Large corporate pension funds continue to perform worse than generally accepted investment benchmarks, according to an update of a provocative study that names the pension funds.
Piscataqua Research Inc., Portsmouth, N.H., led by Stephen J. Church, president, conducted the exceptional research. It involves U.S. defined benefit funds of 30 of the largest U.S. companies. The study evaluates their performance from 1987 through 1996. As of Dec. 31, these pension funds totaled $444 billion.
These corporate sponsors are recognized as among the most sophisticated of pension fund investors. But, as the study indicates, the underperformance shows "the strategies chosen by the companies need review. The strategies have not produced significant identifiable value over an extended period."
"The investment results identify a significant question about the investment strategies employed by these companies," the study asserts.
Corporate pension executives typically don't report the investment returns of their pension funds. Still Mr. Church devised a way to calculate their returns using publicly available financial statements of the corporate sponsors.
The study shows the pension funds' performance improving, mostly in the last five years. Still, it is below Piscataqua's benchmark, a bogey weighted 60% to the Standard & Poor's 500 Stock Index and 40% to the Lehman Brothers Government/Corporate Bond Index. Over the 10-year period, the benchmark returned a compound annual 12.7%.
The pension fund underperformance averaged 1.16 to 1.41 percentage points a year. "To leave about 1% a year on the table doesn't sound like much," he said. "But when you convert it to dollars, it means something. That's $70 billion left on the table."
Of the specific funds in the study, Xerox returned an annualized 13.24%; Dow Chemical Co., 12.43%; AT&T Corp. and Ford Motor Co., both 12.23%; USX-U.S. Steel Group, 12.02%; and GTE Corp., 11.82%.
Also, BellSouth Corp., Caterpillar Inc. and Eastman Kodak, all were at 11.77%; SBC Communications Inc.. 11.75%; General Motors Corp., 11.73%; E.I. du Pont de Nemours & Co., 11.59%; Pacific Telesis Group, 11.57%; and U S WEST Inc., 11.56%.
Also, Chevron Corp., 11.54%.; NYNEX Corp., 11.29%; Lockheed Corp., 11.27%; McDonnell Douglas Corp., 11.26%; Bell Atlantic Corp., 11.11%; IBM Corp., 11.09%; Ameritech Corp., 11%; Sears Roebuck & Co., 10.98%; Boeing Co., 10.94%; Philip Morris Cos., 10.92: ; Allied Signal Inc., 10.89%; General Electric Co., 10.76%; General Dynamics Corp., 10.73%; Chrysler Corp., 10.54%; United Technologies Corp., 10.23%; and Westinghouse, 8.24%.
"Xerox's numbers are questionable," Mr. Church said. "It includes its (United Kingdom) subsidiary in its U.S. pension fund. That is 15% to 20% of (pension) assets."
Westinghouse, while dismal, shows improvement. In the previous Piscataqua study with seven years of data, the company's fund averaged 7.73%. Mr. Church attributes the improvement to its indexing much of its fund in recent years. Julie Forsythe, Westinghouse director-pensions, declined to comment.
Breaking out other results, the study notes, "Over the last eight years, these companies have underperformed a portfolio of U.S. Treasury bonds which behaves similarly to the value of the liabilities of these pension funds. Though there are unique aspects of this period, eight years is an extended period of time to underperform a no-risk investment."
"It's clear they need to do something different" in strategy, Mr. Church said. They have been changing. "Most of these companies have adopted more structured pension fund management than they used 10 years ago," meaning doing more indexing, consolidating managers, and becoming more fee sensitive. "The easy answer would be to index everything," he added. "I don't know if that's the right answer. But the reason performance has improved is that they have been indexing more."