Sunday, July 31, 2005

They got the Gold Mine, We got the Shaft...

How Wall Street wrecked United's Pension

Companies do not generally invest their pension money themselves, but instead farm out the work to an array of outside professionals. There are pension consultants to help set an investment strategy and recommend the money managers who actually pick the stocks and other particular investments. There are actuaries to design benefits packages and calculate how much companies need to contribute each year.

Custodial banks hold the assets in trust. Brokers execute trades. Once a year, an outside auditor is supposed to review the plan and issue an opinion about its conformity with generally accepted accounting principles.

Problems can arise when there are undisclosed relationships among these different service providers.

"Asset allocation is very much driven by hidden financial considerations," said Edward A. H. Siedle, the president of Benchmark Financial Services, a company that audits pension funds. He said one reason that pension funds tend to invest heavily in high-turnover, active equities is that "those investments have commissions and fees that can be shared with gatekeepers and others that pave the way." Companies that sponsor pension plans can also reap accounting gains if they increase the risk of their pension investments.


The S.E.C. monitors investment advisers but has no legal standing to enforce the pension rules. In a study, released in May, of pension consultants, it found the industry vulnerable to abuse and referred a dozen consultants to its investigative branch for possible enforcement action.

The advisors and the Corporate executives ride off into the sunset a bit wealthier and the retirees try to plan around a dramatic drop in income. Of course the union bears plenty of responsibility, too. They signed off on riskier investments in the Pension plan to free up money for wage increases. Irresponsible corporate governance (not direct class warfare) could be a strong issue for Democrats in the next election. Business is being driven by short term gain, usually at the expense of the future health, even survival of the enterprise. How about a 5 or 10 year waiting period for those stock options and mega bonuses? Just to be fair, Governance in Unions and Non Profits could be much better as well.

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