ISG's Pension Fund Management Strategies

The assignment requires analyzing the challenges faced by ISG in managing its pension fund, including excessive losses and high employee pensions. It involves suggesting four strategies for overcoming these challenges: implementing an early retirement policy, taking advantage of the Olympic opportunity, controlling overheads, and proposing a lump sum payment to retirees through National Association of Pension Fund. The assignment also includes references to relevant books, journals, and online resources.

LEWIS CONSULTANT LINE ITEMS

Table of Contents
RESEARCH PAPER.......................................................................................................................1
REFERENCES................................................................................................................................4

RESEARCH PAPER
Lewis Consultant Service (LCS) is a consultation providing service firm that aims at
providing the best consultation services to the firms of different sizes for promoting their brand
recognition and growth. As per the case, a company named Incredible Sport Gear suffered loss
of its entire employee pension funds during the period of economic crisis in the year 2007. The
CEO of the company does not want to lay the workforce & wants to continue to hire more
workers. The existing workers cannot retire & new employed people are the family members
both these are working under the same roof. During crisis in US, many of the companies have
lost their defined benefits (DB) pension funds, as a result, companies failed to meet out their
DBO subject to employee pension. Thus, the aim of the present research is to recommend the
four-line items by which Incredible Sport Gear can address such issue and come back on track.
Service cost & interest cost: Traditionally applied DBO plan were aimed to provide a
fixed guaranteed income to the employees in which a fixed proportion of worker’s salary is
contributed in the employee pension, thus, the benefits of social security is presented in terms of
fixed income. However, in current times, employees have their own retirement plans called DC
(Defined contributory) schemes that are managed as investment accounts in which savers are
communicated with the benefits in terms of assets and its volatility indicates its risk (Biondi &
Sierra, 2017). The new scheme will help Incredible Sport Gear and protect savers by holding
pension fund in risk free income assets and thereby assist the organization to get back on the
track from the losses suffered during the period of economic crisis. It does not allow company’s
managers to invest the pension fund of the employees in deferred annuities or other long-term
maturity asset like US treasury Bonds. It is because, if the said firm, invest pension fund in such
assets then with the increase in interest rate, prices will fall and results in collapse during
economic downturn. Companies must invest in risk free assets i.e. US treasury Bills which is
considered as risk free assets and are considered fully protected. Service & interest cost are the
two important elements of Projected Benefit Obligation (PBO) and pension expenses which have
been paid by the Incredible Sport Gear on pension fund (Liu, Meng & Ma, 2016.). Thus, through
holding investment of employee’s pension in risk-free assets, companies can secure itself against
the probable risk due to economic downfall. It will not bring any impact to the pension cost; as a
result, net profit of the company will not be affected. It will enable company to mitigate the risk
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associated with the rise in interest rate and the loss of pension funds. Hence, by investing in risk-
free asset, ISG can stabilize the financial cost and prevent itself against the potential risk of
economic crisis.
Assets shocks: In US, companies have suffered excessive loss on their private pension
funds due to loss in their assets valuation. Majority of the losses have been accounted for the
pension fund because of high risk comparatively to that of average equity risk, as a result,
companies have lost their value of assets and faced loss (Ambachtsheer, 2016).
Liabilities shock: Costing method, interest rate for discounting and the prevailing
domestic accounting standards had a considerable effect on the liabilities valuation during
economic downfall. During such period, pension planners suffered drop down in their liabilities
due to increase in corporate debt. However, it shows rapid increase with the decline in interest
rate (Choi & et.al., 2016).
Liability Driven Investment: During crisis, many nations have faced collapse of their
pension funds due to high equity exposure. Thus, the reduction in the excessive equity exposure
and employing liability driven investment strategy (LDI) is considered as the best strategy to
manage investment pattern of the employee pension fund. It helps to manage risk as a result of
volatility in interest rates. In order to overcome assets and liability shock, it can be suggested to
the Incredible Sport Gear to use LDI because Assets Liability Management (ALM) considers
liability as a benchmark for the purpose of assets allocation thus, it presents the clear picture of
company’s assets and liabilities (Raudla, 2017). However, LDI focuses on implementing
investment portfolio by which Incredible Sport Gear can match the nature & behaviour of their
liabilities with their assets to minimize interest rate risk & safeguard the business itself against
possible collapse due to crisis. It works on two concepts, first is immunisation which match
assets & liabilities duration by investing into bonds for this, business can also use interest-rate
swaps. Second is dedication strategy that focuses on matching the cash flows from liabilities and
assets using a bond portfolio. LDI helps to distribute risk in varied ways so as to minimize the
risk hence its implementation will assist Incredible Sport Gear to get back on the track from the
loss of pension fund during crisis (Naczyk & Domonkos, 2016).
Investment: Pension fund’s key goal is to maximize return and protect sponsor. In US,
traditional investment strategy was the balanced strategy comprising 60% equity & 40%
investment in fixed income securities. However, with the economic downturn, as companies
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faced funding deficit, new rules of accounting allowed firms to discount their liabilities at the
expected rate of return (Impavido & Tower, 2009). Thus, this policy will be a better choice for
the Incredible Sport Gear to minimize deficit by promoting investment in riskier assets with high
return and lowering business liabilities. Economic crisis in 2007 brought LDI at the doorstep of
pension funds in US. It can be used by the firm as a risk management strategy for the closed
employee pension fund in order to minimize volatility & maximize pension contribution for the
sponsors (Ambachtsheer, 2017). It helps to reduce possible loss due to excessive fluctuations and
assist the firm to come back on the track so as to run operations successfully in the competitive
field.
Amortization: Incredible Sport Gear can be suggested to amortize the employee pension
fund lost in financial crisis over fixed time duration. With the help of this, it can set off its losses
incurred over a decided time period which will decline its annual net profit by the amount set off
and reduce employee pension fund in the balance sheet as well (Franzen, 2010). It will be a good
strategy because setting off all the losses in a particular year is not possible as it will result in
reducing its net income. Hence, by charging some fraction of loss against yearly return will be a
better idea to improve ISG’s bottom line.
Suggestions: Besides this, ISG can be recommended with the four strategies through which, it
can overcome from the losses suffered and get back on the track, presented underneath:
 The first and foremost important suggestion is that ISG can implement early retirement
policy wherein employees will be allowed to get voluntary retirement from the course of
employment before reaching the retirement age at some reduced benefits.
 Secondly, in US, economic crisis occurred in 2007/08 and in the same period, Olympics
have been held. Thus, it is the best opportunity available to the ISG to maximize its sales
revenue by providing various supplies in the Olympic. Thus, company can contact with
the organisers and file a tender at minimum price. With the help of it, it can maximize its
revenues to a great extent and come back on the track from the excessive loss of pension
fund.
 Thirdly, it is also considered beneficial for the company to control on the excessive
overheads so as to maximize their total return. More importantly, ISG can discontinue all
the benefits that it is providing to the employees and must pay specific attention to the
worker’s salaries and PF only as both these are the basic requirement of every worker.
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Through this, it can curtail its expenditures and maximize net yield so as to get back on
the track.
 National Association of Pension Fund which is a government sponsored exchange also
can be proposed as an appropriate strategy in which retiree is provided with a lump sum
payment at the time of retirement hence, considered as less riskier approach.

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REFERENCES
Books and Journals
Ambachtsheer, K.P. (2016). The Future of Pension Management. no. May. pp.1-19.
Ambachtsheer, K.P. (2017). The Future of Pension Management: Integrating Design,
Governance, and Investing. 2016. FINANCIAL ANALYSTS. p.146.
Biondi, Y. & Sierra, M. (2017). Pension management between financialization and
intergenerational solidarity: a socio-economic analysis and a comprehensive
model. Socio-Economic Review, p.mwx015.
Choi, C. & et.al. (2016). Net Contribution, Liquidity, and Optimal Pension
Management. Journal of Risk and Insurance, 83(4). pp.913-948.
Liu, Y., Meng, Q. & Ma, Y. (2016). The Enlightenment to China from UK’s Pension Entering
Capital Market. American Journal of Industrial and Business Management. 6(08), p.885.
Naczyk, M. & Domonkos, S. (2016). The financial crisis and varieties of pension privatization
reversals in Eastern Europe. Governance. 29(2). pp.167-184.
Raudla, R. (2017). 8 Cutback Management in Estonia During the Crisis of 2008–10 and
Beyond. Public Management in Times of Austerity. p.129.
Online
Franzen, D. (2010). Managing Investment Risk in Defined Benefit Pension Funds”, OECD
Working Papers on Insurance and Private Pensions. [Online]. Available through:
http://www.oecd.org/finance/private-pensions/44899253.pdf>. [Accessed on 20th July
2017].
Impavido, G. & Tower, I. (2009). How the Financial Crisis Affects Pension and Insurance and
Why the Impacts Matters. [Online]. Available through: <
https://www.imf.org/external/pubs/ft/wp/2009/wp09151.pdf>. [Accessed on 20th July
2017].
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