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"Oregon companies' pensions are in peril"

U.S. Bancorp and Weyerhaeuser try unconventional approaches with their pension money and get burned

Most investment gurus recommend balancing retirement savings invested in volatile stocks with stable bonds or cash. That's not what U.S. Bancorp does. The Minneapolis-based bank, Oregon's largest by market share, put 100 percent of its $2.9 billion employee pension plan in stocklike investments, its annual report showed.

The result: The plan plunged from being 50 percent overfunded at the start of 2008 to 19 percent underfunded by the end -- a $1.4 billion loss.

Weyerhaeuser Co. doesn't adhere to convention either. It had 86 percent of its $6.9 billion pension in hedge funds and private equity. The Federal Way, Wash.-based forest products company once boasted to workers that its strategy returned a stunning 17 percent a year.

Last year, the plan lost 40 percent, or $2.7 billion, of its value. It went from being 40 percent overfunded to 7 percent underfunded. In April, the company suspended its 401(k) match.

Both illustrate the risks of aggressively investing worker retirement funds. Most companies plug between one-half and two-thirds of their assets in stocks or equities. They put far less -- 4 percent to 7 percent -- in hedge funds and private equity.

"It's unlike other pension funds I've seen, that's for sure," said Diane DelGuirco about Weyerhaeuser. DelGuirco is a University of Oregon associate finance professor who has studied pension accounting.

Weyerhaeuser spokesman Bruce Amundson declined comment. U.S. Bank spokeswoman Teri Charest, when questioned about the bank's investment allocation, referred to the company's annual report. In it, the company said that while investing in bonds might lead to less volatility, it also "limits the pension plan's long-term up-side potential." So, the bank's compensation committee based its all-equity strategy on its plans' "investment horizon and the financial viability of the company to meet its funding objectives."

More corporate pensions, lured by high returns, have dabbled in hedge funds and private equity but none to the extent of Weyerhaeuser. Such alternative investments pose different risks from stocks and bonds because they often require long-term commitments and their exotic holdings can be hard to value.

"Just by their definition, they're not transparent," said Jennifer Koski, a finance professor at the University of Washington. "You can't know what's going on inside of them. So when you invest in a hedge fund, you basically end up investing in the manager. To me that raises red flags. In general, it violates my rule of 'Don't buy anything you don't understand.'"

Weyerhaeuser loaned its pensions $200 million last year after some funds blocked withdrawals, or redemptions, leaving its plans with less cash than expected to pay workers wanting lump-sum benefits, the company said.

Workers didn't understand Weyerhaeuser's strategy but weren't concerned because returns were high and the company was liable for any problems, one union leader said.

"The sense I got out of it is they were using their pension fund almost as a large hedge fund," said Don Draeger, who represented 220 union workers at a former Weyerhaeuser plant in Albany. "I don't think any of us really understood the logic behind the instruments they were talking about."

Federal law does not prohibit alternative investments, but it requires pension managers to invest prudently. Still, federal officials have taken note of the practice. U.S. Labor Department officials recently threatened to penalize a New York company unless it improved how it valued its pension investments in private equity. Outside experts have recommended the agency develop guidelines for such investments, but not adopt new regulations.

"There's lots of risks," said Susan Mangiero, founder of Pension Governance Inc., a research firm. "But on the flip side, if you don't look at (investment) alternatives like hedge funds, you may be leaving money on the table."

Some economists allege companies use aggressive pension investing to inflate earnings. A 2006 study by Harvard University and University of Chicago researchers found evidence that corporate managers facing mergers, worsening performance or large compensation contracts appeared to alter pension accounting to goose earnings.

Despite last year's market turmoil, pension advisers think pension plans will turn even more to alternative investments to make up losses or to offset risks in stocks. Hedge funds are responding by lowering fees and offering better reporting.

"We're seeing hedge fund managers offer their existing clients more information on the underlying portfolios," said Janine Baldridge, director of investment strategy at Russell Investments in Tacoma.

Weyerhaeuser has since sold mills in Albany and Springfield to International Paper Co., which has one-tenth of its pension in hedge funds and derivatives. "May was the best month we've ever had in our hedge fund portfolio," company pension manager Robert Hunkeler said.

Draeger is fine with Hunkeler's plans to expand that strategy. "At least when their investment managers talked to us, they gave you the feeling that it wasn't just 'Trust us on this,'" Draeger said.

-- Brent Hunsberger; brenthunsberger@news.oregonian.com

