The relative severity of the 1973-74 bear market explains only part of the extreme reaction among pension executives. A large part of their reaction stems from their increased involvement with pension assets and with the financial implications of the Employee Retirement Income Security Act.

With the passage of ERISA, setting explicit portfolio objectives became a critical task. Objectives must match the pension sponsor’s needs with what the money manager can reasonably attain in the expected investment environment, balancing risk against return. Pension executives are now beginning to appraise both risk and return within a systematic framework and to specify them in quantitative terms. The well known phrase “maximum return consistent with appropriate levels of risk” may have seen its day.

We can expect, in response to these trends, pronounced changes in the way the money manager organizes the investment decision-making process. While they may not come about quickly or easily, changes are inevitable: The management of pension portfolios will become more and more a discipline and less and less an art.