Blogging Employee Benefits

February 25, 2006

Administration Characterizes Pension Investment Policies as “Hazardous”

Filed under: Pensions, Retirement Policy — Fuguerre @ 3:14 pm

While market fluctuations appear to have been an important contributor to these woes [of defined benefit plan funded status declines], they could be made less so. To see why, recall from above [in the Economic Report of the President] that the PBGC manages the pension plans it receives from financially distressed employers. In doing so, it reduces exposure to interest-rate fluctuations by matching investment payoffs with the timing of employee benefits. The value of plan assets and liabilities will tend to move more closely under this strategy of duration matching than they would under the strategies that employers appear to have used.

– Page 77, Chapter 3 of the
Economic Report of the President

That is, the Administration wants defined benefit pension plans to dump their stock portfolios – amounting to about $1 trillion for private pension plans, plus hundreds of billions more held by public pension plans – in favor of duration-matched fixed income portfolios. In fact, the White House ventures over the line, characterizing common pension investment policy as “hazardous,” an unconscionable selection of terms absent evidence and charges of ERISA fiduciary violations. Although pending changes in accounting standards and various volatility-amplifying rules in proposed pension reform legislation will influence pension fund investing away from equities, the Administration itself does not yet explicitly propose a direct requirement to that end, but that lack of concrete initiative doesn’t rein in the Administration’s reliance on overly colorful adjectives.

When the report does finally get around to specifics, the Administration reiterates key terms of its Proposal for Pension Reform: curtailment of voluntary acceleration of funding by restricting reliance on credit balances; increasing the volatility of funding by reference to spot interest rates and asset values, regardless of the funded status of the pension, and elevation of funding targets. No word yet on how the Administration plans to meet its budget’s projection of PBGC income with the declining premium base that its policy will guarantee.

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