Expect sweeping changes at Ameritech Corp.'s pension management division when its pension fund is merged with that of SBC Communications Inc.
The pension fund merger -- which could come a year or longer after the companies themselves combine -- will create a giant pool of $52 billion in retirement assets.
The changes are likely to be patterned after those implemented at Pacific Telesis Group's investment management unit following SBC's 1996 acquisition of the San Francisco-based Baby Bell.
Once SBC, San Antonio, Texas, took command of PacTel's $16.8 billion in employee benefit assets last year, it terminated the entire staff of 13 responsible for investments and administration; it ended PacTel's internal investment management program, but encouraged three of the top investment managers to establish a money management firm that would invest for the combined pension plan; it reviewed all of the managers at both plans, terminating several, while retaining those it considered superior; it conducted an asset allocation study to unify its targets; and it adopted a cash balance plan for its non-union employees.
Roger W. Wohlert, managing director-finance and assistant treasurer at SBC, said merging the retirement assets of the SBC and Ameritech plans is a long way off, because so many approvals are needed first.
"Until the companies get the approvals for a merger, the pension administrators don't spend time planning or getting together," he said.
But Mr. Wohlert conceded he is curious about what assets might be in the Ameritech plans, and said that once the merger is official, his first order of business will be to find out as much as he can about the Ameritech assets.
He estimated it could take a year before corporate officials would formulate a plan about how to merge the plans.
The defined benefit plan assets of SBC and PacTel merged effective Oct. 1, about a year after the companies themselves merged. Defined benefit assets totaled $23 billion as of Dec. 31, Mr. Wohlert said.
The plans are still being integrated. The management plans will be merged this year but the unions are negotiating details of their plans. The four defined contribution plans, with $8 billion in assets, will be combined soon, Mr. Wohlert said.
Gerrell Ross, a spokesman at Ameritech, said it was too early to speculate about how and when the two plans might merge.
"The employees were informed that all their benefit programs will remain the same," he said.
$18.6 billion plan
An industry analyst who insisted on anonymity said Ameritch's pension plan employs about 30 people in operations and investment management. Ameritech had $18.6 billion in total retirement assets as of Sept. 30.
The analyst, who was familiar with the SBC-PacTel merger, noted merging the pension funds "is a process that moves very slowly."
At PacTel, the analyst said, "the pensions were left alone initially, but as they (the companies) got closer to an approval, those involved in running the pension made decisions about how the plan would operate.
"Since it was SBC that made the bid for Ameritech, that will drive the process, just as it did with PacTel."
Another source said the PacTel investment staff remained in place for about 18 months after the merger was announced.
In fact, the internal asset managers expected to be kept on at SBC, but early last August, two months before the defined benefit plans merged, SBC officials asked them to become external managers by establishing a separate firm.
The new firm -- McGahan, Greene, McHugh Capital Management LLC, San Francisco -- opened Oct. 1, the day the defined benefit assets merged. It is managing $2 billion for SBC using the same core strategy it used at PacTel -- a large-cap enhanced index fund, which has done very well, said Richard McGahan, principal. The firm, which is investing in private and public equity, plans to invest for other institutional clients as well.
Before the merger, the three partners were top executives on the PacTel investment staff. Mr. McGahan was executive director, investment management; Shannon Greene served as portfolio manager, fixed income; and Lawrence McHugh, portfolio manager of active domestic equities.
SBC converted its defined benefit plan for salaried workers to a cash balance plan in January. PacTel already had one, so it was easy to combine them, said a consultant familiar with both plans. Ameritech has a pension equity plan, which should not be hard to merge with the others, he said. Union employees aren't covered under these more cutting-edge plans, because they cost more, the consultant added.
SBC's Mr. Wohlert said an asset allocation study was conducted earlier this year to simplify the investment process at the combined pension plan. The new targets are: domestic equity, 55%; international equity, 15%; domestic fixed income, 28%; real estate, 1%; cash, 1%.
This compares with Ameritech's 59% in equity; 25.2%, fixed income; 4.1% private equity; 11.7% real estate equity, according to Pensions & Investments' Jan. 26 pension fund directory.
The combined SBC/PacTel fund has 21 domestic equity managers, 12 international equity managers and seven fixed-income managers.
"We eliminated some on the basis of performance and duplication," Mr. Wohlert said. "We're always hiring and eliminating."
By contrast, Ameritech's defined benefit plan has 78 external managers, according to the Money Market Directory. Of those, only Brinson Partners Inc., Heitman Capital Management, Jennison Associates Capital Corp., Pilgrim Baxter & Associates and the RREEF Funds also were SBC managers as of Sept. 30, according to the P&I survey.
Ameritech's master trustee and global custodian was State Street Bank & Trust as of that date, while SBC's was Boston Safe Deposit and Trust Co.
PacTel was running $899 million or 9% of its $12.8 billion defined benefit plan internally as of Sept. 30, 1997, according to the P&I pension fund directory. Ameritech had $1.5 billion under internal management as of that date, around 8.9% of its $13.8 billion defined benefit plan, according to the survey. Since SBC has not used internal management, it's unlikely it will maintain the internal management program at Ameritech, analysts predicted.
There always are staff duplications that need to be eliminated, said Fred Schick, vice president at Sedgwick Noble Lowndes, Chicago, a pension consulting firm.
"Usually there are two investment divisions, two benefits units in human resources that deal with retirement benefits, and when plans are merged, you don't need two directors of benefits administration or two directors of pension investments. But since you're dealing with such huge asset pools with thousands of participants, these issues can't be resolved overnight," Mr. Schick said.
Because both companies are Baby Bells, their plans probably have more similarities than differences, he said.
Ameritech's defined contribution plan, which amounted to $4.7 billion as of Sept. 30, was allocated 56.3% to Ameritech stock; 25.7%, non-Ameritech stock; 2.2%, fixed income; and 15.8% stable value.
The $3.1 billion SBC defined contribution 401(k) plan had 66.9% in SBC stock; 16.2% in other stock; 1.05% in fixed income; 13% in stable value; and 2.85%, other.