CLEVELAND - Thomas J. Hartland, CEO of Cleveland-based Hartland & Co. Investment Consultants, thinks medium-size corporate pension funds have extended the "contribution holiday" afforded by high equity returns too far.
After surveying 67 pension plans, foundations, endowments and hospitals in Ohio and surrounding states, Mr. Hartland has concluded that many midsize corporations still are on vacation, to the point where they're neglecting their pension funds and not maximizing returns.
"As rates of return have been pretty easy to achieve, corporate pension committees have spent less and less time drilling down to find out how good their returns are and weed out parts of the plan that aren't working," Mr. Hartland said.
And although officials at some of those companies and some other consultants disagree, Mr. Hartland is not alone in his thinking.
Mike Young, a partner at William M. Mercer Investment Consulting Inc., Minneapolis, said he has seen a number of pension funds that have stopped focusing as much on their investments as well as how their pension plans can play into the company's overall business picture.
"They could have looked at things like the whole process of what the plan's funded status should be as we go through time," Mr. Young said. "What do we want it to be in order to make the plan financially as good as it can be, in terms of its effect on the company?"
Mr. Young said many companies haven't looked at that picture, and it may cost them both in terms of funding future pension liabilities and strengthening the company's bottom line.
For example, say Company A has a healthy pension fund surplus - more than the company would ever pay out in liabilities - and is considering buying Company B, whose pension plan is underfunded. Company A could take Company B's pension plan into its own, use some of its overfunding to absorb the underfunded plan, and negotiate a lower purchase price for its trouble, Mr. Young said. The resulting savings increases Company A's shareholder value, he said.
Mr. Hartland said his pension fund survey, while admittedly limited in scope, still points out what he sees as potential problems.
For instance, 43% of pension fund respondents said they were "disappointed" by their returns, which averaged 11.9% in 1999, the period covered by the survey. The Independent Consultants Cooperative median return for pension funds in 1999 was 14.9%.
That compares with a 15.9% average return for hospitals, foundations and endowments as reported in the survey. However, 80% of the pension fund officials said they didn't make any kind of universe comparisons to see how others fared.
The median 1999 return for foundations, hospitals and endowments, according to the ICC, was 14.9%. Forty-three percent of those hospitals, foundations and endowments that responded classified their three-year returns as "outstanding" or "above average."
Less equity exposure
A big reason for the lower pension fund returns, compared with hospitals, foundations and endowments, was that pension funds reported, on average, 61% of their assets in equities. Thirty percent of the pension funds that responded said they had equity assets of less than 50%. That compares with an average equity exposure of more than 70% for hospitals, foundations and endowments.
At the same time, the survey showed 88% of the pension plans were overfunded, with half having more than double what they needed to meet liabilities. Yet only 38% of the respondents said they based their asset allocation on pension liability information.
The survey comprised 30 foundations, hospitals and endowments with $4.3 billion in assets; 16 defined benefit pension plans with $3.1 billion in assets; and 21 401(k) plans with $2.7 billion in assets. One-quarter of the defined benefit pension plans had more than $250 million in assets.
"The trend to recognize is that investment strategies can be created to help maintain this overfunded position," Mr. Hartland wrote in his executive summary. "We see this as an opportunity missed by a large number of institutions."
But not everyone agrees with Mr. Hartland. Other consultants who work with midsize corporate pension plans say their clients actively manage their plans, and that manager searches, asset allocation changes and good overall returns prove their point.
Jack Dyer, vice president of Aon Investment Consulting, Tampa, said while he agrees that some corporate plan sponsors have become accustomed to high returns in the last half decade, he doesn't think plan sponsors have stopped paying attention to their pension funds.
"They are paying attention to their investments and are paying attention to the actuarial work on an annual basis," Mr. Dyer said. "They're doing what they can."
Likewise, executives of some plans of the size and type Mr. Hartland believes may be neglecting their pension funds say they're as active as they've ever been. They have to be, now that the rising tide of equities that lifted almost all boats in previous years seems to be ebbing.
Take Rhodia Inc.'s $636 million pension fund, for example. Dawn Sanchez, pension investment and compliance adviser for the Cranbury, N.J.-based fund, said Rhodia last year restructured its entire portfolio. Through early 2000, the fund had most of its assets in value stocks. So Rhodia took 35% of its assets and gave the money to State Street Global Advisors, Boston, to invest - 20% in growth stocks and 15% in value stocks, Ms. Sanchez said.
Additionally, the fund diversified into domestic fixed income. Before the overhaul, Rhodia Inc. had all of its fixed-income assets in foreign investments. The fund took 30% of its fixed income assets and put the money into domestic fixed-income instruments.
"It seemed like a good move," she said. "We had no large-cap growth investments, we were looking to reduce our fees. Also, a good portion of our portfolio was in international fixed income. We wanted to become a little more conservative."
Margarett H. Gorodess, executive consultant and director of investment manager searches for Becker, Burke Associates Inc., Chicago, said she sees more plan sponsors actively overseeing their plans than she does companies that are neglecting their pension funds.
Becker, Burke works with clients in the small- to midsize range, from $100 million to $500 million. Ms. Gorodess said even the shift to cash balance plans, which some companies have adopted as a way to save money, shows they're actively involved.
So how does a consultant gauge whether a pension fund is paying attention to its investments? "Are they staying awake in meetings?" Ms. Gorodess joked. "We find they (plan sponsors) are as concerned as they ever were, both about asset allocation and evaluations of managers and more refined in the question of assigning appropriate benchmarks and finding appropriate peer groups. They're paying more attention to short-term manager performance. It's far from being `Well, ho-hum, we're still fully funded and so goodbye and see you next time."'