The year 2000 computer problem presents potentially large problems for pension fund fiduciaries. If they haven't started thinking about how the problem could affect their funds, and begun taking remedial steps, they should start right now.
Fiduciaries face a multifaceted problem:
* How will the Y2K problem affect their internal fund operations? Are their own computer systems clean of the bug? Will their portfolio management and accounting systems continue to function when the calendar rolls over to Jan. 1, 2000?
* What steps have they taken to ensure their key service providers will be Y2K compliant by the deadline? For a pension fund these include money managers, consultants and master trustees/global custodians, and swaps counterparties.
For money mangers, the service providers include institutional brokers who execute their trades, and institutions with which they have securities lending or soft-dollar agreements.
* For internally managed pension funds and outside money managers, the problem also includes determining how compliant each company in a portfolio is, and how exposed to potential disaster each company is, or problems if a key supplier encounters Y2K trouble and shuts down for any significant period.
The number of companies chief investment officers and portfolio managers must monitor runs into the hundreds or possibly the thousands.
The year 2000 problem involves computer software in which dates are represented by only the last two digits of the year. On Jan. 1, 2000, the dates in those programs will read 00, and many computers will cease to function because the date will make no sense to the programs.
Dennis G. Grabow, chief executive officer, Millennium Investment Corp., Chicago, makes a compelling presentation of the complexity of the problem. Besides mainframes and personal computers, the problem includes so-called embedded computer systems that include circuit boards on production lines or processing units. These embedded systems, he points out, have to be physically changed, not just reprogrammed, a costly and labor-intensive process.
A recent report at the Food Marketing Institute annual meeting noted a major supermarket chain tested its year 2000 compliance in one of its stores and found it wasn't ready; its safe, security cameras, heating and cooling and other systems stopped working.
The National Association of Manufacturers warned businesses in a recent report that failure to bring systems into year 2000 compliance would invite lawsuits. Its legal counsel suggested the litigation explosion could be $1 trillion. The counsel was "pessimistic about all systems being fixable, even if identified," according to the report.
The problem involves every market, every country. Most pension funds have international investments, many in emerging markets. The difficulty of dealing with the Y2K problem could overwhelm these economies already distracted by, and financially burdened with, other problems. Fiduciaries should ask if their funds should remain invested in any of these markets.
Fiduciaries need to confront the possibility of lawsuits that could affect companies in which they invest or pension funds themselves for failing to exercise proper diligence. Pension funds -- called the biggest lump of money in the world -- could make alluring litigation targets.
