Managing Pension Liabilities: The Road Ahead

Changes in accounting, law, and the lifespan of employees have companies considering outsourcing their defined benefit pension plans.

A growing number of firms, including Fidelity Investments, Frank Russell, Northern Trust, SEI Investments, UBS Global Asset Management, and Barclays Global Investors, are pitching more-sophisticated pension-management services. Providers say the number of queries from CFOs has skyrocketed since FAS 158 and the PPA. Nevertheless, the question remains: Is outsourcing something as sensitive as employees’ retirement benefits in companies’ best interest?

Some think not. “The downside to any form of outsourcing is the loss of control, which could have cost ramifications,” says attorney John Martini, practice group leader for the Tax, Benefits, and Wealth Planning Group in the Philadelphia office of Reed Smith LLP. “As the fiduciary, you have an obligation to monitor the activities of the outsourcing provider. In a period in which stocks are losing value, even what appear to be the most prudent, reasonable actions — like outsourcing — will get scrutinized if the stock tanks and the sharks come out to play.”

No surprise, then, that some companies are holding firm to their current strategies, at least for now. “We froze our defined benefit plan and continue to manage it in-house,” says David Devonshire, recently retired CFO of Motorola Inc. (He retains the title of executive vice president.) “We’ve looked at outsourcing and are obviously well aware of it as a burgeoning trend, but we didn’t feel a compelling need to do it. Of course, that can always change.”

Other companies have been quicker to jump. “Managing pension plans is not a core competency for us,” says Bill Dordelman, vice president of finance at Comcast Corp. The Philadelphia-based cable provider inherited a defined benefit plan following its 2002 acquisition of AT&T Broadband — but not, regrettably, the plan’s in-house pension staff. “For us to create an in-house investment staff would be costly and inefficient,” Dordelman says. “Outsourcing management of the plan to a firm that makes asset-allocation decisions on a day-to-day basis, and is willing to put its money where its mouth is in terms of being a fiduciary, made complete sense.”

Mark Halverson, managing director of the global wealth management services division of Accenture’s Capital Markets practice, sums up the essential argument made by the new crop of service providers this way: “Most employers are not experts on managing money on behalf of employees, and don’t necessarily view retirement management as a strategic capability. Rather, providing these benefits is an obligation they have to fulfill to their employees.”

And some of them do a bad job of it. “We’ve seen too many examples of companies that have loaded their retirement plans with their own stock, without allowing for appropriate asset allocation and diversification, to the detriment of their individual employees,” says Halverson.

For acquisition-minded companies that suddenly find themselves burdened with multiple pension plans, the outsourcing option can be particularly compelling. “We’ve got some U.S. defined benefit plans and some Canadian ones; some that are underfunded and some that are overfunded,” says Bill Ferko, CFO and vice president at Genlyte Group Inc., a Louisville-based manufacturer of lighting fixtures. “Meanwhile, we’re moving most of the organization into defined contribution plans.”

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