The board of directors of the Pension Benefit Guaranty Corp. has been negligent.
Though corporate pension plans are being terminated at a rapid rate as the economy worsens, major new liabilities are likely to land upon the PBGC in the coming months, while a former director has been accused of corruption. And board members, all new, have yet to hold a meeting since President Barack Obama took office.
In part the problem is that the PBGC was created with a poor governance structure. Its board is composed of the secretaries of treasury, labor and commerce. Because these officials have what they perceive to be more important responsibilities, the board rarely meets, as Pensions & Investments has noted in the past.
The last PBGC board meeting was February 2008, according to the Government Accountability Office. Since the PBGC's creation in 1974, the board held only 37 meetings with a quorum, and six without a quorum. From 1983 though 1991, it held only one meeting, and that was a teleconference.
The PBGC has operated essentially without direction from the board and with no oversight of the troubled insurance program or its internal management. That internal management is under scrutiny: Former Executive Director Charles E.F. Millard has been accused of making inappropriate contacts with BlackRock Inc., JPMorgan Asset Management and Goldman Sachs Asset Management, which the agency was in the process of hiring to manage $2.5 billion in real estate and private equity investments.
The board appears to have rubber-stamped vital decisions of the staff, such as the move to abandon its liability-driven investment strategy in favor of a larger allocation to equities, promoted by Mr. Millard. That decision might prove wise, but it appears to have been done without the deliberation such a significant move would entail and without controls to root out improprieties.
Now is the time for the PBGC to conduct a forensic audit of its own operations. The PBGC has never conducted such an audit, either of its internal operation or of the terminated plans it has taken over. Back in 2005, the PBGC declined to take up an offer to conduct forensic audits of terminated plans to see what, if any, responsibility for underfunding was attributable to money manager and consultant conflicts of interests in overseeing the plans and to pursue litigation to recover losses.
It should terminate the contracts with any money manager, the hiring of which is found to have been handled improperly.
The board must also turn its attention to the PBGC's growing deficit, a problem that won't be easy to solve.
At least as early as 2003, the GAO put the PBGC's single employer insurance system on its list of high risk major federal programs that need urgent attention.
The PBGC was set up to insure against corporate pension plan failure. But it was not provided the financial resources to deal with the massive defaults it now faces from Chrysler LLC and possibly General Motors Corp., as well as other companies that have failed in the past year or are on the brink of insolvency.
The program faces $13 billion in estimated net claim exposure from the auto companies. That amount would more than double the PBGC's deficit. As of Sept. 30, the PBGC's single-employer program had a $10.7 billion deficit, with $61.6 billion in assets and $72.3 billion in liabilities.
Congress needs to restructure the PBGC board, whose members are too busy with their own departmental responsibilities to give the agency the attention it deserves. The board also is too small to oversee the tasks it has.
The secretaries should be replaced by a greater number of appointees with the professional experience and time to deal with the challenges.
The board didn't create the financial crisis the PBGC now faces, but a better board could help guide policy on how to deal with the troubles. Congress ultimately will have to deal with the PBGC's deficit.
Raising premiums would serve as only a short-term salve because corporations would likely terminate plans that are becoming too costly. Freezing the PBGC current obligations or lowering benefit guarantees appear to be the only viable alternatives, leaving plans in the future with less, or no, PBGC protection.
The PBGC must avoid a taxpayer bailout, which would be unfair to employees who do not have defined benefit plans. Such a bailout has already occurred indirectly with the billions of dollars of federal assistance to GM and Chrysler, but bailouts violate the intention behind the PBGC's creation, and mask the larger societal costs of defined benefit programs.