Skip to main content
MENU
Subscribe
  • Subscribe
  • Account
  • LOGIN
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE Act 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2022 Retirement Income Conference
    • 2022 Managing Pension Risk & Liabilities
    • 2022 WorldPensionSummit
Breadcrumb
  1. Home
  2. Print
August 24, 2009 01:00 AM

Experts offer tips on what PBGC needs

Advice ranges from changing investments to abolishing the pension insurance agency

Doug Halonen
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    Simply changing the investment policy of the Pension Benefit Guaranty Corp. won't give the agency a fighting chance of slashing its mushrooming budget deficit, some industry investment experts and former PBGC officials contend.

    What the agency really needs is legislative authority to raise the premiums plan sponsors pay for the PBGC's pension insurance policy, they argue. One went so far as to advocate abolishing the PBGC.

    “It will almost be impossible to reduce the deficit dramatically through an investment policy alone,” said James Keightley, a partner in the law firm Keightley & Ashner LLP, Washington, and a former PBGC general counsel.

    The PBGC's budget deficit, which soared to an all-time high of $33.5 billion as of March 31, is at issue because the PBGC board earlier this month confirmed it had suspended a policy adopted during the Bush administration and is considering a new, as-yet undefined policy (Pensions & Investments, Aug. 10).

    Under the earlier policy, adopted in February 2008, 45% of the agency's $48 billion in investible assets were to be in equities, 45% in fixed income and 10% in alternatives.

    Before 2008, 75% to 85% of the PBGC's assets were in a liability-driven investment strategy, with the balance invested in stocks.

    Asked by P&I what they would do if they ran the PBGC, investment experts' responses ranged from switching back to the LDI-like policy or retaining some variation of the more aggressive investment policy adopted during the Bush administration.

    At the same time, they warned that the agency's deficit has become so large that it is extremely unlikely it can be eliminated through investment returns alone.

    “I don't think investment policy will make a difference” to the PBGC's deficit, said Robert Arnott, chairman of Research Associates LLC, Pasadena, Calif. “It's deck chairs on the Titanic. Plug the hole before you rearrange the deck chairs if you want to stay afloat.

    “PBGC's biggest issue is not investment policy but liability management,” Mr. Arnott said.

    “Congress has boxed PBGC in with contractual pricing of insurance, and no powers to enforce adherence to insurance policies the way a private insurance provider would be able to,” he continued.

    'Structurally defective'

    Said Bradley Belt, chairman of Palisades Capital Advisors LLC, Washington, and PBGC executive director from April 2004 through May 2006: “The pension insurance program is structurally defective.

    “As structured, it (the PBGC) has limited ability to control its financial well-being. Essentially, it is required to take over underfunded pension plans and incur losses,” he said.

    “In contrast to private-sector insurers, it doesn't have the unilateral authority to adjust insurance premiums to make up for the losses.”

    Among the experts recommending the PBGC shift back to an LDI strategy are Mr. Belt and Zvi Bodie, a professor of finance and economics at Boston University School of Management.

    “I implemented a liability-driven investment strategy,” while at the PBGC, Mr. Belt said. “I continue to believe that's an appropriate policy for the agency.”

    “My own view is that the purpose of the assets is to satisfy the liabilities, and it is not appropriate for a governmental entity to be taking on significant investment risks on behalf of the taxpayers,” he said.

    Mr. Bodie said he believes the PBGC board could use any asset allocation strategy it wants, as long it also uses derivative overlays to match its asset and liability exposures. “You use a derivatives overlay or swap contracts to completely neutralize the risks,” he said.

    Jonathan Waite, director, investment management advice and chief actuary, SEI Institutional Group, Oaks, Pa., said he believes the timing might be wrong for a PBGC return to LDI now. He also said he thinks the more aggressive investment policy seems reasonable.

    “I would expect that once they (the PBGC board members) have reconsidered their asset allocation, they will look closely at considering opportunities in the alternative space,” Mr. Waite said. “I would recommend that they strongly consider that because of the opportunity for return and the opportunity to get that return in a manner not correlated with their other assets ... ”

    The PBGC board is composed of the secretaries of Treasury, Labor and Commerce.

    The key policy dilemma for the PBGC, according to attorney Mr. Keightley: “If you invest conservatively, you risk locking in your loss. If you invest aggressively, you increase your risk of a bigger deficit.”

    As far as the prospects of slashing the PBGC's deficit go, the agency has two major sources of revenue: investment returns and premiums, Mr. Keightley said.

    “It's a huge (deficit) gap and getting bigger, and more plans are getting into trouble and PBGC is taking them over, increasing PBGC's underfunding,” Mr. Keightley said.

    Mr. Keightley add that while he is no investment expert, he would invest the agency's assets conservatively: “I'm not sure the market is going to go up aggressively.”

    But SEI's Mr. Waite warned that raising premium levels could spur plan sponsors to get out of the defined benefit business, leading to a smaller group of contributors to the premium pool. “It's a very difficult balancing act,” Mr. Waite said.

    Meir Statman, a professor of finance at Santa Clara Calif.) University's Leavey School of Business, recommended the federal government forget balancing acts and just ax the PBGC — a move that he said would encourage migration to the defined contribution system.

    “Pull the plug (on the PBGC) over time, with a transition period such that the people who are now dependent on it are not left out in the cold,” Mr. Statman said.

    Recommended for You
    Read the print edition of P&I
    Read the print edition of P&I
    How low is low? Projections say it's not low enough
    How low is low? Projections say it's not low enough
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    New SEC Rule on Fair Pricing Determination Needs Careful Consideration
    Sponsored Content: New SEC Rule on Fair Pricing Determination Needs Careful Consideration

    Reader Poll

    June 6, 2022
    SEE MORE POLLS >
    Sponsored
    White Papers
    Nearing the finish line: Ideas on end-state investing for corporate DB plans
    The Meaning of "Portfolio Intelligence"
    Credit Indices: Closing the Fixed Income Evolutionary Gap
    Forever in Style: Benchmarking with the Morningstar® Broad Style Indexes℠
    Crossroads: Politics, Inflation, & Bonds
    Is there a mid-cap gap in your DC plan?
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    June 20, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2022. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE Act 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2022 Retirement Income Conference
      • 2022 Managing Pension Risk & Liabilities
      • 2022 WorldPensionSummit