Corporate pension executives should integrate pension plans into the company's overall corporate finances to avoid potential losses in shareholder equity, according to a JPMorgan Asset Management report released today. Bill McHugh, group head of JPMorgan Asset's strategic investment advisory group, said companies already have taken big hits in shareholder equity as a result of FAS 158, the new pension-accounting rule that went into effect late last year, but they are surprised when they learn how much more shareholder equity remains at risk.
"Clients thought this was a big non-issue. But when they plug their asset allocation into our model, and a few facts about the (corporate balance sheet), it has been an eye-opener," he said.
JPMorgan Asset officials developed three metrics that estimate the effect of defined benefit plans on shareholder equity, cash flow and earnings, the report said. They allow pension executives to better manage interest-rate risk by extending the duration of portfolios, lower equity allocations to reduce short-term volatility, and diversify into an array of alternative asset classes.
To reduce volatility, JPMorgan Asset estimates that between 25% and 35% of final-pay plan assets will be invested in alternatives within the next five years, up from the current average of 8%. For cash balance plans, alternative allocations could be as high as 50% of plan assets, the report said.
