1). Frequent Policy Changes Occurred, but Changes to Actual Asset Allocation Were Moderate

PBGC’s investment policy has changed frequently since 1990, alternating  between more conservative and more aggressive approaches to  investment. PBGC’s Investment Objective Changes Have Had Moderate Effect on Actual Asset Allocations

Since 1990, PBGC has shifted its investment policy five times. In 2006, PBGC adopted a new policy as a result of its biennial review  process. Due  in part to the market downturn during the period the 2008 policy was in  place, the transaction costs associated with asset trades of about $9.3  billion that were tracked during the last two phases of the transition  totaled nearly $74.6 million (or 80 basis points). PBGC’s Investment Performance Results Have Been Mixed

Our analysis of PBGC’s investment performance found that PBGC’s  investments performed better than most on an asset-only basis compared  with the seven benchmark portfolios (see table 3). PBGC Investments Underperformed Relative to Benchmark Portfolios When Returns Were Assessed with the Liability Return

When consideration of changes in liabilities was included in our analysis,  we found that PBGC’s investments did not perform as well as the seven  benchmark portfolios. PBGC’s Policies and Procedures for Implementing Its Investment Policy Are Incomplete

In our review of PBGC’s internal documents, we found that the agency has  largely functioned without complete investment policy statements and  operating procedures. Further, PBGC staff have largely functioned without the benefit  of fully developed and documented operating procedures. Investment Policy Statements Generally Lack Specifics in Key Areas

The investment policies issued by PBGC’s board for strategic guidance in  the planning and execution of investments have generally lacked a number  of provisions recommended for sound investment management or have  been insufficiently detailed to provide adequate guidance for staff  concerning certain investment objectives. Conclusions

PBGC has grown from a relatively small agency with about $34 million in  assets in its first year after its establishment in 1974, to one with almost  $80 billion in assets in fiscal year 2010. The agency’s  policies and procedures for asset management still reflect its small agency  past. Current work under way  by PBGC’s CID staff to develop such policies and procedure is an  important first step, but greater commitment is needed from both the  PBGC board and its management to assure that PBGC can effectively and  consistently meet its obligation to conduct the many investment related  functions it performs. To ensure a disciplined and long-term approach to investment, we  recommend PBGC and its board of directors develop and maintain a  comprehensive investment policy statement that provides clear  organizational accountability, well-defined goals, and risk management  parameters. 2. To ensure proper stewardship of PBGC’s assets and effective  implementation of its investment policy, we recommend that PBGC  develop a complete set of operating procedures and guidelines  consistent with recognized best practices in industry and government. In our view, these initial actions and continued efforts  to implement our recommendations fully can only strengthen the  stewardship of PBGC’s investments to better assure that PBGC can  effectively and consistently meet its obligation to conduct the many  investment-related functions it performs. Appendix I: Scope and Methodology

To determine how Pension Benefit Guaranty Corporation’s (PBGC)  investment objectives have changed over time and whether policy goals  have been met, we collected and reviewed investment policies used by  PBGC from 1990 through the policy dated October 2009. To determine how PBGC’s changes  in investment policy compared to other entities, we interviewed officials  from several pension consultants, investment and transition managers, life  and property and casualty insurers, and large state pension plans. Pension Protection Act Benchmark Portfolio. To determine how well PBGC’s investment policies and operations  comport with best practices in the industry, we interviewed PBGC’s  Inspector General, current PBGC board member’s representatives, and  PBGC staff. These organizations include the Chartered Financial Analyst  Institute, the Foundation for Fiduciary Studies, the Association of Pension  Plan Fund Auditors, the Government Finance Officers Association, and  Independent Fiduciary Services. 2.
Why GAO Did This Study

The Pension Benefit Guaranty Corporation's (PBGC) insures the pension benefits of more than 44 million people. Since its inception in 1974, PBGC's assets have grown from about $34 million to almost $80 billion in 2010, largely through assets received in plan terminations. Despite significant swings in PBGC's investment history, there has been little focus on the extent to which it has met its investment goals, the nature of its investment policies or how they compare with best practices in the industry. GAO examined (1) how PBGC's investment objectives have changed over time and the outcomes associated with those changes, (2) the performance of PBGC's investments, and (3) how well PBGC's investment policies and operations comport with best practices in the industry. To address these questions, GAO reviewed PBGC's investment policy statements and operational procedures; analyzed data on investments; and interviewed PBGC officials, officials from several state pension plans and foreign pension insurers, and other experts.

What GAO Found

PBGC's investment objectives and stated asset allocation targets have changed frequently in the last 8 years, alternating between more conservative and more aggressive approaches to investing. Yet these changes in stated objectives had only a moderate effect on PBGC's actual asset allocation because, for a variety of reasons, PBGC did not meet its targets. In our review of their investment history, we found that PBGC did not routinely monitor transaction costs related to its policy shifts and, at certain times, significant transaction costs were incurred. For example, we determined based on data obtained from PBGC's investment managers that nearly $75 million in transaction costs were incurred during the economic downturn which coincided with the period when the 2008 policy was being implemented and subsequently suspended. Using seven benchmarks, one of which was a Pension Protection Act benchmark that GAO constructed, GAO's analysis shows that PBGC's investments performed better than most benchmarks on an asset-only basis, but tended to underperform all seven of the benchmarks when returns were assessed together with the growth in liabilities. GAO notes that both analyses have limitations and can be seen by some experts as incomplete. However, GAO's method of analysis is consistent with how financial economics literature suggests investment performance analysis should be conducted. Finally, GAO's analysis found no apparent adverse effect on PBGC's investment performance as a result of changes in policy. PBGC's policy statements and operating procedures are incomplete and do not provide sufficient guidance to ensure sound implementation of its investment policies. The investment policies issued by PBGC's board for strategic guidance in the planning and execution of investments have generally lacked a number of provisions recommended by the Chartered Financial Analyst Institute; Independent Fiduciary Services; and other experts of sound investment management, such as the Government Finance Officers Association. Moreover, according to our review and based on interviews with PBGC staff, the policy statements have been insufficiently detailed to provide adequate guidance for staff. In addition, PBGC's Corporate Investments Department's staff have largely functioned without the benefit of fully-developed and documented operating procedures. Although PBGC has grown from a relatively small agency to one holding almost $80 billion in assets, its policies and procedures still reflect in many ways its small agency past. To ensure that PBGC can effectively and consistently meet its obligation to manage a fund of this size and its liabilities, PBGC's board and its management must enact better stewardship, standards, and procedures to ensure that PBGC can effectively and consistently meet its obligation to conduct the many investment related functions it performs.

What GAO Recommends

GAO recommends that the PBGC and its board of directors (1) develop and maintain comprehensive investment policy statements and (2) develop a complete set of operating procedures and guidelines for its investment activities. GAO received comments from the Department of Labor and the PBGC. They generally agreed with our recommendations.