UPDATE:Lawmakers Scrutinize PBGC Solvency Amid $33.5 Billion Deficit
May 20 2009 - 5:29PM
Dow Jones News
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;
darrell.hughes@dowjones.com