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Meeting of the Board of Directors of the Pension Benefit Guaranty Corporation September 7, 2016

Meeting of the Board of Directors of the Pension Benefit Guaranty Corporation September 7, 2016

Attendees

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
Ali Khawar, Counselor to the Secretary, Department of Labor
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

Department of the Treasury
Amias Gerety, Acting Assistant Secretary for Financial Institutions
Sarah Hammer, Director of the Office of Financial Institutions Policy
Philip Quinn, Senior Policy Analyst, Office of Financial Institutions Policy
Kim Egert, Senior Policy Advisor, Office of Financial Institutions
Hilary Brandenburg, Office of Financial Institutions  

Department of Commerce
Penny Pritzker, Secretary of Commerce
Justin Antonipillai, Counselor to the Secretary performing the duties of the Under Secretary of Economic Affairs
Rick Lattimer, Policy Analyst, Economics and Statistics Administration
Kenneth R. White, Policy Analyst, Economics and Statistics Administration

PBGC Advisory Committee
Joyce Mader, Chair, representing the interests of employee organizations
Donald Butt, representing the interests of the general public (by phone)
Robin Diamonte, representing the interests of employers
Regina Jefferson, representing the interests of the general public
Henry Eickelberg, representing the interests of employers
Joyce St. Clair, representing the interests of the general public
Babette Ceccotti, representing the interests of employee organizations  

PBGC
Tom Reeder, Director
Judith Starr, General Counsel and Secretary to the Board
Patricia Kelly, Chief Financial Officer
John Greenberg, Chief Investment Officer
Chris Bone, Director, Policy Research and Analysis Department
Alice Maroni, Chief Management Officer

PBGC Office of Inspector General
Bob Westbrooks, Inspector General
Bill Owens, OIG Chief of Staff
Ron Engler, OIG Chief Counsel

PBGC Office of the Participant and Plan Sponsor Advocate
Constance Donovan, Participant and Plan Sponsor Advocate
Camille Castro, Associate Participant and Plan Sponsor Advocate

The Chair called the meeting to order at 10:10 a.m., greeting the attendees and extending a special welcome to the members of the PBGC Advisory Committee.  Due to the press of time, and to ensure sufficient attention could be paid to the Advisory Committee recommendation, the Chair turned first to the Director's report, after which the meeting proceeded in accordance with the established agenda (Attachment 1).

Director Tom Reeder briefed the Board on current pension-related legislative activity.  He announced the successful conclusion of the smaller asset managers procurement, which has resulted in awards to a diverse group of five highly qualified firms.  The Director updated the Board on the status of the search for a risk management officer and on the two regulatory initiatives expected to be published in the coming weeks.  Finally, the Director commended the cooperative effort among the Advisory Committee, PBGC staff and the Board agency staff in arriving at today's investment policy recommendation.

The Chair then recognized Advisory Committee Chair Joyce Mader, who explained that the entire Advisory Committee participated in the development of its investment policy recommendation, with its investment subcommittee -Robin Diamonte, Henry Eickelberg and Don Butt -- handling the detailed work.  She then turned the presentation over to Robin Diamonte.

Ms. Diamonte explained the concepts of liability driven investing (LDI) -- being aware of one's liabilities and working to get fully funded over time - and glide path -moving out of riskier assets as funding improves.  The Advisory Committee worked with firms experienced with LDI to develop model portfolios to increase duration and improve capital efficiency of PBGC's fixed income portfolio.  The models broke PBGC's fixed income portfolio into two buckets - hedging and return seeking, and optimized the portfolio for each, moving PBGC from a portfolio that is 40% hedged to one that is 55% hedged.   This movement is Phase 1 of the LDI approach the Committee is recommending.   PBGC could implement part of the recommended portfolio in six months and the remainder in 15 to 18 months through a new procurement of an LDI manager, which would include the flexibility to utilize a variety of instruments to achieve PBGC's LDI objectives.

Mr. Eickelberg emphasized that the importance of understanding that PBGC is not trying to earn its way out of the deficit but rather keeping an eye on its liabilities and cash flows from increased premiums that can be used for a better funded status.  Mr. Butt added that the recommendation is supported by the PBGC staff, 3 consultants, the Advisory Committee's experience, and the Board Representatives.

Board Member Pritzker expressed her appreciation for the quality of the presentation and asked for a preview of what happens after Phase 1.  Ms. Diamonte explained that the PBGC will need to decide what its ultimate funding goal will be and what funding levels would act as triggers for further derisking.  The staff would not be able to ignore triggers but would need to go to the Board for an exception.

Board Representative Gerety thanked the Advisory Committee and noted his agreement with the triggers as a one way ratchet where the only direction is taking risk off the table.  He also expressed his appreciation for the rigor and realism brought to the projections.

The Chair complimented the process as remarkably productive and constructive, noting that adopting this recommendation is one of the most important things the Board can do for PBGC.  He therefore made the following motion:

To approve the recommendation of the Advisory Committee to authorize PBGC to utilize Liability Driven Investment techniques to minimize funded status volatility and the risk of future deficits through a strategy that reduces funded ratio volatility by increasing interest rate hedging assets or reducing growth and return seeking assets if the funded ratio and deficit improve, and maintains the level of interest rate hedging assets if the funded ratio and deficit worsen.

The motion was seconded and then passed.

The Chair advised that the Board Representatives will work with PBGC and the Advisory Committee on specified changes to the Investment Policy Statement that the Board can ratify by resolution.  After giving thanks to all involved, the Board went into executive session with the Inspector General, and then with the Director.

The meeting concluded at 11:30 a.m.

AGENDA

JOINT MEETING OF THE BOARD OF DIRECTORS OF THE PENSION BENEFIT GUARANTY CORPORATION (PBGC) AND THE PBGC ADVISORY COMMITTEE   

Wednesday, September 7, 2016 10:00 AM - 11:30 AM    

I. Introduction by Secretary Perez 
II. Introduction by Advisory Committee Chair Joyce Mader
III. Director's Report
IV. Advisory Committee Fixed Income Portfolio Recommendation and Discussion
V. OIG Executive Session
VI. Board Member Executive Session

Last updated May 15, 2017