Mass. Law Blocks State Pension Fund from Starting Bond Insurer

The Massachusetts state pension fund cannot and should not start a bond insurer, executive director Michael Travaglini said Monday.

Travaglini, who oversees the $52 billion Pension Reserves Investment Management Board, said pension funds should not be in the business of insuring securities as California Treasurer Bill Lockyer has proposed.

Lockyer last month said he was exploring the possibility of having state pension funds create a new bond insurer after many established guarantors lost their top ratings due to risky subprime mortgage exposure.

“I am very glad that in Massachusetts we are prohibited by our enabling statutes (from creating a bond insurer),” Travaglini told the Reuters Hedge Funds and Private Equity Summit.

“I’m in the investment business, not the lending business in any way, shape or form. It’s certainly not the primary mission of the fund as I see it.”

In a diversified economy, there are companies that can play that role much better than pension funds, he added.

Lockyer’s idea to set up a bond insurer, which could rival a guarantor started recently by Warren Buffett’s Berkshire Hathaway Inc, is still in initial stages.

Travaglini also said that pension obligation bonds that some states have sold to plug in the unfunded liability in their retirement plans is a “bad idea.”

That’s because pension funds run the risk of owing more than the unfunded liability if the return on funds borrowed with the sale of the bonds does not exceed the interest rate on this debt.

“It’s too risky for me,” he said.

Travaglini spoke as Connecticut was scheduled to start marketing to retail investors $2 billion of pension obligation bonds to close the unfunded gap in its teachers’ retirement fund.

Massachusett’ Pension Reserves Investment Management Board is only 80 percent funded, according to Travaglini.

He said the pension funds’ assets should not cover its liabilities 100 percent to avoid pressure from beneficiaries to lower their contributions or increase their pensions.

(For summit blog: http://summitnotebook.reuters.com/)

(Reporting by Anastasija Johnson, editing by Phil Berlowitz)