Section 17. The Pension Benefit Guaranty Corporation\1\

    The Pension Benefit Guaranty Corporation (PBGC) was
established under title IV of the Employee Retirement Income
Security Act of 1974 (ERISA) (88 Stat. 829, Public Law 93-406)
to insure private pension beneficiaries against the complete
loss of promised benefits if their defined benefit pension plan
is terminated without adequate funding.
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    \1\This section draws from: a CBO report entitled ``Federal
Insurance of Private Pension Benefits,'' October 1987; the PBGC Annual
Report to Congress Fiscal Year 1992; a Joint Committee on Taxation
print entitled ``Current Issues Relating to PBGC Premiums and Single-
Employer Defined Benefit Pension Plans,'' May 15, 1987; and a Joint
Committee on Taxation print entitled ``Present Law and Issues Relating
to Pension Benefit Guaranty Corporation Guarantees of Retirement
Annuities Paid By Insurance Companies,'' April 4, 1990.
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            EXPLANATION OF THE CORPORATION AND ITS FUNCTIONS

                             ADMINISTRATION

    The PBGC is a Government-owned corporation. A three-member
board of directors, chaired by the Secretary of Labor,
administers the Corporation. The Secretary of Commerce and the
Secretary of the Treasury are the other directors. ERISA
provides for a seven-member Advisory Committee, appointed by
the President, for staggered 3-year terms. The Advisory
Committee advises the PBGC on issues such as the appointment of
trustees in termination proceedings, investment of funds, plan
liquidations, and other matters as requested by the PBGC.

                       PLAN TERMINATION INSURANCE

Defined benefit and defined contribution plans
    There are two basic kinds of pension plans: ``defined
benefit'' and ``defined contribution'' plans. Under a defined
benefit plan, employees receive a fixed benefit at retirement
prescribed by a formula set forth in the plan. The employer
makes annual contributions to the plan based on actuarial
calculations designed to ensure that the plan has sufficient
funds to pay the benefit prescribed by the formula. Under a
defined contribution plan, no particular benefit is promised.
Instead, benefits are based on the balance of an individual
account maintained for the benefit of the employee. The benefit
received by an employee at retirement is generally dependent on
two factors: total contributions made to the plan on the
employee's behalf during the employee's participation in the
plan, and the investment experience of the amounts contributed
on the employee's behalf. Under either type of pension plan,
employees may also be permitted to make contributions.
    Under a defined contribution plan, the employee bears all
the risk of poor investment performance of the assets invested
in a plan. Whether the funds are invested well or poorly, the
employee gets at retirement only what was contributed plus the
amount actually earned.
    Under a defined benefit plan, the employer bears more of
the risk of loss. The Internal Revenue Code and ERISA contain
minimum funding standards that require the employer to make
contributions to a defined benefit plan to fund promised
benefits. Thus, for example, if the plan experiences poor
investment performance, actuarial miscalculations, or low
benefit estimates, the employer will be required to make
additional contributions to the plan. However, the minimum
funding rules provide for funding over a period of time, and do
not require that the plan have assets to pay all the benefits
earned under the plan at any particular time. Thus, it is
possible for a defined benefit plan to terminate without having
sufficient assets to pay promised benefits. The PBGC insures
defined benefit plan benefits up to certain limits to protect
plan participants in the event of such a termination. However,
the PBGC does not protect all benefits promised under a plan so
that even under a defined benefit plan, the employees bear some
risk of loss.
    Defined benefit plans are fewer in number than defined
contribution plans, but cover more participants and account for
a greater volume of assets. In 1990, defined benefit pension
plans accounted for 16 percent of all pension plans, but were
the primary form of coverage for 62\2\ percent of all pension
participants and accounted for 57 percent of pension assets.
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    \2\ Figure of 62 percent primary coverage is for 1991.
    Source: EBRI, December 1993 Issue Brief on pension coverage and
participation.
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    The PBGC insures benefits only under certain defined
benefit plans and only up to certain monthly amounts. Private
defined benefit pension plans insured by the PBGC continue to
be well funded in general, with more than $1 trillion in
assets, exceeding liability by several hundred billion dollars.
However, the PBGC faces substantial direct exposure from a
relatively small number of single-employer plans, concentrated
in the steel, airline, tire and automobile industries, with
unfunded liabilities of $53 billion, as of December 31, 1992.
Underfunding in multiemployer plans, as of January 1, 1991 (the
most recent information available) totaled $10.6 billion. The
operations of the insurance program, and insurance limits, are
described below. Defined contribution plans are not insured by
the PBGC.

Single-employer and multiemployer plans

    Defined benefit plans insured by the PBGC fall into two
categories: single-employer plans and multiemployer plans.
Multiemployer plans are collectively bargained arrangements
maintained by more than one employer. Single-employer plans,
whether or not collectively bargained, are each maintained by
one employer.
    The risk to the PBGC posed by single-employer plans is
different from that posed by multiemployer plans. Generally,
single-employer plans are more vulnerable to the risk of
underfunding due to financial weakness of the sponsoring
employer; the PBGC is more vulnerable to the risk that a single
employer will be unable to make up the difference between
funded and promised benefits. Issues concerning insurance of
multiemployer plans are more likely to concern the allocation
of liabilities as firms enter and leave the participating
group.
    The PBGC insures the benefits of 41 million pension plan
participants, including active workers and retirees. Of these,
78 percent, or about 32 million, are covered by approximately
64,000 single-employer pension plans, and 22 percent, or about
8.9 million, are covered by approximately 2,000 multiemployer
plans.

Other requirements for PBGC coverage

    The PBGC covers only those defined benefit plans which meet
the qualification requirements of Section 401 of the Internal
Revenue Code. These are also the requirements that plans must
meet in order to receive the significant tax benefits available
to pension plans.
    Generally, to be qualified under the Internal Revenue Code,
a pension plan must be established with the intent of being a
permanent and continuing arrangement; must provide definitely
determinable benefits; may not discriminate in favor of highly
compensated employees with respect to coverage, contributions
or benefits; and must cover a minimum number of participants.
    Pension plans specifically excluded from insurance by the
PBGC include government and church plans, defined contribution
plans, plans of fraternal societies financed entirely by member
contributions and plans maintained by certain professionals
with 25 or fewer participants.

                            PLAN TERMINATION

Single-employer plans

    An employer can voluntarily terminate a single-employer
plan only in a standard or distress termination. The
participants and the PBGC must be notified of the termination.
The PBGC may involuntarily terminate a plan.
            a. Standard terminations
    A standard termination is permitted only if plan assets are
sufficient to cover benefit liabilities. Generally, benefit
liabilities equal all benefits earned to date by plan
participants, including vested and nonvested benefits (which
automatically become vested at the time of termination), and
including certain early retirement supplements and subsidies.
Benefit liabilities may also include certain contingent
benefits (for example, plant shutdown benefits). If assets are
sufficient to cover benefit liabilities (and other termination
requirements, such as notice to employees, have not been
violated), the plan distributes benefits to participants. The
plan provides for the benefit payments it owes by purchasing
annuity contracts from an insurance company, or otherwise
providing for the payment of benefits, for example, by
providing the benefits in lump sum distributions.
    Assets in excess of the amounts necessary to cover benefit
liabilities may be recovered by the employer in an asset
reversion. The asset reversion is included in the gross income
of the employer and is also subject to a nondeductible excise
tax. The excise tax is 20 percent of the amount of the
reversion if the employer establishes a qualified replacement
plan, or provides certain benefit increases in connection with
the termination. Otherwise, the excise tax is 50 percent of the
reversion amount.
            b. Distress terminations
    If assets in the plan are not sufficient to cover benefit
liabilities, the employer may not terminate the plan unless the
employer meets one of four criteria necessary for a
``distress'' termination:
  --The contributing sponsor, and every member of the
        controlled group of which the sponsor is a member, is
        being liquidated in bankruptcy or other similar State
        insolvency proceedings;
  --The contributing sponsor and every member of the sponsor's
        controlled group is being reorganized in bankruptcy or
        similar State proceeding;
  --The PBGC determines that termination is necessary to allow
        the employer to pay its debts when due;
  --The PBGC determines that termination is necessary to avoid
        unreasonably burdensome pension costs caused solely by
        a decline in the employer's work force.
    These requirements, added by the Single Employer Pension
Plan Amendments Act of 1986 (SEPPAA) and modified by the
Pension Protection Act of 1987 (PPA), are designed to ensure
that the liabilities of an underfunded plan remain the
responsibility of the employer, rather than the PBGC, unless
the employer meets strict standards of financial need
indicating genuine inability to continue funding the plan.
            c. Involuntary terminations
    In order to terminate a plan involuntarily, the PBGC must
obtain a court order. The PBGC may institute court proceedings
only if the plan in question has not met the minimum funding
standards, will be unable to pay benefits when due, a
substantial owner has received a distribution greater than
$10,000 (other than by reason of death), or the liability of
the PBGC may reasonably be expected to increase if the plan is
not terminated. The PBGC must terminate a plan if the plan is
unable to pay benefits that are currently due. A court may
order termination of the plan in order to protect the interests
of participants, to avoid unreasonable deterioration of the
plan's financial condition, or to avoid an unreasonable
increase in the PBGC liability under the plan.
            d. PBGC trusteeship
    When an underfunded plan terminates in a distress or
involuntary termination, the plan effectively goes into PBGC
receivership. The PBGC becomes the trustee of the plan, takes
control of any plan assets, and assumes responsibility for
liabilities under the plan. The PBGC makes payments for benefit
liabilities promised under the plan with assets received from
two sources: assets in the plan before termination, and assets
recovered from the employer (see below). The balance, if any,
of guaranteed benefits owed to beneficiaries is paid from the
PBGC's revolving funds (see below).
            e. Employer liability to the PBGC

    Following a distress or involuntary termination, the plan's
contributing sponsor and every member of that sponsor's
controlled group is liable to the PBGC for the excess of the
value of the plan's liabilities as of the date of plan
termination over the fair market value of the plan's assets on
the date of termination. The liability is joint and several,
meaning that each member of the controlled group can be held
responsible for the entire liability. Generally, the obligation
is payable in cash or negotiable securities to the PBGC on the
date of termination. Failure to pay this amount upon demand by
the PBGC may trigger a lien on the property of the contributing
employer's controlled group for up to 30 percent of its net
worth. Obligations in excess of this amount are to be paid on
commercially reasonable terms acceptable to the PBGC.
            f. Benefit payments
    When an underfunded plan terminates, the benefits that the
PBGC will pay depend on the statutory guaranty, asset
allocation, and recovery on the PBGC's employer liability
claim.
    Guaranteed benefits.--Within certain limits, the PBGC
guarantees any retirement benefit that was nonforfeitable
(vested) on the date of plan termination other than benefits
that vest solely on account of the termination, and any death,
survivor or disability benefit that was owed or was in payment
status at the date of plan termination. Generally only that
part of the retirement benefit that is payable in monthly
installments (rather, than for example, lump sum benefits
payable to encourage early retirement) is guaranteed.
Retirement benefits that commence before the normal age of
retirement are guaranteed, provided they meet the other
conditions of guarantee. Contingent benefits (for example,
early retirement benefits provided only if a plant shuts down)
are guaranteed only if the triggering event occurs before plan
termination.
    There is a statutory ceiling on the amount of monthly
benefits payable to any individual that may be guaranteed. This
ceiling is indexed according to changes in the Social Security
wage base, and is $2,556.82 in 1994 for a single life annuity
payable at age 65. This limit is actuarially reduced for
benefits payable before age 65, or payable in a different form.
    The reduction in the maximum guarantee for benefits paid
before age 65 is 7 percent for each of the first 65 years under
age 65, 4 percent for each of the next 5 years, and 2 percent
for each of the next 10 years. The reduction in the maximum
guarantee for benefits paid in a form other than a single life
annuity depends on the type of benefit, and if there is a
survivor's benefit, the percentage of the benefit continuing to
surviving spouse and the age difference between the participant
and spouse.
    For example, consider a retiree who, at plan termination in
1994, is age 60 and whose spouse is 2 years younger. The
participant is receiving a joint and 50 percent survivor's
benefit (a benefit that continues to a surviving spouse upon
the death of the participant at a reduced level of 50 percent).
In this case, the maximum guarantee applicable to the
participant is $1,465.82 per month [$2,556.82 x .90
joint and survivor benefit form x .65 (participant age)
x .98 (spouse 2 year younger)]
    The guarantee for any new benefit, including benefits under
new plans and benefits provided by amendment to already
existing plans, is phased in over 5 years following creation of
the benefit.
    Asset allocation.--Assets of a terminated plan are
allocated to pay benefits according to a priority schedule
established by statute. Under this schedule, some nonguaranteed
benefits are payable from plan assets before certain guaranteed
benefits. For example, certain benefits that have been in pay
status for more than 3 years have priority over guaranteed
benefits not in pay status.
    Section 4022(c) benefits.--The PBGC is also required to pay
participants a portion of their unfunded, nonguaranteed
benefits based on a ratio of recovery on the employer liability
claim to the amount of that claim.
    As a result of the asset allocation and section 4022(c)
benefits, reimbursement to the PBGC for its payment of
guaranteed benefits may be less than the total value of assets
recovered from the terminated plan.

Multiemployer plans

    In the case of multiemployer plans, the PBGC insures plan
insolvency, rather than plan termination. Accordingly, a
multiemployer plan need not be terminated to qualify for PBGC
financial assistance, but must be found to be insolvent. A plan
is insolvent when its available resources are not sufficient to
pay the plan benefits for the plan year in question, or when
the sponsor of a plan in reorganization reasonably determines,
taking into account the plan's recent and anticipated financial
experience, that the plan's available resources will not be
sufficient to pay benefits that come due in the next plan year.
    If it appears that available resources will not support the
payment of benefits at the guaranteed level, the PBGC will
provide the additional resources needed as a loan. The PBGC may
provide loans to the plan year after year. If the plan recovers
from insolvency, it must begin repaying loans on reasonable
terms in accordance with regulations.
    The PBGC guarantees benefits under a multiemployer plan of
the same type as those guaranteed under a single employer plan,
but a different guarantee ceiling applies. As a result of the
Multiemployer Pension Plan Amendments Act of 1980 (Public Law
96-364, referred to as MPPAA), the limit for multiemployer
plans is the sum of 100 percent of the first $5 of monthly
benefits per year of credited service, and 75 percent of the
next $15 of monthly benefits. (The 75 percent is reduced to 65
percent for plans that do not meet certain pre-ERISA minimum
funding standards.)
    MPPAA requires that PBGC conduct a study every 5 years to
determine whether changes are needed in the multiemployer
premium rate or guarantee. PBGC completed the second such study
in 1990, confirming the program's financial solvency, but also
finding that inflation had devalued the existing guarantee
limits.

                    FINANCIAL CONDITION OF THE PBGC

                                OVERVIEW

    According to its most recent annual report, the PBGC's
multiemployer plan insurance program is in sound financial
condition. Assets exceeded liabilities by $276 million at the
end of the fiscal year 1993.
    However, by the end of fiscal year 1993, the larger single-
employer program was showing an accumulated deficit of $2.9
billion. That is, the assets in PBGC's single-employer program
were $2.8 billion less than the value of PBGC's liability for
future benefit payments. PBGC's assets are comprised of
premiums collected, assets recovered from terminated plans and
recoveries from employers, and accumulated investment income.
PBGC's liability for future benefit payments is the
(discounted) present value of the stream of future benefit
payments PBGC is obligated to pay participants and
beneficiaries of terminated plans and plans booked as probable
terminations.

                              MAJOR CASES

Major Single-Employer Cases

    The past year saw the conclusion of several of PBGC's
largest cases, as The LTV Corporation, Continental Airlines,
and Trans World Airlines all began to consummate their
agreements with PBGC and emerged from bankruptcy
reorganizations. Negotiations and litigation continued in a
number of other major cases.

The LTV Corporation

    LTV emerged from bankruptcy on June 28, 1993. The company's
plan of reorganization included an agreement finalized earlier
in the year with PBGC under which LTV immediately contributed
$787 million in cash to three underfunded LTV Steel pension
plans as part of a nearly $2 billion initial infusion to the
plans. That payment began the process of eliminating the plans'
underfunding of $3 billion based on a 28-year payment schedule.
    Also as part of the agreement, the district court approved
a request by PBGC, LTV, and LTV's creditors to vacate prior
court decisions on the amount and priority of PBGC's bankruptcy
claims.
    As a result of the settlement, LTV's pension plans remain
ongoing and approximately 100,000 participants, including
nearly 60,000 retirees, are receiving full benefits. PBGC will
monitor the plans closely as LTV goes forward and continues the
necessary funding of the plans.

Eastern Air Lines/Continental Airlines

    As part of Continental's bankruptcy reorganization in April
1993, the airline and PBGC finalized an agreement that settled
Continental's joint-and-several liability for unpaid
contributions of approximately $58 million due the terminated
Eastern Air Lines pension plans and approximately $700 million
in unfunded pension liabilities. The agreement also provided
additional protection for Continental's ongoing pension plans.
Continental and its subsidiaries had been part of Eastern's
group of commonly controlled companies. PBGC received more than
$21 million in cash, an airplane trust worth $70-75 million,
and approximately 5 percent of the new Continental common
stock. Continental's pensions plans also received an extra
contribution of $10 million of new Continental stock to protect
the pensions of Continental's employees.

Trans World Airlines (TWA)

    TWA's emergence from bankruptcy in November 1993 followed
the settlement reached in early January between PBGC, TWA, the
airline's creditors and unions, and Carl Icahn, the former
owner of TWA. That agreement, negotiated in 1992 and signed in
early January 1993, resolved Mr. Icahn's and TWA's liabilities
for TWA's two defined benefit pension plans, which were
underfunded by about $1 billion as of December 1992.
    Under the agreement, Mr. Icahn provided TWA with $200
million in financing and relinquished control of the airline to
its employees and creditors. TWA's pension plans, which are
ongoing but with no future benefit accruals, were assumed by
Pichin Corporation, an Icahn company that will be responsible
for minimum funding payments to the plans. The annual funding
will be provided in part by TWA through payments on secured 15-
year notes totalling $300 million. The balance of the required
payments, up to a total of $200 million, will be made by
another Icahn company. If the plans terminate in the future,
PBGC will receive the balance of the TWA notes, as well as
annual payments totalling $240 million from Mr. Icahn's group
of companies. All of TWA's and Mr. Icahn's commitments under
the agreement are secured.

Astrum International (formerly E-II Holdings, Inc.)

    In a case demonstrating the value of PBGC's early warning
program, Astrum responded to early PBGC action with measures
that protect the pensions of 19,000 workers and retirees from
two affiliated companies. Astrum had planned a reorganization
in bankruptcy that would have relieved it of liability for the
pension plans of two related companies, which were underfunded
by as much as $40 million. PBGC successfully intervened to
negotiate protection for the plans prior to conclusion of the
bankruptcy proceeding. The resulting agreement assures
continued funding of, and Astrum's continued secondary
liability for, the plans which will remain in operation.

Lone Star Industries, Inc.

    PBGC reached an agreement with the bankrupt Lone Star
regarding the company's 10 pension plans, which are underfunded
by a total of about $73 million. Under the agreement, which
still needs bankruptcy court approval, Lone Star would
contribute up to $13 million to the plans over and above its
minimum required contribution. In addition, PBGC will receive
security valued at a minimum of $30 million to protect against
future termination of the plans.

Collins v. PBGC; Page v. PBGC

    In these consolidated class-action suits, the plaintiffs--
participants in plans that terminated before September 26,
1980, without having been amended to adopt ERISA's minimum
vesting standards--sought a court ruling requiring PBGC to
guarantee their benefits as if their plans had been amended.
PBGC had determined at the time their plans terminated that
only those benefits vested under the express terms of their
plans were guaranteeable. PBGC and the plaintiffs were
discussing a settlement as the year ended.

CF&I Steel Corporation

    PBGC has been seeking recovery on its claims for a CF&I
plan that was underfunded by about $220 million when terminated
in March 1992. Under CF&I's consensual plan of reorganization
confirmed early in the year, PBGC will receive a share of
liquidation proceeds that will include a limited partnership
interest in the business that was transferred to new owners by
an asset sale, and may include cash and other consideration.
PBGC's preliminary estimate of the total value of the potential
recovery is about $33 million. PBGC may recover additional
amounts depending on the outcome of its appeal of bankruptcy
court rulings on its claims.

White Consolidated Industries, Inc.

    PBGC has been seeking to establish White's liability for
the estimated $120 million underfunding in several pension
plans transferred in a 1985 transaction with Blaw Knox
Corporation. PBGC alleged that a principal purpose of White in
entering into the transaction was to evade the pension
liabilities. PBGC terminated two of the plans, with total
underfunding of about $97 million, when they ran out of money.
Although a district court denied White's liability for the
plans, an appellate court reinstated PBGC's lawsuit against
White. The U.S. Supreme Court denied White's petition for
review and the case continues in district court.

New Valley Corporation (Formerly Western Union Corporation)

    New Valley, which sponsors one pension plan that is
underfunded by about $470 million, has been in bankruptcy since
November 1991. Both New Valley and its unsecured creditors have
proposed separate reorganization plans. PBGC is actively
negotiating to ensure that the pension plan will be adequately
protected under any reorganization proposals.

Pan Am Corporation

    By yearend, PBGC's bankruptcy claims against Pan Am for
$914 million of unfunded benefits and $350 million in
contributions owed to three terminated Pan Am pensions plans
were still unresolved. Court hearings on PBGC's claims and
related issues were postponed until April 1994.

Wean, Inc.

    PBGC pressed bankruptcy claims totalling about $121 million
against Wean that included $13 million for Wean's underfunded
pension plans and $108 million for a now-terminated underfunded
plan that Wean had transferred to United Engineering and
Foundry, Inc. PBGC asserts that one of Wean's principal
purposes of the transaction was to evade liability to PBGC for
the United Engineering plan. PBGC settled its claims against
United Engineering and continues to pursue an agreement with
Wean.

                                 LOSSES

    Through the end of fiscal year 1993, the PGBC's single-
employer program had incurred net losses of $6 billion (see
table 17-1). PBGC's net losses equal the portion of guaranteed
benefit liabilities not covered by plan assets or recoverable
employer liability. These losses will eventually have to be
covered through higher premiums, earnings on PBGC assets, or
other sources of revenues.

                       TABLE 17-1.--LOSS EXPERIENCE FROM SINGLE-EMPLOYER PLANS\1\
                                              [Dollars in millions]
----------------------------------------------------------------------------------------------------------------
                                                                                                        Average
                                                                        Trust   Recoveries             net loss
              Year of termination                 Number    Benefit     plan       from        Net        per
                                                 of plans  liability   assets    employers   losses   terminated
                                                                                                         plan
----------------------------------------------------------------------------------------------------------------
1975-1981......................................       824       $741      $295       $129       $317       $0.4
1982-1987......................................       689      2,694       848        184      1,661        2.4
1988-1993......................................       335      4,579     1,871        312      2,396       7.2
                                                ----------------------------------------------------------------
    Total......................................     1,848      8,014     3,014        626      4,374  ..........
Probable future terminations...................        46      3,645     1,403        616      1,627  ..........
                                                ----------------------------------------------------------------
    Total......................................     1,894    $11,659    $4,417      1,242     $6,001  ..........
----------------------------------------------------------------------------------------------------------------
\1\Stated amounts are subject to change until PBGC finalizes values for liabilities, assets, and recoveries of
  terminated plans. Amounts in this table are valued as of the date of each plan's termination and differ from
  amounts reported in PBGC's Financial Statements which are valued as of the end of the stated fiscal year.

Note: Numbers may not add up to totals due to rounding.

Source: PBGC Fiscal Year 1993 Annual Report.

    PBGC's losses have increased considerably over time. Within
that trend, there has been substantial annual variability due
to the sporadic terminations of very large underfunded plans.
Fewer underfunded plans terminated in 1993 than the previous
year, and losses from underfunded plans declined slightly
because of fewer new major terminations.
     Table 17-1 demonstrates the growth in net losses over the
Corporation's history. In the 6 years from 1988 to 1993, net
losses, not including probable terminations, exceeded the
losses of the prior 6 years by 44 percent and were more than 7
times greater than the losses from the first 7 years of PBGC's
operation. PBGC also faces probable losses of $1,627 million
for 46 plans that are expected to terminate after fiscal 1993
year end. Those probable terminations represent 27 percent of
PBGC's total net losses since inception.
    As shown by table 17-2, the number of single-employer plan
terminations that result in claims against the PBGC is a tiny
fraction of all plan terminations. In fiscal year 1993, PBGC
permitted completion of about 6,700 standard terminations and
88 distress or involuntary terminations of underfunded plans.
While terminations of underfunded plans made up less than 2
percent of all terminations, PBGC's deficit in the single-
employer program grew slightly to $2.9 billion, reflecting
PBGC's vulnerability to termination of large underfunded plans.

   TABLE 17-2.--TOTAL NUMBER OF TERMINATED SINGLE-EMPLOYER PLANS,
 NUMBER OF PLANS WITH CLAIMS AGAINST PBGC, AND ACCUMULATED DEFICIT 
------------------------------------------------------------------------
                                                             Accumulated
                                      Number of   Number of  deficit end
                                     terminated    claims      of year
                                       plans       against    (millions
                                                    PBGC     of dollars)
------------------------------------------------------------------------
Fiscal year:
    1975...........................       2,568         100        -15.7
    1976...........................       9,104         171        -41.0
    1977...........................       7,331         130        -95.3
    1978...........................       5,260         102       -137.8
    1979...........................       4,888          81       -146.4
    1980...........................       4,033         103        -94.6
    1981...........................       5,084         137       -188.8
    1982...........................       6,131         131       -332.8
    1983...........................       6,870         146       -523.3
    1984...........................       7,711          96       -462.0
    1985...........................       8,723         107     -1,325.3
    1986...........................       6,915         118     -3,826.4
    1987...........................      10,924          91     -1,548.5
    1988...........................      10,836          79     -1,543.3
    1989...........................      11,433          58     -1,123.6
    1990...........................      11,462          60     -1,912.8
    1991...........................       7,586          72     -2,510.0
    1992...........................       8,018          47     -2,737.1
    1993...........................       6,788       \1\65     -2,771.8
                                    ------------------------------------
      Total........................     141,665       1,894     -2,896.8
------------------------------------------------------------------------
\1\Includes 46 plans with claims of $1 million or more that were
  probable terminations as of the end of fiscal year 1993.

Source: Pension Benefit Guaranty Corporation.

                               FINANCING

    The sources of financing for PBGC are per-participant
premiums collected from insured plans, assets in terminated
underfunded plans for which the PBGC has become trustee,
investment earnings, and amounts owed to the PBGC by employers
who have terminated underfunded plans. In addition, PBGC has
the authority to borrow up to $100 million from the Treasury.
    Single-employer premiums.--An employer who maintains a
covered single-employer defined benefit pension plan must pay
an annual premium for each participant under the plan.
Initially set at $1 per participant, the per-participant
premium was raised to $2.60 beginning in 1979, and then raised
again by the Single Employer Pension Plan Amendments Act
(SEPPAA) to $8.50 beginning in 1986. The Pension Protection Act
of 1987, contained in the Omnibus Budget Reconciliation Act of
1987, raised the basic premium to $16, and imposed an
additional variable rate, or risk-related, premium on
underfunded plans. The variable rate premium was initially set
at $6 per each $1,000 of the plan's unfunded vested benefits,
up to a maximum of $34 per participant. Accordingly, the
maximum premium was $50 per participant.
    The Omnibus Budget Reconciliation Act of 1990 (OBRA 90)
increased the basic premium to $19, the variable rate premium
to $9 per each $1,000 of the plan's unfunded vested benefits,
up to a maximum of $53 per participant. Thus, beginning in
1991, the maximum premium is $72 per participant. OBRA 90 did
not change the ratio of revenue raised by the basic and
variable rate portions of the premium. Single-employer premium
income equaled $890 million in 1993.
    Multiemployer plan premiums.--The premium for multiemployer
plans was initially $0.50 per participant. The Multiemployer
Pension Plan Amendments Act raised the premium to $1.40 for
years after 1980. This was set to increase gradually to its
current level, $2.60. Multiemployer premium income equaled $23
million in 1993.
    Assets from terminated plans.--When the PBGC becomes
trustee of a terminated plan, it receives control of any assets
in the plan. These assets are placed in one of two trust funds
(one for multiemployer plans, one for single-employer plans).
    Employer liability.--An employer which terminates an
underfunded defined benefit plan is liable to the PBGC for
certain amounts. Before the changes made by SEPPAA, an
employer's liability was generally capped at 30 percent of the
employer's net worth. SEPPAA removed this limit, leaving
employers whose liability would have been capped liable for an
additional share of unfunded benefit commitments above 30
percent of net worth. The Pension Protection Act of 1987
further increased employer liability, leaving employers liable
for all amounts up to 100 percent of unfunded benefit
liabilities.
    Investment income.--The PBGC maintains two separate
financial programs, each consisting of a revolving fund and a
trust fund, to sustain its single-employer and multiemployer
plan insurance programs. Its revolving funds consist of
collected premiums and income resulting from investment of the
premiums. They had a value of $5 billion as of September 30,
1993.
    The trust funds consist of assets received from all
terminated plans of which the PBGC is or will be a trustee, and
employer liability payments. These assets are invested in a
diversified portfolio of investments including equities, fixed
income securities, and real estate. The net market value of the
trust funds was $3.3 billion as of September 30, 1993.
    Chart 17-1 diagrams the relationship between the PBGC's
financing and its payment of guaranteed benefits to plan
participants.

    CHART 17-1. FINANCIAL STRUCTURE OF THE PENSION BENEFIT GUARANTY
                              CORPORATION
<CHART 17-1>

                          LEGISLATIVE HISTORY

                         SINGLE EMPLOYER PLANS

    The PBGC was established under the Employee Retirement
Income Security Act of 1974 (ERISA) for the purpose of insuring
benefits under defined benefit pension plans. As originally
structured, in the case of a single-employer plan, termination
of a plan triggered the PBGC insurance mechanism. The
contributing employer was liable to the PBGC for unfunded
insured benefits up to 30 percent of the net worth of the
employer. If unfunded insured liability exceeded this amount,
the PBGC had to absorb the excess and spread the loss over
insured plans. Employers generally faced no restrictions on
their ability to terminate an underfunded plan.

The Single Employer Pension Plan Amendments Act of 1986 (SEPPAA)

    By September 30, 1985, the PBGC reported that the deficit
in its single-employer insurance program was $1.3 billion, and
growing rapidly. Congress responded by enacting SEPPAA. Major
reforms under SEPPAA, which was included as title XI of the
Consolidated Omnibus Budget Reconciliation Act of 1985 (P.L.
99-272), included:
          1. Raising the per-participant premium to $8.50, from
        $2.60.
          2. Providing that an underfunded plan may be
        terminated only if the contributing employer, and every
        member of the employer's controlled group, meets
        certain criteria of ``financial distress''. As a
        result, employers could not place the liability for
        underfunded plans on the PBGC without demonstrating
        real financial inability to maintain and fund the plan.
          3. Providing that, in addition to the liability to
        the PBGC under prior law for the lesser of the unfunded
        guaranteed benefits or 30 percent of the collective net
        worth of the controlled group, employer liability also
        included the amount by which 75 percent of unfunded
        guaranteed benefits exceeded 30 percent of net worth.
          4. Providing that unpaid and waived contributions
        were due and payable in full as of the date of
        termination.
          5. Creating a new liability to plan participants for
        certain nonguaranteed benefits.

Pension Protection Act of 1987

    By the beginning of 1987, it became increasingly apparent
that the reforms implemented under SEPPAA were inadequate to
ensure the long-term solvency of the PBGC. Accordingly,
Congress enacted the Pension Protection Act of 1987 as part of
the Omnibus Budget Reconciliation Act of 1987 (P.L. 100-203),
which included a number of significant reforms:
          1. Variable rate premium.--Increasing the basic
        premium to $16, and instituting an additional premium
        that rises with the degree of underfunding in the plan
        and, thus, the risk posed by the plan to the PBGC.
          2. Minimum funding standards.--Requiring faster
        funding of unfunded benefits, to reduce the PBGC's
        exposure in the event of plan termination.
          3. Employer liability to the PBGC.--Making the
        controlled group liable for minimum funding
        contributions to ongoing plans.
          4. Unpaid employer contributions.--Improving the
        status of a claim for unpaid employer contributions in
        bankruptcy by giving such a claim the same status as a
        tax claim.
          5. Distress criteria.--The use of Chapter 11
        (bankruptcy reorganization) as a criterion for
        termination was tightened. The employer was now
        required to show that liquidation would necessarily
        follow if the plan were not terminated.
          6. Additional payments to participants.--Section 4049
        of ERISA was repealed. The full employer liability now
        runs solely to the PBGC. The PBGC will pay participants
        and beneficiaries a portion of their outstanding
        benefit liabilities (i.e., unfunded benefit liabilities
        that are not guaranteed benefits) from the PBGC's
        employer liability recovery.
The Act included additional significant reforms, including
revised minimum funding rules, a quarterly pension funding
requirement, a strengthening of the PBGC's lien authority, a
reduction of the number of times an employer may ``waive,'' or
decline to make, otherwise required plan contributions, and
other modifications.

                  MULTIEMPLOYER PLAN INSURANCE PROGRAM

    Coverage for multiemployer plans under ERISA was structured
similarly to that of single-employer plans. However, the PBGC
was not required to insure benefits of multiemployer plans that
terminated before July 1, 1978. Congress extended the deadline
for mandatory pension coverage several times, until enactment
of the Multiemployer Pension Plan Amendments Act of 1980, or
MPPAA (P.L. 96-364). MPPAA required more complete funding for
multiemployer plans, especially those in financial distress. It
also improved the ability of plans to collect contributions
from employers. MPPAA changed the insurable event that triggers
PBGC protection to plan insolvency, rather than plan
termination. Thus, if a multiemployer plan becomes financially
unable to pay benefits at the guaranteed level when due, the
PBGC will provide financial assistance to the plan, in the form
of a loan. Finally, MPPAA imposed withdrawal liability on
employers who ceased to contribute to a multiemployer plan.

                          BUDGETARY TREATMENT

    Since 1981, administrative expenses of the PBGC and the
benefit payments to participants in plans under the PBGC's
trusteeship have been counted as Federal outlays. Certain
receipts of the agency--including premium payments, interest on
balances in the revolving fund, and transfers to the revolving
fund from the trust fund--offset PBGC expenses in the Federal
budget. Liabilities for future benefit payments and other
accruals are not taken into account. In each year since 1981
(when the program was first included in the Federal budget) the
effect of the PBGC has been to reduce overall Federal outlays
(see table 17-3). During this period, the PBGC reported
receipts in excess of benefit payments and administrative costs
by a cumulative total of more than $4.4 billion. In years
before 1981, Federal accounts for the PBGC would also have
shown annual inflows exceeding expenses in each year of program
operation. Under the present method of cash budgeting, the
annual surpluses may obscure the impact of PBGC's growing
future liabilities.

 TABLE 17-3.--FEDERAL BUDGETARY TREATMENT OF THE PBGC, 1975-93
                        [In millions of dollars]
------------------------------------------------------------------------
                                                               Outlays
                                                              appearing
                               Expenses\1\     Offsetting       in the
                                             collections\2\    Federal
                                                              budget\3\
------------------------------------------------------------------------
                  Not included in the Federal budget\4\

------------------------------------------------------------------------
Fiscal year:
    1975....................         3.2            35.5              NA
    1976....................        12.8            28.5              NA
    1977....................        21.0            41.0              NA
    1978....................        47.6            61.9              NA
    1979....................        52.3            91.5              NA
    1980....................        59.1            90.1              NA
                             -------------------------------------------
      Total.................       196.0           348.5              NA

------------------------------------------------------------------------
                    Included in the Federal budget\4\

------------------------------------------------------------------------
Fiscal year:
    1981....................        79.4           123.1           -29.0
    1982....................       104.3           157.0           -66.9
    1983....................       161.2           182.4            -9.5
    1984....................       180.0           189.8            -9.9
    1985....................       195.3           210.4           -19.1
    1986....................       272.1           343.9          -105.9
    1987....................       508.6           636.8           -71.9
    1988....................       489.4           560.3          -277.7
    1989....................       779.8         1,190.1          -149.1
    1990....................       744.6         1,175.3          -679.9
    1991....................       598.7         1,339.4          -787.3
    1992....................       766.4         1,491.3          -654.5
    1993....................       833.3         2,323.2        -1,508.2
                             -------------------------------------------
      Total.................     5,713.1         9,914.0        -4,368.9
------------------------------------------------------------------------
\1\Includes primarily administrative costs and benefit payments.
\2\Includes primarily premium income, interest income, and transfers
  from the pension insurance trust fund to the revolving fund.
\3\Outlays do not equal the difference between expenses and offsetting
  collections because of changes in obligated program balances between
  the beginning and the end of the fiscal year.
\4\The PBGC was first included in the Federal budget in 1981, in
  accordance with Public Law 96-364.

Note: This table includes both the single-employer and multiemployer
  pension insurance programs. (NA=not applicable.)

Source: Congressional Budget Office using data from the appendix to the
  Federal budget, various years.

                  FUTURE FINANCIAL STATUS OF THE PBGC

    In its fiscal year 1993 annual report, PBGC estimated $53
billion of unfunded liabilities in single-employer defined
benefit pension plans as of December 31, 1992, an increase from
the $38 billion reported in 1992. Multiemployer plans represent
$10.6 billion in underfunding as of January 1, 1991. The
reasons for this growth include benefit increases in certain
plans and falling interest rates.
    Not all pension underfunding represents likely claims upon
PBGC's insurance. PBGC's most recent analyses disclose
reasonable possible losses of about $13 billion, compared to
last year's $12 billion. This exposure is concentrated in a
relatively small number of companies, primarily in the
automobile, steel, tire, and airline industries.
    PBGC annually publishes a list of 50 companies with the
largest pension underfunding. PBGC's most recent listing showed
unfunded vested benefits among the 50 companies as of December
31, 1992 of $38.0 billion, an increase of 30 percent from the
prior year. The data was verified with the companies named on
the list and is based on publicly available information.
Experience has indicated, however, that PBGC's losses after a
plan terminates often exceed estimated amounts because of lower
contributions prior to plan termination and more early
retirements than anticipated.
    Historically, most of the claims made against PBGC have
come from flat-benefit plans that cover hourly workers in
unionized companies. Because benefits are often increased at
regular intervals as part of contract negotiations, new
liabilities are added before old ones are funded, leaving the
plans chronically underfunded. The current-law funding rules,
which require funding based on current legal obligations, do
not allow flat-benefit plans to anticipate yet-to-be bargained
future benefit increases.
    In contrast, final-pay or final-salary plans are almost
always overfunded relative to insured termination liabilities
because their funding schedules anticipate ever-increasing
salaries, and therefore, future benefit levels. Consequently,
typical final-pay plans have funding ratios of 120 percent,
while flat-benefit plans typically are 77 percent funded.
Therefore, the average final-pay plan can absorb considerable
changes in interest rates, actuarial assumptions, and
investment performance without posing exposure to PBGC. Flat-
benefit plans cannot.
    The future financial condition of the pension insurance
program is highly uncertain because it will depend largely on
how many private pension plans terminate and on the amount of
underfunding in those plans. Both factors are hard to forecast
accurately. Moreover, as was discussed above, a few pension
plans with extremely large unfunded liabilities have dominated
PBGC's past claims, and its future may likewise depend
significantly on the fate of a few large plans, making
liabilities even more difficult to predict. Future terminations
will probably be influenced by overall economic conditions, by
the prosperity of particular industries, by competition from
abroad, and by a variety of factors that are specific to
particular firms--such as their competitive position in the
industry, their agreements with labor groups, and the
assessments of their financial prospects that are necessary to
obtain credit. In addition, PBGC's losses with respect to
future terminations will depend on how well companies fund
their plans, and on the PBGC's position in bankruptcy
proceedings. Finally, pending litigation could have a material
impact on the financial condition of the PBGC.
    The PBGC in its fiscal year 1993 annual report presented
three different forecasts of future claims and resulting
deficits and surpluses to indicate the potential variability of
its financial condition.
    Forecast A is based on the average annual net claim over
the entire PBGC history ($505 million per year) and projects a
deficit of $1.9 billion by the end of fiscal year 2003.
Forecast B is based on the average annual net claim for the
most recent 12 fiscal years ($695 million per year). Under
Forecast B, PBGC's projected deficit would grow to $5 billion
by the end of fiscal year 2003. Forecast C assumes $1.2 billion
of net claims each year and assumes that termination of the
plans with approximately $13 billion of underfunding that
represent reasonably possible losses will occur over the next
10 years. Under Forecast C, PBGC's deficit is projected to
reach $13.8 billion by the end of fiscal year 2003.

TABLE 17-4.--YEAR-BY-YEAR PROJECTIONS OF PBGC DEFICITS UNDER VARIOUS
               FORECASTS, SINGLE-EMPLOYER PROGRAM\1\
          [Amounts as of September 30; in billions of dollars]
------------------------------------------------------------------------
                                    Forecast A   Forecast B   Forecast C
------------------------------------------------------------------------
1993.............................          2.9          2.9          2.9
1994.............................          2.7          2.9          3.5
1995.............................          2.5          2.9          4.1
1996.............................          2.3          3.0          4.9
1997.............................          2.2          3.1          5.8
1998.............................          2.0          3.3          6.8
1999.............................          1.9          3.5          7.9
2000.............................          1.8          3.8          9.1
2001.............................          1.8          4.1         10.5
2002.............................          1.8          4.5         12.1
2003.............................          1.9          5.0         13.8
------------------------------------------------------------------------
\1\PBGC's fiscal year-end deficit equals the amount by which PBGC's
  liabilities exceed PBGC's assets. The largest component of PBGC's
  total liabilities is the present value of future benefit payments,
  including amounts owed to participants in terminated plans and plans
  with a high probability of termination.

Source: PBGC.

    PBGC's current method of forecasting future claims is based
on PBGC's experience over the last decade. This method fails to
take into account the uncertainty facing PBGC regarding future
economic conditions. Because of the limitations of the current
method, PBGC is building a simulation model to improve
understanding of the uncertainty of its future claims
forecasts. The model is being designed to simulate bankruptcy
rates and pension funding over a 30-year period and will
forecast PBGC's financial conditions over a broad set of
possible economic scenarios. PBGC anticipates its model will
measure the uncertainty surrounding forecasts of future claims,
and also will have the capacity to measure the impact of
various proposals to change PBGC's program.

             RECENT CONGRESSIONAL AGENCY OVERSIGHT REPORTS

    In response to growing concerns about the financial
stability of the PBGC, the agency has been the subject of
oversight investigation by the Congressional Budget Office
(CBO), the General Accounting Office (GAO), and by the
Congressional Research Service (CRS).
    On February 4, 1993, CBO released its report, ``Controlling
Losses of the Pension Benefit Guaranty Corporation.'' The
report examines the causes of PBGC's losses and offers options
for reforming the program. The report concludes that the PBGC
currently has $2.5 billion more in liabilities than it has in
assets, and that, without reform, this deficit can be expected
to increase by tens of billions of dollars. CBO notes that
there is no serious possibility that the Federal Government
will allow the PBGC to default on its obligations to plan
participants, but that the prospect of a taxpayer-financed
bailout is increasingly likely.
    CBO offers three major reasons for the persistent and
increasing PBGC losses. First, the PBGC premiums are too low to
cover the administrative costs and underfunding associated with
terminated, insured plans. Second, the Employee Retirement
Income Security Act of 1974 (ERISA) permits companies to
underfund their defined benefit pension plans. Third, neither
the PBGC nor the Congress have established a system to properly
assess and manage the losses that inevitably result from
permitting companies to underfund their plans.
    Finally, CBO offers several suggestions to help ensure
fiscal balance in the PBGC insurance system. CBO notes that
over the short-term Congress must make adjustments to ensure
that PBGC has sufficient assets with which to meet its pension
liabilities. Over the long-term Congress must improve the
structural capacity of the Federal Government to operate the
pension insurance program by gathering better information about
risks, giving immediate budget recognition to these liabilities
as they accrue, allowing PBGC to adjust premiums more quickly
to reflect changes in risks of loss in the system, and by
requiring that private capital be at least partially at risk to
increase the incentive of companies to monitor and control
losses under the pension insurance program.
    On December 30, 1992, GAO released its report, ``Hidden
Liabilities Increase Claims Against Government Insurance
Program'' (GAO/HRD 93-7). The report reviews the factors that
cause hidden liabilities, assesses the impact of these factors
on recent claims against the pension insurance program, and
analyzes PBGC's ability to control these factors.
    The report concludes that the Federal Government's exposure
to unfunded liabilities in private pension plans is much larger
than plans have indicated on their annual reports to the
Internal Revenue Service (IRS). In a survey of 44 terminated
pension plans trusteed by the PBGC, underfunding was $1 billion
(58 percent) higher at the time of termination than most
recently reported to the IRS. Therefore, when a pension plan
terminates with insufficient assets, PBGC is likely to absorb
unfunded liabilities considerably greater than the plan
previously reported.
    GAO found that 80 percent of this discrepancy was due to
differences in actuarial assumptions used to value plan
liabilities, the payment of special shutdown and early
retirement benefits, and earlier-than-anticipated retirements
of plan participants. The remaining 20 percent of the hidden
liabilities were due to PBGC's receipt of fewer assets than
reported by the plan primarily as the result of benefit
payments from the plan and missed contributions to the plan.
    GAO found that PBGC has little ability to control its
exposure from these hidden liabilities. Further, GAO found that
financially troubled plan sponsors sometimes take actions that
increase the burden on PBGC, such as raising benefits in lieu
of increasing wages or failing to make contributions to their
plans. In subsequent congressional testimony, GAO reported that
in a separate review of the underfunded pension plans sponsored
by eight companies with significantly underfunded pension plans
during the 1990-91 time period, it found that aggregate
underfunding increased by over $5 billion, of which nearly $2.2
billion was attributable to benefit increases in these plans.
    On February 1, 1993, CRS released its report ``Are Pension
Guarantees Another Savings and Loan Collapse in the Making?''
(93-121 EPW). In this report, CRS examines the similarities and
differences between PBGC today and the Federal Savings and Loan
Insurance Corporation (FSLIC) in the years before the S&L
collapse. The report concludes that while not strictly
analogous, there are similarities. CRS notes that just as
deposit insurance weakened the incentive of depositors to
remove funds from risky thrifts, pension insurance creates a
similar ``moral hazard'' incentive for pension plan sponsors
and participants to allow plans to become underfunded. In
addition, just as FSLIC was reluctant to act promptly to shut
down insolvent thrifts, the PBGC is reluctant to cut its losses
by terminating pension plans. Finally, the primary financial
information presented to Congress in the Federal budget for the
ill-fated FSLIC was, and for PBGC is, short-term cash flows
that do not reflect the long-term liabilities that are accruing
and can fail to give an indication of a deteriorating long-term
situation.
    The CRS report concludes by noting that the PBGC has only
limited power to act on information about its own financial
health since Congress has set in statute PBGC premiums and
rules governing pension insurance and plan funding standards.
The PBGC has limited control over its financial condition, and
ultimately the solvency of the PBGC depends on how Congress
responds to information about the financial status of the
pension program. Unless significant changes are made in the way
pension insurance is priced and benefits funded, it may be
necessary to curtail the pension promises that the Government
guarantees. Otherwise, taxpayer revenue ultimately may be
needed.