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CCH® PENSION — 8/24/11

PBGC Developing Investment Policies, Operating Procedures Based On GAO Recommendations

from Spencer’s Benefits Reports: The Pension Benefit Guaranty Corporation (PBGC) should (1) develop and maintain comprehensive investment policy statements; and (2) develop a complete set of operating procedures and guidelines for its investment activities, recommended the Government Accountability Office (GAO).

Assets held by the PBGC have grown from $34 million in 1974 to almost $80 billion in 2010, largely because of assets received from plan terminations, the GAO noted. “Despite significant swings in PBGC’s investment history, there has been little focus on the extent to which it has met its investment goals, the nature of its investment policies or how they compare with best practices in the industry.”

The GAO found that the “PBGC’s investment objectives and stated asset allocation targets have changed frequently in the last eight years, alternating between more conservative and more aggressive approaches to investing. Yet these changes in stated objectives had only a moderate effect on PBGC’s actual asset allocation because, for a variety of reasons, PBGC did not meet its targets.” The GAO noted that transaction costs related to these policy shifts were not routinely monitored, and in certain times, significant costs were incurred.

The PBGC’s investment returns from assets alone were better than most of the benchmarks used by the GAO, but they underperformed all of the benchmarks when the returns were assessed together with the growth in liabilities. However, “GAO’s analysis found no apparent adverse effect on PBGC’s investment performance as a result of changes in policy.”

The GAO was particularly critical of the PBGC’s policy statements and operating procedures, which it found were incomplete and “do not provide sufficient guidance to ensure sound implementation of its investment policies. The investment policies issued by PBGC’s Board for strategic guidance in the planning and execution of investments have generally lacked a number of provisions recommended by the Chartered Financial Analyst Institute; the Independent Fiduciary Services; and other experts of sound investment management, such as the Government Finance Officers Association.”

According to the GAO, “the policy statements have been insufficiently detailed to provide adequate guidance for staff. In addition, PBGC’s Corporate Investments Department’s staff have largely functioned without the benefit of fully-developed and documented operating procedures.”

PBGC Agrees With The Recommendations

The PBGC agrees with both of the GAO’s recommendations and is implementing them, Josh Gotbaum, executive director of the PBGC, wrote in response to the GAO report.

The PBGC’s Board of Directors recently approved a comprehensive investment policy statement, he said, that was developed after extensive analysis and a review of policy options.

Concerning the need for clear investment operating procedures and guidelines, the PBGC’s Corporate Investments Department has reviewed the practices of other institutions. As a result, new procedures and guidelines are being implemented that cover such areas as transaction management, cash management, investment procedures, special situations, and manager due diligence. “Working with our General Counsel, we also developed a set of ethical guidelines specifically tailored to our corporate investment activities,” Mr. Gotbaum added.

For more information on the GAO report (GAO-11-271), visit http://www.gao.gov/products/GAO-11-271.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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