Do corporations manage their pension funds the same way they manage their business operations?
Take Commonwealth Edison Co., a subsidiary of Chicago-based Unicom Corp. and a utility notorious for its high electric rates and its declared uncertainty on whether it can even provide power on a hot day, normal in the summer.
Imagine if its pension fund is run with similar excess and equivocation.
For example, take the issue of how the company in its business handles diversification, forecasting, liquidity, hedging and fees. How are these handled with its pension fund?
Typically, corporate pension funds present an image of being a distinct entity, separated from the successes and shortcomings of decision-making in business. Instead, the image of pension funds suggests they're run under models of modern financial theory, rigorously analyzing every penny of cost, each basis point of performance. Pension funds, as the image goes, command the top professionals and make impressive long- and short-term views on the market. Those views incorporate economic, political, social and demographic outlooks. Then they condense that philosophical view into an asset allocation, incorporating a wide array of investment styles and strategies, each designed to provide the proper correlation and risk level for the overall portfolio.
That's the image of pension funds.
But one can imagine parallels between how the corporation runs its business and how it runs its pension fund. Many of the people responsible for the business operations also oversee the pension fund investments.
In the case of Commonwealth Edison, one doesn't know how the pension fund is operated because company executives have declined to comment and provide information.
But the often-assailed operations of the company raise potential parallels with the pension fund.
Diversification. Commonwealth Edison for its business operations has concentrated its power-generating capacity in nuclear plants. It became a leading nuclear power producer. The result, however, has been high costs and troubled operations.
For its pension fund, one can wonder how well Commonwealth Edison has diversified its investment portfolio.
Forecasting. Just after temperatures in its service area rose to the 90s, Commonwealth Edison publicly revealed its concern about its ability to supply enough power for its customers. Any June in Chicago typically has 90-degree weather. But Commonwealth Edison, although it has been in business for decades, has been unable to see the approach of hot weather and align its power supply accordingly.
For its pension fund, one might speculate how it uses forecasting in investing.
Liquidity. For business, the relevant analogy might be daily power generation. Commonwealth Edison, in the midst of a recent brief heat wave, asked customers to turn off their air conditioners during the day, just when they most likely would want or need them.
For the pension fund, one might like to know how the company plans its liquidity needs. Does it have adequate liquidity to provide benefits, or ask beneficiaries to withhold cashing their pension check until liquidity improves?
Hedging. Commonwealth Edison has acknowledged concern about having adequate power supplies, essentially hedging against weather-related needs. How does the pension fund use hedging techniques?
Fees. Commonwealth Edison, in the event of power shortages, will have to buy more electricity at a high cost to make up for deficiencies. In that regard, one wonders how it approaches the fees its pays for investment management, brokerage and other services.
Of course, its pension fund might be a well-run operation. But then why doesn't the company have those people, or people like them, running the business operations?