Another Great Idea! As the asset markets are getting negative returns, lets invest pension money there. Perhaps private equity will bail us out!
Equities lure US pension guarantor
By Norma Cohen in London and Anuj Gangahar in New York
Published: February 18 2008 20:31 | Last updated: February 18 2008 20:31
The Pension Benefit Guaranty Corporation, the US government-sponsored guarantor for pensions, plans to step up its investments in riskier assets such as equities as it seeks to plug a $14bn deficit.
The move, quietly announced on the President’s Day public holiday in the US on Monday, will mean the PBGC will double its allocation of equity investments to 45 per cent of its total assets.
The PBGC, which in effect acts as a pensions insurance fund, guarantees the benefits of 44m workers and is currently paying benefits to 700,000 retirees. It holds approximately $55bn (€37.4bn, £28bn) in assets to invest under its new policy.
It has, however, no access to credit from the government. It relies only on insurance premiums paid by the companies whose plans it insures and the investment returns those premiums can earn. If it became insolvent, it would either have to slash benefits paid to retirees or seek a taxpayer bailout.
The PBGC did not have the resources to meet all its future commitments, Charles Millard, director of the corporation, said yesterday.
In view of the current deficit, Mr Millard, said: “We do want to make sure we do our best to avoid the need for a taxpayer bailout. The old strategy locks in the deficit.”
Mr Millard said he believed the long-term nature of its liabilities meant that the PBGC could withstand short-term market volatility.
He also announced that the scheme would make investments in private equity and real estate.
The PBGC altered its investment strategy in 2004 to tilt towards increased investments in low-risk bonds, which move with pension liabilities. The deficit rose and subsequent legislative attempts to increase the scheme’s funds failed.
The PBGC, which also holds pension scheme assets it takes over from insolvent employers, held 28 per cent in equities at the end of last year.
Under the new, higher-risk investment plan it will allocate 45 per cent of its total assets to a diversified set of fixed-income investments, down from about 72 per cent at the end of 2007. It will also invest 10 per cent in alternative investment vehicles, including hedge funds.
The move reflects widespread concerns about fixed-income investments amid the continuing fallout from the US subprime mortgage crisis. Last year the equity portion of the corporation’s investments returned 16.5 per cent while the fixed-income portion returned just 3.4 per cent.
Mr Millard said that the new strategy had a 57 per cent chance of eventually funding the PBGC fully, while the old strategy had only a 19 per cent chance of that.
The new policy was adopted after an extensive review, begun in mid-2007. This showed that the diversified portfolio adopted by the board would have outperformed the current asset mix 98 per cent of the time over rolling 20-year periods.
President George W. Bush announced a legislative proposal earlier this month allowing the PBGC to raise premiums it charges underfunded pension plans.
The proposal, included in the president’s fiscal 2009 federal budget, is aimed at helping the agency close the deficit in its single-employer programme.
Copyright The Financial Times Limited 2008
By Norma Cohen in London and Anuj Gangahar in New York
Published: February 18 2008 20:31 | Last updated: February 18 2008 20:31
The Pension Benefit Guaranty Corporation, the US government-sponsored guarantor for pensions, plans to step up its investments in riskier assets such as equities as it seeks to plug a $14bn deficit.
The move, quietly announced on the President’s Day public holiday in the US on Monday, will mean the PBGC will double its allocation of equity investments to 45 per cent of its total assets.
The PBGC, which in effect acts as a pensions insurance fund, guarantees the benefits of 44m workers and is currently paying benefits to 700,000 retirees. It holds approximately $55bn (€37.4bn, £28bn) in assets to invest under its new policy.
It has, however, no access to credit from the government. It relies only on insurance premiums paid by the companies whose plans it insures and the investment returns those premiums can earn. If it became insolvent, it would either have to slash benefits paid to retirees or seek a taxpayer bailout.
The PBGC did not have the resources to meet all its future commitments, Charles Millard, director of the corporation, said yesterday.
In view of the current deficit, Mr Millard, said: “We do want to make sure we do our best to avoid the need for a taxpayer bailout. The old strategy locks in the deficit.”
Mr Millard said he believed the long-term nature of its liabilities meant that the PBGC could withstand short-term market volatility.
He also announced that the scheme would make investments in private equity and real estate.
The PBGC altered its investment strategy in 2004 to tilt towards increased investments in low-risk bonds, which move with pension liabilities. The deficit rose and subsequent legislative attempts to increase the scheme’s funds failed.
The PBGC, which also holds pension scheme assets it takes over from insolvent employers, held 28 per cent in equities at the end of last year.
Under the new, higher-risk investment plan it will allocate 45 per cent of its total assets to a diversified set of fixed-income investments, down from about 72 per cent at the end of 2007. It will also invest 10 per cent in alternative investment vehicles, including hedge funds.
The move reflects widespread concerns about fixed-income investments amid the continuing fallout from the US subprime mortgage crisis. Last year the equity portion of the corporation’s investments returned 16.5 per cent while the fixed-income portion returned just 3.4 per cent.
Mr Millard said that the new strategy had a 57 per cent chance of eventually funding the PBGC fully, while the old strategy had only a 19 per cent chance of that.
The new policy was adopted after an extensive review, begun in mid-2007. This showed that the diversified portfolio adopted by the board would have outperformed the current asset mix 98 per cent of the time over rolling 20-year periods.
President George W. Bush announced a legislative proposal earlier this month allowing the PBGC to raise premiums it charges underfunded pension plans.
The proposal, included in the president’s fiscal 2009 federal budget, is aimed at helping the agency close the deficit in its single-employer programme.
Copyright The Financial Times Limited 2008
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