Weyerhaeuser loaned its pensions $200 million last year after some funds blocked withdrawals, or redemptions, leaving its plans with less cash than expected to pay workers wanting lump-sum benefits, the company said.

Workers didn't understand Weyerhaeuser's strategy but weren't concerned because returns were high and the company was liable for any problems, one union leader said.

"The sense I got out of it is they were using their pension fund almost as a large hedge fund," said Don Draeger, who represented 220 union workers at a former Weyerhaeuser plant in Albany. "I don't think any of us really understood the logic behind the instruments they were talking about."

Federal law does not prohibit alternative investments, but it requires pension managers to invest prudently. Still, federal officials have taken note of the practice. U.S. Labor Department officials recently threatened to penalize a New York company unless it improved how it valued its pension investments in private equity. Outside experts have recommended the agency develop guidelines for such investments, but not adopt new regulations.

"There's lots of risks," said Susan Mangiero, founder of Pension Governance Inc., a research firm. "But on the flip side, if you don't look at (investment) alternatives like hedge funds, you may be leaving money on the table."

Some economists allege companies use aggressive pension investing to inflate earnings. A 2006 study by Harvard University and University of Chicago researchers found evidence that corporate managers facing mergers, worsening performance or large compensation contracts appeared to alter pension accounting to goose earnings.

Despite last year's market turmoil, pension advisers think pension plans will turn even more to alternative investments to make up losses or to offset risks in stocks. Hedge funds are responding by lowering fees and offering better reporting.

"We're seeing hedge fund managers offer their existing clients more information on the underlying portfolios," said Janine Baldridge, director of investment strategy at Russell Investments in Tacoma.

Weyerhaeuser has since sold mills in Albany and Springfield to International Paper Co., which has one-tenth of its pension in hedge funds and derivatives. "May was the best month we've ever had in our hedge fund portfolio," company pension manager Robert Hunkeler said.

Draeger is fine with Hunkeler's plans to expand that strategy. "At least when their investment managers talked to us, they gave you the feeling that it wasn't just 'Trust us on this,'" Draeger said.

-----

To see more of The Oregonian, or to subscribe the newspaper, go to http://www.oregonian.com.

Copyright (c) 2009, The Oregonian, Portland, Ore.

Distributed by McClatchy-Tribune Information Services.

For reprints, email tmsreprints@permissionsgroup.com, call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA.

NYSE:USB, NYSE:WY, NYSE:NWY, NYSE:IP,

A service of YellowBrix, Inc.