Bradley Belt, the executive director of the Pension Benefit Guaranty Corp., is facing a complex series of problems, not the least of them the $23.3 billion deficit that the nation’s pension insurer revealed in releasing its financials on Monday. But he has one simple message for the CFOs of companies sponsoring defined-benefit retirement plans: Get to know what your chief investment officer is doing with the pension money.
“Clearly, the chief financial officer and the chief investment officer need to be in lockstep” when it comes to linking the investment of pension-plan assets to retiree payouts, Belt said in an interview with CFO editors on Tuesday.
To be sure, the executive director was thinking hard about the matching of assets and liabilities in his own organization, a federal corporation that guarantees the payment of basic pension benefits for more than 44 million American workers and retirees taking part in more than 31,000 defined-benefit plans. While the PBGC’s $39 billion in assets would enable it to meet its obligations for a few years, they can only go so far in funding its $62 billion liability.
Belt feels, however, that future pension shortfalls can be staved off if finance executives display foresight about asset-liability match-ups at their own organizations. CFOs should have more guidance for corporate investment executives than simply, “go off and earn an 8 percent return,” he said. “Investment officers have done what’s been asked of them. The question is [whether] what’s been asked of them has been the right thing.”
Finance chiefs should make sure that investment officers take the timing of pension liabilities as well as the return of the plan’s assets into account, according to Belt. The funding needs of plans of companies with many soon-to-retire workers can sharply differ from those of plans with relatively youthful employees, he noted.
While the PBGC chief demurred from advising executives about investing pension assets in equities, the plan’s investment officers should manage such risks precisely, he said. For instance, if finance executives do set a goal of an 8 percent return over time, they need to be aware of when the trough might occur in that period. Unfortunately, because of the nature of business cycles, pension plans are most likely to be in an investment trough when the companies sponsoring them are most likely to default on their pension payments, according to Belt.
“If you had better matched your assets and liabilities, if you had immunized from the outset, you would not be taking risk on the employee compensation side,” he added.
To help avoid retirement-plan asset shortfalls, CFOs should think about their companies’ pension exposure in the broader context of overall corporate risk. “One thing I’ve never understood is why chief financial officers would want to take so much risk on employee compensation — why investors would want the company to be taking so much risk on employee compensation,” said Belt. “I’d think you’d want to neutralize your risk with respect to employee compensation and focus on operating risk.”
During the interview, Belt also said that finance executives should proceed with caution in accounting for their pension plans and reporting the results in their financials. One suggestion: Provide “more robust” retirement-plan disclosure in the management’s discussion and analysis section of 10-Ks.
Further, given the currently stiff scrutiny being applied to corporate accounting practices by the Securities and Exchange Commission and by auditors, he added that finance chiefs “need to be very concerned about not using pension plans to manage earnings.”