What pension executives most fear about Jan. 1 is that they won't realize what they've overlooked until it's too late.
"In the end, when the clock rolls over is when you will really know," said Nathan Fischer, chief investment officer for the Employees' Retirement System of Hawaii, Honolulu.
While pension executives are confident of their in-house preparations, they are not as sure about the Y2K exposure of their outside money managers, custodians and the markets in which they invest.
Most plan sponsors expect to have their own internal systems ready for Y2K by the end of this month, if they are not already remedied and tested. Testing is expected to be done up until the last minute at most pension funds.
Trustees want to know -- by summer's end at the latest -- whether their managers are compliant. Pension fund executives in most cases are hesitant to give managers ultimatums, but some said they will consider during the summer whether suspension or termination will be needed. None of the plan sponsors interviewed named any problem firms.
No one is ready to issue any guarantees to retirees and plan participants that the year 2000 bug is extinct, but plan sponsors are getting as many assurances as possible from their service providers that any glitches will be minor.
The urgency of Y2K compliance has led most of the largest U.S. pension funds to communicate with their managers and custodians in one form or another -- through surveys, meetings, on-site visits, letters, phone calls, e-mail messages and faxes.
Generally, plan sponsors define compliance as having all mission-critical systems ready to register year 2000 dates without breaking down.
For the most part, they say, responses have been encouraging, but some are taking concrete steps to protect themselves.
T. Britton Harris, president of GTE Investment Management Corp., Stamford, Conn., has surveyed outside money managers twice and said most will be compliant by June 30. He and GTE's pension fund trustees plan on-site meetings with the top 10 money managers for the $18 billion in domestic defined benefit, $7 billion in domestic defined contribution and $3 billion in other plan assets of GTE Corp.
Consolidation of GTE's pension assets with those of New York-based Bell Atlantic Corp. may be put off until after Jan. 1, Mr. Harris said, but planning will be done this year.
Bell Atlantic, working separately from GTE, has written assurances from managers and is now working on getting the SEC filings of brokers, said Marie LoGiudice, vice president of operations at Bell Atlantic Management Co., which oversees the company's $37 billion defined benefit plan and $14.5 billion defined contribution plan.
United Airlines, Chicago, and AT&T Co., Berkeley Heights, N.J., have set June 30 deadlines for managers to demonstrate Y2K compliance. If they aren't compliant by then, they will need to develop contingency plans.
Because managers largely have been responsive to the funds' requests, pension executives did not say how they would handle managers that failed to come up with such plans.
Robert Angelica, chairman and CEO of AT&T Investment Management Co., which oversees AT&T's $20 billion defined benefit fund and $11 billion defined contribution plan, said money managers will have until Sept. 30 to finish such plans.
"Based on what I see so far, by and large people seem to be in good shape," he said.
Some plan sponsors are focused on assessing legal liabilities.
The Pennsylvania Public School Employees' Retirement System, Harrisburg, is including warranty language in all investment adviser contracts. Under the warranties, which are valid through Dec. 31, 2002, managers agree to have their information systems compliant and to consider Y2K preparedness in making investment decisions. Real estate managers must guarantee any property with electronic systems owned directly or indirectly by the pension fund will not be affected by Y2K.
Jeffrey Clay, deputy executive director of the $46 billion retirement system, said the financial industry is "pretty much on track" in terms of weathering Y2K.
The $156 billion California Public Employees' Retirement System, Sacramento, has developed specific contract wording in which managers promise "fault-free performance in processing of date and date-related data." The clause is meant to assure there won't be any glitches, and that if there are, CalPERS won't be penalized for them. The clause is being inserted in all new money manager contracts, a spokesman said.
CalPERS also is interested in international companies' preparedness and is surveying more than 2,600 non-U.S. corporations in which the system invests, asking about contingency plans, status of mission-critical systems and the cost of becoming compliant.
International and emerging markets seem to be the asset classes pension executives are most concerned about, although most intend to stick to their asset allocations.
"The greatest fear for the markets will be fear itself," said Tom Milne, chief investment officer of the $22 billion Tennessee Consolidated Retirement System in Nashville.
For Mr. Milne, international equity managers are the most worrisome group because of uncertainty in the markets.
He's giving all of the system's money managers until the end of this month to be compliant, but is less concerned about the stability of the regional allocation and how subcustodians will perform during the date change.
While the amount invested in each country is left to the managers, the regional allocation is determined by the fund, which is currently overweighted by around 15 percentage points in the Pacific region as compared with the EAFE index, Mr. Milne said. The fund's December decision to stress the region was not related to Y2K.
Tennessee fund executives might limit managers' dealings overseas or limit their trading activity for a day or two at the end of the year.
In emerging markets, the fear is about not only stock performance, but also the ability to account for holdings. Many plan sponsors are wondering whether their subcustodial networks will hold up after the start of next year.
Emerging markets managers realize there is a concern, said David Zellner, director of investments for the $12 billion General Board of Pension and Health Benefits of the United Methodist Church, Evanston, Ill. The fund nonetheless will not back out of its $200 million commitment to emerging markets.
Harris Lirtzman, director of risk oversight at the $90 billion New York City Retirement Systems, initially had mixed manager survey results. In April 1998, responses to a risk survey he sent to managers ranged from "comprehensive to barely adequate," he said. In October, he sent a follow-up letter to managers urging those that didn't have ways to test their systems to become part of the Securities Industry Association testing, and to test the communication systems with the pension fund's custodian, Citibank NA, New York. Eighteen managers took him up on the offer.
At this point, it seems things will run smoothly, but if trustees have any reason to believe a manager will not be compliant, the firm will be suspended, Mr. Lirtzman said.
The United Methodist board has identified high-risk managers and asked them to provide contingency plans, Mr. Zellner said. He would not name specific firms.
On the public pension fund side, Rhode Island isn't afraid of punishing red-flag managers.
In July or August, Treasurer Paul J. Tavares will determine whether he will need to take money away from non-compliant managers, something he is not hesitant to do but that probably won't be necessary, said a spokesman. Mr. Tavares oversees more than $6 billion in pension fund assets managed by more than 25 money managers.
CalPERS, which is taking a far more comprehensive approach than many other plan sponsors, also is closely watching its stock investments for possible Y2K bugaboos.
James E. Burton, chief executive officer, wrote to 1,600 U.S. companies urging them to comply with SEC Y2K disclosure requirements.
The fund also surveyed 2,469 international companies in which CalPERS has more than $35 billion invested. Only 600 responded and only 13.5% of those gave information or responded meaningfully, a spokesman said.
"A company's failure to make adequate disclosures about its Y2K exposure makes it extremely difficult for an investor to make informed investment decisions," said Charles P. Valdes, chairman of CalPERS' investment committee.
The response rates to the survey varied by region. Only 5.9% of Latin American countries surveyed responded. Overall, 12 companies certified they will be Y2K compliant and told CalPERS they had written plans for solving Y2K problems. Officials of these companies also said they had checked key customers and vendors for compliance and had checked and renovated 100% of their systems by Jan. 1 of this year.
The $81 billion New York State Teachers' Retirement System, Albany, screened SEC filings of 40 of its 60 largest U.S. stock holdings for potential Y2K problems. All of the companies screened said they did not expect any "material adverse impact" at the turn of the year.
Most pension plan sponsors said they trust their managers are screening the companies in their portfolios as part of normal analysis of particular stocks.