Labor chief wants pension insurer on less risky path
Calls for suspension of investment strategy
WASHINGTON - Labor Secretary Hilda Solis, chairwoman of the federal agency that insures the pensions of 44 million Americans, has urged its board to suspend a controversial strategy under which the majority of a $64 billion investment fund was to be shifted out of bonds and into riskier stocks, according to documents obtained by the Globe.
The investment strategy is important because the Pension Benefit
In February 2008, at the urging of its then-executive director, Charles E. F. Millard, the pension agency's board unanimously approved a plan to put 55 percent of its portfolio in stocks, private equity, and real estate, up from 15 to 25 percent in stocks. Millard argued that the change in strategy would pay off over the long term and possibly avoid the need for a taxpayer bailout. The gradual move into stocks started late last year.
But earlier this month, the agency's inspector general reported that Millard violated rules by playing a role in awarding contracts to Wall Street firms that would implement part of the strategy dealing with real estate and private equity. The inspector general also said Millard had discussed his Wall Street job prospects with an official at one of the firms. As a result, the pension agency indicated it would freeze three contracts that had gone to Wall Street firms.
Solis wants to go further, recommending in a May 21 proposed resolution that the agency suspend the new strategy in its entirety, meaning that the broader shift to stocks would also stop. In light of ongoing investigations, Solis wrote, the pension agency "shall cease all further activity to implement" the investment strategy that the Bush-era board had approved. The document has not been previously reported.
Her recommendation would take effect if, as expected, it is agreed to by the other two board members, Commerce Secretary Gary Locke and Treasury Secretary Timothy Geithner. Locke has signed off and Geithner is expected to follow.
The issue has been unresolved because the agency's board has not held a full-fledged meeting this year, but a Solis spokeswoman said yesterday that the strategy has recently been put on hold pending the board's decision. The agency itself has been in limbo because President Obama has not yet nominated a replacement for Millard, who left with the Bush administration on Jan. 20. It is being run by an acting director.
During a hearing of the Senate Select Committee on Aging last week, Millard repeatedly refused to answer repeated questions from the chairman, Herb Kohl of Wisconsin, about his involvement in the contracts, invoking his Fifth Amendment right against self-incrimination.
In an interview with the Globe earlier this year, Millard strongly defended the change in investments. Asked about criticism that the strategy was too risky, he responded, "Ask me in 20 years. The question is whether policy makers will have the fortitude to stick with it."
But Solis apparently has seen enough.
Of the $33 billion deficit reported last week, about $3 billion was due to investment losses, which came during the stock market downturn in the past six months. Solis wrote that the suspension of the policy should remain in effect while the matter is under investigation, and it is widely expected to remain frozen until a new director takes over and makes a new assessment.
The investment strategy was controversial from the beginning. The Government Accountability Office reported last summer that the strategy "will likely carry more risk" than the agency projected, and the head of the Congressional Budget Office, Peter Orszag, who is now Obama's budget director, expressed concerns about "risky" elements of the strategy. Under the prior strategy, most of the pension fund had been invested in conservative Treasury bonds, which historically have offered lower returns but have been less volatile than the stock market.
A former agency consultant, Boston University professor Zvi Bodie, was among the harshest critics. He said it was foolish for the agency to take the premiums that it collects from private pension plans - which typically invest heavily in stocks - and invest the money in the stock market. He compared it to a company that uses the premiums collected for hurricane insurance to invest in beachfront property.
In an interview yesterday, Bodie said that the agency should go even further than returning to its prior strategy of investing 15 to 25 percent of its portfolio in stocks. He said the agency should put its entire fund in Treasury bonds and readjust its strategy to ensure that it has enough money to pay its liabilities. Bodie predicted that a taxpayer bailout is inevitable.
"It is back to the drawing board as far as PBGC is concerned," Bodie said. "They need to be bailed out of the hole. You can't fix it except by major surgery."
The agency has said that it has enough cash to meet its current obligations but said that it is concerned about the long-term deficit.
The agency insures up to $54,000 a year in pension payments for retirees who are at least 65 years old; however, the agency pays less under certain circumstances, including early retirement. While the insurance fund is not backed by the federal government - unlike federal bank deposit insurance - it is widely believed that taxpayers would be liable if it runs out of money.
Michael Kranish can be reached at kranish@globe.com. 