GREENWICH, Conn. - Plan sponsors are faced with doing their jobs in a hostile environment, according to a new survey by Greenwich Associates.
Early reports based on Greenwich's annual plan sponsor study suggest fund executives will be swimming upstream this year to produce the kinds of returns they have become used to.
Plan sponsors have done a good job managing assets during the past 15 years, but they have operated under mostly favorable conditions that now are deteriorating, according to the Greenwich report. All funds are faced with an increasingly hostile environment and the risks of derivatives.
Additionally, corporate plans have to face the issues of retiree health care and a growing shift to defined contribution plans. Public plans have to deal with unfunded liabilities, and endowments have to face the implications of spending rules.
The report - Eleven Thorny Problems Facing Sponsors Today - is based on interviews with officials from 1,092 corporate funds, 323 public funds and 205 endowments and foundations conducted last September and October.
The 11 problems are:
Interest rates. Asset allocation is the key issue for the next market cycle, because of the breadth of choices and because of the dismal outlook for all of them, according to Greenwich's consultants. But most estimates indicate interest rates will rise, which will affect prices for domestic stocks and bonds, as well as international investments, currency values and the value of real estate.
Corporate fund issues. Asset allocation and return on investment are the top priorities for approximately 50% of corporate sponsors. The corporate funds have lowered sharply their return expectations, according to the survey; their average discount rates have dropped to 7.8% in 1994 from 8.7% in 1991. Corporate plan executives are reacting by making more aggressive investments, increasing their equity and international allocations. Corporate sponsors increased their average equity allocation to 57.4% in 1994 from 53.6% in 1993 and international stock allocations rose to 7.9% from 7.6%.
Shifting to defined contribution. Greenwich's research found corporations continue replacing defined benefit plans with defined contribution plans.
Retiree health care. The cost of providing retiree health benefits has the potential to be the largest problem for some corporations, and some are dealing with the problem by eliminating the benefits, according to Greenwich's analysis. The portion of corporate plans providing retiree health care has dropped to 60% last year from 76% in 1992 and 68% in 1993. 13% have reduced benefits, 16% have raised deductibles and 23% have asked employees to share costs.
Foreign-funded plans. With the large growth of U.S. corporations overseas, foreign pension assets will become a larger portion of the funds plan executives will have to deal with. Twenty-five percent of corporate sponsors said they already are involved in managing foreign pension assets, and another 35% said they expect to be.
Unfunded liabilities. Public pension plans are faced with payments to retirees that are growing faster than the rate of inflation, while facing the same liabilities as the corporate plans. The research showed the average monthly payment increased to $913 in 1994 from $798 in 1993, while 86% of public funds are assuming rates of return of less than 8.5%. Again, sponsors are coping with the liabilities by investing more in equities and non-U.S. securities; 8.6% of them have assets in international securities, up from 7.9% in 1993.
Derivatives. Both corporate and public funds are using more derivative instruments, and sponsors maintain they are a valid investment if used properly, said Greenwich's consultants. Ten percent of both corporate and public funds are using structured investments, compared with 3% in 1993.
Social issues. Among the social issues, hiring of minority managers is down, while economically targeted investments are up. None of the corporate funds surveyed plan to hire minority managers this year, and only 7% used them in 1994, compared with 12% in 1993. Among public funds, the percentage using minority managers dropped to 28% last year from 29% in 1993 and the percentage planning to hire them dropped to 9% from 12%. On the other hand, the use of ETIs by public funds rose to 8% in 1994 from 6% the previous two years.
While 64% of corporate funds leave the decisions involving social issues to their managers and only 9% give them guidelines, 48% of public plans let the managers decide and 14% give them guidelines.
Endowments and foundations's social stands: They fall between corporate and public funds in their attitudes toward social issues.
Forty percent leave social issues up to their managers, and the use of ETIs has decreased, to 9% in 1994 from 12% in 1992. On the other hand, they have increased their use of minority managers to 13% from 7% in 1992 and another 5% plan to start hiring them.
Spending plans vs. investment returns. Endowments and foundations are spending more of their assets, but expecting lower returns from their investments. To cope, they reduced their domestic stock allocations to 45.7% from an average 51.8% in 1993, while increasing their international equity allocation to 9.5% from 7%, and their allocation to real estate - a class that has performed very well for them - to 3.4% from 2.3%.
Master trusts. All types of funds are faced with getting value and satisfaction from their master trust providers, according to Greenwich's consultants. The ability to custom-tailor reports is critical, but the number of sponsors who regard their providers as first class is minimal.