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News & Policy

PBGC Announces New Investment Policy

January 29, 2004

The Pension Benefit Guaranty Corporation has adopted a new investment policy to better manage the financial risks facing the federal pension insurance program, Executive Director Steven A. Kandarian announced today.

"As an insurer of private sector defined benefit pension plans and as an annuity provider, the PBGC should have as the centerpiece of its investment strategy sound risk management," Kandarian said. "The PBGC's new policy will reduce balance sheet volatility arising from a mismatch between assets and liabilities."

PBGC's liabilities-the fixed annuities the agency must pay to participants in trusteed pension plans-are bond-like in nature. PBGC's liabilities move in the opposite direction of interest rates, increasing as interest rates fall and decreasing as interest rates rise. Under the new investment policy, the PBGC will increase its investment in duration matched fixed-income securities over the next two years. As a result, the portion of invested assets allocated to equities is expected to decline to between 15 percent and 25 percent of total invested assets, from 37 percent as of the end of fiscal year 2003.

The PBGC will continue to benefit when equity markets rise because pension plans insured by the agency remain heavily invested in equities. At the same time, when equity markets fall, the new policy ensures that PBGC's own financial condition will not deteriorate to the same degree as the assets in insured pension plans.

"Financial stability is the goal of any insurer," Kandarian said. "This new policy will move the PBGC closer to the asset mix typically associated with private sector annuity providers."

The policy was adopted after an extensive review process that began shortly after Kandarian, a former investment banker and founder of a private equity partnership, took the helm of the agency more than two years ago. PBGC's Board of Directors, comprised of the Secretaries of Labor, Treasury and Commerce, formally adopted the policy earlier this month. By agreement, the investment policy will be reviewed by the Board no less than once every two years.

Since 2000, a record number of pension plan terminations combined with low interest rates has transformed the $9.7 billion surplus in PBGC's single-employer program into an $11.2 billion shortfall.

"Most factors that affect PBGC's financial health, such as the number of corporate bankruptcies and the funded status of terminating pension plans, are beyond the agency's control," Kandarian said. "A well-crafted investment strategy is one of the few tools the PBGC has to keep the guarantee program from falling even deeper into deficit. As I prepare to return to the private sector next month, I am gratified to leave behind a sound investment policy that frees the administration to focus on long-term solutions to the problem of pension underfunding."

PBGC assets are divided between a revolving fund for premium revenue, which is invested in Treasury bonds, and a trust fund for assets acquired from failed pension plans. Short-term cash holdings in the revolving fund are managed internally by the PBGC, with all other discretionary investments managed by professional money management firms. These managers are selected by the PBGC on the basis of their demonstrated performance, expertise and expense.

The PBGC is a federal corporation created under the Employee Retirement Income Security Act of 1974. It currently guarantees payment of basic pension benefits for about 44 million American workers and retirees participating in over 31,000 private-sector defined benefit pension plans.

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PBGC No. 04-25