Professor warns PBGC must change tactics

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Jeffrey R. Brown says the PBGC made a bad investment decision.

Congress should give the Pension Benefit Guaranty Corp. the same tools private insurers have to assess risk and set premiums if the country wants to avoid another multibillion-dollar taxpayer bailout, a University of Illinois finance professor warns.

Charles E.F. Millard, PBGC director, recently testified in front of a House committee that the agency lost $4.1 billion on investments in fiscal year 2008. The agency has $64.3 billion in assets.

Jeffrey R. Brown, professor at the Urbana-Champaign school, says recent financial troubles only underscored flaws in the PBGC's design and, more importantly, show how flawed the agency's decision earlier this year was to move more assets into riskier investments.

In a paper titled “Guaranteed Trouble: The Economic Effects of the Pension Benefit Guaranty Corp.” published in the winter issue of the Journal of Economic Perspectives, Mr. Brown argued that the agency sets premiums too low, does not do enough to promote adequate funding of pension obligations and failed to promote sufficient information disclosure to market participants.

“Why would an insurance company invest in the same asset they're insuring?” Mr. Brown said in a phone interview, adding that in periods of financial distress more companies will most likely need the PBGC at the same time the agency sees its assets dwindle.

“Taxpayers are going to be on hook for this, and we shouldn't be surprised when that day comes,” he said. “If we're going to have an insurance program, let's at least make sure it operates like an insurance program ought to operate.”

“The staff at the PBGC ... (is) a very smart and capable group,” he said. “They're constrained to using the rules they're working under. Congress needs to address this.” — Jennifer Byrd