The Pension Benefit Guaranty Corp. is rolling out a pilot program that will give as many as five smaller asset managers a shot at managing a portion of the agency's $85 billion in assets.
"We have seen some really high-quality smaller asset managers, but it's been an area where we've been unable to invest," explained John Greenberg, PBGC's chief investment officer.
The success of the pilot program will determine whether or not PBGC will continue to include smaller asset managers going forward, and in what capacity. Managers with a minimum $250 million in assets under management can qualify for the new business.
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The pilot program is strictly focused on the U.S. core fixed-income allocation. The amount of assets the winning firms manage will depend on their existing AUM; PBGC said it will limit its assets to no more than 20 percent of what winning firms already manage, meaning a firm with the minimum $250 million under management will be awarded no more than $50 million.
All told, Greenberg said PBGC expects to allocate about 1 percent of the Corp.'s assets through the pilot program. No more than five firms will be awarded the new business, as that is as many as PBGC can "safely handle" with its current staff, according to Greenberg. All of the contracts will be awarded at the same time.
An official RFP will be circulated next month, and the selection of firms is expected to happen by the end of the year. Greenberg said he is prepared for a lot of interest from industry.
Firms also will need a minimum five-year performance history, and will undergo the same competitive evaluation as other money mangers, PBGC said in a statement.
Though a set period of evaluation has not been set, Greenberg said the ultimate success of the managers will determine the program's fate, whether it is extended, enlarged, and whether or not smaller firms are solicited to manage equity and other portions of PBGC's portfolio.
Right now, PBGC uses 13 outside managers to oversee its portfolio, including behemoths like BlackRock, Goldman Sachs, JP Morgan, Pimco, Neuberger Berman and State Street, among others. The agency did not provide information on how much each firm manages.
PBGC's last investment policy was issued in May 2011. It established a 30 percent target allocation for equities, and 70 percent for fixed-income. PBGC bylaws require a new policy statement every four years.
In 2008, 45 percent of assets were allocated to equities, 45 percent to fixed-income, and 10 percent to alternatives.
In the press conference announcing the new pilot program, Chief of Staff Ann Orr said the PBGC is constantly evaluating allocation strategies, in concert with PBGC's board, which includes the Secretaries of Labor and Treasury.
Last year, PBGC reported record deficits. The multiemployer program deficit rose to $42.4 billion, up from $8.3 billion the previous year, while the single-employer program deficit improved to $19.3 billion, down from $27.4 billion the previous year.
Returns of PBGC's investment portfolio go to funding its obligations, along with the premiums paid by sponsors of defined benefit plans.
In fiscal year 2014, the single-employer program had $3.8 billion in premium revenue and $6.4 billion in investment revenue. The multiemployer program had $75 million in premium revenue, and $122 million in investment revenue.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
