Experts offering strategies for management of pension funds.

With pension funds becoming a riskier proposition for employers, firms that specialize in managing retirement plans are touting their specialized expertise and new, high-tech tools as a means of allowing companies to keep offering the traditional benefit.

At the same time, human resource consultants, 401(k) managers and Wail Street brokerages expect to see increased business themselves because provisions in new federal legislation provide further incentives for companies to switch to some sort of defined-contribution plan.

Human resource consultant firms also are gearing up for increased business from employers looking to reassess their entire employee retirement benefit program. For example, Chicago-based Segal Co., which has significant Los Angeles operations, has been sponsoring breakfast seminars in some markets to outline how they can help employers go beyond simple compliance to improve their plan's condition.

But for companies that want to continue offering pensions, look for them to seek advice on how to proceed with "liability-driven investment strategies"--a technical-sounding concept that simply breaks down to minimizing the peaks and valleys that accompanies most longterm, high-yield investing while still meeting pension funding obligations.

"For firms like ourselves with an institutional focus on creating value through stock selection, this law in some ways plays into one of our strengths," said Rob Harkins, of the Los Angeles office of Pittsburgh, Pa.-based Mellon Financial Corp., the nation's third largest defined benefit asset manager. "A lot of our market-neutral strategies are about taking what would otherwise be the past investment and adding a higher return with a lower level of volatility."

Mellon isn't the only company with operations in Los Angeles gearing up for providing this investment advice. Northern Trust Corp., the nation's fourth largest defined benefit asset manager, just formed a new Investment Solutions Team.

The unit plans to provide more analytical tools to clients who will need to build up the financial health of their plans given the new rules created by this summer's passage of the Pension Protection Act of 2006.

New strategies, new players

Because a pension plan's liabilities extend out over decades, pension managers traditionally have been oriented toward a total-return investment approach, in which the company aims to get the best return over the long term. The ups and down of riskier investments such as equities tend to even out over time while generating a higher return. It's comparable to the approach recommended for young workers who have years to build their 401(k)s and IRAs.

But the new federal law's seven-year deadline to reverse the course of underfunded pension plans is encouraging plan managers to think more like middle-aged workers who have only a few years left to build their nest eggs.

A typical pension plan today might set its investment benchmark at meeting or beating the S&P 500. Under a liability-driven investment framework the liabilities--the amount owed workers--would be the benchmark, said Duane Rocheleau, who in July was appointed head of Northern Trust's Investment Solutions Team.

"Liability-driven investment is a framework for measuring and monitoring the risk of the pension plan ... in the context of the plan's liabilities," said Rocheleau.

In the United Kingdom, where pension plans have been under rules similar to the new ones in the U.S. for several years, Rocheleau said the percentage of long-term bonds in pension plans has grown modestly to 35 percent from 20 percent.

Though it's expected that bonds, with their more stable and predictable returns, will now have a greater role in pension plan asset allocation, there are ways to keep equities a major source of pension plan investment.

Provisions in the new federal law discourage companies from waiting until the last minute to get their pension ducks in order. That's where high-tech tools become key in creating liability benchmarks, determining the right asset allocation and providing real time monitoring so action can be made quickly to keep a plan on track.

At Northern Trust, Rocheleau said new products enable its managers to more quickly calculate whether an investment strategy is working or assets have to be quickly reallocated. "We have an advantage in that we have the client's assets and we place them on a regular basis," he said.

Meanwhile, Mellon offers a product for its investment manager clients call Dashboard, part of its Internet-based Workbench software that provides graphic displays of investment portfolio data in an easier-to-understand fashion. The program can help alert managers when returns are failing outside their investment mandates.

Even so, Harkins said pension asset managers shouldn't believe that these strategies and tools will do more than slow the migration of companies away from traditional retirement plans.

"The changes in the new law and the pending accounting changes are going to shrink the defined benefit market," Harkins said. "We're in an economy where it's harder for companies to pass on increased costs to consumers. It's going to come down to which companies will have the wherewithal to stay with their defined benefit."

BY DEBORAH CROWE

Staff Reporter