In his paper, titled "Modernizing the Defined-Benefit Pension System," Mr. Fabozzi introduces a quantitative model in which corporate executives can link the management of their pension plans to the overall financial management of their companies. The paper also said the days when corporate pension officials set the asset allocation of their funds based on the traditional "risk/reward" model should come to an end. The paper was co-written by John Mulvey, a finance professor at Princeton University, Princeton, N.J.; William Pauling, an accountant at Towers Perrin, New York; Koray Simsek, an associate professor at EDHEC, Nice, France; and Zhuojuan Zhang, a doctoral candidate at Princeton.
In his paper, Mr. Fabozzi points out that 299 of the 342 companies in the Standard & Poor's 500 index have pension plans that are underfunded by a total of about $210 billion. Companies such as Delta Air Lines, Atlanta, are being forced to consider bankruptcy because they cannot afford contributing to their pension plans to bring them up to an acceptable funding level.
Additionally, in a recent study, SEI Investments, Oaks, Pa., interviewed 100 chief financial officers, 39% of whom said their respective defined benefit plans have become such a headache that they are considering closing them to new employees within the next year. In the same study, 62% of the CFOs said their pension plans dragged down company profits. Last month, IBM Corp., Armonk, N.Y., became the latest major company to act, announcing it would close its cash balance plan to new employees in favor of a 401(k) plan.
Mr. Fabozzi's proposals, if implemented, could have a major impact on the way corporate pension plans set their asset allocations, as most of them simply factor in levels of expected returns in accordance with risk when setting them. Mr. Fabozzi's proposals would also hold corporations accountable for high levels of underfunding — an issue that has only recently grabbed the attention of analysts and shareholders.