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Letter to the Honorable George Miller 1 (April 2008)

handle is hein.congrec/cbo9528 and id is 1 raw text is: April 24, 2008 Honorable George Miller Chairman Committee on Education and Labor U.S. House of Representatives Washington, DC 20515 Dear Mr. Chairman: In response to your request, the Congressional Budget Office (CBO) has reviewed the new investment policy recently adopted by the Pension Benefit Guaranty Corporation (PBGC) and supporting materials provided by Rocaton Investment Advisors, LLC, the institutional investment firm that acted in a consulting capacity to PBGC's board of directors prior to the change in policy. As part of its analysis, CBO reviewed the assumptions underlying PBGC's decision and assessed the revised policy's potential for affecting the corporation's ability to meet its obligations to retirees and for increas- ing costs to taxpayers. Prior to February of this year, PBGC's investment strategy was to hold about 75 per- cent of its portfolio in bonds, with the duration of those assets matched to the corpo- ration's obligations. The remainder of the portfolio was invested in equities. PBGC's new strategy reduces to 45 percent its allocation to fixed-income assets, in order to increase the proportion devoted to equities (45 percent) and to further diversify into alternative asset classes (10 percent). The change in investment strategy represents an effort on the part of PBGC to increase the expected returns on its assets and to diminish the likelihood that taxpayers will be called on to cover some of its liabilities. The new strategy is likely to produce higher returns, on average, over the long run. But the new strategy also increases the risk that PBGC will not have sufficient assets to cover retirees' benefit payments when the economy and financial markets are weak. By investing a greater share of its assets in risky securities, PBGC is 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. If interest rates fall at the same time that the overall economy and financial mar-

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