BOSTON — Senior strategists at Pyramis Global Advisors, Boston, are not convinced that corporate defined benefit plans will be piling into alternatives to the degree that JPMorgan Asset Management's William McHugh thinks.
While Pete Chiappinelli agreed that liability-driven investment strategies are a legitimate way to manage a pension plan's liabilities economically, he said concerns about the impact of Financial Accounting Standard 158 are overblown. Mr. Chiappinelli is senior vice president of strategic services at Pyramis.
"It's not a material issue for CFOs. Most CFOs are not lying awake at night, worrying about their pension plans," he said. For most corporations, the defined benefit plan is a very small part of the overall corporate balance sheet and that since the Financial Accounting Standards Board has been talking about Statement 158 for five years, "the impact is relatively benign, it's already been factored in."
From that perspective, Mr. Chiappinelli said Pyramis executives don't expect pension executives to significantly change portfolio weightings. "We are seeing a reduction of equity exposure by corporate plans on the margins. To say that there is a mad rush out of equities is not accurate. And to seriously think pension plans will be shifting between even 20% to 30% of assets into alternatives is simply not believable," he said.
Mr. Chiappinelli said he basing his conviction on the fact that "alternatives are a very hard sell. Take hedge funds: no transparency, 2/20 fees, lockups, unproven risk management, capacity concerns and likely returns compression. I don't think these are small issues for pension fund managers. And for private equity to become a huge allocation is just wishful thinking on the part of private equity managers. Our research shows — and we really drilled down and asked pension fund executives for more information about this issue — that sponsors are very concerned about too much money chasing too few deals."
While Pyramis does offer its institutional clients portfolio construction advice and services such as LDI strategies, it does not offer private equity. Pyramis doesn't manage hedge funds internally, but its investment platform does permit the use of third-party funds.
Messrs. Chiappinelli and McHugh agree on one thing: FASB's hints about what the second phase of FAS 87 may contain — potential changes to corporations' ability to "smooth" pension returns — are likely causing the first traces of insomnia among CFOs. No timeline has been set for introducing phase two, but Messrs. McHugh and Chiappinelli mentioned that many CFOs they know have moved on to worry about what accounting changes may lie ahead for their companies. Said Mr. Chiappinelli: "If and when FASB decides to touch the income statement, that's when CFOs will reach for the Valium."
