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PBGC Posts Financial, Performance Gains in 2008 Annual Report; Director Millard Urges Continued Investment Diversification

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PBGC Posts Financial, Performance Gains in 2008 Annual Report; Director Millard Urges Continued Investment Diversification
January 15, 2009

WASHINGTON-The Pension Benefit Guaranty Corp. solidified its foundation for the future during fiscal year 2008, the Corporation reported in its 2008 Annual Report, released today.

"Our focus in 2008 was on strengthening the PBGC for the long haul," said Director Charles E.F. Millard. "We succeeded in doing that on many fronts. We shaved almost $3 billion off the deficit, we put in place a diversified investment policy, and we improved governance and operations to better serve the people who count on us for their retirement security."

Millard noted that the progressive shrinkage of the shortfall, to $11.2 billion from 2007's $14.1 billion and 2006's $18.9 billion, was a positive development. "Our efforts to protect the pensions of bankrupt companies boosted the insurance program's bottom line by hundreds of millions of dollars," Millard said. "Through the work of our legal and negotiation staffs, 13 auto parts makers successfully reorganized without transferring their pension liabilities to the PBGC. Also, in a brutal year for financial markets, we limited our investment losses to 6.5 percent of assets."

Investment Diversification

The diversified investment policy adopted in February 2008 is crucial for the PBGC's ability to sustain itself financially, according to Millard. The new policy allocates of 45 percent of Corporation assets to equity investments, 45 percent to fixed income, and 10 percent to alternative investments, such as private equity and real estate.

"The new policy was tailored for the PBGC's long-term investment horizon and to give us the best possible chance of meeting our obligations," Millard said. "It substantially increases the possibility of full funding and has lower standard deviation, higher Sharpe ratios, and lower ultimate downside risk. And because we have taken a deliberate approach to implementation, the PBGC has avoided some of the recent turmoil in the markets."

To observers who criticize the investment policy for moving away from the PBGC's former heavy concentration in fixed income, Millard replied: "Come talk to me in 20 years. It is a long-term policy. I am confident that if future decision makers stay the course, in two decades the PBGC will still be keeping its commitments to retirees without a taxpayer bailout."

Investment Modernization: Chief Investment Officer; Investment Committee; Strategic Partnerships; Transition Principles; Securities Lending; Longevity Project

The Corporation in 2008 undertook several initiatives to improve and modernize its investment management program. A career investor with long public-sector experience was hired as chief investment officer to oversee relationships with outside investment managers and lead in-house staff. An investment committee was formed to evaluate potential managers in a manner more comprehensive than required by simple government procurement rules, consistent with the best practices of other large institutional investors.

The PBGC also entered into strategic partnerships with three leading financial service firms, BlackRock, Goldman Sachs, and J.P. Morgan, who will manage very significant real estate and private equity allocations and supplement staff efforts with a full range of services. "Our strategic partners give us access to the best minds in the business, to use as we need them at a fixed price," Millard said. "The strategic partnership approach is new, but is gaining traction among large institutional investors. Being able to leverage the intellectual and human capital of these world-class firms puts the PBGC at the forefront of resource management practices among institutional investors."

The Corporation also articulated a set of standards to govern its managers' conduct in large-dollar asset transitions, and offered them in booklet form, The PBGC Standard, for the pension plans it insures and other large investors.

Other investment initiatives include a comprehensive review of the Corporation's securities lending program and launch of the Longevity Project, an ongoing dialogue with private sector experts on managing longevity risk through the capital markets.

Protection, Governance, and Operations

Other PBGC achievements detailed in the 2008 Annual Report include:

  • Stepped-up protection for underfunded plans. Using previously dormant regulatory authority, the PBGC in 2008 negotiated financial protections for the pension plans of five downsizing companies, including Electrolux Home Products and Elkem Metals. "We will use all tools at our disposal to safeguard pensions and the insurance program," said Millard. "Our recent agreement with auto parts maker Visteon for $55 million in additional protection is an example of our continuing, aggressive efforts on behalf of workers and retirees in the pension plans we insure."
  • Plan restoration monitoring. The PBGC instituted a process of systematic analysis of the financial strength of companies that had terminated their pension plans to determine if the plans could be restored.
  • Improved governance. The PBGC Board of Directors adopted a set of revised bylaws that provide greater measurement of and accountability for the Corporation's management challenges. "Board members and their designated representatives have offered the attentive oversight that the PBGC needs," Millard said. "Never before in PBGC history has the Board been so productively engaged in the Corporation's governance, and I wish to thank them for their wise counsel."
  • Successful transformation of information technology. The Corporation's improved IT planning, development and management was validated by the Office of Management and Budget, which ended the Corporation's presence on the official OMB Watch List.
  • Strategic planning. In 2008, the PBGC adopted a new strategic plan to guide corporate planning, its first in four years. To foster a culture of accountability, Director Millard implemented new performance management measures, which align staff performance with the Corporation's strategic goals. "Nothing is more important to the PBGC's success than the creative efforts of its dedicated staff," Millard noted. "Our new performance management measures reward those efforts and encourage all employees to deliver their best on behalf the people we serve."
  • Operations re-engineering. The PBGC in 2008 adopted a methodology for finding operational waste. By applying the process to the calculation of participant benefits in trusteed plans, the Corporation found it could reduce the lead time from 18 months to six. As a result, retirees are getting more timely information about their benefits, allowing them to better plan their financial futures. In 2009 PBGC management will apply this approach to other operational areas.
  • Customer satisfaction scores. In 2008, the PBGC raised the scores it received on the American Customer Satisfaction Index from retirees, future retirees, and premium payers, continuing a record that is among the very best in government. "Serving the men and women who depend on us for retirement income is our reason for being," said Millard. "We take pride in the high ratings they give us, and pledge that we will always put their interests first. The PBGC has never missed a monthly check, and insofar as we are able, we pledge that we never will."

As a presidential appointee, Millard leaves his PBGC post with the end of the Bush administration on January 20. "Serving the American people by safeguarding their retirement security at the PBGC has been an honor and a privilege," said Millard. "My deepest thanks go to the dedicated members of the PBGC staff, who made the honor of the office a pleasure as well. Undoubtedly, formidable challenges lie ahead for the PBGC in these uncertain economic times. Corporations and their pension plans will face enormous strains, and the PBGC will be directly affected by economic conditions outside its control. One thing is clear however: the work we have done in 2008 has left the Corporation well prepared to deal with these challenges and carry out its mission."

The PBGC is a federal corporation created under the Employee Retirement Income Security Act of 1974. It currently guarantees payment of basic pension benefits earned by 44 million American workers and retirees participating in more than 29,000 private-sector defined benefit pension plans. The agency receives no funds from general tax revenues. Operations are financed largely by insurance premiums paid by companies that sponsor pension plans and by investment returns.

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