2. how was it used before the October market decline liberalized their context policies. of the byentire the Forsponsors. pension year'sresults) committees, hadthe an insignificant mainquestionsimpact nowconcerns on thewhether pension does take place, the Pension Benefit GuarantyCorporation (PBGC) insures a 10.4 percentof total assets,during the fourthquarterof 1987. This is the pension Witness:benefits Jackto its L. employees. VanDerhei, EBRI The Adjunct new accounting Senior requ Research irementsmandated Associate,by Conclusions 3. was it successful during the October market decline certain the plancost system level of portfolio in of the aggregate, nominal insurance vested additional hasbenefits become questions prohibitive forthemajority concerning andwhether of defined theiteffect will benefit work on If theThe process Impactis ofimplemented the Octoberthrough 1987Stock financial Marketfutures, Declineon other Pension advantages Plans may largestloss recordedduring the last fiveyears. Net capitallossesof $152 FASB87 are phased Employee in with Benefit a two step Research process. Institute, The income2121 statement K Street, (expense) ' , T-63 also exist:22 InvestmentIssuesfor DefinedBenefitPensionPlans in individual volatile 4. whatplan markets. is the sponsors market However, and fortheir portfolio LORplan is apparently participants insurance for ready remain. defined to respond benefit It is important to pension these plan participants. Thus to the extentthat the PBGC remainssolvent (atleast provisions billionwere must partially N.beW., applied Suite offset for600, years by dividend Washington, beginning payments after D.C.and December 20037, interest 15,(202) 1986 income while 775-6327 of $18 the In the aftermath of the stock market decline, a number of conclusions can plans today Statementof criticisms to note I. that Itby isthe cheaper providing relative and longer easier impact term toofemploy policies October than that 'sto results require tradedepend sizable lesstrading in blocks large ofand part stocks that on on billion. a cash flow Amongbasis) plan types, thereis fourth little quarter immediate 1987impact losseson relative theplan toparticipants. totalassets balancesheet (liability)provisionsmust be appliedforyears beginningafter be drawn. 5. what and bonds is thebecause likely the future commission of portfolio of futures insurance contracts for defined are lower benefit than will the manner protectinif which not total investment equity risk portfolios, is shared atbetween leastthe plansurplus sponsors of and pensions plan increased Supplemental Jack withthe L. Sheet: VanDerhei, proportion Julyof Ph.D., total 12 hearing Adjunct assetsSenior invested on theResearch inInvestment stock. Associate Single-employer of Pension December15, 1988. If the presentvalue of plan liabilities,ignoringfuture funds.2Z thoseon stocks. pension plans Plan Assets and ABased participants major onfactor fiscal 3. determining While year there 1987 figures, are the several extent there of plan does thedesign short not considerations, appear term impact to be of anysuch the immediate market as the definedcontributionfunds,with 42 percentof total assets investeddirectly salarygrowth, is greaterthan the marketvalue of plan assets,employersmust • It appears that the majority of pension funds were not involved in the decline availability 2. on Itdefined continues of lump-sum benefit Joseph to reduce distributions, pension S. Piacentini, exposures plansthat is toResearch whether the affect market's Analyst the thesponsors allocation vagariestook asof the advantage risk, market it concern in stockfor onthe September solvency 30, oflost the PBGC $55 billion, as a result or of 12.0 thepercent marketof drop, total especially assets. recognizea balance sheet liability equal to the unfundedamount (including October decline. DefinedContributionPensionPlans of Portfolio is determined the fact drops insurance that primarily by short they is generally selling aby device the type more have usedof and to more pension more protect opportunity futures plan the(defined value contracts. to sit ofbenefit out the portfolio this ortype defined of in Single-employer afterthe modifications defined Employee to benefit theBenefit single-employer funds Research (40percent component Institute in stock) of the lost system $71 enacted billion unfunded On Monday accrued October pensioncost). 19, 1987, the Dow Jones Industrial Average Statement marketmovementthan otherinvestors.This isdue to the factthatmost defined the by contribution) the 3. eventOmnibus Itoflets aselected significant pension Budget Reconciliation by fund the market portfolios sponsor. decline Act remains of without 1987. undisturbed. ° giving The changes up the potential included to an (10.1percentof totalassets);multiemployerplans (29percentin stock)lost dropped a record 508 points, or 23 percent, causing great concern • The aggregate level of pension funds at the end of 1987 exceeded the level benefit benefit The increase impact pension from ofof the rising the per-participant plans market markets. have decline a 19positive premium Although on defined from cash numerous $8.50 contribution flowto as variations $16.00 wellpension and as of significant the this plans introduction approach depends cash $8.1 billion(6.3percentof total assets). The throughout prospectoffinancial includinga markets. pensionliability Private on trusteed the bodypension of the balance funds, sheet with established at the end of 1986. reservesand do notnecessarilyhave to byrelyon sellingsecuritiesto meet cash exist, With on Under of Theathe stock variable athe ittypes portfolio defined ismarket basically of rate benefit investments collapse insurance premium implemented plan based of program the offered October on employer through the in and 1987, amount place, one provides whether ofwhich of two itaunderfunding lump approaches: is specified followed expected sum distributions benefit, 5dynamic for years that thehedging pension usually of plan. bull are has direct prompted andsome indirect sponsorsstock to consider holdings altering totalling at least a $590 portion billion of their (45 or transactions in the financial futures markets. needs. provided. 15 A Participants surveyof 48 of inthe defined largest contribution managersofplans tax-exempt will see assets the results showsthat of Aportfolios related markets, full assessment tocalled would an employee's new take ofattention the onimpact length a less toof of conservative the the service risks market and associated decline investment /orpay.on with Under PBGC's posture. various this expected approach, pension Indeed claims this fund the The pension gains asset madeallocation duringthefrom firstequities threequarters to bonds of in 1987 a combined manner that to offset would ensure fourth percent of total fund assets) as of September 30, suffered large Jack L. VanDerhei • Net sales of equities was not unusually large when viewed in a time series pension fallen prices fund money in their managers accounts, were not although selling theon losses October of October 19. Between 1987 should that day be was would employer's investment therequire casecost prior strategies. ais detailed to whatever theOctober analysis For isnecessary example, market based decline toon it provide plan highlighted asfunding pension thebenefit funds ratios questions specified. using andabout estimated portfolio Under the quarter losses.losses, Stateforand total local 1987government earningsof $69 pension billion, funds, or 6.1 which percent. held Even $226 at least a minimum amount of surplusfor the plan. Likewise,a significant perspective. offset and Ittheshould the defined by end the beof contribution noted large November, at gains themore approach, of outset the than previous that 60% theof there employer's the ninemoney ismonths. nothing contribution managers Those intrinsically reported about is specified. to they retire unique had insurance probability appropriate had of level atermination. larger of equity percentage 7exposure However, offor their thepension increased assets funds in exposure equities andthefaced effectiveness thanbythose the PBGC not of direct stock holdingsof privatetrusteedfunds,responsible for most of the decrease billion ininthe stock plan's (40funding percentratio of would total provide assets)an on incentive Septemberto forgo 30, were any as a result of the decline has been documented in two studies. The U.S. using Amay been about adversely defined suffer net the a device buyers strategy. contribution if affected they thattoThe cash reduces varying 80 plan out asrespondents the degrees, can well. their Joseph risk involve accounts S. ofand toPiacentini aathe only pension specific in survey 17% the plan were near produced contribution portfolio. net future, sellers. by the (as and Presidential Indeed, in Only therefore a money this 3 of portfolioinsurance. This testimonypresentsdata and surveysthe literature fourthquarterloss,showeda positivereturnfor theyear. Furthermore,total further benefit liberalizationsuntil the plan was restored to a surplus • Investment gains produced in the first three quarters of 1987 more than decision might the 48consider managers is oftenremaining surveyed, made implicitly employed including infor the oneanother major asset allocation vendor year oroftwo. stage. portfolio An investment insurance, Department Task purchase on the Force effect pension of onLabor Market of the plan), produced Mechanisms market or it preliminary collapse can(the takeon Brady the estimates pension form Commission) ofplans of a profit-sharing, theand had changes onanthe average inbehavior the thrift assets of 45 or of position. 1987returns Although were positive assetfor levels alldecreased plan types. significantly Single-employer as adefined resultbenefit of the Submittedto the offset the losses recognized in the fourth quarter of that year. sold manager into could the easily decline, decrease and 7 did the some riskiness buying of on thethe portfolio day of the by decline. 50 percentMany by percent and savings, pension liabilities of funds ortheir employee during for assets single-employer, the stock infourth equities ownership quarter as defined of plan. of September 1987. benefit Contributions 30. pension Of those, plans are accumulated 11 from were December using in and definedcontributionfundsrealizedreturnsof 6.4 percentand 6.6 percent October Findingsmarket fromdecline, the EBRI this /FRBeffect pension can not investment be viewed database in isolation study as plan shed Many 31, of the 1986 401(k) respondents toplans October also neither 19, were 1987. bought adversely The norresults sold affected forindicate the by the first decline, an day overall orsince two decrease after they the are in lowering portfolio individual the insurance participant active asset andaccounts. had allocation an average A participant's fromequity 100 percent allocation benefit to 50amount of percent 56 percent. varies (andwith 2 leaving 3 the respectively, some light while on themultiemployer impact of funds the market realized decline a 3.6 percent on private return.trusteed sponsorswereat leastpartiallyinsulatedfromtheeventualbalancesheetimpact • Direct holdings of equities by pension funds declined marginally in the the often remainder significantly in a risk-free invested U. S. asset House in company of suchRepresentatives as stock T-bills).and equity However, pools. this2Bstrategy Pension decline, level surplus ofassets and contributions, others (assets tookminus age advantage at Aqqreqate liabilities) entry, of sharply retirement Statistics oflower $41age, billion equity and investment to prices. $17716 billion earnings (a pension funds and on the behavior of these pension funds in stock by a correspondingincreasein the interestrate used to compute the present fourth quarter of 1987. would automatically result in a proportionate decrease in the portfolio's decrease executives It (orappears losses of)may .4safe 18.8 begin percent). to conclude to reconsider B The that other portfolio theevidence, options insurance provided. a studywas bySuch Salomon notoptions universally Brothers, might Although markets private duringtrusteed the fourth pensionquarter fundsgenerally of 1987. didnot Thesell study theirreveals stockduring that valueof liabilitiesin 1987. Thisisdue tothe factthat FASB87 providesmuch The expected successful include lonqaterm return. highly during impact Hearing diversified the Inonmarket contrast, on pension thedecline, balanced Investment investment portfolio however. fund of decisions or insurance Pension use The ofwill chairman Plan more offers depend Assets guaranteed of a on combination Leland future investment O'Brien asset of found Data the on private averagefunding trusteed ratio pension of the funds 500reported largestcorporations here were developed shrankfrom bymore the the these fourth funds quarter, didthe notoverall reactinvestment to the mix decline of these byfunds fleeing didchange. the market. Direct moreguidancethanitspredecessorswithrespectto theinterestrateassumptions contracts. • Portfolio insurance, as implemented by some firms, was not completely Rubenstein allocation financial The effects instruments (LOR), practices. of the themarket that firm Although will--at that decline the pioneered least rebalancing on in defined portfolio theory--truncate ofbenefit portfolios insurance, plan the appear estimates sponsors distribution to be that are a than Employee 200 percent BenefitResearch at the beginning Institute of(EBRI) October andtothe 166Federal percentReserve by theBoard end of(FRB) the holdings chosen And, by though of thecorporate plan fourth sponsor. equity quarter In fell essence, investment from 40 thepercent assumed losses ofdiscount their were total rate large,must assets they reflect to did 36 ESOPs successful in limiting equity losses during the market decline. natural of possible consequence rates ofof return companies Committee at some striving on pre-specified Ways toand meetMeans target minimum equity floorallocations return (e.g., that month; acomplicated using typical Trust however, fund and Universe insured multifaceted. this is Comparison bywell hisabove firm The Service took the nextlosses 14portion data 3 percent of compiled of twofunding the to testimony four by Wilshire ratio percentage will seen Associates at discuss points year the percent, notrates fully primarily at which offsetdue the gains to pension therealized decline benefitin during could valuebeof the effectively stock firstholdings. three settled. quarters In other of end 1986.9 no have the more been year. than exceeded a 15 percent by the decline strength during of thethe five-year next year). bull market, There is the obviously apparent a beyond individual (Wilshire-TUCS). thepromised components EBRI limit ofpublishes the dueoverall to discontinuities these impact estimates including between onthe anthe impact ongoing Chicago ofbasis the Mercantile Pension in its words, a "market value" of the termination liability must be calculated. • It appears that the majority of pension funds did not have portfolio degree The cost Benefit Private extent associated of Guaranty Insured conservatism of the Pension with Corporation, losses such Reserves produced was Subcommittee a the "guarantee"; greater minimum by the for ondecline funding Oversight plans although with standard was inadramatic. the higher revisions case Ainvestment ofPensions introduced portfolio in & Exchange Quarterly (where Pension futures Investment contracts Report tied (QPIR). to theState S&P 500 andindex local are government traded)and pension the Fortunatelyforplansponsors,thePBGC(immediate)close-outrateincreasedfrom insurance programs in place during October 1987. insurance, A publicly New Investment nother Yorkpotentia Stock traded Aqe it can Exchange lsurvey stocks; be impact conceptualized indicates possibly (where of thethe that mark the market as emost the t adconstant e1,000 determines affected cline largest oncost were ben the e(as fitemployee pension price opposed security offunds stock the toresu stocks amight ownership cost lts from that that have by data the are Omnibus drawnfrom Budget theReconciliation FRB'sFlowof Funds Act of(FOF) 1987, publications. the new pension Dataaccounting on private 7.5 Onpercent net, at private the beginning trusteedof 1987 pension to 8.25 funds percent neither at the end bought of thenor year. sold 11 make plans is reduced proportional up(ESOP) their the index). long-term that tocontain 24thecommitment rate only ofsuch to return the stocks. stock the Most portfolio market ESOPs by would ashave muchhave investments as $10 otherwise billion in th standards e fact that mandated the vast by the majority Financial of privat Accounting e definedStandards benefit Board, pensionand plans investment promise insured pension reserves are tabulated from the American Council of Life stock to any large extent during the fourth quarter of 1987 (that • The overall impact of the market decline can not be viewed in isolation. closely produced) Insurance's orinprivately Life the region Insurance held above companies. Factbook. the minimum Six floor ESOPs return. that own 2°30 percentor more of following astrategies benefit the statincluding eOctober d in nomi 1987 portfolio nalmarket terms insurance. decline. after the Of benthe Effects efit 173 accrua respondents, onl defined period ceas 7.5% contribution eshad (i.e. made , No Implications data are currently for Defined available Benefiton Contributions the effect of theOctober 1987 stockmarket is, stock sales were offset by stock purchases of equal value). Trustees are simultaneously responding July 12, 1988 to incentives created by increased their "significant companies' shifts publicly in their traded long-term stocks asset suffered mixesaintotal thewake paper ofloss the crash. of $410 ''17 no The participants post- post-October employment aremarket then inflation discussed for portfolio protection). including insurance Ifcash the appears or plan deferred does to benot arrangements characterized terminate and and by declineon privateinsuredpensionreserves. Presumably,any effect on the 79 This compares with a net sale of $14 billion in stock during the volatility in the financial markets as well as the pension accounting million Portfolio On average, between insurance these October funds may15 had be and reduced created 27. FMC their by Corporation, dynamic long-term hedging which equityheld commitments strategies 32 percent by thatof 8 increased the employee On Monday sponsor stock prices. October remai ownership 2 ns s19, However, profitab 1987, plans. le the alternatives itDow appJones ears to toIndustrial portfolio be quite Average insurance likely dropped thatareatexpensive a least record a prior quarter and $35 billion during the first three quarters of percentof insuredreservesthat arebacked by generalaccountswas limitedby periodically the practices companyshares adjust mandaoutstanding ted a portfolio by the's Financial on asset June 30 allocation Accounting was estimated between Standards to active lose Board $239 and and million. risk-free several29 portion too: percentage theayear. static of points, themix impact with much ofamore lower post-retirement than stock the component previously inflation would mentioned wicut ll the be indemnifi EBRI investor /FRB edresults out onof anthe of ad 508 points,or 23 percent,causinggreatconcernthroughoutfinancialmarkets. stateregulationsrestrictingcommonstockinvestmentsof generalaccounts. In Althougha decreaseinpensionassetslevelswillgenerallyresultinan increase new provisions enacted by the Omnibus Budget Reconciliation Act of 1987, large higher assets. Benefit defined long 21Security Based term benefit on returns for theDefined pension level expected and Benefit plans term from for Participants of equities, the protection entire andfourth desired, strategic quarter anasset initial ofallocation 1987 active (3.6 hoc Private basis.trusteed I° A severe pension reduction funds,with in the direct leveand l ofindirect pensionstock assets holdings could totalling postpone addition,in 1986total assetsof U.S. life insurancecompaniesexceededtotal inrequiredminimumpensioncontributions,it is impossibleto predicthowfirms including a new exposure-related premium for the Pension Benefit Guaranty The and percent). allocation $590other Tax billion Reform timing is (45 established. Act percent approaches of 1986 oftotal are contained It likely is fund then assets) provisions toadjusted misjudge asofthat, September in a large response overpart 30, time, toof suffered will changes the market offer large in cost of living adjustments for retirees and perhaps cause sponsors involved in obligations Overall, private (including trusteed pensionobligations) pension fundsby $61 suffered billion. net Corporate losses ofstock $135 willbeaffectedbecauseof thevarietyof methodspermittedforsmoothingmarket portfolio Corporation, values more and the rigorous passage minimum of time. funding Portfolio standards insurance for underfunded is not a market plans volatility. those losses. ESOPState participants Someand pension localnearing funds government that retirement discontinued pensionage funds, an portfolio option which held insurance to diversify $226 billion after their the in collective bargaining agreements to take a harder line when negotiating new or holdings billion, of or life 10.4 insurance percentcompanies of total totalled assets,$91 during billion,the or just fourth9.7 quarter percent valuefluctuation.An assetvaluationmethodwill be acceptableto the Internal PortfolioInsurance TM and a more restrictive full funding limitation for overfunded plans. The stock investment timing improved stockmarket (40 technique, benefit percent portfolios. decline pthere lans ofin total for October isAncurrent no assets) employee attempt have workers. ontried who to September forecast to is reduce at30, least returns. market were55adversely volatility years In rising old affected markets, in andother has as of Since total theparticipant's assets.I It is benefit therefore amountunlikely in a defined thatbenefit the stock plandoes market notdecline depend Revenue of 1987. Service This forfunding is the purposes largest ifloss itproduces recordedan actuarial during value the last of assets five well. an increasing net effect percentage of these changes of themay portfolio be to make is trustees allocated more to conservative active assets;as in to ways completed suchas tenreducing yearsofthe ESOP equity participation exposureofmust theportfolio. be permitted Some to diversify executivesup have to uponthe investmentexperienceof the planassets,any immediatelossesto such that seriously years. isbetween threatened Net 80 capital percent the security losses and120of percent ofinsured $152of billion fair pension market reserves were value. partially backed 12 Moreover, by general offset the investment management. declining Accountinq 25 Portfolio accounts. percentinsurance, markets, Implications of his or an perhaps her increasing foraccount the Defined most balance percentage Benefit controversial atPension the is allocated end aspect Plans of the oftothe year reserve market lessdecline, assets. amounts stayed a planwith resulting theallocations from the October theyhaddecline whileusing willportfolio be borne by insurance, the sponsor indicating unless cash by flow dividend impactpayments of the market and decline interestdepends incomeon the of type $18 of billion. actuarialAmong cost PrivateTrusteedPensionFunds Under previously they represents planhad extreme types, not diversified; anassumed alternative conditions, fourthextra after quarter to the risk active five portfolio because additional 1987 assetof losses may allocation the years behedging allocated relative hestrategies. orstrategy. she entirely to musttotal 26 Bybe1987, to permitted either assets fund method the plan adopted. terminates 13 in an underfundedstatus.5 If an underfundedtermination active or reserve assets. • Defined contribution plan participants suffered short-term losses to the to managers increased diversify hadbought up withto 50 coverage thepercent proportion forless moreamounts than of 60 total previously billion assets of diversified. assets; invested at thein It beginning should stock. Some private insuredpensionreservesinvestedin separateaccountsmay have extent their investments included equities. ESOPparticipants may have When be of FASB noted, this portfolio Statement year however, only No. insurance that half 87, Employers' this offaced that provision its remain Accountinq first iscovered. effective realfor test Although Pensions only during for much (FASB the stock October has 87) acquired been establishes decline, written after been Single-employer more adverselyaffected. defined contribution Separateaccounts funds, were invested with 4243percent percent in of Contraryto some reports, it appears that the new minimum funding standards December31, 1986. suffered the largest losses. Unfortunately, the diversification requirements Alternatively, standards on it Findings this failed 31ttopic from is for miserably also financial the in portfolio the EBRI possible academic in /FRB reporting insurance the pension tojudgment and distinguish and financial investment mayaccounting be of implemented some plans literature, database commentators. for by an the study byemployer five indirectly source shed basic Furthermore, some of that questions changing employer light offers on enacted total by assets the Omnibus investedBudget directly Reconciliation in stockActonof September 1987 will not 30,accentuate lost $55 corporate equity in 1986, and a given separate account may be 100 percent added by the Tax Reform Act of 1986 have not been in force long enough to asset the impact allocations of the through market the decline financial on private futures trusteed markets. pension As the market fundsand declines, on the regulators appear contributions relevant were tofor investigating thethis pension discussion: plan charges (i.e., that private portfolio versusinsurance public pension was aplans). major billion, or 12.0 percent of total assets. Single-employer defined the invested increase in stock. in theHowever, minimumrequired equityinvestments contribution in for separate underfunded accounts plans. accounted An be I. ofwhat anyis realit value to ESOPparticipants nearing retirement age. An more behavior employee financial ofis these entitled futures pension are to make funds sold this short in stock election against markets during the during equity a five the assets year fourth insured. period. quarter This The of cause Whilethis of the section market's dealsfast primarily drop.with Disillusioned, issuesrelating such to private pensionplans sponsors covered as additional funding charge equal to the excess of the deficit reduction for benefit just9.1 funds percent (40ofpercent allprivate in insured stock) pension lost $71 reserves billion in 1986. (i0.iTherefore, percent 1987. The studyrevealsthatthesefundsdidnotreactto thedeclineby fleeing profit periodgenerated beginswith from the these plan sales year of is the presumed ESOPfollowing to offset the the later lossesof on(I) thethe pension plan Honeywell, that underdefines ERISA, Mead one what Corp., survey percentage, and has San found if Diego any, that Gasaccording of& the Electric participant's toCo. the pension suspended accrued executives or canceled benefits of contribution while of total some private assets); (primarily pension multiemployer an 18 funds yearinvested amortization plans through of(29 existing life percent insurance unfunded in companies stock) liabilities lost may the market. And, though fourthquarterinvestmentlosseswere large,they did plan year assets. in which Conversely, the employee asattains the market age rises, 55 or (2) thesethe contracts plan year canin bewhich removed. the attributable 29 of the nation's to employer largeststate contributions andmunicipal are funds, nonforfeitable. the equitypositions Since the of have $8.1suffered billion substantial (6.3 percent lossesofduetotal to theassets). stockmarket decline (at least in measured on a termination basis) over a portion of the minimum funding not fullyoffsetgains realizedduring the firstthreequartersof the year. 14Onereasonforthisapparentcontradiction(i.e.,an 18year amortization employee implementation the funds completes wereof generally ERISA, tenyears the below of longest participation theperiod maximumoflevels in service theallowed ESOP. thatThe can before election be required the October period for contribution the shortrun), otherwise most probably required did bynot. ERISA (primarily30 or 40 year amortization stock market decline. Most of those interviewedindicated their funds are ends Theoretically, 100 percent in the plan vesting both yearwas forms following 15 years. of this the fifth technique such offer planyear. two advantages The ESOP is torequired a plan producing 22Ralph a smaller L. Knisley, amount Jr. than "Portfolio a 30 or 40Insurance: year amortization) Will the New is that Importance the latter of The gains made during the first three quarters of 1987 combined to of unfundedpast servicecosts)will be requiredfor underfundedplansforplan On net, private trusteedpension funds neither bought nor sold stock to any Surplus to sponsor. amortization State allow and Management First participants Local period itGovernment enables Change is applied tothe pension make Retirement Strategy tothe afunds liability diversification of Funds toFund retain which Managers?" most reflects election ofFE the Manual, expected asset within April gains future 901987, days they pay maintaininga conservativeequity stanceat a time when othersare increasing years offsetbeginning fourth after quarter December losses, 31, 1988. for However total it1987 appears earnings that, with of few $69 largeextentduringthefourthquarterof 1987 (thatis,stocksaleswere offset pp. Jack following increases achieve 82-83. L6The . when VanDerhei while the fiscal the end the year markets of is18Adjunct the year 1987 plan move amortization figures Senior year. upwards, Research do not period yet include also Associate is applied enables theofimpact to the them a Employee liability tooflimit theBenefit market amount their their equity stakesto take advantageof reducedstock prices. For 20 funds billion, or 6.1 percent. Even direct stock holdings of private exceptions,this will not impactexistingplans until such time that they are by stockpurchasesof equalvalue). Thiscompareswith a net saleof $14billion losses that Research reflects when Institute. the the markets obligations Joseph fall. S. Thisof Piacentini may the besponsor doneis with Research iforthe without Analyst. planregard was terminated The to timing views decline surveyed, onequity the equities exposures in the havePBGC been portfolio limitedby (estimated the respective to be instate the range or local of trusteed funds, responsible for most of the fourth quarter loss, in stockduringthepriorquarterand$35billionduringthefirstthreequarters considerations. The $146 expressed immediately. ESOP 23 million Barry will inB.either for this Burr, For the stateament example, have "Restrictions first to provide 26 it are days could 'Poor solely atof beleast used October). Medicine': those three onlyof atinvestment Pension The the timeseffect authors, of Execs perceived options of Greatly and thethat do market market Favor not are governments.The medianmaximumequitypositionallowedin the funds was 50%, State showedandalocal positive government returnretirement for thefunds, year.whichFurthe heldrmore, total assets totalof $561 1987 of the year. The resultsdid vary by type of plan however. Defined benefit vulnerability. not necessarily Free activity inconsistent Market," is minimal represent Pensions Itwith also however regulations the allows & Investment views in comparison portfolios of issued the Aqe, or trustees toelect to Feb the be 8,potential to invested and 1988, distribute sponsors pp. more impact 13-14. of an aggressively. of amount theanEmployee adverse to the but the stock exposureof the median fund was just 40%. Of the 9 remaining billion returns onwere September positive 30, 1987, for suffered all plancapital types.losses Single-employer of $54 billionon defined their Benefit plansand Research multiemployer Institute, plans orwere itsnet staff. sellersofequityduringthisquarterwith participant funds, 15"Impact the median notofin the equity excess Stock was of Market 35%. the maximum Drop Jacqueline on amount Employee Dutton which Benefit andthe Fred Plans," participant Williams, BNA Pension "Public could legal benefit decision and indefined the dispute contribution with the LTV funds Corporation realized over who returns shouldpay of for 6.4 corporateequity holdingsduring the fourthquarter. Capitalgains and losses salesof $7.1billionand$0.5billionrespectively.Basedon assetallocations elect the Funds company's to Survive have$2 diversified. Market billion Decline: pension Such Cautious fund a distribution shortfall. Equity Stance must See Cynthia be Limits madeDamage F. within Mitchell /Two 90Smell days and Reporter, 24However, October Wells 26, 1987, Fargopp. investment 1401-3. advisers, another large purveyor of on other investmentsof these fundscannot be estimated,becauseFRB data (on percent and 6.6 percent respectively, while multiemployer funds at the end of the third quarter of 1987, this represents2.4 percentof all following Trouble, 19Hayne Sell the E.end Stocks," Leland, of the "Who Pensions diversification Should& Buy Investment Portfolio election Aqe, Insurance?" period. November30, Journal 1987, ofpp. Finance, 47-48. Ann portfolio realized Hagedorn, insurance a "LTV 3.6 Pension percent and a Fund licensee return. Caseof Goes LOR's Unresolved technique, As Judge claim Rules to have Moreprovided Evidence which these estimatesare based) value non-equityassets at cost rather than equitiesheld by definedbenefitplansand 1.3percentformultiemployerplans. (May 1980), 16joelChernoff, pp. 581-594."ManagersDidn't Sell on 'BlackMonday'," Pensions& protection is Needed," within The Wall a fraction StreetJournal, of a percentage June 12, point 1988, of the p. 10. levelclientsexpected. market value. These funds realizedinterestincomeand dividendpaymentsof Defined contributionplans, however,were net buyers of equitiesduring this InvestmentAge. November30, 1987,p. I. 4Although only the two polar cases in selecting a pension plan are more Although than $10 private billionduring trusteedthe fourth pensionquarter. funds2 generally did not sell 11Althoughnot the only determinantof the interestrate assumptionunder quarter with net purchasesof $7.2 billion (3.6 percentof the total in the ZSln 2°Thismid-November, cost does notBankers materialize Trustcalculated directly; that instead, a one-year it canplan be thought with a of -5 discussed their stock here,during it is important the fourth to note quarter, that inthe recent overall years several investment employers mix FASB 87, it is appropriateto considerrates used to price annuity contracts previousquarter). as the17Joel opportunity Chernoff, cost "Equity of havingMarket a portion Exodus: of $10 the pension Billionplan Cut Could assets Be in Legacy risk- percent haveZThe been floor methodology adopting wouldplans then isexplained cost thatbetween combine indetail 4the andbest 6.25 inJack features percent L. VanDerhei, in oflost bothupside approaches. "AnEmpirical capture. The Impacton Plan Sponsorsand Participants that of could these befunds used to didsettle change. the pension Directobligation holdings (including of corporate the rates equity used 27MarkVoorhees,"CanPortfolioInsuranceMakea Comeback?," Institutional free of Earlier Crash," assets in the Pensions at year the that time & Investment plan of awould market Age. have increase. February cost 2 percent. 8, The 1988, costp. Mark will I.Voorhees, obviously "Can be Analysisof Risk-relatedPremiumsforthePensionBenefitGuarantyCorporation," byfell the PBGC from to 40value percent the liabilities of their total of terminating assets topension 36 percent, plans). primarily It shouldbe noted that,in the case of definedbenefitpensionplans, the net Investor,January1988,pp. 57-58. positively Individual associated responses withtothe thedegree assetallocation of protectionissue desired. were at In times othereven words, more Report Portfolio to the Insurance Pension Make Benefit a Comeback?," GuarantyCorporation, Institutional June Investor, 1988. January 1988, due to the decline in value of stock holdings. salesof equitiesduringthemarketdeclineis not a newdevelopment. In fact, pp. pronounced. 57-58. Inmid-November,Rockwellreportedlytold itsmanagersto liquidate a "guarantee" 5Adefined that benefit the portfolio pensionplan will termination not declineisby referred more than to as 15insufficient percent in While the precedingmaterialsuggeststhat the market decline (whenviewed in 12TreasuryRegulation Sections 1.412(c)(2)-I(b)(4)(i)and 1.412(c)(2)- an analysisof the time series for this figure reveals that defined benefit one all year their 2BAsurvey willstock require of holdings more less than which activity 1,000 hadexecutives comprised than one which an responsible estimated permits for no 75 percent decline employee of atbenefit all the $6 in ifthe 8Ray market Schmitt, valueEffect of planofassets StockisMarket lessthan Downturn thepresent on Pensions, valueof Congressional allbenefits 1( State b)(6).and local government retirement funds, which held total pensionplanswerenetsellersof equitiesineachquarterfromthefirstquarter the billion samefund. time period. At the Perhaps same time, lessBoeing obviousreportedly is that the purged costmost should of decline the fund's as funds Research at 1,400 Service, of America's December29, largest 1987, corporations p. 11. foundthat 48 percentof 401(k) guaranteedby the PBGC. Underfundedterminationsareonly permittedif certain assets of $561 billion on September 30, 1987, suffered capital of 1985to thefirstquarterof 1988. Moreover,the salesof equitiesbydefined assets stocks.were Hilary invested Rosenberg, in domestic "Going stock, on the including Defensive," company Institutional stockwhichaccounted Investor, the distress term Z6The ofcriteria Burlington protection(e.g., Industries is lengthened. liquidation Inc. or pension Forreorganization morefund information, switched in bankruptcy) the allmathematically- of itsequities aremet. IAmerican Council of Life Insurance,Life Insurance Fact Book Update losses 13Some ofactuarial $54 billion costmethods on their(unit-credit, corporate entry equityageholdings normalandduring individual the benefitpensionplansinthefourthquarterof 1988variedby plansize. Defined for January 28 percent 1988,pp. of 60-62. all assets for theseplans. See GreenwichAssociates,More to inclined fourth cash Although 9Hilary in reader quarter. November Rosenberg, a plan's shouldinCguaranteed see apital order "Going Simon togains lock Benninga on benefits the inandgains. and Defensive," will losses Marshall be The closely onBlume, San Institutional other Diego related "On investments Gas theto& Optimality its Investor, Electric vested of level (Washington, premium) D.C.: provide American an explicit Council amortization of Life Insurance, component 1987). while others (frozen benefitplanswith more than $75 million in assets had net salesequal to 3.6 January Co. ofbenefits, Portfolio pension 1988, they Insurance," fund pp. will 60-62. hasdiffer continued Journal due of to selling Finance, the maximum stock (December index monthly futures 1985), limitation to pp.hold 1341-1352. ondown insured its Policy,Less Tactics,LargeCorporatePensions,1988,p. 48. these funds cannot be estimated, because FRB data (on which these initialliability,attainedagenormalandaggregate)attributea portionof the percentof existingequitylevelswhiledefinedbenefitpensionplanswith assets 18Portionsof this sectionoriginallyappearedin EverettT. Allen, Jr., equity amounts exposure. (currently Some $1909.09) of the funds and ERISA thatSection have retained 4022(b)portfolio which provides insurance forare the normal estimates 21nterest cost are toand amortization based) dividends value from ofU.S. non-equity gains. Department Seeassets Arthur of Commerce, at W. cost Anderson, Bureau rather ofPension Census, than lessthan that amounthad netsalesof equitiesof only 0.6percentof existing 29Jacqueline 211°See john Steven R. Meneghetti, Dutton, Allen,Nicky Robert "Portfolio Robertshaw, Clark Insurance: and"ESOPS Daniel Finding Take Sumner, a Bath the "Post-Retirement Right -- Market Balance," Socks contemplating Joseph gradual marketJ.phase-in value. Melone, changes of Jerry These insurance in S.long-term Rosenbloom, funds coverage realized asset and to allocation. make Jack interest the L. program VanDerhei, Trudy income less Ring, Pension subject and "Risks Planning, dividend toHedged abuse Financeso_fSelectedPublicEmployeeRetirementSystems(Washington,D.C.,April MathematicsforActuaries,(Wellesley,Massachusetts:The WindsorPress,1985), levels. Pension 6th ed., World, (Homewood, September Illinois: 1986, Richard p. 36 ff.D. Irwin,1988). Defined Adjustments in from Newnewly Ways," Contribution established of Pensions," Pensions Plans," or& recently Investment Journal Pensions liberalized ofAqe_ &Human Investment April Resources plans. 18, Aqe, 1988, Vesting (1986), November p. 3. is pp. a2,legal 118-137. 1987, concept p. 8. p. payments 86 of more than $i0 billion during the fourth quarter. 1988).Capitalloss basedon Flow of Fundsdata calculatedby EBRI. Overall,privatetrusteedpensionfunds I0 sufferednet lossesof $135 billion,or 78946 3 52 EMPLOYEE BENEFIT RESEARCH INSTITUTE 2121 K Street, NW / Suite 600 / Washington, DC 20037-2121 i Telephone 202-659-0670 FAX 202-775-6312 1