The extent of the damage inflicted on pension plans by last year's stock market plunge suggests companies sponsoring defined-benefit (DB) plans will take defensive action. But one pension consulting firm warns that in the current environment, plan sponsors should be wary of implementing a popular approach to limiting a plan's interest-rate risk, called liability-driven investing (LDI).
LDI strategies aim to match a pension plan's assets more closely to its liabilities to avoid a mismatch that cuts into funding. One common way to do that is to put on an interest-rate swap that lengthens the duration of the plan's assets to bring it closer to the duration of the liabilities.
But Jon Waite, chief actuary at SEI Investments, a provider of asset management and investment operations solutions, says initiating an interest-rate swap right now might not work out that well because it's likely that as credit becomes more available, spreads will start to narrow. "It's possible that credit spreads could expand from the current levels, but we expect that interest rate spreads will decrease to be more in line with their long-term norms and as that happens, the value of your interest-rate swap is going to decrease," Waite says. "And that decrease is not in line with what's happening with your liabilities."
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Another approach to LDI is to increase a pension plan's fixed-income holdings. Waite is also uncomfortable initiating that type of move at this point, though, noting that increasing a plan's bond holdings is likely to mean decreasing its equity allocation. "If you're pulling money out of the return-enhancing assets and putting them into fixed income just to get rid of interest-rate risk, you may be having unintended consequences relative to long-term asset allocation and the return," he says. "Do you really expect equities not to improve this year?"
A report on LDI released earlier this year by Russell Investments suggests that the fall-out from the problems experienced by complex mortgage securities might scare plan sponsors away from employing LDI strategies involving derivatives, such as interest-rate swaps. But the Russell report concludes that over the next five years, adoption of LDI strategies is likely to become widespread as sponsors of pension plans react to the losses they've suffered over the last year.
SUSTAINABILITY
Reducing Costs With Green IT
Companies' increasing interest in a greener approach to information technology is driven by concerns about the bottom line.
Technology consulting company IDC reports that 68% of the almost 150 IT executives it surveyed said energy efficiency was "top of mind" for them when they considered green IT, which IDC defines as the environmentally responsible use of the technology involved in companies' IT systems, such as servers, storage, network, communication and consumer devices. And 51% say their company's interest in green IT stemmed directly from the cost savings possible. Vernon Turner, senior vice president of enterprise infrastructure at IDC, says the savings possible from implementing Green IT varies for each company, but notes that data centers can account for up to 30% of a company's IT budget spent on energy.
The survey also shows, though, that just 22% of companies have budgeted for green IT efforts.
REAL ESTATE
Vacancies Up, Rents Go Down
Cheaper rents may be one saving grace for companies trying to cut costs amid the economic downturn.
The latest data from real estate services firm Cushman & Wakefield shows the average office vacancy rate in central business districts rose to 12.5% in the first quarter, up from 11.2% at the end of last year. That's the highest level since 2006.
The increasing supply of office space is putting a dent in rents. The average asking rent slid 2.2% in the first quarter, to $39.50 per square foot, from $40.37 at the end of 2008. The changes ranged from a 14.3% decline in San Francisco, to $39.68 per square foot, and a 6.4% drop in New York, to $65.01 a square foot, to a 1% rise in Washington, to $50.85 per square foot.
Ken McCarthy, managing director of New York area research at Cushman & Wakefield, says vacancy rates are likely to remain under upward pressure.
"When you see employment decrease, as we're clearly seeing right now, the amount of space in the market will tend to increase," McCarthy says. "The second thing we look at is the amount of space [added] by new construction."
With both those factors pushing the vacancy rate higher, he says, "we do think rents are going to remain under pressure for the balance of this year."
RISK MANAGEMENT
The Supply Chain Is Springing Leaks by the Truckload
Do you know where your cargo is right now? Cargo theft is a growing problem, with estimates from the FBI and industry groups putting annual losses at between $15 billion and $30 billion. Experts say those numbers are probably understated because many thefts are never reported.
"It's certainly one of the main risks in the supply chain for significant losses," says Mark Sullivan, head of loss prevention at Kroll, noting that a single truckload can be a bounty for cargo thieves. "With a 53-foot trailer, depending on the load, you could have millions of dollars worth of inventory," he says, citing pharmaceuticals and electronics as examples of high-value merchandise.
But less expensive freight that can be resold very quickly is also attractive to cargo thieves, Sullivan says. "A truckload of diapers or baby formula is like hitting a gold mine–if you can drop into a flea market, you can sell diapers for immediate cash." And criminals bring an impressive level of organization to this line of work; Sullivan recalls a case in which a trailer, recovered within hours of being stolen, had already been repainted.
In one nod to the problem, Travelers Cos., the St. Paul, Minn.-based insurer, unveiled a sting trailer last fall that it uses to apprehend cargo theft rings. "There have been arrests made as a result of the use of the sting trailer," says Scott Cornell, manager of the Travelers specialty investigations group. Travelers, the leading underwriter of marine inland insurance, which covers goods in transit, also runs courses in warehouse and cargo theft prevention for its customers.
Cornell says U.S. port areas, like the northeast, southeast and west coast, are hot spots for cargo theft, and Kroll's Sullivan notes a "huge increase" in truck hijackings and cargo theft in Mexico.
Companies "should be concentrating on regimented, documented security protocols that become part of their culture of doing business," Cornell says, citing topics like the areas that truck drivers should avoid and methods used to secure trucks. Sullivan says that since cargo thefts are often perpetrated with the aid of inside information, "one of the things that I advocate with my clients is really limiting the knowledge within the organization of outbound freight–what's on the trailer, when it's going."
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