Pension Benefit Guaranty Corporation:

Single-Employer Pension Insurance Program Faces Significant Long-Term Risks

GAO-04-90: Published: Oct 29, 2003. Publicly Released: Oct 29, 2003.

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Barbara D. Bovbjerg
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More than 34 million participants in 30,000 single-employer defined benefit pension plans rely on a federal insurance program managed by the Pension Benefit Guaranty Corporation (PBGC) to protect their pension benefits, and the program's long-term financial viability is in doubt. Over the last decade, the program swung from a $3.6 billion accumulated deficit (liabilities exceeded assets), to a $10.1 billion accumulated surplus, and back to a $3.6 billion accumulated deficit, in 2002 dollars. Furthermore, despite a record $9 billion in estimated losses to the program in 2002, additional severe losses may be on the horizon. PBGC estimates that financially weak companies sponsor plans with $35 billion in unfunded benefits, which ultimately might become losses to the program.

The single-employer pension insurance program returned to an accumulated deficit in 2002 largely due to the termination, or expected termination, of several severely underfunded pension plans. Factors that contributed to the severity of the plans' underfunded condition included a sharp stock market decline, which reduced plan assets, and an interest rate decline, which increased plan termination costs. For example, PBGC estimates losses to the program from terminating the Bethlehem Steel pension plan, which was nearly fully funded in 1999 based on reports to the Internal Revenue Service (IRS), at $3.7 billion when it was terminated in 2002. The plan's assets had decreased by over $2.5 billion, while its liabilities had increased by about $1.4 billion since 1999. The single-employer program faces two primary risks to its long-term financial viability. First, the large losses in 2002 could continue or accelerate if, for example, structural problems in particular industries result in additional bankruptcies. Second, revenue from premiums and investments might be inadequate to offset program losses. Participant-based premium revenue might fall, for example, if the number of program participants decreases. Because of these risks, GAO has recently placed the single-employer insurance program on its high-risk list of agencies with significant vulnerabilities to the federal government. While the recent decline in the single-employer program's financial condition is not an immediate crisis, the threats to the program's long-term viability should be addressed. Several reforms might be considered to reduce the risks to the program's long-term financial viability. These include strengthening funding rules applicable to poorly funded plans, modifying program guarantees, restructuring premiums, and improving the availability of information about plan investments, termination funding, and program guarantees. Under each reform, several possible actions could be taken. For example, one way to modify program guarantees is to phase-in certain unfunded benefits, such as "shutdown benefits," which may provide significant early retirement benefit subsidies to participants affected by a plant closing or a permanent layoff.

Matters for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: With the passage (and subsequent enactment) of the Pension Protection Act of 2006 (HR 4, P.L. 109-280), Congress has enacted among the most significant and broad-reaching changes to private pension law since the original passage of ERISA in 1974. The law enacts several changes to increase contributions for underfunded plans, including raising the full funding target from 90 to 100 percent, requiring stricter funding of plans considered at greater risk for termination, and requiring funding of plan funding deficits within 7 years. The bill restricts the guarantee of shutdown benefits by PBGC, with the guarantee phased in over 5 years starting with the date of the shutdown, equivalent to the funding of plan amendments. The law also restricts plans below 60 percent funded from paying shutdown benefits. Regarding PBGC premiums: the law effectively raises the variable rate premium by eliminating the waiver previously allowed for plans at the full funding limit. Further, fixed-rate premiums were raised by earlier legislation, the Deficit Reduction Act of 2005 (S. 1932), which raised premiums from $19/participant to $30/participant, which will adjust upwards to reflect wage growth. Both bills also implement a new termination premium of $1250/participant for sponsors that terminate a plan in bankruptcy and re-emerge from bankruptcy. Combined, these changes reform the PBGC premium structure to somewhat better reflect the risk imposed by weak plans and sponsors. The bill moves sponsors toward calculating and reporting liabilities on a termination basis, but only partially. It replaces the 30-year Treasury rate as the baseline discount rate with a modified yield curve based on a blended rate based on high-quality corporate bond rates. Sponsors would use a short-term rate for liabilities due within 5 years, a medium-term rate for benefits to be paid 5 to 15 years in the future, and a long-term rate for liabilities due beyond 15 years. The law also reduces the "smoothing" period for calculating liabilities (by reducing the period over which plans can average interest rates from 4 to 2 years) and assets (by reducing the period over which plans can average the level of assets from 5 to 2 years). Further, plans considered "at risk" of termination must calculate plan liabilities using some additional assumptions considered consistent with a terminating plan, such as that employees would retire as early as possible and would take benefits as a lump sum. In these ways, both assets and liabilities should better reflect current market conditions, although not to the extent that calculation on termination basis would. The bill requires disclosing to participants if a plan is fully funded (and funding percentage if below 100 percent) and the level of assets and liabilities, based on these new rules. It also compels plans to disclose the asset allocation of plan investments and a "general description" of benefits guaranteed by the PBGC, along with an explanation about the limits of PBGC insurance.

    Matter: Given the multidimensional and serious nature of the financial risks to PBGC's single-employer insurance program, to millions of pension plan participants and potentially to the federal budget, Congress may wish consider pension reform that is comprehensive in scope and balanced in effect. Such a comprehensive response should include changes to strengthen plan funding, especially for underfunded plans, and improve the transparency of plan information as well as consider proposals to restructure program guarantees, for example those concerning shutdown benefits. In addition, PBGC's premium structure should be re-examined to see whether premiums can better reflect the risk posed by various plans to the pension system. In any case, reforms in these areas should be based on a thorough analysis of their effects on the potentially competing interests of protecting retirees' pensions and minimizing the burden on sponsors. Essential elements of this reform would include proposals to require plans to calculate liabilities on a termination basis and disclose this information to all participants annually. Particularly with regard to disclosure, Congress may wish to consider requiring that all participants receive information about plan investments and the minimum benefit amount that PBGC guarantees should their plan be terminated

  2. Status: Closed - Not Implemented

    Comments: The Pension Protection Act of 2006 (HR 4, P.L. 109-280) does not change the current practice of cash-based accounting for pension cost estimates on the federal budget. In September 2005, the Congressional Budget Office (CBO) issued a report ("The Risk Exposure of the Pension Benefit Guaranty Corporation") that lists options to increase the agency's insurance programs' transparency, including switching to an accrual-based budgetary treatment of PBGC's operations. (This report cites GAO-05-294, but on a different topic.)

    Matter: To improve the transparency of the potential cost to the government and taxpayers of the PBGC's pension guarantees, Congress may wish to encourage the development and reporting of accrual based risk-assumed cost estimates in the federal budget in conjunction with the current cash-based estimates. Such forward looking estimates could more clearly reflect the financial condition of the program and provide information and incentives necessary to assess the future implications of programmatic decisions.


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