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Risks to Single-Employer Insurance Program Highlight Need for 
Comprehensive Reform' which was released on October 14, 2003.

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Testimony:

Before the Special Committee on Aging, United States Senate:

United States General Accounting Office:

GAO:

For Release on Delivery Expected at 10:00 a.m.

Tuesday, October 14, 2003:

Pension Benefit Guaranty Corporation:

Long-Term Financing Risks to Single-Employer Insurance Program 
Highlight Need for Comprehensive Reform:

Statement of Barbara D. Bovbjerg, Director Education, Workforce, and 
Income Security:

GAO-04-150T:

GAO Highlights:

Highlights of GAO-04-150T, a testimony before the Special Committee on 
Aging, U.S. Senate. 

Why GAO Did This Study:

More than 34 million workers and retirees in 30,000 single-employer 
defined benefit pension plans rely on a federal insurance program 
managed by the Pension Benefit Guaranty Corporation (PBGC) to protect 
their pension benefits, and the program's long-term financial 
viability is in doubt. Over the last decade, the program swung from a 
$3.6 billion accumulated deficit (liabilities exceeded assets), to a 
$10.1 billion accumulated surplus, and back to a $3.6 billion 
accumulated deficit, in 2002 dollars. Furthermore, despite a record $9 
billion in estimated losses to the program in 2002, additional severe 
losses may be on the horizon. PBGC estimates that financially weak 
companies sponsor plans with $35 billion in unfunded benefits, which 
ultimately might become losses to the program. 

This testimony provides GAO's observations on the factors that 
contributed to recent changes in the single-employer pension insurance 
program's financial condition, risks to the program's long-term 
financial viability, and changes to the program that might be 
considered to reduce those risks.


What GAO Found:

The single-employer pension insurance program returned to an 
accumulated deficit in 2002 largely due to the termination, or 
expected termination, of several severely underfunded pension plans. 
Factors that contributed to the severity of plans' underfunded 
condition included a sharp stock market decline, which reduced plan 
assets, and an interest rate decline, which increased plan termination 
costs. For example, PBGC estimates losses to the program from 
terminating the Bethlehem Steel pension plan, which was nearly fully 
funded in 1999 based on reports to IRS, at $3.7 billion when it was 
terminated in 2002. The plan's assets had decreased by over $2.5 
billion, while its liabilities had increased by about $1.4 billion 
since 1999. 

The single-employer program faces two primary risks to its long-term 
financial viability. First, the losses experienced in 2002 could 
continue or accelerate if, for example, structural problems in 
particular industries result in additional bankruptcies. Second, 
revenue from premiums and investments might be inadequate to offset 
program losses experienced to date or those that occur in the future. 
Revenue from premiums might fall, for example, if the number of 
program participants decreases. Because of these risks, we recently 
placed the single-employer insurance program on our high-risk list of 
agencies with significant vulnerabilities to the federal government.

While there is not an immediate crisis, there is a serious problem 
threatening the retirement security of millions of American workers 
and retirees. Several reforms might reduce the risks to the programís 
long-term financial viability. Such changes include: strengthening 
funding rules applicable to poorly funded plans, modifying program 
guarantees, restructuring premiums, and improving the availability of 
information about plan investments, termination funding, and program 
guarantees. Any changes adopted to address the challenge facing PBGC 
should provide a means to hold plan sponsors accountable for 
adequately funding their plans, provide plan sponsors with incentives 
to increase plan funding, and improve the transparency of plan 
information.

What GAO Recommends:

www.gao.gov/cgi-bin/getrpt?GAO-04-150T.

To view the full product, including the scope and methodology, click 
on the link above. For more information, contact Barbara Bovbjerg at 
(202) 512-7215 or bovbjergb@gao.gov.

[End of section]

Mr. Chairman and Members of the Committee:

I am pleased to be here today to discuss the serious financial 
challenges facing the Pension Benefit Guaranty Corporation's (PBGCs) 
single-employer insurance program. This federal program insures the 
benefits of the more than 34 million workers and retirees participating 
in private defined-benefit pension plans.[Footnote 1] Over the last few 
years, the finances of PBGC's single-employer insurance 
program,[Footnote 2] have taken a severe turn for the worse. From a 
$3.6 billion accumulated deficit in 1993, the program registered a 
$10.1 billion accumulated surplus (assets exceeded liabilities) in 2000 
before returning to a $3.6 billion accumulated deficit, in 2002 
dollars.[Footnote 3] More fundamentally, the long-term viability of the 
program is at risk. Even after assuming responsibility for several 
severely underfunded pension plans and recording over $9 billion in 
estimated losses in 2002, PBGC estimated that as of September 30, 2002, 
it faced exposure to approximately $35 billion in additional unfunded 
liabilities from ongoing plans that were sponsored by financially weak 
companies and may terminate.[Footnote 4]

This risk involves an issue beyond PBGC's current and future financial 
condition; it also relates to the need to protect the retirement 
security of millions of American workers and retirees. I hope my 
testimony will help clarify some of the key issues in the debate about 
how to respond to the financial challenges facing the federal insurance 
program for single-employer defined-benefit plans. As you requested, I 
will discuss (1) the factors that contributed to recent changes in the 
single-employer pension insurance program's financial condition, (2) 
risks to the program's long-term financial viability, and (3) changes 
to the program that might be considered to reduce those risks.

To identify the factors that contributed to recent changes in the 
single-employer program's financial condition, we discussed with PBGC 
officials, and examined annual reports and other available information 
related to the funding and termination of three pension plans: the 
Anchor Glass Container Corporation Service Retirement Plan, the Pension 
Plan of Bethlehem Steel Corporation and Subsidiary Companies, and the 
Polaroid Pension Plan. We selected these plans because they represented 
the largest losses to PBGC in their respective industries in fiscal 
year 2002. PBGC estimates that, collectively, the plans represented 
over $4 billion in losses to the program at plan termination. In 
particular, I will focus on the experience of the Bethlehem Steel plan 
because it provides such a vivid illustration of the immediate and 
long-term challenges to the program and the need for additional 
reforms. To identify the primary risks to the long-term viability of 
the program and options to address the challenges facing the single-
employer program, we interviewed pension experts at PBGC, at the 
Employee Benefits Security Administration of the Department of Labor, 
and in the private sector and reviewed analyses and other documents 
provided by them. To obtain additional information as to the risks 
facing PBGC from certain industries, we discussed with PBGC, and 
reviewed annual and actuarial reports for the 2003 distress termination 
of the U.S. Airways pension plan for pilots. To determine what changes 
might be considered to reduce those risks, we reviewed proposals for 
reforming the single-employer program made by the Department of the 
Treasury, PBGC, and pension professionals.

Let me first summarize my responses to your questions. The termination, 
or expected termination, of several severely underfunded pension plans 
was the major reason for PBGC's single-employer pension insurance 
program's return to an accumulated deficit in 2002. Several underlying 
factors contributed to the severity of the plans' underfunded condition 
at termination, including a sharp decline in the stock market, which 
reduced plan asset values, and a general decline in interest rates, 
which increased the cost of terminating defined-benefit pension plans. 
Falling stock prices and interest rates can dramatically reduce plan 
funding as the sponsor approaches bankruptcy. For example, while annual 
reports indicated the Bethlehem Steel Corporation pension plan was 
almost fully funded in 1999 based on reports to IRS, PBGC estimates 
that the value of the plan's assets was less than 50 percent of the 
value of its guaranteed liabilities by the time it was terminated in 
2002. The current minimum funding rules and other rules designed to 
encourage sponsors to fully fund their plans were not effective at 
preventing it from being severely underfunded at termination.

Two primary risks could affect the long-term financial viability of the 
single-employer program. First, and most worrisome, the high level of 
losses experienced in 2002, due to the bankruptcy of companies with 
large underfunded defined-benefit pension plans, could continue or 
accelerate. This could occur if the economy recovers slowly or weakly, 
returns on plan investments remain poor, interest rates remain low, or 
the structural problems of particular industries with pension plans 
insured by PBGC result in additional bankruptcies. Second, PBGC might 
not receive sufficient revenue from premium payments and its own 
investments to offset the losses experienced to date or those that may 
occur in subsequent years. This could happen if participation in the 
single-employer program falls or if PBGC's return on assets falls below 
the rate it uses to calculate the present value of benefits promised in 
the future. Because of its current financial weaknesses, as well as the 
serious, long-term risks to the program's future viability, we recently 
placed PBGC's single-employer insurance program on our high-risk list.

While there is not an immediate crisis, there is a serious problem that 
needs to be addressed. Some pension professionals have suggested a 
"wait and see" approach, betting that brighter economic conditions 
might ameliorate PBGC's financial challenges. However, the recent 
trends in the single-employer program's financial condition illustrate 
the fragility of PBGC's insured plans and suggest that an improvement 
in plan finances due to economic recovery may not address certain 
fundamental weaknesses and risks facing the single-employer insurance 
program. Agency officials and other pension professionals have 
suggested taking a more proactive approach and have identified a 
variety of options to address the challenges facing PBGC's single-
employer program. In our view, several reforms might be considered to 
reduce the risks to the single-employer program's long-term financial 
viability. These include strengthening funding rules applicable to 
poorly funded plans, modifying program guarantees, restructuring 
premiums, and improving the availability of information about plan 
investments, termination funding, and program guarantees. Under each 
reform, several possible actions could be taken. For example, one way 
to modify program guarantees is to phase-in certain unfunded benefits, 
such as "shutdown benefits." In addition, one way premiums could be 
restructured would be to base them, not only on the degree of plan 
underfunding, but also on the economic strength of the plan sponsor, 
the degree of risk to the plan's investment portfolio, the plan's 
benefit structure, and participant demographics. These options are not 
mutually exclusive, either in combination or individually and several 
variations exist within each. Each option also has advantages and 
disadvantages. In any event, any changes adopted to address the 
challenge facing PBGC should provide a means to hold sponsors 
accountable for adequately funding their plans, provide plan sponsors 
with incentives to increase plan funding, and improve the transparency 
of the plan's financial information.

Background:

Before enactment of the Employee Retirement and Income Security Act 
(ERISA) of 1974, few rules governed the funding of defined benefit 
pension plans, and participants in these plans had no guarantees they 
would receive the benefits promised. When Studebaker's pension plan 
failed in the 1960s, for example, many plan participants lost their 
pensions.[Footnote 5] Such experiences prompted the passage of ERISA to 
better protect the retirement savings of Americans covered by private 
pension plans. Along with other changes, ERISA established PBGC to pay 
the pension benefits of participants, subject to certain limits, in the 
event that an employer could not.[Footnote 6] ERISA also required PBGC 
to encourage the continuation and maintenance of voluntary private 
pension plans and to maintain premiums set by the corporation at the 
lowest level consistent with carrying out its obligations.[Footnote 7]

Under ERISA, the termination of a single-employer defined-benefit plan 
results in an insurance claim with the single-employer program if the 
plan has insufficient assets to pay all benefits accrued under the plan 
up to the date of plan termination.[Footnote 8] PBGC may pay only a 
portion of the claim because ERISA places limits on the PBGC benefit 
guarantee. For example, PBGC generally does not guarantee annual 
benefits above a certain amount, currently about $44,000 per 
participant at age 65.[Footnote 9] Additionally, benefit increases in 
the 5 years immediately preceding plan termination are not fully 
guaranteed, though PBGC will pay a portion of these increases.[Footnote 
10] The guarantee is limited to certain benefits, including so-called 
"shut-down benefits,"--significant subsidized early retirement 
benefits that are triggered by layoffs or plant closings that occur 
before plan termination. The guarantee does not generally include 
supplemental benefits, such as the temporary benefits that some plans 
pay to participants from the time they retire until they are eligible 
for Social Security benefits.

Following enactment of ERISA, however, concerns were raised about the 
potential losses that PBGC might face from the termination of 
underfunded plans. To protect PBGC, ERISA was amended in 1986 to 
require that plan sponsors meet certain additional conditions before 
terminating an underfunded plan. (See app I.) For example, sponsors 
could voluntarily terminate their underfunded plans only if they were 
bankrupt or generally unable to pay their debts without the 
termination.

Concerns about PBGC finances also resulted in efforts to strengthen the 
minimum funding rules incorporated by ERISA in the Internal Revenue 
Code (IRC). In 1987, for example, the IRC was amended to require that 
plan sponsors calculate each plan's current liability,[Footnote 11] and 
make additional contributions to the plan if it is underfunded to the 
extent defined in the law.[Footnote 12] As discussed in a 
report,[Footnote 13] we issued earlier this year, concerns that the 30-
year Treasury bond rate no longer resulted in reasonable current 
liability calculations has led both the Congress and the Administration 
to propose alternative rates for these calculations.[Footnote 14]

Despite the 1987 amendments to ERISA, concerns about PBGC's financial 
condition persisted. In 1990, as part of our effort to call attention 
to high-risk areas in the federal government, we noted that weaknesses 
in the single-employer insurance program's financial condition 
threatened PBGC's long-term viability.[Footnote 15] We stated that 
minimum funding rules still did not ensure that plan sponsors would 
contribute enough for terminating plans to have sufficient assets to 
cover all promised benefits. In 1992, we also reported that PBGC had 
weaknesses in its internal controls and financial systems that placed 
the entire agency, and not just the single-employer program, at 
risk.[Footnote 16] Three years later, we reported that legislation 
enacted in 1994 had strengthened PBGC's program weaknesses and that we 
believed improvements had been significant enough for us to remove the 
agency's high-risk designation.[Footnote 17] Since that time, we have 
continued to monitor PBGC's financial condition and internal controls. 
For example, in 1998, we reported that adverse economic conditions 
could threaten PBGC's financial condition despite recent 
improvements;[Footnote 18] in 2000, we reported that contracting 
weaknesses at PBGC, if uncorrected, could result in PBGC paying too 
much for required services;[Footnote 19] and this year, we reported 
that weaknesses in the PBGC budgeting process limited its control over 
administrative expenses.[Footnote 20]

PBGC receives no direct federal tax dollars to support the single-
employer pension insurance program. The program receives the assets of 
terminated underfunded plans and any of the sponsor's assets that PBGC 
recovers during bankruptcy proceedings.[Footnote 21] PBGC finances the 
unfunded liabilities of terminated plans with (1) premiums paid by plan 
sponsors and (2) income earned from the investment of program assets.

Initially, plan sponsors paid only a flat-rate premium of $1 per 
participant per year; however, the flat rate has been increased over 
the years and is currently $19 per participant per year. To provide an 
incentive for sponsors to better fund their plans, a variable-rate 
premium was added in 1987. The variable-rate premium, which started at 
$6 for each $1,000 of unfunded vested benefits, was initially capped at 
$34 per participant. The variable rate was increased to $9 for each 
$1,000 of unfunded vested benefits starting in 1991, and the cap on 
variable-rate premiums was removed starting in 1996. After increasing 
sharply in the 1980s, flat-rate premium income declined from $753 
million in 1993 to $654 million in 2002, in constant 2002 
dollars.[Footnote 22] (See fig. 1.) Income from the variable-rate 
premium fluctuated widely over that period.

Figure 1: Flat-and Variable-Rate Premium Income for the Single-Employer 
Pension Insurance Program, Fiscal Years 1975-2002:

[See PDF for image]

Note: PBGC follows accrual basis accounting, and as a result, included 
in the fiscal year 2002 statement an estimate of variable rate premium 
income for the period covering January 1 through September 30, 2002, 
for plans whose filings were not received by September 30, 2002. We 
adjusted PBGC data using the Consumer Price Index for All Urban 
Consumers: All Items.

[End of figure]

The slight decline in flat-rate premium revenue over the last decade, 
in real dollars, indicates that the increase in insured participants 
has not been sufficient to offset the effects of inflation over the 
period. Essentially, while the number of participants has grown since 
1980, growth has been sluggish. Additionally, after increasing during 
the early 1980s, the number of insured single-employer plans has 
decreased dramatically since 1986. (See fig. 2.):

Figure 2: Participants and Plans Covered by the Single-Employer 
Insurance Program, 1980-2002:

[See PDF for image]

[End of figure]

The decline in variable-rate premiums in 2002 may be due to a number of 
factors. For example, all else equal, an increase in the rate used to 
determine the present value of benefits reduces the degree to which 
reports indicate plans are underfunded, which reduces variable-rate 
premium payments. The Job Creation and Worker Assistance Act of 2002 
increased the statutory interest rate for variable-rate premium 
calculations from 85 percent to 100 percent of the interest rate on 30-
year U.S. Treasury securities for plan years beginning after December 
31, 2001, and before January 1, 2004.[Footnote 23]

Investment income is also a large source of funds for the single-
employer insurance program. The law requires PBGC to invest a portion 
of the funds generated by flat-rate premiums in obligations issued or 
guaranteed by the United States, but gives PBGC greater flexibility in 
the investment of other assets.[Footnote 24] For example, PBGC may 
invest funds recovered from terminated plans and plan sponsors in 
equities, real estate, or other securities and funds from variable-rate 
premiums in government or private fixed-income securities. According to 
PBGC, however, by policy, it invests all premium income in Treasury 
securities. As a result of the law and investment policies, the 
majority of the single-employer program's assets are invested in U.S. 
government securities. (See fig. 3.):

Figure 3: Market Value of Single-Employer Program Assets in Revolving 
and Trust Funds at Year End, Fiscal Years 1990-2002:

[See PDF for image]

Note: Other includes fixed-maturity securities, other than U.S. 
government securities, such as corporate bonds. In 2002, fixed-maturity 
securities, other than U.S. government securities, totaled $946 
million. We adjusted PBGC data using the Consumer Price Index for All 
Urban Consumers: All Items.

[End of figure]

Since 1990, except for 3 years, PBGC has achieved a positive return on 
the investments of single-employer program assets. (See fig 4.) 
According to PBGC, over the last 10 years, the total return on these 
investments has averaged about 10 percent.

Figure 4: Total Return on the Investment of Single-Employer Program 
Assets, Fiscal Years 1990-2002:

[See PDF for image]

[End of figure]

For the most part, liabilities of the single-employer pension insurance 
program are comprised of the present value of insured participant 
benefits. PBGC calculates present values using interest rate factors 
that, along with a specified mortality table, reflect annuity prices, 
net of administrative expenses, obtained from surveys of insurance 
companies conducted by the American Council of Life Insurers.[Footnote 
25] In addition to the estimated total liabilities of underfunded plans 
that have actually terminated, PBGC includes in program liabilities the 
estimated unfunded liabilities of underfunded plans that it believes 
will probably terminate in the near future.[Footnote 26] PBGC may 
classify an underfunded plan as a probable termination when, among 
other things, the plan's sponsor is in liquidation under federal or 
state bankruptcy laws.

The single-employer program has had an accumulated deficit--that is, 
program assets have been less than the present value of benefits and 
other liabilities--for much of its existence. (See fig. 5.) In fiscal 
year 1996, the program had its first accumulated surplus, and by fiscal 
year 2000, the accumulated surplus had increased to almost $10 billion, 
in 2002 dollars. However, the program's finances reversed direction in 
2001, and at the end of fiscal year 2002, its accumulated deficit was 
about $3.6 billion. PBGC estimates that this deficit grew to $5.7 
billion by July 31, 2003. Despite this large deficit, according to a 
PBGC analysis, the single-employer program was estimated to have enough 
assets to pay benefits through 2019, given the program's conditions and 
PBGC assumptions as of the end of fiscal year 2002.[Footnote 27] Losses 
since that time may have shortened the period over which the program 
will be able to cover promised benefits.

Figure 5: Assets, Liabilities, and Net Position of the Single-Employer 
Pension Insurance Program, Fiscal Years 1976-2002:

[See PDF for image]

Note: Amounts for 1986 do not include plans subsequently returned to a 
reorganized LTV Corporation. We adjusted PBGC data using the Consumer 
Price Index for All Urban Consumers: All Items.

[End of figure]

Termination of Severely Underfunded Plans Was Primary Factor in 
Financial Decline of Single-Employer Program:

The financial condition of the single-employer pension insurance 
program returned to an accumulated deficit in 2002 largely due to the 
termination, or expected termination, of several severely underfunded 
pension plans. In 1992, we reported that many factors contributed to 
the degree plans were underfunded at termination, including the payment 
at termination of additional benefits, such as subsidized early 
retirement benefits, which have been promised to plan participants if 
plants or companies ceased operations.[Footnote 28] These factors 
likely contributed to the degree that plans terminated in 2002 were 
underfunded. Factors that increased the severity of the plans' unfunded 
liability in 2002 were the recent sharp decline in the stock market and 
a general decline in interest rates. The current minimum funding rules 
and variable-rate premiums were not effective at preventing those plans 
from being severely underfunded at termination.

PBGC Assumed Responsibility for Several Severely Underfunded Plans in 
2002:

Total estimated losses in the single-employer program due to the actual 
or probable termination of underfunded plans increased from $705 
million in fiscal year 2001 to $9.3 billion in fiscal year 2002, in 
2002 dollars. In addition to $3.0 billion in losses from the unfunded 
liabilities of terminated plans, the $9.3 billion included $6.3 billion 
in losses from the unfunded liabilities of plans that were expected to 
terminate in the near future. Some of the terminations considered 
probable at the end of fiscal year 2002 have already occurred. For 
example, in December 2002, PBGC involuntarily terminated an underfunded 
Bethlehem Steel Corporation pension plan, which resulted in the single-
employer program assuming responsibility for about $7.2 billion in 
PBGC-guaranteed liabilities, about $3.7 billion of which was not funded 
at termination.

Much of the program's losses resulted from the termination of 
underfunded plans sponsored by failing steel companies. PBGC estimates 
that in 2002, underfunded steel company pension plans accounted for 80 
percent of the $9.3 billion in program losses for the year. The three 
largest losses in the single-employer program's history resulted from 
the termination of underfunded plans sponsored by failing steel 
companies: Bethlehem Steel, LTV Steel, and National Steel. All three 
plans were either completed terminations or listed as probable 
terminations for 2002. Giant vertically integrated steel companies, 
such as Bethlehem Steel, have faced extreme economic difficulty for 
decades, and efforts to salvage their defined-benefit plans have 
largely proved unsuccessful. According to PBGC's executive director, 
underfunded steel company pension plans have accounted for 58 percent 
of PBGC single-employer losses since 1975.

Plan Unfunded Liabilities Were Increased by Stock Market and Interest 
Rate Declines:

The termination of underfunded plans in 2002 occurred after a sharp 
decline in the stock market had reduced plan asset values and a general 
decline in interest rates had increased plan liability values, and the 
sponsors did not make the contributions necessary to adequately fund 
the plans before they were terminated. The combined effect of these 
factors was a sharp increase in the unfunded liabilities of the 
terminating plans. According to annual reports (Annual Return/Report of 
Employee Benefit Plan, Form 5500) submitted by Bethlehem Steel 
Corporation, for example, in the 7 years from 1992 to 1999, the 
Bethlehem Steel pension plan went from 86 percent funded to 97 percent 
funded. (See fig. 6.) From 1999 to plan termination in December 2002, 
however, plan funding fell to 45 percent as assets decreased and 
liabilities increased, and sponsor contributions were not sufficient to 
offset the changes.

Figure 6: Assets, Liabilities, and Funded Status of the Bethlehem Steel 
Corporation Pension Plan, 1992-2002:

[See PDF for image]

Note: Assets and liabilities for 1992 through 2001 are as of the 
beginning of the plan year. During that period, the interest rate used 
by Bethlehem Steel to value current liabilities decreased from 9.26 
percent to 6.21 percent. Assets and liabilities for 2002 are PBGC 
estimates at termination in December 2002. Termination liabilities were 
valued using a rate of 5 percent.

[End of figure]

A decline in the stock market, which began in 2000, was a major cause 
of the decline in plan asset values, and the associated increase in the 
degree that plans were underfunded at termination. For example, while 
total returns for stocks in the Standard and Poor's 500 index (S&P 500) 
exceeded 20 percent for each year from 1995 through 1999, they were 
negative starting in 2000, with negative returns reaching 22.1 percent 
in 2002. (See fig. 7.) Surveys of plan investments by Greenwich 
Associates indicated that defined-benefit plans in general had about 
62.8 percent of their assets invested in U.S. and international stocks 
in 1999.[Footnote 29]

Figure 7: Total Return on Stocks in the S&P 500 Index, 1992-2002:

[See PDF for image]

[End of figure]

A stock market decline as severe as the one experienced from 2000 
through 2002 can have a devastating effect on the funding of plans that 
had invested heavily in stocks. For example, according to a 
survey,[Footnote 30] the Bethlehem Steel defined-benefit plan had about 
73 percent of its assets (about $4.3 billion of $6.1 billion) invested 
in domestic and foreign stocks on September 30, 2000. One year later, 
assets had decreased $1.5 billion, or 25 percent, and when the plan was 
terminated in December 2002, its assets had been reduced another 23 
percent to about $3.5 billion--far less than needed to finance an 
estimated $7.2 billion in PBGC-guaranteed liabilities.[Footnote 31] 
Over that same general period, stocks in the S&P 500 had a negative 
return of 38 percent.

In addition to the possible effect of the stock market's decline, a 
drop in interest rates likely had a negative effect on plan funding 
levels by increasing plan termination costs. Lower interest rates 
increase plan termination liabilities by increasing the present value 
of future benefit payments, which in turn increases the purchase price 
of group annuity contracts used to terminate defined-benefit pension 
plans.[Footnote 32] For example, a PBGC analysis indicates that a drop 
in interest rates of 1 percentage point, from 6 percent to 5 percent, 
increased the termination liabilities of the Bethlehem Steel pension 
plan by about 9 percent, which indicates the cost of terminating the 
plan through the purchase of a group annuity contract would also have 
increased.[Footnote 33]

Relevant interest rates may have declined 3 percentage points or more 
since 1990.[Footnote 34] For example, interest rates on long-term high-
quality corporate bonds approached 10 percent at the start of the 
1990s, but were below 7 percent at the end of 2002. (See fig. 8.):

Figure 8: Interest Rates on Long-Term High-Quality Corporate Bonds, 
1990-2002:

[See PDF for image]

[End of figure]

Minimum Funding Rules and Variable-Rate Premiums Did Not Prevent Plans 
from Being Severely Underfunded:

IRC minimum funding rules and ERISA variable rate premiums, which are 
designed to ensure plan sponsors adequately fund their plans, did not 
have the desired effect for the terminated plans that were added to the 
single-employer program in 2002. The amount of contributions required 
under IRC minimum funding rules is generally the amount needed to fund 
benefits earned during that year plus that year's portion of other 
liabilities that are amortized over a period of years.[Footnote 35] 
Also, the rules require the sponsor to make an additional contribution 
if the plan is underfunded to the extent defined in the law. However, 
plan funding is measured using current liabilities, which a PBGC 
analysis indicates have been typically less than termination 
liabilities.[Footnote 36] Additionally, plans can earn funding credits, 
which can be used to offset minimum funding contributions in later 
years, by contributing more than required according to minimum funding 
rules. Therefore, sponsors of underfunded plans may avoid or reduce 
minimum funding contributions to the extent their plan has a credit 
balance in the account, referred to as the funding standard account, 
used by plans to track minimum funding contributions.[Footnote 37]

While minimum funding rules may encourage sponsors to better fund their 
plans, the rules require sponsors to assess plan funding using current 
liabilities, which a PBGC analysis indicates have been typically less 
than termination liabilities. Current and termination liabilities 
differ because the assumptions used to calculate them differ. For 
example, some plan participants may retire earlier if a plan is 
terminated than they would if the plan continues operations, and 
lowering the assumed retirement age generally increases plan 
liabilities, especially if early retirement benefits are subsidized. 
With respect to two of the terminated underfunded pension plans that we 
examine, for example, a PBGC analysis indicates:

* The retirement age assumption for the Anchor Glass pension plan on an 
ongoing plan basis was 65 for separated-vested participants. However, 
the retirement age assumption appropriate for those participants on a 
termination basis was 58--a decrease of 7 years. According to PBGC, 
changing retirement age assumptions for all participants, including 
separated-vested participants, resulted in a net increase in plan 
liabilities of about 4.6 percent.

* The retirement age assumption for the Bethlehem Steel pension plan on 
an ongoing plan basis was 62 for those active participants eligible for 
unreduced benefits after 30 years of service. On the other hand, the 
retirement age assumption for them on a plan termination basis was 55 - 
the earliest retirement age. According to PBGC, decreasing the assumed 
retirement age from 62 to 55 approximately doubled the liability for 
those participants.

Other aspects of minimum funding rules may limit their ability to 
affect the funding of certain plans as their sponsors approach 
bankruptcy. According to its annual reports, for example, Bethlehem 
Steel contributed about $3.0 billion to its pension plan for plan years 
1986 through 1996. According to the reports, the plan had a credit 
balance of over $800 million at the end of plan year 1996. Starting in 
1997, Bethlehem Steel reduced its contributions to the plan and, 
according to annual reports, contributed only about $71.3 million for 
plan years 1997 through 2001. The plan's 2001 actuarial report 
indicates that Bethlehem Steel's minimum required contribution for the 
plan year ending December 31, 2001, would have been $270 million in the 
absence of a credit balance; however, the opening credit balance in the 
plan's funding standard account as of January 1, 2001, was $711 
million. Therefore, Bethlehem Steel was not required to make any 
contributions during the year.

Other IRC funding rules may have prevented some sponsors from making 
contributions to plans that in 2002 were terminated at a loss to the 
single-employer program. For example, on January 1, 2000, the Polaroid 
pension plan's assets were about $1.3 billion compared to accrued 
liabilities of about $1.1 billion--the plan was more than 100 percent 
funded. The plan's actuarial report for that year indicates that the 
plan sponsor was precluded by the IRC funding rules from making a tax-
deductible contribution to the plan.[Footnote 38] In July 2002, PBGC 
terminated the Polaroid pension plan, and the single-employer program 
assumed responsibility for $321.8 million in unfunded PBGC-guaranteed 
liabilities for the plan. The plan was about 67 percent funded, with 
assets of about $657 million to pay estimated PBGC-guaranteed 
liabilities of about $979 million.

Another ERISA provision, concerning the payment of variable-rate 
premiums, is also designed to encourage employers to better fund their 
plans. As with minimum funding rules, the variable-rate premium did not 
provide sufficient incentives for the plan sponsors that we reviewed to 
make the contributions necessary to adequately fund their plans. None 
of the three underfunded plans that we reviewed, which became losses to 
the single-employer program in 2002 and 2003, paid a variable-rate 
premium in the 2001 plan year. Plans are exempt from the variable-rate 
premium if they are at the full-funding limit in the year preceding the 
premium payment year, in this case 2000, after applying any 
contributions and credit balances in the funding standard account. Each 
of these four plans met this criterion.

PBGC Faces Long-Term Financial Risks from a Potential Imbalance of 
Assets and Liabilities:

Two primary risks threaten the long-term financial viability of the 
single-employer program. The greater risk concerns the program's 
liabilities: large losses, due to bankrupt firms with severely 
underfunded pension plans, could continue or accelerate. This could 
occur if returns on investment remain poor, interest rates stay low, 
and economic problems persist. More troubling for liabilities is the 
possibility that structural weaknesses in industries with large 
underfunded plans, including those greatly affected by increasing 
global competition, combined with the general shift toward defined-
contribution pension plans, could jeopardize the long-term viability of 
the defined-benefit system. On the asset side, PBGC also faces the risk 
that it may not receive sufficient revenue from premium payments and 
investments to offset the losses experienced by the single-employer 
program in 2002 or that this program may experience in the future. This 
could happen if program participation falls or if PBGC earns a return 
on its assets below the rate it uses to value its liabilities.

Several Factors Affect the Degree to Which Plans Are Underfunded and 
the Likelihood That Plan Sponsors Will Go Bankrupt:

Plan terminations affect the single-employer program's financial 
condition because PBGC takes responsibility for paying benefits to 
participants of underfunded terminated plans. Several factors would 
increase the likelihood that sponsoring firms will go bankrupt, and 
therefore will need to terminate their pension plans, and the 
likelihood that those plans will be underfunded at termination. Among 
these are poor investment returns, low interest rates, and continued 
weakness in the national economy and or specific sectors. Particularly 
troubling may be structural weaknesses in certain industries with large 
underfunded defined-benefit plans.

Poor investment returns from a decline in the stock market can affect 
the funding of pension plans. To the extent that pension plans invest 
in stocks, the decline in the stock market will increase the chance 
that plans will be underfunded should they terminate. A Greenwich 
Associates survey of defined-benefit plan investments indicates that 
59.4 percent of plan assets were invested in stocks in 2002.[Footnote 
39] Clearly, the future direction of the stock market is very difficult 
to forecast. From the end of 1999 through the end of 2002, total 
cumulative returns in the stock market, as measured by the S&P 500, 
were negative 37.6 percent. In 2003, the S&P 500 has partially 
recovered those losses, with total returns (from a lower starting 
point) of 14.7 percent through the end of September. From January 1975, 
the beginning of the first year following the passage of ERISA, through 
September 2003, the average annual compounded nominal return on the S&P 
500 equaled 13.5 percent.

A decline in asset values can be particularly problematic for plans if 
interest rates remain low or fall, which raises plan liabilities, all 
else equal. The highest allowable discount rate for calculating current 
plan liabilities, based on the 30-year U.S. Treasury bond rate, has 
been no higher than 7.1 percent since April, 1998, lower than any 
previous point during the 1990s.[Footnote 40] Falling interest rates 
raise the price of group annuities that a terminating plan must 
purchase to cover its promised benefits and increase the likelihood 
that a terminating plan will not have sufficient assets to make such a 
purchase.[Footnote 41] An increase in liabilities due to falling 
interest rates also means that companies may be required under the 
minimum funding rules to increase contributions to their plans. This 
can create financial strain and increase the chances of the firm going 
bankrupt, thus increasing the risk that PBGC will have to take over an 
underfunded plan.

Economic weakness can also lead to greater underfunding of plans and to 
a greater risk that underfunded plans will terminate. For many firms, 
slow or declining economic growth causes revenues to decline, which 
makes contributions to pension plans more difficult. Economic 
sluggishness also raises the likelihood that firms sponsoring pension 
plans will go bankrupt. Three of the last five annual increases in 
bankruptcies coincided with recessions, and the record economic 
expansion of the 1990s is associated with a substantial decline in 
bankruptcies. Annual plan terminations resulting in losses to the 
single-employer program rose from 83 in 1989 to 175 in 1991, and, after 
declining to 65 in 2000, the number reached 93 in 2001.[Footnote 42]

Weakness in certain industries, particularly the airline and automotive 
industries, may threaten the viability of the single-employer program. 
Because PBGC has already absorbed most of the pension plans of steel 
companies, it is the airline industry, with $26 billion of total 
pension underfunding, and the automotive sector, with over $60 billion 
in underfunding, that currently represent PBGC's greatest future 
financial risks. In recent years, profit pressures within the U.S. 
airline industry have been amplified by severe price competition, 
recession, terrorism, the war in Iraq, and the outbreak of Severe Acute 
Respiratory Syndrome (SARS), creating recent bankruptcies and 
uncertainty for the future financial health of the industry. As one 
pension expert noted, a potentially exacerbating risk in weak 
industries is the cumulative effect of bankruptcy; if a critical mass 
of firms go bankrupt and terminate their underfunded pension plans, 
others, in order to remain competitive, may also declare bankruptcy to 
avoid the cost of funding their plans.

Because the financial condition of both firms and their pension plans 
can eventually affect PBGC's financial condition, PBGC tries to 
determine how many firms are at risk of terminating their pension plans 
and the total amount of unfunded vested benefits. According to PBGC's 
fiscal year 2002 estimates, the agency is at potential risk of taking 
over $35 billion in unfunded vested benefits from plans that are 
sponsored by financially weak companies and could terminate.[Footnote 
43] Almost one-third of these unfunded benefits, about $11.4 billion, 
are in the airline industry. Additionally, PBGC estimates that it could 
become responsible for over $15 billion in shutdown benefits in PBGC-
insured plans.

PBGC uses a model called the Pension Insurance Modeling System (PIMS) 
to simulate the flow of claims to the single-employer program and to 
project its potential financial condition over a 10-year period. This 
model produces a very wide range of possible outcomes for PBGC's future 
net financial position.[Footnote 44]

Revenue from Premiums and Investments May Not Offset Program's Current 
Deficit or Possible Future Losses:

To be viable in the long term, the single-employer program must receive 
sufficient income from premiums and investments to offset losses due to 
terminating underfunded plans. A number of factors could cause the 
program's revenues to fall short of this goal or decline outright. For 
example, fixed-rate premiums would decline if the number of 
participants covered by the program decreases, which may happen if 
plans leave the system and are not replaced. Additionally, the 
program's financial condition would deteriorate to the extent 
investment returns fall below the assumed interest rate used to value 
liabilities.

Annual PBGC income from premiums and investments averaged $1.3 billion 
from 1976 to 2002, in 2002 dollars, and $2 billion since 1988, when 
variable-rate premiums were introduced. Since 1988, investment income 
has on average equaled premium income, but has varied more than premium 
income, including 3 years in which investment income fell below zero. 
(See fig. 9.) In 2001, total premium and investment was negative and in 
2002 equaled approximately $1 billion.

Figure 9: PBGC Premium and Investment Income, 1976-2002:

[See PDF for image]

Note: We adjusted PBGC data using the Consumer Price Index for All 
Urban Consumers: All Items.

[End of figure]

Premium revenue for PBGC would likely decline if the total number of 
plans and participants terminating their defined-benefit plans exceeded 
the new plans and participants joining the system. This decline in 
participation would mean a decline in PBGC's flat-rate premiums. If 
more plans become underfunded, this could possibly raise the revenue 
PBGC receives from variable-rate premiums, but would also be likely to 
raise the overall risk of plans terminating with unfunded liabilities. 
Premium income, in 2002 dollars, has fallen every year since 1996, even 
though the Congress lifted the cap on variable-rate premiums in that 
year.

The decline in the number of plans PBGC insures may cast doubt on its 
ability to increase premium income in the future. The number of PBGC-
insured plans has decreased steadily from approximately 110,000 in 1987 
to around 30,000 in 2002.[Footnote 45] While the number of total 
participants in PBGC-insured single-employer plans has grown 
approximately 25 percent since 1980, the percentage of participants who 
are active workers has declined from 78 percent in 1980 to 53 percent 
in 2000. Manufacturing, a sector with virtually no job growth in the 
last half-century, accounted for almost half of PBGC's single-employer 
program participants in 2001, suggesting that the program needs to rely 
on other sectors for any growth in premium income. (See fig 10.) In 
addition, a growing percentage of plans have recently become hybrid 
plans, such as cash-balance plans that incorporate characteristics of 
both defined-contribution and defined-benefit plans. Hybrid plans are 
more likely than traditional defined-benefit plans to offer 
participants the option of taking benefits as a lump-sum distribution. 
If the proliferation of hybrid plans increases the number of 
participants taking lump sums instead of retirement annuities, over 
time this would reduce the number of plan participants, thus 
potentially reducing PBGC's flat-rate premium revenue.[Footnote 46] 
Unless something reverses these trends, PBGC may have a shrinking plan 
and participant base to support the program in the future and that base 
may be concentrated in certain, potentially more vulnerable industries.

Figure 10: Distribution of PBGC-Insured Participants by Industry, 2001:

[See PDF for image]

Note: Percentages do not sum to 100 due to rounding.

[End of figure]

Even more problematic than the possibility of falling premium income 
may be that PBGC's premium structure does not reflect many of the risks 
that affect the probability that a plan will terminate and impose a 
loss on PBGC. While PBGC charges plan sponsors a variable-rate premium 
based on the plan's level of underfunding, premiums do not consider 
other relevant risk factors, such as the economic strength of the 
sponsor, plan asset investment strategies, the plan's benefit 
structure, or the plans demographic profile. Because these affect the 
risk of PBGC having to take over an underfunded pension plan, it is 
possible that PBGC's premiums will not adequately and equitably protect 
the agency against future losses. The recent terminations of Bethlehem 
Steel, Anchor Glass, and Polaroid, plans that paid no variable-rate 
premiums shortly before terminating with large underfunded balances, 
lend some evidence to this possibility. Sponsors also pay flat-rate 
premiums in addition to variable-rate premiums, but these reflect only 
the number of plan participants and not other risk factors that affect 
PBGC's potential exposure to losses. Full-funding limitations may 
exacerbate the risk of underfunded terminations by preventing firms 
from contributing to their plans during strong economic times when 
asset values are high and firms are in the best financial position to 
make contributions.

It may also be difficult for PBGC to diversify its pool of insured 
plans among strong and weak sponsors and plans. In addition to facing 
firm-specific risk that an individual underfunded plan may terminate, 
PBGC faces market risk that a poor economy may lead to widespread 
underfunded terminations during the same period, which potentially 
could cause very large losses for PBGC. Similarly, PBGC may face risk 
from insuring plans concentrated in vulnerable industries that may 
suffer bankruptcies over a short time period, as has happened recently 
in the steel and airline industries. One study estimates that the 
overall premiums collected by PBGC amount to about 50 percent of what a 
private insurer would charge because its premiums do not account for 
this market risk.[Footnote 47]

The net financial position of the single-employer program also depends 
heavily on the long-term rate of return that PBGC achieves from the 
investment of the program's assets. All else equal, PBGC's net 
financial condition would improve if its total net return on invested 
assets exceeded the discount rate it used to value its liabilities. For 
example, between 1993 and 2000 the financial position of the single-
employer program benefited from higher rates of return on its invested 
assets and its financial condition improved. However, if the rate of 
return on assets falls below the discount rate, PBGC's finances would 
worsen, all else equal. As of September 30, 2002, PBGC had 
approximately 65 percent of its single-employer program investments in 
U.S. government securities and approximately 30 percent in equities. 
The high percentage of assets invested in Treasury securities, which 
typically earn low yields because they are considered to be relatively 
"risk-free" assets, may limit the total return on PBGC's 
portfolio.[Footnote 48] Additionally, PBGC bases its discount rate on 
surveys of insurance company group annuity prices, and because PBGC 
invests differently than do insurance companies, we might expect some 
divergence between the discount rate and PBGC's rate of return on 
assets. PBGC's return on total invested funds was 2.1 percent for the 
year ending September 30, 2002, and 5.8 percent for the 5-year period 
ending on that date. For fiscal year 2002, PBGC used an annual discount 
rate of 5.70 percent to determine the present value of future benefit 
payments through 2027 and a rate of 4.75 percent for payments made in 
the remaining years.

The magnitude and uncertainty of these long-term financial risks pose 
particular challenges for the PBGC's single-employer insurance program 
and potentially for the federal budget. In 1990, we began a special 
effort to review and report on the federal program areas we considered 
high risk because they were especially vulnerable to waste, fraud, 
abuse, and mismanagement. In the past, we considered PBGC to be on our 
high-risk list because of concerns about the program's viability and 
about management deficiencies that hindered that agency's ability to 
effectively assess and monitor its financial condition. The current 
challenges to PBGC's single-employer insurance program concern 
immediate as well as long-term financial difficulties, which are more 
structural weaknesses rather than operational or internal control 
deficiencies. Nevertheless, because of serious risks to the program's 
viability, we have placed the PBGC single-employer insurance program on 
our high-risk list.

Several Reforms Might Reduce The Risks To The Program's Financial 
Viability:

Although some pension professionals have suggested a "wait and see" 
approach, betting that brighter economic conditions improving PBGC's 
future financial condition are imminent, agency officials and other 
pension professionals have suggested taking a more prudent, proactive 
approach, identifying a variety of options that could address the 
challenges facing PBGC's single-employer program. In our view, several 
types of reforms might be considered to reduce the risks to the single-
employer program's long-term financial viability. These reforms could 
be made to:

* strengthen funding rules applicable to poorly funded plans;

* modify program guarantees;

* restructure premiums; and:

* improve the availability of information about plan investments, 
termination funding, and program guarantees.

Several variations exist within these options and each has advantages 
and disadvantages. In any event, any changes adopted to address the 
challenge facing PBGC should provide a means to hold sponsors 
accountable for adequately funding their plans, provide plan sponsors 
with incentives to increase plan funding, and improve the transparency 
of the plan's financial information.

Strengthening Plan Funding Rules Might Reduce Program Risks:

Funding rules could be strengthened to increase minimum contributions 
to underfunded plans and to allow additional contributions to fully 
funded plans.[Footnote 49] This approach would improve plan funding 
over time, while limiting the losses PBGC would incur when a plan is 
terminated. However, even if funding rules were to be strengthened 
immediately, it could take years for the change to have a meaningful 
effect on PBGC's financial condition. In addition, such a change would 
require some sponsors to allocate additional resources to their pension 
plans, which may cause the plan sponsor of an underfunded plan to 
provide less generous wages or benefits than would otherwise be 
provided. The IRC could be amended to:

* Base additional funding requirement and maximum tax-deductible 
contributions on plan termination liabilities, rather than current 
liabilities. Since plan termination liabilities typically exceed 
current liabilities, such a change would likely improve plan funding 
and therefore reduce potential claims against PBGC. One problem with 
this approach is the difficulty plan sponsors would have determining 
the appropriate interest rate to use in valuing termination 
liabilities. As we reported, selecting an appropriate interest rate for 
termination liability calculations is difficult because little 
information exists on which to base the selection.[Footnote 50]

* Raise threshold for additional funding requirement. The IRC requires 
sponsors to make additional contributions under two circumstances: (1) 
if the value of plan assets is less than 80 percent of its current 
liability or (2) if the value of plan assets is less than 90 percent of 
its current liability, depending on plan funding levels for the 
previous 3 years. Raising the threshold would require more sponsors of 
underfunded plans to make the additional contributions.

* Limit the use of credit balances. For sponsors who make contributions 
in any given year that exceed the minimum required contribution, the 
excess plus interest is credited against future required contributions. 
Limiting the use of credit balances to offset contribution requirements 
might also prevent sponsors of significantly underfunded plans from 
avoiding contributions. Such limitations might also be applied based on 
the plan sponsor's financial condition. For example, sponsors with poor 
cash flow or low credit ratings could be restricted from using their 
credit balances to reduce their contributions.

* Limit lump-sum distributions. Defined benefit pension plans may offer 
participants the option of receiving their benefit in a lump-sum 
payment. Allowing participants to take lump-sum distributions from 
severely underfunded plans, especially those sponsored by financially 
weak companies, allows the first participants who request a 
distribution to drain plan assets, which might result in the remaining 
participants receiving reduced payments from PBGC if the plan 
terminates. However, the payment of lump sums by underfunded plans may 
not directly increase losses to the single employer program because 
lump sums reduce plan liabilities as well as plan assets.

* Raise the level of tax-deductible contributions. The IRC and ERISA 
restrict tax-deductible contributions to prevent plan sponsors from 
contributing more to their plan than is necessary to cover accrued 
future benefits.[Footnote 51] Raising these limitations might result in 
pension plans being better funded, decreasing the likelihood that they 
will be underfunded should they terminate.[Footnote 52]

Modifying Program Guarantee Would Decrease Plan Underfunding:

Modifying certain guaranteed benefits could decrease losses incurred by 
PBGC from underfunded plans. This approach could preserve plan assets 
by preventing additional losses that PBGC would incur when a plan is 
terminated. However, participants would lose benefits provided by some 
plan sponsors. ERISA could be amended to:

* Phase-in the guarantee of shutdown benefits. PBGC is concerned about 
its exposure to the level of shutdown benefits that it guarantees. 
Shutdown benefits provide additional benefits, such as significant 
early retirement benefit subsidies to participants affected by a plant 
closing or a permanent layoff. Such benefits are primarily found in the 
pension plans of large unionized companies in the auto, steel, and tire 
industries. In general, shutdown benefits cannot be adequately funded 
before a shutdown occurs. Phasing in guarantees from the date of the 
applicable shutdown could decrease the losses incurred by PBGC from 
underfunded plans.[Footnote 53] However, modifying these benefits would 
reduce the early retirement benefits for participants who are in plans 
with such provisions and are affected by a plant closing or a permanent 
layoff. Dislocated workers, particularly in manufacturing, may suffer 
additional losses from lengthy periods of unemployment or from finding 
reemployment only at much lower wages.

* Expand restrictions on unfunded benefit increases. Currently, plan 
sponsors must meet certain conditions before increasing the benefits of 
plans that are less than 60 percent funded.[Footnote 54] Increasing 
this threshold, or restricting benefit increases when plans reach the 
threshold, could decrease the losses incurred by PBGC from underfunded 
plans. Plan sponsors have said that the disadvantage of such changes is 
that they would limit an employer's flexibility with regard to setting 
compensation, making it more difficult to respond to labor market 
developments. For example, a plan sponsor might prefer to offer 
participants increased pension payments or shutdown benefits instead of 
offering increased wages because pension benefits can be deferred--
providing time for the plan sponsor to improve its financial condition-
-while wage increases have an immediate effect on the plan sponsor's 
financial condition.

Restructuring The Program's Premium Structure Might Improve Its 
Financial Viability:

PBGC's premium rates could be increased or restructured to improve 
PBGC's financial condition. Changing premiums could increase PBGC's 
revenue or provide an incentive for plan sponsors to better fund their 
plans. However, premium changes that are not based on the degree of 
risk posed by different plans may force financially healthy companies 
out of the defined-benefit system and discourage other plan sponsors 
from entering the system. Various actions could be taken to reduce 
guaranteed benefits. ERISA could be amended to:

* Increase or restructure variable-rate premium. The current variable-
rate premium of $9 per $1,000 of unfunded liability could be increased. 
The rate could also be adjusted so that plans with less adequate 
funding pay a higher rate. Premium rates could also be restructured 
based on the degree of risk posed by different plans, which could be 
assessed by considering the financial strength and prospects of the 
plan's sponsor, the risk of the plan's investment portfolio, 
participant demographics, and the plan's benefit structure--including 
plans that have lump-sum,[Footnote 55] shutdown benefit, and floor-
offset provisions.[Footnote 56] One advantage of a rate increase or 
restructuring is that it might improve accountability by providing for 
a more direct relationship between the amount of premium paid and the 
risk of underfunding. A disadvantage is that it could further burden 
already struggling plan sponsors at a time when they can least afford 
it, or it could reduce plan assets, increasing the likelihood that 
underfunded plans will terminate. A program with premiums that are more 
risk-based could also be more challenging for PBGC to administer.

* Increase fixed-rate premium. The current fixed rate of $19 per 
participant annually could be increased. Since the inception of PBGC, 
this rate has been raised four times, most recently in 1991 when it was 
raised from $16 to $19. Such increases generally raise premium income 
for PBGC, but the current fixed-rate premium has not reflected the 
changes in inflation since 1991. By indexing the rate to the consumer 
price index, changes to the premium would be consistent with inflation. 
However, any increases in the fixed-rate premium would affect all plans 
regardless of the adequacy of their funding.

Increasing Transparency of Plan Information Might Encourage Sponsors to 
Better Fund Plans, Reducing Program Risks:

Improving the availability of information to plan participants and 
others about plan investments, termination funding status, and PBGC 
guarantees may give plan sponsors additional incentives to better fund 
their plans, making participants better able to plan for their 
retirement. ERISA could be amended to:

* Disclose information on plan investments. While some asset allocation 
information is reported by plans in form 5500 filings with the IRS, 
some plan investments may be made through common and collective trusts, 
master trusts, and registered investment companies, which make it 
difficult or impossible for participants and others to determine the 
asset classes-such as equity or fixed-income investments-for many plan 
investments. Improving the availability of plan asset allocation 
information may give plan sponsors an incentive to increase funding of 
underfunded plans or limit risky investments. Information provided to 
participants could also disclose how much of plan assets are invested 
in the sponsor's own securities. This would be of concern because 
should the sponsor becomes bankrupt; the value of the securities could 
be expected to drop significantly, reducing plan funding. Although this 
information is currently provided in the plan's form 5500, it is not 
readily accessible to participants. Additionally, if the defined-
benefit plan has a floor-offset arrangement and its benefits are 
contingent on the investment performance of a defined-contribution 
plan, then information provided to participants could also disclose how 
much of that defined-contribution plan's assets are invested in the 
sponsor's own securities.

* Disclose plan termination funding status. Under current law, sponsors 
are required to report a plan's current liability for funding purposes, 
which often can be lower than termination liability. In addition, only 
participants in plans below a certain funding threshold receive annual 
notices of the funding status of their plans.[Footnote 57] As a result, 
many plan participants, including participants of the Bethlehem Steel 
pension plan, did not receive such notifications in the years 
immediately preceding the termination of their plans. Expanding the 
circumstances under which sponsors must notify participants of plan 
underfunding might give sponsors an additional incentive to increase 
plan funding and would enable more participants to better plan their 
retirement.

* Disclose benefit guarantees to additional participants. As with the 
disclosure of plan funding status, only participants of plans below the 
funding threshold receive notices on the level of program guarantees 
should their plan terminate. Termination of a severely underfunded plan 
can significantly reduce the benefits participants receive. For 
example, 59-year old pilots were expecting annual benefits of $110,000 
per year on average when the US Airways plan was terminated in 2003, 
while the maximum PBGC-guaranteed benefit at age 60 is $28,600 per 
year.[Footnote 58] Expanding the circumstances under which plan 
sponsors must notify participants of PBGC guarantees may enable more 
participants to better plan for their retirement.

Conclusion:

The current financial challenges facing PBGC and the array of policy 
options to address those challenges are more appropriately viewed 
within the context of the agency's overall mission. In 1974, ERISA 
placed three important charges on PBGC: first, protect the pension 
benefits so essential to the retirement security of hard working 
Americans; second, minimize the pension insurance premiums and other 
costs of carrying out the agency's obligations; and finally, foster the 
health of the private defined-benefit pension plan system. While 
addressing one or even two of these goals would be a challenge, it is a 
far more formidable endeavor to fulfill all three. In any event, any 
changes adopted to address the challenges facing PBGC should provide 
plan sponsors with incentives to increase plan funding, improve the 
transparency of the plan's financial information, and provide a means 
to hold sponsors accountable for funding their plans adequately. 
Ultimately, however, for any insurance program, including the single-
employer pension insurance program, to be self-financing, there must be 
a balance between premiums and the program's exposure to losses.

A variety of options are available to the Congress and PBGC to address 
the short-term vulnerabilities of the single-employer insurance 
program. Congress will have to weigh carefully the strengths and 
weaknesses of each option as it crafts the appropriate policy response. 
However, to understand the program's structural problems, it helps to 
understand how much the world has changed since the enactment of ERISA. 
In 1974, the long-term decline that our nation's private defined-
benefit pension system has experienced since that time might have been 
difficult for some to envision. Although there has been some absolute 
growth in the system since 1980, active workers have comprised a 
declining percentage of program participants, and defined-benefit plan 
coverage has declined as a percentage of the national private labor 
force. The causes of this long-term decline are many and complex and 
have turned out to be more systemic, more structural in nature, and far 
more powerful than the resources and bully pulpit that PBGC can bring 
to bear.

This trend has had important implications for the nature and the 
magnitude of the risk that PBGC must insure. Since 1987, as employers, 
both large and small, have exited the system, newer firms have 
generally chosen other vehicles to help their employees provide for 
their retirement security. This has left PBGC with a risk pool of 
employers that is concentrated in sectors of the economy, such as air 
transportation and automobiles, which have become increasingly 
vulnerable. As of 2002, almost half of all defined-benefit plan 
participants were covered by plans offered by firms in manufacturing 
industries. The secular decline and competitive turmoil already 
experienced in industries like steel and air transportation could well 
extend to the other remaining strongholds of defined-benefit plans in 
the future, weakening the system even further.

Thus, the long-term financial health of PBGC and its ability to protect 
workers' pensions is inextricably bound to this underlying change in 
the nature of the risk that it insures, and implicitly to the 
prospective health of the defined-benefit system. Options that serve to 
revitalize the defined benefit system could stabilize PBGC's financial 
situation, although such options may be effective only over the long 
term. The more immediate challenge, however, is the fundamental 
consideration of the manner in which the federal government protects 
the defined-benefit pensions of workers in this increasingly risky 
environment. We look forward to working with the Congress on this 
crucial subject.

Mr. Chairman, members of the committee, that concludes my statement. 
I'd be happy to answer any questions you may have.

[End of section]

Appendix I: Key Legislative Changes That Affect the Single-Employer 
Insurance Program:

As part of the Employee Retirement and Income Security Act (ERISA) of 
1974, the Congress established the Pension Benefit Guaranty Corporation 
(PBGC) to administer the federal insurance program. Since 1974, the 
Congress has amended ERISA to improve the financial condition of the 
insurance program and the funding of single-employer plans (see table 
1).

Table 1: Key Legislative Changes to the Single-Employer Insurance 
Program Since ERISA Was Enacted:

Year: 1974; Law: ERISA; Number: P.L. 93-406; Key provisions: Created a 
federal pension insurance program and established a flat-rate premium 
and minimum and maximum funding rules.

Year: 1986; Law: Single-Employer Pension Plan Amendments Act of 1986 
enacted as Title XI of the Consolidated Omnibus Budget Reconciliation 
Act of 1985; Number: P.L. 99-272; Key provisions: Raised the flat-rate 
premium and established financial distress criteria that sponsoring 
employers must meet to terminate an underfunded plan.

Year: 1987; Law: Pension Protection Act enacted as part of the Omnibus 
Budget Reconciliation Act of 1987; Number: P.L. 100-203; Key 
provisions: Increased the flat-rate premium and added a variable-rate 
premium based on 80 percent of the 30-year Treasury rate. In addition, 
established a permissible range of 90-110 percent around the weighted 
average 30-year of the Treasury rate as the basis for current liability 
calculations, increased the minimum funding standards, and established 
a full-funding limitation based on 150 percent of current liability.

Year: 1994; Law: Retirement Protection Act enacted as part of the 
Uruguay Rounds Agreements Act, also referred to as the General 
Agreement on Tariffs and Trade; Number: P.L. 103-465; Key provisions: 
Raised the basis for variable-rate premium calculation from 80 percent 
to 85 percent of the 30-year Treasury rate (effective July 1997). 
Phased out the cap on the variable-rate premium. Strengthened funding 
requirements by narrowing the permissible range of the allowable 
interest rates to 90-105 percent of the weighted average 30-year 
Treasury rate and standardizing mortality assumptions for the current 
liability calculation. Also, established 90 percent as the minimum 
full-funding limitation.

Year: 2001; Law: The Economic Growth and Tax Relief Reconciliation Act 
of 2001; Number: P.L. 107-16; Key provisions: Accelerated the phasing 
out of the 160 percent full-funding limitation and repealed it for plan 
years beginning in 2004 and thereafter.

Year: 2002; Law: The Job Creation and Worker Assistance Act of 2002; 
Number: P.L. 107-147; Key provisions: Temporarily expanded the 
permissible range of the statutory interest rates to 90 to 120 percent 
of the weighted average of the 30-year Treasury rate for current 
liability calculations and temporarily increased the PBGC variable-rate 
premium calculations to 100 percent of the 30-year Treasury rate for 
plan years beginning after December 31, 2001, and before January 1, 
2004.

Source: Public Law.

[End of table]

FOOTNOTES

[1] A defined-benefit plan promises a benefit that is generally based 
on an employee's salary and years of service. The employer is 
responsible for funding the benefit, investing and managing plan 
assets, and bearing the investment risk. In contrast, under a defined 
contribution plan, benefits are based on the contributions to and 
investment returns on individual accounts, and the employee bears the 
investment risk. 

[2] There are two federal insurance programs for defined-benefit plans: 
one for single-employer plans and another for multiemployer plans. Our 
work was limited to the PBGC program to insure the benefits promised by 
single-employer defined-benefit pension plans. Single-employer plans 
provide benefits to employees of one firm or, if plan terms are not 
collectively bargained, employees of several related firms. 

[3] PBGC estimates that its deficit had grown to about $5.7 billion at 
the end of July 2003 based on its latest unaudited financial report.

[4] PBGC estimates that by the end of fiscal year 2003, the amount of 
underfunding in financially troubled companies could exceed $80 
billion. According to PBGC, for example, companies whose credit quality 
is below investment grade sponsor a number of plans. PBGC classifies 
such plans as reasonably possible terminations if the sponsors' 
financial condition and other factors did not indicate that termination 
of their plans was likely as of year-end. See PBGC 2002 Annual Report, 
p. 41. The independent accountants that audited PBGC's financial 
statement reported that PBGC needs to improve its controls over the 
identification and measurement of estimated liabilities for probable 
and reasonably possible plan terminations. According to an official, 
PBGC has implemented new procedures focused on improving these 
controls. See Audit of the Pension Benefit Guaranty Corporation's 
Fiscal Year 2002 and 2001 Financial Statements in PBGC Office of 
Inspector General Audit Report, 2003-3/23168-2 (Washington, D.C.: Jan. 
30, 2003).

[5] The company and the union agreed to terminate the plan along the 
lines set out in the collective bargaining agreement: retirees and 
retirement eligible employees over age 60 received full pensions and 
vested employees under age 60 received a lump-sum payment worth about 
15 percent of the value of their pensions. Employees, whose benefit 
accruals had not vested, including all employees under age 40, received 
nothing. James A. Wooten, "'The Most Glorious Story of Failure in 
Business:' The Studebaker - Packard Corporation and the Origins of 
ERISA." Buffalo Law Review, vol. 49 (Buffalo, NY: 2001): 731.

[6] Some defined-benefit plans are not covered by PBGC insurance; for 
example, plans sponsored by professional service employers, such as 
physicians and lawyers, with 25 or fewer employees.

[7] See section 4002(a) of P.L. 93-406, Sep. 2, 1974.

[8] The termination of a fully funded defined-benefit pension plan is 
termed a standard termination. Plan sponsors may terminate fully funded 
plans by purchasing a group annuity contract from an insurance company 
under which the insurance company agrees to pay all accrued benefits or 
by paying lump-sum benefits to participants if permissible. Terminating 
an underfunded plan is termed a distress termination if the plan 
sponsor requests the termination or an involuntary termination if PBGC 
initiates the termination. PBGC may institute proceedings to terminate 
a plan if, among other things, the plan will be unable to pay benefits 
when due or the possible long-run loss to PBGC with respect to the plan 
may reasonably be expected to increase unreasonably if the plan is not 
terminated. See 29 U.S.C. 1342(a).

[9] The amount guaranteed by PBGC is reduced for participants under age 
65.

[10] The guaranteed amount of the benefit increase is calculated by 
multiplying the number of years the benefit increase has been in 
effect, not to exceed 5 years, by the greater of (1) 20 percent of the 
monthly benefit calculated in accordance with PBGC regulations or (2) 
$20 per month. See 29 C.F.R. 4022.25(b).

[11] Under the IRC, current liability means all liabilities to 
employees and their beneficiaries under the plan. See 26 U.S.C. 
412(l)(7)(A). In calculating current liabilities, the IRC requires 
plans to use an interest rate from within a permissible range of rates. 
See 26 U.S.C. 412(b)(5)(B). In 1987, the permissible range was not more 
than 10 percent above, and not more than 10 percent below, the weighted 
average of the rates of interest on 30-year Treasury bond securities 
during the 4-year period ending on the last day before the beginning of 
the plan year. The top of the permissible range was gradually reduced 
by 1 percent per year beginning with the 1995 plan year to not more 
than 5 percent above the weighted average rate effective for plan years 
beginning in 1999. The top of the permissible range was increased to 20 
percent above the weighted average rate for 2002 and 2003. The weighted 
average rate is calculated as the average yield over 48 months with 
rates for the most recent 12 months weighted by 4, the second most 
recent 12 months weighted by 3, the third most recent 12 months 
weighted by 2, and the fourth weighted by 1.

[12] Under the additional funding rule, a single-employer plan 
sponsored by an employer with more than 100 employees in defined-
benefit plans is subject to a deficit reduction contribution for a plan 
year if the value of plan assets is less than 90 percent of its current 
liability. However, a plan is not subject to the deficit reduction 
contribution if the value of plan assets (1) is at least 80 percent of 
current liability and (2) was at least 90 percent of current liability 
for each of the 2 immediately preceding years or each of the second and 
third immediately preceding years. To determine whether the additional 
funding rule applies to a plan, the IRC requires sponsors to calculate 
their current liability using the highest interest rate allowable for 
the plan year. See 26 U.S.C. 412(l)(9)(C).

[13] U.S. General Accounting Office, Private Pensions: Process Needed 
to Monitor the Mandated Interest Rate for Pension Calculations, 
GAO-03-313 (Washington, D.C.: Feb. 27, 2003).

[14] The Pension Preservation and Savings Expansion Act of 2003, H.R. 
1776, introduced April 11, 2003, would make a number of changes to the 
IRC to address retirement savings and private pension issues, including 
replacing the interest rate used for current liability calculations 
(currently, the rate on 30-year Treasury bonds) with a rate based on an 
index or indices of conservatively invested, long-term corporate bonds. 
In July of 2003, the Department of the Treasury unveiled The 
Administration Proposal to Improve the Accuracy and Transparency of 
Pension Information. Its stated purpose is to improve the accuracy of 
the pension liability discount rate, increase the transparency of 
pension plan information, and strengthen safeguards against pension 
underfunding.

[15] Letter to the Chairman, Senate Committee on Governmental Affairs 
and House Committee on Government Operations, GAO/OCG-90-1, Jan. 23, 
1990. GAO's high-risk program has increasingly focused on those major 
programs and operations that need urgent attention and transformation 
to ensure that our national government functions in the most 
economical, efficient, and effective manner. Agencies or programs 
receiving a "high risk" designation receive greater attention from GAO 
and are assessed in regular reports, which generally coincide with the 
start of each new Congress.

[16] U.S. General Accounting Office, High-Risk Series: Pension Benefit 
Guaranty Corporation, GAO/HR-93-5 (Washington, D.C.: Dec. 1992).

[17] U.S. General Accounting Office, High-Risk Series: An Overview, 
GAO/HR-95-1 (Washington, D.C.: Feb. 1995).

[18] U.S. General Accounting Office, Pension Benefit Guaranty 
Corporation: Financial Condition Improving but Long-Term Risks Remain, 
GAO/HEHS-99-5 (Washington, D.C.: Oct. 16, 1998).

[19] U.S. General Accounting Office, Pension Benefit Guaranty 
Corporation: Contracting Management Needs Improvement, GAO/HEHS-00-130 
(Washington, D.C.: Sept. 18, 2000).

[20] U.S. General Accounting Office, Pension Benefit Guaranty 
Corporation: Statutory Limitation on Administrative Expenses Does Not 
Provide Meaningful Control, GAO-03-301 (Washington, D.C.: Feb. 28, 
2003).

[21] According to PBGC officials, PBGC files a claim for all unfunded 
benefits in bankruptcy proceedings. However, PBGC generally recovers 
only a small portion of the total unfunded benefit amount in bankruptcy 
proceedings, and the recovered amount is split between PBGC (for 
unfunded guaranteed benefits) and participants (for unfunded 
nonguaranteed benefits).

[22] In 2002 dollars, flat-rate premium income rose from $605 million 
in 1993 to $654 million in 2002.

[23] See section 405, P.L. 107-147, Mar. 9, 2002.

[24] PBGC accounts for single-employer program assets in separate trust 
and revolving funds. PBGC accounts for the assets of terminated plans 
and plan sponsors in a trust fund, which, according to PBGC, may be 
invested in equities, real estate, or other securities. PBGC accounts 
for single-employer program premiums in two revolving funds. One 
revolving fund is used for all variable-rate premiums, and that portion 
of the flat-rate premium attributable to the flat-rate in excess of 
$8.50. The law states that PBGC may invest this revolving fund in such 
obligations, as it considers appropriate. See 29 U.S.C. 1305(f). The 
second revolving fund is used for the remaining flat-rate premiums, and 
the law restricts the investment of this revolving fund to obligations 
issued or guaranteed by the United States. See 29 U.S.C. 1305(b)(3).

[25] In 2002, PBGC used an interest rate factor of 5.70 percent for 
benefit payments through 2027 and a factor of 4.75 percent for benefit 
payments in the remaining years.

[26] Under Statement of Financial Accounting Standard Number 5, loss 
contingencies are classified as probable if the future event or events 
are likely to occur. 

[27] The estimate assumes: (1) a rate of return on all PBGC assets of 
5.8 percent and a discount rate on future benefits of 5.67 percent; (2) 
no premium income and no future claims beyond all plans with 
terminations that were deemed "probable" as of September 30, 2002; (3) 
administrative expenses of $225 million in fiscal year 2003, $229 
million per year for fiscal year 2004-14, and $0 thereafter; (4) mid-
year termination for "probables"; and (5) that PBGC does not assume 
control of "probable" assets and future benefits until the date of plan 
termination.

[28] U.S. General Accounting Office, Pension Plans: Hidden Liabilities 
Increase Claims Against Government Insurance Programs, GAO/HRD-93-7 
(Washington, D.C.: Dec. 30, 1992).

[29] 2002 U.S. Investment Management Study, Greenwich Associates, 
Greenwich, Conn.

[30] Pensions & Investments, vol. 29, Issue 2 (Chicago: Jan. 22, 2001).

[31] According to the survey, the Bethlehem Steel Corporation pension 
plan made benefit payments of $587 million between Sept. 30, 2000, and 
Sept. 30, 2001. Pensions and Investments, www.pionline.com/pension/
pension.cfm (downloaded on June 13, 2003).

[32] Present value calculations reflect the time value of money: a 
dollar in the future is worth less than a dollar today because the 
dollar today can be invested and earn interest. The calculation 
requires an assumption about the interest rate, which reflects how much 
could be earned from investing today's dollars. Assuming a lower 
interest rate increases the present value of future payments.

[33] The magnitude of an increase or decrease in plan liabilities 
associated with a given change in discount rates would depend on the 
demographic and other characteristics of each plan.

[34] To terminate a defined-benefit pension plan without submitting a 
claim to PBGC, the plan sponsor determines the benefits that have been 
earned by each participant up to the time of plan termination and 
purchases a single-premium group annuity contract from an insurance 
company, under which the insurance company guarantees to pay the 
accrued benefits when they are due. Interest rates on long-term, high-
quality fixed-income securities are an important factor in pricing 
group annuity contracts because insurance companies tend to invest 
premiums in such securities to finance annuity payments. Other factors 
that would have affected group annuity prices include changes in 
insurance company assumptions about mortality rates and administrative 
costs.

[35] Minimum funding rules permit certain plan liabilities, such as 
past service liabilities, to be amortized over specified time periods. 
See 26 U.S.C. 412(b)(2)(B). Past service liabilities occur when 
benefits are granted for service before the plan was set up or when 
benefit increases after the set up date are made retroactive.

[36] For the analysis, PBGC used termination liabilities reported to it 
under 29 C.F.R. sec 4010.

[37] See 26 U.S.C. 412(b).

[38] See 26 U.S.C. 404(a)(1) and 26 U.S.C. 412(c)(7). The sponsor might 
have been able to make a contribution to the plan had it selected a 
lower interest rate for valuing current liabilities. Polaroid used the 
highest interest rate permitted by law for its calculations.

[39] 2002 U.S. Investment Management Study, Greenwich Associates, 
Greenwich, Conn.

[40] The U.S. Treasury stopped publishing a 30-year Treasury bond rate 
in February 2002, but the Internal Revenue Service publishes rates for 
pension calculations based on rates for the last-issued bonds in 
February 2001. Interest rates to calculate plan liabilities must be 
within a "permissible range" around a 4-year weighted average of 30-
year Treasury bond rates; the permissible range for plan years 
beginning in 2002 and 2003 was 90 to 120 percent of this 4-year 
weighted average.

[41] A potentially offsetting effect of falling interest rates is the 
possible increased return on fixed-income assets that plans, or PBGC, 
hold. When interest rates fall, the value of existing fixed-income 
securities with time left to maturity rises.

[42] The last three recessions on record in the United States occurred 
during 1981, 1990-91, and 2001. (See www.bea.gov/bea/dn/gdpchg.xls.)

[43] This estimate comprises "reasonably possible" terminations, which 
include plans sponsored by companies with credit quality below 
investment grade that may terminate, though likely not by year-end. 
Plan participants have a nonforfeitable right to vested benefits, as 
opposed to nonvested benefits, for which participants have not yet 
completed qualification requirements.

[44] PBGC began using PIMS to project its future financial condition in 
1998. Prior to this, PBGC provided low-, medium-, and high-loss 
forecasts, which were extrapolations from the agency's claims 
experience and the economic conditions of the previous 2 decades.

[45] In contrast, defined-contribution plans have grown significantly 
over a similar period--from 462,000 plans in 1985 to 674,000 plans in 
1998.

[46] If a plan sponsor purchases an annuity for a retiree from an 
insurance company to pay benefits, this would also remove the retiree 
from the participant pool, which would have the same effect on flat-
rate premiums.

[47] Boyce, Steven, and Richard A. Ippolito, "The Cost of Pension 
Insurance," The Journal of Risk and Insurance (2002) vol. 69, No.2, p. 
121-170.

[48] The return on fixed-income assets sold before maturity may also be 
affected by capital gains (or losses). The price of a bond moves in the 
opposite direction as interest rates, and so if interest rates fall, 
bondholders may reap capital gains.

[49] If the Congress chooses to replace the 30-year Treasury rate used 
to calculate pension plan liabilities, the level of the interest rate 
selected can also affect plan funding. For example, if a rate that is 
higher than the current rate is selected, plan liabilities would appear 
better funded, thereby decreasing minimum and maximum employer 
contributions. In addition, some plans would reach full-funding 
limitations and avoid having to pay variable-rate premiums. Therefore, 
PBGC would receive less revenue. Conversely, a lower rate would likely 
improve PBGC's financial condition. In 1987, when the 30-year Treasury 
rate was adopted for use in certain pension calculations, the Congress 
intended that the interest rate used for current liability calculations 
would, within certain parameters, reflect the price an insurance 
company would charge to take responsibility for the plans pension 
payments. However, in the late 1990s, when fewer 30-year Treasury bonds 
were issued and economic conditions increased demand for the bonds, the 
30-year Treasury rate diverged from other long-term interest rates, an 
indication that it also may have diverged from group annuity purchase 
rates. In 2001, Treasury stopped issuing these bonds altogether, and in 
March 2002, the Congress enacted temporary measures to alleviate 
employer concerns that low interest rates on the remaining 30-year 
Treasury bonds were affecting the reasonableness of the interest rate 
for employer pension calculations. Selecting a replacement rate is 
difficult because little information exists on which to base the 
selection. Other than the survey conducted for PBGC, no mechanism 
exists to collect information on actual group annuity purchase rates. 
Compared to other alternatives, the PBGC interest rate factors may have 
the most direct connection to the group annuity market, but PBGC 
factors are less transparent than market-determined alternatives. Long-
term market rates may track changes in group annuity rates over time, 
but their proximity to group annuity rates is also uncertain. For 
example, an interest rate based on a long-term market rate, such as 
corporate bond indexes, may need to be adjusted downward to better 
reflect the level of group annuity purchase rates. However, as we 
stated in our report earlier this year, establishing a process for 
regulatory adjustments to any rate selected may make it more suitable 
for pension plan liability calculations. See GAO-03-313.

[50] GAO-03-313.

[51] Employers are generally subject to an excise tax for failure to 
make required contributions or for making contributions in excess of 
the greater of the maximum deductible amount or the ERISA full-funding 
limit.

[52] For example, one way to do this would be to allow deductions 
within a corridor of up to 130 percent of current liabilities. 
Gebhardtsbauer, Ron. American Academy of Actuaries testimony before the 
Subcommittee on Employer-Employee Relations, Committee on Education and 
the Workforce, U.S. House of Representatives, Hearing on Strengthening 
Pension Security: Examining the Health and Future of Defined Benefit 
Pension Plans. (Washington, D.C.: June 4, 2003), 9.

[53] Currently, some measures exist to limit the losses incurred by 
PBGC from newly terminated plans. PBGC is responsible for only a 
portion of all benefit increases that the sponsor adds in the 5 years 
leading up to termination. 

[54] IRC provides generally that a plan less than 60 percent funded on 
a current liability basis may not increase benefits without either 
immediately funding the increase or providing security. See 26 U.S.C. 
401(a)(29).

[55] For example, a plan that allows a lump-sum option--as is often 
found in a cash-balance and other hybrid plan--may pose a different 
level of risk to PBGC than a plan that does not. 

[56] Under the floor-offset arrangement, the benefit computed under the 
final pay formula is "offset" by the benefit amount that the account of 
another plan, such as an Employee Stock Ownership Plan, could provide. 

[57] The ERISA requirement that plan sponsors notify participants and 
beneficiaries of the plan's funding status and limits on the PBGC 
guarantee currently goes into effect when plans are required to pay 
variable-rate premiums and meet certain other requirements. See 29 
U.S.C. 1311 and 29 C.F.R. 4011.3.

[58] However, the actual benefit paid by PBGC depends on a number of 
factors and may exceed the maximum guaranteed benefit. For example, 
PBGC expects that the average annual benefit paid to U.S. Airways 
pilots who are 59 years of age with 29 years of service will be about 
$85,000, including nonguaranteed amounts. PBGC said that many US 
Airways pilots will receive more than the $28,600 maximum limit 
because, according to priorities established under ERISA, pension plan 
participants may receive benefits in excess of the guaranteed amounts 
if there are enough assets or recoveries from the plan sponsors. For 
example, a participant who could have retired 3 years prior to plan 
termination (but did not) may be eligible to receive both guaranteed 
and nonguaranteed amounts. PBGC letter in response to follow-up 
questions from the Committee on Finance, U. S. Senate (Washington, 
D.C.: April 1, 2003).