GAO: PBGC Investment Policy May be Riskier than First Thought

August 18, 2008 ( - A Congressional oversight agency on Monday argued that a new investment policy unveiled earlier this year represents more risk for the nation's private-sector pension insurer than the agency admits.

In a new report, “The Implementation of New Investment Policy Will Need Stronger Board Oversight,” the Government Accountability Office (GAO), complained that the board of the Pension Benefit Guaranty Corporation (PBGC) has not been as directly involved in monitoring the agency’s investment policy statement as it should have been. The GAO outlined a series of governance reforms in the way the PBGC board supervises the agency’s operations.

The GAO contended that with a goal of slashing the PBGC’s $14-billion deficit by emphasizing growth in investment returns in the pension insurer’s newest investment policy will be riskier than PBGC officials have admitted. The PBGC has argued that the latest policy is diversified enough to mitigate the risks inherent in broadening its targeted investments.      

“In a short period of time, the investment policy has changed from one focused on optimizing returns to limiting PBGC’s exposure to interest rate risk to returns again,” the GAO complained. “While the board formally approved each policy, it has not taken an active and engaged role in ensuring that its own policy objectives are met. As a result, the board’s lack of policy direction and oversight may be hindering PBGC’s long-term viability.”

class=”NoteCaption”> Not that the PBGC’s new investment policy would strike most plan sponsors as radical; 40% to fixed-income, 39% to equities, 10% to real estate and private equity, 6% to alternative equities, and 5% to alternative fixed-income (See  PBGC Makes Big Shift to Stocks, Alternatives ).

“However, GAO’s assessment demonstrates that the risks are likely higher in the new allocation,” GAO researchers wrote. “Although it is important that the PBGC consider ways to optimize its portfolio, including higher return and diversification strategies, the agency faces unique challenges, such as PBGC’s need for access to cash in the short-term to pay benefits, which could further increase the risks it faces with any investment strategy that allocates significant portions of the portfolio to volatile or illiquid assets.”

The GAO also contended it may not be wise to count only on investment income to turn around the agency’s long-standing budget problems.

“Although PBGC’s new investment policy was developed in response to its current deficit, relying solely on investment income to remedy PBGC’s inherently poor financial outlook is likely to introduce additional risk to PBGC’s portfolio. The degree of the risk associated with the new policy is unclear and may carry more risks than the previous policy. If the investment strategy is focused on improving the PBGC’s financial condition, a worsening condition could lead to increasingly risky strategies that may threaten the pension benefits of retirees.”

The first step toward better agency governance, the GAO contended, was to have complete disclosure and understanding of the risks PBGC faces that it said will help the board and PBGC better plan for implementing the new policy.

Board members need accountability measures, such as objectives, milestones, and completion time frames, to conduct careful, ongoing oversight and to ensure that PBGC achieves its policy goals and protects the pension benefits of retirees, the GAO said.

To help fix the problem, the GAO called for the following:

  • The PBGC director must formally submit, for board approval, a written implementation plan that outlines accountability measures for carrying out the new investment policy, such as PBGC's key objectives, milestones, and completion time frames;
  • The PBGC director must report periodically on the progress toward meeting the objectives, milestones, and time frames in the plan and to provide justification for any deviations in the approved implementation plan; and
  • Documentation of the board's agreement or disagreement with any deviations from the policy implementation plan. To gain a better understanding of the risks involved in the new investment policy, PBGC should conduct sensitivity analyses before implementing the new policy. These analyses should use a variety of assumptions of the risks and returns of the new allocation that incorporates assets, liabilities, and funded position, according to GAO.

The GAO report is available  here .