GAO Cautions Against Proposed PBGC Investment Strategy
August 24, 2008
The Pension Benefit Guaranty Corp., the government entity that insures the pensions of roughly 44 million Americans, has understated the risks of its new investment policy, according to the U.S. Government Accountability Office.
The GAO reported that the PBGC’s new investment strategy is risky because it “allocates significant portions of the portfolio to volatile or illiquid assets.” The PBGC said earlier this year that it would hold more stocks as well as alternative investments such as real estate and private equity in an effort to close a $14 billion gap in its funding.
The GAO is not the only doubter. Boston University economist Zvi Bodie believes that such a strategy would be like “an insurance company investing the proceeds from hurricane insurance premiums in Florida real estate,” according to an August 22 column by Floyd Norris of the New York Times.
While the new strategy could enhance the PBGC’s investment returns, the GAO said, it “will likely also carry more risk than acknowledged by PBGC’s analysis.” The PBGC has been financed by pension industry premiums, not U.S. taxpayers.The PBGC argues that its new investment strategy reduces risk through greater diversification. Its new allocation targets are 45% stocks, 45% bonds and 10% alternative investments. In the past, it held only 15% to 25% stocks, with the balance in bonds.
In response to the GAO, the PBGC noted that its board of directors “provides consistent and robust oversight” over the agency’s investments, and was instrumental in drafting the new policy.
“Other than some process-related criticisms, the GAO study confirms that the board was correct to adopt the new diversified policy,” said PBGC Director Charles E.F. Millard. “Under all scenarios tested by the GAO, the new policy's level of risk—standard deviation—is consistent with the best practices of other large institutional investors.”
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