Zvi Bodie tells Boston Globe, pension insurer’s aggressive switch to stocks is “totally crazy”

in Finance, Risk Management, SMG Hot Topics
March 15th, 2010

Zvi Bodie

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World-renowned retirement investment expert Zvi Bodie, the Norman and Adele Barron Professor of Management at Boston University, is interviewed by the Boston Globe for the article “Pension insurer shifted to stocks.”  “Concern increases as losses mount; Failing plans could overwhelm agency,” writes journalist Michael Kranish, who goes on to report:

Just months before the start of last year’s stock market collapse, the federal agency that insures the retirement funds of 44 million Americans departed from its conservative investment strategy and decided to put much of its $64 billion insurance fund into stocks.

Switching from a heavy reliance on bonds, the Pension Benefit Guaranty Corporation decided to pour billions of dollars into speculative investments such as stocks in emerging foreign markets, real estate, and private equity funds….Analysts expressed concern that large portions of the trust fund might have been lost at a time when many private pension plans are suffering major losses. The guarantee fund would be the only way to cover the plans if their companies go into bankruptcy.

“The truth is, this could be huge,” said Zvi Bodie, a Boston University finance professor who in 2002 advised the agency to rely almost entirely on bonds. “This has the potential to be another several hundred billion dollars. If the auto companies go under, they have huge unfunded liabilities” in pension plans that would be passed on to the agency….

Bodie…[also] questioned why a government entity that is supposed to be insuring pension funds should be investing in stocks and real estate at all. Bodie once likened the agency’s strategy to a company that insures against hurricane damage and then invests the premiums in beachfront property.

Since he issued that warning, he said, the agency has gone even more aggressively into stocks, which he called “totally crazy.”

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