Study: Pension Managers Overstayed in Equity Markets

April 25, 2003 (PLANSPONSOR.com) - A new union-commissioned study of the ailing US pension fund system says money managers overstayed their welcome as the equity market tanked and didn't go after those committing widespread corporate stock fraud.

Commissioned by the United Steelworkers of America (USWA), the study by the nonprofit Center for Economic and Policy Research (CEPR) charged that pension managers failed to recognize the stock “bubble” in the late 1990s so they didn’t flee to safety in other asset classes, according to a Dow Jones report.

Dean Baker, author of the study and CEPR co-director said that criticisms voiced in the study could also be applied to other large institutional investors, including mutual fund companies.”Anyone who was managing a lot of money at that time should have recognized the bubble and should have gotten out,” Baker said.

They wasted, for example, between $70 billion and $90 billion on investment in the tech sector that will produce little or no return in the foreseeable future, Baker estimated. “By 1998, it was clear the returns on stocks at best would be very, very low,” he told Dow Jones. “At that point, the only sensible strategy was to get money out of equities and into bonds or some other fixed income investment.”

Instead, pension funds largely kept their big stake in equities. Specifically, pension funds had 44.9% of their investments in domestic equities in 1997; in 2000, the share of domestic equities was 43%.

Needed Reforms

The CEPR findings argue forcefully for reforms, which ensure that pension funds are invested in the long-term interest of their beneficiaries, USWA International President Leo Gerard told Dow Jones. “The precipitous decline in the value of public and private pension funds triggered by the Enron scandal and the rest of the corporate crime wave has had a devastating effect on workers and companies, alike,” Gerard said. 

The hard-hit US Steel sector has seen a handful of its major players flee into bankruptcy protection, leaving federal pension insurer Pension Benefit Guaranty Corp. to pick up the responsibility for making payments to retirees and beneficiaries – so much so that steel and airline industry plans together have eaten up a major chunk of the pension agency’s budget (See  Steel, Airlines Weigh on PBGCJudge Green Lights Bethlehem-ISG Deal).  

The CEPR study also slammed pension fund managers for failing to monitor closely enough the firms in which they held large amounts of stock. CEPR accused the pension asset managers of “completely fail(ing) in their responsibility to restrain the salary demands of top management.” Some lost big sums on companies like Enron Corp., and WorldCom Inc., CEPR pointed out.

CEPR said that as pension funds bled money, fund managers earned handsome fees. They drew between $200 million and $400 million, for example, in the past five years, according to the study.

The study, which analyzed Federal Reserve Board flow of funds data that detail where pensions invested their money, put the loss in public and private pensions since 1997 at more than $1 trillion. Public and private pension funds have lost huge sums in the past few years, the victims of a soured stock market and low interest rates that mean plan sponsors must put more money away to cover future obligations.

Standard & Poor’s issued a pension report this week compiled from recent corporate filings indicating that companies will continue to face intense pressure to control pension costs this year (See  S&P: $206 Billion Pension Shortfall in 2002 ).

Also, S&P 500 companies poured $46 billion into defined benefit plans in 2002 – a threefold increase from 2001 and about 6% of the total cash flow from operations of the S&P firms, according to a study by Credit Suisse (See  Companies Pour $46 Billion Into Pensions in 2002  ).

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