Wednesday, April 1, 2009

Pension Benefit Guaranty Insurance Fund Made Huge Switch into Stocks Last Summer

Once more, this is not an April Fool's joke... it just feels like it is. Chalk up another one in the "future bailout via robbery of grandchildren's living standard" list. From my estimates we shall see bailouts in insurance co. annuities, commercial real estate, state pension liabilities, federal corporate pension liabilities... I think that gets us through year end. Then comes 2010. Might there indeed be a great reason for the government to stoke this stock market by any means possible? Nah, that would be tin foil-ish.

The scary thing is we only have federal pension guarantee fund's results though Sept 30, 2008. And it was already $11 Billion in the hole. Should be a DANDY report coming up once we're updated. In case I miss it dear reader, please make sure to send me the newest investment results once they are "unveiled".

  • Just months before the start of last year's stock market collapse, the federal agency that insures the retirement funds of 44 million Americans departed from its conservative investment strategy and decided to put much of its $64 billion insurance fund into stocks. Switching from a heavy reliance on bonds, the Pension Benefit Guaranty Corporation decided to pour billions of dollars into speculative investments such as stocks in emerging foreign markets, real estate, and private equity funds.
  • The agency refused to say how much of the new investment strategy has been implemented or how the fund has fared during the downturn. The agency would only say that its fund was down 6.5 percent - and all of its stock-related investments were down 23 percent - as of last Sept. 30, the end of its fiscal year. But that was before most of the recent stock market decline and just before the investment switch was scheduled to begin in earnest. No statistics on the fund's subsequent performance were released.
  • Nonetheless, analysts expressed concern that large portions of the trust fund might have been lost at a time when many private pension plans are suffering major losses. The guarantee fund would be the only way to cover the plans if their companies go into bankruptcy.
  • "The truth is, this could be huge," said Zvi Bodie, a Boston University finance professor who in 2002 advised the agency to rely almost entirely on bonds. "This has the potential to be another several hundred billion dollars. If the auto companies go under, they have huge unfunded liabilities" in pension plans that would be passed on to the agency. (what is funny is I am so numb to numbers that a "couple hundred billion" is peanuts - that's just one AIG bailout)
  • .... they warn about a "perfect storm" scenario in which the agency's fund plummets in value just as more companies go into bankruptcy and pass their pension responsibilities onto the insurance fund.
  • "The worst case scenario is coming to pass," said Mark Ruloff, a fellow at the Pension Finance Institute, an independent group that monitors pensions. He said the agency leaders "fail to realize that they are an insurer of pension plans and therefore should be investing differently than the risk their participants are taking."
  • Last year, as director of the Congressional Budget Office, Peter Orszag expressed alarm that the agency was "investing a greater share of its assets in risky securities," which he said would make it "more likely to experience a decline in the value of its portfolio during an economic downturn the point at which it is most likely to have to assume responsibility for a larger number of underfunded pension plans.
  • However, Charles E.F. Millard, the former agency director who implemented the strategy until the Bush administration departed on Jan. 20, dismissed such concerns. Millard, a former managing director of Lehman Brothers, said flatly that "the new investment policy is not riskier than the old one." (Risk controls and Lehman Brothers clearly go together like peas in a pod....)
  • He said the previous strategy of relying mostly on bonds would never garner enough money to eliminate the agency's deficit. "The prior policy virtually guaranteed that some day a multibillion-dollar bailout would be required from Congress," Millard said. (well that actually was a true statement - you see, when you can't make up shortfalls via normal investments, you begin to take risks...) He said he believed the new policy - which includes such potentially higher-growth investments as foreign stocks and private real estate - would lessen, but not eliminate, the possibility that a bailout is needed. (not to worry, this was all headed to an eventual bailout one way or the other - I've been following this story for quite a few years. It was just a matter of when and how much)
  • But Bodie, the BU professor who advised the agency, questioned why a government entity that is supposed to be insuring pension funds should be investing in stocks and real estate at all. Bodie once likened the agency's strategy to a company that insures against hurricane damage and then invests the premiums in beachfront property. Since he issued that warning, he said, the agency has gone even more aggressively into stocks, which he called "totally crazy."
  • Asked whether the strategy was a mistake, given the subsequent declines in stocks and real estate, Millard said, "Ask me in 20 years. The question is whether policymakers will have the fortitude to stick with it." (again this is not an April Fools joke; remember Bush appointees do not make mistakes - Heckuva job Millard-y!)

Thank you for giving me the opportunity to appear before you today. I am honored and humbled that President Bush has nominated me to serve as the Director of the Pension Benefit Guaranty Corporation, and I appreciate your consideration of my nomination. Public service is a privilege which I hold dear and I am sincerely grateful for this opportunity to serve.

It's been our privilege too! Thank you for your "service".
  • The Pension Benefit Guaranty Corporation may be little-known to most Americans, but it serves as a lifeline for the 1.3 million people who receive retirement checks from it, and the 44 million others whose plans are backed by the agency.
  • The agency was set up in 1974 out of concern that workers who had pensions at financially troubled or bankrupt companies would lose their retirement funds. The agency operates by assessing premiums on the private pension plans that they insure. It insures up to $54,000 annually for individuals who retire at 65.
  • Despite its name, the agency does not necessarily guarantee the full value of a person's pension and is not backed by the full faith and credit of the government. (oh but it will be - this is the type of thing that leads to pitchforks and torches - if there is one group of people who seem willing to demonstate and march like those crazy socialists in Europe - its seniors. Everyone else? We've got American Idol to distract) [Feb 20, 2009: Viva the Elderly of New York City!]
  • Nonetheless, agency officials say that if the pension agency fails to meet its obligation, the government would come under intense political pressure to step in. That means taxpayers - including those who don't get pensions - could be asked to pay for a bailout. (yes yes, please take more ... I have much to give... take it all)
  • Currently, the agency owes more in pension obligations than it has in funds, with an $11 billion shortfall as of last Sept. 30. (sounds vaguely familiar - a shortfall in a state or federal government agency... hmm... I detect a pattern somewhere here) Moreover, the agency might soon be responsible for many more pension plans.
Just add it to the bill!
  • Most of the nation's private pension plans suffered major losses in 2008 and, all together, are underfunded by as much as $500 billion, according to Bodie and other analysts. (nah, $500 Billion was so pre crash - we're talking at least $1 Trillion now) [Mar 4, 2009: Bloomberg - Hidden Pension Fiasco May Foment Another $1 Trillion Bailout]
  • The Government Accountability Office is preparing a new review of the investment policy, but in the meantime it continues to place the agency on its list of federal programs at "high risk."
I repeat, this is not April Fool's. Although you would not be blamed for feeling like the fool for putting up with a system like this.

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