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Comptroller General's Forum: 

Highlights of a GAO Forum: 

The Future of the Defined Benefit System and the Pension Benefit 
Guaranty Corporation: 

June 2005: 

GAO-05-578SP: 

GAO Highlights: 

Highlights of GAO-05-578SP: 

Why GAO Convened This Forum: 

Employer-sponsored defined benefit pension plans face unprecedented 
challenges in the midst of significant changes in our nationís 
retirement landscape. Many defined benefit plans and the federal agency 
that insures them, the Pension Benefit Guaranty Corporation (PBGC), 
have accumulated large and growing deficits that threaten their 
survival. Meanwhile, the percentage of American workers covered by 
defined benefit plans has been declining for about 30 years, reflecting 
a movement toward defined contribution plans (e.g., 401(k) plans) and 
perhaps fundamental changes in how our society thinks about who should 
bear responsibility and risk for the retirement income security of 
American workers. It is imperative that policymakers address not only 
the challenges facing the defined benefit system and the PBGC, but also 
consider broader questions about overall retirement income policy. 

To address these issues, GAO convened a diverse group of knowledgeable 
individuals who have been influential in shaping the defined benefit 
pensions debate over the years. Participants included government 
officials, researchers, accounting experts, actuaries, plan sponsor and 
employee group representatives, and members of the investment 
community. 

What Participants Said: 

Forum participants debated both the specifics of potential changes to 
the regulations governing Americaís defined benefit pension system and 
broader ideas about how policymakers should address retirement income 
security. There were varying levels of agreement on the following 
statements: 

* Current pension funding rules do not adequately ensure sound funding 
in plans that are at the greatest risk of termination, and the federal 
government needs to do more to hold employers accountable for the 
benefit promises they make. 

* Addressing deficiencies in the pension funding rules would be more 
effective and more important than reforming the PBGC premium structure, 
since policymakers should focus on getting employers to fulfill the 
promises they make to employees. 

* Greater pension funding flexibility could help maintain adequate 
pension funding and remove disincentives that have stopped plan 
sponsors from contributing more to their plans in the past. 

* PBGCís premium structure should better reflect the risk that a 
pension plan presents to the solvency of PBGCís pension insurance 
program. 

* Improvements should be made to the transparency and timeliness of 
pension plan financial information that is reported to plan 
participants, regulators, and those who invest in the plan sponsorís 
stocks and bonds. 

* Any reforms of pension funding rules and premium structures would be 
easier to achieve by separately addressing ďlegacy costsĒóthe costs 
from terminated and currently underfunded defined benefit plans. 

* Although the traditional defined benefit system has been in retreat 
for about 30 years, this trend might be halted if policymakers would 
clarify the legal ambiguities surrounding cash balance and other hybrid 
plans. 

Rather than focusing on promoting certain types of pension plans, 
policymakers should identify and encourage those features of pension 
plans (both defined benefit and defined contribution) that are most 
likely to provide sufficient income security for American retirees. 

www.gao.gov/cgi-bin/getrpt?GAO-05-578SP. 

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]

Contents: 

Introduction from the Comptroller General of the United States: 

Background: 

Funding Rules: 

PBGC Premiums: 

Transparency of Pension Plan Information: 

Emerging Issues: 

PBGC's Mandate: 

Appendixes: 

Appendix I: Forum Agenda: 

Appendix II: Forum Participants: 

Appendix III: Comptroller General's Presentation Slides: 

Appendix IV: GAO Contacts and Staff Acknowledgments: 

Related GAO Products: 

Figures: 

Figure 1: Assets, Liabilities, and Net Financial Position of PBGC's 
Single-Employer Insurance Program, 1980-2004: 

[End of section]

Introduction from the Comptroller General of the United States: 

Employer-sponsored defined benefit pension plans, which have served as 
a cornerstone of private sector retirement income security for several 
decades, face unprecedented challenges in the midst of significant 
changes in our nation's retirement landscape. Many defined benefit 
plans and the federal agency that insures them, the Pension Benefit 
Guaranty Corporation (PBGC), have accumulated large and growing 
deficits that threaten their future survival. At the end of fiscal year 
2004, PBGC reported a $23.3 billion accumulated deficit in its primary 
pension insurance program, the single-employer program, and estimates 
that it is exposed to an additional $96 billion in potential losses 
from underfunded plans sponsored by non-investment-grade 
companies.[Footnote 1] While these deficits have surged in the last 3 
years, the percentage of American workers covered by defined benefit 
plans has been declining for about 30 years, reflecting a movement 
toward defined contribution plans (e.g., 401(k) plans) and perhaps 
fundamental changes in how our society thinks about who should bear 
responsibility and risk for the retirement income security of American 
workers. The recent public debate over the merits of including 
individual accounts as part of a more comprehensive Social Security 
reform proposal should lead us to consider fundamental questions about 
overall retirement income policy. As part of this effort, it is 
imperative that policy makers address the challenges facing the defined 
benefit system and the PBGC. 

Policymakers need to confront these challenges now because over 40 
million Americans are counting on the private sector defined benefit 
system for at least part of their retirement income. The sooner action 
is taken, the more flexibility there will be to strengthen the 
financial condition of poorly funded defined benefit plans and the 
PBGC. Much of PBGC's exposure stems from large, underfunded pension 
plans in certain industries with structural weaknesses, which may be 
attributed, at least in part, to certain macroeconomic forces such as 
deregulation and globalization. These and other terminated and 
underfunded plans have increased both the costs of the pension 
insurance program and PBGC's exposure to risk. Because current law 
requires PBGC to finance itself through the collection of insurance 
premiums, the assets of failed plans, and related investment earnings, 
companies with healthier pension plans have borne increased premium 
costs over the years to help cover PBGC's deficits. It is unclear how 
much longer companies with well-funded pension plans will be willing to 
pay higher premiums and remain within the defined benefit system. The 
nature of any related legislative reforms will likely have a bearing on 
this issue. 

In two important ways, the current condition of the PBGC is a microcosm 
of the larger federal government and our Social Security system. First, 
PBGC has a large and growing deficit, which should be addressed sooner 
rather than later. And second, PBGC's pension insurance program is 
emblematic of a large number of federal government programs that must 
be reexamined because of fundamental changes in the world since they 
were enacted. The Employee Retirement Income Security Act of 1974 
(ERISA), which among other things established the PBGC, was passed in 
response to trends and challenges that existed at a time when defined 
benefit plans were growing and most pension plan participants in the 
private sector were enrolled in defined benefit plans. At that time, 
Congress and the American people may well have expected continued 
growth of defined benefit plans in the decades to come. 

In light of changes in the retirement landscape that have taken place 
over the last 30 years and the immediate financial and structural 
challenges facing the defined benefit system and the PBGC, GAO convened 
this forum to address problems with the existing defined benefit 
system, and to discuss broader issues of retirement income security. 
The forum brought together a diverse group of knowledgeable individuals 
who have been influential in shaping the defined benefit pensions 
debate over the years. Participants included government officials, 
researchers, accounting experts, actuaries, plan sponsor and employee 
group representatives, and members of the investment community (See 
app. I for the forum's agenda and app. II for a list of forum 
participants). All brought a commitment to forward thinking and an 
eagerness to move beyond defining and measuring the problem to 
discussing how to broaden understanding and public dialogue so that 
action could be both more immediate and more informed. 

The forum was designed to create a space where a rich, meaningful, and 
unattributed discussion could take place and a mutual understanding 
among the various stakeholders involved could be achieved. In 
particular, the forum sought to identify some possible approaches and 
strategies that could address the underlying structural problems and 
long-term challenges facing the defined benefit pension system and the 
PBGC. In smaller discussion groups, participants talked about pension 
funding rules, PBGC's premium structure, and transparency and 
disclosure of pension plan financial information. In these discussions 
and in plenary sessions, participants also considered a number of other 
issues, including attributes of retirement savings plans that 
government should promote and whether "legacy costs"--costs from 
terminated and currently underfunded defined benefit plans--should be 
addressed separately in any proposals to reform pension funding and 
premium rules. Also, participants debated whether PBGC should primarily 
serve as a social insurance program, a market-based insurer, or a 
hybrid. 

This report summarizes the ideas and themes that surfaced at the forum 
and the collective discussion of the forum participants as well as 
subsequent comments received from participants based on a draft of this 
report. 

I want to thank all the forum participants for taking the time to share 
their knowledge, insights, and perspectives. These will be of value to 
the American people and to their representatives in Congress as they 
communicate with their constituents about the need for change in the 
defined benefit system and the PBGC. We at GAO will also benefit from 
these insights as we carry out our mission to help Congress examine the 
ways to ensure the sustainability of the system and the solvency of the 
PBGC while ensuring the pension benefits earned by millions of 
Americans. I look forward to working with the forum's participants on 
this and other issues of mutual interest and concern in the future. 

Signed by: 

David M. Walker: 
Comptroller General of the United States: 

[End of section]

Background: 

Before the enactment of the Employee Retirement Income Security Act of 
1974, companies had been sponsoring pension plans for almost 100 
years.[Footnote 2] During the mid-20th century, private pension plans 
gained in popularity and grew from covering 19 percent of the workforce 
in 1945 to 40 percent in 1960.[Footnote 3] However, few rules governed 
the funding of these plans, and participants had no guarantees that 
they would receive the benefits promised. When Studebaker's pension 
plan failed in the 1960s, thousands of plan participants lost most or 
all of their pensions. Such experiences captured national attention and 
prompted the passage of ERISA to better protect the retirement income 
of Americans covered by private sector pension plans. Among other 
things, ERISA created the PBGC to protect the benefits of plan 
participants, subject to certain limits, in the event that plan 
sponsors could not meet the benefit obligations under their plans. 
ERISA also established rules for funding defined benefit pension plans, 
instituted pension insurance premiums, promulgated certain fiduciary 
rules, and developed annual reporting requirements. Now, when a plan is 
terminated with insufficient assets to pay promised benefits, PBGC 
assumes responsibility for the plan and for paying benefits to 
participants. Although PBGC provides insurance protection for over 
29,000 single-employer pension plans, covering 34.6 million people, the 
percentage of private sector workers covered by a defined benefit plan 
has dropped from 39 percent in 1975 to 21 percent in 2004. 

To try to ensure that plans have sufficient assets to pay for their 
benefit obligations, ERISA created minimum funding standards. Under 
current law, if a plan becomes sufficiently underfunded, the plan 
sponsor is required to make an additional contribution, known as a 
deficit reduction contribution. The funding rules also set maximum 
levels for tax-deductible contributions. However, prior GAO work has 
shown that the pension funding rules were not designed to ensure that 
plans have the means to meet their benefit obligations in the event 
that plan sponsors run into financial distress.[Footnote 4]

PBGC receives no direct federal tax dollars to support the single- 
employer pension insurance program.[Footnote 5] Instead, the program 
receives the assets of terminated underfunded plans and any of the 
sponsor's assets that PBGC recovers during bankruptcy 
proceedings.[Footnote 6] PBGC finances the unfunded accrued liabilities 
of terminated plans with premiums paid by plan sponsors and income 
earned from the investment of program assets. Since its inception, 
PBGC's single-employer program has received most of its premium income 
from flat-rate premiums, which companies pay each year for every 
participant in a defined benefit plan they sponsor. Initially, the flat-
rate premium was set at $1 per participant per year. This rate was 
raised several times and since 1991 has been set at $19. In 1987, a 
variable-rate premium was added to provide an incentive for sponsors to 
better fund their plans. For each $1,000 of unfunded vested benefits, 
plan sponsors pay a premium of $9. In fiscal year 2004, PBGC received 
nearly $1.5 billion in premiums, including more than $800 million in 
variable rate premiums, but paid out more than $3 billion in benefits 
to plan participants or their beneficiaries. 

To meet the information needs of the federal agencies that administer 
federal pension laws, the PBGC, the Department of Labor, and the 
Internal Revenue Service jointly develop the Form 5500, to be used by 
pension plan administrators to meet their annual reporting requirements 
under ERISA and the Internal Revenue Code (IRC). This form and its 
attached statements and schedules are used to collect detailed plan 
information about assets, liabilities, insurance, and financial 
transactions, plus financial statements audited by an independent 
qualified public accountant, and for defined benefit plans, an 
actuarial statement. We have reported in prior work that Form 5500 
information may often be of limited value because, when it becomes 
available, its information is generally at least 2 years old.[Footnote 
7] In addition to requiring the Form 5500, if a company's pension plans 
reach a certain level of underfunding, ERISA requires the company to 
provide detailed financial information to PBGC in what is called a 4010 
filing. The 4010 filing includes proprietary information about the plan 
sponsor, its total pension assets, and its total benefit obligations 
were the company to terminate its pension plans immediately. Under 
current law, PBGC is not permitted to disclose this information to the 
public. Last, publicly traded corporations whose defined benefit plans 
are material to their financial statements must provide information 
about the effect of their pensions on their balance sheet and 
operations in a footnote to their 10-K filings to the Securities and 
Exchange Commission. 

The single-employer program has had an accumulated deficit--that is, 
the value of program assets has been less than the present value of 
benefits and other obligations--for much of its existence. (See fig. 
1.) In fiscal year 1996, the program had its first accumulated surplus, 
and by fiscal year 2000, the accumulated surplus had increased to about 
$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. In July 2003, we designated PBGC's 
single-employer insurance program as high risk, given its deteriorating 
financial condition and long-term vulnerabilities.[Footnote 8] In 
fiscal year 2004, the single-employer program incurred a net loss of 
$12.1 billion, and its accumulated deficit increased to a record $23.3 
billion, up from $11.2 billion a year earlier. Furthermore, PBGC 
estimated that total underfunding in single-employer plans exceeded 
$450 billion, as of the end of fiscal year 2004. 

Figure 1: Assets, Liabilities, and Net Financial Position of PBGC's 
Single-Employer Insurance Program, 1980-2004: 

[See PDF for image]

[End of figure]

Recently, the Administration has proposed wide-ranging reform for 
defined benefit pension plans and PBGC's single-employer insurance 
program. Specifically, the proposal's objectives are to (1) reform the 
funding rules to ensure sponsors keep pension promises; (2) reform 
premiums to better reflect a plan's risk and restore PBGC to financial 
health; and (3) improve disclosure to workers, investors, and 
regulators about pension plan status. Similarly, in previous reports 
dating back to 1992, we have emphasized that reforming these three 
areas is critical to restoring financial health to PBGC's pension 
insurance program and ensuring retirement security for millions of 
American workers. 

Funding Rules: 

Participants generally agreed that current pension funding rules do not 
adequately ensure sound funding in plans that are at the greatest risk 
of termination and the federal government needs to do more to hold 
employers accountable for the benefit promises they make. Many said 
that successfully reworking the funding rules would be the best way to 
bring about stability in the defined benefit system and PBGC's 
finances. Some participants suggested that the funding rules provide 
more flexibility to allow for larger contributions to plans during 
favorable economic conditions, thus improving plans' chances of 
surviving difficult economic conditions. Forum participants also 
addressed the importance of properly measuring pension plan assets and 
liabilities in order for funding rules to function properly. 
Participants generally agreed that the timing of expected benefit 
payments should affect measurement of liabilities, but they disagreed 
on the merits of utilizing a yield curve to measure these liabilities. 

Funding Rules Need Strengthening to Prevent Severe Plan Underfunding: 

Sidebar: 

Minimum Funding Requirements: 

Generally speaking, defined benefit pension plans insured by the PBGC 
are subject to minimum funding requirements that are determined by 
ERISA and the Internal Revenue Code. Essentially, plan liabilities are 
measured in two ways: (1) according to an actuarial valuation method 
that relies on a number of demographic and economic assumptions and (2) 
according to a more uniform measure that is prescribed by law, though 
still subject to some discretion by the plan sponsor. In general, the 
required contribution is the expected increase in the liability during 
the year, plus an amount to amortize any unfunded liabilities from past 
years. If the value of plan assets falls below 90 percent of the 
liability on the more uniform measure, the plan sponsor must generally 
make a deficit reduction contribution to the plan. Plan assets can be 
measured at either their market value or their actuarial value, which 
smoothes out volatility in market valuations, though actuarial asset 
values cannot deviate more than 20 percent from the market value of 
assets.

[End of sidebar]

Participants generally agreed that strengthening the funding rules is 
vital to alleviating the defined benefit system's finances. They 
suggested some changes to the funding rules that they thought would 
better ensure adequate plan funding and reduce PBGC's exposure to 
underfunded plans. 

* Minimum funding and deficit reduction contribution rules could be 
tightened. Some participants expressed concern that the threshold for 
requiring a deficit reduction contribution is not sufficiently 
stringent. Some suggested that the minimum required funding ratio of a 
plan's assets to its current liability should be raised from the 
current level of 90 percent. One participant noted that the funding 
rules allow companies considerable latitude in deciding how much to 
contribute to their pension plans in any given year.[Footnote 9] Many 
participants also agreed that addressing deficiencies in the pension 
funding rules would be more effective and more important than reforming 
the PBGC premium structure, since policymakers should focus on getting 
employers to fulfill the promises they make to employees. 

* Participants suggested ways to limit PBGC's exposure to plan 
underfunding. Participants suggested that policymakers act to limit 
both underfunding in pension plans and PBGC's exposure to pension 
underfunding by (1) curbing distribution of lump sum payments, (2) 
limiting federal guarantees of shutdown benefits,[Footnote 10] and (3) 
restricting plans from increasing benefits when they are severely 
underfunded. 

* Participants generally agreed that lump sum distributions from plans 
should be eliminated or at least discouraged because, on a large scale, 
they can increase the probability of insolvency in underfunded plans. 
For example, where participants in an underfunded plan believe that the 
PBGC guarantee may not cover their full benefits in the event of a plan 
termination, many may elect to receive their benefits in a lump sum 
rather than risk reduced annuity payments from PBGC if the plan 
terminates. This may create a "run on the bank," exacerbating the 
possibility of the plan's insolvency as assets are liquidated more 
quickly than expected, potentially leaving fewer assets to pay benefits 
for other plan participants. Forum participants said lump sum 
distributions could be discouraged by (1) setting minimum funding 
requirements according to a plan's expected lump sum distribution 
frequency (i.e., plans with higher lump sum distribution frequencies 
would have to maintain higher funding levels); (2) establishing a two- 
tier minimum funding requirement for lump sum distributions, which 
would only allow executives to receive lump sums if a certain threshold 
were reached, and would only allow other employees to receive lump sums 
if another funding level was met; or (3) linking lump sum distributions 
to plan funding status. For instance, if the plan were 80 percent 
funded, participants would not be able to receive more than 80 percent 
of their benefit in a lump sum and the remaining 20 percent would 
either be forfeited or reduced and paid out as an annuity. This would 
require amending existing laws that do not permit cutbacks in earned 
pension benefits. 

* Some participants suggested ways to limit PBGC's exposure to shutdown 
benefits. One option would be to require plans to prefund shutdown 
benefits by including them in current liability measures. 
Alternatively, shutdown benefits could be guaranteed at a lower level 
than regular pension benefits earned. For example, shutdown benefits 
could be subject to phase-in provisions that are based on the timing of 
factory closures, rather than the timing of amendments to plans that 
introduce or increase shutdown benefits. Currently, plant shutdowns 
prior to plan terminations usually result in higher claims for PBGC 
than if these events take place concurrently. 

* Most participants generally agreed that either plans should be 
restricted from increasing benefits in underfunded plans or the federal 
government should consider further limiting PBGC's guarantees of 
benefit increases under certain circumstances. Some participants 
expressed concerns that under current funding rules, plan sponsors can 
increase benefits for participants in underfunded plans, even if the 
plan sponsor may not ultimately be able to pay for these benefit 
increases. Thus, there are incentives for financially troubled plan 
sponsors and their employees to agree on pension benefit increases, in 
lieu of wage increases, because at least part of the benefit increases 
are guaranteed by PBGC. However, at least one participant said there 
should not be reductions in PBGC guarantees or limits to benefit 
increases. 

Current Rules Discourage Companies from Better Funding Their Pensions: 

Sidebar: 

Maximum Contribution Regulations: 

Generally speaking, a plan sponsor may make a tax-deductible 
contribution to its pension plan of an amount that is at least as much 
as the planís unfunded current liability. Other rules may allow for a 
larger deduction. Contributions beyond the deductible amount may be 
subject to a tax. In the 1980s and early 1990s Congress reduced 
employersí maximum tax-deductible contributions, imposed excise taxes 
on employer contributions that were not tax-deductible, and placed 
penalties on withdrawals of surplus assets.

[End of sidebar]

Several participants said that greater pension funding flexibility 
could help maintain adequate pension funding and remove disincentives 
that have stopped plan sponsors from contributing more to their plans 
in the past. 

* Current funding rules do not follow the business cycle. Some 
participants said that the maximum pension plan contribution levels set 
by law are too restrictive because they do not allow companies to make 
tax-qualified contributions to their plans when they can most afford 
it. Consequently, when the economy and equity prices decline, plan 
sponsors may be forced to make contributions when they can least afford 
them. Participants suggested raising the current limit on the amount 
companies can contribute to their pension plans on a tax-qualified 
basis during profitable times so their plans would remain in better 
financial condition in the event of a recession or stock market 
decline. Some participants said, that in recent years, the maximum 
funding restrictions have prohibited plan sponsors from making 
additional tax-qualified contributions when cash was readily available 
to the employer.[Footnote 11] However, at least one participant noted 
that increasing the limits on tax-deductible contributions to pension 
plans would reduce federal tax revenues. Furthermore, in one 
participant's opinion, the companies most likely to overfund their 
pension plans are those in healthy financial condition that are least 
likely to submit a claim to PBGC. 

* Taxes on plan reversions discourage firms from making additional 
contributions during profitable times. Some participants said that 
excise taxes present disincentives for plan sponsors to contribute more 
than the required minimum to their pension plans. They explained that 
if the rate of return on a plan's assets is greater than the growth in 
its liabilities, as happened during much of the 1990s, the plan sponsor 
would be required to pay a 50 percent reversion tax plus corporate tax 
on any surplus money that the employer receives when a plan is 
terminated with sufficient assets to satisfy the plan's liabilities. 
Thus, as companies consider their long-term cash needs, they might be 
reluctant to contribute more than the minimum as long as the reversion 
tax impedes them from recovering any excess plan funds. One participant 
asked whether the reversion tax should be reduced from its current rate 
of 50 percent to a rate that would better reflect the true economic 
value of the tax deferral that companies gain from funding their plans. 

Effective Funding Rules Require Accurate Measures of Plan Assets and 
Liabilities: 

Sidebar: 

Yield Curve Approach: 

Current rules require all plans to measure current liability with a 
discount rate based on a high-quality corporate bond index. However, a 
single rate for all plans may not accurately estimate the present value 
of plan obligations since demographic factors such as the average age 
of plan participants can vary between plans. In theory, the present 
value of a planís benefit obligations may be more accurately estimated 
by discounting expected future benefit payments at the market interest 
rate for bonds that mature when benefit payments are due (i.e., plans 
that cover predominantly older workers and retirees would use a shorter-
term interest rate). Generally, bonds with shorter maturities have 
lower yields. Discounting benefit payments at a lower interest rate, 
assuming all other factors equal, results in a greater current 
liability. The Administration has proposed replacing the single 
corporate bond rate with a series of corporate bond rates, the so-
called yield curve.

Rate of Return Assumptions: 

Pension funding rules require plan sponsors to estimate a long-term 
expected rate of return on plan assets. The higher this rate, the lower 
the value of assets a plan needs to meet minimum funding requirements, 
according to its actuarial funding method. However, other uniform 
(though still subject to some discretion) measures of pension funding 
may override these actuarial funding measures and result in additional 
contribution requirements. For further information see GAO-04-395.

[End of sidebar]

Participants discussed a number of pension funding issues related to 
measurement of pension assets and liabilities. There was general 
agreement on broad principles, but disagreement over the costs and 
benefits of specific proposals. 

* Measures of plan liabilities should consider the timing of benefit 
payments, though not necessarily using a yield curve. Participants 
generally agreed that the duration (a measure related to the timing of 
a set of cash flows) of plan liabilities should affect their 
measurement and required funding levels. Some participants recommended 
tying liabilities to a yield curve to more accurately measure them. 
This could also encourage plans to adopt investment strategies, based 
on the yield curve, of holding bonds of the same duration as the plan's 
liabilities. Thus, changes in interest rates would have similar effects 
on both plan assets and liabilities and would not significantly change 
the funding status of a plan. Opponents of the yield curve approach 
argued that it might not improve accuracy of liability measures because 
an imbalance of supply and demand for bonds of certain durations could 
skew interest rates. It was added that the yield curve is only likely 
to improve the accuracy of pension measurements when short-and long- 
term interest rates significantly differ, and only then for plans with 
workers that are particularly old or young; thus, it may not be worth 
the significantly greater administrative expense of using a yield 
curve. Another participant said there are reasonable alternatives to 
using a yield curve that produce similar results. For example, plans 
could calculate the average duration of their liabilities and then use 
the corresponding interest rate to determine their current liability. 

* Flexibility in rate of return assumptions may encourage riskier 
investments. Some participants said that plan sponsors have incentives 
to invest in riskier assets so they can more readily justify 
assumptions of higher expected rates of return on plan assets. One 
participant said funding rules should not make it easier for companies 
to make bets using employees' pension assets. It was also noted that 
funding rules do not differentiate among types of plan assets and thus 
a fully funded plan can still present a risk to PBGC because an asset- 
liability mismatch would leave it exposed to market risk. Other 
participants, however, noted that some plan sponsors have greater 
tolerance for pension investment risk than others and should be allowed 
to invest according to their own strategy. 

* Market valuations improve transparency but may not be optimal for 
plan funding. Participants generally agreed that mark-to-market 
valuations of plan assets and liabilities increase transparency and 
provide the best measure of a plan's current funding status, but 
opinions varied about whether the benefits of increased transparency 
outweighed the costs.[Footnote 12] Some participants said that plan 
sponsors might accept mark-to-market accounting for disclosure 
purposes, but some participants said that plan sponsors would not 
support it for plan funding purposes. Opponents of mark-to-market 
accounting said it would increase volatility of plan funding, making it 
harder for firms to develop long-term funding and cash flow management 
strategies. One participant said plan sponsors may discontinue their 
pension plans if they do not believe they can predict and manage the 
cost of funding pension benefits. Another added that the only way to 
manage the uncertainty of mark-to-market accounting would be to shift 
most pension plan assets from equities to bonds, a change which would 
have significant ramifications for U.S. financial markets.[Footnote 13]

Proponents of market valuation of plan assets and liabilities said that 
the benefits of increased transparency and accuracy outweigh concerns 
over increased volatility in pension funding. One participant said 
incorporating mark-to-market methodology in both the pension funding 
and accounting rules would become increasingly harder to avoid because 
it is becoming standard financial accounting practice around the world 
as investors and regulators demand more transparency. Some participants 
said that mark-to-market accounting would compel plan sponsors to 
manage volatility by investing in bonds to match the duration of their 
plan assets and liabilities. This would both eliminate the market risk 
to which PBGC is currently exposed and lead to better-funded pension 
plans. Another participant said that not switching to market valuations 
would allow companies to continue using accounting and reporting rules 
to obscure the true cost of their pensions, leading to a hidden subsidy 
for plans. 

PBGC Premiums: 

Sidebar: 

Risk and PBGC Premiums: 

Currently, PBGCís 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 plan sponsors may be subject to a variable-rate 
premium based on a planís level of underfunding, premiums do not 
consider other relevant risk factors, such as the planís investment 
strategies, benefit structure, demographic profile, or the financial 
strength of the plan sponsor. For further information see GAO-04-90. 

[End of sidebar]

Most participants generally agreed that PBGC's premium structure should 
better reflect risk and that the government should more strongly 
emphasize variable-rate premiums. Some said that increasing the flat- 
rate premium is necessary for reforming the defined benefit insurance 
system. Others urged government regulators to look at ways to measure 
the risk a pension plan poses to PBGC, including the financial strength 
of the plan sponsor and how plan assets are invested, in addition to 
the plan's funding status. Pension plans invested heavily in equities 
expose PBGC to substantial risk, especially during volatile periods in 
the equity markets. 

* PBGC's premium structure could better reflect risk. Participants 
generally agreed that PBGC's premium structure should continue to 
consist of two parts: a flat-rate premium met by all plan sponsors and 
a variable-rate premium paid by those companies that create additional 
risks for the pension insurance system. However, some participants said 
that the government should make the current premium structure more risk-
based by placing stronger emphasis on the variable-rate premium and 
requiring all underfunded plans to pay it, a condition that does not 
presently exist.[Footnote 14] Moreover, a more expensive variable- rate 
premium could provide incentives for companies to adequately fund their 
pension plans. In addition, at least two participants said that 
increasing the annual flat-rate premium from $19 to $30 per person, as 
proposed by the Administration, would still be inexpensive for the 
insurance that PBGC provides. Furthermore, one participant added that 
flat-rate premiums should be tied to an index, such as wage growth, to 
ensure that premiums would rise as benefits grow. However, other 
participants urged caution about the extent to which the government 
raises premiums. They said the higher costs could hasten both the 
failure of unhealthy plans and the exit of healthy plans from the 
defined benefit system. 

Sidebar: 

Rates of Return and Earnings: 

For corporate financial statements, the expected rate of return is used 
to calculate the annual expected investment return on pension assets, 
which factors into the measurement of pension expense. To calculate a 
dollar amount for the expected return, the expected rate of return is 
multiplied by the value of the pension assets. This expected return is 
used instead of the actual return in the calculation of pension 
expense, which has the effect of smoothing out the volatility of 
investment returns from year to year. If the expected return on plan 
assets is high enough, a company may report a negative pension expense--
or pension income on its financial statements. For further information 
see GAO-04-395. 

[End of sidebar] 

* Accurately assessing risk profiles of pension plans is necessary for 
developing risk-based premiums. In order to price risk-based premiums, 
one participant noted that the government needs to develop a system 
that accurately assesses the risk that a plan poses to the pension 
insurance system. Presently, PBGC uses credit ratings, in part, to 
determine which companies' pension plans pose the greatest risk of 
termination.[Footnote 15] However, some participants said that because 
credit ratings are lagging indicators, they may not sufficiently 
measure a company's risk to PBGC. Furthermore, credit ratings could 
lead to inaccurate assessments of risk for PBGC because they may not 
penalize investment grade companies with underfunded and unhealthy 
pension plans. Instead, one participant said that PBGC needs new ways 
to gauge its risks and discussed the idea of "stress testing" plans for 
weaknesses.[Footnote 16] These tests, possibly performed as a mandatory 
service by the financial services industry, could be periodically 
reported to government regulators. 

* Investment strategies should factor into assessments of plan risk. 
Some participants said that pension plans' investment strategies should 
be considered when evaluating how much risk plans pose to PBGC's 
insurance program. Some participants said there is a belief that 
investing in equities lowers a company's pension costs because the 
higher expected returns will result in lower cash contributions. During 
most of the 1990s, investments in equities produced returns that 
exceeded growth in plan liabilities, and in many cases, these 
investment gains relieved plan sponsors of the need to make any 
contributions to their pension plans to meet funding requirements. 
However, at least one participant said investments in equities, even 
for fully funded plans, can lead to severe plan underfunding, 
especially during volatile periods in the equity markets. For example, 
it was pointed out that negative stock market returns from 2000 to 2002 
resulted in rapid deterioration in the funding status of pension plans. 
Others added that under the current funding rules and premium 
structure, PBGC will remain exposed to moral hazard as long as plan 
sponsors can promise benefits that they might not be able to afford 
because plan investment risk is not properly priced.[Footnote 17] Some 
participants said that companies could reduce plan funding volatility 
by investing in bonds because plan liabilities have characteristics 
that are similar to bonds such as present values that are sensitive to 
changes in interest rates. However, plan sponsors may be reluctant to 
do this because it would generally have a negative effect on the 
corporate earnings they report in their financial statements. 

Other participants, however, said that returns on assets have surpassed 
expectations over the past decade, despite stock market declines since 
2000. Thus, asset allocations have not been the problem, and over time, 
most employers can withstand the volatility of equity markets. The 
bigger problem, according to at least one participant, is that 
liabilities have increased faster than expected, particularly because 
of low interest rates. 

Transparency of Pension Plan Information: 

Participants generally agreed that further steps should be taken to 
increase the transparency and timeliness of plan financial information 
to plan participants, regulators, and investors. Such steps could 
include requiring additional disclosures in corporate financial 
statements and enhancing annual reports to plan participants. 

* Corporate financial statements are an important source of up-to-date 
plan financial information, but additional information could help. 
Forum participants generally agreed that recent changes in corporate 
financial statement accounting rules related to pensions had improved 
the transparency of pension information.[Footnote 18] In particular, 
one person noted that investors and others now have key pieces of data, 
such as asset allocations, projected pension contributions, and 
projected benefit payments. However, several participants said that 
much of the information on pensions in corporate financial statements, 
while helpful to knowledgeable investors, would be of limited 
usefulness to average plan participants. While forum participants 
supported the Financial Accounting Standards Board's efforts to improve 
the transparency of pension information, they suggested additional 
changes that would be helpful to plan participants, investors, and 
regulators. Suggested changes included requiring companies to provide: 

* plan cash flow projections;

* projected minimum funding contributions;

* statements in the Management Discussion and Analysis section on long- 
term trends in a company's pensions and implications for the plan 
sponsor; and: 

* disaggregated pension plan information, such as separate plan 
information based on domestic versus foreign plans and tax-qualified 
versus non-tax-qualified plans. 

While such changes would further enhance the transparency of pension 
information, at least one participant noted that it is important not to 
burden companies with additional or overlapping reporting and 
disclosure requirements. 

* The 4010 filing requirement could be revised to better reflect risks 
to PBGC. Some participants said that the current 4010 filing 
requirement should be revised to better target PBGC's risks. They 
agreed that the current 4010 underfunding threshold of $50 million is 
too low, given the relative values of assets and liabilities in most 
large plans. There was support for revising the threshold so that only 
those plans that truly represent a risk to PBGC would be required to 
file. One participant noted that the 4010 provision, as originally 
proposed, was based on a percentage of underfunding rather than a flat 
dollar amount. However, plan sponsors objected to the percentage 
measure, and the flat dollar amount was a compromise. 

Participants' opinions varied on the need to publicly disclose 4010 
information. It was suggested that plan funding information in 4010 
filings be made public because it is much timelier than Form 5500 data 
and more accurately measures the funding of a pension plan in the event 
of termination. However, concerns were raised about the ability of 
investors and plan participants to understand this information, which 
may cause unnecessary concern about the financial health of the plan 
and plan sponsor. One participant noted that there are legitimate 
business reasons not to disclose 4010 information to the public. For 
example, many plan sponsors view the detailed plan funding information 
as proprietary. 

Sidebar: 

Summary Annual Reports: 

ERISA requires plans to provide participants and beneficiaries 
receiving benefits from the plan a Summary Annual Report each year. The 
Summary Annual Report summarizes the planís financial status based on 
information that the plan administrator provides to the Department of 
Labor on its annual Form 5500.

[End of sidebar]

* Participants should receive more complete and timely information on 
plan financial status and PBGC-guaranteed benefits. Many participants 
agreed that plan participants should be provided more meaningful and 
timely information on the financial condition of their pension plans as 
well as information about PBGC-guaranteed benefits. For example, 
participants may have trouble understanding the implications of funding 
information about a multibillion dollar pension plan. Data in the 
Summary Annual Reports sent to plan participants are based on Form 5500 
filings. Consequently, Summary Annual Reports suffer from the same lack 
of timely data as does the Form 5500. Forum participants noted that the 
financial condition of a plan can change significantly by the time 
regulators receive the Form 5500 and plan participants receive their 
Summary Annual Report. To address this lack of timely information, 
participants suggested: 

* moving the Form 5500 from a paper-based filing to an electronic 
filing; and: 

* varying the filing deadlines for the Form 5500 according to the 
importance of the information provided. For example, estimated plan 
funding information could be filed earlier than other data. This would 
also allow plan sponsors to send out Summary Annual Reports earlier. 

Another participant pointed out that beyond providing plan participants 
with plan financial information, plan participants need to be better 
educated about information on the Form 5500 and Summary Annual Report 
as well as how the U.S. pension system works overall. Thus, plan 
participants could better understand the information they receive about 
their pension benefits. 

Many forum participants said plan participants and beneficiaries should 
receive information annually on their expected retirement benefits and 
the extent to which these benefits are guaranteed by PBGC. One person 
suggested that plan participants be provided information about their 
accrued benefits and the effect on their benefits of working both up to 
their company's normal retirement age and beyond it. Another forum 
participant stated that information about the limits on benefits 
guaranteed by PBGC is important because, as occurred with some in the 
airline industry, participants may face a significant reduction in 
benefits if their plan is taken over by PBGC. 

Emerging Issues: 

According to participants, the debate over funding rules, premiums, and 
the role of the PBGC should take place amidst fundamental policy 
discussions about how to promote retirement income security, 
particularly since the traditional defined benefit pension system has 
weakened. In light of debates over issues such as an individual account 
component to Social Security, simplification of the tax code, and 
pension reform, policymakers should think about how to delegate 
responsibility for asset management and risk among individuals and 
entities that can pool and professionally manage risk, such as 
employers, insurers, and the government. However, as policymakers think 
about the future of retirement, the past failures of many large defined 
benefit plans continue to weigh on the defined benefit system. 
Participants suggested a few ways to address the legacy costs of 
terminated and presently underfunded plans, especially those in 
industries that have been deregulated or more affected by 
globalization, but noted there are not any easy options. 

Policymakers Should Think Broadly about Retirement Income Security: 

Participants recognized the decline of defined benefit pension plans 
and encouraged policymakers to broadly consider how best to promote 
retirement income security. Among other things, participants suggested 
that decision makers clarify the legal status of cash balance and other 
hybrid pension plans. 

* The traditional defined benefit system is under threat. Participants 
broadly agreed that while employer-sponsored defined benefit plans have 
played an important role in providing secure retirements to millions of 
Americans, the traditional defined benefit pension system is in a 
decline that is likely to continue. Reasons cited for this decline 
include a regulatory structure that is biased in favor of defined 
contribution plans, recent investment experiences that have resulted in 
significant plan underfunding and uncertainty over potential changes in 
funding rules, pension accounting standards, and PBGC premiums. 
Furthermore, workers often do not recognize the importance of certain 
features of defined benefit pensions until they approach retirement. 
However, some participants wondered whether adoption of individual 
accounts as part of Social Security would lead employees to value 
defined benefit plans more highly. 

Sidebar: 

Cash Balance Pension Plans: 

Cash balance plans are a type of defined benefit plan that look more 
like a defined contribution plan to participants. As with other defined 
benefit plans, the sponsor is responsible for managing the planís 
commingled assets and complying with the minimum funding requirements. 
However, information about benefits is communicated to plan 
participants through the use of hypothetical account balances, which 
makes the plan appear like an individual account-based defined 
contribution plan. The hypothetical account balances communicated to 
plan participants do not necessarily bear any relationship to actual 
assets held by the plan.

[End of sidebar]

* Clarifying the legal status of cash balance plans may encourage some 
companies to remain in the defined benefit system. Several participants 
stated that lawmakers need to clarify the status of cash balance and 
other hybrid plans as soon as possible to prevent the further demise of 
the defined benefit system and the PBGC. Cash balance plans constitute 
approximately 20 percent of large defined benefit plans, and some 
sponsors of cash balance plans have already exited the defined benefit 
system because of the legal uncertainty they face. Their exit, and the 
potential exit of other cash balance plan sponsors, is gradually 
reducing the PBGC's premium base and potentially placing even greater 
strain on those who remain behind in the defined benefit system. 

* Policymakers should encourage certain pension plan features rather 
than certain plan types. Some participants suggested that the debate 
over federal retirement policy needs to move beyond distinctions 
between defined benefit and defined contribution plans. Participants 
widely agreed on the value of defined benefit pension plans but 
disagreed over whether the federal government should promote defined 
benefit plans more than other vehicles for retirement savings. Others 
added that discussions of retirement policy need to focus on ways to 
create incentives and remove barriers for employers to set up 
retirement plans and how to get American workers to build adequate 
retirement savings and security. This may be achieved by thinking about 
the interaction of private pensions and Social Security and by looking 
at hybrid pension plans, such as cash balance plans and plans that 
combine the best features of defined benefit and defined contribution 
plans. Participants suggested that pension plans include the following 
features: 

* automatic participation;

* portability of benefits to accommodate workers who frequently change 
jobs;[Footnote 19]

* allow participants to pass on accumulated wealth to their heirs;

* professional money management;

* pooled investment risk;

* ability for participants to work longer;

* minimal leakage (early withdrawals and borrowing) from retirement 
savings; and: 

* incentives to receive benefits in the form of a fixed annuity, rather 
than a lump sum distribution. 

Addressing Legacy Costs of Failed and Underfunded Pension Plans: 

Participants spoke about the advantages, disadvantages, and significant 
challenges to separating legacy costs from current and future funding 
and premiums rules. They also proposed several ways to pay for legacy 
costs. 

* Separately addressing legacy costs could encourage future 
participation in the defined benefit system and ease passage of reform 
proposals. Separating legacy costs from the existing and future 
liabilities of the remaining defined benefit plans might encourage plan 
sponsors to remain in the defined benefit system. Many plan sponsors 
are concerned that, through increased PBGC premiums, they may be 
required to pay for the failures of other companies to responsibly fund 
and manage their pension plans. Presently, companies that sponsor 
healthy plans are subsidizing weak plans, and it is unclear how much 
longer companies with well-funded pension plans will be willing to 
remain within the defined benefit system. Some participants noted that 
resolving the matter of legacy costs could be a key component of any 
pension reform legislation that tightened the funding rules and 
assessed premiums according to risk. Such a proposal would essentially 
strike a deal between the federal government and employers that would 
settle PBGC's unfunded liabilities through an infusion of general 
revenues, while imposing stricter pension funding standards on plan 
sponsors to minimize the possibility of significant future underfunding 
in the defined benefit system. Others added that if legacy costs are 
addressed separately, it would be possible to establish a more 
functional, risk-based insurance system. And, one participant added, 
resolution of pension legacy costs would bring a measure of security to 
millions of American retirees and workers who face uncertainty about 
their pension benefits. While participants generally supported 
separating pension legacy costs from ongoing pension liabilities, many 
opposed limiting the scope to specific industries such as air 
transportation and steel, which have been affected by globalization and 
deregulation. 

* Separately addressing legacy costs could set a bad precedent. 
Requiring taxpayers or other companies to pay for failed private sector 
pension plans sends a message that the government will bail out 
companies who poorly design and manage their benefit plans or 
businesses. Furthermore, according to one participant, paying for 
defined benefit plan legacy costs with federal tax revenues would 
increase the federal government's deficit, perhaps by as much as $100 
billion, according to one participant. 

* Defining legacy costs is difficult. Participants provided different 
definitions of legacy costs in the defined benefit system. Some noted 
that any underfunded terminated plan that has been trusteed by PBGC 
represents a legacy cost. Another proposed defining legacy costs as any 
unfunded current liability. And one person pointed out that we may not 
even be able to accurately determine the extent of the legacy costs in 
the defined benefit system because they will eventually include costs 
for events that have not yet happened. 

* Determining who pays for legacy costs is politically challenging. 
Many participants said that it is not reasonable to expect the 
companies remaining in the defined benefit system to pay for the costs 
of plans that have failed. Requiring them to do so would drive the 
healthy plans and plan sponsors out of the defined benefit system. On 
the other hand, it is hard to equitably shift the costs of these 
benefits to the general population, especially since a large percentage 
of Americans do not have any form of private pension. 

* Participants suggested several ways to address pension legacy costs: 

* Taxpayer bailout. Some participants said that relative to the entire 
federal budget, a taxpayer bailout would not cost much over a long 
period of time, and this would be a small price to pay for shoring up 
an important part of the nation's private pension system. 

* Industry-specific fees. Some participants said that those industries 
that have placed the greatest burden on the defined benefit system 
should be required to fund at least their share of the legacy costs. 
For example, the government could impose a fee on airline tickets that 
would cover the underfunded airline plans that have been taken over by 
PBGC. 

* Consolidate plans in distressed industries. One participant suggested 
that pension plans from financially distressed companies in troubled 
industries (e.g., airlines, steel) be grouped together into 
multiemployer plans that would be jointly managed by a board of 
trustees representing employer, employee, and government interests. Such 
a plan would be required to follow a set of investment guidelines that 
would limit future funding risk. 

* Security trading commissions. One participant suggested imposing a 
securities trading commission on the financial services industry to 
help cover legacy costs, because they have benefited over the years 
from managing pension plan assets and have an interest in the 
continuance of the defined benefit system. 

* Expand universe of defined benefit plans. Another participant 
suggested that the government seek to expand the defined benefit 
universe, primarily by resolving the legal status of cash balance 
plans. Having more employers in the system would distribute the costs 
across a wider population. 

* Wait for higher interest rates. Others suggested that much of the 
underfunding problem will eventually be solved by rising interest 
rates, which would reduce the present value of benefit obligations. 
However, higher interest rates could lead to lower stock and bond 
prices and thus reduce the market value of pension plan assets. 

PBGC's Mandate: 

Many participants said there is a conflict in PBGC's mandates to 
promote defined benefit plans and insure them all at the lowest cost 
while remaining self-financed. Some participants advocated for PBGC 
serving as a social insurance program because a market-based program 
would increase costs for companies and make it difficult for many to 
maintain their plans. Others argued that the agency should become more 
of a market-based insurer so as to manage the risks it faces. For 
example, PBGC should have both the authority to adjust premium rates 
and a higher standing in bankruptcy proceedings. These participants 
also said that the current social support system is problematic because 
guaranteed PBGC insurance encourages weak plan sponsors to make benefit 
promises they cannot keep. In addition, participants debated the 
optimal investment strategies for PBGC's portfolio of assets. 

* PBGC should play a social insurance role. Some participants said PBGC 
should serve as part of a wider government effort to promote defined 
benefit plans. This may require the federal government to transfer 
general revenues to PBGC occasionally. At least two participants 
acknowledged that the federal pension insurance system is flawed 
because, when it was designed, nobody anticipated the collapse of 
entire industries along with their pension plans. Nonetheless, one 
participant said the legislative history shows that PBGC was not 
intended to be run like a commercial insurance company and that the 
insurance component of PBGC was drafted on a social support system 
model. It was emphasized that transforming PBGC into a market-based 
insurer would adversely affect both sponsors and participants by 
dramatically increasing premium rates and making it difficult for 
companies to maintain their defined benefit pension plans. Some 
participants also said that without fixing the funding rules, the 
defined benefit system cannot be properly insured. 

* PBGC should operate more like a commercial insurer. Some participants 
said that PBGC should remain self-financing, like a commercial 
insurance program. A few participants pointed out that PBGC has limited 
ability to control and manage its risks in the way that any commercial 
insurer normally can. Some participants suggested that: 

* PBGC should have the authority to set and adjust premiums and: 

* PBGC should be able to act sooner to work with any plan sponsor 
entering bankruptcy and restructure a plan to try to obtain long-term 
refunding if the plan would otherwise be terminated. 

One participant stated that PBGC's present role as a social insurer 
does not encourage healthy plans and is contributing to the decline of 
defined benefit plans because, in effect, it provides loan guarantees 
of promises made by weak employers to their employees. Employers can 
thus promise benefits they may not be able to afford, since they can 
pass the cost off to PBGC. 

* PBGC would benefit from improved standing in bankruptcy, but this 
would create other challenges. Participants broadly disagreed over what 
ought to be PBGC's standing in bankruptcy. While improving PBGC's 
standing in bankruptcy would help PBGC recover more money in plan 
terminations, a change in the rules needs to carefully consider the 
impact on existing creditors and the access of plan sponsors to the 
credit markets. Some participants noted the following: 

* Under current law, it is too easy for companies to shed their pension 
obligations during bankruptcy proceedings in order to emerge from 
bankruptcy, and: 

* Improving PBGC's standing in bankruptcy would slightly increase the 
cost of credit for plan sponsors and would slightly increase PBGC's 
administrative expenses. It is not clear whether these cost increases 
can be accurately modeled. 

* PBGC's investment strategy may not be optimal. Participants debated 
PBGC's investment strategy, and some of them felt that PBGC has not 
invested in an optimal portfolio of assets. It was suggested that PBGC 
invest more heavily in high-quality corporate bonds, since they offer a 
higher rate of return than Treasury bonds and are nearly as safe as 
investments. Furthermore, one person suggested that there is a conflict 
of interest in PBGC's investment policy since the Secretary of the 
Treasury sits on PBGC's board. Another participant said that PBGC's 
investments in equities multiply its exposure to market risk because 
most large plans it insures are heavily invested in equities. In a 
stock market decline, the value of PBGC's equity portfolio would fall 
at the same time that the assets of the plans it insures decline in 
value. Thus it would make more sense if PBGC were to sell short the 
Standard & Poor's 500 stock index. It was also suggested that PBGC 
invest long in bonds of well-funded companies and sell short the bonds 
of poorly funded companies. 

[End of section]

Appendixes: 

Appendix I: Forum Agenda: 

The Future of the Defined Benefit System and the PBGC: 

Thursday, February 3, 2005: 

Agenda: 

8:30: Registration, breakfast: 

9:00: Welcome and Introduction David M. Walker, Comptroller General of 
the United States: 

9:15: Brief overviews of topics for breakout groups: 

* Pension funding rules Ron Gebhardtsbauer, Senior Research Fellow, 
American Academy of Actuaries: 

* PBGC premiums and guarantees Brad Belt, Executive Director, PBGC: 

* Pension transparency/accounting David Zion, Director, Credit Suisse 
First Boston: 

9:30: Presentation of Administration's Pension Reform Proposal Ann L. 
Combs, Assistant Secretary, Employee Benefits Security Administration, 
Department of Labor: 

9:45: Break and move to discussion groups: 

* Breakout group discussions: 

* Strengthening funding rules: 

* Enhancing transparency of plan financial information: 

Facilitators: Doug Elliott, President, Center on Federal Financial 
Institutions; 
Olivia S. Mitchell, Professor of Insurance & Risk Management, The 
Wharton School, University of Pennsylvania; 
Dallas Salisbury, President, Employee Benefits Research Institute: 

11:30: Break/Pick up box lunches for working lunch: 

11:45: Reports from breakout groups and discussion: 

* Presentation of points of consensus and disagreement: 

* Plenary discussion based on reports from groups: 

Moderator: David M. Walker: 

12:45: Plenary Discussion of Broader Defined Benefit Plan Issues: 

* Presentation of pre-forum survey responses: 

* Discussion topics: 

What is likely to be the future role of DB plans in providing 
retirement income for private sector workers?

To what extent should the federal government promote DB plans or should 
the government take a more neutral posture on private retirement plan 
design?

Was PBGC designed to fulfill a social insurance purpose, or act as a 
self-sustaining insurer?

How do we keep PBGC solvent without overburdening the employers 
remaining in the DB system?

Do we need a more explicit national policy to address structural 
weaknesses in certain industries, with large underfunded pensions?

How will/should Social Security and/or tax reform affect the DB plan 
system?

Moderators: 

David M. Walker; 
Barbara D. Bovbjerg, Director, Education, Workforce, and Income 
Security Issues, GAO: 

2:15: Wrap-up: 

2:30: Adjourn: 

[End of section]

Appendix II: Forum Participants: 

The Future of the Defined Benefits System and the PBGC: 

Thursday, February 3, 2005: 

Moderator: David M. Walker: 
Comptroller General of the United States: 
U.S. Government Accountability Office: 

Participants: 

Eddie Adkins: 
Member, Employee Benefits Technical Resource Panel: 
American Institute of Certified Public Accountants: 

Joseph A. Applebaum: 
Chief Actuary, U.S. Government Accountability Office: 

Brad Belt: 
Executive Director, Pension Benefit Guaranty Corporation: 

Richard Berner: 
Managing Director, Chief U.S. Economist, Morgan Stanley: 

David S. Blitzstein: 
Director, Negotiated Benefits Department: 
United Food and Commercial Workers International Union: 

Teresa Bloom: 
Chief of Government Affairs: 
American Society of Pension Professionals and Actuaries: 

Bill Bortz: 
Associate Benefits Tax Counsel, U.S. Department of the Treasury: 

Phyllis Borzi: 
Research Professor: 
The George Washington University School of Public Health: 

Barbara D. Bovbjerg: 
Director, Education, Workforce, and Income Security Issues: 
U.S. Government Accountability Office: 

Ann L. Combs: 
Assistant Secretary, Employee Benefits Security Administration: 
U.S. Department of Labor: 

Julia Lynn Coronado: 
Senior Research Associate, Watson Wyatt & Company: 

Randy G. DeFrehn: 
Executive Director, National Coordinating Committee for Multiemployer 
Plans: 

John W. Ehrhardt: 
Principal & Consulting Actuary, Milliman, Inc. 

Doug Elliott: 
President, Center on Federal Financial Institutions: 

Karen Ferguson: 
Director, Pension Rights Center: 

Peter Fisher: 
Managing Director, Blackrock: 

Ron Gebhardtsbauer: 
Senior Pension Fellow, American Academy of Actuaries: 

Gary A. Glynn: 
President, US Steel and Carnegie Pension Fund: 

Carol D. Gold: 
Director, Employee Plans, Tax Exempt & Government Entities: 
Internal Revenue Service: 

Jeremy Gold: 
Jeremy Gold Pensions: 

Britt Harris: 
Chief Executive Officer, Bridgewater Associates, Inc. 

Nell Hennessy: 
President, Fiduciary Counselors Inc. 

Robert H. Herz: 
Chairman, Financial Accounting Standards Board: 

J. Mark Iwry: 
Nonresident Senior Fellow, The Brookings Institution: 

Dennis M. Kass: 
Chairman and CEO, Jennison Associates: 

Jim Klein: 
President, American Benefits Council: 

Betty Krikorian: 
Principal, BLK Consulting: 

James B. Lockhart: 
Deputy Commissioner, Social Security Administration: 

Olivia S. Mitchell: 
Professor of Insurance and Risk Management: 
The Wharton School, University of Pennsylvania: 

Michael Peskin: 
Managing Director, Morgan Stanley: 

Alan Reuther: 
Legislative Director, United Auto Workers: 

Elizabeth Robinson: 
Deputy Director, Congressional Budget Office: 

Dallas Salisbury: 
President, Employee Benefit Research Institute: 

Scott Sprinzen: 
Managing Director, Corporate and Government Ratings: 
Standard & Poor's: 

Carol Stacey: 
Chief Accountant, Division of Corporation Finance: 
U.S. Securities and Exchange Commission: 

Gene Steuerle: 
Senior Fellow, Urban Institute: 

Mark J. Ugoretz: 
President, ERISA Industry Committee: 

Kim Walker: 
Chair, CIEBAQwest Asset Management CompanyCaptain: 

Duane Woerth: 
President, Air Line Pilots Association: 

David Zion: 
Director, Credit Suisse First Boston: 

[End of section]

Appendix III: Comptroller General's Presentation Slides: 

The Future of the Defined Benefit System and the PBGC:

February 3, 2005:

Challenges Facing the DB System:

* Large accumulated deficits for many active plans, the PBGC, and the 
U.S. Government; 
* Structural weaknesses in certain industries with large, underfunded 
DB plans; 
* PBGC has limited control over its risks; 
* Decline in DB plans; 
* Changing demographics and workforce trends; 
* Legal and regulatory uncertainties; 
* Social Security reform initiatives.

Total Underfunding Single-Employer Program Plans 1980--2004*:

[See PDF for image] -graphic text:

Bar graph with 25 items:

Year: 1980; 
Billions of dollars: $29.5.

Year: 1981; 
Billions of dollars: $25.

Year: 1982; 
Billions of dollars: $36.4.

Year: 1983; 
Billions of dollars: $14.5.

Year: 1984; 
Billions of dollars: $20.1.

Year: 1985; 
Billions of dollars: $22.7.

Year: 1986; 
Billions of dollars: $27.6.

Year: 1987; 
Billions of dollars: $28.2.

Year: 1988; 
Billions of dollars: $34.1.

Year: 1989; 
Billions of dollars: $49.7.

Year: 1990; 
Billions of dollars: $55.

Year: 1991; 
Billions of dollars: $74.

Year: 1992; 
Billions of dollars: $84.2.

Year: 1993; 
Billions of dollars: $109.3.

Year: 1994; 
Billions of dollars: $61.7.

Year: 1995; 
Billions of dollars: $94.5.

Year: 1996; 
Billions of dollars: $99.6.

Year: 1997; 
Billions of dollars: $87.8.

Year: 1998; 
Billions of dollars: $104.7.

Year: 1999; 
Billions of dollars: $22.8.

Year: 2000; 
Billions of dollars: $39.4.

Year: 2001; 
Billions of dollars: $163.9.

Year: 2002; 
Billions of dollars: $400.

Year: 2003; 
Billions of dollars: $452.

2003: PBGC placed on GAO's High-Risk List.

Year: 2004*; 
Billions of dollars: $450.

Source: PBGC.

* Note: 2004 data is an estimate as of September 30, 2004.

[End of figure]

Financial Position of PBGC Single-Employer Program 1995-2004:

[See PDF for image]

[End of figure]

Composition of Spending as a Share of GDP Under Baseline Extended:

[See PDF for image] -graphic text:

Line/Stacked Bar combo chart with 4 groups, 1 line (Revenue) and 4 bars 
per group.

2003; 
All other spending; Percent of GDP: 10.3%; 
Medicare & Medicaid; Percent of GDP: 3.8%; 
Social Security; Percent of GDP: 4.4%; 
Net interest; Percent of GDP: 1.4%; 
Revenue; Percent of GDP: 16.4%.

2015; 
All other spending; Percent of GDP: 8.5%; 
Medicare & Medicaid; Percent of GDP: 5.4%; 
Social Security; Percent of GDP: 4.8%; 
Net interest; Percent of GDP: 1.8%; 
Revenue; Percent of GDP: 19.8%.

2030; 
All other spending; Percent of GDP: 8.5%; 
Medicare & Medicaid; Percent of GDP: 8.1%; 
Social Security; Percent of GDP: 6.7%; 
Net interest; Percent of GDP: 3.3%; 
Revenue; Percent of GDP: 19.8%.

2040; 
All other spending; Percent of GDP: 8.5%; 
Medicare & Medicaid; Percent of GDP: 9.9%; 
Social Security; Percent of GDP: 7.4%; 
Net interest; Percent of GDP: 6.8%; 
Revenue; Percent of GDP: 19.8%.

Notes: In addition to the expiration of tax cuts, revenue as a share of 
GDP increases through 2014 due to (1) real bracket creep, (2) more 
taxpayers becoming subject to the AMT, and (3) increased revenue from 
tax-deferred retirement accounts. After 2014, revenue as a share of GDP 
is held constant. Budgetary effects due to passage of the Working 
Families Tax Relief Act of 2004 are not reflected in this simulation.

Source: GAO's September 2004 analysis.

[End of figure]

Composition of Spending as a Share of GDP Assuming Discretionary 
Spending Grows with GDP After 2004 and All Expiring Tax Provisions Are 
Extended:

[See PDF for image] -graphic text:

Line/Stacked Bar combo chart with 4 groups, 1 line (Revenue) and 4 bars 
per group.

2003; 
All other spending; Percent of GDP: 10.3%; 
Medicare & Medicaid; Percent of GDP: 3.8%; 
Social Security; Percent of GDP: 4.4%; 
Net interest; Percent of GDP: 1.4%; 
Revenue; Percent of GDP: 16.4%.

2015; 
All other spending; Percent of GDP: 9.8%; 
Medicare & Medicaid; Percent of GDP: 5.4%; 
Social Security; Percent of GDP: 4.9%; 
Net interest; Percent of GDP: 3%; 
Revenue; Percent of GDP: 17.4%.

2030; 
All other spending; Percent of GDP: 9.8%; 
Medicare & Medicaid; Percent of GDP: 8.1%; 
Social Security; Percent of GDP: 7.1%; 
Net interest; Percent of GDP: 8.5%; 
Revenue; Percent of GDP: 17.4%.

2040; 
All other spending; Percent of GDP: 9.8%; 
Medicare & Medicaid; Percent of GDP: 9.9%; 
Social Security; Percent of GDP: 8.6%; 
Net interest; Percent of GDP: 17.8%; 
Revenue; Percent of GDP: 17.4%.

Notes: Although expiring tax provisions are extended, revenue as a 
share of GDP increases through 2014 due to (1) real bracket creep, (2) 
more taxpayers becoming subject to the AMT, and (3) increased revenue 
from tax-deferred retirement accounts. After 2014, revenue as a share 
of GDP is held constant.

Source: GAO's September 2004 analysis.

[End of figure]

PBGC's Risk is Concentrated in a Few IndustriesÖ:

* Legacy costs in industries facing significant globalization, 
deregulation, and competitive and technological changes and challenges:

- e.g., steel and air transportation sectors; 
* Potential domino effect of plan terminations:

- Plan terminations by a few may encourage competitors to declare 
bankruptcy to terminate their plans, too; 
* Raises Question: Should financial difficulties of certain industries, 
including pension underfunding, be addressed separately from wider 
efforts to reform the DB system?

Exposure of Single-Employer Program:

[See PDF for image] -graphic text:

Two pie charts with six items each:

Claims, 1975-2003:

Primary metals: 53%; 
Air transportation: 17%; 
Other manufacturing: 12%; 
Other Non-manufacturing: 10%; 
Machinery: 4%; 
Fabricated metals: 4%.

Reasonably Possible Exposure, 2004:

Manufacturing: 51%; 
Transportation, communication and utilities: 32%; 
Service/Other: 8%; 
Wholesale & retail trade: 6%; 
Agriculture, mining & construction: 2%; 
Finance, insurance & real estate: 1%.

Source: PBGC.

[End of figure]

ÖAnd Increasingly in Large Plans:

Total Plans Have Declined While Concentration of Risk Has Increased:

[See PDF for image]

[End of figure]

PBGC Cannot Limit Its Risk:

* PBGC must insure all eligible plans, is subject to certain "put 
option" risks, and is exposed to market risk from plan investments.

* PBGC premiums do not reflect:

- Plan sponsor's financial position; 
- Risk in plan's investment portfolio; 
- Plan's benefit structure; 
- Plan's demographic profile.

* PBGC is insurer of last resort.

* PBGC's revenue base is shrinking.

Employee Preference: DC vs. DB:

* AAA/SOA survey conclusion: People tend to prefer the type of 
retirement plan in which they are already enrolled (most active 
participants are in DC plans today).

* The traditional DB system provides a certain and secure benefit but 
may be ineffective for building retirement assets for those who change 
jobs frequently:

- Vesting provisions; 
- Backloading of accruals; 
- Lack of portability.

Increasingly Mobile Labor Force:

Percent of workers with tenure of 10+ years at current employer:

[See PDF for image]

[End of figure]

Retirees are Living Longer:

Life Expectancy at 65 Years of Age:

[See PDF for image]

[End of figure]

Legal & Regulatory Uncertainties:

* Employer concern over status of cash balance plans.

* Employer concern over potential changes to:

- Pension funding rules; 
- PBGC premiums and other insurance reforms; 
- Pension accounting rules.

* Lack of action by policymakers may drive more employers away from DB 
plans.

Social Security Reform Initiatives:

* Social Security is not adequately funded to deliver on promised 
benefits beginning in 2042.

* Social Security reform is being debated.

* Social Security reform may involve modified benefits and individual 
accounts.

* What implications will Social Security reform have on private 
pensions, in general, and on DB plans, in particular?

Defined Benefit Plan Weaknesses Have Serious Implications for National 
Retirement Policy:

* Current Issues:

- Protecting the benefits of workers in terminated plans; 
- Improving funding of DB plans going forward; 
- Addressing the PBGC's financial exposure.

* Broader Issues: What is the future role of DB plans in ensuring 
retirement income security?

- Revitalized DB system vs. smoother transition to a DC world.

- Impact of Social Security reform on the private DB and DC system and 
personal savings arrangements.

Role of PBGC?

Social Insurance Program:

* Encourage growth of private pension plans; 
* Cover all eligible plans; 
* Ability to exercise "put options" on the system; 
* Limited "risk-related" premiums; 

Vs. Financially Sound Insurer:

* No federal budget appropriations; 
* Limited to borrowing $100M from Treasury; 
* Limited ability to encourage funding and moderate losses; 
Other Broad Issues:

* Is the pension insurance model still viable as the number of DB plans 
declines?

* Different theoretical frameworks for pension funding: actuarial vs. 
financial economics view.

* Dealing with pension legacy costs in an open, deregulated, and 
dynamic economy.

Broad Goals for Reform of the DB System:

* Improve transparency of plan financial information.

* Provide incentives and safeguards for plan sponsors to improve plan 
funding.

* Hold plan sponsors accountable for adequately funding their plans.

Potential Steps:

Improve Transparency:

* Disclose plan investments, funding status, and benefit guaranty 
limitations to plan participants and others; 
* Review and possibly revise pension accounting rules (FAS 87).

Modify Funding Rules and Premiums:

* Strengthen funding rules applicable to poorly funded plans; 
* Raise full funding limitations; 
* Adjust pension premiums to reflect risk.

Other Regulatory Steps:

* Clarify legal status of cash balance plans; 
* Eliminate floor/offset arrangements with significant investment 
concentrations in employer securities; 
* Limit lump sums and benefit increases in underfunded plans; 
* Modify program guarantees (e.g., phase-in rules); 
* Modify bankruptcy laws?

[End of slide presentation] 

[End of section]

Appendix IV: GAO Contacts and Staff Acknowledgments: 

Contacts: 

Barbara D. Bovbjerg, Director (202) 512-7215: 

Staff Acknowledgments: 

In addition to the contact above, David A. Eisenstadt, Benjamin A. 
Federlein, Jason S. Holsclaw, George A. Scott, and Derald L. Seid made 
important contributions to organizing this forum and producing this 
report. 

[End of section]

Related GAO Products: 

[End of section]

Private Pensions: Government Actions Could Improve the Timeliness and 
Content of Form 5500 Pension Information, GAO-05-491. Washington, D.C.: 
June 3, 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 Structural Problems Limit Agency's 
Ability to Protect Itself from Risk, 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-360T] 
Washington, D.C.: March 2, 2005. 

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.: October 7, 2004. 

Pension Plans: Additional Transparency and Other Actions Needed in 
Connection with Proxy Voting. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-749] 
Washington, D.C.: August 10, 2004. 

Private Pensions: Publicly Available Reports Provide Useful but Limited 
Information on Plans' Financial Condition. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-395] 
Washington, D.C.: March 31, 2004. 

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.: December 17, 2003. 

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. 

Private Pensions: Changing Funding Rules and Enhancing Incentives Can 
Improve Plan Funding. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-176T] 
Washington, D.C.: October 29, 2003. 

Pension Benefit Guaranty Corporation: Long-Term Financing Risks to 
Single-Employer Insurance Program Highlight Need for Comprehensive 
Reform. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-150T] 
Washington, D.C.: October 14, 2003. 

Pension Benefit Guaranty Corporation: Single-Employer Pension Insurance 
Program Faces Significant Long-Term Risks. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-873T] 
Washington, D.C.: September 4, 2003. 

Options to Encourage the Preservation of Pension and Retirement 
Savings: Phase 2. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-990SP] 
Washington, D.C.: July 29, 2003. 

Private Pensions: Participants Need Information on Risks They Face in 
Managing Pension Assets at and during Retirement. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-810] 
Washington, D.C.: July 29, 2003. 

Private Pensions: Process Needed to Monitor the Mandated Interest Rate 
for Pension Calculations. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-313] 
Washington, D.C.: February 27, 2003. 

Answers to Key Questions About Private Pension Plans. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-02-745SP] 
Washington, D.C.: September 18, 2002. 

(130433): 

FOOTNOTES

[1] PBGC also manages an insurance program for multiemployer plans, 
which covers approximately 10 million participants. This insurance 
program had an accumulated deficit of $236 million at the end of fiscal 
year 2004. 

[2] Wooten, James A., The Employee Retirement Income Security Act of 
1974, A Political History, (2004), Berkeley: University of California 
Press, p.17. 

[3] Wooten, p.34. 

[4] GAO, Pension Benefit Guaranty Corporation: Single-Employer Pension 
Insurance Program Faces Significant Long-Term Risks, GAO-04-90 
(Washington, D.C.: Oct. 29, 2003) and Private Pensions: Recent 
Experiences of Large Defined Benefit Plans Illustrate Weaknesses in 
Funding Rules, GAO-05-294 (Washington, D.C.: May 31, 2005). 

[5] If funds generated are insufficient to meet operating cash needs in 
any period, PBGC has available a $100 million line of credit from the 
U.S. Treasury for liquidity purposes. 

[6] 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 must be split between PBGC (for 
unfunded guaranteed benefits) and participants (for unfunded 
nonguaranteed benefits). 

[7] See GAO, Private Pensions: Publicly Available Reports Provide 
Useful but Limited Information on Plans' Financial Condition, GAO-04- 
395 (Washington, D.C., Mar. 31, 2004). 

[8] See GAO, Pension Benefit Guaranty Corporation Single-Employer 
Insurance Program: Long-Term Vulnerabilities Warrant "High Risk" 
Designation, GAO-03-1050SP (Washington, DC: July 23, 2003). 

[9] Sponsors of underfunded plans may sometimes avoid or reduce cash 
contributions if they have earned funding credits as a result of 
favorable experience, such as contributing more than the minimum in the 
past. For example, contributions beyond the minimum may be recognized 
as a funding credit. These credits are not measured at their market 
value and accrue interest each year at the plan's long-term expected 
rate of return on assets, which is called the valuation interest rate. 

[10] Shutdown benefits provide employees additional benefits, such as 
early retirement benefit subsidies in the event of a plant shutdown or 
permanent layoff. However, in general, plant shutdowns are inherently 
unpredictable, so it is difficult to recognize the costs of shutdown 
benefits in advance, and current law does not allow advance funding for 
the cost of benefits arising from future unpredictable contingent 
events(See 26 U.S.C. 412(m)(4)(D)). Shutdown benefits can suddenly and 
dramatically increase plan liabilities, and the related additional 
benefit payments drain plan assets. 

[11] Recent research shows that many employers could have contributed 
more to their pension plans during the 1990s by using a more 
conservative interest rate to measure their plans' current liabilities. 
One study concludes that a firm's strategic use and commitment to its 
pension program are the most important factors explaining contributions 
to defined benefit plans over time. A recent GAO study shows that in 
1996, among the 100 largest plans measured by current liability, 16 of 
the 30 plans that had a maximum deductible contribution of zero could 
have increased their maximum deductible contribution by choosing a 
lower discount rate. See T. Ghilarducci and W. Sun, "Did ERISA Fail Us 
because Firms' Pension Funding Practices Are Perverse?," Paper 
presented at the 57th Annual Meeting of the Industrial Relations 
Research Association (Philadelphia, PA: January 2005); GAO, Private 
Pensions: Recent Experiences of Large Defined Benefit Plans Illustrate 
Weaknesses in Funding Rules, GAO-05-294 (Washington, D.C.: May 31, 
2005); and PBGC analysis, unpublished. 

[12] Mark-to-market accounting refers to recording the price or value 
of a liability, security, portfolio, or account according to its 
current market value rather than its book value or a notional value, 
such as an actuarial value. 

[13] By contrast, certain actuarial funding methods aim to maintain 
relatively smooth contributions to plans over time on the presumption 
that returns on investments in a portfolio of stocks and bonds will 
vary from year to year, but will revert to a long-term average that can 
be estimated. Based on the estimated average rate of return, annual 
contributions may be estimated and budgeted by the plan sponsor. 

[14] Sponsors of underfunded plans can avoid paying the variable-rate 
premium if they are at the full funding limit in the year preceding the 
premium payment year after applying any contributions and credit 
balances. One of the ways plans earn credits is by contributing more 
than required in previous years. Credits can then be used to offset 
minimum funding contributions in later years. For example, Bethlehem 
Steel met this criterion and only contributed about $71.3 million to 
its pension plan during years 1997 through 2001 as compared with the 
approximately $3.0 billion it contributed from 1986 through 1996. PBGC 
terminated Bethlehem Steel's pension plan in December 2002, resulting 
in a total loss of nearly $3.7 billion for the agency. 

[15] Credit ratings are generally considered to be a useful proxy for a 
firm's financial health. Ratings typically take into consideration the 
creditworthiness of guarantors, or insurers, or other forms of credit 
enhancement on the obligation and take into account the currency in 
which the obligation is denominated. An investment grade rating implies 
that the debtor will probably repay its obligations when due. 

[16] Stress testing is a risk management tool used to evaluate the 
potential impact on a firm of a specific event or movement in a set of 
financial variables. Stress tests help firms gauge their potential 
vulnerability to exceptional but plausible events. Bank for 
International Settlements: Stress Testing at Major Financial 
Institutions: Survey Results and Practice (January 2005); Bank for 
International Settlements: A Survey of Stress Tests and Current 
Practice at Major Financial Institutions (April 2001). 

[17] Moral hazard surfaces when the insured parties--in this case, plan 
sponsors--engage in behavior in which they would not have otherwise 
engaged had they not been insured against certain losses. In the case 
of the pension insurance system, this might include the willingness of 
parties to enter into agreements that increase pension liabilities, 
rather than taking wage increases. 

[18] In December 2003 the Financial Accounting Standards Board issued a 
revision to its accounting standard on pension disclosures. Some of the 
new disclosure requirements include a description of how pension assets 
are invested, a narrative description of how the expected rate of 
return on assets was selected, and the employer's estimated 
contribution to plans in the following year. The revised standard does 
not change the general approach used in the financial statements of 
aggregating this information across all pension plans. 

[19] One participant questioned whether employers are the proper nexus 
for pension plans in today's world since many of them cannot bear the 
risk of investing plan assets and being liable for making up investment 
losses. 

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