20,000 PENSION FUNDS

The Strongest Source of New Capital

ONE of the newest and fastest-growing sources of new capital in the U.S. economy is the vast program of private pension funds. There are now 20,000 separate corporate plans covering in million workers, or 17% of the whole U.S. labor force. Their assets this year will reach $19 billion, and they are growing at the rate of $2 billion each year. By 1960, pension funds will have estimated assets of $35 billion and new contributions will be pouring in at the rate of $6 billion annually--30% of all savings available for new investment. For businessmen, the big problem is: How should this huge retirement kitty be invested so that it will bring maximum benefits both to workers and the U.S. economy?

Of the 20,000 pension programs, some 13,000, mostly the smaller plans, are insured by life-insurance companies and still invest extensively in such traditionally conservative securities as Government bonds. But the remaining 7,000 programs, which have 60% of all the money, are handled privately either by company officials or bank trustees, and they are using their funds to serve both workers and industry. While in 1946 the funds invested up to 50% of their money in Government bonds, today the Treasury Department reports that the percentage has fallen to 20%.

With the great postwar building boom, pension trustees are beginning to lend money on big office buildings, shopping centers and housing developments. Other companies are turning to well-paying corporate bonds to provide an increasing flow of new money for industrial expansion. While few companies invest in their own stocks (some even have specific rules against it), Sears, Roebuck has put 60% of its $600 million fund into its own shares, much of the other 40% into mortgages on its 696 U.S. stores.

But the biggest change of all is the flood of pension money going into the stock market. Up to 1950, few companies dared put more than 5% of their funds in common or preferred stocks, for fear that capital losses might imperil benefit payments. Today, many firms have as much as 50% of their pension fund in the market, and most of it in common stocks. Dr. Robert E. Wilson, chairman of the $2 billion Standard Oil Co. (Indiana), calls the pension funds "the strongest source of new capital going into the market." Where Stanolind once had 60% of its funds in Government bonds, it now has only 20%. On the switch from bonds to stock. Stanolind has sharply increased its workers' return, much of it in fat dividends from the oil industry itself. Other companies, such as American Airlines, General Aniline & Film Corp., are also going in more heavily for common stocks. Another large company, with a $100 million program, has 32% of its money invested in common stocks, another 13% in preferred stocks.

Since few pension investors are interested in quick, speculative gains, the effect of this buying has been to bull up as well as stabilize the stock market. Most funds invest on the "dollar averaging" principle, i.e., assign a specific amount of money each year to buying a certain stock. If the stock rises, the fund can buy fewer shares; if the stock falls, it can buy more, thus tending to stabilize the market.

Critics of the new stock-buying program argue that stocks are always risky, claim that dollar averaging has not really been tested since the market has pushed consistently higher over the past four years. They also worry that in a depression, with more workers retiring early, funds will have to take big losses to raise the cash they need. On the other hand, some critics feel that fund purchases are actually too conservative; too much of the money is in blue chips and too little in riskier, but better-paying issues.

For their part, the pension investors defend the current program as neither too risky nor too conservative. Most portfolios are well spread out between Government and industrial bonds, preferred and common stock. As for concentrating on blue chips exclusively, they point to a recent survey showing that in the entire portfolios of 130 companies, only 100 owned five stocks in common. While established utility stocks are the first choice of most companies, their second and third choices are in such growing fields as electronics, oil and chemicals.

In the future the trend of pension investment will be increasingly towards the newer growth industries. The current popularity of such blue chips as Standard Oil (N.J.), Detroit Edison, Du Pont, General Electric has already pushed prices to the point where the stocks in the Dow-Jones industrial average pay only 4.9% in dividends. As the blue chips grow too expensive, more and more pension money will go into new fields. Then businessmen will have to toe a fine line between their basic objective of protecting the workers' pensions and their responsibility to the U.S. economy as a whole.

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