Full transcript of the P&I pension strategists roundtable

On June 27 in New York, Pensions & Investments hosted a roundtable featuring some of the nation's leading pension strategists discussing the future of defined benefit plans. The participants were M. Barton Waring, managing director and head of the client advisory group at Barclays Global Investors, San Francisco; Peter Chiappinelli, senior vice president of strategic services, Pyramis Global Advisors, Boston; Eve Guernsey, chief executive officer, Americas, of JPMorgan Asset Management, New York; Martin Leibowitz, managing director, Morgan Stanley, New York; Cynthia Steer, chief research strategist and managing director, fixed income, at CRA RogersCasey, Darien, Conn.; and Kurt Winkelmann, managing director and head of global investment strategy at Goldman Sachs Asset Management, New York. Nancy K. Webman, editor of P&I, moderated the discussion.

Pensions & Investments: What do you see for the future of defined benefit plans?

Ms. Guernsey: I think the trend we've begun to see of the freezing of defined benefit plans is going to continue for a lot of the reasons that are very familiar to this group.

Reason No. 1 is, as an employer, it's unclear that it's truly seen as a benefit by employees. Given the turnover rate of the average tenure of employees in most corporations today, waiting around for a defined benefit plan is just no longer in the cards.

Second is that - at least as currently managed - defined benefit plans are extremely expensive.

And third, the benefit that they did represent to corporations is coming to an end as a result of the pending legislation. The ability to use credit, the ability to see it as part of your income, etc., etc. - all of the benefits from a corporate point of view - are going away.

So I think that as the shift from managing defined benefit (plans) as a pool of assets moves more consistently toward managing both assets and liabilities, what we're going to see is a shift toward the CFO paying (more) attention. It's going to be increasingly sort of a corporate finance set of solutions, and I think that, when looked at in that light, freezing plans is going to be a norm.

Mr. Winkelmann: I think it's fair to say that the consensus view is for a continued decline in the number of DB plans. … Just to give you a rough statistic, if you look over the last 10- to 15-year period, the percentage of assets in corporate pension plans relative to DC plans has basically declined from 53% to 44%.

Now, I don't want to claim false precision in the numbers, so if you said mid-50s to mid-40s, that might give us a round ballpark (figure). …

That said, the pace of change - in our view - has actually slowed down somewhat.

From a corporate perspective, as distinct from a beneficiary perspective … the rationale is face forward. First … it is the case that the existing rules on smoothing, mark to market and the contribution policy do imply some volatility in corporate accounting statements. Given the kind of reforms that people are talking about, which is to say reducing the smoothing … those just exacerbate some of the volatility in the corporate accounting statements.

So our sense is that while these trends in the accounting and regulatory environment are going to change, that's going to exacerbate the issue. Consequently - again, from a corporate perspective - I don't think the situation is particularly rosy for defined benefit plans.

P&I: You were talking about the decline in assets where you said mid-50s to mid-40s compared to DC plans?

Mr. Winkelmann: Yes. The DC plans plus the DB plan assets, and take DBs as a percent of that, that's going to go from the mid-50s to the mid-40s.

P&I: Over what period?

Mr. Winkelmann: Over the last 10, 15 years.

Mr. Chiappinelli: I'm always intrigued and troubled by a question of the future of DB because embedded in that is an assumption there will be this mass behavior in sync, and I think we need to make some very, very clean distinctions between all the different camps.

One cannot generalize about the future of DB.

The first thing we need to do, the first bifurcation, is public behavior vs. corporate behavior. Maybe today … we're going to focus on corporate, but let's not forget that two-thirds of the assets are still sitting in public plans.

Corporate plans are clearly on the defensive for all the reasons we're going to talk about a lot today. They're referred to lots of different ways: actors on the stage; boxers in the ring. But there's no doubt that if you are a CFO or a CIO today, you're being asked uncomfortable questions. …

Many of these factors … aren't even relevant to the public side, so they're not under the same kinds of pressures. The commitment culturally and contractually on the public side is very, very strong to the DB model.

On the corporate side … there are some that are clearly under duress, and they're the usual suspects we know about. Certain industries, certain individual companies … they are the source of the headline news in your publication and other publications, and of course these are big plans and cover lots of employees. I don't mean at all to dismiss it or minimize it.

This underfunded problem is indeed highly, highly concentrated with a few plans or a few industries.

What's the (adage)? Twenty percent of the guests eat 80% of the hors d'oeuvres. Here it's even more of the case: Five percent of the plans account for somewhere like 50% to 60% of the underfunding. ...

I will agree with the consensus view; no one is starting a new DB plan today. I think we can all just sort of agree upon that. So even if one more plan decides to freeze, the trend is absolutely downward. There is no growth. But I think when we look at either the pace or the number of plans that will do it, we have to make a very, very clear distinction about the future of public plans vs. corporate plans first. And even within the corporate sector, we can isolate which one you're going to have: more radical investment solutions; more dramatic changes in investment strategies; or more radical changes in the benefit policy.

Mr. Waring: Well, I just want to go on record early as being in violent agreement with what everybody else said. I may be a little bit of a Pollyanna on this one, and maybe it's just for purposes of discussion …

You know, there is no better way to spread your working life income over your entire life than a defined benefit plan. It's got efficiencies over the defined contribution plan that are remarkably significant. It's not that a defined contribution plan can't be run pretty well, but it can never be run with the benefits and efficiencies … I shouldn't say never - (let's say) can't easily be run on the same level of efficiency - as the defined benefit plan.

So I think one thing that we have to imagine is that there might be a time when people wake up and start saying, "Wait a minute, you know, we probably ought to be moving back, the pendulum should be swinging back toward defined benefit plans."

I think portability of defined contribution is way overrated. It's hard for me to imagine very many employers, certainly not as many as they're actually claiming … really don't care about their work force feeling portable. Whether it's high tech or whatever, you need your software engineers and your other people, whoever they are, to have some longevity on your work force. There's learning that happens, there's the ability to promote strong people. You need longevity. And a defined benefit plan is kind of explicitly set up as a longevity enhancement device, whereas defined contribution is explicitly set up to enhance portability. So I think, again, as the benefit world matures and kind of gets a better handle on both defined benefit and defined contribution, the relative weight and importance of DB is something that can only be realized over the long term.

You know, one of the comments that you often hear, and Eve mentioned a minute ago, is that these plans are costly and risky. It probably is true that they're costly, and certainly the experience has been that they're risky, but, you know, they don't have to be.

The accounting isn't going to change that. The accounting treatment doesn't make them more risky or more costly if we go mark to market. They already are as costly and as risky as they're going to be; and that cost is purely a function of the benefit promise.

There's a lot of misunderstanding that somehow the cost is going to change with different accounting treatments, or you can manage costs through the accounting somewhat. You can't manage cost. You can sometimes postpone it and defer it into different periods, but the present value of your future normal costs for giving those benefits is the amount of the present value of the benefits, and it can't be any other way.

You know, the risk and the way that we've been managing plans using smoothing on the liabilities is different than what's going on in the assets. There's no way to get rid of the risk in investment plans. There's no asset you can invest in to escape liabilities. Mark to market actually gives us opportunities to invest in things that you can hedge a liability with, because as soon as that liability is smooth, you can start managing it out and then, in fact, you can start thinking about exactly how to control how much risk you take.

Most of the risk, it turns out … is investment mismatch risk. Of course, if we have any amount of bonds in 30% of our portfolio, it's going to be highly risky against these very long duration pension liabilities. And of course if we have 70% equities, it's going to be very risky against our bondlike liability portfolio - those are known risks. We see them coming; we know those are risky. …

There are ways to control risks by controlling the investment policy ... but it requires mark to market. You can't actually do it without mark to market and looking through at the underlying economic accounting, if you will.

So I think there's hope for DB plans. The near-term trend - which has had us coming down from somewhere in the neighborhood of 50% of the work force covered by DB plans maybe 30 years ago … today it's only about 22% - that's likely to continue for a while. But the death of defined benefit plans has been exaggerated.

Ms. Steer: Well, I feel a little bit wistful, you know, when we talk about the death now for DB plans. Like Barton and Peter, I feel very much that it's an efficient mechanism, and I believe very much in the DB side of the house. I also think we have, as an industry, for the last 15 years not invested enough on the education of the DB side … and in fact all our lawyers for many years told us we couldn't. We have a lot of catching up to do. …

But what I think is interesting is that we are here partly, not just because of interest rates, but because of contribution holidays. I would just like to put for the record that No. 1 on the corporate side of the house, the reason we're here is the IRS did not allow us to take tax deductions on contributions through the '90s … and it was uneconomic for major corporations to make those contributions; we would be a lot better off had that reality not been in place. …

But on the public plan side, it is startlingly different. The funding reality of those plans who made contributions during the '90s and those who didn't, and the state legislatures or the city legislatures who had contribution holidays, have a much different funding reality than the ones who didn't. Those who had contributions during the '90s and early 2000 probably have, you know, a 95% to 100% funding level at this point.

So, you know, I am wistful. It's a good, efficient mechanism.

I also think we have examples around the world where hybrids will work … I would like to be a little more optimistic that maybe some day when we get through this and we understand what we're doing better, that there will be a new DB plan.

Mr. Leibowitz: Well, it's kind of nice actually sitting here like a poker game and everyone else is declared. … But I guess in fairness I should confess that up to a couple of years ago I was involved in running the biggest DC plan around ... But even then, and still now, I feel wistful: that's a great word. DB plans are, you know, wonderfully ideal … for … beneficiaries. And the character of DB plans is not easily reproduced in DC plans for a lot of reasons. …

Some of my best friends are DB pension plans, but I think they do have problems and I think they are an endangered species. It is true that there probably still is asset growth, in fact even in the governmental plans and let's not forget that, but they also are under stress. …

Barton is absolutely correct. It's not a question of the accounting or even the regulation, which just adds fuel to the fire, but the problems are endemic in the economics. It is a big promise. A couple of things which perhaps do deserve mention is that it's a particularly big promise in an environment where people are living much longer, where there is a fundamental uncertainty as to how long they're going to live, and where the compounding issues of health care interact with that.

The other issue, which is I think particularly important in this country, is the issue of inflation. Our plans are typically nominally based. One of (Barton's) papers has pointed out that there is a strong real rate characteristic to the projected liability, but the terminal payments are almost always, these days, without any inflation adjustment or certainly any material inflation adjustment. And while we tend to live in a world of low inflation, we are talking about the next 30, 40 years.

In some ways these issues interact, because one of the ways to deal with excessive nominal liabilities is inflation. It is not like the government itself is free of such … liabilities, just to go back to the health-care issue. So I think we've got big problems with DB plans. I don't share the optimism that there will be resurgence. … Frankly, I wish I did.

Ms. Steer: I wish I did, too.

Mr. Leibowitz: I think that in terms of a constructive way of dealing with things, it's important to turn to DC plans and try to find ways of making them viable, and try to inject many of the good features of DB plans into the framework.

P&I: How can a corporation use mark-to-market accounting to its advantage? Will mark-to-market accounting actually enhance the surplus in a corporate defined benefit plan?

Ms. Steer: It sort of strips down to reality ... I mean, you really know what you have got. But do many of us manage on a cash basis? I don't know that many of us manage on a cash basis. So it's just another reality.

Mr. Winkelmann: I think Martin actually said it correctly: The true economics are mark to market, and the accounting isn't going to change that.

So the fact that there is this smoothing, the fact that we might not necessarily use market discount rates … I mean, they're there, but the true economic picture is mark to market. So I think the real question is: Suppose we do mark to market, what kind of impact is that going to have on the way analysts think about the companies.

And I was just talking with Barton yesterday on precisely this issue, and he made the point, look, if you go back five years ago when people weren't paying much attention and you talk mark to market, they wouldn't have had an impact. But at this point people are paying attention, they're paying attention to what the discount rate assumptions are, so could we have an impact on market pricing if we move to mark to market? Possibly. But as a quasi efficient-markets kind of guy … I would say people are already talking about it, so I think it's just not that big of a deal.

Mr. Leibowitz: I guess the question when you have different parties involved … (is) when there is an underlying reality, it's important that people see the underlying reality, and if some people think other people are not seeing (that) reality, you can have that effect, that inappropriate effect …

Mr. Winkelmann: I think that's right. The question is to what extent is everybody paying attention, really paying attention.

Mr. Leibowitz: Yes, on both the corporate as well as the public market.

Ms. Steer: I think the possible tragedy, however, in a mark-to-market environment, unlike the smoothing market, (is) the governance of the plan becomes much more short-term focused. I keep seeing us look at short-term performance a lot more when we have long-term pools of capital, we have a long-term balance sheet issue, we have a long-term income statement issue.

And I'm old enough to remember the transition from FASB 8 to FASB 52, which is the transition where all of foreign exchange gains and losses came right into the income statement and then there was more of a smoothing on FASB 52. And this is such a long-term issue; it's not a dissimilar kind of issue. I just hope our governance sort of modifies but doesn't change radically.

Mr. Winkelmann: I think mark to market is going to bring into very clear relief, let me get this right … it will make very clear some of the points Barton raised about the interest rate mismatch, where the risks are in the plan. So I think it actually has the potential to shift our investment policy toward a long-term focus. You can call me optimistic….

Ms. Guernsey: I think that's possible, but maybe the answer lies in the middle of what everybody said. If you do have that sharp view of the true economic reality, it could, for a healthy plan, promote a healthier investment environment, healthier investment plan. But I think for those that are less healthy, it will hasten the freezing of those plans.

Ms. Steer: But I think it will do a disconnect between cash flow and … spending policy on the downside. I think you're going to have more focus on, OK, not total return but (rather), how am I going to pay for the benefit in four years. The actuarial flaw, as we have thought about DB plans, is the indifference in the short end about how you pay the benefits, you know, vs. the long-term total return.

Mr. Waring: But that's where you guys get reconciled. The long-term is reconciled by what Kurt's saying, once you get past that flaw and start seeing what's really going on.

Ms. Steer: And that's what is a better thing.

Mr. Chiappinelli: I'm not sure if I'm agreeing with them or disagreeing with you ... but I think also the CFO or CIO function will go through a materiality exercise. It's not just "Oh, mark to market, this screws up everything on my financial statements." It's immaterial.

Look, a business has volatility in all of its inputs. This is the nature of what they do. If you're Starbucks and you are dealing with volatile coffee prices, you're dealing with volatile coffee prices. It's your decision (on) what's your hedging strategy on coffee bean prices, if any. ... But it's a decision, it's an economic decision and you can do it; you can partially do it or you can do it the whole way. It's a pure economic decision.

All this has done is (taken) your labor costs and your pension costs and corrected your balance sheet impact, which is different from the day-to-day coffee prices.

I get that it's a long-term liability, but if it's not a major component, if it's not a material driver of your costs … it can be a billion-dollar plan, it can be a $2 billion plan, but relative to a sizable debt structure, relative to a very large market cap … I mean, you've got oil companies that are not sweating bullets over this. They have big plans, but it is not, on a relative basis, a material driver of the cost structure.

Mr. Leibowitz: However, Peter, I think there is a correlation between large, labor-intense organizations, which are understandably stressed in this global environment, and having large plans which have become larger with the course of time and markets that have not.

Mr. Chiappinelli: Absolutely.

Mr. Leibowitz: I think what you are saying is true for some companies, where it's, you know, a peanut vs. the elephant itself. But in other cases it is a sufficient-size elephant and one which the organizations are not comfortable viewing as part of their regular flow of business, (and) it is going to be a problem, in some ways quite apart from how well-funded it may or may not be at a different point in time. The volatilities there will require all the parties involved to have comfort that everyone is seeing through to the underlying economics the right way. And that's a tall order.

Ms. Steer: Marty, I would also like to bring up your point about inflation, because for the first time in 25 years we have changing yield curves, we have changing inflation, we have changing foreign exchange rates and we don't have a central bank of one. So we're laying this very complex problem onto balance sheets in a globalized world where you have got the possibility of inflationary erosion coming into the balance sheet; it's a more complex kind of problem.

Mr. Leibowitz: You just mentioned one thing, which I think is very important, that I missed. Let me just emphasize it: globalization. We in the U.S. have a relatively unique situation to the extent that there is far more dependence upon employee-based type of retirement arrangements than in other countries with whom we compete …

Mr. Waring: I think my answer is simply the one that I gave in the op-ed that I did for P&I (Oct. 4, 2004), and that basically was if you want to manage these plans so they aren't too costly and they aren't too risky, then you have to have mark to market.

You know, basically all of the affected parties here - whether it's labor, whether it's management, whether it's the regulators - all of them are having a hard time seeing the problem with non-mark-to-market accounting. Basically I think it's going to make management's job easier in terms of controlling risks and costs. It's going to make the laborer's job easier in terms of understanding what they've got and negotiating benefits. It's going to make the regulator's job easier.

As a matter of fact, I think all of the interests come together with one version of accounting instead of the three or four versions we have right now, if we go to complete mark to market. And I don't mean just changing the discount rate. I mean mark to market all the way through to changing the distribution calculation - far more than what people talked about. When you hear some of the actuaries saying "Hey, we are all financial conduits now" and all they've done is change how they think about the discount rate … they haven't changed how they think about income and expense, they haven't changed how they think about calculating contributions - all those things will be improved to the benefit of everybody. Everybody will be better off with mark to market.

That's, I know, a totally contra-opinion to what our friends out there in sponsorland have as their first reaction. However, when they hear that, they listen. It's an interesting and worthy argument to them, even though it is contra to the position they are taking so far. Even CIEBA (the Committee on Investment of Employee Benefit Assets) wants to hear that view.

Mr. Leibowitz: Barton, do you have concerns that it might be a very tough transition?

Mr. Waring: To mark to market?

Mr. Leibowitz: No. If we were to have mark to market, a tough transition to a nirvana of everyone looking at fundamental economics and reacting to it in an appropriate way rather than, you know, in a paranoid or overwrought way.

Mr. Waring: Well, yes, I think that it might well be a tough transition. Nobody likes change. … But several things will have to happen. I mean, the actuarial and the accounting communities will have to get up to speed (on the fact) that it's a non-trivial task. The whole notion of how to refocus the investment policy efforts so the long term is still taken care of … You know, there's a bunch of follow-on effects that people will have to learn, and those of us that spend way too much of our lives with our heads so deep in this problem that it almost appears simple to us may sometimes fail to appreciate people who have real jobs - and this is a small part of their life - how quickly they're going to catch on and have it all make sense to them.

Ms. Steer: But, frankly, one size doesn't fit all. Those corporations whose treasury and pension areas have not been separated for a decade are going to have a much easier time … I mean it could, in an off sense, spell the death of the separate investment management company at the corporate level. You have got to have such an integrated function. ...

What I think is very interesting, if I were to look at organizational charts, is that the function of treasurer of a corporation, which generally sometimes had an equal - the CIO of the pension fund was sort of on an equal level - that function of treasurer has just gone up because that's where the hedging functions are, that's where the global integration is.

So that's become a much more complex job relative to the CFO job right now. And it's going to be interesting how this evolves.

Mr. Waring: Certainly any CIO that thinks his job is just a big manager has a new vision coming.

Mr. Chiappinelli: I tell you, I really feel for the plan sponsor community. These are bright, intelligent, hard-working folks. Many of them didn't get their MBA in finance, they don't have their CFAs, don't spend their days and nights thinking about this. They have regular day jobs and so they've asked the firms that are sitting around this table for help; they have hired consultants, they have hired all sorts of experts. Many of them, a whole generation of them, have just been trained on CAPM (capital asset pricing model) and efficient frontier, and now they feel comfortable talking this language and feel like they've finally got it.

And now ... talk of (liability-driven investing) and talk about different risk metrics, although that may end up being the right way to think about it, it's a change. It's rewriting the rule books and … what defines a successful plan. It's what they're going to have to report to their boards on: Did we make it or not. That whole metric has been (changed) or is about to change.

And I feel for them because they just got up to speed on CAPM, and now we're changing the risk factor that they're going to be judged against.

It may be the right thing to be doing, but …

P&I: Other than Salomon's (latest figure of) $50 billion in underfunding (for the pension plans in the S&P 500), does anybody have any other number they want to throw in on the latest size of the underfunding?

Ms. Guernsey: We did a survey a short time ago that shows that at the end of 2005, the median funded ratio was 86%, and that that was exactly the same as our survey at the end of 2004. That's for the top 200 funds.

What I struggle with a little bit is, is the corporate pension funding crisis over? I kind of go back to what Cynthia was saying. I don't see the corporate pension funding crisis itself as an end, but rather a symptom of a very long path of actions - sticking just with corporates - that our corporations have taken: the contribution holiday; the sharp increase in expensive investment rates of return that they have used; the investment policies they put in place; the risks they took when the equity market was as strong as it was and not correcting fast enough.

I think the funding crisis is a symptom rather than a result, for one. And two, whether or not it's a crisis depends in my mind on whether you are looking at it in the short term or you are looking at it over the long-term life of the pension funds and the liability they are promising to pay.

Over the long term I don't see it as much as a crisis, but if we get the short-term mentality that Cynthia is talking about with some of the changes and regulations that are pending, it could become more of a crisis.

Mr. Winkelmann: We have checked some other sources on other estimates, and the reality is that those estimates, as with everything else, it's a range. … I think the consensus in what we've been reading is that some of the underfunding issues have been ameliorated.

But I agree with Eve's point, which is the fact that the numbers have changed doesn't really change the basic issue: Should we be thinking about a different way to manage our benefit plans. And irrespective of whether we had a good line of equities and bond deals, or corporations making contributions - those have all had an impact on the change in funding status - that doesn't take us away from the point that there's another way for us to be thinking about managing pension plans. We really ought to be thinking about that.

Ms. Guernsey: Perhaps that's a direction we can go. But I think we should go to the point that Cynthia made, which is we can't any longer look at retirement in terms of DB only. It's got to be a combination of DB and DC, hybrid, whatever terminology you want to use, but there is no either/or. There is no single solution. It's got to be looked at in concert with the other retirement plans that are available to employees.

Mr. Leibowitz: The $50 billion - that cannot incorporate the public plans, right?

Mr. Winkelmann: No.

Ms. Steer: The public plans would probably be on average, the very large ones, around 65% to 80% funded.

Mr. Waring: In all likelihood the problem's much bigger on the public plan side than on the corporate side. You know, there's a couple of differences in accounting on the public plan side that make it hard to compare apples and apples, too. The public plans use an expected return on the assets as the discount rate, which by reference to the rates used on corporate plans, tend to vastly understate the liability.

They also use, though, going in the other direction, the much broader definition of liability, typically the present value of benefits, which includes future service and future pay increases, or a (projected benefit obligation) measure, which includes pay increases. … So that is a broader measure, and then the discount rate difference is a shrinking issue. … So there is a big problem on the public plan side.

Ms. Steer: In public plans, they have an opportunity right now, given the level of interest rates, that the corporate plans don't. They could actually go out and issue a (pension obligation bond). Given the long-term economics, it's going to be below the long-term rate of return in most cases. … The interesting thing on the economics that I see is you will probably hit pay dirt in essence in less than 10 years, and in some cases, five to eight years.

P&I: Is anybody doing it?

Ms. Steer: There are some people that are doing it, but there's a lot of knots to get there. …

Mr. Waring: Kurt and Marty, you guys watch the interest rate stuff probably more closely than I do. With the runups in rates this year, has that been offset by asset movement so there has not been a net improvement from that, or has that caused an improvement this year?

Mr. Leibowitz: That's been an improvement.

Mr. Winkelmann: Yes.

P&I: A lot of people are talking about liability-driven investing with the possible mark-to-market accounting. What are the pros and cons of liability-driven investing, and will it cause pension plans to miss out on the upside during a strong market cycle?

Mr. Leibowitz: First of all, I think the term LDI is very important because it implies a narrow focus on a narrow liability. I think when you talk about should we embrace asset-liability management, the answer has to be: "We should have been doing it all along." There is no argument for not considering your ultimate liabilities as you go about managing assets. The issue is to do it in not a narrow way, but a comprehensive way, a way that incorporates multiple horizons that you really do have to live through.

What is usually meant by LDI, in this particular conversation, is a fairly narrow way of essentially trying to address the interest rate movements. Sometimes it's taken to mean really almost kind of freezing the plan, and I think if that were to be the case, you do lose something because when you take risk off the table or a certain kind of risk … you don't want to take the opportunity off the table. A long-term liability, a long-term plan is the ideal investment vehicle for being able to generate returns and to take and remove that possibility is just leaving money on the table. …

So to be narrowly (focused on) LDI, without using that as part of a totalistic sort of way of investing, yes, I think it could be very counterproductive in a DB framework or in a DC framework.

Ms. Steer: I agree with Marty.

I think, No. 1, liability-driven investing is a very useful way to start to look at the problem. But again, one size doesn't fit all.

No. 2, you have to look at it in a robust asset-liability framework. And it can't be a dollar-only framework; it has to be a multicurrency framework. And this is, I think, where corporate treasuries have an advantage over their public plan counterparts, because they continue to look at it in a corporate framework.

The third thing is, it allows you to take a look at the longer term vs. the shorter term.

To my mind, there won't be any solutions that are robust enough without the ability to go long/short. But there will not be a solution in the dollar-only context because you have less than 350 issues in the Lehman (Government/Corporate bond index) when you really look at it, that could go. Frankly, there won't be any solution, the liability-driven solution, without using a mark-to-market long-duration security, either nominals or (index-linked bonds). And we do not use the linkers and the TIPS asset classes robustly enough to make that framework.

In that long-duration framework - and you guys on the theory side are much better than we who just do the practical side of the world - in a world of moving inflation, interest rates and foreign exchange rates, I want to be able to take advantage of all this because that's where I'm going to combat erosion.

There was a reason the yen was the carry trade for a lot of people in the world right now. We should be using what we know very well and sort of turning the CAPM as we know it on its head, and really use it in this more robust framework.

Mr. Waring: I think, like Marty said, the term LDI is kind of an unfortunate term. It's kind of the latest buzzword that makes it sound like there is a new idea out there, and it's not a new idea. All pension plans that have done asset-liability studies, even if you don't agree that those studies used newer technologies, they would be forgiven if they thought they were managing in a liability-driven way over the years.

The CAPM version of the technology for liability-relative investing has been around since at least the mid-'80s, if not earlier. Marty wrote one of the early papers on it. As far as I can figure out … that seemed to emerge just from the natural thinking of the liabilities from some of the work Treynor had done in the mid-'70s. By the 1990s, Sharpe was writing articles about how to do it better. Not how to do it, not announcing concepts, but how to make the calculation easier. (Jack Treynor is president of Treynor Capital Management Inc. William F. Sharpe is a Nobel laureate in economics and founder of Financial Engines Inc.)

So this has been around a long time, and it just really hasn't been used much. We have known the concept of it, but I think the accounting problem has kept us from using it. People who started using this term - liability-driven investing, LDI -in the last year or two actually were coming at it from entirely a cash-flow-matching way, as if that was new. There's really not much new in there, and certainly looking at what these people are doing in their LDI-type cash matching doesn't rise to the standard of what was being done in the '80s.

So in many ways, LDI really is an unfortunate term. It's all about investment strategy in the presence of a liability; investment strategy and policy in the presence of a liability. And, for better or worse, that's surplus optimization as the tool of choice for how to do that and how to conceptualize the problem.

We don't give up anything except uncompensated risk. Right now we have a lot of uncompensated risk in pension plans, of interest rate mismatches and maybe an overly zealous attention to attribute exposures. We can actually hedge out through most plans - particularly reasonably well-funded plans -all of the interest rate risk and also maintain whatever amount of equity exposure we want due to the magic of being able to separate the risk-free component from the excess-return components and using derivatives and swaps and futures.

So we can hedge out all interest rate risk in many plans, if not most, and hold whatever amount of equity we want to hold simultaneously if we want equity to help pay for the plan. Helping pay for the plan is a risky proposition that, in a bad cycle - and cycles can be quite long - might make the plan more expensive. That's the tradeoff for a pension plan basis.

But LDI isn't new. It doesn't cost anybody anything long term or short term. I guess the benefit of it is that it has heightened people's interest in the right technologies, and maybe out of this we will have something more sensible than simple cash-flow matching.

Mr. Chiappinelli: I think there is a perception in the plan sponsor community of it being a new science or perhaps even a dark science, and I think they are all well served to try and talk about the history and that this is nothing new.

I think it also helps to try and relate it to the world that they do know and are comfortable with. … We sometimes just try to talk about it not in terms of LDI, but in terms of benchmarking. They understand benchmarks. They understand deviations from benchmarks. They understand the risk-return tradeoff of hedging. …

When we remind them of that, we simply say OK, now we're just going to go change benchmarks. It's not that different. But the benchmark that maybe you haven't been used to over most of your career is this liability, and it behaves this way and therefore your pension strategy can be this. You can lock it down - that's called immunization - but you are going to give up something. Or you can have an imperfect hedge; you can allow and tolerate some volatility around that benchmark with the potential for some upside.

And when we break it down into a world that they know, it becomes a lot less intimidating than that new language and new vocabulary. In the world of benchmarking and taking a risk by deviation from the benchmark, it starts to sound a lot less intimidating and, frankly, a lot more logical. And that's when it is actually helpful to have the CFO in the room. Because he/she brings that mindset of hedging ratios and they get it. They're much more fluid in the way they do it because that's what they do in a more day-to-day basis.

Mr. Winkelmann: I think Marty brings up a great point: LDI has been around for a long time. LDI is really an unfortunate terminology. The fact that people are using the terminology, the fact that they're actually putting that out there, is probably not a good thing because it is focusing people on the idea that the liabilities trend is the true benchmark. And to Barton's point, it does force them to say, "Look, I've got to think about risk and return in terms of surplus terms, not in excess returns."

From where I sit, that is not a good thing. When we start thinking about surplus risk and surplus volatility, it gets us to a world where the dominant source of risk - dominant is too strong, somewhere within 40% and 50% of the risk of surplus - is coming from the interest rate mismatch.

Now, others of my colleagues have argued this is an uncompensated risk. Actually, it's not really uncompensated. What it's expressing is a bearish view on interest rates. It's expressing it because the dollar duration mismatch is so extensive that basically the plan has an embedded view that rates are going up for a very, very, very long time. What makes it different today than, say, 20 years ago is it's a risk that people can actually manage.

I think the difference in the world today vs., say, 20 years ago … is that we have more widely available product to help in hedging. If you think about liquidity in the swaps market, (it's) much, much more extensive than if you go back 20 years. Importantly - and I think this brings up one of Peter's points - the familiarity with those tools is much broader, not just within the corporate treasury area, but also some of the pension executives.

I think we do operate in a much different world, a world where the ideas have been around, the papers have been out there. It's a world where people have the tools and they can start applying the tools. I think the big issue that we face right now is: How do we get organizations comfortable that, in terms of broad education, they can actually get the job done.

Ms. Guernsey: I'm very much in that camp. You know, we've been managing long-duration assets for 25 years, and we have had conversations with our clients about the liability side of their obligation for as long as that.

But until the more recent past, we haven't seen people think more creatively about how they can achieve what is simply a reduction in the interest rate risk. They have associated it with lengthening the duration of the bond portfolio. They see the cost inherent in that. They worry about the timing of that, and so end up being sort of a deer in a headlight.

But with the new tools they now see available to them, they see exactly what Marty said, and you, Barton: You can actually accomplish a dramatic elimination of interest risk through tools that will not prevent you from also managing and optimizing a surplus.

Ms. Steer: But isn't the danger in the implementation?

Ms. Guernsey: Yes.

Mr. Waring: What's the danger?

Ms. Steer: Let's take the example of the U.K. in implementing long-duration policies, what has happened to the market and the pricing of the bonds in those markets. …

Mr. Waring: You are saying the demand pushes the rates down?

Ms. Steer: Right. … I think that then pushes it back onto the plan sponsors and people like us to say, "Let's take a look at this problem, what part of it can we tackle." One of the wonderful things about this issue is that nobody's liabilities look the same. Nobody's inflation sensitivity looks the same. In the end … no one's manager mix is the same.

Mr. Winkelmann: Could there be a market impact? Possibly.

But I guess the way I come into this is once we start thinking about risk and return in surplus terms, we can much more explicitly identify where we're taking the views. The discount rate is down 50 basis points and we think it's going to go back up. We may not want to match exactly duration.

So the key thing here is being very explicit about the potential sources of portfolio returns and adjusting the pension policy accordingly.

Mr. Chiappinelli: I think that's an important point. We have had these conversations, now taking it from an LDI perspective, or in response to new accounting, (that) we may need to extend duration. And that's crazy. Clients say, "I'm taking on a huge interest rate bet," and we have to politely say, "You already have one; you have had one on for a long, long time."

Ms. Steer: And even when you put your programs in place, you are still going to have one.

Mr. Chiappinelli: From a surplus perspective, it's becoming more neutralized. Moving from a very unhedged position to a more hedged position is really the argument.

Ms. Steer: But managing those programs and the governance around those programs is very complex.

Mr. Leibowitz: Yes. And certainly the ability to create hedges against the liabilities - and very importantly, researching the right way to take advantage of the opportunities that a long-term liability affords - is better now than it's ever been, in terms of the tools that are available and the familiarity and the acceptance of those tools.

I think there still are issues as to whether there are times in the market when one should put these things on and times when one should not, or not put them on fully, and times even when the issue of taking them off may arise.

But I do agree that those questions, which are very important ones, are crystallized by having a clear view as to what your liability truly is.

Mr. Waring: Some of this is beta vs. alpha discussion as well. I think, to Kurt's point, these aren't uncompensated bets. If you have a view about interest rates, you have to be careful about saying that is a conditionally compensated bet, to the extent that your view of the interest rates going up is correct, and that's a zero sum gain view. That's an active view.

So that's kind of an alpha opportunity. Some of the things that you are talking about, Cynthia, are alpha opportunities, so you have to manage it around, but it is worthwhile.

I think the beta opportunity here, your investment policy, your equilibrium position, should be surplus optimal.

That being said, if you see places where you have to use and capture an edge, you know, there's risk associated with that, active risk, it's an actively returned effort. But there's no reason not to try to go after something.

Right now when I show a client what their interest rate exposure is, and I tell them that they have an active view on it, and they look at it, their eyes get this big. It's because what they're seeing is typically eight, 10, 12 years of percentage points, or your duration, however you want to express it, in a couple of different dimensions of duration.

And they say, "Well, you know I think rates are going to go up so I'm not sure I want to change that." And I say to them, "Well, why don't you think about it this way: Why don't you think about putting on a policy, a beta position of being fully hedged and then tell me how much, based on the strength of your views about interest rates, you would like to stay short as an explicit view that you are willing to stand up and be accounted for." And I get these very silly smiles from people, because all of a sudden they may be accountable for the views; the implicit bet they are not accountable for. It's a 10-year bet that you can sort of throw the Hail Marys at and maybe get lucky. But if it goes against you and rates go down ...

Ms. Guernsey: I was talking to one of the guys in our investment bank about exactly that point. He said every time he gets through a conversation like that with a client, what goes through his mind is Dirty Harry saying, "How lucky do you feel?"

Can I get back to something Barton said? And I would love to get Cynthia's practical experience with this one. It relates to the same hesitancy that you are talking about, Barton, the point about when do I put it on, when do I take it off. How do you see clients dealing with exactly that question? Are they able to articulate it within an investment policy or are they somehow giving you discretion over that? That's a paralyzing question.

Mr. Leibowitz: You're right, it is paralyzing. It's a tough one. But I think in the recent environment, when interest rates were so low, most corporate people that I talked to felt that they didn't want to put it on at that point, in part because maybe they're getting pinned down by doing so. But also they really felt that this was a low period of interest rates and that that situation was not one that's going to likely persist over the next 10 to 20 years, or maybe even two years.

I think one of the things that has changed quite dramatically is that the results of the toxic combination of low interest rates and very bad markets - which are not coincidental, OK - that led to the sudden surge in economic deficit in these plans was a shock to many in corporate management.

And I think that what it has done is essentially focused this attention on the underlying economic reality and that many, many managers - senior management - are now poised to take action at the right time. That's a big move; OK? So I wouldn't dismiss the fact that they haven't done anything at this point; I think they're poised to take action at the right time.

Ms. Guernsey: I totally agree with that.

Mr. Winkelmann: I agree with that.

Mr. Waring: What is the right time, though?

Mr. Leibowitz: I will let you know.

Ms. Guernsey: We asked a group of about 35 of our clients what do the interest rates have to move to in order for them to act, because half the people in the room said that's exactly the position they were taking, they were getting ready for that moment. They picked a rate - some said six, some said seven - but they picked a rate where they were going to move.

Mr. Waring: Right now, if you do some informal surveys of the economists on the Street, they're saying there's not a lot of upward room left. There might be some - a half point, maybe a point - but I'm starting to think that maybe we're going to see a little bit more activity and a few more people pulling the trigger.

Mr. Winkelmann: I think we have all roughly had the same experience.

So what is going on, certainly with the clients that we are talking to, is they're going through the study phase and basically getting all the ammunition set: trying to figure out what the levels are; trying to figure out what it means in terms of the hedging policy; trying to figure out what it means in terms of an overall investment policy. When they hit that rate, they've got all the study work done and they're ready to go.

Mr. Chiappinelli: Where I know it's starting to click is when they are starting to ask the questions, Cynthia, that you asked about: "Well, what happens if everybody does this, will it undo what I just tried doing?" And so the more sophisticated ones are thinking about (being) the first mover - using the term "first mover advantage" - of locking it in before the ocean of monies move out that way. So I agree - I think we're all agreeing - plans are absolutely thinking about it, studying it.

Ms. Steer: I hope they're using enough resources. I personally would love to see an article from you on the experiences of the immunization and the defeasance programs of the mid- to late '80s. You know, where the transaction costs in some cases were overwhelming, and just some history …

Mr. Leibowitz: Well, certainly the transaction costs are much lower these days, no two ways about it. I thought the transactions gave reasonable experiences, but I think the experience was very different in the following sense: Back during the '80s, you had tremendous pressure on very large corporations who were really, really hurting. You had very high interest rates and you had actuaries and accountants who were at that time forcing a discount rate of 4% in the face of 10% and 20%, so it was a weird situation. I mean, in some ways the economics really didn't move. It was risk reducing … the only way that you could actually get through the accounting/actuarial barrier was to go to one of these defeasance programs … you could do it and save a huge amount of money.

Ms. Steer: And in the end they made a lot of money because they defeased with the government bonds that were at 12%, 13%, 14% and 15%. In essence, you have got the flip side of this problem.

Mr. Leibowitz: It was a circumstance where you were going in the right economic direction, you were reducing the risk for all the parties involved, and it turned out to be a great opportunity.

Ms. Steer: But I think the great news to your point is we have these tools, Kurt, that we can use and long/short programs. The derivatives are going to be able to help us.

That being said, almost no one on the plan sponsor side understands parsing risk in a kind of robust fashion. They don't know how to manage the counterparty. They're sort of on a daily basis. Many are very, very sophisticated, some are not; so there's a long learning curve.

The governance around those programs … has largely been in the alternative space, where you don't have to deal with it outside of the framework of the investment policy statement. So I think there's some hybrid governance that has to evolve and has been evolving over the last two or three years. I have been very heartened by some of the anecdotes that I have heard on the corporate treasury side of people getting together when, traditionally, there would have been a block between the two groups.

Mr. Leibowitz: I think we probably are all in agreement that corporations are poised to take action in terms of some form of interest rate hedging. The next question, and a very important one, is: Are they doing this with risk reduction in mind? Will that be tantamount to risk elimination?

Because I think there is a strong tendency on the part of many - it's a natural tendency - to say: "Look, I have had enough of DB plans. I'm not going to take the interest rate risk off and then go and invest an investment operation on the side; I'm going to take the risk off and say 'sayonara DB plans.'" It's a combination of both. I think the market rates are sufficient and the funding deficit or maybe a little surplus is adequate, so it's not going to be too unbearable to do it.

And then I'm basically going to say now all your liabilities are in DC format and that's the end of DB. I think that would be something which is certainly going to happen with many plans. And I think it would be - in some ways from a social point of view and maybe even from a corporate point of view - unfortunate.

Ms. Steer: I think so too.

Mr. Leibowitz: It's taking opportunities off the table which are the natural structural opportunities that are associated with a long-term investor. And, you know, when you stop to think about it, the best long-term investor around - and the one who could take advantage of long-term opportunities - is a long-term pension fund. And if you take that off the table, things are being lost in many, many dimensions.

Ms. Guernsey: I don't think there's anyone at the table who wouldn't like to see the defined benefit plan continue in some form. But it's increasingly difficult to see why a corporation will not make the decision you just described.

Mr. Winkelmann: I come at this a little bit differently.

If we think about defined benefit plans, they offer at least four distinct advantages for beneficiaries. The first is scaled economies, the second is professional portfolio construction, and the third is access. So we have been talking about the use of scale-based strategies. The fourth thing that we have kind of talked about is the idea that they can smooth out some of the long-term …

Mr. Waring: Mortality risk.

Mr. Winkelmann: … Mortality risk and in the end long-term insurance. I think we all agree at the same time that the current defined contribution structure is actually falling short on practically every single one of those.

Now, I'm not optimistic, frankly, that the long-term resolution is to go back to the defined benefit plan. I think the corporations are looking a different way, and it's hard for me to see that they're going to go back.

What has to evolve is a structure that helps the beneficiaries get all those benefits that we had in a DB plan. What we need to be focusing on, from a social perspective, is how do we start changing the DC model to help us get some of those benefits.

Ms. Guernsey: We're starting to see some of that with auto enrollment, with managed accounts, with institutional commingled funds being used in a plan vs. mutual funds. But I do think there's going to be this gap.

Mr. Waring: There's some tremendous distance to go, too. I mean, the opportunities for immunization are very rare; the fees are still predominantly on a retail model rather than institutional; there is no mandatory requirement for contribution.

You know, places like Australia I think do DC plans so much better than we do generally. … They have got mandatory contributions. They are threatening 15%; it's only 9% right now. They have organizations … that are going after institutionally priced investments and coordinating complete strategic asset allocation policy mixes for folks.

P&I: Whose mandatory contribution is it, employer or participant?

Mr. Waring: I believe it's participant.

P&I: Nine percent by the participant?

Mr. Waring: If they had their way there, they would move it to 15. Of course that would even be better. But we could learn a lot from some other places.

Ms. Steer: And Australia has solved a lot of their problems that many of us have not.

Mr. Waring: Well, it's not a fantasy; they still don't have that much immunization.

Ms. Steer: I would love to see a robust alliance. The two skill sets that I see missing is some experience rating that's a little bit more live on the liability side, and the alliance with our insurers who actually understand this movement between assets and liabilities better than many of us on the pension plan side.

Mr. Leibowitz: That brings up a very interesting question: What may be the emerging role of insurance companies in terms of picking up these DB liabilities?

Ms. Steer: IPGs (immediate participation guarantees) are wonderful. I think the IPG's day has come again. An IPG is actually an annuity contract that on an annual basis participates in both the upside of the liabilities and the downside of the liabilities and the upside of the assets.

Mr. Leibowitz: But not the downside of the assets.

Ms. Steer: I have had some experience with IPGs, and I think they are a very interesting vehicle. Now, you can also attach separate account portfolios to the IPGs, to the liabilities, and those structures were in place for the last 20, 25 years. They largely went out of popularity, but these contracts are still domiciled. There's opportunity to sort of look at this back and forth.

Mr. Waring: I think whenever I looked at an IPG, I have been involved as an expert witness.

Ms. Steer: I don't know. In my experience, they're much more robust.

Mr. Leibowitz: With tools, it's always a question of including swaps, having things well-priced. And immunization is very important. Immunizing all these things, the issue of pricing becomes very, very important in these matters.

But the structure of an IPG is something not to dismiss. I wouldn't be surprised to see it come back in some form. Although my real concern is that there's going to be a wholesale off-loading of all the liabilities and investment opportunities. I think that's the real danger we face.

Mr. Waring: But I don't think it's going to be the insurance companies. There are some people that are talking about it, so I think it's worth addressing - that you have to discount it at something like the risk rate less a spread for them to make a profit. By the time you get down to a risk rate less a spread, there are very few companies that are going to want to pay that amount of money to get out from under that liability. You can dress it up with things like IPGs and stuff, but that's just dressing to make it look more attractive.

Ms. Steer: No. See, that's where I have a real disagreement with you. Like Marty, I really fear that people (will) off-load and not understand the opportunities they're missing while really sort of staunching the blood on the liabilities. I think if we think about anything, that assets and liabilities over different economic time frames present different sets of opportunities. Just because we're in a transitional world economically doesn't mean we need to use the mind set of the old economics to look at the new economics.

P&I: How much knowledge transfer is actually happening between the practices on the risk management and hedging sides and the treasury areas? How much knowledge transfer is happening over into the pension areas, and what needs to happen from here on in to facilitate that knowledge?

Mr. Winkelmann: Well, I think that touches on all the risk management issues.

Ms. Guernsey: It's a funnel, right? At the very largest plans it's quite broad, but as you go down, it sort of disappears.

Mr. Leibowitz: I'm impressed at how sophisticated corporate financial management is these days. I think the silos (are not) in terms of different functions but in terms of the knowledge base, especially given the nature of the roles that the operating executives are in. … I mean, it won't take long for them to get with it.

Mr. Chiappinelli: I think it clearly has been happening; the involvement of the treasury function had been independent for sometime. I think any rumbling from FASB is just an open invitation to migrate that skill set into the pension arena, and that, if anything, is just an acceleration of the base of those skills.

Ms. Guernsey: What are you seeing at your office?

Ms. Steer: We see a myriad of different things. I think in this respect, however, the public plans are disadvantaged because I think the skill sets between the (corporate) treasury area and the pension area are much more integrated. There's even a case to be made on the public plan side that the liability functions are vastly separated from the debt issuance functions. And I don't know enough states, but you can have vastly different people.

So there I think there's not a lot of integration, and the issues are much more complex and much more troublesome, just from a governance perspective.

Mr. Winkelmann: That brings up an interesting point. If you look at the last five or six years, the larger plans have gotten on board, I think reasonably quickly, with the whole idea of risk budgeting, risk monitoring. I think that familiarity has then fed into the kind of interactions with the treasury staff in terms of figuring out how to use those tools.

On the public side, it's been a little bit slower. Cynthia brings up a very good point, which is a governance issue, and that is starting to come into play.

We have had a couple of clients on the public side now who have said, "You know, this risk stuff is very interesting, it's a very interesting way to think about investment policy and a very interesting way to start framing where the investment decision is made and a very interesting way for us to organize our governance."

I'm optimistic people will start using the idea of a risk budget from a governance perspective as well.

Mr. Leibowitz: Can I bring up a point which I think we should put on the table?

It's not true - I just realized - it's not true that defined benefit plans are not going forward. They're going forward, actually, in some fairly huge ways overseas. Many governments, many foreign corporations have defined benefit plans, which they did not fund before, which are now starting to become funded in some cases massively.

Mr. Winkelmann: That's true.

Mr. Leibowitz: They are plans which in many cases are very sophisticated. Barton and I were just on the panel for a World Bank debtor's group. We were there with one of the European pension plan representatives and he gave a terrific, very, very thoughtful presentation of trying to address really all the issues we talked about and in the context of providing inflation-adjusted returns -which is the standard, you know, off these shores - inflation-adjusted liabilities.

So I think these issues are global. The DB debate is alive, and at least the debate is active. They are trying to find ways of making adjustments to the plans. ... They are looking at some very interesting ways of risk-sharing between the beneficiaries and the sponsors in terms of being able to provide different levels of benefits dependent upon the returns of the assets. So there are a lot of things going on, off these shores.

Someone mentioned that we really should look much more broadly. Even right across the border in Canada, very interesting things are happening in terms of some very sophisticated discussion to new approaches to the DB, DC and DB/DC combinations.

Ms. Steer: And they have been looking globally at over-the-counter soliciting for a decade on the derivative side.

Mr. Leibowitz: Because they had to.

Ms. Steer: They had to. But I agree with you; we need to look at this in a global sense.

Mr. Waring: To take Marty's point a little further, from Europe to Asia, where there's a lot of government social security systems increasingly being funded, these are just big DB plans with greater or lesser degrees of funding vs. pay as you go. And massive numbers of them; you know, the big economies, the People's Republic of China, Japan …

Ms. Steer: Japan, absolutely.

Mr. Leibowitz: Japan.

Mr. Waring: Singapore, to some extent. Sometimes it's only government employees, like in Korea and Taiwan. But there's a big, big defined benefit world out there in Asia.

Mr. Leibowitz: Together with that, there are some very interesting what you might call heritage-type plans - Singapore has their long-term investment program - people that generate surpluses and are trying to invest them in a long-term oriented sort of way. This has great similarities to a DB type framework - trying to address what they feel will be longer term liabilities - even if not so precisely defined.

P&I: We only have a couple minutes left. What is the best way to manage the assets after a company freezes a plan?

Mr. Waring: Well, it presumes that people are going to freeze a plan. I hate having that question on the agenda.

I don't think whether your plan is frozen or not makes a very big difference in terms of how much surplus risk one should take. Any of these plans should be liability hedged in terms of their liability risk. But beyond that, how much equitylike-risk asset exposures a plan should have doesn't make all that much difference between an ongoing plan and a frozen plan.

In practice, what we seem to see is that when sponsors do freeze the plan, they lose some interest and some portion of that population will go to a solely all-bond sort of portfolio. In the U.K., I know, we thought there was going to be a lot of that. It turned out to be much less than we expected. But there is still some small portion of the population that just loses interest in having risky assets and just goes to an all-bond portfolio.

The right answer is the same: What's your risk tolerance for using equitylike assets to gain a higher expected return that might pay for the plan if the realizations are good?

Mr. Winkelmann: I think the basic techniques are the same. The only really real issue is implementation. So how you manage the hedging portfolio might change a bit. Beyond that, I think the basic arithmetic works out exactly the same.

Mr. Chiappinelli: I think there is a common perception that it is an immediate and hardy move to bonds or an immediate and hardy duration extension, that sort of thing. And I think Barton is right. You have chosen a point on that efficient frontier as it relates to your appetite for volatility, for surplus volatility … and that hasn't changed.

Mr. Leibowitz: I would take a slightly different point of view. I think there is a certain change. You have to take one form of risk off the table, and therefore … you would have more beta risk in the system. And the question as to how you would want to control that risk, where you want to set it, how you want to diversify I think would be somewhat different. For example, just for openers, the role of bonds would be very different once you have taken bond rate risk off the table.

P&I: Thank you so much.