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Meeting of the Board of Directors of the Pension Benefit Guaranty Corporation April 21, 2015

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
Hilary Duke, Division Chief, Office of Policy and Research, Employee Benefits Security Administration
Nicole Swift, Employee Benefits Law Specialist, Employee Benefits Security Administration
Erin Hesse, Special Assistant to the Assistant Secretary of Labor

 Department of the Treasury

Amias Gerety, Acting Assistant Secretary for Financial Institutions
Mark Iwry, Senior Advisor to the Secretary of the Treasury and Deputy Assistant Secretary (Retirement and Health Policy)
Patricia Kao, Director, Office of Financial Institutions Policy
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
Mark Doms, Under Secretary for Economic Affairs
Rick Lattimer, Policy Analyst, Economics and Statistics Administration
Justin Antonipillai, Deputy General Counsel

PBGC Advisory Committee

 Joyce Mader, Chair
Cheryl Alston
Donald Butt
Robin Diamonte
Dallas Salisbury


Alice Maroni, Acting Director
Ann Orr, Chief of Staff
Judith Starr, General Counsel and Secretary to the Board
Patricia Kelly, Chief Financial Officer
John Greenberg, Chief Investment Officer
Sandy Rich, Chief of Negotiations and Restructuring
Cathy Kronopolus, Chief of Benefits Administration
Bob Scherer, Chief Information Officer
Chris Bone, Director, Policy Research and Analysis Department

PBGC Office of Inspector General

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

PBGC Participant and Plan Sponsor Advocate

Constance Donovan,Participant and Plan Sponsor Advocate
Yolanda Wartenburg, Associate Participant and Plan Sponsor Advocate

The Chair called the joint meeting to order at 11:04 a.m., and welcomed the attendees.  After thanking the Advisory Committee members for their work on investment policy recommendations, he advised that the Board's goal is to make the decision on investment policy at the next Board meeting. The Chair requested PBGC Chief Management Office Alice Maroni to address implementation of the Smaller Manager Pilot Program in her presentation.  The meeting then proceeded in accordance with the established agenda (Attachment 1).

Advisory Committee Chair Joyce Mader then summarized the recommendation of the Advisory Committee.  Since the last joint meeting in July 2014, the Committee worked with PBGC staff on detailed follow-up questions from the Board, performing studies and modeling outcomes.  As a result, the Committee is not changing its original recommendation on the bond allocation.  It is changing its recommendation on rebalancing ranges to keep them where they are now.  It is making a slight change to the allocations for equity and alternatives, and has specified the types of alternatives it is recommending - real estate and private equity.

Advisory Committee Member Cheryl Alston explained that the Committee is recommending an increase in the nonbond allocation from 30% to 35% to reduce the impact of rising interest rates on the portfolio.  The recommendation reduces public equity from 30% to 28% and increases the recommended allocation for alternatives from 5% to 7%.  Ms. Alston explained that before adding one asset class in 2006 and two in 2008, PBGC had not added new asset classes for 26 years.  PBGC has two levers in its portfolio:  asset allocation and asset classes.  The recommendation makes a slight change to the asset allocation lever and adds two asset classes.  The first, real estate, has a spectrum of reward and risk.  The recommendation is to add real estate investments from the more conservative side of the spectrum, including core, core plus and value added.  The Committee is not recommending opportunistic investments (i.e., raw land).  Similarly, for private equity the Committee is recommending the more conservative end of the spectrum such as buyout, and is not recommending venture, infrastructure or hedge funds.  PBGC already has inherited alternatives, so this is not a new class but new for proactive investment. 

Secretary Perez asked about the human capital implications of adding the new asset classes.  A discussion ensued among the Board and Advisory Committee members about the challenges posed, readiness of staff and issues involved in picking managers of managers and controlling the layers of fees.   Ms. Alston observed the challenges could all be met and that the added diversification and lack of correlation with equity and bonds should cause the risk/return profile of the portfolio to improve.

Advisory Committee Member Robin Diamonte next addressed the Board's question on the likelihood of the single-employer program earning its way out of deficit in 10 years. She observed that the interest rate is what matters the most.  The study conducted for the Committee looked at three interest rate environments:  base case (interest rates increase), flat (no change) and decreasing.  Under the current policy, the base case has a 60% chance of eliminating the deficit.  Adding growth assets takes the probability up to 65%.  In a flat rate scenario, the chance is 50% with growth assets and in a decreasing rate scenario goes below 50%.   The study then looked at the best, median and worst percentiles under each scenario, which showed there is not a lot of downside risk from adding alternatives.  If interest rates rise by one percent, fixed income will lose about $5 billion but liabilities will go down about $10.5 billion, resulting in a better net position.  Ms. Diamonte observed that the recommended policy would give PBGC a little more probability of becoming fully funded with very little downside risk. She also noted that if the Board approves the policy, an implementation plan will be very important and that the expertise on the Advisory Committee can be leveraged to help with the structure.  Going forward, the Committee has been looking at the bond allocation, as PBGC has a very large bond portfolio with many types of bonds.  They are looking at whether the bond portfolio has the optimal allocation in terms of hedging PBGC liabilities.  The Chair acknowledged this is a very important question.  Finally, Ms. Diamonte noted for the future that adding risk is not intended to be indefinite and that when a desired result is reached PBGC should start taking risk off the table.

The Chair asked for input from the remaining Committee Members.  Both Donald Butt and Dallas Salisbury expressed their support for the Advisory Committee recommendations.  In response to Secretary Pritzker's question about the recommended allocation to alternatives, Committee Members explained that the allocation is the right first step for PBGC as it learns to manage the new classes.

After thanking Committee Members, the Chair recognized Chief Management Officer Alice Maroni.  She explained the issues that the proposed timeline for implementation of the Smaller Manager Pilot Program takes into account.  Ms. Maroni then noted the Corporation's concentrated corporate-wide focus on internal controls, including day-long training for all managers.  She then introduced to the Board PBGC's new Chief Information Officer, Bob Scherer.  In response to the Chair, she advised that the Delphi plan processing is continuing to be on schedule.

Chief Financial Officer Patricia Kelly then responded to questions from Secretary Pritzker about a premium accounting error that had been discovered after the financial audit.  Ms. Kelly explained that management does not view the error as material to the integrity of the FY2014 financial statements taken as a whole.  However, the auditors will review the error along with qualitative aspects of the control environment to determine their opinion, which will in turn drive how the error is disclosed.

Acting Deputy Chief Policy Officer Michael Rae provided an update on implementation of the Multiemployer Pension Reform Act of 2014 (MPRA).   PBGC, Treasury and Labor are working very closely together.  Treasury must issue guidance on benefit suspensions by mid-June and PBGC is tying the release of its partition regulation to that date because some plans will need both types of help, and there are a number of similar terms in both provisions that the agencies are trying to define consistently.  The agencies have done outreach, coordinated release of Requests for Information (RFI), received comments and are working through them.  He also discussed with the Chair the upcoming hearing on possible follow-up legislation.

The Chair expressed his thanks for the outreach the agencies have done.

The Board went into executive session with the Inspector General, and then into executive session.  The meeting concluded at 1:00 p.m.

Attachment 1



  Tuesday, April 21, 2015
11:00 AM-12:30 PM

 I. Introduction by Secretary Perez

II. Introduction by Advisory Committee Chair Joyce Mader

III. Advisory Committee Investment Poliy Statement Recommendation and Discussion

IV. Chief Management Officer's Report

V. MPRA Implementation

VI. OIG Executive Session

VII. Board Member Executive Session


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