Pension Benefit Guaranty Corporation's New Policy

Along with discussion of Bear Stearns, the WSJ's opinion page has a helpful discussion of another moral hazard problem: the Pension Benefit Guaranty Corporation.   The PBGC is a government safeguard against shortfalls by company pensions.  The PBGC is funded by "premiums paid by employers,assets from failed pension plans, recoveries from bankruptcies and returns on invested assets."  The difficulty for the PBGC is that its funding does not meet its obligations, so in order to remedy the problem the PBGC has decided on a new investment policy that will more heavily invest in equities.  Unlike some sovereign wealth funds, the PBGC does not select stocks or bonds or actively manage its own portfolio, relying instead on professional money managers and market index funds.   The PBGC believes its new strategy will both obtain better returns and reduce risk through diversification.  Still, the WSJ warns that the PBGC strategy may create more risk, and in any event it still leaves the PBGC vulnerable, which could potentially mean a government (read: taxpayer) bail-out.  The WSJ asks: If we are even going to have a PBGC, why not demand higher premiums?   The reason is, I suppose, that there would be a great outcry over the burdens placed on small businesses, similar to what has happened with the planned (but not yet realized) imposition of Sarbanes-Oxley's 404 to smaller companies.  However, the important difference between the two scenarios is that in the case of unfunded pension liabilities, taxpayers ultimately bear the risk of failure; in the case of potential losses due to the decision not to apply 404, investors bear the risk of failure (and can price accordingly).

Posted by Paul Rose