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Big US pension funds have taken `Black Monday' in stride. Long bull market formed cushion, officials say

Pension funds in the United States are thought to be $200 billion poorer because of the stock market's 22 percent fall one day last month, but many managers are not terribly concerned. ``The fall certainly has been an inconvenience, but not a disaster,'' says Anthony Gray, the president of Sun Bank Investment Management Group, in Orlando, Fla. Mr. Gray manages $2 billion in pensions. His funds now emphasize stocks in consumer nondurables and drug companies, and they hold 12 percent cash.

``The more bonds you had, the better off you did,'' he observes. If a fund had put 70 percent of its assets in equities and 30 percent in bonds, for example, the fund would probably be off 14 percent after the market's fall, he says.

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During October, the Standard & Poor's 500 index of 500 stocks declined 21.5 percent, Gray says, while some bond funds climbed 4 percent. But for the first nine months of the year, the S&P index was up 35.9 percent, while some corporate bonds declined 8.2 percent and some government bonds fell 3.3 percent.

Gray says he is not overly alarmed, however, by the market's effect on pension performance. That's because the five-year bull market led to pension overfunding, as the fund managers' investments earned much more than was necessary to cover employee benefits.

The overfunding may have been as great as $350 billion at the end of last year, says Dallas Salisbury, president of the Employee Benefit Research Institute in Washington, D.C. Public and private pensions have $2 trillion in assets, he says, adding that pensions have recovered much of the ground they lost since the Oct. 19 plunge.

``The reason the pensions weathered the fall so well is that they were in terrific shape when the fall came,'' observes Michael Clowes, editor of Pensions & Investment Age magazine. ``They were 100 percent overfunded on Oct. 15; now they're probably only 50 percent overfunded.''

There are two types of private pension plans: defined benefit and defined contribution. Mr. Clowes says people in defined-contribution plans might have been affected more by the fall than those in defined-benefit plans.

``Under defined benefits, the company will give you a specific benefit, and the company has to stand behind that promise of benefit, regardless of the investment's behavior,'' he explains. The federal Pension Benefit Guaranty Corporation stands behind these plans if the company cannot meet its obligation or goes out of business.

Under a defined-contribution plan, a company will put money in an investment the employee chooses, and the PBGC does not cover the plan. ``The employees take the risk in the marketplace themselves,'' Clowes notes.

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The most current figures show that there are 216,000 defined-benefit plans covering 40.9 million employees and 535,000 defined-contribution plans, with 32.9 million employees. ``The fall really had no effect on individual pensioners, because the majority are in defined-benefit plans,'' says Gray.

For people who were counting on pension benefits soon, some months would have been more opportune than others to retire. ``People would have been 20 percent better off if they had retired in August,'' Clowes estimates. ``But the perspective to keep in this is that pension funds have given up what they gained, not what they earned,'' he adds.

As a rule of thumb, companies put about 50 percent of their pension fund assets in stocks, between 35 and 40 percent in bonds, and the rest in money funds, real estate, or other investments.

AT&T's pension fund lost $4 billion from its peak of $31 billion, says David Feldman, the corporate vice-president of investment management. ``We lost one year's worth of nice appreciation, but the diversification of the portfolio worked as it was supposed to,'' because bonds provided some appreciation for the fund.

A self-correcting mechanism in the fund moved money among the various investment choices as the market went up. ``We expected a correction,'' Mr. Feldman says. The fund is allocated 50 percent in stocks, 30 percent in bonds, and 10 percent in real estate.

Pension funds do not hold stocks on margin. This is where many small investors got caught in the market's fall, as brokers who had lent customers part of the money to buy stocks required investors to put up more collateral. Pensions own about 25 percent of US equities.

Over the long run, stocks have outperformed bonds, which is one reason pensions invest so greatly in this area. Despite the possibility that pensions may have lost between 12 percent and 15 percent of their portfolios since the end of September, it is the long-term outlook that is important.

``This loss is not that alarming,'' stresses Howard Ward, a principal in pension fund accounts and portfolio manager at Scudder, Stevens & Clark a mutual fund in New York, ``because healthy pension plans have long-term horizons; they are looking to maximize over the years.'' The majority of pension plans in the country are healthy, which means the assets exceed the current liabilities, he explains.

``We advise our clients not to get caught up in the last three weeks; the decline shouldn't have a material impact on the investment policy of healthy plans,'' Mr. Ward says. Scudder manages $8 billion in pensions.

Ben Capaldi does find, however, that the fall has delayed some investment in pension funds. ``In making presentations we find the fall has slowed up the cash flow as pensions assess where they are,'' says the vice-president and partner of Brandywine Asset Management in Wilmington, Del.

Brandywine invests fully in equities and manages $215 million in pensions and endowments. Before the fall, the stocks were heavily weighted toward utilities and financials, Mr. Capaldi says, which protected the funds somewhat.

On Oct. 19, when the market fell 508 points, Brandywine's accounts fell 14.3 percent, the Dow Jones industrial average lost 22.6 percent, and the S&P 500 lost 20.5 percent, Capaldi says.

Capaldi is looking at changes in the equity mix now, because utilities have relatively outperformed the market, and the company looks for companies with low valuations and low price-earnings ratios. Industrials and consumer goods are areas Brandywine is turning to.

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