Pension plan risk was downplayed

GAO criticizes volatile strategy

By Associated Press | Monday, August 18, 2008

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The federal agency charged with backstopping pension benefits for 44 million Americans has understated the risks of its new investment policy, a congressional watchdog said Monday.

The Government Accountability Office (GAO) said in a report that the Pension Benefit Guaranty Corp.'s new strategy could significantly boost the PBGC's investment returns, but it "will likely also carry more risk than acknowledged by PBGC's analysis."

The PBGC said earlier this year that it would take a more aggressive investment approach by investing more in stocks and adding new alternative investments, such as real estate and private equity funds.

The agency, which has assets of $68 billion, hopes the strategy will help it close a $14 billion gap between those assets and its liabilities. Otherwise, taxpayers could be called upon to pony up extra funding, the director of the PBGC has warned.

The PBGC has said its new approach will reduce risk because it will result in a more diversified portfolio of 45 percent stocks, 45 percent bonds and 10 percent in alternative investments.

Previously, its targets were 75 percent to 85 percent bonds and 15 percent to 25 percent in stocks, although the actual figure reached 28 percent last year. The agency is seeking bids from Wall Street firms to help manage the switch.

The GAO, however, said that under certain scenarios, the new strategy would have more volatile results than the old approach. The report said that's risky because PBGC pays out more than $4 billion a year to retirees and needs access to cash.

That need increases the risk of "any investment strategy that allocates significant portions of the portfolio to volatile or illiquid assets," the GAO said. Funds allocated to private equity, for example, may not be returned for up to seven years, the report said.

But Charles Millard, PBGC's director, said the report shows that even under the GAO's calculations, the new strategy takes on less risk than most institutional investors and could provide an additional $20 billion to $40 billion in investment gains over 30 years. That's enough to close the agency's deficit.

The PBGC is one of the government's largest corporations and insures about 30,000 defined-benefit pension plans.

Defined-benefit plans pay benefits based on years of service, salary levels and other factors. They are being increasingly replaced by 401(k)-style plans in which benefits depend on the employee's contributions. The PBGC doesn't insure 401(k) plans.

The PBGC's finances have come under strain as it has taken over several large pension plans in recent years from bankrupt airline and steel companies, including a $17 billion plan maintained by UAL Corp., parent of United Airlines. United emerged from bankruptcy in 2006.

The PBGC is funded by fees paid by the companies it insures, assets from failed pension plans, recoveries from bankruptcies and returns on invested assets. It doesn't receive taxpayer funds.

The agency now covers pensions for 1.3 million Americans who are either retired or soon will be. That's up from 624,000 in 2001.

The GAO report also urged the PBGC's board, which is headed by the secretary of the Labor Department, to more closely monitor the agency's investments.

Labor Secretary Elaine L. Chao, in a letter included in the report, said the board has increased its oversight recently and reviews the PBGC's investment policy "at least" every two years and approves it "at least" every four years.

The GAO report was requested by four senators, including the chairman and senior Republican on the Senate Finance Committee - Sens. Max Baucus, Montana Democrat, and Charles E. Grassley, Iowa Republican.

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