PBGC Assets:

Implementation of New Investment Policy Will Need Stronger Board Oversight

GAO-08-667: Published: Jul 17, 2008. Publicly Released: Aug 18, 2008.

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The Pension Benefit Guaranty Corporation (PBGC) insures the retirement future of over 44 million people. As a federal guarantor of private defined benefit plans, PBGC finances its operations through insurance premiums, investment income, and funds from terminated pension plans. PBGC is governed by a board of directors comprised of the Secretaries of Commerce, Labor, and Treasury, who are responsible for providing policy direction and oversight but often rely on board representatives. In 2004, PBGC began reviewing its investment policy biennially and recently decided to broaden the range of asset classes in which it invests. GAO reviewed PBGC's procedures for developing and implementing its investment policies, and examined PBGC's most recent investment policy. To address these issues, GAO reviewed and analyzed PBGC policies and data, assessed the analysis informing the recent policy change, and interviewed agency officials and other experts.

PBGC's directors collaborated with board representatives to reach consensus on a board-approved investment policy for each of the recent biennial reviews; however, it is not clear to what extent the board oversaw PBGC's efforts to implement its policy. Three different PBGC directors managed the policy reviews, which culminated in board ratification of the 2004, 2006, and 2008 policies. In 2004, the board instructed PBGC to limit its exposure to financial risk by reducing equity holdings to a range of 15 to 25 percent of its total investments; the board made the same requirements in 2006. The board has assigned responsibility to PBGC staff for implementing the investment program, monitoring investment managers, and reporting on investment performance. However, by 2008, the board's policy goal had not been attained. PBGC staff told us that high equity returns and low fixed-income returns made it difficult to reach the target allocation and that flexibilities built into the policy had allowed them to maintain a higher ratio, particularly since equity returns helped improve PBGC's overall financial condition. While PBGC's director and staff kept the board apprised of its investment performance and asset allocation, GAO found no indication that the board had approved the deviation from its established policy or expected PBGC to continue to reduce the proportion of equities to meet the policy objectives. While the investment policy adopted in 2008 aims to reduce PBGC's $14 billion deficit by investing in assets with a greater expected return, GAO found that the new allocation will likely carry more risk than acknowledged by PBGC's analysis. According to PBGC officials, the new allocation will be sufficiently diversified to mitigate the expected risks associated with the higher expected return. They also asserted that it should involve less risk than the previous policy. However, GAO's assessment demonstrates that the risks are likely higher in the new allocation. Although it is important that the PBGC consider ways to optimize its portfolio, including higher return and diversification strategies, the agency faces unique challenges, such as PBGC's need for access to cash in the short-term to pay benefits, which could further increase the risks it faces with any investment strategy that allocates significant portions of the portfolio to volatile or illiquid assets.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In October 2008, the Chair of the PBGC board at the time (Secretary Chao) reported that the PBGC Board expects the PBGC to adhere to the implementation plan and to promptly notify the Board through the Board Representatives of any proposed changes to or deviations from the plan. Changing market conditions could necessitate some adjustments to the implementation plan or its timetable and the Board and Board Representatives will review any such modifications. The Board considers that presentations by PBGC and verbal agreement and informal guidance by the Board and the Board Representatives constitute appropriate oversight in most instances and the Board and Board Representatives will continue that practice. Changes to the investment policy will always be documented by Board resolution; however, modifications related to the timing of the full transition to the new policy or related matters will be informally reviewed and approved, unless the Board determines that circumstances indicate that more formal documentation is necessary with respect to a particular deviation or series of deviations from the implementation plan. In FY10, PBGC added that the Board expects the PBGC to adhere to the temporary investment policy and transition plan guidance and to promptly notify the Board through the Board Representatives of any proposed changes to or deviations from the plan. As of July 2012, the agency met its target allocation. PBGC confirmed that there were no deviations from the implementation of the investment policy. Had there been, the CFO would have addressed the matter as part of her regular briefings to the Board on investment performance.

    Recommendation: To ensure accountability for the full implementation of the board's new investment policy decisions and its appropriate oversight of an investment policy that carries more risk, the PBGC board should document the board's agreement or disagreement with any deviations from the policy implementation plan.

    Agency Affected: Pension Benefit Guaranty Corporation

  2. Status: Closed - Implemented

    Comments: In October 2008, the Chair of the PBGC board at the time (Secretary Chao) reported that the PBGC Director is responsible to the Board for the implementation and administration of the new investment policy. Accordingly, the PBGC Director is responsible for keeping the Board and the Board Representatives informed by confirming implementation plan compliance, explaining deviations from the plan, and consulting the Board and Board Representatives on any proposed amendments to the plan. The Board Representatives, on behalf of the Board, confer regularly with the PBGC Director on the implementation of the program, its progress and challenges, and advise the Board members, as appropriate. As part of their implementation oversight, the Board Representatives have also conferred with the PBGC Inspector General and one of PBGC's primary investment advisors about the process and strategy. In addition, Board agency staff (and sometimes Board Representatives) regularly attend PBGC Advisory Committee meetings on investment issues and periodically consult with PBGC staff on investment issues. Furthermore, as required by the Investment Policy Statement, the PBGC provides monthly investment activity reports to the Board. In 2012, PBGC reported that the agency implemented a practice of regular reporting regarding the investment policy statement by the CFO and the CIO. The CFO updates the Board of Directors at each Board meeting regarding financial and investment-related activities and results. Board meetings are now held four times a year. At the most recent Board meeting on June 13, 2012, the CFO discussed progress in implementing the 2011 Investment Policy Statement (IPS) and reaching sub-asset class targets at that time. The CFO also addressed transition activity, specific risks related to European exposure, and performance.

    Recommendation: To ensure accountability for the full implementation of the board's new investment policy decisions and its appropriate oversight of an investment policy that carries more risk, the PBGC board should require the PBGC director to report periodically on the progress toward meeting the objectives, milestones, and time frames in the plan and to provide justification for any deviations in the approved implementation plan.

    Agency Affected: Pension Benefit Guaranty Corporation

  3. Status: Closed - Implemented

    Comments: In October 2008, the Chair of the PBGC board at the time (Secretary Chao) reported that PBGC's Board of Directors is committed to providing strong oversight of the PBGC's implementation of the new investment policy. The PBGC Director is responsible to the Board for the implementation and administration of the investment program. In response to Board guidance, the PBGC Director has provided a written implementation plan for the new investment policy to the Board Representatives and briefed them on it. The implementation plan sets forth the major objectives, milestones, and time frames projected for implementing the new asset classes set forth in the new Investment Policy Statement.

    Recommendation: To ensure accountability for the full implementation of the board's new investment policy decisions and its appropriate oversight of an investment policy that carries more risk, the PBGC board should require the PBGC director to formally submit for board approval a written implementation plan that outlines accountability measures for carrying out the new investment policy, such as PBGC's key objectives, milestones, and completion time frames.

    Agency Affected: Pension Benefit Guaranty Corporation

  4. Status: Closed - Implemented

    Comments: PBGC reported that it asked Goldman Sachs to perform a supplemental comparative analysis. Goldman Sachs used varied investment assumptions (e.g., return, risk, and correlations) from alternative sources. In addition, PBGC stated that it agrees with GAO that sensitivity analyses are important, and indicated that it would continue to perform them going forward.

    Recommendation: To gain a better understanding of the risks involved in the new investment policy, PBGC should conduct sensitivity analyses before implementing the new policy. These analyses should use a variety of assumptions of the risks and returns of the new allocation that incorporates assets, liabilities, and funded position.

    Agency Affected: Pension Benefit Guaranty Corporation

 

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