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Retirement Planning: Millard’s Folly October 27, 2008

Posted by retirementwithaplan in social security and pensions.
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When he spoke before the Senate Finance Committee, President Bush’s nominee for the head of the Pension Benefit Guaranty Corporation, Charles Millard gave the following as his credentials:

“I have had the chance to serve as a VISTA Volunteer in Crown Heights, Brooklyn, and as a Board member of the New York Urban League. In 1985, I worked in Chile for the Vicariate of Solidarity, a Santiago-based human rights organization. I have served as a New York City Councilman and was then appointed by Mayor Rudolph Giuliani to be the President of the New York City Economic Development Corporation (EDC) and Chairman of the New York City Industrial Development Agency. I also worked as a Legislative Assistant in the early 1980s for Congresswoman Millicent Fenwick of New Jersey.

“My work in New York as head of EDC is worth noting,” he explained, “because, like PBGC, EDC was created as a corporation to manage governmental programs that are principally business-like in nature, produce self-sustaining revenue, involve numerous negotiated transactions, and require greater budget and other flexibility than a traditional government agency.”

He continues to speak of his qualifications as a “Wall Street attorney representing large financial institutions” which, I suppose by default makes him qualified to handle the finances of one of the last economically stable retirement plans. Mr. Millard’s statement to the senators included his job as “Managing Director involved in investment banking, public finance and investment management with firms such as Lehman Brothers and Prudential Securities”.

His appointment was all but unnoticed until last February when he hatched a plan to retool the agency’s investments to get a better return. When the fiscal year ended for the agency in September, the results of that move was revealed.

The PBGC or Pension Benefit Guaranty Corporation acts like an insurance company, collecting premiums from companies with pensions and overseeing their funding. It was created to protect employees from company inaction or worse, the complete collapse of the plan. Because of the way the administration views these types of retirement plans and the never-ending push for privatized, employee controlled and directed plans, the PBGC has fallen behind on its obligation to those employees/retirees and because of that, has been running in the red.

Mr. Millard came up with a plan to reap some of the profits that the bull markets had to offer. To do this, Mr. Millard went to Wall Street, a place not unfamiliar to this lawyer turned PBGC chief cum investor.

Mr. Millard defended his actions and his belief that he could provide for a decent return on the PBGC’s money if he simply increased the risk levels in the current basket of securities that the corporation owned. Acting “within the level considered mainstream for large institutional investors” he suggested that of the “eight scenarios that GAO analyzed” his move into equities would bring the balance sheet closer to solvency.

His optimistic predictions suggested at the time that “the new asset allocation outperforms the old, with increased returns of $19 billion to $42 billion over 30 years. This makes it more likely the PBGC will be able to meet its future obligations.” Did the GAO simply miscalculate, optimistically predicting future earnings almost as a guarantee, misleading this non-professional investor to make a wrong move?

There are certain truths to be recalled at this point. It is true; the PBGC was losing money. The number of potential pension collapses was growing with each market downturn and companies were increasingly trying to raid the pensions of their employees, shift assets of executives into them or sell off critical units in an effort to decentralize and remove the obligation to the plan. Fixing these problems was well within the powers of this government-sponsored enterprise. But with the head of agency beholden to his appointment, the likelihood that such strong-arm tactics they could have employed was increasingly improbable.

I have mentioned numerous times in the past the causes of the PBGC’s shortfall could be tied directly to the ongoing privatization policies put forth by the Bush administration. Had companies been held responsible, which could have been achieved with a small change in the accounting rules, the need to invest in less-conservative investments would not have been necessary to achieve financial solvency.

While these changes would not have been welcomed by business, they would have made the plans much less dependent of the agency. But the changes to that were being lobbied to the accounting rules would be far different that the type that create tighter regulation. An excellent example of the attack on the rules of business accounting came from the Treasury. They have engaged in repeated attempts to modify the GAAP or Generally Accepted Accounting Principles, to make US markets more attractive to overseas listings. Those rule changes would have had an effect on pensions as well, offering yet another example of how this administration’s free-market thinking got us to this point.

Mr. Millard’s folly cost the PBGC over $4 billion as of September, with the lion’s share of those losses coming in September. Mr. Millard continued to defend his strategy suggesting that the previous asset allocation, which contained a 15-25% exposure to equities, would be increased to as much as 45% with other investments in fixed income (45%) and alternatives such as real estate. And even after the 6.5% drop in the portfolio value of the PBGC, a loss it could ill-afford, Mr. Millard told House Education and Labor Committee that the company was actually doing better than it had in the past.

He was quoted in a report by Reuters telling Congress: “the people who depend on us should not be concerned.” But we are because since that report was made public, the markets have lost trillions of dollars in additional value almost guaranteeing that the losses reported by the PBGC have grown in the month just past. These are the same markets Mr. Millard told us would provide solvency where there was none.

Mr. Millard can expect those losses to mount in the coming fiscal year as the economy heads toward recession. Pensions, for all of their faults, are the single best economic stabilizer in an environment weighted with outsized risk. Now the quality of those plans will also come into question as well. Mr. Millard’s efforts to avoid a bailout by tapping the equities markets may have ensured that one will come in the near future. As Congress tries to wrangle some sort of relief for those that really need it, the PBGC will at some point, need to take its place in line and ask taxpayers to fund what should have been left alone.

The previous article about this subject, The PBGC Re-tools, can be found here.

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Comments»

1. Isabella Coldivar - October 30, 2008

Thank you for breaking it down like this. Seeing the way all the numbers play out really puts it into perspective. Retirement has become tricky due to the current state of the economy but this helps a lot.

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