CHICAGO -- Morton International Inc. outsourced investment management for its $600 million defined benefit pension plan to Northern Trust Global Advisors Inc.
Executives at Morton expect the move will improve pension risk management and monitoring.
Northern will hire and monitor Morton's money managers. Morton executives will continue to make asset allocation and actuarial-related decisions.
Michael Meegan, Morton's director of benefit finance, said details on the structure -- such as the degree to which manager-of-manager funds will be used and the role of existing managers -- have yet to be determined.
As part of the switch to Northern, an asset-liability study will be conducted, and reviews of the fund's asset allocation, investment policies and objectives and fund risk tolerances will take place, Mr. Meegan said.
Morton currently allocates 75% of assets to U.S. equities, 10% to international equities, 14% to fixed income and 1% to real estate. Most of the stocks and at least half of the bonds are actively managed.
Northern executives already have begun meeting with Morton's 11 managers to get up to speed on their investment processes, returns and organizational structures.
The review process is expected to take six months to a year, Mr. Meegan said.
Morton's move to outsourcing --in the works for almost two years -- was fueled by the investment industry's recent focus on risk management and monitoring.
Neither poor performance nor dissatisfaction with existing managers was part of the decision, he said.
"We (found) ourselves needing to reach out and find an outsourcing partner to be an extension of our staff," given that the scope of pension management is broadening, Mr. Meegan said. "We needed that full-time set of professionals to help us do our jobs of pension fund oversight," he said.
Besides Northern Trust, the other firms to receive a request for proposal from Morton were: Frank Russell Investment Management Co., Tacoma, Wash.; Morgan Stanley Asset Management Inc., New York; Brinson Partners Inc., Chicago; and SEI Asset Management Group, Oaks, Pa.
"Any one of the five could truly get the job done. Morton felt comfortable with all five," Mr. Meegan said.
Morton executives already had a relationship with Northern. The Northern Trust Co. unit, formerly RCB Trust Co., had managed Morton's $75 million Canadian subsidiary plan since 1984, as well as part of its international equities allocation, he said.
Morton's current U.S. equities managers are: Neuberger & Berman LLC; Fisher Investments Inc.; Northern Trust's index fund group; Lynch & Mayer Inc.; Trend Capital Management; State Street Research and Management Co.; William Blair & Co.; and John A. Levin & Co. Inc.
For international stocks, Morton uses Northern and Frank Russell for manager-of-managers funds.
Morton's bond managers are Bankers Trust Co. and Northern Trust, both for indexed portfolios, and CIGNA Retirement & Investment Services, for active management.
The fund's existing setup has led to strong absolute returns, with performance getting a boost from the fund's relatively high allocation to equities.
Morton's pension fund returned 23.8% in 1997, 22.4% annualized for the three years ended Dec. 31, and 15.6% annualized for the five years ended Dec. 31. (In the same periods, the Standard & Poor's 500 Index returned 33.4%, 31.2%, and 20.3%, respectively. The Salomon Broad Bond Index returned 9.6%, 10.4%, and 7.5%, respectively).
Mr. Meegan said Morton's performance places it in the top quartile for each of those periods in Northern Trust's ERISA Composite.
Despite satisfaction with the performance, Morton executives believe more analysis and oversight will be needed in the future.
"On a total fund basis, we were not equipped to deal with any holes or gaps" that might be created in the complicated interrelationships of its investment managers, Mr. Meegan said.
"I am what you would call a one-person shop," he said.
Broader decisions are made by senior managers on a pension trust investment committee composed of Mr. Meegan, the company's chief financial officer, treasurer, vice president of human resources and corporate secretary.
"If we can reduce cost and reallocate my time to a higher and better use, hopefully with lower risk and better returns, that's sort of Nirvana," Mr. Meegan said.
Whereas he previously had several different points of contact for investment management services, he now will have just one.
Mr. Meegan said Morton wasn't the first company to outsource pension management, and it won't be the last.
"From my own perspective, this may be a trend that is developing. I think we're just on the cusp. I must admit I'm excited about the prospect."
Companies with limited pension staffs, such as companies that resulted from a spinoff or divestiture, might be attracted to the outsourcing solution, he said.
"For those firms that do have limited resources, (outsourcing) is a very possible solution, a good solution," Mr. Meegan said.
Among the companies that have outsourced their pension plans: General Signal Corp., Stamford, Conn., with more than $900 million in assets; Sonoco Products, Hartsville, S.C., with more than $700 million in assets; World Color Press, Greenwich, Conn., with about $150 million in cash balance assets; Grolier Inc., Danbury, Conn., with about $50 million in assets; and Genlyte Group Inc., Union, N.J., with about $40 million in assets.
Mr. Meegan said the corporate trend to outsource non-core activities in an effort to boost the company's share value also will lead more companies to outsource their pension assets.
"I have as much responsibility to Morton shareholders as an operating" unit, he said.
But unlike some other outsourcing situations, Morton will retain control over asset allocation and actuarial decisions, which in his view "should not be delegated to an outsourcing firm," he said.
Moreover, he said "it is important that plan sponsors remember they're not assigning away their named fiduciary responsibilities."
