US - The Pension Benefit Guaranty Corporation (PBGC) has been accused of making a "double or nothing bet" with its assets, in a desperate attempt to reduce its deficit.
Under this policy, it will allocate 45% of its assets to a diversified set of fixed-income investments, 45% to diversified equity investments and 10% to alternative investment classes. The agency's previous policy set an equity investment target of 15-25%.
But Ethan Kra, Mercer's chief actuary-retirement in the US, and Mark Ruloff, director of asset allocation at Watson Wyatt Investment Consulting in the US, said the agency was taking a big risk on the markets.
Ruloff said the PBGC was repeating mistakes of the past, in investing in a similar way to the pension funds it was insuring.
He said: "Now the PBGC finds itself in a deficit position, because of these past risks, it doesn't want to increase premiums, basically hurting the loyal customers who have managed their plans well, nor does it want to ask the government for a bail-out for these past missteps.
"So it is taking what it sees see as its only approach left to make up this deficit and basically doing a double or nothing risk on the same correlated risk that got it into trouble to begin with."
Kra agreed the PBGC approach was flawed because risk analysis showed the upkick in claims would coincide with the downturn in the stock market.
He said: "There have been research papers done over the years which suggest that the ideal investment strategy for the PBGC would actually be to short the stock market because that way it would make money on the shorts when it is picking up the biggest liabilities and lose money on its investments when it has no claims."
However, he said such a strategy would not be feasible from a political perspective: "At a minimum, there are many who believe it should be investing in bonds, because investing in stocks is doubling the bet. It is really betting the ranch on the market, where if the market does well it will look great but if the market does poorly it will be in double trouble."
Ruloff said better options would be for the government to put up the capital to run the PBGC as an insurance company, or re-examine whether the PBGC should continue to exist.
He said: "It's basically a poor business plan. You can't insure against bad markets for every single pension plan because when there are bad market conditions, it affects all of them."
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