SIC 6371
PENSION, HEALTH, AND WELFARE FUNDS



Establishments primarily engaged in managing retirement, health, and welfare funds comprise what is commonly called the pension fund industry. Companies owning pension funds are called fund sponsors. Sponsors maintain funds for the purpose of meeting future obligations, such as benefit payments to retired employees. Some sponsors manage their own funds, or reserves, while others hire fund managers or consultants to conduct their investment activities.

NAICS Code(s)

523920 (Portfolio Management)

524292 (Third Party Administration for Insurance and Pension Funds)

525110 (Pension Funds)

525120 (Health and Welfare Funds)

Industry Snapshot

Total pension fund assets in the United States amounted to $6.79 trillion in 2000, down from $6.85 trillion in 1999. In the late 1990s, the industry was characterized by the scramble for increasingly diversified investment strategies, as fund managers attempted to safeguard long-term stability while registering strong short-term yields in the surging U.S. financial markets. Private funds, which had grown to account for 71.5 percent of all pension fund assets in 1998, accounted for only 66 percent of assets by the end of 2000. The growth of private funds had been attributable to a number of factors, including uncertainty regarding the future of the public pension system, a relaxed regulatory environment in the financial sector, and the strong economy. However, the economic downturn in the early 2000s caused some consumers to shy away from the private fund market.

According to the Federal Reserve Board's Flow of Funds Accounts of the United States, roughly 31 percent of all U.S. household assets were held in pension funds in 2002, continuing a long trend; the figure stood at 29.1 percent in 1998 and 23.3 percent in 1990. Pension funds held $2.1 trillion in corporate equities in 2000. Pension funds are expected to grow at an increasing rate in the early 2000s as the baby-boomer population ages.

Organization and Structure

Pension funds are essentially vehicles by which workers can save income generated during their productive years to help them maintain a reasonable living standard when they retire. More than 80 percent of employers offer some type of savings plan that will provide pension or retirement benefits to at least some of their employees. In addition, workers can invest in pension vehicles such as life insurance or various tax-deferred annuities that act as funds.

Pension funds operate under the assumption that money, which the employer or employee places into the fund, will earn interest income at a rate greater than inflation. The more interest and savings that accrue over a period of time, the more money will be available to provide benefits for the employee at retirement. Pension funds are generally favored over most other long-term savings plans because they benefit from a favorable tax status. These tax laws allow employees to defer taxes on both their savings and the interest income that those savings produce.

Government Agencies. Federal, state, county, and municipal governments all provide pension plans for their employees. Publicly owned corporations, such as the Tennessee Valley Authority, also fall into this category. In addition, the federally funded Old Age Survivors' Insurance (OASI) fund is included in this group. These public funds constitute approximately 29 percent of all pension assets. OASI is the largest, by number of members, of all government pension funds. This national program of social insurance is designed to cover all persons employed in the United States with the exception of clergy, some state employees, and most federal workers. Unlike national insurance programs in other countries, OASI entitlements are not based on need but rather on previous individual contributions. In 1999 more than 175 million Americans were covered under OASI and the fund maintained about $350 billion in assets.

Most federal employees who are not covered by OASI are included in the Civil Service Retirement System (CSRS) or Federal Employees Retirement System pension funds, which provide retirement, survivorship, and disability benefits to career employees of the federal government. Participation in these plans is compulsory. In 1999 these plans covered a combined five million workers and maintained approximately $430 billion in assets.

State and local pension funds, which cover public employees, together covered an estimated 18 million employees in 1998, with assets of $2.34 trillion.

Private Plans. Private plans that employ fund managers exist in both the nonprofit and commercial sectors. These funds (exclusive of funds managed by insurance companies) accounted for approximately 71.5 percent of all pension assets. Organizations in the nonprofit sector include churches and service associations, while commercial entities include for-profit establishments. Together, these pension funds accounted for about $5.7 trillion in assets in 1998. Funds sponsored by insurance companies include persons covered by Keough or other self-employment plans, Individual Retirement Accounts (IRAs), and various tax sheltered annuity savings plans. Pension assets sponsored by insurance companies amounted to $1.4 trillion, or 17.5 percent of all pension assets, in 1998.

Pension funds in the private sector, as well as some funds in the public sector, can be classified as either "defined benefit" or "defined contribution" plans. Defined benefit plans, once the most popular type, promise annuities—beginning at retirement—that are usually based on the worker's years of service and average wage during the last few years of employment. With a defined contribution plan, firms effectively contribute to an employee's savings account. The accumulated tax-preferred savings belong to the worker, who usually receives a lump sum at retirement. In 1998, private defined benefit plans carried about $2.1 trillion in assets, with 62 percent invested in equities; while defined contribution plans held about $2.2 billion, with 69 percent in equities.

In order to receive tax-preferred status for their private pension funds, managers must comply with Internal Revenue Service (IRS) regulations and guidelines. The Federal Employee Retirement Security Act (ERISA) of 1974 is the principal legislative tool used to govern pension funds. It imposes minimum funding requirements, primary fiduciary responsibilities, and disclosure criteria. For instance, a fund manager must show that its reserves cannot be diverted prior to the satisfaction of all liabilities and that it will not discriminate in favor of its more highly paid employees. Details about the fund must also be made known to employees or members.

An important element of the private pension fund market is the Pension Benefit Guaranty Corporation (PBGC). This government agency insured the pensions of 42 million Americans in about 44,000 defined benefit pension plans during 1999. If a company defaults on its retirement benefit obligations to its members or their dependents, the PBGC assumes liability.

Fund Management Structure. Pension fund management entails two basic activities: serving members or employees covered by the plan and directing investment and management of asset reserves. The fundamental provisions of any pension plan sets forth rules of eligibility, conditions for the receipt of pensions, a pension benefit formula, and a source of contributions. Companies that sponsor funds usually place control of the funds with a corporate trustee. Trustees, or custodians, oversee the funds to ensure that they comply with federal regulations. Trustees also supervise investment decisions made by fund managers.

While many fund sponsors hire outside consulting and investment firms to assist with investment of their pension reserves, most also have fund managers in-house, or within their organization. The fund manager may, in turn, hire several other managers or consultants who specialize in various investment activities. Administration activities, such as handling fund members' needs and delivering payment services, are often handled separately by the fund sponsor.

A pension fund manager is charged with three basic duties: developing a financial profile of the fund, developing investment policies, and formalizing an investment program. The financial profile essentially describes the plan's funding structure. The funding structure consists of existing assets such as cash and investments, obligations for currently retired employees, obligations for future retirees, and expected future contributions by both employees and the fund sponsor. The plan's funding structure is influenced by several factors, including the growth stage of the company, estimates for future employee and profit growth, expected future investment returns, and future tax rates.

When developing investment policies, managers must adopt return objectives, risk constraints, and asset diversification requirements. These components, when properly synthesized, serve to minimize the risk of investment losses and ensure that the minimum return necessary to meet future obligations is realized.

Finally, the formalization of the investment program requires selection of an investment committee to review strategy; definition of an asset allocation plan; creation of a detailed investment portfolio strategy; and the determination of an effective means of monitoring, evaluating, and reporting investment results. For example, the manager must determine the proportion of assets that are placed into stocks, bonds, real estate, international assets, or other investment vehicles. A common method that fund managers use to gauge the performance of their funds is comparison with standard indexes. Market indexes, such as the Standard & Poor's 500 stock index, serve as benchmarks to judge the effectiveness of the manager's strategy.

Financial Structure. Although thousands of pension plans served both the public and private sectors in 1998, the control of assets was steadily gravitating toward the largest funds. The top 200 funds maintained assets of $3.7 trillion that year, amounting to 38 percent of all pension-fund assets. The top 100, moreover, controlled $3.1 trillion, up from a mere $270 billion in 1979.

Background and Development

Pensions for military personnel have existed for centuries. The pilgrims of Plymouth Colony enacted a crude pension system for their soldiers in 1636. The first pension law in the United States, however, was implemented in 1789 and promised benefits to those who enlisted in the colonial army.

The concept of providing pensions for retired employees did not begin until the nineteenth century in Europe and did not significantly spread to the United States until the early twentieth century. One of these first pension plans set up a fund for teachers in New Jersey in 1896. Similar plans soon followed. One of the first federal pension funds was the Federal Civil Service Retirement and Disability Fund, established in 1920. Public plans that followed set up funds to benefit retiring policemen, firemen, and congressmen.

Just as it helped to establish public pension plans, legislation has been a great impetus for the advancement of the private pension industry. The Revenue Act of 1921 provided the first major private pension catalyst. This act laid the foundation for the basic tax rules governing private pensions in the 1990s. It allowed pension contributions to be deducted from the firm's taxable income, permitted tax-free accumulations within pension funds, and allowed deferral of personal income taxation on pensions until retirement.

The pension movement gained additional strength during World War II, when government wage and salary restrictions caused workers to seek more fringe benefits. A few years later, in 1949, pensions were classified by the court as acceptable tools for union bargaining. This development vastly increased the number of U.S. laborers in pension plans.

Growth of Pension Funds. Despite their origins in the first half of the twentieth century, private and public pension funding did not realize widespread popularity until the 1950s. Prior to 1950, pension plans were largely viewed as a discretionary benefit offered by an employer as a token of appreciation for a worker's efforts. After that time, however, several factors began to reshape society's views toward pensions. Companies began to use pensions as a form of compensation because of the tax advantages associated with them. In addition, an aging population was seeking ways to ensure a stable future.

In 1974 the Employee Retirement Income Security Act allowed for substantially greater diversification of pension fund investments. The act stressed that investments need not be examined individually by regulators, but in the context of an entire portfolio, thus granting much greater leverage to and placing more emphasis on fund managers.

Between 1950 and the end of the century, the number of people covered by Social Security insurance alone increased from 23 million to more than 175 million. Fund assets for all pension plan types during this period swelled from about $31 billion to $8.01 trillion in 1998. During the 1980s alone, pension-fund assets grew by more than 300 percent. The bull market of the mid- and late 1990s also boosted pension-fund assets.

Aside from changing public attitudes and legislation, an aging population is a root cause of the growth in pension fund assets. The percentage of the U.S. population over 65 years of age more than doubled between 1920 and 1980 to about 12 percent. The fantastic growth in the number and percentage of aged persons in the United States reflects birthrate declines, an increase in life expectancies, and the curtailment of immigration.

The 1980s. Pension fund management during the 1980s was affected by several trends and developments that continued to shape the industry in the early 1990s. Two of the most significant trends included an increase in popularity of defined contribution plans in comparison to traditionally popular defined benefit plans, and stricter regulations regarding fund reserves.

The increase in the popularity of defined contribution plans in the private pension market resulted in part from the economic boom of the 1980s, as well as the more appropriate benefit structure of contribution plans in the new business environment. Defined contribution plans also benefited from a comparatively liberal set of regulations and tax laws. As a result, they provided a higher rate of return than defined benefit plans.

Besides increased investment returns, one reason for the popularity of defined contribution plans during the 1980s was that employees had a better feel for exactly what they were getting back from their investment. Workers also felt as if they had more investment control than defined benefit plans offered. Contribution plans were also viewed as more mobile—an important consideration for people who expected to change employers.

Many employers also preferred defined contribution plans because they were easier and less expensive for the company to maintain than traditional defined benefit plans. In addition, employers were able to shift more administrative costs to their employees.

Rapid growth in defined contribution plans began to wane slightly in the late 1980s as the economy slowed and new regulations diminished their benefits. Nevertheless, total investment in contribution plans by fund sponsors exceeded assets in defined benefit plans in the mid-1990s.

A second development that fund managers encountered in the 1980s was stricter federal reserving requirements for their funds. Regulators began to question whether many private pension funds had adequate reserves to meet their future obligations. Amplifying their concerns were company failures in the late 1980s, which placed stress upon PBGC reserves. Furthermore, the stock market crash of 1987 reduced the value of many pension funds. The failures of Pan Am and Eastern Air Lines alone cost the PBGC $1.6 billion. As a result, several regulations and initiatives were enacted that affected pension funds.

Three efforts, in particular, served to change the industry. The Omnibus Reconciliation Act (OBRA) of 1987 and Financial Accounting Standard (FAS) No. 87 both served to enforce adequate reserves in pension funds. In addition, the Tax Reform Act of 1986 effected changes reducing some of the employer and employee gains derived from both defined contribution and defined benefit plans.

Besides increasing their use of defined contribution plans and having to adapt to new regulations, fund managers also started becoming actively involved in the management of the companies in which they invested. As some pension fund managers became concerned about what they felt were unsound business practices, they began to put pressure on the companies in which they owned significant shares to improve their operations. Typical suggestions for improvements related to better boardroom practices. The California Public Employees' Retirement System (CALPERS), for example, began targeting 12 companies each year for improvements. In 1992, CALPERS published the names of some companies that refused to meet with its representatives regarding changes; the companies subsequently agreed to meet with fund managers. Other trends in the pension fund industry that accelerated in the 1980s included activity by fund managers in alternative investments and foreign assets.

In contrast to solid investment returns realized by fund managers during most of the 1980s, investment performance diminished in the late 1980s and early 1990s as the U.S. economy stagnated. Regulators became concerned that many pension plans were underfunded and might not be able to meet their future obligations. Therefore, legislation was enacted to help ensure the financial stability of private funds. Meanwhile, the future success of the federal social insurance pension fund remained doubtful.

The 1990s. Going into the 1990s, pension fund sponsors and managers were struggling to overcome the stagnating effects of low interest rates combined with lackluster returns on their investment portfolios. They were also striving to improve the ratio of assets to liabilities in their funds in the face of a sluggish world economy. Many of them were also grappling with increased fund liabilities brought about by premature employee layoffs from downsizing. General Dynamics Corp., for instance, reduced its workforce by almost 67 percent in two years, requiring it to raise at least $1 billion in payments to companies that purchased some of its divisions. As another example, Texas Utilities Co.'s fund assets plummeted 50 percent, to $785 million, as its workforce shrank 30 percent and assets were consumed to meet unexpected benefit obligations.

The pension fund industry in the mid-1990s also prepared to manage a rapid influx of capital during the coming decade, a result of aging baby-boomers saving for their retirement. Hotly contested political debates over the future of the Social Security System also portended strong growth in private pension funds. With the help of the bull market in stocks, pension funds enjoyed strong asset growth in the mid-1990s. Assets allocated to foreign investment, real estate equity investments, and alternative investments showed significant growth, while popular alternative investments included private equity and buyouts, venture capital investments, private debt, and non-investment grade bonds. In foreign investments, allocations remained far larger in foreign equities than in foreign bonds.

New legislation promised to change the face of the pension fund industry as the Democratic Clinton administration took office in 1993. By the end of his first term, Clinton had proposed or signed into law more legislation and pushed for more regulatory changes than any administration since the passage of the Employee Retirement Income Security Act of 1974 (ERISA).

Two major pieces of legislation affecting pension plans were the Retirement Protection Act of 1994 (RPA) and the Small Business Job Protection Act of 1996 (SBJPA). The RPA resulted in several new regulations for pension plans covering areas such as minimum funding requirements, liquidity, payouts, and reporting requirements. The SBJPA contained provisions revising the Internal Revenue Code and ERISA that were billed as "pension simplification." These provisions included new tax rules covering individuals, retirement plan distribution rules, and a new tax-favored retirement plan for small businesses called the Savings Incentive Match Plan for Employees (SIMPLE). It was expected that the SIMPLE plan would replace the current SAR/SEP plan being used by small businesses by the end of 1997.

Among the major policy changes embedded in these pieces of legislation was the reduction of the salary cap used for calculating pension benefits. By reducing the salary limitation from $225,000 to $150,000, the new law had the effect of reducing the maximum pension benefits for high-paid executives. Another major change concerning Individual Retirement Accounts (IRAs) allowed non-working spouses to receive favorable tax treatment for contributions of up to $2,000.

Pension plan sponsors may choose to manage their assets internally or use outside money management services. In 1995, internally managed equity assets surpassed internally managed fixed income investments for defined benefit plans. In 1996, that was reversed, with internally managed bond portfolios surpassing those of stocks. Among the top 200 pension funds, $1 trillion in assets invested in defined benefit plans were managed internally in 1998; for defined contribution plans, of course, the figure was much lower, at only $103 billion.

Several factors were at play affecting the choice of internal versus external management. It was generally recognized that it was cheaper to purchase investment services externally than internally. Some funds experienced trouble retaining good money managers, who could find higher salaries at money management firms. Some funds have grown so large that they began to feel it would be more effective to have their funds managed externally. One factor working in favor of internal management was the trend among larger plan sponsors to index their core equity assets rather than have them actively managed.

An estimated 18 percent of private pensions were underfunded in 1999, down from 55 percent in 1980. Moreover, the majority of those pension funds considered fundamentally sound were particularly well insulated to weather potential minor stock-market plunges. Analysts surmised that it would require about a 30 percent decline in the stock market before surplus assets would be depleted among the healthy funds, a cushion that was markedly thicker among the largest funds. As a result, fund managers were likely to see their contributions and expenses decline well into the 2000s. Contributions by the top 200 funds totaled $38.1 billion in 1999, down from $44.1 billion in 1997. Meanwhile, assets among the top 200 outpaced liabilities by a margin of 20 percent, a gap not enjoyed since the end of the last economic-boom cycle in 1989. Assets jumped 13.4 percent in 1999, while liabilities dropped 13 percent.

The most pronounced growth among the top 200 funds was due in large part to mergers and acquisitions. High-profile pension-fund mergers occurred between SBC Communications and Ameritech Corporation, resulting in the fifth-largest corporate fund, as well as between BP America and Amoco Corp. The consolidation in the asset-management industry mirrored the increasing concentration of the financial-services sector as a whole, resulting in a tightening supply of institutional investors with burgeoning buying clout. It also intensified the growing international flavor of the pension-fund industry; 54 mergers or acquisitions in 1999 were between domestic funds, while 51 involved international deals.

Pension funds with a social conscience began to establish themselves in the late 1990s. After laws were clarified allowing trustees to offer pension funds the option of employing socially responsible investment (SRI) schemes in their portfolios, the use of SRI criteria jumped 13 percent in 1999, following a 9-percent incline the year before. Overall, approximately $2.1 trillion in funds run in accordance with SRI principles, which take into account social issues ranging from human rights to environmental friendliness in screening for sound investment options. In the late 1990s, the performance of such portfolios had outpaced the industry average, which, along with heightened popular concern over social issues, was expected to result in even greater SRI application in coming years.

Current Conditions

Throughout the 1990s the leading public funds increased their exposure to equities. A total of 61 percent of these funds' assets were invested in public securities in 1999, up from 22 percent in 1979. Moreover, fund managers were leaning toward more proficient employment of alternative investment exposure by way of real estate and venture capital. Finally, with the fantastically high ratio of assets to liabilities, a strategy that has gained favor with fund managers is the splitting of portfolios into two distinct parts that focus on separate goals. While one-half can focus on covering liabilities, the other can chase immediate returns. Still, amidst the raging economy and bull market, many fund managers were reluctant to forego potentially lucrative short-term gains in favor of shoring up their risk-management schemes, out of fear of losing investors. As a result, the assets of the 200 largest U.S. pension funds eclipsed a record $4 trillion in 2000. When the stock market crashed, however, this exposure to the stock market caused pensions fund assets to tumble. In 2001, the assets of the 200 largest U.S. pension funds slid 14.4 percent to $3.5 trillion. Assets of the 1,000 top funds fell 12.7 percent, from more than $5 trillion in 2000 to $4.8 trillion in 2001.

Various investment strategies are available to pension plan sponsors. Among the top 200 funds, more than 100 funds utilized such strategies as equity index funds, foreign equities, and real estate in their investment strategies. Defined benefit plans tend to more heavily invest in U.S. equities, which accounted for 43.2 percent of the top 200 defined benefit plans' allocation in 2001. Defined contribution plans focus more on the current performance levels. Thus, the heightened popularity of defined contribution plans in the mid- and late 1990s was in large measure related to the booming financial markets. In 2000, the top 200 defined benefit plans had allocated 64 percent of their assets to equities; this figure dropped to 61 percent in 2001.

The stock market's decline has prompted some pension funds to begin seeking alternative investments. For example, the Retirement System of Alabama offered $240 million for a 37.5 percent stake in bankrupt US Airways Group Inc. in September of 2002. According to the Alabama pension fund's CEO David Bronner, the reason for such an offer is simple: "You can't get any decent returns from stocks or bonds, so you can either sit on your cash or find something else."

Another major pension issue potentially affecting all fund managers in the 2000s was the gradual demise of the Social Security pension system. The long-term viability of this system was in serious doubt, as pension analysts predicted that the plan was underfunded to such a degree that it would be insolvent by 2036, leaving private pension funds and individual savings plans to make up the shortfall. Furthermore, the fund will likely require federal reimbursements by the year 2016. Through the early 2000s, debates were raging on Capitol Hill regarding the possible privatization of Social Security.

Industry Leaders

The top 10 pension fund sponsors in 2001 were California Public Employees ($143.8 billion in assets), New York State Common ($106 billion), California State Teachers ($95.5 billion), Federal Retirement Thrift ($93.3 billion), Florida State Board ($88.5 billion), General Motors ($82.5 billion), Texas Teachers ($75.1 billion), New York State Teachers ($74.9 billion), General Electric ($68.7 billion), and New Jersey ($66.7 billion).

Some of the largest fund management consultants that serve many of the larger funds, such as those just mentioned, include the Frank Russell Company, Callan, Wilshire, and Evaluation Associates. These firms offer specialty services to pension fund clients such as real estate investment or index counseling.

The largest trustee company in the pension fund industry was Bankers Trust New York Corporation. Other large trustees include Northern Trust, State Street Bank, Mellon Bank, and J.P. Morgan. These trustees, or custodians, monitor and effectively account for pension funds to ensure that sponsors and managers comply with federal regulations.

Workforce

The pension fund industry workforce is largely comprised of professionals with the financial or legal knowledge necessary to properly oversee and invest fund assets. Seven employment functions within the industry include administrative staff, attorneys, actuaries, investment advisers and money managers, accountants and auditors, custodians or trustees, and performance monitors. Each of these functions also requires support staff. Administrative employees are responsible for keeping track of existing fund assets, current and future obligations, and future contributions. Positions in this field require financial and accounting skills.

Attorneys help fund managers to follow both federal and state regulations governing fund management and administration. Actuaries are responsible for predicting future pension fund obligations and contributions; they also determine investment return requirements. Actuaries rely on advanced mathematical and statistical techniques to accomplish these tasks and often must train for several years to become fully designated in their profession.

Money managers provide portfolio investment services for fund sponsors and managers. They buy and sell securities and other assets in accordance with prevailing investment strategies and market conditions. Various companies may provide these services, including bank trust departments, money management firms, specialty management firms, and index fund managers. Index fund managers administer funds in which pension fund sponsors and managers can place assets. Index funds, which became popular during the 1980s, derive returns from a broad market portfolio that serves to minimize transactions costs and management fees and to reduce market risks. Pension funds typically pay mangers a percentage of the assets managed. Corporate fund managers earned an average annual salary of $118,632 in the late 1990s. Jobs in money management typically require at least business or economics degree, and often an M.B.A. or other advanced degree.

Accountants and auditors, usually Certified Public Accountants, assist in the financial reporting process. They also provide technical assistance with data processing and financial analysis.

Employment opportunities in most areas of the pension fund industry are expected to grow much faster than average, as assets placed in funds proliferate during the 2000s. Particularly, the demand for specialty consultants who can provide detailed investment advice about alternative investment assets should increase. The demand for services related to defined contribution plans should also grow faster than average.

America and the World

The pension fund industry in the United States is similar to and was originally modeled after the British pension system. While most other industrialized countries have pension systems similar to the United States and Britain, some countries rely more heavily on government-sponsored pension plans.

Besides the fact that the United States has more pension fund assets than any other country in the world, American pension funds also differ from funds in many countries in the way that their assets are allocated. Britain, which has the second largest pension fund industry, places much more of its assets in both domestic and international equities than in bonds. Pension plan managers in the Netherlands, on the other hand, are far more likely to place more of their assets in bonds and international assets than are U.S. managers.

Foreign Investment. Although U.S. pension managers have been investing internationally since the 1970s, it was not until the 1980s that investment in overseas assets accelerated. In 1980, the largest U.S. pension funds were devoted almost exclusively to U.S. investment. By the late 1990s, more than 69 percent of U.S. companies offered international equity, compared with 39 percent in 1994. In fact, the dollar value of foreign assets held by U.S. pension funds skyrocketed during the 1990s to more than $300 billion by 1994 and nearly $960 billion by 1999. Moreover, 6 of the 10 most expensive merger or acquisition deals in 1999 were between U.S. and foreign funds.

Fund managers sought foreign investment assets in the 1990s because they provided higher yields. For instance, since 1971 foreign bond returns have outperformed U.S. bonds by a margin of 5 percent. Foreign investments also increase investment-portfolio diversity, which reduces the risk of losses caused by regional economic downturns.

Part of the reason for the influx of investment into foreign countries has been a reduction in the barriers to entry for fund managers. The development of the European Union and its common currency along with a pan-European investment market in the late 1990s opened up the market to increased foreign investment. Multilateral investment deals negotiated at major world financial institutions have accelerated this process.

Despite reduced investment barriers, many restrictions still exist in most countries that limit pension fund activity. For instance, local and regional restrictions place limits on the amount foreigners can invest in various assets classes. Localities in some nations, such as Spain and Portugal, require that funds invested in their precinct be managed by local organizations.

Public pension systems in all industrialized nations were under increasing strain throughout the 1990s, which was expected to lead to greater emphasis on private pension funds. The nations of continental Europe were likely to experienced the most pronounced privatization boom due to the historically high reliance on state provision in those countries.

While increased returns and diversification have lured U.S. pension managers particularly to industrialized Asian and European countries, the emerging markets in Latin America, the Pacific Rim, and China are beginning to offer some of the greatest opportunities for investors. While these less-developed markets remain riskier, they offer the potential for comparatively high returns, as well as diversification for many pension fund portfolios.

Research and Technology

In the 1990s, pension sponsors were using advanced information systems to reduce their administrative workforces and improve efficiency. Similarly, fund managers implemented systems allowing more efficient reporting and monitoring of investments. These systems were used to integrate the sponsor's general pension fund strategies with the investment activities of its managers and consultants. Consultants were under pressure, as well, to improve their record-keeping systems to compete with larger investment management companies.

Developments in computer technology and software continued to deliver significant advances in the actuarial investments fields. Professionals used new mathematical models and statistical techniques that were previously unavailable.

Pension funds were also scrambling to catch up to banks and stock brokerages in establishing an online presence. The extent of online financial services grew exponentially in the early 2000s, and consumers performed a greater share of their investing via the World Wide Web. As relaxed regulations allowed financial institutions to perform a wider range of activities, analysts expected a growing number of customers would place most or all of their financial business with a single firm. As a result, pension funds rapidly entered the online world to snare potential customers before they developed relationships with other, more Internet-savvy firms.

Further Reading

Barreto, Susan. "Top 1,000 Funds Grow 13 percent for Year." Pensions & Investments, 24 January 2000.

Burr, Barry B. "Contribution Holiday: Pension Surpluses Big Enough to Weather Fall." Pensions & Investments, 24 January 2000.

Chernoff, Joel. "It's a Different World for Institutional Managers." Investment News, 24 January 2000.

Fulman, Ricki. "Just His Style: Bronner Says US Air Deal Will Pay Off When Industry, Now 'in a Dither,' Turns Around." Pensions & Investments, 30 September 2002.

Jacobius, Arleen. "DC Equity Exposure Tops DB Plan Levels." Pensions & Investments, 7 February 2000.

Kelly, Bruce. "Banner Year: U.S. Pension Funds Finish the Decade in Tiptop Shape." Pensions & Investments, 10 January 2000.

Kennedy, Mike. "At $3.5 Trillion: Assets of Top 200 U.S. Pension Funds Sink 14 percent." Pensions & Investments, 21 January 2002.

——. "Few Wane: Mergers Move Funds in Top 200." Pensions & Investments, 24 January 2000.

Lansing, Kevin. "Social Security Fix Becomes More Difficult as Time Passes." Bridge News, 20 December 2000.

"Pension Reform Ahead." Life Insurance International, February 1999.

U.S. Board of Governors of the Federal Reserve System. Flow of Funds Accounts of the United States. Washington, D.C.: GPO, 15 December 1999.

——. Flow of Funds Accounts of the United States. Washington, D.C.: GPO, 6 March 2003.

"U.S. Warms up to SRI Schemes." Financial News, 15 November 1999.

Williamson, Christine. "The Marrying Kind: More Money Than Deals in 1999 Mergers; European-U.S. Partnerships Top the List." Pensions & Investments, 10 January 2000.

Woolsey, Christine. "Nest Eggs are Hatching Online." Insurance Networking, November 1998.



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