PBGC Diversifies Its Investments Policy

Heavier allocation to equities and alternative investments key to PBGC meeting its long-term obligations

The Pension Benefit Guaranty Corporation (PBGC) announced February 18 that it has adopted a new diversified investment policy, which includes investing heavier in equities and alternative investments, to help ensure the federal insurance program can meet its long-term obligations to America's retirees.

There is currently approximately $55 billion available to the PBGC to invest in the new investment policy. Under the new policy, the PBGC says it 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 15% to 25%, although the actual level of equity investments was 28% at the end of FY 2007, the PBGC says.

"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," said PBGC Director Charles Millard in a release. "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. This strategy gives the Corporation a 57% likelihood of full funding within ten years, compared to 19% under the previous policy."

As of year-end FY 2007, the PBGC says it had an accumulated deficit of $14 billion. The new policy was adopted after an extensive review process that began in mid-2007, PBGC says. The Board reviews the investment policy every two years, with the last review occurring in 2006. "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," according to the PBGC release announcing the new policy.

James Klein, president of the American Benefits Council, applauds PBGC's move and says it validates a key recommendation of the September 2005 report Promises to Keep: The True Nature of the Risks to the Defined Benefit Pension System, which explored the varying dimensions of the PBGC's financial profile. "The report argued that the agency's financial standing has been hurt through its investment strategy; some of which is imposed by law and some of which the agency itself could modify," Klein said in a release. He said the report noted that "the PBGC's overall mix of all invested assets is overly conservative and heavily skewed toward fixed-income securities," which Klein says indicates that the PBGC has not taken sufficient advantage of the higher long-term returns earned by equity investments.

"Pension policy should always be crafted by looking at the long view rather than based on a snapshot point in time," Klein said. "This more appropriate strategy, increasing investment in equities, will fulfill this philosophy by generating greater returns down the road."

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