Pension agency loses almost $5 billion on stocks

[October 25, 2008]  WASHINGTON (AP) -- The federal agency charged with backstopping pension benefits for 44 million Americans lost almost $5 billion from investments in stocks in the budget year that ended Sept. 30, the agency head acknowledged Friday.

The Pension Benefit Guarantee Corp. will lose 6 percent to 7 percent on its entire investment portfolio, PBGC Director Charles Millard told the House Education and Labor Committee. It lost a significantly higher percentage of its investments in equities.

But that won't jeopardize the agency's ability to pay retirees who depend on it, Millard reassured lawmakers.

The PBGC has assets of $68 billion and liabilities of $83 billion. Millard said that over the long term, a new policy of creating a more diversified portfolio of 45 percent stocks, 45 percent bonds and 10 percent in alternative investments will produce better returns that give the agency a 57 percent chance to climb out of its deficit hole within a decade.

But the stock market has taken a sharp dive this month and those losses have yet to be reflected in PBGC estimates.

At present, the PBGC investment portfolio is about 70 percent fixed income assets like Treasury bonds and 30 percent in equities. That's about the same as a year ago, when the PBGC posted a 7.2 percent gain on its investments.

"We did not make the shift yet," Millard said.

There has been considerable debate over whether to shift more agency assets into stocks.

"This long-term, more diversified strategy aims at generating better returns that provide a greater likelihood that the corporation can meet its long-term obligations," Millard said.

"I am not sold at this point," he said. "Wall Street and this country is littered with people who had game plans designed by the brightest people in the room."

Millard reminded the lawmakers that the agency "pays monthly pension benefits spread over the lifetimes of participants and beneficiaries, not as lump sums. As a result, PBGC has sufficient funds to meet its obligations for a number of years."

The PBGC is one of the government's largest corporations and insures approximately 30,000 defined benefit pension plans. Defined benefit plans pay benefits based on years of service, salary levels and other factors. They are being increasingly replaced by 401(k)-style plans in which benefits depend on the employee's contributions. The PBGC doesn't insure 401(k) plans.

The PBGC's finances have come under strain as it has taken over several large pension plans in recent years from bankrupt airline and steel companies, including a $17 billion plan maintained by UAL Corp., parent of United Airlines. United emerged from bankruptcy in 2006.

The PBGC is funded by fees paid by the companies it insures, assets from failed pension plans, recoveries from bankruptcies and returns on invested assets. It doesn't receive taxpayer funds.

[Associated Press; By ANDREW TAYLOR]

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