Goldman Sachs (NYSE:GS)
Historical Stock Chart
5 Years : From Oct 2011 to Oct 2016
U.S. Senate lawmakers are scrutinizing the Pension Benefit Guaranty Corp.'s ability to continue paying monthly annuities to retirees amid news that the agency's deficit has tripled to roughly $33.5 billion in the last six months.
The financial update came at the request of Congress as lawmakers discussed PBGC's solvency and concern of mismanagement at a Wednesday hearing held by the Senate Special Committee on Aging.
The $33.5 billion shortfall, up from a $11 billion shortfall reported at the close of fiscal year 2008, is a record high for the agency and comes on the heels of controversy surrounding former PBGC director Charles Millard, who may have crossed the line with communication he had with potential investment partners.
"Given the state of the economy, the question of PBGC's viability is more urgent than ever," said committee Chairman Herb Kohl, D-Wis.
The first PBGC issue Kohl addressed at the hearing dealt with communication Millard had with potential investment partners, some of whom Millard described as friends and former colleagues. Millard's extensive communication with firms during the bidding process prompted concerns that has cast doubt on the selection process.
Kohl asked Millard a series of questions, only to have Millard repeatedly invoke his Fifth Amendment right.
Nonetheless, PBGC will likely cancel the contracts it brokered under Millard's tenure with investment partners - specifically Goldman Sachs Group Inc. (GS), BlackRock Inc. (BLK) and JPMorgan Chase & Co. (JPM) - to advise the PBGC on reallocating a portion of the agency's then $48.4 billion investment portfolio.
PBGC Acting Director Vincent Snowbarger said the agency will work with its board of directors to rectify the situation, along with making policy changes to limit the director's involvement in selecting investment partners.
Committee members said PBGC's ballooning deficit, limited governance structure that needs to be overhauled and operational constraints continue to prompt concern about the agency's ability to remain solvent.
Snowbarger attributed the $33.5 billion deficit to pension plans terminations, investment losses, administrative fees and a decrease in the agency's interest factor - which is a method PBGC uses to value liabilities.
"Economic turmoil poses issues we have never before confronted and that do not lead to easy solutions," Snowbarger. He reassured committee members that despite the inflating deficit, "PBGC has sufficient funds to meet its benefit obligations for many years" because the monthly annuity payments are not lump sums.
Still, the agency makes more than $350 million in annuity payments monthly to workers or retirees who are eligible. The agency insures the pensions of nearly 44 million Americans.
The agency receives its funding primarily from insurance premiums that companies pay and from returns on its investment portfolio, which has been scrutinized as well.
The agency's investment portfolio, as of April 30, had 30% allocation for equities, 68% bonds and less than 2% with alternative investments, such as private equity and real estate. All of PBGC's alternative investments have been inherited from failed pension plans.
Apprehension about PBGC's operational structure and which industries and sectors agency officials believe could pose great fiscal risk were among the other topics discussed at the hearing.
The agency is closely monitoring financially distressed businesses related to automotive, retail, financial services and health-care industries. Of particular concern is the automotive industry; PBGC estimates that pension underfunding in the entire auto sector is $77 billion, of which $42 billion would be guaranteed.
PBGC has been highly criticized before by lawmakers for plans to switch to a more equity aggressive investment strategy designed to deflate the agency's deficit. Lawmakers have said PBGC should retain more conservative investments, bonds.
In February 2008, the PBGC adopted a new investment policy that would put 45% of its assets into equity investments, 45% in fixed income and 10% in "alternative investments, such as private equity."
GAO Associate Director Barbara Bovbjerg the investment plan is no longer viable because of the financial meltdown and economic contraction. Experts continue to warn that PBGC's financial and structural conditions threaten the agency's ability to stay afloat long-term.
- By Darrell A. Hughes, Dow Jones Newswires; 202-862-6684; email@example.com