The Pension Benefit Guaranty Corporation's takeover of United Airlines' pension fund may cause the PBGC to shed UAL's equity holdings and buy significant amounts of Treasuries, with some market officials expecting the PBGC to keep on its path of overweighting conservative fixed-income assets. The PBGC, with $38.9 billion in assets in its single-employer trustee fund, takes over more than 150 plans per year but the $7.2 billion UAL plan is of the larger variety. The PBGC recently announced it had reached a settlement with the bankrupt carrier to take over its significantly underfunded plan.
"Clearly when they take up [United's] pension plan they'll be bond buying and stock selling," said one accounting strategist at a bond dealer. And because the PBGC is heavily weighted toward long-duration Treasuries in its fixed-income investments elsewhere in its portfolio, the belief is it will swap stocks for government bonds once it assumes United's share.
Considering the PBGC stated it would reduce its holdings of equities to 15-25%, the organization could conceivably sell up to $3.4 billion of UAL's holdings of equities and swap them for bonds. And given that more than 90% of fixed income goes into Treasuries, the move could mean a technical boost for Treasuries over the next few months.
Analysts are quick to point out any increase would obviously be a drop in the bucket for the Treasury market and would not affect yields. But given the PBGC models safe pension investing, the cumulative effect of other pension plans following its lead could be one of the reasons yields have been so low, one strategist said.
The airline's pension assets hold only 32% in fixed income, while 63% is invested in equities and 5% in other assets, according to the company's 10K statement. The PBGC's $28.5 billion in investments in its single-employer program trust fund, meanwhile, are 54.8% composed of Treasuries.
To be sure, any change in asset allocation will come gradually and Jeffrey Speicher, spokesman for the PBGC, declined to provide more insight. Yet he noted the PBGC takes over 155-190 plans a year, with the last major ones being those of US Airways' $1.7 billion pension plan in February and Bethlehem Steel Corporation's $3.5 billion pension fund in 2003. Speicher did not provide further details on the asset allocations in these plans by press time. But as an example, the single employer terminated plans that had not yet been added to the trustee fund by September last year held only $3 million in Treasuries and $281 million in corporates and other bonds. Equities took up the lion's share at $382 million.