imprecise numbers. Greek hero Atlas may have the easier task.

Editor's Note:

1. Check out "Will the Real Pension Deficit Please Stand Up?" (June 22, 2006).

2. Click to read "Pension Actuary's Guide to Financial Economics" by Jeremy Gold et al, published by the Society of Actuaries and the Academy of Actuaries in 2006.

Excuse Me! Excuse Me! Pension Fiduciaries - Heed the Call

Several recent experiences inspire this post. On the positive side, two weeks ago, I had the pleasure of spending time with my step niece, a darling little girl of 3. After just 15 minutes, I realized that her favorite way of getting attention is to scream "excuse me" as many times as it takes until nearby adults acknowledge her. Cute at first, it annoys after a few shouts but Lilly certainly gets her way.

On the other end of the experiential spectrum, my Sunday foray to Starbuck's introduced me to "Miss Manners Not." Though I was first at the counter and obviously not yet finished paying for a handful of gift certificates, a lady customer thrice reached over me and then pushed me aside to order a cup of joe. Not being shy, I murmured "sorry to be in the way." To my shock, she replied "it's okay." Yes, my first response was to tilt my cup in her direction ("oops") but give me credit for being an adult who quickly cooed sotto voce, "let it go." (You've met folks like this gal, right? Gotta love 'em for their arrogance and cluelessness.)

Here's the connection to all things pension.

Everyday brings new headlines about the retirement crisis. Just a few days ago, New York Times reporter Mary Walsh cites a new study that shows that 2007 investment gains for America's giant pension funds are fast being erased by early 2008 market tumult. Likely to add to the funding gap and compelling a need for cash infusions is a strategic move away from equity. More disturbing is that jumbo plans, in distress, could "swamp the federal insurance system," already reeling from certain airline and manufacturing company woes. Piling on is the Fed's lowering of interest rates which pushes up the size of defined benefit plan liabilities, exacerbating things. Given tighter funding rules, courtesy of the Pension Protection Act of 2006, plan sponsors have much less latitude in riding out the storm, if even possible. (See "Market Turmoil Has Taken a Toll on Big Pension Funds" by Mary Walsh, April 17, 2008. Also read "2007 Gains Reversed in First Quarter of 2008" by John W. Ehrhardt and Paul C. Morgan, "Milliman 2008 Pension Funding Study," April 2008.)

In January 2008, the U.S. Government and Accountability Office ("GAO") released an alarm bell in the form of its report entitled "State and Local Government Retiree Benefits." They concluded that "58 percent of 65 large pension plans" had funding ratios of about 80 percent in 2006, a decline since 2000. By extension, this means that 42 percent are in bad shape. (There is continuing controversy over whether 80 percent is deemed "safe" or instead suggests a need to worry.)

For individuals, new research cites the need for a long-term, relatively stable mix of stocks and bonds. In "Hitting or Missing the Retirement Target: Comparing Contribution and Asset Allocation Schemes of Simulated Portfolios," Professors Harold J. Schleef and Robert M. Eisinger argue that the likelihood of having enough money to retire comfortably is depressingly low. As New York Times contributor and money talking head, Mark Hulbert, points out, life-cycle or "target date" maturity funds may not perform "in line with their long-term averages." (Read "The Odds for a Retirement Nest Egg, Recalculated," New York Times, April 20, 2008.)

Of course, if Louis Lowenstein, author of The Investor's Dilemma: How Mutual Funds Are Betraying Your Trust and What to Do About It is right, fees and revenue-sharing arrangements will continue to erode retirement savings (meager for most), making it tougher to reach even a low savings goal. While employers shed their traditional benefit plans, they nevertheless have a vested stake in wanting their employees to be self-sufficient. Happy workers are typically productive workers who spin gold for shareholders and performance-compensated executives.

For the still clueless pension decision-makers, oblivious to the merits of effective asset-liability management (the equivalent of my coffee shop lady), hopefully the onslaught of economic and regulatory indicators will create a stir. If not, perhaps my young niece will take her "excuse me, excuse me, pay attention" show on the road.

UK Pension Gains Wiped Out

Even British comic book hero Union Jack may not be able to save the day for some UK pension plans. According to data just released by the Pension Protection Fund, the net funding status for nearly 8,000 private defined benefit plans widened to 97.5 billion pound sterling. Worse than the 80.8 billion GBP gap reported for January 2008, this February 2008 number is deemed "highest since June 2003" and represents the fourth consecutive monthly gap. Another telling indicator of problems is the news that "In February 2008, the total surpluses of schemes in surplus fell to £32.6 billion from £37.3 billion1 at the end of January 2008." Twelve months ago, the "aggregate surplus of all schemes in surplus stood at £68.6 billion." Click to review the Pension Protection Fund data report.

Citing anemic equity performance and falling bond yields as the culprits, the report's authors add that lower bond yields resulted in a 8.1% rise in aggregate liabilities "while weaker equities have reduced assets by 1.5%." Noteworthy are the results of a survey commissioned by the PPF and carried out by KPMG that show that few respondents (defined benefit plans considered "large") employ liability hedging techniques. The chart that maps funding status to percent of liabilities seems to support a widely held belief that "where funding is severely low the schemes need to take a certain degree of investment risk to help get back to full funding, given the PPF is insuring a certain level of benefits."

Does this mean that regulatory subsidies discourage hedging? If so, the UK would not be unique in terms of a rational but perverse response to changed incentives. (The notion of unintended consequences is one of the free market economic arguments against regulation, especially when "innocents" end up paying the bill.)

Click to access the January 2008 survey entitled "Pension Protection Fund: Investment Strategy and LDI Survey."

On a related note, a survey of US and Canadian plan sponsors, focused on their pension risk management practices, is due out shortly. A collaborative effort on the part of the Society of Actuaries and Pension Governance, LLC, the results support those of the aforementioned UK survey with respect to lower than expected amount of hedging (of both assets and liabilities).

U.S. Debt Level at Record High

There is something for everyone when it comes to U.S. national debt. Unfortunately, that "something" is a gigantic IOU to the banks, insurance companies, mutual funds and international investors who buy our government bonds and bills. Click here to access statistics about ownership of U.S. government securities. According to "National Debt at Record $9 Trillion" by Associated Press International reporter Martin Crutsinger,  "It took the country from George Washington until Ronald Reagan to reach the first $1 trillion in debt."

Zowie!

Lest you confuse the deficit with debt, the U.S. Treasury offers Frequently Asked Questions that describe the deficit as "the fiscal year difference between what the United States Government (Government) takes in from taxes and other revenues, called receipts, and the amount of money the Government spends, called outlays." In contrast, the total debt includes accumulated deficits "plus accumulated off-budget surpluses." Click here to read other factoids about our crushing economic situation.

Ignore the finger pointers in Congress who explain why U.S. debt is racing past $9 trillion (that's 12 zeroes). Focus instead on the school of thought that taxpayers (especially younger ones) are on the hook. According to the U.S. debt clock site, "the estimated population of the United States is 303,509,977 so each citizen's share of this debt is $30,036.47."

In retirement land, this slice of Uncle Sam's spending frenzy hurts. With more than a few companies, and state and local plan sponsors, cutting back on benefits, taking on more debt has as much appeal as getting a tooth pulled, without novocaine. Click here to see how quickly national debt is mounting. Refresh your screen several times to appreciate the speed with which we are being pushed into an economic hot zone.

For companies seeking to grow, increased national debt crowds out other borrowers. This in turn has the effect of raising the cost of capital which typically means lower profits and decreased share price. Why is this important to plan participants?

Simply put, the probability of payout at current benefit levels critically depends on the plan sponsor's financial health. Additionally, troubled companies are not likely to hire. For those retirees seeking a return to the workforce, that's unwelcome news indeed. Don't forget the pension asset-liability management challenges associated with excess leverage. To finance its funding gap, the U.S. government issues more bonds and/or raises taxes. The former impacts the shape and magnitude of the yield curve, which affects a plan sponsor's ability to manage interest rate risk. The latter impedes new spending and truncates growth, dragging corporate earnings downward.

The bottom line is that none of us escapes this problem. What a mess!

Pension Buyouts - Banks Are Gearing Up

In discussing his relationship with service providers, a plan sponsor recently told me that he feels like a juicy steak to a hungry lion. Everyone wants his business and he struggles to keep up with the many requests for meetings with consultants, actuaries and asset managers. According to "Pensions may be outsourced : Banks look to take the plans and their assets off the hands of employers" (October 31, 2007), that fiduciary may be even busier now, fending off requests to assume his company's defined benefit plan(s).  As Los Angeles Times reporter Jonathan Peterson describes, Citigroup has just received an okay from the Federal Reserve to "take over" a $400 million retirement plan, sponsored by Thomson Regional Newspapers.

If a harbinger of things to come (and banks are definitely gearing up for this business), risk management acumen and internal controls should be front and center. After all, if a liability is transferred from the original plan sponsor to a large bank, it will be discomfort indeed if that bank struggles with keeping its own house in order. The stakes are too high. Lest you think that big always means better, keep in mind that we've just gone through a rollercoaster summer with a handful of financial giants reporting losses.

As regulators examine the efficacy of pension buyouts by banks in the U.S. and elsewhere, this blog's author recommends that a bank's pension-related risk control abilities be made publicly available for analysis and review. The last thing we need is a concentration of pension assets in a few shaky hands. Better that everyone is comfortable upfront with the buyers' abilities in the areas of risk management, operational processing and good pension governance.

 

A Billion Here, A Billion There...

Though there is a question about whether former Illinois Senator Everett Dirksen ever said "A billion here, a billion there, and pretty soon you're talking real money," the statement is apt.

A quick read of the headlines suggests things are going to get ugly fast, and with little chance of a let-up anytime soon. Federal Reserve Chairman Ben S. Bernanke, in his October 15, 2007 address to members of the Economic Club of New York was no less sanguine. He offered that "Conditions in financial markets have shown some improvement since the worst of the storm in mid-August, but a full recovery of market functioning is likely to take time, and we may well see some setbacks." Click here to read the full text of his speech.

Billions of dollars in losses, due to sub-prime problems and related woes, pummeled recent earnings for more than a few organizations, sending the equity markets into a tailspin on October 19, 2007. Pundits report that the Dow had its worst day since early August, with worries about a looming recession being only one of several fears. Twenty years after Black Monday (October 19, 1987), the term "deja vu" comes to mind. At that time, this blog's author worked on a futures and options trading desk and well remembers the frenzy that ensued. Names then considered "too big to fail," no longer exist. Sobering lessons learned?

Hopefully.

At a time of unprecedented technological advances in terms of analytical capabilities and information flow, why is it that risk management is still anathema to some? Arguably there will be times when "tail" events occur, despite the best intentions to create, implement and periodically review back-office, middle-office and trading desk activities. One possible silver lining is that organizations (for which this applies) go back to the drawing board to design a more effective set of checks and balances. Improved risk architecture could include any number of things, including the following:

  • Frequent and thorough testing of valuation models by independent third parties
  • Regular and more granular correlation analysis that (a) takes into consideration the reality that market convergence does sometime occur and (b) then tries to identify when it is most likely to present itself accordingly
  • Assessment of hedge effectiveness, and by extension, (a) what factors create "hedge leakage" and (b) thereby leave an organization exposed to adverse market conditions
  • Identification of risk drivers, along with both a quantitative and common sense ("smell test") assessment of their likely behavior and probability of occurrence
  • Identification as to how to improve collateral management
  • Better training for everyone involved in trading activity and oversight
  • Improved (or creation) risk budget that explicitly lays out how money is to be allocated on a risk capital basis.

Some will win as markets tremble but what about the losers? After today, equity-laden retirement portfolios won't look so good. Entire employee teams are shutting down as the credit crisis takes hold. Depressed times will certainly force plan sponsors to rethink their investment decisions.

How much money has to disappear before billions mean something other than zeros on a piece of paper?

LDI Costs Go Up for Plan Sponsors as LIBOR Soars

While seen by some as a new-fangled name for an old concept ("keep your eye on the liability ball"), liability-driven investing ("LDI") is taking the defined benefit world by storm. Thought by some as a panacea for mismatched assets and liabilities, one type of LDI strategy entails the use of an interest rate swap (or a portfolio of swaps) whereby a plan sponsor receives a cash amount tied to a fixed rate (usually a specified treasury yield plus X basis points). Its obligation as a Floating Rate Payor is determined by the set level of a variable rate benchmark such as the six-month London Interbank Offered Rate ("LIBOR"). Like anything else, there is no free lunch. Besides the collateral a plan sponsor must pledge to the counterparty (such as a major bank), yield curve changes are another factor. Moreover, as LIBOR rises, the plan sponsor must pay more when swap settlement occurs. (This assumes the absence of an interest rate cap that could otherwise create a ceiling as short-term rates climb.) This is exactly what has been happening of late.

According to the Wall Street Journal, ("Libor Pops Up," September 6, 2007), LIBOR has steadily risen over the last few weeks. Even more troubling, its parallel moves with the Fed Funds Rate have been shattered by credit market turmoil. "In normal market conditions, Libor tracks the Federal Funds rate pretty closely, and as recently as July the two were just 13 basis points, or hundredths of a percent, apart. As of Wednesday's close, that gap had grown to nearly 50 basis points, or half a percent. With exposure to the U.S. mortgage market cropping up in seemingly unlikely places, such as banks around Europe, banks that lend at Libor are expressing concern, through the rising rates, that borrowers who appear safe may prove to have something ugly hiding on their balance sheets."

While the British Bankers' Association suggests stability as of September 7, 2007 (due to central bank intervention), one wonders if this can be sustained. After Friday's disappointing jobs number in the U.S. and statements from money folks worldwide ("The credit crunch is only just beginning."), plan sponsors may find themselves exchanging one problem (pension gap) for another (rising short-term rates that drive up swap floating obligations). 

Add market volatility and new regulatory mandates for disclosure to the mix and it's seat belt time for pension fiduciaries with financial decisions to make. Moreover, in "Why Libor Defies Gravity: Divergence of a Key Global Rate Points to Strain" (September 5, 2007), Wall Street Journal reporters Ian McDonald and Alistair MacDonald note that many other short-term rates are actually falling even as LIBOR and related financial instruments struggle. That's cold comfort if a corporate plan sponsor issues commercial paper or borrows via a short-term facility tied to LIBOR.

More to come about an increasingly important topic - LDI and pension financial management.

Editor's Note:

1. Click here to access LIBOR rates from the British Bankers' Association.

2. Click here to access H15 Selected Interest Rates from the Federal Reserve.

3. Click here to read derivative instrument FAQs, courtesy of the International Swaps and Derivatives Association, Inc.

 

Fly Away Pension Promises?



Memorial Day fireworks will be extra special for two airlines - American and Continental. In a pre-holiday move, Congress and the White House okayed the use of an 8.25% rate to determine the estimated DB liability, attempting to create parity for solvent airlines. (Higher discount rates lower the projected net unfunded liability for a defined benefit plan.) According to reporter John Crawley ("US Congress weighs new pension relief for airlines," May 24, 2007), this is "still below Northwest and Delta but more generous than the tougher formula required by lawmakers last year." Click here to read the article.

In response, the Allied Pilots Association (APA), "representing the 12,000 pilots of American Airlines (NYSE: AMR)" cautioned management not to use new rules as an an excuse to reduce funding. APA president , Captain Ralph Hunter, reiterated the unions' agreement to annual concessions of more than $600 million, motivated in part by the recognition of being "at risk in bankruptcy court." Click here to read the full text of the May 25, 2007 press release.

This is not the first, nor the last time, that discount rate discussions will take center stage. Questions about appropriate assumptions linger. (According to the H-15 Statistical Release, 20-year U.S. treasury bond yields as of May 21, 2007 were reported as approximately 5.02%.)

In a December 11, 2006 speech to CPAs, SEC Fellow Joseph B. Ucuzoglu cites an important element of the Pension Protection Act of 2006, taken together with the Financial Reporting Release No. 72. Registrants "should provide transparent disclosure in Management's Discussion & Analysis of the Act's anticipated impact on the company's liquidity and capital resources. Although in some circumstances it will be difficult to forecast precise funding requirements due to the annual recomputation required by the Act, it will often be possible to provide disclosure of the magnitude of cash commitments for future annual periods assuming present market conditions remain constant."

What are the implications?

1. New legislation allows additional airline carriers to use an estimated discount rate that is, by some accounts, "too high."

2. If the result is an artificially low estimated liability number, SEC filings could reflect an overly optimistic assessment of a company's liquidity situation and related ability to pay.

3. Plan participants may therefore want to take a tour "behind the numbers." After all, cash is required to pay benefits, irregardless of discount rate assumptions.

4. Don't stop with airlines. Compare reported discount rate assumptions with economic reality for a given plan. Does the number comport with current capital market conditions? Is it sustainable? If not, what is the likely TRUE impact on benefit plan payouts and the funding needs of the plan sponsor and isn't that important information to have?

Will the Real Pension Deficit Please Stand Up?

A flurry of activity is upon us in defined benefit land. The goal? Identify "high risk" plans early on. This, according to certain members of Congress, would be followed with additional funding by plan sponsors and thereby (hopefully) reduce the possibility of a government takeover. Critics counter that such a reform could make things worse, especially for already cash-strapped companies, struggling to stay in business. Moreover, they add that a risk classification based on unrealistic assumptions regarding early retirements at maximum benefit levels makes little sense.

The "Performance and Accountability Report: Fiscal Year 2005" shows a deficit of nearly $23 billion for the Pension Benefit Guaranty Corporation while estimating "future exposure to new probable terminations" at $108 billion, nearly four times the "damage".

In its primer on pension accounting and funding, the American Academy of Actuaries describes at least four types of numbers - service cost, accumulated benefit obligation, projected benefit obligation and present value of future benefits. They add that "Amounts calculated under pension funding rules are completely different than those calculated for pension accounting, and one must be careful not to mix the two topics."

Keep in mind that smoothing and credit balances are other considerations as we try to navigate our way through the maze of pension metrics. New rules that address (a) the treatment of a company's pre-funding of a plan and (b) whether a sponsor can continue to average a plan's value over several years could materially impact reported pension costs. (To the extent that capital market participants react to accounting numbers as inaccurate barometers of economic health, C-level executives could be busy with related financial tasks.)

Okay, we get it. There are lots of ways to measure pension deficits but which one tells us what we really want to know?

What is the truth?

Will the real pension deficit please stand up?