Despite suffering a 23 percent decline in its stock portfolio during the fiscal year that ended in September, the head of the government agency that insures private-sector pension plans told a congressional committee Friday that the agency “is actually sounder today that it was 12 months ago.”
Charles E.F. Millard, the director of the Pension Benefit Guaranty Corp. (PBGC), said the agency’s cumulative deficit had declined in fiscal 2008 from more than $14 billion to as low as $11 billion, depending upon the final results of the agency’s annual audit.
Preliminary data indicate that the value of the PBGC’s stock portfolio declined by $4.8 billion during the 12-month period ending in September, which coincided with a nasty bear market. The fact that the PBGC intends to increase the share of stocks in its asset portfolio elicited some contentious questions from Democrats on the House Education and Labor Committee.
Offsetting part of the loss from stocks, rising interest rates generated about $700 million in gains in the agency’s fixed-income securities, such as corporate bonds and Treasury debt instruments. More important, rising interest rates were also responsible for significant reductions in the PBGC’s liabilities.
Together, the reduction in liabilities and the gains from fixed-income assets overwhelmed the sizable loss from the agency’s stock investments.
It turned out that the PBGC benefited this past year from the fact that it had not yet implemented the new investment policy it adopted in February. The new policy, which is geared toward generating higher returns, will increase the share of stocks and emerging-market securities in PBGC’s asset portfolio.
Stocks represented 27 percent of last year’s portfolio, but their share is scheduled to eventually increase to 45 percent, including 6 percent from emerging markets (e.g., Mexico and India), whose stocks make up only 0.5 percent of PBGC’S assets today. Corporate bonds and Treasury debt securities will decline significantly from the 69 percent of assets they represent today to 42 percent in the future, 2 percent from junk bonds and 3 percent in emerging market debt.
Had PBGC’s portfolio reflected the composition of the new investment policy announced in February, its stock losses would have been much greater last year. Committee Chairman George Miller, California Democrat, compared the new policy to “launch[ing] a lifeboat in the middle of a storm.”
Mr. Millard replied that the old investment policy “locked in the deficit” and presumed an eventual baiIout by Congress, which the new investment policy is trying to avoid. In his prepared testimony, Mr. Millard told the committee that the prior policy gave the agency only a 19 percent chance to eliminate its deficit within 10 years, while the new policy would provide a 57 percent chance to erase the shortfall.
Still, Mr. Miller worried about investing in Zimbabwe’s bonds and securitized mortgages in the real estate sector. Mr. Millard disabused the chairman on the latter investment and didn’t bother to comment on the former.
“I want to emphasize that, despite the current economic slowdown, PBGC will be able to meet its benefit payment obligations for a number of years to come,” Mr. Millard told the committee. “PBGC’s problems — our deficit problems — are very long-term problems.”
Please read our comment policy before commenting.