By Nancy Trejos
Washington Post Staff Writer
Thursday, October 23, 2008

The government agency that insures private-sector pension plans for millions of Americans lost $1.2 billion in the past 11 months to Aug. 31, including a $3.1 billion loss in stock investments.

The Pension Benefit Guaranty Corp. incurred the loss even before the stock market's historic tumble last month, according to preliminary unaudited figures released by the House Education and Labor Committee.

Rep. George Miller (D-Calif.) announced the figures at a hearing he chaired yesterday in San Francisco on how the financial crisis is affecting retirement benefits. The PBGC later confirmed the figures.

PBGC spokesman Jeffrey Speicher played down the decline, saying it was a 1.2 percent drop from Jan. 1 to Aug. 31, compared with a 12.6 percent decline in the Standard & Poor's 500-stock index.

"Our prudent diversified approach to handling our investments over the past year has resulted in losses that are far smaller than those suffered by most other market participants," wrote PBGC Director Charles E.F. Millard in a follow-up e-mail to The Washington Post.

The agency, which protects the retirement savings of almost 44 million Americans, ended 2007 with a $14 billion deficit. That deficit is expected to shrink to about $10 to $12 billion, Speicher said.

The PBGC's stock market declines were offset by gains in other investment classes, such as fixed income. The agency has $68 billion worth of assets in two funds, both of which are used to pay benefits to workers whose pension plans have failed, said Speicher.

Miller said he was worried about the PGBC's ability to fund failed plans at a time when many businesses, and their pensions, are on the brink of collapse.

"We've had a number of institutions go bankrupt. What happens to those retirees? What happens to the auto industry?" Miller said. "The question is: Will the PBGC be in a position to handle those problems or not?"

Speicher said: "We have enough to cover our obligations."

The PBGC loss comes as many Americans are already feeling insecure about their retirement savings. Many companies are increasingly pushing their employees into defined-contribution programs, such as 401(k)s, that are largely dependent on stock performance.

Defined-benefit plans, such as pensions, are managed by the employer. They are less exposed to stocks and therefore the more stable of the two retirement vehicles. But many companies have gone bankrupt, leaving their employees' pensions in the hands of the PBGC. Among the pensions managed by the agency are those for US Airways and Bethlehem Steel employees.

Olivia Mitchell, director of the Pension Research Council at the University of Pennsylvania's Wharton School, called this a "dangerous time" for the PBGC.

"They are certainly not improving their funding situation, and given the economic forecast where many of the companies that offer defined benefit programs won't be able to pay the full premiums and bring their plans up to full funding, we're still in a precarious situation," she said.

Miller blamed the $3.1 billion loss on the agency's investment in mortgage-backed securities. Speicher confirmed that 6 percent of the agency's portfolio is in mortgage-backed securities. But he said they were fixed-income products and, therefore, not the cause of the drop.

Miller also questioned the agency's decision in February to adopt a new policy that would allow it to invest 45 percent of its portfolio in equities, 45 percent in fixed-income and 10 percent in alternative investments. Previously, it could invest only 15 to 25 percent in equities and 75 to 85 percent in fixed-income.

"The people served by the PBGC have already lost their original pensions. . . . I don't think we should be investing in high-risk instruments when this is the last chance for people to hold on to what little retirement benefits they have left," Miller said.

The shift has not yet happened, however, with 70 percent of the portfolio still in fixed-income. The new asset allocation, agency officials said, would produce a more diversified portfolio and work better for long-term investing.

"It is important to note two things: The PBGC does not pick securities, stocks or bonds. It does pick some of the top investment managers in the world. Our investment timeline is not quarters or fiscal years, but decades," said Millard, who is to testify before the Education and Labor Committee tomorrow.