Your article regarding the change in investment policy at the Pension Benefit Guaranty Corp. (PBGC says goodbye to LDI, page 1, Feb. 18) was thorough and rightly highlighted the importance of such a move in today's investment world. While the piece encompassed much of what PBGC is trying to accomplish, it missed perhaps the most important purpose of the new strategy: risk mitigation through diversification.
As every investment professional knows, diversification mitigates risk. It is critical to sound risk management. This new policy of 45% equities, 45% fixed income and 10% alternatives is far more diversified than the prior policy of 75% to 85% fixed income. While it may seem counterintuitive to say that shifting from fixed-income investments provides less risk, diversification has actually resulted in a lower standard deviation in the new policy. This is a sound, mainstream financial approach and places PBGC on solid ground.
Additionally, PBGC's new policy focuses on the long-term nature of its liabilities. The agency has the funds to meet its obligations in the near term, and is prudently looking to increase its returns for needs that will arise 20 or 30 years from now.
The new policy has an expected annual return rate of 7.7% vs. 5.7% with the old one. In fact, a detailed analysis of the new policy indicates that the agency's assets would have been almost $7 billion greater at the end of the last fiscal year had it adopted a similar portfolio five years ago. If it had, its deficit would be half of what it presently is.
Indeed, the new policy increases the likelihood of full funding in 10 years from a 19% possibility to a 57% probability. In the most likely scenario, the PBGC funded position (assets less obligations) in 10 years is expected to be $18 billion greater than with the old investment policy. In the worst-case scenario, the PBGC funded positions in 10 years are expected to be $9 billion greater than with the old investment policy.
The PBGC fulfills an important role in protecting the defined benefit pensions of 40 million Americans. They can each rest assured that the step the agency has taken has made their financial futures more secure.
Richard A. Manka
PBGC Advisory Committee