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CCH® PENSION AND BENEFITS — 5/14/08

New PBGC investment strategy poses increased risk during an economic downturn, says CBO chief

A new diversified investment policy adopted by the PBGC is likely to produce higher returns over the long run, but also increases the risk that the PBGC will not have sufficient assets to pay benefits during an economic downturn, the director of the Congressional Budget Office (CBO) said in an April 24, 2008 letter. The letter was sent to Rep. George Miller (D-CA) by Peter R. Orszag, director of the CBO, in response to a request that the CBO review the PBGC’s new investment policy.

Under the new investment policy, adopted in February 2008 (see CCH Pension Plan Guide Newsletter, Report No. 1723, February 25, 2008), the PBGC allocates 45% of its assets to a diversified set of fixed income investments, 45% to diversified equity investments, and 10% to alternative investment classes. Under the prior investment strategy, the PBGC held 75% of its portfolio in bonds, with the remainder invested in equities.

Higher returns, but higher risk

According to the CBO director, the change in the PBGC’s investment strategy represents an effort on the part of the PBGC to increase the expected return on its assets, and to diminish the likelihood that taxpayers will be called on to cover some of its liabilities. The new strategy is likely to produce higher returns, on average, over the long run, said the CBO director. However, he said, the new strategy also “increases the risk that PBGC will not have sufficient assets to cover retirees’ benefit payments when the economy and financial markets are weak.” By investing a greater share of its assets in risky securities, the PBGC is “more likely to experience a decline in the value of its portfolio during an economic downturn.” According to the CBO director, if interest rates fall at the same time the overall economy and financial markets decline, the present value of benefit obligations will increase, and pension plans likely to be assumed by the PBGC will be even more underfunded as a result.