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entitled 'Private Pensions: Opportunities Exist to Further Improve the 
Transparency of PBGC's Financial Disclosures' which was released on 
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United States Government Accountability Office:

GAO: 

Report to Congressional Requesters:

March 2006:

Private Pensions:

Opportunities Exist to Further Improve the Transparency of PBGC's 
Financial Disclosures:

GAO-06-429:

GAO Highlights:

Highlights of GAO-06-429, a report to congressional requesters.

Why GAO Did This Study:

The Pension Benefit Guaranty Corporation's (PBGC) single-employer 
insurance program insures the pension benefits of over 34 million 
participants in almost 29,000 private sector defined benefit pension 
plans. The increase in PBGCs probable claims has raised questions 
about PBGCs monitoring and financial disclosure practices, including 
whether the information that PBGC discloses is sufficient for 
interested parties to understand the effect on PBGCs financial 
condition. GAO examined (1) the steps that PBGC takes to monitor and 
ensure the accuracy of its probable claims, (2) how PBGCs financial 
liability reporting compares with those of publicly traded companies, 
and (3) the steps PBGC has taken to improve the transparency of its 
financial reporting and whether additional improvement is needed.

What GAO Found:

PBGC takes steps to monitor and ensure the accuracy of its single-
employer probable claims forecasts. PBGC reported it monitors its 
probable claims on an ongoing basis by contacting plan sponsors to 
obtain certain plan financial information, reviewing filings submitted 
by probable plans to conduct a risk analysis, and performing valuations 
to determine the present value of net probable claims and expected date 
of probable plan termination. To ensure the accuracy of its probable 
claims, PBGC reported that it uses an automated system and available 
plan financial data to calculate the assets and liabilities for 
probable plans. 

PBGC and public companies have different practices for disclosing 
certain information about liability settlements, including probable 
losses, that arise from the differences between PBGCs responsibilities 
and disclosure policies, and the Security and Exchange Commissions 
(SEC) requirements for public companies. While PBGC and public 
companies follow the same accounting standards for recording probable 
losses in their annual financial statements, they each follow different 
policies and requirements when reporting information about probable 
losses throughout the fiscal year. When reporting information on 
liability settlements, public companies are required to follow the 
standards set forth by SEC requirements, while PBGC, which is not 
subject to SEC requirements, follows its own set of policies and 
procedures. GAO found that PBGC's disclosure practices regarding 
probable losses are more comparable to those of the Federal Deposit 
Insurance Corporation (FDIC).

PBGC has made efforts to improve the transparency of the information it 
discloses about its financial condition, but pension experts, financial 
analysts, and others believe that additional improvements are still 
needed.  PBGC has recently taken steps to include more information 
about its methodology for determining probable claims in its annual 
reports and make more detailed information on its financial condition 
available on its Web site.  However, pension experts, analysts, and 
industry association representatives still have concerns about 
transparency. Many stated that the press releases PBGC issues that 
announce newly terminated plans do not provide the public with enough 
information to determine the financial impact of such plans on PBGCs 
published deficit. In addition, these parties expressed concern about 
the lack of transparency regarding the methodology PBGC uses to 
determine its interest rate its uses to calculate its liabilities. 
Specifically, these parties told us the fact that PBCG does not widely 
disclose the interest rate methodology contributes to ambiguity about 
PBGCs assumptions and means that these parties are unable to fully 
assess PBGC's financial condition.

What GAO Recommends:

To improve the transparency of the information PBGC discloses about its 
financial condition, GAO recommends that PBGC (1) disclose in its press 
releases whether a newly terminated plan was already included in its 
published deficit, and (2) make its interest rate methodology more 
widely available to the public.  PBGC agreed with our recommendations. 
Also, PBGC, FDIC, and SEC provided technical comments on the draft. We 
incorporated each agencys comments as appropriate. 

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:

Letter:

Results in Brief:

Background:

PBGC Has a Process in Place to Monitor and Ensure the Accuracy of Its 
Single-Employer Probable Claims Forecasts:

PBGC and Public Companies Follow Different Reporting Requirements when 
Reporting Liability Settlements, Including Probable Losses:

PBGC'S Financial Disclosures Have Improved, but Transparency in Some 
Areas Remains an Issue:

Conclusions:

Recommendations:

Agency Comments:

Appendix I: Comments from the Pension Benefit Guaranty Corporation:

Appendix II: Comments from the Securities and Exchange Commission:

Appendix III: Other Concerns Regarding the Information PBGC Discloses 
about Its Financial Condition:

Appendix IV: GAO Staff Acknowledgments:

Table:

Table 1: List of Probable Classification Criteria:

Figure:

Figure 1: Summary of Probable Net Claims Activity, Fiscal Years 1987- 
2004:

Abbreviations:

ACLI: American Council of Life Insurers:

CWG: Contingency Working Group:

ERISA: Employee Retirement Income Security Act:

FASAB: Federal Accounting Standards Advisory Board:

FASB: Financial Accounting Standards Board:

FDIC: Federal Deposit Insurance Corporation:

GAAP: Generally Accepted Accounting Principles:

IPVFB: Integrated Present Value of Future Benefits:

IRS: Internal Revenue Service:

OMB: Office of Management and Budget:

PBGC: Pension Benefit Guaranty Corporation:

SEC: Securities and Exchange Commission:

United States Government Accountability Office:

Washington, DC 20548:

March 27, 2006:

The Honorable John Lewis: 
Ranking Minority Member: 
Subcommittee on Oversight Committee on Ways and Means House of 
Representatives:

The Honorable Earl Pomeroy: 
House of Representatives:

The Pension Benefit Guaranty Corporation's (PBGC) single-employer 
insurance program is a federal program that insures certain benefits of 
the more than 34 million workers and retirees covered by almost 29,000 
private sector defined benefit pension plans. In recent years, because 
of the collapse of several large underfunded pension plans, the 
program's financial condition has deteriorated from a $9.7 billion 
cumulative surplus at the end of fiscal year 2000, to a $22.8 billion 
cumulative deficit as of the end of fiscal year 2005. PBGC's 
liabilities include liabilities incurred from plans that have already 
terminated and, as required under Generally Accepted Accounting 
Principles (GAAP), estimated losses incurred from "probable" 
terminations, also referred to as "probable claims." A plan is 
classified as a probable claim if PBGC determines that it is likely to 
terminate in the future. Forty-six percent ($10.4 billion) of PBGC's 
cumulative deficit as of the end of fiscal year 2005 represents PBGC's 
estimated liability for its probable claims. PBGC cites the 
deteriorating financial position of a number of PBGC-insured plans and 
the companies that sponsor them as a primary reason for the increase in 
the amount booked as probable claims. GAO has previously reported on 
this and other structural problems facing PBGC's single-employer 
program.[Footnote 1] In 2003, we placed PBGC's single-employer 
insurance program on our high-risk list of agencies and programs that 
need broad-based transformations to address major challenges, because 
of our concerns about the program's long-term viability.

PBGC's financial condition is determined by comparing the values of its 
assets and its liabilities. PBGC's assets consist primarily of 
accumulated premiums paid by covered plans (invested in Treasury 
securities) and plan assets assumed by PBGC when it takes over a plan. 
PBGC's liabilities consist primarily of future benefit payment 
obligations for plans it takes over and for plans that it believes will 
probably terminate in the near future.[Footnote 2]

The increase in PBGC's probable claims in recent years has raised 
questions about PBGC's monitoring and financial disclosure practices, 
including whether the information that PBGC discloses is sufficient for 
interested parties to understand the net effect of such claims and 
ultimately terminations. In September 2005, we provided detailed 
information about PBGC's process for determining single-employer 
probable claims and some information about PBGC's practices for 
disclosing information about these claims.[Footnote 3] To address 
further questions about the transparency of PBGC's probable claims 
process and its disclosure practices, we are reporting on (1) the steps 
that PBGC takes to monitor and ensure the accuracy of its probable 
claims forecasts, (2) how PBGC's financial liability reporting compares 
with that of publicly traded companies, and (3) the steps PBGC has 
taken to improve the transparency of its financial reporting on its 
probable claims and financial condition and whether additional 
improvement is needed.

To determine the steps PBGC takes to monitor and ensure the accuracy of 
its probable claims forecasts, we reviewed PBGC documents and 
interviewed PBGC officials about the methods they use, including the 
information sources used to monitor claims. We also reviewed the 
agency's process and internal controls for ensuring the accuracy of 
claims and analyzed PBGC's historical data about its probable claims, 
but we did not test its controls to ensure that they are effective. To 
determine and compare PBGC and public company practices for making 
financial disclosures, we reviewed applicable Generally Accepted 
Accounting Principles, Financial Accounting Standards Board (FASB) 
standards, Financial Accounting Standards Advisory Board (FASAB) 
standards, Securities and Exchange Commission (SEC) disclosure 
requirements, and the financial disclosures that PBGC and public 
companies issue. To determine the steps PBGC has taken to improve the 
transparency of its financial disclosures and whether additional 
improvement is needed, we identified PBGC initiatives aimed at 
improving disclosure and interviewed industry association 
representatives, financial analysts, and pension experts to determine 
what further improvements could be made. We conducted our work from 
September 2005 through February 2006 in accordance with generally 
accepted government auditing standards.

Results in Brief:

PBGC reports that it takes steps to monitor and ensure the accuracy of 
its single-employer probable claims forecasts. PBGC monitors its 
probable claims on an ongoing basis by contacting plan sponsors to 
obtain certain plan financial information, reviewing filings submitted 
by probable plans to conduct a risk analysis, and performing valuations 
to determine, among other things, the present value of net probable 
claims and expected date of probable plan termination. PBGC also 
regularly reviews and updates its list of probable claims that it 
monitors. To help ensure the accuracy of its probable claim estimates, 
PBGC uses an automated system and available plan financial information 
to calculate the quarterly and fiscal year-end financial statement 
assets and liabilities for probable claims. PBGC officials believe 
their probable claims estimates are fairly accurate because the 
estimates are generally close to the final net liability amounts for 
those probable plans it ultimately took over.

PBGC and public companies have different practices for disclosing 
certain information about liability settlements, including probable 
losses, that arise from the differences between PBGC's responsibilities 
and disclosure policies, and SEC's requirements for public 
companies.[Footnote 4] While PBGC and public companies follow the same 
accounting standards for recording probable losses in their annual 
financial statements, they each follow different policies and 
requirements when reporting information about probable losses 
throughout the fiscal year. When reporting information on liability 
settlements, public companies are required to follow the standards set 
forth by SEC requirements, while PBGC, which is not subject to SEC 
requirements, follows its own set of policies and procedures. For 
example, SEC requires companies to disclose major events throughout the 
year, such as liability settlements, that shareholders should know 
about, which can include any probable losses that are considered to be 
material, in Form 8-K. In contrast, PBGC's policy prohibits the 
reporting of information on plans classified as probable claims in 
order to protect the economic health of the plan sponsor. We found that 
PBGC's disclosure practices regarding information about probable losses 
are more comparable to those of other government corporations, like the 
Federal Deposit Insurance Corporation (FDIC). According to officials 
from both agencies, PBGC and FDIC follow the same accounting standards 
and face similar risks when disclosing information on liability 
settlements, including probable losses. For example, both agencies 
state they do not disclose probable loss amounts in their financial 
liability disclosures because doing so might compromise their position 
in litigation and negatively affect the financial condition of entities 
under their jurisdiction.

Although PBGC has taken measures to improve the transparency of the 
information it reports related to its financial condition, pension 
experts, financial analysts, and others said that additional 
improvements are needed. PBGC recently began to include more 
information about its methodology for determining probable claims in 
its annual reports and has made more detailed information on its 
financial condition available on its Web site. However, pension 
experts, analysts, and industry association representatives said that 
they have specific concerns about the transparency of information PBGC 
reports about its financial condition. For example, they told us that 
the press releases PBGC issues to announce new plan terminations do not 
provide the public with enough information to determine the 
terminations' financial effect on PBGC's published deficit. Pension 
experts and others said that such omissions may give the false 
impression that the announced liability in the press release is a new 
financial liability to PBGC and that PBGC is adding the entire amount 
of the announced liability to its current financial deficit. However, 
if the terminated plan was among PBGC's probable claims included in its 
year-end financial statement, much of the plan's liability would 
already be included in PBGC's deficit figures. Pension experts and 
others also expressed concern about the lack of transparency regarding 
PBGC's interest rate assumptions, such as information about the 
methodology PBGC uses to calculate its interest rate. Specifically, the 
fact that PBGC does not widely disclose the methods it uses to 
determine its interest rate assumptions raises ambiguity about its 
assumptions and means that others are unable to fully assess PBGC's 
financial condition. Finally, most parties agreed that the information 
PBGC reports about its financial condition is likely to become 
increasingly important if changes are made to pension accounting rules, 
because such changes could have an effect on defined benefit plans 
insured by PBGC.

Because of the questions raised about PBGC's financial disclosure 
practices, we make recommendations to PBGC to disclose, in its press 
releases, whether a newly terminated plan was classified as a probable 
claim and already included in its reported deficit in its annual 
financial statement; and to make its interest rate methodology more 
widely available to the public on its Web site. PBGC agreed with our 
recommendations. PBGC stated that in its future media releases it would 
note whether or not reserves have previously been made relating to the 
termination of the subject company's defined benefit plans and post 
additional details regarding its interest methodology on its Web site.

Background:

PBGC's single-employer insurance program is a federal program that 
protects the retirement incomes of more than 34 million workers and 
retirees covered by almost 29,000 private sector defined benefit 
pension plans. Defined benefit pension plans promise to pay a specified 
monthly benefit at retirement, commonly based on salary and years on 
the job. 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, assets from pension plans 
taken over by PBGC, and recoveries from the companies formerly 
responsible for the plans it took over. In addition, PBGC uses Form 
5500 information--the primary source of information for both the 
federal government and the private sector regarding the operation, 
funding, assets, and investments of private pension plans--to monitor 
single-employer defined benefit pension plan activities, focusing on 
assets, liabilities, number of participants, and funding levels. Form 
5500 information is also used to forecast PBGC's potential liabilities.

The Employee Retirement Income Security Act of 1974 (ERISA) established 
PBGC to insure the pension benefits of participants, subject to certain 
limits, in the event that an employer cannot pay its promised 
benefits.[Footnote 5] ERISA also required PBGC to encourage the 
continuation and maintenance of voluntary private pension plans and to 
maintain premiums set by the corporation at the lowest level consistent 
with carrying out its obligations.[Footnote 6] PBGC may pay only a 
portion of a participant's accrued benefit because of limits on the 
PBGC benefit guarantee; PBGC generally does not guarantee benefits 
above a certain amount, currently $47,659 annually per participant at 
age 65. Additionally, benefit increases arising from plan amendments in 
the 5 years immediately preceding plan termination are not fully 
guaranteed, although PBGC will pay a portion of these increases. 
Finally, sponsors of PBGC-insured defined benefit plans pay annual 
premiums to PBGC for their coverage.[Footnote 7]

PBGC prepares its financial statements in accordance with standards 
promulgated by the Federal Accounting Standards Advisory 
Board.[Footnote 8] For procedures on how to record and report 
contingencies, FASB's Statement of Financial Accounting Standards No. 
5, Accounting for Contingencies (FAS No. 5), specifically requires that 
a liability for loss contingency be recorded if two conditions are met: 
(1) information available prior to issuance indicates that it is 
probable that a liability has been incurred at the date of the 
financial statements, and (2) the amount of the loss can be reasonably 
estimated. For fiscal year 2005, PBGC received its 13th consecutive 
clean or unqualified audit opinion from its independent auditors.

As a wholly-owned government corporation, PBGC is subject to the 
financial and internal control reporting requirements of Chapter 91 of 
Title 31 of the U.S. Code (commonly known as the Government Corporation 
Control Act). The Office of Management and Budget (OMB) issues guidance 
to the heads of federal agencies and government corporations that sets 
out the annual process for them to make a statement as to the adequacy 
of their entity's internal controls. In light of new requirements for 
publicly-traded companies relating specifically to internal controls 
over financial reporting and management's related responsibilities, 
contained in the Sarbanes-Oxley Act of 2002,[Footnote 9] OMB recently 
revised its guidance to adopt enhanced requirements for internal 
controls over financial reporting by major federal agencies. 
Specifically, OMB added an entirely new appendix to its existing 
guidance requiring that these agencies establish a formal process for 
assessing their internal controls over financial reporting. This new 
requirement, however, applies only to the 24 CFO Act agencies,[Footnote 
10] and thus these specific requirements do not apply to PBGC.

To estimate the present value of its future liabilities, PBGC develops 
interest rate factors, similar to interest rates, to use for these 
calculations, based on surveys of insurance companies conducted by the 
American Council of Life Insurers (ACLI) for PBGC and the Internal 
Revenue Service (IRS).[Footnote 11] The survey asks insurers to provide 
the net annuity price for annuity contracts for plan terminations. PBGC 
develops interest rate factors, similar to interest rates, from the 
survey results that together with PBGC's other actuarial assumptions 
produce prices in line with those of the private sector insurers 
surveyed, which are adjusted to the end of the year using an average of 
the Moody's Corporate Bond Indices for Aa and A-rated corporate bonds 
for the last 5 trading days of the month. The adjusted interest rate 
factors are published in mid-December for use in January. The interest 
rate factors are then further adjusted each subsequent month of the 
year on the basis of the average of the Moody's bond indices. All other 
things being equal, when interest rates are lower, more money is needed 
today to finance future benefits because this money will earn less 
income when invested. Therefore, lower interest rate assumptions result 
in higher liability amounts, while higher interest rate assumptions 
result in lower liability amounts.

In 1997, we reported that the cash-based federal budget, which focuses 
on annual cash flows, does not adequately reflect the cost or the 
economic impact of PBGC's single-employer pension insurance program and 
other federal 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, these benefits are paid over a period of years 
or even decades. As a result, there can be years in which PBGC's 
current cash collections are estimated to exceed current cash payments, 
regardless of the expected long-term cost to the government. We 
concluded that the use of accrual concepts in the budget for PBGC and 
other insurance programs has the potential to better inform budget 
choices.

SEC, the principal federal regulator of the U.S. securities markets, 
requires public companies to disclose meaningful financial and other 
information to the public. SEC's mission is to protect investors, 
maintain fair orderly and efficient markets, and facilitate capital 
formation. Public companies are required to submit reports to SEC on 
Form 8-K, the "current report" companies must file with SEC to announce 
certain major events that shareholders should know about, including any 
expected losses that are considered to be material. In addition, public 
companies must submit annual reports on Form 10-K and quarterly reports 
on Form 10-Q.[Footnote 13] These disclosures are designed to keep the 
public informed about any information that could be considered 
important for investors. This provides a common pool of knowledge for 
all investors to use to judge for themselves whether to buy, sell, or 
hold a particular security.

FDIC is a government corporation. In addition to its roles as primary 
federal regulator of state-chartered banks that are not members of the 
Federal Reserve System and back-up regulator for all insured depository 
institutions, FDIC said it promotes public confidence and stability in 
the U.S. financial system by insuring deposits in banks and thrift 
institutions; by examining and supervising financial institutions; by 
identifying, monitoring, and addressing risks to the deposit insurance 
funds; and by limiting the effect on the economy and the financial 
system when a bank or thrift institution fails. Similar to PBGC, FDIC 
receives no congressional appropriations; it is funded by premiums that 
banks and thrift institutions pay for deposit insurance coverage and 
from earnings on investments in U.S. Treasury securities.

PBGC Has a Process in Place to Monitor and Ensure the Accuracy of Its 
Single-Employer Probable Claims Forecasts:

PBGC reports that it monitors its probable claims on an ongoing basis 
by contacting plan sponsors to obtain certain plan financial 
information, reviewing filings submitted by probable plans to conduct a 
risk analysis, and performing valuations to determine, among other 
things, the present value of net probable claims and expected date of 
probable plan termination. PBGC also regularly updates and reviews its 
list of probable claims that it monitors. PBGC also takes certain steps 
to ensure the accuracy of its probable claims, such as using an 
automated system for estimating probable claims and the most currently 
available data when calculating its estimates. We found that PBGC's 
probable claims estimates are reasonable because they are generally 
close to the final claim amounts that are determined for these plans 
that PBGC ultimately takes over.

PBGC Has Procedures in Place to Monitor Single-Employer Probable Claims 
on a Year-round Basis:

PBGC assesses underfunded plans to determine which plans should be 
classified as probable claims and monitored on an ongoing basis. To be 
classified as a probable claim, a plan must meet at least one of the 
seven criteria PBGC uses, five of which it characterizes as objective, 
and two as subjective. According to PBGC officials, objective criteria 
are used when substantial evidence exists to indicate that the plan 
sponsor is in liquidation or insolvency proceedings or will meet the 
requirements for a distress or involuntary termination. Subjective 
criteria involve management judgment.[Footnote 14] Table 1 shows the 
different applications of the objective and subjective criteria used to 
classify plans as probable claims.

Table 1: List of Probable Classification Criteria:

Criterion type: Objective; 
Description: The plan's contributing sponsor(s) is in liquidation under 
Title 11 of the United States Code or comparable state insolvency 
proceeding.

Criterion type: Objective; 
Description: PBGC has received a distress termination filing, and 
substantial evidence exists that the requirements for a distress 
termination are likely to be met.

Criterion type: Objective; 
Description: PBGC has been informed that a distress termination will be 
filed, and substantial evidence exists that the requirements for a 
distress termination are likely to be met.

Criterion type: Objective; 
Description: PBGC has advised the plan administrator that a distress 
termination should be filed, and substantial evidence exists that the 
requirements for a distress termination are likely to be met.

Criterion type: Objective; 
Description: PBGC is considering or is expected to consider the plan 
for an involuntary termination, and substantial evidence exist that the 
requirements for an involuntary termination are likely to be met.

Criterion type: Subjective; 
Description: The plan was classified as reasonably possible and it was 
determined that the plan is a very high risk plan that should be 
classified as probable.

Criterion type: Subjective; 
Description: Plans can be classified as probable if any other set of 
circumstances exist that in PBGC's judgment constitute a probable 
termination. 

Source: GAO analysis of PBGC data.

[End of table]

Once probable plans are identified, PBGC uses certain information to 
more closely monitor such plans and the future claims they represent. 
To accomplish this, PBGC primarily relies on information it receives 
from plan sponsors, information from Section 4010 filings, reportable 
event and distress termination filings, and other sources.[Footnote 15]

* Information from plan sponsors: PBGC officials said they contact plan 
sponsors in order to monitor the case and obtain any required 
information not submitted by the plan sponsor, such as the plan's most 
recent Form 5500 filing and actuarial valuation report. PBGC officials 
said they also make an assessment of the potential for termination. 
This is part of a process that encompasses (1) querying the plan 
sponsor about the intentions with regard to its pension plans, (2) 
obtaining estimates of due and unpaid employer contributions and 
unfunded benefits, and (3) performing a risk analysis.

* Section 4010 filings: These filings provide PBGC with actuarial and 
other information on some underfunded plans and financial information 
for companies that meet certain criteria. PBGC said that these filings 
are an important component of PBGC's monitoring activities. Section 
4010 of ERISA requires the reporting of plan actuarial and company 
financial information by employers with plans that have aggregate 
unfunded vested benefits in excess of $50 million, missed required 
contributions in excess of $1 million, or outstanding minimum funding 
waivers in excess of $1 million. The information required to be filed 
includes (1) plan identifying information, (2) information regarding 
the fair market value of plan assets and the value of benefit 
liabilities on a PBGC termination liability basis, and (3) financial 
information, such as financial statements.

* Reportable event and distress termination filings: The major types of 
reportable event filings that PBGC uses to monitor underfunded plans 
include the inability of a plan to pay participants the benefits due 
them in the form prescribed by the plan, bankruptcy or insolvency 
proceedings, liquidation proceedings or the dissolving of the plan 
sponsor, and failing to meet the minimum funding standards. According 
to PBGC officials, PBGC is notified of reportable events affecting 
approximately 300 plans per year. On average, 200 of these plans either 
undergo standard terminations or continue without termination, 
resulting in PBGC not taking over the plan.[Footnote 16] The remaining 
100 plans eventually become distress terminations or involuntary 
terminations.[Footnote 17]

* Other sources: PBGC uses Form 5500 information to monitor plan 
funding. PBGC also monitors news sources (e.g., Bloomberg, Livedgar, 
and NewsEdge) to identify transactions that could adversely affect plan 
funding status and ultimately PBGC. In addition, PBGC contracts with 
Dun and Bradstreet's First Alert Service, which reports on bankruptcy 
filings within several days of the filing.

As part of its monitoring process, all probable claims are reviewed by 
PBGC's Contingency Working Group (CWG), which is composed of 
representatives from various departments and divisions within PBGC. The 
CWG is responsible for approving probable plan classifications and 
probable loss amounts. PBGC updates its probable claims three times per 
year, and performs valuations for financial reporting purposes on all 
plans on the probable claims list. For each financial reporting date 
(March 31, June 30, and September 30), PBGC actuaries prepare a 
preliminary list of probable claims that also contains the estimated 
date of plan termination and the present value of the each plan's net 
claim. For each period, the Contingency Working Group reviews and 
approves the finalized list of probable claims.

PBGC Takes Steps to Ensure the Accuracy of Its Probable Claims:

PBGC reports that it takes certain steps to help ensure the accuracy of 
its probable claims. One of PBGC's key controls to help ensure accuracy 
is an automated system for estimating probable claims. The Integrated 
Present Value of Future Benefits (IPVFB) system estimates the probable 
losses and does so according to GAAP and FAS No. 5 standards. To 
calculate the fiscal year end financial statement assets and 
liabilities for probable plans, plan information such as Form 5500 
filings, asset statements, annuity purchases, contributions, and 
estimated dates of plan termination are entered into the IPVFB system 
as of the estimated date of plan termination and fiscal year end. This 
system adjusts the liabilities from the plan's assumptions, such as 
mortality, interest, and expected retirement age, to standard 
assumptions used by PBGC, and then produces a report that provides PBGC 
staff with information on how the assets and liabilities are brought 
forward from the Actuarial Valuation Report date to the date of the 
financial statements. PBGC officials reported that the agency's process 
for estimating its probable claims is reviewed by its financial 
auditors as part of its annual audit of its financial statements. As 
noted earlier, the auditors have issued unqualified audit opinions for 
the last 13 years.

PBGC officials also told us they help ensure high levels of accuracy by 
using the most current data available as the starting point in their 
valuation process, but there's room for improving the timeliness of the 
data. For example, PBGC has 4010 data for the largest plans that it 
designates as probable claims, but even those data are 3  months old 
when received, and they are received only once per year. On occasion, 
PBGC is able to obtain more current actuarial valuation reports, but it 
is not able to do this regularly for all plans on the probables list.

PBGC officials also said since single-employer probable claims are 
estimates, factors that are not fully determinable can cause the actual 
claims PBGC receives to differ from its probable estimates. According 
to these officials, when they calculate their probable estimates, they 
usually do not have complete data on the provisions of the plan, the 
characteristics of plan participants, the exact date of plan 
termination, the precise value of plan assets and liabilities at that 
termination date, or the level of recoveries from the plan's sponsor, 
all of which may change over time. Additionally, potential changes in 
PBGC's valuations, knowledge of specific plan provisions, and 
participant characteristics combine in ways that can cause the actual 
claims from these plans to deviate from the estimates, regardless of 
the timeliness of the data used in preparing the estimates. When a 
probable claim becomes an actual claim, PBGC officials said they adjust 
the probable claim estimate to that of the actual claim amount as of 
the date of plan termination. If a plan is removed from the probables 
list for a reason other than termination, the previously estimated 
claim is removed from the probable claims total and reclassified, often 
as a reasonably possible claim.[Footnote 18]

PBGC data showed its total probable claims estimates ($21.8 billion) 
for all plans that eventually terminated were within one percentage 
point of the actual claim amount ($21.9 billion). Ninety-five percent 
of the $22.9 billion in resolved probable claims was in plans that 
terminated with PBGC.[Footnote 19] In addition, historically the vast 
majority of probable claims (76%) subsequently become actual claims, as 
shown in figure 1.

Figure 1: Summary of Probable Net Claims Activity, Fiscal Years 1987- 
2004:

[See PDF for image]

Source: PBGC data.

[End of figure]

Moreover, of the $16.9 billion of probable net claims that were 
reported in the financial statements as of the end of fiscal year 2004, 
more than $10 billion was in plans that terminated during fiscal year 
2005.

PBGC and Public Companies Follow Different Reporting Requirements when 
Reporting Liability Settlements, Including Probable Losses:

PBGC and public companies have different practices for disclosing 
information about liability settlements, including probable losses. 
Although PBGC and public companies follow the same accounting standards 
for recording probable losses in their annual financial statements, 
they each follow different policies and requirements when reporting 
information about probable losses throughout the fiscal year. When 
reporting information on liability settlements, PBGC follows its own 
set of policies and procedures, while public companies are required to 
follow the standards set forth by SEC requirements. PBGC's disclosure 
practices regarding financial liabilities are similar to those of other 
government corporations, namely FDIC, which operates similar programs 
and faces similar risks.

Differences in PBGC and Public Company Liability Settlement Reporting 
Result from Differences between PBGC Disclosure Policies and SEC 
Requirements:

PBGC and publicly traded companies have different practices for 
disclosing information on liability settlements, including probable 
losses. Both PBGC and public companies follow the same accounting 
standards for recording probable losses in their annual financial 
statements. For example, PBGC announces an estimated liability from 
probable claims in its annual report, and public companies report 
similar information about probable losses in their annual reports. 
However, when reporting information about probable losses throughout 
the fiscal year, PBGC and public companies have different practices, 
which result from the different policies and requirements of each 
entity.

PBGC's reporting in its annual report, or elsewhere, is meant to avoid 
the disclosure of any information on specific plans classified as 
probable in order to prevent harm to the economic health of the plan 
sponsor. When a plan is classified as a probable claim and has not yet 
terminated, PBGC's policy precludes the disclosure of any information 
indicating that a specific plan has been classified as a probable 
claim. In its annual report, PBGC reports its probable claim estimates 
as an aggregated total value of net claims in order to conceal exactly 
which plans are included in the figure. PBGC also identifies its 
probable claim estimates by industry in its financial statements. PBGC 
officials said their policy of not disclosing any information on plans 
so classified is meant to avoid causing more economic distress to the 
plan sponsor, because such plans usually have plan sponsors that are 
already economically weak. According to these officials, this policy 
exists so that disclosure does not unnecessarily (1) compromise a 
company's ability to continue as a going concern and (2) influence a 
sponsor's decision whether to maintain or terminate its pension plans. 
For example, if investors knew that PBGC had classified a particular 
plan as a probable claim, this could encourage additional negative 
speculation about the financial health of the plan sponsor and trigger 
activity that might further the financial instability of the company.

When PBGC takes over a plan, it typically issues a press release 
announcing the liability PBGC expects to incur, without indicating if 
the terminated plan had already been booked as a probable claim and 
consequently included in its previously announced deficit in its year- 
end financial report. According to PBGC officials, PBGC does not 
release the amount of its previously booked probable claims in its 
press releases for fear of compromising PBGC's position in litigation 
and of negatively affecting a company's financial condition. These 
officials said that releasing its previously booked probable claim 
amounts would enable someone to make a comparison between PBGC's booked 
liability for a particular plan and the amount of underfunding for that 
plan. Publicizing this information could affect PBGC's ability to 
recover the full amount of a plan's claims in litigation because 
companies are likely to resist a settlement with PBGC for more than the 
amount of PBGC's previously booked losses. In addition, announcing the 
previously booked liability also has a negative impact on a company's 
ability to obtain additional financing and may worsen its financial 
condition.

In contrast, public companies must follow SEC requirements for 
disclosing information on financial liability settlements, including 
probable claims. Federal securities laws enforced by SEC require that 
public companies disclose information on liabilities booked as a 
probable loss. Public companies must submit current reports to SEC on 
Form 8-K for a number of specified events, including any material event 
that might affect the investment decisions of shareholders. For 
example, when a public company books a material liability as 
"probable," the company is required to file a Form 8-K with SEC. Often 
companies issue such information in a press release, which they may 
attach to the 8-K.

Although SEC requires public companies, under certain conditions, to 
disclose information about a probable loss, there is much variability 
in how these companies choose to disclose this information. According 
to SEC officials, some companies choose to provide as much information 
as possible concerning their probable losses, while other companies 
choose to release less information. For example, some companies release 
the specific amount of a probable loss in an 8-K, and after the 
liability has changed from a probable claim to a certainty, these 
companies choose to redisclose the previously booked quantity to fully 
demonstrate the total financial impact of the liability on the company. 
Other companies choose to be more general in their disclosure of 
probable liabilities by disclosing information about these quantities 
in general terms, such as announcing a range instead of a specific 
number.

Pension experts, financial analysts, SEC officials, and others said 
that the different reporting practices and policies of PBGC and public 
companies are a consequence of the different risks and responsibilities 
faced by each entity. They agreed that there would likely be further 
economic distress for plan sponsors if PBGC divulged which plans are 
classified as probable before those plans terminate. These experts also 
noted that while PBGC has an obligation to not disclose information on 
its probable claims, public companies have a responsibility to report 
as much information as possible, including probable claims, in order to 
keep investors informed and able to make knowledgeable decisions. 
Finally, they said that the unique risks of PBGC as a government 
corporation make its disclosure responsibilities distinctively 
different from those of public companies.

PBGC's Liability Settlement Reporting Practices Are More Comparable to 
Those of FDIC:

We found that PBGC's reporting practices are more comparable to those 
of government corporations like FDIC than they are to those of public 
companies. Both corporations operate similar types of programs, and 
both agencies have a responsibility to ensure the stability of the 
programs they operate. Unlike public companies, PBGC and FDIC are not 
subject to SEC requirements. In our discussions with PBGC and FDIC 
officials, we found that both agencies have adopted similar disclosure 
policies when reporting probable losses.

According to officials from PBGC and FDIC, both agencies follow the 
same accounting standards and face similar risks when disclosing 
information about probable losses. For example, officials from both 
agencies said they do not disclose case-specific, detailed information 
on probable claims in order to protect the entities under their 
jurisdictions from further economic distress. Just as PBGC avoids 
exacerbating the economic situation faced by plan sponsors whose plans 
are booked as probable, FDIC avoids any financial statement disclosure 
action that might cause further economic distress for the institutions 
it insures. In addition, PBGC follows a policy of not disclosing 
probable claim amounts in its press releases announcing the termination 
of a plan. FDIC officials said that the agency issues a press release 
on the day of institution failure that may or may not, depending on the 
nature and timing of the failure, include an estimated cost to the 
Insurance Fund. The unique responsibilities of each entity heavily 
influence the nature and content of the disclosures.

PBGC'S Financial Disclosures Have Improved, but Transparency in Some 
Areas Remains an Issue:

Over the years, PBGC has made efforts to improve the transparency of 
its disclosures, including revising its annual report to include more 
detailed information about its methodology for determining probable 
claims, and it has published more detailed information about its 
financial condition on its Web site. Despite PBGC's efforts to improve 
the transparency of its disclosures, pension experts and others told us 
that they would like to see more information disclosed when PBGC 
announces the termination of a new plan in its press releases and that 
they have some uncertainty about PBGC's methodology for calculating its 
interest rate. In addition, pension experts, financial analysts, and 
industry association representatives told us that PBGC's disclosures 
are likely to become increasingly important in light of upcoming 
changes in the pension accounting rules for plan sponsors.

PBGC Has Taken Steps to Improve the Transparency of Its Financial 
Disclosures:

PBGC officials told us they regularly review the agency's policies for 
disclosing information related to its financial condition and revise 
their disclosure documents as needed. According to PBGC officials, when 
making decisions to revise its disclosures, PBGC takes into 
consideration, among other things, current changes in the private 
pension environment that affect the agency's financial condition and 
information that would help the public better understand PBGC's current 
financial condition.

Over the last several years PBGC took the following actions to improve 
the transparency of its disclosures:

* it published a fact sheet on its Web site that provides answers to 
questions that have been raised about PBGC financial condition, 
including its deficit, the true cost of its insurance program, and 
pension underfunding;

* it revised its annual report to include more detailed information 
about its methodology for determining probable claims;

* it revised its Pension Insurance Data Book 2003 , which has detailed 
statistics for the agency's insurance programs, to include information 
related to PBGC's claims experiences in order to provide more 
historical data on the number and size of claims by the year the plans 
terminated, the funding levels of the plans at termination, and the 
size of the plans at termination;

* it released extensive data about PBGC's financial condition, as well 
as explanatory and white papers about how to understand PBGC's 
financial condition, reports, and methods available on its Web site 
(www.pbgc.gov); and:

* it revised the agency's Web site to make it more user-friendly.

PBGC officials also said they conduct a range of educational outreach 
activities with their various stakeholders, including plan 
participants, experts, policy makers, and the press. For example, PBGC 
discusses its financial condition at various meetings with plan 
participants held each year. PBGC officials also regularly give 
speeches at gatherings of actuaries, lawyers, financial officers, 
benefit specialists, and other members of the plan sponsor community. 
PBGC also issues press releases regarding its current financial 
condition, in connection with the annual financial statements.

Pension Experts, Financial Analysts, and Others Have Concerns about the 
Transparency of PBGC's Disclosures:

Some pension experts and others have expressed concern that some 
aspects of PBGC's disclosures are still unclear. For example, PBGC does 
not include sufficient information to determine the financial impact of 
new terminations on PBGC's financial position when it issues a press 
release. When announcing the termination of a new plan in its press 
releases, PBGC does not announce whether or not the terminated plan was 
previously booked as a probable and already included in its reported 
deficit and reported in its annual financial statement. For example, 
when a large plan is terminated, PBGC puts out a press release 
announcing the following information about the terminated plan:

* the type of termination and reason for termination;

* plan information, including the amount of assets, amount of 
liability, level of funding, and the number of employees covered by the 
plan;

* the current estimate of PBGC's liability; and:

* a review of pension rules and guarantee limits.

When announcing a plan's termination, PBGC does not disclose whether 
the plan was previously booked as a probable claim, and experts and 
others said this practice leads some to believe that PBGC is assuming a 
wholly new liability, in addition to the large deficit already reported 
by PBGC in its annual report. According to PBGC officials, in the case 
of most large terminations, PBGC has already recorded a major part of 
the announced liability in its reported deficit as a probable claim. 
Thus, when PBGC issues a press release, it may appear that PBGC is 
assuming a considerable liability with the termination of a large 
underfunded pension plan when in fact most of the announced liability 
has been previously recorded in PBGC's annual financial statement and 
is already reflected in its previously reported deficit. Pension 
experts and financial analysts said that PBGC's press releases include 
PBGC's best estimate of the financial liability facing PBGC without any 
mention of how much of this liability has already been recorded as a 
probable claim in its annual financial statement. Experts and others 
told us that when PBGC puts out a press release announcing the 
termination of a new plan, they regularly receive telephone calls from 
the media and others asking if this announced liability is a new 
liability added to PBGC's deficit. By revealing whether the newly 
terminated plan was previously recorded as a probable claim, PBGC would 
give policy makers and others better information to understand the 
impact on PBGC's financial condition.

Pension experts and financial analysts were also concerned that they 
remain uncertain about PBGC's methodology for calculating the interest 
rate it uses to discount its long-term liabilities and would like to 
see more information disclosed about this process. The interest rate 
used by PBGC to calculate its liabilities has a significant effect on 
the reported financial condition of PBGC. For instance, if PBGC reduced 
its interest rate, the value of its liabilities would increase, and 
conversely, if PBGC increased its interest rate, the value of PBGC's 
liabilities would decrease. Pension experts said that because PBGC's 
interest rate choice has a large impact on its reported financial 
position, they are troubled that the assumptions surrounding the 
interest rate decision are not transparent. Pension experts and 
financial analysts said that they are uncertain of the exact 
calculations used by PBGC to calculate its rate, and they believe that 
PBGC could do more to clarify its interest rate assumptions and the 
effect of this rate on its reported financial position.

According to PBGC officials, information about their interest rate 
calculations is available upon request but is not provided in its 
annual financial disclosure documents. Although PBGC discloses its 
interest rate factors and some of its actuarial assumptions in its 
annual financial statement, it does not disclose its entire interest 
rate methodology. PBGC officials also told us that in 2003, during 
bankruptcy proceedings for US Airways, the court reviewed PBGC's 
interest rate. During these proceedings, PBGC submitted a detailed 
presentation on how the rate is calculated, which is now part of the 
public record. The court upheld PBGC's use of its interest rate. PBGC 
officials told us they distribute documentation of their methodology 
when it is requested. However, while the assumptions and calculations 
PBGC uses to calculate its interest rate are public information, such 
information is not readily accessible to experts, plan sponsors, plan 
participants, or lawmakers because they may not know that this 
information is available upon request.

Pension experts and others also had additional concerns about PBGC's 
methodology and practices that PBGC has addressed. Specifically, they 
were concerned that PBGC's practices and disclosures overstate PBGC's 
economic distress by (1) including estimated probable claim liabilities 
in its deficit, (2) not publishing a projected date of PBGC's 
insolvency,[Footnote 20] and (3) using a low interest rate. For more 
information on these concerns and PBGC's responses to these concerns, 
see appendix III.

Concerns about the transparency of information on the financial 
condition of the PBGC are not new. As we previously reported, the cash- 
basis of the federal budget contributes to a lack of transparency about 
PBGC and other federal insurance programs that may delay recognition of 
emerging financial problems.[Footnote 21] Furthermore, current budget 
reporting may not provide policy makers with information or incentives 
to address potential funding shortfalls before claim payments come due. 
Generally costs are recorded in the budget too late for policy makers 
to control them or even ensure that adequate resources will be 
available to cover them. The delayed budget recognition of these costs 
can reduce the number of viable options available to policy makers and 
may ultimately increase the cost to the government.

Finally, many of the pension experts, financial analysts, and industry 
association representatives we consulted observed that PBGC's 
disclosures are likely to become increasingly important if changes to 
the pension accounting rules currently under discussion are made, as 
these could have an effect on defined benefit plans covered by PBGC. 
The primary accounting rule change that is being discussed is likely to 
move the disclosure of the funding status of pension plans from the 
footnotes to the balance sheet of the employer's financial statement. 
According to FASB, this change is intended to make an employer's 
pension obligations more visible on the balance sheet and income 
statement in order to increase the transparency of the plan sponsor's 
financial position. Financial analysts and others told us that there 
are many potential effects to this expected change that do not directly 
influence PBGC but are likely to indirectly affect PBGC's financial 
condition. For example, pension experts and analysts said that the new 
FASB changes could have a positive effect on PBGC's future financial 
condition by promoting greater contributions and higher funding levels 
from plan sponsors, thus reducing PBGC's exposure to financially 
troubled plans.

Conclusions:

The information that PBGC reports on its probable claims and financial 
liabilities is the main source of information that policy makers and 
interested parties have to evaluate the financial condition of PBGC. 
The more transparent PBGC is about the impact of new terminations on 
PBGC's financial positions and the methodology it uses to determine its 
interest rate, the less ambiguity there will be about PBGC's financial 
condition and the more beneficial PBGC's financial reporting will be 
for policy makers and others. Public understanding of PBGC's financial 
condition will become even more important in the near future if the 
proposed changes to pension accounting rules are made, potentially 
affecting PBGC's financial condition.

The risks faced by PBGC when disclosing information about probable 
claims are not the same as those faced by public companies. PBGC must 
be careful not to release information that can negatively affect the 
sponsors of the plans it insures or its ability to recover assets from 
the sponsors of the plans that it takes over. Public companies' 
disclosures are aimed at providing necessary information to investors. 
Improving the transparency of the financial information released by 
PBGC will require finding a solution that does not hinder the agency's 
ability to make recoveries from plan sponsors for the losses it incurs.

Recommendations:

We recognize that PBGC believes that there are reasons for withholding 
certain information about its probable claims. As we reported, PBGC 
does not disclose the names and liability amounts for newly terminated 
plans that were classified as probable claims because of its concerns 
of compromising PBGC's position during litigation and negatively 
affecting the economic health of plan sponsors. However, PBGC could 
better describe the impact of new claims on its reported net financial 
position when announcing new plan terminations in its press releases. 
Therefore, we recommend that PBGC consider disclosing, in its press 
releases, whether a newly terminated plan was classified as a probable 
and already included in its reported deficit in its annual financial 
statement.

To improve the transparency of the interest rate assumptions PBGC uses 
to calculate its liabilities, we recommend that PBGC makes it interest 
rate methodology more widely available to the public. In doing so, PBGC 
should considering making this information available on its Web site.

Agency Comments:

We provided a draft of this report to PBGC, FDIC, the Department of 
Labor (Labor), SEC, and the Department of the Treasury (Treasury). PBGC 
provided written comments, which appear in appendix I. PBGC's comments 
agreed with the findings and conclusions of our report. SEC provided 
written comments which appear in appendix II. SEC's comments generally 
agreed with our findings related to SEC's Form 8-K and material 
liabilities. The agency's comments also provided additional information 
that is related to Form 8-K requirements and financial statement 
disclosure of loss contingencies. PBGC and FDIC also provided technical 
comments on the draft. We did not receive any comments from Labor and 
Treasury. We incorporated each agency's comments as appropriate.

As arranged with your office, unless you publicly announce its contents 
earlier, we plan no further distribution of this report until 30 days 
from the issue date. At that time, we will send copies of this report 
to the Secretary of Labor, the Secretary of the Treasury, and the 
Executive Director of the Pension Benefit Guaranty Corporation; 
appropriate congressional committees; and other interested parties. We 
will also make copies available to others on request. In addition, the 
report will be available at no charge on GAO's Web site at [Hyperlink, 
http://www.gao.gov].

If you have any questions concerning this report, please contact me at 
(202) 512-7215. Other contacts and acknowledgments are listed in 
appendix IV.

Signed By:

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

[End of section]

Appendix I: Comments from the Pension Benefit Guaranty Corporation:

PBGC 
Pension Benefit Guaranty Corporation:
1200 K Street, N.W., Washington, D.C. 20005-4026:

March 15, 2006:

Barbara D. Bovbjerg, Director:
Education, Workforce and Income Security Issues: 
U.S. Government Accountability Office: 
Washington, D.C. 20548:

Dear Ms. Bovbjerg:

Thank you for the opportunity to comment on the draft version of your 
report entitled, "Private Pensions: Opportunities Exist to Further 
Improve the Transparency of PBGC's Financial Disclosures."

We place a significant emphasis on the accuracy of our financial 
reporting processes, especially reporting of probable claims as 
required by Statement of Financial Accounting Standard No. 5 under 
Generally Accepted Accounting Principles. Our financial statements and 
the notes to our financial statements meet disclosure requirements, and 
as the report notes, the amount of information disclosed has increased 
over the years. As evidence of the accuracy of our financial statements 
and the adequacy of our disclosures, the Independent Public Accountant, 
Clifton Gunderson, acting under the auspices of our Office of Inspector 
General, recently issued an unqualified opinion on PBGC's financial 
statements-our 13th straight "clean" opinion.

We understand the importance of financial reporting transparency, and 
believe that transparency has helped users of our financial statements 
to better understand the structural challenges facing the pension 
insurance program and the need for action. The report correctly notes 
that there are limitations on the nature and type of information we are 
able to disclose.

We have addressed our specific responses to the two recommendations 
included in the report below:

GAO Recommendation: Disclose in its press releases whether a newly 
terminated plan was already included in its published deficit.

PBGC Response:

We already provide details regarding total probable claims by industry. 
We have not released the amount of previously-booked claims for newly 
terminated plans in our press releases as a means of protecting the 
identity of other undisclosed plans that are part of our published 
deficit. Having said that, we can and will note in future media 
releases whether or not reserves have previously been made relating to 
the termination of the subject company's defined benefit plans. We 
believe that this level of disclosure will improve transparency without 
jeopardizing the identity of other undisclosed plans previously 
included in our reserves.

GAO Recommendation: Make its interest rate methodology more widely 
available to the public.

PBGC Response:

Our interest factor methodology has been made publicly available 
through presentations to professional conferences and industry 
associations as well as through meetings with interested analysts. 
Consistent with the GAO's recommendation, we will also post additional 
details regarding our interest methodology on our website, [Hyperlink, 
www.pbgc.gov].

We appreciate GAO's efforts in highlighting the important challenges 
facing the Pension Benefit Guaranty Corporation as we work to safeguard 
America's pension insurance program.

Sincerely,

Signed By: 

James C. Gerber:
Chief Financial Officer:

[End of section]

Appendix II: Comments from the Securities and Exchange Commission:

United States:
Securities And Exchange Commission: 
Washington. D.C. 20549:

Division Of Corporation Finance: 
Mail Stop 5546:

March 23, 2006:

Diana Brauner: 
Analyst: 
Education, Workforce, and Income Security: 
U.S. Government Accountability Office: 
Room 5A56B:
441 G Street, NW: 
Washington, DC 20548:

Dear Ms. Brauner:

Thank you for your email dated March 7, 2006 and the opportunity to 
comment on excerpts from the draft report being prepared by the GAO 
entitled Private Pensions: Opportunities Exist to Further Improve the 
Transparency of PBGC's Financial Disclosures (GAO-06-129). As you know, 
during preparation of the draft report, we had opportunity to meet with 
you and other members of your office to discuss the disclosure that is 
required for public companies related to liability settlements. We 
agree with your assertion that information related to the incurrence of 
a material liability should be reported in a current report on Form 8-K 
and we provide more specifics related to the form requirements below 
should you wish to expand your discussion. We also wanted to point out 
the disclosure that is required in financial statements related to loss 
contingencies, those considered to be either probable or reasonably 
possible, which may also be relevant to your consideration of PBGC's 
disclosure.

Aside from the items that are specifically required to be reported on 
Form 8-K, disclosure under Item 8.01 is required for events that a 
public company believes would be of importance for investors. For 
example, if a public company incurred a material loss by entering into 
a litigation settlement, the Company would disclose the event in a Form 
8-K under Item 8.01. An example of a specific Form 8-K disclosure item 
related to a loss contingency is a potential or actual exposure to loss 
resulting from an obligation under a guarantee contract, which would 
require disclosure of the nature and amount of the obligation in a Form 
8-K under Items 2.03 and 2.04.

The disclosure that a company provides in the financial statements that 
are included in its public filings related to loss contingencies is 
governed by generally accepted accounting principles. GAAP requires a 
company to record an estimated loss related to a loss contingency if 
both of the following conditions are met: (a) it is probable that a 
liability has been incurred and (b) the amount of loss can be 
reasonably estimated. Disclosure is required in the financial 
statements of the nature of the loss and the amount recorded. If no 
loss has been recorded because one or both of the conditions are not 
met (the loss is not probable or can't be reasonably estimated), 
disclosure is still required if it is reasonably possible that a loss 
has been incurred, and would include the nature of the contingency and 
an estimate of the possible loss or range of loss, or a statement that 
an estimate cannot be made. See FASB Statement of Financial Accounting 
Standards No. 5 Accounting for Contingencies for the GAAP requirements.

We appreciate the opportunity to provide comments on the draft report. 
Please call me at 202-551-3405 if you have any questions or comments.

Sincerely,

Signed By:

Carol A. Stacey:
Chief Accountant:

[End of section]

Appendix III: Other Concerns Regarding the Information PBGC Discloses 
about Its Financial Condition:

Pension experts and others had additional concerns about the Pension 
Benefit Guaranty Corporation's (PBGC) methodology and practices that 
have been addressed by PBGC. Pension experts and industry association 
representatives told us they are also concerned that PBGC's practices 
and disclosures overstate its economic distress by (1) including 
estimated probable claim liabilities in its deficit, (2) not publishing 
a projected date of insolvency, and (3) using a low interest rate. Each 
of these concerns has already been addressed by PBGC.

Estimated Probable Claim Liabilities in Its Deficit:

PBGC includes estimated net losses incurred from probable terminations 
in its liabilities when calculating its deficit. Some experts are 
concerned that PBGC's deficit is largely composed of liabilities from 
probable claims that might never terminate. In addition, these parties 
told us that by only booking the net claim, instead of booking the 
assets and liabilities separately, PBGC is making its own funded ratio 
look worse. PBGC officials agreed that this practice may make their 
funded ratio lower but said it has no impact on the size of its 
deficit. However, PBGC officials said that according to FAS 5, PBGC is 
required to include the expected net claims from probable claims in its 
financial statement if the loss is probable and the amount of the loss 
can be reasonably estimated. Furthermore, the accounting standards do 
not permit PBGC to separately book plan assets and liabilities of 
probable claims until PBGC takes over the plan.

Projected Date of Insolvency:

Pension experts and industry association representatives also told us 
that PBGC publicizes its large financial deficit without publishing an 
estimated date of insolvency. While some experts we spoke to understand 
that PBGC has enough assets to pay its promised obligations for a 
number of years, they are concerned that by not announcing a date of 
insolvency, PBGC leaves the impression that participants are at 
imminent risk of not receiving their benefits. PBGC officials told us 
that a projected date of insolvency for the single-employer program is 
not calculated because there are many uncertain variables that will 
affect PBGC's future cash flows, and it is not possible to reasonably 
project a date of insolvency with any accuracy. The uncertainty of when 
PBGC will trustee new plans, how those claims will affect PBGC's future 
cash flows, and of PBGC's revenue from investment returns make it 
impossible to make reasonable predictions of the date of PBGC's 
insolvency. However, PBGC officials reported that the agency's analysis 
has shown that there is less than a 10 percent chance that its single- 
employer program will not have sufficient assets to pay guaranteed 
benefits through 2020.

Interest Rate Level:

Some pension experts, industry association representatives, and 
financial analysts disagree with PBGC's choice of interest rate used 
when calculating the value of its liabilities and argue that this 
interest rate is unrealistically low, thereby overstating the value of 
its reported deficit. These experts said that PBGC should be using a 
higher interest rate that is more in line with current corporate 
economic conditions. According to PBGC officials, the agency's interest 
factors are based on the rate at which a private insurance company 
would charge plan sponsors to take on a plan's promised benefits. The 
survey ensures that PBGC's termination values reflect the current 
market price of terminating a plan. PBGC officials also noted that its 
auditors have issued unqualified opinions on its financial statements, 
which include its liabilities for probable losses and the interest 
factors used to calculate these liabilities. In addition, the American 
Academy of Actuaries conducted a study that found its procedures 
accurately reflected annuity prices.

[End of section]

Appendix IV: GAO Staff Acknowledgments:

Staff Acknowledgments:

Tamara Cross, Assistant Director; Raun Lazier, Analyst-in-Charge; Diana 
Blumenfeld; Joseph Applebaum; Richard Burkard; Robert Dacey; Kimberly 
McGatlin; Jonathan McMurray; James McTigue Jr; and Roger J. Thomas made 
important contributions to this report.

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Pub. L. No. 107-204,  302, 404, 116 Stat. 745, 777, 789 (July 30, 
2002).

FOOTNOTES

[1] See GAO, Pension Benefit Guaranty Corporation: Single-Employer 
Pension Insurance Program Faces Significant Long-Term Risks, GAO-04-90 
(Washington, D.C.: Oct. 29, 2003); Private Pensions: Recent Experiences 
of Large Defined Benefit Plans Illustrate Weaknesses in Funding Rules, 
GAO-05-294 (Washington, D.C.: May 31, 2005); Private Pensions: Revision 
of Defined Benefit Pension Plan Funding Rules Is an Essential Component 
of Comprehensive Pension Reform, GAO-05-794T (Washington, D.C.: June 7, 
2005); Private Pensions: The Pension Benefit Guaranty Corporation and 
Long-Term Budgetary Challenges, GAO-05-772T (Washington, D.C.: June 9, 
2005); and Private Pensions: Questions Concerning the Pension Benefit 
Guaranty Corporation's Practices Regarding Single-Employer Probable 
Claims, GAO-05-991R (Washington, D.C.: September 9, 2005). 

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

[3] GAO, Private Pensions: Questions Concerning the Pension Benefit 
Guaranty Corporation's Practices Regarding Single-Employer Probable 
Claims, GAO-05-991R (Washington, D.C. September 2005) 

[4] For the purposes of this report, the term "liability settlements" 
is being used to discuss the information that PBGC, the Federal Deposit 
Insurance Corporations (FDIC), and public companies disclose about 
probable claims that occur between annual financial statements. 

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

[6] 29 U.S.C. 1302(a). 

[7] Premiums have two components: a per participant charge paid by all 
sponsors and a "variable-rate" premium that some underfunded plans pay 
based on the level of unfunded benefits. 

[8] The Federal Accounting Standards Advisory Board (FASAB) considers 
and promulgates accounting concepts and standards for the federal 
government. FASAB is sponsored by the Comptroller General of the United 
States, the Director of the Office of Management and Budget (OMB), and 
the Secretary of the Treasury of the United States. 

[9] Pub. L. No. 107-204, 3012, 404, 116 Stat. 745, 777, 789(July 30, 
2002).

[10] 31 U.S.C.  901.

[11] ACLI conducts four surveys annually. PBGC interest rate factors 
used for its financial statements are based on an average of the 
surveys conducted in June and September.

[12] GAO, Budget Issues: Budgeting for Federal Insurance Programs, GAO/ 
AIMD-97-16 (Washington D.C.: Sept. 30, 1997).

[13] The annual report on Form 10-K provides a comprehensive overview 
of the company's business and financial condition and includes audited 
financial statements. The Form 10-Q includes unaudited financial 
statements and provides a continuing view of the company's financial 
position during the year. The report must be filed for each of the 
first three fiscal quarters of the company's fiscal year.

[14] According to PBGC, subjective criteria must typically be used when 
most plans meet the criteria for recognition under FAS No. 5 of GAAP 
while in or close to reorganization under Chapter 11 bankruptcy.

[15] At least one of the following criteria must be met in order for 
PBGC to approve a distress termination filing: (1) liquidation in 
bankruptcy (Chapter 7) or insolvency proceedings; (2) reorganization in 
bankruptcy (Chapter 11); (3) a company will be unable to continue to 
stay in business unless its plan is terminated; and (4) unreasonable, 
burdensome pension costs caused solely by a decline in workforce.

[16] The termination of a fully funded defined benefit plan is called a 
standard termination. According to PBGC officials, in a standard 
termination the plan sponsor either purchases annuities for the plan's 
participants or the plan pays them lump sum distributions to satisfy 
its financial obligations.

[17] PBGC may initiate involuntary terminations for several reasons, 
including if PBGC's loss from that plan may be expected to increase 
unreasonably if the plan is not terminated. 29 U.S.C. 1342(a).

[18] Plans are classified as reasonably possible if they have over $50 
million in aggregate underfunding, the plan sponsor's bonds are below 
investment grade, the sponsor has applied for a minimum funding wavier 
with the Internal Revenue Service or has missed a minimum funding 
contribution, or the sponsor is in reorganization under Chapter 11.

[19] The $22.9 billion amount represents both $21.8 billion for 
probable claims that became actual claims and $1.1 billion for claims 
that were removed from the probable category. 

[20] This is the date when PBGC's available resources will not be 
sufficient to pay the monthly benefits currently coming due.

[21] U.S. General Accounting Office, Budget Issues: Budgeting for 
Federal Insurance Programs, GAO/AIMD-97-16 (Washington D.C.: Sept. 30, 
1997) and U.S. Government Accountability Office, Private Pensions: The 
Pension Benefit Guaranty Corporation and Long-Term Budgetary 
Challenges, GAO-05-772T (Washington D.C.: June 9, 2005). 

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