"People need to understand that the threat to the PBGC generally is not just underfunding," Millard said in an interview with Pensions & Investments. "It’s the bankruptcy of [companies sponsoring] underfunded plans that is our threat, not the underfunding of healthy companies."
Under current law, the PBGC’s main recourse when faced with a financially challenged company with an underfunded pension plan is to threaten to terminate the plan. But the problem for the agency is that when it terminates a plan, it also assumes the liabilities, which adds pressure to the agency’s substantial funding deficit, now $11.2 billion. If the agency were allowed to raise premiums paid by the struggling company or take other steps to shore up the plan’s financial health before termination, the PBGC’s potential liability exposure would decrease.
"Risk-based premiums as well as forms of intermediate relief would go a long way to avoiding the moral hazard inherent in the pension insurance system," Millard says.
The Bush administration promoted a legislative proposal over the past several years that would have cleared the way for the PBGC to assess risk-based premiums on underfunded plans. But the proposal never got traction in Congress because employers opposed it and nobody but the PBGC supported it.
Still, Millard believes Congress would be well-advised to give the proposal a fresh look.
"The 401(k) elements of the Pension Protection Act were terrific," says Millard, who was named the PBGC’s top executive in May 2007. "But I think there’s still more work to be done relating to defined-benefit plans."
(The premiums now are the same for all corporate sponsors and are based on the number of people in the plan, although seriously underfunded plans pay an additional premium that is based on the amount of underfunding, not on the risk posed by the company.)
The agency’s huge deficit and Millard’s desire to avoid any eventual PBGC taxpayer bailout spurred the most significant contribution during his tenure: a major change in the agency’s asset allocation policy in February 2008 that permits the agency to invest up to 10 percent of the $55 billion it has available in private equity and real estate. Both are new asset classes for the PBGC.
Under the new asset allocation, designed to close the PBGC’s deficit over the next 10 to 20 years, 45 percent of assets will be in equities, 45 percent in fixed income and 10 percent in alternatives. Previously, 75 to 85 percent was in fixed income in a strategy designed to match assets with liabilities. The remainder was invested in stocks.
Some critics have charged that the new asset allocation is too aggressive for an agency that is supposed to backstop failed private pension plans. But Millard says the new policy has a far better chance of closing the PBGC deficit than the previous policy did.
"I would urge people to recognize that it is a long-term policy, and that PBGC’s liabilities will last for decades, and we need an investment policy that focuses on the long term," Millard says.
The new policy already has resulted in the commitment of $2.5 billion to three money managers to serve as strategic partners for investments in private equity and real estate, Millard says.
Under the deal, announced late last year, separate commitments of $900 million each were made to BlackRock Inc. and JPMorgan Asset Management, and $700 million was given to Goldman Sachs Asset Management. PBGC officials have declined to say how much each firm would run specifically in private equity or real estate.
But along with investing the assets, the firms are providing the PBGC with advice on risk management, consolidated reporting and education of PBGC investment staff, Millard says.
"These strategic partnerships are going to bring tremendous resources to a relatively small [PBGC] team that is managing a very large trust fund," Millard says. "I think it’s going to rebound tremendously to the PBGC’s benefit in the long term to have such greater resources on call."
Millard cited the creation of an investment committee for selecting investment managers as among his other major accomplishments. Previously, PBGC staff selected investment managers using federal procurement rules alone. The new committee provides an additional level of review.
"We’ve put in place an investment committee where we didn’t really have one," Millard says.
In addition, Millard says the PBGC on his watch also set disclosure and transparency requirements for the managers hired to move PBGC assets from one asset class to another.
Millard says transition managers previously lacked any disclosure requirements.
"While we don’t regulate that industry, I think we’ve offered a road map to pensions and other institutional investors for how to conduct asset transitions more cost-effectively and more transparently," Millard says.
Before he joined the PBGC in 2007, Millard was managing director of Broadway Partners, a national real estate investment and management firm in New York. In addition, he was formerly a New York City councilman and president of the New York City Economic Development Corp., a cabinet-level post when Rudolph Giuliani was the city’s mayor.