Most large corporate pension funds have performed worse than generally accepted investment benchmarks, according to a provocative study, which names the pension funds. The worst performer was Westinghouse Electric Corp. The best performer - Xerox Corp. -exceeded the benchmarks.
Stephen J. Church, president of Piscataqua Research Inc., Portsmouth, N.H., completed the study in 1994. Now he's in the process of updating his research, hoping to finish it sometime this summer. His preliminary results, while showing improvement in performance, still find corporate pension funds underperforming.
Corporate pension executives typically don't report the investment returns of their defined benefit funds; General Electric Co. is the only one he could recall that does. So Mr. Church devised a way to calculate their returns using the financial statements of the corporate sponsors, principally the pension plan note. Upon completing his calculations, he sends his results to each sponsor for confirmation. For his last study, about half of them replied. Using cross-checks like these, he tries to verify the accuracy of his calculations. "I haven't heard of anyone call to tell me I was wrong," he said.
His initial study covered 30 major corporate pension funds from 1987 through 1993. These sponsors "are recognized as among the most sophisticated pension fund managers," the study noted. In all, 28 underperformed a standard allocation benchmark for the seven-year period of 60% stocks and 40% bonds. The benchmark returned 11.93%; the average of the 30 pension funds was 10.9%. His benchmark used the weighted returns of the Standard & Poor's 500 Stock Index and the Lehman Brothers Government/Corporate Bond Index.
Of the specific funds, Westinghouse had an annualized return over the seven years of 7.73%; Boeing Co., 9.52%; United Technologies Corp., 9.62%; General Electric Co., 9.85%; McDonnell Douglas Corp., 9.86%; Allied-Signal Inc., 9.94%; Chrysler Corp., 9.98%.
Also, Philip Morris Cos., 10.31%; Bell Atlantic Corp., 10.48%; Ameritech Corp., 10.73%; Caterpillar Inc., 10.84%; IBM Corp., 10.84%; NYNEX Corp., 10.84%; Pacific Telesis Group, 10.86%; Sears Roebuck & Co., 10.96%; Southwestern Bell Corp. (now SBC Communications Inc.), 10.96%.
Also, Lockheed Corp., 11.03%; AT&T Corp., 11.09%; E.I. du Pont de Nemours & Co., 11.15%; General Dynamics Corp., 11.31%; U S WEST Inc., 11.39%; Chevron Corp., 11.43%; General Motors Corp., 11.47%; BellSouth Corp., 11.51%; USX Corp., 11.65%; GTE Corp., 11.72%; Dow Chemical Co., 11.8%; Ford Motor Co., 11.86%.
Also, Eastman Kodak Co., 12.13%; and Xerox, 13.57%.
Mr. Church, a former senior consultant at Wilshire Associates Inc., Santa Monica, Calif., started his firm four years ago to "bring good financial results to an area that has a lot of storytelling and misinformation.*.*.*.*I want to help the CFO manage the pension fund better."
He said he thought more pension funds would outperform the benchmark. The results of his study show the costs of active management. Those costs, including fees and brokerage costs of having a higher turnover than indexing, subtract some 100 to 150 basis points from a pension investor's performance.
"If you are doing so poorly, why not index?" he suggests. But he isn't against active management. "I believe active management should be used; but it's a question of how you manage the managers" to obtain the best results.
His study tried also to score the consultants of these pension funds, noting the difficulty of measuring their performance without knowing their assignments and concluding, "There is no indication that consultants as a group add value" because most sponsors underperformed.
By the way, General Electric, in its latest annual report, notes its pension fund returned 21.2% in 1995, based on my research. By contrast, following the Church standard of the 60-40 mix, the benchmark, according to my calculations, returned 30.25%.