GAO: PBGC’s Investment Policy Statements Incomplete

August 1, 2011 ( – The Government Accountability Office (GAO) is recommending that the Pension Benefit Guaranty Corporation (PBGC) and its board of directors develop and maintain comprehensive investment policy statements and develop a complete set of operating procedures and guidelines for its investment activities.

The GAO concluded in its review that PBGC’s policy statements and operating procedures are incomplete and do not provide sufficient guidance to ensure sound implementation of its investment policies. The investment policies issued by PBGC’s board for strategic guidance in the planning and execution of investments have generally lacked a number of provisions recommended by the Chartered Financial Analyst Institute; Independent Fiduciary Services; and other experts of sound investment management, such as the Government Finance Officers Association.   

Moreover, GAO said that according to the review and interviews with PBGC staff, the policy statements have been insufficiently detailed to provide adequate guidance for staff. In addition, PBGC’s Corporate Investments Department’s staff have largely functioned without the benefit of fully-developed and documented operating procedures.  

According to the GAO report, PBGC’s investment objectives and stated asset allocation targets have changed frequently in the last eight years, alternating between more conservative and more aggressive approaches to investing. Yet these changes in stated objectives had only a moderate effect on PBGC’s actual asset allocation because, for a variety of reasons, PBGC did not meet its targets.   

In its review of the agency’s investment history, GAO found that PBGC did not routinely monitor transaction costs related to its policy shifts and, at certain times, significant transaction costs were incurred. For example, GAO determined based on data obtained from PBGC’s investment managers that nearly $75 million in transaction costs were incurred during the economic downturn which coincided with the period when the 2008 policy was being implemented and subsequently suspended.   

Using seven benchmarks, one of which was a Pension Protection Act benchmark that GAO constructed, GAO’s analysis shows that PBGC’s investments performed better than most benchmarks on an asset-only basis, but tended to underperform all seven of the benchmarks when returns were assessed together with the growth in liabilities. GAO notes that both analyses have limitations and can be seen by some experts as incomplete. However, its method of analysis is consistent with how financial economics literature suggests investment performance analysis should be conducted. Finally, GAO’s analysis found no apparent adverse effect on PBGC’s investment performance as a result of changes in policy.  

The report concluded: “Although PBGC has grown from a relatively small agency to one holding almost $80 billion in assets, its policies and procedures still reflect in many ways its small agency past. To ensure that PBGC can effectively and consistently meet its obligation to manage a fund of this size and its liabilities, PBGC’s board and its management must enact better stewardship, standards, and procedures to ensure that PBGC can effectively and consistently meet its obligation to conduct the many investment related functions it performs.”  

The GAO report can be accessed from