U.S. Pension Guaranty Corporation Lost $5 billion
WSJ
By DARRELL A. HUGHES
October 24, 2008

WASHINGTON -- The head of the U.S. Pension Benefit Guaranty Corporation said that his agency is facing a shortfall because it has lost nearly $5 billion in stock investments at a time when more companies are inadequately funding their pension plans, forcing the PBGC to take them over.

"PBGC has faced many challenges, including economic contraction in certain industries that traditionally have provided defined-benefit pensions," PBGC Director Charles Millard testified before the House Education and Labor Committee Friday.

PBGC reported earlier this week a $3.12 billion loss in equity investment during the 11 months ended August 2008. Those losses increased by roughly $1.7 billion in September alone, bringing the fiscal year 2008 total stock investment loss to $4.79 billion, according to documents released by the agency.

"With the current market turmoil, we have to ask the question whether it is wise to invest our nation's pension backstop in volatile equities," said House Education and Labor Chairman George Miller.

The agency's negative financial report comes as lawmakers are demanding more transparency from PBGC officials with regard to investment and management policies. The financial crisis has pension watchdogs and lawmakers on edge, which has magnified PBGC's role in insuring pensions of millions of workers.

"The PBGC itself is actually sounder today than it was 12 months ago," Mr. Millard said. Still, PBGC's bond and stock investment income losses total about $4 billion.

The federal agency said it expects a deficit of $10 billion to $12 billion for fiscal-year 2008, down from the previous year's $14 billion deficit. PBGC has total assets of $68 billion and $83 billion worth of liabilities.

Mr. Millard told the panel the costs associated with the agency stepping in to take control of a pension plan when terminated by a company has contributed to the agency's deficit.

However, he said, "I want to emphasize that, despite the current economic slowdown, PBGC will be able to meet its benefit payment obligations for a number of years to come."

He told the committee that "given the recent market turmoil...we expect that the [agency's] total return on investment in 2008 will be somewhere in the range of negative 6% to 7%." By comparison, PBGC saw a positive return on its investments of 4.2% in 2006 and 7.2% in 2007.

Mr. Millard said that after consultation with an independent consultant in mid-2007, PBGC adopted a new investment policy in February that put 45% of its assets in equity investments, 45% of its assets in fixed-income and 10% of its assets in "alternative investments such as private equity."

"This long-term, more-diversified strategy aims at generating better returns that provide a greater likelihood that the [PBGC] can meet its long-term obligations," Mr. Millard said.

According to Mr. Millard, the new strategy is "very, very moderate, very sensible, very consistent with what other investors in the market would do."

But Rep. Miller said the new policy "dramatically shifts PBGC's investments away from fixed-income securities" and said the committee wants to "examine the rationale for such a change in light of the recent market meltdown."

Mr. Millard told Rep. Miller the agency had attempted to diversify its assets. "We don't want to be subject to just what the S&P is doing on any given day," Mr. Millard said. "We don't want to be subject to what Treasury [bonds] are doing on any given day."

However, the congressman called it "a little disingenuous to suggest that the equity thing is going swimmingly."

Mr. Millard responded, "I haven't suggested that anything is going swimmingly...Our equity investments are pretty much consistent with everyone else's equity investments."

Despite Mr. Millard's position that the new investment policy is best for a long-term return on investments, Rep. Miller maintained he isn't convinced and Congress will continue to explore the validity of PBGC's investment strategies.

PBGC's desire to have investment diversification isn't an acceptable answer considering the economic downturn and extensive loss of pensions, Rep. Miller said.

Write to Darrell A. Hughes at darrell.hughes@wsj.com

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