The government-sponsored body that insures the pensions of 44m Americans is to dramatically increase its investments in risky assets such as equities and real estate as it tries to avoid the need for a taxpayer bailout.
The move by the Pension Benefit Guaranty Corporation, which suffers a $14bn (€9.5bn, £7.2bn) deficit, was announced on the President's Day public holiday yesterday when most Americans enjoy a day off. It will see the corporation roughly double its investment in equities, to 45 per cent of its total assets.
The new strategy represents a big shift for the corporation, which has previously sought to minimise its risk by putting most of its investments into safer but lower-yielding bonds, rather than equities.
Charles Millard, director of the PBGC, said the plan offered a much higher chance that the insurance fund would be able to earn enough cash to meet all its commitments without having to ask employers for higher contributions or taxpayers for a bailout.
The equity portion of its investments returned 16.5 per cent last year, while the fixed-income portion returned just 3.4 per cent.
Mr Millard agreed that if the corporation was unable to tackle its deficit by raising additional funds from investment, employers or taxpayers, its only remaining option would be slashing retirement benefits - an unacceptable move.
"The purpose of this investment strategy is to avoid a taxpayer bailout," Mr Millard said, adding that the new strategy was actually less risky because the investments would be spread among a wider variety of asset classes.
He said the new strategy offered nearly a 60 per cent chance that the PBGC would be fully funded within 10 years, while the previous one offered only a 20 per cent chance.
"The whole problem is that we are underfunded. We are chronically underfunded," he said.
However, the move underscores the grim choices facing the PBGC, an agency under fire from both political parties as it tries to shore up its weakened finances.
Although the agency was created by government, it is not backed by it and relies only on insurance premiums paid by the companies whose plans it insures and the investment returns those premiums can earn.
It currently pays benefits to more than 700,000 retirees. Legislation that would have forced companies to fund their schemes more fully - and limited PBGC losses - failed overwhelmingly in 2005.
Another overhaul was adopted instead in 2006 that improved some safeguards but failed to ensure full funding.
President George W. Bush has announced a legislative proposal that would allow the PBGC to increase some premiums from 2009.
The PBGC, which also holds assets from schemes taken over from insolvent employers, held 28 per cent in equities at the end of last year.
It will also allocate 45 per cent to a diversified set of fixed-income assets, down from about 72 per cent at the end of 2007, and 10 per cent to alternative investments including hedge funds.
