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The Pension Benefit Guaranty Corporation (PBGC) insures the pension benefits of 43 million American workers and retirees participating in nearly 26,000 private sector defined benefit plans through its single-employer and multiemployer insurance programs. PBGC’s financial portfolio is one of the largest of any federal government corporation, with more than $80 billion in assets. Yet, because of long-term challenges related to PBGC’s governance and funding structure, PBGC’s financial future is uncertain. At the end of fiscal year 2012, PBGC’s net accumulated financial deficit was $34 billion—an increase of over $23 billion from the end of fiscal year 2008, and significantly worse than in 2000, when PBGC reported a $10 billion surplus (see figure 6). PBGC estimates that its financial risk for potential termination of underfunded plans sponsored by financially weak firms is about $295 billion, an amount that has continued to worsen since the economic downturn in 2008. The Pension Protection Act of 2006 (PPA)^[1] strengthened some aspects of funding rules, but in response to the recession, subsequent legislation has softened these provisions—initially by phasing in PPA’s changes,^[2] and more recently, through changes in how minimum contributions are calculated.^[3] Thus, while Congress has enacted various provisions to strengthen PBGC’s governance and PBGC has implemented various measures to improve its operations, weaknesses in the structure of its board and its revenue streams continue to undermine the agency’s long-term financial stability. GAO designated the single-employer program as high risk in July 2003, and added the multiemployer program in January 2009.

Congress has recently taken action to strengthen PBGC’s overall management and governance structure, addressing many of the concerns GAO has raised over the years. In July 2012, the Moving Ahead for Progress in the 21st Century Act (MAP-21) became law, with several provisions pertaining to PBGC, including measures to stabilize pension contribution requirements, adjust premium rates, and improve PBGC’s governance^[1]—all areas that GAO has targeted in its previous recommendations for strengthening PBGC. The provisions intended to improve PBGC’s governance include such things as detailing the working relationships between PBGC’s Board of Directors and PBGC’s Inspector General, General Counsel, and Advisory Committee; creating new positions for a Risk Management Officer and a Participant and Plan Sponsor Advocate; requiring an independent peer review of PBGC’s insurance modeling systems, to be conducted annually; and providing for the National Academy of Public Administration to conduct a study and, within a year, make recommendations to Congress regarding PBGC’s governance structure. GAO has long recommended that the composition of PBGC’s board—currently made up of the Secretaries of the Treasury, Commerce, and Labor—be expanded to include additional members with diverse backgrounds who possess knowledge and expertise useful to PBGC’s mission.

PBGC has also taken steps to address several areas of weakness noted in previous GAO reports. For example, in response to concerns about the agency’s management of its assets and to ensure a more disciplined and long-term approach to investment, PBGC issued a new investment policy statement in May 2011. The new statement is more comprehensive than in the past, providing clear organizational accountability, well-defined goals, and risk management parameters. In addition, with proper oversight from the Chief Financial Officer (CFO), PBGC has subsequently aligned its portfolio with these new objectives and has the CFO provide regular reports to the Board of Directors at each board meeting regarding financial and investment-related activities and results. PBGC officials also reported that, consistent with the new requirements under MAP-21, the agency implemented a practice of holding board meetings more regularly, four times a year. Due to improved market conditions since PBGC adopted a new investment policy in May 2011, the agency’s investment income has rebounded from its sharp decline in 2008.

Another area of weakness noted in past GAO reports is the structure of PBGC’s premium rates, which are set by law. Currently, the level of plan underfunding is the only risk factor considered in determining a sponsor’s premium rate. To strengthen PBGC’s finances and encourage companies to preserve sound pensions, in 2011 the Administration proposed legislative reforms calling for the consideration of additional risk factors in how rates are calculated. Such risk factors might include a plan’s investment strategies, benefit structure and benefit level, demographic profile, or the plan sponsor’s financial strength. PBGC has made efforts to enhance understanding of the proposed reforms by analyzing the limitations of the current system, and by modeling various premium options that factor in consideration of a sponsor’s financial health as well as plan underfunding. GAO agrees that incorporation of additional risk factors into a redesign of PBGC’s premium structure could better align rates with a sponsor’s risk of terminating an underfunded plan and placing a future claim on PBGC. However, no action has been taken as yet in response to these proposed reforms.

In light of PBGC’s heavy reliance on contractors, the agency’s contract management practices have long been another area of concern highlighted in several previous reports from GAO and from PBGC’s Inspector General. However, GAO’s recent work in this area found that PBGC has taken several steps to strengthen accountability of its contract management in response to the recommendations in these reports. For example, PBGC has implemented new practices requiring that service contracts more than $100,000 include documentation of the decision to use contractors instead of federal employees, that contract files be reviewed annually, and that staff assigned contract monitoring duties have their performance of these duties reflected in their performance evaluations.

Both Congress and PBGC’s insurance programs have taken significant steps to address many of GAO’s concerns with PBGC’s overall management and governance structure, reflecting increased top-level attention to the challenges facing this agency. Once fully implemented, the changes enacted under MAP-21 and improvements made by PBGC should allow the agency to improve its management and better protect the retirement incomes of workers with private-sector defined benefit pension plans. However, despite these actions, certain challenges related to PBGC’s governance and funding structure remain. PBGC continues to face the ongoing threat of losses from the termination of underfunded plans, while grappling with a steady decline in the defined benefit pension system (with fewer plans participating in the single-employer program with each passing year) and inadequate sources of revenue to finance future claims. As a result, PBGC’s financial future remains uncertain.

To improve the financial stability of PBGC’s insurance programs, Congress should consider taking the following actions:

• adopting further changes to PBGC’s governance structure—in particular, expanding the composition of its Board of Directors;
• authorizing a redesign of PBGC’s premium structure to better align rates with sponsor risk;
• strengthening funding requirements for plan sponsors as the economy improves; and
• working with PBGC to develop a strategy for funding PBGC claims over the long term as the defined benefit sector continues to decline.

Pension Benefit Guaranty Corporation

Pension Benefit Guaranty Corporation

Pension Benefit Guaranty Corporation

Pension Benefit Guaranty Corporation

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Pension Benefit Guaranty Corporation

Pension Benefit Guaranty Corporation

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Pension Benefit Guaranty Corporation

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