Pension Funds and Corporate Enterprise Risk Management

Abstract

This article explains how the liquid pool of pension assets can be strategically invested to manage the combined pension and corporate risks to the joint benefit of the plan sponsors (shareholders) and plan participants. It is necessary to understand the relationship between the pension plan and the corporation in an increasingly sophisticated world in order to manage pension assets effectively within a corporate enterprise framework. Corporations need to increase the return they offer to investors per unit of risk that they add in order to increase shareholder wealth. Many companies need to concern themselves with liquidity. An appropriate liquidity measure is the ratio of near-term cash demands to the corporate free cash flow (FCF) plus liquid assets. The liquidity and debt-to-equity management may require differing investment strategies. The unfunded pension liabilities (adjusted for tax) are a debt of the corporation. Funding, or making a contribution to the pension plan, should be considered the equivalent of a debt buyback. Corporate finance theory maintains that a corporation is a vehicle that passes performance through to the individual shareholders. This implies that value cannot be added to shareholders by including equities in the company's pension portfolio, as they can easily alter their own equity exposure.