Pension Risk Matters

Two Giants Merge - Que Pasa?

PG-Info@pensiongovernance.com (Susan Mangiero) — Mon, 29 Jun 2009 00:28:20 -0500

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.

Interview With Susan Mangiero About Pension Risk Management

PG-Info@pensiongovernance.com (Susan Mangiero) — Wed, 24 Jun 2009 00:30:36 -0500

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.

Does Your Plan Have an Effective Travel Policy?

PG-Info@pensiongovernance.com (Susan Mangiero) — Wed, 17 Jun 2009 00:28:24 -0500

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!

I'm Back and Raring to Blog

PG-Info@pensiongovernance.com (Susan Mangiero) — Tue, 16 Jun 2009 00:04:40 -0500

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.

Gordon Gekko and Over Funded Pensions

PG-Info@pensiongovernance.com (Susan Mangiero) — Tue, 02 Jun 2009 00:58:25 -0500

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.

Employee Benefit Plans Built to Last

PG-Info@pensiongovernance.com (Susan Mangiero) — Thu, 28 May 2009 00:26:08 -0500

As I strolled around the ancient ruins of Rome last week (one of the reasons I did not blog for a few days), I was struck by the reality that so little seems built to last. Notwithstanding the architectural glory of the Forum and Colosseum and other magnificent nods to history, our society seems focused on "new and improved." Discard the old. Bring in the new. While unlikely that benefit plan professionals strategically planned obsolescence years ago, one wonders whether retirement plans were ever built to last.

Someone recently asked me for my opinion about what he deemed the inevitable demise of defined benefit ("DB") plans. I countered "not so fast," asserting that changing workplace demographics are giving benefit design teams pause when considering whether to jettison traditional pensions. One investment committee member told me that their company engineers griped loud enough for management to reverse course and bring back the "old fashioned" but popular DB arrangement.

Unhappy 401(k) participants may likewise eventually vote by migrating to employers who offer or reinstate DB plans. Regulators are considering mandates to force employers to strengthen one part of a wobbly three-legged retirement stool. If individuals save little on their own and Social Security is on its knees, who else to pick up the slack but the private sector?

Don't laugh. If the Hula Hoop can make a resurgence with fitness buffs and even have its own magazine, why not defined benefit plans?

If and when these schemes return and/or new savings products come about (driven in large part by rules, regulations and laws), wouldn't it be great to create with permanence in mind? From a cost-benefit perspective, how much money and angst might be saved by doing it right the first time, whatever "right" turns out to be?

Are Pensions the New Power Players In Hedge Fund Land?

PG-Info@pensiongovernance.com (Susan Mangiero) — Thu, 21 May 2009 01:35:52 -0500

According to "Hedge Fund Power Shift Could Be A Good Thing," Securities Industry News reporter Carol Curtis (May 18, 2009) posits that hedge funds will benefit from a recent push to lower fees. Say what? Yes indeed. The thinking goes like this. As pensions push for lower fees and improved transparency from hedge fund and private equity fund managers alike, their win may thwart U.S. and global attempts to regulate alternatives. This in turn will put smiles on the faces of non-traditional fund managers, making for interesting bedfellows all the way round.

Speaking of full disclosures, I was interviewed for this article by Carol Curtis. I pointed out the nature of recent demands for concessions, adding that pensions, endowments and foundations should ask about the make up of both administrative and performance fees rather than relying on gross percentages.

Suppose an institutional investor is comparing Hedge Fund A against Hedge Fund B. The latter may spend more on operations because it licenses a sophisticated risk management system which in turn helps that fund monitor its holdings on a regular basis. Is the "cheaper" fund the better choice? It depends on a variety of issues. The point is that total fees charged may not tell the full story. Institutional investors will want to understand the nature of spending and the basis on which performance numbers are calculated, at a minimum.

Click to read this opinion piece. You may need a password to access the full article.

Have Recent Pension Probes Opened the Door to Better Practices?

PG-Info@pensiongovernance.com (Susan Mangiero) — Wed, 20 May 2009 00:59:10 -0500

In 1905, poet George Santayana wrote that “Those who cannot remember the past are condemned to repeat it.” Was he prescient or practical, acknowledging that human behavior sometimes tends towards inertia if the challenge is deemed too hard? Unfortunately for those who favor inaction, the tide is turning in favor of transparency and investment best practices (and arguably none too soon).

A recent survey conducted by the IBM Institute for Business Value augurs poorly for those who think the past holds the key to the future. To the contrary, nearly nine out of ten surveyed financial executives said they believe that high returns are no longer achievable and that “excessive risk taking, opacity and leverage” have gone the way of the dodo bird. If true, think about the difficulties that lie ahead for institutional investors.

One asset allocation mistake or sloppy due diligence step could cut short any meaningful chance of realizing even modest yields over time as it will be harder to make up for lost ground. More than a few pension, endowment and foundation leaders will simply have no chance but to button up their procedures in order to mitigate uncompensated risk. Their very financial survival will depend on the proper identification, assessment and management of qualitative and quantitative sources of uncertainty.

New rules will come and go, forcing what regulators will invariably characterize as best investment practices. They will be wrong. Staying in business will critically depend on going well beyond the letter of the law and instead committing to a robust and comprehensive focus on economic "compliance" where it counts, i.e. preserving or growing available cash. For example, suppose an institutional investor conducts background checks on key traders but ignores lock ups or undue concentration of said traders' positions. Absent Lady Luck, the pension, endowment and/or foundation will have taken one step forward and two steps backward by spending money to address one risk factor while ignoring others.

The good news is that opportunity presents itself in these turbulent times. Enlightened organizations can differentiate themselves as advocates of buy side governance, thereby potentially reducing their exposure to litigation, lowering the chance of economic losses and/or enhancing their respective reputations with plan participants, donors, taxpayers, shareholders and other relevant constituencies.

Reform won't be easy. Diminished budgets for risk management technology systems and skilled personnel will challenge even well-intentioned institutions. Unfortunately, excuses will fall on deaf ears if promises can't be kept. A retiree or grantee won't care why the checks don't arrive on time or arrive and then bounce.

The future is here. Everyone is a risk manager now.

PBS Frontline Documentary About Madoff

PG-Info@pensiongovernance.com (Susan Mangiero) — Sat, 16 May 2009 12:16:58 -0500

If you haven't watched the 55 minute PBS Frontline documentary about the Madoff fraud (originally aired on May 12, 2009), click here. As I watched the video, I kept asking myself. How could this happen? Why were so many individuals willing to trust without verification? Hopefully (as they become available) court case transcripts will shed some light on the due diligence role of intermediaries. If financial market participants can learn lessons to better mitigate risks, we'll have at least one silver lining from this massive debacle.

Welcome xtremErisa.com to the pension blogroll

PG-Info@pensiongovernance.com (Susan Mangiero) — Thu, 14 May 2009 00:06:24 -0500

Though he prefers to remain anonymous, the creator of a new blog takes delight in being ever so slightly irreverent. An ERISA attorney by trade, the creator of xtremERISA is a big fan of pop culture so expect more than a few references to art and music. For example, a recent post about TARP recalls the lyrics of Head East's song entitled "Never Been Any Reason." Though I'm not familiar with Head East (Does that make me an unhip fogey?), I have to agree with the blogger's sentiment that recent regulatory initiatives seem out of sorts.

"You've been talking in circles

Since I've been able to cry

There's never been any reason

For never telling me why, yeah, yeah"

Welcome xtremERISA. The field needs some humor now and then.

Over the Counter No More - Blessing or Curse for Institutional Investors?

PG-Info@pensiongovernance.com (Susan Mangiero) — Wed, 13 May 2009 21:45:57 -0500

According to the Bank for International Settlements, the global over-the-counter ("OTC") derivatives market toppled $683.7 trillion as of June 2008. See "OTC derivatives market activity in the first half of 2008" (November 2008). It should come as no surprise then that hungry regulators have set their sights on this economic juggernaut. We're regulating almost everything else. Why should OTC instruments be any different?

Hot off the press, the U.S. Department of Treasury today announced plans to regulate "all Over-The-Counter derivatives" with stated objectives that include:

"Preventing activities within the OTC markets from posing risk to the financial system
Promoting efficiency and transparency within the OTC markets
Preventing market manipulation, fraud, and other market abuses
Ensuring that OTC derivatives are not marketed inappropriately to unsophisticated parties."

This is not the first time that Washington has tried a D-word power grab. In May 2002, I wrote "Anyone up for OTC Derivatives Regulation?" in which I pondered whether more government intervention would help. (H.R. 4038, mandating derivatives market reform, did not survive a Congressional vote.) Quote me as saying that "Mandatory regulation comes with a hefty price tag. Compliance diverts resources that could be expended elsewhere on behalf of shareholders. The law of unintended consequences loom large and the 'one-size-fits-all' approach encourages adverse selection. This, in turn, rewards imprudent risk-taking and exacerbates problems associated with misuse."

In 1994, the International Association of Financial Engineers selected my student paper for presentation at their annual conference in New York City. Entitled "In Defense of a Free Financial Derivatives Market," I emphasized the costs of compliance and the oft-perverse aftermath, as countless organizations scramble to avoid regulatory problems by seeking loopholes. So far, few have disputed the factors I laid out then as expensive and therefore aptly deemed as "economic bads." I'm not alone in believing that what I scribed then remains true today in terms of the many costs of regulation. The list includes:

"The cost of compliance, related to regulatory recordkeeping
The cost associated with creating an asymmetry of market information
The cost of creating the problem of adverse selection by treating all risks as equal
The cost of abrogating the legal right of individuals to contract with agents and to own private property
The cost of making hedge management more difficult, and
The cost of stifling product innovation."

Was I prescient in 1994 and 2002? Perhaps but I think many could read the handwriting on the wall. What goes up must come down, right? After all, the topic du jour is whether any market or organization should be allowed to grow "too big to fail."

What does OTC derivative instrument regulation mean for pensions, endowments and foundations? One likely outcome is that the cost of hedging will go up at the same time that some institutional investors favor a more systematic approach to risk management. Will regulation make the world safer? Probably not. There is the danger that some will be lulled into complacency by equating more rules with less uncertainty. I'd much prefer an effort to have OTC derivative buyers and sellers better assess and manage risks. As CPA Michael Jellison wrote in response to "U.S. Lays Out New Derivatives Rules" by Kara Scannell and Corey Boles (Wall Street Journal, May 13, 2009):

"To the investor - if the instrument does not make intuitive sense to you on its face, stay away from it. That's the best form of regulation."

Touche!

Editor's Note: Email your name and fax number if you would like a hard copy of "In Defense Of A Free Financial Derivatives Market" by Susan Mangiero, 1994. Some of the statistics are dated but the principles remain valid.

Pension Plans as Plaintiffs - 800 Pound Gorilla of Litigation

PG-Info@pensiongovernance.com (Susan Mangiero) — Fri, 08 May 2009 00:28:22 -0500

Just a reminder that our webinar entitled "Pension Plans as Plaintiffs - 800 Pound Gorilla of Litigation" will be held on May 12, 2009 from 2:00 PM EST to 3:30 PM EST. Our esteemed speaker panel includes:

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

Since the passage of the Private Securities Litigation Reform Act of 1995, pension plans in the U.S. and abroad continue to play the role of lead plaintiff. Empirical evidence suggests that their presence can often impact litigation terms such as settlement amunt and timing. Hear experts talk about (a) when, and on what basis, pensions are likely to serve as lead plaintiff (b) what happens when a pension plan opts out of settlement (c) trend in sequential lawsuits (ERISA first, followed by securities litigation complaints (d) relationship between fiduciary liability insurance costs and litigation damages and (e) globalization of class action litigation that involves pension plaintiffs.

Email PG-Webinars@pensiongovernance.com or click here for more information

Disappearing Trash Can and 401(k) Withdrawals

PG-Info@pensiongovernance.com (Susan Mangiero) — Thu, 07 May 2009 10:29:50 -0500

The other day, I visited our local Blockbuster store to rent a fun movie (anything for a pick me up with this gloomy market) and I noticed something missing. The trash can that I would ordinarily use in disposing of my weekend coffee cup was gone. In chatting with the video store manager, I was surprised to hear her say that the shopping center manager had deemed it a luxury and had it carted away. At $400 a month to empty, no more waste container. A true sign of the times no doubt but a bit disconcerting nonethless.

Retirement accounts have been likewise impacted by hard times. In "401(k)s Hit by Withdrawal Freezes" (May 5, 2009), Wall Street Journal writer Eleanor Laise describes what must be a horribly uncomfortable situation for plan participants. Unable to transfer their money out of funds invested in illiquid instruments such as real property or securities such as Lehman Brothers debt, individuals are confronted with lack of liquidity at the same time that they are watching the value of their holdings plumment. More than a few 401(k) plan fiduciaries are scratching their collective heads, wondering how otherwise "safe" alternatives could have been invested in "hard to value" securities or financial arrangements in the first place.

In defense of the asset managers, their claim is that unwinding positions to facilitate redemptionsfor some would place an undue burden on remaining investors. This is a familar theme. More than a few hedge fund managers last fall put the kabosh on redemptions by defined benefit plans, even when contractually permitted.

In "More People Tap Retirement Accounts" (May 7, 2009), Wall Street Journal reporter Arden Dale cites a recent Watson Wyatt study that chronicles an increase to 44% of the "number of companies reporting early withdrawals for hardship from 401(k) and 403(b) plans. Penalties for early withdrawal, taxes and the opportunity cost of not being able to earn interest on interest makes such requests expensive. However, if someone is laid off or asked to accept lower wages, it is no surprise that pull-outs are occurring now on a regular basis. Advisors suggest taking out a loan against defined contribution holdings if possible.

Let's hope that financial woes are soon contained and that individual retirees are not asked to continue subsidizing decisions by others, over which plan participants had no control. The inconvenience of a disappearing trash can is one thing. Disappearing retirement accounts is a far more serious situation.

Don't Ever Let Others Destroy Your Dream - What a Lovely Inspiration

PG-Info@pensiongovernance.com (Susan Mangiero) — Mon, 04 May 2009 00:38:04 -0500

In case you missed it, and if you need a wonderful pick-me-up in these gloomy economic times, you MUST listen to Susan Boyle singing "I Dreamed a Dream." Pay attention to the audience members who, presumably based on Susan's appearance and carriage, turned from doubting Thomases to hugely appreciative fans.

I love this video for several reasons. First, I am so sick of reading about arrogant "leaders" who are anything but (in contrast to those humble folks who just keep plugging along, trying to do the best job possible). Second, this woman (who apparently sacrificed a lot to care for her ailing mother) finally got a chance to shine and yet took the accolades in stride. Third, Susan Boyle is 48 years old, proving that it is NEVER too late to grab the brass ring, whatever that happens to be for you. Fourth, she was thrilled with a job well done, taking pride in quality, rather than waiting for praise.(She walked off the stage after receiving a standing ovation but before hearing the judges' comments.) Fifth, she is proof once again that if someone says "no," keep trying to figure out a way to get to "yes."

You go girl and many, many thanks for being an inspiration to all of us!

How Important Are Exit Events to Venture Capital and Private Equity Limited Partners?

PG-Info@pensiongovernance.com (Susan Mangiero) — Sat, 02 May 2009 23:52:40 -0500

If there is any silver lining from the recent market rout, it is (hopefully) a renewed focus on how to comprehensively risk adjust returns. For some pensions, endowments and foundations, barriers to liquefying positions have come as an unpleasant surprise. Other institutional investors appear to embrace illiquidity as a gateway to possible rewards, evidenced by their allocation of monies to venture capital and private equity.

Interestingly, there seems to be something brewing on the buy side with respect to less liquid investments. One might argue that defined benefit plans and other long-term investors should query about distributable cash along the way for a company "built to last" rather than encouraging professional fund managers to back multiple start-ups and hope that at least one or two of them can be flipped within a reasonable period of time at a higher price than cost.

In "The Venture Capital Math Problem" (April 29, 2009), Fred Wilson, notable principal of Union Square Ventures, predicts that "We'll see some of the large public pension funds who have been drawn to venture capital over the past decade decide to leave the asset class because it does not scale to the levels they need to efficiently invest capital." If I understand Wilson's blog post correctly, he seems to be suggesting that a shrinking venture capital industry is a good thing. His arithmetic goes like this:

Venture capitalists raised between $20 to $30 billion each year between 2004 and 2008 or an average of $25 billion of deployable funds.
This money "needs to generate 2.5x net of fees and carry to the investors to deliver a decent return" or 3 times gross returns or $75 billion "in proceeds to the venture funds."
Assuming that each venture capitalist fund owns an average of 20% of funded companies, $75 billion in gross proceeds to them "must come from exits producing $375bn in total value."

Even allowing for Wilson's estimate of average total (multiple fund) venture capital equity interest of 50% and required sales of portfolio companies equal to $150 billion, the message is clear. At a time when capital market conditions have all but shuttered traditional exits, how can the typical VC fund return "enough" to entice new limited partners and/or maintain current allocations?

Rosetta Stone, a provider of language instruction products, brought recent smiles to investment bankers everywhere with a highly successful stock issue a few weeks ago. See "Rosetta Stone IPO Soars," U.S. News & World Report, April 16, 2009. Before then, Thomson Reuters and the National Venture Capital Association had reported an absence of Initial Public Offering ("IPO") activity for two quarters, with merger and acquisition ("M&A") exits fewer than 60 transactions for Q1-2009. See "Venture-Backed Exit Market Remains a Concerns in the First Quarter" (April 1, 2009).

According to Wilson, the venture capital math problem is this. If the industry requires $150 billion per year in exits but is getting about $100 billion instead (half of which is returned to venture capital fund managers), VCs end up earning about $40 billion, net of fees and carry. This is roughly 1.6 times on investor's capital if $25 billion per year ends up in venture capital pools. "If you assume the investors' capital is tied up for an average of 5 years..." then one should expect about 10% per annum. Whether 10% (if realized or surpassed) is sufficient reward for pensions, endowments and foundations remains to be seen. As VentureBeat writter Anthony Ha suggests, venture capital returns oft compare favorably to traditional equity investments. Consider that the reported 3 year return for "All Venture" was 4.2% compared to -10.3% for NASDAQ and -10% for the S&P 500. Refer to "Don't stop believing: Venture performance didn't dip that badly," VentureBeat.com, April 27, 2009.

The reality is that information about projected return drivers is necessary but not sufficient for pension decision-makers. Financial and regulatory exigencies now confront retirement plan fiduciaries in ways that are complex and impossible to ignore. A particular venture capital fund may look appealing to certain trustees in terms of return potential but be turned away because liquidity trumps. On the other hand, underfunded plans may seek salvation by ratcheting up their exposure to investments with the potential to generate more than the commonly used 8% return on asset assumption. Cash is increasingly king for schemes that require mandatory "top ups."

If indeed fewer monies make their way to venture capital, infrastructure and private equity fund managers, what will this trend mean for future economic growth opportunities? The answer is likely to vary, depending on your belief as to whether venture capitalists can jump start innovation. Certainly, some great companies in the United States and abroad have been backed by those general and limited partners willing to take early stage company risks. See "Venture Impact: The Economic Importance of Venture Capital Backed Companies to the U.S. Economy, Fourth Edition," Global Insight, 2007. A countervailing view is that, contrary to the desires of the National Venture Capital Association, taxpayer dollars should not subsidize attempts to restore liquidity. See "Another dumb way to spend taxpayer money" by Harold Bradley, Kansas City Star, May 1, 2009.

As an advocate of free markets and the notion that necessity is the mother of invention, it is refreshing to learn that several organizations have or are formalizing mechanisms to trade otherwise illiquid economic holdings. Financial expert Roger Ehrenberg has an interesting take on the creation of private markets for venture-backed positions. See "Private Equity Markets" Not Today, Perhaps Tomorrow" (April 26, 2009).

To exit or not exit. That is the question of the day.

Harvard Law School Presentation About Pension Litigation

PG-Info@pensiongovernance.com (Susan Mangiero) — Tue, 28 Apr 2009 01:36:36 -0500

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

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

Happy National Teach Children to Save Day

PG-Info@pensiongovernance.com (Susan Mangiero) — Tue, 21 Apr 2009 00:56:30 -0500

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

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

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

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

Tale of Woe for Major City Pension

PG-Info@pensiongovernance.com (Susan Mangiero) — Tue, 21 Apr 2009 00:52:38 -0500

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

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

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

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

U.S. GAO Addresses Pension Buyouts by Financial Firms

PG-Info@pensiongovernance.com (Susan Mangiero) — Mon, 20 Apr 2009 23:21:16 -0500

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.

Are Pension Funds the New Venture Capitalists?

PG-Info@pensiongovernance.com (Susan Mangiero) — Sun, 19 Apr 2009 00:08:38 -0500

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

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

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

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

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