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According to the Boston Globe, the Pension Benefit Guaranty Corporation approved a more aggressive allocation of fund assets at just about the worst possible moment. (HT Michael W.)

Just months before the start of last year’s stock market collapse, the federal agency that insures the retirement funds of 44 million Americans departed from its conservative investment strategy and decided to put much of its $64 billion insurance fund into stocks.

Switching from a heavy reliance on bonds, the Pension Benefit Guaranty Corporation decided to pour billions of dollars into speculative investments such as stocks in emerging foreign markets, real estate, and private equity funds.

Here is a chart the paper published that shows the new target allocation approved last year. Had it stuck to its knitting, it might have outperformed the market significantly. Treasurys have been the best performing asset class for awhile now.

PBGC doesn’t disclose its investments. According to the article they’re only willing to admit that the overall portfolio was down 6.5% for the last fiscal year, ending 9/30/08. Their stock investments were down 23% for that fiscal year. Of course the market has been hammered since Sept. 30th, so many are worried the fund may be in dire shape at the very moment more failed corporate pension plans become its responsibility.

Charles E.F. Millard, the former agency director who implemented the strategy until the Bush administration departed on Jan. 20, dismissed…concerns….

He said the previous strategy of relying mostly on bonds would never garner enough money to eliminate the agency’s deficit. “The prior policy virtually guaranteed that some day a multibillion-dollar bailout would be required from Congress,” Millard said….

But [Zvi] Bodie, the [Boston University] professor who advised the agency, questioned why a government entity that is supposed to be insuring pension funds should be investing in stocks and real estate at all. Bodie once likened the agency’s strategy to a company that insures against hurricane damage and then invests the premiums in beachfront property.

This is a must-read article. It includes lots of other interesting tidbits about PBGC. I didn’t know that it’s “not backed by the full faith and credit of the government.”

This is another HUGE problem waiting to explode. Private pension plans are underfunded to the tune of $500 billion. Many of them will become taxpayers’ responsibility as their corporate sponsors — like GM and Chrysler — declare bankruptcy.

This is another example of a government guarantee perverting incentives. Seems to me many unions may want to force their employers into bankruptcy in order to shift their pension plans from troubled corporate balance sheets to Uncle Sam’s. In some cases, this might appear to be a preferable outcome as opposed to negotiating benefit reductions.

Trouble is, Uncle Sam is bankrupt. He doesn’t have money to fund unpayable pension promises either.

Source: Federal Pension Trouble: Its Shift to Stocks