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Minutes of Joint Pension Benefit Guaranty Corporation Board of Directors and Advisory Committee Meeting, July 25, 2014


Department of Labor

Thomas E. Perez, Secretary of Labor and Chair of the PBGC Board of Directors
Phyllis C. Borzi, Assistant Secretary of Labor, Employee Benefits Security Administration
Judy Mares, Deputy Assistant Secretary of Labor, Employee Benefits Security Administration
Ali Khawar, Chief of Staff, Employee Benefits Security Administration
Hilary Duke, Division Chief, Office of Policy and Research, Employee Benefits Security Administration
Kendra Kosko, Employee Benefits Law Specialist, Office of Policy and Research, Employee Benefits Security Administration

Department of the Treasury

Mary J. Miller, Under Secretary for Domestic Finance
Mark Iwry, Senior Advisor to the Secretary of the Treasury and Deputy Assistant Secretary (Retirement and Health Policy)
Sam Valverde, Senior Advisor to Under Secretary Miller
Philip Quinn, Senior Policy Analyst, Office of Financial Institutions Policy
Kim Egert, Policy Advisor, Office of Financial Institutions Policy
Liz Hipple, Policy Advisor, Office of Financial Institutions Policy

Department of Commerce

Penny Pritzker, Secretary of Commerce (via teleconference)
Mark Doms, Under Secretary for Economic Affairs
Rick Lattimer, Policy Analyst, Economics and Statistics Administration (via teleconference)

PBGC Advisory Committee

David Strauss, Chairman
Cheryl Alston
David Blitzstein
Robin Diamonte
Joyce Mader
Dallas Salisbury


Joshua Gotbaum, Director
Jioni Palmer, Acting Chief Policy Officer
Judith Starr, General Counsel and Secretary to the Board
Alice Maroni, Chief Management Officer
Patricia Kelly, Chief Financial Officer
John Greenberg, Chief Investment Officer
Daniel Rourke, Senior Advisor

PBGC Office of Inspector General

Deborah Stover-Springer, Acting Inspector General
Rashmi Bartlett, Assistant Inspector General for Audit
Peter Paradis, Assistant Inspector General for Investigations

PBGC Participant and Plan Sponsor Advocate

Constance Donovan

The Chair called the joint meeting to order at 8:50 a.m., observing that this was the first board meeting ever to be held at PBGC.  He recognized Advisory Committee Chairman David Strauss and thanked him and the Advisory Committee for their work. He then recognized Director Gotbaum in his last board meeting before departing the Administration at the end of August.  He commented that the Board will be taking a deep dive into investment policy.  He requested that Advisory Committee Chairman Strauss and Director Gotbaum integrate into their presentations a discussion of returns needed to close the asset/liability gap, PBGC's contingent liabilities and PBGC's institutional competence to oversee an allocation to alternative investments. The meeting then proceeded in accordance with the established agenda (Attachment 1).

Chairman Strauss introduced the members of the Advisory Committee.  Although the Committee Members have diverse backgrounds and perspectives, they have reached a consensus on the investment policy recommendations being made today, with the full support of PBGC professional staff.  The recommendations also are supported by plan sponsors who are PBGC's premium payers, and are closer to plan practice but more conservative.  They are:  increase the equity allocation by 5%, create within the equity allocation a 10% allocation to alternative investment, and widen the rebalancing range from 5% to 10%.  These are modest changes that can easily be made pending the next full review of the policy.

Advisory Committee members explained the bases for their recommendations, including the need for (1) growth assets to close the gap between assets and liabilities, (2) diversification into alternatives as an equity substitute to lower risk, (3) a sufficient rebalancing range to give PBGC staff needed flexibility and lower costs, and (4) more tools in the toolbox to manage an $80 billion portfolio.  They expressed their confidence in PBGC staff's ability to distinguish between alternative investments that present dangerous risks and those that do not.

Participants also discussed the effect of a rising interest rate environment on the portfolio under the current policy.  PBGC would incur losses on its bond portfolio but its liabilities will also decline due to a higher discount rate, which would offset the losses  Because PBGC's liabilities are greater than its assets, Director Gotbaum explained that the net effect will be positive, and agreed to provide an estimate of its range to the Board.

Committee Members explained to the Board that their recommendation was not to increase the equity allocation to 45%; rather the alternatives would be funded out of the 35% equity allocation. Extending the rebalancing range was not intended to expand the equity allocation but to allow the equity allocation to be rebalanced to 35% when it is cost-effective.

Participants also discussed the perennial question of whether PBGC should invest like a pension fund or an insurance company.  Committee Member Salisbury advised the Board that the Committee's recommendation represented a compromise of his personal views and those of former member Wilson, who viewed the insurance company model as more appropriate for PBGC.   If the results of the 2013 Exposure Report had been known before the vote, they might have pushed harder for more bonds.  While he is comfortable with the recommendation being made today, he would not be comfortable with an allocation of 45% equity plus a 10% allocation to alternatives.

Secretary Pritzker raised the topic of investment manager diversity.  Committee Member Alston discussed the success of the City of Dallas Pension Fund's emerging manager program.  The Chair, with the support of Secretary Pritzker and Under Secretary Miller, called for an assessment of an emerging manager program for PBGC, including best practices, as an action item for the next meeting and requested the Advisory Committee's help on the issue.

Director Gotbaum then spoke in support of the Advisory Committee's recommendations, opining that their adoption would help close the deficit and lessen risk by increasing diversification.  He urged the Board to show the pension plan sponsor community we hear them by trying to solve the deficit without raising premiums.

The Chair thanked the participants for a rich discussion and noted the need for full information before acting.  He requested that PBGC and the Committee complete a report on PBGC's contingent liabilities as soon as possible, and also provide more description of alternatives and what other countries are doing.  After thanking the Advisory Committee for its input, the Chair turned to the Director's Report.

Director Gotbaum reviewed the changing landscape PBGC faces and the issues he has taken on as Director.  He emphasized the need to reform the multiemployer system, which will require congressional compromise.  He also urged reform of PBGC governance and attention to retirement security issues.  In closing, he thanked the President and the Administration for giving him the opportunity to lead an excellent agency on an increasingly important mission, and the Advisory Committee for their always candid professional advice.  He thanked the staff of the PBGC as some of the finest civil servants he has ever known and stated it has been an incredible privilege to serve.

The Chair expressed his thanks to the Director on behalf of the Board, noting the thousands of people who are better off as a result of the Director's work.  He then asked the Advisory Committee to provide its views on PBGC governance to the Board, addressing what can be done both with and without congressional action. 

The Chair adjourned the meeting at 10:25 a.m.

Attachment 1





Friday, July 25, 2014

8:45 AM - 10:15 AM

I. Introduction by Secretary Perez

II. Introduction by Advisory Committee Chair David Strauss

III. Advisory Committee Investment Policy Recommendations

IV. PBGC Investment Policy Recommendations

V. Director's Report

VI. Executive Session(s)