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entitled 'Pension Benefit Guaranty Corporation: Single-Employer 
Pension Insurance Program Faces Significant Long-Term Risks' which was 
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Report to Congressional Requesters:

United States General Accounting Office:

GAO:

October 2003:

PENSION BENEFIT GUARANTY CORPORATION:

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

Pension Benefit Guaranty Corporation:

GAO-04-90:

GAO Highlights:

Highlights of GAO-04-90, a report to congressional requesters 

Why GAO Did This Study:

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.

What GAO Found:

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 programs financial 
condition is not an immediate crisis, the threats to the programs 
long-term viability should be addressed. Several reforms might be 
considered to reduce the risks to the programs 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.

What GAO Recommends:

GAO is not recommending executive action. However, given the long-term 
nature of the financial risks to PBGCs single-employer insurance 
program, the Congress should consider a comprehensive response that 
includes changes to strengthen plan funding and improve the 
transparency of plan information as well as consider proposals to 
modify program guarantees. In addition, PBGCs premium structure 
should be re-examined to see whether premiums can better reflect the 
risk posed by various plans to the pension system.

www.gao.gov/cgi-bin/getrpt?GAO-04-90.

To view the full product, including the scope and methodology, click 
on the link above. For more information, contact Barbara Bovbjerg at 
(202) 512-7215 or bovbjergb@gao.gov.

[End of section]

Contents:

Letter:

Results in Brief:

Background:

Termination of Severely Underfunded Plans Was Primary Factor in 
Financial Decline of Single-Employer Program:

PBGC Faces Long-Term Financial Risks from a Potential Imbalance of 
Assets and Liabilities:

Several Reforms Might Reduce the Risks to the Program's Financial 
Viability:

Conclusion:

Matters for Congressional Consideration:

Agency Comments:

Appendix I: Scope and Methodology:

Appendix II: Key Legislative Changes That Affected the Single-Employer 
Program:

Appendix III: The Administration Proposal for Pension Reform:

Appendix IV: Differences in Interest Rate Calculations Contribute to 
Differences between Termination and Current Liabilities:

Appendix V: Comments from the Pension Benefit Guaranty Corporation:

Appendix VI: GAO Contacts and Staff Acknowledgments:

Contacts:

Staff Acknowledgments:

Table:

Table 1: Key Legislative Changes to the Single-Employer Insurance 
Program Since ERISA Was Enacted:

Figures:

Figure 1: Flat-and Variable-Rate Premium Income for the Single-Employer 
Pension Insurance Program, Fiscal Years 1975-2002:

Figure 2: Participants and Plans Covered by the Single-Employer 
Insurance Program, 1980-2002:

Figure 3: Market Value of Single-Employer Program Assets in Revolving 
and Trust Funds at Year End, Fiscal Years 1990-2002:

Figure 4: Total Return on the Investment of Single-Employer Program 
Assets, Fiscal Years 1990-2002:

Figure 5: Assets, Liabilities, and Net Position of the Single-Employer 
Pension Insurance Program, Fiscal Years 1976-2002:

Figure 6: Assets, Liabilities, and Funded Status of the Bethlehem Steel 
Corporation Pension Plan, 1992-2002:

Figure 7: Total Return on Stocks in the S&P 500 Index, Calendar Years 
1992-2002:

Figure 8: Interest Rates on Long-Term High-Quality Corporate Bonds, 
1990-2002:

Figure 9: PBGC Premium and Investment Income, 1976-2002:

Figure 10: Distribution of PBGC-Insured Participants by Industry, 2001:

Figure 11: Average Termination and Current Liability Funding Ratios for 
Plans Submitting Termination Liability Data to PBGC under Section 4010 
of ERISA, Plan Years 1996 -2001:

Figure 12: PBGC Termination, and Highest and Lowest Current Liability, 
Interest Rates, 1996-2002:

Abbreviations:

EBSA: Employee Benefits Security Administration:

ERISA: Employee Retirement and Income Security Act:

IRC: Internal Revenue Code:

IRS: Internal Revenue Service:

OMB: Office of Management and Budget:

PIMS: Pension Insurance Modeling System:

PBGC: Pension Benefit Guaranty Corporation:

SARSummary Annual Report:

SARS: Severe Acute Respiratory Syndrome:

S&P 500: Standard and Poor's 500:

United States General Accounting Office:

Washington, DC 20548:

October 29, 2003:

The Honorable John Boehner 
Chairman 
Committee on Education and the Workforce 
House of Representatives:

The Honorable Sam Johnson 
Chairman 
Subcommittee on Employer-Employee Relations 
Committee on Education and the Workforce 
House of Representatives:

The Pension Benefit Guaranty Corporation's (PBGC) single-employer 
insurance program is a federal program to insure the benefits of the 
more than 34 million workers and retirees participating in private 
defined-benefit pension plans.[Footnote 1] Over the last few years, the 
program's finances have taken a severe turn for the worse. From a $3.6 
billion accumulated deficit in 1993, the program registered a $10.1 
billion accumulated surplus (assets exceeded liabilities) in 2000 
before returning to a $3.6 billion accumulated deficit, in 2002 
dollars.[Footnote 2] More fundamentally, the long-term viability of the 
program is at risk. Even after assuming responsibility for several 
severely underfunded pension plans and recording over $9 billion in 
estimated losses in 2002, PBGC estimated that as of September 30, 2002, 
it faced exposure to approximately $35 billion in additional unfunded 
liabilities from ongoing plans that were sponsored by financially weak 
companies and may terminate.[Footnote 3]

This risk involves an issue beyond PBGC's current and future financial 
condition; it also relates to the need to protect the retirement 
security of millions of American workers and retirees. This report 
highlights some of the key issues in the debate about how to respond to 
the financial challenges facing the federal insurance program for 
single-employer defined-benefit plans. As you requested, we addressed 
the following issues: (1) what factors contributed to recent changes in 
the single-employer pension insurance program's financial condition, 
(2) what are the risks to the program's long-term financial viability, 
and (3) what changes to the program might be considered to reduce those 
risks?

To identify the factors that contributed to recent changes in the 
single-employer program's financial condition, we discussed with PBGC 
officials, and examined annual reports and other available information 
related to the funding and termination of three pension plans: the 
Anchor Glass Container Corporation Service Retirement Plan, the Pension 
Plan of Bethlehem Steel Corporation and Subsidiary Companies, and the 
Polaroid Pension Plan. We selected these plans because they represented 
the largest losses to PBGC in their respective industries in fiscal 
year 2002. PBGC estimates that, collectively, the plans represented 
over $4 billion in losses to the program at plan termination. To 
identify the primary risks to the long-term viability of the program 
and options to address the challenges facing the single-employer 
program, we interviewed pension experts at PBGC, at the Employee 
Benefits Security Administration of the Department of Labor, and in the 
private sector and reviewed analyses and other documents provided by 
them. To obtain additional information as to the risks facing PBGC from 
certain industries, we discussed with PBGC, and reviewed annual and 
actuarial reports for the 2003 distress termination of the U.S. Airways 
pension plan for pilots. To determine what changes might be considered 
to reduce those risks, we reviewed proposals for reforming the single-
employer program made by the Department of the Treasury, PBGC, and 
pension professionals. We performed our work from April through 
September 2003 in accordance with generally accepted government 
auditing standards. Our scope and methodology are explained more fully 
in appendix I.

Results in Brief:

The termination, or expected termination, of several severely 
underfunded pension plans was the major reason for PBGC's single-
employer pension insurance program's return to an accumulated deficit 
in 2002. Several underlying factors contributed to the severity of the 
plans' underfunded condition at termination, including a sharp decline 
in the stock market, which reduced plan asset values, and a general 
decline in interest rates, which increased the cost of terminating 
defined-benefit pension plans. Falling stock prices and interest rates 
can dramatically reduce plan funding as the sponsor approaches 
bankruptcy. For example, while annual reports indicated the Bethlehem 
Steel Corporation pension plan was almost fully funded in 1999 based on 
reports to IRS, PBGC estimates that the value of the plan's assets was 
less than 50 percent of the value of its guaranteed liabilities by the 
time it was terminated in 2002. The current minimum funding rules and 
other rules designed to encourage sponsors to fully fund their plans 
were not effective at preventing it from being severely underfunded at 
termination.

Two primary risks could affect the long-term financial viability of the 
single-employer program. First, and most worrisome, the high level of 
losses experienced in 2002, due to the bankruptcy of companies with 
large underfunded defined-benefit pension plans, could continue or 
accelerate. This could occur if the economy recovers slowly or weakly, 
returns on plan investments remain poor, interest rates remain low, or 
the structural problems of particular industries with pension plans 
insured by PBGC result in additional bankruptcies. Second, PBGC might 
not receive sufficient revenue from premium payments and its own 
investments to offset the losses experienced to date or those that may 
occur in subsequent years. This could happen if participation in the 
single-employer program falls or if PBGC's return on assets falls below 
the rate it uses to calculate the present value of benefits promised in 
the future. Because of its current financial weaknesses, as well as the 
serious, long-term risks to the program's future viability, we recently 
placed PBGC's single-employer insurance program on our high-risk list.

Several reforms might be considered to reduce the risks to the single-
employer 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." In addition, one way premiums could be restructured would be 
to base them, not only on the degree of plan underfunding, but also on 
the economic strength of the plan sponsor, the degree of risk of the 
plan's investment portfolio, the plan's benefit structure, and 
participant demographics.

Because the magnitude and uncertainty of the long-term financial risks 
pose particular challenges for the PBGC's single-employer insurance 
program and the protection of the retirement security of millions of 
American workers and retirees, this report considers a matter for 
congressional consideration regarding several reforms that might be 
considered to reduce the risks to the single-employer program's long-
term financial viability.

Background:

Before enactment of the Employee Retirement and Income Security Act 
(ERISA) of 1974, few rules governed the funding of defined-benefit 
pension plans, and participants had no guarantees that they would 
receive the benefits promised. When Studebaker's pension plan failed in 
the 1960s, for example, many plan participants lost their 
pensions.[Footnote 4] Such experiences prompted the passage of ERISA to 
better protect the retirement savings of Americans covered by private 
pension plans. Along with other changes, ERISA established PBGC to pay 
the pension benefits of participants, subject to certain limits, in the 
event that an employer could not.[Footnote 5] ERISA also required PBGC 
to encourage the continuation and maintenance of voluntary private 
pension plans and to maintain premiums set by the corporation at the 
lowest level consistent with carrying out its obligations.[Footnote 6]

Under ERISA, the termination of a single-employer defined-benefit plan 
results in an insurance claim with the single-employer program if the 
plan has insufficient assets to pay all benefits accrued under the plan 
up to the date of plan termination.[Footnote 7] PBGC may pay only a 
portion of the claim because ERISA places limits on the PBGC benefit 
guarantee. For example, PBGC generally does not guarantee annual 
benefits above a certain amount, currently about $44,000 per 
participant at age 65.[Footnote 8] Additionally, benefit increases in 
the 5 years immediately preceding plan termination are not fully 
guaranteed, though PBGC will pay a portion of these increases.[Footnote 
9] The guarantee is limited to certain benefits, including so-called 
shutdown benefits--significant subsidized early retirement benefits--
that are triggered by layoffs or plant closings that occur before plan 
termination. The guarantee does not generally include supplemental 
benefits, such as the temporary benefits that some plans pay to 
participants from the time they retire until they are eligible for 
Social Security benefits.

Following enactment of ERISA, however, concerns were raised about the 
potential losses that PBGC might face from the termination of 
underfunded plans. To protect PBGC, ERISA was amended in 1986 to 
require that plan sponsors meet certain additional conditions before 
terminating an underfunded plan. For example, sponsors could 
voluntarily terminate their underfunded plans only if they were 
bankrupt or generally unable to pay their debts without the 
termination. Key amendments to ERISA affecting the single-employer 
program are listed in appendix II.

Concerns about PBGC finances also resulted in efforts to strengthen the 
minimum funding rules incorporated by ERISA in the Internal Revenue 
Code (IRC). In 1987, for example, the IRC was amended to require that 
plan sponsors calculate each plan's current liability,[Footnote 10] and 
make additional contributions to the plan if it is underfunded to the 
extent defined in the law.[Footnote 11] As discussed in a report we 
issued earlier this year,[Footnote 12] concerns that the 30-year 
Treasury bond rate no longer resulted in reasonable current liability 
calculations has led both the Congress and the administration to 
propose alternative rates for these calculations.[Footnote 13]

Despite the 1987 amendments to ERISA, concerns about PBGC's financial 
condition persisted. In 1990, as part of our effort to call attention 
to high-risk areas in the federal government, we noted that weaknesses 
in the single-employer insurance program's financial condition 
threatened PBGC's long-term viability.[Footnote 14] We stated that 
minimum funding rules still did not ensure that plan sponsors would 
contribute enough for terminating plans to have sufficient assets to 
cover all promised benefits. In 1992, we also reported that PBGC had 
weaknesses in its internal controls and financial systems that placed 
the entire agency, and not just the single-employer program, at 
risk.[Footnote 15] Three years later, we reported that legislation 
enacted in 1994 had strengthened PBGC's program weaknesses and that we 
believed improvements had been significant enough for us to remove the 
agency's high-risk designation.[Footnote 16] Since that time, we have 
continued to monitor PBGC's financial condition and internal controls. 
For example, in 1998, we reported that adverse economic conditions 
could threaten PBGC's financial condition despite recent 
improvements;[Footnote 17] in 2000, we reported that contracting 
weaknesses at PBGC, if uncorrected, could result in PBGC paying too 
much for required services;[Footnote 18] and this year, we reported 
that weaknesses in the PBGC budgeting process limited its control over 
administrative expenses.[Footnote 19]

In 1997, we reported that the cash-based federal budget, which focuses 
on annual cash flows, does not adequately reflect the cost or the 
economic impact of federal insurance programs, including the single-
employer pension insurance program.[Footnote 20] This is true because, 
generally, cost is only recognized in the budget when claims are paid 
rather than when the commitment is made. The cost of pension insurance 
is further obscured in the budget because while its annual net cash 
flows reduce the budget deficit, PBGC's growing long-term commitment to 
pay pension benefits has no effect on the deficit. For example, the 
liabilities from terminated underfunded pension plans taken over by 
PBGC are not recognized in the budget. We concluded that the use of 
accrual concepts in the budget for PBGC and other insurance programs 
has the potential to better inform budget choices. We also stated, 
however, that agencies, such as PBGC, might need to develop and test 
methodologies that would enable them to generate reasonable and 
unbiased cost estimates of the risk assumed by the government, which 
are critical to the successful implementation of accrual-based 
budgeting for insurance programs.[Footnote 21] As such, as a first step 
toward developing an accrual-based budget, we recommended that the 
Office of Managemetn and Budget (OMB) encourage agencies to develop 
methodologies and provide cost information on a risk-assumed basis in 
the budget document along side the cash-based budget information it 
currently provides. OMB agreed with our conclusions and noted that they 
would like to pursue such improvements but was not doing so because it 
did not have the expertise that would be required.

PBGC receives no direct federal tax dollars to support the single-
employer pension insurance program. The program receives the assets of 
terminated underfunded plans and any of the sponsor's assets that PBGC 
recovers during bankruptcy proceedings.[Footnote 22] PBGC finances the 
unfunded liabilities of terminated plans with (1) premiums paid by plan 
sponsors and (2) income earned from the investment of program assets.

Initially, plan sponsors paid only a flat-rate premium of $1 per 
participant per year; however, the flat rate has been increased over 
the years and is currently $19 per participant per year. To provide an 
incentive for sponsors to better fund their plans, a variable-rate 
premium was added in 1987. The variable-rate premium, which started at 
$6 for each $1,000 of unfunded vested benefits, was initially capped at 
$34 per participant. The variable rate was increased to $9 for each 
$1,000 of unfunded vested benefits starting in 1991, and the cap on 
variable-rate premiums was removed starting in 1996. Figure 1 shows 
that, after increasing sharply in the 1980s, flat-rate premium income 
declined from $753 million in 1993 to $654 million in 2002, in constant 
2002 dollars.[Footnote 23] Income from the variable-rate premium 
fluctuated widely over that period.

Figure 1: Flat-and Variable-Rate Premium Income for the Single-Employer 
Pension Insurance Program, Fiscal Years 1975-2002:

[See PDF for image]

Note: PBGC follows accrual basis accounting, and as a result, included 
in the fiscal year 2002 statement an estimate of variable-rate premium 
income for the period covering January 1 through September 30, 2002, 
for plans whose filings were not received by September 30, 2002. We 
adjusted PBGC data using the Consumer Price Index for All Urban 
Consumers: All Items.

[End of figure]

The slight decline in flat-rate premium revenue over the last decade, 
in real dollars, indicates that the increase in insured participants 
has not been sufficient to offset the effects of inflation over the 
period. Essentially, while the number of participants has grown since 
1980, growth has been sluggish. Additionally, after increasing during 
the early 1980s, the number of insured single-employer plans has 
decreased dramatically since 1986. (See fig. 2.):

Figure 2: Participants and Plans Covered by the Single-Employer 
Insurance Program, 1980-2002:

[See PDF for image]

[End of figure]

The decline in variable-rate premiums in 2002 may be due to a number of 
factors. For example, all else equal, an increase in the rate used to 
determine the present value of benefits reduces the degree to which 
reports indicate plans are underfunded, which reduces variable-rate 
premium payments. The Job Creation and Worker Assistance Act of 2002 
increased the statutory interest rate for variable-rate premium 
calculations from 85 percent to 100 percent of the interest rate on 30-
year U.S. Treasury securities for plan years beginning after December 
31, 2001, and before January 1, 2004.[Footnote 24]

Investment income is also a large source of funds for the single-
employer insurance program. The law requires PBGC to invest a portion 
of the funds generated by flat-rate premiums in obligations issued or 
guaranteed by the United States, but gives PBGC greater flexibility in 
the investment of other assets.[Footnote 25] For example, PBGC may 
invest funds recovered from terminated plans and plan sponsors in 
equities, real estate, or other securities and funds from variable-rate 
premiums in government or private fixed-income securities. According to 
PBGC, however, by policy, it invests all premium income in Treasury 
securities. As a result of the law and investment policies, the 
majority of the single-employer program's assets are invested in U.S. 
government securities. (See fig. 3.):

Figure 3: Market Value of Single-Employer Program Assets in Revolving 
and Trust Funds at Year End, Fiscal Years 1990-2002:

[See PDF for image]

Note: Other includes fixed-maturity securities, other than U.S. 
government securities, such as corporate bonds. In 2002, fixed-maturity 
securities, other than U.S. government securities, totaled $946 
million. We adjusted PBGC data using the Consumer Price Index for All 
Urban Consumers: All Items.

[End of figure]

Since 1990, except for 3 years, PBGC has achieved a positive return on 
the investments of single-employer program assets. (See fig 4.) 
According to PBGC, over the last 10 years, the total return on these 
investments has averaged about 10 percent.

Figure 4: Total Return on the Investment of Single-Employer Program 
Assets, Fiscal Years 1990-2002:

[See PDF for image]

[End of figure]

For the most part, liabilities of the single-employer pension insurance 
program are comprised of the present value of insured participant 
benefits. PBGC calculates present values using interest rate factors 
that, along with a specified mortality table, reflect annuity prices, 
net of administrative expenses, obtained from surveys of insurance 
companies conducted by the American Council of Life Insurers.[Footnote 
26] In addition to the estimated total liabilities of underfunded plans 
that have actually terminated, PBGC includes in program liabilities the 
estimated unfunded liabilities of underfunded plans that it believes 
will probably terminate in the near future.[Footnote 27] 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.

The single-employer program has had an accumulated deficit--that is, 
program assets have been less than the present value of benefits and 
other liabilities--for much of its existence. (See fig. 5.) In fiscal 
year 1996, the program had its first accumulated surplus, and by fiscal 
year 2000, the accumulated surplus had increased to almost $10 billion, 
in 2002 dollars. However, the program's finances reversed direction in 
2001, and at the end of fiscal year 2002, its accumulated deficit was 
about $3.6 billion. PBGC estimated that this deficit had grown to $8.8 
billion by August 31, 2003. Despite this large deficit, according to a 
PBGC analysis, the single-employer program was estimated to have enough 
assets to pay benefits through 2019, given the program's conditions and 
PBGC assumptions as of the end of fiscal year 2002.[Footnote 28] Losses 
since that time may have shortened the period over which the program 
will be able to cover promised benefits.

Figure 5: Assets, Liabilities, and Net Position of the Single-Employer 
Pension Insurance Program, Fiscal Years 1976-2002:

[See PDF for image]

Note: Amounts for 1986 do not include plans subsequently returned to a 
reorganized LTV Corporation. We adjusted PBGC data using the Consumer 
Price Index for All Urban Consumers: All Items.

[End of figure]

Termination of Severely Underfunded Plans Was Primary Factor in 
Financial Decline of Single-Employer Program:

The financial condition of 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. In 1992, we reported that many factors contributed to 
the degree plans were underfunded at termination, including the payment 
at termination of additional benefits, such as subsidized early 
retirement benefits, which have been promised to plan participants if 
plants or companies ceased operations.[Footnote 29] These factors 
likely contributed to the degree that plans terminated in 2002 were 
underfunded. Factors that increased the severity of the plans' unfunded 
liability in 2002 were the recent sharp decline in the stock market and 
a general decline in interest rates. The current minimum funding rules 
and variable-rate premiums were not effective at preventing those plans 
from being severely underfunded at termination.

PBGC Assumed Responsibility for Several Severely Underfunded Plans in 
2002:

Total estimated losses in the single-employer program reported in PBGC 
annual reports increased from $705 million in fiscal year 2001 to $9.3 
billion in fiscal year 2002. In addition to $3.0 billion in losses from 
the unfunded liabilities of terminated plans, the $9.3 billion included 
$6.3 billion in losses from the unfunded liabilities of plans that were 
expected to terminate in the near future. Nearly all of the 
terminations considered probable at the end of fiscal year 2002 have 
already occurred. For example, in December 2002, PBGC involuntarily 
terminated an underfunded Bethlehem Steel Corporation pension plan, 
which resulted in the single-employer program assuming responsibility 
for about $7.2 billion in PBGC-guaranteed liabilities, about $3.7 
billion of which was not funded at termination.

Much of the program's losses resulted from the termination of 
underfunded plans sponsored by failing steel companies. PBGC estimates 
that in 2002, underfunded steel company pension plans accounted for 80 
percent of the $9.3 billion in program losses for the year. The three 
largest losses in the single-employer program's history resulted from 
the termination of underfunded plans sponsored by failing steel 
companies: Bethlehem Steel, LTV Steel, and National Steel. All three 
plans were either completed terminations or listed as probable 
terminations for 2002. Giant vertically integrated steel companies, 
such as Bethlehem Steel, have faced extreme economic difficulty for 
decades, and efforts to salvage their defined-benefit plans have 
largely proved unsuccessful. According to PBGC's executive director, 
underfunded steel company pension plans have accounted for 58 percent 
of PBGC single-employer losses since 1975.

Plan Unfunded Liabilities Were Increased by Stock Market and Interest 
Rate Declines:

The termination of underfunded plans in 2002 occurred after a sharp 
decline in the stock market had reduced plan asset values and a general 
decline in interest rates had increased plan liability values, and the 
sponsors did not make the contributions necessary to adequately fund 
the plans before they were terminated. The combined effect of these 
factors was a sharp increase in the unfunded liabilities of the 
terminating plans. According to annual reports (Annual Return/Report of 
Employee Benefit Plan, Form 5500) submitted by Bethlehem Steel 
Corporation, for example, in the 7 years from 1992 to 1999, the 
Bethlehem Steel pension plan went from 86 percent funded to 97 percent 
funded. (See fig. 6.) From 1999 to plan termination in December 2002, 
however, plan funding fell to 45 percent as assets decreased and 
liabilities increased, and sponsor contributions were not sufficient to 
offset the changes.

Figure 6: Assets, Liabilities, and Funded Status of the Bethlehem Steel 
Corporation Pension Plan, 1992-2002:

[See PDF for image]

Note: Assets and liabilities for 1992 through 2001 are as of the 
beginning of the plan year. During that period, the interest rate used 
by Bethlehem Steel to value current liabilities decreased from 9.26 
percent to 6.21 percent. Assets and liabilities for 2002 are PBGC 
estimates at termination in December 2002. Termination liabilities were 
valued using a rate of 5 percent.

[End of figure]

A decline in the stock market, which began in 2000, was a major cause 
of the decline in plan asset values, and the associated increase in the 
degree that plans were underfunded at termination. For example, while 
total returns for stocks in the Standard and Poor's 500 index (S&P 500) 
exceeded 20 percent for each year from 1995 through 1999, they were 
negative starting in 2000, with negative returns reaching 22.1 percent 
in 2002. (See fig. 7.) Surveys of plan investments by Greenwich 
Associates indicated that defined-benefit plans in general had about 
62.8 percent of their assets invested in U.S. and international stocks 
in 1999.[Footnote 30]

Figure 7: Total Return on Stocks in the S&P 500 Index, Calendar Years 
1992-2002:

[See PDF for image]

[End of figure]

A stock market decline as severe as the one experienced from 2000 
through 2002 can have a devastating effect on the funding of plans that 
had invested heavily in stocks. For example, according to a 
survey,[Footnote 31] the Bethlehem Steel defined-benefit plan had about 
73 percent of its assets (about $4.3 billion of $6.1 billion) invested 
in domestic and foreign stocks on September 30, 2000. One year later, 
assets had decreased $1.5 billion, or 25 percent, and when the plan was 
terminated in December 2002, its assets had been reduced another 23 
percent to about $3.5 billion--far less than needed to finance an 
estimated $7.2 billion in PBGC-guaranteed liabilities.[Footnote 32] 
Over that same general period, stocks in the S&P 500 had a negative 
return of 38 percent.

In addition to the possible effect of the stock market's decline, a 
drop in interest rates likely had a negative effect on plan funding 
levels by increasing plan termination costs. Lower interest rates 
increase plan termination liabilities by increasing the present value 
of future benefit payments, which in turn increases the purchase price 
of group annuity contracts used to terminate defined-benefit pension 
plans.[Footnote 33] For example, a PBGC analysis indicates that a drop 
in interest rates of 1 percentage point, from 6 percent to 5 percent, 
increased the termination liabilities of the Bethlehem Steel pension 
plan by about 9 percent, which indicates the cost of terminating the 
plan through the purchase of a group annuity contract would also have 
increased.[Footnote 34]

Relevant interest rates may have declined 3 percentage points or more 
since 1990.[Footnote 35] For example, interest rates on long-term high-
quality corporate bonds approached 10 percent at the start of the 
1990s, but were below 7 percent at the end of 2002. (See fig. 8.):

Figure 8: Interest Rates on Long-Term High-Quality Corporate Bonds, 
1990-2002:

[See PDF for image]

[End of figure]

Minimum Funding Rules and Variable-Rate Premiums Did Not Prevent Plans 
from Being Severely Underfunded:

IRC minimum funding rules and ERISA variable rate premiums, which are 
designed to ensure plan sponsors adequately fund their plans, did not 
have the desired effect for the terminated plans that were added to the 
single-employer program in 2002. The amount of contributions required 
under IRC minimum funding rules is generally the amount needed to fund 
benefits earned during that year plus that year's portion of other 
liabilities that are amortized over a period of years.[Footnote 36] 
Also, the rules require the sponsor to make an additional contribution 
if the plan is underfunded to the extent defined in the law. However, 
plan funding is measured using current liabilities, which a PBGC 
analysis indicates have been typically less than termination 
liabilities.[Footnote 37] Additionally, plans can earn funding credits, 
which can be used to offset minimum funding contributions in later 
years, by contributing more than required according to minimum funding 
rules. Therefore, sponsors of underfunded plans may avoid or reduce 
minimum funding contributions to the extent their plan has a credit 
balance in the account, referred to as the funding standard account, 
used by plans to track minimum funding contributions.[Footnote 38]

While minimum funding rules may encourage sponsors to better fund their 
plans, the rules require sponsors to assess plan funding using current 
liabilities, which a PBGC analysis indicates have been typically less 
than termination liabilities. Current and termination liabilities 
differ because the assumptions used to calculate them differ. For 
example, some plan participants may retire earlier if a plan is 
terminated than they would if the plan continues operations, and 
lowering the assumed retirement age generally increases plan 
liabilities, especially if early retirement benefits are subsidized. 
With respect to two of the terminated underfunded pension plans that we 
examine, for example, a PBGC analysis indicates:

* The retirement age assumption for the Anchor Glass pension plan on an 
ongoing plan basis was 65 for separated vested participants. However, 
the retirement age assumption appropriate for those participants on a 
termination basis was 58--a decrease of 7 years. According to PBGC, 
changing retirement age assumptions for all participants, including 
separated vested participants, resulted in a net increase in plan 
liabilities of about 4.6 percent.

* The retirement age assumption for the Bethlehem Steel pension plan on 
an ongoing plan basis was 62 for those active participants eligible for 
unreduced benefits after 30 years of service. On the other hand, the 
retirement age assumption for them on a plan termination basis was 55-
-the earliest retirement age. According to PBGC, decreasing the assumed 
retirement age from 62 to 55 approximately doubled the liability for 
those participants.

As shown in appendix IV, changes in the interest rates used to 
calculate termination and current liabilities also play a role in 
determining to what extent termination liabilities differ from current 
liabilities.

Other aspects of minimum funding rules may limit their ability to 
affect the funding of certain plans as their sponsors approach 
bankruptcy. According to its annual reports, for example, Bethlehem 
Steel contributed about $3.0 billion to its pension plan for plan years 
1986 through 1996. According to the reports, the plan had a credit 
balance of over $800 million at the end of plan year 1996. Starting in 
1997, Bethlehem Steel reduced its contributions to the plan and, 
according to annual reports, contributed only about $71.3 million for 
plan years 1997 through 2001. The plan's 2001 actuarial report 
indicates that Bethlehem Steel's minimum required contribution for the 
plan year ending December 31, 2001, would have been $270 million in the 
absence of a credit balance; however, the opening credit balance in the 
plan's funding standard account as of January 1, 2001, was $711 
million. Therefore, Bethlehem Steel was not required to make any cash 
contributions during the year.

Other IRC funding rules may have prevented some sponsors from making 
contributions to plans that in 2002 were terminated at a loss to the 
single-employer program. For example, on January 1, 2000, the Polaroid 
pension plan's assets were about $1.3 billion compared to accrued 
liabilities of about $1.1 billion--the plan was more than 100 percent 
funded. The plan's actuarial report for that year indicates that the 
plan sponsor was precluded by the IRC funding rules from making a tax-
deductible contribution to the plan.[Footnote 39] In July 2002, PBGC 
terminated the Polaroid pension plan, and the single-employer program 
assumed responsibility for $321.8 million in unfunded PBGC-guaranteed 
liabilities for the plan. The plan was about 67 percent funded, with 
assets of about $657 million to pay estimated PBGC-guaranteed 
liabilities of about $979 million.

Another ERISA provision, concerning the payment of variable-rate 
premiums, is also designed to encourage employers to better fund their 
plans. As with minimum funding rules, the variable-rate premium did not 
provide sufficient incentives for the sponsors of the plans that we 
reviewed to make the contributions necessary to adequately fund their 
plans. None of the three underfunded plans that we reviewed, which 
became losses to the single-employer program in 2002 and 2003, paid a 
variable-rate premium in the 2001 plan year. Plans are exempt from the 
variable-rate premium if they are at the full-funding limit in the year 
preceding the premium payment year, in this case 2000, after applying 
any contributions and credit balances in the funding standard account. 
Each of these three plans met this criterion.

PBGC Faces Long-Term Financial Risks from a Potential Imbalance of 
Assets and Liabilities:

Two primary risks threaten the long-term financial viability of the 
single-employer program. The greater risk concerns the program's 
liabilities: large losses, due to bankrupt firms with severely 
underfunded pension plans, could continue or accelerate. This could 
occur if returns on investment remain poor, interest rates stay low, 
and economic problems persist. More troubling for liabilities is the 
possibility that structural weaknesses in industries with large 
underfunded plans, including those greatly affected by increasing 
global competition, combined with the general shift toward defined-
contribution pension plans, could jeopardize the long-term viability of 
the defined-benefit system. On the asset side, PBGC also faces the risk 
that it may not receive sufficient revenue from premium payments and 
investments to offset the losses experienced by the single-employer 
program in 2002 or that this program may experience in the future. This 
could happen if program participation falls or if PBGC earns a return 
on its assets below the rate it uses to value its liabilities.

Several Factors Affect the Degree to Which Plans Are Underfunded and 
the Likelihood That Plan Sponsors Will Go Bankrupt:

Plan terminations affect the single-employer program's financial 
condition because PBGC takes responsibility for paying benefits to 
participants of underfunded terminated plans. Several factors would 
increase the likelihood that sponsoring firms will go bankrupt, and 
therefore will need to terminate their pension plans, and the 
likelihood that those plans will be underfunded at termination. Among 
these are poor investment returns, low interest rates, and continued 
weakness in the national economy or specific sectors. Particularly 
troubling may be structural weaknesses in certain industries with large 
underfunded defined-benefit plans.

Poor investment returns from a decline in the stock market can affect 
the funding of pension plans. To the extent that pension plans invest 
in stocks, the decline in the stock market will increase the chance 
that plans will be underfunded should they terminate. A Greenwich 
Associates survey of defined-benefit plan investments indicates that 
59.4 percent of plan assets were invested in stocks in 2002.[Footnote 
40] Clearly, the future direction of the stock market is very difficult 
to forecast. From the end of 1999 through the end of 2002, total 
cumulative returns in the stock market, as measured by the S&P 500, 
were negative 37.6 percent. In 2003, the S&P 500 has partially 
recovered those losses, with total returns (from a lower starting 
point) of 14.7 percent through the end of September. From January 1975, 
the beginning of the first year following the passage of ERISA, through 
September 2003, the average annual compounded nominal return on the S&P 
500 equaled 13.5 percent.

A decline in asset values can be particularly problematic for plans if 
interest rates remain low or fall, which raises plan liabilities, all 
else equal. The highest allowable discount rate for calculating current 
plan liabilities, based on the 30-year U.S. Treasury bond rate, has 
been no higher than 7.1 percent since April, 1998, lower than any 
previous point during the 1990s.[Footnote 41] Falling interest rates 
raise the price of group annuities that a terminating plan must 
purchase to cover its promised benefits and increase the likelihood 
that a terminating plan will not have sufficient assets to make such a 
purchase.[Footnote 42] An increase in liabilities due to falling 
interest rates also means that companies may be required under the 
minimum funding rules to increase contributions to their plans. This 
can create financial strain and increase the chances of the firm going 
bankrupt, thus increasing the risk that PBGC will have to take over an 
underfunded plan.

Economic weakness can also lead to greater underfunding of plans and to 
a greater risk that underfunded plans will terminate. For many firms, 
slow or declining economic growth causes revenues to decline, which 
makes contributions to pension plans more difficult. Economic 
sluggishness also raises the likelihood that firms sponsoring pension 
plans will go bankrupt. Three of the last five annual increases in 
bankruptcies coincided with recessions, and the record economic 
expansion of the 1990s is associated with a substantial decline in 
bankruptcies. Annual plan terminations resulting in losses to the 
single-employer program rose from 83 in 1989 to 175 in 1991, and after 
declining to 65 in 2000, the number reached 93 in 2001.[Footnote 43]

Weakness in certain industries, particularly the airline and automotive 
industries, may threaten the viability of the single-employer program. 
Because PBGC has already absorbed most of the pension plans of steel 
companies, it is the airline industry, with $26 billion of total 
pension underfunding, and the automotive sector, with over $60 billion 
in underfunding, that currently represent PBGC's greatest future 
financial risks. In recent years, profit pressures within the U.S. 
airline industry have been amplified by severe price competition, 
recession, terrorism, the war in Iraq, and the outbreak of Severe Acute 
Respiratory Syndrome (SARS), creating recent bankruptcies and 
uncertainty for the future financial health of the industry. As one 
pension expert noted, a potentially exacerbating risk in weak 
industries is the cumulative effect of bankruptcy: if a critical mass 
of firms go bankrupt and terminate their underfunded pension plans, 
others, in order to remain competitive, may also declare bankruptcy to 
avoid the cost of funding their plans.

Because the financial condition of both firms and their pension plans 
can eventually affect PBGC's financial condition, PBGC tries to 
determine how many firms are at risk of terminating their pension plans 
and the total amount of unfunded vested benefits. According to PBGC's 
fiscal year 2002 estimates, the agency is at potential risk of taking 
over $35 billion in unfunded vested benefits from plans that are 
sponsored by financially weak companies and could terminate.[Footnote 
44] Almost one-third of these unfunded benefits, about $11.4 billion, 
are in the airline industry. Additionally, PBGC estimates that it could 
become responsible for over $15 billion in shutdown benefits in PBGC-
insured plans.

PBGC uses a model called the Pension Insurance Modeling System (PIMS) 
to simulate the flow of claims to the single-employer program and to 
project its potential financial condition over a 10-year period. This 
model produces a very wide range of possible outcomes for PBGC's future 
net financial position.[Footnote 45]

Revenue from Premiums and Investments May Not Offset Program's Current 
Deficit or Possible Future Losses:

To be viable in the long term, the single-employer program must receive 
sufficient income from premiums and investments to offset losses due to 
terminating underfunded plans. A number of factors could cause the 
program's revenues to fall short of this goal or decline outright. For 
example, fixed-rate premiums would decline if the number of 
participants covered by the program decreases, which may happen if 
plans leave the system and are not replaced. Additionally, the 
program's financial condition would deteriorate to the extent 
investment returns fall below the assumed interest rate used to value 
liabilities.

Annual PBGC income from premiums and investments averaged $1.3 billion 
from 1976 to 2002, in 2002 dollars, and $2 billion since 1988, when 
variable-rate premiums were introduced. Since 1988, investment income 
has on average equaled premium income, but has varied more than premium 
income, including 3 years in which investment income fell below zero. 
(See fig. 9.):

Figure 9: PBGC Premium and Investment Income, 1976-2002:

[See PDF for image]

Note: We adjusted PBGC data using the Consumer Price Index for All 
Urban Consumers: All Items.

[End of figure]

Premium revenue for PBGC would likely decline if the total number of 
plans and participants terminating their defined-benefit plans exceeded 
the new plans and participants joining the system. This decline in 
participation would mean a decline in PBGC's flat-rate premiums. If 
more plans become underfunded, this could possibly raise the revenue 
PBGC receives from variable-rate premiums, but would also be likely to 
raise the overall risk of plans terminating with unfunded liabilities. 
Premium income, in 2002 dollars, has fallen every year since 1996, even 
though the Congress lifted the cap on variable-rate premiums in that 
year.

The decline in the number of plans PBGC insures may cast doubt on its 
ability to increase premium income in the future. The number of PBGC-
insured plans has decreased steadily from approximately 110,000 in 1987 
to around 30,000 in 2002.[Footnote 46] While the number of total 
participants in PBGC-insured single-employer plans has grown 
approximately 25 percent since 1980, the percentage of participants who 
are active workers has declined from 78 percent in 1980 to 53 percent 
in 2000. Manufacturing, a sector with virtually no job growth in the 
last half century, accounted for almost half of PBGC's single-employer 
program participants in 2001, suggesting that the program needs to rely 
on other sectors for any growth in premium income. (See fig 10.) In 
addition, a growing percentage of plans have recently become hybrid 
plans, such as cash-balance plans, that incorporate characteristics of 
both defined-contribution and defined-benefit plans. Hybrid plans are 
more likely than traditional defined-benefit plans to offer 
participants the option of taking benefits as a lump-sum distribution. 
If the proliferation of hybrid plans increases the number of 
participants leaving the program by taking lump sums instead of 
retirement annuities, over time this would reduce the number of plan 
participants, thus potentially reducing PBGC's flat-rate premium 
revenue.[Footnote 47] Unless something reverses these trends, PBGC may 
have a shrinking plan and participant base to support the program in 
the future and that base may be concentrated in certain, potentially 
more vulnerable industries.

Figure 10: Distribution of PBGC-Insured Participants by Industry, 2001:

[See PDF for image]

Note: Percentages do not sum to 100 due to rounding.

[End of figure]

Even more problematic than the possibility of falling premium income 
may be that PBGC's premium structure does not reflect many of the risks 
that affect the probability that a plan will terminate and impose a 
loss on PBGC. While PBGC charges plan sponsors a variable-rate premium 
based on the plan's level of underfunding, premiums do not consider 
other relevant risk factors, such as the economic strength of the 
sponsor, plan asset investment strategies, the plan's benefit 
structure, or the plans demographic profile. Because these affect the 
risk of PBGC having to take over an underfunded pension plan, it is 
possible that PBGC's premiums will not adequately and equitably protect 
the agency against future losses. The recent terminations of Bethlehem 
Steel, Anchor Glass, and Polaroid, plans that paid no variable-rate 
premiums shortly before terminating with large underfunded balances, 
lend some evidence to this possibility. Sponsors also pay flat-rate 
premiums in addition to variable-rate premiums, but these reflect only 
the number of plan participants and not other risk factors that affect 
PBGC's potential exposure to losses. Full-funding limitations may 
exacerbate the risk of underfunded terminations by preventing firms 
from contributing to their plans during strong economic times when 
asset values are high and firms are in the best financial position to 
make contributions.

It may also be difficult for PBGC to diversify its pool of insured 
plans among strong and weak sponsors and plans. In addition to facing 
firm-specific risk that an individual underfunded plan may terminate, 
PBGC faces market risk that a poor economy may lead to widespread 
underfunded terminations during the same period, which potentially 
could cause very large losses for PBGC. Similarly, PBGC may face risk 
from insuring plans concentrated in vulnerable industries that may 
suffer bankruptcies over a short time period, as has happened recently 
in the steel and airline industries. One study estimates that the 
overall premiums collected by PBGC amount to about 50 percent of what a 
private insurer would charge because its premiums do not account for 
this market risk.[Footnote 48]

The net financial position of the single-employer program also depends 
heavily on the long-term rate of return that PBGC achieves from the 
investment of the program's assets. All else equal, PBGC's net 
financial condition could improve if its total net return on invested 
assets exceeded the discount rate it used to value its 
liabilities.[Footnote 49] For example, between 1993 and 2000 the 
financial position of the single-employer program benefited from higher 
rates of return on its invested assets and its financial condition 
improved. However, if the rate of return on assets falls below the 
discount rate, PBGC's finances would worsen, all else equal. As of 
September 30, 2002, PBGC had approximately 65 percent of its single-
employer program investments in U.S. government securities and 
approximately 30 percent in equities. The high percentage of assets 
invested in Treasury securities, which typically earn low yields 
because they are considered to be relatively "risk-free" assets, may 
limit the total return on PBGC's portfolio.[Footnote 50] Additionally, 
PBGC bases its discount rate on surveys of insurance company group 
annuity prices, and because PBGC invests differently than do insurance 
companies, we might expect some divergence between the discount rate 
and PBGC's rate of return on assets. PBGC's return on total invested 
funds was 2.1 percent for the year ending September 30, 2002, and 5.8 
percent for the 5-year period ending on that date. For fiscal year 
2002, PBGC used an annual discount rate of 5.70 percent to determine 
the present value of future benefit payments through 2027 and a rate of 
4.75 percent for payments made in the remaining years.

The magnitude and uncertainty of these long-term financial risks pose 
particular challenges for the PBGC's single-employer insurance program 
and potentially for the federal budget. In 1990, we began a special 
effort to review and report on the federal program areas we considered 
high risk because they were especially vulnerable to waste, fraud, 
abuse, and mismanagement. In the past, we considered PBGC to be on our 
high-risk list because of concerns about the program's viability and 
about management deficiencies that hindered that agency's ability to 
effectively assess and monitor its financial condition. The current 
challenges to PBGC's single-employer insurance program concern 
immediate as well as long-term financial difficulties, which are more 
structural weaknesses rather than operational or internal control 
deficiencies. Nevertheless, because of serious risks to the program's 
viability, we have placed the PBGC single-employer insurance program on 
our high-risk list.

Several Reforms Might Reduce the Risks to the Program's Financial 
Viability:

Several types of reforms might be considered to reduce the risks to the 
single-employer program's long-term financial viability. These reforms 
could be made to:

* strengthen funding rules applicable to poorly funded plans;

* modify program guarantees;

* restructure premiums; and:

* improve the availability of information about plan investments, 
termination funding status, and program guarantees.

Several variations exist within these options.

Strengthening Plan Funding Rules Might Reduce Program Risks:

Funding rules could be strengthened to increase minimum contributions 
to underfunded plans and to allow additional contributions to fully 
funded plans.[Footnote 51] This approach would improve plan funding 
over time, while limiting the losses PBGC would incur when a plan is 
terminated. However, even if funding rules were to be strengthened 
immediately, it could take years for the change to have a meaningful 
effect on PBGC's financial condition. In addition, such a change would 
require some sponsors to allocate additional resources to their pension 
plans, which may cause the plan sponsor of an underfunded plan to 
provide less generous wages or benefits than would otherwise be 
provided. The IRC could be amended to:

* Base additional funding requirement and maximum tax-deductible 
contributions on plan termination liabilities, rather than current 
liabilities. Since plan termination liabilities typically exceed 
current liabilities, such a change regarding deficit reduction 
contributions would likely improve plan funding and therefore reduce 
potential claims against PBGC. One problem with this approach is the 
difficulty plan sponsors would have determining the appropriate 
interest rate to use in valuing termination liabilities. As we 
reported, selecting an appropriate interest rate for termination 
liability calculations is difficult because little information exists 
on which to base the selection.[Footnote 52]

* Change requirement for making additional funding contributions. The 
IRC requires sponsors to make additional contributions under two 
circumstances: (1) if the value of plan assets is less than 80 percent 
of its current liability or (2) if the value of plan assets is less 
than 90 percent of its current liability, depending on plan funding 
levels for the previous 3 years. Raising the threshold would require 
more sponsors of underfunded plans to make the additional 
contributions.

* Limit the use of credit balances. For sponsors who make contributions 
in any given year that exceed the minimum required contribution, the 
excess plus interest is credited against future required contributions. 
Limiting the use of credit balances to offset contribution requirements 
might also prevent sponsors of significantly underfunded plans from 
avoiding cash contributions. Such limitations might also be applied 
based on the plan sponsor's financial condition. For example, sponsors 
with poor cash flow or low credit ratings could be restricted from 
using their credit balances to reduce their contributions.

* Limit lump-sum distributions. Defined benefit pension plans may offer 
participants the option of receiving their benefit in a lump-sum 
payment. Allowing participants to take lump-sum distributions from 
severely underfunded plans, especially those sponsored by financially 
weak companies, allows the first participants who request a 
distribution to drain plan assets, which might result in the remaining 
participants receiving reduced payments from PBGC if the plan 
terminates.[Footnote 53] However, the payment of lump sums by 
underfunded plans may not directly increase losses to the single 
employer program because lump sums reduce plan liabilities as well as 
plan assets.

* Raise the level of tax-deductible contributions. The IRC and ERISA 
restrict tax-deductible contributions to prevent plan sponsors from 
contributing more to their plan than is necessary to cover accrued 
future benefits.[Footnote 54] Raising these limitations might result in 
pension plans being better funded, decreasing the likelihood that they 
will be underfunded should they terminate. [Footnote 55]

Modifying Program Guarantee Would Decrease Plan Underfunding:

Modifying certain guaranteed benefits could decrease losses incurred by 
PBGC from underfunded plans. This approach could preserve plan assets 
by preventing additional losses that PBGC would incur when a plan is 
terminated. However, participants would lose benefits provided by some 
plan sponsors. ERISA could be amended to:

* Phase in the guarantee of shutdown benefits. PBGC is concerned about 
its exposure to the level of shutdown benefits that it guarantees. 
Shutdown benefits provide additional benefits, such as significant 
early retirement benefit subsidies to participants affected by a plant 
closing or a permanent layoff. Such benefits are primarily found in the 
pension plans of large unionized companies in the auto, steel, and tire 
industries. In general, shutdown benefits cannot be adequately funded 
before a shutdown occurs. Phasing in guarantees from the date of the 
applicable shutdown could decrease the losses incurred by PBGC from 
underfunded plans.[Footnote 56] However, modifying these benefits would 
reduce the early retirement benefits for participants who are in plans 
with such provisions and are affected by a plant closing or a permanent 
layoff. Dislocated workers, particularly in manufacturing, may suffer 
additional losses from lengthy periods of unemployment or from finding 
reemployment only at much lower wages.

* Expand restrictions on unfunded benefit increases. Currently, plan 
sponsors must meet certain conditions before increasing the benefits of 
plans that are less than 60 percent funded.[Footnote 57] Increasing 
this threshold, or restricting benefit increases or accruals when plans 
reach the threshold, could decrease the losses incurred by PBGC from 
underfunded plans. Plan sponsors have said that the disadvantage of 
such changes is that they would limit an employer's flexibility with 
regard to setting compensation, making it more difficult to respond to 
labor market developments. For example, a plan sponsor might prefer to 
offer participants increased pension payments or shutdown benefits 
instead of offering increased wages because pension benefits can be 
deferred--providing time for the plan sponsor to improve its financial 
condition--while wage increases have an immediate effect on the plan 
sponsor's financial condition.

Restructuring the Program's Premium Structure Might Improve Its 
Financial Viability:

PBGC's premium rates could be increased or restructured to improve 
PBGC's financial condition. Changing premiums could increase PBGC's 
revenue or provide an incentive for plan sponsors to better fund their 
plans. However, premium changes that are not based on the degree of 
risk posed by different plans may prompt financially healthy companies 
to exit the defined-benefit system and discourage other plan sponsors 
from entering the system. Various actions could be taken to reduce 
guaranteed benefits. ERISA could be amended to:

* Increase or restructure variable-rate premium. The current variable-
rate premium of $9 per $1,000 of unfunded liability could be increased. 
The rate could also be adjusted so that plans with less adequate 
funding pay a higher rate. Premium rates could also be restructured 
based on the degree of risk posed by different plans, which could be 
assessed by considering the financial strength and prospects of the 
plan's sponsor, the risk of the plan's investment portfolio, 
participant demographics, and the plan's benefit structure--including 
plans that have lump-sum,[Footnote 58] shutdown benefit, and floor-
offset provisions.[Footnote 59] One advantage of a rate increase or 
restructuring is that it might improve accountability by providing for 
a more direct relationship between the amount of premium paid and the 
risk of underfunding. A disadvantage is that it could further burden 
already struggling plan sponsors at a time when they can least afford 
it, or it could reduce plan assets, increasing the likelihood that 
underfunded plans will terminate. A program with premiums that are more 
risk-based could also be more challenging for PBGC to administer.

* Increase fixed-rate premium. The current fixed rate of $19 per 
participant annually could be increased. Since the inception of PBGC, 
this rate has been raised four times, most recently in 1991 when it was 
raised from $16 to $19. Such increases generally raise premium income 
for PBGC, but the current fixed-rate premium has not reflected the 
changes in inflation since 1991. By indexing the rate to the consumer 
price index, changes to the premium would be consistent with inflation. 
However, any increases in the fixed-rate premium would affect all plans 
regardless of the adequacy of their funding.

Increasing Transparency of Plan Information Might Encourage Sponsors to 
Better Fund Plans, Reducing Program Risks:

Improving the availability of information to plan participants and 
others about plan investments, termination funding status, and PBGC 
guarantees may give plan sponsors additional incentives to better fund 
their plans, making participants better able to plan for their 
retirement. ERISA could be amended to:

* Disclose information on plan investments. Information on the 
allocation of plan investments among asset classes--such as equity or 
fixed income--is available from Form 5500s prepared by plan sponsors, 
but that information is not affirmatively furnished to participants and 
beneficiaries. Additionally, some plan investments may be made through 
common and collective trusts, master trusts, and registered investment 
companies, and asset allocation information for these investments might 
need to be obtained from Form 5500s prepared by those entities or from 
their prospectuses. Improving the accessibility of plan asset 
allocation information may give plan sponsors an incentive to increase 
funding of underfunded plans or limit riskier investments. Moreover, 
only participants in plans below a certain funding threshold receive 
annual notices regarding the funding status of their plans, and the 
information plans must currently provide does not reflect how the 
plan's assets are invested. One way to enhance notices provided to 
participants could be to include information on how much of plan assets 
are invested in the sponsor's own securities. This would be of concern 
because should the sponsor becomes bankrupt, the value of the 
securities could be expected to drop significantly, reducing plan 
funding. Although this information is currently provided in the plan's 
Form 5500, it is not readily accessible to participants. Additionally, 
if the defined-benefit plan has a floor-offset arrangement and its 
benefits are contingent on the investment performance of a defined-
contribution plan, then information provided to participants could also 
disclose how much of that defined-contribution plan's assets are 
invested in the sponsor's own securities.

* Disclose plan termination funding status. Under current law, sponsors 
are required to report a plan's current liability for funding purposes, 
which often can be lower than termination liability. In addition, only 
participants in plans below a certain funding threshold receive annual 
notices of the funding status of their plans.[Footnote 60] As a result, 
many plan participants, including participants of the Bethlehem Steel 
pension plan, did not receive such notifications in the years 
immediately preceding the termination of their plans. Expanding the 
circumstances under which sponsors must notify participants of plan 
underfunding might give sponsors an additional incentive to increase 
plan funding and would enable more participants to better plan their 
retirement. Under the administration's proposal, all sponsors would be 
required to disclose the value of pension plan assets on a termination 
basis in their annual reporting. The administration proposes that all 
companies disclose the value of their defined benefit pension plan 
assets and liabilities on both a current liability and termination 
liability basis in their Summary Annual Report.[Footnote 61]

* Disclose benefit guarantees to additional participants. As with the 
disclosure of plan funding status, only participants of plans below the 
funding threshold receive notices on the level of program guarantees 
should their plan terminate. Termination of a severely underfunded plan 
can significantly reduce the benefits participants receive. For 
example, 59-year old pilots were expecting annual benefits of $110,000 
per year on average when the U.S. Airways plan was terminated in 2003, 
while the maximum PBGC-guaranteed benefit at age 60 is $28,600 per 
year.[Footnote 62] Expanding the circumstances under which plan 
sponsors must notify participants of PBGC guarantees may enable more 
participants to better plan for their retirement.

Additionally, in 1997, we reported that the current cash-based budget 
for federal insurance programs, such as the single-employer pension 
insurance program generally provides incomplete and misleading 
information on the cost and fiscal impact of those programs.[Footnote 
63] We stated that accrual-based reporting would recognize the cost of 
the insurance commitment when the decision is made to provide the 
insurance, regardless of when the cash flows occur. This earlier 
recognition of the cost of the government's commitment would, among 
other things, provide an opportunity to control costs and build budget 
reserves for future claims. However, we also reported that agencies, 
such as PBGC, might need to develop and test methodologies to generate 
the risk-assumed cost estimates critical to the successful 
implementation of accrual-based budgeting for insurance programs. In 
its comments on our report, OMB stated that, while it agreed with our 
conclusions and would like to pursue such improvements, it was not 
doing so because it did not have the expertise that would be required. 
Given the record losses that the single-employer pension insurance 
program sustained in 2002 and the deteriorating financial condition of 
PBGC it is more important than ever to acquire the necessary expertise 
and invest in the development of loss estimation methodologies and 
tools.

Conclusion:

While the recent decline in the single-employer program's financial 
condition is not an immediate crisis, threats to the program's long-
term viability should be addressed. The insolvency of PBGC potentially 
threatens the retirement security of millions of Americans because 
termination of severely underfunded plans can significantly reduce the 
benefits participants receive. It also poses risks to the general 
taxpaying public who ultimately would be made responsible for paying 
benefits that PBGC is unable to afford. These risks require that 
meaningful, if perhaps difficult, steps be taken that improve the long-
term funding status of plans and accountability of plan sponsors, 
especially those that represent a clear risk to PBGC and plan 
participants and their beneficiaries. In contrast, reforms intended to 
provide immediate relief to struggling plan sponsors--such as exempting 
plans from the additional funding requirement or increasing the 
discount rate--might actually increase the risk that plan sponsors 
terminate with severely underfunded plans in the not so distant future 
if the economic fortunes of those sponsors do not improve.

The factors contributing to the deterioration of PBGC's financial 
condition go beyond the effects of the recent economic downturn. For 
example, current funding rules do not provide adequate protection to 
PBGC or workers and retirees against losses from financially weak 
sponsors with significantly unfunded benefits, leaving PBGC to pay 
benefits at least to guaranteed levels. In addition, PBGC guarantees 
other types of benefits, such as shutdown benefits, that employers have 
promised their employees but are not required to fund until shutdown 
occurs. Furthermore, the premiums paid by pension sponsors to 
participate in the single-employer program do not account for all the 
risks posed by plans and, therefore, some sponsors may not be paying 
enough to compensate PBGC for the risks it undertakes. Although these 
issues can affect employee retirement funds, employers who are going 
bankrupt may not be required to notify pension participants of the 
funding status of their pensions, leaving participants unable to plan 
for a future that may include less income than they were anticipating.

In addition to the reforms in the administration's proposal, the 
Treasury Department, Labor Department, and PBGC are considering several 
areas--funding rules, actuarial assumption, and other areas such as 
PBGC premiums--for reform. However, the challenges facing PBGC suggest 
that a broader, more comprehensive response is needed. For example, as 
we stated in an earlier report,[Footnote 64] the interest rate used for 
current liability calculation should reflect the group annuity purchase 
rate. However, any changes to the interest rate should consider related 
provisions such as averaging, minimum and maximum rates, and changes to 
the mortality table. Furthermore, irrespective of the discount rate 
chosen, differences in plan cash flows should be given consideration in 
making any changes to the current funding standards. Without a 
comprehensive approach, efforts to improve the long-term financial 
condition of PBGC may not be effective.

Matters for Congressional Consideration:

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, the Congress should 
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, the Congress should consider requiring that all 
participants receive information about plan investments and the minimum 
benefit amount that PBGC guarantees should their plan be terminated.

To improve the transparency of the potential cost to the government and 
taxpayers of the PBGC's pension guarantees, the Congress may also 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.

Agency Comments:

We provided a draft of this report to Labor, Treasury, and PBGC. PBGC 
also provided written comments, which appear in appendix V, that 
incorporate comments from the Treasury and Labor Departments and 
represent the views of the Commerce Department. Labor, Treasury, and 
PBGC also provided technical comments, which we incorporated as 
appropriate.

We are sending copies of this report to the Secretary of Labor, the 
Secretary of the Treasury, and the Executive Director of the PBGC, 
appropriate congressional committees, and other interested parties. We 
will also make copies available to others on request. In addition, the 
report will be available at no charge on GAO's Web site at http://
www.gao.gov.

If you have any questions concerning this report, please contact me at 
(202) 512-7215 or Charles A. Jeszeck at (202) 512-7036. Other contacts 
and acknowledgments are listed in appendix VI.

Barbara D. Bovbjerg 

Director, Education, Workforce and Income Security Issues:

Signed by Barbara D. Bovbjerg: 

[End of section]

Appendix I: Scope and Methodology:

To identify the changes in the financial condition of the single-
employer program, we reviewed and analyzed Pension Benefit Guaranty 
Corporation (PBGC) financial statements for 1991 through 2002, and 
obtained additional financial information on the program from PBGC for 
1974 through 1990. To identify the factors that contributed to recent 
changes in the single-employer program's financial condition, we 
discussed with PBGC officials, and examined annual reports and other 
available information related to, the funding and termination of three 
pension plans: the Anchor Glass Container Corporation Service 
Retirement Plan, the Pension Plan of Bethlehem Steel Corporation and 
Subsidiary Companies, and the Polaroid Pension Plan. We selected these 
plans because they represented the largest losses to PBGC in their 
respective industries in fiscal year 2002. PBGC estimates that, 
collectively, the plans represented over $4 billion in losses to the 
program at plan termination. We also reviewed analyses of the program's 
financial condition and plan funding issues prepared by actuaries and 
other pension professionals. To examine the difference between 
termination and current liability, and identify the factors that cause 
that difference, we obtained summary level termination liability data, 
and limited data for specific plans, submitted by plans to PBGC under 
section 4010 of the Employee Retirement and Income Security Act (ERISA) 
of 1974, as amended.

To identify the primary risks to the long-term viability of the program 
and options to address the challenges facing the single-employer 
program, we interviewed pension experts at PBGC, at the Employee 
Benefits Security Administration (EBSA) of the Department of Labor, and 
in the private sector and reviewed analyses and other documents 
provided by them. These include data on PBGC's income, cash flows, 
premium structure and base, investments, and assets and liabilities. To 
obtain additional information as to the risks facing PBGC from certain 
industries, we discussed with PBGC, and reviewed annual and actuarial 
reports for, the 2003 distress termination of the U.S. Airways pension 
plan for pilots.

To determine what changes to the single-employer program might be 
considered to reduce the risks that it faces, we reviewed and analyzed 
proposals from the administration, the American Academy of Actuaries, 
and various pension plan organizations and legislative proposals 
introduced during the 108th Congress. We also spoke with officials from 
PBGC, EBSA, and the Department of the Treasury; research actuaries; and 
individuals from organizations that represent plan sponsors.

We performed our work at PBGC and EBSA from April through September 
2003 in accordance with generally accepted government auditing 
standards.

[End of section]

Appendix II: Key Legislative Changes That Affected the Single-Employer 
Program:

As part of the ERISA, the Congress established PBGC to administer the 
federal insurance program. Since 1974, the Congress has amended ERISA 
to improve the financial condition of the insurance program and the 
funding of single-employer plans (see table 1).

Table 1: Key Legislative Changes to the Single-Employer Insurance 
Program Since ERISA Was Enacted:

Year: 1974; Law: ERISA; Number: P.L. 93-406; Key provisions: Created a 
federal pension insurance program and established a flat-rate premium 
and minimum and maximum funding rules.

Year: 1986; Law: Single-Employer Pension Plan Amendments Act of 1986 
enacted as Title XI of the Consolidated Omnibus Budget Reconciliation 
Act of 1985; Number: P.L. 99-272; Key provisions: Raised the flat-rate 
premium and established financial distress criteria that sponsoring 
employers must meet to terminate an underfunded plan.

Year: 1987; Law: Pension Protection Act enacted as part of the Omnibus 
Budget Reconciliation Act of 1987; Number: P.L. 100-203; Key 
provisions: Increased the flat-rate premium and added a variable-rate 
premium for underfunding calculated on the basis of 80 percent of the 
30-year Treasury rate. In addition, established a permissible range of 
90-110 percent around the weighted average the 30-year Treasury rate as 
the basis for current liability calculations, increased the minimum 
funding standards, and established a full-funding limitation based on 
150 percent of current liability.

Year: 1994; Law: Retirement Protection Act enacted as part of the 
Uruguay Rounds Agreements Act, also referred to as the General 
Agreement on Tariffs and Trade; Number: P.L. 103-465; Key provisions: 
Raised the basis for variable-rate premium calculation from 80 percent 
to 85 percent of the 30-year Treasury rate (effective July 1997). 
Phased out the cap on the variable-rate premium. Strengthened funding 
requirements by narrowing the permissible range of the allowable 
interest rates to 90-105 percent of the weighted average the 30-year 
Treasury rate and standardizing mortality assumptions for the current 
liability calculation. Also, established 90 percent of current 
liability as the minimum full-funding limitation.

Year: 1997; Law: Taxpayer Relief Act of 1997; Number: P.L. 105-34; Key 
provisions: Phased in increases in the current liability funding limit 
to155 percent for plan years beginning in 1999 with incremental 
increases to 170 percent for plan years beginning in 2005.

Year: 2001; Law: The Economic Growth and Tax Relief Reconciliation Act 
of 2001; Number: P.L. 107-16; Key provisions: Accelerated the phasing 
out of the 160 percent full-funding limitation and repealed it for plan 
years beginning in 2004 and thereafter.

Year: 2002; Law: The Job Creation and Worker Assistance Act of 2002; 
Number: P.L. 107-147; Key provisions: Temporarily expanded the 
permissible range of the statutory interest rates to 90-120 percent of 
the weighted average the 30-year Treasury rate for current liability 
calculations and temporarily increased the PBGC variable-rate premium 
calculations to 100 percent of the 30-year Treasury rate for plan years 
beginning after December 31, 2001, and before January 1, 2004.

Source: Public Law.


[End of table]

[End of section]

Appendix III: The Administration Proposal for Pension Reform:

On July 8, 2003, the U.S. Treasury Department announced "The 
Administration Proposal to Improve the Accuracy and Transparency of 
Pension Information." The proposal presented four areas of change in 
order to improve pension security for Americans: (1) the accuracy of 
the pension liability discount rate, (2) the transparency of pension 
plan information, (3) safeguards against pension underfunding, and (4) 
comprehensive funding reforms. Subsequent congressional testimony by 
the Treasury Department and the U.S. Labor Department highlighted other 
areas of the pension system that the administration is considering 
reforming.

1. Improving the Accuracy of the Pension Liability Discount Rate:

Sponsors must use a discount rate to calculate the current value of 
their plans' pension obligations and of lump-sum withdrawals.[Footnote 
65] Currently, this rate is based on the rate of 30-year Treasury 
bonds, securities that have not been newly issued since 2001. There is 
concern that too high a discount rate would lead to pension 
underfunding, while too low a rate would cause businesses to have to 
put more money into their pension funds to pay promised benefits. The 
administration recommended replacing the 30-year Treasury bond rate 
with a yield curve based on high-quality, long-term corporate bond 
rates. It claims that pension discount rates should reflect the risk 
embodied in assets held by insurance companies to make group annuity 
payments, and that these assets consists largely of highly rated 
corporate-issued bonds.

Similarly, the administration proposed using the same yield curve to 
discount lump-sum distributions from plans. Currently, lump sums are 
calculated using the 30-year Treasury rate, a rate that may differ from 
the one used to calculate current plan liabilities. The administration 
proposal would have plans discounting lump sums and plan liabilities at 
the same rate. For both lump sums and liabilities, the administration 
proposes phasing in the yield curve beginning in the third year, with 
the phase-in complete by the fifth year.

Sponsors would compute liabilities by choosing rates along the yield 
curve based on when the plan is due to make benefit payments. Thus, 
sponsors would discount benefits due farther in the future at a longer-
term rate than those paid in the near future. Since long-term rates 
tend to exceed short-term rates, this would imply that plans with a 
higher proportion of older workers and retirees would use lower rates 
to discount their liabilities than those with younger workers. 
Similarly, the proposal would also have plans use a discount rate along 
the yield curve for lump sums that reflects the life expectancy of 
retirees, with lump sums for older workers discounted at a shorter-term 
rate than those for younger workers.

To further increase pension discount rate accuracy, the administration 
further proposed reducing the use of smoothing in calculating plan 
liabilities. Sponsors currently use a discount rate on plan liabilities 
based on a 4-year moving average of interest rates. The administration 
claimed that such smoothing reduces the accuracy of liability measures 
because the discount rate is not necessarily based on current market 
conditions, which may mask changes in plan solvency. The proposal would 
reduce the smoothing period, over a 3-year phase-in beginning in the 
third year, to a 90-day moving average.

2. Increasing the Transparency of Pension Plan Information:

To increase transparency, the administration proposal calls for plans 
to disclose liabilities on a termination basis, as well as on a current 
liability basis, in their annual reporting. Currently, a sponsor must 
disclose its plan's current liability, which is intended to reflect the 
value of liabilities in an ongoing plan, using a discount rate based on 
the 30-year Treasury bond rate. Termination liability reflects the cost 
to a company of paying an insurer to meet its pension obligations 
should the plan terminate. This is calculated by using a PBGC interest 
factor, which is based on a survey of insurance companies and may 
reflect group annuity purchase rates, rather than by using the 30-year 
Treasury bond rate. Termination liability is often higher than current 
liability.

The proposal would also have pension plans with more than $50 million 
of underfunding make public their plan assets, liabilities, and funding 
ratios, information that PBGC already collects. Currently, section 4011 
of the ERISA, as amended, requires that sponsors of plans that are less 
than 90 percent funded send notices to workers and retirees describing 
the plan's funding status and the limits of PBGC guarantees.[Footnote 
66]

The proposal would also have plans disclose liabilities calculated by 
using a duration-matched yield curve, even before the yield curve is 
fully phased in for funding purposes. That is, sponsors would disclose 
the value of their liabilities by using a discount rate on the yield 
curve that reflects the duration of its plan liabilities, with a plan 
with more benefits owed far in the future using a longer-term discount 
rate than one with more benefits owed in the near future.

3. Strengthening Safeguards against Pension Underfunding:

Currently, a plan generally may not provide unfunded or unsecured 
benefit increases greater than $10 million if the plan's funding ratio 
falls below 60 percent of current liability. To strengthen pension 
funding, the administration proposed prohibiting benefit increases by 
the plan sponsored by firms with a credit rating below investment grade 
and with a funding ratio below 50 percent of termination, as opposed to 
current liability. In addition, the plan would also be frozen--with no 
accruals resulting from additional service, age or salary growth--and 
lump-sum payments would also be prohibited unless the employer 
contributed cash or provided security to fully fund any added benefits. 
For firms already in bankruptcy, the administration would fix the 
benefit guarantee as of the date the plan sponsor filed for bankruptcy.

4. Supporting Comprehensive Funding Reforms:

In addition to the reforms above, the proposal states that the 
administration is exploring additional reforms to improve the funding 
status of defined benefit plans. These include:

* Changing rules regarding minimum contributions of underfunded plans.

* Raising limits on tax-deductible contributions.

* Limiting the use of credit balances.

* Reducing new benefit amortization periods.

* Updating mortality tables.

* Making retirement assumptions accurate.

* Making lump-sum estimates accurate.

* Limit or eliminate certain unfunded benefit guarantees.

* Restructuring PBGC premiums to reflect risk.

* Applying the same principles of accuracy and transparency to the 
multiemployer pension program.

[End of section]

Appendix IV: Differences in Interest Rate Calculations Contribute to 
Differences between Termination and Current Liabilities:

A plan's termination liability measures the value of accrued benefits 
using assumptions appropriate for a terminating plan, while its current 
liability measures the value of accrued benefits using assumptions 
specified in applicable laws and regulations. Interest rates are a key 
assumption in calculating the present value of future pension benefits, 
and the degree that the interest rates used to calculate termination 
and current liabilities differ would contribute to the degree that the 
two liability measures differ. Generally:

* Liabilities determined on a termination basis should be calculated 
using an interest rate that reflects the factors that insurance 
companies consider in pricing the group annuities they sell to pension 
plan sponsors who terminate their defined benefit plans. However, 
information needed to determine actual group annuity purchase rates is 
not available since annuity purchases are private transactions between 
insurance companies and purchasers. Instead, under PBGC regulations, 
sponsors who are required by ERISA, as amended, to report plan 
termination liability information to PBGC, calculate that liability 
using a rate published by PBGC.[Footnote 67] PBGC determines that rate 
based on surveys of insurance companies performed by the American 
Council of Life Insurers.

* Current liabilities are to be calculated using an interest rate from 
within a range of permissible rates based on 30-year Treasury rates, as 
specified in the Internal Revenue Code.[Footnote 68]

Figure 11 shows that funding ratios using termination liabilities were 
typically lower than funding ratios using current liabilities, for 
plans reporting termination liabilities to PBGC under section 4010 of 
ERISA, as amended. In 1996, for example, the average funding ratio 
based on termination liability was 69 percent, but the average funding 
ratio based on current liability was 99 percent.[Footnote 69] 
Termination liability funding ratios are typically lower than current 
liability funding ratios because termination liabilities are typically 
greater than current liabilities.

Figure 11: Average Termination and Current Liability Funding Ratios for 
Plans Submitting Termination Liability Data to PBGC under Section 4010 
of ERISA, Plan Years 1996 -2001:

[See PDF for image]

Note: Current liability is reported as of the beginning of the plan 
year, and termination liability is reported as of the end of the plan 
year. Therefore, in figure 11, current liability funding ratios are as 
of the beginning of the plan year, and termination liabilities are as 
of the end of the preceding plan year. As a result, any changes in plan 
benefits that went into effect at the beginning of a plan year would be 
reflected in that year's current liability funding ratio but not its 
termination liability funding ratio. Funding ratios are calculated by 
dividing assets by liabilities.

[End of figure]

Figure 12 shows that the PBGC rate used to calculate termination 
liabilities, and the maximum and minimum rates used to calculate 
current liabilities, varied considerably 1996 through 2001. In the 
first 3 years, PBGC termination liability rates were typically less 
than current liability rates, but in the following 2 years, termination 
liability rates were typically higher than current liability rates. 
Lower interest rates result in higher liability values, and higher 
rates result in lower liability values.[Footnote 70] As a result, when 
the PBGC termination rate was high, relative to the current liability 
rate, termination liabilities would be reduced relative to current 
liabilities, causing the gap between the two funding ratios to narrow, 
as it did in 2001.

Figure 12: PBGC Termination, and Highest and Lowest Current Liability, 
Interest Rates, 1996-2002:

[See PDF for image]

Note: PBGC published two rates, one for the first 20 to 25 years of a 
valuation period and another for the remaining years. The figure shows 
the PBGC rate for the first part of the valuation period.

[End of figure]

[End of section]

Appendix V: Comments from the Pension Benefit Guaranty Corporation:

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

Office of the Executive Director:

October 22, 2003:

Ms. Barbara Bovbjerg, Director:

Retirement Education, Workforce, and Income Security Issues U.S. 
General Accounting Office:

Dear Ms. Bovbjerg:

The PBGC is pleased to comment on behalf of the Administration on GAO's 
draft report, "Single-Employer Pension Insurance Program Faces 
Significant Long-Term Risks.":

The report provides a comprehensive review of the causes of the 
historically high deficit in the Pension Benefit Guaranty Corporation's 
single-employer insurance program. It also provides a thorough analysis 
of the challenges to pension protection for millions of American 
workers and retirees in defined benefit plans. The report will provide 
valuable information to policymakers as they address the serious 
problems of pension underfunding, adverse demographic trends, and 
weaknesses in the pension funding rules.

The Administration has been working to address the challenges to 
pension security that are explored in the GAO report. Recently the 
Administration made several specific legislative recommendations to 
improve the accuracy of the measurement of pension liabilities by using 
discount rates based on a corporate-bond yield curve; to improve 
disclosure and transparency of pension funding to plan participants and 
to analysts and investors; and to require immediate funding or security 
for benefit increases in highly underfunded plans of financially 
troubled companies.

The Administration is continuing to develop specific pension funding 
proposals to set stronger funding targets, foster more consistent 
contributions, mitigate volatility, and increase flexibility for 
companies to fund up their plans in good economic times. The 
Administration also is considering additional areas for possible 
reform.

The Administration appreciates GAO's excellent work in this important 
area and looks forward to working with GAO and the Congress on pension 
reform.

Sincerely,

Steven A. Kandarian: 

Executive Director:


Signed by Steven A. Kandarian: 

[End of section]

Appendix VI: GAO Contacts and Staff Acknowledgments:

Contacts:

Charles A. Jeszeck, Assistant Director (202) 512-7036 Daniel F. 
Alspaugh, Analyst-in-Charge (425) 904-2177:

Staff Acknowledgments:

In addition to those named above, Joseph Applebaum, Mark M. Glickman, 
Corinna Nicolaou, David Noguera, John M. Schaefer, George A. Scott, and 
Roger J. Thomas made important contributions to this report.

FOOTNOTES

[1] A defined-benefit plan promises a benefit that is generally based 
on an employee's salary and years of service. The employer is 
responsible for funding the benefit, investing and managing plan 
assets, and bearing the investment risk. In contrast, under a defined 
contribution plan, benefits are based on the contributions to and 
investment returns on individual accounts, and the employee bears the 
investment risk. There are two federal insurance programs for defined-
benefit plans: one for single-employer plans and another for 
multiemployer plans. Our work was limited to the PBGC program to insure 
the benefits promised by single-employer defined-benefit pension plans. 
Single-employer plans provide benefits to employees of one firm or, if 
plan terms are not collectively bargained, employees of several 
unrelated firms.

[2] PBGC estimates that its deficit had grown to about $8.8 billion at 
the end of August 2003 based on its latest unaudited financial report.

[3] PBGC estimates that by the end of fiscal year 2003, the amount of 
underfunding in financially troubled companies could exceed $80 
billion. According to PBGC, for example, companies whose credit quality 
is below investment grade sponsor a number of plans. PBGC classified 
such plans as reasonably possible terminations if the sponsors' 
financial condition and other factors did not indicate that termination 
of their plans was likely as of year-end. See PBGC 2002 Annual Report, 
p. 41. The independent accountants that audited PBGC's financial 
statement reported that PBGC needs to improve its controls over the 
identification and measurement of estimated liabilities for probable 
and reasonably possible plan terminations. According to an official, 
PBGC has implemented new procedures focused on improving these 
controls. See Audit of the Pension Benefit Guaranty Corporation's 
Fiscal Year 2002 and 2001 Financial Statements in PBGC Office of 
Inspector General Audit Report, 2003-3/23168-2 (Washington, D.C.: Jan. 
30, 2003).

[4] The company and the union agreed to terminate the plan along the 
lines set out in the collective bargaining agreement: retirees and 
retirement-eligible employees over age 60 received full pensions and 
vested employees under age 60 received a lump-sum payment worth about 
15 percent of the value of their pensions. Employees whose benefit 
accruals had not vested, including all employees under age 40, received 
nothing. James A. Wooten, "The Most Glorious Story of Failure in 
Business: The Studebaker-Packard Corporation and the Origins of ERISA." 
Buffalo Law Review, vol. 49 (Buffalo, NY: 2001): 731.

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

[6] See section 4002(a) of P.L. 93-406, Sept. 2, 1974.

[7] The termination of a fully funded defined-benefit pension plan is 
termed a standard termination. Plan sponsors may 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. Terminating 
an underfunded plan is termed a distress termination if the plan 
sponsor requests the termination or an involuntary termination if PBGC 
initiates the termination. PBGC may institute proceedings to terminate 
a plan if, among other things, the plan will be unable to pay benefits 
when due or the possible long-run loss to PBGC with respect to the plan 
may reasonably be expected to increase unreasonably if the plan is not 
terminated. See 29 U.S.C. 1342(a). 

[8] The amount guaranteed by PBGC is reduced for participants under age 
65.

[9] The guaranteed amount of the benefit increase is calculated by 
multiplying the number of years the benefit increase has been in 
effect, not to exceed 5 years, by the greater of (1) 20 percent of the 
monthly benefit increase calculated in accordance with PBGC regulations 
or (2) $20 per month. See 29 C.F.R. 4022.25(b). 

[10] Under the IRC, current liability means all liabilities to 
employees and their beneficiaries under the plan. See 26 U.S.C. 
412(l)(7)(A). In calculating current liabilities, the IRC requires 
plans to use an interest rate from within a permissible range of rates. 
See 26 U.S.C. 412(b)(5)(B). In 1987, the permissible range was not more 
than 10 percent above, and not more than 10 percent below, the weighted 
average of the rates of interest on 30-year Treasury bond securities 
during the 4-year period ending on the last day before the beginning of 
the plan year. The top of the permissible range was gradually reduced 
by 1 percent per year beginning with the 1995 plan year to not more 
than 5 percent above the weighted average rate effective for plan years 
beginning in 1999. The top of the permissible range was increased to 20 
percent above the weighted average rate for 2002 and 2003. The weighted 
average rate is calculated as the average yield over 48 months with 
rates for the most recent 12 months weighted by 4, the second most 
recent 12 months weighted by 3, the third most recent 12 months 
weighted by 2, and the fourth weighted by 1.

[11] Under the additional funding requirement rule, a single-employer 
plan sponsored by an employer with more than 100 employees in defined-
benefit plans is subject to a deficit reduction contribution for a plan 
year if the value of plan assets is less than 90 percent of its current 
liability. However, a plan is not subject to the deficit reduction 
contribution if the value of plan assets (1) is at least 80 percent of 
current liability and (2) was at least 90 percent of current liability 
for each of the 2 immediately preceding years or each of the second and 
third immediately preceding years. To determine whether the additional 
funding rule applies to a plan, the IRC requires sponsors to calculate 
current liability using the highest interest rate allowable for the 
plan year. See 26 U.S.C. 412(l)(9)(C).

[12] U.S. General Accounting Office, Private Pensions: Process Needed 
to Monitor the Mandated Interest Rate for Pension Calculations, 
GAO-03-313 (Washington, D.C.: Feb. 27, 2003).

[13] In October 2003, the House passed the Pension Funding Equity Act 
of 2003 (H.R. 3108), which for plan years beginning in 2004 and 2005 
would temporarily change the permissible range and interest rate for 
current liability calculations to not above and not more than 10 
percent below, the weighted average of a rate based on one or more 
indices of conservatively invested long-term corporate bonds. In July 
of 2003, the Department of the Treasury unveiled The Administration 
Proposal to Improve the Accuracy and Transparency of Pension 
Information. Its stated purpose is to improve the accuracy of the 
pension liability discount rate, increase the transparency of pension 
plan information, and strengthen safeguards against pension 
underfunding. See appendix III.

[14] Letter to the Chairman, Senate Committee on Governmental Affairs 
and House Committee on Government Operations, GAO/OCG-90-1, Jan. 23, 
1990. GAO's high-risk program has increasingly focused on those major 
programs and operations that need urgent attention and transformation 
to ensure that our national government functions in the most 
economical, efficient, and effective manner. Agencies or programs 
receiving a "high risk" designation receive greater attention from GAO 
and are assessed in regular reports, which generally coincide with the 
start of each new Congress.

[15] U.S. General Accounting Office, High-Risk Series: Pension Benefit 
Guaranty Corporation, GAO/HR-93-5 (Washington, D.C.: Dec. 1992). 

[16] U.S. General Accounting Office, High-Risk Series: An Overview, 
GAO/HR-95-1 (Washington, D.C.: Feb. 1995).

[17] U.S. General Accounting Office, Pension Benefit Guaranty 
Corporation: Financial Condition Improving but Long-Term Risks Remain, 
GAO/HEHS-99-5 (Washington, D.C.: Oct. 16, 1998).

[18] U.S. General Accounting Office, Pension Benefit Guaranty 
Corporation: Contracting Management Needs Improvement, GAO/HEHS-00-130 
(Washington, D.C.: Sept. 18, 2000).

[19] U.S. General Accounting Office, Pension Benefit Guaranty 
Corporation: Statutory Limitation on Administrative Expenses Does Not 
Provide Meaningful Control, GAO-03-301 (Washington, D.C.: Feb. 28, 
2003).

[20] U.S. General Accounting Office, Budget Issues: Budgeting for 
Federal Insurance Programs, GAO/AIMD-97-16 (Washington D.C.: Sept. 30, 
1997).

[21] In most cases, the risk-assumed approach would be analogous to a 
premium rate-setting process in that it looks at the long-term expected 
cost of an insurance commitment at the time the insurance commitment is 
extended. The risk assumed by the government is essentially that 
portion of a full risk-based premium not charged to the insured.

[22] According to PBGC officials, PBGC files a claim for all unfunded 
benefits in bankruptcy proceedings. However, PBGC generally recovers 
only a small portion of the total unfunded benefit amount in bankruptcy 
proceedings, and the recovered amount is split between PBGC (for 
unfunded guaranteed benefits) and participants (for unfunded 
nonguaranteed benefits).

[23] In 2002 dollars, flat-rate premium income rose from $605 million 
in 1993 to $654 million in 2002.

[24] See section 405, P.L. 107-147, Mar. 9, 2002.

[25] PBGC accounts for single-employer program assets in separate trust 
and revolving funds. PBGC accounts for the assets of terminated plans 
and plan sponsors in a trust fund, which, according to PBGC, may be 
invested in equities, real estate, or other securities. PBGC accounts 
for single-employer program premiums in two revolving funds. One 
revolving fund is used for all variable-rate premiums, and that portion 
of the flat-rate premium attributable to the flat-rate in excess of 
$8.50. The law states that PBGC may invest this revolving fund in such 
obligations as it considers appropriate. See 29 U.S.C. 1305(f). The 
second revolving fund is used for the remaining flat-rate premiums, and 
the law restricts the investment of this revolving fund to obligations 
issued or guaranteed by the United States. See 29 U.S.C. 1305(b)(3).

[26] In 2002, PBGC used an interest rate factor of 5.70 percent for 
benefit payments through 2027 and a factor of 4.75 percent for benefit 
payments in the remaining years.

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

[28] The estimate assumes: (1) a rate of return on all PBGC assets of 
5.8 percent and a discount rate on future benefits of 5.67 percent; (2) 
no premium income and no future claims beyond all plans with 
terminations that were deemed probable as of September 30, 2002; (3) 
administrative expenses of $225 million in fiscal year 2003, $229 
million per year for fiscal years 2004-14, and $0 thereafter; (4) mid-
year termination for probables; and (5) that PBGC does not assume 
control of probable assets and future benefits until the date of plan 
termination.

[29] U.S. General Accounting Office, Pension Plans: Hidden Liabilities 
Increase Claims Against Government Insurance Programs, GAO/
HRD-93-7(Washington, D.C.: Dec. 30, 1992).

[30] 2002 U.S. Investment Management Study, Greenwich Associates, 
Greenwich, Conn.

[31] Pensions & Investments, vol. 29, Issue 2 (Chicago: Jan. 22, 2001).

[32] According to the survey, the Bethlehem Steel Corporation pension 
plan made benefit payments of $587 million between Sept. 30, 2000, and 
Sept. 30, 2001. Pensions and Investments, www.pionline.com/pension/
pension.cfm (downloaded on June 13, 2003).

[33] Present value calculations reflect the time value of money: A 
dollar in the future is worth less than a dollar today because the 
dollar today can be invested and earn interest. The calculation 
requires an assumption about the interest rate, which reflects how much 
could be earned from investing today's dollars. Assuming a lower 
interest rate increases the present value of future payments. 

[34] The magnitude of an increase or decrease in plan liabilities 
associated with a given change in discount rates would depend on the 
demographic and other characteristics of each plan.

[35] To terminate a defined-benefit pension plan without submitting a 
claim to PBGC, the plan sponsor determines the benefits that have been 
earned by each participant up to the time of plan termination and 
purchases a single-premium group annuity contract from an insurance 
company, under which the insurance company guarantees to pay the 
accrued benefits when they are due. Interest rates on long-term, high-
quality fixed-income securities are an important factor in pricing 
group annuity contracts because insurance companies tend to invest 
premiums in such securities to finance annuity payments. Other factors 
that would have affected group annuity prices include changes in 
insurance company assumptions about mortality rates and administrative 
costs.

[36] Minimum funding rules permit certain plan liabilities, such as 
past service liabilities, to be amortized over specified time periods. 
See 26 U.S.C. 412(b)(2)(B). Past service liabilities occur when 
benefits are granted for service before the plan was set up or when 
benefit increases after the set up date are made retroactive. 

[37] For the analysis, PBGC used termination liabilities reported to it 
under 29 C.F.R. sec 4010.

[38] See 26 U.S.C. 412(b). 

[39] See 26 U.S.C. 404(a)(1) and 26 U.S.C. 412(c)(7). The sponsor might 
have been able to make a contribution to the plan had it selected a 
lower interest rate for valuing current liabilities. Polaroid used the 
highest interest rate permitted by law for its calculations.

[40] 2002 U.S. Investment Management Study, Greenwich Associates, 
Greenwich, CT.

[41] The U.S. Treasury stopped publishing a 30-year Treasury bond rate 
in February 2002, but the Internal Revenue Service publishes rates for 
pension calculations based on rates for the last-issued bonds in 
February 2001. Interest rates to calculate plan liabilities must be 
within a "permissible range" around a 4-year weighted average of 30-
year Treasury bond rates; the permissible range for plan years 
beginning in 2002 and 2003 was 90 to 120 percent of this 4-year 
weighted average. 

[42] A potentially offsetting effect of falling interest rates is the 
possible increased return on fixed-income assets that plans, or PBGC, 
hold. When interest rates fall, the value of existing fixed-income 
securities with time left to maturity rises.

[43] The last three recessions on record in the United States occurred 
during 1981, 1990-91, and 2001. (See www.bea.gov/bea/dn/gdpchg.xls.)

[44] This estimate comprises "reasonably possible" terminations, which 
include plans sponsored by companies with credit quality below 
investment grade that may terminate, though likely not by year-end. 
Plan participants have a nonforfeitable right to vested benefits, as 
opposed to nonvested benefits, for which participants have not yet 
completed qualification requirements.

[45] PBGC began using PIMS to project its future financial condition in 
1998. Prior to this, PBGC provided low-, medium-, and high-loss 
forecasts, which were extrapolations from the agency's claims 
experience and the economic conditions of the previous 2 decades. 

[46] In contrast, defined-contribution plans have grown significantly 
over a similar period--from 462,000 plans in 1985 to 674,000 plans in 
1998.

[47] If a plan sponsor purchases an annuity for a retiree from an 
insurance company to pay benefits, this would also remove the retiree 
from the participant pool, which would have the same effect on flat-
rate premiums.

[48] Boyce, Steven, and Richard A. Ippolito, "The Cost of Pension 
Insurance," The Journal of Risk and Insurance (2002) vol. 69, No.2, p. 
121-170.

[49] PBGC's investment income needs to cover the increase in the 
present value of future benefits from existing claims. Investment 
income above this level would improve PBGC's net financial condition, 
all else equal. Conversely, investment income below the present value 
of future claims will increase PBGC's deficit, all else equal.

[50] The return on fixed-income assets sold before maturity may also be 
affected by capital gains (or losses). The price of a bond moves in the 
opposite direction as interest rates, and so if interest rates fall, 
bondholders may reap capital gains.

[51] If the Congress chooses to replace the 30-year Treasury rate used 
to calculate pension plan liabilities, the level of the interest rate 
selected can also affect plan funding. For example, if a rate that is 
higher than the current rate is selected, plan liabilities would appear 
better funded, thereby decreasing minimum and maximum employer 
contributions. In addition, some plans would reach full-funding 
limitations and avoid having to pay variable-rate premiums. Therefore, 
PBGC would receive less revenue. Conversely, a lower rate would likely 
improve PBGC's financial condition. In 1987, when the 30-year Treasury 
rate was adopted for use in certain pension calculations, the Congress 
intended that the interest rate used for current liability calculations 
would, within certain parameters, reflect the price an insurance 
company would charge to take responsibility for the plans pension 
payments. However, in the late 1990s, when fewer 30-year Treasury bonds 
were issued and economic conditions increased demand for the bonds, the 
30-year Treasury rate diverged from other long-term interest rates, an 
indication that it also may have diverged from group annuity purchase 
rates. In 2001, Treasury stopped issuing these bonds altogether, and in 
March 2002, the Congress enacted temporary measures to alleviate 
employer concerns that low interest rates on the remaining 30-year 
Treasury bonds were affecting the reasonableness of the interest rate 
for employer pension calculations. Selecting a replacement rate is 
difficult because little information exists on which to base the 
selection. 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 market-determined alternatives. Long-
term market rates may track changes in group annuity rates over time, 
but their proximity to group annuity rates is also uncertain. For 
example, an interest rate based on a long-term market rate, such as 
corporate bond indexes, may need to be adjusted downward to better 
reflect the level of group annuity purchase rates. However, as we 
stated in our report earlier this year, establishing a process for 
regulatory adjustments to any rate selected may make it more suitable 
for pension plan liability calculations. See GAO-03-313.

[52] GAO-03-313.

[53] The administration's proposal would require companies with below 
investment grade credit ratings whose plans are less than 50 percent 
funded on a termination basis to immediately fully fund or secure any 
new benefit improvements, benefit accruals or lump-sum distributions.

[54] Employers are generally subject to an excise tax for failure to 
make required contributions or for making contributions in excess of 
the greater of the maximum deductible amount or the ERISA full-funding 
limit.

[55] For example, one way to do this would be to allow deductions 
within a corridor of up to 130 percent of current liabilities. 
Gebhardtsbauer, Ron. American Academy of Actuaries testimony before the 
Subcommittee on Employer-Employee Relations, Committee on Education and 
the Workforce, U.S. House of Representatives, Hearing on Strengthening 
Pension Security: Examining the Health and Future of Defined Benefit 
Pension Plans. (Washington, D.C.: June 4, 2003), 9.

[56] Currently, some measures exist to limit the losses incurred by 
PBGC from newly terminated plans. PBGC is responsible for only a 
portion of all benefit increases that the sponsor adds in the 5 years 
leading up to termination. 

[57] IRC provides generally that a plan less than 60 percent funded on 
a current liability basis may not increase benefits without either 
immediately funding the increase or providing security. See 26 U.S.C. 
401(a)(29).

[58] For example, a plan that allows a lump-sum option--as is often 
found in a cash-balance and other hybrid plan--may pose a different 
level of risk to PBGC than a plan that does not. 

[59] Under the floor-offset arrangement, the benefit computed under the 
final pay formula is "offset" by the benefit amount that the account of 
another plan, such as an Employee Stock Ownership Plan, could provide. 

[60] The ERISA requirement that plan sponsors notify participants and 
beneficiaries of the plan's funding status and limits on the PBGC 
guarantee currently goes into effect when plans are required to pay 
variable-rate premiums and meet certain other requirements. See 29 
U.S.C. 1311 and 29 C.F.R. 4011.3.

[61] Participants and individuals receiving benefits from their plan 
must receive a Summary Annual Report (SAR) from their plan's 
administrator each year. The SAR summarizes the plan's financial status 
based on information that the plan administrator provides to the 
Department of Labor on its annual Form 5500. This document must 
generally be provided no later than 9 months after the close of the 
plan year.

[62] However, the actual benefit paid by PBGC depends on a number of 
factors and may exceed the maximum guaranteed benefit. For example, 
PBGC expects that the average annual benefit paid to U.S. Airways 
pilots who are 59 years of age with 29 years of service will be about 
$85,000, including nonguaranteed amounts. PBGC said that many US 
Airways pilots will receive more than the $28,600 maximum limit 
because, according to priorities established under ERISA, pension plan 
participants may receive benefits in excess of the guaranteed amounts 
if there are enough assets or recoveries from the plan sponsors. For 
example, a participant who could have retired 3 years prior to plan 
termination (but did not) may be eligible to receive both guaranteed 
and nonguaranteed amounts. PBGC letter in response to follow-up 
questions from the Committee on Finance, U.S. Senate (Washington, D.C.: 
Apr. 1, 2003).

[63] GAO/AIMD-97-16, 143.

[64] GAO-03-313.

[65] GAO-03-313.

[66] In addition, section 4010 of ERISA requires that plan sponsors 
with more than $50 million in plan underfunding file annual financial 
and actuarial information with PBGC, though this information is not 
made public.

[67] Sponsors are required to provide PBGC with termination liability 
information if, among other things, the aggregate unfunded vested 
benefits at the time of the preceding plan year of plans maintained by 
the contributing sponsor and the members of its controlled group exceed 
$50 million, disregarding plans with no unfunded benefits. See 29 
U.S.C. 1310(b). Among the information to be provided to PBGC is the 
value of benefit liabilities determined using the assumptions 
applicable to the valuation of benefits to be paid as annuities in 
trusteed plans terminating at the end of the plan year. See 29 C.F.R. 
4010(8)(d)(2). 

[68] See footnote 10.

[69] We have reported averages for the plans submitting termination 
liability information to PBGC, instead of ratios for specific plans, 
because ERISA generally precludes the disclosure of the information 
submitted by plans to PBGC as part of the 4010 process. See 13 U.S.C. 
1310(c).

[70] When interest rates are lower, for example, more money is needed 
today to finance future benefits because it will earn less income when 
invested. To illustrate the effect of a change in interest rates on the 
present value of a stream of future payments: at a 6 percent interest 
rate, a promise to pay $1.00 per year for the next 30 years has a 
present value of about $14. If the interest rate is reduced to 1.0 
percent, however, the present value of $1.00 per year for 30 years 
increases to about $26.

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