Q & A.

• Position: Special Report: Pension Fund Management

Q&A Following the panelists' presentations, Moderator David Kelby asked the executives to take questions from the floor. Ivy S. Bernhardson, vice president and senior associate counsel at General Mills, joined the discussion.

Here, Kelby reads questions from cards sent forward from the audience.

KELBY: First question. Sarah, why do pension assets belong to the beneficiaries and not to the company, which has the obligation to make sure the assets cover the liabilities?

TESLIK: If the assets belonged to the company, then they would be taxable to the company. The idea is that the government has an interest in tax favoring money that is set aside in a variety of ways, such as through defined contribution plans or defined benefit plans. But the key question is this: is the money in fact the pensioners? Because that determines the tax-favored status.

While a company bears the risk of making sure that the assets in its pension plan will pay for the benefits under a defined benefit plan, those assets are still plan assets and thus are owned by the beneficiaries.

I'm not playing ignorant to the overfunding question. I'm awfully sympathetic to companies. If they're bearing the risk and they're overfunded, they ought to be able to get the money back as long as the tax questions are worked out.

KELBY: Dale, why does GE use money managers at all, since the company has the expertise and resources to manage pension funs directly?

FREY: We use them principally in the international area because we like to get their input on various parts of the world. However, we think we contribute as much to that dialogue as we take from it.

KELBY: Phil, would you elaborate on your idea of built-in conflicts that investment managers have in voting proxies?

O'CONNELL: I have in mind the investment manager who comes to the plan sponsor and says, "Here's my record over the past two years. I've outperformed any index you can use for comparison, and I'm going to continue to do that from quarter to quarter." Therefore, the way he puts food on his table at home is by continuing to outperform whatever the index is. When he is presented witha voting decision that will tend to increase the value of the portfolio today rather than tomorrow, he naturally will vote to increase the value of the portfolio today--because that's how he is compensated. Now, is that pattern necessarily his fault? No. It's our fault, the plan sponsors', because we have given him the wrong incentive.

FREY: I'm gald you...