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United States Government Accountability Office: GAO: 

Report to the Chairman, Committee on Health, Education, Labor, and 
Pensions, U.S. Senate: 

November 2012: 

Pension Benefit Guaranty Corporation: 

Redesigned Premium Structure Could Better Align Rates with Risk from 
Plan Sponsors: 

GAO-13-58: 

GAO Highlights: 

Highlights of GAO-13-58, a report to the Chairman, Committee on 
Health, Education, Labor, and Pensions, U.S. Senate. 

Why GAO Did This Study: 

At the end of fiscal year 2011, PBGC insured the pension benefits of 
44 million U.S. workers, retirees, and beneficiaries in about 27,000 
private defined benefit plans. PBGC’s 2011 net accumulated deficit of 
$26 billion, coupled with future risks posed by plan sponsors and 
their plans, threatens PBGC’s solvency. To help contain PBGC’s 
deficit, Congress recently passed legislation increasing PBGC 
premiums. Beyond simply increasing rates, the administration has 
proposed granting PBGC authority to redesign its premium structure to 
more fully reflect the risk of new claims. To better understand the 
issues involved, GAO was asked to examine (1) options available to 
adjust premiums to improve PBGC’s financial condition; (2) potential 
implications of adjusting premiums; and (3) potential implementation 
challenges in moving to a more risk-based premium structure. 

To conduct this work, GAO reviewed relevant legislation, analyzed PBGC 
premium data, and interviewed officials implementing other risk-based 
premium structures in this country and the United Kingdom, as well as 
numerous experts and plan sponsors reflecting a broad spectrum of 
perspectives on the topic. 

What GAO Found: 

Various options are available to make the Pension Benefit Guaranty 
Corporation’s (PBGC) premium structure more risk-based and better 
reflect the risk of future claims. Historically, PBGC’s premiums have 
not fully reflected the risks PBGC insures against-—chiefly that a 
plan sponsor with an underfunded plan will become bankrupt, forcing 
the termination of the plan and imposing a claim on PBGC. PBGC’s 
current structure relies largely on a flat-rate premium that is based 
on the number of plan participants and that assesses rates equally per 
plan participant across all sponsors. PBGC also charges a variable-
rate premium that is based on just one risk factor, plan underfunding. 
One available option is to further increase rates within this current 
structure; however, plan underfunding alone is a poor proxy for the 
risk of new claims. An alternative option is to redesign premiums to 
incorporate additional risk factors, such as a sponsor’s financial 
strength (as currently being explored by PBGC) or a plan’s investment 
strategy (as is currently done in the United Kingdom). 

Moving to a more risk-based system would shift premium costs among 
sponsors. To analyze the potential effects of different premium 
structures, PBGC developed a model using data from a sample of about 
2,700 plans. Under one possible option explored by PBGC that 
incorporated an additional risk factor for a sponsor’s financial 
health, financially healthier sponsors would tend to pay less and 
financially riskier sponsors more-—as much as $257 more per 
participant, depending on their assigned risk level. Some pension 
experts and plan sponsors we spoke with raised concerns about this 
potential redistribution of costs. For example, some believe that plan 
terminations would increase. However, prior work from GAO and others 
indicates that other factors-—including sponsor size, collective 
bargaining agreements, and overall plan cost-—are more important in 
sponsors’ decisions to freeze their plans. Some pension experts and 
plan sponsors also noted that a more risk-based system could lead to 
premium increases during poor economic conditions when sponsors are 
least able to pay, and that it is inequitable for current sponsors to 
pay higher rates to address costs resulting from prior plan 
terminations. However, experts also made suggestions about how to 
address such concerns within a redesigned premium structure, such as 
by capping premium levels and averaging sponsors’ funding levels over 
multiple years to reduce volatility. 

The process of redesigning and implementing a more risk-based premium 
structure poses potential data and administrative challenges. To help 
address these challenges, PBGC’s model could be further developed to 
evaluate the implications of incorporating additional risk factors, 
such as company financial health and plan investment mix. Such efforts 
could include identifying any additional data needs, as well as 
exploring the effects on sponsors, including any potentially 
disproportional hardships on smaller companies resulting from 
redistributing higher rates to riskier sponsors based on a redesigned 
structure. Although PBGC is uniquely situated to take on additional 
rate-setting responsibilities, if Congress were to relinquish some 
authority in this area, certain safeguards still may be required to 
help mitigate concerns about PBGC’s governance, oversight, and 
transparency. These safeguards could include additional congressional 
oversight, soliciting public feedback, and establishing an appeals 
process for sponsors who wish to challenge their assessment. 

What GAO Recommends: 

GAO suggests that Congress consider revising PBGC’s premium structure 
to better reflect the agency’s risk from individual plans and 
sponsors, and recommends that PBGC further develop its analyses of 
possible redesign options. 

View [hyperlink, http://www.gao.gov/products/GAO-13-58]. For more 
information, contact Charles Jeszeck at (202) 512-7215 or 
jeszeckc@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Various Options Are Available for More Risk-Based Premiums: 

Moving to a More Risk-Based Structure Shifts Premium Costs to Riskier 
Sponsors: 

Moving to a Risk-Based Premium Structure Poses Various Challenges: 

Conclusions: 

Matters for Congressional Consideration: 

Recommendation for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Recent Legislation Related to the Pension Benefit Guaranty 
Corporation: 

Appendix II: President's Fiscal Year 2013 Budget Proposal for PBGC: 

Appendix III: Further GAO Analyses of a Risk-Based Premium Option: 

Appendix IV: The United Kingdom's Pension Protection Fund's Premium 
Structure: 

Appendix V: Overview of Pension Benefit Guaranty Corporation's Process 
for Calculating Its Deficit: 

Appendix VI: Overview of Pension Benefit Guaranty Corporation's 
Pension Insurance Modeling System: 

Appendix VII: Plan Sponsors and Pension Experts Interviewed: 

Appendix VIII: History of Pension Benefit Guaranty Corporation 
Premiums for the Single-Employer Program, Fiscal Years 1974 to 2012: 

Appendix IX: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Premium Rates under MAP-21: 

Table 2: PBGC's Risk Exposure: 

Table 3: Various Estimates of PBGC's Total Risk Exposure: 

Table 4: Rates under MAP-21 Compared to a Hypothetical Option to 
Adjust PBGC Premiums under the Current Structure: 

Table 5: Different Options to Incorporate Additional Risk Factors into 
Premiums: 

Table 6: Total Premium Rates per Participant (Flat + Variable) under a 
Hypothetical Risk-Based Option: 

Table 7: Premium Rates under Hypothetical Risk-Based Option Compared 
to Rates in Plan Year 2010 and in Plan Year 2015 under MAP-21: 

Table 8: Options Suggested by Experts to Address PBGC's Past Deficit 
Costs Other Than Annual Premium Increases: 

Table 9: Preliminary Joint Committee on Taxation Score of Revenue 
Changes Caused by Surface Transportation Conference Report Related to 
Pension Funding Stabilization and PBGC Premiums Provisions, Fiscal 
Years 2012-2022: 

Table 10: Proposed Budget Savings Listed under PBGC: 

Table 11: Increase in Premium Rates for the Single-Employer Program 
Estimated by PBGC for the President's Fiscal Year 2013 Budget, Fiscal 
Years 2013-2022: 

Table 12: Distribution of Plans by Financial Health and Funded Status 
under a Hypothetical Risk-Based Option: 

Table 13: Number and Percentage of Participants with Premium Rate 
Changes under One Hypothetical Risk-Based Option: 

Table 14: Number and Percentage of Plans with Premium Rate Changes 
under One Hypothetical Risk-Based Option: 

Table 15: Components of the United Kingdom's Pension Protection Fund's 
Premium Formula, Plan Year 2012/13: 

Table 16: Main Components of Assets and Liabilities Included in PBGC's 
Statements of Financial Condition: 

Table 17: PBGC Statements of Financial Condition for its Single-
Employer and Multiemployer Programs, Fiscal Year 2011: 

Figures: 

Figure 1: PBGC's Annual Premium Revenue and Investment Income Compared 
to New Claims for the Single-Employer Program, Fiscal Years 2000-2011: 

Figure 2: Percentage of Sponsors with Premium Rate Changes under 
PBGC's Risk-Based Option Compared with Estimated Rates in Plan Year 
2015 under MAP-21: 

Figure 3: PBGC's Surplus/Deficit for the Single-Employer Program, 
Fiscal Years 1980 to 2011: 

Figure 4: PBGC Actual and Projected Net Financial Position for the 
Single-Employer Program, Fiscal Years 2001 to 2020: 

Abbreviations: 

CAMELS: capital, asset quality, management, earnings, liquidity, and 
sensitivity to market risk: 

CBO: Congressional Budget Office: 

DB: defined benefit: 

ERISA: Employee Retirement Income Security Act of 1974: 

EWP: Early Warning Program: 

FDIC: Federal Deposit Insurance Corporation: 

MAP-21: Moving Ahead for Progress in the 21st Century Act: 

PBGC: Pension Benefit Guaranty Corporation: 

PIMS: Pension Insurance Modeling System: 

PPA: Pension Protection Act of 2006: 

PPF: Pension Protection Fund: 

PRAD: PBGC's Policy Research and Analysis Department: 

UK: United Kingdom: 

[End of section] 

United States Government Accountability Office: Washington, DC 20548: 

November 7, 2012: 

The Honorable Tom Harkin: 
Chairman: 
Committee on Health, Education, Labor, and Pensions: United States 
Senate: 

Dear Mr. Chairman: 

The Pension Benefit Guaranty Corporation (PBGC) is a government 
corporation that was established under the Employee Retirement Income 
Security Act of 1974 (ERISA)[Footnote 1] to protect the pension 
benefits of American workers. As of the end of fiscal year 2011, PBGC 
was responsible for insuring the benefits of nearly 44 million 
workers, retirees, and beneficiaries participating in about 27,000 
private sector defined benefit (DB) plans, but faced an accumulated 
deficit of $26 billion. The bulk of this deficit ($23 billion) is 
attributable to PBGC's single-employer program,[Footnote 2] reflecting 
the disparity between the value of future benefits owed to 
participants of terminated plans insured under this program and the 
funds available to pay for these benefits. PBGC's deficit has 
increased over the last decade--mostly due to the termination of a few 
large, underfunded single-employer DB plans, as well as investment 
losses and declines in interest rates following the economic downturn. 
At the same time, PBGC's financial condition has been adversely 
affected by long-standing structural challenges--including a steady 
decline in the number of private employers sponsoring DB plans and a 
statutory premium structure that does not adequately reflect the risk 
of future claims from plan terminations. [Footnote 3] 

Congress attempted to put the agency on a firmer financial footing by 
strengthening plan funding rules and increasing premium rates for plan 
sponsors through various provisions in the Pension Protection Act of 
2006 (PPA)[Footnote 4] and the Moving Ahead for Progress in the 21st 
Century Act (MAP-21), enacted July 6, 2012, which increased premium 
rates for sponsors of DB plans within the current premium structure. 
[Footnote 5] Despite these developments, PBGC still faces a 
substantial deficit from past claims and exposure to risk of losses 
from future claims that could potentially lead to the agency's 
insolvency. 

One proposal to help address the agency's deficit--specified in the 
President's fiscal year 2013 budget--would give PBGC the authority to 
move to a more risk-based premium structure for plan sponsors 
participating in the single-employer program. To gain a better 
understanding of the advantages and disadvantages of such a proposal, 
you asked us to examine (1) the options that are available to adjust 
premiums to improve PBGC's long-term financial condition, (2) the 
potential implications of these options for plan sponsors and 
participants, and (3) the potential implementation challenges in 
moving to a risk-based premium structure. 

To determine what options are available to adjust PBGC's premium 
structure to improve its future financial condition, we first reviewed 
relevant federal laws pertaining to PBGC's current premiums, including 
increases to premiums made under MAP-21 (see appendix I), and PBGC 
policies for collecting premiums for the single-employer program. We 
then reviewed the President's proposal for more risk-based premiums 
(see appendix II) as well as various academic and policy papers that 
suggest other approaches that might be considered in redesigning 
PBGC's premium structure. We also obtained data from a model PBGC 
developed to illustrate different premium options. We assessed the 
validity of the model's formulas and assessed the reliability of the 
model's data set of 2,699 plans. We used the model's data set to 
conduct further analyses of various options (see appendix III). In 
addition, we interviewed PBGC officials and other federal officials 
from the Department of Commerce, Federal Deposit Insurance Corporation 
(FDIC), the Department of Labor (Labor), and the Department of the 
Treasury about these options, as well as pension officials from the 
United Kingdom's (UK) Pension Protection Fund (PPF)--an agency that 
provides benefit insurance to participants in DB plans and charges 
risk-based premiums to plans sponsors in the UK (see appendix IV). 
[Footnote 6] To better understand how PBGC determines its risk 
exposure for future claims and losses, we obtained information about 
how PBGC calculates its deficit (see appendix V) and how PBGC uses the 
Pension Insurance Modeling System (PIMS) to measure risk and make 
projections (see appendix VI).[Footnote 7] While PBGC's Inspector 
General found problems with some detailed data generated by PIMS, we 
reviewed the PIMS data provided to us and conducted a meeting with 
PBGC officials to discuss the reliability of these data and some of 
the data used in its exposure report. We determined that the PIMS data 
provided to us and used by PBGC in its report were sufficiently 
reliable to provide information on the approximate magnitude of PBGC's 
future financial condition and to generally understand the mechanics 
of premium options. 

To obtain information about the potential implications of different 
premium options for plan sponsors and participants and the potential 
implementation challenges of moving to a risk-based premium structure, 
we interviewed a broad range of pension experts including academics, 
actuaries, business organizations, and labor officials. We also 
conducted interviews with a small judgmental sample of nine plan 
sponsors, selected to reflect an array of characteristics including 
plan size, sponsor financial condition, and union involvement. (See 
appendix VII for a list of organizations and plan sponsors we 
contacted.) 

We conducted this performance audit between July 2011 and September 
2012 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

Background: 

PBGC was established under ERISA, in part, to insure the pension 
benefits of participants in qualified DB plans and pay participants up 
to certain statutory limits should their plans be terminated with 
insufficient funds.[Footnote 8] DB plans provide a benefit that is 
determined by a formula based on various factors specified in the 
plan, such as an employee's salary, years of service, and age at 
retirement. 

PBGC has a three-member Board of Directors, consisting of the 
Secretaries of the Departments of Commerce, Labor, and the Treasury, 
that is charged with providing policy direction and oversight of 
PBGC's finances and operations. PBGC's Director is appointed by the 
President and subject to Senate confirmation.[Footnote 9] Consistent 
with our previous recommendations concerning challenges to PBGC's 
governance,[Footnote 10] the recently enacted MAP-21 included numerous 
provisions to strengthen PBGC's board and governance structure overall 
(see appendix I).[Footnote 11] 

PBGC administers two separate insurance programs: a single-employer 
program and a multiemployer program[Footnote 12] and is charged with 
encouraging continuation of private pension plans, providing for 
timely and uninterrupted payment of participants' pension benefits (up 
to the insured limits) should plans be terminated with insufficient 
funds, and maintaining premiums established under the statute at the 
lowest level consistent with its obligations under ERISA.[Footnote 13] 
PBGC-insured DB plans have been in decline since the 1980s. As of 
2011, PBGC insured about 25,500 single-employer DB plans covering 
about 34 million participants, down from nearly 92,000 plans in 1990. 
During this period, many sponsors have voluntarily terminated their 
plans. These are standard terminations whereby sponsors terminate 
fully funded plans by purchasing a group annuity contract from an 
insurance company, under which the insurance company agrees to pay all 
accrued benefits, or by paying lump-sum benefits to participants if 
permissible.[Footnote 14] An event preceding at least some of these 
terminations was a so-called plan "freeze"--an amendment to the plan 
to limit some or all future pension accruals for some or all plan 
participants.[Footnote 15] Despite these declines, there appears to be 
some lingering strength in the DB system. In its survey of 400 DB plan 
sponsors conducted between October 2011 and December 2011, Towers 
Watson found that although approximately two-thirds of sponsors that 
once offered a DB plan to new hires no longer offer these benefits, 
many active DB sponsors remain committed to offering a DB plan in the 
future.[Footnote 16] 

PBGC Funding and Deficit: 

To finance its operations, PBGC has three key sources of funds: (1) 
pension assets obtained from underfunded, terminated single-employer 
plans which it takes over;[Footnote 17] (2) premiums paid by both 
single-employer and multiemployer plan sponsors; and (3) investment 
income and net gains and losses generated from the investment of these 
funds.[Footnote 18] Figure 1 shows that the annual amount of PBGC's 
new claims in the single-employer program has fluctuated dramatically 
during the last 12 years--sometimes exceeding the amount of premium 
and thereby contributing to persistent deficits.[Footnote 19] As also 
illustrated in figure 1, the amount of premium revenue PBGC has 
collected from plans in the single-employer program has been much less 
volatile than investment return or new claims, growing fairly steadily 
over the last 10 years from $967 million in fiscal year 2002[Footnote 
20] to nearly $2.1 billion in fiscal year 2011.[Footnote 21] 

Figure 1: PBGC's Annual Premium Revenue and Investment Income Compared 
to New Claims for the Single-Employer Program, Fiscal Years 2000-2011: 

[Refer to PDF for image: stacked vertical bar graph] 

Fiscal year: 2000; 
Premium revenue:	$1.032 billion; 
New claims: $0.11 billion. 

Fiscal year: 2001; 
Premium revenue:	$1.025 billion; 
New claims: $1.206 billion. 

Fiscal year: 2002; 
Premium revenue:	$0.967 billion; 
New claims: $4.307 billion. 

Fiscal year: 2003; 
Premium revenue:	$1.141 billion; 
New claims: $7.538 billion. 

Fiscal year: 2004; 
Premium revenue:	$1.712 billion; 
New claims: $3.217 billion. 

Fiscal year: 2005; 
Premium revenue:	$1.65 billion; 
New claims: $10.812 billion. 

Fiscal year: 2006; 
Premium revenue:	$1.586 billion; 
New claims: $1.011 billion. 

Fiscal year: 2007; 
Premium revenue:	$1.577 billion; 
New claims: $0.339 billion. 

Fiscal year: 2008; 
Premium revenue:	$1.399 billion; 
New claims: $0.278 billion. 

Fiscal year: 2009; 
Premium revenue:	$1.875 billion; 
New claims: $8.073 billion. 

Fiscal year: 2010; 
Premium revenue:	$2.275 billion; 
New claims: $0.833 billion. 

Fiscal year: 2011; 
Premium revenue:	$2.072 billion; 
New claims: $0.716 billion. 

Source: GAO analysis of PBGC data. 

Note: Data adjusted for inflation.

[End of figure] 

As of the end of fiscal year 2011, PBGC's single-employer program had 
an accumulated deficit of just over $23 billion, which is the result 
of comparing the value of its assets with the value of its liabilities 
for claims incurred to date.[Footnote 22] Although there are differing 
views about the appropriateness of the assumptions PBGC uses in 
calculating its deficit,[Footnote 23] there is general agreement that 
failure to address various structural challenges could have 
consequences for both PBGC's long-term financial condition and the 
health of the DB system. Market performance and low interest rates 
affect PBGC's financial position, but so, too, have various structural 
challenges, including historically inadequate plan funding 
requirements and premium levels for private DB plan sponsors. For 
example, PPA attempted to strengthen plan funding requirements, but 
these changes were modified or postponed due to the economic downturn, 
resulting in reduced funding for plans. In addition, in previous 
reports on PBGC, we have recommended that PBGC's premium structure be 
re-examined to explore whether premiums could better reflect the risk 
posed by various plans to the pension system.[Footnote 24] In response 
to such concerns, MAP-21 included provisions changing the minimum 
funding rules once again in order to improve pension funding 
stabilization and increased premium rates effective beginning in 2013. 

[Side bar: What Could Happen Should PBGC's Single-Employer Program 
Become Insolvent: 
Because PBGC would be unable to fully pay benefit obligations to its 
insured participants, the insolvency of PBGC's single-employer program 
would potentially threaten the retirement security of millions of 
Americans. Insolvency implies that PBGC's insurance programs will have 
exhausted all assets on hand used to pay benefit obligations to its 
insured participants. If that were to occur, PBGC could no longer rely 
on investment income from these assets or the value of the assets 
themselves to pay these benefits. PBGC would thus become entirely 
dependent on its premium revenue stream to pay benefit obligations. 
Had insolvency occurred in 2011, PBGC would have been unable to pay 
all benefits obligated to participants using only premium revenues. 
That year, PBGC paid nearly $5.5 billion in benefits but only 
collected $2.1 billion in premium income. The last year that PBGC's 
premium revenue exceeded the amounts of benefits paid was 1999, when 
PBGC collected $902 million in premiums and paid $901 million in 
benefits. End of side bar] 

PBGC has reported a net accumulated deficit since 2002. As a result of 
these deficits and structural issues impeding PBGC's ability to 
adequately fund its insurance programs, including the likelihood of 
large, unfunded pension plan terminations, we have included PBGC's 
single-employer program on our high risk list since 2003.[Footnote 25] 
PBGC receives no funds from general tax revenue. However, if at some 
point in the future the agency were to exhaust all of its assets and 
become insolvent, its commitments would not be backed by the full 
faith and credit of the federal government,[Footnote 26] and the 
agency would only have premium revenue to rely on to pay its benefit 
obligations. As a consequence, PBGC could be forced to dramatically 
cut benefit payments to participants, seek federal revenue, or raise 
premiums significantly to meet its benefit commitments. 

PBGC's Current Premium Structure: 

Under the current premium structure for its single-employer program, 
PBGC collects from sponsors a per participant flat-rate premium; a 
variable-rate premium that is based on a plan's level of underfunding; 
and a termination premium from sponsors of single-employer plans that 
terminate their plans under certain circumstances.[Footnote 27] While, 
conceptually, the flat-rate premium uses number of participants as a 
proxy for plan size, to the extent that the premium structure relies 
on flat-rate premiums, sponsors with greater numbers of participants 
pay more toward the cost of covering risk than sponsors with smaller 
numbers of participants, regardless of the ages of the participants, 
the average level of plan benefits, or other risk-related differences. 
To the extent that the premium structure relies on variable-rate 
premiums, sponsors with more underfunded plans pay more toward the 
cost of covering risk than sponsors with better funded plans, 
regardless of the riskiness of the plan assets or the financial health 
of the plan sponsor. As a result, there is concern that the current 
statutory premium structure does not allocate premiums to match the 
variation in risk posed by different plan sponsors. In fact, the heavy 
focus on the flat-rate premium tends to create a cross-subsidy paid by 
financially healthy sponsors to cover the risks posed by sponsors that 
are less financially strong. 

For plan years beginning in 2006, the base flat rate was $30 per 
participant, but with inflation adjustments it was set at $35 for 
2012, and the base variable rate was $9 for every $1,000 of plan 
underfunding. Under provisions enacted in MAP-21, rates were increased 
within this same premium structure. The flat-rate premium begins to 
rise in 2013, and then the variable-rate premium begins to rise in 
2014, subject to a limit (see table 1).[Footnote 28] 

Table 1: Premium Rates under MAP-21: 

Rate type: Flat rate (per participant); Rates by plan year: 
2011: $35[A]; 
2012: $35[A]; 
2013: $42; 
2014: $49; 
2015: (indexed)[B]. 

Rate type: Variable rate (per $1,000 of unfunded vested benefits)[C]; 
Rates by plan year: 
2011: $9; 
2012: $9; 
2013: $9 or more based on indexing[C]; 2014: $13 or more based on 
indexing[C]; 2015: $18 or more based on indexing[C]. 

Sources: MAP-21, Pub. L. No. 112-141, § 40221, 126 Stat. 405, 850-52. 

[A] This reflects the base rate of $30 adjusted for inflation. 

[B] After 2014, rates will be indexed based on increases in the 
national average wage index, as determined by the Social Security 
Administration, and then rounded to the nearest whole dollar. 

[C] Though calculated based on the amount of underfunding, the 
variable rate is subject to a per participant limit of $400 for 2013, 
with indexing based on increases in the national average wage index, 
as determined by the Social Security Administration. In addition, MAP-
21 provided for an additional $4 increase in plan year 2014 and an 
addition $5 increase in plan year 2015. 

[End of table] 

Historical Premium Rates Have Been Inadequate to Cover Claims: 

Historically, PBGC's premiums have not fully reflected the risks PBGC 
insures against--chiefly that a plan sponsor with an underfunded plan 
will become bankrupt, forcing the termination of the plan and imposing 
a claim on PBGC.[Footnote 29] Risks related to claims already incurred 
in the past depend on such factors as the PBGC's own investment 
strategy, stock market returns and interest rate fluctuations, and the 
possibility of longevity improvements that are greater than expected 
(see table 2). 

Table 2: PBGC's Risk Exposure: 

Type of risk: New claims risk; 
Description: PBGC exposure is based on several factors: 
* plan sponsor behavior with regard to maintaining plans, funding 
plans, and investing (allocating) plan assets; 
* size of new claims; 
* economic conditions, including the level of bankruptcies, stock 
market returns, and interest rates; 
* adequacy of premium levels, either set by Congress or by PBGC if 
granted such authority. 

Type of risk: PBGC financial risk; Description: PBGC exposure is based 
on several factors: 
* PBGC's investment strategy; 
* stock market returns and interest rate movements; 
* participant longevity improvements greater than expected. 

Source: GAO analysis of PBGC's 2010 Exposure Report. 

[End of table] 

PBGC has estimated that if premium rates were kept at fiscal year 2011 
levels,[Footnote 30] total premium revenue from single-employer plans 
over the next 10 years would be less than the amount of expected new 
claims. In addition, many pension experts and the administration 
believe that PBGC premiums have been much lower than what a private 
financial institution would charge for insuring the same risk and are 
insufficient for PBGC to meet its long-term obligations. Indeed, one 
study estimated that the overall premiums collected by PBGC are equal 
to about 50 percent of what a private insurer would charge because its 
premiums do not adequately account for risks.[Footnote 31] To set 
premiums at a level sufficient to cover PBGC's total risk exposure 
would require an analysis of total risk. Several methods have been 
used to estimate PBGC's total risk exposure with widely varying 
results, as described in table 3. 

Table 3: Various Estimates of PBGC's Total Risk Exposure: 

Estimation method: Credit ratings of sponsors with underfunded plans; 
Description: Estimate risk exposure from underfunding by plan sponsors 
whose credit ratings are below investment grade or that meet one or 
more financial distress criteria. PBGC already performs this analysis 
by classifying these sponsors' underfunded plans as reasonably 
possible terminations. 

Estimation method: Market value of insurance; Description: Estimate 
risk exposure from the price a private insurer would charge. In a 2005 
report, the Congressional Budget Office (CBO) estimated PBGC's risk 
exposure using this method based on the price that a private insurer 
would charge to accept the insurance obligations of PBGC for all plans 
that terminate over a given time period.[A] 

Estimation method: Total unfunded liabilities; Description: Estimate 
PBGC's risk exposure by calculating the agency's total potential 
liabilities from underfunding in all PBGC-insured plans, whether these 
unfunded liabilities are vested or not, and estimate the risk 
associated with those liabilities. 

Source: GAO analysis of reports and data related to PBGC's total risk 
exposure. 

[A] U.S. Congressional Budget Office, The Risk Exposure of the Pension 
Benefit Guaranty Corporation (Washington, D.C.: September 2005). 

[End of table] 

Each method provides quantifiable insight into the extent of PBGC's 
risk exposure. For example, in fiscal year 2011, PBGC estimated that 
its risk exposure to reasonably possible terminations in its single-
employer program totaled approximately $227 billion, an increase from 
$170 billion the previous year. Further, PBGC estimated that the total 
unfunded liabilities in all PBGC-insured plans were $415 billion in 
fiscal year 2010.[Footnote 32] CBO estimated that in 2005, the present 
value of PBGC's net costs for DB pension insurance for single-employer 
plans over 10 years was about $87 billion. Total costs for the 
insurance for 15-and 20-year time horizons were $119 billion and $142 
billion, respectively.[Footnote 33] 

In addition, the CBO has proffered several methods for establishing 
the target level of premium revenue to be generated. One possibility 
is to adopt what CBO describes as an "actuarially fair premium 
structure"--that is, one that would equate the present value of 
expected premium revenues with the present value of expected costs to 
PBGC. Notably, based on CBO's 2005 analysis, a uniform risk premium--
one that increases both the flat-and variable-rate portions of 
current-law premiums by a fixed proportion[Footnote 34]--would yield 
premium charges that were 6.5 times larger than rates in effect in 
2005 to be comparable to premiums charged in a private insurance 
market to cover PBGC's insurance obligations, with a flat rate of 
$123.50 per participant per year and a variable rate of $58.50 per 
$1,000 of underfunding. 

Various Options Are Available for More Risk-Based Premiums: 

Various options are available to make PBGC's statutory premium 
structure more risk-based to better reflect the risk of future claims 
and improve PBGC's financial condition. On July 6, 2012, the President 
signed into law MAP-21, which included provisions calling for rate 
increases within PBGC's current premium structure for all single-
employer plan sponsors insured by PBGC.[Footnote 35] Historically, the 
bulk of premium revenue has been generated from the flat-rate 
component of the premium (tied to the number of plan participants) 
that assesses rates equally per capita across all sponsors regardless 
of risk. The variable-rate component of the premium reflects plan and 
sponsor risk to some extent, but has been based solely on just one 
risk factor, plan underfunding; however, plan underfunding alone is a 
poor proxy for the risk of a new claim, as it does not take into 
account the sponsor's financial health. PBGC has concluded from its 
own analysis that the sponsor's financial health is a better predictor 
of a future claim. There are numerous options available for 
incorporating this risk factor, as well as others, into the variable 
rate, which could help account for greater levels of risk posed to 
PBGC by certain plans and sponsors, as is done by other insurance 
agencies in the United States and abroad. For example, the FDIC, which 
provides deposits insurance, has used a risk-based premium system 
since 1993. In addition, the UK's pension insurer determines its 
premiums based on a risk factor for a plan's asset investment mix, as 
well as the sponsor's financial strength. 

Adjusting Premiums within the Current Structure: 

Even within the current structure, rates could be adjusted to become 
more risk-based and help PBGC to increase its revenues. By increasing 
the proportion of revenues generated from the variable rate rather 
than the flat rate, and increasing rates overall--such as provided 
under MAP-21--the higher premium costs would be shifted more to 
sponsors with plans that are more underfunded (see table 4). Such an 
option would be more risk-based than in the past, and could help 
reduce the growth of PBGC's deficit while providing greater incentive 
to sponsors to fully fund their plans. 

Table 4: Rates under MAP-21 Compared to a Hypothetical Option to 
Adjust PBGC Premiums under the Current Structure: 

New premium structure provided for in the Moving Ahead for Progress in 
the 21st Century Act[A]; 
Flat rate per participant: $49 by plan year 2014 indexed thereafter; 
Variable rate per $1000 of plan underfunding: $18 by plan year 2015 
indexed thereafter; 
Description: 
* Phase-in of rate increase; 
* Revenue estimated over 10 years; 
* The variable rate is limited to $400 per participant for plan year 
2013 with indexing thereafter; 
* $9 billion in additional premium revenue generated[B]; 
* 58 percent of additional premium revenue attributable to increase in 
flat rate; 
* 42 percent of additional premium revenue attributable to increase in 
variable rate. 

Option to increase rates under the current structure[C]; Flat rate per 
participant: Flat rate increased so that the increase to total premium 
revenue is evenly distributed between the flat rate and variable rate; 
Variable rate per $1000 of plan underfunding: Variable rate increased 
so that the increase to total premium revenue is evenly distributed 
between the flat rate and variable rate; Description: 
* No phase-in of rate increase; 
* Revenue estimated on annual basis over 8 years; 
* $16 billion in additional premium revenue generated ($2 billion 
annually)[D]; 
* 50 percent of additional premium revenue attributable to the flat 
rate; 
* 50 percent of additional premium revenue attributable to the 
variable rate. 

Source: GAO analysis of documents related to PBGC premiums. 

[A] MAP-21, § 40221, 126 Stat. 405, 850-852 (2012). 

[B] Revenue increase compared to plan year 2012 rates. 

[C] For this option, rates were generated by PBGC using a hypothetical 
model created to explore the effects of different premium options on 
rates and premium revenue. PBGC's hypothetical model used plan year 
2010 data from PBGC's premium database and did not incorporate any 
projections about future levels of plan funding or participant counts. 
This hypothetical option increases rates within the current premium 
structure without incorporating additional risk factors. 

[D] Revenue increase compared with estimates under plan year 2010 
rates. 

[End of table] 

To explore this option, PBGC developed a model to illustrate the 
various ways premiums could be adjusted to meet different revenue 
targets over varying lengths of time by increasing either the flat 
rate or the variable rate, or both, by certain percentages.[Footnote 
36] The model used standard quantitative techniques to show how 
different premium options would affect rates and generate premium 
revenue over time without a rate phase-in--the model did not use PIMS 
for its calculations. PBGC officials stressed that their model is 
purely hypothetical and not intended as a policy proposal. However, by 
way of illustration, PBGC used the model to generate one scenario 
whereby the additional revenue would be obtained in equal amounts from 
increases in both the flat and variable rates over 8 years to meet the 
administration's proposed $16 billion premium revenue target. Under 
this scenario, PBGC estimated that to reach the annual $2 billion 
revenue target in the first year without a rate phase-in, premium 
revenue from both the flat rate and variable rate would have to 
increase by 77 and 76 percent, respectively. We estimated that under 
this option, the flat rate would increase to $62 per participant and 
the variable rate to nearly $16 per $1,000 of plan underfunding. 
[Footnote 37] Under this option, 50 percent of the premium revenue 
increase is attributable to the variable rate compared to 47 percent 
under MAP-21 rates. However, the only risk factor incorporated into 
the variable rate under both this option and MAP-21 is plan 
underfunding. 

Alternative Options to Incorporate Additional Risk Factors into 
Premiums: 

Other premium options could more fully take into account the agency's 
exposure to the risk of new claims by incorporating other risk 
factors. PBGC's risk could be better mitigated through alternative 
premium options that incorporate other risk factors into the variable 
rate to more fully take into account the agency's exposure to the risk 
of future losses. Because the variable-rate premium is currently based 
solely on plan underfunding, it does not capture the agency's overall 
risk as well as it could if additional risk factors were also taken 
into consideration, such as a plan's investment strategies, benefit 
structure and benefit level, demographic profile, or the plan 
sponsor's financial strength. [Footnote 38] By incorporating these 
additional risk factors into PBGC's rates and collecting 
proportionally greater amounts of revenue from plan sponsors posing 
greater risk to the agency, PBGC premiums could be better aligned with 
the continuum of risk facing the agency. The incorporation of 
additional risk factors to PBGC's premiums would require congressional 
action. 

PBGC has conducted analyses showing that measures of underfunding are 
not a reliable predictor of plan termination and future claims on the 
agency. In these analyses, PBGC reviewed funding levels for plans that 
had terminated from fiscal years 2009 to 2011,[Footnote 39] and found 
the average termination funding level was about 54 percent on the date 
of termination. For the year previous to termination, the average 
funding level measurement on which the variable-rate premium was 
calculated for these plans was about 84 percent. Because of the 
differences found in a plan's funding-level measurements, PBGC 
officials believe that measures of a sponsor's financial strength--
determined using credit scores or Dun & Bradstreet scores--are a 
better predictor of new claims than underfunding. 

Much like premiums set by insurance companies,[Footnote 40] PBGC 
premium rates could be set based on individual risk profiles for 
sponsors and their plans. As with any premium structure, risk-based 
premiums could be designed to address only the risk of new costs that 
PBGC will incur from future claims, or they could be designed to help 
address PBGC's risk of future insolvency, which also reflects deficit 
costs from past terminations. In addition to helping PBGC stabilize 
its deficit, incorporating additional risk factors into premiums could 
help PBGC to better manage risk by raising proportionally greater 
amounts of revenue from financially riskier sponsors whose plans are 
underfunded, and provide an incentive to sponsors to fully fund their 
plans and reduce other risk factors under their control, such as 
through plan asset allocation. Possible approaches for incorporating 
additional risk factors into PBGC's premium structure are described 
further below, along with information on the approach used by the FDIC 
for banking institutions (see table 5). 

Table 5: Different Options to Incorporate Additional Risk Factors into 
Premiums: 

Premium option: Option to incorporate additional risk factor for 
sponsor financial health[A]; 
Flat rate: $44 per participant; 
Variable rate with additional risk factors: Variable rate incorporates 
additional risk factor for sponsor financial health; Description: 
* No phase-in of rate increase; 
* Variable rate calculated on a per participant basis; 
* Rates capped at four times plan year 2010 rates on a per participant 
basis; 
* Revenue estimated on annual basis over 8 years; 
* $16 billion in additional premium revenue generated ($2 billion 
annually)[B]; 
* 16 percent of additional premium revenue attributable to the flat 
rate[C]; 
* 84 percent of additional premium revenue attributable to the 
variable rate[C]. 

Premium option: Option to use different methods to calculate premiums 
based on size of institution (FDIC); Flat rate: n/a; 
Variable rate with additional risk factors: Risk premium incorporates 
risk factors for size and financial strength; Description: 
* Different methods used to calculate premiums based on the size of 
the institution; 
* Premiums are generally set based on a bank; 
* 's aggregate assets (funding level) and supervisory rating 
(financial strength); 
* Premiums based on bank placement into one of four risk categories; 
* Premiums range set to meet annual revenue target needed to insure 
against identified risk; 
* Premium rates can change quarterly through monitoring of bank 
capitalization and supervisory data. 

Premium option: Option to incorporate additional risk factor for plan 
investment strategy (UK's PPF); 
Flat rate: Plan-based premium (comparable to PBGC flat-rate premium) 
targeted to meet revenue estimated; Variable rate with additional risk 
factors: Risk-based premium (comparable to PBGC variable-rate premium) 
incorporates risk factors for plan underfunding, sponsor insolvency, 
and plan asset investment risk; 
Description: 
* Both a plan-based (flat) and risk-based premium charged to sponsors; 
* Premium rates set for 3 years; 
* Scaling factor used to adjust risk-based premiums to meet 3-year 
revenue target; 
* 10 percent of premium revenue attributable to plan-based premium and 
90 percent attributable to risk-based premium; 
* Smoothing techniques used to adjust premium rates to account for 
adverse economic conditions. 

Source: GAO analysis of documents related to PBGC, FDIC, and PPF 
premiums. 

[A] For this option, rates were generated by PBGC using a hypothetical 
model created to explore the effects of different premium options on 
rates and premium revenue. PBGC's hypothetical model used plan year 
2010 data from PBGC's premium database and did not incorporate any 
projections about future levels of plan funding or participant counts. 

[B] Revenue increase compared with estimates under plan year 2010 
rates. 

[C] These percentages are for revenue increases attributable to the 
flat and variable rate before applying the four times plan year 2010 
per participant rate cap provided under the President's proposal. 

[D] The PPF refers to plans as schemes and premiums as levies. For the 
purpose of this report, we continue to use plans and premiums when 
discussing PPF's premium framework. 

[End of table] 

Modeling More Risk-Based Options under the President's Proposal: 

The President's 2013 budget proposes to reform how PBGC premiums are 
determined by giving the PBGC board the authority to take into account 
the risks that different sponsors pose to their retirees and to PBGC. 
The President's budget proposes raising $16 billion in additional 
premium revenue over a 10-year period, from 2013 to 2022, and would 
require a year of study and public comment before any implementation 
and the gradual phasing in of any increases due to changes in the 
premium structure. To reach this target over this period, the 
administration proposed limiting the premium increase to $4 billion in 
additional flat-rate premiums and $12 billion in additional variable-
rate premiums. By way of comparison, the increases under MAP-21 are 
estimated to generate $5.1 billion from the flat rate and $3.8 billion 
from the variable rate over the same period. By relying more heavily 
on variable-rate premiums than under MAP-21, the President's proposal 
would result in sponsors posing greater risk to PBGC paying higher 
premiums, and sponsors posing less risk to PBGC paying lower premiums. 

PBGC used its model to explore one possible approach to incorporating 
an additional risk factor into the variable-rate premium to illustrate 
how the mechanics of a more risk-based option might work. Under this 
option, the variable rate for each plan is calculated based on a 
combination of risk factors, including sponsor financial health, to 
meet the President's $16 billion premium revenue target. The financial 
health of a plan sponsor would be taken into account in tandem with 
the funded level of a plan to enhance the extent to which risk is 
accounted for in the premium structure. For the financial health 
factor, PBGC assigned a measure on a scale of 1 to 5 based on the 
plan's Dun & Bradstreet credit risk ranking or the lower of the plan's 
available Standard & Poor's or Moody's credit ratings. PBGC then 
combined these scores with scores based on the plan's level of funding 
to assign a corresponding variable rate used for calculating the 
premium. 

In developing this hypothetical risk-based option, PBGC set rates to 
reach the $16 billion target over 8 years by raising an additional $2 
billion in premium revenue over plan year 2010 premiums without a 
phase-in period. To accomplish this, PBGC constructed a scenario 
whereby the flat rate would increase from $35 to $44 per participant, 
and the variable rate would increase on a per participant basis rather 
than on the dollar amount of plan underfunding. Specifically, PBGC 
weighted the variable rate on a sliding scale that increased as plan 
funding weakened and decreased with stronger financial health of the 
sponsor (see table 6). The flat and variable rates were combined into 
a single rate and then capped on a per participant basis, as under the 
President's proposal, to be not more than four times the premium rates 
in plan year 2010.[Footnote 41] (See appendix III for additional GAO 
analyses of this premium option.) 

Table 6: Total Premium Rates per Participant (Flat + Variable) under a 
Hypothetical Risk-Based Option: 

Financial health: Extremely healthy (1); Funded status: 
(1): 120% funded: $44; 
(2): 90 to under 120% funded: $44; (3): 75% to under 90% funded: $69; 
(4): Less than 75% funded: $94. 

Financial health: Very healthy (2); Funded status: 
(1): 120% funded: $44; 
(2): 90 to under 120% funded: $44; (3): 75% to under 90% funded: $94; 
(4): Less than 75% funded: $144. 

Financial health: Healthy (3); 
Funded status: 
(1): 120% funded: $74; 
(2): 90 to under 120% funded: $104; (3): 75% to under 90% funded: 
$119; (4): Less than 75% funded: $194. 

Financial health: Risky (4); 
[Empty]; 
Funded status: (1): 120% funded: $124; (2): 90 to under 120% funded: 
$204; (3): 75% to under 90% funded: $244; (4): Less than 75% funded: 
$444. 

Financial health : Very risky (5); Funded status: 
(1): 120% funded: $134; 
(2): 90 to under 120% funded: $224; (3): 75% to under 90% funded: 
$269; (4): Less than 75% funded: $494. 

Source: PBGC. 

[End of table] 

However, PBGC's estimates under the risk-based option could be 
adjusted in various ways. For example, the premium rates shown in 
table 6 that are used in the model could be changed based on the 
underfunding and financial strength risk factors. Different rates 
could be applied to increase or decrease the weight given to plan 
underfunding or a sponsor's financial health. Any combination of 
weighting could be applied to test different policy options (i.e., 
greater weight reflected in the rate for financial weakness). Further, 
the model's rates could be set to track with the actual risk of new 
claims. If PBGC chose to change any of the rates based on an analysis 
of historical funding and financial health data correlated with actual 
claim patterns, these rates could vary for certain sponsors who pose 
greater risk to PBGC. This option in its current form does not 
directly take into account other risk factors associated with 
different plans' asset investment mixes, the size of a plan relative 
to the size of its sponsor, and the level of plan benefits and 
demographic profile of plan participants.[Footnote 42] In addition, as 
with the hypothetical option to increase rates under the current 
structure, the rates generated under the risk-based option are based 
on plan year 2010 plan funding and participant counts, and do not 
include any phase-in of rates or changes to assumptions on future 
funding levels or participant counts. PBGC could incorporate these 
other risk factors into the model, and change funding and participant 
count assumptions to allow a rate phase-in to further fine tune the 
distribution of the combined underfunding and financial health scores 
and the associated premium rates. However, PBGC officials emphasized 
that the purpose of generating this option was purely to illustrate 
one hypothetical scenario of how rates could be redesigned to 
incorporate the additional risk factor of a sponsor's financial health 
to raise additional premium revenue and to distribute premiums more in 
line with the risk posed by different plan sponsors--it is not a 
policy proposal, and the agency has no plans at this time to conduct 
further analyses to incorporate additional risk factors. 

FDIC's Risk-Based Premiums: 

FDIC, a federal corporation that insures the deposits of all federally 
insured depository institutions, has long used risk-based premiums to 
help insure depositors against the risk of loss. In 1993, FDIC adopted 
a risk-related premium system, which was designed to reduce the cross-
subsidy that stronger banks implicitly provided to weaker banks under 
its previous flat-rate premium system. The new system was intended to 
provide proper incentives for risk taking, whereby banks who pose a 
higher risk have a higher premium rate. FDIC's risk-based premiums are 
based primarily on two factors: aggregate assets and a composite 
supervisory rating reflecting capital, asset quality, management, 
earnings, liquidity, and sensitivity to market risk (referred to as 
"CAMELS").[Footnote 43] FDIC sets a premium target range--which it 
refers to as a designated reserve ratio--that is a percentage of 
insured deposits based on historical loss information; the premium 
target range permits FDIC to take account of different economic 
conditions. Banks pay different rates that add up to the target based 
on their placement in four risk categories arrived at by analyzing 
their capitalization (which is roughly equivalent to a bank's funding 
level) and their CAMELS rating (which is roughly equivalent to a 
bank's financial health). Following the economic crisis of 2008, FDIC 
began to reconsider risk-based pricing methods for large banks, taking 
into account the risks that caused severe problems for large banks. 
Effective in the second quarter of 2011, FDIC began assessing the 
risks posed by larger banks differently than smaller institutions, by 
basing their evaluation on more forward looking risk metrics and by 
requiring higher-risk banks to pay higher premiums when the bank 
assumes the risk rather than paying when conditions deteriorate. In 
addition, the FDIC charged a higher premium rate for large banks with 
high asset concentrations and less stable balance sheet liquidity. 

The UK's DB Premium Framework: 

At least one country has already moved to a more risk-based system for 
determining premium rates. The UK's Pension Protection Fund (PPF)--the 
government corporation responsible for insuring benefits to 
participants of DB plans--already incorporates additional risk factors 
into its premium structure. [Footnote 44] The PPF premium, referred to 
as a pension protection premium, [Footnote 45] has two components: a 
risk-based premium and a plan-based premium. The risk-based premium is 
based on the likelihood of a plan making a claim on the PPF (which PPF 
terms "insolvency risk") and the potential size of that claim (which 
PPF terms "underfunding risk"). PPF uses the Dun & Bradstreet failure 
score--a measure of the likelihood of sponsor bankruptcy--as the risk 
factor for determining a sponsor's insolvency risk.[Footnote 46] 
Beginning with plan year 2012/13, the PPF will also consider a plan's 
investment strategy to adjust underfunding risk when calculating a 
plan's premium. (See appendix IV for a description of the components 
of PPF's premium formula.) The PPF then uses a premium scaling factor 
to calculate a plan's premium to meet a certain revenue target. 
[Footnote 47] 

For plan year 2011/12, all sponsors with plans funded up to 155 
percent had underfunding risk calculated--thereby paying a risk-based 
premium[Footnote 48]--with the underfunding risk factor used for a 
plan decreasing as its funding level increases. Sponsors whose plans 
were funded at or above 155 percent did not pay a risk-based premium. 
For the 2012/13 plan year, plan underfunding will be calculated using 
5-year averages--referred to as smoothing[Footnote 49]--for plan 
assets and liabilities, and will for the first time take a plan's 
investment strategy into account, adjusting a plan's underfunding risk 
based on the plan's level of investment risk. The risk-based premium 
is also capped to protect the most vulnerable plans.[Footnote 50] 
Prior to the 2012/13 plan year, the plan-based premium was also based 
on a plan's estimated liabilities to its participants. Starting with 
the 2012/13 plan year, the plan-based premium will be based on a 
plan's smoothed liabilities to its participants and on a premium 
multiplier to cover the costs to the agency of capping the highest 
risk-based premiums, which should amount to about 10 percent of the 
total premium.[Footnote 51] 

The PPF premium framework differs in a number ways from PBGC's current 
premium structure and from other proposals to redesign PBGC premiums. 
Key features include the following: 

* Equitable basis of PPF's plan-based levy. The plan-based premium 
used prior to the 2012/13 plan year can be considered, essentially, 
PPF's version of PBGC's flat-rate premium. The difference is that 
PBGC's flat-rate premium is calculated on a per participant basis, 
whereas PPF's plan-based premium is a percentage of the liability owed 
to participants. The percentage of liability approach is a more 
equitable distribution in the sense that it is based on the total 
liability owed by a plan to its participants, rather than on a plan's 
participant count (a plan could have many participants but a 
relatively small liability, or few participants but a very large 
liability, so that the number of participants per se has limitations 
as a measure of exposure). For example, consider two plans with the 
same number of participants, but one has a liability twice as large as 
the other (either because of more generous benefits or costlier 
demographics). Although, all other things being equal, the plan with 
greater liability is riskier, under its current premium structure, 
PBGC would charge both plans the same fixed premium, whereas PPF would 
have charged a larger plan-based premium to the plan with greater 
liabilities. 

* Proportionality in PPF's underfunding factor. In the risk-based 
premium option modeled by PBGC, a plan's funded status is represented 
by its funded ratio (the ratio of plan assets to plan liabilities). 
The variable rate applied to that plan is, in part, determined using 
that ratio to assign the sponsor to one of the designated risk premium 
categories and the rate is then applied on a per participant basis. In 
contrast, the PPF represents funded status by the actual financial 
value of the unfunded liability of each plan and does not assign a 
plan to a funded category, but instead applies a premium directly to 
the unfunded amount (similar to the current PBGC variable-rate 
premium), so that the premium charged is more proportional to the 
individual unfunded exposure of the plan. By being directly linked to 
the level of underfunding in each individual plan, PPF's premium may 
more accurately reflect the level of risk posed by plans than the 
hypothetical approach modeled by PBGC. 

* Linkage of PPF premiums to long-term funding strategy. PPF publishes 
a long-term funding strategy, which sets out how the agency intends to 
have the financial resources needed to pay existing levels of 
compensation to current and future PPF participants and become 
financially self-sufficient by 2030.[Footnote 52] Integral to its 
funding strategy, PPF monitors how its premiums might need to change 
under different economic circumstances in order to meet its funding 
target.[Footnote 53] Although PBGC publishes its annual Exposure 
Report--which estimates future claims and premium revenues--it does 
not currently have the statutory authority to change rates based on 
these estimates to meet specific revenue targets. 

* Proportionality and effectiveness of including plan asset allocation 
as a risk factor. Although new for PPF and therefore untested, 
incorporating this significant risk factor into rates could better 
align premiums with risk and could also provide an incentive for 
sponsors to use less risky asset allocations. 

In addition, there are differences related to risk premium caps 
between PPF's framework and PBGC's proposed risk-based premium that 
could potentially have distributional effects on rates and premium 
levels. The cap on PPF's risk-based premium is 75 basis points (.75 
percent) of the plan's liability to its participants. This compares to 
the administration's proposal for a different type of cap for PBGC 
whereby premiums would be limited to four times a sponsor's plan year 
2010 premiums on a per participant basis and the new $400 per 
participant variable-rate limit set by the recent legislation. How 
premium caps are calculated could change the distributional pattern of 
the amount of premiums sponsors would pay under different premium 
options, and could adjust the total amount of revenue collected by 
PBGC under these options. 

Moving to a More Risk-Based Structure Shifts Premium Costs to Riskier 
Sponsors: 

Compared to the distribution of costs under the current structure, 
premium costs would be redistributed to those sponsors posing greater 
risk to PBGC under a more risk-based structure. For example, if the 
financial health of the plan sponsor were included as a risk factor, 
financially risky sponsors would pay more, while financially healthy 
sponsors would pay less. This risk-based structure would decrease the 
cross-subsidization present in the current premium structure that 
relies largely on the flat rate charged to all sponsors based on 
number of participants no matter the level of risk they pose. Pension 
experts and plan sponsors we spoke with raised various concerns about 
this redistribution of costs. For example, some voiced concerns that 
higher premiums might increase the frequency of plan freezes[Footnote 
54] and terminations; however, our previous work indicates that, 
generally, this would be unlikely. Some noted that depending on the 
way risk is incorporated, premiums could rise during recessions when 
financially weak companies are least able to bear the costs, 
especially smaller companies. Some also expressed concern about the 
equity of various premium redesign options, especially those that 
require current sponsors to pay higher premiums to address PBGC's 
deficit for prior plan terminations. Experts and officials suggested 
various ways to address such concerns. 

Financially Risky Sponsors Would Be Charged Higher Premiums: 

Under a more risk-based structure that included sponsor financial 
health as a risk factor, premium costs would be redistributed to 
better reflect the risk posed by each plan sponsor. To better 
understand the implications of moving to one such more risk-based 
structure, we analyzed the data provided in PBGC's sample of 2,699 
plans to determine the range of per participant rates sponsors would 
pay under PBGC's hypothetical risk-based option compared with rates in 
plan year 2010 and the increases scheduled to be in place in 2015 as a 
result of MAP-21. As summarized in table 7, compared with rates in 
2010, minimum rates are higher across the board under both the new law 
and the more risk-based option, while the maximum rates are lower due 
to the adoption of a variable-rate limit (no more than $400 per 
participant under MAP-21 and four times the per participant rate paid 
in plan year 2010 for the hypothetical risk-based option). In a 
comparison of rates under the risk-based option with estimated rates 
under MAP-21 in plan year 2015, those with plans that are well funded 
(that is, funded at 120 percent or more) could see their rates 
decrease slightly ($44 vs. $49) if they are financially healthy, while 
their rates could more than double ($134 vs. $49) if they are 
categorized as very risky. Among those with plans that are poorly 
funded (that is, funded at less than 75 percent), sponsors could see 
higher rates under the more risk-based structure depending on whether 
they are financially healthy or not ($94 to $494 vs. $57 to $449). For 
example, a poorly funded plan that is very risky could see its rates 
increase as much as $257 per participant. 

Table 7: Premium Rates under Hypothetical Risk-Based Option Compared 
to Rates in Plan Year 2010 and in Plan Year 2015 under MAP-21: 

Dollars per participant: 

Plan year 2010 rates[B]; 
Range of premium rates among plans in sample[A]: Greater than 120% 
funded: $35[C]; 
Greater than 90% to under 120% funded: $35-$315[C]; 75% to under 90% 
funded: $38-$708; Less than 75% funded: $39-$2,481. 

Plan year 2015 rates under MAP-21 (estimated)[D]; Greater than 120% 
funded: $49; 
Greater than 90% to under 120% funded: $49-$449; 75% to under 90% 
funded: $54-$449; Less than 75% funded: $57-$449. 

PBGC's hypothetical risk-based option (incorporates additional risk 
factor for financial health)[E]; 
Range of premium rates among plans in sample[A]: Greater than 120% 
funded: $44-$134; Greater than 90% to under 120% funded: $44-$224; 75% 
to under 90% funded: $69-$269; Less than 75% funded: $94-$494. 

Source: GAO analysis of PBGC data from a sample of defined benefit 
plans used in PBGC's hypothetical premium model. 

[A] PBGC's model used plan year 2010 data from a sample of 1,114 
sponsors of 2,699 DB plans covering 27.5 million participants. The 
model covered 81 percent of all PBGC insured participants (33.8 
million) in 2010. 

[B] To calculate the per participant rates for plan year 2010, PBGC 
divided the total premiums each plan paid in plan year 2010 by the 
participant count for that plan. To calculate the range of premium 
rates by funding level, we grouped PBGC's per participant rates data 
for each plan into the four funding categories PBGC used in its 
hypothetical premiums model. 

[C] In several instances, PBGC's model used 2009 data to calculate per 
participant rates for sponsors. Since the flat rate was $34 per 
participant in 2009, the lower bound of the per participant rate 
calculated for plans funded at 90 percent or greater--plans that are 
not required to pay a variable-rate premium--was $34. We choose to 
limit our analysis of PBGC's model to data from 2010. 

[D] Pub. L. No. 112-141, 126 Stat. 405 (2012). Rates under MAP-21 for 
2015 are estimated using data from PBGC's premium model, including 
participant and underfunding levels from 2010. We estimated rates by 
placing a limit of $400 on the variable rate on a per participant 
basis as required under the new law and by grouping per participant 
rates data for each plan into the four funding categories PBGC used in 
its hypothetical premiums model. 

[E] Rates under this option are affected by both the aggregate funding 
level for a sponsor's plan and the sponsor's financial health rating. 
To calculate the per participant rates for the risk-based option, PBGC 
used plans' funding levels and participant counts from its plan year 
2010 premium database and incorporated financial health data for each 
sponsor. Based on a plan's funding level and the financial health of 
the plan's sponsor, PBGC assigned each plan to a risk category that 
carried a specific per participant rate. To calculate the range of 
premium rates by funding level, we grouped PBGC's per participant 
rates data for each plan into the four funding categories PBGC used 
for this option in its hypothetical premiums model. 

[End of table] 

To determine how these rate changes would be redistributed at company 
level, rather than at plan level, we aggregated the data in PBGC's 
sample by sponsor. We found that the 2,699 plans in the sample were 
sponsored by 1,114 different companies. As summarized in figure 2, our 
analysis suggests that for the two-thirds of companies that were 
ranked more financially healthy (that is, sponsors whose financial 
health is considered extremely healthy, very healthy, or healthy), 
premiums would decrease for most (71 percent of sample companies). 
These decreases were largely due to the lower flat rate under the 
risk-based option compared to the MAP-21 rate. In contrast, for the 
companies that were ranked less financially healthy (that is, sponsors 
whose financial health is considered either risky or very risky), 
premiums could increase for most (92 percent of these sample 
companies). The increases were mainly due to how the financial health 
risk factor affects per participant rates under the risk-based option 
for these companies. 

Figure 2: Percentage of Sponsors with Premium Rate Changes under 
PBGC's Risk-Based Option Compared with Estimated Rates in Plan Year 
2015 under MAP-21: 

[Refer to PDF for image: vertical bar graph] 

Sponsor financial health: Extremely healthy (1); 
Sponsors with increased rate: 1%; 
Sponsors with decreased rate: 99%. 

Sponsor financial health: Very healthy (2); 
Sponsors with increased rate: 2%; 
Sponsors with decreased rate: 98%. 

Sponsor financial health: Healthy (3); 
Sponsors with increased rate: 54%; 
Sponsors with decreased rate: 46%. 

Sponsor financial health: Risky (4); 
Sponsors with increased rate: 91%; 
Sponsors with decreased rate: 9%. 

Sponsor financial health: Very Risky (5); 
Sponsors with increased rate: 93%; 
Sponsors with decreased rate: 7%. 

Sponsor financial health: More financially healthy (1-3); 
Sponsors with increased rate: 31% (Increase range: $1 to $109 per 
participant); 
Sponsors with decreased rate: 69% (Decrease range: -$1 to -$380 per 
participant). 

Sponsor financial health: Less financially healthy (4-5); 
Sponsors with increased rate: 92% (Increase range: $1 to $257 per 
participant); 
Sponsors with decreased rate: 8% (Decrease range: -$3 to -$225 per 
participant). 

Sponsor financial health: All sponsors; 
Sponsors with increased rate: 52%; 
Sponsors with decreased rate: 48%. 

Source: GAO analysis of PBGC data from a sample of 2,699 defined 
benefit plans used in PBGC's hypothetical premium model. 

[End of figure] 

Because rates under the risk-based option are calculated on a per 
participant basis, the magnitude of these changes will vary by company 
depending on the number of participants in the plan or plans that they 
sponsor. For example, among the 143 least financially healthy 
companies with increases in premiums under PBGC's risk-based option, 
the number of plans and participants for companies varied widely. On 
the small end of the spectrum, one company sponsored a plan with 825 
participants. This company's estimated total premium cost would be 
$407,550 under PBGC's risk-based premium, compared with $370,425 under 
MAP-21 in plan year 2015, a 10 percent increase. On the large end, 
another company sponsored a plan with 327,463 participants. This 
company's estimated total premium cost would be $100.9 million under 
PBGC's risk-based premium, compared with $43.2 million under MAP-21 in 
plan year 2015, a 133 percent increase, even with the cap. 

Risk-Based Premiums Not Likely to Increase Plan Freezes and 
Terminations: 

Although plan sponsors and experts expressed varying opinions about 
how moving to a more risk-based premium structure might influence 
future sponsor behavior, risk-based premiums are not likely to 
increase plan freezes and terminations. In our previous work on the 
subject, we did not find that increases in premium costs were a 
significant reason for sponsors to freeze or terminate their DB plans. 
Among the many reasons sponsors cited in our 2008 report for freezing 
their largest plans, the most often cited were the impact of annual 
contributions on their firm's cash flows and the unpredictability of 
plan funding. The factors that were most likely to influence 
implementing a hard freeze--that is, a freeze that ceases all future 
benefit accruals--were sponsor size and the extent to which a 
sponsor's plans are subject to collective bargaining agreements. 
[Footnote 55] A more recent survey of DB plan sponsors by Towers 
Watson reported similar findings.[Footnote 56] Sponsors cited reducing 
cost and minimizing cost volatility as the primary reasons for 
freezing plans or converting plans to some other type of retirement 
savings instrument. PBGC premium increases were not mentioned by 
sponsors as a factor for freezing or converting their plans.[Footnote 
57] Moreover, according to PBGC officials, premiums generally account 
for a small percentage of compensation costs.[Footnote 58] 

Nevertheless, several experts and others we spoke with pointed out 
that increased premium costs could have negative implications for DB 
plan sponsors. For example, some commented that increased premiums 
might divert funds that sponsors would have otherwise used to fund 
their pension plans or other company priorities such as job creation 
and business investment. A few told us they viewed a potential 
increase in PBGC premiums simply as a tax increase on companies that 
sponsor DB pension plans. One sponsor we spoke with commented that DB 
pension plans are already in duress because of historically low 
interest rates for plan funding obligations, and that increased 
premium costs would add another challenge to sponsors. Another noted 
that it is increasingly more difficult to justify the costs of DB 
pension plans to management, and increased premiums may be the final 
factor in a sponsors' decision to freeze or terminate their plan. 
However, another sponsor said that given all the other challenges 
facing pension plans, increasing premiums is unlikely to have a 
significant effect. 

Pension experts we spoke with also differed in their opinion on 
whether implementing a new premium structure would lead to plan 
freezes or terminations. Several--including, five business 
professionals, three academics, one labor representatives, one 
actuary, and one federal official--noted that increased premium costs 
may cause an increase in plan freezes or terminations, which could 
result in negative implications for the retirement security of plan 
participants.[Footnote 59] As one academic noted, under a risk-based 
premium structure, premium costs for "healthy" plans and sponsors may 
decrease, while "unhealthy" plans and sponsors will likely have 
increased premium costs, further worsening their financial position 
and potentially causing these plan sponsors to exit the DB system. 
However, others stated that they believed that increased premiums will 
not increase plan freezes and terminations. For example, an agency 
official said that premiums have historically been set low, and 
premium increases are unlikely to cause plan freezes or terminations. 
Additionally, another agency official noted that since there are many 
factors influencing plan sponsors' decisions to terminate a plan, 
premium increases will likely have little impact. 

According to PBGC data, pension plan freezes have become more common 
in recent years, even with little change in premium rates. Plan 
freezes increased nearly 50 percent from 2003 to 2008. Specifically, 
PBGC reported that as of the end of 2009, approximately 27 percent of 
all PBGC-insured plans were hard frozen.[Footnote 60] Voluntary 
terminations have also increased in recent years, with an 
approximately 29 percent increase from fiscal year 2003 to 2010. 
[Footnote 61] 

Rather than inducing plan sponsors to freeze or terminated their 
plans, several pension experts--as well as PBGC officials--expressed 
the hope that moving to a more risk-based premium system would 
encourage less risky behavior among plan sponsors. For example, when 
faced with increased premiums for increased risk, sponsors might adopt 
safer asset allocation practices and contribute more to their plans to 
keep funding levels higher. 

Other Potential Behavioral Effects Cited, but Impact Uncertain: 

Rather than inducing plan sponsors to freeze or terminate their plans, 
several pension experts--as well as PBGC officials--expressed the hope 
that moving to a more risk-based premium system would encourage less 
risky behavior among plan sponsors. For example, when faced with 
increased premiums for increased risk, sponsors might adopt safer 
asset allocation practices or contribute more to their plans to keep 
funding levels higher. One pension actuary has noted that the current 
variable-rate premium can have an economic effect equivalent to an 
additional return on investment. For example, when, in 2015, the 
variable rate reaches $18 per year per $1,000 of underfunding, an 
additional $100 contributed to an underfunded plan will reduce annual 
premiums by $1.80, or 1.80 percent, and so can be viewed as boosting 
investment return by almost 2 percent--which is a potentially stronger 
incentive to fund the plan than what exists currently. Similarly, the 
new assessment in the UK based on the riskiness of plan asset 
allocation could possibly induce plan sponsors to shift to somewhat 
less risky asset allocations. Either effect--increased funding or less 
risky asset allocations--would in turn reduce the risk to the pension 
insurer. Little is yet known about the likelihood or magnitude of 
these potential effects, however, and PBGC does not include any 
behavioral impacts in its modeling. 

Concerns Raised That Risk-Based Premiums Could Increase during 
Recessions: 

Some pension experts we spoke with raised concerns about the potential 
for premiums to rise when companies are least able to bear the costs, 
as could be the case during recessions. Depending on how risk factors 
are incorporated into rates, premiums could have a pro-cyclical 
effect--that is, they would increase during economic downturns. As 
economic conditions worsen, more companies would fall into the less 
financially healthy categories, and more plans would become less well-
funded, resulting in higher premiums. This could lead to financially 
weaker firms being required to pay higher premiums at precisely the 
time that they can least afford to do so. 

Recognizing that increased premium costs could prove a hardship for 
some sponsors, Congress included a cap on premium increases under MAP-
21, enacted in July 2012, and the President's proposal also included a 
cap.[Footnote 62] In addition, PBGC officials told us that they are 
concerned about the cyclicality of risk-based premiums and would 
consider supporting the use of an average of a sponsor's 5-year 
funding levels to help smooth the impact that economic cycles would 
have on risk-based premium rates.[Footnote 63] FDIC faced similar 
concerns when designing its new premium system for financial 
institutions in 2006. To address these concerns, the FDIC capped 
premiums for its riskiest category of institutions at 60 percent below 
what the premium amount would be under a purely risk-based system. 
[Footnote 64] In doing so, FDIC sought to address long-standing 
concerns of the industry, regulators, and others that premiums should 
not be set so high as to prevent an institution that is troubled and 
seeking to rebuild its health from doing so. As a result of the cap, 
however, some degree of cross-subsidy still exists in the premium 
system between financially healthier institutions and troubled 
institutions. 

The impact of having to pay higher rates under a new premium structure 
also may pose more of a challenge for some smaller companies than some 
larger ones, as they may have fewer resources to draw from for these 
added costs. The data in PBGC's premium model do not include 
information on company size, such as a sponsor's assets, revenue, 
operating costs, or payroll expenditures. Without such data, it is 
unclear the extent to which smaller companies may experience a 
hardship under the risk-based option. In contrast, in designing its 
premium system, the FDIC created a structure that differentiates 
between large and small institutions. In general, only larger 
institutions (those with $10 billion or more in assets) have their 
premiums based on forward looking risk measures, which incorporate 
market-based information such as credit agency ratings of an 
institution's debt offerings. Smaller institutions have their premiums 
based on financial ratios, such as an institution's capital, past-due 
loans, and income, and its CAMELS ratings. For smaller institutions, 
FDIC data show that the higher on the CAMELS scale institutions are 
rated, the higher the rate of failure. Risk premiums for larger 
institutions also incorporate CAMELS ratings; however, FDIC officials 
have indicated that incorporating debt ratings provides a fuller, 
market-based picture of an institution's condition than do financial 
ratios. 

General Concerns about Equity Implications of Increasing Premiums Also 
Raised: 

Plan sponsors and others we spoke with also raised some concerns about 
the equity of increasing premiums under a more risk-based structure. 
In particular, several raised concerns about having current sponsors 
pay higher premiums to pay for PBGC's liabilities from plans 
terminated in the past. Further, the amount of revenue currently being 
proposed to be raised through increased premiums is unlikely to cover 
the full amount of future claims, let alone help to address 
liabilities due to past claims. Nevertheless, adjusting premiums under 
the current structure, as called for under MAP-21, would not alleviate 
the equity concerns of how the current structure addresses these 
liabilities. To address equity concerns, several pension experts noted 
the need to separate PBGC's existing liabilities from the projected 
cost of future claims, and they suggested various alternative 
surcharges for accomplishing this (see table 8). These surcharges 
attempt to raise revenue to pay existing liabilities more equitably by 
targeting companies that have re-emerged from bankruptcy, that are in 
industries with the largest previous claims, and that are past as well 
as current sponsors. However, each has drawbacks that limit its 
effectiveness as a potential revenue-raising tool for this purpose. 

Table 8: Options Suggested by Experts to Address PBGC's Past Deficit 
Costs Other Than Annual Premium Increases: 

Bankruptcy Re-Emergence Surcharge: A surcharge could be levied against 
sponsors whose plans terminate in bankruptcy, but re-emerge after 
turning over their liabilities to PBGC. The surcharge would be 
separate from, and in addition to, the termination premium, which is 
levied on plan sponsors that terminate an underfunded pension plan.[A] 
Such a surcharge could promote greater accountability among plan 
sponsors responsible for PBGC's deficit, but may place a serious 
financial burden on these formerly bankrupt companies. 

Industry-Specific Surcharge: 
A surcharge could be levied on those industries that have accounted 
for a disproportionate amount of PBGC's deficit. 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. This 
surcharge may incentivize plan sponsors within certain industries to 
manage their plans more responsibly. However, this may place a 
financial burden on these companies or their customers through 
increased prices, and these would not be the same companies that 
contributed to PBGC's deficit by terminating their plans in the past. 

Retirement Sponsor Surcharge: 
A surcharge could be levied on an ongoing basis across all DB plan 
participants, and/or a one-time surcharge could be levied on any past 
or present sponsor that provides a DB retirement plan. This approach 
recognizes that all DB plan sponsors have a stake in the health of the 
DB retirement system, and PBGC's insurance program that helps protect 
its participants. However, this surcharge would place an additional 
cost on healthy plan sponsors who are less likely to be responsible 
for contributing to PBGC's deficit by terminating their plans in the 
future. 

Source: GAO interviews with pension experts. 

[A] 29 U.S.C. 1306(A)(7).The termination premium applies to certain 
plan terminations occurring after 2005. Sponsors and their controlled 
groups owe PBGC a termination premium if a pension plan terminates in 
a distress termination pursuant to ERISA section 4041(c)(2)(B)(ii) or 
(iii), or in a PBGC-initiated termination under ERISA section 4042. 29 
U.S.C. §§ 1341(c)(2)(B)(ii) and (iii), and 1342. For plan year 2011, a 
plan sponsor is liable to pay a termination premium at the rate of 
$1,250 per plan participant per year for 3 years. 

[End of table] 

In addition, some plan sponsors and others we spoke with voiced 
concerns about whether potential risk-based factors could equitably 
represent the future risk of particular sponsors and their plans to 
PBGC or could have other adverse consequences for sponsors. For 
example, some sponsors expressed concern about including a risk factor 
measuring plan asset investment mix, in particular, because, as noted 
by one sponsor, it is important for plan sponsors to invest assets 
according to their individual needs and priorities. Some experts also 
expressed equity concerns about the potential inclusion of a 
creditworthiness factor. One expert stated that if information about 
the financial status of DB plan sponsors were made public, it could 
put these companies at a competitive disadvantage compared to 
companies that do not sponsor DB plans. Furthermore, a few plan 
sponsors said that risk-based premiums are conceptually appealing, but 
that fairly measuring risk may not be feasible. For example, one 
sponsor said that it would be difficult to fairly measure and assess 
the risk factors used in setting risk-based premium rates and to make 
the results of these measurements transparent. 

Moving to a Risk-Based Premium Structure Poses Various Challenges: 

The process of redesigning and implementing a more risk-based premium 
structure poses a number of operational challenges. Additional data 
and analysis would be needed on the selected risk factors, with 
regular monitoring to ensure that the data are accurate and up-to-
date. PBGC is uniquely situated to take on this complex task, but if 
granted the statutory authority to do so, the agency could then face a 
number of additional administrative challenges concerning governance, 
transparency, and sponsor recourse. 

Additional Data and Analysis Would Be Needed: 

The rate-setting entity responsible for implementation of a risk-based 
premium structure likely would require access to financial and other 
firm-specific information to provide a sound technical basis for the 
underlying parameters of a risk-based premium regime. The specific 
types of information needed would depend on the specific factors 
selected, but the information currently being collected may not be 
sufficient in some cases. For example, PBGC currently obtains 
information about plans from two main sources: the Form 5500 and the 
Form 4010. Plan sponsors are required to submit the Form 5500 annually 
to Labor, Internal Revenue Service, and PBGC.[Footnote 65] This form 
includes information about the level of plan underfunding (which is 
currently captured in the variable-rate premium) and the investment 
mix of plan assets (which is a potential risk factor that could be 
incorporated). The other main source of information, the Form 4010, is 
submitted to PBGC by plan sponsors only under certain circumstances, 
[Footnote 66] requiring plans with substantial underfunding to provide 
additional financial and actuarial information. The PPA revised the 
provisions that determine which plans are required to submit the form, 
and according to PBGC officials, the agency no longer obtains 
information from some plans that are exempt from filing under the 
revised criteria, but still pose a risk to PBGC.[Footnote 67] 

PBGC also obtains information about the financial health of plan 
sponsors through its Early Warning Program (EWP), which is responsible 
for monitoring companies that are deemed to pose a greater risk to 
PBGC because they are financially troubled or have a significantly 
underfunded pension plan.[Footnote 68] EWP uses information from a 
variety of sources in conducting its work, including credit ratings, 
financial information services, news databases, and information from 
Labor, the Internal Revenue Service, and the Securities and Exchange 
Commission. While information gathered through the EWP would be 
relevant to the potential risk factor of a company's financial health, 
the EWP does not systematically gather data for all plan sponsors, and 
PBGC may be limited in its ability to use some credit rating data to 
assess risk within a redesigned premium structure.[Footnote 69] 

Other government agencies with risk-based premiums have established 
reliable sources of needed information to support their premium 
structures. For example, the FDIC relies entirely on pre-existing 
sources of information and technical resources to assess risk for its 
risk-based premiums. FDIC obtains information on institutions' 
aggregate assets from the quarterly reports submitted by each bank. 
The CAMELS ratings are developed during on-site examinations of each 
institution, during which regulators more closely assess institutions' 
exposure to risk. These quarterly reports and on-site examinations 
existed prior to FDIC's shift to risk-based premiums, so FDIC did not 
need to gather additional information or develop new expertise when it 
implemented its risk-based premium structure. 

Alternatively, to obtain the information needed to implement the risk-
based premium structure in the UK, the PPF (the UK's pension insurance 
agency) relies on information obtained annually through an online 
exchange.[Footnote 70] PPF calculates its risk-based premiums based on 
three risk factors: level of underfunding, risk posed by the plan's 
investment strategy, and risk of sponsor insolvency (or bankruptcy). 
The exchange provides the agency with information on plans' level of 
underfunding and how plan assets are allocated across investments with 
different levels of risk. Very large plan sponsors--those with plan 
liabilities of £1.5 billion or greater (about $2.35 billion in U.S. 
dollars)--are required to submit additional information about their 
investments, while submission is optional for smaller plans. To assess 
sponsors' risk of insolvency, PPF currently relies on Dun & 
Bradstreet's failure scores--a measure of the likelihood of sponsor 
bankruptcy--rather than attempting to develop in-house expertise to do 
their own scoring.[Footnote 71] 

Regulatory differences, however, between the UK's PPF and PBGC could 
limit wholesale applicability of PPF's premium framework for PBGC. For 
example, PPF functions as part of a larger pension regulatory 
structure, which includes The Pensions Regulator--the agency 
responsible for regulating pension plans in the UK. One of The 
Pensions Regulator's stated objectives is to reduce the risk that PPF 
will need to take on unfunded liabilities, and documents we reviewed 
show that the agency has statutory authority to work with plan 
sponsors to mitigate these risks through increasing plan funding 
levels and other measures. In contrast, the oversight of pensions in 
the United States is more diffused with different authorities residing 
with the Employee Benefits Security Administration, the Internal 
Revenue Service, and PBGC. In addition, the governance structure of 
U.S. single-employer pensions and UK pensions differ significantly. 
For example, documents we reviewed show that UK pension law requires 
that at least one-third of individuals responsible for administering 
the plan, or plan trustees, must be selected by plan participants, 
while there is no requirement for stakeholder representation among 
fiduciaries of U.S. single-employer plans. Further, the scale of PPF's 
insurance program is much smaller than PBGC's single-employer program. 
In fiscal year 2011, PPF insured 12 million participants, while PBGC 
provided insurance for 44 million participants. 

Stronger Governance and Oversight Would Be Needed: 

Implementing a more risk-based premium structure creates governance 
challenges whether authority for premium setting rests with Congress, 
PBGC, or another entity. Premiums for PBGC's single-employer program--
both the flat rate premium and the variable-rate premium--are 
currently set by statute and PBGC lacks the statutory authority to 
modify premium rates and structures on its own.[Footnote 72] Although 
legislation has been enacted to periodically adjust the level of 
premiums, this process has resulted in rates that do not adequately 
reflect the risk to PBGC's financial condition. But even if Congress 
were to relinquish some authority over setting premium rates, it could 
still maintain an important role in the process. For example, some 
experts we spoke with suggested that Congress could establish the 
broad framework for incorporating additional risk factors into PBGC's 
premium structure legislatively, but leave the detailed mechanics of 
how to construct such a structure to others with greater technical 
expertise. In addition, a number of pension experts we spoke with said 
that congressional oversight would be useful during the premium 
redesign process. Many supported regular reporting by PBGC to Congress 
on progress in developing and implementing a risk-based premium 
structure, with some going further to suggest that Congress retain the 
right to approve the proposed changes to the premium structure. 
[Footnote 73] 

While Congress has the authority to set and change premiums, PBGC has 
considerable expertise in reviewing relevant data to assist with 
designing a more risk-based premium structure. In many ways, as the 
implementing agency of the current premium structure, PBGC is uniquely 
situated to obtain and analyze the complex data needed to design and 
implement a more risk-based premium structure. However, if PBGC were 
granted statutory authority to redesign its premium structure, 
stronger governance and oversight of the agency may be required. The 
MAP-21, enacted in July 2012, included certain changes to strengthen 
PBGC's governance structure, such as by establishing a risk management 
officer within the agency, authorizing a study of the PBGC Board of 
Directors, and requiring the Board of Directors to meet at least four 
times a year and to convene one joint meeting per year with the PBGC 
Advisory Committee.[Footnote 74] The MAP-21 also requires the Board of 
Directors to establish a policy to identify and mitigate potential 
conflicts of interest.[Footnote 75] 

However, even with the recent legislative changes, concerns with 
PBGC's governance structure with respect to implementing a risk-based 
premium structure would persist. Our prior work has found that the 
current size of PBGC's board is not sufficient to include the diverse 
set of interests or expertise needed to provide policy direction for 
PBGC.[Footnote 76] Some of the pension experts we spoke with 
maintained that PBGC's current board structure is adequate to provide 
sufficient oversight, while others echoed our concerns, commenting 
that the board of directors needs to be more active and reflect a 
wider range of technical expertise and stakeholder interests should it 
be granted additional statutory authority with respect to implementing 
a more risk-based premium structure. 

At the same time, some experts we spoke with also noted that certain 
safeguards could be put in place to help mitigate such concerns. For 
example, special temporary commissions--such as an independent 
advisory committee comprised of a range of stakeholders and experts--
are a tool that can be used to formulate recommendations for specific 
policy areas.[Footnote 77] Along these lines, some pension experts we 
spoke with suggested establishing an independent advisory committee--
comprised of a range of knowledgeable representatives from a range of 
fields, which could include academics, actuarial and labor experts--to 
play a formal role in the premium redesign process. Such an advisory 
committee could help ensure that the premium redesign process reflects 
stakeholder concerns and needed expertise.[Footnote 78] A number of 
redesign suggestions from various stakeholder groups have already 
emerged, such as setting caps on premium increases, offering a 
transition period for new rates, using an independent third-party 
measure of creditworthiness, and reducing adverse effects on sponsors 
produced by economic downturns and higher premiums by smoothing 
(averaging) premium rates over several years to reduce volatility. 

Greater Transparency and Provisions for Recourse Would Be Necessary: 

A more risk-based premium structure would likely increase the demand 
for procedures to expand the transparency of PBGC's policies and 
technical work to bolster confidence in the agency's ability to 
effectively implement such a system, including procedures for recourse 
in the event of the assessment of excessive or inaccurate premiums. 
Various concerns have been raised about the agency's lack of 
transparency, especially related to the technical tools used to inform 
policy changes. Such a perceived lack of transparency could hamper 
public confidence in the agency's efforts to implement a redesigned 
premium structure. Some pension experts and plan sponsors we spoke 
with expressed concerns that PBGC's operations--particularly its PIMS 
model--are not clear or easily understandable, making it difficult to 
assess the accuracy and reasonableness of its estimates. This lack of 
clarity has contributed to a lack of confidence in the agency and its 
public estimates among some in the plan sponsor and business 
communities.[Footnote 79] For example, PBGC officials told us that the 
PIMS model--which is used to project the possible impact of policy 
changes on the agency's finances--has not been independently reviewed 
and, as of February 2012, the model had only been made available to 
one external group for review. Responding to this need to improve 
quality control procedures for PBGC, MAP-21 requires PBGC to contract 
with a capable agency or organization independent of the PBGC to 
conduct an annual peer review of PIMS.[Footnote 80] Should it receive 
some rate-setting responsibility, this lack of transparency could 
extend to PBGC's efforts to develop a risk-based premium structure. 

To increase the transparency of any processes PBGC may be authorized 
to use to calculate risk factors, experts we spoke to generally 
supported adopting various other safeguards, including the following: 

* Disclosing methodology for creating risk profiles. Require 
publication of the methodology used to create sponsors' risk profiles, 
while continuing to safeguard any non-publicly available information 
used in actually calculating risk-based premiums.[Footnote 81] 

* Publishing a risk-based premium schedule. Require publication of a 
schedule that includes information such as premium rates and key dates 
for plan sponsors. 

* Soliciting public feedback. In redesigning the premium structure, 
include a mechanism for soliciting public feedback--either through a 
public comment period or by holding public hearings--to improve the 
transparency of the process.[Footnote 82] 

* Increasing congressional reporting and oversight. Require PBGC to 
regularly report to Congress--either through testimony or written 
report--on progress made on implementing a risk-based premium 
structure. Such reports could contain specific information related to 
risk-based premiums, such as risk measures, cross indicators, and 
premiums by industry. 

Finally, it is also important to bolstering confidence in a redesigned 
premium structure to include provisions for recourse if a sponsor 
wishes to appeal its risk assessment. For example, in the UK, the PPF 
implemented an appeals process allowing plan sponsors to request a 
review of their case if they believe there is a mistake in the 
calculation of the plan-based premium or the underfunding component of 
the risk-based premium.[Footnote 83] PPF officials noted that in the 
initial year during which risk-based premiums were levied (2006-2007), 
sponsors filed approximately 200 appeals (or approximately 3 percent 
of an estimated 7,800 plans).[Footnote 84] However, 5 years later, in 
the most recent premium year (2011-2012), the number of appeals had 
dropped to 70 (or approximately 1 percent of an estimated 6,550 
plans),[Footnote 85] suggesting that sponsor confidence in PPF has 
grown. 

Conclusions: 

PBGC faces a number of challenges in its role as insurer and protector 
of pension benefits under DB systems that millions of Americans rely 
on for retirement security. To remain financially solvent, PBGC relies 
on returns on its investments as well as premiums. However, the number 
of DB plans has been falling and premium rates have not adequately 
matched the level of risk posed to PBGC for losses resulting from new 
claims. If PBGC's current financial challenges are not resolved, the 
agency could ultimately face insolvency, potentially resulting in a 
need for legislative changes to make either painful reductions to 
participant benefits or additional significant increases in premiums, 
or to provide for taxpayers to cover these costs. A key objective of 
redesigning PBGC's premium structure would be to ensure that premium 
revenue keeps pace with future claims and that the new structure is 
designed to decrease cross-subsidization between financially healthy 
and unhealthy sponsors. By adopting a structure that allows rates to 
better align with the risk posed by individual plans and sponsors, 
Congress has an opportunity to help PBGC contain its deficit and 
strengthen PBGC's ability to remain solvent into the future. 

Determining whether--and if so, how--to redesign and implement a more 
risk-based premium structure will require new tools, new data, and new 
processes. PBGC's hypothetical model created to illustrate different 
premium options and its analyses of the effects of incorporating an 
additional risk factor are extremely useful tools for informing the 
debate on how PBGC's premium structure might be redesigned. However, 
these efforts are only a first step. As shown and illustrated by other 
risk-based premium structures implemented in this country by the FDIC 
for deposit insurance and abroad by the UK's pension insurance fund, 
options exist to establish risk-based premiums on a broad array of 
financial data. Much like these agencies' premium structures, PBGC 
premiums could be designed to identify each individual sponsor's 
unique risk profile and charge each sponsor a specific risk premium 
sufficient to cover that risk. To ensure that any changes to PBGC's 
premium structure are designed and implemented in a reliable and fair 
way, decisions will need to be informed by a wide range of 
perspectives. The continuing involvement of stakeholders in the form 
of an advisory committee to assist with implementing these changes 
could be helpful in improving the transparency and legitimacy of the 
new system, whether Congress retains its premium-setting authority or 
determines that the authority for premium setting should rest with 
PBGC or another entity. 

Moreover, should a more risk-based premium structure be adopted, it 
will be important for the responsible rate-setting entity to have 
access to the right information and expertise to adequately assess 
risk to incorporate any new risk factors into the process. Revising 
sponsors' financial reporting requirements--such as on the Form 4010--
could improve PBGC's ability to collect key information that may be 
necessary to help the agency estimate its risk exposure to future 
claims and strengthen implementation of any changes to the premium 
structure. It will also be important to ensure that the rate-setting 
entity has adequate expertise to conduct rational evaluations of the 
future risk posed by plan sponsors in order to provide a sound basis 
for setting premiums accordingly in alignment with that risk. To this 
end, Congress has taken an important step with MAP-21 by establishing 
quality control requirements for PBGC, including an annual peer review 
of PIMS. Ensuring that this annual peer review includes review of the 
inputs and assumptions used in PIMS projections and resulting outputs, 
specifically as they relate to premium setting, would further enhance 
the transparency and credibility of any calculations used to support a 
more risk-based premium structure. 

Also, should a more risk-based premium structure be adopted, it will 
be important to identify the financial impact that risk-based premiums 
have on plan sponsors and on the future of the DB system. A more fully 
risk-based premium structure would presumably redistribute costs onto 
plan sponsors posing the greatest risk to PBGC--sponsors who may be 
financially weak. Congress and PBGC will need to consider the impact 
of this added burden on these plan sponsors, particularly during weak 
economic periods. 

Matters for Congressional Consideration: 

To help strengthen the PBGC insurance program, Congress should 
consider: 

1. authorizing redesign of PBGC's premium structure to more fully 
reflect the risk posed by plans and sponsors to the agency, such as by 
providing for the incorporation of additional risk factors. 

In addition, to improve PBGC's ability to collect key information that 
may be necessary to help the agency estimate its risk exposure to 
future claims and strengthen implementation of any changes to the 
premium structure, Congress should consider: 

2. providing PBGC with access to additional information needed to 
assess risk and assist in setting premiums, such as key Form 4010 
information from sponsors identified as financially unhealthy. 

Moreover, to better understand the mechanics of how best to 
incorporate additional risk factors, improve transparency, and help 
inform the evaluation of the various redesign options, Congress should 
consider: 

3. establishing an independent premiums advisory committee reflecting 
a range of perspectives--including representatives from federal 
agencies, sponsors, actuaries, private insurers, and labor groups, for 
example--to improve transparency in the premium redesign process by 
assisting with such activities as developing the mechanics for 
incorporating additional risk factors and implementing new rates, as 
well as delineating a variety of alternative methods to address PBGC's 
deficit. 

Recommendation for Executive Action: 

To enhance understanding and better inform the debate on the possible 
effects of moving to a more risk-based premium structure, during 
consideration of various redesign options and after a redesign may be 
authorized, we recommend that the Director of PBGC take the following 
action: 

1. Continue to develop PBGC's hypothetical model and analyses of 
various premium redesign options and their impacts on sponsors and 
report the results to Congress. As part of these analyses, PBGC should 
evaluate the potential effects on sponsors of incorporating additional 
risk factors, such as company financial health and plan investment 
mix, and include an assessment to identify any potentially 
disproportional hardships on smaller companies that may result from 
the redistribution of higher rates to riskier sponsors. 

Agency Comments and Our Evaluation: 

[pending] 

As arranged with your offices, unless you publicly announce its 
contents earlier, we plan no further distribution of this report until 
30 days from the date of this letter. At that time, we will send 
copies to the Secretaries of Commerce, Labor, and Treasury, and other 
interested parties. In addition, the report is available at no charge 
on the GAO website at [hyperlink, http://www.gao.gov]. 

If you or your staff have any questions about this report, please 
contact me at (202) 512-7215 or jeszeckc@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. GAO staff who made key contributions 
to this report are listed in appendix IX. 

Sincerely yours, 

Signed by: 

Charles A. Jeszeck: 
Director, Education, Workforce, and Income Security Issues: 

[End of section] 

Appendix I: Recent Legislation Related to the Pension Benefit Guaranty 
Corporation: 

On July 6, 2012, the President signed into law the Moving Ahead for 
Progress in the 21st Century Act (MAP-21).[Footnote 86] Although 
pensions were not the primary purpose of the act, it included several 
provisions that pertain to PBGC. For example, the law changed how 
defined benefit (DB) plans may determine their required funding, 
increased premium rates for sponsors of single-employer and 
multiemployer DB plans insured by the Pension Benefit Guaranty 
Corporation (PBGC), and made changes to improve the governance of 
PBGC. Provisions from the law related to PBGC are briefly summarized 
below, along with a table detailing the preliminary revenue scoring by 
the Joint Committee on Taxation for these changes. 

Part I--Pension Funding Stabilization: 

Sec. 40211. Pension funding stabilization. 

The law changed how the minimum funding required for a single-employer 
plan may be determined. Specifically, it provided for adjustment of 
interest rates to be used in determining a plan's funding target. 
Plans that take advantage of this provision in determining their 
required minimum funding must provide information on the impact of 
electing to do so in their annual funding notices. 

Part II--PBGC Premiums: 

Sec. 40221. Single employer plan annual premium rates. Sec. 40222. 
Multiemployer annual premium rates. 

The law increases PBGC premium rates for both single-employer and 
multiemployer DB plans. 

Effective beginning in 2013, the law changes the flat and variable 
premium rates and puts a cap on the variable-rate premium. Each flat 
or variable rate is subject to a different inflation adjustment, and 
the variable-rate premium cap has its own inflation adjustment. 

Part III--Improvements Of PBGC: 

Sec. 40231. Pension Benefit Guaranty Corporation Governance 
Improvement. 

The law amended the Employee Retirement Income Security Act of 1974 
(ERISA) provisions relating to the PBGC Board of Directors, Advisory 
Committee, Director and other PBGC officials in various ways. Among 
other things, with respect to the Board of Directors, the law 
established that a majority of its members constitutes a quorum and 
the vote of a majority of board members present shall be an act of the 
board. Under the provision, the board is to meet no less than 4 times 
a year with not fewer than two members present. At least one of those 
meetings must be with the PBGC Advisory Committee. It also provided 
that the PBGC Inspector General is to report to the board and at least 
twice a year attend a board meeting to report on PBGC operations. 
Furthermore, the provision clarifies the role of the General Counsel, 
and expressly provides that the Inspector General and the Inspector 
General legal counsel are independent of PBGC management and its 
general counsel. The law includes specific requirements to PBGC's 
Board of Directors and Director to avoid conflicts of interest and 
provides for the PBGC to have a risk management officer. It expressly 
provided that the PBGC Board of Directors is ultimately responsible 
for overseeing PBGC and that the Director is directly accountable to 
the Board of Directors and can be removed by the Board of Directors or 
the President. It also set the Director's term at 5 years unless 
removed before the expiration of the term by the President or the 
Board of Directors. 

The law also stated the sense of Congress that (1) the Board of 
Directors should form committees, including an Audit Committee and an 
Investment Committee composed of at least two members, to enhance the 
overall effectiveness of the board, and (2) the Advisory Committee 
should provide the board with policy recommendations regarding changes 
to the law that would be beneficial to the PBGC or the voluntary 
private pension system. 

The law also directs the PBGC, not later than 90 days after enactment, 
to contract with the National Academy of Public Administration to 
conduct a study to include (1) a review of governance structures of 
organizations analogous to the PBGC and (2) recommendations with 
respect to various topics relating to the Board of Directors, such as 
composition, procedures, and policies to enhance congressional 
oversight. The results of the study are to be reported within a year 
of initiation of the study to the Committee on Health, Education, 
Labor, and Pensions and Committee on Finance of the Senate and the 
Committee on Education and the Workforce and Committee on Ways and 
Means of the House of Representatives. 

Sec. 40232. Participant and plan sponsor advocate. 

The law requires the Board of Directors to choose a Participant and 
Plan Sponsor Advocate from the candidates nominated by the PBGC 
Advisory Committee. Among other things, this advocate is to act as a 
liaison between the corporation and participants in terminated pension 
plans, ensure that participants receive everything they are entitled 
to under the law, and provide plan sponsors with assistance in 
resolving disputes with the corporation. Each year, the advocate will 
provide a report on their activities to the Committee on Health, 
Education, Labor, and Pensions and Committee on Finance of the Senate, 
the Committee on Education and the Workforce of the House of 
Representatives, and the Committee on Ways and Means of the House of 
Representatives summarizing the issues raised by participants and plan 
sponsors and making recommendations for changes to improve the system. 

Sec. 40233. Quality control procedures for the Pension Benefit 
Guaranty Corporation. 

The law requires PBGC to contract with a capable agency or 
organization independent from the PBGC, such as the Social Security 
Administration, to conduct an annual peer review of PBGC's Single-
Employer and Multiemployer Pension Insurance Modeling Systems (PIMS). 
The first reviews must be initiated no later than 3 months after 
enactment of the act. 

The law also requires PBGC to develop written quality review policies 
and procedures for all modeling and actuarial work performed by PBGC's 
Policy, Research, and Analysis Department, and conduct a record 
management and record keeping review. Finally, the law requires PBGC 
to provide a timetable for addressing outstanding recommendations made 
by the Inspector General relating to the Policy, Research, and 
Analysis Department and the Benefits Administration and Payment 
Department. 

Sec. 40234. Line of credit repeal. 

The law repeals section 4005(c) of ERISA,[Footnote 87] which permitted 
PBGC to issue notes or other obligations in an amount up to 
$100,000,000. 

Table 9: Preliminary Joint Committee on Taxation Score of Revenue 
Changes Caused by Surface Transportation Conference Report Related to 
Pension Funding Stabilization and PBGC Premiums Provisions, Fiscal 
Years 2012-2022: 

Pension funding stabilization; 
2012: 595; 
2013: 2,391; 
2014: 4,576; 
2015: 5,144; 
2016: 3,765; 
2017: 1,671; 
2018: 274; 
2019: -807; 
2020: -2,328; 
2021: -3,121; 
2022: -2,766; 
2012-2017: 18,142; 
2012-2022: 9,394. 

Cap single-employer variable rate; 2012: 0; 
2013: 0; 
2014: -140; 
2015: -260; 
2016: -280; 
2017: -130; 
2018: -60; 
2019: -20; 
2020: -10; 
2021: -10; 
2022: -10; 
2012-2017: -810; 
2012-2022: -920. 

Increased flat-rate premiums; 
2012: 0; 
2013: 200; 
2014: 400; 
2015: 400; 
2016: 500; 
2017: 530; 
2018: 570; 
2019: 600; 
2020: 630; 
2021: 630; 
2022: 670; 
2012-2017: 2,030; 
2012-2022: 5,130. 

Variable-rate premiums; 
2012: 0; 
2013: 0; 
2014: 0; 
2015: 760; 
2016: 1,190; 
2017: 810; 
2018: 570; 
2019: 370; 
2020: 290; 
2021: 330; 
2022: 330; 
2012-2017: 2,760; 
2012-2022: 4,710. 

Multiemployer programs; 
2012: 0; 
2013: 20; 
2014: 15; 
2015: 15; 
2016: 25; 
2017: 25; 
2018: 25; 
2019: 30; 
2020: 30; 
2021: 30; 
2022: 40; 
2012-2017: 100; 
2012-2022: 255. 

Interaction; 
2012: 0; 
2013: 0; 
2014: 0; 
2015: 50; 
2016: 227; 
2017: 231; 
2018: 256; 
2019: 208; 
2020: 209; 
2021: 159; 
2022: 110; 
2012-2017: 508; 
2012-2022: 1,450. 

Extension for Transfers/420 for life insurance; 2012: 0; 
2013: 0; 
2014: 20; 
2015: 41; 
2016: 42; 
2017: 43; 
2018: 44; 
2019: 45; 
2020: 47; 
2021: 18; 
2022: 24; 
2012-2017: 145; 
2012-2022: 354. 

Net total revenue increases; 
2012: 595; 
2013: 2,611; 
2014: 4,871; 
2015: 6,150; 
2016: 5,469; 
2017: 3,180; 
2018: 1,679; 
2019: 426; 
2020: -1,132; 
2021: -1,964; 
2022: -1,602; 
2012-2017: 22,875; 
2012-2022: 20,373. 

Source: Joint Committee on Taxation. 

[End of table] 

[End of section] 

Appendix II: President's Fiscal Year 2013 Budget Proposal for PBGC: 

The Budget of the United States Government, Fiscal Year 2013, includes 
information on the President's budget priorities organized by agency. 
Administratively, PBGC is an entity within of the Department of Labor. 
In the President's budget, one of the funding highlights for the 
Department of Labor includes the following: "Safeguards workers' 
pensions by encouraging companies to fully fund their employees' 
promised pension benefits and assuring the long-term solvency of the 
Federal pension insurance system." The President proposes 
accomplishing this by (1) raising $16 billion in additional premium 
revenue over 10 years through phased-in increases to PBGC's flat and 
variable-rate premiums, and (2) giving the PBGC's Board of Directors 
the authority to adjust premiums. 

Excerpts from the President's Budget Proposal: 

(1) The administration proposed raising $16 billion in additional 
premium revenue over 10 years by raising $4 billion in additional 
flat-rate premiums and $12 billion in additional variable-rate 
premiums (see table 10). Relevant excerpts from the budget proposal 
are provided below. 

* Strengthen the Safety Net for Workers' Retirement Benefits. All 
Americans deserve a secure retirement.... The Pension Benefit Guaranty 
Corporation (PBGC), which protects the retirement security of 44 
million workers in defined benefit pension plans, is also critical to 
the success of a robust pension system. When underfunded plans 
terminate, PBGC assumes responsibility for paying the insured 
benefits. PBGC is responsible for paying current and future retirement 
benefits to more than 1.5 million workers and retirees. PBGC receives 
no taxpayer financing and relies primarily on premiums paid by insured 
plans. PBGC premiums are currently much lower than what a private 
financial institution would charge for insuring the same risk and are 
insufficient for PBGC to meet its long-term obligations. As of the end 
of September 2011, PBGC faced a $26 billion deficit. The 
Administration proposes to encourage companies to fully fund their 
pension benefits and ensure PBGC's continued financial soundness by 
giving the PBGC Board the authority to adjust premiums to better 
account for the risk the agency is insuring. This proposal consists of 
two parts: a gradual increase in the single-employer flat-rate premium 
that will raise approximately $4 billion by 2022; and PBGC Board 
discretion to increase the single-employer variable-rate premium to 
raise $12 billion by 2022. This proposal would save $16 billion over 
the next decade. (p. 146) 

Table 10: Proposed Budget Savings Listed under PBGC: 

Deficit increases (+) or decreases (-) in millions of dollars: 

Improve Pension Benefit Guaranty Corporation (PBGC) solvency; 2013: --; 
2014: -$81; 
2015: -$1,828; 
2016: -$2,275; 
2017: -$2,316; 
2018: -$2,067; 
2019: -$1,713; 
2020: -$1,616; 
2021: -$1,874; 
2022: -$2,210; 
Totals: 2013-2017: -$6,500; 
Totals: 2013-2022: -$15,980. 

Source: Budget proposal, p. 231, Table S-9. Mandatory and Receipt 
Proposals (excerpt under Labor). 

[End of table] 

(2) The President's fiscal year 2013 budget proposes giving the PBGC 
Board of Directors the authority to adjust premiums. Relevant excerpts 
from the budget proposal are provided below. 

* Shores Up the Pension Benefit Guaranty Corporation to Protect Worker 
Pensions. The Pension Benefit Guaranty Corporation (PBGC) acts as a 
backstop to protect pension payments for workers whose companies have 
failed. Currently, the PBGC's pension insurance system is itself 
underfunded, and the PBGC's liabilities exceed its assets. The PBGC 
receives no taxpayer funds and its premiums are currently much lower 
than what a private financial institution would charge for insuring 
the same risk. The Budget proposes to give the PBGC Board the 
authority to adjust premiums and directs PBGC to take into account the 
risks that different sponsors pose to their retirees and to PBGC. This 
will both encourage companies to fully fund their pension benefits and 
ensure the continued financial soundness of PBGC. In order to ensure 
that these reforms are undertaken responsibly during challenging 
economic times, the Budget would require a year of study and public 
comment before any implementation and the gradual phasing-in of any 
premium increases. This proposal is estimated to save $16 billion over 
the next decade. (p. 147) 

Rate Increases under the President's Proposal: 

PBGC estimated the increases in the flat and variable rates that would 
be needed to reach the administration's revenue targets over the 10-
year period. PBGC estimated that the flat rate would need to double 
from the current rate of $35 per participant to $71 in 2022, and the 
variable rate would increase almost eight-fold from its current rate 
of $9 per $1,000 of underfunding to $71 in 2022 (see table 11). 

Table 11: Increase in Premium Rates for the Single-Employer Program 
Estimated by PBGC for the President's Fiscal Year 2013 Budget, Fiscal 
Years 2013-2022: 

Flat rate (dollars charged per participant)[A]; 2013: $36.00; 
2014: $40.00; 
2015: $44.00; 
2016: $48.00; 
2017: $52.00; 
2018: $56.00; 
2019: $60.00; 
2020: $63.00; 
2021: $67.00; 
2022: $71.00. 

Variable rate (dollars charged per $1,000 of underfunding)[B]; 2013: 
$9.00; 
2014: $15.88; 
2015: $22.76; 
2016: $29.64; 
2017: $36.53; 
2018: $43.41; 
2019: $50.29; 
2020: $57.17; 
2021: $64.05; 
2022: $70.93. 

Source: GAO analysis of PBGC data. 

[A] The flat-rate premium is calculated on a per participant basis. 
Under current law, the flat rate for fiscal year 2012 is $35 per 
participant, and is indexed to increases in the national average wage 
index, as determined by the Social Security Administration. 29 U.S.C. 
§ 1306(a)(3)(A) and (F). 

[B] The variable-rate premium is calculated based a plan's level of 
underfunding whereby every $1,000 of underfunding is multiplied by the 
rate. Under current law, the variable rate is $9 per every $1,000 of 
plan underfunding. The current flat and variable rates are authorized 
in 29 U.S.C. 1306 § 1306(a)(3)(F). 

[End of table] 

This estimate is based on PBGC's projections that assume plan 
participant levels would remain unchanged[Footnote 88] and unfunded 
vested benefit levels would decline significantly over the next decade 
[Footnote 89] and do not incorporate any additional risk factors into 
the variable rate. PBGC projected this decrease in underfunding 
(increase in funding) due to several factors,[Footnote 90] including 
PPA funding requirements that will tend to bolster plan funding over 
this period.[Footnote 91] 

However, PBGC used PIMS to make assumptions about future unfunded 
vested benefit levels for estimating premium rates for the President's 
proposal, and PBGC officials recognize that uncertainty exists in the 
many economic factors and underlying assumptions used for this 
projection. In addition, the agency's Inspector General recently 
identified internal control deficiencies related to actuarial 
estimates used in the agency's PIMS model.[Footnote 92] We reviewed 
the PIMS data provided to us and conducted a meeting with PBGC 
officials to discuss the reliability of these data and some of the 
data used in its exposure report. We determined that the PIMS data 
provided to us and used by PBGC in its report were sufficiently 
reliable to provide information on the approximate magnitude of PBGC's 
future financial condition and to generally understand the mechanics 
of premium options. 

Using the same assumptions PBGC used to estimate rates for the 
President's fiscal year 2013 budget, we estimated the increases in 
rates that would be needed to reach a revenue target of $23 billion, 
the current level of PBGC's deficit in the single-employer program. 
This scenario illustrates the increases in rates that would be 
required if no other sources of revenue were available to help address 
PBGC's deficit, such as returns on investment. We found that under 
this scenario, the flat-rate premium would need to increase to $75 and 
the variable-rate premium to $106 by fiscal year 2022. 

[End of section] 

Appendix III: Further GAO Analyses of a Risk-Based Premium Option: 

To better understand the impact on rates under one hypothetical risk-
based option, we conducted additional analyses using data provided to 
us by PBGC from a premium option model PBGC designed to illustrate 
different premium scenarios. PBGC's model used 2010 data from a sample 
of 2,699 DB plans covering 27.5 million participants. The model 
covered 81 percent of all PBGC insured participants (33.8 million) in 
2010. 

First, we analyzed the sample data to determine how the plans would be 
distributed based on their financial health and funded status. Results 
are summarized in table 12. 

Table 12: Distribution of Plans by Financial Health and Funded Status 
under a Hypothetical Risk-Based Option: 

Financial health: Extremely healthy (1); Funded status: 
120%: 21; 
90% to under 120%: 110; 
75% to under 90%: 59; 
Less than 75%: 6; 
Total plans: 196. 

Financial health: Very healthy (2); Funded status: 
120%: 58; 
90% to under 120%: 349; 
75% to under 90%: 155; 
Less than 75%: 24; 
Total plans: 586. 

Financial health: Healthy (3); 
Funded status: 
120%: 55; 
90% to under 120%: 527; 
75% to under 90%: 367; 
Less than 75%: 68; 
Total plans: 1017. 

Financial health: Risky (4); 
Funded status: 
120%: 20; 
90% to under 120%: 215; 
75% to under 90%: 203; 
Less than 75%: 85; 
Total plans: 523. 

Financial health: Very risky (5); 
Funded status: 
120%: 15; 
90% to under 120%: 118; 
75% to under 90%: 178; 
Less than 75%: 66; 
Total plans: 377. 

Total: 
Funded status: 
120%: 169; 
90% to under 120%: 1319; 
75% to under 90%: 962; 
Less than 75%: 249; 
Total plans: 2699. 

Source: GAO analysis of PBGC data from a sample of 2,699 defined 
benefit plans used in PBGC's hypothetical premium model. 

[End of table] 

Next, we analyzed the effect of the rate changes under this option on 
the sample based on the number of participants in the sample of plans 
used in PBGC's model, as shown in table 13. In total, we estimate that 
rates would decrease under the risk-based option over 2015 rates for 
plans covering a majority of participants in the sample when 
considering the per participant costs for sponsors, regardless of the 
funding status of a participant's plan or the financial health of the 
participant's sponsor. 

Table 13: Number and Percentage of Participants with Premium Rate 
Changes under One Hypothetical Risk-Based Option: 

Plan funded status: 120%; 
Premium rate change over 2015 per participant rate: Participants with 
increase: 904,921 (42%); Participants with decrease: 1,238,648 (58%). 

Plan funded status: 90% to under 120%; Premium rate change over 2015 
per participant rate: Participants with increase: 7,158,249 (42%); 
Participants with decrease: 9,948,743 (58%). 

Plan funded status: 75% to under 90%; Premium rate change over 2015 
per participant rate: Participants with increase: 2,355,025 (37%); 
Participants with decrease: 4,033,812 (63%). 

Plan funded status: Less than 75%; Premium rate change over 2015 per 
participant rate: Participants with increase: 1,375,433 (74%); 
Participants with decrease: 491,817 (26%). 

Plan financial health: Extremely healthy (1); Premium rate change over 
2015 per participant rate: Participants with increase: 5,160 (less 
than 1%); Participants with decrease: 2,684,969 (100%). 

Plan financial health: Very healthy (2); Premium rate change over 2015 
per participant rate: Participants with increase: 67,446 (1%); 
Participants with decrease: 9,340,587 (99%). 

Plan financial health: Healthy (3); Premium rate change over 2015 per 
participant rate: Participants with increase: 4,858,897 (61%); 
Participants with decrease: 3,083,163 (39%). 

Plan financial health: Risky (4); 
Premium rate change over 2015 per participant rate: Participants with 
increase: 3,603,325 (90%); Participants with decrease: 390,053 (10%). 

Plan financial health: Very risky (5); Premium rate change over 2015 
per participant rate: Participants with increase: 3,258,800 (94%); 
Participants with decrease: 214,248 (6%). 

Plan financial health: More financially healthy (1-3); Premium rate 
change over 2015 per participant rate: Participants with increase: 
4,931,503 (25%); Participants with decrease: 15,108,719 (75%). 

Plan financial health: Less financially healthy (4-5); Premium rate 
change over 2015 per participant rate: Participants with increase: 
6,862,125 (92%); Participants with decrease: 604,301 (8%). 

Source: GAO analysis of PBGC data from a sample of 2,699 defined 
benefit plans used in PBGC's hypothetical premium model. 

[End of table] 

We further analyzed the effect of the rate changes under this option 
on plans in PBGC's sample. As table 14 shows, the distributional 
effect of premium changes for plans using this option varies based on 
a sponsor's financial health and plan funding levels. We estimate that 
premiums for a majority of plans categorized as more financially 
healthy would decrease, due in part to the proposed increase in the 
flat rate to $49 per participant under the new law compared to $44 per 
participant under this option. In the model, PBGC assumed that plans 
with 90 percent or greater funding levels and rated as either 
extremely healthy or very healthy for financial health would be 
considered as low risk for plan termination and would therefore not 
have a variable rate included in their premium calculation. We 
estimated that two-thirds of plans considered financially healthy 
would have their rates decreased and that nearly all plans considered 
less financially healthy would experience a rate increase under this 
option. 

Table 14: Number and Percentage of Plans with Premium Rate Changes 
under One Hypothetical Risk-Based Option: 

Plan funded status: Greater than 120%; Premium rate change over 2015 
per participant rate: Plans with increase: 90 (53%); 
Plans with decrease: 79 (47%). 

Plan funded status: Greater than 90% to under 120%; Premium rate 
change over 2015 per participant rate: Plans with increase: 770 (58%); 
Plans with decrease: 549 (42%). 

Plan funded status: 75% to under 90%; Premium rate change over 2015 
per participant rate: Plans with increase: 408 (42%); 
Plans with decrease: 554 (58%). 

Plan funded status: Less than 75%; Premium rate change over 2015 per 
participant rate: Plans with increase: 169 (68%); 
Plans with decrease: 80 (32%). 

Plan financial health: Extremely healthy (1); Premium rate change over 
2015 per participant rate: Plans with increase: 2 (1%); 
Plans with decrease: 194 (99%). 

Plan financial health: Very healthy (2); Premium rate change over 2015 
per participant rate: Plans with increase: 16 (3%); 
Plans with decrease: 570 (97%). 

Plan financial health: Healthy (3); Premium rate change over 2015 per 
participant rate: Plans with increase: 598 (59%); 
Plans with decrease: 419 (41%). 

Plan financial health: Risky (4); 
Premium rate change over 2015 per participant rate: Plans with 
increase: 478 (91%); 
Plans with decrease: 45 (9%). 

Plan financial health: Very risky (5); Premium rate change over 2015 
per participant rate: Plans with increase: 343 (91%); 
Plans with decrease: 34 (9%). 

Plan financial health: More financially healthy (1-3); Premium rate 
change over 2015 per participant rate: Plans with increase: 616 (34%); 
Plans with decrease: 1183 (66%). 

Plan financial health: Less financially healthy (4-5); Premium rate 
change over 2015 per participant rate: Plans with increase: 821 (91%); 
Plans with decrease: 79 (9%). 

Source: GAO analysis of PBGC data from a sample of 2,699 defined 
benefit plans used in PBGC's hypothetical premium model. 

[End of table] 

[End of section] 

Appendix IV: The United Kingdom's Pension Protection Fund's Premium 
Structure: 

The United Kingdom's (UK) Pension Protection Fund (PPF) employs a 
premium structure--which it refers to as a levy[Footnote 93]--that 
includes a risk-based premium to help mitigate risk presented by 
sponsors of defined benefit (DB) plans.[Footnote 94] Beginning with 
its first plan year in 2006/07, risk factors have been incorporated 
into premium rates. PPF has experienced a surplus in its net financial 
position when comparing its assets and its liabilities. As of March 
31, 2011, PPF had a $1.08 billion surplus, an increase of $480 million 
over the previous year. 

Features of PPF's Premium Structure: 

PPF sets a premium revenue target based on a long-term funding 
strategy of accumulating assets that are 10 percent larger than its 
liabilities. To meet its revenue target, PPF collects two types of 
premiums from plan sponsors: a risk-based premium and a plan-based 
premium. The risk-based premium is based on three risk factors---a 
plan's asset investment mix, a plan's funding level, and risk of 
sponsor bankruptcy, which PPF refers to as insolvency risk. The plan-
based premium is based on the size of a plan and its liabilities. For 
plan year 2012/13, PPF is using the following formula to calculate the 
plan-based and risk-based premiums: 

Risk-based premium: 
underfunding risk modified by investment risk stress (U*Inv) x 
insolvency risk (P) x levy scaling factor (C): 

Plan-based premium: 
.000085 (h) x smoothed liabilities (L): 

Table 15 describes the different components of PPF's premium formula 
for plan year 2012/13. 

Table 15: Components of the United Kingdom's Pension Protection Fund's 
Premium Formula, Plan Year 2012/13: 

Risk-based premium: 

Premium formula component: Underfunding risk (U); Description: 
Represents the potential size of a plan's claim on the PPF. U is the 
underfunding amount of the plan determined by using the plan's assets 
and liabilities, taking account of any valid contingent asset 
arrangements and deficit-reduction contributions. Contingent assets 
are assets that a sponsor puts forth to reduce potential losses to 
PPF.[A] Asset and liability values used in calculating underfunding 
risk are adjusted based on an investment risk methodology (see below.) 

Premium formula component: Investment risk (INV); Description: An 
adjustment made to underfunding risk that takes into account risk 
posed by a sponsor's investment strategy for its plans' assets. 
Different asset classes used for investing--such as bonds, equities, 
commodities, and hedge funds--are stressed according to risk and the 
value of assets in each asset class is increased or decreased as 
appropriate by the corresponding asset stress percentage INV. 

Premium formula component: Insolvency risk (P); Description: 
Represents the likelihood of a plan's sponsor becoming insolvent and 
the plan potentially becoming a claim on the PPF. P is the probability 
of insolvency of the sponsor, taking into account the plan structure. 
Probabilities of insolvency are provided to the PPF by Dun & 
Bradstreet. P may be modified where there is a Type A contingent 
asset, which is a parent or group company guarantee to cover PPF 
losses should the plan terminate. PPF uses D&B failure scores to 
estimate a sponsor's insolvency risk. Based on this score, a sponsor 
is placed in one of 10 premium bands, with each band assigned an 
associated premium rate. 

Premium formula component: Premium scaling factor (C); Description: 
Scales down risk-based premium so that together with the plan-based 
levies, PPF will ensure that the total premium collected matches the 
premium estimate, which is based on long-term risk exposure. In the 
premium formula, this is represented as C and is .89 for 2012/13. 

Plan-based premium: 

Premium formula component: Multiplier (H); Description: H is a plan-
based premium multiplier applied to every plan to cover the costs of 
capping[B] the highest risk-based premiums--about 10 percent of the 
premium. 

Premium formula component: Liabilities (L); Description: L is the 
plan's estimated liabilities as of a certain date. 

Source: GAO analysis of PPF data. 

[A] PPF describes contingent assets as those assets that occur when 
another company under the same corporate umbrella as a plan sponsor 
guarantees a portion of the plan's liabilities, thereby reducing the 
plan sponsor's risk of entering bankruptcy. Continent assets can also 
occur when a plan sponsor (or a company under the same corporate 
umbrella) pledges assets--a bank account, land, or securities--that 
will go to the pension plans if a sponsor enters bankruptcy or when a 
party outside the sponsor's corporate umbrella guarantees a portion of 
the plan's liabilities, either through a letter of credit or a bank 
guarantee. 

[B] The risk-based premium is also capped to protect the most 
vulnerable plans. The cap for 2012/13 is 75 basis points (0.75 
percent) of smoothed liabilities. Where the risk-based premium 
calculated using the above formula exceeds 0.75 percent of a plan's 
liabilities, the cap is applied and the premium is decreased 
accordingly. 

[End of table] 

PPF allows plan sponsors to lower their premium by pledging contingent 
assets, which can be used to cover potential losses from underfunded 
plans that terminate and reduce the risk posed to PPF, and thus reduce 
their risk-based premium. PPF defines contingent assets in a number of 
ways. Type A contingent assets occur when another company under the 
same corporate umbrella as a plan sponsor guarantees a portion of the 
plan's liabilities, thereby reducing the plan sponsor's risk of 
entering bankruptcy. Type B continent assets occur when a plan sponsor 
(or a company under the same corporate umbrella) pledges assets--a 
bank account, land, or securities--that will go to the pension plans 
if a sponsor enters bankruptcy. Type C contingent assets occur when a 
party outside the sponsor's corporate umbrella guarantees a portion of 
the plan's liabilities, either through a letter of credit or a bank 
guarantee. Both Type B and C contingent assets lower the liabilities 
that PPF would take over in the event that the sponsor was to enter 
bankruptcy and transfer its plan(s) to the agency. 

PPF's Funding Strategy: 

PPF's funding strategy is formulated to meet the agency's stated long-
term goal of accumulating assets that are 10 percent larger than the 
agency's liabilities by 2030, which represents a state of self-
sufficiency.[Footnote 95] Initially, the funding strategy reflected a 
"top down" approach in which the PPF would decide upon the total level 
of premiums that it deemed appropriate in a given year, and adjusted 
the premium parameters accordingly on an annual basis. Beginning with 
the 2012/13 plan year, the funding strategy is revised to reflect a 
"bottom up" approach in which the parameters will be fixed for 3 years 
and, ideally, remain stable for 3 years between reviews. 

Potential Applicability of PPF's Premium Structure for PBGC: 

Specific components of PPF's premium structure--such as use of 
additional risk factors for sponsor financial health and plan 
investment strategy, setting rates based on long-term budget 
estimates, and smoothing techniques--might have applicability for 
PBGC.[Footnote 96] However, there are substantial regulatory, 
fiduciary, and scale differences between PPF and PBGC. For example, 
PPF functions as part of a larger pension regulatory structure, which 
includes The Pension Regulator (PR). One of PR's stated objectives is 
to reduce the risk that PPF will need to take on unfunded liabilities, 
and the agency has statutory authority to work with plan sponsors to 
mitigate these risks through increasing plan funding levels and other 
measures. In addition, UK pension law requires that at least one-third 
of individuals responsible for administering the plan, or plan 
trustees, must be selected by plan participants, while there is no 
requirement for stakeholder representation among fiduciaries of U.S. 
plans. Further, the scale of the number of participants PPF insures is 
much smaller than participants insured by PBGC. In 2011, PPF insured 
12 million participants, while PBGC provided insurance for 44 million 
participants. 

[End of section] 

Appendix V: Overview of Pension Benefit Guaranty Corporation's Process 
for Calculating Its Deficit: 

As required under ERISA,[Footnote 97] each year, PBGC calculates the 
corporation's net financial position by determining the values of its 
assets, offset by the value of its liabilities, for the single-
employer and multiemployer programs combined. According to PBGC, a 
primary objective of its financial statements, and specifically its 
net financial position, is to provide information that is useful in 
assessing the agency's present and future ability to ensure that its 
plan beneficiaries receive benefits when due. Although long-term 
projections inherently contain a significant degree of uncertainty, a 
surplus net financial position signifies that, based on the 
assumptions used, PBGC estimates that it has sufficient assets to pay 
all current and future guaranteed benefit obligations; a deficit net 
financial position signifies that its assets are not sufficient to pay 
all future obligations. The deficit is calculated in conformance with 
generally accepted accounting principles, which, among other things, 
require making estimates and assumptions that affect the reported 
amounts of liabilities as of the date of the statement and that may 
change over time. In particular, liabilities included in the single-
employer deficit calculation include those from claims already 
incurred and claims deemed probable in the near term, but not future 
claims beyond that.[Footnote 98] The main components of PBGC's assets 
and liabilities and descriptions of how PBGC determines the values for 
each of those components are summarized in table 16. The amounts of 
assets and liabilities in these various categories, for fiscal year-
end 2011, can be found in table 17 later in this section. 

Table 16: Main Components of Assets and Liabilities Included in PBGC's 
Statements of Financial Condition: 

Assets: 

Financial statement component: Investments, at market; Description of 
valuation: Investment assets are valued based on market prices, 
specifically, on the last sale of a listed security, on the mean of 
the "bid-and-ask" for nonlisted securities, or on a valuation model in 
the case of fixed income securities that are not actively traded.[A] 
These valuations are determined as of the end of each fiscal year. 
Purchases and sales of securities are recorded on the trade date. PBGC 
marks a plan's assets to market and any increase or decrease in the 
market value of a plan's assets occurring after the date on which the 
plan is terminated must, by law, be credited to or suffered by PBGC. 

Financial statement component: Receivables, net (including premiums 
and investment income)[B]; 
Description of valuation: Premiums receivable represent the estimated 
earned but unpaid portion of premiums and past due premiums deemed 
collectible, including penalties and interest. Investment income is 
accrued as earned. 

Financial statement component: Cash and cash equivalents; Description 
of valuation: Cash includes cash on hand and demand deposits. Cash 
equivalents are investments with original maturities of 1 business day 
and highly liquid investments that are readily convertible into cash 
within 1 business day. 

Financial statement component: Securities lending collateral; 
Description of valuation: PBGC's custodian bank requires collateral 
that equals 102 percent to 105 percent of the securities lent. The 
custodian bank either receives cash or noncash as collateral or 
returns collateral to cover mark-to-market changes. 

Financial statement component: Capitalized assets, net; Description of 
valuation: Capitalized assets include furniture and fixtures, 
electronic processing equipment and internal-use software. These costs 
are shown net of accumulated depreciation and amortization. 

Liabilities: 

Financial statement component: Total present value of future benefits, 
net; 
Description of valuation: Net liabilities for future pension benefits 
that PBGC is or will be obligated to pay the participants of single-
employer plans terminated and trusteed, in accordance with the limits 
specified in ERISA, and plans that have $50 million or more of 
underfunding that PBGC believes will probably terminate in the near 
future.[C] 

Financial statement component: Total present value of nonrecoverable 
future financial assistance; 
Description of valuation: The estimated value of nonrecoverable future 
financial assistance to multiemployer plans that are not able to meet 
their benefit obligations,[D] including probable insolvent plans. 

Financial statement component: Payables, net (including unearned 
premiums, amounts due for purchases of securities and derivative 
contracts)[B]; 
Description of valuation: The liability for unearned premiums 
represents an estimate of payments received during the fiscal year 
that cover the portion of a plan's year after PBGC's fiscal year-end. 
Securities sold under repurchase agreements are valued at the amounts 
at which the securities well be subsequently reacquired. 

Net position (loss): 
Total assets minus total liabilities. 

Source: PBGC's 2011 Annual Report. 

[A] An investment valuation model is a widely accepted method used in 
finance to compute the current value of an asset based on statistical 
inputs for cash flow expectations. 

[B] In addition, derivative financial instruments are recorded at fair 
value and are included on the Statements of Financial Condition as 
investments and derivative contracts. Swaps are netted rather than 
recorded at gross levels for the individual contracts as "Receivables, 
net-Derivative contracts" and "Derivative contracts" (liabilities). 
PBGC invests in and discloses its derivative investments in accordance 
with the guidance contained in the FASB Accounting Standards 
Codification Section 815, Derivatives and Hedging. 

[C] PBGC may classify an underfunded plan as a probable termination 
when, among other things, the plan's sponsor is in liquidation under 
federal or state bankruptcy laws. 

[D] In accordance with Title IV of ERISA, PBGC provides financial 
assistance to multiemployer plans, in the form of loans, to enable the 
plans to pay guaranteed benefits to participants and reasonable 
administrative expenses. 29 U.S.C. § 1431. These loans, issued in 
exchange for interest-bearing promissory notes, constitute an 
obligation of each plan. 

[End of table] 

PBGC's Assumptions in Valuing Future Benefit Payments: 

Changes to the underlying assumptions used to value liabilities can 
have a material effect on PBGC's net financial position and on any 
conclusions drawn about PBGC's ability to pay all current and future 
guaranteed benefit obligations (from claims already incurred and those 
deemed probable in the near term) from assets on hand. According to 
PBGC, liabilities under the single-employer program are valued by 
estimating the present value of future benefits expected to be paid--
that is, PBGC uses certain assumptions to adjust the value of future 
benefit payments to reflect the time value of money (by discounting) 
and the probability of payment (by means of decrements, such as for 
death or retirement). The calculation requires an assumption about 
interest rates, which reflects how much could be earned in the future 
from investing today's dollars. Assuming a lower interest rate 
increases the present value of future payments or benefits.[Footnote 
99] 

PBGC develops its assumptions on discount rates based on group annuity 
prices,[Footnote 100] identified through a group annuity survey 
conducted by the American Council of Life Insurers. PBGC maintains 
that the annuity prices found on the survey reflect rates at which its 
liabilities (net of administrative expenses) could be settled in the 
market at September 30 for the respective year via single-premium 
nonparticipating group annuities issued by private insurers.[Footnote 
101] 

PBGC notes that many factors, including Federal Reserve policy, 
changing expectations about longevity risk, and competitive market 
conditions may affect its estimate of these rates. Using data from the 
annuity survey, PBGC establishes two interest rate factors to compute 
estimates of the present value of its liabilities--the "select" and 
"ultimate" rates.[Footnote 102] A decline in PBGC's asset values can 
be particularly problematic if these interest rates remain low or 
fall, which raises PBGC's liabilities, all else equal. 

PBGC also notes that, over time, actuarial adjustments may occur as 
the result of new data (e.g., mortality experience, revised 
participant data), as well as from changes in valuation methodology, 
such as estimating liabilities on a group basis ("nonseriatum") versus 
calculating a separate liability for each person ("seriatum"). 
Liabilities also will grow with the passage of time (as future benefit 
payments draw closer to payment), will decrease as benefits are paid 
out (discharging part of the liability), and will change with changes 
in interest rates and changes in other actuarial assumptions. These 
adjustments represent the change in the present value of future 
benefits that results from applying actuarial assumptions in the 
calculation of liabilities.[Footnote 103] 

PBGC's Fiscal Year 2011 Financial Statement: 

For fiscal year-end 2011, PBGC reported net accumulated deficit of 
approximately $26.04 billion. (A summary of PBGC's deficit calculation 
for fiscal year-end 2011 is found in table 17). 

Table 17: PBGC Statements of Financial Condition for its Single-
Employer and Multiemployer Programs, Fiscal Year 2011: 

Dollars in millions: 

Assets: 

Investments, at market; 
Single-employer program: $66,271; 
Multiemployer program: $1,720; 
Single-employer and multiemployer combined: $67,991. 

Receivables, net (including premiums); Single-employer program: $3,049; 
Multiemployer program: $13; 
Single-employer and multiemployer combined: $3,062. 

Cash and cash equivalents; 
Single-employer program: $5,021; 
Multiemployer program: $5; 
Single-employer and multiemployer combined: $5,026. 

Securities lending collateral; 
Single-employer program: $4,587; 
Multiemployer program: 0; 
Single-employer and multiemployer combined: $4,587. 

Capitalized assets, net; 
Single-employer program: $32; 
Multiemployer program: $1; 
Single-employer and multiemployer combined: $33. 

Total assets; 
Single-employer program: $78,960; 
Multiemployer program: $1,739; 
Single-employer and multiemployer combined: $80,699. 

Liabilities: 

Total present value of future benefits, net; Single-employer program: 
$92,953; 
Multiemployer program: $1; 
Single-employer and multiemployer combined: $92,954. 

Total present value of nonrecoverable future financial assistance; 
Single-employer program: 0; 
Multiemployer program: $4,475; 
Single-employer and multiemployer combined: $4,475. 

Total payables; 
Single-employer program: $9,273; 
Multiemployer program: $33; 
Single-employer and multiemployer combined: $9,306. 

Total liabilities; 
Single-employer program: $102,226; Multiemployer program: $4,509; 
Single-employer and multiemployer combined: $106,735. 

Net position (loss); 
Single-employer program: ($23,266); Multiemployer program: ($2,770); 
Single-employer and multiemployer combined: ($26,036). 

Source: PBGC's 2011 Annual Report. 

[End of table] 

To estimate the present value of future benefits, PBGC used a 20-year 
select interest factor of 4.31 percent followed by an ultimate factor 
of 4.26 percent for the remaining years. PBGC strengthened its 
mortality assumptions in 2011 (i.e., assumed longer life expectancy), 
which resulted in higher interest factors than would have been 
estimated under the previous mortality assumption.[Footnote 104] In 
addition, PBGC has estimated that as of September 30, 2011, 135 
multiemployer plans[Footnote 105] will exhaust plan assets and need 
financial assistance from PBGC to pay guaranteed benefits and plan 
administrative expenses.[Footnote 106] 

PBGC's Historical Net Financial Position: 

Over the last 20 years, PBGC has experienced marked swings in its 
annual net financial position for its single-employer program (see 
figure 3). For example, by fiscal year-end 1990, PBGC experienced a 
$3.0 billion (in 2011 dollars) accumulated deficit, but by fiscal 
year-end 2000, PBGC's deficit had shifted to a nearly $12.5 billion 
surplus (in 2011 dollars), in part due to fewer new claims, higher 
interest rates used to value liabilities, and investment gains. In 
recent years, PBGC has again reported growing deficits. Between fiscal 
year-ends 2008 and 2011, the single-employer program's deficit grew 
from just over $11 billion (in 2011 dollars) to just over $23 billion. 
Much of this recent increase in its accumulated deficit was the result 
of investment losses and declines in interest rates in the wake of the 
economic downturn and the termination of a relatively small number of 
very large underfunded plans. 

Figure 3: PBGC's Surplus/Deficit for the Single-Employer Program, 
Fiscal Years 1980 to 2011: 

[Refer to PDF for image: vertical bar graph] 

Fiscal year: 

1980: -$0.2 billion; 
1985: -$2.4 billion; 
1990: -$3.0 billion; 
1995: -$0.4 billion; 
1996: $1.2 billion; 
1997: $4.7 billion; 
1998: $6.6 billion; 
1999: $9.2 billion; 
2000: $12.4 billion; 
2001: $9.7 billion; 
2002: -$4.5 billion; 
2003: -$13.5 billion; 
2004: -$27.4 billion; 
2005: -$25.9 billion; 
2006: -$20.0 billion; 
2007: -$14.0 billion; 
2008: -$11.2 billion; 
2009: -$21.7 billion; 
2010: -$22.0 billion; 
2011: -$23.3 billion. 

Source: GAO analysis of PBGC data. 

Note: Data adjusted for inflation. 

[End of figure] 

[End of section] 

Appendix VI: Overview of Pension Benefit Guaranty Corporation's 
Pension Insurance Modeling System: 

In 1998, PBGC began to use its Pension Insurance Modeling System 
(PIMS) to help the agency better understand and quantify its long-term 
risk and exposure to loss under different economic conditions and 
policy alternatives. Much like insurers of catastrophic risk (natural 
disasters), PBGC is vulnerable to large losses that occur with 
relatively low probabilities. With these types of insurance, the 
historic pattern of claims is not an adequate predictor of future 
experience. Instead, it is more informative to examine the underlying 
processes that give rise to claims and assess their likelihood of 
occurring. PIMS is a stochastic (randomly determined) simulation model 
designed to quantify the amount of risk facing PBGC's two insurance 
programs. The model does not predict future claims. Rather, by fully 
exploiting the historic relationships of key economic variables, the 
model assigns probabilities to various levels of potential claims. 
PBGC uses this information to estimate its potential future financial 
positions. PIMS is also used to assess various policy alternatives--
such as changes in plan funding requirements or PBGC's premium 
structure--and their impact on PBGC's financial condition. PIMS is not 
used to calculate the current deficit. (See appendix V for information 
on how PBGC calculates its deficit.) 

PIMS is a stochastic (random) simulation model of elements in PBGC's 
financial statement. The random effects in the simulation are based on 
measures of the historical volatility in key factors that underlie the 
pension insurance, including interest rates, stock market returns, and 
corporate bankruptcy rates. For each year in a simulation, the model 
randomly selects values for each element and, combining these factors, 
determines PBGC's financial condition under that scenario. The model 
generates thousands of multiyear projections of PBGC's future 
financial condition. The results from the different scenarios are 
compiled to show how frequently different types of outcomes are 
simulated. The frequency with which an outcome is simulated (for 
example, that PBGC attains a surplus in the next 10 years) estimates 
the likelihood of that outcome's actual occurrence. 

Step 1: Modeling the Underlying Mechanics: 

To project a range of PBGC's possible future financial positions, PIMS 
must begin by modeling some of the underlying mechanics and 
relationships that feed into the simulated outcomes. These portions of 
the model include macroeconomic factors, corporate sponsor behavior, 
and pension plan behavior. 

Macroeconomic Factors: 

According to PBGC, the most important variables in PIMS are two 
macroeconomic factors: stock returns and interest rates. Stock returns 
are modeled to fluctuate in the short-term but revert to a long-term 
average, so each year's S&P 500 return is equal to 10.4 percent plus a 
random disturbance. The disturbance is randomly selected to represent 
the historic distribution of stock returns. Interest rates, unlike 
stock returns, are correlated over time. To model interest rates, PIMS 
uses a simple random walk process whereby this year's interest rate 
equals last year's interest rate plus a random disturbance. Because 
stock returns are more likely to be high when factors related to the 
interest rate are falling, PIMS uses historical estimates to correlate 
the random disturbances that affect stock returns and interest rates. 

Plan Sponsor Behavior: 

For plan sponsors, PIMS models measures of financial health and, from 
that, the probability of bankruptcy. The measures of financial health 
include financial ratios (i.e., equity-to-debt and cash flow-to-asset 
ratios), employment levels, and equity values. Financial ratios are 
modeled as a regression to long-term averages of these measures, with 
random disturbances. Employment and equity levels are modeled using a 
random walk process, and values for both measures are correlated based 
on their historical relationship. To model plan sponsor bankruptcy, 
PIMS measures the historical relationship between the probability of 
bankruptcy and firms' employment levels and financial ratios. These 
factors, taken together, determine the probability that a sponsor will 
enter bankruptcy during a given period. 

Pension Plan Behavior: 

To model pension plan behavior, PIMS uses a database with detailed 
information about a non-representative sample of 450 of the 28,000 
plans covered by PBGC. These 450 plans represented about half of 
PBGC's insurance exposure in the single-employer defined benefit 
system.[Footnote 107] The plans in the sample are weighted based on 
funding ratios to represent all plans insured by PBGC. Plan 
information in the PIMS database includes asset returns, sponsor 
contributions, participant composition, and benefit and salary levels. 

* Asset returns: PIMS uses historical information of individual plans' 
returns based on correlations with stock returns and interest rates. 
Each plan's asset returns also has a random element that is not 
correlated to the simulated economic scenario. 

* Sponsor contributions: PIMS models sponsor contributions in two 
different ways: (1) for projecting future claims, sponsors are assumed 
to make the minimum contribution required by Internal Revenue Code; 
and (2) for projecting variable-rate premium collections, a higher 
level of contributions reflects historical data on PBGC premium 
collections. 

* Participant composition: PIMS models participant composition by 
simulating participants' retirement, separation from employment, and 
death based on actuarial assumptions. In addition, the number of 
active participants in each plan fluctuates according to the sponsor's 
total employment level. 

* Benefit and salary levels: PIMS models benefit level growth as equal 
to the rate of inflation plus a fixed parameter to represent 
productivity growth. To model salaries paid, PIMS assumes that 
salaries grow with age and service to reflect merit and promotion, and 
average salary levels for a given age and service level grow at the 
rate of inflation plus productivity growth. 

Step 2: Combining Components into Simulated Scenarios: 

In a simulation, PIMS uses these components of its model to project 
possible outcomes. PIMS first draws a series of stock returns and 
interest rates--called an economic scenario--one for each simulated 
year. Next, plan sponsors and pension plans are all subjected to the 
economic scenario to determine how they react and, ultimately, how it 
affects PBGC. To create a distribution of possible future outcomes, 
PIMS draws 500 unique economic scenarios and runs plan sponsors 
through each economic scenario 10 times for a total of 5,000 different 
simulations. 

Plan Sponsors' Risk of Bankruptcy: 

Each plan sponsor is brought through the series of economic scenarios. 
The model draws new financial ratios and employment levels for each 
sponsor in each simulated year and, based on that, assigns each 
sponsor a probability of bankruptcy. PIMS uses this probability to 
determine whether a sponsor enters bankruptcy during each scenario. To 
illustrate, PIMS models a sponsor's chances of bankruptcy as a lottery 
urn filled with balls. If a sponsor has a 1 percent probability of 
bankruptcy during an economic scenario, its urn contains one ball to 
represent bankruptcy and 99 balls to represent survival to the next 
period. PIMS draws a ball from the urn for each of the times a firm is 
cycled through the model's simulated economic scenarios.[Footnote 108] 
A sponsor enters bankruptcy during any simulation where PIMS draws the 
ball that represents bankruptcy. Plans sponsored by bankrupt sponsors 
are assumed to present a claim to PBGC if they are less than 80 
percent funded. Otherwise a standard termination is assumed. 

Pension Plans' Risk of Underfunding: 

PIMS brings each pension plan through the economic scenario, with 
equity returns, interest rates, and its sponsor's simulated employment 
level and plan demographics all affecting the plan's assets and 
liabilities. By including minimum funding rules to simulations, PIMS 
calculates possible paths in underfunding within the constraints of 
existing funding rules. In addition, plan sponsors will be assessed 
PBGC premiums and make contributions to the plan. For purposes of 
modeling future claims in PIMS, it is assumed that employers will 
contribute the minimum required amount each year and that any credit 
balance remaining when any new funding rules take effect will be used 
to the maximum extent permitted until the balance is completely 
depleted. 

PBGC's Financial Position and Risk of Loss: 

Finally, PBGC is brought through the economic scenario. This includes 
effects on PBGC's existing assets and liabilities from previously 
terminated plans, both from investment returns and from revaluations 
of liabilities due to changes in interest rates. The agency also makes 
benefit payments to trusteed participants and collects premiums from 
sponsors. To determine premium revenue, PIMS estimates revenue 
associated with flat-rate premiums (based on each plan's projected 
participant level) and variable-rate premiums (based on each plan's 
projected funding level). PBGC may also experience a new claim 
associated with sponsor bankruptcy. When a plan sponsor enters 
bankruptcy, PIMS estimates the level of underfunding for benefits that 
PBGC guarantees; any plan funded at 80 percent or less becomes a claim 
on PBGC. 

To project PBGC's future financial condition, PIMS uses a detailed 
database of about 450 actual plans, sponsored by about 330 firms, 
which represent about half of PBGC's insurance exposure in the single-
employer defined benefit system measured from the Form 5500 filings. 
The database includes the plan demographics, plan benefit structure, 
asset values, liabilities, and actuarial assumptions. It also includes 
key financial information about the employer sponsoring the plan. The 
PIMS database contains pension plan information from Schedule B of the 
Form 5500 (Annual Return/Report of Employee Benefit Plan). In 
addition, more recent data available from Employee Retirement Income 
Security Act of 1974 section 4010[Footnote 109] filings is utilized 
for certain large underfunded plans. 

Step 3: Summarizing the Results: 

In its 2010 Exposure Report,[Footnote 110] PBGC estimates that of out 
of 5,000 simulations, none project that PBGC's single-employer program 
will run out of money within the next 10 years (fiscal year 2020). In 
the PIMS projection for the PBGC 2010 Annual Report, 2.5 percent of 
the simulations project that the program will run out of money by 
fiscal year 2030. A slight majority of the simulations result in 
improved or unchanged positions. 

However, because some simulations result in very large deficits for 
the program, the average (mean) outcome is a decline in the program's 
position from a deficit of $21.3 in fiscal year 2011 to a deficit of 
$24.2 billion by fiscal year 2020 (see figure 4). PIMS offers a range 
of probable outcomes, with high and low values calculated for each 
year. Although PBGC projects a zero percent probability that its 
single-employer program will be insolvent by the end of fiscal year 
2020, as the figure shows, the high and low value estimates--which 
represent the 85th and 15th percentiles for the projections--ranges 
from a surplus of $4 billion to a deficit of nearly $53 billion for 
that fiscal year. [Footnote 111] 

Figure 4: PBGC Actual and Projected Net Financial Position for the 
Single-Employer Program, Fiscal Years 2001 to 2020: 

[Refer to PDF for image: line graph] 

Year: 2001; 
Actual: $7.7 billion. 

Year: 2002; 
Actual: -$3.6 billion. 

Year: 2003; 
Actual: -$11.2 billion. 

Year: 2004; 
Actual: -$23.3 billion. 

Year: 2005; 
Actual: -$22.8 billion. 

Year: 2006; 
Actual: -$18.1 billion. 

Year: 2007; 
Actual: -$13.1 billion. 

Year: 2008; 
Actual: -$10.7 billion. 

Year: 2009; 
Actual: -$21.1 billion. 

Year: 2010; 
Actual: -$21.6 billion. 

Year: 2011; 
Projected "high/low" range (85th percentile to 15th percentile): 
-$15.03 to -$26.9 billion; 
Projected average: -$21.3 billion. 

Year: 2012; 
Projected "high/low" range (85th percentile to 15th percentile): 
-$12.7 to -$31.9 billion; 
Projected average: -$22.6 billion. 

Year: 2013; 
Projected "high/low" range (85th percentile to 15th percentile): 
-$10.5 to -$35.5 billion; 
Projected average: -$23.3 billion. 

Year: 2014; 
Projected "high/low" range (85th percentile to 15th percentile): 
-$7.6 to -$39.2 billion; 
Projected average: -$23.9 billion. 

Year: 2015; 
Projected "high/low" range (85th percentile to 15th percentile): 
-$6.1 to -$42.4 billion; 
Projected average: -$24.5 billion. 

Year: 2016; 
Projected "high/low" range (85th percentile to 15th percentile): 
-$4.9 to -$44.4 billion; 
Projected average: -$24.6 billion. 

Year: 2017; 
Projected "high/low" range (85th percentile to 15th percentile): 
-$2.8 to -$46.9 billion; 
Projected average: -$24.4 billion. 

Year: 2018; 
Projected "high/low" range (85th percentile to 15th percentile): 
-$0.9 to -$48.8 billion; 
Projected average: -$24.4 billion. 

Year: 2019; 
Projected "high/low" range (85th percentile to 15th percentile): 
$1.7 to -$51.1 billion; 
Projected average: -$24.3 billion. 

Year: 2020; 
Projected "high/low" range (85th percentile to 15th percentile): 
$4 to -$52.5 billion; 
Projected average: -$24.2 billion. 

Source: PBGC data. 

[End of figure] 

For the multiemployer program, PBGC estimates a 6.2 percent chance 
that the multiemployer program will be insolvent by 2020, and a 29.2 
percent chance that it will be insolvent by 2030, mostly due to the 
deterioration in two large multiemployer plans. 

Limitations of PIMS: 

PIMS is not a predictive model and it does not attempt to anticipate 
behavioral responses by a company to changed circumstances, such as 
changes to the premium structure. For example, the model has not been 
used to anticipate a sponsor's behavioral reaction--such as 
voluntarily terminating or freezing their plans, or increasing plan 
funding above the minimum required, or changing plan asset 
allocation--to an increase in premiums or to the introduction of risk 
factors to premium rates. Various paths of underfunding can occur in 
the future, and PIMS does not allow PBGC to know which particular path 
of underfunding might occur or which particular firms might enter 
bankruptcy. However, PBGC assumes that the process that generates 
historical volatility in key variables is reasonably representative of 
the process that governs future volatility, and that PIMS provides for 
a reasonable evaluation of the likelihood that various economic 
scenarios can develop. By modeling real pension plans and 
incorporating minimum funding rules, PBGC uses PIMS to quantify the 
likelihood that various levels of exposure can develop under these 
conditions. 

In May 2012, PBGC's Inspector General identified internal control 
deficiencies related to the agency's PIMS model.[Footnote 112] PBGC's 
Inspector General reported that the agency published its 2010 Annual 
Exposure Report with erroneous and inconsistent results from its PIMS 
model. Furthermore, the Inspector General reported that PBGC's Policy 
Research and Analysis Department (PRAD) did not conduct any documented 
review of the underlying support used for the report and lacks quality 
control policies to ensure the integrity of reported estimates. The 
report made several recommendations to ensure the quality of PRAD's 
actuarial work products, including establishing policies and 
procedures to review contractor work performed with PIMS; establishing 
policies and procedures to retain supporting documentation of work 
done by PRAD actuaries and actuarial contractors; and developing and 
documenting a strategic review of the process of creating actuarial 
reports to identify critical control points to increase quality 
control. Relevant to these deficiencies, Congress made improvements to 
PBGC in the Moving Ahead for Progress in the 21st Century Act. 
[Footnote 113] Under those amendments PBGC is to contract with an 
outside agency (such as the Social Security Administration) to conduct 
an annual review of PIMS. The first reviews will be initiated no later 
than 3 months after the enactment of the act. Further, PBGC is also 
required to establish written quality control procedures for modeling 
and actuarial work done in PRAD, including a record management review 
to determine records that must be retained. Within two months, PBGC is 
required submit a report to Congress detailing a timetable for 
addressing recommendations from the Inspector General's recent report 
on PRAD. 

[End of section] 

Appendix VII: Plan Sponsors and Pension Experts Interviewed: 

Plan Sponsors: 

We conducted interviews with a small judgmental sample of nine plan 
sponsors, selected to reflect a range of attributes, including company 
financial health, plan funded status, size of plan (based on the 
market value of the plan's assets), number of participants, status of 
plan (active or frozen), and union involvement.[Footnote 114] 

* Comerica Incorporated, Dallas, Texas (financial services): 

* Exelon Corporation, Chicago, Illinois (energy provider): 

* General Electric Company, Fairfield, Connecticut (multiple 
industries): 

* Lockheed Martin Corporation, Bethesda, Maryland (aeronautics/ 
electronics): 

* R.R. Donnelley & Sons Company, Chicago, Illinois (communications): 

* The McClatchy Company, Sacramento, California (publishing): 

* Tomkins PLC, London, United Kingdom (engineering/manufacturing): 

* TOTAL S.A., Courbevoie, France (energy provider): 

* Whirlpool Corporation, Benton Harbor, Michigan (home appliances): 

Pension Experts: 

We also conducted interviews with pension experts reflecting a range 
of academic, actuarial, business, and labor perspectives from the 
institutions and organizations listed below. [Footnote 115] 

* American Benefits Council: 

* AFL-CIO: 

* American Academy of Actuaries: 

* American Enterprise Institute: 

* American Society of Pension Professionals and Actuaries: 

* Boston University: 

* Brookings Institution: 

* Covington & Burling: 

* Davis and Harman Drexel University: 

* Employee Benefit Research Institute: 

* ERISA Industry Committee: 

* Massachusetts Institute of Technology: 

* National Institute on Retirement Security: 

* The New School: 

* Pennsylvania State University: 

* Pension Rights Center: 

* Society of Actuaries: 

* Towers Watson: 

* United Auto Workers: 

* U.S. Chamber of Commerce: 

[End of section] 

Appendix VIII: History of Pension Benefit Guaranty Corporation 
Premiums for the Single-Employer Program, Fiscal Years 1974 to 2012: 

For plan years beginning: 1974-1977; Flat-rate premium (per 
participant): $1.00; Variable-rate premium (per $1000 of unfunded 
vested benefits)[B]: -; Termination premium (per participant per year 
for 3 years)[B]: -. 

For plan years beginning: 1978-1985; Flat-rate premium (per 
participant): $2.60; Variable-rate premium (per $1000 of unfunded 
vested benefits)[B]: -; Termination premium (per participant per year 
for 3 years)[B]: -. 

For plan years beginning: 1986-1987; Flat-rate premium (per 
participant): $8.50; Variable-rate premium (per $1000 of unfunded 
vested benefits)[B]: -; Termination premium (per participant per year 
for 3 years)[B]: -. 

For plan years beginning: 1988-1990; Flat-rate premium (per 
participant): $16.00; Variable-rate premium (per $1000 of unfunded 
vested benefits)[B]: $6; Termination premium (per participant per year 
for 3 years)[B]: -. 

For plan years beginning: 1994-2005; Flat-rate premium (per 
participant): $19.00; Variable-rate premium (per $1000 of unfunded 
vested benefits)[B]: 9; Termination premium (per participant per year 
for 3 years)[B]: -. 

For plan years beginning: 2006; 
Flat-rate premium (per participant): $30.00[A]; Variable-rate premium 
(per $1000 of unfunded vested benefits)[B]: $9; Termination premium 
(per participant per year for 3 years)[B]: $1,250. 

For plan years beginning: 2007; 
Flat-rate premium (per participant): $31.00; Variable-rate premium 
(per $1000 of unfunded vested benefits)[B]: $9; Termination premium 
(per participant per year for 3 years)[B]: $1250. 

For plan years beginning: 2008; 
Flat-rate premium (per participant): $33.00; Variable-rate premium 
(per $1000 of unfunded vested benefits)[B]: $9; Termination premium 
(per participant per year for 3 years)[B]: $1250. 

For plan years beginning: 2009; 
Flat-rate premium (per participant): $34.00; Variable-rate premium 
(per $1000 of unfunded vested benefits)[B]: $9; Termination premium 
(per participant per year for 3 years)[B]: $1250. 

For plan years beginning: 2010-2012; Flat-rate premium (per 
participant): $35.00; Variable-rate premium (per $1000 of unfunded 
vested benefits)[B]: $9; Termination premium (per participant per year 
for 3 years)[B]: $1250. 

Source: GAO analysis of PBGC data. 

[A] For each plan year beginning after 2006, this amount is adjusted 
annually based on changes in the national average wage index, as 
defined in section 209(k)(1) of the Social Security Act, (42 U.S.C. § 
409(k)(1)). 29 U.S.C. § 1306(a)(3)(F). The premium rate will not 
decline even if the national average wage index declines. The adjusted 
premium rate is rounded to the nearest multiple of $1. 

[B] Where dashes are shown, the variable-rate premium and termination 
premium did not yet exist. 

[End of table] 

[End of section] 

Appendix IX: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Charles A. Jeszeck, (202) 512-7215 or jeszeckc@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Margie Shields (Assistant 
Director), Ted Burik (Analyst-in-Charge), Margaret Childs, David 
Chrisinger, Kimberly Granger, Isabella Johnson, Gene Kuehneman, Mimi 
Nguyen, Frank Todisco, Walter Vance, and Craig Winslow made key 
contributions to this report. 

[End of section] 

Footnotes: 

[1] Pub. L. No. 93-406, § 4002(a), 88 Stat. 829, 1004 (codified as 
amended at 29 U.S.C. § 1302(a)). 

[2] PBGC administers two separate insurance programs: a single-
employer program and a multiemployer program. The single-employer 
program, comprised of about 25,000 DB plans, insures each plan 
established and maintained by one employer. The much smaller 
multiemployer program, comprised of about 1,500 plans, insures plans 
that are arranged through collective bargaining between one or more 
labor unions and a group of employers in a particular trade or 
industry. This report focuses on the challenges facing PBGC's single-
employer program. 

[3] Generally speaking, a claim occurs when a plan sponsor with an 
underfunded plan goes bankrupt. 

[4] Pub. L. No. 109-280, 120 Stat. 780. 

[5] Although primarily about funding highways, MAP-21 included several 
pension-related provisions, requiring changes to the funding rules for 
DB plan sponsors, strengthening PBGC governance practices, as well as 
increasing premium rates for DB plans covered by PBGC's single-
employer and multiemployer insurance programs. Pub. L. No. 112-141, § 
40221, 126 Stat. 404, 846-59 (2012). (See appendix I for more 
information on the pension-related provisions included in MAP-21.) 

[6] We did not conduct independent legal analysis to verify the 
information about the PPF's premium framework, but rather relied on 
PPF documents that are publicly available and on discussions with PPF 
officials. See appendix IV for a description of the risk factors the 
PPF has incorporated into its premium structure in the UK. 

[7] In May 2012, PBGC's Inspector General released a report finding 
that PIMS, one of the modeling tools the agency uses to make estimates 
of its future financial condition and evaluate premium options, lacks 
key internal controls to ensure the integrity of the model's reported 
results. Specifically, the Inspector General found that PBGC had 
published erroneous and inconsistent results in its 2010 Exposure 
Report and that PBGC's Policy Research and Analysis Department failed 
to conduct documented reviews of the underlying support used for the 
report and lacked quality control policies to ensure the integrity of 
reported estimates. PBGC's response to the Inspector General's 
findings includes a commitment to strengthening and documenting the 
quality assurance process, to posting a corrected report on PBGC's 
website, and to noting the errors in the forthcoming fiscal year 2011 
Exposure Report. See PBGC Office of Inspector General, Ensuring the 
Integrity of Policy Research and Analysis Department's Actuarial 
Calculations, PA-12-87 (Washington, D.C.: May 2012). Subsequently, 
MAP-21 instructed PBGC to provide a specific report addressing 
outstanding recommendations made by the Inspector General relating to 
the Policy, Research, and Analysis Department and the Benefits 
Administration and Payment Department. § 40231(f), 126 Stat. 855-56. 

[8] 29 U.S.C. §§ 1302(a)(2) and 1361. The guaranteed benefit limits 
for participants in single-employer plans cannot exceed the statutory 
maximum, adjusted annually, at the time the plan terminates. For 2012, 
the maximum is $54,000 per year for a person retiring at age 65 with 
no survivor benefit (that is, a single-life annuity). The maximum is 
lower for those retiring under age 65 or with a survivor benefit. 29 
U.S.C. § 1322(b)(3); 29 C.F.R. § 4022.23 (2012). Other guaranteed 
benefit limits for participants in single-employer plans include the 
phase-in limit and accrued-at-normal limit. Under the phase-in limit, 
for any benefit increase implemented through a plan amendment that has 
been in effect for less than 5 years, only a pro-rata portion can be 
guaranteed. 29 U.S.C. § 1322(b)(1) and (7); 29 C.F.R. § 4022.25 
(2012). Under the accrued-at-normal limit, the monthly guaranteed 
benefit cannot be greater than the monthly benefit provided as a 
straight-life annuity (that is, a periodic payment for the life of the 
retiree, with no additional payments to survivors) available at the 
plan's normal retirement age. 29 C.F.R. § 4022.21 (2012). 

[9] 29 U.S.C. § 1302(d). Prior to the enactment of the PPA, ERISA 
charged the Secretary of Labor as the chair of PBGC's board with 
administering PBGC. The Secretary has, in turn, historically delegated 
the responsibility for administering PBGC to an executive director. 
Since the enactment of PPA the director has replaced the chair of the 
board as PBGC administrator. § 411(a), 120 Stat. 935. 

[10] We have previously reported concerns regarding PBGC's board, 
including limitations in its ability to provide policy direction and 
oversight to PBGC, and the need for the implementation of certain 
types of reporting requirements--such as congressional notifications 
and reporting protocols for advisory committees--to ensure effective 
communication between PBGC and Congress. See GAO, Pension Benefit 
Guaranty Corporation: Governance Structure Needs Improvements to 
Ensure Policy Direction and Oversight, [hyperlink, 
http://www.gao.gov/products/GAO-07-808] (Washington, D.C.: July 6, 
2007) and Pension Benefit Guaranty Corporation: Improvements Needed to 
Strengthen Governance Structure and Strategic Management, [hyperlink, 
http://www.gao.gov/products/GAO-11-182T] (Washington, D.C.: Dec. 1, 
2010). 

[11] § 40231, 126 Stat.853-56. 

[12] 29 U.S.C. §§ 1322 and 1322a. The single-employer program insures 
plans established and maintained by one employer. Single-employer 
plans can be established unilaterally by the sponsor or through a 
collective bargaining agreement with a labor union. The multiemployer 
program insures plans that are arranged through collective bargaining 
between a labor union and a group of employers in a particular trade 
or industry. Management and labor representatives must jointly govern 
multiemployer plans. 29 U.S.C. § 1002(37). 

[13] 29 U.S.C. § 1302(a). 

[14] 29 U.S.C. § 1341(b). If the sponsor of a single-employer plan 
meets the statutory requirements for financial distress and the plan 
does not have sufficient assets to pay promised ("vested accrued") 
benefits, the plan will be terminated--referred to as distress or 
involuntary termination--and PBGC will likely become the plan's 
trustee, assuming responsibility for paying benefits to participants 
as they become due, up to the guaranteed benefit limits. 29 U.S.C. § 
1341(c). 

[15] For example, a pension plan may close to new participants, or a 
plan may opt to prohibit existing participants from earning pension 
benefits in the future. 

[16] The Towers Watson study further found that larger DB plan 
sponsors are less likely to move away from a DB design than their 
smaller counterparts and that certain industries (e.g., utilities, 
health care) are more likely to depend on DB benefits as a vital 
component of reward packages to attract and retain skilled workers. 

[17] The PPA included provisions to modify funding rules and increase 
premiums for sponsors of single-employer plans. §§ 101, 102, 111, and 
112, and 401 and 405, 120 Stat. 784-809, 820-846, and 922 and 928-29. 
However, Congress has provided funding relief in the last few years 
and revised some provisions to help mitigate the effects of the recent 
economic downturn. Worker, Retiree, and Employer Recovery Act of 2008, 
Pub. L. No. 110-458, §§ 101, 102, 121 and 122, 122 Stat. 5092, 5093-
5103, 5113-14. Parts of PPA must be reauthorized in 2014. PPA, § 221, 
120 Stat. 918-19. Congress provided additional relief in MAP-21. § 
40221, 126 Stat. 850-52. 

[18] 29 U.S.C. § 1305(b). Throughout this report we refer to all funds 
generated through the investment of assets as investment income. We 
recently reported on PBGC's investment strategy; see GAO, Pension 
Benefit Guaranty Corporation: Asset Management Needs Better 
Stewardship, [hyperlink, http://www.gao.gov/products/GAO-11-271] 
(Washington, D.C.: June 30, 2011). 

[19] While figure 1 compares premium revenue and investment income to 
new claims, some amount of investment revenue is needed simply to keep 
pace with interest on existing liabilities (absent other changes, 
liabilities grow in value over time as future benefit payments draw 
closer). As such, one way to judge the adequacy of premiums is to 
compare premium revenue against new claims, over a sufficiently long 
period. 

[20] Premium revenue for fiscal year 2002 is adjusted for inflation. 

[21] The nearly $2.1 billion in premium revenue in fiscal year 2011 
consisted of $1.1 billion in flat-rate premiums and $929 million in 
variable-rate premiums. 

[22] The value of liabilities is equal to the actuarial present value 
of projected future benefit payments, which is determined by use of 
certain assumptions to adjust the amount of future benefit payments to 
reflect the time value of money (by discounting) and the probability 
of payment (by means of decrements, such as for death or retirement). 
The calculation requires an assumption about interest rates, which 
reflects how much could be earned in the future from investing today's 
dollars. PBGC also includes the estimated liabilities in excess of 
assets for new claims that it deems probable. 

[23] See appendix V for a more detailed description of how PBGC 
calculates its deficit. 

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

[25] GAO, High-Risk Series: An Update, [hyperlink, 
http://www.gao.gov/products/GAO-03-119] (Washington, D.C.: January 
2003); High-Risk Series: An Update, [hyperlink, 
http://www.gao.gov/products/GAO-09-271] (Washington, D.C.: January 
2009); and High-Risk Series: An Update, [hyperlink, 
http://www.gao.gov/products/GAO-11-278] (Washington, D.C.: February 
2011), 150-153. Although we designated PBGC's single-employer program 
as a "high-risk" program in 2003, we first designated PBGC as a high-
risk area in 1990, citing taxpayers' exposure to potential losses from 
the termination of large, underfunded plans. In 1995, we removed PBGC 
from our list of high-risk areas due to congressional and agency 
actions that we believed would reduce PBGC's exposure to losses. In 
2009, we also designated the multiemployer program as high risk. 

[26] Historically under ERISA, PBGC was granted a $100 million line of 
credit from the federal government. ERISA, § 4005(c), 88 Stat. 1010. 
Under MAP-21, enacted in July 2012, this line of credit was 
discontinued. § 40234, 126 Stat. 858-59. 

[27] 29 U.S.C. § 1306(a)(3)(A)(1), (E) and (F). PBGC collects a 
termination premium from sponsors of single-employer plans terminated 
in bankruptcy reorganization or involuntarily by PBGC. 29 U.S.C. § 
1306(a)(7). PBGC may initiate an "involuntary" termination if the plan 
has not met minimum funding standards, the plan will be unable to pay 
benefits when due, a reportable event has occurred, or the possible 
long-run loss to PBGC with respect to the plan may reasonably be 
expected to increase if the plan is not terminated. For plan year 
2011, the termination premium was $1,250 per participant per year for 
3 years. 

[28] § 40221, 126 Stat. 850-52. 

[29] See appendix VIII for a summary of historical PBGC premium rates, 
1974 to 2012. 

[30] For the purpose of this projection, PBGC assumed that the flat 
rate would increase each year over the current rate by approximately 
$1 to account for an annual increase in the wage growth index and that 
the variable rate would remain the same as current law for the period. 

[31] See Steven Boyce and Richard A. Ippolito, "The Cost of Pension 
Insurance," The Journal of Risk and Insurance, vol. 69, no. 2 (2002): 
121-170. 

[32] PBBC's estimated total unfunded liabilities are based on all plan 
liabilities, whether vested or not. 

[33] See U.S. Congressional Budget Office, The Risk Exposure of the 
Pension Benefit Guaranty Corporation (Washington, D.C.: September 
2005). 

[34] The uniform premium also does not vary according to sponsor or 
plan characteristics. 

[35] § 40221, 126 Stat. 446-448 (2012). The law also provided for rate 
increases for all multiemployer plan sponsors insured by PBGC. Pub. L. 
No. 112-141, § 40222, 126 Stat. 852-53. 

[36] In constructing its model, PBGC selected a sample of plans from 
its 2010 premium database that had readily available data regarding 
either the sponsor's credit rating or Dun & Bradstreet score. The 
resulting sample included 2,699 plans. We validated the model by 
reviewing the formulas PBGC used to analyze the 2010 premium data and 
assessed the reliability of the data used in the model. Where we found 
problems with formulas or other points of information used in the 
model's analysis, we discussed these issues with PBGC officials and 
made corrections to their analysis. 

[37] For the purpose of its analysis in the premium model, PBGC 
estimated a combined flat and variable rate on a per participant basis 
for the hypothetical option to increase rates under the current 
structure in order to make comparisons to per participant rates under 
other options. Under the hypothetical option to increase rates under 
the current structure, PBGC estimated that the combined per 
participant rate (i.e., the flat rate, plus the amount collected from 
the variable rate divided by the number of plan participants) ranged 
from $60 to $4,367. By way of comparison, PBGC calculated that 
combined premium rates under the structure in place for fiscal year 
2010 ranged from $35 per participant to $2,481. 

[38] 29 U.S.C. § 1306(a)(3)(E). 

[39] Data for fiscal year 2011 were through April 2011. 

[40] Two pension experts we spoke with believe that PBGC is not an 
insurance program since it is statutorily required to insure all DB 
plans. These experts instead believe that PBGC is a social protection 
program, providing participants a social safety net by obligating the 
payment of pension benefits up to certain limits for underfunded plans 
that terminate. 

[41] The President had also proposed in his Plan for Economic Growth 
and Deficit Reduction from September 2011 that total PBGC premiums for 
any plan would not exceed four times the amount payable with respect 
to the plan for the 2010 plan year, on a per participant basis. Under 
PBGC's risk-based option, PBGC estimates that 84 percent of the total 
increase in premium revenue over 2010 levels would be attributable to 
the increase in the variable rate for sponsors. 

[42] This particular premium design levies the variable rate portion 
of the premium--which reflects both plan underfunding and sponsor 
financial health--on a per participant basis. An alternative would be 
to levy the variable rate portion as a percentage of the plan's 
liability--which would reflect the fact that two plans with the same 
number of participants could have different levels of plan liability, 
and therefore risk exposure, per participant, because of differences 
in the level of benefits provided by the plan and in the ages of plan 
participants. 

[43] For more information on FDIC's efforts to tie premiums to the 
estimated risk a bank poses to the agency, see GAO, Deposit Insurance: 
Assessment of Regulators' Use of Prompt Corrective Action Provisions 
and FDIC's New Deposit Insurance System [hyperlink, 
http://www.gao.gov/products/GAO-07-242] (Washington, D.C.: Feb. 15, 
2007). 

[44] We did not conduct independent legal analysis to verify the 
information in this section of the report but rather relied on 
discussions with PPF officials in the UK and on PPF public documents. 

[45] The PPF refers to plans as schemes and premiums as levies. For 
the purpose of this report, we continue to use plans and premiums when 
discussing PPF's premium framework. 

[46] In the UK, the Dun & Bradstreet failure score predicts the 
likelihood that a company will obtain legal relief from its creditors 
or cease operations over the next 12-month period. It is presented as 
a ranking score ranging from 1-100: 1 indicates the highest risk of 
failure and 100 the lowest level of risk. Businesses with the same 
failure score have the same risk of failure. 

[47] PPF's annual revenue target is based on estimates of the funds 
required to meet certain future financial goals. Beginning in August 
2010, PPF has published its funding strategy, which sets out how the 
agency intends to have the financial resources needed to pay existing 
levels of compensation to current and future PPF participants and 
become financially self-sufficient by 2030. For plan year 2012/13, the 
premium scaling factor is set to scale down risk-based premiums so 
that together with the plan-based premiums, PPF will collect revenue 
sufficient to meet its target ($864 million) for the year. 

[48] A plan's premium depends on the funding position of the plan. PPF 
uses information about the value of plan assets and liabilities 
supplied to the agency by sponsors to calculate underfunding risk. 

[49] To reduce the impact of short-term volatility in the financial 
markets, and to ensure that all plans are treated on a consistent 
basis, for plan year 2012/13, PPF will smooth the value of the assets 
and liabilities that a plan reports using 5-year financial market 
averages up to March 30, 2012. 

[50] The cap for 2012/13 is 75 basis points (0.75 percent) of smoothed 
liabilities. Where the risk-based premium calculated using the above 
formula exceeds 0.75 percent of a plan's liabilities, the cap is 
applied and the premium is decreased accordingly. 

[51] While the premium cap applies only to some plans' risk-based 
premiums, the multiplier is spread across all plans' plan-based 
premiums to help meet PPF's revenue target. PPF contends that this 
approach also makes the necessary cross-subsidy in the plan-based 
premium more transparent as it ends the practice of scaling up risk-
based premiums to cover the cost of capping. In essence, PPF is 
minimizing the amount of cross-subsidization in the plan-based premium 
by limiting it to only cover premiums lost via the capping on risk-
based premium. In the previous plan year, a multiplier was applied to 
every plan so that plan-based premiums made up an estimated 20 percent 
of the total pension protection premium estimate for the year. 

[52] PPF defines self-sufficiency as a level of assets 10 percent in 
excess of its liabilities. In addition to being fully funded, PPF's 
goal is to eliminate its exposure to interest rate fluctuation, 
inflation, and other market risks. PPF also wants to build a reserve 
to further protect itself against future claims and the impact of 
members living longer than it estimates. Most recently, PPF's latest 
assessments show that the probability of achieving self-sufficiency 
measured on its base case has improved from 83 percent in March 2010 
to 87 per cent in March 2011. 

[53] To help reduce volatility for plan sponsors, PPF's risk-based 
premium is now fixed for 3 years. Beginning with the 2012/13 plan 
year, PPF revised its funding strategy to reflect a "bottom up" 
approach in which risk factor parameters will be fixed for 3 years 
and, ideally, remain stable between each 3-year review. Under this 
approach, PPF intends to keep the risk-based premium scaling factor 
and the plan-based multiplier fixed for 3 years--a sponsor's risk-
based premium will only change if its risk level changes. Previous to 
plan year 2012/13, PPF's model reflected a "top down" approach in 
which the PPF would decide upon the premium that it deemed appropriate 
in a given year, and then set the premium parameters accordingly on an 
annual basis. 

[54] A plan freeze is an amendment to the plan to limit some or all 
future pension accruals for some or all of the plan participants. For 
example, a pension plan may close to new participants, or a plan may 
opt to prohibit existing participants from earning pension benefits in 
the future. 

[55] As of 2008, larger sponsors, those with 10,000 or more total 
participants, were significantly less likely than smaller sponsors to 
have implemented a hard freeze. Similarly, firms with some or all 
plans subject to collective bargaining are significantly less likely 
to implement hard freezes than sponsors with no plans subject to 
collective bargaining. See GAO, Defined Benefit Pensions: Plan Freezes 
Affect Millions of Participants and May Pose Retirement Income 
Challenges, [hyperlink, http://www.gao.gov/products/GAO-08-817] 
(Washington, D.C.: July 21, 2008). 

[56] Towers Watson conducted the survey from October 2011 to December 
2011 and included responses from 424 DB pension plan sponsors at 
midsize and large organizations. Respondents were asked about changes 
to their retirement plans over the past 10 years, their motivations 
behind those changes and their future retirement offerings. See Towers 
Watson, Pensions in Transition: Retirement Plan Changes and Employer 
Motivations (New York, N.Y.: May 2012). 

[57] While higher premiums were not cited as a reason to freeze or 
terminate a plan, lower premiums were cited as a potential reason to 
reopen a plan after it had been frozen. Ibid. 

[58] According to PBGC's analysis of Bureau of Labor Statistics data, 
premiums account for about 1 cent per hour of total average 
compensation costs. This analysis was based on data that indicated 
that, on average, private industry employers spend approximately 3.6 
percent of total compensation costs on retirement and savings 
expenses, and of this, PBGC premiums generally account for 
approximately 3.4 percent of total pension costs. However, PBGC's 
analysis does not take into account that only about 10 percent of 
private companies offer access to DB plans. A more accurate 
calculation would need to reflect the cost of premiums compared to 
compensation costs among just those firms offering DB plans, but the 
Bureau of Labor Statistics does not provide a breakdown of data to 
allow such an analysis. 

[59] Our previous work on the topic noted that plan freezes and 
terminations may impact participants' retirement security by reducing 
future benefits, though this may be somewhat or entirely offset by 
increases in other benefits or a replacement retirement-savings plan. 
Additionally, under a plan termination, most participants wait about 3 
years for PBGC to complete the benefit determination process and 
provide their finalized benefit amounts. Long delays and uncertainty 
over final benefit amounts in a plan termination make it difficult for 
workers to plan for retirement, and for retirees who have come to 
depend on a certain level of monthly income. See [hyperlink, 
http://www.gao.gov/products/GAO-08-817] and GAO, Pension Benefit 
Guaranty Corporation: Workers and Retirees Experience Delays and 
Uncertainty when Underfunded Plans Are Terminated, [hyperlink, 
http://www.gao.gov/products/GAO-10-181T] (Washington, D.C.: Oct. 29, 
2009). 

[60] A hard freeze--the most common type of freeze--occurs when all 
future benefit accruals cease. 

[61] However, to terminate a plan voluntarily can be costly, as plan 
sponsors must fully fund all benefits, either by distributing lump-sum 
payments (to the extent allowed under the plan and elected by 
participants) or by purchasing annuities to secure participants' 
benefits into the future. 29 U.S.C. § 1341(b). An underfunded plan 
cannot be terminated unless the sponsor demonstrates it cannot fund 
the plan, usually through a bankruptcy proceeding. Thus, when a 
healthy sponsor terminates an underfunded plan, it first must fully 
fund the plan prior to termination. When PBGC initiates the 
termination of a plan, it is because it determines the sponsor will be 
unable to fund the plan, and it intervenes to protect participants' 
benefits. 

[62] As noted earlier, under MAP-21, per participant premium rates are 
capped at no more than $400 beginning in 2013. Under the President's 
deficit reduction proposal, per participant rates for premiums are 
capped at no more than four times the rates paid in plan year 2010. 

[63] During the recent economic downturn and current economic 
situation, Congress took similar steps to mitigate the effects of the 
PPA provisions requiring increased contributions to underfunded plans, 
allowing sponsors to amortize increases to their contributions over a 
longer period, postponing implementation of the increased funding 
requirements for some firms, and averaging market interest rates over 
a 25-year period to provide relief against the current low interest 
rate environment. Preservation of Access to Care for Medicare 
Beneficiaries and Pension Relief Act of 2010, Pub. L. No. 111-192, 124 
Stat. 1280,1283-1306, §§ 201-211; and Worker, Retiree, and Employer 
Recovery Act of 2008, Pub. L. No. 110-458, §§ 101, 102, 121 and 122, 
122 Stat. 5092, 5093-5103, 5113-14, and MAP-21, § 40221, 126 Stat. 
850-52. 

[64] In 2006, FDIC officials noted that the number of institutions in 
this highest category is small and thus the trade-off between lower 
premiums for troubled institutions and potentially larger losses for 
FDIC later would not be significant. See [hyperlink, 
http://www.gao.gov/products/GAO-07-242]. 

[65] 29 U.S.C. §§ 1021(b)(1) and 1023. 

[66] 29 U.S.C. § 1310. Section 4010 of ERISA requires certain 
underfunded plans to report identifying, financial, and actuarial 
information to the PBGC. Specifically, the conditions for reporting on 
the form 4010 include (1) that the funding target at the end of the 
preceding plan year is less than 80 percent, (2) certain conditions 
for imposition of a lien have been met, or (3) minimum funding waivers 
in excess of $1 million have been granted to any plan maintained by a 
sponsor or member of its controlled group, and any portion is still 
outstanding. 

[67] Pub. L. No. 109-280, § 505(a), 120 Stat. 946. 

[68] According to PBGC's fact sheet on the program, the EWP identifies 
potential business transactions that could jeopardize the pension 
insurance program, and PBGC works with plans sponsors to negotiate 
additional contributions or security (which may include letters of 
credit or financial guarantees) for underfunded pensions within the 
context of the transaction. PBGC will work with the company to tailor 
a settlement that is appropriate to the business transaction and 
financially feasible for the company. 

[69] Pursuant to the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, federal agencies are to review their regulations and 
remove any reference to or requirement of reliance on credit ratings 
and substitute other appropriate standards of credit-worthiness. Pub. 
L. No. 111-203, § 939A, 124 Stat. 1376, 1887 (2010). Thus, PBGC would 
be required to establish its own standard of credit-worthiness rather 
than use credit ratings to assess the risk of plan sponsors in its 
premium structure. 

[70] The exchange is maintained by the UK's Pensions Regulator, the 
agency responsible for regulating pension plans in the UK. The 
exchange allows sponsors to upload information about their plans and 
make premium payments electronically. The Pensions Regulator works 
closely with the PPF to monitor high-risk plans, minimize claims, and 
ensure that employers do not take advantage of the insurance provided 
by PPF. 

[71] The Dun & Bradstreet failure score is designed to predict the 
likelihood that a company will cease operations without paying all 
creditors over the next 12 months. This includes the onset of failure 
such as a meeting of creditors, administrator appointments, 
bankruptcy, receiver appointments, petitions for winding-up and other 
legal events. 

[72] 29 U.S.C. § 1306(a)(3)(A)(i), (E) and (F). 

[73] The President's deficit reduction proposal to incorporate 
additional risk factors into the PBGC premium structure included a 
provision for Congress to review the regulations under the "major 
rule" section of the Congressional Review Act. 5 U.S.C. §§ 801-805. 
Under the act, federal agencies promulgating regulations must submit a 
copy to GAO and both houses of Congress before the rules can take 
effect and Congress may enact a joint resolution of disapproval that 
is sent to the President for signature. We report to the Congress on 
each major rule, summarizing and assessing the procedural steps taken 
by the federal agencies in promulgating them. Congress always has the 
option of seeking to overrule regulations through the usual 
legislative process. 

[74] § 40231, 126 Stat. 854-56. 

[75] § 40231(b), 126 Stat. 854. 

[76] In [hyperlink, http://www.gao.gov/products/GAO-07-808], we 
recommended that PBGC's board should (1) establish formal guidelines 
that articulate the authorities of the board members, their respective 
departments, and PBGC's Director and (2) PBGC's board should establish 
policies, procedures, and mechanisms for providing oversight of PBGC 
that are consistent with corporate governance guidelines. These 
recommendations have been implemented. For example, in May 2008, PBGC 
issued a final rule to revise the board's bylaws to specifically 
delineate roles and responsibilities of involved parties. However, 
some of our more recent work shows that while the board has been 
meeting more often during the last few years compared to prior years, 
its members still have little time to devote to PBGC. See [hyperlink, 
http://www.gao.gov/products/GAO-11-182T]. 

[77] GAO, 21st Century Challenges: Reexamining the Base of the Federal 
Government, [hyperlink, http://www.gao.gov/products/GAO-05-325SP] 
(Washington, D.C.: February 2005). 

[78] Similarly, the President's recent proposal on deficit reduction 
called for the PBGC board to consult with individuals or organizations 
representing the interest of employees, plan sponsors, and the general 
public in designing a more risk-based premium structure. 

[79] Our prior work has noted that the ultimate success of a major 
policy change--such as the redesign of PBGC's statutory premium 
structure--depends, in part, on having reliable data and credible 
analysis to provide a compelling rationale for the proposed change. 
See [hyperlink, http://www.gao.gov/products/GAO-05-325SP]. 

[80] Pub. L. No. 112-141, § 40233(a), 126 Stat. 857-58. 

[81] The President's 2013 budget proposal to incorporate additional 
risk into the PBGC premium structure would prohibit publicly 
disclosing information used to determine premiums for plan sponsors, 
and PBGC already protects confidential information. 

[82] In previous work, we found that for policy reconsideration 
efforts of this scale, the success of the process depends, in part, on 
including a clear and transparent process for engaging the broader 
public in the debate over recommended changes. See [hyperlink, 
http://www.gao.gov/products/GAO-05-325SP]. 

[83] Plan sponsors have 28 days to appeal their premium invoice. If a 
plan sponsor believes its failure score is inaccurate, they are 
instructed to contact Dun & Bradstreet directly. 

[84] This includes the number of appeals directed to PPF. Total number 
of appeals, including those relating to the Dun & Bradstreet failure 
score, was 1,500 in 2006/7 and 560 in 2011/12. 

[85] This figure reflects the number of plans as of March 31, 2011, 
the most recently available data. 

[86] Pub. L. No. 112-141, 125 Stat. 405 (2012). The law was enacted 
primarily to authorize funds for highways, highway safety programs, 
transit programs and for other purposes. 

[87] 29 U.S.C. § 1305. 

[88] To estimate the flat-rate premium for the single-employer program 
for fiscal years 2013 to 2022, PBGC projected that the total 
participant count in its insured DB plans in this program would remain 
unchanged. However, PBGC's projection on the level of plan 
participants over the period stands in contrast to a decline in 
participants that PBGC has reported beginning in fiscal year 2005. We 
estimate that on average, participant levels have declined by about a 
quarter percentage point each year since 2005. Using a higher 
projected participant count would tend to overstate revenues for the 
period based on a per participant premium. 

[89] PBGC estimates that unfunded vested benefit levels would decrease 
from nearly $283 billion in fiscal year 2013 to just over $24 billion 
by fiscal year 2019, remaining close to that level for the remainder 
of the period. Based on this assumption, PBGC projects that even with 
rate increases proposed under the President's budget, annual revenues 
from the variable rate will decrease from $2.2 billion in fiscal year 
2013 to $1.7 billion in fiscal year 2022. The actual level of unfunded 
vested benefits in future years would depend on, among other factors, 
capital market factors such as stock market returns. Changes in PBGC's 
assumptions about unfunded vested benefit levels could significantly 
affect the amount of revenue estimated to be collected through the 
variable rate. 

[90] PBGC uses PIMS to estimate future underfunding under current and 
future funding rules as a function of a variety of economic 
parameters. PIMS models the effect of the PPA funding requirements and 
establishes a baseline for equity returns and interest rates over this 
period for the underfunding projection. See appendix VI for a 
description of PIMS. 

[91] Pub. L. No. 109-280, §§ 101, 102, 111, and 112, 120 Stat. 784-809 
and 820-846. PPA introduced new funding requirements for single-
employer DB plans beginning in 2008. The law requires plan funding to 
be equal to 100 percent of the plan's liabilities (these PPA funding 
target liabilities are not calculated using the same assumptions and 
methods as the liabilities to determine unfunded vested benefits for 
purposes of determining variable rate premiums). The 100 percent 
funding target is phased in at 92 percent in 2008, 94 percent in 2009, 
96 percent in 2010, and 100 percent in 2011 and later years. Any 
unfunded liability will have to be amortized--paid with interest--over 
7 years. 

[92] The Inspector General found that PBGC had published erroneous and 
inconsistent results in its 2010 Exposure Report and that PBGC's 
Policy, Research, and Analysis Department failed to conduct documented 
reviews for accuracy of the underlying PIMS input data, calculations, 
or assumptions used for the report and lacked quality control policies 
to ensure the integrity of reported actuarial estimates. PBGC's 
response to the Inspector General's findings includes a commitment to 
strengthening and documenting the quality assurance process, to 
posting a corrected report on PBGC's website, and to noting the errors 
in the forthcoming 2011 Exposure Report. See Pension Benefit Guaranty 
Corporation Office of Inspector General, Ensuring the Integrity of 
Policy Research and Analysis Department's Actuarial Calculations 
(Washington, D.C.: May 2012). 

[93] The PPF refers to plans as schemes and premiums as levies. For 
the purpose of this report, we continue to use plans and premiums when 
discussing PPF's premium framework. 

[94] We did not conduct independent legal analysis to verify the 
information in this section of the report but rather relied on 
discussions with PPF officials and review of documents related to 
PPF's premium structure. 

[95] The 10 percent margin is to cover the risk of longevity 
improvements greater than what PPF describes as its best estimate, and 
also the residual risk of future claims. The year 2030 is chosen as 
being the time at which the level of risk from future insolvencies is 
projected to be relatively low compared with the size of the PPF. 

[96] This was discussed in more detail on pages 22-25 and 39-40 of 
this report. 

[97] 29 U.S.C. § 1308. 

[98] Plans of companies with credit ratings below investment grade and 
multiemployer plans that may require future financial assistance are 
classified as "reasonably possible" terminations, rather than 
"probable" terminations. Although PBGC uses the estimates for 
reasonably possible plan terminations to assist with understanding the 
agency's future financial condition, these estimates are not included 
in PBGC's calculation of its deficit. 

[99] In addition to the present value of future benefits calculated 
for the single-employer program, PBGC values the liabilities for the 
multiemployer program by calculating the present value of estimated 
nonrecoverable future financial assistance--that is, estimated 
nonrecoverable payments to be provided in the future to multiemployer 
plans that are not able to meet their benefit obligations. 

[100] A single-premium nonparticipating group annuity is a contract 
between an insured entity, such as a plan sponsor, and an insurance 
company that transfers pension obligations from the plan sponsor or 
other insured entity to the insurance company, in return for a one-
time payment to the insurance company. The insurance company thereby 
takes on the investment risk, longevity risk, and other risks inherent 
in pension obligations. 

[101] GAO has reported that other than the survey conducted for PBGC, 
no mechanism exists to collect information on actual group annuity 
purchase rates. Compared to other alternatives, the PBGC interest rate 
factors may have the most direct connection to the group annuity 
market, but PBGC factors are less transparent than other, more direct 
market-determined alternatives, such as published, high-quality bond 
interest rates. Such long term bond rates may track changes in group 
annuity rates over time, but their proximity to group annuity rates is 
also uncertain. For example, a high-quality long-term bond interest 
rate may need to be adjusted downward to better reflect the level of 
group annuity purchase rates. GAO, Pension Benefit Guarantee 
Corporation: Single-Employer Pension Insurance Program Faces 
Significant Long-Term Risks, [hyperlink, 
http://www.gao.gov/products/GAO-03-873T] (Washington, D.C.: Sept. 4, 
2003). 

[102] These rates--also known as discount rates--effectively form a 
two-segment yield curve where cash flows that occur during the initial 
period are discounted by the "select" interest rate and those 
occurring after the initial period are discounted by the "ultimate" 
interest rate. For more on these rates see [hyperlink, 
http://www.pbgc.gov/prac/interest.html]. 

[103] PBGC recently changed the actuarial assumptions on participant 
mortality it uses to estimate present value of future benefits. For 
September 30, 2010, PBGC reported using the 1994 Group Annuity 
Mortality 94 Static Table set forward 1 year, projected 26 years to 
2020 using scale AA. Based on a 2011 study of PBGC's participant 
mortality, PBGC reported adopting new healthy lives mortality tables 
for the June 30, 2011, and subsequent valuations. For June 30, 2011, 
PBGC used the Retirement Plan-2000 Combined Healthy (RP-2000 CH) Male 
and Female Tables, each set back 1 year and projected 21 years to 2021 
using Scale AA. The number of years that PBGC projects the mortality 
table reflects the number of years from the 2000 base year of the 
table to the end of the fiscal year (11 years in fiscal year 2011) 
plus PBGC's calculated duration of its liabilities (10 years in fiscal 
year 2011). PBGC reported that the study also recommended changes in 
the mortality assumptions for disabled lives which will also be 
implemented in the June 30, 2011, and subsequent valuations. 

[104] Annuity prices are based on both underlying interest rate and 
mortality assumptions. When greater longevity is assumed, a higher 
interest assumption is then needed to produce annuity rates that match 
those in the American Council of Life Insurers survey. 

[105] The 135 plans fall into three categories--plans currently 
receiving financial assistance; plans that have terminated but have 
not yet started receiving financial assistance from PBGC; and ongoing 
plans (not terminated) that the corporation expects will require 
financial assistance in the future. 

[106] PBGC does not provide assistance for the full amount of these 
multiemployer plans' liabilities, and not all of PBGC's financial 
assistance to multiemployer plans is nonrecoverable. But, as we have 
reported previously, only 1 of the 62 plans that received PBGC 
financial assistance between 1981 and 2009 had repaid its loan as of 
2010. See GAO, Private Pensions: Changes Needed to Better Protect 
Multiemployer Pension Benefits, [hyperlink, 
http://www.gao.gov/products/GAO-11-79] (Washington, D.C.: Oct. 18, 
2010). 

[107] As measured by Form 5500 filings. 

[108] A typical simulation consists of 5,000 different scenarios (500 
unique economic scenarios, which PBGC and each plan and sponsor 
experience 10 times). 

[109] 29 U.S.C. § 1310. 

[110] Pension Benefit Guaranty Corporation, 2010 PBGC Annual Exposure 
Report. (Washington, D.C.: November 2011). 

[111] The mean projection for the single-employer program is based on 
a range of possible outcomes. For example, while the set of all 
single-employer results for this period includes "tail" financial 
positions from a surplus of $55 billion to a deficit of $157 billion, 
the difference between the projection's high and low values ranges 
from a $4.0 billion surplus to a $52.5 billion deficit, significantly 
less than the full range. 

[112] Pension Benefit Guaranty Corporation Office of Inspector 
General, Ensuring the Integrity of Policy Research and Analysis 
Department's Actuarial Calculations (Washington, D.C.: May 2012). 

[113] Pub. L. No. 112-141, § 40233, 126 Stat. 405,857-58, and S. Rep. 
No. 112-557, at 664 (2012). 

[114] To assist in identifying our sample of plan sponsors to be 
interviewed, we requested a random list of 180 plans from PBGC with 
certain descriptive information about each of the plans. According to 
PBGC, the spreadsheet of 180 plans they provided was randomly selected 
from a listing of all plans in PBGC's 2010 premium database that had 
readily available data regarding either the sponsor's credit rating 
for publicly traded companies or Dun & Bradstreet's score for private 
companies. PBGC officials said they sorted the list of plans in 
alphabetical order by company and then selected every 15TH row to 
create the random sample of plans. PBGC provided information on 
company financial health and each plan's funded status, number of 
participants, market value of assets, and whether the plan was frozen 
or partially frozen. We added information on union involvement based 
on what we could discern from the plan names. We then selected an 
initial list of 18 plans, and another back-up list of 18 plans, that 
represented an array of characteristics for potential interviews. We 
were ultimately able to complete interviews with nine sponsors, listed 
here. 

[115] To identify experts to contact, we began with the list of 
participants from a GAO forum held in 2005, and updated the list with 
suggestions from agency officials. See GAO, Highlights of a GAO Forum: 
The Future of the Defined Benefit System and the Pension Benefit 
Guaranty Corporation, [hyperlink, 
http://www.gao.gov/products/GAO-05-578SP] (Washington, D.C.: June 
2005). 

[End of section] 

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