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Testimony: 

Before the Subcommittee on Oversight, Committee on Ways and Means, 
House of Representatives: 

United States Government Accountability Office: 
GAO: 

For Release on Delivery: 
Expected at 10:00 a.m. EDT:
Wednesday, September 24, 2008: 

Pension Benefit Guaranty Corporation: 

Improvements Needed to Address Financial and Management Challenges: 

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

GAO-08-1162T: 

GAO Highlights: 

Highlights of GAO-08-1162T, a testimony before the Subcommittee on 
Oversight, Committee on Ways and Means, House of Representatives. 

Why GAO Did This Study: 

The Pension Benefit Guaranty Corporation (PBGC) insures the retirement 
future of nearly 44 million people in more than 30,000 private-sector 
defined benefit pension plans. 

In July 2003, GAO designated PBGCs single-employer pension insurance 
programits largest insurance programas high risk, including it on 
GAOs list of major programs that need urgent attention and 
transformation. The program remains on the list today with a projected 
financial deficit of just over $13 billion, as of September 2007. 

Because Congress exercises oversight of PBGC, GAO was asked to testify 
today on 1) the critical role PBGC plays in protecting the pension 
benefits of workers and how PBGC is funded, 2) the financial challenges 
facing PBGC, and 3) the PBGCs governance, oversight and management 
challenges. 

To address these objectives, we are relying on our reports from the 
last several years that, as part of our designation of PBGCs single-
employer program as high-risk, explored the financial and management 
challenges facing the agency. GAO has made a number of recommendations 
and matters for Congressional consideration in these past reports. PBGC 
generally agreed with these past recommendations and is implementing 
many of them. No new recommendations are being made as part of this 
testimony. 

What GAO Found: 

PBGC administers the current or future pension benefits for a growing 
number of participants of plans that have been taken over by the 
agencyfrom 500,000 in fiscal year 2000 to 1.3 million participants in 
fiscal year 2007. PBGC is financed by insurance premiums set by 
Congress and paid by sponsors of defined benefit (DB) plans, investment 
income, assets from pension plans trusteed by PBGC, and recoveries from 
the companies formerly responsible for those trusteed plans; PBGC 
receives no funds from general revenues. The treatment of PBGC in the 
federal budget is complicated by the use of two accountsan onbudget 
revolving fund and a non-budgetary trust fund. Ultimately this budget 
treatment can be confusing--especially in the short-termas on-budget 
gains may be offset by long-term liabilities that are not reported to 
on-budget accounts. 

PBGCs single-employer program faces financial challenges from a 
history of weak plan funding rules that left it susceptible to claims 
from sponsors of large, severely underfunded pension plans. PBGC had 
seen recent improvements to its net financial position due to generally 
better economic conditions and from statutory changes that raised 
premiums and took measures designed to strengthen plan funding and PBGC 
guarantees. However, certain improvements have only just begun phasing-
in and the changes did not completely address a number of the risks 
that PBGC faces going forward. Further, PBGC just began implementing a 
new investment policy that, while offering the potential for higher 
returns, also adds significant variability and risk to the assets it 
manages. Also, changing economic conditions could further expose PBGC 
to future claims. 

Figure: PBGC Assets and Liabilities, Fiscal Year 1991 to 2007: 

[Refer to PDF for image] 

This figure is a combination vertical bar and line graph depicting the 
following data: 

Year: 1991; 
Assets: $5.918 billion; 
Liabilities: $8.241 billion. 

Year: 1992; 
Assets: $6.602 billion; 
Liabilities: $9.050 billion. 

Year: 1993; 
Assets: $8.828 billion; 
Liabilities: $11.449 billion. 

Year: 1994; 
Assets: $8.659 billion; 
Liabilities: $9.702 billion. 

Year: 1995; 
Assets: $10.848 billion; 
Liabilities: $10.971 billion. 

Year: 1996; 
Assets: $12.548 billion; 
Liabilities: $11.555 billion. 

Year: 1997; 
Assets: $15.910 billion; 
Liabilities: $12.210 billion. 

Year: 1998; 
Assets: $18.376 billion; 
Liabilities: $13.023 billion. 

Year: 1999; 
Assets: $19.123 billion; 
Liabilities: $11.886 billion. 

Year: 2000; 
Assets: $21.524 billion; 
Liabilities: $11.438 billion. 

Year: 2001; 
Assets: $22.575 billion; 
Liabilities: $14.727 billion. 

Year: 2002; 
Assets: $26.374 billion; 
Liabilities: $29.854 billion. 

Year: 2003; 
Assets: $35.016 billion; 
Liabilities: $46.515 billion. 

Year: 2004; 
Assets: $40.063 billion; 
Liabilities: $63.604 billion. 

Year: 2005; 
Assets: $57.630 billion; 
Liabilities: $80.741 billion. 

Year: 2006; 
Assets: $61.138 billion; 
Liabilities: $80.019 billion. 

Year: 2007; 
Assets: $68.438 billion; 
Liabilities: $82.504 billion. 

Source: GAO analysis of PBGC annual report data. 

[End of figure] 

Improvements are needed to PBGCs governance structure and to its 
strategic approach to program management. PBGCs three member board of 
directors is limited in its ability to provide policy direction and 
oversight. PBGC may also be exposed to challenges as the board, its 
representatives, and the director will likely change with the upcoming 
presidential transition in January. In addition, PBGC lacks a strategic 
approach to its acquisition and human capital management needs. Three-
quarters of PBGCs administrative budget is spent on contractors, yet 
PBGCs strategic planning generally does not recognize contracting as a 
major aspect of PBGC activities. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-1162T]. For more 
information, contact Barbara Bovbjerg at (202) 512-7215 or 
bovbjergb@gao.gov. 

[End of section] 

Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here today to discuss the financial and operational 
challenges facing the Pension Benefit Guaranty Corporation (PBGC). PBGC 
operates two pension insurance programs that protect the retirement 
income of nearly 44 million workers in over 30,000 private-sector 
defined benefit pension plans. In July 2003, GAO designated PBGC's 
single-employer pension insurance program--its largest insurance 
program--as "high risk," including it on GAO's list of major programs 
that need urgent attention and transformation.[Footnote 1] The program 
remains on the list today with a projected financial deficit of just 
over $13 billion, as of September 2007. 

PBGC was created as a self-financing, wholly owned government 
corporation by the Employee Retirement Income Security Act of 1974 
(ERISA).[Footnote 2] PBGC is managed by a presidentially-appointed, 
Senate-confirmed director, and governed by a three-member board of 
directors, consisting of the Secretaries of the Treasury, Labor, and 
Commerce, that is charged with providing policy direction and oversight 
of PBGC's finances and operations. PBGC's primary responsibilities are 
to collect premiums from the sponsors of defined benefit plans to 
insure against default and to assume administration of underfunded 
plans that terminate. In the event of a plan default, PBGC assumes 
control of plan assets (including amounts due and payable from the plan 
sponsor), calculates benefit amounts due plan participants, and pays 
recipients as benefits are due. 

My statement is based on our prior work assessing PBGC's long-term 
financial challenges, and several reports that we have published over 
the past two years on PBGC governance and management. Specifically, my 
statement will discuss the (1) critical role PBGC plays in protecting 
the pension benefits of workers and how PBGC is funded, (2) financial 
challenges facing PBGC, and (3) PBGC's governance, oversight and 
management challenges. 

In summary, PBGC administers the current or future pension benefits for 
a growing number of participants of plans that have been taken over by 
the agency--from 500,000 in fiscal year 2000 to 1.3 million 
participants in fiscal year 2007. PBGC is financed by insurance 
premiums set by Congress and paid by sponsors of defined benefit (DB) 
plans,[Footnote 3] investment income, assets from pension plans 
trusteed by PBGC, and recoveries from the companies formerly 
responsible for those trusteed plans; PBGC receives no funds from 
general revenues. The treatment of PBGC in the federal budget is 
complicated by the use of two accounts--an on-budget revolving fund and 
a non-budgetary trust fund. This budget treatment can be confusing-- 
especially in the short-term--as on-budget gains may be offset by long- 
term liabilities that are not reported to on-budget accounts. 

PBGC's insurance programs, and specifically the single-employer 
program, face financial challenges from a history of weak plan funding 
rules that left it susceptible to claims from sponsors of large, 
severely underfunded pension plans. We designated PBGC's single- 
employer insurance program as "high risk" in 2003, because of its 
longstanding financial challenges. PBGC had seen recent improvements to 
its net financial position due to generally better economic conditions 
and from statutory changes that raised premiums and took measures 
designed to strengthen plan funding and PBGC guarantees. However, 
certain improvements have only just begun phasing-in and the changes 
did not completely address a number of the risks that PBGC faces going 
forward. Further, PBGC just began implementing a new investment policy 
that, while offering the potential for higher returns, also adds 
significant variability and risk to the assets it manages. 

Improvements are needed to PBGC's governance structure, to oversight of 
the corporation, and to its strategic approach to program management. 
PBGC's three-member board of directors is limited in its ability to 
provide policy direction and oversight. The three cabinet secretaries 
who comprise the board have numerous other responsibilities, and are 
unable to dedicate consistent and comprehensive attention to PBGC. With 
only 3 members, PBGC's board may not be large enough to include the 
knowledge needed to direct and oversee PBGC. According to corporate 
governance guidelines, the board of directors should be large enough to 
provide the necessary skill sets, but also small enough to promote 
cohesion, flexibility, and effective participation. PBGC may also be 
exposed to challenges as the board, its representatives, and the 
director will likely change with the upcoming presidential transition 
in January, limiting the board's institutional knowledge of the 
corporation. In addition, we found that PBGC lacks a strategic approach 
to its acquisition and human capital management needs. Although three- 
quarters of PBGC's administrative budget is spent on contractors, 
PBGC's strategic planning generally does not recognize contracting as a 
major aspect of PBGC activities. PBGC also lacks formal, comprehensive 
human capital policies, programs and practices and does not routinely 
target workforce data to understand its current and future workforce 
needs. 

PBGC Guarantees Pension Benefits for Millions and is Funded by Premiums 
and Assets of Terminated Plans: 

PBGC plays a critical role in protecting the pension benefits of 
private sector workers--it is responsible for administering current or 
future pension benefit payments to just over 1.3 million plan 
participants. Its budget operations flow through two accounts, one that 
appears in the federal budget and one that does not. PBGC's budget can 
be confusing, especially in the short-term, as apparent federal budget 
gains may be offset by long-term liabilities that are not reported to 
on-budget accounts. 

PBGC Plays a Critical Role in Protecting Pension Benefits: 

PBGC plays a critical role in protecting the pension benefits of 
private sector workers. PBGC administers current or future pension 
benefit payments to a growing number of plan participants, from just 
under one-half million in fiscal year 2000 to 1.3 million in fiscal 
year 2007. Figure 1 shows the breakdown of recipients of benefit 
payments from PBGC's single-insurance program. 

Figure 1: Number of Payees Receiving Current or Future Single-Employer 
Program Benefits from PBGC, fiscal year 1985-2007: 

[See PDF for image] 

This figure is a stacked vertical bar graph depicting the following 
data: 

Fiscal year: 1985; 
Current payees (in year): 0.077 million; 
Future (or deferred) payees: 0.092 million. 

Fiscal year: 1986; 
Current payees (in year): 0.092 million; 
Future (or deferred) payees: 0.139 million. 

Fiscal year: 1987; 
Current payees (in year): 0.111 million; 
Future (or deferred) payees: 0.074 million. 

Fiscal year: 1988; 
Current payees (in year): 0.112 million; 
Future (or deferred) payees: 0.087 million. 

Fiscal year: 1989; 
Current payees (in year): 0.112 million; 
Future (or deferred) payees: 0.088 million. 

Fiscal year: 1990; 
Current payees (in year): 0.116 million; 
Future (or deferred) payees: 0.085 million. 

Fiscal year: 1991; 
Current payees (in year): 0.146 million; 
Future (or deferred) payees: 0.171 million. 

Fiscal year: 1992; 
Current payees (in year): 0.156 million; 
Future (or deferred) payees: 0.17 million. 

Fiscal year: 1993; 
Current payees (in year): 0.162 million; 
Future (or deferred) payees: 0.162 million. 

Fiscal year: 1994; 
Current payees (in year): 0.176 million; 
Future (or deferred) payees: 0.163 million. 

Fiscal year: 1995; 
Current payees (in year): 0.187 million; 
Future (or deferred) payees: 0.163 million. 

Fiscal year: 1996; 
Current payees (in year): 0.206 million; 
Future (or deferred) payees: 0.182 million. 

Fiscal year: 1997; 
Current payees (in year): 0.213 million; 
Future (or deferred) payees: 0.202 million. 

Fiscal year: 1998; 
Current payees (in year): 0.216 million; 
Future (or deferred) payees: 0.213 million. 

Fiscal year: 1999; 
Current payees (in year): 0.229 million; 
Future (or deferred) payees: 0.225 million. 

Fiscal year: 2000; 
Current payees (in year): 0.243 million; 
Future (or deferred) payees: 0.226 million. 

Fiscal year: 2001; 
Current payees (in year): 0.283 million; 
Future (or deferred) payees: 0.246 million. 

Fiscal year: 2002; 
Current payees (in year): 0.362 million; 
Future (or deferred) payees: 0.326 million. 

Fiscal year: 2003; 
Current payees (in year): 0.477 million; 
Future (or deferred) payees: 0.375 million. 

Fiscal year: 2004; 
Current payees (in year): 0.533 million; 
Future (or deferred) payees: 0.424 million. 

Fiscal year: 2005; 
Current payees (in year): 0.698 million; 
Future (or deferred) payees: 0.489 million. 

Fiscal year: 2006; 
Current payees (in year): 0.622 million; 
Future (or deferred) payees: 0.52 million. 

Fiscal year: 2007; 
Current payees (in year): 0.631 million; 
Future (or deferred) payees: 0.675 million. 

Source: PBGCs Pension Insurance Data Book 2006 (table S-20), PBGCs 
Pension Insurance Data Book 2001 (table S-3), and preliminary data. 

[End of figure] 

PBGC benefits are insured up to certain limits--up to $51,750 per year 
(about $4300 per month) for participants aged 65, with lower benefits 
for younger participants.[Footnote 4] While the actual annual benefits 
paid to participants are not adjusted for inflation, the initial 
maximum levels are set by law and are indexed for inflation. Covered 
benefits include pension benefits accrued at normal retirement age, 
most early retirement benefits, and survivor and disability benefits. 
PBGC pays these benefits when a plan is terminated and the plan has 
insufficient assets to pay all benefits accrued under the plan up to 
the date of plan termination. In 2006, PBGC paid over 622,000 people a 
median benefit of about $296 per month. 

The vast majority of the participants in PBGC-trusteed plans receive 
all the benefits they were promised by their plan. Benefits for some 
participants may be reduced if 1) their benefits exceed PBGC's maximum 
guarantee limit, 2) a benefit increase occurred (or became payable due 
to a plant shutdown) within five years of the plan's termination, or 3) 
a part of their benefit is a supplemental benefit.[Footnote 5] In 
addition to paying guaranteed benefits, PBGC may pay certain non- 
guaranteed benefits in limited circumstances involving asset recoveries 
from employers. 

PBGC receives no funds from general tax revenues. Operations are 
financed by insurance premiums set by Congress and paid by sponsors of 
defined benefit plans, investment income of assets from pension plans 
trusteed by PBGC ($4.8 billion in investment income from $68.4 billion 
in assets for its combined programs in 2007) and recoveries from the 
companies formerly responsible for the plans. Under current law, other 
than statutory authority to borrow up to $100 million from the Treasury 
Department (sometimes referred to as a $100 million line of credit), no 
substantial source of funds is available to PBGC if it runs out of 
money.[Footnote 6] In the event that PBGC were to exhaust all of its 
holdings, benefit payments would have to be drastically cut unless 
Congress were to take positive action to provide support. 

In 2007, PBGC received over $1.5 billion in premium income. An insured 
plan in the single employer program was required to pay PBGC a yearly 
premium of $31 per participant for pension benefit insurance coverage 
in 2007. This per-participant premium rate is adjusted annually to wage 
inflation. Plans that are underfunded as specified by ERISA must pay 
PBGC an additional premium of $9 per $1,000 of underfunding. Some 
terminating plans have to pay an "exit" premium of $1,250 per 
participant per year for three years if they undergo a distress or PBGC-
initiated plan termination on or after January 1, 2006. 

PBGC also insures multiemployer defined benefit pensions through its 
multiemployer program. Multiemployer plans are established through 
collective bargaining agreements involving two or more unrelated 
employers and are common in industries such as construction, trucking, 
mining, the hotel trades, and segments of the grocery business. The 
multiemployer program is far smaller than the PBGC single employer 
program, insuring about 10 million participants in about 1,530 plans. 
Like the single employer program, PBGC collects premiums from 
sponsoring employers and insures multiemployer participant benefits up 
to a limit, although both the level of premiums and the maximum insured 
limit are far lower than those for the single employer program. 
[Footnote 7] Further, unlike the single-employer program, a 
multiemployer plan termination does not trigger the PBGC benefit 
guarantee. A terminated multiemployer plan continues to pay full plan 
benefits so long as it has sufficient assets to do so.[Footnote 8] 

PBGC's Budget Only Partly Flows through the Federal Government: 

The treatment of PBGC in the federal budget is complicated by the use 
of two accounts--an on-budget revolving fund and a non-budgetary trust 
fund. Some activities flow through the federal budget and other 
activities are outside the federal budget. Not only is PBGC's budget 
structure complex, it can also result in confusing signals about the 
financial health of PBGC and create unintended policy incentives. 

PBGC's receipts and disbursements are required by law to be included in 
the federal budget.[Footnote 9] These cash flows are reported in the 
budget in a single revolving fund account.[Footnote 10] The cash flows 
include premiums paid, interest income on federal securities, benefit 
payments, administrative expenses, and reimbursements from PBGC's non- 
budgetary trust fund. The non-budgetary trust fund includes assets 
obtained from terminated plans and is managed by private money- 
managers. Because the trust fund is a non-budgetary account, the 
transfer of assets from terminated plans to PBGC is not considered a 
receipt to the government. Likewise, the liabilities PBGC incurs when 
it takes over an underfunded plan or other changes in PBGC's assets and 
liabilities are not reflected in the budget. Figure 2 provides an 
overview of PBGC's budgetary and non-budgetary cash flows. 

Figure 2: PBGC's cash flows: 

[See PDF for image] 

This figure is an illustration of PBGC's cash flows, as follows: 

Nonbudgetary: 
Assets and recoveries from terminated underfunded plans: to: 
Nonbudgetary Trust Fund (Invested by private money managers): to: 
On-Budget Revolving Fund (invested in government securities) (Partial 
reimbursement for benefit payments and administrative expenses). 

On-budget: 
Payments of premiums from employers; and; 
Interest on U.S. securities; to: 
On-Budget Revolving Fund (invested in government securities); to: 
Benefit payments and financial support; and 
Administration and other operating expenses. 

Source: Congressional Budget Office. 

[End of figure] 

When an insured pension plan is terminated, assets are transferred to 
PBGC's non-budgetary trust fund. Neither these assets nor the benefit 
liabilities appear on the federal balance sheet and PBGC's net loss is 
not recorded in the federal government's income statement. Assets in 
the non-budgetary trust fund are commingled and no longer identified 
with particular plans. PBGC has broad authority to oversee and 
administer pension assets held in its trust fund and is free to invest 
and expend the funds as if it were a private fiduciary of the trust 
fund's holdings. PBGC can invest the assets in whatever way it chooses, 
as long as it acts in the best financial interest of beneficiaries. 

In addition to the non-budgetary trust fund, PBGC has an on-budget 
revolving fund. Premium income and transfers from the trust fund for 
both benefit payments and administrative expenses are deposited to the 
revolving funds as offsetting collections (that is, offsets to 
outlays). Unlike the trust fund, the revolving fund appears on the 
federal government's balance sheet and provides PBGC with permanent 
spending authority to carry out its activities. In years that premium 
income and trust fund reimbursements exceed benefit payment and 
administrative costs, the revolving fund would show negative outlays, 
thus improving the overall fiscal balance of the federal government. 
Any funds that are not used to pay benefits or expenses are considered 
unobligated balances and are available for expenditure in the next 
year. By law, unobligated funds in the revolving fund must be held in 
Treasury securities and earn interest income. 

PBGC transfers funds from the non-budgetary trust fund to its on-budget 
revolving fund to pay a portion of retirement annuities and certain 
administrative costs. Such transfers are referred to as reimbursements 
and are recorded as offsetting collections in the budget. Generally, 
the proportion of benefit payments that is reimbursed from the trust 
fund depends on the aggregate funding level of the plans that PBGC has 
taken over and is adjusted periodically. In other words, if the average 
funding ratio of all plans taken over by PBGC is 50 percent, then half 
of all benefit payments originate from the non-budgetary trust fund. In 
addition to financing benefits, trust fund assets are also transferred 
to the revolving fund to pay for PBGC's administrative expenses related 
to terminations. PBGC's other administrative expenses are paid directly 
from the revolving fund.[Footnote 11] 

Insurance programs with long-term commitments, such as PBGC, may 
distort the budget's fiscal balance by looking like revenue generators 
in years that premium collections exceed benefit payments and 
administrative expenses because the programs' long-term expected costs 
are not reported. For example, in 2004 when PBGC's losses measured on 
an accrual basis ballooned and its deficit grew from $11 billion to $23 
billion, PBGC's cash flow reported in the budget was positive and 
reduced the federal government's budget deficit. 

GAO has reported previously that the cash-based federal budget, which 
focuses on annual cash flows, does not adequately reflect the cost of 
pension and other insurance programs.[Footnote 12] Generally, cost is 
only recognized in the budget when claims are paid rather than when the 
commitment is made. Benefit payments of terminated plans assumed by 
PBGC may not be made for years, even decades, because plan participants 
generally are not eligible to receive pension benefits until they reach 
age 65. Once eligible, beneficiaries then receive benefit payments for 
the rest of their lives. As a result, there can be years in which 
PBGC's current cash collections exceed current cash payments, 
regardless of the expected long-term cost to the government. 

PBGC Continues to Face Financial Challenges: 

PBGC's single-employer program faces financial challenges both from 
past claims resulting from bankruptcies and plan termination, which 
have been concentrated in a few industrial sectors, and structural 
problems such as weak plan funding rules and a premium structure that 
does not fully reflect the various risks posed by plans. Because of 
these financial challenges, GAO designated the single-employer program 
as "high risk" in 2003, and it remains so today. PBGC has seen recent 
improvements to its net financial position and recent legislative 
changes have raised premiums, changed certain plan funding rules and 
limited PBGC guarantees. However, the legislation has only been 
recently implemented and it did not completely address a number of the 
risks that PBGC faces going forward. Further, PBGC has recently 
implemented a new investment policy which adds significant variability 
and risk to the assets it manages. 

PBGC's net deficit for the single-employer program, which is currently 
$13.1 billion, reached a peak of $23.3 billion (or $23.5 billion for 
both insurance programs combined) in 2004 largely as a result of a 
number of realized and probable claims that occurred during that year. 
[Footnote 13] See figure 3 for the difference between PBGC assets and 
liabilities for both insurance programs from 1991 to 2007. GAO has 
generally focused its work on the single-employer pension insurance 
program with respect to PBGC's overall financial challenges. This is 
because the single-employer program represents nearly all of the assets 
and liabilities held by PBGC.[Footnote 14] 

Figure 3: PBGC Assets and Liabilities, Fiscal Year 1991 to 2007: 

[See PDF for image] 

This figure is a combination vertical bar and line graph depicting the 
following data: 

Year: 1991; 
Assets: $5.918 billion; 
Liabilities: $8.241 billion. 

Year: 1992; 
Assets: $6.602 billion; 
Liabilities: $9.050 billion. 

Year: 1993; 
Assets: $8.828 billion; 
Liabilities: $11.449 billion. 

Year: 1994; 
Assets: $8.659 billion; 
Liabilities: $9.702 billion. 

Year: 1995; 
Assets: $10.848 billion; 
Liabilities: $10.971 billion. 

Year: 1996; 
Assets: $12.548 billion; 
Liabilities: $11.555 billion. 

Year: 1997; 
Assets: $15.910 billion; 
Liabilities: $12.210 billion. 

Year: 1998; 
Assets: $18.376 billion; 
Liabilities: $13.023 billion. 

Year: 1999; 
Assets: $19.123 billion; 
Liabilities: $11.886 billion. 

Year: 2000; 
Assets: $21.524 billion; 
Liabilities: $11.438 billion. 

Year: 2001; 
Assets: $22.575 billion; 
Liabilities: $14.727 billion. 

Year: 2002; 
Assets: $26.374 billion; 
Liabilities: $29.854 billion. 

Year: 2003; 
Assets: $35.016 billion; 
Liabilities: $46.515 billion. 

Year: 2004; 
Assets: $40.063 billion; 
Liabilities: $63.604 billion. 

Year: 2005; 
Assets: $57.630 billion; 
Liabilities: $80.741 billion. 

Year: 2006; 
Assets: $61.138 billion; 
Liabilities: $80.019 billion. 

Year: 2007; 
Assets: $68.438 billion; 
Liabilities: $82.504 billion. 

Source: GAO analysis of PBGC annual report data. 

Note: Figure includes assets and liabilities of single-employer program 
and multi-employer program. The single-employer program accounts for 
over 95 percent of all assets and liabilities within each year over 
this period. 

[End of figure] 

The assets and liabilities that PBGC accumulates from taking over, or 
"trusteeing," plans has increased rapidly over the last 5 years or so. 
This is largely due to the termination, typically through bankruptcies, 
of a number of very large, underfunded plan sponsors.[Footnote 15] In 
fact, eight of the top 10 largest firms that have presented claims to 
PBGC did so from 2002 to 2005. (See table 1). 

Table 1: Top 10 Firms Presenting Claims (1975-2006) Single-employer 
Program: 

Top 10 firms: 1. United Airlines; 
Number of plans: 4; 
Fiscal year(s) of plan terminations(s): 2005; 
Claims (by firm): $7,484,348,482; 
Vested participants: 122,541; 
Claim per vested participant: $61,076; 
Average percent of total claims (1975-2006): 22.9%. 

Top 10 firms: 2. Bethlehem Steel; 
Number of plans: 1; 
Fiscal year(s) of plan terminations(s): 2003; 
Claims (by firm): $3,654,380,116; 
Vested participants: 97,015; 
Claim per vested participant: $37,668; 
Average percent of total claims (1975-2006): 11.2%. 

Top 10 firms: 3. US Airways; 
Number of plans: 4; 
Fiscal year(s) of plan terminations(s): 2003, 2005; 
Claims (by firm): $2,690,222,805; 
Vested participants: 59,778; 
Claim per vested participant: $45,004; 
Average percent of total claims (1975-2006): 8.2%. 

Top 10 firms: 4. LTV Steel; 
Number of plans: 6; Fiscal year(s) of plan terminations(s): 2002, 2003, 
2004; 
Claims (by firm): $2,136,698,831; 
Vested participants: 83,879; 
Claim per vested participant: $25,474; 
Average percent of total claims (1975-2006): 6.5%. 

Top 10 firms: 5. National Steel; 
Number of plans: 7; Fiscal year(s) of plan terminations(s): 2003; 
Claims (by firm): $1,275,628,286; 
Vested participants: 35,580; 
Claim per vested participant: $35,852; 
Average percent of total claims (1975-2006): 3.9%. 

Top 10 firms: 6. Pan American Air; 
Number of plans: 3; 
Fiscal year(s) of plan terminations(s): 1991, 1992; 
Claims (by firm): $841,082,434; 
Vested participants: 37,485; 
Claim per vested participant: $22,438; 
Average percent of total claims (1975-2006): 2.6%. 

Top 10 firms: 7. Weirton Steel; 
Number of plans: 1; Fiscal year(s) of plan terminations(s): 2004; 
Claims (by firm): $690,181,783; 
Vested participants: 9,196; 
Claim per vested participant: $75,052; 
Average percent of total claims (1975-2006): 2.1%. 

Top 10 firms: 8. Trans World Airlines; 
Number of plans: 2; 
Fiscal year(s) of plan terminations(s): 2001; 
Claims (by firm): $668,377,106; 
Vested participants: 34,257; 
Claim per vested participant: $19,511; 
Average percent of total claims (1975-2006): 2.0%. 

Top 10 firms: 9. Kaiser Aluminum; 
Number of plans: 3; Fiscal year(s) of plan terminations(s): 2004; 
Claims (by firm): $600,009,879; 
Vested participants: 17,591; 
Claim per vested participant: $34,109; 
Average percent of total claims (1975-2006): 1.8%. 

Top 10 firms: 10. Kemper Insurance; 
Number of plans: 2; Fiscal year(s) of plan terminations(s): 2005; 
Claims (by firm): $568,417,151; 
Vested participants: 12,221; 
Claim per vested participant: $46,512; 
Average percent of total claims (1975-2006): 1.7%. 

Top 10 firms: Top 10 total; 
Number of plans: 33; 
Claims (by firm): $20,609,346,871; 
Vested participants: 509,543; 
Claim per vested participant: $40,447; 
Average percent of total claims (1975-2006): 63.2%. 

Top 10 firms: All other total; 
Number of plans: 3,640; 
Claims (by firm): $12,017,433,400; 
Vested participants: 1,194,479; 
Claim per vested participant: $10,061; 
Average percent of total claims (1975-2006): 36.8%. 

Top 10 firms: Total; Number of plans: 3,673; 
Claims (by firm): $32,626,780,271; 
Vested participants: 1,704,022; 
Claim per vested participant: $19,147; 
Average percent of total claims (1975-2006): 100.0%. 

Source: PBGC's Pension Insurance Data Book 2006 (table S-31). 

[End of table] 

These top 10 claims alone currently account for nearly two-thirds of 
all of PBGC's claims and are concentrated among firms representing the 
steel and airline industries. Overall, these industries account for 
about three-quarters of PBGC's total claims and total single-employer 
benefit payments in 2006. 

While the claims presented by the steel and airline industries were due 
in some part to restructuring and competitive pressures in those 
industries, it is important to recognize other economic and regulatory 
factors affected PBGC and DB plan sponsors as a whole. For example, 
when we reported on airline pension plan underfunding in late 2004 we 
noted that several problems contributed to the broad underfunding of DB 
plans.[Footnote 16] These problems included cyclical factors like the 
so called "perfect storm" of key economic conditions, in which declines 
in stock prices lowered the value of pension assets used to pay 
benefits, while at the same time a decline in interest rates inflated 
the value of pension liabilities. The combined "bottom line" result was 
that many plans were underfunded at the time and had insufficient 
resources to pay all of their future promised benefits. Figure 4 shows 
the underfunding of PBGC's single-employer plans from 1991 to 2007. 

Figure 4: Figure 4. Underfunding of PBGC Single-Employer Insured Plans 
Using Alternative Measures, 1991-2007: 

[See PDF for image] 

This figure is a combination line and multiple vertical bar graph 
depicting the following data: 

Beginning of year: 1991; 
Underfunding among large plans (as required by ERISA section 4010): 0; 
Underfunding among plans that are 'reasonably possible' for 
termination: $13 billion; 
Total underfunding in PBGC-Insured plans: $55 billion. 

Beginning of year: 1992; 
Underfunding among large plans (as required by ERISA section 4010): 0 
Underfunding among plans that are 'reasonably possible' for 
termination: $12.36 billion; 
Total underfunding in PBGC-Insured plans: $74 billion. 

Beginning of year: 1993; 
Underfunding among large plans (as required by ERISA section 4010): 0 
Underfunding among plans that are 'reasonably possible' for 
termination: $13.06 billion; 
Total underfunding in PBGC-Insured plans: $84.2 billion. 

Beginning of year: 1994; 
Underfunding among large plans (as required by ERISA section 4010): 0 
Underfunding among plans that are 'reasonably possible' for 
termination: $18.23 billion; 
Total underfunding in PBGC-Insured plans: $109.3 billion. 

Beginning of year: 1995; 
Underfunding among large plans (as required by ERISA section 4010): 0 
Underfunding among plans that are 'reasonably possible' for 
termination: $14.56 billion; 
Total underfunding in PBGC-Insured plans: $61.7 billion. 

Beginning of year: 1996; 
Underfunding among large plans (as required by ERISA section 4010): 
$38.1 billion; 
Underfunding among plans that are 'reasonably possible' for 
termination: $22.47 billion; 
Total underfunding in PBGC-Insured plans: $94.5 billion. 

Beginning of year: 1997; 
Underfunding among large plans (as required by ERISA section 4010): 
$28.7 billion; 
Underfunding among plans that are 'reasonably possible' for 
termination: $20.73 billion; 
Total underfunding in PBGC-Insured plans: $99.6 billion. 

Beginning of year: 1998; 
Underfunding among large plans (as required by ERISA section 4010): 
$25.2 billion; 
Underfunding among plans that are 'reasonably possible' for 
termination: $15.38 billion; 
Total underfunding in PBGC-Insured plans: $87.8 billion. 

Beginning of year: 1999; 
Underfunding among large plans (as required by ERISA section 4010): 
$34.9 billion; 
Underfunding among plans that are 'reasonably possible' for 
termination: $17.5 billion; 
Total underfunding in PBGC-Insured plans: $104.7 billion. 

Beginning of year: 2000; 
Underfunding among large plans (as required by ERISA section 4010): 
$7.37 billion; 
Underfunding among plans that are 'reasonably possible' for 
termination: $3.79 billion; 
Total underfunding in PBGC-Insured plans: $22.8 billion. 

Beginning of year: 2001; 
Underfunding among large plans (as required by ERISA section 4010): 
$19.46 billion; 
Underfunding among plans that are 'reasonably possible' for 
termination: $9.54 billion; 
Total underfunding in PBGC-Insured plans: $39.4 billion. 

Beginning of year: 2002; 
Underfunding among large plans (as required by ERISA section 4010): 
$95.57 billion; 
Underfunding among plans that are 'reasonably possible' for 
termination: $34.1 billion; 
Total underfunding in PBGC-Insured plans: $163.9 billion. 

Beginning of year: 2003; 
Underfunding among large plans (as required by ERISA section 4010): 
$273.37 billion; 
Underfunding among plans that are 'reasonably possible' for 
termination: $83.92 billion; 
Total underfunding in PBGC-Insured plans: $419.7 billion. 

Beginning of year: 2004; 
Underfunding among large plans (as required by ERISA section 4010): 
$283.34 billion; 
Underfunding among plans that are 'reasonably possible' for 
termination: $95.67 billion; 
Total underfunding in PBGC-Insured plans: $452.1 billion. 

Beginning of year: 2005; 
Underfunding among large plans (as required by ERISA section 4010): 
$289.64 billion; 
Underfunding among plans that are 'reasonably possible' for 
termination: $108.04 billion; 
Total underfunding in PBGC-Insured plans: $431.8 billion. 

Beginning of year: 2006; 
Underfunding among large plans (as required by ERISA section 4010): 
$212.5 billion; 
Underfunding among plans that are 'reasonably possible' for 
termination: $73.3 billion; 
Total underfunding in PBGC-Insured plans: $452.1 billion. 

Beginning of year: 2007; 
Underfunding among large plans (as required by ERISA section 4010): 0 
Underfunding among plans that are 'reasonably possible' for 
termination: $65.7 billion; 
Total underfunding in PBGC-Insured plans: $225 billion. 

Source: PBGCs Pension Insurance Data Book 2006 (table S-47), 2007 
Annual Management Report, and preliminary data. 

Note: 'Underfunding among large plans' is from data obtained under 
Section 4010 of ERISA, which, prior to the Pension Protection Act of 
2006 (PPA) required that companies annually provide PBGC with 
information on their underfunded plans if the firm's aggregate 
underfunding exceeds $50 million or there is an outstanding lien for 
missed contributions exceeding $1 million or an outstanding funding 
waiver of more than $1 million and underfunding is reported based on an 
estimate of vested benefits. Section 4010 data was not required or 
reported prior to 1996, and is not yet reported for 2007 due to changes 
from PPA. 'Underfunding among plans that are reasonably possible for 
termination' is among plan sponsors with less than investment-grade 
bond ratings and is based on an estimate of vested benefits. 'Total 
underfunding in PBGC-insured plans' includes the universe of PBGC 
single-employer insured plans and estimated total liabilities are based 
on all plan liabilities, whether vested or not. 

[End of figure] 

In 2003, GAO designated PBGC's single-employer program as high-risk, or 
as a program that needs urgent Congressional attention and agency 
action. We specifically noted PBGC's prior-year net deficit as well as 
the risk of the termination among large, underfunded pension plans, as 
reasons for the programs high-risk designation.[Footnote 17] As part of 
our monitoring of PBGC as a high-risk agency we have highlighted 
additional challenges faced by the single-employer program. Among these 
concerns were the serious weaknesses that existed with respect to plan 
funding rules[Footnote 18] and that PBGC's premium structure and 
guarantees needed to be re-examined to better reflect the risk posed by 
various plans.[Footnote 19] Additionally the number of single-employer 
insured DB plans has been rapidly declining, and, among the plans still 
in operation, many have frozen benefits to some or all participants. 
[Footnote 20] Additionally the prevalence of plans that are closed to 
new participants seems to imply that PBGC is likely to see a decline in 
insured participants, especially as insured participants seem 
increasingly likely to be retired (as opposed to active or current) 
workers. 

There have been a number of developments with respect to PBGC's 
situation since we issued our most recent high risk updates in 2005 and 
2007. At least until fairly recently, key economic conditions have been 
generally favorable for DB plan sponsors and plan funding has generally 
improved. In addition, major pension legislation was enacted which 
addressed many of the concerns articulated in our previous reports and 
testimonies on PBGC's financial condition. The Deficit Reduction Act of 
2005 (DRA) was signed in to law on February 8, 2006 and included 
provisions to raise flat-rate premiums[Footnote 21] and created a new, 
temporary premium for certain terminated single-employer plans. 
[Footnote 22] Later that year the Pension Protection Act of 2006 (PPA) 
was signed into law and included a number of provisions aimed at 
improving plan funding and PBGC finances. However, PPA did not fully 
close plan funding gaps, did not adjust premiums in a way that fully 
reflected risk from financially distressed sponsors and provided 
special relief to plan sponsors in troubled industries, particularly 
those in the airline industries. PBGC's net financial position improved 
from 2005 to 2006 because some very large plans that were previously 
classified as probable terminations were reclassified to a reasonably 
possible designation as a result of the relief granted to troubled 
industries. Since this provision has only been implemented for a few 
years, it is still too early to determine how much risk of new claims 
these reclassified plans still represent to PBGC. As many of the 
provisions in PPA are still phasing-in, we will continue to monitor the 
status of the single-employer program with respect to PPA and will be 
updating our high risk series in early 2009. 

GAO recently reported on a newly developing financial challenge facing 
PBGC due to the recent change to its investment policy.[Footnote 23] 
While the investment policy adopted in 2008 aims to reduce PBGC's $14 
billion deficit by investing in assets with a greater expected return, 
GAO found that the new allocation will likely carry more risk than 
acknowledged by PBGC's analysis. According to PBGC the new allocation 
will be sufficiently diversified to mitigate the expected risks 
associated with the higher expected return. They also asserted that it 
should involve less risk than the previous policy. However, GAO's 
assessment found that, although returns are indeed likely to grow with 
the new allocation, the risks are likely higher as well. Although it is 
important that the PBGC consider ways to optimize its portfolio, 
including higher return and diversification strategies, the agency 
faces unique challenges, such as PBGC's need for access to cash in the 
short-term to pay benefits, which could further increase the risks it 
faces with any investment strategy that allocates significant portions 
of the portfolio to volatile or illiquid assets. 

Improvements Needed to PBGC's Governance, Oversight and Management: 

Improvements are needed to PBGC's governance structure, to oversight of 
the corporation, and to its strategic approach to program management. 
PBGC's three member board of directors is limited in its ability to 
provide policy direction and oversight. According to corporate 
governance guidelines, the board of directors should be large enough to 
provide the necessary skill sets, but also small enough to promote 
cohesion, flexibility, and effective participation. PBGC may also be 
exposed to challenges as the board, its representatives, and the 
director will likely change with the upcoming presidential transition 
in January, limiting the board's institutional knowledge of the 
corporation. In addition, Congressional oversight of PBGC in recent 
years has ranged from formal congressional hearings to the use of its 
support agencies, such as GAO, the Congressional Budget Office, and the 
Congressional Research Service. However, unlike some other government 
corporations, PBGC does not have certain reporting requirements for 
providing additional information to Congress. Finally, we found that 
PBGC lacks a strategic approach to its acquisition and human capital 
management needs. 

PBGC's Governance Structure Needs Improvement: 

PBGC's board has limited time and resources to provide policy direction 
and oversight and had not established comprehensive written procedures 
and mechanisms to monitor PBGC's operations.[Footnote 24] PBGC's three- 
member board, established by ERISA, includes the Secretary of Labor as 
the Chair of the Board and the Secretaries of Commerce and Treasury. We 
noted that the board members have designated officials and staff within 
their respective agencies to conduct much of the work on their behalf 
and relied mostly on PBGC's management to inform these board members' 
representatives of pending issues. PBGC's board members have numerous 
other responsibilities in their roles as cabinet secretaries and have 
been unable to dedicate consistent and comprehensive attention to PBGC. 

Since PBGC's inception, the board has met infrequently. In 2003, after 
several high-profile pension plan terminations, PBGC's board began 
meeting twice a year (see figure 5). PBGC officials told us that it is 
a challenge to find a time when all three cabinet secretaries are able 
to meet, and in several instances the board members' representatives 
officially met in their place. While the PBGC board is now meeting 
twice a year, very little time is spent on addressing strategic and 
operational issues. According to corporate governance guidelines, 
boards should meet regularly and focus principally on broader issues, 
such as corporate philosophy and mission, broad policy, strategic 
management, oversight and monitoring of management, and company 
performance against business plans.[Footnote 25] However, our review of 
the board's recorded minutes found that although some meetings devoted 
a portion of time to certain strategic and operational issues, such as 
investment policy, the financial status of PBGC's insurance programs, 
and outside audit reviews, the board meetings generally only lasted 
about an hour. 

Figure 5: Number of PBGC Board Meetings 1974 to September 2008: 

[See PDF for image] 

This figure is an illustration of a timeline indicating the number of 
PBGC Board Meetings 1974 to September 2008, as follows: 

Year: 1974; 
Meeting (with quorum): 1. 

Year: 1975; 
Meeting (with quorum): 5. 

Year: 1976; 
Meeting (with no quorum): 2; 
Meeting (with quorum): 4. 

Year: 1977; 
Meeting (with no quorum): 3; 
Meeting (with quorum): 3. 

Year: 1978; 
Meeting (with no quorum): 1; 
Meeting (with quorum): 2. 

Year: 1979; 
Meeting (with quorum): 2. 

Year: 1981; 
Meeting (with quorum): 1. 

Year: 1982; 
Meeting (with quorum): 1. 

Year: 1987; 
Teleconference: 1. 

Year: 1992; 
Meeting (with quorum): 1. 

Year: 1993; 
Teleconference: 2. 

Year: 1994; 
Meeting (with quorum): 1. 

Year: 1995; 
Meeting (with quorum): 1. 

Year: 2003; 
Meeting (with quorum): 1. 

Year: 2004; 
Teleconference: 1; 
Meeting (with quorum): 2. 

Year: 2005; 
Meeting (with quorum): 3. 

Year: 2006; 
Meeting (with quorum): 2. 

Year: 2007; 
Meeting (with quorum): 2. 

Year: 2008; 
Meeting (with quorum): 1. 

Source: GAO analysis of PBGC documents and board meeting minutes. 

[End of figure] 

The size and composition of PBGC's board does not meet corporate 
governance guidelines. According to corporate governance guidelines 
published by The Conference Board,[Footnote 26] corporate boards should 
be structured so that the composition and skill set of a board is 
linked to the corporation's particular challenges and strategic vision, 
and should include a mix of knowledge and expertise targeted to the 
needs of the corporation. We did not identify any other government 
corporations with boards as small as at PBGC. Government corporations' 
boards averaged about 7 members, with one having as many as 15. In 
addition, PBGC may also be exposed to challenges as the board, board 
members' representatives, and the director will likely change with the 
upcoming presidential transition in January 2009, limiting the board's 
institutional knowledge of the corporation. 

The recent revision of PBGC's investment policy provides an example of 
the need for a more active board.[Footnote 27] We found that PBGC 
board's 2004 and 2006 investment policy was not fully implemented. 
While the board assigned responsibility to PBGC for reducing equity 
holdings to a range of 15 to 25 percent of total investment, by 2008 
the policy goal had not been met. Although the PBGC director and staff 
kept the board apprised of investment performance and asset allocation, 
we found no indication that the board had approved the deviation from 
its established policy or expected PBGC to continue to meet policy 
objectives. 

We previously recommended that Congress consider expanding PBGC's board 
of directors, to appoint additional members who possess knowledge and 
expertise useful to PBGC's responsibilities and can provide needed 
attention. Further, dedicating staff that are independent of PBGC's 
executive management and have relevant pension and financial expertise 
to solely support the board's policy and oversight activities may be 
warranted. In response to our finding, PBGC contracted with a 
consulting firm to identify and review governance models and provide a 
background report to assist the board in its review of alternative 
corporate governance structures. The consulting firm's final report 
describes the advantages and disadvantages of the corporate board 
structures and governance practices of other government corporations 
and select private sector companies, and concludes that there are 
several viable alternatives for PBGC's governance structure and 
practices. 

Along with the board's limited time and resources, we found that the 
board had not established comprehensive written procedures and 
mechanisms to monitor PBGC's operations. There were no formal protocols 
concerning the Inspector General's interactions with the board, 
[Footnote 28] and PBGC internal management were not required to 
routinely report all matters to the board. Even though PBGC used 
informal communication to inform the board, it could not be certain 
that it received high quality and timely information about all 
significant matters facing the corporation. As a result we recommended 
that PBGC's board of directors establish formal guidelines that 
articulate the authorities of the board, Department of Labor, other 
board members and their respective representatives. In May 2008 PBGC 
revised its bylaws. As part of its bylaw revision, the board of 
directors more explicitly defined the role and responsibilities of the 
director and the corporation's senior officer positions, and outlined 
the board's responsibilities, which include approval of policy matters 
significantly affecting the pension insurance program or its 
stakeholders; approval of the corporation's investment policy; and 
review of certain management and Inspector General reports. 

Congress Has Overseen PBGC in Several Ways and Some other Government 
Corporations have Additional Reporting Requirements: 

Since 2002, PBGC officials have testified 20 times before various 
congressional committees--mostly on broad issues related to the status 
of the private sector defined benefit pension policy and its effect on 
PBGC--and, in 2007, the Senate conducted confirmation hearings of 
PBGC's director. PBGC must annually submit reports to Congress on its 
prior fiscal year's financial and operational matters, which include 
information on PBGC's financial statements, internal controls, and 
compliance with certain laws and regulations.[Footnote 29] In addition, 
through its support agencies--GAO, the Congressional Budget Office, and 
the Congressional Research Service--Congress has also provided 
oversight and reviewed PBGC. Specifically, Congress has asked GAO to 
conduct assessments of policy, management, and the financial condition 
of PBGC. For example, we conducted more than 10 reviews of PBGC over 
the past 5 years, including assessments related to PBGC's 2005 
corporate reorganization and weaknesses in its governance structure, 
human capital management, and contracting practices. Our work also 
raised concerns about PBGC's financial condition and the state of the 
defined benefit industry. 

Some government corporations have additional reporting requirements for 
notifying Congress of significant actions. For example, the Millennium 
Challenge Corporation is required to formally notify the appropriate 
congressional committees 15 days prior to the allocation or transfer of 
funds related to the corporation's activities.[Footnote 30] The 
Commodity Credit Corporation is subject to a similar requirement. 
[Footnote 31] These examples demonstrate how Congress has required 
additional reporting requirements for certain activities conducted by 
government corporations. PBGC generally has no requirements to formally 
notify Congress prior to taking any significant financial or 
operational actions. 

A More Strategic Approach Could Improve Contracting and Human Capital 
Management at PBGC: 

As reported in our recent work on PBGC contracting and human capital 
management,[Footnote 32] contracting plays a central role in helping 
PBGC achieve its mission and address unpredictable workloads. Three- 
quarters of PBGC's budget was spent on contracts and nearly two-thirds 
of its personnel are contractors, as shown in figure 6. Since the mid- 
1980s, PBGC has had contracts covering a wide range of services, 
including the administration of terminated plans, payment of benefits, 
customer communication, legal assistance, document management, and 
information technology. From fiscal year 2000 through 2007, PBGC's 
contract spending increased steadily along with its overall budget and 
workload, and its use of contract employees outpaced its hiring of 
federal employees. As PBGC workload grew due to the significant number 
of large pension plan terminations, PBGC relied on contractors to 
supplement its workforce, acknowledging that it has difficulty 
anticipating workloads due to unpredictable economic conditions. 

Figure 6: PBGC Overall Versus Contractor Spending and Personnel, Fiscal 
Year 2007: 

[See PDF for image] 

This figure is a horizontal stacked bar graph depicting the following 
data: 

Employees: 
Federal: 811; 
Contractors: 1,502. 

PBGC appropriation: 
Total: $398 million; 
Contracts: $297 million. 

Source: PBGC. 

[End of figure] 

In 2000, we recommended that PBGC develop a strategic approach to 
contracting by conducting a comprehensive review of PBGC's future human 
capital needs and using this review to better link contracting 
decisions to PBGC's long-term strategic planning process. PBGC took 
some initial steps to implement our recommendation, and in August 2008, 
we reported that PBGC had recently renewed its efforts and drafted a 
strategic human capital plan. 

In addition to drafting a strategic human capital plan, PBGC recently 
issued its strategic plan; however this plan does not document how the 
acquisition function supports the agency's missions and goals. Although 
contracting is essential to PBGC's mission, we found that the 
Procurement Department is not included in corporate-level strategic 
planning. Further, PBGC's draft strategic human capital plan 
acknowledges the need for contractor support, but does not provide 
detailed plans for how the contract support will be obtained. While 
PBGC's workload can expand and contract depending on the state of plan 
terminations, planning documents do not include strategies for managing 
the fluctuations. Based on these findings, we recommended that PBGC 
revise its strategic plan to reflect the importance of contracting and 
to project its vision of future contract use, and ensure that PBGC's 
procurement department is included in agency-wide strategic planning. 

PBGC also needs a more strategic approach for improving human capital 
management. While PBGC has made progress in its human capital 
management approach by taking steps to improve its human capital 
planning and practices--such as drafting a succession management plan-
-the corporation still lacks a formal, comprehensive human capital 
strategy, articulated in a formal human capital plan that includes 
human capital policies, programs, and practices.[Footnote 33] PBGC has 
initiatives for the management of human capital, such as ensuring 
employees have the skills and competencies needed to support its 
mission and establishing a performance-based culture within the 
corporation, and has made some progress toward these goals. However, 
PBGC has not routinely and systematically targeted and analyzed all 
necessary workforce data--such as attrition rates, occupational skill 
mix, and trends--to understand its current and future workforce needs. 

PBGC is generally able to hire staff in its key occupations--such as 
accountants, actuaries, and attorneys--and retain them at rates similar 
to those of the rest of the federal government. However, PBGC has had 
some difficulty hiring and retaining staff for specific occupations and 
positions, including executives and senior financial analysts. PBGC has 
made use of various human capital flexibilities in which the 
corporation has discretionary authority to provide direct compensation 
in certain circumstances to support its recruitment and retention 
efforts, such as recruitment and retention incentives, superior 
qualification pay-setting authority, and special pay rates for specific 
occupations.[Footnote 34] However, PBGC officials said that they had 
not recently explored additional flexibilities that required the 
approval of OPM and OMB to determine whether they would be applicable 
or appropriate for the corporation. 

Conclusions: 

PBGC clearly faces many challenges. The impact of PPA is still unclear, 
but in any case difficult decisions for the future still remain. While 
PBGC's net financial position has improved along with economic 
conditions that until recently had been favorable to plan sponsors, we 
are concerned that such conditions are changing and could leave PBGC 
exposed to another spate of claims from sponsors of very large severely 
underfunded plans. The challenges PBGC faces are acutely illustrated by 
its recent changes to its asset investment policy. The aim of the 
change to the policy is to reduce the current deficit through greater 
returns, but, holding all else equal, the potential for greater returns 
comes with greater risk. This greater risk may or may not be warranted, 
but the uncertain results of the policy could have important 
implications for all PBGC stakeholders: plan sponsors, insured 
participants, insured beneficiaries, as well as the government and 
ultimately taxpayers. 

One thing that is certain: PBGC will continue to require prudent 
management and diligent oversight going forward. However, PBGC faces 
challenges with its board structure, which will only become more 
apparent in the coming months as the board, its representatives, and 
the corporation's director will likely be entirely replaced by a new 
president. Without adequate information and preparation, this 
transition could limit not only the progress made by the current board, 
its representatives, and director, but may also hinder the 
corporation's ability to insure and deliver retirement benefits to 
millions of Americans that rely on the corporation. As this transition 
highlights, an improved board structure is critical in helping PBGC 
manage the daunting, and in many ways fundamental, long-term financial 
challenges it faces, which is why we have recommended the Congress 
restructure the Board. 

Chairman Lewis, Congressman Ramstad, and Members of the Subcommittee, 
this concludes my prepared statement. I would be happy to respond to 
any questions you may have. 

Contacts and Staff Acknowledgments: 

For further questions about this statement, please contact Barbara D. 
Bovbjerg at (202) 512-7215. Individuals making key contributions to 
this statement include Blake Ainsworth, Charles Jeszeck, Jay McTigue, 
Charles Ford, Monika Gomez, Craig Winslow, and Susannah Compton. 

[End of section] 

Appendix I: List of Selected GAO Reports and Testimonies Related to the 
Pension Benefit Guaranty Corporation: 

Pension Benefit Guaranty Corporation: Need for Improved Oversight 
Persists, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-1062]. 
Washington, D.C.: September 10, 2008. 

Pension Benefit Guaranty Corporation: Some Steps Have Been Taken to 
Improve Contracting, but a More Strategic Approach Is Needed. 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-871]. Washington, 
D.C.: August 18, 2008. 

PBGC Assets: Implementation of New Investment Policy Will Need Stronger 
Board Oversight. [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-
667]. Washington, D.C.: July 17, 2008. 

Pension Benefit Guaranty Corporation: A More Strategic Approach Could 
Improve Human Capital Management. [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-08-624]. Washington, D.C.: June 12, 2008. 

High Risk Series: An Update. [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-07-310]. Washington, D.C.: January 2007. 

Pension Benefit Guaranty Corporation: Governance Structure Needs 
Improvements to Ensure Policy Direction and Oversight. [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-07-808] Washington, D.C.: July 6, 
2007. 

PBGC's Legal Support: Improvement Needed to Eliminate Confusion and 
Ensure Provision of Consistent Advice. [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-07-757R]. Washington, D.C.: May 
18, 2007. 

Private Pensions: Questions Concerning the Pension Benefit Guaranty 
Corporation's Practices Regarding Single-Employer Probable Claims. 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-991R]. Washington, 
D.C.: September 9, 2005. 

Private Pensions: The Pension Benefit Guaranty Corporation and Long- 
Term Budgetary Challenges. [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-05-772T]. Washington, D.C.: June 9, 2005. 

Private Pensions: Recent Experiences of Large Defined Benefit Plans 
Illustrate Weaknesses in Funding Rules. [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-05-294]. Washington, D.C.: May 
31, 2005. 

Pension Benefit Guaranty Corporation: Single-Employer Pension Insurance 
Program Faces Significant Long-Term Risks. [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-04-90]. Washington, D.C.: October 
29, 2003. 

Pension Benefit Guaranty Corporation Single-Employer Insurance Program: 
Long-Term Vulnerabilities Warrant 'High Risk' Designation. [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-03-1050SP]. Washington, D.C.: 
July 23, 2003. 

Pension Benefit Guaranty Corporation: Statutory Limitation on 
Administrative Expenses Does Not Provide Meaningful Control. 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-301]. Washington, 
D.C.: February 28, 2003. 

GAO Forum on Governance and Accountability: Challenges to Restore 
Public Confidence in U.S. Corporate Governance and Accountability 
Systems. [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-419SP]. 
Washington, D.C.: January 2003. 

[End of section] 

Footnotes: 

[1] GAO, Pension Benefit Guaranty Corporation Single-Employer Insurance 
Program: Long-Term Vulnerabilities Warrant "High Risk" Designation, 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-1050SP] 
(Washington, D.C.: July 23, 2003). 

[2] Pub. L. No. 93-406, 88 Stat. 829. (Sept. 2, 1974)(codified, as 
amended, at 29 U.S.C.   1001-1461). 

[3] Employers may voluntarily sponsor DB plans, defined contribution 
(DC) plans, or both for their employees. DB plans promise to provide a 
benefit that is generally based on a formula that typically includes an 
employee's salary and years of service. Under a DC plan, such as a 
401(k) plan, employees have individual accounts to which the employee, 
employer, or both make contributions, and benefits are based on 
contributions along with investment returns (gains and losses) on the 
accounts. 

[4] The limit is reduced if the benefit is not paid as a single-life 
annuity. For example, the limit is reduced if the benefit is paid as a 
joint-and-survivor annuity. 

[5] Additional guarantee restrictions apply if the plan's termination 
date occurred while the employer was in a bankruptcy proceeding that 
began on or after September 16, 2006, or if the plan is a commercial 
passenger airline plan or airline catering plan that elected the 17- 
year funding relief under the Pension Protection Act of 2006, Pub. L. 
No. 109-280,  402, 120 Stat. 780, 922-28 (Aug. 17, 2006)(reprinted in 
26 U.S.C.  430 note). 

[6] PBGC has used this "line of credit" only once--to cover the 
agency's startup costs--and quickly repaid. 

[7] Multiemployer DB plans must pay PBGC a yearly premium of $8.00 per 
participant for pension benefit insurance coverage in 2007. Like the 
single employer program, the PBGC multiemployer premium rate is 
adjusted annually to changes in the national average wage index and 
then rounded to the nearest whole dollar. However, there is no 
underfunding or exit premium for multiemployer plans. For multiemployer 
plan participants, the maximum insured benefit is about $12,870 for a 
participant with 30 years of service. Unlike the single employer 
program, the maximum insurable benefit limit for multiemployer 
participants is not indexed to wage inflation and has not changed since 
December 2000. 

[8] PBGC permits multiemployer plans that cannot pay full benefits to 
pay reduced benefits equal to the PBGC guarantee. For plans that become 
insolvent, PBGC will typically loan the plan an amount necessary to pay 
guaranteed benefits and administrative expenses. In the past, few plans 
receiving financial assistance from PBGC have recovered sufficiently to 
repay all the monies lent to them and PBGC typically does not expect 
the loans to be repaid. An allowance has been established on PBGC's 
financial records to account for financial assistance that is not 
expected to be repaid. 

[9] 29 U.S.C.  1302(g)(2). 

[10] 29 U.S.C.  1305. Although technically there are seven revolving 
funds, PBGC uses only three, and their activities are combined into one 
fund for reporting purposes. 

[11] Prior to 2004, administrative expenses not directly related to 
terminations were paid from appropriations, which were then reimbursed 
by the revolving fund. Legislation enacted in 2003 eliminated the 
distinction between moneys covering administrative expenses related to 
terminations and those unrelated to terminations; now, all 
administrative spending is considered direct spending from the 
revolving fund. 

[12] GAO, Budget Issues: Budgeting for Federal Insurance Programs, 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/AIMD-97-16] 
(Washington D.C.: Sept. 30, 1997). 

[13] Claims are the net cost of terminating a pension plan--the gap 
between its assets and its liabilities. 

[14] As noted earlier, the multiemployer program is a much smaller 
program. For example, the current liabilities of the multiemployer 
program represent less than 3 percent of PBGC's total liabilities for 
both its insurance programs. Despite its smaller size, we have reported 
on the unique financial challenges that the program faces and we will 
continue to monitor developments. See GAO, Private Pensions: 
Multiemployer Plans Face Short-and Long-Term Challenges, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-04-423](Washington, D.C.: March 
26, 2004). 

[15] The termination of a fully funded DB plan is called 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. The 
termination of an underfunded plan, termed a distress termination, is 
allowed if the plan sponsor requests the termination and the sponsor 
satisfies other criteria. Alternatively, PBGC may initiate an 
"involuntary" termination. PBGC may institute proceedings to terminate 
a plan if the plan has not met the minimum funding standard, the plan 
will be unable to pay benefits when due, a reportable event has 
occurred, 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). 

[16] GAO, Private Pensions: Airline Plans' Underfunding Illustrates 
Broader Problems with the Defined Benefit Pension System, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-05-108T] (Washington, D.C.: Oct. 
7, 2004) 

[17] The condition of the single-employer program has been a 
longstanding concern of both the Congress and GAO. 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. 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. 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--though we continued to 
monitor PBGC's situation. 

[18] GAO, Private Pensions: Recent Experiences of Large Defined Benefit 
Plans Illustrate Weaknesses in Funding Rules, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-05-294] (Washington, D.C.: May 
31, 2005) 

[19] GAO, Pension Benefit Guaranty Corporation: Single-Employer Pension 
Insurance Program Faces Significant Long-Term Risks, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-04-90] (Washington, D.C.: Oct. 
29, 2003) 

[20] A plan freeze is an amendment to the plan to limit some or all 
future pension accruals for some or all plan participants. See GAO, 
Defined Benefit Pensions: Plan Freezes Affect Millions of Participants 
and Pose Retirement Income Challenges, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-08-817] (Washington, D.C.: July 
21, 2008) and GAO, Private Pensions: Timely and Accurate Information Is 
Needed to Identify and Track Frozen Defined Benefit Plans, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-04-200R] (Washington, D.C.: Dec. 
17, 2003). 

[21] The flat-rate premium is a per-participant premium that plans pay 
to PBGC each year. In 2008, the rate for the flat premium is $33 per 
participant in insured single-employer plans. For multiemployer plans 
the flat rate premium is $9.00 per participant. These rates are 
adjusted annually by an average-national-wage index. 

[22] Pub. L. No. 109-171,  8101, 120 Stat. 4, 180-83 (codified at 29 
U.S.C.  1306). The legislation created a new premium for sponsors of 
plans that are terminated on an involuntary or distressed termination 
basis. The required payment is $1,250 per plan participant, per year, 
for three years after the termination. For sponsors whose plans were 
terminated while the program was being reorganized under chapter 11 of 
the bankruptcy code, the premium would be levied after the sponsor 
emerges from bankruptcy. Under DRA the premium would not apply to firms 
that are liquidated by a bankruptcy court or to terminations after 
December 2010. 

[23] GAO, PBGC Assets: Implementation of New Investment Policy Will 
Need Stronger Board Oversight, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-08-667] (Washington, D.C.: July 17, 2008) 

[24] GAO, Pension Benefit Guaranty Corporation: Governance Structure 
Needs Improvements to Ensure Policy Direction and Oversight, 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-808] (Washington, 
D.C.: July 6, 2007). 

[25] Matteo Tonello and Carolyn K. Brancato, Corporate Governance 
Handbook, 2007: Legal Standards and Board Practices, Research Report R- 
1405-07-RR, The Conference Board (New York, New York: 2007). 

[26] Corporate Governance Handbook, 2007, Research Report R-1405-07-RR. 
The Conference Board is a global business membership and research 
organization that creates and disseminates knowledge about management 
and the marketplace. 

[27] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-667]. 

[28] PBGC's Office of the Inspector General is an independent office 
within PBGC established under the Inspector General Act (codified, as 
amended, at 5 U.S.C. appx). 

[29] PBGC is required each year to submit to Congress and the President 
an annual report, which must include the actuarial assumptions and 
methods PBGC uses to evaluate the expected 5-year operations and status 
of its pension benefit guaranty funds, and a comparison of its funds' 
investment returns with a designated index. 29 U.S.C.  1308. 

[30] The Millennium Challenge Corporation is a U.S. government 
corporation designed to work with foreign countries to reduce global 
poverty through the promotion of sustainable economic growth. 22 U.S.C. 
 7701, 7703. 

[31] The Commodity Credit Corporation (CCC) is a U.S. government 
corporation created to stabilize, support, and protect farm income and 
prices. CCC also helps maintain balanced and adequate supplies of 
agricultural commodities and aids in their distribution. 15 U.S.C.  
714. 

[32] See GAO, Pension Benefit Guaranty Corporation: Some Steps Have 
Been Taken to Improve Contracting, but a More Strategic Approach Is 
Needed, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-871] 
(Washington, D.C.: August 18, 2008) and GAO, Pension Benefit Guaranty 
Corporation: A More Strategic Approach Could Improve Human Capital 
Management, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-624] 
(Washington, D.C.: June 12, 2008). 

[33] According to GAO's internal control and management tool, agencies 
should have control activities, such as policies, procedures, 
techniques, and mechanisms that help ensure that management's 
directives to mitigate risk identified during the risk assessment 
process are carried out. Common categories of control activities 
include, in part, management of human capital. As part of human capital 
management, agencies should consider having a coherent overall human 
capital strategy that encompasses human capital policies, programs, and 
practices to guide the agency. GAO, Internal Control Management and 
Evaluation Tool, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-01-
1008G] (Washington, D.C.: Aug. 1, 2001). 

[34] Like most federal agencies, PBGC offers a wide range of employee 
benefits such as health benefits, life insurance benefits, paid leave 
and holidays, telecommuting or other flexible work schedules, transit 
subsidies, retirement investment options, flexible health spending 
accounts, long-term care insurance, student loan repayments, child care 
and car pool subsidies, and an on-site fitness center--most of which 
are available to other federal agencies. 

[End of section] 

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