GREENWICH, Conn. - Manager turnover, more asset allocation questions and underfunding worries are making the pension fund executive's job a tougher lot, according to the annual plan sponsor survey by Greenwich Associates.
The report, "Big Job Gets Bigger - And Bigger," warns asset allocation mistakes and money manager turnover can affect funding ratios, which already are under pressure from increased liabilities. The sponsors are hiring and firing managers faster and worrying more about asset allocation, and even shifting to defined contribution plans is not reducing their workload, according the study.
It also showed pension officers are turning mostly to international investing as a home for assets that had benefited from a run-up in the domestic stock market.
Greenwich said the average allocation to international stocks and bonds increased to 11.4% in 1996 from 6.7% in 1992; respondents said they expect the allocation to grow to 12.8% by 1999.
But the increased international exposure raises certain issues, the report noted. Pension executives assume foreign markets will yield higher returns than the U.S. market, but they also assume those investments will come with lower risk.
Additionally, international investments mainly are equity, increasing funds' equity allocation, which in turn increases their dependence on sometimes unrealistic return expectations.
Domestic equity allocations, meanwhile, climbed to 47.8% in 1996 from 43.9% in 1992, while U.S. bonds dropped to 26.2% in 1996 from 33.6% in 1992. Respondents predicted domestic stocks will account for 47.6% of assets in 1999; domestic bonds, 26%.
The report also said rate of return and actuarial assumptions must be realistic; it noted some corporate pension fund executives are anticipating returns of more than 10% on common stock.
"They need to recognize equities can go down as well as up, so when the market goes down it's not just a panic, run-for-the-hills type of thing," said Greenwich Partner Rodger Smith.
In manager selection, the survey found the average number of managers per fund continues to increase - to 9.7 managers in 1996 from 8.9 in 1994 - even though pension officials talk about reducing their manager stables.
Greenwich's research also found 34% of funds had terminated managers in 1996, up from 30% in 1992. Stock managers were hard hit: 15% of funds replaced value managers in 1996, up from 3% in 1994; and 13% of funds replaced growth managers, compared with 4% in 1994.
Switching managers can cost the fund 2% to 3% of the portfolio, Greenwich estimated. And for every manager selected, 22 candidates are screened by the consultant, 16 complete the questionnaire, five interview and four make it to final presentations.
Manager-hopping also undermines the relationship needed for a pension executive to get the full value of the managers' services, according to the report. Greenwich has been focusing on what it calls the "new paradigm" manager, a firm that handles various asset classes and performs a more in-depth, consulting function. The survey found 11% of funds had such a strategic relationship, down from 15% in 1995, while the number interested in exploring the concept held at 3%. But the report adds that in interviews, sponsors show they are grappling with the concept, even if they have been less than successful in implementing it.
"Here is a trend that has come from the pension funds, not from the managers," said Mr. Smith. "And one of the challenges is the managers' ability to develop the kind of relationships and service that the pension funds want or desire. This kind of relationship may be lagging plan sponsors' expectations."
The move toward defined contribution plans has not eased the complexity of the pension executive's job, even though participants assume investment responsibility in defined contribution plans, the survey showed.
Greenwich projects defined contribution assets will account for 65% of all corporate pension assets during the next decade. Currently, defined contribution assets account for 38% of all corporate pension assets, vs. 27% 10 years ago. Public fund defined contribution assets grew to 35% in 1996 from 25% in 1995.
Greenwich did not ask the same from public plan sponsors because the defined contribution assets in public funds are still small and the plans are mainly used to complement traditional defined benefit plans, rather than replace them as corporations are doing, said Mr. Smith.
"Public funds have not caught the defined contribution bug to the extent that corporate America has," he said.
But the plans are becoming more complex. Greenwich reports the average number of investment options offered has grown to 5.2 in 1996 from 3.9 in 1992; only 12% of plans offer three options or less and only 4% offer only one.
Increased options create more need for more involved communications, as well as more thorough education, the report said. And service providers are not always rising to the challenge.
"What providers are providing is what I'd call 'bells and whistles' and not necessarily what sponsors maintain they really need - another factor that makes the sponsor's job tougher and more complicated," wrote John Webster, partner. Sponsors need education to get new employees and non-participants in the plan more than they need toll-free numbers and on-line reporting, noted Mr. Webster.
Greenwich's analysts recommended emphasizing lifecycle funds to encourage better asset allocation among participants, rather than offering a variety of asset-specific options.
"Those haven't caught on to the extent that we think they should - because they really simplify the communications a lot," said Mr. Smith. He noted that if full-time investment professionals struggle with asset allocation, participants who think about investments occasionally could not be expected to do better.
Meanwhile, Greenwich found the portion of defined contribution assets invested in company stock continued to rise - to 33% from 30% in 1994 - a larger share than any other asset class. Greenwich's analysts have been warning about the overdependence on company stock, noting it is risky for participants to have so much retirement money in a security whose value is so closely linked with the fate of their jobs.
"If a company runs into problems .*.*. not only is his job in jeopardy, but so is a percentage of his pension," said Mr. Smith.
"It would be a bold asset manager who'd put one-tenth of the assets of a pension plan into a single stock, but here are people putting in an average of one-third," Mr. Webster wrote.
Outsourcing benefits functions also are getting mixed reviews from respondents. Sponsors disagree about whether it cuts costs, and many worry about losing control while still shouldering the responsibility.
The survey also found the average funding ratio among corporate plans dropped to 119% in 1996 from 144% in 1994. About 17% were less than 95% funded; 7% were below 85%.
Among public funds, the average funding ratio rose to 93% in 1996 from 87% in 1994, while total unfunded liabilities dropped to $120 billion in 1996 from $190 billion in 1994.
Declining interest rates had caused a rise in liabilities, as did a change in the mortality tables mandated by the Internal Revenue Service, Greenwich noted. That led many pension funds to increase their risk levels to meet rising liabilities, Greenwich warned.
The survey also found fewer sponsors offering retiree health care benefits. In 1996, 58% of corporations offered retiree medical, down from 63% in 1995 and 76% in 1992. Among public funds, 43% offered retiree medical in 1996, 46% in 1995 and 57% in 1992.
The report is based on interviews conducted in September and October with executives at 1,022 corporate funds, 334 public funds and 225 endowments.
