FT.com: 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. http://www.ft.com/cms/s/0/51023502-de5e-11dc-9de3-0000779fd2ac.html
Now let me see if I got this right. Employers take on unhedged risk-bearing equities in their own pension funds against the wishes of both their employees/retirees and their shareholders (if they really know what they’re investing in). Then the only backstop, the PBGC, takes on the same risks! So if yields fall and equity markets tank (sound familiar?) then who’s left holding the (half empty) bag? US taxpayers. Thankfully I’m on the outside looking in.
PBGC gets lots wrong. As do all government bailout funds. Moral hazard looms large. What company in trouble wouldn’t bail out of their pension fund and leave PBGC holding the bag? Simply rational behavior in that situation.
ok, let’s treat this as an excercise problem “discuss the suitability of PNGC’s proposal to increase portfolio weight in equity and hedge fund under significant current decifit situation” current asset = 55 bn decifit = 14 bn (about 25% of current asset) liquidity needs: currently paying 700,000 retirees among 44m insured workers previous asset allocation: 72% fixed income, 28% equities new asset allocation: 45% fixed income, 45% equities, 10% hedge fund the old asset allocation seems to be too conservative, considering the small current liquidity needs the new asset allocation is balanced, suitable for an investment with long time horizon. However, the deficit means that PNGC’s ability to take risk is below average. Without futher details, we do not know how the liquidity needs will increase over the next few years. But it will surely increase, thus PNGC’s ability to take risk will decrease. So PNGC takes on more risk when its ability to take risk has subtantially decreased. But from a long term strategic point of view, increasing the portfolio weight on equity may be unavoidable. Otherwise, the deficit has very little chance to be recovered. However, under the current market condition of probable recession in the US, the implementation of the new asset allocation requires tactical considerations. Indeed, if the yields will continue to fall significantly, the fund may be benefited by gradually moving from fixed income to equity.
eerrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr I missed this and almost thought it was a joke. What’s this BS - “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.”? a) Where did he get these numbers from? (They are just BS because calculating the probability that hedge funds and stock markets do anything is silly) b) What happens the other x% of the time? Somehow a government agency is investing in hedge funds with the idea that if it loses the American tax payer will pick up the tab?! I’m really pissed about that. c) You wouldn’t believe the crap I’ve seen in hedge fund portfolios - defaulted K-mart leases in Alaska, claims in bankruptcy court in Venezuela, ownership of non-functional communication satellites, huge gamma-negative positions in interest rate derivatives, etc., etc., etc. Who would want their pensions depending on that? I love to assign blame to the Bush Administration and I’m doing it again. Those guys have made such a mess of things that everyday it feels more like 1972 in America again. It took us 10 years to fix those problems and we had to endure disco and polyester leisure suits to do it.
Now here was a good idea at S&P 1,350 . . . gideon Wrote: ------------------------------------------------------- > FT.com: 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. >