NEW YORK -- Last year was one of the best years ever for U.S. pension funds as their assets soared and their liabilities shrank.
Because of rising equity markets and rising interest rates, pension fund assets outgrew liabilities at a record pace in 1999, according to research by Ryan Labs Inc., a New York-based money manager and research firm. The assets of the 200 largest public and private U.S. pension funds are now 26% greater than the liabilities, the biggest gap since 1989, when Ron Ryan, president of his eponymous firm, started calculating and comparing them.
Ryan Labs recorded a 19% gain in assets over liabilities in 1996, the second-best year of the decade. Pension assets outgrew liabilities by 5.6% in 1998.
Because of the roaring stock markets, total assets grew last year by close to 13.4%, according to Ryan Labs data. Liabilities, on the back of falling bond prices, dropped 12.7%.
The Standard & Poor's 500 stock index gained 21% in 1999. But bonds were hammered. The yield on the 30-year Treasuries rose to close to 6.5% at the end of last year from less than 5% a year and a half ago.
"It was a bad year for bonds, so assets outperformed liabilities by more than you'd think," Mr. Ryan said. "We're dealing with numbers here that are way out of proportion with what's considered normal."
But most pension executives don't realize their good luck, he said. Some are dealing with never-before-seen surpluses. Therefore, it's a good time to reappraise a fund's asset allocation and match it to current liabilities, he added.
Mr. Ryan proposes pension executives at plans with surplus assets should break their pension fund portfolios into two distinct parts to meet two different objectives. One portfolio could be structured to match liabilities, another would be structured to generate incremental returns.
To do so, funds should first match all pension liabilities with zero-coupon 30-year Treasury bonds.
This would ensure the fund would never fall below a fully funded position and would bring pension funds into alignment with standard accounting rules when counting liabilities, he said.
Then with any remaining assets the fund could invest aggressively for incremental return.
Corporations would save money -- and bolster their bottom lines -- if they restructured as he prescribes because they no longer would need to make contributions, he said. "Reduced cost equals reduced pension fund contributions," he said.
And public plans would not have to rely on tax increases to pay for an unexpected jump in liabilities.
Some U.S. pension plans already are handling assets and liabilities as Mr. Ryan suggests.
AMR Investment Services Inc., which oversees $12 billion in retirement assets for American Airlines Inc., is one. About 40% of its $5.2 billion defined benefit plan is in dedicated long-duration bond strategies that match the assets to the liabilities, said William Quinn, president of AMR in Fort Worth, Texas.
"We are probably one of a handful (of pension funds) that manages the assets-liabilities equation," said Mr. Quinn.
He estimates no more than 15% of U.S. pension funds employ such a strategy.
Such a strategy might make more sense for corporate plans in businesses that are cyclical, Mr. Quinn noted. The bottom lines of companies in cyclical industries such as airlines, steelmakers and car manufacturers would benefit if the companies calculated current pension liabilities and matched them to a portion of current assets. AMR has three managers running its long-duration strategy: Goldman Sachs Asset Management; J.P. Morgan Investment Management Inc.; and NISA Investment Advisors.
In fact, Mr. Quinn believes the interest in the strategy is picking up. He said a couple of major U.S. pension funds had called him near the end of last year about the strategy. He declined to name the pension funds.
Mr. Ryan based his calculations on the average asset allocation as of Sept. 30, 1998, for Pensions & Investments' ranking of the top 200 public and private pension funds. In it, plan sponsors had an aggregate asset allocation mix of: 45.6% U.S. equity; 30.6% fixed income; 12.1% international equity; 2.2% cash; and 9.5% in other investments.