Pension Benefit Guaranty Corporation (PBGC) Investment Policy: Issues for Congress

Pension Benefit Guaranty Corporation (PBGC)
Investment Policy: Issues for Congress
September 8, 2008
Kelly Kinneen
Analyst in Income Security
Domestic Social Policy Division
Patrick Purcell
Specialist in Income Security
Domestic Social Policy Division

Pension Benefit Guaranty Corporation (PBGC)
Investment Policy: Issues for Congress
Summary
The Pension Benefit Guaranty Corporation (PBGC) is a federal corporation
established under Title IV of the Employee Retirement Income Security Act of 1974
(ERISA, P.L. 93-406). The PBGC insures private pension beneficiaries against the
complete loss of accrued benefits if their defined benefit pension plan is terminated
without adequate funding. The PBGC receives no appropriations from general
revenue. Its operations are financed by insurance premiums set by Congress and paid
by sponsors of defined benefit plans, investment income from the assets in its trust
fund, and recoveries from the companies formerly responsible for the trusteed plans.
The PBGC insures the pension benefits of 44 million workers and retirees. In
FY2007, the PBGC paid about $4.3 billion in benefits to almost 1.3 million workers
whose pension plans had failed. The PBGC currently has a $14.1 billion deficit in
assets necessary to satisfy all claims made through FY2007. Although the PBGC’s
liabilities are not explicitly backed by the full faith and credit of the federal
government, Congress could face political pressure to bail out the PBGC at taxpayer
expense should the agency become financially insolvent.
As of September 30, 2007, the value of the PBGC’s total investments, including
cash and investment income, was approximately $62.6 billion. Premium income is
required by law to be invested in debt obligations guaranteed by the U.S.
government. The assets from terminated plans and their sponsors are accounted for
in a trust fund that was most recently valued at $48.1 billion. There are no statutory
limitations on how PBGC can invest the assets in its trust fund.
In February 2008, the PBGC announced that it had adopted a new investment
policy aimed at generating higher investment returns. The new policy allocates 45%
of the assets to fixed-income investments, 45% to equity investments and 10% to
alternative investment classes, including real estate and private equity. The PBGC’s
previous investment policy, adopted in 2004, set an equity investment target of 15%
to 25%, with the remaining assets allocated primarily to fixed income investments.
If the PBGC’s higher expected investment returns are accompanied by reduced
risk — as the PBGC has asserted — then U.S. taxpayers, as the ultimate guarantors
of PBGC insurance, will be better off. However, if the higher returns are
accompanied by commensurately higher risk, then taxpayers are neither better nor
worse off, because the PBGC’s true financial condition will not have changed.
Taxpayers would be worse off under the new policy if higher investment returns
forestall fundamental reforms in the pension insurance system — such as adopting
risk-based premiums — that could result in improving the long-term financial
condition of the agency. Taxpayers, who would benefit from reduced exposure to the
risk of having to bail out the PBGC if fundamental reforms in PBGC financing and
governance were enacted, will be worse off if the agency does not achieve the
reduction in its deficit that it has predicted the new investment policy will attain.

Contents
Background on the PBGC...........................................1
The Two Kinds of Pension Plans..................................1
The PBGC’s Benefit Guarantee...................................2
The Single-Employer Insurance Program.......................2
The Multiemployer Insurance Program.........................2
PBGC Benefit Limits.......................................4
Sources of Funding............................................4
PBGC Premiums..........................................5
Recent Reforms...........................................7
Background on PBGC Investment Policy...............................8
PBGC’s Investment Income......................................8
Accounting in the Federal Budget................................10
Oversight of PBGC Investments.................................11
PBGC’s New Investment Policy.............................11
Investment Strategies..........................................14
The “Total Return” Approach...............................14
The “Asset-Liability Matching” Approach.....................16
Implications of the New Policy......................................18
PBGC’s Future Financial Condition..............................18
Risks for Taxpayers...........................................21
List of Figures
Figure 1. PBGC Income from Premiums and Investment Earnings,
1997-2007 ...................................................8
Figure 2. Financial Structure of the PBGC..............................9
Figure 3. PBGC Assets Held in Trust Fund and Revolving Fund, 1997-2007..10
Figure 4. Percentage of PBGC Assets Invested in Equities, 1990-2007.......13
Figure 5. Average Percentage Allocation of Assets Among the
200 Largest Defined Benefit Pension Plans, 2007....................15
List of Tables
Table 1. Claims Experience of PBGC Single-Employer Insurance
Program and Probable Future Terminations.........................3
Table 2. PBGC Premium Revenue and Benefit Payments, 1997-2007.........6
Table 3. Target Asset Allocation of PBGC Trust Fund, 2008..............11
Table 4. Previous PBGC Target Investment Allocation,
Actual Investment Allocations, and New Target Allocation ...........12
Table 5. Asset Allocation of UK Pension Protection Fund, 2008...........20

Pension Benefit Guaranty Corporation
(PBGC) Investment Policy:
Issues for Congress
Background on the PBGC
The Pension Benefit Guaranty Corporation (PBGC) is a federal corporation
established under Title IV of the Employee Retirement Income Security Act of 1974
(ERISA, P.L. 93-406). The PBGC insures private pension beneficiaries against the
complete loss of accrued benefits if their defined benefit pension plan is terminated
without adequate funding. The PBGC receives no appropriations from general
revenue. Its operations are financed by insurance premiums set by Congress and paid
by sponsors of defined benefit plans, investment income from the assets in its trust
fund, and recoveries from the companies formerly responsible for the trusteed plans.
The Two Kinds of Pension Plans
There are two kinds of pension plans: “defined benefit” plans and “defined
contribution” plans. A participant in a defined benefit plan receives a fixed benefit
at retirement prescribed by a formula set forth in the plan, usually based on pay, years
of service, or both. The employer makes contributions to the plan based on actuarial
calculations designed to ensure that the plan has sufficient funds to pay the future
benefit prescribed by the formula. Under a defined contribution plan, no particular
benefit is promised. Instead, benefits are based on the balance of an individual
account maintained for the benefit of the employee. The benefit received by a
participant at retirement is generally dependent on two factors: total contributions
made to the plan during the worker’s participation in the plan and the investment
experience of the amounts contributed on the employee’s behalf. Under either type
of pension plan, employees may be permitted to make contributions. The PBGC
insures qualified defined benefit pensions provided by employers in the private
sector. A plan is qualified if it meets the requirements of the Internal Revenue Code
and ERISA and is thus eligible for favorable tax treatment. Defined contribution
plans and nonqualified defined benefit plans are not insured by the PBGC.
In a defined benefit plan, the employer bears the risk of investment losses. The
Internal Revenue Code and ERISA contain minimum funding standards that require
the employer to make contributions to a defined benefit plan to fund promised
benefits. If, for example, the plan experiences poor investment performance or
actuarial miscalculations, the employer will be required to make additional
contributions to the plan. The minimum funding rules provide for funding over a
period of time and do not require the plan to have sufficient assets to pay all the
benefits earned under the plan at any particular time. It is possible for a defined
benefit plan to terminate without having sufficient assets to pay promised benefits.

The PBGC insures defined benefit plan benefits up to certain limits to protect plan
participants in the event of such a termination. However, the PBGC may not protect
all benefits promised under a plan. Consequently, if a defined benefit plan is
terminated while it is not fully funded, the participants might receive less from the
PBGC than they were promised under the plan.
The PBGC’s Benefit Guarantee
The PBGC currently insures the pension benefits of 44 million workers and
retirees participating in more than 30,000 private-sector defined benefit pension
plans. In FY2007, the PBGC paid about $4.3 billion in benefits to almost 1.3 million
individuals whose pension plans had failed.¹
The PBGC insures both single-employer and multiemployer pension plans. The
PBGC’s single-employer program guarantees payment of basic pension benefits
when an underfunded plan terminates. When an underfunded pension plan sponsored
by a financially distressed company is terminated, the PBGC takes over the plan
assets and assumes responsibility for paying retirement benefits to the plan’s
participants, subject to the statutory benefit limits.
The Single-Employer Insurance Program. In 2007, the PBGC’s
single-employer program insured the pensions of 33.8 million workers and retirees
in about 28,900 plans. The program is directly responsible for the benefits of about
1.2 million workers and retirees in almost 3,800 trusteed pension plans. The PBGC
insurance program for single-employer plans reported a deficit of $13.11 billion in²
FY2007, based on assets of $67.24 billion and liabilities of $80.35 billion. The
deficit for 2007 was $5 billion less than the $18.1 billion deficit reported one year
earlier. The PBGC reported that the decline in the deficit was due primarily to
investment income of $4.7 billion and a $2.8 billion actuarial credit as a result of³
higher valuation interest factors.
Through the end of FY2006, the PBGC’s single-employer program had incurred
net claims of $29.0 billion (see Table 1.) Of this amount, nine of the ten largest
claims against the PBGC, totaling $19.8 billion, occurred between 2001 and 2005.
The PBGC’s net claims equal the portion of guaranteed benefit liabilities not covered
by plan assets or recovered from the general assets of the employer. These claims will
eventually have to be covered through premiums, earnings on PBGC assets, or other
sources of revenue.
The Multiemployer Insurance Program. Multiemployer plans are
collectively bargained plans to which more than one company makes contributions.
The PBGC’s multiemployer program provides financial assistance through loans to
insolvent plans to enable them to pay benefits. The PBGC does not become the
trustee of insolvent multiemployer plans. These loans (which are typically not repaid)

¹ PBGC, Annual Management Report, 2007; [http://www.pbgc.gov/docs/2007AMR.pdf].
² PBGC, Annual Management Report, 2007.
³ In general, changes in pension liabilities are inversely related to changes in interest rates.

generally continue year after year until the plan no longer needs assistance or has paid
all promised benefits at the guaranteed level.
In 2007, the PBGC’s multiemployer program insured the pensions of 9.9 million
workers and retirees in about 1,530 plans. The multiemployer program reported a net
deficit of $955 million, a $216 million net deterioration from the end of the previous
year.⁴ The loss for the year was due largely to PBGC’s booking of additional
probable losses from expected future financial assistance to troubled plans. The
program had assets of $1.2 billion and liabilities totaling about $2.2 billion.
Table 1. Claims Experience of PBGC Single-Employer
Insurance Program and Probable Future Terminations
(in millions of $)
^Y^e^{ar of}^Num^b^er^Beⁿ^e^fi^t^Tr^ust^P^l^aⁿ^Recoveries^from^Net^Av^era^g^e^Net^Claⁱ^m^Per
^Term^ina^t^ioⁿ^{of Pl}^an^s^Lia^b^ilit^y^Asse^t^s^E^m^ployers^Claⁱ^m^s^T^erm^{inated Plan}
^1975-¹⁹⁷⁹⁵⁸⁶^{397 145}⁵⁶¹⁹⁶^0.33
^1980-¹⁹⁸⁴⁶²¹^{1,257 514}¹⁵⁸⁵⁸⁶^0.94
^1985-¹⁹⁸⁹⁵³⁷^{2,351 651}¹⁵⁹^1,541^2.87
^1990-¹⁹⁹⁴⁶⁹³^{5,116 2,275}⁴⁴⁶^2,396^3.46
^1995-¹⁹⁹⁹⁴⁴⁰^{2,196 1,413}⁷³⁷¹⁰^1.61
²⁰⁰⁰⁷²^{367 266}¹⁵⁸⁵^1.19
²⁰⁰¹¹¹⁷^{3,687 2,536}¹⁸⁵⁹⁶⁶^8.26
²⁰⁰²¹⁷⁸^{8,243 4,505}²⁷⁸^3,460^19.44
²⁰⁰³¹⁵⁶^{13,307 6,922}¹⁵⁰^6,235^39.97
²⁰⁰⁴¹⁴⁵^{5,967 2,802}⁴⁸¹^2,684^18.51
²⁰⁰⁵⁹⁷^{21,592 10,137}^1,579^9,876^101.81
²⁰⁰⁶³¹^{678 366}¹³²⁹⁹^9.66
^Subtotal^3,673^{65,159 32,532}^3,593^29,033^7.91
^Probabl^e
^Futur^e
^T^e^rmⁱⁿ^atⁱ^oⁿ^s²⁷^{17,430 12,568}⁰^4,862^—^—
^T^o^tal³^,700^{82,589 45,100}^3,593^33,895^—^—
^Source:^P^eⁿ^s^ioⁿ^B^eⁿ^e^f^{it Gu}^ar^an^ty^Co^r^p^o^r^atioⁿ^.
^No^tes:^St^a^t^e^d^am^o^uⁿ^t^{s ar}^{e su}^b^j^{ect to}^ch^an^g^e^uⁿ^{til P}^B^{GC f}ⁱⁿ^a^{lizes v}^a^lu^{es f}^o^r^liab^{ilities, assets, an}^d
^recov^e^ries^of^termⁱⁿ^{ated plan}^s^.^A^m^ouⁿ^t^sⁱⁿ^th^is^{table are v}^a^lu^{ed as}^of^th^e^d^a^t^e^o^f^each^plan^’^s
^ter^mⁱⁿ^atioⁿ^an^d^dⁱ^f^f^e^r^f^r^o^m^am^o^uⁿ^t^{s r}^e^p^o^r^tedⁱⁿ^P^B^GC’^s^Fin^aⁿ^c^{ial Statem}^en^{ts, w}^h^ich^ar^{e v}^a^lu^ed^as
^of^th^{e en}^{d of}^th^{e f}ⁱ^s^{cal y}^{ear. Nu}^m^b^ers^m^a^yⁿ^o^{t add u}^p^{to totals}^du^{e to rou}ⁿ^dⁱⁿ^g^.

⁴ PBGC, Annual Management Report, 2007.

PBGC Benefit Limits. There is a statutory ceiling on the benefits that are
insured by the PBGC. A different benefit limit applies to each program. For plans
that terminate in 2008, the annual limit for the single-employer program is $51,750
for a single life annuity payable at age 65. The guarantee for the multiemployer
program is much lower. In 2008, for an individual with 30 years of service, the
annual guaranteed limit is $12,870. The annual benefit limits are indexed each year
to the average annual increase in wages in jobs covered by Social Security. Because
the benefit limit is higher than the pensions earned by most participants in insured
plans, most workers in single-employer plans taken over by PBGC receive the full
benefit earned at the time of termination. However, the lower guarantee limit for the
multiemployer program has left most of the retirees in insolvent plans without their
full benefits.⁵
The PBGC currently has a $14.1 billion deficit in assets necessary to satisfy all
claims made through 2007. The Government Accountability Office (GAO) has
identified PBGC’s single-employer program as “high-risk,” stating that “the program
remains exposed to the threat of terminations of large underfunded plans in weak
industries and of sponsors voluntarily terminating or freezing their [defined benefit]⁶
plans.” In 2007, the PBGC’s estimated potential exposure to future claims was
approximately $66 billion, down from $73 billion in 2006.⁷ Not all underfunded
pension plans are likely to present claims to the PBGC. The estimate of $66 billion
represents underfunding of plan sponsors whose credit ratings are below investment
grade or meet one or more financial distress criteria. It is not an estimate of likely
claims against the PBGC.
The PBGC’s liabilities are not explicitly backed by the full faith and credit of⁸
the federal government. However, should the agency become financially insolvent,
the GAO has noted that “Congress could face enormous pressure to bail out the⁹
PBGC at taxpayer expense.”
Sources of Funding
The PBGC receives no appropriations from general revenues. Instead, by law
the agency’s operations are financed from four sources:

⁵ PBGC, Annual Management Report, 2007.
⁶ United States Government Accountability Office, High-Risk Series: An Update, January

2007, at [http://www.gao.gov/new.items/d07310.pdf].

⁷ PBGC, Annual Management Report, 2007.
⁸ 29 U.S.C. § 1302(g)(2)
⁹ David Walker, Testimony of the Comptroller General, Hearing of the Senate Commerce,
Science, and Transportation Committee, “The Impact of Federal Pensions and Bankruptcy
Policy on the Financial Health of the Airline Industry,” October 7, 2004.

^!insurance premiums paid by the sponsors of covered private defined
benefit pension plans,
^!assets from terminated plans taken over by the PBGC,
^!investment income, and
^!recoveries from sponsors of terminated pension plans in bankruptcy
proceedings.
In addition, the PBGC has the authority to borrow up to $100 million from the U.S.
Treasury.
PBGC Premiums. Unlike insurers in the private sector, the PBGC cannot set
the premiums for the insurance it provides. Plan sponsors are required by law to
purchase insurance from the PBGC, and the insurance premiums are set by Congress.
Historically, premiums have been the most reliable source of PBGC revenue. The¹⁰
agency received $1.557 billion in premium revenue in 2007.
An employer that maintains a single-employer defined benefit pension plan must
pay an annual premium for each participant in the plan. The PBGC’s single-employer
premium income was $1.48 billion in FY2007. Initially set at $1 per participant by
ERISA in 1974, Congress has raised the premium periodically since then. The
Omnibus Budget Reconciliation Act of 1987 (P.L. 100-203) imposed an additional
variable rate premium on underfunded plans. The variable rate premium was initially
set at $6 for each $1,000 of the plan’s unfunded vested benefits, up to a maximum
of $34 per participant.
The Omnibus Budget Reconciliation Act of 1990 (P.L. 101-508) increased the
basic per capita premium to $19, and the variable rate premium to $9 for each $1,000
of the plan’s unfunded vested benefits, up to a maximum of $53 per participant.
Beginning in 1991, the maximum variable rate premium was $72 per participant. The
Retirement Protection Act of 1994 (P.L. 103-465) left the per capita premium at $19
per participant. However, the cap on the variable rate premium was phased out over
a three-year period beginning in 1994.
The Deficit Reduction Act of 2005 (DRA, P.L. 109-171) increased the per
capita premium from $19 to $30 for 2006 and indexed the premium to the annual rate
of growth in the national average wage beginning in 2007. The 2008 premium rate
for single-employer plans is $33 per participant. The DRA also created a new
premium of $1,250 per participant to be assessed on any underfunded
single-employer plan that undergoes a distress termination or is involuntarily
terminated by the PBGC, to be paid annually for each of the three years following the
date of termination, or if later, the employer’s exit from bankruptcy. This premium
is in addition to any other PBGC premiums that are due for the plan year. As enacted
by the DRA, the special premium would not have applied to plans terminated after
December 31, 2010.

¹⁰ PBGC, Annual Management Report, 2007.

The Pension Protection Act of 2006 (PPA, P.L. 109-280) made the special
termination premium permanent for plans that undergo a distress termination or are
involuntarily terminated by the PBGC. The PPA also made the variable rate premium
of $9 per $1,000 of underfunding more widely applicable. Prior to enactment of the
PPA, the variable rate premium was waived for an underfunded plan if it was not
underfunded in any two consecutive years out of the previous three years. Under the
PPA, the variable premium is assessed on all underfunded plans, regardless of the
plan’s funding status in earlier years.
The premium for multiemployer plans was initially $0.50 per participant. The
Multiemployer Pension Plan Amendments Act of 1980 (P.L. 96-364) raised the
premium to $1.40 for years after 1980. This premium was set to increase gradually
to $2.60. The DRA of 2005 increased the flat-rate per-participant premium for
multiemployer defined benefit plans from $2.60 to $8.00. For the 2007 plan year and
later plan years, the premium will be adjusted annually by the rate of growth in the
national average wage. The PBGC’s multiemployer premium income equaled $81
million in FY2007.
As shown in Table 2, since 1998, growth in the PBGC’s premium revenue has
been outpaced by increases in benefit payments to plan beneficiaries and
administrative and investment expenses.
Table 2. PBGC Premium Revenue
and Benefit Payments, 1997-2007
(in millions of $)
Fiscal TotalPremiumBenefitAdministrative and InvestmentPremiums Minus Benefit Payments
Year RevenuePaymentsExpenses and Expenses
1997 1,090 824 155 111
1998 989 848 158 -17
1999 925 902 161 -138
2000 831 903 167 -239
2001 845 1,043 184 -382
2002 812 1,538 225 -951
2003 973 2,489 290 -1,806
2004 1,485 3,007 288 -1,810
2005 1,477 3,686 342 -2,551
2006 1,500 4,082 405 -2,987
2007 1,557 4,266 378 -3,087
^Source:^P^eⁿ^s^ioⁿ^B^eⁿ^e^f^{it Gu}^ar^an^ty^Co^r^p^o^r^atioⁿ^.

Recent Reforms. Although the PBGC’s net position has improved $9.2
billion since 2004, it fell $31.0 billion from 2001 to 2004. Many factors contributed
to the large swing in PBGC’s funded position, chief among them the terminations in
2002 and 2005 of several large pension plans in the steel and airline industries with
high levels of underfunding. Falling interest rates (used to discount future benefit
payments) significantly increased the value of PBGC’s liabilities, and poor stock
market returns in 2001 and 2002 resulted in negative investment income.
In part to address the PBGC’s deteriorating funded status, Congress passed the
Pension Protection Act of 2006, the most comprehensive reform of the nation’s
pension laws since the enactment of ERISA in 1974. The PPA established new
funding rules for defined benefit plans, increased the flat-rate premium paid by
pension plan sponsors, and required the variable premium to be assessed on all
underfunded plans. The PPA provided for exceptions to some of the new funding
rules for plans sponsored by commercial airlines.
Although the impact of these reforms is still unclear, the Congressional Budget
Office (CBO) has stated that the PPA failed to address the underlying structural
problems facing the PBGC, because the increased premiums are not commensurate
with the amount of unfunded pension claims from terminated plans that the PBGC¹¹
is likely to assume in the future.
The future financial condition of the PBGC is highly uncertain because it
depends greatly on how many private pension plans terminate and on the amount of
underfunding in those plans. Both factors are difficult to forecast. Over its history,
a relatively few pension plans with very large unfunded liabilities have dominated the
PBGC’s claims, and its future may likewise depend significantly on the fate of a few
large plans. Future terminations will be influenced by overall economic conditions,
the prosperity of particular industries, competition from abroad, and a variety of
factors that are specific to particular firms — such as their competitiveness in their
industries, their agreements with labor groups, and the credit ratings. In addition, the
PBGC’s losses with respect to future terminations will depend on how well
companies fund their plans.
The PBGC’s exposure to pension plan underfunding can shift dramatically from
year to year in response to conditions in the stock market and changes in interest
rates. A recent report by Credit Suisse Equity Research estimated that the funded
status of defined benefit pension plans operated by companies in the Standard &
Poor’s 500 had declined by about $170 billion from the end of 2007 to the middle
of 2008, due primarily to poor investment returns. In the aggregate, pension plans
were overfunded by $60 billion at the end of 2007 and were underfunded by $110
billion by the middle of 2008.¹² Pension plan funding levels had seen steady
improvement since 2002, when pension plans had more than $200 billion in
underfunding.

¹¹ CBO, Letter to Honorable George Miller, Chairman, House Committee on Education and
Labor, April 24, 2008, at [http://www.cbo.gov/ftpdocs/91xx/doc9156/04-24-Miller-
PBGC_Letter.pdf].
¹² Credit Suisse, Pension Plans Losing Ground, July 18, 2008^.

Background on PBGC Investment Policy
PBGC’s Investment Income
In recent years, investment income from the PBGC’s assets has outpaced
premium income as a source of revenue, as shown in Figure 1. The sources of the
assets invested by the PBGC are premium revenues, assets of terminated plans, and
recoveries from the general assets of plan sponsors. The termination of several large
pension plans in 2002 and 2005 contributed to a large increase in the assets in
PBGC’s investment portfolio. As of September 30, 2007, the value of the PBGC’s
total investments, including cash and investment income, was approximately $62.6
billion. The PBGC’s investment income in FY2007 was $4.76 billion. The rate of
return on investment was approximately 7.6%.
Figure 1. PBGC Income from Premiums and Investment Earnings,
1997-2007
^Source:^P^B^G^C^a^nnua^l^r^e^p^o^r^t^s^,^1997-^2007.
The PBGC maintains two separate financial programs, each consisting of a
revolving fund and a trust fund, to sustain its single-employer and multiemployer plan
insurance programs. Premium revenues are accounted for in revolving funds that are
included in the federal budget. By law, the PBGC is required to invest certain
revolving fund assets in debt obligations issued or guaranteed by the United States,
while other assets can be invested in other debt obligations.¹³ Current policy is to

¹³ PBGC has seven revolving funds, referred to collectively as “the revolving fund.” Total
revolving fund income, including cash and investment income, as of September 30, 2007,
(continued...)

invest these revolving funds only in Treasury securities. At the end of FY2007, the
revolving funds’ value was $14.5 billion.
The assets from terminated pension plans and recoveries from the general assets
of plan sponsors are accounted for in a trust fund that is not included in the federal
budget. Trust fund assets were most recently valued at $48.1 billion. There are no
statutory limitations on how the PBGC can invest the assets in its trust fund.
Figure 2 diagrams the relationship between the PBGC’s financing and its
payment of guaranteed benefits to plan participants.
Figure 2. Financial Structure of the PBGC

^Source:^C^oⁿ^g^r^es^sⁱ^on^{al B}^u^dg^{et Of}^fⁱ^ce.
As shown in Figure 3, PBGC’s trust fund has grown significantly since 2003,
while the size of the revolving fund has remained relatively steady, despite recent
increases in both the variable premium and flat-rate premium.
¹³ (...continued)
was approximately $1.0 billion for Fund 1, $1.2 billion for Fund 2, and $12.3 billion for
Fund 7. ERISA authorized the establishment of Funds 3, 4, 5 and 6 for special purposes that
have never been utilized by the PBGC. Excess funds in Revolving Funds 1 and 2 may be
invested in obligations issued or guaranteed by the United States. The corporation may
invest excess funds in Revolving Fund 7 in such debt obligations as the corporation
considers appropriate.

Figure 3. PBGC Assets Held in Trust Fund and Revolving Fund,
1997-2007
^S^o^u^rce:^A^nnua^{l R}^e^por^ts^of^the^P^B^G^C^{, 1997-}^2007.
Accounting in the Federal Budget
The assets in PBGC’s investment portfolio are only partly accounted for in the
federal budget. The revolving fund is a budgetary account, meaning that cash flows
into and out of the account appear in the federal budget. In contrast, PBGC’s trust
fund is nonbudgetary. When the PBGC assumes control of the assets of an
underfunded pension plan that has been terminated, those assets do not appear on the
federal balance sheet, and transfers of such assets to the PBGC are not treated as
receipts to the government.¹⁴ Although investment returns to the revolving fund
appear as a receipt or outlay (in the case of negative returns) for the federal
government, investment returns to the trust fund do not.

¹⁴ For more information, see CRS Report RS22650, The PBGC and the Federal Budget, by
William Klunk.

Oversight of PBGC Investments
Under federal law, the PBGC’s investment policy statement must be approved
by PBGC’s Board of Directors, which consists of the Secretary of Labor, the
Secretary of the Treasury, and the Secretary of Commerce.¹⁵ According to PBGC’s
by-laws, the Board reviews the investment policy statement at least every two years
and approves the investment policy statement at least every four years.¹⁶ The
PBGC’s investment policy is implemented by PBGC’s staff, but PBGC does not
actively manage its portfolio. Invested assets are managed by professional
management firms or are invested in passive market index funds, subject to PBGC
oversight.
PBGC’s New Investment Policy. In February 2008, the PBGC announced
that it had adopted a new investment policy aimed at generating higher investment
returns while providing increased protection against the risk of increasing its deficit
over time. As shown in Table 3, the new policy allocates 45% of the PBGC’s assets
to fixed-income investments, 45% to equity investments, and 10% to alternative
investment classes, including real estate and private equity.
Table 3. Target Asset Allocation
of PBGC Trust Fund, 2008
Asset ClassAllocation
Core Equities39%
US Equities20%
Non-U.S. Equities19%
Alternative Equities (emerging markets)6%
Core Fixed Income40%
Long-term Corporate Bonds14%
Long-term Treasury Bonds22%
Treasury Inflation Protected Securities4%
Alternative Fixed Income5%
High-yield Bonds2%
Emerging-market Bonds3%
Other Investments10%
Real Estate5%
Private Equity 5%
Total100%
^Source:^P^eⁿ^s^ioⁿ^B^eⁿ^e^f^{it Gu}^ar^an^ty^Co^r^p^o^r^atioⁿ^.

¹⁵ For a more detailed discussion of the Boards’ oversight responsibilities, see GAO report
08-667, PBGC ASSETS: Implementation of New Investment Policy Will Need Stronger
Board Oversight at [http://www.gao.gov/new.items/d08667.pdf].
¹⁶ See 73 Federal Register 29,985 (May 23, 2008).

The PBGC’s previous investment policy, adopted in 2004, set an equity
investment target of 15% to 25%, with the remaining assets to be allocated primarily
to fixed income investments. In practice, the PBGC’s actual asset allocation differed
slightly from the target allocations. As shown in Table 4, the PBGC’s new policy
significantly expands PBGC’s exposure to alternative asset classes and equity
securities.
Table 4. Previous PBGC Target Investment Allocation, Actual
Investment Allocations, and New Target Allocation
(in %)
Asset PreviousFY2004FY2005FY2006FY2007New
Class Target Ac t u al Ac t u al Ac t u al Ac t u al Tar g e t
Equity Securities15-2537.5526.3427.2431.5745
Fixed Maturity75-8562.0773.5472.7568.3545
Other Alternatives-0.390.120.010.0710
^Source:^{CRS an}^aly^s^{is o}^f^d^a^{ta f}^r^o^m^th^{e P}^eⁿ^s^ioⁿ^B^eⁿ^e^f^{it Gu}^ar^an^ty^Co^r^p^o^r^atioⁿ^.
^Note:^N^u^m^b^ers^m^a^yⁿ^o^t^{add u}^p^t^o^100%^du^{e t}^o^rouⁿ^dⁱⁿ^g^.
Throughout its history, the PBGC has shifted the investment of trust fund assets
between bonds and stocks with changes in its leadership and in financial analysts’
theories of risk management. From the agency’s inception in 1974 until 1990, the
PBGC Board approved a policy of investing primarily in equity securities, aiming to
maximize investment returns. In 1990, the PBGC reduced its equity exposure and
increased its investment in long-term bonds with maturities matched to the agency’s
liabilities. Beginning in 1994, it switched back to a policy of greater investment in
equities.
As shown in Figure 4, the PBGC’s investments in equities have ranged between
18% and 40% of assets since 1990. The investment policy announced in February
2008, with a target of investing 45% of assets in equities, would result in the PBGC’s
highest percentage investment in equities at any time since 1990.

Figure 4. Percentage of PBGC Assets Invested in Equities,

1990-2007

^Source:^A^nnua^l^Re^p^o^r^t^s^o^f^t^h^e^P^B^G^C^,^1990-^2007.
The PBGC has stated that the objective of the new investment policy is to
“prudently maximize investment returns in order to meet the Corporation’s current¹⁷
and future obligations.” The PBGC has stated that it expects the policy to generate
higher returns and to reduce risk by diversifying its asset allocation, including¹⁸
investment in alternative assets such as private equity. A forecasting model
developed by PBGC’s investment consultant, Rocaton Investment Advisors, LLC,
suggested that shifting the PBGC’s allocation from fixed income to equities and/or
alternative asset classes would improve the PBGC’s financial condition in the
long-run. According to the Rocaton analysis, the new asset mix chosen by PBGC
gives the agency a 57% likelihood of full funding within ten years, compared to 19%¹⁹
under the previous policy. The study by Rocaton estimated that, compared to the
previous policy, the PBGC’s expected funded ratio would be higher, and its worst-
case funded ratio would be lower, under the new investment policy compared to the
previous policy.
¹⁷ Millard, Charles. “PBGC’s New Diversified Investment Policy,” Pension & Benefits
Daily. Vol. 8, No. 42 (March 4, 2008).
¹⁸ PBGC press release, “PBGC Announces New Investment Policy,” February 18, 2008, at
[http://www.pbgc.gov/media/news-archive/news-releases/2008/pr08-19.html]. Hereafter
cited as “PBGC press release, February 18, 2008.”
¹⁹ ^PBG^C^pres^s^rel^eas^{e, F}^e^bru^a^ry^{18, 2008.}

Investment Strategies
Other things being equal, higher expected rates of return on investment are
associated with higher levels of investment risk. However, the PBGC has asserted
that even though its equity exposure is increasing, it expects its new investment
policy to reduce its overall risk through asset diversification. Under the new policy,
the PBGC would hold 45% of its assets in equities, 45% in bonds, and 10% in
alternative investments. The PBGC’s previous investment portfolio was less
diversified, consisting mainly of long-term, investment-grade bonds.
The PBGC also has stated that its long-term investment horizon allows it to
benefit from what is sometimes called “time diversification.” This is a theory of
investment that asserts that the risk associated with investing in stocks decreases over
time.²⁰ In its analysis for the PBGC, Rocaton stated that, “investors with time
horizons of 10-20 years and greater seem well-positioned to wait out market volatility
and realize the significant long-term rewards of investing in riskier assets.”²¹
Although there is general agreement among economists on the benefits of asset
diversification with respect to portfolio risk, there is a divergence of opinion as to
whether or not investment risk associated with a particular asset or class of assets
declines as the period of time that the asset is held increases.
The changes in the PBGC’s investment policy in 2004 and 2008 embody two
very different approaches to investment risk that reflect this divergence of opinion.
These approaches can be referred to as a “total return” strategy and an “asset-liability
matching” strategy.
The “Total Return” Approach. The new PBGC investment strategy, with
its emphasis on increasing the proportion of assets invested in equities, is based in
part on the assumption that the higher expected rate of return on equities will result
in the PBGC’s assets growing faster than its liabilities. This approach is used by a
majority of the pension plans that the PBGC insures (see Figure 5). Asset allocation
decisions are based upon what investors believe will deliver the highest possible
return for a given level of risk, measured as the likely deviation of rates of return
around the average. Common stocks — equities — have a higher expected rate of
return than bonds, but they also are riskier in that the actual rates of return vary more
around the average than the rates of return on bonds. Investors with long time
horizons often invest a greater percentage of assets in equities than investors with
shorter-term time horizons. They expect that the higher long-run expected rate of
return on equities will offset the risk associated with the greater volatility of the rate²²

of return on equities.
²⁰ ^PBG^C^pres^s^rel^eas^{e, F}^e^bru^a^ry^{18, 2008}.
²¹ ^Ro^c^a^t^oⁿ^I^nve^st^m^e^nt^A^d^vi^so^r^s^,^LLC.^,^Pen^s^ioⁿ^Ben^e^{fit Gu}^a^r^aⁿ^t^{y Co}^rp^o^r^a^tioⁿ^Iⁿ^vestmen^t^P^o^lⁱ^{cy a}ⁿ^d
^S^t^ra^te^g^y^Disc^u^ssioⁿ^{, Decem}^{ber 4, 2007, p. 67}.
²² This investment strategy is the basis for the allocation of assets in the “life-cycle” funds
offered by many 401(k) plans. The assets of younger plan participants, who will not need
access to their retirement funds for many years, are invested primarily in equities under the
(continued...)

Figure 5. Average Percentage Allocation of Assets
Among the 200 Largest Defined Benefit Pension Plans,

2007

^Source:^Pensⁱ^ons^{and Inves}^t^m^ent^s^{, 2007 y}^ear-^eⁿ^d^s^u^rv^ey^of^defⁱⁿ^e^{d ben}^e^fⁱ^t^pl^an^s^.
^No^te:^T^h^{e “}^O^th^{er” categ}^oryⁱⁿ^clu^d^esⁱⁿ^v^e^s^t^m^eⁿ^t^sⁱⁿ^cas^h^{(1.2%), real es}^{tate equ}^ity
⁽³^.⁶^%)^,^aⁿ^d^o^t^he^r^unsp^e^cⁱ^fi^e^dⁱ^nve^st^m^e^nt^s.
The PBGC would now have a significantly higher funded status had the agency
recently been more heavily invested in equities than its previous policy allowed. The
PBGC is required by the Pension Protection Act of 2006 to estimate the effects of an
asset allocation of 60% to the Standard & Poor’s 500 equity index and 40% to the
Shearson-Lehman Aggregate Bond Index. For the fiscal year ending September 30,
2007, this allocation would have increased the assets of the PBGC by an estimated
$2.3 billion. Over the five-year period ending September 30, 2007, the PBGC’s
assets would have been an estimated $7.3 billion higher with a portfolio invested

60% in stocks and 40% in bonds.²³

Unlike a corporate pension plan, however, the PBGC is fully exposed to the risk
of investment losses. Corporate pension plans may be encouraged to invest in
equities by the presence of PBGC insurance. A company sponsoring an insured
²² (...continued)
assumption that their long time horizon will give their investment portfolios time to recover
from short-term declines in the stock market. As participants grow older, and are nearer to
retirement, their assets are slowly re-allocated to a heavier concentration in bonds, which
have a lower expected rate of return than stocks, but also are less subject to large capital
losses than stocks.
²³ PBGC, Annual Management Report 2007^.

pension has a sort of “heads we win, tails you lose” relationship with the PBGC. In
contrast, the PBGC has no other party onto which it can offload its unfunded
liabilities except, ultimately, the taxpayers. The GAO has noted that
Investments in riskier assets with higher expected rates of return may allow
financially weak plan sponsors and their plan participants to benefit from the
upside of large positive returns on pension plan assets without being truly
exposed to the risk of losses. The benefits of plan participants are guaranteed by
PBGC, and weak plan sponsors that enter bankruptcy can often have their plans²⁴
taken over by PBGC.
The “Asset-Liability Matching” Approach. The assumption that the risk
of holding stocks decreases as the period of time that they are held increases is
disputed by some economists. These economists assert that the risk associated with
stocks actually rises with the length of time that they are held. They note that
If stocks were not risky in the long run, then the financial services industry would
be quite willing to provide — maybe even for free — long-term financial
contracts that provide a rock solid guarantee that investors would not lose money
if they held on to a broadly diversified stock portfolio for, say, 30 years. Yet such
long-term put option contracts do not even exist, because financial market
participants believe that the risk of such a contract is increasing with the time²⁵
horizon, not decreasing.
Modern portfolio theory holds that the higher expected return on stocks is
exactly the price of the risk associated with the investment and that the risk-adjusted
rates of return on stocks and bonds are equal. Despite the higher expected nominal
rate of returns on stocks, the present value of $1 invested in bonds at any given time
is equal to the present value of $1 invested in stocks. The higher rate of return on
stocks — the so-called “equity premium” — represents compensation to an investor
for taking on the additional risk, measured as the standard deviation on the expected²⁶
rate of return, of holding stocks rather than bonds. Given this risk, a pension fund,
for example, should choose an asset allocation that minimizes the risk that the fund
will be unable to pay its liabilities when they come due as a result of an untimely
decline in the value of equities. This approach — often called asset-liability
matching — favors investment in fixed-income instruments, such as bonds, with
maturities that are matched to the times at which the pension plan’s liabilities will²⁷
come due for payment.

²⁴ David Walker, Comptroller General of the United States, “The Pension Benefit Guaranty
Corporation and Long-Term Budgetary Challenges.” June 9, 2005. Testimony before the
Committee on the Budget, House of Representatives, at [http://www.gao.gov/new.items/
d05772t.pdf].
²⁵ Brown, Jeffrey R., Hassett, Kevin A. and Smetters, Kent A., “Top Ten Myths of Social
Security Reform,” October 2005, at [http://ssrn.com/abstract=1150180].
²⁶ The standard deviation of the rate of return is a measure of the likely variation of annual
rates of return around the average — or expected — rate of return.
²⁷ Jeremy Gold and Nick Hudson, “Creating Value in Pension Plans — Gentlemen Prefer
Bonds,” Journal of Applied Corporate Finance, 2003.

The value of a pension plan’s liabilities is greatly influenced by changes in
interest rates. Like bonds, changes in pension plan liabilities are inversely related to
changes in interest rates. Liabilities increase when interest rates fall and decrease
when interest rates rise.²⁸ Some economists have argued that pension plans should
invest all of their assets in bonds that are matched to the plan’s expected cash flows
in order to avoid the possibility that the pension plan will be forced to sell bonds that
have not yet reached maturity at a time of rising interest rates.²⁹
In contrast, investing assets in equities can be a poor hedge against interest rate
swings. Stock prices often rise when interest rates fall, providing protection from
interest rate risk, but there have been periods when this was not true, including the
period from 2000 to 2002, when a bear market in stocks coincided with falling
interest rates. In 2004, soon after experiencing capital losses in equity investment,
the PBGC announced that it would adopt an asset-liability matching approach to
investing its assets, thus reducing its equity exposure in favor of fixed-income
securities matched to its liabilities. At that time, the PBGC noted that adopting a
portfolio concentrated in high-quality, long-term bonds would bring it closer to the
portfolios held by insurance companies, which have historically limited their equity
exposure. According to the American Council of Life Insurers (ACLI), bonds
represent the majority of assets held by private life insurance providers. While equity
represents about 5% of total insurance company assets, 72% of insurance company
assets are in bonds.³⁰
There is some evidence that corporate pension plans also are exploring
asset-liability matching as an investment strategy. Provisions in the PPA and the
enactment of Financial Accounting Standard No. 158 provide incentives for pension
fund managers to move away from more volatile pension investments such as stocks.
The PPA reduced the number of years over which plans can “smooth” (average) their
investment gains and loses, and FAS 158 requires corporations that sponsor defined
benefit pensions to put the funded status of the plan on their balance sheets, rather
than in a footnote as was required before.³¹

²⁸ A bond with a face value of $1,000 that pays annual interest of $50 (or 5%) could be sold
for $1,250 if interest rates were to fall to 4% because $50 is 4% of 1,250. However, the
bond could be sold for only $833 if interest rates were to rise to 6% because $50 is 6% of
$833. When the bond matures, the original issuer will pay the holder the face value of
$1,000, regardless of the prevailing rate of interest. Maturity-matched pension plan
portfolios are thus “immunized” against the risk of unfavorable changes in interest rates.
²⁹ Bodie, Zvi. “On Asset-Liability Matching and Federal Deposit and Pension Insurance.”
Federal Reserve Bank of St. Louis Review, July/August 2006, 88(4), pp. 323-29, at
[http://research.stlouisfed.org/ publications/review/ 06/07/Bodie.pdf].
³⁰ ACLI, Fact Book 2007.
³¹ For an explanation of the smoothing provisions of the PPA, see CRS Report RL33703,
Summary of the Pension Protection Act, by Patrick Purcell.

The pension actuarial firm, Milliman, Inc., reported in a recent study that the
percentage of pension plan assets invested in equities declined from 60% in 2006 to
55% in 2007.³² A recent examination of investment allocations made in 2007 by the
defined benefit pension plans of firms in the Standard & Poor’s 500 index noted that
firms were reducing their pension plans’ investment in equities in favor of increased
investment in bonds and other assets, including hedge funds and private equity.
However, in this survey the median equity allocation in 2007 was still 63%, down
only slightly from the 65% median allocation in 2006.³³
Because the pension plans that the PBGC insures are heavily invested in
equities, an asset-liability matching approach would help to ensure that the PBGC’s
own financial condition would not deteriorate at the same time that the assets held
by the pension plans it insures are declining in value. If the PBGC invests
substantially in equities, it risks having to take over underfunded plans at the same
time that its own assets are declining in value because pension plan underfunding
often increases during periods of falling stock prices.
Implications of the New Policy
PBGC’s Future Financial Condition
The PBGC’s decision in 2008 to reduce asset-liability matching in favor of a
strategy aimed at generating higher expected returns was driven in part by the
agency’s concerns about its deficit. The PBGC’s previous investment policy was not
designed to maximize investment income, but to keep the agency’s deficit from
deteriorating further while policymakers pursued reforms to address PBGC’s funding
deficit. However, even after the PPA was enacted, the President’s Budget for
FY2009 noted that “neither the single-employer nor multiemployer program has the
resources to satisfy fully the agency’s long-term obligations to plan participants.”³⁴
The PBGC has limited authority to adopt policies that could directly affect its
financial condition. Unlike insurers in the private sector, it has no authority to set the
premiums for the insurance it provides. It cannot strengthen the funding
requirements for insured plans, reduce the amount of pension benefits that it insures,
or reject companies that it deems excessively risky to insure. All of these authorities
rest exclusively with the United States Congress. The companies that sponsor
defined benefit pension plans have a financial interest in lobbying Congress to
persuade it not to make PBGC premiums too high or plan funding requirements too
onerous, because increases in premiums and stricter funding standards directly affect
these firms’ annual profit-and-loss statements.

³² Milliman, 2008 Pension Funding Study. The study includes the 100 U.S. public
companies with the largest defined benefit pension assets whose 2007 annual reports were
released by March 15, 2008.
³³ Credit Suisse, Pension Plans Losing Ground. July 18, 2008.
³⁴ Budget of the United States Government, Fiscal Year 2009 — Appendix, p. 747, at
[ h t t p : / / www.whi t e house.go v/ omb/ budget / f y2009/ appendi x.ht ml ] .

The PBGC is required by law to invest its income from premiums in securities
backed by the full faith and credit of the U.S. government. It has the legal authority,
however, to invest its trust fund, consisting mainly of the assets of underfunded plans
for which the PBGC has become the trustee, in assets of its choice. In announcing
the new investment policy adopted in 2008, the PBGC stated its desire to maximize
its investment income, and thus reduce its deficit. However, while the PBGC has
asserted that its new policy will be less risky in the long-term than its previous policy,
some of the assumptions underlying that assertion are open to question.
The PBGC adopted its new investment policy in part in response to an analysis
of investment options conducted for the agency by Rocaton Investment Advisors,
LLC. The conclusions reached in that analysis are sensitive to the methods and
assumptions on which they were based. An assessment of the relative risks of the
PBGC’s previous investment policy and its new policy, for example, depends largely
on how the risk associated with each class of assets in the portfolio is measured, and
on the relative weights of each class of asset in the old and new portfolios.
The risk associated with holding a given financial asset is that the actual rate of
return will deviate from the expected rate of return. This risk is measured as the
standard deviation of the rate of return. The more volatile the asset — that is, the
more widely actual annual rates of return are dispersed around the average — the
greater the standard deviation. In its study for the PBGC, Rocaton assumed that the
rate of return on long-term Treasury bonds (with a 15-year average duration³⁵) will
have a standard deviation of 11.2%. CRS examined rates of return on long-term
Treasury bonds over the period from 1926 through 2007 and found the standard
deviation around the mean real rate of return to be 8.4% for 10-year Treasury bonds
and 11.2% for 30-year Treasury bonds.³⁶ The Rocaton study assumed that the rate
of return on U.S. equities would have a standard deviation of 15%. CRS examined
rates of return on U.S. equities as measured by the Standard & Poor’s 500 index over
the period from 1926 through 2007 and found the standard deviation around the
mean annual real rate of return to be 20%. Rocaton’s lower estimate of the volatility
of returns on stocks could be significant to the extent that it could appear to make
investments in stocks less risky than the historical data indicate.
A determination as to whether the PBGC’s new, more equity-heavy investment
policy will be less risky than the previous, more bond-heavy investment policy
depends in part on the estimated volatility of the rates of return on stocks and bonds.
It is not clear from the report prepared by Rocaton whether the analysts conducted
a sensitivity analysis in which the key assumptions — such as the standard deviations
of the rates of return on stocks and bonds — were changed to evaluate the effect on
the results of the analysis. To the extent that the relative riskiness of the PBGC’s
new investment policy compared to its previous policy is directly influenced by these

³⁵ Duration is a measurement of a bond’s price sensitivity to changes in market interest rates.
For a typical bond, duration is less than the bond’s time to maturity. Price volatility is
greater for a bond with longer duration compared to a similar bond with a lower duration.
³⁶ From 1926 through 2007, both 10-year and 30-year Treasury bonds had a mean real rate
of return of 5.3%. Rates of return were obtained from [http://www.globalfinancial
data.com].

and other key assumptions, it would be prudent for the model used by Rocaton to be
subjected to a sensitivity analysis.
It is possible that the shift away from asset-liability matching to an investment
policy focused on earning higher rates of return on investment could increase the risk
that the PBGC will experience a decline in the value of its investments at the same
time that the plans it insures are becoming increasingly underfunded. In a stock
market downturn, the plans that PBGC stands to inherit are likely to have
experienced a drop in the value of their assets. If it were more heavily invested in
equities, the PBGC would be exposed to the same investment losses as the plans that
it insures, effectively giving the PBGC “double-exposure” to the effect of a stock
market decline as the agency’s liabilities were increasing.
Although the PBGC’s statements about the new investment policy have
emphasized the Corporation’s long-term investment horizon, the PBGC still needs
access to cash in the short-run to pay the benefits of beneficiaries in the plans it has
trusteed. When looking at the PBGC’s current and potential future cash needs,
Rocaton noted that the duration of the PBGC’s current liabilities allows the
Corporation to weather short-term volatility in its investment portfolio. However,
Rocaton did not examine PBGC’s contingent liabilities — the liabilities that the
PBGC has not yet assumed from underfunded plans that have yet to terminate —
noting only that these liabilities are uncertain in both timing and magnitude.
In contrast to the PBGC’s new investment policy, the asset allocation strategy
of the Pension Protection Fund (PPF), the government-sponsored guarantor of
defined benefit pensions in the United Kingdom, attempts to mitigate the risk of the
Fund’s assets declining concurrently with an increase in the under-funding of the
pension plans it insures.³⁷ As Table 5 shows, the PPF is invested predominantly in
fixed income securities.
Table 5. Asset Allocation of UK
Pension Protection Fund, 2008
AssetAllocation (%)
Cash20.0
Global Bonds50.0
UK Equities12.5
Global Equities7.5
Property7.5
Currency Overlay2.5
Total100
^Source:^U^K^P^e^nsi^o^{n P}^r^o^t^e^c^tⁱ^o^{n Fund}^.

³⁷ Pension Protection Fund, “Statement of Investment Principles,” July 2008, at
[http://www.pensionprotectionfund.org.uk/sip_j uly_2008.pdf].

Risks for Taxpayers
The PBGC’s previous asset-liability matching investment strategy had very little
chance of eliminating the PBGC’s deficit. According to PBGC’s former Director,
Steven Kandarian, the previous investment strategy was a tool to keep the program
from falling further into deficit while policymakers pursued long-term solutions to
the problem of pension underfunding.³⁸ The new policy will likely generate higher
average annual returns than the previous policy. However, it also increases the
likelihood that the PBGC will suffer investment losses concurrently with an increase
in the underfunding of the plans that it insures.
If the PBGC’s new investment policy generates higher expected returns,
accompanied by reduced risk — as the PBGC and Rocaton have asserted — then
U.S. taxpayers, as the de facto guarantors of PBGC insurance, will be better off. If
the higher returns are accompanied by commensurately higher risk, then taxpayers
are neither better nor worse off, because the PBGC’s true financial condition will not
have changed. However, if that higher risk results in investment losses that the
agency would not have experienced under the previous policy, and the PBGC’s
deficit grows, then taxpayers will be worse off.
Taxpayers also could be worse off if higher investment returns forestall
fundamental reforms in PBGC financing, such as adopting risk-based premiums, that
could improve the long-term financial condition of the agency and reduce the risk
that they will at some point in the future have to bail out an insolvent PBGC.

³⁸ PBGC press release, January 29, 2004.