The PBGC said earlier this year that it would take a more aggressive investment approach by investing more in stocks and adding new alternative investments, such as real estate and private equity funds.
The agency, which has assets of $68 billion, hopes the strategy will help it close a $14 billion gap between those assets and its liabilities. Otherwise, taxpayers could be called upon to pony up extra funding, the director of the PBGC has warned.
The PBGC has said its new approach will reduce risk because it will result in a more diversified portfolio of 45 percent stocks, 45 percent bonds, and 10 percent in alternative investments.
Previously, its targets were 75 percent to 85 percent bonds and 15 percent to 25 percent in stocks, though the actual figure reached 28 percent last year. The agency is seeking bids from Wall Street firms to help manage the switch.
The GAO, however, said that under certain scenarios the new strategy would have more volatile results than the old approach. The report said that's risky because PBGC pays out more than $4 billion a year to retirees and needs access to cash.
That need increases the risk of "any investment strategy that allocates significant portions of the portfolio to volatile or illiquid assets," the GAO said. Funds allocated to private equity, for example, may not be returned for up to seven years, the report said.
But Charles Millard, PBGC's director, said the report shows that even under the GAO's calculations, the new strategy takes on less risk than most institutional investors and could provide an additional $20 billion to $40 billion in investment gains over 30 years. That's enough to close the agency's deficit.
"The whole point of the new policy is to make it far less likely that Congress will have to engineer a bailout," he said.
The PBGC is one of the government's largest corporations and insures approximately 30,000 defined benefit pension plans. Defined benefit plans pay benefits based on years of service, salary levels and other factors. They are being increasingly replaced by 401(k)-style plans in which benefits depend on the employee's contributions. The PBGC doesn't insure 401(k) plans.
The PBGC's finances have come under strain as it has taken over several large pension plans in recent years from bankrupt airline and steel companies, including a $17 billion plan maintained by UAL Corp., parent of United Airlines. United emerged from bankruptcy in 2006.
The PBGC is funded by fees paid by the companies it insures, assets from failed pension plans, recoveries from bankruptcies and returns on invested assets. It doesn't receive taxpayer funds.
The agency now covers pensions for 1.3 million Americans who are either retired or soon will be. That's up from 624,000 in 2001.
The GAO report also urged the PBGC's board, which is chaired by the Labor Secretary, to more closely monitor the agency's investments.
The board "has not taken an active and engaged role," the GAO said, and should require more formal reporting by the PBGC's director about the new investment plan.
Labor Secretary Elaine Chao, in a letter included in the report, said the board has increased its oversight recently and reviews the PBGC's investment policy "at least" every two years and approves it "at least" every four years.
The GAO report was requested by four senators, including Sens. Max Baucus, D-Mont., and Charles Grassley, R-Iowa, chairman and senior Republican on the Senate Finance Committee.
Some members of Congress have criticized the PBGC for taking a conservative investment approach. It adopted the 15 percent to 25 percent equity limit in 2004.
Rep. Earl Pomeroy, D-N.D., said in an interview last week that the adoption of the equity cap cost the agency "billions of dollars."
In its 2007 annual report, the PBGC acknowledged that an investment portfolio with 60 percent in stocks and 40 percent bonds would have produced $7.3 billion more in returns over five years than the more conservative approach.