From the December-January 2010 issue of Treasury & Risk magazine

Asset Losses Push Companies To Focus on Pension Funding

After volatile markets ravaged the assets in defined-benefit pension plans over the last couple of years, companies are reshaping their investment strategies and paying closer attention to the risks involved in operating pension plans.

"The premise is that you need to develop investment strategies that are not just based blindly on the asset side, but also incorporate many other factors, notably the funded status," says Ari Jacobs, North American retirement solutions leader at Hewitt Associates.

A plan that's 70% funded should take a different approach from one that's 130% funded, Jacobs says. "A plan that is fully funded should really act quickly and swiftly to ensure that they lock in that funded status and not continue to take on equity risk they may not be rewarded for."

A recent Hewitt survey of more than 400 retirement professionals showed a trend toward more conservative investing. Thirty-eight percent say they've reduced their exposure to equities, while 19% are holding more Treasuries and 37% have upped their corporate bond holdings.

The Hewitt survey also found that 83% of plan sponsors expect to make additional contributions to their plan, with 66% saying they intend to maintain a funded status of at least 80% in order to avoid benefit limitations imposed under that threshold by the Pension Protection Act.

The damage to plan assets has also fueled interest in liability-driven investing (LDI), a strategy that involves matching the duration of a plan's assets more closely with the duration of its liabilities. A survey by investment solution provider SEI found that 51% of U.S. pension executives now say they're using LDI, up from 36% in 2008 and 17% in 2007.

"We're seeing plan sponsors changing their mind-set from assets only to, 'I have to manage the whole package of assets and liabilities,'" says Jon Waite, director of investment management advice and chief actuary at SEI. "'How do I manage that funded status?'" is the question they're asking, he says.

The most popular way to implement an LDI strategy is long-duration bonds, which are used by 98% of the pension executives who told SEI they had implemented LDI. Interest-rate derivatives were the runner-up, cited by 40% of pension executives globally and 46% of U.S. pension executives.


No. 1 Fraud: Revenue Recognition

Revenue recognition schemes remain the most common type of financial statement fraud, although their incidence declined again in 2008. A recent study by the Deloitte Forensic Center found 30% of the Securities and Exchange Commission's financial statement fraud enforcement releases involved revenue recognition in 2008, down from 33% in 2007.

The second most common fraud, improper disclosures, was cited in 18% of the 2008 SEC releases, up from 13% in 2007.

Two industries seem to be particularly fertile ground for such fraud. Of the 1,501 alleged frauds Deloitte identified in the releases, 550, or 37%, occurred in the technology, media and telecommunications industry, and 438, or 29%, occurred in consumer businesses.

Not surprisingly, executives involved in preparing financial statements are the ones most frequently tagged with fraud. Deloitte says 44% of the individuals identified in such frauds were CFOs, controllers and chief accounting officers.


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