Pension insurer criticized for switching investment strategies too frequently

Introduction

The Pension Benefit Guaranty Corporation (PBGC), a federal corporation insuring traditional pensions of more than 44 million American workers, has made too many changes to how it invests almost $80 billion in assets, according to the Government Accountability Office.

PBGC has run a deficit of about $23 billion for the past year, due to $102.5 billion in liabilities on its books. The liabilities are mostly future payments owed to retirees in underfunded or terminated defined benefit pension plans ranging from big companies such as Lehman Brothers and Fraser Papers to smaller bankrupt companies such as Alabama Aircraft Industries Inc. and Erving Industries.

PBGC changed its strategy for allocating its investment assets five times since 1990, alternating between conservative and aggressive approaches, the government watchdog said. Data from PBGC investment managers shows that it incurred $74.6 million in transaction costs during the recent economic downturn after the PBGC’s 2008 investment policy was adopted, then suspended, the GAO said.

“Shifts in policy of this frequency are thought to reflect an undisciplined approach to investing,” the GAO report said. “[Experts] noted that it can take up to five years for a policy to be fully implemented and to have an impact that can be evaluated.”

Last year, iWatch News reported how the PBGC flunked an independent audit of the way it managed its finances. A review of hundreds of pages of memos, audits and internal reports showed the PBGC had misled Congress and its own inspector general into believing that chronic problems were resolved.

The new GAO report criticized PBGC for lacking detailed investment operating procedures needed by its staff for much of its 37-year history.

“PBGC must take a more disciplined and long-term approach to investment by developing and adhering to a long-term comprehensive investment policy and developing a complete compendium of operational policies and procedures,” the report said.

The GAO measured PBGC’s investment performance from 1976 through 2009 against seven market benchmarks, including the S&P 500 index of stocks and the Barclays Capital Long-Term Government Credit Index of bonds. While PBGC’s investments performed better than most benchmarks on an asset-only basis, they tended to underperform all seven of the benchmarks when returns were assessed together with the growth in liabilities, the watchdog said.

However, at the same time the GAO said its analysis found “no clear evidence” that the frequent shifts in investment strategies hurt PBGC’s investment performance.

The report pointed to several areas of weakness within PBGC, including its management style, which the GAO said “still reflects in many ways its small agency past.”

The GAO recommended that PBGC “develop and maintain consistent policy statements” and “develop a complete set of operating procedures and guidelines for its investment activities.”

Labor Secretary Hilda Solis, who is also chairman of the PBGC board, said she agreed with both recommendations and that the PBGC has begun implementing them. “For the first time, a PBGC investment policy statement is available to the public on the PBGC website,” Solis said in a letter attached to the GAO report.

In May, the PBGC approved an investment policy to maximize total return “within a prudent risk framework” that reflects its obligations and the types of assets held by pension plans of troubled companies that could fall under the PBGC. Staff at PBGC are now preparing recommendations for the board, which must approve target allocations and ranges for sub-asset classes.

Going forward, the board will review its investment policy every two years and consider every four years whether the policy should be affirmed or revised, Solis said.

FAST FACT: In fiscal 2010, PBGC earned $7.8 billion from its investments, took over assets from nearly 150 companies, and received $2.3 billion in insurance premiums from companies with traditional defined benefit pension plans. PBGC does not receive taxpayer money and funds itself with insurance premiums, assets acquired from terminated plans and investment income earned on those assets.