The aftermath of September 11 is uncharted territory for US pension funds. It is not simply a matter of asset allocation strategy which takes into account new financial market trends, there is also the problem of how to cover the costs of death and disability benefits for members in the event of a catastrophe.
Before September 11, pension funds could rely on historic figures about mortality and calculate their liabilities according to these. Now the terrorist threat is changing everything. The World Trade Center tragedy has wiped out whole companies. Some firms, like the bond dealer Cantor Fitzgerald, have lost the majority of their employees. This sits alongside the 300 or more firefighters and policemen who died. This is why some pension fund managers are re-thinking their policies, particularly the funds related to big international organisations, such as the United Nations, which could itself be a target in future terrorist attacks. However, in the event of terrorism, the consequences and reactions vary from case to case.

The New York City Police Pension Fund (Police) and the New York City Fire Department Pension Fund (Fire) have been hit hard, but they look like they are sufficiently funded to face the emergency. The Police fund has around 39,000 members still in service and more than 34,000 retired members; the market value of its assets is roughly $17bn. The Fire fund has 27,000 members, more than 11,000 still in service; its assets are around $6bn. The custodian, investment adviser and manager of the two funds (as well as of the other three New York City pension funds) is the New York City comptroller. But each fund has its own trustees and actuaries, who contribute in the taking of strategic decisions. Since the system is defined benefit, this means that contributions, not benefits, can change. Death and disability benefits are paid out of the funds’ resources.
“We take the money from our assets,” explains chief Michael Welsome, executive director of the Fire fund. “Our actuary checks our financial and demographic situation at the end of every fiscal year, then he advises us whether to change our asset allocation or to ask the City for more contributions. Currently our balance remains quite strong, even after September 11. Our investments are very well diversified. So we do not intend to change our policy and will not look for an outside insurance coverage”. Current holdings of the New York City pension system – which includes the Police and Fire funds - are about 52% in stocks. On September 20 mayor Rudolph Giuliani announced that the five city funds would invest $800m (more than 1% of the $75bn total assets) in US equities, to boost American businesses following the terrorist attacks. Benefits paid by the Police and Fire funds don’t have anything to do with the other federal funds, lump sums granted by the mayor’s office and money given by charities that the families of the NYC firefighters and policemen killed on duty will receive.
The private firm that was most affected by the terrorist attack was Cantor Fitzgerald, which lost 700 of its 1,000 employees in New York. Cantor’s pension fund was a defined contribution one, a 401(k) plan. Members were eligible to make payroll contribution to individual accounts and could decide how to invest them; in certain cases matching contributions were made to the plan in the form of eSpeed stocks (eSpeed was an online trading company listed and controlled by Cantor). Now all the 401 (k) accounts will be transferred to the surviving spouses or the employees’ estates. Spouses and estates will receive from Cantor a wide range of other benefits, funded also by 25% of the partnership’s profits for the next five years. Among the other benefits, every employee was covered with a life insurance issued by CNA or Prudential, which will pay twice the base salary, up to a maximum of $100,000.
Outside insurance coverage is an option that the United Nations Joint Staff Pension Funds (UNJSPF) is considering. The UNJSPF is a defined benefit pension scheme in which death benefits are automatically provided for, under the regulations, to a survivor whose spouse dies while in active service. Such benefits are payable at a standard annual rate of one-half the retirement benefit that would have been payable had the participant worked until his or her normal retirement age. Being a DB plan, the UNJSPF benefits are calculated on the basis of a predetermined formula, which takes into account years of service, age and the last five years of pensionable salary. “Of course”, explains Bernard Cochemé, UNJSPF chief executive officer, “the fund has no problem paying such benefits as the number of deaths in active service is extremely low and the anticipated liabilities are factored into the fund’s required rate of contribution on the basis of past experience as supported by periodic actuarial valuations (carried out every two years). All claims, therefore are financed from the fund’s own resources rather than through an insurance arrangement”.
Before September 11, the UNJSPF managers were already discussing whether to change this policy, while reviewing all the security procedures, which are so sensitive in institutions like the UN. “In light of the WTC tragedy, we will be rethinking our policy,” says Cochemé. “In fact a major catastrophe on the scale of the attack on the Twin Towers would heavily affect the resources of the fund. A significant increase in the actual number of deaths would change the future mortality assumptions significantly and the required contribution rate would rise significantly. As such an increase would be unacceptable to our participants as well as to our employing organisations, the fund will have to consider alternative arrangements, perhaps through outside insurance coverage or a combination of outside insurance and self coverage.”
The issue is on the agenda of a meeting organized by the UNJSPF in Washington at the end of October. “We’ll discuss it with other pension funds of important international institutions, like the World Bank,” says Cochemé , “but the decision process is very long and complex. The final word is with our board, which meets in July 2002.”
In the meantime the problem is whether the cost of insurance coverage in the US is going to rise too. It’s happening already for the property-casualty contracts, at a rate of 20-30% increase. The risk of a catastrophe caused by terrorists cannot be priced, say the insurers; that’s why they are lobbying for government support in paying damages for similar events.

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