The Pension Benefit Guaranty scandal that isn’t (at least not yet)

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The Boston Globe had a story Monday (which is making the rounds today) about the Pension Benefit Guaranty Corporation’s decision last year to switch from investing mostly in fixed-income securities to a mix of 45% fixed-income, 45% equities, 5% real estate and 5% private equity. This was the lede:

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.

There’s a big difference between deciding to put and actually putting, though, and while the Globe reported that the agency “refused to say how much of the new investment strategy has been implemented,” a quick look at the PBGC’s Annual Management Report (available here) for the fiscal year that ended in September reveals that the answer is probably not much. From the report:

Cash and fixed income securities totaled approximately 71 percent of total assets invested at the end of FY 2008, compared to 68 percent for FY 2007. Equity securities represented 27 percent of total assets invested at the end of FY 2008, compared to 32 percent for FY 2007. Alternative investments, comprised largely of private equity acquired from trusteed plans, represented 2% of investments at the end of FY 2008.

This sounds like they hadn’t monkeyed with the allocation at all yet (changes in market value would explain the decline in the share of equities and the rise in the fixed-income share)—in keeping with the “careful and deliberate approach to the implementation of this new [investment] policy” that is promised elsewhere in the report. I find it staggering that the Globe fails to mention this in its article, and while I guess it’s possible that Charles Millard, the former New York City Councilman and former investment banker (and one of the last holdovers of the old Upper East Side moderate Republican scene) who was the PBGC’s director until the Bush administration left town on Jan. 20, went and sped things up spectacularly starting Oct. 1, I’d like to see some evidence before accusing him of that.

That still leaves the question of whether moving more of the PBGC’s stash into equities is a good idea. The Globe article cites Boston University’s Zvi Bodie, who’s been arguing for years that retirement savings don’t belong in stocks, saying that it’s a horrible idea. So there’s that. And some of the better-run pension funds have in recent years been shifting from equities into bonds to better match assets with liabilities (I’m thinking here especially of GM’s pension fund). But I’m not really clear on what the optimal asset mix would be for a government agency that guarantees pensions into perpetuity and can count on a regular income stream into perpetuity. Are you?

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