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January 24, 2000 12:00 AM

STOCKS STORY: Top 1,000 funds grow 13% for year

Surging equity markets helped DB and DC plans to progress at the same pace for once

Susan Barreto
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    Thanks to booming equity markets, assets of the country's largest 1,000 employee benefit funds grew 13% in the year ended Sept. 30.

    Defined contribution plans and defined benefit plans grew at the same pace last year, according to Pensions & Investments statistics, unlike recent years when defined contribution plan growth has topped that of defined benefit plans.

    When adjusted for market gains, however, total assets for the top 1,000 dropped 2%. Defined benefit funds among the top 1,000 fell by 3%, while defined contribution plans decreased by 1%, after market adjustments.

    The story was the same among the top 200 funds.

    Employee benefit assets for the top 200 funds totaled $3.7 trillion. Defined contribution plans and defined benefit plans of the 200 largest U.S. retirement plans both reported increases of 14% in assets in the year ended Sept. 30.

    In adjusting for market growth, however, the 200 largest defined benefit funds' assets actually fell 2%. The loss of assets likely is a result of a 15% increase in benefit payments and a 3% drop in employer contributions. A number of corporate plans in the ranking either dropped their contributions or significantly lowered them as they approached full funding status.

    Defined contribution plans among the top 200 held fairly steady, gaining 1% in assets after taking into account the market gains during 1999.

    Both market-adjusted figures

    take into account the misclassification of the United Nations Joint Staff Pension Fund. The fund is a defined benefit plan, but was listed as a defined contribution plan in last year's survey.

    The market-adjusted change was calculated by applying benchmark returns for the year ended Sept. 30 to the pension assets from the year-earlier survey. The benchmarks used were: the median domestic equity manager's one-year performance in Pensions & Investments' Performance Evaluation Report; the Salomon Broad Bond index; the Morgan Stanley Capital International Europe Australasia Far East index; the Salomon non-U.S. World Government Bond index; U.S. Treasury bills; NCREIF's Property index; and the 30-year mortgage rate.

    Reflecting the market

    The growth in assets may be a reflection of the stock market's performance of the past three years, said Jerry Mingione, an actuary with Philadelphia-based Towers Perrin's retirement financial management practice.

    Most plans are using asset-smoothing actuarial techniques to spread the market gains of recent years over five years or so, he said.

    Towers Perrin research of companies listed in the Dow Jones industrial average revealed that annual pension expenses at those companies in recent years have averaged 0.1% of revenue, or roughly $40 million, which is significantly lower than years past, according to the firm.

    P&I's survey showed that employer contributions to defined benefit plans among the top 200 pension funds declined 3%, to $38.1 billion.

    And while contributions are falling, benefit payments continued to rise in the year ended Sept. 30 by 15%, to total $110 billion.

    Of the 200 largest funds, Abbott Laboratories, BP Amoco Corp., Citigroup Inc., Ford Motor Co., Deere & Co. and Northwest Airlines Inc. all dropped their employer contributions in 1999. Ten other companies reduced their contributions.

    The fall in contributions also has corresponded with an increased allocation to equities among many funds. In the aggregate asset mix of the top 200 defined benefit funds, overall equity (domestic and international) increased by 3.7 percentage points from a year earlier.

    At American Airlines Inc., Fort Worth, Texas, contributions to the defined benefit plan fell by 44% to $94 million, while the airline's equity exposure increased by 10 percentage points, said William F. Quinn, president of AMR Investment Services, which oversees the airline's pension assets.

    The $5 billion pension fund increased allocations to international equity, emerging markets and domestic equity.

    Boost in alternatives

    Overall, pension funds increased their allocations to alternative asset classes such as venture capital, private equity and total return strategies.

    Brian Hersey, investment director in the Atlanta office of Watson Wyatt Investment Consulting, said he has seen plan sponsors look to these asset classes mainly for the benefit of diversification.

    According to P&I's survey, the largest increase in alternatives was private equity. The amount the defined benefit plans in the top 200 had invested in the asset class tripled, to total $49 billion. (One factor in the increase, however, is classification. This year, P&I included buyout funds with private equity; in previous years they were broken out.)

    Venture capital investments rose 36%, to total $17 billion.

    Investing in international equity also is proving more popular with larger funds, especially since many funds can transfer their gains from domestic to international equity, according to Mr. Hersey.

    Among the top 200 pension funds, the aggregate allocation to international equity increased 2.1 percentage points. Dollars investments in emerging markets, as reported by the funds, increased by 44%, according to the P&I survey.

    Overseas bond allocations were mixed. While international fixed income increased by 48%, emerging market debt fell by 9%. In the aggregate asset mix, international bonds held fairly steady, dropping just 0.4 percentage points.

    A land boom

    Real estate was another area of interest for pension funds, with assets in real estate equity up 5% to $83.4 billion and investments in mortgages up 108% to total $26.2 billion. But as part of the overall aggregate asset mix, real estate equity dropped 0.2 percentage points.

    Investments in real estate are mainly growing through opportunistic funds, and primarily overseas because the U.S. market has reached an equilibrium, said Ray Milnes, national industry director in real estate in the Chicago office of KPMG LLP.

    The market for private real estate investment trusts was marked this year by various pension funds completing joint ventures with REITs, he said.

    Among the top 200 defined benefit plans, REIT market activity accounted for $9.3 billion, according to the P&I survey.

    Other survey findings related to the defined benefit funds among the top 200 include:

    * internally managed assets increased 7%, to $1 trillion;

    * domestic equity investments grew 18%, to $501 billion, boosting the allocation in the aggregate asset mix 2 percentage points;

    * overall indexed equity was up 11%, to $659 billion;

    * overall indexed bond allocations were up 56%, to $123 billion;

    * enhanced indexed equity totaled $80 billion, while enhanced indexed bonds totaled $21 billion; and

    * hybrid plans totaled $48 billion and cash balance plans totaled $19 billion.

    Key findings for the top 200 defined contribution plans were:

    * internally managed assets fell 11%, to $103 billion;

    * indexed equity increased by 30%; and

    * international active equity investments were $10 billion.

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