When PBGC takes over a terminated plan, it becomes the trustee and may invest the assets of the plan in the full range of investments available to other ERISA plan trustees. By law, PBGC must invest its premiums in debt obligations. Through most of its history, PBGC invested most of the trust funds assets in stocks and other non-debt asset classes to diversify its portfolio. However, in 2004, PBGC began a shift away from equities to bonds. As a result, 72% of PBGC's total assets were fixed-income securities at the end of its last fiscal year (September 30, 2007). PBGC this week announced it is moving back to a more diversified portfolio, investing 55% of its $55 billion portfolio in stocks and alternative investments.(Click here for the BNA story in the Pension & Benefits Daily.)
Over 75 percent of PBGC's assets were in the trust funds at the end of its last fiscal year and thus able to be invested in stocks and other asset classes. This means the PBGC has much the same flexibility that private plan fiduciaries have to build a diversified portfolio, since any diversified pension portfolio is likely to have more than 25% in fixed income securities. Under the new policy, stocks and fixed income securities will each represent 45 percent of PBGC's portfolio, with the remaining 10 percent invested in alternative investments.
This is good news for plan participants and for defined benefit plan sponsors. PBGC's shift to fixed income securities was an attempt to match its assets with its liabilities. However, at the time it was adopted, PBGC had a deficit of over $11 billion. Unfortunately, going to an immunized portfolio when you don't have enough assets to pay all benefits means you simply lock in the deficit.
There is ample evidence that a diversified portfolio will yield a higher return with less risk over time than one heavily weighted toward fixed income securities.
Is 45-45-10 the right mix of stocks, bonds and alternative investments? Hard to tell without seeing the full study. But it is certainly a step in the right direction. Kudos to Director Millard and the PBGC Board (the Secretaries of Labor, Treasury and Commerce) for taking this step.