Financial Interworkings of Fiduciary Plans Cary MeinersSt. Paul Travelers Terrence M. Deneen Pension Benefit Guaranty Corporation Barbara GubitoseAcordia Rod Rodriguez, Esq.Day, Berry & Howard LLP Marc Siegel Center for Financial Research & Analysis
The Pension Landscape • A call for transparency and honesty • Unfunded pension liabilities for the S&P 500 approximates over $200 billion • 60% of the S&P 500 still offer traditional pensions • Claims on the PBGC have soared • Healthcare costs/other post-retirement benefits are perhaps a greater, and largely unfunded, problem • Municipalities and the public sector facing the same concerns - now approaching $1 trillion in underfunding
Accounting For Change • One of FASB’s goals is to better match pension plan assets to pension obligations • S&P 500 companies totaled a $264 billion discrepancy between reported pension B/S assets and pension underfunding • The FASB project will include other postretirement employee benefits (OPEB) • Transparency is needed on the balance sheet, income statement and cash flows
Current Congressional Proposals • Congress (via ERISA) establishes all rules for pension funding • House and Senate bills will force change • May actually reduce funding by $160 billion in the next three years • Will likely create “zones” of underfunding, triggering acceleration of funding by employers • Likely to get a new law in 2006 • Will underfunding affects sources and frequency of claims?
Fiduciary Duties • “Exclusive Purpose” and the Duty of Loyalty • “Prudent Person Standard” and the Duty of Care • Role of Diversification • Plan Guidelines
Fiduciary Liability • Scope of Damages • Joint & Several Liability • Plan Remedies • Limitations • Limitation of Duties: • Appointing Fiduciaries • Candidate Evaluation • Monitoring Performance
Fiduciary Best Practices • Fiduciary Best Practices: • Regular Meetings with Minutes • Plan Review and Education/Training • Prudent Processes - Documentation • Written Investment Policy • Compliance Hygiene/Audits • Fiduciary Liability Insurance • Communication
Hedge Funds: The Answer or the Problem? • For some, underfunding means taking more risk, not laying out more cash • Pension plans currently provide 40% of the $600 billion in buyout funds • A repeat of derivatives or is this different? • Are pension managers equipped to handle these complex investments? • What are the fiduciary implications and responsibilities?
Hedge Funds: The Answer or the Problem? • Investment in private equity/hedge funds runs deep for many: • GM: 10% of pension assets invested in private equity • Delta: 13% • Eastman Kodak: 20% • The State of Pennsylvania: 23% • Weyerhaeuser: 39%
Are Underwriters Up To the Task? • The complexity of pension accounting • Reliance on outdated information • Less insured interaction than on D&O • Private company/nonprofit challenges • Will insured meetings have to change? • Underwriting in the future - what to look for
Resource Acknowledgement • Information has been obtained from the following sources: • NY Times Online • BusinessWeek Online • FASB Website • Forbes Magazine