Investment Insight

Is Corporate America adequately managing employee pension funds?

By many accounts, it has been a good year for corporate pension funds. For the first time since 1999, assets for most pension portfolios showed positive investment returns, reducing deficits by more than $50 billion. Meanwhile, discount-rate relief passed by Congress in April has lowered required contributions to many underfunded plans at least temporarily. But the question remains: is Corporate America’s $4 trillion-plus pension portfolio any better prepared to weather the next downturn?

A revision of FAS 132 was supposed to answer that question. Thanks to the new regulations, which went into effect last December, companies have had to disclose descriptions of investment strategies and targets, plan-asset allocations, expected benefits payments going forward five years, and estimated cash contributions for the coming fiscal year.

The new disclosures are reassuring, but they are far from conclusive.

On the positive side, corporate pension plans appear adequately diversified. According to Howard Silverblatt, a market equities analyst for Standard & Poor’s, the average S&P 500 company has 64.3 percent of its pension assets in equities, 30.1 percent in fixed income, 4.3 percent in real estate, and 1.8 percent in “other” investments.

Companies are also showing more restraint in projecting expected rates of return from pension portfolios — figures they were charged with inflating during the market meltdown. Jack Ciesielski, publisher of The Analyst’s Accounting Observer, says that 2004 10-Ks show “a big outbreak of rationality” associated with those rates.

FAS 132 will also allow analysts to better question them. “Now when a company says it’s expecting a 10 percent return, you can shoot your mouth off if the plan has 60 percent of its assets in fixed income,” he says.

Others say that FAS 132 barely scratches the surface. The information required “is a lot of fluff,” charges Mark Beilke, director of employee-benefits research at actuarial firm Milliman Inc. “The idea was to show how the payments and liabilities of a plan will unfold over the future — but it failed.” The mandate does not elicit the right kind of information about the types of assets and length of liabilities over the life of a plan, he charges.

With investors and regulators looking closely at pension performance, many believe FAS 132 is just the beginning of a push for more disclosure. Once the door is open and investors realize the impact of pension performance on corporate performance, “they start to ask for more,” says Erol Hakanoglu, managing director at Goldman Sachs’s Capital Market Strategies. He predicts disclosure trends for pensions will mirror those for stock options, with firms gradually providing more details on assets and the durations of liabilities.

What’s Missing

One of the biggest complaints against FAS 132 is that the requirements are not specific enough. For example, the four categories in which assets must be grouped — equities, fixed income, real estate, and other — are too vague for analysts to adequately compare expected rates of return against market rates. “If you say you invest in real estate, is that a REIT [real estate investment trust], or a property, or what? And there is no separate disclosure for hedge funds or high-yield bonds, which will be more volatile,” says Hakanoglu. Moreover, there’s little guarantee that what is reported at year-end will hold true during the year.


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