Financial Interworkings of Fiduciary Financial Interworkings of Fiduciary PlansPlans

Cary MeinersCary MeinersSt. Paul TravelersSt. Paul Travelers

Terrence M. Deneen Terrence M. Deneen Pension Benefit Guaranty CorporationPension Benefit Guaranty Corporation

Barbara GubitoseBarbara Gubitose AcordiaAcordia

Rod Rodriguez, Esq.Rod Rodriguez, Esq.Day, Berry & Howard LLPDay, Berry & Howard LLP

Marc Siegel Marc Siegel Center for Financial Research & AnalysisCenter for Financial Research & Analysis

The Pension LandscapeThe Pension Landscape

• A call for transparency and honesty• Unfunded pension liabilities for the S&P 500

approximates over $200 billion• 60% of the S&P 500 still offer traditional pensions• Claims on the PBGC have soared• Healthcare costs/other post-retirement benefits are

perhaps a greater, and largely unfunded, problem• Municipalities and the public sector facing the same

concerns - now approaching $1 trillion in underfunding

Accounting For ChangeAccounting For Change

• One of FASB’s goals is to better match pension plan assets to pension obligations

• S&P 500 companies totaled a $264 billion discrepancy between reported pension B/S assets and pension underfunding

• The FASB project will include other postretirement employee benefits (OPEB)

• Transparency is needed on the balance sheet, income statement and cash flows

Current Congressional Current Congressional ProposalsProposals

• Congress (via ERISA) establishes all rules for pension funding

• House and Senate bills will force change May actually reduce funding by $160 billion in

the next three years• Will likely create “zones” of underfunding,

triggering acceleration of funding by employers

• Likely to get a new law in 2006• Will underfunding affects sources and

frequency of claims?

Fiduciary DutiesFiduciary Duties

• “Exclusive Purpose” and the Duty of Loyalty

• “Prudent Person Standard” and the Duty of Care

• Role of Diversification

• Plan Guidelines

Fiduciary LiabilityFiduciary Liability

• Scope of Damages Joint & Several Liability Plan Remedies Limitations

• Limitation of Duties: Appointing Fiduciaries Candidate Evaluation Monitoring Performance

Fiduciary Best PracticesFiduciary Best Practices

• Fiduciary Best Practices: • Regular Meetings with Minutes• Plan Review and Education/Training• Prudent Processes - Documentation• Written Investment Policy• Compliance Hygiene/Audits• Fiduciary Liability Insurance• Communication

Hedge Funds: The Answer Hedge Funds: The Answer or the Problem?or the Problem?

• For some, underfunding means taking more risk, not laying out more cash

• Pension plans currently provide 40% of the $600 billion in buyout funds

• A repeat of derivatives or is this different?• Are pension managers equipped to handle

these complex investments?• What are the fiduciary implications and

responsibilities?

Hedge Funds: The Answer Hedge Funds: The Answer or the Problem?or the Problem?

• Investment in private equity/hedge funds runs deep for many: GM: 10% of pension assets invested in

private equity Delta: 13% Eastman Kodak: 20% The State of Pennsylvania: 23% Weyerhaeuser: 39%

Are Underwriters Up To the Are Underwriters Up To the Task?Task?

• The complexity of pension accounting

• Reliance on outdated information

• Less insured interaction than on D&O

• Private company/nonprofit challenges

• Will insured meetings have to change?

• Underwriting in the future - what to look for

Resource Resource AcknowledgementAcknowledgement

• Information has been obtained from the following sources: NY Times Online BusinessWeek Online FASB Website Forbes Magazine