I would like to point out two errors that Pensions & Investments made recently in reporting that Caterpillar Inc. is reducing internal management of pension assets.
The first was in a Sept. 19, page 3 story by Fred Williams, "Internal management slipping away." The comments regarding Caterpillar were totally erroneous and without a named source. I promptly called Mr. Williams to set the record straight.
The second was in a Jan. 23, page 1 article, "Largest plans' assets increase a slight 2.2%," by Christine Philip. The article refers to the Sept. 19 story and implies that it has been substantiated by Monica Butler, client executive in the U.S. consulting group of Frank Russell Trust Co., Tacoma, Wash. I have verified with Ms. Butler that she did not make any comments regarding Caterpillar's pension fund, which is in line with Russell's standard policy.
Caterpillar Investment Management Ltd., Caterpillar's wholly owned subsidiary, has managed a portion of Caterpillar's pension fund since 1989. We have managed a Russell 2000 Index for more than five years that touts an inception-to-date return exceeding the index. We have managed an Standard & Poor's 500 Stock Index for more than three years that has tracked the index within five basis points since inception. Caterpillar Inc. is pleased with our performance and is considering expanding our role, not reducing it.
Your publication is a powerful force in our industry and your readers and our customers believe what they read in P&I. I understand that mistakes do happen, but please set the record straight. We are the adviser to the $700 million Preferred Group of Mutual Funds, a $120 million group trust and $500 million in separate accounts. We have customers all across the country that need to know we are alive and well in Peoria.
Caterpillar Investment Management Ltd.
Editor's note: The Jan. 23 story did not intend to imply that Ms. Butler had named any companies with reference to the elimination of in-house investment management departments. There should have been a paragraph break after Ms. Butler's comments to make clear the different sources used in the story. Also, there should be a correction to both the Sept. 19 story by Mr. Williams and to the Jan. 23 story by Ms. Philip, which picked up the same mistake. Caterpillar did not scale back its internal investment management; it remains in control of the management of the company's pension assets through a subsidiary, Caterpillar Investment Management Ltd.
Martin Stempel does a disservice to state and local government pension plans by lumping them in with federal plans in his Dec. 26 Commentary Page article. Although federal plans have a huge unfunded liability, state and local plans don't. In addition, state and local plans are subject to an array of reporting and oversight federal plans don't have. Thus, when it comes to inadequacies in funding and policing, the problem lies with the federal plans, not the state and local ones.
Funding. Mr. Stempel combines state and local plans with federal plans to show an unfunded liability of $1.24 trillion. Buried later in is commentary is the real news about underfunding; the lion's share of it - $1.11 trillion - belongs to the federal government. The remaining amount is borne by state and local governments. But unlike the federal government, states and localities have funds on hand, $708.9 billion to be exact, to pay pensions. Thus, money is available for benefits promised to state and local employees both now and in the future.
By lumping federal plans in with those provided by state and local governments, Mr. Stempel leaves the impression that all public plans are in a dire funding condition. Looking at state and local plans alone presents a much more positive picture. They have assets sufficient to cover 85% of their long-term liabilities. In addition, they are amortizing the remaining unfunded liabilities over periods averaging 25 years.
Moreover, states that are having funding problems are working to correct them. The Illinois Legislature took a major step last year to address its pension systems' underfunding. It approved a program whereby the state will make an automatic payment each year into the pension plans. The program will stabilize funding and reduce the unfunded liabilities for future years.
The Oklahoma Legislature made significant changes in the funding of the Teachers Retirement System in 1992. It raised the amount of money that school districts must contribute to the system as well as raising teacher contributions. It also instituted a cost savings by changing the formula for computing retirement eligibility.
Oversight. Because state and local plans are public entities, decisions affecting them are made in a fish bowl. First, the terms of the plan are approved in the open forum of the legislature or city council. Second, the boards of most state and local plans include employee and retiree members. This ensures that those with the most to lose if the pension plan underperforms have a voice in plan management. Third, all 50 states have enacted liberal government-in-the-sunshine, Freedom of Information, and open meetings laws, so that legislators, plan participants and members of the public have access to information about the plans. These factors ensure policing of state and local plans that doesn't exist on the federal level.
Reporting rules. Not only are state and local plans subject to significant oversight, but also they must comply with a variety of reporting and disclosure rules. First, plan administrators must file comprehensive reports with the governor, or some other executive branch officer, as well as with the legislature. Second, state and local plans generally are subject to annual audits performed by either a state auditor, an independent auditor, or both. Third, they have regular actuarial valuations conducted by certified actuaries.
COLAs. Mr. Stempel exaggerates the prevalence of COLAs available to retirees of public pension plans. Although federal employees receive an automatic COLA each year, the situation is not the same for state and local government retirees. In many states, COLAs are provided on an irregular basis. Under such an "ad hoc" system, retirees might not receive a COLA for several years in a row. Another type of COLA is based on excess investment returns; if returns are not high enough in certain years, no benefit is paid.
State and local plans are, on the whole, well-funded. In instances where problems are occurring, they are being addressed. The plans are reviewed periodically and systematically, and decisions affecting them are made in an open and public fashion. This ensures the plans are well policed.
We need responsible debate that accurately characterizes the differences between federal plans and other public plans.
Cynthia L. Moore
National Councilon Teacher Retirement
Towle/Johnson Associates Inc. was not included in your Dec. 12 directory of minority and women-owned managers.
The firm has $35 million under management and invests in domestic, international and emerging market equities.
Margaret M. Towle is chairman, chief executive officer and co-chief investment officer. The phone number is (206) 654-4120.
Jill F. Johnson
Towle/Johnson Associates Inc.
I wish to report a correction in the Jan. 23 specialissue of the 1000 largest pension funds.
The fund ranked No. 241 on page 26, "N.J. Electric & Gas," should read "PSE&G."
PSE&G is an electric and gas company in New Jersey.
Earl W. White
PSE&G-Public Service Electricand Gas Co.