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can't put the money aside in the same way an individual can when saving for retirement. Here is why:

An individual can provide for retirement by putting money in the bank now which, with interest, can be spent in retirement. If individuals did this, there would be no need for pension funds. The problem is that individuals don't, or don't save enough, so pension funds were created to do the same kind of saving for them.

Part of policymakers' thinking was that, by providing tax-favored treatment and encouraging professional management, the Government could encourage collectively the kind of long-term planning and willpower that we lack individually.

This assumption may be unrealistic; it certainly gets less realistic the larger funds get and the more of the economy they own. Policymakers in search of money for current programs cannot realistically be expected to ignore large piles of money or a major chunk of the market. Witness the Social Security "surplus."

Current needs and current votes are real; future needs can only be guessed. Perhaps a pay-as-you-go system is the most that can be realistically expected from society.

The Economist suggests that those whose job it is to protect and provide retirement income should recognize these limits to society's ability, "preemptive capitulation," and recognize, in the face of these limitations, that the best way to ensure that pensions will be paid is to insure that there will be money in the economy generally to pay them, as well as money to meet other needs.

The best way to do that is to choose policies or investment strategies that are most apt to produce a healthy economy over the long term. In other words, even if money has not been officially set aside for pensions when the boomers retire, if the assets exist within the economy, ways will be found to pay pensions.

Conversely, legal rights to pensions will be meaningless if to pay them out would be too damaging to the rest of society. Legal niceties are meaningless if the wealth isn't there.

It is important to emphasize what this is not saying. It is not saying it is futile for fiduciaries to try to invent fund assets to make benefit payments possible in the future; it simply suggests that sticking exclusively to traditional investment functions may not be the best way to do so.

It is not saying that ERISA's exclusive benefit rule is now inappropriate and that fiduciaries should go charging after whatever other policies tickle their fancy; it simply suggests that to act effectively for the exclusive benefit of beneficiaries, fiduciaries must pick investment strategies most apt to have a positive, portfoliowide and marketwide long-term impact.

The point is, then, that the interests of large pension funds are in fact inseparable from the interests of the economy. Pension funds have no stake in creating rapid change or volatility for their

own sakes.

Equally important, however, pension funds have a very big stake in making sure such change is possible, is cheap and efficient, and is driven by market forces. If a healthy, ongoing economy is critically important to pension funds, they must be free to use their market clout to help encourage it.

Having this interest does not necessarily mean staying committed to the same investments, or same investment vehicles for 30 years.

Let me give you one example:

Council members are thus exploring new ways to give corporate planners the dependable long-term backing they need for long-term business planning in return for the accountability any shareholder would need for such a commitment.

Pension funds are thus looking for the best ways to keep their money in healthy businesses and to provide new money to promising new businesses. These are not only the best ways to ensure full employment, good jobs, and an internationally competitive economy, they are the best ways to protect pension assets.

A warning in closing: It is probably fair to say that the biggest threat to America's ability to pay pensions to all future generations, but especially the boomers, and perhaps the biggest threat to the performance of the economy generally is the potential that lawmakers and others will allow this increasingly large portion of the market to be driven by nonmarket forces.

This will happen if pension funds have defined for them what investments are deemed acceptable, what investment vehicles are deemed tastefully prudent, and what trading pace is deemed prudently gentile.

Rarely, if ever before, has a market economy had so many investors whose interests are so closely tied to those of the whole community. In the interest of the community, as well as in the interests of the pensioners, they should be allowed to pursue them.

Chairman PICKLE. Thank you.

[The statement of Ms. Teslik follows:]

Testimony By

The Executive Director of the
Council of Institutional Investors

Sarah A.B. Teslik

Before the Committee on Ways and Means
Subcommittee on Oversight

Hearings on the Utilization of Pension Assets
in Leveraged Buy-Outs and Related Transactions
April 27, 1989

The Council of Institutional Investors was formed to help its members fulfill their fiduciary obligations to increase the size and assure the security of their funds. At the time, forming such an organization seemed to many observers to be an unnecessary and quirky thing for fiduciaries to do. Traditional fiduciary investment functions -- allocating, buying, selling, voting, monitoring, and accounting -- were well understood and could be carried out without much communication with or cooperation from others. Pension fund fiduciaries were generally correct in believing that they fulfilled their obligations by carrying out these functions individually in the way they would if they were managing an individual's money, but on a larger scale. Fund security was not even an issue: pension assets were being tax favored, not taxed, and few serious efforts were being made by others to help themselves to a slice of the pension pie.

Times are changing rapidly, and, to quote Arthur Miller, attention must be paid to that fact -- particularly by fiduciaries held to a prudent expert standard. Whether by direct taxation or by mandating or denying specific investments, changing actuarial assumptions, taxing trades, lowering funding ceilings, or changing UBTI rules, state and federal policymakers and powerful constituent groups are increasingly diverting or spending pension assets for nonpension purposes. Protecting fund assets is thus rapidly becoming a if not the_- big priority for fiduciaries: is no point in fussing over traditional investment strategies if the earnings simply get siphoned off.

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An exclusive focus on traditional investment functions is increasingly inappropriate for another reason as well. The larger a fund gets the less it will be able to improve returns by limiting itself to refining its traditional investment functions. This is not just because transaction and market impact costs rise with size: funds are now large enough that they are and must remain in every market sector. They will thus inevitably be more affected over time by forces that affect the market generally than by efforts to dart in and out of specific portions of it. The larger a fund becomes the less appropriate it is for its fiduciaries to model their behavior after that of trustees of a small trust fund.

Fortunately, the kind of supplemental activity most apt in this new environment to add value to the funds is also the kind of activity most apt to protect them as well. The point is a subtle

one that requires a brief explanation.

An individual can provide for retirement by putting money aside now, which, with interest, can be spent in retirement. If individuals did in fact do this there would be no need for pension funds. The problem is that individuals don't, or don't save enough, so pension funds were created to do the same kind of saving for them. Part of policy makers' thinking was that, by providing tax-favored treatment and encouraging professional management, the government could encourage collectively the kind of long-term planning and willpower that was lacking on the individual level.

This assumption may be unrealistic; it certainly gets less realistic the larger funds get and the more of the economy they own. Policymakers in search of money for current programs cannot realistically be expected to ignore large piles of money or a major chunk of the market. Witness the Social Security "surplus. " Current needs and current votes are real; future needs can only be guessed. Perhaps a pay-as-you-go system is the most that can be realistically expected from society.

This should be a modestly scary thought for babyboomers (and for your Executive Director, who, if this is all pointless, should resign). The Economist suggests that those whose job it is to protect and provide retirement income should recognize that there are limits to society's ability to save ("preemptive capitulation") and recognize, in the face of these limitations, that the best way to insure that pensions will be paid is to insure that there will be money in the economy generally to pay them (as well as money to meet other needs). The best way to do that is to choose policies or investment strategies that are most apt to produce a healthy economy over the long term. In other words, even if money has not been officially set aside for pensions when the boomers retire, if the assets exist within the economy, ways will be found to pay pensions. Conversely, legal rights to pensions will be meaningless if to pay them out would be too damaging to the rest of society. Legal niceties are meaningless if the wealth isn't there.

It is important to emphasize what this is not saying. It is not saying it is futile for fiduciaries to try to invest fund assets to make benefit payments possible in the future: it simply suggests that sticking exclusively to traditional investment functions may not be the best way to do so. It is not saying that the exclusive benefit rule is now inappropriate and that fiduciaries should go charging after whatever other policies tickle their fancy: it simply suggests that to act effectively for the exclusive benefit of beneficiaries, fiduciaries must pick investment strategies most apt to have a positive portfolio-wide and market-wide long-term impact.

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that pension funds' interests are truly

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Understanding this inseparable from those of the country's economy generally should make it easy to understand the silliness of those who warn of the evils created by the size and investment strategies of pension funds. Virtually every market evil has been blamed on pension funds, but the most common allegation is that pension funds are legally and psychologically driven to ignore long-term performance. The claim is that funds focus exclusively on outperforming the market in the short term (clinically known as "myopia quartalia hysteria"). Such behavior, in turn, is said not only to fuel M&A activity, LBOS, and the junk bond market, and but to prevent corporate longterm planning, damage international competitiveness, cause job losses, and break up communities.

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These allegations of rampant short termism would be funny if they weren't so dangerous. As the foregoing discussion has attempted to explain, no one has a bigger stake in acting in the best interests of the economy and its corporate constituencies generally and over the long-term than those who increasingly are the market. There is no free lunch. Pension funds and pensioners lose if they take profits now, and, as a consequence, a company or an industry or the economy performs badly later. one has more to gain by responsible long term market behavior than pension funds.

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The suggestion that ERISA prevents such an outlook is equally silly. ERISA doesn't require a short-term focus period. It is interesting that those who make such a claim never cite ERISA sections, regulations, or opinions to back it up. ERISA does specify one investment time horizon fiduciaries are to invest

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so that the funding obligations of the plan can be met. In the vast majority of cases these obligations are on-going, and hence, long term. Thus, for most funds, investing to make money now at the expense of making more money later would be more apt to be a breach of one's ERISA obligations than a satisfaction of them.

Council members' turnover and holding period figures demonstrate that they recognize that their interest in both individual corporations and the market is ongoing. Council members are working with policymakers and corporate representatives to clarify these misperceptions, to emphasize the importance of protecting pension assets, and to make clear that while managements and pension funds have similar long-term interests, pension funds cannot and should not attempt to secondguess most management decisions. Council members are thus exploring new ways to give corporate planners the dependable long-term backing they need for long-term business planning in return for the accountability any shareholder would need for such a commitment.

This kind of activity takes coordination and communication

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