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.