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CCH® PENSION AND BENEFITS — 9/03/08

Volatility creates challenges for multiemployer trustees, survey says

A recent survey of selected multiemployer pension fund trustees, some union trustees and some management, has highlighted the challenges being faced by trustees and the solutions they are finding. SEI Global Institutional Solutions questioned trustees representing 25 multiemployer pension funds, none of them SEI clients. Of the survey participants, 57% were union trustees and 43% represented management.

Decreasing volatility an important goal

Nearly two-thirds (64%) of the trustees said that decreasing volatility in the investment portfolio while maintaining current returns was a higher priority than increasing investment returns while maintaining current volatility. Recent market performance has caused trustees to seek methods to budget for short-term market volatility. An increase in investment diversification is one means of addressing the volatility of the assets and the plan impact that follows.

Consequently, 68% of the trustees questioned said that they have added new asset classes to their portfolio in the past year and 64% said that they increased the plan’s allocation to alternative investments in the past year. On average, about 11% of plan investments are invested in alternative investments. Investment products now being utilized include:

- international equity, by 80% of respondents,

- hedge funds, by 76% of respondents,

- real estate, by 76% of respondents,

- private equity, by 44% of respondents, and

- emerging market equity, by 28% of respondents.

Pension Protection Act adds challenges

Almost all of the trustees, 96%, agreed that the Pension Protection Act (PPA) has increased the complexity of managing the pension plan. 72% of the trustees anticipated that their PPA funded status would be in the “green zone,” and the rest, 28%, thought their plans would be considered “endangered,” or in the “yellow zone.” Placement in the endangered zone can result in restrictions on the plan, requiring steps to improve the funded position of the plan and make new disclosures to members.

Increasing accountability of investment consultants

Almost all of the trustees, 96%, felt that their organization’s investment consultants should share in legal accountability with the plan trustees for decisions to hire and fire investment managers. 92% use an outside investment consultant to do manager research and make recommendations. Nearly half of the respondents did not feel that the trustees were 100% accountable for investment manager decisions.

Plan trustees, according to SEI, appear to be looking for a “fiduciary management” model that involves the delegation of certain plan management functions, such as manager selection and oversight, to a fiduciary partner. Over half (56%) of the trustees polled acknowledged that they no longer consider using a traditional investment consultant as the only option for pension investment management.

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