by Calculated Risk on 2/18/2008 05:56:00 PM

From the Pension Benefit Guaranty Corporation: New Investment Policy

The PBGC currently has approximately $55 billion to invest in the new investment policy. Under this new policy, the PBGC will allocate 45 percent of its assets to a diversified set of fixed-income investments, 45 percent to diversified equity investments and 10 percent to alternative investment classes. The agency’s previous policy set an equity investment target of 15–25 percent, although the actual level of equity investments was 28 percent at the end of FY 2007.

The PBGC had an accumulated deficit of $14 billion as of year-end FY 2007.

Because the PBGC’s obligations are paid over many years, the new investment policy is designed to take advantage of a long-term investment horizon. The strategy of increased diversification—including use of alternative investments—aims at generating returns, while providing superior protection against ultimate downside risks over time.

The policy was adopted after an extensive review process that began in mid-2007. The review evaluated current and alternative investment policies over 5-, 10- and 20-year periods. The review showed that the diversified portfolio adopted by the Board would have outperformed the current asset mix 98 percent of the time over rolling 20-year periods. The Board reviews the investment policy every two years, with the last review occurring in 2006.

“The PBGC has the ability to accept some degree of short-term volatility to achieve our goal of enhancing assets to pay benefits,” Millard said. “However, the policy is carefully structured to balance risk and returns, and to improve PBGC’s chances of reaching full funding over the long term, while maintaining our ability to meet our obligations to retirees.”

The PBGC does not select individual stocks or bonds, or actively manage its portfolio. Its invested assets are managed by professional money management firms or invested in various market indexes.

The PBGC is not funded by tax dollars, and does not enjoy the full faith and credit of the United States government. The agency is financed by premiums paid by employers, assets from failed pension plans, recoveries from bankruptcies and returns on invested assets.

The PBGC is a federal corporation created under the Employee Retirement Income Security Act of 1974. It currently guarantees payment of basic pension benefits for about 44 million American workers and retirees participating in over 30,000 private-sector defined benefit pension plans.