William F. Quinn, who oversees American Airlines' pension funds and is chairman and CEO of American Beacon Advisors, answered selected questions from Pensions & Investments' readers, submitted during the week of Sept. 18.
Scroll down to read Mr. Quinns responses and to see whether he answered your question. Read Pensions & Investments Face to Face interview with Mr. Quinn here.
With more than 35 years in the business of defined benefit plans and finance, Mr. Quinn is currently wearing several big hats:
• Hes the chairman and CEO of American Beacon Advisors, Fort Worth, Texas, which manages more than $48.4 billion in assets for a variety of clients, including the pension funds of American Airlines Inc.
• Hes a vice president of American Airlines in Fort Worth.
• Hes also president and trustee of American Beacon Funds, a mutual fund management company he founded that manages assets of more than $20 billion.
• And in October, hes slated to add another cap to his professional wardrobe when he is expected to step in as chairman of the Committee on Investment of Employee Benefit Assets, a public policy industry group representing the nations largest private pension funds.
From your very high and broad vantage point in the institutional investment industry, what do you think is the most serious challenge facing large private and public defined benefit plans. What actions would you suggest companies and public entities take in addressing that challenge? I think the challenges to the private and public funds are a bit different. For private funds, I believe withstanding the pressure to focus investments on short-term issues to reduce the volatility of funding and accounting rules will be increasingly difficult. There will be more and more pressure to invest in liability-driven vehicles that may not always make sense. As a result, the costs of these plans could increase, thereby making them no longer competitive and continuing their demise. The second largest challenge is to achieve returns that make these plans competitive cost-wise. Folks will need to achieve returns of 9% to 10%, which is becoming increasingly difficult; thus, they will need to look to new sources for returns. For public funds, the biggest challenge is to resist continually improving benefits when plans become close to fully funded, and to meet the existing liabilities that frequently include inflation adjustments.
Do you have an opinion on hedge funds or so-called 130/30 strategies within the context of defined benefit retirement plans? As noted in the (P&I) article, I don't feel hedge funds in general are appropriate, as one cannot truly control the risks these managers take and they are very costly vehicles that have way too much money and brainpower chasing away small inefficiencies. However, I do find the concept of 130/30 intriguing if you find disciplined investment advisers and pay a reasonable fee. It only makes sense that managers who typically can find undervalued securities to go long can also identify over-valued securities to short and add incremental returns.
Should governments be looking at other types of pension plans? Specifically, should they be moving away from existing defined benefit plans for current employees to less costly defined contribution plans for future employees? Generally, I feel DB plans are best for both employees and employers. They offer more certain benefits and transfer many risks (i.e., investments, inflation, mortality, etc.) from employees to the public fund, which is in a better position to understand and manage (those risks). DB plans provide the public entity with competitive benefits to attract and retain employees. Over the long term, DB plans, when managed efficiently, will cost the same as DC plans, although there may be more volatility in the funding cycle. The major challenge is for public funds to avoid over-committing benefit promises just because plans are appropriately funded in good times.
Given today's level of interest rates, should extending duration still remain the dominant theme (i.e., improving ALM mismatch) regardless of the price/value of the asset? Generally, I feel DB plans are best for both employees and employers. They offer more certain benefits and transfer many risks (i.e., investments, inflation, mortality, etc.) from employees to the public fund, which is in a better position to understand and manage (those risks). DB plans provide the public entity with competitive benefits to attract and retain employees. Over the long term, DB plans, when managed efficiently, will cost the same as DC plans, although there may be more volatility in the funding cycle. The major challenge is for public funds to avoid over-committing benefit promises just because plans are appropriately funded in good times.
Pension funds need to consider the long-term economics and their plans' needs in deciding whether or not to implement asset/liability matching strategies. Part of that is not disregarding the current prices and yields levels. Thoughtful sponsors will look at yields, the outlook for interest rates, their plans' funded ratios, and how much volatility their plans can withstand as part of implementing these strategies.
What is your worst fear about the state of the U.S. pension system? My largest concern is that the focus on short-term market results for funding and accounting will lead more and more companies to discontinue their DB plans. Secondly, with increased reliance on DC plans, I worry that people won't voluntarily save enough, will not make appropriate long-term investments and may outlive their savings by taking out too much early in their retirement years.