An analysis of performance of 142 U.S. pension funds by K.P.A. Advisory Services Ltd., Toronto, points to two disturbing problems: a lack of effective organizational management and a lack of policy discipline among trustees.
The analysis vividly showed the resulting cost to the pension funds over a 10-year period. On the one hand, according to the analysis, pension funds gained 69 basis points annually from their investments in specific asset classes. On the other hand, they gave up 58 basis points, consisting of an annual loss of 21 basis points from not rebalancing to the policy allocation, and another 37 basis points from poor operating cost management.
That 58 basis points equals millions of dollars lost for the largest pension funds, and significant amounts for smaller funds.
The net implementation value-added of 11 basis points isn't shooting the lights out, Keith Ambachtsheer, president of K.P.A., told Pensions & Investments in the Jan. 26 issue.
The data depict results from much of the 1990s, when the euphoria of continuing double-digit investment returns might have made pension trustees and management complacent. But it might be that pension plans didn't have much in the way of effective organization to begin with.
Pension plans periodically conduct managerial reviews, asset allocation studies and actuarial audits — as they should. But they often overlook a review of operations, organization and decision making. Certainly pension trustees and staff should be subject to at least the same type of rigorous analysis and performance standards as those to which they should subject their money managers and consultants.
A poor market has often been said to compel pension plan trustees to seek ways to improve overall performance by managing smarter. Perhaps the recent bear market has induced funds to seek such improvements.
The Ohio Public Employees Retirement System, Columbus, for instance, is conducting an investment operational review. It is evaluating the system's operations and recommending improvements. More pension funds should do the same.
Let's hope the euphoria of a big stock market gain in 2003 doesn't ease the pressure and cause trustees to return to complacency.