WASHINGTON (Reuters) - The former head of the U.S. agency that insures corporate pensions refused to testify Wednesday at a Senate hearing examining allegations that he had improper contacts with Wall Street firms.
Charles Millard, the former director of the Pension Benefit Guaranty Corp, invoked his Constitutional right to avoid self-incrimination after being subpoenaed to testify at a Senate Aging Committee hearing.
"Against the advice of senior leadership, he participated directly in picking the winners" of contracts that eventually went to BlackRock, JPMorgan and Goldman, PBGC Inspector General Rebecca Anne Batts told the hearing.
The contracts were part of a plan PBGC agreed to in early 2008 to boost its returns by investing in a broader range of instruments, including private equity, real estate and international equities.
"He engaged in extensive calling and emailing with Wall Street firms. Mr. Millard said these contacts were OK because these were his friends," Batts said.
After the hearing, a bipartisan group of six senators asked the Justice Department to explore the links between the bidders and the ex-chairman.
The agency, which insures traditional corporate pensions, said Wednesday it had a $33.5 billion deficit for the first half of fiscal 2009, worsening from a $10.7 billion deficit at the end of fiscal 2008. It sees substantial underfunding in plans by automakers, auto parts and other industries.
The agency blamed the ballooning deficit on new pension plan terminations, expectations distressed companies would turnover their retirement accounts to the government and a decline in interest rates which are used to value liabilities.
The Senate committee is chaired by Herb Kohl, who plans to introduce legislation designed to strengthen the PBGC's board of directors and conflict-of-interest policies. The Wisconsin Democrat is also calling for a $100 million contract won by JPMorgan and Goldman to be rebid.
The PBGC's inspector general said last week in a draft report that Millard violated a prohibition on contact with bidders seeking agency business.
Telephone records and emails showed Millard had contact with BlackRock, Goldman Sachs and JPMorgan Chase, which were later hired to manage real estate and private equity investments.
Batts said she found no criminal activity on the part of the bidders.
Lawmakers are increasingly concerned about the PBGC's financial health as Detroit's automakers enter bankruptcy or are on its precipice.
"As General Motors teeters on the edge of insolvency, hundreds of thousands of workers' pensions could soon become the responsibility of PBGC," Kohl said.
The agency may also need to step in and help Chrysler LLC, which filed for bankruptcy protection, he said.
Among the automakers, pension underfunding for guaranteed benefits is about $42 billion, the agency said.
Although most private companies with pension plans backed by the agency are not at risk, "the amount of underfunding in pension plans sponsored by financially weaker employers is very substantial," Vince Snowbarger, PBGC acting director, said in testimony prepared for the hearing.
The agency's exposure cuts across all sectors of the U.S. economy from weak airlines and troubled financial services to healthcare, steel and retail.
Nevertheless, Snowbarger said the agency expects to have enough money to meet its obligations for "many years."
One in seven Americans have traditional pensions known as defined benefit plans, which depend on corporate contributions to pay retirees a set amount. The PBGC was created in 1974 to insure defined benefit plans.
Such plans, which provide retirement benefits based on a worker's years of service and earnings, were once widely used. In recent years, many companies have sought to replace them with less costly plans that do not guarantee the retirement benefits a worker will receive.
Reporting by Kim Dixon and John Crawley; Editing by Lisa Von Ahn, Leslie Gevirtz, Tim Dobbyn