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E M P L O Y E E B E N E F I T S , C O M P E N S A T I O N
A N D P E N S I O N L A W
Vol. 3, No. 2: January 31, 2002
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Publisher: LSN Subject Matter Journals
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Editor: PAMELA J. PERUN
Urban Institute
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Copyright: SSEP, Inc. 2002. All rights reserved.
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Topic of This Issue:
Pension Finance Issues
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T A B L E of C O N T E N T S
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NEW and FORTHCOMING ARTICLES
"The Next Generation of Index-Trackers: Exchange-Traded Funds and
the Investment Duties of Fiduciaries"
Company and Securities Law Journal, Vol. 18, November 2000
PAUL USMAN ALI
University of Queensland
MARTIN L. GOLD
MFAS Investment Advisors
WORKING PAPERS
"International Pension Swaps"
ZVI BODIE
Boston University
School of Management
National Bureau of Economic Research (NBER)
ROBERT C. MERTON
Harvard Business School
National Bureau of Economic Research (NBER)
"Wealth Effects of Banks' Rights to Market and Originate
Annuities"
ARNOLD R. COWAN
Iowa State University
Department of Finance
JANN C. HOWELL
Iowa State University
Department of Finance
MARK L. POWER
Iowa State University
Department of Finance
"The German Social Market in the World of Global Finance: Pension
Investment Management and the Limits of Consensual Decision
Making"
GORDON LESLIE CLARK
University of Oxford
School of Geography
DANIEL MANSFIELD
University of Bristol
School of Geographical Sciences
ADAM TICKELL
University of Bristol
School of Geographical Sciences
"How Much is Investor Autonomy Worth?"
SHLOMO BENARTZI
University of California at Los Angeles
RICHARD H. THALER
University of Chicago
National Bureau of Economic Research (NBER)
"Behavioral Finance and Investor Governance"
LAWRENCE A. CUNNINGHAM
Yeshiva University, Benjamin Cardozo School of Law
S S R N I N F O R M A T I O N
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EDITORIAL POLICIES
To provide the broadest coverage of research in Employee
Benefits, Compensation and Pension Law we do not referee working
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Benefits, Compensation and Pension Law whose topics suit the
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scholarly discourse.
N E W and F O R T H C O M I N G Articles
_________________________________________________________________
"The Next Generation of Index-Trackers: Exchange-Traded Funds and
the Investment Duties of Fiduciaries"
Company and Securities Law Journal, Vol. 18, November 2000
BY: PAUL USMAN ALI
University of Queensland
MARTIN L. GOLD
MFAS Investment Advisors
Contact: PAUL USMAN ALI
Email: Mailto:pau_ali@hotmail.com
Postal: University of Queensland
T.C. Beirne School of Law
St. Lucia
4072 Brisbane, Queensland AUSTRALIA
Phone: +61 7 3365 2206
Fax: +61 7 3365 1454
Co-Auth: MARTIN L. GOLD
Email: Mailto:martinlgold@hotmail.com
Postal: MFAS Investment Advisors
Level 10 Aurora Place
88 Phillip Street
Sydney NSW 2000, AUSTRALIA
ABSTRACT:
This article explains the structure of Exchange-Traded Funds
(ETFs), and describes the proposed Australian ETFs, as well as
the ETFs that have been launched in the United States, the UK
and Europe, and Asia. The article also considers the key issues
under Australian law confronting fund managers, pension trustees
and other fiduciaries who are considering investing in ETFs.
Under Australian law, fiduciaries are required to invest the
funds entrusted to them in accordance with the "prudent investor
rule". However, an allocation of funds to an ETF raises a more
fundamental legal issue: has the fiduciary, by investing funds
in an ETF, improperly delegated its investment powers and so
breached its legal obligation to act personally? This issue
arises each time a fiduciary appoints an external manager to
invest fund assets, but is particularly acute in the case of
ETFs and other managed strategies where the fund assets are
committed to a strategy without the ability for the fiduciary to
intercede in the strategy.
The law on delegation by fiduciaries in Australia is in an
unsatisfactory state. The common law places strict limits on
delegation - it is only in cases of "necessity", that a
fiduciary can depart from its legal obligation to exercise
investment powers personally. This principle has arguably been
superseded by the broad statutory powers conferred by the
Australian Corporations Law on fiduciaries that are responsible
for managed funds. In contrast, despite the introduction of
special legislation regulating pension funds, questions remain
about the ability of pension trustees to invest pension assets
in ETFs and other managed strategies.
Keywords: Exchange-Traded Funds, Managed Funds, Pension Funds,
Investment Powers, Fiduciary Duties
JEL Classification: K22, G23
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W O R K I N G P A P E R Abstracts
_________________________________________________________________
"International Pension Swaps"
BY: ZVI BODIE
Boston University
School of Management
National Bureau of Economic Research (NBER)
ROBERT C. MERTON
Harvard Business School
National Bureau of Economic Research (NBER)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=288781
Paper ID: Boston University School of Management Working Paper
No. 02-01
Date: January 2002
Contact: ZVI BODIE
Email: Mailto:zbodie@bu.edu
Postal: Boston University
School of Management
Finance/Economics
595 Commonwealth Avenue
Boston, MA 02215 USA
Phone: (617) 353-4160
Fax: (617) 353 6667
Co-Auth: ROBERT C. MERTON
Email: Mailto:rmerton@hbs.harvard.edu
Postal: Harvard Business School
Morgan 397
Soldiers Field
Boston, MA 02163 USA
ABSTRACT:
During the past twenty years, swap contracts have become key
financial "adapters" linking diverse national financial systems
to the global financial network. Today banks and investment
companies around the world use swaps extensively to manage their
currency, interest-rate, and equity-market risks and to lower
their transaction costs. Yet pension funds, which have grown
rapidly over that same 20-year period, hardly use swaps at all.
This paper suggests how pension funds could use swaps to achieve
the risk-sharing benefits of broad international diversification
and hedging while avoiding the "flight" of scarce domestic
capital to other countries. The paper also shows how swaps can
be used to lower the risks of expropriation and to lower the
other transaction costs of investing in other countries.
Keywords: Pensions, diversification, risk-sharing, swaps
JEL Classification: F3, G15, G18, G23, K23, K33
______________________________
"Wealth Effects of Banks' Rights to Market and Originate
Annuities"
BY: ARNOLD R. COWAN
Iowa State University
Department of Finance
JANN C. HOWELL
Iowa State University
Department of Finance
MARK L. POWER
Iowa State University
Department of Finance
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=287161
Date: October 2001
Contact: ARNOLD R. COWAN
Email: Mailto:arnie@iastate.edu
Postal: Iowa State University
Department of Finance
Carver Hall
Ames, IA 50011-2063 USA
Phone: 515-294-8112
Co-Auth: JANN C. HOWELL
Email: Mailto:jhowell@iastate.edu
Postal: Iowa State University
Department of Finance
Carver Hall
Ames, IA 50011-2063 USA
Co-Auth: MARK L. POWER
Email: Mailto:mpower@iastate.edu
Postal: Iowa State University
Department of Finance
Carver Hall
Ames, IA 50011-2063 USA
ABSTRACT:
We examine wealth effects, for banks and insurers, of bank
rights to sell and underwrite annuities. The stock-price
reactions to four court and regulatory decisions are consistent
with expectations of bank gains at insurers' expense.
Cross-sectionally, smaller, riskier insurers with higher
distribution costs and substantial annuity business sustain
larger wealth losses. Larger, riskier bank holding companies
with fee-based and consumer business gain most, consistent with
the extension of federal safety-net guarantees as a source of
gains. Banking stock-price reactions to the Supreme Court's
decision are opposite other findings, possibly reflecting
unfulfilled expectations of a broader mandate for expanded bank
rights.
Keywords: Annuities, VALIC, financial modernization,
deregulation, deposit insurance, Blackfeet National Bank, event
studies
JEL Classification: G21, G22, G28, G14, L51
______________________________
"The German Social Market in the World of Global Finance: Pension
Investment Management and the Limits of Consensual Decision
Making"
BY: GORDON LESLIE CLARK
University of Oxford
School of Geography
DANIEL MANSFIELD
University of Bristol
School of Geographical Sciences
ADAM TICKELL
University of Bristol
School of Geographical Sciences
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=238701
Date: August 1, 2000
Contact: GORDON LESLIE CLARK
Email: Mailto:gordon.clark@geog.ox.ac.uk
Postal: University of Oxford
School of Geography
Mansfield Road
Oxford OX1 3TB, UK
Phone: +44 1865 271928
Fax: +44 1865 271940
Co-Auth: DANIEL MANSFIELD
Email: not available
Postal: University of Bristol
School of Geographical Sciences
University Road
Bristol BS8 1SS, UNITED KINGDOM
Co-Auth: ADAM TICKELL
Email: not available
Postal: University of Bristol
School of Geographical Sciences
University Road
Bristol BS8 1SS, UNITED KINGDOM
ABSTRACT:
In a previous paper we emphasised the changing national and
international accounting standards used to measure net pension
liability. Beginning with the implications of this analysis for
the financing of German employer-sponsored pensions, in this
paper we focus upon the internal management of corporate pension
assets and liabilities. Two issues drive the analysis. One has
to do with the emerging coalescence of interests joining
corporate management and shareholders in relation to the
management of pension assets and liabilities. The second issue
has to do with the allocation of risk and uncertainty between
social partners when negotiating the financing and final value
of promised retirement income. We analyse the importance of
workers' risk aversion and the widely-held goal of stable
long-term real incomes for the management of pension assets. In
the context of global financial markets, we suggest that the
institutional framework of investment decision making common to
many of Germany's largest firms is under considerable pressure;
three models of investment decision making relevant to pension
assets and liabilities are used to illustrate this point.
Contrasts are drawn with competing systems of corporate
governance, noting the incorporation of pension financing into
Anglo-American corporate treasuries. Implications are drawn with
respect to the changing status of German employer-sponsored
supplementary pensions in relation to debate over the future of
social security and social insurance.
JEL Classification: G23, G28, L33
______________________________
"How Much is Investor Autonomy Worth?"
BY: SHLOMO BENARTZI
University of California at Los Angeles
RICHARD H. THALER
University of Chicago
National Bureau of Economic Research (NBER)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=294857
Other Electronic Document Delivery:
http://www.afajof.org/prog2002.shtml
SSRN only offers technical support for papers
downloaded from the SSRN Electronic Paper Collection
location. When URLs wrap, you must copy and paste
them into your browser eliminating all spaces.
Paper ID: AFA 2002 Atlanta Meetings
Date: March 2001
Contact: SHLOMO BENARTZI
Email: Mailto:shlomo.benartzi@anderson.ucla.edu
Postal: University of California at Los Angeles
Anderson Graduate School of Management
Box 951481
405 Hilgard Avenue
Box 951361
Los Angeles, CA 90095-1361 USA
Phone: 310-206-9939
Fax: 310-267-2193
Co-Auth: RICHARD H. THALER
Email: Mailto:richard.thaler@gsb.uchicago.edu
Postal: University of Chicago
Room 205D
1126 East 59th Street
Chicago, IL 60637 USA
ABSTRACT:
There is a worldwide trend towards increasing investor autonomy.
Investors are increasingly able to pick their own portfolios.
How good a job are they doing? We present individuals saving for
retirement with information about the distribution of outcomes
they could expect from the portfolios they picked and also the
median portfolio selected by their peers. A majority of our
survey participants actually prefer the median portfolio to the
one they picked for themselves. Furthermore, we find that a
majority of investors who preferred to form their own portfolio
rather than accept one that was picked for them by a
professional investment manager, preferred the distribution of
returns implied by the suggested portfolio to the one they
selected on their own. We investigate various alternatives to
these findings and offer some evidence to support the view that
part of the results are attributable to the fact that investors
do not have well-defined preferences.
______________________________
"Behavioral Finance and Investor Governance"
BY: LAWRENCE A. CUNNINGHAM
Yeshiva University, Benjamin Cardozo School of Law
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=255778
Paper ID: Cardozo Law School, Public Law Research Paper No. 32
Date: January 2001
Contact: LAWRENCE A. CUNNINGHAM
Email: Mailto:cunning@ymail.yu.edu
Postal: Yeshiva University, Benjamin Cardozo School of Law
55 Fifth Ave.
New York, NY 10003 USA
Phone: 212-790-0435
Fax: 212-790-0205
ABSTRACT:
The efficient market hypothesis is a special case in finance. It
explains only tiny fractions of observed phenomena. Perhaps its
major contribution is a formal definition of an ideal market
world, to which policy formulations may be directed and against
which they can be measured. Indeed, it seems unlikely that the
infirmities of market action ever will be so minuscule as to
render the EMH more than a special case, though it may explain
more in the future than it does now. However things evolve,
during the evolutionary course the shackles of the EMH should be
unloosed from corporate and investing culture.
Part I presents behavioral finance as to how prices of stocks
are formed–including a theoretical framework, empirical
evidence, and psychological explanations. It integrates these
materials into a model of market and investor behavior that can
be used as a lens through which to analyze a wide variety of
legal rules and policies bearing on market regulation and
corporate governance. Part II is a series of prescriptions on
the implications of this account relating to investor
governance. It starts with a proposal to promote and expand
investor education concerning the cognitive biases behavioral
finance exposes. It proceeds to introduce and propose reforms in
three critical areas of law and policy that this model impacts:
(1) the market regulatory environment in which investors
participate, including suitability and churning rules and
policies relating to day trading, margin trading, and circuit
breakers; (2) the legal duties of boards of directors in making
capital allocation decisions such as equity offerings, dividend
distributions and stock acquisitions; and (3) issues in
corporate and securities litigation, principally the reliance
requirement in securities fraud cases and the stock market
exception to the appraisal remedy in cash out mergers.
The efficient market idea turns out to be an aspiration worth
pursuing, but one never likely to be realized. These proposals
and prescriptions therefore operate both to push the reality
toward the ideal and to deal with the gap that will persist. The
article has a major public policy subtext too, at stake in the
discussion of how prices are formed is the overarching question
of capital allocation. Society is better off in terms of
aggregate wealth when its resources are allocated to those best
able to deploy them. Investors allocating capital based on
rational calculation will produce that result, while those
allocating based on sentiment will not.
A word on methodology concludes the piece concerning where the
piece fits in the bourgeoning legal literature drawing on
behavioral social science. Throughout the intellectual history
and genealogy of behavioral finance, legal scholars with a
social science inclination have drawn on various strands of
thought pioneered in these fields, importing the work of the
cognitive psychologists, principally behavioral decision theory
(which they call BDT). Concerns of the lead importers center on
the usefulness of BDT to legal scholarship and policymaking
generally include whether all it will do is furnish criticism of
law and economics and fail to offer its own positive theories of
law or normative prescriptions. Whatever power BDT has for legal
scholarship in general, this Article should leave no doubt that
it furnishes a positive theory of market behavior quite
different than that of efficiency (imported and promoted by some
law and economics devotees) and that this theory carries with it
substantial normative implications for law and legal policy in
the fields of securities and corporate law.