A recent decision by the Pension Benefit Guaranty Corp. to roll back the equity investments in its $54 billion investment portfolio — to less than 30% from 37% — adds to the likelihood the PBGC will need a taxpayer bailout.
At least that's the argument former Bush administration officials are advancing following news that the Obama administration's PBGC board had overturned a key aspect of the Bush administration's more aggressive investment policy for the agency.
“The reality is that PBGC is insolvent, not in the short term but in the long term,” said Bradford P. Campbell, who served as assistant secretary of labor of the Employee Benefits Security Administration during the Bush administration. The EBSA chief is the liaison between the PBGC and its board, which consists of the secretaries of the departments of labor, treasury and commerce.
“Returning to a fixed-income-driven strategy is a less optimal strategy that increases the likelihood of an eventual PBGC congressional bailout,” said Mr. Campbell, who is now an attorney for the law firm Schiff Hardin LLP, Washington.
PBGC officials aren't commenting on how they plan to reinvest the more than $3.8 billion. But sources close to the agency said the board has signaled it wants the PBGC to return to the roughly 70% fixed income/30% equities split that the agency had in place as of March 31.
Jeffrey Speicher, a PBGC spokesman, said the PBGC board has not yet adopted a permanent investment policy to replace the Bush policy. He also said the agency doesn't discuss upcoming transactions, in part because it wants to obtain the best price it can for new investments.
“On Oct. 14, the board instructed us to prudently rebalance and reduce PBGC's investment inequities,” Mr. Speicher said. “We will not be offering any updates on that process.”
Leopoldo Guzman, president of Guzman & Co., an investment bank and broker-dealer in Coral Gables, Fla., maintained that “investment in equities is the only way to achieve over a long-term horizon a return above the liabilities and (to) thereby reduce the probability of an eventual taxpayer bailout.” Mr. Guzman was a Bush appointee to the PBGC advisory committee, which provides advice on investments and other issues to the pension insurer.
But others say the Obama administration's rebuff to the equities allocation in the Bush administration's PBGC investment policy was in the agency's best interest.
“It's a move in the right direction,” said Mark Ruloff, director of asset allocation for Watson Wyatt Worldwide, Arlington, Va. “The strategy is going back to a more prudent strategy of limiting investment risks that are correlated with PBGC insurance risk.”
“To the extent it is moving more in the direction of a liability-driven investment policy, I would consider that to be prudent and appropriate,” added Bradley Belt, chairman of Palisades Capital Advisors LLC, Washington, and PBGC executive director from April 2004 through May 2006.