The importance of pension funds in the capital markets and securing retirement income has been, despite the attention it receives, underplayed.
While not creating it, the Employee Retirement Income Security Act of 1974 spurred the development of the modern money management industry, including, more recently with the growth of employee-directed 401(k) plans, the mutual fund industry.
ERISA fostered investment professionalism and the practical application of advanced and sometime esoteric academic ideas, like risk, diversification, indexing. These ideas generally improved performance for investors and made investing more honest, safer and less costly.
The growing power of pension funds has made corporations and their management and directors more accountable, too, by providing capital for the corporate takeover wave in the 1980s and fostering the creation of the corporate governance movement, although public pension funds, not ERISA funds, led that cause.
The safeguarding of what has become known as the biggest lump of money in the world is important not only to beneficiaries, but also to the economy for all the capital it provides existing and start-up companies.
Pension funds are important assets.
For example, last year General Motors Corp., in its annual report, reported its U.S. pension assets returned an actual gain of $7.159 billion, far larger than its corporate net income has ever been. In 1992, its U.S. defined benefit pension assets returned $2.771 billion; and in 1991, $7.393 billion.
General Dynamics Corp.'s pension assets are larger than its corporate assets.
Yet, little is known about how these companies manage these tremendous assets. The GM $43 billion U.S. defined benefit fund has a higher market value than GM corporation itself. The pension fund would rank among the 10 largest entities in the Standard & Poor's 500 in terms of market capitalization.
Despite this significance, sponsors haven't helped themselves by being reticent - even secretive in some cases - about their pension plan policies and practices. Over the years, they should have been more willing to discuss issues to educate the public about underfunding that in many cases isn't as scary as the numbers seem to indicate, or about reversions that most often provide important economic effects without jeopardizing the security of benefits.
A better informed public would lead to better pension policy, less fear-mongering.
Through a better educated public, corporations would have more credibility in opposing such well-intentioned, but economically flawed, proposals as the Retirement Protection Act of 1994, or of proposals to use pension money for government infrastructure projects.
More communication with the public would also serve to provide more understanding and support of risky-sounding pension fund investments like venture capital or derivative-based strategies, or capital-exporting investments in international markets.
To generate this understanding among the public requires more information. One place for this communication is annual reports. By and large the available information is dismal, even after the adoption of Financial Accounting Standard 87, which improved reporting.
Disclosure benefits the corporation, too. It serves to remind management and directors of their fiduciary responsibility as sponsors in such areas as returns, risk, management fees, contributions, funding levels.
The now-required federal Form 5500 serves no useful purpose and should be scrapped.
Shareholders and beneficiaries, suppliers and creditors, supported by groups like the Financial Accounting Standards Board, should demand corporations provide much more information on pension plans.
Otherwise, this biggest lump of retirement benefits and economic capital risks being eroded by uninformed public policy.