Consultant: 2000 to 2002 'Most Destructive' to Pensions, Endowments

February 28, 2003 ( - US pension funds and endowments took the most severe hit to their total value in 2002 than they have suffered since 2000 - losing more than $1 trillion in assets under management in the 2000 to 2002 period.

According to a matched sample of 380 large corporate funds that have interviewed with Greenwich Associates for each of the past three years, the average 2002 decline was a whopping 14.6%. That was an even stronger gut punch than corporate funds’ 10.1% loss sustained in 2001. Greenwich research consultant Dev Clifford called the 2000 to 2002 period “probably the most destructive in the whole history of the US fund business” in the Greenwich research report.

Among public funds, the value decrease wasn’t quite as severe, but was hardly minor nevertheless. A matched sample of 199 public pension funds revealed average asset losses of 9.3% from 2001 to 2002, slightly worse than their 8.9% reduction from 2000 to 2001.

Endowments and foundations fared best, losing 6.3% of their value in 2001-2002, as opposed to 5.9% of their value in 2000-2001, according to a matched sampling of 125 non-profit funds.

Equity Positions Diminish

From representing more than half the total asset mix two years ago, domestic equity fell in terms of proportionate investment, from 49.4% in 2001 to 46.8% 2002. Fixed income investment rose nearly as much, from 26.4% to 27.8%, according to Greenwich.

Endowments are the most heavily invested in alternative asset classes, namely private equity and hedge funds. These two, along with the less novel alternative category of equity real estate, picked up many new institutional investors in 2002.

Overall, the actuarial earnings rate of return assumptions for more than 1,000 corporate and public funds were marginally lower in 2002 than in 2001, 8.8% in 2001, 8.6% in 2002. On average, public funds reduced their assumptions from 8.3% to 8%. Yet corporate funds stayed level – 8.9% in both years.

Less than a quarter (24%) of corporate funds changed their rates last year. “While it may not be right to adjust actuarial assumptions as they cover 20 or more years, the average rate of return expectations of both corporate and public funds are so much lower that – overall – they don’t have a prayer of reaching their actuarial assumptions in the foreseeable future,” Consultant William Wechsler said in the Greenwich report.

Many corporate funds are pushing down their actuarial assumptions, with most reducing them below 9% – a move consultant John Webster labeled “a welcome return to reality.”

The Funding Crisis

The number of underfunded pension programs is also growing, according to Greenwich. Just two years ago, fewer than 10% of corporate funds were underfunded. By the start of 2002, nearly 30% were. The balance of existing funds against the projected benefits obligations among corporate funds fell from 121% to 103% in just two years. Among corporate funds with over $5 billion in assets, the drop was more severe yet – from 125% to 99%.

The news was bad at public funds, too, where the percentage of underfunded plans rose from 46% to 52% overall, and from 48% to 58% among those funds with over $5 billion in assets.

Pension Officials’ Pay Rises

Average compensation rose among fund officials in total and across all fund types, according to Greenwich Associates’ research. On average, pension officials reported earning $136,600 in total compensation in 2002, driven in large part by an increase in salary. The average bonus actually dipped slightly. Endowment officials actually do better than those at corporate funds, earning $156,100 while corporate officials receive $148,600. Public officials continue to lag their peers, with an average total compensation package of $98,800, up from $94,800 in 2001.

From August to October 2002, Greenwich Associates interviewed fund professionals at 574 corporate funds, 246 public funds, and 212 endowments and foundations in the United States.