Charles E.F. Millard, Director of the Pension Benefit Guaranty Corporation (PBGC), explained in testimony before the House Committee on Education and Labor and Chairman, George Miller (D-California), that the PBGC’s newly announced investment policy change (See PBGC Makes Big Shift to Stocks, Alternatives ) is expected to dramatically increase its chance of closing its deficit, which Millard said is expected to be in the $10 billion to $12 billion range at the end of FY 2008.
Charles E.F. Millard
Millard testified that the prior policy meant approximately a 19% chance of pulling even on the agency’s budget in a decade, while the new approach would give the PBGC approximately a 57% chance of achieving that goal.
That investment policy, Millard said, “Is designed to take advantage of PBGC’s long-term investment horizon” and will allocate 45% percent of its assets to equity investments, 45% to fixed income, and 10% to alternative investments, such as private equity. Millard asserted: “This long-term, more diversified strategy aims at generating better returns that provide a greater likelihood that the corporation can meet its long-term obligations.”
He insisted the changes the PBGC was making were all intended to help the agency live up to its mandate to protect the private-sector pensions of workers and retirees.
“Companies that sponsor pension plans have a responsibility to live up to the promises they have made to their workers and retirees,” Millard contended. “But when a company cannot keep its promises, workers and retirees need a strong insurance program as a safety net. We are building on the 2006 reforms and making internal improvements to strengthen the safety net.”
Millard has faced doubters about whether the policy change is prudent (See GAO: PBGC Investment Policy May be Riskier than First Thought ). The GAO also questioned whether the board sufficiently monitored the implementation of investment changes and suggested a variety of changes in the PBGC.
Also, faced with questions about how badly the agency has fared in the recent market downturn, Millard said Friday the agency did not yet have audited budget figures for FY 2008, but that officials expect the total return on investments to be -6% to -7% for the period. That compares with 7.2% in 2007, generating $4.76 billion in investment income, and $4.2 percent in 2006.
Millard also indicated during his Capitol Hill appearance that:
- The agency's modeling efforts, in which officials try to predict when plans will need PBGC intervention, indicate $73.3 billion in exposure for FY 2006 and $65.7 billion for FY 2007. Manufacturing plans topped the list for both years, with forecast liabilities of $37.6 billion for FY 2006 and $37.6 billion for FY 2007.
- As of September 30, 2007, the value of PBGC's total investments in the single-employer and multiemployer programs, including cash and accrued investment income, was approximately $62.6 billion. Equity securities at the end of FY 2007 represented approximately 28% of total assets, compared to 23% at the end of FY 2006.
- The $13.1 billion deficit in the single-employer program at the end of FY 2007 is the difference between assets of $67.2 billion and liabilities of $80.4 billion. Liabilities include claims from actual terminations and probable terminations.
- Millard told the lawmakers that at the end of fiscal year 2008, "there remains substantial reasonably possible exposure in airlines and steel."
Millard's testimony is available here .
Friday's hearing in Washington followed a committee session in San Francisco earlier in the week, which focused on the impact of the financial crisis on Americans' retirement savings (See House Committee Takes Retirement Investigation on the Road ). Miller's panel also considerd the issue earlier in the month (See Congress Considers Market Impact on Retirement Security ).