Training

Digging Out of the Pension Hole

At the University of Pennsylvania, finance executives learn about their fiduciary responsibilities ''in a field that they never paid much attention...
Marie LeoneJuly 16, 2004

At Wharton, the focus of executive education on pensions is shifting from the sell side to the buy side.

In the past, faculty at the University of Pennsylvania’s business school dedicated courses to the asset-management side of the pension equation, says Olivia Mitchell, a professor of insurance and risk management at Wharton. Further, the pension sessions tended to be minor segments of a broader risk management course and usually attracted insurance brokers, money managers, and board members whose aim it was to better understand fund management.

Starting this year, however, a three-day course will be devoted to corporate pension strategy and design. It will look at “the liability side of the pension picture,” notes Mitchell, who points out that, unlike previous courses, this session aims to attract corporate finance executives. “CFOs and treasurers always develop an acute interest in the subject when they discover that underfunded pension plans are putting their companies in a hole,” asserts the professor.

Mitchell — who is also the executive director of Wharton’s Pension Research Council, which sponsors studies on private-pension and Social Security issues — says that a confluence of forces prompted Wharton to launch the new executive education program, dubbed “Pension Strategy: Designing Resilient Retirement Systems.”

Recent accounting scandals, a post-dotcom stock-market lull, and the aging of the baby-boom population have created a demand for more information about plan design, regulation, risk management, and legal issues, the professor explains. Suddenly, senior executives “are realizing that they have a fiduciary responsibility in a field that they never paid much attention to,” she adds.

To be sure, before corporations were dogged by suspect accounting and faltering markets that hurt investment income, finance executives rarely felt called upon to focus on pensions, Mitchell says. But today, directors and officers face increased risk and liability if they don’t promote better governance and more financial transparency in all areas of corporate finance, including pension planning and administration.

What’s more, executives at companies that offer defined-benefit plans face fiduciary liabilities that include the accounting and legal exposures associated with underfunded pensions, says Mitchell. Executives whose companies offer 401(k)s and other defined-contribution plans also assume legal hazards when they make plan-design decisions, especially in light of Enron-like scandals involving employee investments in company stocks. Among the defined-contribution matters that senior managers, who are often plan fiduciaries, must ponder: whether to offer workers the choice of investing in company stock, how diverse the fund’s investment choices should be, and whether to set up a default selection if employees fail to choose a fund.

To help executives wrestle with such choices, the course addresses several key pension issues. The topics include avoiding common pitfalls in design strategy; developing an effective response to changing rules, demographics, and economics; assessing investment education and communications; and managing the liabilities of plan assets. Offered for the first time this year, the course coincides with two significant dates in pension history: the 50th anniversary of the school’s Pension Research Council and the 30th anniversary of the federal Employee Retirement Income Security Act (ERISA).

Mitchell believes the course will also provide executives with a chance to review fiduciary responsibilities that have arisen as a result of the Sarbanes-Oxley Act. Among other things, the new law bars insider trading during pension-fund blackout periods, mandates a 30-day notice prior to blackout periods, and increases criminal penalties (including fines and prison time) for those who willfully violate ERISA.

The course will also cover issues affecting multinationals, such as how to manage pension plans functioning in a number of countries with differing accounting rules. For instance, company accountants might have to wrangle with various liability-smoothing and mark-to-market rules in different localities. More specifically, executives at U.S.-based companies with plans in countries like Japan and Germany must cope with the rules requiring corporations to report underfunded pension liabilities in their financial reports.

Mitchell thinks that a look at pension programs will give executives an insight into their broader business operations. After all, the accounting, bankruptcy, labor relations, and capital-markets issues that executives must study in mastering the retirement-plan field “are a microcosm of corporate finance,” she argues.

Pension Strategy: Designing Resilient Retirement Systems” will be presented at The Wharton School of the University of Pennsylvania on September 15-17, 2004.