Exodus from equities

WASHINGTON — Executives at many of the nation's largest corporations would shift their pension funds out of stocks and into long-duration bonds within the next three years if the Bush administration's proposals to shore up the Pension Benefit Guaranty Corp. and overhaul pension funding rules become law.

Bonds tend to earn lower returns than stocks, so such a move could substantially increase the cost of the pension funds to employers. That, in turn, could prompt about two-thirds of the nation's largest corporations to freeze new benefit accruals for existing employees or shut the plans to new workers.

Those are among the results of a survey of 27 big corporate plan sponsors by the Committee on Investment of Employee Benefit Assets of the Association of Financial Professionals, Bethesda, Md.

Of the pension executives who would move assets out of stocks, more than one- third would reduce equity exposure by at least 15 percentage points; one-third by up to 10 points; and the remainder by five points.

The survey also raised questions about the bond market's ability to satisfy increased demand for long-duration securities without disruption.

"Policy-makers in Washington should keep these survey results in mind as they consider pension reform," said Kimberly G. Walker, chairwoman of CIEBA and president of Qwest Asset Management Co., Denver. "Reform should protect and enhance retirement security for current and future workers, not undermine it."

Qwest has a $9 billion pension plan and $3 billion defined contribution plan.

In January, the Bush administration unveiled an ambitious legislative package that would scrap the pension funding rules and require companies to value their liabilities along a yield curve of corporate bonds. Instead of letting companies continue to use a four-year average of interest rates on bonds, the proposal would use only a 90-day average of interest rates on corporate bonds; companies also would be required to use market values of pension assets, instead of a "smoothed" or average rate.

For the first time, companies also would find their PBGC insurance premiums linked to their creditworthiness: Those with below-investment-grade debt would pay higher "at risk" premiums. In addition, the insurance premiums for companies with fully funded pension plans would increase to $30 a participant from the current $19 and, subsequently, be tied to inflation.

CIEBA members most object to the use of a 90-day average of interest rates on corporate bonds to value liabilities, and the requirement to use market values of pension assets, Ms. Walker said.

According to the survey, those two provisions would prompt more than half of respondents to reduce their equity exposure and increase the duration of their domestic bond portfolio.

Additionally, those provisions would "very likely" or "likely" spur 30% of respondents to close plans to existing participants and lead another 20% to freeze future benefit accruals for current participants.

Two-thirds of those surveyed also said accounting changes that would eliminate companies' ability to average their pension assets would cause them to move out of stocks and cause slightly more than half of them to either freeze their pension plans to existing participants or freeze future benefit accruals.

Moreover, more than 20% of companies with credit ratings that are below investment grade or hovering just above would reduce their equity exposure by 15% or more, and 60% would "very likely" freeze their pension plans because of the provision requiring "at risk" companies to pay higher PBGC premiums.

CIEBA would like funding rules that are "more long-term oriented in nature," Ms. Walker said. The nation's most influential corporate plan sponsors would also like lawmakers to ease in any rule changes over several years and let companies make up any pension funding shortfall over at least 10 years, Ms. Walker said.