Report to Congressional Committees

United States Government Accountability Office

GAO

May 2005 PRIVATE PENSIONS

Recent Experiences of 

Large Defined Benefit 

Plans Illustrate 

Weaknesses in 

Funding Rules 

GAO-05-294 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-05-294.

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and methodology, click on the link above. 

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Highlights of GAO-05-294, a report to 

congressional committees 

May 2005

PRIVATE PENSIONS

Recent Experiences of Large Defined 

Benefit Plans Illustrate Weaknesses in 

Funding Rules 

Each year from 1995 to 2002, while most of the largest DB pension plans 

had assets that exceeded their current liabilities, 39 percent of plans on 

average were less than 100 percent funded. By 2002, almost one-fourth of 

the 100 largest plans were less than 90 percent funded. Further, because of 

leeway in the actuarial methodology and assumptions sponsors may use 

to measure plan assets and liabilities, underfunding may actually have 

been more severe and widespread than reported. Additionally, 62.5 

percent of sponsors of the largest plans each year on average made no cash 

contribution because the rules allow sponsors to satisfy minimum funding 

requirements through plan accounting credits that substitute for cash 

contributions. 

From 1995 to 2002, only 6 unique plans in our sample were subject to an 

additional funding charge (AFC), the primary funding mechanism to address 

underfunding, a total of 23 times. By the time a firm was subject to an AFC, 

its plan was likely significantly underfunded, and such plans remained 

poorly funded. By using other funding credits, just over 30 percent of the 

time sponsors of these plans were able to forgo cash contributions in the 

years their plans were assessed an AFC. Two very large and significantly 

underfunded plans terminated without their sponsors owing a cash 

contribution in the 3 years prior to termination, illustrating further 

weaknesses in the AFC. 

To the extent that financially weak firms sponsor underfunded plans, 

weaknesses in funding rules create a potentially large financial risk to PBGC 

and thus retirement security generally. From 1995 to 2002, on average each 

year, 9 of the largest 100 plans had a sponsor with a speculative grade credit 

rating, suggesting financial weakness and poor creditworthiness. Plans of 

speculative grade-rated sponsors had lower average funding levels and were 

more likely to incur an AFC than other plans. As of September 30, 2004, 

PBGC estimated that plans of financially weak companies with a “reasonably 

possible” chance of termination had plans with an estimated $96 billion in 

underfunding. 

Funding Levels among the Annual 100 Largest DB Plans, 1995–2002 

0

20

40

60

80

100

1995 1996 1997 1998 1999 2000 2001 2002

Percentage of 100 largest DB plans

Source: GAO analysis of PBGC Form 5500 research data.

Year

Less than

80% funded

80% to less 

than 90% funded

90% to less 

than 100% funded

100% to less 

than 110% funded

110% funded 

or above

Pension funding rules are intended 

to ensure that plans have sufficient 

assets to pay promised benefits to 

plan participants. However, recent 

terminations of large underfunded 

plans, along with continued 

widespread underfunding, suggest 

weaknesses in these rules that may 

threaten retirement incomes of 

these plans’ participants, as well as 

the future viability of the Pension 

Benefit Guaranty Corporation 

(PBGC) single-employer insurance 

program. We have prepared this 

report under the Comptroller 

General's authority, and it is 

intended to assist the Congress in 

improving the financial stability of 

the defined benefit (DB) system 

and PBGC. We have addressed this 

report to each congressional 

committee of jurisdiction to help in 

their deliberations. This report 

examines: (1) the recent funding 

and contribution experience of the 

nation’s largest private DB plans; 

(2) the funding and contribution 

experience of large underfunded 

plans, and the role of the additional 

funding charge (AFC); and (3) the 

implications of large plans’ recent 

funding experiences for PBGC, in 

terms of risk to the agency’s ability 

to insure benefits. 

What GAO Recommends

The Congress should consider 

broad pension reform that is 

comprehensive in scope and 

balanced in effect. However, if 

features of current regulation are 

retained, Congress should consider 

measures to strengthen the AFC 

and limit the use of funding 

standard account credits to 

substitute for cash contributions. 
Page i GAO-05-294 Private Pensions 

Letter 1

Results in Brief 3 

Background 5 

Many of the 100 Largest Plans’ Liabilities Exceeded Plan Assets 

from 1995 to 2002, and Few Sponsors Were Required to Make 

Cash Contributions 11 

Very Few Sponsors of Underfunded Large Plans Paid an AFC from 

1995 to 2002 25 

Large Plans’ Sponsors’ Credit Ratings Appear Related to Certain 

Funding Behavior and Represent Risk to PBGC 30 

Conclusions 37 

Matters for Congressional Consideration 40 

Agency Comments 41 

Appendix I Scope and Methodology 44 

Appendix II Statistics for Largest 100 Defined Benefit Plans, 

1995-2002 46 

Appendix III Comments from the Department of Labor 49 

Appendix IV Comments from the Pension Benefit Guaranty 

Corporation 50 

Appendix V GAO Contact and Staff Acknowledgments 52 

Glossary 53 

Related GAO Products 55 

Contents 
Page ii GAO-05-294 Private Pensions 

Tables 

Table 1: FSA Credits and Charges for Bethlehem Steel and LTV 

Steel Plans, 2000-2002 23 

Table 2: Average Plan Size and Funding Levels 46 

Table 3: Cash Contributions 46 

Table 4: Funding Standard Account (FSA) Credits, Other than Cash 

Contributions 47 

Table 5: Full Funding Limitation (FFL) 47 

Table 6: Additional Funding Charge (AFC) 48 

Figures 

Figure 1: Accumulated Surplus/Deficit and Annual Net Gain/Loss of 

PBGC Single-Employer Program 10 

Figure 2: Almost One-Fourth of the Largest Pension Plans Were 

Less than 90 Percent Funded on a Current Liability Basis 

in 2002 13 

Figure 3: Most Sponsors Made No Cash Contribution Most Years 17 

Figure 4: Average Cash Contributions, as a Percentage of Minimum 

Required Annual Funding, Were Lowest during Strong 

Funding Years 19 

Figure 5: Distribution of Average Cash Contributions, as a 

Percentage of Minimum Required Annual Funding, 

Illustrates that Plans Relied More Heavily on FSA Credits 

to Meet Minimum Funding Obligations from 1997 to 2000 20 

Figure 6: For Selected Years from 1996 to 2002, Most Sponsors 

Contributed the Plan’s Maximum Deductible Amount, 

Which for a Number of Plans Was Zero 25 

Figure 7: Most Plans Less than 90 Percent Funded Were Not 

Assessed an AFC 27 

Figure 8: AFC Assessments Sometimes Exceeded Cash 

Contributions of Plans Subject to AFC, 1995-2002 29 

Figure 9: Plans Sponsored by Firms with a Speculative Grade 

Rating Generally Had Lower Levels of Funding on a 

Current Liability Basis 32 

Figure 10: Sponsors with Speculative Grade Ratings Are More 

Likely to Use the Highest Allowable Interest Rate to 

Estimate Current Plan Liabilities 33 

Figure 11: Total Underfunding among All DB Plans, and among 

Those Considered by PBGC as Reasonably Possible for 

Termination, Has Increased Markedly since 2001 35 
Page iii GAO-05-294 Private Pensions 

Figure 12: Over 80 Percent of Sponsors Associated with PBGC’s 

Largest Termination Claims Had Speculative Grade 

Ratings 10 Years prior to Termination 36 

Abbreviations 

AFC additional funding charge 

DB defined benefit 

DRC deficit reduction contribution 

ERISA Employee Retirement Income Security Act 

FFL full funding limitation 

FSA funding standard account 

IRC Internal Revenue Code 

OBRA ’87 Omnibus Budget Reconciliation Act of 1987 

PBGC Pension Benefit Guaranty Corporation 

PRAD Policy, Research and Analysis Department 

S&P Standard and Poor’s 

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Page 1 GAO-05-294 Private Pensions 

May 31, 2005 

Congressional Committees 

The Pension Benefit Guaranty Corporation’s (PBGC) single-employer 

insurance program is a federal program that insures certain benefits of the 

more than 34 million worker, retiree, and separated vested participants of 

over 29,000 private sector defined benefit (DB) pension plans. In recent 

years, because of unfavorable economic conditions and the collapse of 

large underfunded pension plans sponsored by well-known firms like 

Bethlehem Steel, U.S. Airways, and United Airlines, the program’s 

financial condition has worsened significantly. From a $9.7 billion surplus 

at the end of fiscal year 2000, the program reported a $23.3 billion deficit 

as of September 2004, including a $12.1 billion loss for fiscal year 2004.1

 In 

addition, financially weak firms sponsored DB plans with a combined 

$96 billion of underfunding as of September 2004, up from $35 billion as of 

2 years earlier.2

 These figures illustrate both PBGC’s current financial 

difficulties and the ongoing threat underfunded DB pension plans pose to 

the agency. 

The Employee Retirement Income Security Act of 1974 (ERISA), as 

amended, and the Internal Revenue Code (IRC) prescribe pension funding 

rules to determine how much a firm sponsoring a DB pension plan (or 

“sponsor”) must contribute to its plans each year.3

 An amendment to 

ERISA and the tax code added the additional funding charge (AFC), a 

 1

This figure represents the excess of the net present value of PBGC’s single-employer 

program’s future benefit payments to participants of terminated plans, plus expenses, over 

the program’s assets, plus anticipated losses from probable future terminations. The $23.3 

billion deficit for fiscal year 2004 already includes the recent takeover by PBGC of several 

United Airlines pension plans. 

2

The recent downgrading of the credit ratings for Ford and General Motors to noninvestment grade status is likely to raise this $96 billion figure significantly. 

3

For key legislative changes that have affected the single-employer program, see GAO, 

Pension Benefit Guaranty Corporation: Single-Employer Pension Insurance Program 

Faces Significant Long-Term Risks, GAO-04-90 (Washington, D.C.: Oct. 29, 2003), 

appendix II. 

United States Government Accountability Office

Washington, DC 20548 
Page 2 GAO-05-294 Private Pensions 

supplementary charge assessed to sponsors of certain underfunded plans.4

While these funding rules seek to ensure that plans contain sufficient 

assets to pay promised pension benefits to plan participants, recent 

terminations of large and severely underfunded pension plans have called 

into question their effectiveness. 

We have prepared this report under the Comptroller General's authority, 

and it is intended to assist the Congress in improving the financial stability 

of the defined benefit system and PBGC. As it may prove helpful in the 

deliberations of committees with jurisdiction over pension issues, we have 

addressed this report to each of these committees. In previous reports, we 

have called for comprehensive DB pension reform that, among other 

elements, would include changes to the current funding rules to encourage 

firms to better, and more transparently, fund their plans. We have also 

called for a range of PBGC insurance program and other related reforms.5

Because of the risks facing the single-employer program, in July 2003 we 

placed the program on our high-risk list of government operations facing 

significant vulnerabilities.6

 Further, there are parallels between the 

financial problems of the DB pension system and those of Social Security, 

currently the focus of domestic public policy debate, as well as the 

broader long-term budgetary challenges facing the federal government.7

To assess how well the minimum funding rules have performed and to 

better understand how key rules work to protect plans from becoming 

severely underfunded, we will address the following issues: (1) the recent 

trend in funding and contribution behavior for the nation’s largest private 

 4

The AFC comprises different additional charges for specific underfunded plan liabilities, 

including the deficit reduction contribution, or DRC. Because the AFC combines the DRC 

with other charges and offsets, we refer to the AFC, instead of the DRC, throughout this 

report as the “bottom line” additional charge that some underfunded plans owe. 

5

Previously reported reforms include strengthening funding rules applicable to poorly 

funded plans; modifying PBGC single-employer program guarantees; restructuring PBGC 

premiums; and improving the availability of information about plan investments, 

termination funding status, and program guarantees. Several variations of reform were 

discussed within each reform option. For further information, see GAO-04-90. 

6

For further information on the challenges facing PBGC, see GAO, Pension Benefit 

Guaranty Corporation Single-Employer Pension Insurance Program: Long-Term 

Vulnerabilities Warrant High-Risk Designation, GAO-03-1050SP (Washington, D.C.: Jul. 

23, 2003), and High-Risk Series: An Update, GAO-05-207 (Washington, D.C.: Jan. 2005). 

7

See GAO, 21st Century Challenges: Re-Examining the Base of the Federal Government, 

GAO-05-325SP (Washington, D.C.: Feb. 2005). 
Page 3 GAO-05-294 Private Pensions 

DB plans, (2) the funding and contribution experience of large 

underfunded plans and the role of the AFC, and (3) the implications of 

large plans’ recent funding experience for PBGC, in terms of risk to the 

agency’s ability to insure benefits. 

Our analysis focused on DB pension data for the 100 largest plans as 

ranked by current liabilities reported on Schedule B of the Form 55008

each year from 1995 to 2002, as well as on financial information on 

sponsors of these large plans.9

 For details on our scope and methodology, 

please see appendix I. Our work was done in accordance with generally 

accepted government auditing standards from November 2003 to May 

2005. 

From 1995 to 2002, while most of the 100 largest plans had assets that 

exceeded their current liabilities, on average 39 of these plans each year 

were less than 100 percent funded on a current liability basis; that is, their 

plans’ current liabilities exceeded plan assets reported at their actuarial 

value. Overall, reported plan funding levels were generally stable and 

strong over the late 1990s, with no more than 9 of the 100 largest plans less 

than 90 percent funded in any year from 1996 to 2000. However, by 2002 

over half of the 100 largest plans were less than 100 percent funded, and 

approximately one-fourth of plans were less than 90 percent funded. 

Further, because of leeway in the actuarial methodology and assumptions 

that sponsors may use to measure plan assets and liabilities, underfunding 

may actually have been more severe and widespread than reported on the 

 8

Form 5500 is a disclosure form that private sector employers with qualified pension plans 

are required to file with the Internal Revenue Service (IRS), Labor’s Employee Benefit 

Security Administration (EBSA), and PBGC. IRS administers and enforces tax code 

provisions concerning private pension plans, EBSA enforces ERISA requirements regarding 

disclosure and other issues, and PBGC insures the benefits of participants in most private 

sector defined benefit pension plans that are eligible for preferential tax treatment. 

9

These 100 plans are not a “closed group.” For example, a plan that is one of the 100 largest 

plans in one year may not be in the sample of plans if its liabilities are not in the 100 largest 

plans for other years. Twenty-five plans are in the sample every year from 1995 to 2002, and 

51 plans are in at least 7 of the 8 years of the sample. From 1995 to 2002 we witness 187 

distinct plan identifiers called the employee identification number (EIN) and plan 

identification number (PIN). However, the actual number of completely unrelated plans in 

our sample may be lower than the 187 reported because a number of plan sponsors in our 

sample merged or changed names. For various reasons, EINs and PINs used to identify 

Form 5500 filings can change throughout the life cycle of a plan. These changes can occur 

because of changes in corporate structure, the sale of a division or plant to another firm, or 

filer error. 

Results in Brief 
Page 4 GAO-05-294 Private Pensions 

Form 5500. Additionally, each year on average 62.5 percent of sponsors of 

the 100 largest plans made no annual cash contributions to their plans. 

One key reason for limited or no contributions is that the funding rules 

allow a sponsor to satisfy minimum funding requirements without 

necessarily making a cash contribution each year, even though the plan 

may be underfunded. 

From 1995 to 2002, very few sponsors of the 100 largest plans were 

required to pay an additional funding charge (AFC), a funding mechanism 

designed to reduce severe plan underfunding. Most of the affected plans 

were less than 80 percent funded by the time they were assessed an AFC, 

and those that owed an AFC were likely to remain significantly 

underfunded and owe the AFC again in the future. Further, sponsors of 2 

severely underfunded plans that terminated were sometimes subject to a 

small or no AFC, and made no cash contributions in the 3 years prior to 

termination. Because funding rules allow sponsors owing an AFC to use 

credits other than cash contributions to satisfy funding requirements, 

sponsors’ contributions on average were less than the AFC assessed. Just 

over 30 percent of the time a plan was assessed an AFC, the sponsor of 

that plan did not make a cash contribution in the year that the AFC was 

assessed. 

Underfunded plans sponsored by financially weak firms pose a greater 

risk to PBGC than do other plans. From 1995 to 2002, on average, 

9 percent of the largest 100 plans each year had a sponsor with a 

speculative grade credit rating, suggesting these firms’ financial weakness 

and poor creditworthiness. Firms with a speculative grade credit rating 

were more likely to sponsor underfunded plans, implying that these plans 

presented a significant risk to PBGC and other premium payers. As a 

group, these plans had lower average funding levels and were more likely 

to incur an AFC. In addition, speculative grade-rated sponsors generally 

had a higher incidence of using the highest legally allowable interest rate 

to discount reported plan liabilities. The use of higher interest rates tends 

to depict plan funding in a more optimistic light. To the extent that the 

interest rates used by plans are overly optimistic, these plans have the 

potential to create additional financial exposure and thus risk to PBGC. Of 

PBGC’s 41 largest claims in which the rating of the sponsor was known, 

39 have involved plan sponsors that were rated as speculative grade just 

prior to termination. Among these claims, over 80 percent of plan sponsors 

were rated as speculative grade 10 years prior to termination. The future 

outlook is similar: Plans sponsored by companies with speculative grade 

credit ratings and classified by PBGC as “reasonably possible” for 

termination represent an estimated $96 billion in potential claims. 
Page 5 GAO-05-294 Private Pensions 

Because the current DB pension funding rules appear to expose PBGC and 

participants to the risk that plans will have insufficient assets to pay 

promised benefits, this report raises two matters for congressional 

consideration. To the extent that the current funding framework is 

retained, these matters regard reforms to the funding rules that might be 

considered to reduce the number and severity of underfunded plans and 

the single-employer program’s financial exposure. 

In DB plans, formulas set by the employer determine employee benefits. 

DB plan formulas vary widely, but benefits are frequently based on 

participant pay and years of service, and typically paid upon retirement as 

a lifetime annuity, or periodic payments until death.10 Because DB plans 

promise to make payments in the future, and because tax-qualified DB 

plans must be funded, employers must use present value calculations to 

estimate the current value of promised benefits.11 The calculations require 

making assumptions about factors that affect the amount and timing of 

benefit payments, such as an employee’s retirement age and expected 

mortality, and about the expected return on plan assets, expressed in the 

form of an interest rate. The present value of accrued benefits calculated 

using mandated assumptions is known as a plan’s “current liability.” 

Current liability provides an estimate of the amount of assets a plan needs 

today to pay for promised benefits. 

Before the enactment of ERISA, few rules governed the funding of DB 

pension plans, and participants had little assurance that they would 

receive the benefits promised. ERISA, and several amendments to the law 

 10Lifetime annuities may also offer the option of continuing payments to a survivor after the 

participant’s death. Some DB plans also offer the option of taking benefits as a lump-sum 

payment. For more on pension dispositions, see GAO, Private Pensions: Participants 

Need Information on Risks They Face in Managing Pension Assets at and during 

Retirement, GAO-03-810 (Washington, D.C.: Jul. 29, 2003). In recent years, some sponsors 

have converted their traditional DB plans to so-called hybrid, or cash balance, plans. Cash 

balance plans are a form of defined benefit plan that determines benefits on the basis of 

hypothetical individual accounts and commonly offer a lump-sum feature. For more 

information on cash balance plans, see GAO, Private Pensions: Implications of 

Conversions to Cash Balance Plans, HEHS-00-185 (Washington, D.C.: Sept. 29, 2000), and 

Cash Balance Plans: Implications for Retirement Income. HEHS-00-207 (Washington, 

D.C.: Sept. 29, 2000). 

11Present value calculations reflect the time value of money—that a dollar in the future is 

worth less than a dollar today, because the dollar today can be invested and earn interest. 

Using a higher interest rate will lower the present value of a stream of payments because it 

implies that a lower level of assets today will be able to fund those future payments. 

Background 
Page 6 GAO-05-294 Private Pensions 

since its passage, established minimum funding requirements for sponsors 

of pension plans in order to try to ensure that plans contain enough assets 

to pay promised benefits. In principle, a sponsor must annually fund the 

amount required to fund the plan’s “normal cost,” the amount of earned 

benefits allocated during that year, plus a specified portion of other 

liabilities that may be amortized over a period of years. 

Compliance with the minimum funding requirements is recorded through 

the plan’s funding standard account (FSA). The FSA tracks events that 

affect the financial health of a plan during that plan year: credits, which 

reflect improvements to the plan’s assets, such as contributions, amortized 

experience gains,12 and interest; and charges, which reflect an increase in 

the plan’s financial requirements, such as the plan’s normal cost and 

amortized charges such as the initial actuarial liability, experience losses, 

and increases in a plan’s benefit formula.13 If FSA credits exceed charges in 

a given plan year, the plan’s FSA registers a net “credit balance” that may 

be carried forward to the next plan year; conversely, a prior year’s funding 

deficiency also carries forward. The FSA credit balance at year-end is 

equal to the FSA credit balance at the beginning of the year plus FSA 

credits less FSA charges. Compliance with the minimum funding standard 

requires that the FSA balance at the end of the year is non-negative. An 

existing credit balance accrues interest and may be drawn upon to help 

satisfy minimum funding requirements for future plan years, and therefore 

may offset the need for future cash contributions. 

ERISA and the IRC prescribe rules regarding the assumptions that 

sponsors must use to measure plan liabilities and assets. For example, for 

plan years 2004 and 2005, the IRC specifies that the interest rate used to 

calculate a plan’s current liability must fall within 90 to 100 percent of the 

weighted average of the rate on an index of long-term investment-grade 

corporate bonds during the 4-year period ending on the last day before the 

 12Experience gains and losses reflect, among other things, the difference between actual 

asset performance and the assumed rates of return on assets for the plan, as reported in 

previous years. 

13Plans may amortize experience gains or losses over a 5-year period. Changes in the terms 

of the plan arising from plan amendments may be amortized over a 30-year period. Thus, 

these events continue to affect the FSA and plan funding for several years after they occur. 
Page 7 GAO-05-294 Private Pensions 

beginning of the plan year.14 Similarly, rules dictate that sponsors report an 

“actuarial” value of assets that must be based on reasonable assumptions 

and must take into account the assets’ market value.15 This value may 

differ in any given year, within a specified range,16 from the current market 

value of plan assets, which plans also report. While different assumptions 

will change a plan’s reported assets and liabilities, sponsors eventually 

must pay the amount of benefits promised; if the assumptions used to 

compute current liability differ from the plan’s actual experience, current 

liability will differ from the amount of assets actually needed to pay 

benefits.17

Funding rules generally treat a plan as an ongoing entity, and plans do not 

necessarily have to maintain an asset level equal to current liabilities every 

year. However, the funding rules include certain mechanisms that are 

intended to keep plans from becoming too underfunded. One such 

mechanism is the AFC, introduced by the Omnibus Budget Reconciliation 

Act of 1987 (OBRA ‘87). The AFC requires sponsors of plans with more 

than 100 participants that have become underfunded to a prescribed level 

to make additional plan contributions in order to prevent funding levels 

from falling too low. With some exceptions, plans with an actuarial value 

of assets below 90 percent of current liabilities are affected by the AFC 

 14The rate used to calculate current liability has usually been based on the 30-year Treasury 

bond rate, with the allowable range above and below the 4-year weighted average varying 

in different years. The Pension Funding Equity Act of 2004 replaced the Treasury bond rate 

with the corporate index for plan years 2004 and 2005. See IRC Section 412(b)(5)(B)(ii)(II). 

For further discussion of rates used to discount pension liabilities, see GAO, Private 

Pensions: Process Needed to Monitor the Mandated Interest Rate for Pension 

Calculations, GAO-03-313 (Washington, D.C.: Feb. 27, 2003). 

1526 U.S.C. 412(c)(2)(A). 

16Actuarial asset values cannot be consistently above or below market, but in a given year 

may be anywhere from 80 to 120 percent of the market asset level. 

17A plan’s current liability may differ from its “termination liability,” which measures the 

value of accrued benefits using assumptions appropriate for a terminating plan. Sponsors 

are required to provide PBGC with termination liability information if, among other things, 

the aggregate unfunded vested benefits of plans maintained by the contributing sponsor 

and the members of its controlled group exceed $50 million. See 29 U.S.C. 1310. For further 

discussion of current versus termination liability, see GAO-04-90, appendix IV. 
Page 8 GAO-05-294 Private Pensions 

rules.18 The rules for determining the amount of the AFC are complex, but 

they generally call for sponsors to pay a percentage of their unfunded 

liability. Under current law, plans that owe an AFC may still apply FSA 

credits to meet their funding obligation and therefore may not be required 

to satisfy the AFC with a cash contribution. 

In addition to setting funding rules, ERISA established PBGC to guarantee 

the payment of the pension benefits of participants, subject to certain 

limits, in the event that the plan could not.19 Under ERISA, the termination 

of a single-employer DB plan may result 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.20 PBGC 

may pay only a portion of a participant’s accrued benefit because ERISA 

places limits on the PBGC benefit guarantee. For example, PBGC generally 

does not guarantee benefits above a certain amount, currently $45,614 

annually per participant at age 65.21 Additionally, benefit increases arising 

from plan amendments in the 5 years immediately preceding plan 

termination are not fully guaranteed, although PBGC will pay a portion of 

 18A single-employer plan may be subject to an AFC in a plan year if plan assets fall below 90 

percent of current liabilities. However, a plan is not subject to an AFC 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 at least 2 consecutive of the 3 immediately preceding years. To determine 

whether the AFC applies, the IRC requires sponsors to calculate current liabilities using the 

highest interest rate allowable for the plan year. See 26 U.S.C. 412(l)(9)(C). 

19Some DB plans are not covered by PBGC insurance; for example, plans sponsored by 

professional service employers, such as physicians and lawyers, with 25 or fewer active 

participants. 

20The termination of a fully funded DB plan is called 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. The termination of an underfunded 

plan, termed a distress termination, is allowed if the plan sponsor requests the termination 

and the sponsor satisfies other criteria. Alternatively, PBGC may initiate an “involuntary” 

termination. PBGC may institute proceedings to terminate a plan if the plan has not met the 

minimum funding standard, the plan will be unable to pay benefits when due, a reportable 

event has occurred, or the possible long-run loss to PBGC with respect to the plan may 

reasonably be expected to increase unreasonably if the plan is not terminated. See 29 

U.S.C. 1342(a). 

21This guarantee level applies to plans that terminate in 2005. The amount guaranteed is 

adjusted (1) actuarially for the participant’s age when PBGC first begins paying benefits 

and (2) if benefits are not paid as a single-life annuity. Because of the way ERISA allocates 

plan assets to participants, certain participants can receive more than the PBGC 

guaranteed amount. 
Page 9 GAO-05-294 Private Pensions 

these increases.22 Further, PBGC’s benefit guarantee is limited to the 

monthly straight life annuity benefit the participant would receive if she 

were to commence the annuity at the plan’s normal retirement age.23

Sponsors of PBGC-insured DB plans pay annual premiums to PBGC for 

their coverage. Premiums have two components: a per participant charge 

paid by all sponsors (currently $19 per participant), and a “variable-rate” 

premium that some underfunded plans pay based on the level of unfunded 

benefits.24

Despite the presence of minimum funding rules and the AFC, plan 

underfunding has persisted. In recent years, the level of total plan 

underfunding has increased rapidly, from about $39 billion in 2000 to an 

amount estimated to exceed $450 billion as of September 30, 2004. While 

the single-employer program has over $39 billion in assets to pay benefits 

in the near term, it already faces liabilities of over $62 billion. Thus, there 

is concern that the expected continued termination of large plans by 

bankrupt sponsors will push the program more quickly into insolvency, 

generating greater pressure on the Congress, and ultimately the taxpayers, 

to provide PBGC financial assistance to avoid reductions in guaranteed 

payments to retirees.25 Because of concerns about the long-term viability 

of the single-employer program, as illustrated by its growing accumulated 

deficit (see fig. 1), in July 2003 we placed the program on GAO’s high-risk 

list of agencies and programs that need broad-based transformations to 

address major challenges. In October 2003, we identified several 

 22The guaranteed amount of the benefit amendment 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). 

23For more on PBGC guarantee limits, see Pension Benefit Guaranty Corporation, Pension 

Insurance Data Book 1999 (Washington, D.C., Summer 2000), pp. 2-14. 

24The additional premium equals $9.00 for each $1,000 (or fraction thereof) of unfunded 

vested benefits. However, no such premium is charged for any plan year if, as of the close 

of the preceding plan year, contributions to the plan for the preceding plan year were not 

less than the full funding limitation for the preceding plan year. 

25PBGC has available a $100 million line of credit from the U.S. Treasury for liquidity 

purposes if funds generated from premium receipts and investment activities are 

insufficient to meet operating cash needs in any period. However, while PBGC is a 

government corporation under ERISA, it is not backed by the full faith and credit of the 

federal government. For projections of the magnitude and timing of insolvency of PBGC’s 

single employer program, see, for example, “PBGC: Updated Cash Flow Model from 

COFFI,” Center on Federal Financial Institutions (COFFI) (Washington, D.C.: Nov. 18, 

2004). 
Page 10 GAO-05-294 Private Pensions 

categories of reform that the Congress might consider to strengthen the 

program over the long term. We concluded that the Congress should 

consider comprehensive reform measures to reduce the risks to the 

program’s long-term financial viability.26 These suggested reforms included 

strengthening funding rules, along with possibly modifying program 

guarantees; restructuring PBGC premiums; improving the transparency of 

plan and program information; and certain other reforms. 

Figure 1: Accumulated Surplus/Deficit and Annual Net Gain/Loss of PBGC SingleEmployer Program 

GAO has a statutory responsibility for auditing the overall financial 

position of the executive branch of the U.S. government. In a recent 

report, we describe the serious challenges facing the nation from current 

fiscal policies that, if unchecked, will lead to large, escalating, and 

unsustainable budget deficits.27 This fiscal challenge stems in part from 

 26GAO 04-90. 

27See GAO-05-325SP. 

-24

-18

-12

-6

0

6

12

Dollars in billions 

Source: the Pension Benefit Guaranty Corporation.

Year

Accumulated surplus/deficit

Annual net gain/loss

1980 1983 1986 1989 1992 1995 2001 1998 2004
Page 11 GAO-05-294 Private Pensions 

increasing obligations of retirement-related programs like Social Security, 

which faces long-term financial insolvency because of increased life 

expectancy. Improvements in life expectancy have extended the average 

amount of time spent by workers in retirement, from 11.5 years in 1950 for 

the average male worker to 18 years as of 2003. 

In February 2005, the Administration proposed several measures designed 

to strengthen funding for single-employer DB pension plans.28 The main 

elements of reform include (1) reforming the funding rules to ensure that 

sponsors keep their retirement promises; (2) improving disclosure to 

workers, investors, and regulators about pension plan status; and 

(3) reforming premiums to better reflect a plan’s risk and restoring the 

PBGC to financial health. The Administration asserts that such changes 

would shore up the structural problems in the DB system and strengthen 

the system’s financial health. 

From 1995 to 2002, while most of the 100 largest plans had sufficient 

assets to cover their plan liabilities, many did not. On average, each year 

39 of these plans were less than 100 percent funded, and 10 had assets 

below 90 percent of their current liabilities. Reported funding levels for 

the group generally were stable and strong from 1996 to 2000, but they 

worsened somewhat in 2001 before deteriorating noticeably in 2002. 

Furthermore, because of leeway in the actuarial methodology and 

assumptions sponsors may use to measure plan assets and liabilities, 

underfunding may actually have been more severe and widespread than 

reported at the end of the period. Because of flexible funding rules 

permitting the use of accounting credits other than cash contributions to 

satisfy minimum funding obligations, on average 62.5 of the 100 largest 

plans each year received no cash contributions from their sponsors, 

including 41 percent of plans that were less than 100 percent funded. 

 28See http://www.dol.gov/ebsa/pdf/SEPproposal2.pdf. Also see GAO-04-90, appendix III, for 

more discussion of the Administration’s earlier pension reform proposal, announced on 

July 8, 2003. 

Many of the 100 

Largest Plans’ 

Liabilities Exceeded 

Plan Assets from 1995 

to 2002, and Few 

Sponsors Were 

Required to Make 

Cash Contributions 
Page 12 GAO-05-294 Private Pensions 

The 100 largest plans each year from 1995 to 2002 contained mostly wellfunded plans. However, on average 39 of these plans each year were less 

than 100 percent funded; that is, for these plans, current liabilities 

exceeded the reported actuarial value of assets in the plan. An average of 

10 plans each year had asset levels below 90 percent of their current 

liability, and 3 plans were less than 80 percent funded (see fig. 2).29

 29An underfunded plan does not necessarily indicate that the sponsor is unable to pay 

current benefits. Underfunding means that the plan does not currently have enough assets 

to pay all accrued benefits, a portion of which will be paid in the future, under the given 

actuarial assumptions about asset rate of return, retirement age, mortality, and other 

factors that affect the amount and timing of benefits. 

Many Plans Each Year 

Were Underfunded, and 

More Became 

Underfunded in Recent 

Years 
Page 13 GAO-05-294 Private Pensions 

Figure 2: Almost One-Fourth of the Largest Pension Plans Were Less than 90 

Percent Funded on a Current Liability Basis in 2002 

As a group, funding levels among the 100 largest plans were reasonably 

stable and strong from 1996 to 2000. Except for 1999, in no year did more 

than 39 plans have liabilities exceeding assets, and no more than 9 plans 

each year were below 90 percent funded. In 2001 there were signs of 

increased underfunding, and by 2002, more than half of the largest plans 

were less than 100 percent funded, with 23 plans less than 90 percent 

funded. Two factors in the deterioration of many plans’ finances were the 

decline in stock prices and in interest rates. From 2000 to 2002, the 

Standard & Poor’s (S&P) 500 stock index declined sharply each year. 

Given that DB plans on average held approximately half of their assets in 

0

20

40

60

80

100

1995 1996 1997 1998 1999 2000 2001 2002

Percentage of 100 largest DB plans

Source: GAO analysis of PBGC Form 5500 research data.

Year

Less than 80% funded 

80% to less than 90% funded

90% to less than 100% funded

100% to less than 110% funded

110% funded or above
Page 14 GAO-05-294 Private Pensions 

stocks from 1995 to 2000,30 the decline in stock prices meant a sharp 

decline in the value of many plans’ pension assets. In addition, over the 

sample period, 30-year Treasury bond rates, which served as the 

benchmark for the rate used by plans to calculate pension liabilities, 

generally fell steadily, raising liabilities.31 The combination of lower asset 

values and higher pension liabilities had a serious adverse effect on overall 

defined benefit funding levels. 

Accurate measurement of a plan’s liabilities and assets is central to the 

sponsor’s ability to maintain assets sufficient to pay promised benefits, as 

well as to the transparency of a plan’s financial health. Because many 

plans chose allowable actuarial assumptions and asset valuation methods 

that may have altered their reported liabilities and assets relative to 

market levels, it is possible that funding over our sample period was 

actually worse than reported for a number of reasons. These include the 

use of above-market rates that differ from market values and the use of 

actuarial asset values that may differ from current asset values. Two large 

plans that terminated in 2002 illustrate the potential discrepancies 

between reported and actual funding. 

Reported current liabilities are calculated using a weighted average of 

rates from the 4-year period before the plan year. This weighting offers 

sponsors the advantage of being able to smooth fluctuations in liabilities 

that sharp swings in interest rates would cause, thereby reducing volatility 

in minimum funding requirements and making funding more predictable. 

However, the weighting reduces the accuracy of liability measurement 

because the rate anchoring reported liabilities is likely to differ from 

current market values. If the rates used to calculate current liabilities are 

falling, this would have the effect of decreasing the rise in reported 

liabilities associated with lower rates, making plans appear better funded 

 30See Board of Governors of the Federal System, “Flow of Funds Accounts of the United 

States,” Table L.119.b, Dec. 9, 2004. This approximation likely understates stock holdings as 

a share of pension assets, as DB plans also held assets in mutual fund shares, which may 

also contain stocks. 

31Generally, a lower interest rate will raise plan liabilities, because a lower rate implies a 

lower rate of return on plan assets, requiring a higher level of assets to pay for benefits. 

However, in calculating current liabilities, the IRC allowed plans to use an interest rate 

above the benchmark 4-year weighted average, possibly offsetting the effects of lower rates 

on current liability. For example, sponsors could pick a rate up to 105 percent of the 

weighted average 30-year Treasury rate for plans in 1999; in 2002, this upper range was 

changed to 120 percent of the weighted average. See 26 U.S.C. 412(b)(5)(B). 

Rules May Allow Reported 

Funding Levels to 

Overstate Current Funding 

Levels 

Use of an Above-Market 

Interest Rate to Calculate 

Liabilities 
Page 15 GAO-05-294 Private Pensions 

than they actually were. In a rising interest rate environment, the opposite 

would be true. However, because rules allowed sponsors to measure 

liabilities using a rate above the 4-year weighted average, sponsors could 

reduce plan current liabilities compared with what their value would be if 

calculated at current rates.32 The 4-year weighted average of the reference 

30-year Treasury bond rate exceeded the current market rate in 76 percent 

of the months between 1995 and 2002, and the highest allowable rate for 

calculating current liabilities exceeded the current rate in 98 percent of 

those months. Sponsors of the plans in our sample chose the highest 

allowable interest rate to value their current liabilities 62 percent of the 

time from 1995 to 2002. 

Similarly, for assets, the actuarial value of assets used for funding may 

differ from current market values. The actuarial value of assets cannot be 

consistently above or below market, but in a given year may be anywhere 

from 80 to 120 percent of market asset level. In our sample, 86 percent of 

plans reported a different value for actuarial and market assets. On 

average, using the market value instead of actuarial value of assets would 

have raised reported funding levels by 6.5 percent each year. However, 

while the market value exceeded actuarial value of assets during the late 

1990s, when plan funding was generally strong, in the weaker funding year 

of 2002 market assets dipped below actuarial assets. In 2001 and 2002, 

calculating plan funding levels using market assets would have greatly 

increased the number of plans below 90 percent funded each year. A 

similar calculation for 2002 would have drastically increased the number 

of large plans below 80 percent funded, from 6 to 24. Thus, we see some 

evidence that using actuarial asset values lowered the volatility of reported 

funding levels relative to those using market asset values. However, the 

actuarial value of assets also may have disguised plans’ funded status as 

their financial condition worsened. 

 32In 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. For 2004 and 

2005, the Congress changed the reference rate from the 30-year Treasury bond rate to a 

rate based on long-term investment-grade corporate bonds, and reset the allowable range 

for plans to 90 to 100 percent of this rate. 

Use of Actuarial versus Current 

Asset Values 
Page 16 GAO-05-294 Private Pensions 

Some prominent recent plan terminations reveal some extreme 

discrepancies between reported plan funding levels and market funding 

levels. The Bethlehem Steel Corporation in 2002 reported that its plan was 

85.2 percent funded on a current liability basis, yet the plan terminated 

later that year with assets of less than half of the value of promised 

benefits. The PBGC single-employer program suffered a $3.7 billion loss as 

a result of that termination, its largest ever at the time. Similarly, LTV Steel 

Company reported that its pension plan for hourly employees was over 

80 percent funded on its Form 5500 filing for plan year 2001. When this 

plan terminated in March, 2002, it had assets equal to 52 percent of 

benefits, a shortfall of $1.6 billion.33

For the 1995 to 2002 period, the sponsors of the 100 largest plans each 

year on average made relatively small cash contributions to their plans. 

Annual cash contributions for the 100 largest plans averaged 

approximately $97 million on plans averaging $5.3 billion in current 

liabilities.34 This average contribution level masks a large difference in 

contributions between 1995 and 2001, during which period annual 

contributions averaged $62 million (in 2002 dollars), and in 2002, when 

contributions increased significantly to $395 million per plan. Further, in 

6 of the 8 years in our sample, a majority of the largest plans made no cash 

contribution to their plan (see fig. 3). On average each year, 62.5 plans 

received no cash contribution, including an annual average of 41 percent 

of plans that were less than 100 percent funded.

 33Several factors may explain the wide discrepancy between reported funding levels and 

actual funding levels at termination. Reported funding levels may use an actuarial value of 

assets, which may exceed the market value at termination. In addition, termination 

liabilities are valued using a different interest rate than that used for current liabilities. 

Further, current liabilities and termination liabilities may be measured at different times. 

Unfunded shutdown benefits may also raise termination liabilities. For more discussion of 

the differences between termination and current liabilities, see GAO-04-90, appendix IV. 

34Figures are in 2002 dollars. The $97 million in contributions includes contributions from 

both employers and employees, although the vast majority of contributions come from 

employers. For 1995, the data set contains only employer contributions. 

Two Terminated Plans Showed 

Large Differences between 

Reported and Actual Funding 

Most Sponsors Most Years 

Made No Cash 

Contributions to Plans but 

Satisfied Funding 

Requirements through Use 

of Accounting Credits 
Page 17 GAO-05-294 Private Pensions 

Figure 3: Most Sponsors Made No Cash Contribution Most Years 

Note: Average contributions for 2002 are largely driven by one sponsor’s contribution to its plan. 

Disregarding this $15.2 billion contribution reduces the average plan contribution for 2002 from $395 

million to $246 million. 

The funding rules allow sponsors to meet their plans’ funding obligations 

through means other than cash contributions. If a plan has sufficient FSA 

credits from other sources, such as an existing credit balance or large 

interest or amortization credits, to at least match its FSA charges, then the 

plan does not have to make a cash contribution in that year. Because 

meeting minimum funding requirements depends on reconciling total 

annual credits and charges, and not specifically on cash contributions, 

these other credits can substitute for cash contributions. 

From 1995 to 2002, it appears that many of the largest plan sponsors 

substituted a significant amount of FSA credits for cash contributions. The 

average plan’s credit balance carried over from a prior plan year totaled 

about $572 million (2002 dollars) each year, and 88 percent of plans on 

average carried forward a prior credit balance into the next plan year from 

1995 to 2002. Not only could these accumulated credit balances help a plan 

to meet minimum funding obligations in future years, but they also accrue 

0

50

100

150

200

250

300

350

400

Average contributions (in millions of 2002 dollars)

Percentage of 100 largest DB plans with

sponsors forgoing cash contributions

Source: GAO analysis of PBGC Form 5500 research data.

Year

Average annual contribution for 100 largest plans 

Percentage of plans with sponsors forgoing cash contributions

1995 1996 1997 1998 1999 2000 2001 2002

0

10

20

30

40

50

60

70

80
Page 18 GAO-05-294 Private Pensions 

interest that further augments a plan’s FSA credits. In contrast to large 

prior-year credit balances, annual cash contributions averaged only 

$97 million, in 2002 dollars. On average each year, cash contributions 

represented 90 percent of the minimum required annual funding (from 

cash and credits).35 However, this average figure was elevated by high 

levels of contributions by some plans in 1995, 1996 and 2002. From 1997 to 

2000, when funding levels were generally strong, cash contributions 

averaged only 42 percent of minimum required annual contributions (see 

fig. 4). During these years, a majority of plans in our sample received no 

cash contribution (see fig. 5). Cash contributions represented a smaller 

percentage of annual minimum required funding during years when plans 

were generally well funded, indicating that in these years more plans 

relied more heavily on credits to meet minimum funding obligations. 

 35Minimum required annual funding equals annual total FSA charges, less net amortization 

credits and interest applied to these amortization credits. 
Page 19 GAO-05-294 Private Pensions 

Figure 4: Average Cash Contributions, as a Percentage of Minimum Required 

Annual Funding, Were Lowest during Strong Funding Years 

Note: This figure reports the average percentage across plans for each year. Minimum required 

annual funding equals total FSA charges, less amortization credits and interest on these credits. 

Sponsors can use other FSA credits, if applicable, to satisfy minimum funding requirements in lieu of 

cash. Plans with missing components of the minimum required annual funding calculation or with 

credits that exceed charges (1 plan per year on average) are excluded from the figure. 

0

50

100

150

200

250

300

Average cash contribution, as a percentage of plans’ minimum required funding

Source: GAO analysis of PBGC Form 5500 research data.

Year

1995 1996 1997 1998 1999 2000 2001 2002
Page 20 GAO-05-294 Private Pensions 

Figure 5: Distribution of Average Cash Contributions, as a Percentage of Minimum 

Required Annual Funding, Illustrates that Plans Relied More Heavily on FSA Credits 

to Meet Minimum Funding Obligations from 1997 to 2000 

Note: Minimum required annual funding equals total FSA charges, less amortization credits and 

interest on these credits. Sponsors can use other FSA credits, if applicable, to satisfy minimum 

funding requirements in lieu of cash. Plans with missing components of the minimum required annual 

funding calculation or with credits that exceed charges (1 plan per year on average) are excluded 

from the figure. 

In addition to large credit balances brought forward from prior years, 

sponsors added funding credits from other sources. For example, plans 

reported approximately $42 million (2002 dollars) each year in net interest 

credits. These credits accrue to a plan’s FSA like interest on a bank 

account, accruing to an existing credit balance at the beginning of the plan 

year and to other credits, such as contributions, added during the plan 

year. Rules also allow plans to accrue credits from the excess of a plan’s 

calculated minimum funding obligation above the plan’s full funding 

0

20

40

60

80

100

Percentage of 100 largest DB plans 

Source: GAO analysis of PBGC Form 5500 research data.

Year

Cash contributions accounted for 100% or more of minimum required annual funding

Cash contributions accounted for 50% to less than 100% of minimum required annual funding

1995 1996 1997 1998 1999 2000 2001 2002

Cash contributions accounted for greater than 0% to less than 50% of minimum required annual funding

Cash contributions accounted for 0% of minimum required annual funding
Page 21 GAO-05-294 Private Pensions 

limitation; these credits averaged $47 million (2002 dollars) from 1995 to 

2002.36 Other plan events result in plan charges, which reflect events that 

increase the plan’s obligations. For example, plans reported annual 

amortization losses, which could result from actual investment rates of 

return on plan assets below assumed rates of return (including outright 

losses) or increases in the generosity of plan benefits; these net 

amortization charges averaged almost $28 million (2002 dollars) in our 

sample. Total funding credits, offset by charges, may help satisfy a plan’s 

minimum funding obligation, substituting for cash contributions, and may 

explain why a significant number of sponsors made zero cash 

contributions to their plans in many years. 

The FSA credit accounting system provides some advantages to DB plan 

sponsors. Amortization rules require the sponsor to smooth certain events 

that affect plan finances over several years, and accumulated credit 

balances act as a buffer against swings in future funding requirements.37

These features often allow sponsors to better regulate their annual level of 

contributions. In contrast, contributions and funding levels might fluctuate 

greatly from year to year if funding were based strictly on yearly 

differences between the market value of plan assets and current liabilities. 

Thus, a contribution system with an FSA accounting feature may make 

funding requirements less volatile and contributions more predictable than 

one in which funding was based entirely on current assets and liabilities. 

Similarly, current-law measurement and funding rules provide a plan with 

some ability to dampen volatility in required funding caused by economic 

events that may sharply change a plan’s liabilities or assets. Pension 

experts told us that this predictability and flexibility make DB sponsorship 

more attractive to employers.38

 36Full funding limitation rules set a ceiling for minimum annual funding requirements for a 

plan each year, based on the plan’s liabilities. 

37Some experts argue that since a pension plan represents a long-term financial 

commitment between a firm and its employees, and since current liability measures include 

many benefits that will not be paid until far in the future, it makes sense to smooth out 

year-to-year fluctuations rather than force each plan to balance assets and liabilities at all 

times. 

38There are investment techniques, such as purchasing fixed income assets whose payouts 

match the plan's expected payouts, that could make pension funding relatively predictable, 

even without FSA smoothing. One possible reason that such techniques are not widely 

used may be they are believed to be more expensive, over the long term than an asset 

allocation with significant equity investment exposure. 

FSA Accounting Rules Can 

Make Required 

Contributions Less Volatile 

but May Obscure Funded 

Status and Reduce 

Contributions 
Page 22 GAO-05-294 Private Pensions 

However, the FSA accounting system, by smoothing annual contributions 

and liabilities, may distort a plan’s funding level. For example, suppose a 

sponsor accrues a $1 million credit balance from making a contribution 

above the required minimum in a year. Suppose then that this $1 million 

purchases assets that lose all of their value by the following year. Even 

though the plan no longer had this $1 million in assets, the sponsor could 

still use that credit balance (plus interest on the credit balance) to reduce 

this year’s contribution to the plan. Because of amortization rules, the 

sponsor would have to report only a portion of that lost $1 million in asset 

value as a plan charge the following year.39 Similarly, sponsors are required 

to amortize the financial effect of a change in a plan’s benefit formula, 

which might result in increased benefits and therefore a higher funding 

obligation, over a 30-year period. Thus, even though higher benefits would 

immediately raise a plan’s obligation to fund, the sponsor could spread 

this effect in the plan’s FSA over 30 years. This disconnection between the 

reported and current market condition of plan finances raises the risk that 

plans will not react quickly enough to deteriorating plan conditions. 

Further, it reduces the transparency of plan financial information to 

stakeholders, such as participants, and investors. 

The experience of two large plans that terminated in a severely 

underfunded state help illustrate the potential disconnection between FSA 

accounting and the plan’s true funded status. As stated earlier, the 

Bethlehem Steel Corporation and LTV Steel Company both had plans 

terminate in 2002, each with assets approximately equal to 50 percent of 

the value of benefits. Yet each plan was able to forgo a cash contribution 

each year from 2000 to 2002, instead using credits to satisfy minimum 

funding obligations, primarily from large accumulated credit balances 

from prior years. Despite being severely underfunded, each plan reported 

an existing credit balance in 2002, the year of termination (see table 1). 

 39Conversely, a plan that experiences a large gain in assets must spread this gain over 

several years, which would make the plan appear to be more poorly funded that it actually 

was. 
Page 23 GAO-05-294 Private Pensions 

Table 1: FSA Credits and Charges for Bethlehem Steel and LTV Steel Plans, 2000-2002 

Figures in millions of dollars 

Bethlehem Steel LTV Steel 

Year 2000 2001 2002 2000 2001 2002

Additional funding charge 0 0 181.2 2.2 73.3 79.4

Total FSA charges 277.0 281.0 457.9 351.8 342.9 179.4

Prior year credit balance 980.4 710.8 508.3 1294.3 1257.3 1169.2

Cash contribution 0 0 0 0 0 0

Total FSA credits 987.9 789.3 579.6 1609.1 1512.1 1218.5

End-of-year credit balance 710.8 508.3 121.7 1257.3 1169.2 1039.1

Funded percentage (actuarial 

assets/current liabilities) 85.8% 83.9% 85.2% 88.1% 81.6% 58.4%

Funded percentage at termination 

(plan assets/future benefits) 48.8% 51.9%

Source: GAO Analysis of PBGC Form 5500 research data. 

Note: For funded percentage at termination represents market-valued assets as a percentage of 

PBGC-guaranteed benefits, plus any additional benefits funded by the plan’s assets after allocation 

under section 4044 of ERISA. These benefits are valued at the PBGC interest rate, which is different 

than that used to value current liability on Form 5500. For more discussion of the differences between 

termination and current liabilities, see GAO-04-90, appendix IV. 

Another possible explanation for the many instances in which sponsors 

made no annual cash contribution regards the full funding limitation 

(FFL). The FFL is a cap on minimum required contributions to plans that 

reach a certain funding level in a given plan year.40 However, the FFL does 

not necessarily represent the contribution that would raise plan assets to 

the level of current liability. Between 1995 and 2002, rules permitted some 

plans with assets as low as 90 percent of current liability to reach the FFL, 

meaning that a plan could be considered fully funded without assets 

sufficient to cover all accrued benefits. The FFL is also distinct from the 

 40As with other funding rules, determining a plan’s FFL is complicated. From 1995 to 2002, 

the FFL equaled the higher of (1) 90 percent of the plan’s current liability or (2) the lower 

of (a) the accrued plan liability or (b) 150 to 170 percent (depending on the year) of the 

current liability. As of the 2004 plan year, the 150 to 170 percent measure no longer factors 

in the determination of the FFL. For our sample of plans, an average of 4 plans per year 

were above 150 to 170 percent (depending on the year) of the current liability and had an 

FFL of zero. This means the sponsors of these plans were most likely unable to make 

additional contributions unless they paid an excise tax. 

Full Funding Limitation 

Rule May Have Allowed 

Some Plan Sponsors to 

Forgo Plan Contributions 
Page 24 GAO-05-294 Private Pensions 

plan’s annual maximum tax-deductible contribution.41 Because sponsors 

may be subject to an excise tax on contributions above the maximum, the 

annual maximum contribution can act as a real constraint on cash 

contributions. In contrast, the FFL represents a “maximum minimum” 

contribution for a sponsor in a given year—a ceiling on the sponsor’s 

minimum funding obligation for the plan. 

Flexibility in the FFL rule has allowed many plan sponsors to take steps to 

minimize their contributions. In our sample, from 1995 to 2002 

approximately two-thirds of the sponsors in each year made an annual 

plan contribution at least as large as the plan’s FFL. However, in 65 

percent of these instances, the sponsor had chosen the highest allowable 

rate to calculate current liability; using a lower rate to calculate current 

liability may have resulted in a higher FFL, and therefore may have 

required a higher contribution. Further, the FFL was equal to zero for 

60 percent of plans each year, on average. This means that these plans 

were permitted to forgo cash contributions as a result of the FFL rule. This 

reflects the fact that if a plan’s FFL equaled zero, that plan had assets at 

least equal to 90 percent of current liabilities that year and would not be 

required to make an additional contribution. 

The interaction between the FFL rule and the annual maximum taxdeductible contribution also has implications for the amount that plan 

sponsors can contribute. In some years, the maximum deductible 

contribution rules truly constrained some sponsors from making any cash 

contribution. In 1998, 50 of 60 plans that contributed to the maximum 

deductible amount had a maximum deductible contribution of zero (see 

fig. 6). This meant that any cash contribution into those plans that year 

would generally subject the sponsor to an excise tax.42 For 37 of these 

plans, this was the case even if the sponsor had chosen the lowest 

statutorily allowed interest rate for plan funding purposes, which would 

have produced the highest calculated current liabilities. This constraint 

did not apply to as many plans in some other years. For example, in 1996, 

52 plans contributed the maximum deductible amount. Thirty of these 

 41A plan’s maximum deductible contribution is based on some of the same criteria as the 

FFL determination. A sponsor may also contribute up to the unfunded current liability level 

in each year. 

42For years after 2001, an employer may elect not to count contributions as nondeductible 

up to the full-funding limitation that is based on the accrued liability. Therefore, it could be 

possible for a sponsor to contribute more than the maximum deductible amount and still 

avoid the excise tax. See 26 U.S.C. 4972(c)(7). 
Page 25 GAO-05-294 Private Pensions 

plans had a maximum deductible contribution of zero. However, 16 of 

these 30 could have chosen a lower rate to raise their maximum 

deductible contribution level. 

Figure 6: For Selected Years from 1996 to 2002, Most Sponsors Contributed the 

Plan’s Maximum Deductible Amount, Which for a Number of Plans Was Zero 

Note: Years of analysis are not continuous, as the PBGC study on maximum deductible contributions 

was conducted for years shown. Information on maximum deductible contributions is missing for 

between 7 and 17 plans each year. Data for these plans were either missing or incomplete to 

calculate the plan contributions with respect to the maximum deductible contribution. 

From 1995 to 2002, an average of only 2.9 of the 100 largest DB plans each 

year were assessed an additional funding charge, the funding mechanism 

designed to prevent severe plan underfunding, even though on average 

10 percent of plans each year reported funding levels below 90 percent. 

Over the entire 8-year period, only 6 unique plans that placed among the 

100 largest plans in any year from 1995 to 2002 owed an AFC. These 6 

plans owed an AFC during the period a total of 23 times in years in which 

they were among the 100 largest plans, meaning that plans that were 

assessed an AFC were likely to owe it again. On average, by the time a 

Very Few Sponsors of 

Underfunded Large 

Plans Paid an AFC 

from 1995 to 2002 

0

10

20

30

40

50

60

70

Percentage of 100 largest DB plans

Source: GAO analysis of PBGC Form 5500 research data matched to PBGC study on maximum deductible cash contributions.

Year

Plans that contributed the maximum deductible amount with some cash contributions 

1996 1998 2000 2001 2002

Plans that contributed the maximum deductible amount with zero cash contributions but could have 

used a lower interest rate to increase cash contributions

Plans that contributed the maximum deductible amount with zero cash contributions and could not

use a lower interest rate to increase cash contributions
Page 26 GAO-05-294 Private Pensions 

plan was assessed an AFC, it was significantly underfunded and was likely 

to remain chronically underfunded in subsequent years. Further, during 

this period, 2 of these 6 plans that owed an AFC were terminated, each 

with assets far below promised benefits and each without having had to 

make a cash contribution in the 3 years prior to termination. As with plans 

in general, funding rules allowed sponsors owing an AFC to use FSA 

credits to help meet their funding obligations, in some years allowing 

sponsors to forgo cash contributions altogether. 

Funding rules dictate that a sponsor of a plan with more than 

100 participants in which the plan’s actuarial value of assets fall below 

90 percent of liabilities, measured using the highest allowable interest rate, 

may be liable for an AFC in that year. More specifically, a plan that is 

between 80 and 90 percent funded is subject to an AFC unless the plan 

was at least 90 percent funded in at least 2 consecutive of the 3 previous 

plan years.43 A plan with assets below 80 percent of liabilities, calculated 

using the highest allowable rate, is assessed an AFC regardless of its 

funding history. 

Despite the statutory threshold of a 90 percent funding level for some 

plans to owe an AFC, in practice a plan needed to be much more poorly 

funded to become subject to an AFC. While about 10 plans in our sample 

each year had funding below 90 percent on a current liability basis, on 

average fewer than 3 plans each year owed an AFC (see fig. 7). From 1995 

to 2002, only 6 of the 187 unique plans that composed the 100 largest plans 

each year were ever assessed an AFC,44 and these plans owed an AFC a 

total of 23 times in years in which they were among the 100 biggest plans. 

By the time a sponsor owed an AFC, its plan had an average funding level 

of 75 percent, suggesting that by the time the AFC was triggered, the plan’s 

financial condition was weak. Further, while we observed 60 instances 

between 1995 and 2002 in which a plan had funding levels between 80 and 

90 percent, only 5 times was a plan in this funding range subject to an 

 43For example, a sponsor of a plan that is 85 percent funded in 2003 would be exempt from 

the AFC only if the plan’s funding level exceeded 90 percent in 2000 and 2001 or in 2001 

and 2002. See 26 U.S.C. 412(l)(9)(C). 

44Unique plans refer to the number of plans we observed with distinct plan identifiers 

called EINs and PINs. See footnote 9 for further information on why the actual number of 

completely unrelated plans in our sample may be lower than the 187 reported. 

Few Plans Were Assessed 

an AFC, and These Plans 

Were Likely to Be Very 

Underfunded 
Page 27 GAO-05-294 Private Pensions 

AFC. This would indicate that, in practice, 80 percent represented the 

realistic funding threshold for owing or avoiding the AFC. 

Figure 7: Most Plans Less than 90 Percent Funded Were Not Assessed an AFC 

AFC rules specify a current liability calculation method that may overstate 

actual plan funding, relative to using market measures, thereby reducing 

the number of plans that might be assessed an AFC. To determine if a 

sponsor owes an AFC, rules dictate that the sponsor calculate current 

liability using the highest allowable interest rate, which results in a plan’s 

lowest possible measure of current liability. Because the highest allowable 

rate exceeded current market rates in 98 percent of the months from 

1995 to 2002, this likely lowered current liability measures for AFC 

purposes, which would cause fewer plans to be assessed an AFC. In our 

sample, 5 plans that reported funding levels below 80 percent on a current 

liability basis did not owe an AFC, perhaps because current liability does 

not require the use of the highest allowable interest rate. 

Sponsors that owed an AFC had mixed success at improving their plans’ 

financial conditions in subsequent years, and most of these plans remained 

significantly underfunded. Among the 6 plans that owed the AFC at least 

0

5

10

15

20

25

Percentage of 100 largest DB plans

Source: GAO analysis of PBGC Form 5500 research data.

Year

Plans less than 90% funded 

Plans assessed an AFC

1995 1996 1997 1998 1999 2000 2001 2002
Page 28 GAO-05-294 Private Pensions 

once, funding levels rose slightly from an average 75 percent when the 

plan was first assessed an AFC to an average 76 percent, looking 

collectively at all subsequent years. All of these plans were assessed an 

AFC more than once, and 2 of the 6 plans terminated during the period, 

each with a severe shortfall of assets relative to promised benefits, 

creating large losses for PBGC’s single-employer insurance program. 

Further, the AFC was an imperfect mechanism for improving funding of 

these plans prior to termination. Bethlehem Steel, which terminated its 

plan in 2002 with a funding level under 50 percent, was subject to an AFC 

that year, but not from 1997 to 2001. LTV Steel, which terminated its 

pension plan for hourly employees in 2002 with assets of $1.6 billion below 

the value of benefits, did have its plan assessed an AFC each year from 

2000 to 2002, but for only $2 million, $73 million, and $79 million, or no 

more than 5 percent of the eventual funding shortfall. Despite these AFC 

assessments, LTV contributed no cash to its plan during those years, 

instead using credits to satisfy its funding obligations (see table 1). 

While the formula to determine the amount is complex, the AFC equals 

approximately 18 to 30 percent of the plan’s unfunded liability, with more 

underfunded plans owing a higher percentage than less underfunded 

plans.45 However, the funding rules allow sponsors to use other FSA 

credits, in addition to cash contributions, to satisfy minimum funding 

obligations, including the AFC. Among plans in our sample assessed an 

AFC, the average annual AFC owed was $234 million, but annual 

contributions among this group averaged $186 million, with both figures in 

2002 dollars (see fig. 8). In addition, 61 percent of the time a plan was 

subject to an AFC, the sponsor used an existing credit balance to help 

satisfy its funding obligation. When it did so, the sponsor drew $283 

million from the credit balance—well above what sponsors owing an AFC 

contributed in cash, on average. Just over 30 percent of the time a plan 

was assessed an AFC, the funding rules allowed the sponsor to forgo a 

cash contribution altogether that year. 

 45The AFC represents the required payment in excess of the regular ERISA minimum 

contribution, plus other possible additional charges. A plan owing an AFC must pay 

between 18 and 30 percent of the plan’s “unfunded new liability,” or liability incurred by the 

plan since the start of 1988, plus other charges based on the plan’s normal cost and other 

unfunded liabilities. See 26 U.S.C. 412(l). 

Funding Rules Allow 

Underfunded Plans, 

Including Those Owing 

AFC, to Forgo Cash 

Contributions 
Page 29 GAO-05-294 Private Pensions 

Figure 8: AFC Assessments Sometimes Exceeded Cash Contributions of Plans 

Subject to AFC, 1995-2002 

Again, terminated plans provide a stark illustration of weaknesses in the 

rules’ ability to ensure sufficient funding. Bethlehem Steel’s plan was 

assessed an AFC of $181 million in 2002, but the company made no cash 

contribution that year, just as it had not in 2000 or 2001, years in which the 

plan was not assessed an AFC. When the plan terminated in late 2002, its 

assets covered less than half of the $7 billion in promised benefits. 

Similarly, LTV Steel made no contributions to its plan from 2000 to 2002, 

despite being assessed an AFC in each of those years. Both plans were 

able to apply existing credits instead of cash to satisfy minimum funding 

requirements. 

0

100

200

300

400

In millions of 2002 dollars 

Source: GAO analysis of PBGC Form 5500 research data.

Year

Total AFC assessments 

Total cash contributions by sponsors of plans with an AFC assessment

1995 1996 1997 1998 1999 2000 2001 2002
Page 30 GAO-05-294 Private Pensions 

The recent funding experiences of large plans, especially those plans that 

are sponsored by financially weak firms, illustrate the limited effectiveness 

of certain current funding rules and represent a potentially large implicit 

financial risk to PBGC. From 1995 to 2002, on average, 9 percent of the 

largest 100 plans had a sponsor with a speculative grade credit rating, 

suggesting financial weakness and poor creditworthiness. As a group, 

speculative grade-rated sponsors had lower average funding levels, and 

were more likely to incur an AFC than other sponsors. In addition, 

speculative grade-rated sponsors generally had a higher incidence of using 

the highest legally allowable interest rate to discount reported plan 

liabilities. Using a higher interest rate lowers a plan’s calculated current 

liabilities and may lower the plan’s minimum funding requirement; to the 

extent that this reduces contributions, using the highest allowable interest 

rate may raise the chances of underfunding and raise the financial 

exposure to PBGC. Of PBGC’s 41 largest claims since 1975 in which the 

rating of the sponsor was known, 39 have involved plan sponsors that 

were rated as speculative grade just prior to termination. Among these 

claims, over 80 percent of plan sponsors were rated as speculative grade 

10 years prior to termination. The future outlook is similar: plans 

sponsored by companies with speculative grade credit ratings and 

classified by PBGC as “reasonably possible” of termination represent an 

estimated $96 billion in potential claims. 

The financial health of a plan sponsor may be key to plan funding 

decisions because sponsors must make funding and contribution decisions 

in the context of overall business operations. During our 1995 to 2002 

Large Plans’ 

Sponsors’ Credit 

Ratings Appear 

Related to Certain 

Funding Behavior and 

Represent Risk to 

PBGC 

Speculative Grade 

Sponsors More Likely to 

Have Lower Funding 

Levels 
Page 31 GAO-05-294 Private Pensions 

sample period, we observed between 7 and 13 plans each year with 

sponsors that had a speculative grade credit rating.46,47

From 1995 to 2002, we observed that plans with speculative grade-rated 

sponsors had lower levels of average funding compared with the average 

for the 100 largest plans. For instance, the average funding of plans of 

sponsors that were rated as speculative grade was 12 percentage points 

lower on average than the funding level for all plans from 1995 to 2002 

(see fig. 9). Applying an alternative measure of plan funding that used the 

reported market value measure of plan assets, we obtained broadly similar 

results.48 Plans of speculative grade-rated sponsors were also more likely 

to be underfunded. From 1995 to 2002, each year, on average, 18 percent 

of speculative grade-rated plans had assets that were below 90 percent of 

current liability. Plans of nonspeculative grade-rated sponsors had just 

over half this incidence, or an average of 10 percent of plans funded below 

90 percent of current liability. 

 46The number of plans per year in our sample sponsored by firms with a speculative grade 

rating is: 9 plans in 1995; 11 plans in 1996; 7 plans in 1997; 7 plans in 1998; 8 plans in 1999; 

8 plans in 2000; 13 plans in 2001; and 12 plans in 2002. 

47Credit ratings are generally considered to be a useful proxy for a firm’s financial health. A 

credit rating, generally speaking, is a rating service’s current opinion of the 

creditworthiness of an obligor with respect to a financial obligation. It typically takes into 

consideration the creditworthiness of guarantors, insurers, or other forms of credit 

enhancement on the obligation and takes into account the currency in which the obligation 

is denominated. Moody’s and Standard and Poor’s (S&P) are two examples of well-known 

ratings services. We use S&P ratings throughout our report. S&P long-term credit ratings 

are divided into several categories ranging from AAA, reflecting the strongest credit quality, 

to D, reflecting the lowest. Ratings from AA to CCC may be modified by the addition of a 

plus or minus sign to show relative standing within the major rating categories. The term 

“investment grade” was originally used by various regulatory bodies to connote obligations 

eligible for investment by institutions such as banks, insurance companies, and savings and 

loan associations. Over time, this term gained widespread usage throughout the investment 

community. Ratings in the four highest categories, AAA, AA, A, BBB, generally are 

recognized as being investment grade. Debt rated BB or below generally is referred to as 

speculative grade. Sometimes the term “junk bond” is used as a more irreverent expression 

for this category of riskier debt. 

48Using reported market assets as the numerator of the funding percentage, the average 

funding of plans of sponsors that were rated as speculative grade was 17 percentage points 

lower on average than the funding level for all plans over the 1995-2002 period. 
Page 32 GAO-05-294 Private Pensions 

Figure 9: Plans Sponsored by Firms with a Speculative Grade Rating Generally Had 

Lower Levels of Funding on a Current Liability Basis 

Large plans sponsored by firms with a speculative grade rating were also 

more likely to incur an AFC. While speculative grade-rated sponsors 

accounted for only 9 percent of all sponsors from 1995 to 2002, they 

accounted for just over one-third (8 of 23) of all instances in which a 

sponsor was required to pay an AFC.49 No high investment grade sponsors 

(those rated AAA or AA) were required to pay an AFC for this period. 

While the AFC is intended to be a backstop for underfunded plans, for our 

sample, it affected only those plans that were rated A or lower. The AFC 

may, to some extent, protect PBGC from additional losses so plans cannot 

become even more underfunded, especially if the plan is at risk for 

financial distress. However, to the extent that speculative grade-rated 

sponsors are considered to pose a significant risk for near-term 

bankruptcy, the AFC may not be an effective mechanism for improving a 

 49Six sponsors had plans that were assessed an AFC a total of 23 times during the period. 

0

20

40

60

80

100

120

Average funding level (in percent)

Source: GAO analysis of PBGC Form 5500 research data and COMPUSTAT data.

Year

Plans with investment grade-rated, unrated, or privately held sponsors

Plans with speculative grade-rated sponsors

Average of 100 largest DB plans

1995 1996 1997 1998 1999 2000 2001 2002
Page 33 GAO-05-294 Private Pensions 

plan’s funding level. Plan sponsors that are in financial distress are, by 

definition, having difficulty paying off debts and may be ill equipped to 

increase cash contributions to their plan. That is, the AFC itself may be a 

symptom of plan distress rather than a solution to improve a plan’s 

funding level. AAA or AA rated sponsors, on the other hand, were not 

assessed an AFC from 1995 to 2002, as they likely had the financial 

flexibility to increase contributions to avoid consistently falling below 

funding levels that would have triggered the AFC. 

Large plans with sponsors rated as speculative grade were generally more 

likely to report current liabilities calculated by using the highest allowable 

interest rate under the minimum funding rules. While a majority of 

sponsors from all credit rating categories used the highest allowable 

interest rate over the entire 1995 to 2002 period, speculative grade-rated 

sponsors used the highest rate at an incidence 23 percentage points above 

the incidence for all other plans in the sample (see fig. 10). The use of 

higher interest rates likely lowers a plan’s reported current liability and 

minimum funding requirement. To the extent that this depresses cash 

contributions, such plans may have a higher chance of underfunding, thus 

creating additional financial risk to PBGC. 

Figure 10: Sponsors with Speculative Grade Ratings Are More Likely to Use the 

Highest Allowable Interest Rate to Estimate Current Plan Liabilities 

0

25

50

75

100

Percentage of plans with current liability calculated using the highest allowable interest rate

Source: GAO analysis of PBGC Form 5500 research data and COMPUSTAT data.

Year

Plans with investment grade-rated, unrated, or privately held sponsors

Plans with speculative grade-rated sponsors

Average of 100 largest DB plans

1995 1996 1997 1998 1999 2000 2001 2002
Page 34 GAO-05-294 Private Pensions 

Financial strength of plan sponsors’ business operations has been a key 

determinant of risk to PBGC. Financially weak sponsors are, by the nature 

of the insurance offered by PBGC, likely to cause the most financial 

burden to PBGC and other premium payers. For instance, PBGC typically 

trustees a plan when a covered sponsor is unable to financially support the 

plan, such as in the event of bankruptcy or insolvency.50 Current funding 

rules, coupled with the presence of PBGC insurance, may create certain 

incentives for financially distressed plan sponsors to avoid or postpone 

contributions and increase benefits. Many of the minimum funding rules 

are designed so that sponsors of ongoing plans may smooth contributions 

over a number of years. Sponsors that are in financial distress, however, 

may have a more limited time horizon and place other financial priorities 

above “funding up” their pension plans. To the extent that moral hazard 

from the presence of PBGC insurance causes financially troubled sponsors 

to alter their funding behavior, PBGC’s potential exposure increases.51

Underfunded plans sponsored by financially weak firms pose the greatest 

immediate threat to PBGC’s single-employer program. PBGC’s best 

estimate of the total underfunding of plans sponsored by companies with 

credit ratings below investment grade and classified by PBGC as 

reasonably possible to terminate was an estimated $96 billion as of 

September 30, 2004 (see fig. 11).52

 50In particular, a distress termination of a single employer’s plan may occur if the employer 

meets one of the following conditions: (1) liquidation in bankruptcy or insolvency 

proceedings, (2) reorganization in bankruptcy or insolvency proceedings where bankruptcy 

court determines termination is necessary to allow reorganization, or (3) termination in 

order to enable payment of debts while staying in business or to avoid unreasonably 

burdensome pension costs caused by a decline of the employer’s covered workforce. 

51For a discussion of moral hazard incentives, see GAO, Private Pensions: Airline Plans’ 

Underfunding Illustrates Broader Problems with the Defined Benefit Pension System. 

GAO-05-108T (Washington, D.C.: Oct. 7, 2004). 

52Criteria used for classifying a company as a reasonably possible include, but are not 

limited to, one or more of the following conditions: The plan sponsor is in Chapter 11 

reorganization; funding waiver pending or outstanding with the IRS; sponsor missed 

minimum funding contribution; sponsor’s bond rating is below-investment-grade for 

Standard & Poor’s (BB+) or Moody’s (Ba1); sponsor has no bond rating but unsecured debt 

is below investment grade; or sponsor has no bond rating, but the ratio of long-term debt 

plus unfunded benefit liability to market value of shares is 1.5 or greater. 

Speculative Grade-Rated 

Sponsors Represent 

Greater Risks to PBGC 
Page 35 GAO-05-294 Private Pensions 

Figure 11: Total Underfunding among All DB Plans, and among Those Considered by PBGC as Reasonably Possible for 

Termination, Has Increased Markedly since 2001 

Note: Underfunding figures for non-reasonably possible plans represent the end of the calendar year, 

except for 2004, which represents the end of fiscal year 2004 (September 30, 2004). Figures for 

reasonably possible plans are taken as of the end of each fiscal year. 

PBGC’s claims experience shows that financially weak plans have been a 

source of substantial claims. Of the 41 largest claims in PBGC history in 

which a rating was known, 39 of the plan sponsors involved were credit 

rated as speculative grade 3 years prior to termination (see fig. 12). These 

claims account for 67 percent of the value of total gross claims on the 

single-employer program from 1975 to 2004.53 Most of the plan sponsors 

involved in these claims were given speculative grade ratings for many 

more years prior to their eventual termination. Even 10 years prior to plan 

 53Gross claims are the present value of future benefits less trusteed plan assets. 

0

100

200

300

400

500

Dollars in billions

Source: PBGC 2003 annual data book and PBGC 2004 annual report.

Year

Total underfunding among all PBGC insured DB plans other than plans considered reasonably 

possible for termination

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Underfunding among plans sponsored by firms that are speculatively rated and considered 

reasonably possible for termination
Page 36 GAO-05-294 Private Pensions 

termination, 33 of the 41 plan sponsors involved in the largest gross 

claims, in which the rating of the sponsor was known, were rated as 

speculative grade.54

Figure 12: Over 80 Percent of Sponsors Associated with PBGC’s Largest 

Termination Claims Had Speculative Grade Ratings 10 Years prior to Termination 

Note: Based on 41 of PBGC’s largest gross claims in which the rating of the sponsor was known, 

representing over 67 percent of total gross claims from 1975 to 2004. These 41 claims may include 

sponsors with more than one plan and are not limited to those plans in our sample. Ratings based on 

S&P rating. 

 54Speculative grade-rated issues tend to exhibit significant risk compared with other rated 

issues, even under short time horizons. Historical ratings indicate that speculative graderated plans are much more likely to default on obligations than investment grade-rated 

issues. For instance, over a 3-year period, the highest speculative grade (BB) rated issue 

defaults roughly 7 percent of the time, or 4.3 times more frequently than the lowest 

investment grade rating (BBB). Further, even lower-rated speculative grade issuers tend to 

have even higher default probabilities over a 3-year period—defaulting 19 and 45 percent of 

the time for B and CCC/C rated companies respectively. Typically, an issued rating does 

not change much from year to year. For example, looking at S&P ratings over the 1981-2003 

period, AAA-rated issuers were still rated AAA 1 year later 88 percent of the time and B 

rated-issuers remained B 1 year later 74 percent of the time. 

0

10

20

30

40

50

60

70

80

90

100

Percentage of plan sponsors associated with PBGC’s largest claims

Source: PBGC.

Years prior to date of plan termination 

Investment grade-rated 

10 9 8 7 2 1 6 543

Speculative grade-rated
Page 37 GAO-05-294 Private Pensions 

Widely reported recent large plan terminations by bankrupt sponsors and 

the financial consequences for PBGC have pushed pension reform into the 

spotlight of national concern. Our past work has shown that the roots of 

these current pension problems are broad and structural in nature, and 

that the private DB pension system requires meaningful and 

comprehensive reform. The Administration has already presented a 

proposal for reform and others may soon emerge from the Congress. While 

the complexity of the challenges suggests a considerable debate ahead, the 

emerging consensus that action needs to be taken may be cause for 

optimism. 

Our analysis here examines the effectiveness of certain funding rules and 

suggests that these rules have contributed to the general underfunding of 

pensions and, indirectly, to PBGC’s recent financial difficulties. The 

persistence of a large number of underfunded plans, even during the 

strong economic period of the late 1990s, implies that current funding 

rules are not stringent enough to ensure that sponsors can fund their 

pensions adequately. Perhaps even more troubling is that current rules for 

measuring and reporting plan assets and liabilities may not reflect true 

current values and may understate the funding problem. Further, the very 

small number of sponsors of underfunded plans that pay the AFC indicates 

that the rule needs to be strengthened if it is to serve as the primary 

mechanism for shoring up assets in underfunded plans. 

The current rules have the reasonable and important goals of long-term 

funding adequacy and short-term funding flexibility so as to reduce annual 

contribution volatility. However, our work shows that although the current 

system permits flexibility, it also permits reported plan funding to be 

inadequate, misleading, and opaque, and even so, funding and 

contributions for some plans can still swing wildly from year to year. This 

would appear not to serve the interest of any DB pension stakeholders 

effectively. The challenge is determining how to achieve a balance of 

interests: how to temper the need for funding flexibility with accurate 

measurement, adequate funding, and appropriate transparency. Our work 

shows that although the current system permits flexibility, it also permits 

reported plan funding to be inadequate, misleading, and opaque, and even 

so, funding and contributions for some plans can still swing wildly from 

year to year. This would appear not to serve the interest of any DB pension 

stakeholders effectively. 

Despite flaws in the funding rules, our work here shows that most of the 

largest plans appear to be adequately funded. Rules should acknowledge 

that funding will vary with cyclical economic conditions, and even 

Conclusions 
Page 38 GAO-05-294 Private Pensions 

sponsors who make regular contributions may find their plans 

underfunded on occasion. Periodic and mild underfunding is not usually a 

major concern, but it becomes a threat to workers’ benefits and to PBGC 

when the sponsor becomes financially weak and the risk of bankruptcy 

and plan termination becomes likely. This suggests that perhaps the 

stringency of certain funding rules can be adjusted depending on the 

financial strength of the sponsor, with stronger sponsors being allowed 

greater latitude in funding and contributions than weaker sponsors that 

might present a near-term bankruptcy risk.55 However, focusing more 

stringent funding obligations on weak plans and sponsors is difficult in 

that strong firms and industries can quickly become risky ones, and once 

sponsors and plans become too weak, it may be difficult for them to make 

larger contributions and still recover. 

It should be noted also that while change in the funding rules is an 

essential piece of the reform puzzle, it is certainly not the only piece. 

Indeed, pension reform is a challenge precisely because of the necessity of 

fusing together so many complex, and sometimes competing, elements 

into a comprehensive proposal. Ideally, effective reform would 

• improve the accuracy of plan asset and liability measurement while 

minimizing complexity and maintaining contribution flexibility; 

• develop a PBGC insurance premium structure that charges sponsors 

fairly, based on the risk their plans pose to PBGC, and provides 

incentives for sponsors to fund plans adequately; 

• address the issue of severely underfunded plans making lump-sum 

payments; 

• resolve outstanding controversies concerning cash balance and other 

hybrid plans by safeguarding the benefits of workers regardless of age; 

and 

• improve plan information transparency for PBGC, plan participants, 

unions, and investors in a manner that does not add considerable 

burden to plan sponsors. 

 55The Administration proposal moves in this direction by suggesting sponsors of different 

financial strength have different funding targets. See Strengthen Funding for Single 

Employer Pension Plans, U.S. Department of Labor, Employee Benefits Security 

Administration, February 7, 2005. 
Page 39 GAO-05-294 Private Pensions 

Developed in isolation, solutions to some of these concerns could erode 

the effectiveness of other reform components or introduce needless 

complexity. As deliberations on reform move forward, it will be important 

that each of these individual elements be designed so that all work in 

concert toward well-defined goals. 

This reform effort should also be understood in the context of the 

problems facing other components of retirement security and the federal 

budget generally. For example, Social Security, Medicare, and Medicaid 

serve the larger population of retired and disabled workers, many of 

whom are also affected by DB reform. The demographic dynamics of 

increased longevity in life and retirement affecting the DB system also 

affect these other programs, intensifying existing fiscal pressures on the 

federal budget. Thus, DB pension reform, with these other issues, has 

important implications both for the distribution of retirement income for 

current and future generations and for our overall success in addressing 

these broader budgetary challenges.56

Even with meaningful, carefully crafted reform, it is possible that some DB 

plan sponsors may choose to freeze or terminate their plans. Sponsor exit 

is a serious concern, given the important role DB plans play in providing 

retirement security. However, this is a natural consequence of the inherent 

trade-off that exists in a private pension system that on one hand depends 

on voluntary plan sponsorship and on the other is tax subsidized and 

backed by federal insurance in order to promote the retirement security of 

our nation’s workers. The overarching goals of balanced pension reform, 

and particularly of funding rule reform, should be to protect workers’ 

benefits by providing employers the flexibility they need in managing their 

pension plans while also holding those employers accountable for the 

promises they make to their employees. 

 56For more discussion, see GAO-04-325SP, pp. 54-57. 
Page 40 GAO-05-294 Private Pensions 

As we have noted in previous reports,57 the Congress should consider 

broad pension reform that is comprehensive in scope and balanced in 

effect. Along with changes in the areas of PBGC’s premium structure, 

lump-sum distributions, shutdown benefits, and other areas, funding rule 

changes should be an essential element of DB pension reform. Such 

reform may result in a system with features very different from the 

framework currently governing DB plans and PBGC. However, significant 

reforms that would place the DB system and PBGC on a sounder financial 

footing could also be enacted and could retain many of the features of the 

current regulatory system. Should the Congress choose to move in this 

latter direction, this report highlights certain areas where carefully crafted 

changes could improve plan funding. Specifically, the Congress should 

consider measures that include 

• Strengthening the additional funding charge. One way to do this 

would be to consider raising the threshold levels of funding that trigger 

the AFC so that any sponsor with a plan less than 90 percent funded 

would have to make additional contributions. So that plans do not have 

an incentive to fund just barely above 90 percent, additional 

consideration may be given for a gradual phase-in of the AFC for plans 

that are underfunded between 90 percent and 100 percent of current 

liability. Requiring that financially weak plans that owe an AFC base 

their contributions on termination liability rather than current liability 

might add stringency to the minimum funding rules and might be 

appropriate, since weak sponsors of underfunded plans present a 

greater risk of distress termination to PBGC than other sponsors. 

These reforms could be enacted singly or jointly, but each would 

subject more plans to an AFC, and the reforms would shore up at-risk 

plans before underfunding becomes severe. 

• Limiting the use of FSA credits toward meeting minimum 

funding requirements. We have noted that some sponsors repeatedly 

relied on FSA credits, such as a prior year credit balance or net interest 

credits, to avoid making cash contributions to their plans, and that this 

has been particularly problematic for underfunded plans prior to their 

 57See GAO-04-90; GAO-05-108T; GAO, Pension Benefit Guaranty Corporation: SingleEmployer Pension Insurance Program Faces Significant Long-Term Risks, GAO-03-873T 

(Washington, D.C.: Sept. 4, 2003); Pension Benefit Guaranty Corporation: Long-Term 

Financing Risks to Single-Employer Insurance Program Highlight Need for 

Comprehensive Reform, GAO-04-150T (Washington, D.C.: Oct. 14, 2003); Private Pensions: 

Changing Funding Rules and Enhancing Incentives Can Improve Plan Funding, 

GAO-04-176T (Washington, D.C.: Oct. 29, 2003). 

Matters for 

Congressional 

Consideration 
Page 41 GAO-05-294 Private Pensions 

termination. While FSA credits may have the benefit of moderating 

contribution volatility in the near term, they also have the weakness of 

allowing the sponsors of severely underfunded plans to avoid cash 

contributions and may contribute to volatility later. The Congress 

should consider ways, even if it retains the FSA, to scale back the 

substitution of credits for annual cash contributions. 

While admittedly an extremely complicated matter, meaningful effective 

reform must confront the issue of accurate measurement. We found that 

that the measurement techniques of assets and liabilities that are 

permitted under current funding rules can result in distortions masking 

the true funding status of a plan and can permit sponsors to avoid making 

plan contributions. Techniques that lead to misleading indicators of plan 

health and impede information transparency are a disservice to all key 

stakeholders; to plan participants in making retirement decisions; to 

unions seeking to bargain in the interests of their members; to current and 

potential shareholders in deciding where to invest; and finally to the 

public, which is the ultimate protector of employee benefits. 

We provided a draft of this report to the Department of Labor, Treasury, 

and PBGC. The Department of Labor and PBGC provided written 

comments, which appear in appendix III and appendix IV. Both the 

Department of Labor’s and PBGC’s comments generally agree with the 

findings and conclusions of our report. Treasury did not provide written 

comments. The Department of 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. 

Agency Comments 
Page 42 GAO-05-294 Private Pensions 

If you have any questions concerning this report, please contact me at 

(202) 512-7215. Contact points for our Office of Congressional Relations 

and Public Affairs may be found on the last page of this report. GAO staff 

who made contributions are listed in appendix V. 

Barbara Bovbjerg, Director 

Education, Workforce, and Income Security Issues 
Page 43 GAO-05-294 Private Pensions 

List of Congressional Committees 

The Honorable Charles E. Grassley 

Chairman 

The Honorable Max Baucus 

Ranking Minority Member 

Committee on Finance 

United States Senate 

The Honorable Michael B. Enzi 

Chairman 

The Honorable Edward M. Kennedy 

Ranking Minority Member 

Committee on Health, Education, Labor, and Pensions 

United States Senate 

The Honorable John A. Boehner 

Chairman 

The Honorable George Miller 

Ranking Minority Member 

Committee on Education and the Workforce 

House of Representatives 

The Honorable William M. Thomas 

Chairman 

The Honorable Charles B. Rangel 

Ranking Minority Member 

Committee on Ways and Means 

House of Representatives 
Appendix I: Scope and Methodology 

Page 44 GAO-05-294 Private Pensions 

To describe recent pension funding trends, we analyzed data from 

Schedule B of the Form 5500. This schedule contains information on plan 

assets, liabilities, contributions, funding standard account (FSA) credits 

and charges, and additional funding charge (AFC) calculations. 

Problems with the electronic data of the Form 5500 are well documented.1

To mitigate problems associated with the data we used Form 5500 

research data from the Pension Benefit Guaranty Corporation’s (PBGC) 

Policy, Research and Analysis Department (PRAD). PRAD analysts 

routinely and systematically correct the raw 5500 data submitted by plans, 

and PRAD 5500 data are thought to be the most accurate electronic 

versions. Although we did not independently audit the veracity of the 

PRAD data, we performed routine data reliability checks. In instances 

where the data reliability checks revealed inconsistencies, we contacted a 

PRAD analyst to check and, if appropriate, correct the electronic data 

using information provided to PRAD in hard copy. 

For our analysis, we worked with a subset of the PBGC research data that 

included the 100 largest plans, measured by current liability, annually from 

1995 to 2002.2

 In 2002, the most recent, nearly complete year of available 

Form 5500 data, these 100 plans, with average liabilities per plan of 

$6.7 billion and 94,000 participants, represented approximately 50 percent 

of the total liabilities and about 28 percent of the total participants of the 

approximately 30,000 defined benefit (DB) plans that filed a Form 5500 for 

plan year 2002 as of February 2005. Thus, while our sample data set 

represents only a small portion of the total plans in the single-employer 

program, it constitutes a significant proportion of the liabilities of the DB 

system and the financial risk to PBGC while allowing for more manageable 

analysis. We did not directly test or compare our sample for 

generalizability across the entire sample of single-employer plans. 

 1

See GAO, Private Pensions: Participants Need Information on the Risks of Investing in 

Employer Securities and the Benefits of Diversification, GAO-02-943 (Washington, D.C.: 

Sept. 6, 2002); Retirement Income Data: Improvements Could Better Support Analysis of 

Future Retirees’ Prospects, GAO-03-337 (Washington, D.C.: Mar. 21, 2003); Private 

Pensions: Multiemployer Plans Face Short- and Long-Term Challenges, GAO-04-423

(Washington, D.C.: Mar. 26, 2004); and Private Pensions: Publicly Available Reports 

Provide Useful but Limited Information on Plans’ Financial Condition, 

GAO-04-395 (Washington, D.C.: Mar. 31, 2004). 

2

Each year, our sample contains a new set of 100 largest plans based on the plan liabilities 

in that year. That is, from year to year, the 100 largest plans will add and subtract plans 

from other years’ 100 largest plans. 

Appendix I: Scope and Methodology 
Appendix I: Scope and Methodology 

Page 45 GAO-05-294 Private Pensions 

For 1999 and 2002, the best available data do not contain all possible 

plans, and therefore it is possible that in those years complete data sets 

would yield slightly different samples for our analysis. The 1999 data we 

received from PBGC came from a sample that was missing an estimated 

2,927 of the 37,536 plans in the single-employer program, because of 

missing electronic records in that year. The 2002 data came from a sample 

still missing approximately 300 plans, because of ongoing processing. We 

believe that neither of these factors significantly affects our findings or our 

conclusions. 

To identify how the AFC is calculated and applied, we studied how the 

relevant Employee Retirement Security Act of 1974 (ERISA) and Internal 

Revenue Code (IRC) funding rules are applied, conducted a literature 

review, and interviewed researchers, government officials, pension 

actuaries, and pension sponsor groups familiar with pension funding rules. 

To analyze potential risk to PBGC, we matched sponsor credit ratings 

from the Standard and Poor’s (S&P) COMPUSTAT database, provided to 

us by PBGC, to the sponsor’s pension plan data.3

 PBGC also provided us 

with detailed calculations to determine plans’ full funding limitations for 

purposes of the minimum funding requirements. Additionally, to analyze 

effects of maximum deductible contributions, we matched the results from 

a previously issued PBGC study on the subject to our sample of plans. Our 

work was done in accordance with generally accepted government 

auditing standards. 

 3

In each year of data we matched the relevant December ratings issue for that year. Plans 

sponsored by a company subsidiary were given the rating of the parent unless the 

subsidiary had its own rating. Additionally, the same sponsor may sponsor a number of 

plans in the largest 100 plans for any given year. We observe a number of sponsors with 

multiple plans in any given year of our sample. 
Appendix II: Statistics for Largest 100 

Defined Benefit Plans, 1995-2002 

Page 46 GAO-05-294 Private Pensions 

Table 2: Average Plan Size and Funding Levels 

(Dollar figures in millions of 2002 dollars) 

 Mean Median

Current liability $5,341.6 $3,065.7

Actuarial asset levels $6,019.3 $3,397.9

Number of participants (actual) 80,431 59,508

Plan funding levelsa 112.7% 106.2%

Plans below 100% funded 38.9 

Plans below 90% funded 10.4 

Plans below 80% funded 2.9 

Funding gap, plans below 100% fundedb $425.7 $215.7

Plans using highest allowable interest rate 

to calculate liabilities 62.0% 

Source: GAO analysis of PBGC Form 5500 research data. 

Notes: All figures represent per plan annual averages, from 1995 to 2002, except as described 

differently. Annual dollar figures adjusted to 2002 dollars using annual consumer price index (CPI) 

data. 

Median figures reported are the average of individual year median values. 

For analysis, each year contains that year’s 100 largest plans, ranked by current liabilities. From 1995 

to 2002, 187 unique plans appear in at least 1 year’s sample of 100 largest plans. See footnote 9 in 

main text for further explanation. 

a

Funding levels calculated using actuarially measured assets as a percentage of current liabilities. 

b

Funding gap equals current liabilities less actuarially valued assets, for underfunded plans. 

Table 3: Cash Contributions 

(Dollar figures in millions of 2002 dollars) 

Mean Median

Total cash contributions $97.4 $9.4

Contributions/minimum funding obligation 90.5% 19.1%

Sponsors forgoing cash contributions 62.5%

Underfunded plans receiving no cash contribution 41.1%

Source: GAO analysis of PBGC Form 5500 research data. 

Notes: All figures represent per plan annual averages, from 1995 to 2002, except as described 

differently. Annual dollar figures adjusted to 2002 dollars using annual CPI data. 

Median figures reported are the average of individual year median values. 

For analysis, each year contains that year’s 100 largest plans, ranked by current liabilities. From 1995 

to 2002, 187 unique plans appear in at least 1 year’s sample of 100 largest plans. See footnote 9 in 

main text for further explanation. 

Appendix II: Statistics for Largest 100 

Defined Benefit Plans, 1995-2002 
Appendix II: Statistics for Largest 100 

Defined Benefit Plans, 1995-2002 

Page 47 GAO-05-294 Private Pensions 

Table 4: Funding Standard Account (FSA) Credits, Other than Cash Contributions 

(Dollar figures in millions of 2002 dollars) 

 Mean Median

Plans drawing down accumulated credit balance 15.4%

Accumulated credit balance from prior years $573.7 $123.4

Net amortization credits -$27.8 $0

Full funding limitation credits $46.7 $17.0

Net interest credits $42.2 $4.9

Source: GAO analysis of PBGC Form 5500 research data. 

Notes: All figures represent per plan annual averages, from 1995 to 2002, except as described 

differently. Annual dollar figures adjusted to 2002 dollars using annual CPI data. 

Median figures reported are the average of individual year median values. 

For analysis, each year contains that year’s 100 largest plans, ranked by current liabilities. From 1995 

to 2002, 187 unique plans appear in at least 1 year’s sample of 100 largest plans. See footnote 9 in 

main text for further explanation. 

Table 5: Full Funding Limitation (FFL) 

(Dollar figures in millions of 2002 dollars) 

 Mean Median

FFL amount $645.6 $24.3

Plans with FFL = 0 60.1%

Sponsors contributing at least as much as FFL 64.4%

Instances in which plan making contribution at least 

equal to FFL used highest allowable interest rate 65.5%

Source: GAO analysis of PBGC Form 5500 research data. 

Notes: All figures represent per plan annual averages, from 1995 to 2002, except as described 

differently. Annual dollar figures adjusted to 2002 dollars using annual CPI data. 

Median figures reported are the average of individual year median values. 

For analysis, each year contains that year’s 100 largest plans, ranked by current liabilities. From 1995 

to 2002, 187 unique plans appear in at least 1 year’s sample of 100 largest plans. See footnote 9 in 

main text for further explanation. 
Appendix II: Statistics for Largest 100 

Defined Benefit Plans, 1995-2002 

Page 48 GAO-05-294 Private Pensions 

Table 6: Additional Funding Charge (AFC) 

Dollar figures in millions of 2002 dollars 

 Mean Median

Plans subject to AFCa 2.9

AFC amount assessed $234.1 $148.2

Current liabilities of plans subject to AFC $3,836.7 $3,693.6

Funding gap of plan assessed an AFC $837.1 $953.0

Funded percentage of plan subject to AFC 78.2% 74.7%

Plans below 90% funded subject to AFC 27.7%

Plans 80 to 90% funded subject to AFC 8.3%

Cash contribution, plans subject to AFC $185.7 $118.9

Plans subject to AFC forgoing cash contribution 30.4%

Plans subject to AFC drawing down credit balance 60.9%

Source: GAO analysis of PBGC Form 5500 research data. 

Notes: Figures in this table represent averages and medians of those plans subject to an AFC for the 

entire sample period, except as described differently. Annual dollar figures adjusted to 2002 dollars 

using annual CPI data. 

Median figures reported are the average of individual year median values. 

For analysis, each year contains that year’s 100 largest plans, ranked by current liabilities. From 1995 

to 2002, 187 unique plans appear in at least 1 year’s sample of 100 largest plans. See footnote 9 in 

main text for further explanation. 

a

This represents the average annual number of plans subject to an AFC. From 1995 to 2002, we 

observed 6 unique plans assessed an AFC, all of which had repeat AFC assessments. 
Appendix III: Comments from the Department 

of Labor 

Page 49 GAO-05-294 Private Pensions 

Appendix III: Comments from the 

Department of Labor 
Appendix IV: Comments from the Pension Benefit Guaranty Corporation 

Page 50 GAO-05-294 Private Pensions 

Appendix IV: Comments from the Pension 

Benefit Guaranty Corporation 
Appendix IV: Comments from the Pension Benefit Guaranty Corporation 

Page 51 GAO-05-294 Private Pensions 
Appendix V: GAO Contact and Staff 

Acknowledgments 

Page 52 GAO-05-294 Private Pensions 

Barbara Bovbjerg (202) 512-7215. 

In addition to the contact above, Charles A. Jeszeck, Charles J. Ford, 

Joseph Applebaum, Mark M. Glickman, Scott Heacock, Roger J. Thomas, 

and Amy Vassalotti made important contributions to this report. 

Appendix V: GAO Contact and Staff 

Acknowledgments 

Contact 

Staff 

Acknowledgments 
Glossary 

Page 53 GAO-05-294 Private Pensions 

Actuarial value of assets—the smoothed value of DB plan assets, 

reflecting recent market levels of assets. Rules dictate that the reported 

actuarial assets must be between 80 and 120 percent of market asset levels 

and cannot be consistently above or below market values. 

Additional funding charge (AFC)—a surcharge assessed to DB plans 

that fail specific funding level requirements that increases the minimum 

required funding obligation for the plan sponsor. 

Credit balance—the excess of credits over charges in a plan’s funding 

standard account, which can be carried forward to meet funding 

obligations in future years. 

Current liabilities—the measured value of a DB plan’s accrued benefits 

using an interest rate and other assumptions specified in applicable laws 

and regulations. 

Defined benefit (DB) pension plan—a pension plan that promises a 

guaranteed benefit, generally based on an employee’s salary and years of 

service. (A different type of pension plan, a defined contribution, or DC, 

plan, instead provides an individual account to an employee, to which 

employers, employees, or both make periodic contributions.) 

Employee Retirement Income Security Act of 1974 (ERISA)—the 

federal law that sets minimum standards regarding management, 

operation, and funding of pension plans sponsored by private employers. 

Full funding limitation (FFL)—a limit on the required amount a 

sponsor must contribute to a plan each year, dependent on the plan’s 

funding level. 

Funded ratio—the ratio of plan assets to plan liabilities. 

Funding standard account (FSA)—a plan’s annual accounting record, 

recording events that reflect an increase in a plan’s obligations (charges) 

and those that reflect an increase in the plan’s ability to pay benefits 

(credits). 

Maximum deductible contribution—the maximum a sponsor can 

generally contribute to a plan without facing an excise tax on the excess 

contribution. 

Glossary 
Glossary 

Page 54 GAO-05-294 Private Pensions 

Normal cost—the cost of pension benefits allocated to a specific plan 

year. 

Termination liabilities—the measured value of a DB plan’s accrued 

benefits, using assumptions appropriate for a terminating plan. 
Related GAO Products 

Page 55 GAO-05-294 Private Pensions 

Pension Benefit Guaranty Corporation Structural Problems Limit 

Agency's Ability to Protect Itself from Risk, GAO-05-360T. Washington, 

D.C.: March 2, 2005. 

Private Pensions: Airline Plans’ Underfunding Illustrates Broader 

Problems with the Defined Benefit Pension System. GAO-05-108T. 

Washington, D.C.: October 7, 2004. 

Pension Plans: Additional Transparency and Other Actions Needed in 

Connection with Proxy Voting. GAO-04-749. Washington, D.C.: August 10, 

2004. 

Private Pensions: Publicly Available Reports Provide Useful but Limited 

Information on Plans’ Financial Condition. GAO-04-395. Washington, 

D.C.: March 31, 2004. 

Private Pensions: Timely and Accurate Information Is Needed to 

Identify and Track Frozen Defined Benefit Plans. GAO-04-200R. 

Washington, D.C.: December 17, 2003. 

Pension Benefit Guaranty Corporation: Single-Employer Pension 

Insurance Program Faces Significant Long-Term Risks. GAO-04-90. 

Washington, D.C.: October 29, 2003. 

Private Pensions: Changing Funding Rules and Enhancing Incentives 

Can Improve Plan Funding. GAO-04-176T. Washington, D.C.: October 29, 

2003. 

Pension Benefit Guaranty Corporation: Long-Term Financing Risks to 

Single-Employer Insurance Program Highlight Need for Comprehensive 

Reform. GAO-04-150T. Washington, D.C.: October 14, 2003. 

Pension Benefit Guaranty Corporation: Single-Employer Pension 

Insurance Program Faces Significant Long-Term Risks. GAO-03-873T. 

Washington, D.C.: September 4, 2003. 

Options to Encourage the Preservation of Pension and Retirement 

Savings: Phase 2. GAO-03-990SP. Washington, D.C.: July 29, 2003. 

Private Pensions: Participants Need Information on Risks They Face in 

Managing Pension Assets at and during Retirement. GAO-03-810. 

Washington, D.C.: July 29, 2003. 

Related GAO Products 
Related GAO Products 

Page 56 GAO-05-294 Private Pensions 

Private Pensions: Process Needed to Monitor the Mandated Interest Rate 

for Pension Calculations. GAO-03-313. Washington, D.C.: February 27, 

2003. 

Answers to Key Questions About Private Pension Plans. GAO-02-745SP. 

Washington, D.C.: September 18, 2002. 

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