	Background on the PBGC

The Pension Benefit Guaranty Corporation (PBGC) is a federal corporation established under Title IV of the Employee Retirement Income Security Act of 1974 (ERISA, P.L. 93-406 ). The PBGC insures private pension beneficiaries against the complete loss of accrued benefits if their defined benefit pension plan is terminated without adequate funding. The PBGC receives no appropriations from general revenue. Its operations are financed by insurance premiums set by Congress and paid by sponsors of defined benefit plans, investment income from the assets in its trust fund, and recoveries from the companies formerly responsible for the trusteed plans. In FY2007, the PBGC paid about $4.3 billion in benefits to almost 1.3 million individuals whose pension plans had failed. The PBGC currently has a $14.1 billion deficit in assets necessary to satisfy all claims made through 2007. The PBGC's liabilities are not explicitly backed by the full faith and credit of the federal government. However, should the agency become financially insolvent, the GAO has noted that "Congress could face enormous pressure to bail out the PBGC at taxpayer expense." As of September 30, 2007, the value of the PBGC's total investments, including cash and investment income, was approximately $62.6 billion. The assets from terminated pension plans and recoveries from the general assets of plan sponsors are accounted for in a trust fund that is not included in the federal budget. Trust fund assets were most recently valued at $48.1 billion. There are no statutory limitations on how the PBGC can invest the assets in its trust fund. PBGC's New Investment Policy

In February 2008, the PBGC announced that it had adopted a new investment policy aimed at generating higher investment returns while providing increased protection against the risk of increasing its deficit over time. As shown in Table 3 , the new policy allocates 45% of the PBGC's assets to fixed-income investments, 45% to equity investments, and 10% to alternative investment classes, including real estate and private equity. The PBGC's previous investment policy, adopted in 2004, set an equity investment target of 15% to 25%, with the remaining assets to be allocated primarily to fixed income investments. The PBGC is required by law to invest its income from premiums in securities backed by the full faith and credit of the U.S. government. If the PBGC's new investment policy generates higher expected returns, accompanied by reduced risk—as the PBGC and Rocaton have asserted—then U.S. taxpayers, as the de facto guarantors of PBGC insurance, will be better off. If the higher returns are accompanied by commensurately higher risk, then taxpayers are neither better nor worse off, because the PBGC's true financial condition will not have changed. Taxpayers also could be worse off if higher investment returns forestall fundamental reforms in PBGC financing, such as adopting risk-based premiums, that could improve the long-term financial condition of the agency and reduce the risk that they will at some point in the future have to bail out an insolvent PBGC.
The Pension Benefit Guaranty Corporation (PBGC) is a federal corporation established under Title IV of the Employee Retirement Income Security Act of 1974 (ERISA, P.L. 93-406). The PBGC insures private pension beneficiaries against the complete loss of accrued benefits if their defined benefit pension plan is terminated without adequate funding. The PBGC receives no appropriations from general revenue. Its operations are financed by insurance premiums set by Congress and paid by sponsors of defined benefit plans, investment income from the assets in its trust fund, and recoveries from the companies formerly responsible for the trusteed plans.
The PBGC insures the pension benefits of 44 million workers and retirees. In FY2007, the PBGC paid about $4.3 billion in benefits to almost 1.3 million workers whose pension plans had failed. The PBGC currently has a $14.1 billion deficit in assets necessary to satisfy all claims made through FY2007. Although the PBGC's liabilities are not explicitly backed by the full faith and credit of the federal government, Congress could face political pressure to bail out the PBGC at taxpayer expense should the agency become financially insolvent.
As of September 30, 2007, the value of the PBGC's total investments, including cash and investment income, was approximately $62.6 billion. Premium income is required by law to be invested in debt obligations guaranteed by the U.S. government. The assets from terminated plans and their sponsors are accounted for in a trust fund that was most recently valued at $48.1 billion. There are no statutory limitations on how PBGC can invest the assets in its trust fund.
In February 2008, the PBGC announced that it had adopted a new investment policy aimed at generating higher investment returns. The new policy allocates 45% of the assets to fixed-income investments, 45% to equity investments and 10% to alternative investment classes, including real estate and private equity. The PBGC's previous investment policy, adopted in 2004, set an equity investment target of 15% to 25%, with the remaining assets allocated primarily to fixed income investments.
If the PBGC's higher expected investment returns are accompanied by reduced risk—as the PBGC has asserted—then U.S. taxpayers, as the ultimate guarantors of PBGC insurance, will be better off. However, if the higher returns are accompanied by commensurately higher risk, then taxpayers are neither better nor worse off, because the PBGC's true financial condition will not have changed. Taxpayers would be worse off under the new policy if higher investment returns forestall fundamental reforms in the pension insurance system—such as adopting risk-based premiums—that could result in improving the long-term financial condition of the agency. Taxpayers, who would benefit from reduced exposure to the risk of having to bail out the PBGC if fundamental reforms in PBGC financing and governance were enacted, will be worse off if the agency does not achieve the reduction in its deficit that it has predicted the new investment policy will attain.