The deteriorating funded status of many pension funds has spurred an increase in asset-liability studies since the beginning of the year.
Pension funds doing or planning asset-liability studies include:
* Florida State Board of Administration, Tallahassee. "It's a good time to do an asset-liability study," said Coleman Stipanovich, executive director of the $88 billion pension fund. Reasons include the market's condition and the introduction of a defined contribution plan. Mr. Stipanovich said the fund was due for an asset-liability study; its last one was done in 1999, and officials prefer to conduct them every two years or so, he said. The study, under way now, is expected to be completed by the end of the year. Consultants being used are Ennis Knupp & Associates, Chicago; Rowland Davis, a consulting actuary who works with Ennis Knupp; and Moshe Milevsky, a consultant with IFD Centre at the Fields Institute in Toronto.
"We have now entered a trend to negative cash flow, where distributions exceed cash flow into the fund," Mr. Stipanovich said. System officials are considering diversifying its $2.9 billion alternative investment allocation and will be looking at increasing its investments in venture capital, European private equity, distressed debt and hedge funds. "Because of changes in the risks and returns, we'll feel better doing it in the context of an asset-liability study," he said.
* Highmark Inc., Pittsburgh. "We're in a changing environment," said Joe Reichard, vice president-treasury services and assistant treasurer who oversees the $815 million plan. "We had been fully funded; now we're currently making contributions to the fund," he said. "We just wanted to make sure our asset allocation lines up with our liabilities and projected expenses." The study, expected to be finished in early November, is being conducted by Rocaton Investment Advisors, Darien, Conn.
"It's a changing investment environment and capital market assumptions have changed. I think it's prudent to go through these things regularly," said Mr. Reichard.
* Kentucky Teachers' Retirement System, Frankfort. "We knew that our liabilities were increasing because of the bubble of baby boomers who will be retiring soon, and we wanted to be sure our assets matched up to our liabilities," Gary Harbin, executive secretary of the $11.7 billion fund, said. "We compared assets and liabilities going forward several years to see if we had to alter our asset allocation."
The study was conducted by the fund's consultant, Becker, Burke Associates, Chicago. Stuart Reagan, chief investment officer, said the results indicate the fund should stick to its current asset allocation - 50% equities, 39% fixed-income, 3% real estate and 8% cash - except for small increases in corporate bonds and midcap stocks.
* Orange County Employees Retirement System, Santa Ana, Calif. Keith Bozarth, executive director of the $4.3 billion system, said he and his staff plan to "seriously discuss" doing an asset-liability study. He said it's been "a number of years since the last one, and a lot of changes have taken place in the markets."
Mr. Bozarth also said that there have been a number of changes in the fund's benefits structure over the last few years. He thinks the fund still has a healthy funding ratio, but not as good as it was a few years ago. "I think we're in good shape and I want to stay that way," he said.
* Denver Public Schools Retirement System. "What's happening in the markets now coincided with our normally scheduled asset-liability study," said David Stella, executive director of the $2.4 billion fund. The system conducts a study every five years or so, he said; the last one was in 1997. The study, which was just completed, was done by Callan Associates, San Francisco.
Even if the study had not been scheduled, "we might have taken a look at our asset-liability mix, but not in a full-blown way," Mr. Stella said. The fund wants to examine the risks it wants to take for the returns it needs to achieve, he said. "This shouldn't be a market-driven process."
* White & Case LLP, New York. Allen Marmor, director of pensions and savings plans for the law firm's $45 million defined benefit plan, said the firm is awaiting the results of the study by PwC, New York. The study is due in the next two weeks. "Like everyone else, we have concerns about what our funding will be," he said. "We want to choose funding to get us to the amount of assets we require so we won't become underfunded," he said. "We want to line up our assets to make sure our liabilities are met in the future,"' he said.
* Los Angeles Water & Power Employees' Retirement Plan. Duamel Vellon, retirement plan manager, said the $6 billion system hopes to broaden its investments beyond domestic stocks and bonds "if it fits with the board's risk tolerance." The fund, which received the results of its asset-liability study in May and completed a follow-on asset allocation study in July, is awaiting a decision by the board. "We need to make decisions based on risk tolerances, and we don't know which the board will adopt," said Mr. Vellon. However, he added, "we want to do something more in line with (pension) industry standards (for their investments)."
* UAL Corp., Chicago. "We're hoping to determine what is our best asset allocation structure and the risks/rewards of different asset allocation structures than the one we have now," said Clifford Hew, director, pension investments, at the $11.6 billion fund. The asset-liability study, conducted by Towers Perrin, New York, and Frank Russell Co., Tacoma, Wash., should be finished by the end of the year. The fund's current asset allocation is 50% U.S. equity; 10% non-U.S. equity; 35% fixed-income and 5% alternatives.
Mr. Hew declined to comment when asked if the parent of United Airlines, which has threatened to file for Chapter 11 bankruptcy protection without labor concessions and federal assistance, has made contributions to the pension fund or if it was seeking pension benefit concessions from its unions.
On the rise
Consultants say studies are on the upswing
"We did more asset-liability studies in the first half of 2002 than we did in all of 2001," said Carl Hess, global head of asset allocation studies at Watson Wyatt Worldwide, New York. "The deterioration in many firms' (pension funds) funded status is causing them to re-evaluate their plans or to do them (asset-liability studies) for the first time," he added.
"We're actively working on asset-liability studies for more than 25% of our client base in the institutional consulting group," said Michael Hall, a consultant with Frank Russell Co.
Data from Wilshire Associates, Santa Monica, Calif., shows 51% of state retirement systems are underfunded. Wilshire forecasts a significant 10% to 15% decline in funding ratios when June 30 reports become available. A Wilshire report notes: "The likely result is that the percentage of underfunded state retirement systems will grow from 51% to 75%."
There are several options that come out of the asset-liability studies that pension funds can use, said Watson Wyatt's Mr. Hess. "They can do asset allocation studies, they can change their benefits policy or they can change their funding policy," he said.
Goldman Sachs Group Inc., New York, in a report published last month, said the strategic equity allocations of the 200 largest pension plans were underweight by an average of almost seven percentage points. Goldman said it expects rebalancing flows by pension funds into equities to be as high as $70 billion to $80 billion, with the bulk of the trading through mid-October. Asset-liability studies that show this underweight could lead to more rebalancing and more money flowing into the equity markets.
However, some funds may make no changes at all in their asset allocation.
"Information of new (asset-liability) studies can enable them (plan sponsors) to reassure constituents that it's OK to stay the course with their asset allocation plans," said Russell's Mr. Hall. Most plan sponsors do end up "staying the course. The reason for them not to stay the course shouldn't be because of (movements) in the markets.