With ‘Limited Staff Resources’, PBGC Searches for Consultant

(May 6, 2011) – Faced with a set of problems that separates if from many other institutional investors, the Pension Benefit Guarantee Corporation (PBGC) – the $80 billion fund that insures other corporate pension plans in America – is searching for a consultant.

The current consultant is Wilshire Associates, who will be allowed to submit an RFP for the job once again. The consultant who ultimately wins the business – starting in late October, with a one-year contract extendable for four additional years – will face the unique challenges posed by the fund.

“The PBGC used Wilshire very widely [during my time there],” Charles Millard, former director of the PBGC, told aiCIO. “With limited staff resources, consultants played a regular role in asset allocation discussions, manager selections and general advice.” Providing an additional challenge for the consultant is the fact that the plan is not fully funded, has no explicit backing from the United States government, and must be ready to step in when the companies can no longer support their defined benefit pension plan – oftentimes highly correlated with poorly performing financial markets, which the PBGC invests its fund in.

“Any consultant for PBGC needs to understand well the unique nature of PBGC,” Millard said, expanding upon the idea that the PBGC requires specialized and extensive advice from its consultant. “It is neither pure government agency, nor pure pension fund, nor pure insurance company.”

It won’t be an easy job. In 2010, the PBGC said that its total deficit has increased 4.5% to $23 billion in the year to September 30, up from $22 billion the previous year. The federal agency had seen its funding level pummeled in recent years by the economic downturn, which resulted in more corporate bankrupts and pension failures. "This financial position is the result of inadequate plan funding and misfortunes that have befallen plan sponsors,” the pension insurer said in a release early this year. “In part, it is a result of the fact that the premiums PBGC charges are insufficient to pay for all the benefits that PBGC insures, and other factors." The PBGC said its total obligations increased by $11.5 billion to $102.5 billion. "The deficit – the difference between our assets and liabilities – is not an immediate cash crunch, since we have the assets to pay for the foreseeable future," PBGC spokesman Jeffrey Speicher told aiCIO following the release of the agency's annual report in November.

Partially as a result of this deficit, President Barack Obama’s administration has proposed changes to the system, namely that it be granted the ability to set employer premiums based on risk. Under President Obama’s fiscal year 2012 federal budget proposal, the new authority granted to the PBGC would save the agency an estimated $16 billion over the next 10 years, Business Insurance reported earlier this year. The administration has suggested that the change to employer premiums not be put into practice until after two years of study and public comment.