Pension funds and money managers are skirmishing over potential Y2K computer problems.
The root of the predicament: Many of the potential problems can't be found or eliminated in time.
So, some pension funds -- including the $90 billion California State Teachers' Retirement System, Sacramento -- are requiring newly hired money managers to sign agreements designed to limit the pension funds' liability because of Y2K problems.
But money managers want to narrow their own liability to clients.
Said James Mosman, CalSTRS' chief executive officer: "I know that was an issue with some of our new equity managers because they were balking at signing some of our new language, but we were able to work out language that they were willing to sign and that our attorneys were willing to sign off on."
Executives at Pacific Investment Management Co., Newport Beach, Calif., have been asked to sign documents that were "very well worded. . . . They even had a clause in there saying that if they (pension funds) incur any kind of a loss whatever, PIMCO would have to pay them $1,000 a day even if their loss was a penny a day. We can't sign something like that. It's beyond our control," said Laura Lyons, Y2K program manager at PIMCO.
Some firms running money for the $25 billion Los Angeles County Employees Retirement System, Pasadena, Calif., didn't like the wording of proposed contract modifications about Y2K liability. Negotiations followed, and the contracts were modified "in a way we did not find objectionable," said David Muir, LACERA's chief legal counsel.
As they negotiate new contracts with vendors, officials of the $57 billion New York City Retirement Systems are seeking assurances of Y2K compliance where a failure would constitute a violation of the capability promised by the vendor, said Harris Lirtzman, director of risk oversight.
"It's a very tricky sort of process where the managers want to assure the plan sponsors to the maximum degree possible that they are compliant (with Y2K certification), but with any vendor there are certain limitations they can make concerning their own third parties and other vendors," Mr. Lirtzman said.
"If any one of our managers goes down, we will have standing orders with Citibank (the systems' custodian) to immediately undertake certain steps, or close out or suspend that investment manager until it can demonstrate that it is able to function and immediately transfer the assets at the custodial level from a non-performing to a performing investment manager," he said.
Other pension funds trying to hammer out new agreements include the $1.4 billion Detroit Edison Co. pension fund; $3.3 billion Alameda County Employees' Retirement System, Oakland, Calif.; $20 billion Arizona State Retirement System, Phoenix; $21 billion Western Conference of Teamsters, Seattle; and the $147 billion California Public Employees' Retirement System, Sacramento.
CalPERS is trying another tack, intending to publish on its Web site the names of companies in which it invests that are not endeavoring to fix potential Y2K problems, said spokeswoman Patricia Macht.
WHERE THE PROBLEMS ARE
Attorneys and pension executives say some potential problem areas for pension funds include:
* Direct real estate investments. Buildings contain hundreds of embedded microchips used in operating elevators, lights, sprinklers and electronic sensing systems. A large tenant could file a suit against the pension fund owner, its real estate money manager or the property manager.
* Investments in emerging markets. Employers or plan participants could file suit because of a significant investment loss in emerging markets. Many emerging market countries are believed to be doing very little in comparison with developed countries to solve Y2K problems.
* Some stock investments. Investments in computer companies could be adversely affected, resulting in lawsuits charging mismanagement of assets.
* Custodians losing accounting, settlement or other data. Even a temporary failure resulting from a power outage at a utility and failure of a bank backup power system could mean loss of some security settlement data. Or pension funds might be unable to value their assets for 60 to 90 days because of custodial Y2K problems, and funds might be unable to make additional security trades.
Pension fund officials also have discovered some managers and other vendors invoking federal Y2K disclosure safe harbors. (The Year 2000 Information, Readiness and Disclosure Act of 1998 allows companies to disclose information about their systems that in some cases cannot be used as evidence in a trial.)
Charles Conrad, administrator of the Alameda County fund and chairman of its Y2K committee, said some firms answer pension fund questions with letters indicating the information is protected by the act.
LEGAL NOOSE TIGHTENS
The Alameda County fund also is tightening the legal noose. For example, it is requesting its money managers and other vendors to specify in which areas they are Y2K compliant.
In some instances, the fund is getting no response or "one-paragraph" responses to its four-page letters, Mr. Conrad said. The Y2K committee is trying to figure out the next step for unresponsive firms.
To avoid Y2K legal liability, one company that sold Alameda County critical benefits administration software wrote it wasn't going to technically support the system as of Dec. 31, 1999. But the company quickly backed down and agreed to support the system during 2000. Still, the Alameda fund intends to buy a second benefits software system and run both as 2000 approaches.
Jerome Castellini, an owner of the money management firm CastleArk Management Inc., Chicago, has empathy for pension fund officials trying to indemnify themselves.
"The guys at the end of the day are the pension fund (officials) and they are saying, `I am paying everybody down the chain money to oversee our assets. Why can't I get indemnified?' " he said.
But money managers, while confident about their own software systems, are less sure about the systems of correspondent banks, trust banks or others they work with to manage money, said Mr. Castellini. "We're part of a big chain," he said.
PERSUADING A COURT
No pension fund can solve all of the potential Y2K problems. But what a pension fund can do is to keep records about how it did everything a prudent fiduciary would do to avoid Y2K problems.
"In most cases, fiduciaries who have a lack of process are usually found liable. You have to be able to convince a court you did everything appropriate and reasonable to try to manage the risk," said Alameda County's Mr. Conrad.
Even getting, but not using (if the advice is unworkable) information from a consultant can show a fund to be prudent.
"We had a consultant in here two months ago that told us we need to change our whole asset allocation because of Y2K, that we ought to cut back our equity exposure dramatically because all these big companies are going to have dramatic earnings losses," said CalSTRS' Mr. Mosman.
CalSTRS officials rejected the suggestion.