PBGC Makes Big Shift to Stocks, Alternatives

February 18, 2008 (PLANSPONSOR.com) - While many pension plans in the corporate sector are taking steps to decrease their equity allocations, the nation's private pension insurer is moving in the opposite direction.

Not that the Pension Benefit Guaranty Corporation’s (PBGC) newly announced policy will place it outside the mainstream of most pension plan allocations.   The PBGC, which currently has approximately $55 billion to invest in its new policy, will allocate 45% of its assets to a diversified set of fixed-income investments, 45% to diversified equity investments, and 10% to alternative investment classes.   The agency’s previous policy set an equity investment target of just 15-25%, although the actual level of equity investments was 28% at the end of fiscal 2007.  

“The PBGC is responsible for the pensions of 1.3 million Americans, but we don’t currently have the resources to keep all of our future commitments,”  PBGC Director Charles E.F. Millard said in a press release issued on Washington’s Birthday, a federal holiday.  

“The new investment policy adopted by the PBGC Board of Directors will better manage our invested assets. Although it should generate higher returns, it also offers lower risk through broader diversification,” Millard went on to say.   Millard noted that the strategy gives the PBGC a 57% likelihood of full funding within ten years, compared to just 19% under the previous policy.   The PBGC had an accumulated deficit of $14 billion as of year-end FY 2007 (see  PBGC Deficit Continues to Shrink 0.

In making the announcement, the PBGC noted that, because its obligations are paid over many years, the new investment policy is designed to take advantage of a long-term investment horizon.   The policy was adopted after an extensive review process that began in mid-2007, according to the PBGC.   The review evaluated current and alternative investment policies over 5-, 10- and 20-year periods. The review showed that the diversified portfolio adopted by the Board would have outperformed the current asset mix 98% of the time over rolling 20-year periods.   The Board reviews the investment policy every two years, with the last review occurring in 2006.

"The PBGC has the ability to accept some degree of short-term volatility to achieve our goal of enhancing assets to pay benefits," Millard said. "However, the policy is carefully structured to balance risk and returns, and to improve PBGC's chances of reaching full funding over the long term, while maintaining our ability to meet our obligations to retirees."

The PBGC notes that it does not select individual stocks or bonds, or actively manage its portfolio.   Its invested assets are managed by professional money management firms or invested in various market indexes.   The PBGC is financed by premiums paid by employers, assets from failed pension plans, recoveries from bankruptcies and returns on invested assets.

The PBGC, a federal corporation created under the Employee Retirement Income Security Act of 1974 (ERISA), currently guarantees payment of basic pension benefits for about 44 million American workers and retirees participating in over 30,000 private-sector defined benefit pension plans.