Pension Guarantee Corp Going Into Stocks

by Dollars and Sense

On Monday, the Boston Globe reported what appears to be a scandal with the Pension Benefit Guarantee Corporation, the agency that backs pensions for more than 44 million Americans.

According to the story

Just months before the start of last year's stock market collapse, the federal agency that insures the retirement funds of 44 million Americans departed from its conservative investment strategy and decided to put much of its $64 billion insurance fund into stocks.

Switching from a heavy reliance on bonds, the Pension Benefit Guaranty Corporation decided to pour billions of dollars into speculative investments such as stocks in emerging foreign markets, real estate, and private equity funds.

The agency refused to say how much of the new investment strategy has been implemented or how the fund has fared during the downturn. The agency would only say that its fund was down 6.5 percent - and all of its stock-related investments were down 23 percent - as of last Sept. 30, the end of its fiscal year. But that was before most of the recent stock market decline and just before the investment switch was scheduled to begin in earnest.

No statistics on the fund's subsequent performance were released.

Nonetheless, analysts expressed concern that large portions of the trust fund might have been lost at a time when many private pension plans are suffering major losses. The guarantee fund would be the only way to cover the plans if their companies go into bankruptcy.

"The truth is, this could be huge," said Zvi Bodie, a Boston University finance professor who in 2002 advised the agency to rely almost entirely on bonds. "This has the potential to be another several hundred billion dollars. If the auto companies go under, they have huge unfunded liabilities" in pension plans that would be passed on to the agency.

Blogger Roberto W on TPM notes that the push into stocks and real estate was orchestrated under the leadership of Bush-appointed PBGC head Charles E.F. Millard, formerly of the Lehman Brothers (the company formerly known as a financial services firm until they went bankrupt), and also formerly of Broadway Real Estate Partners.

In his column for Time, Justin Fox thinks that it's premature to call this a scandal because the company hadn't changed its investment portfolio as of the end of FY08, however he fails to comprehend that FY08 ended in September (when the market started to tank) and that the corporation refused to release up-to-date numbers to the Globe.

If we've learned anything from the AIG debacle, it should be that you don't go gambling with the insurance fund.

Labels: Lehman Brothers, Pension Benefit Guarantee Corporation, pensions

 

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4/01/2009 02:04:00 PM