THE CASE FOR INTEGRATION
Unfortunately, plans are still being managed in isolation, held at arm’s length from corporate strategy. Chief financial officers need to get more involved as this off-balance sheet entity is no longer selffunding. Credit and equity analysts are scrutinizing firms about their pension finances. Debt covenants are being rewritten and the cost of capital is rising. Merger and acquisitions are being rejected with pension liabilities cited as the reason. It is not a wonder that board members are asking management some tough questions.
In 2003, General Motors sent an important message when it raised almost US$18 billion from a debt offering. What was unique is that the company placed 75% or $13.5 billion of the proceeds into its hourly and salaried pension plans.
Observers have generally lauded the transaction as a needed boost to member benefit security. They also claim it was a savvy investment move on GM’s part. The reality is pension investment issues are actually corporate finance issues and require the same level of analysis and expertise.
The traditional pension model is not designed to address today’s biggest challenges: volatile or unpredictable contributions. Past plan success metrics(relative performance to a peer group or benchmark)while important, will not help control cash requirements to the plan or volatile pension expense numbers which affect earnings and share prices.
Sponsors require new ways of measuring the effectiveness of their pension plan management. And there are some principles which sponsors should keep in mind when designing their pension management model.
1. Promote plan predictability – Pension management models should align the pension risk management process with those currently undertaken for all variables affecting corporate finances.
2. Create clear accountability for results – By selecting fewer providers who carry more fiduciary responsibility in the process, a committee will be in a better position to leverage their providers’ expertise, and remain focused on the delivery of results.
3. Manage actively, align often – By aligning all the components of the plan and taking a dynamic approach to management, CFOs will be able to make more immediate and timely decisions about the plan that can help control volatility.
4. Measure with new metrics – Rate of return can no longer be used as a sole metric of plan success. The new approach aligns pension metrics with corporate metrics to help achieve overall goals.
As pension plans continue to face financial hardship, sponsors will be looking for new ways to manage their programs. A better way is required to deal with the volatility that has caused so many problems in the first place. In the end, sponsors need to regain control of their plan, and have pension decisions form part of the overall corporate decision-making process.
David Lester is director, national accounts with SEI Investments in Toronto. dlester@seic.com
