, Editorial Director
A quick quiz: At the beginning of 1995 private pension plans had (a) $334.8 billion in equities, or (b) $1,091.9 billion in equities? Answer: Almost certainly (b). But both figures come from the government, so nothing is certain.
The first figure comes from the U.S. Department of Labor, Pensions and Welfare Benefits Administration's Abstract of 1995, Form 5500 Annual Reports. It is certainly wrong.
The second figure is from the Flow of Funds Accounts of the United States, published by the Board of Governors of the Federal Reserve System. I suspect the Fed's numbers are about right because the Fed has been tracking the numbers for 50 years.
The difference between the figures is huge. How could the Labor Department's figure be so off? It's because of the way the department gathers the data on investment holdings in its 5500 form.
The problem is in Schedule H, which seeks funds' financial information. Plan sponsors are asked to itemize plan assets, beginning with total non-interest-bearing cash, and going down the line: interest-bearing cash, U.S. government securities, corporate debt, corporate stocks (other than employer securities), partnership/joint venture interests, etc.
But then we get to the problem. The schedule asks employers for the value of interests in common/collective trusts, pooled separate accounts, master trust investment accounts, registered investment companies, etc.
Many employers dump virtually all of their assets into the master trust line. That way they don't have to (a) bother looking up the figures for most of the other lines, and (b) disclose exactly what their funds' allocations are. In addition, they avoid double-counting.
While pension plans reported only $334.8 billion in equities, they reported $890.6 billion in master trusts, $161.3 billion in collective trusts (commingled funds), $202.5 billion in mutual funds and $64.9 billion in insurance company separate accounts. It is a certainty the figures for master trust assets and mutual fund assets, and even insurance company separate accounts and bank collective trusts, include huge amounts of equities. Thus the $334.8 billion vastly understates the true equity figure.
What the DOL failed to recognize (even though P&I sent a comment letter pointing it out and suggesting a remedy) was that master trusts are not an asset class, but an accounting entity.
A master trust is a vehicle for keeping track of all of a fund's many and varied investment portfolios and pulling together a comprehensive report on the overall status of the fund.
A dollar invested in common stocks by a fund that has a master trust will be double-counted in the asset column if the pension executive fills out both the equity line and the master trust line because the master trust should include the equity portfolio in which the dollar is invested. Likewise, assets in bank pooled equity portfolios will be double-counted if they also are listed on the equity lines.
Thus, the schedule contains no useful information on pension fund asset holdings. And this is a pity, for although we have the Federal Reserve's figures, they are extrapolated from a sample of (ironically) master trust portfolios from which the holdings have been extracted.
The DOL's figures, if collected correctly, would provide a useful check on the Fed's figures. They would be based on the assets of all plans with 100 or more employees.
If pension executives must spend the time and effort in filling out the form, the Department of Labor ought to make sure the information being collected is useful.