Once the investment objectives are set, the next decision involves distribution of the plan’s assets. This process is twofold: selecting the types of assets to be used and then determining the amount to be invested in each type.

In the United States, the preponderance of pension plans is invested in familiar financial assets such as bonds, stocks, and cash equivalents. However, investment is growing in other types of financial instruments, such as guaranteed investment contracts, private placements, venture capital investments and options. (more…)

The treatment of investment risk in corporate pension plans probably is the least satisfactory area in the establishment of investment objectives. In spite of all the work published on risk in the investment literature of the past several years, risk tolerance often is not specified in setting investment objectives. Sometimes, statements of risk are made in general terms (e.g., the fund should not suffer a loss in any designated period) or a maximum tolerable decline in asset value is specified. Such specifications of risk are very difficult for an investment manager to deal with. (more…)

The final task in the area of investments is to establish a monitoring system to evaluate investment performance and to determine whether the fund’s investment objectives have been met. This topic is the subject of a separate monograph published by the Financial Analysts Research Foundation, and it will not be covered at any length here. However, a few comments are pertinent. (more…)

Although practices may differ with respect to the involvement of the corporate sponsor in objective setting and asset allocation retirement, selection of investment managers is rarely delegated. In terms of dollars of assets, most funds are managed by investment managers outside of the corporation, inasmuch as few companies have the internal expert staff needed to perform this function. Moreover, corporate management may prefer to delegate the fiduciary responsibility for investment, and some companies believe that having outside managers reduces some of the problems with respect to pensions in labor negotiations. (more…)

This is usually referred to as the actuarial accrued liability. It is that portion of the actuarial present value of all future benefits (PVFB) that is assigned by the actuarial method to the period prior to the valuation date. present value of all future benefits is the present value of all benefits accrued and unaccrued, past and future. It is a measure of the total obligations of the plan, past and future. That portion assigned to the past is called the actuarial accrued liability. This concept will be discussed again later in the section on actuarial methods. Due to the wide variety of actuarial methods in use, the same plan and assumptions can generate Significantly different actuarial accrued liabilities. In fact, one commonly used method (Aggregate Actuarial Cost) produces a zero actuarial accrued liability by definition. It funds costs over future payrolls only. (more…)

There are two traditional ways to value pension plan assets, i.e., market value and book value (cost). The actuary has always been skeptical about using market value due to the frequency of large short-term swings in security prices. In order to use market value properly, the actuary should value the liabilities at market also, which implies changing the interest rate assumption each year to meet the changing condition of the securities marketplace. This approach is, in fact, what is encouraged by FASB No. 35, which requires market value of assets to be used for disclosure purposes. There is an illusion of accuracy connected with market values because of the assumption that securities could be converted to cash at published prices. In fact, it is questionable whether any large fund could be liquidated with rapidity and if many tried to do so simultaneously, the entire securities market would collapse. (more…)

With respect to investments, the first task of the corporate sponsor is to set return objectives and broad definitions of characteristics for the investment portfolio that receives the corporate contribution. Setting investment objectives by the corporation for the investment manager or managers was not always considered an important function of the corporate sponsor; objective setting frequently was left to the discretion of the investment manager. However, as funds have grown in size, setting investment objectives has assumed increased importance; written objectives are prepared and then reviewed at regular intervals. Unfortunately, objectives often are stated in very vague terms, such as obtaining the maximum return consistent with prudence. Nevertheless, this problem is getting increased attention, and more specific directions may be expected in the future. (more…)

Sense of financial security in retirement will elude anyone who worries about what will happen to them when someone else dies. Whether the risk is loss of investment expertise, the absolute loss of income (e.g., because a pension benefit has no survivor benefit), the loss of assets to probate and estate taxes, or other circumstance of financial loss, providing for survivors is an element of financial security in retirement. (more…)

Everyone is needed financial security in some current stage of their life. While financial security in retirement is involving more freedom from fear and anxiety about having sufficient financial resources in later life. Whether considered from an individual perspective or from a societal view, the attainment of financial security in retirement may hold challenges. (more…)

Issues around retirement income planning are the most obvious. The traditional “three-legged stool” of retirement income planning—Social Security, pension income benefit, and income from personal savings and investments—is increasingly unsteady. Social Security faces a funding crisis in the first half of the twenty-first century because soon there may not be enough workers paying into the system to support those receiving its benefits. Social Security income lifts more than one in three older persons out of poverty—more than 60% of them women. It is by far the single most important contributor to financial security in old age in America. (more…)