Top financial officers, whether in corporations or in state or local government, often are ambivalent about their pension funds, but the days of such must be numbered.
On the one hand these executives and officials want the assets invested so as to produce high returns to minimize the cost of providing the retirement benefits. On the other hand, they want to run their investment program at minimal cost.
That is, they often want Rolls-Royce quality returns at Yugo prices.
The two goals are becoming less and less compatible as the investment opportunities for pension funds, endowments and foundations become ever more complex, encompassing not only stocks, bonds and real estate, but hedge funds, private equity and new varieties of derivatives, which all demand greater levels of expertise.
Not only are the investment vehicles becoming more complex, but so, too, are the administration and compliance problems the new vehicles, and new rules and regulations, are bringing.
The trend toward greater complexity will continue unabated in 2004, and those responsible for pension funds, whether corporate or public, defined benefit or defined contribution, will have tough decisions to make: Do they continue to starve the fund's investment operations and increase the chances of lower-than-optimal returns? Do they move to passive management to minimize costs? Or do they step up and provide the investment teams with the resources they need to deal with the increasingly complex world?
Pensions & Investments has reported on staffing issues at many pension funds over the past decade. Corporate pension staffs have been cut to the bone at many companies, and state and local funds also have been denied the resources they need.
In a commentary in P&I's Dec. 8 issue, Andrew Silton pointed out the lack of resources available to North Carolina's state treasurer, who oversees $65 billion in state retirement and other assets. He blamed a shortsighted Legislature for refusing to increase resources despite requests by Treasurer Richard H. Moore. That intransigence is why Mr. Silton plans to leave this month as chief investment adviser to the state treasurer.
"(O)ur state will not be able to meet the investment challenges of the next 10 years" without more resources, Mr. Silton wrote.
That's a comment that can apply to many large and midsized pension funds. It's time for chief executive officers, chief financial officers, and state and local treasurers to commit to spending the money necessary to seek optimal returns for their pension funds. If they are not prepared to do that, they should get out of the chase for excess return and manage the funds simply and passively.
Stalling between these strategies does a disservice to the beneficiaries, the shareholders or taxpayers who foot the bills, and the investment professionals on staff who attempt to achieve with inadequate resources a task that is very difficult task at the best of times.
