Background:

The Pension Benefit Guaranty Corporation (PBGC) is a U.S. Government agency created under the Employee Retirement Income Security Act of 1974. The Corporation guarantees defined pension benefits for participants and beneficiaries of insolvent companies with underfunded plans. Liabilities and losses assumed by PBGC are unpredictable and are influenced by economic conditions, levels of interest rates, and securities markets.

Investment Profile:

As of September 30, 2007, the value of PBGC's total investments in its two insurance programs, including cash and investment income, was approximately $62.6 billion. PBGC's assets are generated from premium receipts and assets from terminated trusteed plans and their sponsors. The Corporation's assets are segregated into two funds.

The Revolving Funds (valued at approximately $14.5 billion as of September 30, 2007) receive all premium payments and are required by statute or policy to be invested in fixed-income securities. The Trust Funds (valued at approximately $48.1 billion as of September 30, 2007) receive assets from terminated plans. Trust Fund assets can be invested more flexibly than Revolving Fund assets.

Because of the statutory restrictions on investment of the Revolving Funds and PBGC's previous investment policy, fixed-income securities dominated PBGC's asset mix at the end of FY 2007. As of September 30, 2007, cash and fixed-income securities, including securities lending collateral, represented about 72 percent of the total assets invested at the end of the year, while the equity allocation was 28 percent of all assets invested. A very small portion of PBGC's invested portfolio was in real estate and other financial instruments.

Overall investment policy is set by the Corporation's Board of Directors, which consists of the Secretary of Labor (Chairman), the Secretary of the Treasury, and the Secretary of Commerce. In addition, the PBGC Advisory Committee, appointed by the President, advises PBGC's Director on investment activities. PBGC uses institutional investment management firms to invest its assets subject to PBGC oversight. PBGC, with the advice of its Advisory Committee, continually reviews its investment strategy to ensure that it maintains an investment structure that is consistent with its long-term objectives and responsibilities.

In February 2008, following an extensive review that began in mid-2007, PBGC’s Board of Directors adopted a new diversified investment policy to help ensure that the federal insurance program can meet its long-term obligations to America’s retirees. The new policy, which is designed to take advantage of PBGC’s long-term investment horizon, will allocate 45 percent of Corporation assets to equity investments, 45 percent to fixed income, and 10 percent to alternative investments such as private equity. This strategy of increased diversification aims at generating better returns while providing superior protection against ultimate downside risks over time.  The new policy will give PBGC a 57 percent likelihood of achieving full funding within ten years compared to 19 percent under the previous policy.

Investment Results:

During fiscal year 2007, the Corporation achieved a 7.2% return on total invested funds compared to its liability return of 0.7%. PBGC's fixed-income program returned 3.4%, while its equity program returned 16.5%. For the year, PBGC reported gains of about $1.8 billion from fixed-income investments and about $3 billion from equity investments. Other investments, including real estate and insurance contracts, produced a gain of $19 million, for total investment income of about $4.8 billion.