Skip to main content
MENU
Subscribe
  • Subscribe
  • Account
  • LOGIN
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE Act 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2022 Retirement Income Conference
    • 2022 Managing Pension Risk & Liabilities
    • 2022 WorldPensionSummit
Breadcrumb
  1. Home
  2. ASSET OWNERS
October 14, 2013 01:00 AM

Legacy of innovation, resiliency

  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Share
    Share
    Share
    Share
    Share
    Share
    Share
    Share

    Pension funds 40 years ago, while in aggregate enormous by the standards of the day, were tiny by today's measures.

    Private-sector defined benefit plans had a combined $186 billion in assets in 1975, according to the Department of Labor's Employee Benefits Security Administration. In the public sector the same year, the pension assets of 50 states and 50 top municipalities totaled $82 billion, according to a Pensions & Investments report.

    Today the 1,000 largest pension plans, private and public, have total assets of $7.5 trillion — $5.2 trillion in defined benefit and $2.3 trillion in defined contribution plans.

    Those charged with managing and generating that growth had to adapt to changing economic conditions and volatile investment environments. They did so by adopting new investment techniques and vehicles. Current managers must likewise be aware of changing environments and techniques and vehicles so they may carry on this history of growth.

    The tremendous increase in assets has occurred despite the billions of dollars the funds have paid out to participants and other beneficiaries in benefits over the same decades.

    That vast growth in assets and benefits paid came from contributions and investments through income and appreciation.

    While actuarially required contributions are important in securing pensions, well-performing investments make funding pensions affordable.

    Over the long term it takes a rising economy and rising market to fund pension benefits. But a rising market alone cannot make pension plans affordable. Pension plans would have been far more expensive and benefits much less if academics, investment managers and fund executives had not found efficient ways to manage portfolios of billions of dollars.

    A key lesson from the history of investment management is the need to adapt to the circumstances of managing billions in increasingly dynamic and complex markets to remain viable in securing retirement income.

    Assets surged after the passage of ERISA, which required corporations to fund their pension promises. Those charged with managing the burgeoning assets had to look forward, even if all they immediately saw was a wilderness. They could not rely on investment tools and techniques of the past to meet the challenges of investing of vast sums.

    This transformation took place in the years after P&I began publication. At the beginning, investment management was a frontier. Pension fund executives and those overseeing other institutional assets had to blaze their own trails and draw their own maps for many years to surmount challenges in investing.

    Investment concepts considered fundamental today didn't exist.

    A major breakthrough came in 1973 with the invention of index funds, an application of the efficient market theory developed in academia and publicized in 1965. Passive management was a revolutionary departure from active management that was then the way of investing.

    The technique was criticized for accepting mediocrity, putting fiduciaries at risk for seeking only to match, not outperform, market returns in the long term. But early users appreciated the concept, sought to understand its advantages and quickly allocated assets to it. Over time, studies by various academics showed that, over the long term, indexing generally outperformed active equity management, vindicating the approach.

    Another breakthrough was a study published in 1975 comparing the historical returns of stocks, bonds, Treasury bills and inflation, from 1926 through 1974. The study provided the empirical foundation for allocating assets to major asset classes, based on returns and risk, changing the way fiduciaries managed money. It became the standard guide for asset allocation, diversification and benchmarking performance.

    Today's pension funds are the product of these and other concepts originating from modern portfolio theory, which has enabled them to adapt to challenges

    Corporate and public pension assets and liabilities weren't even accounted for with any of the detail they are today, so the setting of investment policy to fund liabilities was more challenging. The Financial Accounting Standards Board was founded only in 1973. Financial Accounting Statements 87 and 88, its first major pension accounting rules, were issued in 1985. The Governmental Accounting Standards Boards, setting guidelines for the public sector, was founded in 1984.

    Pension funds over the past four decades have had to deal with the unexpected and costly impact of economic and market upheavals on contributions and investments, including the 1973 and 1974 market crash, the 1987 crash, the 2001-2003 bear market and the recent Great Recession.

    In addition, they have faced the impact of federal fiscal and monetary policy challenges as well as geopolitical crises. Those include five major wars, including the attack on U.S. soil in 2001 and the continuing war on terror.

    But through all the turmoil, asset owners have been resilient. Even after enduring huge losses, they have adapted to the challenges. Rather than look back with regret, they have looked forward and understood the need to take risks to get returns. They have adapted to the challenges by the use of better risk management tools.

    Pension executives and other investment professionals cannot rest on their accomplishments and current approaches. The concepts that have long anchored investment management, such as long-term investing and diversification, have increasingly come under question, especially in the recent financial market crisis, stimulating calls to make faster decision-making in increasing dynamic markets.

    But institutional investors need to understand the sources of the risks they might take, so they can understand the resources needed to manage them and decide their ability to assume them. Otherwise, they risk winding up in a wilderness without knowing how to use tools to find their way out.

    Related Articles
    40th anniversary
    Market efficiency's challenge
    P&I at 40: Cartoons from 1985 to 1999
    P&I at 40: Cartoons from 2000 to 2009
    Recommended for You
    ONLINE_190329864_AR_0_YBKZZQSSKIZH.jpg
    IMCO returns 9.6% in 2021, outperforming its benchmark
    SLIDESHOW2_824009999_PH_7_HOEACWCAWVKF.jpg
    Northern Trust plan universe returns 0.2% in Q3
    Northern Trust: Institutional asset owners post 6% gain in Q2
    Northern Trust: Institutional asset owners post 6% gain in Q2
    A Good Time for Trend Following
    Sponsored Content: A Good Time for Trend Following

    Reader Poll

    June 6, 2022
    SEE MORE POLLS >
    Sponsored
    White Papers
    Nearing the finish line: Ideas on end-state investing for corporate DB plans
    The Meaning of "Portfolio Intelligence"
    Credit Indices: Closing the Fixed Income Evolutionary Gap
    Forever in Style: Benchmarking with the Morningstar® Broad Style Indexes℠
    Crossroads: Politics, Inflation, & Bonds
    Is there a mid-cap gap in your DC plan?
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    June 20, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2022. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE Act 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2022 Retirement Income Conference
      • 2022 Managing Pension Risk & Liabilities
      • 2022 WorldPensionSummit