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Business & Money

Presenting a new management model.

Fortnightly Magazine - November 2005
  • share some of the accountability, allowing the plan sponsor to focus on the overall business. This can be accomplished by engaging a co-fiduciary to manage the assets. The co-fiduciary will take responsibility for selection of managers within asset classes and will share equally in responsibility, and liability, for the resulting investment structure, thus creating opportunities for financial executives and board members to leverage their expertise in managing other areas of the pension plan.

Manage Actively, Align Often

  • Corporate strategy can change quickly based on market conditions; pension strategy should follow suit. The traditional model often is slow to respond to market scenarios and effect changes to plan management. CFOs no longer can afford to use annual reviews, which are several months out of date, to evaluate the plan and consider changes to plan management.
  • The new approach focuses on managing the plan more dynamically. By aligning all components of the plan, plan sponsors can calibrate against market shifts and potential scenarios that affect the plan.
  • This analysis requires re-measurement of plan metrics on a current and regular basis; for example, using a quarterly funded status measurement incorporating recent interest rate and liability changes, as well as recent market performance. Doing this regularly, and particularly any time economic measures have changed significantly (, discount rate changes), provides CFOs with the ability to make immediate and timely decisions that may help control volatility.

The New Performance Metrics

Under the current model, rate of return remains the dominant metric, even though the negative impact of pension plans on overall finances has worsened for utility companies. Rate of return no longer can be used as the sole measure of plan success. The new approach aligns additional pension metrics with corporate metrics to help achieve overall plan-sponsor goals.

Consider the pension effect on earnings per share (EPS). The new model would align the EPS goal for the organization with the pension metric that most affects it-in this case the FAS 87 expense. The instrument portfolio would be constructed to meet a plan's fiduciary responsibility while also limiting FAS 87 expense volatility. This is just one example of a goal-setting and measurement process that a plan sponsor could utilize.

As the impact of pension problems reaches deeper into areas of corporate finance, the current model for managing pensions will not meet company or employee needs. Utility companies must be willing to adopt a nontraditional approach to the way they manage their pension plans if they want to secure both the long-term financial health of the organization, and the plan.