The union of defense industry stalwarts Grumman Corp. and Northrop Corp. means most or all of the $2.8 billion of Grumman's pension assets will be distributed to external money managers, sources inside and outside the company say.
Los Angeles-based Northrop outbid Martin Marietta Corp. for rights to Grumman by offering $2.17 billion for the Bethpage, N.Y., defense contractor. Following completion of the April 15 tender, the company will be renamed Northrop Grumman Corp.
Northrop Grumman will have total pension assets of approximately $6.7 billion, making it one of the nation's 100 largest pension funds.
Northrop officials won't comment publicly about their plans for the Grumman pension fund. But one source in the Northrop pension department said there's a "strong possibility" some or all of Grumman's assets would become externally managed. Currently, most of Grumman's pension assets are managed by an in-house staff.
The Northrop source said executives there have begun to review the situation. No decisions will be made until after discussions with Grumman officials, he said.
He did not rule out retaining a portion of the Grumman assets with GQ Asset Management, Grumman's pension investment subsidiary: "The whole issue remains to be seen right now."
According to one source, Northrop soon will establish a transition team to review all Grumman operations, including GQ Asset Management, to determine how the two operations will be combined. GQ, headed by William R. Parmentier, assistant treasurer and investment manager, oversees Grumman's employee benefit assets.
Mr. Parmentier said he has had no contact with Northrop officials regarding the Grumman pension fund. He declined to speculate on the future of GQ or the Grumman pension fund.
A money manger whose clients include Northrop said: "There is no way Northrop will keep paying an internal staff to manage money. Northrop is already lean on staff, and they were one of the models (management) tried to put in at IBM."
IBM recently announced it would shift all actively managed pension assets - about one half of the fund's $16 billion internally managed assets - to outside managers while retaining internally only passive investment portfolios. IBM also is reducing its pension staff by at least one half.
"I would not be surprised that Northrop assumes the Grumman assets and begins to move to outside managers. It makes no sense to them to retain any internal management," said the money manager. He added: "Admittedly I am biased."
Most pension and investment consultants said the most likely scenario would have GQ retaining a piece of the portfolio.
One consultant, who wished to remain anonymous, said GQ could retain a sizable portion of the Grumman assets once Northrop officials review its cost and performance structure.
"When two cultures merge, usually they try to use the best of both. At any rate, Grumman and GQ will probably retain management of the funds at least for the next couple of years because Northrop has bigger issues to consider right now than the pension fund. As long as it is being managed professionally, they probably will not make any immediate changes," said the consultant.
William T. Cleary Jr. is national practice leader-defined benefit services at Sedgwick Noble Lowndes, Garden City, N.Y. He said Northrop may view the use of external managers as a more cautious approach, "whereas internal management may be viewed as more aggressive."
Grumman, he said, "has been successful at managing its assets and is going to try and demonstrate that it can do as well as outside managers ... I think if I were (Northrop) I might consider this another investment opportunity. They might consider having a portion of the Grumman assets continue to be managed by the Grumman asset group."
Noting Northrop's heavier exposure to the equity markets (about 58% of total assets vs. about 35% at Grumman) Mr. Cleary said it would be reasonable to expect more Grumman assets be invested in stocks.
Northrop executives "may feel the Grumman style of lower equity exposure doesn't produce enough returns as their higher exposure to equities," he said.
In addition, the Northrop plan has about $1.8 billion in assets in excess of its accumulated pension benefit obligation, according to its 1992 annual report. The Grumman plan has only about a $430 million surplus.
"Northrop may feel that their higher exposure to equities helped cause the overfunding, and may move to impose that view on the Grumman assets by increasing the equity exposure to the higher long-term rates of return associated with the equity market," said Mr. Cleary.
Some consultants believe the overfunding at Northrop will be used to offer enhanced benefits to encourage early retirements.
But one pension consultant who has worked with defense contractors said the surplus may become an issue.
He said the Defense Department has traditionally taken the position it owns a portion of surplus pension assets of its contractors.
"To the extent the companies have been reimbursed by the government for pension expenses, the government feels entitled to a portion of that surplus in the form of lower contributions in the future," the consultant said.
"The government won't ask for it in cash, but they will want to make sure the surplus amount is used in some form to help reduce government pension contributions in the future. They (Northrop Grumman) could still use the surplus, if necessary, for early retirement benefits as long as the government is considered, but the government probably realizes that there are some advantages to it from the reduced payroll at the new company," he said.
The Department of Defense adopted policies in the mid-1980s calling for companies whose pension plans reached full-funded status or were terminated to reimburse the government for pension overcharges. (Pensions & Investments May 4, 1987).
Among the companies hit were FMC Corp., Chicago; Rockwell International Corp., Pittsburgh; United Technologies Corp., Hartford, Conn.; and Lockheed Corp., Burbank, Calif.