A comprehensive futures-based strategy will ease the transition when the former NYNEX Corp. pension fund is merged with the Bell Atlantic Corp. fund Jan. 1.
The futures-based investment strategy has been used in conjunction with NYNEX's passively managed internal operation for seven years as well as its active outside managers for five years to:
Maintain the fund's target asset allocation without disturbing outside managers;
Smooth the transition between managers when managers had to be replaced;
Maintain a fully invested position, e.g. when managers allow cash to build up in their portfolios; and
Provide cash for benefits payments when needed.
As of Sept. 30, total combined assets of the Bell Atlantic retirement and savings plans and the former NYNEX retirement and savings plans exceeded $51 billion.
About $35 billion of that total is in the two defined benefit plans, said Candace Cox, president of Bell Atlantic Asset Management Co., New York, Bell Atlantic's investment management subsidiary.
Around 15% to 20% of those assets, or $5.25 billion to $7 billion, will be managed internally, using the passive strategy with futures that has worked so effectively for NYNEX, she said.
"It has been cost effective and allows us to have control of our assets," Ms. Cox said.
With the merger, she expects the economies of scale will be even greater.
"We're staffed. We have our computers. Now as we go through the transition, we will be able to keep down operating costs," she said.
NYNEX, now referred to internally as Bell Atlantic North, has been internally managing around $2.9 billion, or 15%, of its $19.5 billion in defined benefit assets. Three years ago it also began in-house management of some of its defined contribution plan assets, a policy that will continue as a way to reduce costs and offer participants more options, said Ms. Cox.
Bell Atlantic, whose defined benefit plan assets totaled $16 billion, did not have an internal operation.
NYNEX's defined contribution assets amounted to $6.4 billion while Bell Atlantic's were $4.2 billion, according to Ms. Cox. While Ms. Cox did not give a dollar figure, she noted: "It would be safe to say that in the past BAAMCO's cost was less than half of what it would have cost externally; in the future, our internal costs will be an even smaller fraction."
By using futures, the internal managers "can be nimble and turn on a dime if the market changes," said Audrey Kent, vice president of Bell Atlantic Asset Management.
"We use futures, or derivatives as a proxy for each market we want to be in," Ms. Kent explained. "We don't use them for speculative purposes, but to replicate a certain asset class."
The futures strategy is one used by many large pension funds, because it is cost effective, said Ronald Peyton, president of Callan Associates, San Francisco, which is not a consultant to Bell Atlantic.
"It allows a pension fund to adjust for risk exposure quickly and economically. If an investor has a portfolio in France, for example, and he thinks the market is going down, he can reduce exposure by buying futures, without selling at a loss. Meanwhile, he can keep rolling over the (futures) contracts at a very low fee, until the market picks up again."
Mr. Peyton said in-house managers at large corporate funds are more likely to use such a strategy; those at public funds tend to hire outside managers to run overlay programs.
A prime goal of the NYNEX in-house program has been to manage assets in a structured way against specific benchmarks.
The indexed asset classes managed in-house include a U.S. equity portfolio which tracks the Standard & Poor's 500 Stock Index; a fixed-income portfolio, which holds bonds of one- to 30-year duration and futures to replicate the Lehman Government Bond Index; and an international portfolio, which uses only futuresapproved by the Commodity Futures Trading Commission, and involves buying futures contracts from stock exchanges around the world. Currently, it holds contracts in 10 countries.
Asset allocation is determined by an internal staff once a year, and then implemented by both passive and active in-house and external managers.
As of May 1, the breakdown of NYNEX's defined benefit plan was 63.8% in stocks; 23.5% in fixed income, 0.2% in cash, 5.4% in real estate and 7.1% in alternative investment products.
Also as of May 1, the breakdown of Bell Atlantic's defined benefit plan was 60.2% in stocks, 27.1% in bonds, 3.1% in cash, 7.3% in real estate and 2.3% in alternative investments.
What will, will not change
When the pension plans are merged, some things will change and some won't, Ms. Cox observed.
"What won't change is the role that the in-house group plays, because there are so many practical reasons to keep it."
The internal program at NYNEX began 10 years ago, and has been extremely successful, she said. Three years ago, the investment management arm became a wholly owned subsidiary of what was then NYNEX.
Ms. Cox, who is in charge of hiring managers, is in the process of sorting out the framework for the combined assets.
"We will have as many managers as it takes or as few as are needed for cost synergies. We're taking it case by case, and the decisions are evolving," she said. As of May 1, NYNEX had 33 outside managers for its defined benefit plan; Bell Atlantic, 25.
The goal is to make sure the assets are moved in the most cost-efficient manner, Ms Cox said.
"We're in a unique position to control them, because we know where they have been and where they are going. Extensive planning is involved."
Where there is duplication in investment styles, there will be manager terminations, she acknowledged. Mellon Trust, Boston, which has been the global custodian for both pension funds, will continue to serve in that role, Ms. Cox said.
The internally managed assets have, and will continue to adhere, to an asset allocation structure that is "highly quantitative and highly disciplined," added Ms. Kent.
"We follow it so rigorously, we rebalance every month as necessary. If we are overweight (in one of the allocations) at the end of the month, as we have been because of the strong market, we take it down immediately and use it to pay benefits."
On solid ground
The pension fund has been in a "well-funded" position, added Ms. Cox. No sponsor contribution has been required for five years, she said.
The asset allocation is developed by an in-house team headed by Mark Menchin, vice president of asset allocation, said Ms. Cox. "It is driven by our liability structure," she said. "I have not seen a better process anywhere."
Currently, there is a staff of 30 at the asset management company, which is located on the 33rd floor of a mid-Manhattan skyscraper and operates its own trading room.