United States General Accounting Office 

GAO Report to Congressional Requesters 

October 2003 PENSION BENEFIT 

GUARANTY 

CORPORATION 

Single-Employer 

Pension Insurance 

Program Faces 

Significant Long-Term 

Risks 

GAO-04-90 

Highlights of GAO-04-90, a report to 

congressional requesters 

More than 34 million participants in 

30,000 single-employer defined 

benefit pension plans rely on a 

federal insurance program 

managed by the Pension Benefit 

Guaranty Corporation (PBGC) to 

protect their pension benefits, and 

the program's long-term financial 

viability is in doubt. Over the last 

decade, the program swung from a 

$3.6 billion accumulated deficit 

(liabilities exceeded assets), to a 

$10.1 billion accumulated surplus, 

and back to a $3.6 billion 

accumulated deficit, in 2002 

dollars. Furthermore, despite a 

record $9 billion in estimated 

losses to the program in 2002, 

additional severe losses may be on 

the horizon. PBGC estimates that 

financially weak companies 

sponsor plans with $35 billion in 

unfunded benefits, which 

ultimately might become losses to 

the program. 

GAO is not recommending 

executive action. However, given 

the long-term nature of the 

financial risks to PBGC’s singleemployer insurance program, the 

Congress should consider a 

comprehensive response that 

includes changes to strengthen 

plan funding and improve the 

transparency of plan information as 

well as consider proposals to 

modify program guarantees. In 

addition, PBGC’s premium 

structure should be re-examined to 

see whether premiums can better 

reflect the risk posed by various 

plans to the pension system. 

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

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Barbara 

Bovbjerg at (202) 512-7215 or 

bovbjergb@gao.gov. 

October 2003 

PENSION BENEFIT GUARANTY 

CORPORATION 

Single-Employer Pension Insurance 

Program Faces Significant Long-Term 

Risks 

The single-employer pension insurance program returned to an accumulated 

deficit in 2002 largely due to the termination, or expected termination, of 

several severely underfunded pension plans. Factors that contributed to the 

severity of the plans' underfunded condition included a sharp stock market 

decline, which reduced plan assets, and an interest rate decline, which 

increased plan termination costs. For example, PBGC estimates losses to the 

program from terminating the Bethlehem Steel pension plan, which was 

nearly fully funded in 1999 based on reports to the Internal Revenue Service 

(IRS), at $3.7 billion when it was terminated in 2002. The plan's assets had 

decreased by over $2.5 billion, while its liabilities had increased by about 

$1.4 billion since 1999. 

The single-employer program faces two primary risks to its long-term 

financial viability. First, the large losses in 2002 could continue or 

accelerate if, for example, structural problems in particular industries result 

in additional bankruptcies. Second, revenue from premiums and investments 

might be inadequate to offset program losses. Participant-based premium 

revenue might fall, for example, if the number of program participants 

decreases. Because of these risks, GAO has recently placed the singleemployer insurance program on its high-risk list of agencies with 

significant vulnerabilities to the federal government. 

While the recent decline in the single-employer program’s financial condition 

is not an immediate crisis, the threats to the program’s long-term viability 

should be addressed. Several reforms might be considered to reduce the 

risks to the program’s long-term financial viability. These include 

strengthening funding rules applicable to poorly funded plans, modifying 

program guarantees, restructuring premiums, and improving the availability 

of information about plan investments, termination funding, and program 

guarantees. Under each reform, several possible actions could be taken. For 

example, one way to modify program guarantees is to phase-in certain 

unfunded benefits, such as “shutdown benefits,” which may provide 

significant early retirement benefit subsidies to participants affected by a 

plant closing or a permanent layoff. 

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

2002 dollars (in billions) 

30 

25 

20 

15 

10 

5 

0 

-5 

-10 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 

Assets Liabilites Net position 

Source: PBGC annual reports. 
Contents 


Letter 

Results in Brief 


Background


Termination of Severely Underfunded Plans Was Primary Factor in 


Financial Decline of Single-Employer Program 

PBGC Faces Long-Term Financial Risks from a Potential 

Imbalance of Assets and Liabilities 

Several Reforms Might Reduce the Risks to the Program’s 

Financial Viability 

Conclusion 

Matters for Congressional Consideration 

Agency Comments 

1 

3 

4 

16 

24 

32 

39 

41 

41 

Appendix I Scope and Methodology 

Appendix II 	 Key Legislative Changes That Affected the SingleEmployer Program 

Appendix III The Administration Proposal for Pension Reform 

Appendix IV 	 Differences in Interest Rate Calculations Contribute 

to Differences between Termination and Current 

Liabilities 

Appendix V 	 Comments from the Pension Benefit Guaranty 

Corporation 53 

Appendix VI GAO Contacts and Staff Acknowledgments 54 

Contacts 54 

Staff Acknowledgments 54 

Page i GAO-04-90 Pension Benefit Guaranty Corporation 

43 

45 

46 

49 
Table 

Table 1: Key Legislative Changes to the Single-Employer Insurance 

Program Since ERISA Was Enacted 

Figures 

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

2002 10 

Figure 2: Participants and Plans Covered by the Single-Employer 

Insurance Program, 1980-2002 11 

Figure 3: Market Value of Single-Employer Program Assets in 

Revolving and Trust Funds at Year End, Fiscal Years 1990-

2002 13 

Figure 4: Total Return on the Investment of Single-Employer 

Program Assets, Fiscal Years 1990-2002 14 

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

2002 16 

Figure 6: Assets, Liabilities, and Funded Status of the Bethlehem 

Steel Corporation Pension Plan, 1992-2002 18 

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

Years 1992-2002 19 

Figure 8: Interest Rates on Long-Term High-Quality Corporate 

Bonds, 1990-2002 21 

Figure 9: PBGC Premium and Investment Income, 1976-2002 28 

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

2001 30 

Figure 11: Average Termination and Current Liability Funding 

Ratios for Plans Submitting Termination Liability Data to 

PBGC under Section 4010 of ERISA, Plan Years 1996 – 

2001 50 

Figure 12: PBGC Termination, and Highest and Lowest Current 

Liability, Interest Rates, 1996-2002 52 

Page ii GAO-04-90 Pension Benefit Guaranty Corporation 

45 
Abbreviations 

EBSA Employee Benefits Security Administration 


ERISA Employee Retirement and Income Security Act 


IRC Internal Revenue Code 


IRS Internal Revenue Service 


OMB Office of Management and Budget 


PIMS Pension Insurance Modeling System


PBGC Pension Benefit Guaranty Corporation 


SAR Summary Annual Report 


SARS Severe Acute Respiratory Syndrome 


S&P 500 Standard and Poor’s 500 


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Page iii GAO-04-90 Pension Benefit Guaranty Corporation 
United States General Accounting Office 

Washington, DC 20548 

October 29, 2003 


The Honorable John Boehner 


Chairman 


Committee on Education and the Workforce 


House of Representatives 


The Honorable Sam Johnson 


Chairman 


Subcommittee on Employer-Employee Relations


Committee on Education and the Workforce 


House of Representatives 


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


insurance program is a federal program to insure the benefits of the more 


than 34 million workers and retirees participating in private defined-


benefit pension plans.1

 Over the last few years, the program’s finances 


have taken a severe turn for the worse. From a $3.6 billion accumulated 


deficit in 1993, the program registered a $10.1 billion accumulated surplus 


(assets exceeded liabilities) in 2000 before returning to a $3.6 billion 


accumulated deficit, in 2002 dollars.2

 More fundamentally, the long-term 


viability of the program is at risk. Even after assuming responsibility for 


several severely underfunded pension plans and recording over $9 billion


in estimated losses in 2002, PBGC estimated that as of September 30, 2002, 


it faced exposure to approximately $35 billion in additional unfunded 


1

A defined-benefit plan promises a benefit that is generally based on an employee’s salary 

and years of service. The employer is responsible for funding the benefit, investing and 

managing plan assets, and bearing the investment risk. In contrast, under a defined 

contribution plan, benefits are based on the contributions to and investment returns on 

individual accounts, and the employee bears the investment risk. There are two federal 

insurance programs for defined-benefit plans: one for single-employer plans and another 

for multiemployer plans. Our work was limited to the PBGC program to insure the benefits 

promised by single-employer defined-benefit pension plans. Single-employer plans provide 

benefits to employees of one firm or, if plan terms are not collectively bargained, 

employees of several unrelated firms. 

2

PBGC estimates that its deficit had grown to about $8.8 billion at the end of August 2003 

based on its latest unaudited financial report. 

Page 1 GAO-04-90 Pension Benefit Guaranty Corporation 
liabilities from ongoing plans that were sponsored by financially weak 

companies and may terminate.3 

This risk involves an issue beyond PBGC’s current and future financial 

condition; it also relates to the need to protect the retirement security of 

millions of American workers and retirees. This report highlights some of 

the key issues in the debate about how to respond to the financial 

challenges facing the federal insurance program for single-employer 

defined-benefit plans. As you requested, we addressed the following 

issues: (1) what factors contributed to recent changes in the singleemployer pension insurance program’s financial condition, (2) what are 

the risks to the program’s long-term financial viability, and (3) what 

changes to the program might be considered to reduce those risks? 

To identify the factors that contributed to recent changes in the singleemployer program’s financial condition, we discussed with PBGC officials, 

and examined annual reports and other available information related to 

the funding and termination of three pension plans: the Anchor Glass 

Container Corporation Service Retirement Plan, the Pension Plan of 

Bethlehem Steel Corporation and Subsidiary Companies, and the Polaroid 

Pension Plan. We selected these plans because they represented the 

largest losses to PBGC in their respective industries in fiscal year 2002. 

PBGC estimates that, collectively, the plans represented over $4 billion in 

losses to the program at plan termination. To identify the primary risks to 

the long-term viability of the program and options to address the 

challenges facing the single-employer program, we interviewed pension 

experts at PBGC, at the Employee Benefits Security Administration of the 

Department of Labor, and in the private sector and reviewed analyses and 

other documents provided by them. To obtain additional information as to 

the risks facing PBGC from certain industries, we discussed with PBGC, 

3

PBGC estimates that by the end of fiscal year 2003, the amount of underfunding in 

financially troubled companies could exceed $80 billion. According to PBGC, for example, 

companies whose credit quality is below investment grade sponsor a number of plans. 

PBGC classified such plans as reasonably possible terminations if the sponsors’ financial 

condition and other factors did not indicate that termination of their plans was likely as of 

year-end. See PBGC 2002 Annual Report, p. 41. The independent accountants that audited 

PBGC’s financial statement reported that PBGC needs to improve its controls over the 

identification and measurement of estimated liabilities for probable and reasonably 

possible plan terminations. According to an official, PBGC has implemented new 

procedures focused on improving these controls. See Audit of the Pension Benefit 

Guaranty Corporation’s Fiscal Year 2002 and 2001 Financial Statements in PBGC 

Office of Inspector General Audit Report, 2003-3/23168-2 (Washington, D.C.: Jan. 30, 2003). 

Page 2 GAO-04-90 Pension Benefit Guaranty Corporation 
Results in Brief 

and reviewed annual and actuarial reports for the 2003 distress 

termination of the U.S. Airways pension plan for pilots. To determine what 

changes might be considered to reduce those risks, we reviewed proposals 

for reforming the single-employer program made by the Department of the 

Treasury, PBGC, and pension professionals. We performed our work from 

April through September 2003 in accordance with generally accepted 

government auditing standards. Our scope and methodology are explained 

more fully in appendix I. 

The termination, or expected termination, of several severely underfunded 

pension plans was the major reason for PBGC’s single-employer pension 

insurance program’s return to an accumulated deficit in 2002. Several 

underlying factors contributed to the severity of the plans’ underfunded 

condition at termination, including a sharp decline in the stock market, 

which reduced plan asset values, and a general decline in interest rates, 

which increased the cost of terminating defined-benefit pension plans. 

Falling stock prices and interest rates can dramatically reduce plan 

funding as the sponsor approaches bankruptcy. For example, while annual 

reports indicated the Bethlehem Steel Corporation pension plan was 

almost fully funded in 1999 based on reports to IRS, PBGC estimates that 

the value of the plan’s assets was less than 50 percent of the value of its 

guaranteed liabilities by the time it was terminated in 2002. The current 

minimum funding rules and other rules designed to encourage sponsors to 

fully fund their plans were not effective at preventing it from being 

severely underfunded at termination. 

Two primary risks could affect the long-term financial viability of the 

single-employer program. First, and most worrisome, the high level of 

losses experienced in 2002, due to the bankruptcy of companies with large 

underfunded defined-benefit pension plans, could continue or accelerate. 

This could occur if the economy recovers slowly or weakly, returns on 

plan investments remain poor, interest rates remain low, or the structural 

problems of particular industries with pension plans insured by PBGC 

result in additional bankruptcies. Second, PBGC might not receive 

sufficient revenue from premium payments and its own investments to 

offset the losses experienced to date or those that may occur in 

subsequent years. This could happen if participation in the singleemployer program falls or if PBGC’s return on assets falls below the rate it 

uses to calculate the present value of benefits promised in the future. 

Because of its current financial weaknesses, as well as the serious, longterm risks to the program’s future viability, we recently placed PBGC’s 

single-employer insurance program on our high-risk list. 

Page 3 GAO-04-90 Pension Benefit Guaranty Corporation 
Several reforms might be considered to reduce the risks to the singleemployer program’s long-term financial viability. These include 

strengthening funding rules applicable to poorly funded plans, modifying 

program guarantees, restructuring premiums, and improving the 

availability of information about plan investments, termination funding, 

and program guarantees. Under each reform, several possible actions 

could be taken. For example, one way to modify program guarantees is to 

phase-in certain unfunded benefits, such as “shutdown benefits.” In 

addition, one way premiums could be restructured would be to base them, 

not only on the degree of plan underfunding, but also on the economic 

strength of the plan sponsor, the degree of risk of the plan’s investment 

portfolio, the plan’s benefit structure, and participant demographics. 

Because the magnitude and uncertainty of the long-term financial risks 

pose particular challenges for the PBGC’s single-employer insurance 

program and the protection of the retirement security of millions of 

American workers and retirees, this report considers a matter for 

congressional consideration regarding several reforms that might be 

considered to reduce the risks to the single-employer program’s long-term 

financial viability. 

Background 	 Before enactment of the Employee Retirement and Income Security Act 

(ERISA) of 1974, few rules governed the funding of defined-benefit 

pension plans, and participants had no guarantees that they would receive 

the benefits promised. When Studebaker’s pension plan failed in the 

1960s, for example, many plan participants lost their pensions.4 Such 

experiences prompted the passage of ERISA to better protect the 

retirement savings of Americans covered by private pension plans. Along 

with other changes, ERISA established PBGC to pay the pension benefits 

of participants, subject to certain limits, in the event that an employer 

could not.5

 ERISA also required PBGC to encourage the continuation and 

4

The company and the union agreed to terminate the plan along the lines set out in the 

collective bargaining agreement: retirees and retirement-eligible employees over age 

60 received full pensions and vested employees under age 60 received a lump-sum payment 

worth about 15 percent of the value of their pensions. Employees whose benefit accruals 

had not vested, including all employees under age 40, received nothing. James A. Wooten, 

“The Most Glorious Story of Failure in Business: The Studebaker–Packard Corporation and 

the Origins of ERISA.” Buffalo Law Review, vol. 49 (Buffalo, NY: 2001): 731. 

5

Some defined-benefit plans are not covered by PBGC insurance; for example, plans 

sponsored by professional service employers, such as physicians and lawyers, with 25 or 

fewer employees. 

Page 4 GAO-04-90 Pension Benefit Guaranty Corporation 
maintenance of voluntary private pension plans and to maintain premiums 

set by the corporation at the lowest level consistent with carrying out its 

obligations.6 

Under ERISA, the termination of a single-employer defined-benefit plan 

results in an insurance claim with the single-employer program if the plan 

has insufficient assets to pay all benefits accrued under the plan up to the 

date of plan termination.7

 PBGC may pay only a portion of the claim 

because ERISA places limits on the PBGC benefit guarantee. For example, 

PBGC generally does not guarantee annual benefits above a certain 

amount, currently about $44,000 per participant at age 65.8

 Additionally, 

benefit increases in the 5 years immediately preceding plan termination 

are not fully guaranteed, though PBGC will pay a portion of these 

increases.9 The guarantee is limited to certain benefits, including so-called 

shutdown benefits—significant subsidized early retirement benefits—that 

are triggered by layoffs or plant closings that occur before plan 

termination. The guarantee does not generally include supplemental 

benefits, such as the temporary benefits that some plans pay to 

participants from the time they retire until they are eligible for Social 

Security benefits. 

Following enactment of ERISA, however, concerns were raised about the 

potential losses that PBGC might face from the termination of 

underfunded plans. To protect PBGC, ERISA was amended in 1986 to 

require that plan sponsors meet certain additional conditions before 

terminating an underfunded plan. For example, sponsors could voluntarily 

6

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

7

The termination of a fully funded defined-benefit pension plan is termed a standard 

termination. Plan sponsors may terminate fully funded plans by purchasing a group annuity 

contract from an insurance company under which the insurance company agrees to pay all 

accrued benefits or by paying lump-sum benefits to participants if permissible. Terminating 

an underfunded plan is termed a distress termination if the plan sponsor requests the 

termination or an involuntary termination if PBGC initiates the termination. PBGC may 

institute proceedings to terminate a plan if, among other things, the plan will be unable to 

pay benefits when due or the possible long-run loss to PBGC with respect to the plan may 

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

29 U.S.C. 1342(a). 

8

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

9

The guaranteed amount of the benefit increase is calculated by multiplying the number of 

years the benefit increase has been in effect, not to exceed 5 years, by the greater of 

(1) 20 percent of the monthly benefit increase calculated in accordance with PBGC 

regulations or (2) $20 per month. See 29 C.F.R. 4022.25(b). 

Page 5 GAO-04-90 Pension Benefit Guaranty Corporation 
terminate their underfunded plans only if they were bankrupt or generally 

unable to pay their debts without the termination. Key amendments to 

ERISA affecting the single-employer program are listed in appendix II. 

Concerns about PBGC finances also resulted in efforts to strengthen the 

minimum funding rules incorporated by ERISA in the Internal Revenue 

Code (IRC). In 1987, for example, the IRC was amended to require that 

plan sponsors calculate each plan’s current liability,10 and make additional 

contributions to the plan if it is underfunded to the extent defined in the 

law.11 As discussed in a report we issued earlier this year,12 concerns that 

the 30-year Treasury bond rate no longer resulted in reasonable current 

10Under the IRC, current liability means all liabilities to employees and their beneficiaries 

under the plan. See 26 U.S.C. 412(l)(7)(A). In calculating current liabilities, the IRC requires 

plans to use an interest rate from within a permissible range of rates. See 26 U.S.C. 

412(b)(5)(B). In 1987, the permissible range was not more than 10 percent above, and not 

more than 10 percent below, the weighted average of the rates of interest on 30-year 

Treasury bond securities during the 4-year period ending on the last day before the 

beginning of the plan year. The top of the permissible range was gradually reduced by 

1 percent per year beginning with the 1995 plan year to not more than 5 percent above the 

weighted average rate effective for plan years beginning in 1999. The top of the permissible 

range was increased to 20 percent above the weighted average rate for 2002 and 2003. The 

weighted average rate is calculated as the average yield over 48 months with rates for the 

most recent 12 months weighted by 4, the second most recent 12 months weighted by 3, the 

third most recent 12 months weighted by 2, and the fourth weighted by 1. 

11Under the additional funding requirement rule, a single-employer plan sponsored by an 

employer with more than 100 employees in defined-benefit plans is subject to a deficit 

reduction contribution for a plan year if the value of plan assets is less than 90 percent of 

its current liability. However, a plan is not subject to the deficit reduction contribution if 

the value of plan assets (1) is at least 80 percent of current liability and (2) was at least 

90 percent of current liability for each of the 2 immediately preceding years or each of the 

second and third immediately preceding years. To determine whether the additional 

funding rule applies to a plan, the IRC requires sponsors to calculate current liability using 

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

12U.S. General Accounting Office, Private Pensions: Process Needed to Monitor the 

Mandated Interest Rate for Pension Calculations, GAO-03-313 (Washington, D.C.: Feb. 27, 

2003). 

Page 6 GAO-04-90 Pension Benefit Guaranty Corporation 
liability calculations has led both the Congress and the administration to 

propose alternative rates for these calculations.13 

Despite the 1987 amendments to ERISA, concerns about PBGC’s financial 

condition persisted. In 1990, as part of our effort to call attention to highrisk areas in the federal government, we noted that weaknesses in the 

single-employer insurance program’s financial condition threatened 

PBGC’s long-term viability.14 We stated that minimum funding rules still 

did not ensure that plan sponsors would contribute enough for terminating 

plans to have sufficient assets to cover all promised benefits. In 1992, we 

also reported that PBGC had weaknesses in its internal controls and 

financial systems that placed the entire agency, and not just the singleemployer program, at risk.15 Three years later, we reported that legislation 

enacted in 1994 had strengthened PBGC’s program weaknesses and that 

we believed improvements had been significant enough for us to remove 

the agency’s high-risk designation.16 Since that time, we have continued to 

monitor PBGC’s financial condition and internal controls. For example, in 

1998, we reported that adverse economic conditions could threaten 

PBGC’s financial condition despite recent improvements;17 in 2000, we 

reported that contracting weaknesses at PBGC, if uncorrected, could 

13In October 2003, the House passed the Pension Funding Equity Act of Act of 2003 

(H.R. 3108), which for plan years beginning in 2004 and 2005 would temporarily change the 

permissible range and interest rate for current liability calculations to not above and not 

more than 10 percent below, the weighted average of a rate based on one or more indices 

of conservatively invested long-term corporate bonds. In July of 2003, the Department of 

the Treasury unveiled The Administration Proposal to Improve the Accuracy and 

Transparency of Pension Information. Its stated purpose is to improve the accuracy of 

the pension liability discount rate, increase the transparency of pension plan information, 

and strengthen safeguards against pension underfunding. See appendix III. 

14Letter to the Chairman, Senate Committee on Governmental Affairs and House 

Committee on Government Operations, GAO/OCG-90-1, Jan. 23, 1990. GAO’s high-risk 

program has increasingly focused on those major programs and operations that need 

urgent attention and transformation to ensure that our national government functions in 

the most economical, efficient, and effective manner. Agencies or programs receiving a 

“high risk” designation receive greater attention from GAO and are assessed in regular 

reports, which generally coincide with the start of each new Congress. 

15U.S. General Accounting Office, High-Risk Series: Pension Benefit Guaranty 

Corporation, GAO/HR-93-5 (Washington, D.C.: Dec. 1992). 

16U.S. General Accounting Office, High-Risk Series: An Overview, GAO/HR-95-1 

(Washington, D.C.: Feb. 1995). 

17U.S. General Accounting Office, Pension Benefit Guaranty Corporation: Financial 

Condition Improving but Long-Term Risks Remain, GAO/HEHS-99-5 (Washington, D.C.: 

Oct. 16, 1998). 

Page 7 GAO-04-90 Pension Benefit Guaranty Corporation 
result in PBGC paying too much for required services;18 and this year, we 

reported that weaknesses in the PBGC budgeting process limited its 

control over administrative expenses.19 

In 1997, we reported that the cash-based federal budget, which focuses on 

annual cash flows, does not adequately reflect the cost or the economic 

impact of federal insurance programs, including the single-employer 

pension insurance program.20 This is true because, generally, cost is only 

recognized in the budget when claims are paid rather than when the 

commitment is made. The cost of pension insurance is further obscured in 

the budget because while its annual net cash flows reduce the budget 

deficit, PBGC’s growing long-term commitment to pay pension benefits 

has no effect on the deficit. For example, the liabilities from terminated 

underfunded pension plans taken over by PBGC are not recognized in the 

budget. We concluded that the use of accrual concepts in the budget for 

PBGC and other insurance programs has the potential to better inform 

budget choices. We also stated, however, that agencies, such as PBGC, 

might need to develop and test methodologies that would enable them to 

generate reasonable and unbiased cost estimates of the risk assumed by 

the government, which are critical to the successful implementation of 

accrual-based budgeting for insurance programs.21 As such, as a first step 

toward developing an accrual-based budget, we recommended that the 

Office of Managemetn and Budget (OMB) encourage agencies to develop 

methodologies and provide cost information on a risk-assumed basis in 

the budget document along side the cash-based budget information it 

currently provides. OMB agreed with our conclusions and noted that they 

would like to pursue such improvements but was not doing so because it 

did not have the expertise that would be required. 

18U.S. General Accounting Office, Pension Benefit Guaranty Corporation: Contracting 

Management Needs Improvement, GAO/HEHS-00-130 (Washington, D.C.: Sept. 18, 2000). 

19U.S. General Accounting Office, Pension Benefit Guaranty Corporation: Statutory 

Limitation on Administrative Expenses Does Not Provide Meaningful Control, 

GAO-03-301 (Washington, D.C.: Feb. 28, 2003). 

20U.S. General Accounting Office, Budget Issues: Budgeting for Federal Insurance 

Programs, GAO/AIMD-97-16 (Washington D.C.: Sept. 30, 1997). 

21In most cases, the risk-assumed approach would be analogous to a premium rate-setting 

process in that it looks at the long-term expected cost of an insurance commitment at the 

time the insurance commitment is extended. The risk assumed by the government is 

essentially that portion of a full risk-based premium not charged to the insured. 

Page 8 GAO-04-90 Pension Benefit Guaranty Corporation 
PBGC receives no direct federal tax dollars to support the single-employer 

pension insurance program. The program receives the assets of terminated 

underfunded plans and any of the sponsor’s assets that PBGC recovers 

during bankruptcy proceedings.22 PBGC finances the unfunded liabilities of 

terminated plans with (1) premiums paid by plan sponsors and (2) income 

earned from the investment of program assets. 

Initially, plan sponsors paid only a flat-rate premium of $1 per participant 

per year; however, the flat rate has been increased over the years and is 

currently $19 per participant per year. To provide an incentive for 

sponsors to better fund their plans, a variable-rate premium was added in 

1987. The variable-rate premium, which started at $6 for each $1,000 of 

unfunded vested benefits, was initially capped at $34 per participant. The 

variable rate was increased to $9 for each $1,000 of unfunded vested 

benefits starting in 1991, and the cap on variable-rate premiums was 

removed starting in 1996. Figure 1 shows that, after increasing sharply in 

the 1980s, flat-rate premium income declined from $753 million in 1993 to 

$654 million in 2002, in constant 2002 dollars.23 Income from the variablerate premium fluctuated widely over that period. 

22According to PBGC officials, PBGC files a claim for all unfunded benefits in bankruptcy 

proceedings. However, PBGC generally recovers only a small portion of the total unfunded 

benefit amount in bankruptcy proceedings, and the recovered amount is split between 

PBGC (for unfunded guaranteed benefits) and participants (for unfunded nonguaranteed 

benefits). 

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

2002. 

Page 9 GAO-04-90 Pension Benefit Guaranty Corporation 
Figure 1: Flat- and Variable-Rate Premium Income for the Single-Employer Pension 

Insurance Program, Fiscal Years 1975-2002 

Income (2002 dollars in millions) 

1,400 

1,200 

1,000 

800 

600 

400 

200 

0 

1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 

Fiscal year 

Variable-rate premiums 

Flat-rate premiums 

Source: PBGC. 

Note: PBGC follows accrual basis accounting, and as a result, included in the fiscal year 2002 

statement an estimate of variable-rate premium income for the period covering January 1 through 

September 30, 2002, for plans whose filings were not received by September 30, 2002. We adjusted 

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

The slight decline in flat-rate premium revenue over the last decade, in real 

dollars, indicates that the increase in insured participants has not been 

sufficient to offset the effects of inflation over the period. Essentially, 

while the number of participants has grown since 1980, growth has been 

sluggish. Additionally, after increasing during the early 1980s, the number 

of insured single-employer plans has decreased dramatically since 

1986. (See fig. 2.) 

Page 10 GAO-04-90 Pension Benefit Guaranty Corporation 
Figure 2: Participants and Plans Covered by the Single-Employer Insurance Program, 1980-2002 

Number of participants (millions) Number of plans (thousands) 

40 120 

110 

35 

100 

30 90 

80 

25 

70 

20 60 

50 

15 

40 

10 30 

20 

5 

10 

0 0 

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 

Fiscal year 

Source: PBGC. 

Insured participants 

Plans 

The decline in variable-rate premiums in 2002 may be due to a number of 

factors. For example, all else equal, an increase in the rate used to 

determine the present value of benefits reduces the degree to which 

reports indicate plans are underfunded, which reduces variable-rate 

premium payments. The Job Creation and Worker Assistance Act of 

2002 increased the statutory interest rate for variable-rate premium 

calculations from 85 percent to 100 percent of the interest rate on 30-year 

U.S. Treasury securities for plan years beginning after December 31, 2001, 

and before January 1, 2004.24 

Investment income is also a large source of funds for the single-employer 

insurance program. The law requires PBGC to invest a portion of the funds 

generated by flat-rate premiums in obligations issued or guaranteed by the 

United States, but gives PBGC greater flexibility in the investment of other 

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

Page 11 GAO-04-90 Pension Benefit Guaranty Corporation 
assets.25 For example, PBGC may invest funds recovered from terminated 

plans and plan sponsors in equities, real estate, or other securities and 

funds from variable-rate premiums in government or private fixed-income 

securities. According to PBGC, however, by policy, it invests all premium 

income in Treasury securities. As a result of the law and investment 

policies, the majority of the single-employer program’s assets are invested 

in U.S. government securities. (See fig. 3.) 

25PBGC accounts for single-employer program assets in separate trust and revolving funds. 

PBGC accounts for the assets of terminated plans and plan sponsors in a trust fund, which, 

according to PBGC, may be invested in equities, real estate, or other securities. PBGC 

accounts for single-employer program premiums in two revolving funds. One revolving 

fund is used for all variable-rate premiums, and that portion of the flat-rate premium 

attributable to the flat-rate in excess of $8.50. The law states that PBGC may invest this 

revolving fund in such obligations as it considers appropriate. See 29 U.S.C. 1305(f). The 

second revolving fund is used for the remaining flat-rate premiums, and the law restricts 

the investment of this revolving fund to obligations issued or guaranteed by the United 

States. See 29 U.S.C. 1305(b)(3). 

Page 12 GAO-04-90 Pension Benefit Guaranty Corporation 
Figure 3: Market Value of Single-Employer Program Assets in Revolving and Trust Funds at Year End, Fiscal Years 1990-2002 

Market value (2002 dollars in billions) 

25 

20 

15 

10 

5 

0 

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 

Other 

Equities 

U.S. Government securities 

Source: PBGC annual reports. 

Note: Other includes fixed-maturity securities, other than U.S. government securities, such as 

corporate bonds. In 2002, fixed-maturity securities, other than U.S. government securities, totaled 

$946 million. We adjusted PBGC data using the Consumer Price Index for All Urban Consumers: All 

Items. 

Since 1990, except for 3 years, PBGC has achieved a positive return on the 

investments of single-employer program assets. (See fig 4.) According to 

PBGC, over the last 10 years, the total return on these investments has 

averaged about 10 percent. 

Page 13 GAO-04-90 Pension Benefit Guaranty Corporation 
Figure 4: Total Return on the Investment of Single-Employer Program Assets, Fiscal Years 1990-2002 

Total return (percent) 

30 27.7 

25 

20 

15 

10 

5 

0 

-5 -3.9 

24.4 

11.2 

24.1 

8.5 

21.9 

14.4 

3.6 

13.2 

-3.3 

2.1 

-6.4 

-10 

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 

Fiscal year 

Source: PBGC annual reports. 

For the most part, liabilities of the single-employer pension insurance 

program are comprised of the present value of insured participant 

benefits. PBGC calculates present values using interest rate factors that, 

along with a specified mortality table, reflect annuity prices, net of 

administrative expenses, obtained from surveys of insurance companies 

conducted by the American Council of Life Insurers.26 In addition to the 

estimated total liabilities of underfunded plans that have actually 

terminated, PBGC includes in program liabilities the estimated unfunded 

liabilities of underfunded plans that it believes will probably terminate in 

the near future.27 PBGC may classify an underfunded plan as a probable 

termination when, among other things, the plan’s sponsor is in liquidation 

under federal or state bankruptcy laws. 

26In 2002, PBGC used an interest rate factor of 5.70 percent for benefit payments through 

2027 and a factor of 4.75 percent for benefit payments in the remaining years. 

27Under Statement of Financial Accounting Standard Number 5, loss contingencies are 

classified as probable if the future event or events are likely to occur. 

Page 14 GAO-04-90 Pension Benefit Guaranty Corporation 
The single-employer program has had an accumulated deficit—that is, 

program assets have been less than the present value of benefits and other 

liabilities—for much of its existence. (See fig. 5.) In fiscal year 1996, the 

program had its first accumulated surplus, and by fiscal year 2000, the 

accumulated surplus had increased to almost $10 billion, in 2002 dollars. 

However, the program’s finances reversed direction in 2001, and at the end 

of fiscal year 2002, its accumulated deficit was about $3.6 billion. PBGC 

estimated that this deficit had grown to $8.8 billion by August 31, 2003. 

Despite this large deficit, according to a PBGC analysis, the singleemployer program was estimated to have enough assets to pay benefits 

through 2019, given the program’s conditions and PBGC assumptions as of 

the end of fiscal year 2002.28 Losses since that time may have shortened the 

period over which the program will be able to cover promised benefits. 

28The estimate assumes: (1) a rate of return on all PBGC assets of 5.8 percent and a 

discount rate on future benefits of 5.67 percent; (2) no premium income and no future 

claims beyond all plans with terminations that were deemed probable as of September 30, 

2002; (3) administrative expenses of $225 million in fiscal year 2003, $229 million per year 

for fiscal years 2004-14, and $0 thereafter; (4) mid-year termination for probables; and 

(5) that PBGC does not assume control of probable assets and future benefits until the date 

of plan termination. 

Page 15 GAO-04-90 Pension Benefit Guaranty Corporation 
Figure 5: Assets, Liabilities, and Net Position of the Single-Employer Pension Insurance Program, Fiscal Years 1976-2002 

2002 Dollars in billions 

30 

25 

20 

15 

10 

5 

0 

-5 

-10 

1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 

Assets 

Liabilities 

Net position 

Note: Amounts for 1986 do not include plans subsequently returned to a reorganized LTV 

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

Items. 

The financial condition of the single-employer pension insurance program 

returned to an accumulated deficit in 2002 largely due to the termination, 

or expected termination, of several severely underfunded pension plans. In 

1992, we reported that many factors contributed to the degree plans were 

underfunded at termination, including the payment at termination of 

additional benefits, such as subsidized early retirement benefits, which 

have been promised to plan participants if plants or companies ceased 

operations.29 These factors likely contributed to the degree that plans 

terminated in 2002 were underfunded. Factors that increased the severity 

of the plans’ unfunded liability in 2002 were the recent sharp decline in the 

Source: PBGC annual reports. 

Termination of 

Severely Underfunded 

Plans Was Primary 

Factor in Financial 

Decline of SingleEmployer Program 

29U.S. General Accounting Office, Pension Plans: Hidden Liabilities Increase Claims 

Against Government Insurance Programs, GAO/HRD-93-7(Washington, D.C.: Dec. 30, 

1992). 

Page 16 GAO-04-90 Pension Benefit Guaranty Corporation 
stock market and a general decline in interest rates. The current minimum 

funding rules and variable-rate premiums were not effective at preventing 

those plans from being severely underfunded at termination. 

PBGC Assumed 

Responsibility for Several 

Severely Underfunded 

Plans in 2002 

Total estimated losses in the single-employer program reported in PBGC 

annual reports increased from $705 million in fiscal year 2001 to 

$9.3 billion in fiscal year 2002. In addition to $3.0 billion in losses from the 

unfunded liabilities of terminated plans, the $9.3 billion included 

$6.3 billion in losses from the unfunded liabilities of plans that were 

expected to terminate in the near future. Nearly all of the terminations 

considered probable at the end of fiscal year 2002 have already occurred. 

For example, in December 2002, PBGC involuntarily terminated an 

underfunded Bethlehem Steel Corporation pension plan, which resulted in 

the single-employer program assuming responsibility for about $7.2 billion 

in PBGC-guaranteed liabilities, about $3.7 billion of which was not funded 

at termination. 

Much of the program’s losses resulted from the termination of 

underfunded plans sponsored by failing steel companies. PBGC estimates 

that in 2002, underfunded steel company pension plans accounted for 

80 percent of the $9.3 billion in program losses for the year. The three 

largest losses in the single-employer program’s history resulted from the 

termination of underfunded plans sponsored by failing steel companies: 

Bethlehem Steel, LTV Steel, and National Steel. All three plans were either 

completed terminations or listed as probable terminations for 2002. Giant 

vertically integrated steel companies, such as Bethlehem Steel, have faced 

extreme economic difficulty for decades, and efforts to salvage their 

defined-benefit plans have largely proved unsuccessful. According to 

PBGC’s executive director, underfunded steel company pension plans 

have accounted for 58 percent of PBGC single-employer losses since 1975. 

Plan Unfunded Liabilities 

Were Increased by Stock 

Market and Interest Rate 

Declines 

The termination of underfunded plans in 2002 occurred after a sharp 

decline in the stock market had reduced plan asset values and a general 

decline in interest rates had increased plan liability values, and the 

sponsors did not make the contributions necessary to adequately fund the 

plans before they were terminated. The combined effect of these factors 

was a sharp increase in the unfunded liabilities of the terminating plans. 

According to annual reports (Annual Return/Report of Employee Benefit 

Plan, Form 5500) submitted by Bethlehem Steel Corporation, for example, 

in the 7 years from 1992 to 1999, the Bethlehem Steel pension plan went 

from 86 percent funded to 97 percent funded. (See fig. 6.) From 1999 to 

Page 17 GAO-04-90 Pension Benefit Guaranty Corporation 
plan termination in December 2002, however, plan funding fell to 

45 percent as assets decreased and liabilities increased, and sponsor 

contributions were not sufficient to offset the changes. 

Figure 6: Assets, Liabilities, and Funded Status of the Bethlehem Steel Corporation 

Pension Plan, 1992-2002 

Dollars in billions Percent 

8.0 

7.0 

6.0 

5.0 

4.0 

3.0 

2.0 

1.0 

0 

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 

Assets 

Liabilities 

Funded percentage 

Source: Annual Form 5500 reports and PBGC. 

120 

100 

80 

60 

40 

20 

0 

Note: Assets and liabilities for 1992 through 2001 are as of the beginning of the plan year. During 

that period, the interest rate used by Bethlehem Steel to value current liabilities decreased from 

9.26 percent to 6.21 percent. Assets and liabilities for 2002 are PBGC estimates at termination in 

December 2002. Termination liabilities were valued using a rate of 5 percent. 

A decline in the stock market, which began in 2000, was a major cause of 

the decline in plan asset values, and the associated increase in the degree 

that plans were underfunded at termination. For example, while total 

returns for stocks in the Standard and Poor’s 500 index (S&P 500) 

exceeded 20 percent for each year from 1995 through 1999, they were 

negative starting in 2000, with negative returns reaching 22.1 percent in 

2002. (See fig. 7.) Surveys of plan investments by Greenwich Associates 

Page 18 GAO-04-90 Pension Benefit Guaranty Corporation 
indicated that defined-benefit plans in general had about 62.8 percent of 

their assets invested in U.S. and international stocks in 1999.30 

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

Total return (percent) 

37.6 

7.6 

10.1 

1.3 

23.0 

33.4 

28.6 

21.0 

-9.1 

-11.9 

-22.1 

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 

Source: Standard and Poor's. 

A stock market decline as severe as the one experienced from 

2000 through 2002 can have a devastating effect on the funding of plans 

that had invested heavily in stocks. For example, according to a survey,31 

the Bethlehem Steel defined-benefit plan had about 73 percent of its assets 

(about $4.3 billion of $6.1 billion) invested in domestic and foreign stocks 

on September 30, 2000. One year later, assets had decreased $1.5 billion, or 

25 percent, and when the plan was terminated in December 2002, its assets 

had been reduced another 23 percent to about $3.5 billion—far less than 

needed to finance an estimated $7.2 billion in PBGC-guaranteed 

liabilities.32 Over that same general period, stocks in the S&P 500 had a 

negative return of 38 percent. 

302002 U.S. Investment Management Study, Greenwich Associates, Greenwich, Conn. 

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

32According to the survey, the Bethlehem Steel Corporation pension plan made benefit 

payments of $587 million between Sept. 30, 2000, and Sept. 30, 2001. Pensions and 

Investments, www.pionline.com/pension/pension.cfm (downloaded on June 13, 2003). 

Page 19 GAO-04-90 Pension Benefit Guaranty Corporation 

40 

35 

30 

25 

20 

15 

10 

5 

0 

-5 

-10 

-15 

-20 

-25 

-30 
In addition to the possible effect of the stock market’s decline, a drop in 

interest rates likely had a negative effect on plan funding levels by 

increasing plan termination costs. Lower interest rates increase plan 

termination liabilities by increasing the present value of future benefit 

payments, which in turn increases the purchase price of group annuity 

contracts used to terminate defined-benefit pension plans.33 For example, a 

PBGC analysis indicates that a drop in interest rates of 1 percentage point, 

from 6 percent to 5 percent, increased the termination liabilities of the 

Bethlehem Steel pension plan by about 9 percent, which indicates the cost 

of terminating the plan through the purchase of a group annuity contract 34 would also have increased. 

Relevant interest rates may have declined 3 percentage points or more 

since 1990.35 For example, interest rates on long-term high-quality 

corporate bonds approached 10 percent at the start of the 1990s, but were 

below 7 percent at the end of 2002. (See fig. 8.) 

33Present value calculations reflect the time value of money: A dollar in the future is worth 

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

calculation requires an assumption about the interest rate, which reflects how much could 

be earned from investing today’s dollars. Assuming a lower interest rate increases the 

present value of future payments. 

34The magnitude of an increase or decrease in plan liabilities associated with a given 

change in discount rates would depend on the demographic and other characteristics of 

each plan. 

35To terminate a defined-benefit pension plan without submitting a claim to PBGC, the plan 

sponsor determines the benefits that have been earned by each participant up to the time 

of plan termination and purchases a single-premium group annuity contract from an 

insurance company, under which the insurance company guarantees to pay the accrued 

benefits when they are due. Interest rates on long-term, high-quality fixed-income securities 

are an important factor in pricing group annuity contracts because insurance companies 

tend to invest premiums in such securities to finance annuity payments. Other factors that 

would have affected group annuity prices include changes in insurance company 

assumptions about mortality rates and administrative costs. 

Page 20 GAO-04-90 Pension Benefit Guaranty Corporation 
Figure 8: Interest Rates on Long-Term High-Quality Corporate Bonds, 1990-2002 

Interest rate (percent) 

Jan.-90 Jan.-91 Jan. -92 Jan. -93 Jan. -94 Jan. -95 Jan. -96 Jan. -97 Jan. -98 Jan. -99 Jan. -00 Jan. -01 Jan. -02 

Source: Moody's Investor Services. 

Minimum Funding Rules 

and Variable-Rate 

Premiums Did Not Prevent 

Plans from Being Severely 

Underfunded 

IRC minimum funding rules and ERISA variable rate premiums, which are 

designed to ensure plan sponsors adequately fund their plans, did not have 

the desired effect for the terminated plans that were added to the singleemployer program in 2002. The amount of contributions required under 

IRC minimum funding rules is generally the amount needed to fund 

benefits earned during that year plus that year’s portion of other liabilities 

that are amortized over a period of years.36 Also, the rules require the 

sponsor to make an additional contribution if the plan is underfunded to 

the extent defined in the law. However, plan funding is measured using 

current liabilities, which a PBGC analysis indicates have been typically 

less than termination liabilities.37 Additionally, plans can earn funding 

credits, which can be used to offset minimum funding contributions in 

later years, by contributing more than required according to minimum 

funding rules. Therefore, sponsors of underfunded plans may avoid or 

36Minimum funding rules permit certain plan liabilities, such as past service liabilities, to be 

amortized over specified time periods. See 26 U.S.C. 412(b)(2)(B). Past service liabilities 

occur when benefits are granted for service before the plan was set up or when benefit 

increases after the set up date are made retroactive. 

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

Page 21 GAO-04-90 Pension Benefit Guaranty Corporation 

10 

9 

8 

7 

6 

5 

0 
reduce minimum funding contributions to the extent their plan has a credit 

balance in the account, referred to as the funding standard account, used 

by plans to track minimum funding contributions.38 

While minimum funding rules may encourage sponsors to better fund their 

plans, the rules require sponsors to assess plan funding using current 

liabilities, which a PBGC analysis indicates have been typically less than 

termination liabilities. Current and termination liabilities differ because 

the assumptions used to calculate them differ. For example, some plan 

participants may retire earlier if a plan is terminated than they would if the 

plan continues operations, and lowering the assumed retirement age 

generally increases plan liabilities, especially if early retirement benefits 

are subsidized. With respect to two of the terminated underfunded pension 

plans that we examine, for example, a PBGC analysis indicates: 

• 	 The retirement age assumption for the Anchor Glass pension plan on an 

ongoing plan basis was 65 for separated vested participants. However, the 

retirement age assumption appropriate for those participants on a 

termination basis was 58—a decrease of 7 years. According to PBGC, 

changing retirement age assumptions for all participants, including 

separated vested participants, resulted in a net increase in plan liabilities 

of about 4.6 percent. 

• 	 The retirement age assumption for the Bethlehem Steel pension plan on an 

ongoing plan basis was 62 for those active participants eligible for 

unreduced benefits after 30 years of service. On the other hand, the 

retirement age assumption for them on a plan termination basis was 

55—the earliest retirement age. According to PBGC, decreasing the 

assumed retirement age from 62 to 55 approximately doubled the liability 

for those participants. 

As shown in appendix IV, changes in the interest rates used to calculate 

termination and current liabilities also play a role in determining to what 

extent termination liabilities differ from current liabilities. 

Other aspects of minimum funding rules may limit their ability to affect the 

funding of certain plans as their sponsors approach bankruptcy. According 

to its annual reports, for example, Bethlehem Steel contributed about 

$3.0 billion to its pension plan for plan years 1986 through 1996. According 

to the reports, the plan had a credit balance of over $800 million at the end 

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

Page 22 GAO-04-90 Pension Benefit Guaranty Corporation 
of plan year 1996. Starting in 1997, Bethlehem Steel reduced its 

contributions to the plan and, according to annual reports, contributed 

only about $71.3 million for plan years 1997 through 2001. The plan’s 

2001 actuarial report indicates that Bethlehem Steel’s minimum required 

contribution for the plan year ending December 31, 2001, would have been 

$270 million in the absence of a credit balance; however, the opening 

credit balance in the plan’s funding standard account as of January 1, 2001, 

was $711 million. Therefore, Bethlehem Steel was not required to make 

any cash contributions during the year. 

Other IRC funding rules may have prevented some sponsors from making 

contributions to plans that in 2002 were terminated at a loss to the singleemployer program. For example, on January 1, 2000, the Polaroid pension 

plan’s assets were about $1.3 billion compared to accrued liabilities of 

about $1.1 billion—the plan was more than 100 percent funded. The plan’s 

actuarial report for that year indicates that the plan sponsor was 

precluded by the IRC funding rules from making a tax-deductible 

contribution to the plan.

39 In July 2002, PBGC terminated the Polaroid 

pension plan, and the single-employer program assumed responsibility for 

$321.8 million in unfunded PBGC-guaranteed liabilities for the plan. The 

plan was about 67 percent funded, with assets of about $657 million to pay 

estimated PBGC-guaranteed liabilities of about $979 million. 

Another ERISA provision, concerning the payment of variable-rate 

premiums, is also designed to encourage employers to better fund their 

plans. As with minimum funding rules, the variable-rate premium did not 

provide sufficient incentives for the sponsors of the plans that we 

reviewed to make the contributions necessary to adequately fund their 

plans. None of the three underfunded plans that we reviewed, which 

became losses to the single-employer program in 2002 and 2003, paid a 

variable-rate premium in the 2001 plan year. Plans are exempt from the 

variable-rate premium if they are at the full-funding limit in the year 

preceding the premium payment year, in this case 2000, after applying any 

contributions and credit balances in the funding standard account. Each of 

these three plans met this criterion. 

39See 26 U.S.C. 404(a)(1) and 26 U.S.C. 412(c)(7). The sponsor might have been able to 

make a contribution to the plan had it selected a lower interest rate for valuing current 

liabilities. Polaroid used the highest interest rate permitted by law for its calculations. 

Page 23 GAO-04-90 Pension Benefit Guaranty Corporation 
PBGC Faces LongTerm Financial Risks 

from a Potential 

Imbalance of Assets 

and Liabilities 

Two primary risks threaten the long-term financial viability of the singleemployer program. The greater risk concerns the program’s liabilities: 

large losses, due to bankrupt firms with severely underfunded pension 

plans, could continue or accelerate. This could occur if returns on 

investment remain poor, interest rates stay low, and economic problems 

persist. More troubling for liabilities is the possibility that structural 

weaknesses in industries with large underfunded plans, including those 

greatly affected by increasing global competition, combined with the 

general shift toward defined-contribution pension plans, could jeopardize 

the long-term viability of the defined-benefit system. On the asset side, 

PBGC also faces the risk that it may not receive sufficient revenue from 

premium payments and investments to offset the losses experienced by 

the single-employer program in 2002 or that this program may experience 

in the future. This could happen if program participation falls or if PBGC 

earns a return on its assets below the rate it uses to value its liabilities. 

Several Factors Affect the 

Degree to Which Plans Are 

Underfunded and the 

Likelihood That Plan 

Sponsors Will Go Bankrupt 

Plan terminations affect the single-employer program’s financial condition 

because PBGC takes responsibility for paying benefits to participants of 

underfunded terminated plans. Several factors would increase the 

likelihood that sponsoring firms will go bankrupt, and therefore will need 

to terminate their pension plans, and the likelihood that those plans will be 

underfunded at termination. Among these are poor investment returns, 

low interest rates, and continued weakness in the national economy or 

specific sectors. Particularly troubling may be structural weaknesses in 

certain industries with large underfunded defined-benefit plans. 

Poor investment returns from a decline in the stock market can affect the 

funding of pension plans. To the extent that pension plans invest in stocks, 

the decline in the stock market will increase the chance that plans will be 

underfunded should they terminate. A Greenwich Associates survey of 

defined-benefit plan investments indicates that 59.4 percent of plan assets 

were invested in stocks in 2002.40 Clearly, the future direction of the stock 

market is very difficult to forecast. From the end of 1999 through the end 

of 2002, total cumulative returns in the stock market, as measured by the 

S&P 500, were negative 37.6 percent. In 2003, the S&P 500 has partially 

recovered those losses, with total returns (from a lower starting point) of 

14.7 percent through the end of September. From January 1975, the 

beginning of the first year following the passage of ERISA, through 

402002 U.S. Investment Management Study, Greenwich Associates, Greenwich, CT. 

Page 24 GAO-04-90 Pension Benefit Guaranty Corporation 
September 2003, the average annual compounded nominal return on the 

S&P 500 equaled 13.5 percent. 

A decline in asset values can be particularly problematic for plans if 

interest rates remain low or fall, which raises plan liabilities, all else equal. 

The highest allowable discount rate for calculating current plan liabilities, 

based on the 30-year U.S. Treasury bond rate, has been no higher than 

7.1 percent since April, 1998, lower than any previous point during the 

1990s.41 Falling interest rates raise the price of group annuities that a 

terminating plan must purchase to cover its promised benefits and 

increase the likelihood that a terminating plan will not have sufficient 

assets to make such a purchase.42 An increase in liabilities due to falling 

interest rates also means that companies may be required under the 

minimum funding rules to increase contributions to their plans. This can 

create financial strain and increase the chances of the firm going 

bankrupt, thus increasing the risk that PBGC will have to take over an 

underfunded plan. 

Economic weakness can also lead to greater underfunding of plans and to 

a greater risk that underfunded plans will terminate. For many firms, slow 

or declining economic growth causes revenues to decline, which makes 

contributions to pension plans more difficult. Economic sluggishness also 

raises the likelihood that firms sponsoring pension plans will go bankrupt. 

Three of the last five annual increases in bankruptcies coincided with 

recessions, and the record economic expansion of the 1990s is associated 

with a substantial decline in bankruptcies. Annual plan terminations 

resulting in losses to the single-employer program rose from 83 in 1989 to 

175 in 1991, and after declining to 65 in 2000, the number reached 93 in 43 2001. 

41The U.S. Treasury stopped publishing a 30-year Treasury bond rate in February 2002, but 

the Internal Revenue Service publishes rates for pension calculations based on rates for the 

last-issued bonds in February 2001. Interest rates to calculate plan liabilities must be within 

a “permissible range” around a 4-year weighted average of 30-year Treasury bond rates; the 

permissible range for plan years beginning in 2002 and 2003 was 90 to 120 percent of this 

4-year weighted average. 

42A potentially offsetting effect of falling interest rates is the possible increased return on 

fixed-income assets that plans, or PBGC, hold. When interest rates fall, the value of existing 

fixed-income securities with time left to maturity rises. 

43The last three recessions on record in the United States occurred during 1981, 1990-91, 

and 2001. (See www.bea.gov/bea/dn/gdpchg.xls.) 

Page 25 GAO-04-90 Pension Benefit Guaranty Corporation 
Weakness in certain industries, particularly the airline and automotive 

industries, may threaten the viability of the single-employer program. 

Because PBGC has already absorbed most of the pension plans of steel 

companies, it is the airline industry, with $26 billion of total pension 

underfunding, and the automotive sector, with over $60 billion in 

underfunding, that currently represent PBGC’s greatest future financial 

risks. In recent years, profit pressures within the U.S. airline industry have 

been amplified by severe price competition, recession, terrorism, the war 

in Iraq, and the outbreak of Severe Acute Respiratory Syndrome (SARS), 

creating recent bankruptcies and uncertainty for the future financial 

health of the industry. As one pension expert noted, a potentially 

exacerbating risk in weak industries is the cumulative effect of 

bankruptcy: if a critical mass of firms go bankrupt and terminate their 

underfunded pension plans, others, in order to remain competitive, may 

also declare bankruptcy to avoid the cost of funding their plans. 

Because the financial condition of both firms and their pension plans can 

eventually affect PBGC’s financial condition, PBGC tries to determine how 

many firms are at risk of terminating their pension plans and the total 

amount of unfunded vested benefits. According to PBGC’s fiscal year 

2002 estimates, the agency is at potential risk of taking over $35 billion in 

unfunded vested benefits from plans that are sponsored by financially 

weak companies and could terminate.44 Almost one-third of these 

unfunded benefits, about $11.4 billion, are in the airline industry. 

Additionally, PBGC estimates that it could become responsible for over 

$15 billion in shutdown benefits in PBGC-insured plans. 

PBGC uses a model called the Pension Insurance Modeling System (PIMS) 

to simulate the flow of claims to the single-employer program and to 

project its potential financial condition over a 10-year period. This model 

produces a very wide range of possible outcomes for PBGC’s future net 

financial position.45 

44This estimate comprises “reasonably possible” terminations, which include plans 

sponsored by companies with credit quality below investment grade that may terminate, 

though likely not by year-end. Plan participants have a nonforfeitable right to vested 

benefits, as opposed to nonvested benefits, for which participants have not yet completed 

qualification requirements. 

45PBGC began using PIMS to project its future financial condition in 1998. Prior to this, 

PBGC provided low-, medium-, and high-loss forecasts, which were extrapolations from the 

agency’s claims experience and the economic conditions of the previous 2 decades. 

Page 26 GAO-04-90 Pension Benefit Guaranty Corporation 
Revenue from Premiums 

and Investments May Not 

Offset Program’s Current 

Deficit or Possible Future 

Losses 

To be viable in the long term, the single-employer program must receive 

sufficient income from premiums and investments to offset losses due to 

terminating underfunded plans. A number of factors could cause the 

program’s revenues to fall short of this goal or decline outright. For 

example, fixed-rate premiums would decline if the number of participants 

covered by the program decreases, which may happen if plans leave the 

system and are not replaced. Additionally, the program’s financial 

condition would deteriorate to the extent investment returns fall below 

the assumed interest rate used to value liabilities. 

Annual PBGC income from premiums and investments averaged 

$1.3 billion from 1976 to 2002, in 2002 dollars, and $2 billion since 

1988, when variable-rate premiums were introduced. Since 1988, 

investment income has on average equaled premium income, but has 

varied more than premium income, including 3 years in which investment 

income fell below zero. (See fig. 9.) 

Page 27 GAO-04-90 Pension Benefit Guaranty Corporation 
Figure 9: PBGC Premium and Investment Income, 1976-2002 

Income (2002 dollars in millions) 

3.5 

3.0 

2.5 

2.0 

1.5 

1.0 

0.5 

0 

-0.5 

-1.0 

1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 

Source: PBGC annual financial reports. 

Premium income 

Investment income 

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

Premium revenue for PBGC would likely decline if the total number of 

plans and participants terminating their defined-benefit plans exceeded 

the new plans and participants joining the system. This decline in 

participation would mean a decline in PBGC’s flat-rate premiums. If more 

plans become underfunded, this could possibly raise the revenue PBGC 

receives from variable-rate premiums, but would also be likely to raise the 

overall risk of plans terminating with unfunded liabilities. Premium 

income, in 2002 dollars, has fallen every year since 1996, even though the 

Congress lifted the cap on variable-rate premiums in that year. 

The decline in the number of plans PBGC insures may cast doubt on its 

ability to increase premium income in the future. The number of PBGCinsured plans has decreased steadily from approximately 110,000 in 

1987 to around 30,000 in 2002.

46 While the number of total participants in 

46In contrast, defined-contribution plans have grown significantly over a similar period— 

from 462,000 plans in 1985 to 674,000 plans in 1998. 

Page 28 GAO-04-90 Pension Benefit Guaranty Corporation 
PBGC-insured single-employer plans has grown approximately 25 percent 

since 1980, the percentage of participants who are active workers has 

declined from 78 percent in 1980 to 53 percent in 2000. Manufacturing, a 

sector with virtually no job growth in the last half century, accounted for 

almost half of PBGC’s single-employer program participants in 2001, 

suggesting that the program needs to rely on other sectors for any growth 

in premium income. (See fig 10.) In addition, a growing percentage of 

plans have recently become hybrid plans, such as cash-balance plans, that 

incorporate characteristics of both defined-contribution and definedbenefit plans. Hybrid plans are more likely than traditional defined-benefit 

plans to offer participants the option of taking benefits as a lump-sum 

distribution. If the proliferation of hybrid plans increases the number of 

participants leaving the program by taking lump sums instead of 

retirement annuities, over time this would reduce the number of plan 

participants, thus potentially reducing PBGC’s flat-rate premium revenue.47 

Unless something reverses these trends, PBGC may have a shrinking plan 

and participant base to support the program in the future and that base 

may be concentrated in certain, potentially more vulnerable industries. 

47If a plan sponsor purchases an annuity for a retiree from an insurance company to pay 

benefits, this would also remove the retiree from the participant pool, which would have 

the same effect on flat-rate premiums. 

Page 29 GAO-04-90 Pension Benefit Guaranty Corporation 
Figure 10: Distribution of PBGC-Insured Participants by Industry, 2001 

7% 

12% 

47% 

8% 

12% 

15% 

Information 

Transportation and public utilities 

Finance, insurance, and real estate 

Other 

Services 

Manufacturing 

Source: PBGC.


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


Even more problematic than the possibility of falling premium income 

may be that PBGC’s premium structure does not reflect many of the risks 

that affect the probability that a plan will terminate and impose a loss on 

PBGC. While PBGC charges plan sponsors a variable-rate premium based 

on the plan’s level of underfunding, premiums do not consider other 

relevant risk factors, such as the economic strength of the sponsor, plan 

asset investment strategies, the plan’s benefit structure, or the plans 

demographic profile. Because these affect the risk of PBGC having to take 

over an underfunded pension plan, it is possible that PBGC’s premiums 

will not adequately and equitably protect the agency against future losses. 

The recent terminations of Bethlehem Steel, Anchor Glass, and Polaroid, 

plans that paid no variable-rate premiums shortly before terminating with 

large underfunded balances, lend some evidence to this possibility. 

Sponsors also pay flat-rate premiums in addition to variable-rate 

premiums, but these reflect only the number of plan participants and not 

other risk factors that affect PBGC’s potential exposure to losses. Fullfunding limitations may exacerbate the risk of underfunded terminations 

by preventing firms from contributing to their plans during strong 

economic times when asset values are high and firms are in the best 

financial position to make contributions. 

Page 30 GAO-04-90 Pension Benefit Guaranty Corporation 
It may also be difficult for PBGC to diversify its pool of insured plans 

among strong and weak sponsors and plans. In addition to facing firmspecific risk that an individual underfunded plan may terminate, PBGC 

faces market risk that a poor economy may lead to widespread 

underfunded terminations during the same period, which potentially could 

cause very large losses for PBGC. Similarly, PBGC may face risk from 

insuring plans concentrated in vulnerable industries that may suffer 

bankruptcies over a short time period, as has happened recently in the 

steel and airline industries. One study estimates that the overall premiums 

collected by PBGC amount to about 50 percent of what a private insurer 

would charge because its premiums do not account for this market risk.48 

The net financial position of the single-employer program also depends 

heavily on the long-term rate of return that PBGC achieves from the 

investment of the program’s assets. All else equal, PBGC’s net financial 

condition could improve if its total net return on invested assets exceeded 

the discount rate it used to value its liabilities.49 For example, between 

1993 and 2000 the financial position of the single-employer program 

benefited from higher rates of return on its invested assets and its financial 

condition improved. However, if the rate of return on assets falls below 

the discount rate, PBGC’s finances would worsen, all else equal. As of 

September 30, 2002, PBGC had approximately 65 percent of its singleemployer program investments in U.S. government securities and 

approximately 30 percent in equities. The high percentage of assets 

invested in Treasury securities, which typically earn low yields because 

they are considered to be relatively “risk-free” assets, may limit the total 

return on PBGC’s portfolio.50 Additionally, PBGC bases its discount rate on 

surveys of insurance company group annuity prices, and because PBGC 

invests differently than do insurance companies, we might expect some 

divergence between the discount rate and PBGC’s rate of return on assets. 

PBGC’s return on total invested funds was 2.1 percent for the year ending 

September 30, 2002, and 5.8 percent for the 5-year period ending on that 

48Boyce, Steven, and Richard A. Ippolito, “The Cost of Pension Insurance,” The Journal of 

Risk and Insurance (2002) vol. 69, No.2, p. 121-170. 

49PBGC’s investment income needs to cover the increase in the present value of future 

benefits from existing claims. Investment income above this level would improve PBGC’s 

net financial condition, all else equal. Conversely, investment income below the present 

value of future claims will increase PBGC’s deficit, all else equal. 

50The return on fixed-income assets sold before maturity may also be affected by capital 

gains (or losses). The price of a bond moves in the opposite direction as interest rates, and 

so if interest rates fall, bondholders may reap capital gains. 

Page 31 GAO-04-90 Pension Benefit Guaranty Corporation 
date. For fiscal year 2002, PBGC used an annual discount rate of 

5.70 percent to determine the present value of future benefit payments 

through 2027 and a rate of 4.75 percent for payments made in the 

remaining years. 

The magnitude and uncertainty of these long-term financial risks pose 

particular challenges for the PBGC’s single-employer insurance program 

and potentially for the federal budget. In 1990, we began a special effort to 

review and report on the federal program areas we considered high risk 

because they were especially vulnerable to waste, fraud, abuse, and 

mismanagement. In the past, we considered PBGC to be on our high-risk 

list because of concerns about the program’s viability and about 

management deficiencies that hindered that agency’s ability to effectively 

assess and monitor its financial condition. The current challenges to 

PBGC’s single-employer insurance program concern immediate as well as 

long-term financial difficulties, which are more structural weaknesses 

rather than operational or internal control deficiencies. Nevertheless, 

because of serious risks to the program’s viability, we have placed the 

PBGC single-employer insurance program on our high-risk list. 

Several types of reforms might be considered to reduce the risks to the 

single-employer program’s long-term financial viability. These reforms 

could be made to 

strengthen funding rules applicable to poorly funded plans; 

modify program guarantees; 

• restructure premiums; and 

• 	 improve the availability of information about plan investments, 

termination funding status, and program guarantees. 

Several variations exist within these options. 

Several Reforms 

Might Reduce the 

Risks to the 

• 

Program’s Financial • Viability 

Page 32 GAO-04-90 Pension Benefit Guaranty Corporation 
Strengthening Plan 

Funding Rules Might 

Reduce Program Risks 

Funding rules could be strengthened to increase minimum contributions 

to underfunded plans and to allow additional contributions to fully funded 

plans.51 This approach would improve plan funding over time, while 

limiting the losses PBGC would incur when a plan is terminated. However, 

even if funding rules were to be strengthened immediately, it could take 

years for the change to have a meaningful effect on PBGC’s financial 

condition. In addition, such a change would require some sponsors to 

allocate additional resources to their pension plans, which may cause the 

plan sponsor of an underfunded plan to provide less generous wages or 

benefits than would otherwise be provided. The IRC could be amended to: 

• 	 Base additional funding requirement and maximum tax-deductible 

contributions on plan termination liabilities, rather than current liabilities. 

Since plan termination liabilities typically exceed current liabilities, such a 

change regarding deficit reduction contributions would likely improve 

plan funding and therefore reduce potential claims against PBGC. One 

problem with this approach is the difficulty plan sponsors would have 

determining the appropriate interest rate to use in valuing termination 

51If the Congress chooses to replace the 30-year Treasury rate used to calculate pension 

plan liabilities, the level of the interest rate selected can also affect plan funding. For 

example, if a rate that is higher than the current rate is selected, plan liabilities would 

appear better funded, thereby decreasing minimum and maximum employer contributions. 

In addition, some plans would reach full-funding limitations and avoid having to pay 

variable-rate premiums. Therefore, PBGC would receive less revenue. Conversely, a lower 

rate would likely improve PBGC’s financial condition. In 1987, when the 30-year Treasury 

rate was adopted for use in certain pension calculations, the Congress intended that the 

interest rate used for current liability calculations would, within certain parameters, reflect 

the price an insurance company would charge to take responsibility for the plans pension 

payments. However, in the late 1990s, when fewer 30-year Treasury bonds were issued and 

economic conditions increased demand for the bonds, the 30-year Treasury rate diverged 

from other long-term interest rates, an indication that it also may have diverged from group 

annuity purchase rates. In 2001, Treasury stopped issuing these bonds altogether, and in 

March 2002, the Congress enacted temporary measures to alleviate employer concerns that 

low interest rates on the remaining 30-year Treasury bonds were affecting the 

reasonableness of the interest rate for employer pension calculations. Selecting a 

replacement rate is difficult because little information exists on which to base the 

selection. Other than the survey conducted for PBGC, no mechanism exists to collect 

information on actual group annuity purchase rates. Compared to other alternatives, the 

PBGC interest rate factors may have the most direct connection to the group annuity 

market, but PBGC factors are less transparent than market-determined alternatives. Longterm market rates may track changes in group annuity rates over time, but their proximity 

to group annuity rates is also uncertain. For example, an interest rate based on a long-term 

market rate, such as corporate bond indexes, may need to be adjusted downward to better 

reflect the level of group annuity purchase rates. However, as we stated in our report 

earlier this year, establishing a process for regulatory adjustments to any rate selected may 

make it more suitable for pension plan liability calculations. See GAO-03-313. 

Page 33 GAO-04-90 Pension Benefit Guaranty Corporation 
liabilities. As we reported, selecting an appropriate interest rate for 

termination liability calculations is difficult because little information 52 exists on which to base the selection. 

• 	 Change requirement for making additional funding contributions. The IRC 

requires sponsors to make additional contributions under two 

circumstances: (1) if the value of plan assets is less than 80 percent of its 

current liability or (2) if the value of plan assets is less than 90 percent of 

its current liability, depending on plan funding levels for the previous 3 

years. Raising the threshold would require more sponsors of underfunded 

plans to make the additional contributions. 

• 	 Limit the use of credit balances. For sponsors who make contributions in 

any given year that exceed the minimum required contribution, the excess 

plus interest is credited against future required contributions. Limiting the 

use of credit balances to offset contribution requirements might also 

prevent sponsors of significantly underfunded plans from avoiding cash 

contributions. Such limitations might also be applied based on the plan 

sponsor’s financial condition. For example, sponsors with poor cash flow 

or low credit ratings could be restricted from using their credit balances to 

reduce their contributions. 

• 	 Limit lump-sum distributions. Defined benefit pension plans may offer 

participants the option of receiving their benefit in a lump-sum payment. 

Allowing participants to take lump-sum distributions from severely 

underfunded plans, especially those sponsored by financially weak 

companies, allows the first participants who request a distribution to drain 

plan assets, which might result in the remaining participants receiving 

reduced payments from PBGC if the plan terminates.53 However, the 

payment of lump sums by underfunded plans may not directly increase 

losses to the single employer program because lump sums reduce plan 

liabilities as well as plan assets. 

• 	 Raise the level of tax-deductible contributions. The IRC and ERISA restrict 

tax-deductible contributions to prevent plan sponsors from contributing 

52GAO-03-313. 

53The administration’s proposal would require companies with below investment grade 

credit ratings whose plans are less than 50 percent funded on a termination basis to 

immediately fully fund or secure any new benefit improvements, benefit accruals or lumpsum distributions. 

Page 34 GAO-04-90 Pension Benefit Guaranty Corporation 
more to their plan than is necessary to cover accrued future benefits.54 

Raising these limitations might result in pension plans being better funded, 

decreasing the likelihood that they will be underfunded should they 

terminate. 55 

Modifying Program 

Guarantee Would Decrease 

Plan Underfunding 

Modifying certain guaranteed benefits could decrease losses incurred by 

PBGC from underfunded plans. This approach could preserve plan assets 

by preventing additional losses that PBGC would incur when a plan is 

terminated. However, participants would lose benefits provided by some 

plan sponsors. ERISA could be amended to: 

• 	 Phase in the guarantee of shutdown benefits. PBGC is concerned about its 

exposure to the level of shutdown benefits that it guarantees. Shutdown 

benefits provide additional benefits, such as significant early retirement 

benefit subsidies to participants affected by a plant closing or a permanent 

layoff. Such benefits are primarily found in the pension plans of large 

unionized companies in the auto, steel, and tire industries. In general, 

shutdown benefits cannot be adequately funded before a shutdown 

occurs. Phasing in guarantees from the date of the applicable shutdown 

could decrease the losses incurred by PBGC from underfunded plans.56 

However, modifying these benefits would reduce the early retirement 

benefits for participants who are in plans with such provisions and are 

affected by a plant closing or a permanent layoff. Dislocated workers, 

particularly in manufacturing, may suffer additional losses from lengthy 

periods of unemployment or from finding reemployment only at much 

lower wages. 

• 	 Expand restrictions on unfunded benefit increases. Currently, plan 

sponsors must meet certain conditions before increasing the benefits of 

54Employers are generally subject to an excise tax for failure to make required 

contributions or for making contributions in excess of the greater of the maximum 

deductible amount or the ERISA full-funding limit. 

55For example, one way to do this would be to allow deductions within a corridor of up to 

130 percent of current liabilities. Gebhardtsbauer, Ron. American Academy of Actuaries 

testimony before the Subcommittee on Employer-Employee Relations, Committee on 

Education and the Workforce, U.S. House of Representatives, Hearing on Strengthening 

Pension Security: Examining the Health and Future of Defined Benefit Pension Plans. 

(Washington, D.C.: June 4, 2003), 9. 

56Currently, some measures exist to limit the losses incurred by PBGC from newly 

terminated plans. PBGC is responsible for only a portion of all benefit increases that the 

sponsor adds in the 5 years leading up to termination. 

Page 35 GAO-04-90 Pension Benefit Guaranty Corporation 
plans that are less than 60 percent funded.57 Increasing this threshold, or 

restricting benefit increases or accruals when plans reach the threshold, 

could decrease the losses incurred by PBGC from underfunded plans. Plan 

sponsors have said that the disadvantage of such changes is that they 

would limit an employer’s flexibility with regard to setting compensation, 

making it more difficult to respond to labor market developments. For 

example, a plan sponsor might prefer to offer participants increased 

pension payments or shutdown benefits instead of offering increased 

wages because pension benefits can be deferred—providing time for the 

plan sponsor to improve its financial condition—while wage increases 

have an immediate effect on the plan sponsor’s financial condition. 

Restructuring the 

Program’s Premium 

Structure Might Improve 

Its Financial Viability 

PBGC’s premium rates could be increased or restructured to improve 

PBGC’s financial condition. Changing premiums could increase PBGC’s 

revenue or provide an incentive for plan sponsors to better fund their 

plans. However, premium changes that are not based on the degree of risk 

posed by different plans may prompt financially healthy companies to exit 

the defined-benefit system and discourage other plan sponsors from 

entering the system. Various actions could be taken to reduce guaranteed 

benefits. ERISA could be amended to: 

• 	 Increase or restructure variable-rate premium. The current variablerate premium of $9 per $1,000 of unfunded liability could be increased. 

The rate could also be adjusted so that plans with less adequate 

funding pay a higher rate. Premium rates could also be restructured 

based on the degree of risk posed by different plans, which could be 

assessed by considering the financial strength and prospects of the 

plan’s sponsor, the risk of the plan’s investment portfolio, participant 

demographics, and the plan’s benefit structure—including plans that 

have lump-sum,58 shutdown benefit, and floor-offset provisions.59 One 

advantage of a rate increase or restructuring is that it might improve 

57IRC provides generally that a plan less than 60 percent funded on a current liability basis 

may not increase benefits without either immediately funding the increase or providing 

security. See 26 U.S.C. 401(a)(29). 

58For example, a plan that allows a lump-sum option—as is often found in a cash-balance 

and other hybrid plan—may pose a different level of risk to PBGC than a plan that does 

not. 

59Under the floor-offset arrangement, the benefit computed under the final pay formula is 

“offset” by the benefit amount that the account of another plan, such as an Employee Stock 

Ownership Plan, could provide. 

Page 36 GAO-04-90 Pension Benefit Guaranty Corporation 
accountability by providing for a more direct relationship between the 

amount of premium paid and the risk of underfunding. A disadvantage 

is that it could further burden already struggling plan sponsors at a 

time when they can least afford it, or it could reduce plan assets, 

increasing the likelihood that underfunded plans will terminate. A 

program with premiums that are more risk-based could also be more 

challenging for PBGC to administer. 

• 	 Increase fixed-rate premium. The current fixed rate of $19 per 

participant annually could be increased. Since the inception of PBGC, 

this rate has been raised four times, most recently in 1991 when it was 

raised from 

$16 to $19. Such increases generally raise premium income for PBGC, 

but the current fixed-rate premium has not reflected the changes in 

inflation since 1991. By indexing the rate to the consumer price index, 

changes to the premium would be consistent with inflation. However, 

any increases in the fixed-rate premium would affect all plans 

regardless of the adequacy of their funding. 

Increasing Transparency of 

Plan Information Might 

Encourage Sponsors to 

Better Fund Plans, 

Reducing Program Risks 

Improving the availability of information to plan participants and others 

about plan investments, termination funding status, and PBGC guarantees 

may give plan sponsors additional incentives to better fund their plans, 

making participants better able to plan for their retirement. ERISA could 

be amended to: 

• 	 Disclose information on plan investments. Information on the 

allocation of plan investments among asset classes—such as equity or 

fixed income—is available from Form 5500s prepared by plan 

sponsors, but that information is not affirmatively furnished to 

participants and beneficiaries. Additionally, some plan investments 

may be made through common and collective trusts, master trusts, and 

registered investment companies, and asset allocation information for 

these investments might need to be obtained from Form 5500s 

prepared by those entities or from their prospectuses. Improving the 

accessibility of plan asset allocation information may give plan 

sponsors an incentive to increase funding of underfunded plans or limit 

riskier investments. Moreover, only participants in plans below a 

certain funding threshold receive annual notices regarding the funding 

status of their plans, and the information plans must currently provide 

does not reflect how the plan’s assets are invested. One way to enhance 

notices provided to participants could be to include information on 

how much of plan assets are invested in the sponsor’s own securities. 

This would be of concern because should the sponsor becomes 

bankrupt, the value of the securities could be expected to drop 

Page 37 GAO-04-90 Pension Benefit Guaranty Corporation 
significantly, reducing plan funding. Although this information is 

currently provided in the plan’s Form 5500, it is not readily accessible 

to participants. Additionally, if the defined-benefit plan has a flooroffset arrangement and its benefits are contingent on the investment 

performance of a defined-contribution plan, then information provided 

to participants could also disclose how much of that definedcontribution plan’s assets are invested in the sponsor’s own securities. 

• 	 Disclose plan termination funding status. Under current law, sponsors 

are required to report a plan’s current liability for funding purposes, 

which often can be lower than termination liability. In addition, only 

participants in plans below a certain funding threshold receive annual 

notices of the funding status of their plans.60 As a result, many plan 

participants, including participants of the Bethlehem Steel pension 

plan, did not receive such notifications in the years immediately 

preceding the termination of their plans. Expanding the circumstances 

under which sponsors must notify participants of plan underfunding 

might give sponsors an additional incentive to increase plan funding 

and would enable more participants to better plan their retirement. 

Under the administration’s proposal, all sponsors would be required to 

disclose the value of pension plan assets on a termination basis in their 

annual reporting. The administration proposes that all companies 

disclose the value of their defined benefit pension plan assets and 

liabilities on both a current liability and termination liability basis in 

their Summary Annual Report.61 

• 	 Disclose benefit guarantees to additional participants. As with the 

disclosure of plan funding status, only participants of plans below the 

funding threshold receive notices on the level of program guarantees 

should their plan terminate. Termination of a severely underfunded 

plan can significantly reduce the benefits participants receive. For 

example, 59-year old pilots were expecting annual benefits of $110,000 

per year on average when the U.S. Airways plan was terminated in 

60The ERISA requirement that plan sponsors notify participants and beneficiaries of the 

plan’s funding status and limits on the PBGC guarantee currently goes into effect when 

plans are required to pay variable-rate premiums and meet certain other requirements. See 

29 U.S.C. 1311 and 29 C.F.R. 4011.3. 

61Participants and individuals receiving benefits from their plan must receive a Summary 

Annual Report (SAR) from their plan’s administrator each year. The SAR summarizes the 

plan’s financial status based on information that the plan administrator provides to the 

Department of Labor on its annual Form 5500. This document must generally be provided 

no later than 9 months after the close of the plan year. 

Page 38 GAO-04-90 Pension Benefit Guaranty Corporation 
2003, while the maximum PBGC-guaranteed benefit at age 60 is $28,600 

per year.62 Expanding the circumstances under which plan sponsors 

must notify participants of PBGC guarantees may enable more 

participants to better plan for their retirement. 

Additionally, in 1997, we reported that the current cash-based budget for 

federal insurance programs, such as the single-employer pension 

insurance program generally provides incomplete and misleading 

information on the cost and fiscal impact of those programs.63 We stated 

that accrual-based reporting would recognize the cost of the insurance 

commitment when the decision is made to provide the insurance, 

regardless of when the cash flows occur. This earlier recognition of the 

cost of the government’s commitment would, among other things, provide 

an opportunity to control costs and build budget reserves for future 

claims. However, we also reported that agencies, such as PBGC, might 

need to develop and test methodologies to generate the risk-assumed cost 

estimates critical to the successful implementation of accrual-based 

budgeting for insurance programs. In its comments on our report, OMB 

stated that, while it agreed with our conclusions and would like to pursue 

such improvements, it was not doing so because it did not have the 

expertise that would be required. Given the record losses that the singleemployer pension insurance program sustained in 2002 and the 

deteriorating financial condition of PBGC it is more important than ever to 

acquire the necessary expertise and invest in the development of loss 

estimation methodologies and tools. 

Conclusion 	 While the recent decline in the single-employer program’s financial 

condition is not an immediate crisis, threats to the program’s long-term 

viability should be addressed. The insolvency of PBGC potentially 

62However, the actual benefit paid by PBGC depends on a number of factors and may 

exceed the maximum guaranteed benefit. For example, PBGC expects that the average 

annual benefit paid to U.S. Airways pilots who are 59 years of age with 29 years of service 

will be about $85,000, including nonguaranteed amounts. PBGC said that many US Airways 

pilots will receive more than the $28,600 maximum limit because, according to priorities 

established under ERISA, pension plan participants may receive benefits in excess of the 

guaranteed amounts if there are enough assets or recoveries from the plan sponsors. For 

example, a participant who could have retired 3 years prior to plan termination (but did 

not) may be eligible to receive both guaranteed and nonguaranteed amounts. PBGC letter 

in response to follow-up questions from the Committee on Finance, U.S. Senate 

(Washington, D.C.: Apr. 1, 2003). 

63GAO/AIMD-97-16, 143. 

Page 39 GAO-04-90 Pension Benefit Guaranty Corporation 
threatens the retirement security of millions of Americans because 

termination of severely underfunded plans can significantly reduce the 

benefits participants receive. It also poses risks to the general taxpaying 

public who ultimately would be made responsible for paying benefits that 

PBGC is unable to afford. These risks require that meaningful, if perhaps 

difficult, steps be taken that improve the long-term funding status of plans 

and accountability of plan sponsors, especially those that represent a clear 

risk to PBGC and plan participants and their beneficiaries. In contrast, 

reforms intended to provide immediate relief to struggling plan sponsors— 

such as exempting plans from the additional funding requirement or 

increasing the discount rate—might actually increase the risk that plan 

sponsors terminate with severely underfunded plans in the not so distant 

future if the economic fortunes of those sponsors do not improve. 

The factors contributing to the deterioration of PBGC’s financial condition 

go beyond the effects of the recent economic downturn. For example, 

current funding rules do not provide adequate protection to PBGC or 

workers and retirees against losses from financially weak sponsors with 

significantly unfunded benefits, leaving PBGC to pay benefits at least to 

guaranteed levels. In addition, PBGC guarantees other types of benefits, 

such as shutdown benefits, that employers have promised their employees 

but are not required to fund until shutdown occurs. Furthermore, the 

premiums paid by pension sponsors to participate in the single-employer 

program do not account for all the risks posed by plans and, therefore, 

some sponsors may not be paying enough to compensate PBGC for the 

risks it undertakes. Although these issues can affect employee retirement 

funds, employers who are going bankrupt may not be required to notify 

pension participants of the funding status of their pensions, leaving 

participants unable to plan for a future that may include less income than 

they were anticipating. 

In addition to the reforms in the administration’s proposal, the Treasury 

Department, Labor Department, and PBGC are considering several areas— 

funding rules, actuarial assumption, and other areas such as PBGC 

premiums—for reform. However, the challenges facing PBGC suggest that 

a broader, more comprehensive response is needed. For example, as we 

stated in an earlier report,64 the interest rate used for current liability 

calculation should reflect the group annuity purchase rate. However, any 

changes to the interest rate should consider related provisions such as 

64GAO-03-313. 

Page 40 GAO-04-90 Pension Benefit Guaranty Corporation 
averaging, minimum and maximum rates, and changes to the mortality 

table. Furthermore, irrespective of the discount rate chosen, differences in 

plan cash flows should be given consideration in making any changes to 

the current funding standards. Without a comprehensive approach, efforts 

to improve the long-term financial condition of PBGC may not be 

effective. 

Matters for 

Congressional 

Consideration 

Agency Comments 

Given the multidimensional and serious nature of the financial risks to 

PBGC’s single-employer insurance program, to millions of pension plan 

participants and potentially to the federal budget, the Congress should 

consider pension reform that is comprehensive in scope and balanced in 

effect. Such a comprehensive response should include changes to 

strengthen plan funding, especially for underfunded plans, and improve 

the transparency of plan information as well as consider proposals to 

restructure program guarantees, for example those concerning shutdown 

benefits. In addition, PBGC’s premium structure should be re-examined to 

see whether premiums can better reflect the risk posed by various plans to 

the pension system. In any case, reforms in these areas should be based on 

a thorough analysis of their effects on the potentially competing interests 

of protecting retirees’ pensions and minimizing the burden on sponsors. 

Essential elements of this reform would include proposals to require plans 

to calculate liabilities on a termination basis and disclose this information 

to all participants annually. Particularly with regard to disclosure, the 

Congress should consider requiring that all participants receive 

information about plan investments and the minimum benefit amount that 

PBGC guarantees should their plan be terminated. 

To improve the transparency of the potential cost to the government and 

taxpayers of the PBGC’s pension guarantees, the Congress may also wish 

to encourage the development and reporting of accrual based riskassumed cost estimates in the federal budget in conjunction with the 

current cash-based estimates. Such forward looking estimates could more 

clearly reflect the financial condition of the program and provide 

information and incentives necessary to assess the future implications of 

programmatic decisions. 

We provided a draft of this report to Labor, Treasury, and PBGC. PBGC 

also provided written comments, which appear in appendix V, that 

incorporate comments from the Treasury and Labor Departments and 

represent the views of the Commerce Department. Labor, Treasury, and 

Page 41 GAO-04-90 Pension Benefit Guaranty Corporation 
PBGC also provided technical comments, which we incorporated as 

appropriate. 

We are sending copies of this report to the Secretary of Labor, the 

Secretary of the Treasury, and the Executive Director of the PBGC, 

appropriate congressional committees, and other interested parties. We 

will also make copies available to others on request. In addition, the report 

will be available at no charge on GAO’s Web site at http://www.gao.gov. 

If you have any questions concerning this report, please contact me at 

(202) 512-7215 or Charles A. Jeszeck at (202) 512-7036. Other contacts and 

acknowledgments are listed in appendix VI. 

Barbara D. Bovbjerg 

Director, Education, Workforce 

and Income Security Issues 

Page 42 GAO-04-90 Pension Benefit Guaranty Corporation 
Appendix I: Scope and Methodology 


To identify the changes in the financial condition of the single-employer 

program, we reviewed and analyzed Pension Benefit Guaranty 

Corporation (PBGC) financial statements for 1991 through 2002, and 

obtained additional financial information on the program from PBGC for 

1974 through 1990. To identify the factors that contributed to recent 

changes in the single-employer program’s financial condition, we 

discussed with PBGC officials, and examined annual reports and other 

available information related to, the funding and termination of three 

pension plans: the Anchor Glass Container Corporation Service 

Retirement Plan, the Pension Plan of Bethlehem Steel Corporation and 

Subsidiary Companies, and the Polaroid Pension Plan. We selected these 

plans because they represented the largest losses to PBGC in their 

respective industries in fiscal year 2002. PBGC estimates that, collectively, 

the plans represented over $4 billion in losses to the program at plan 

termination. We also reviewed analyses of the program’s financial 

condition and plan funding issues prepared by actuaries and other pension 

professionals. To examine the difference between termination and current 

liability, and identify the factors that cause that difference, we obtained 

summary level termination liability data, and limited data for specific 

plans, submitted by plans to PBGC under section 4010 of the Employee 

Retirement and Income Security Act (ERISA) of 1974, as amended. 

To identify the primary risks to the long-term viability of the program and 

options to address the challenges facing the single-employer program, we 

interviewed pension experts at PBGC, at the Employee Benefits Security 

Administration (EBSA) of the Department of Labor, and in the private 

sector and reviewed analyses and other documents provided by them. 

These include data on PBGC’s income, cash flows, premium structure and 

base, investments, and assets and liabilities. To obtain additional 

information as to the risks facing PBGC from certain industries, we 

discussed with PBGC, and reviewed annual and actuarial reports for, the 

2003 distress termination of the U.S. Airways pension plan for pilots. 

To determine what changes to the single-employer program might be 

considered to reduce the risks that it faces, we reviewed and analyzed 

proposals from the administration, the American Academy of Actuaries, 

and various pension plan organizations and legislative proposals 

introduced during the 108th Congress. We also spoke with officials from 

PBGC, EBSA, and the Department of the Treasury; research actuaries; and 

individuals from organizations that represent plan sponsors. 

Page 43 GAO-04-90 Pension Benefit Guaranty Corporation 
Appendix I: Scope and Methodology 

We performed our work at PBGC and EBSA from April through September 

2003 in accordance with generally accepted government auditing 

standards. 

Page 44 GAO-04-90 Pension Benefit Guaranty Corporation 
Appendix II: Key Legislative Changes That 

Affected the Single-Employer Program 

As part of the ERISA, the Congress established PBGC to administer the 

federal insurance program. Since 1974, the Congress has amended ERISA 

to improve the financial condition of the insurance program and the 

funding of single-employer plans (see table 1). 

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

Year Law Number Key provisions 

1974 ERISA P.L. 93-406 	 Created a federal pension insurance program and established a 

flat-rate premium and minimum and maximum funding rules. 

1986 Single-Employer Pension Plan Amendments P.L. 99-272 Raised the flat-rate premium and established financial distress 

Act of 1986 enacted as Title XI of the 

Consolidated Omnibus Budget 

Reconciliation Act of 1985 

criteria that sponsoring employers must meet to terminate an 

underfunded plan. 

1987 Pension Protection Act enacted as part of P.L. 100-203 Increased the flat-rate premium and added a variable-rate 

the Omnibus Budget Reconciliation Act of premium for underfunding calculated on the basis of 80 percent 

1987 of the 30-year Treasury rate. In addition, established a 

permissible range of 90-110 percent around the weighted 

average the 30-year Treasury rate as the basis for current 

liability calculations, increased the minimum funding standards, 

and established a full-funding limitation based on 150 percent of 

current liability. 

1994 Retirement Protection Act enacted as part of P.L. 103-465 Raised the basis for variable-rate premium calculation from 80 

the Uruguay Rounds Agreements Act, also percent to 85 percent of the 30-year Treasury rate (effective July 

referred to as the General Agreement on 1997). Phased out the cap on the variable-rate premium. 

Tariffs and Trade Strengthened funding requirements by narrowing the permissible 

range of the allowable interest rates to 90-105 percent of the 

weighted average the 30-year Treasury rate and standardizing 

mortality assumptions for the current liability calculation. Also, 

established 90 percent of current liability as the minimum fullfunding limitation. 

1997 Taxpayer Relief Act of 1997 P.L. 105-34 Phased in increases in the current liability funding limit to155 

percent for plan years beginning in 1999 with incremental 

increases to 170 percent for plan years beginning in 2005. 

2001 The Economic Growth and Tax Relief P.L. 107-16 Accelerated the phasing out of the 160 percent full-funding 

Reconciliation Act of 2001 limitation and repealed it for plan years beginning in 2004 and 

thereafter. 

2002 The Job Creation and Worker Assistance P.L. 107-147 Temporarily expanded the permissible range of the statutory 

Act of 2002 interest rates to 90-120 percent of the weighted average the 30-

year Treasury rate for current liability calculations and 

temporarily increased the PBGC variable-rate premium 

calculations to 100 percent of the 30-year Treasury rate for plan 

years beginning after December 31, 2001, and before January 1, 

2004. 

Source: Public Law. 

Page 45 GAO-04-90 Pension Benefit Guaranty Corporation 
Appendix III: The Administration Proposal 

for Pension Reform 

On July 8, 2003, the U.S. Treasury Department announced “The 

Administration Proposal to Improve the Accuracy and Transparency of 

Pension Information.” The proposal presented four areas of change in 

order to improve pension security for Americans: (1) the accuracy of the 

pension liability discount rate, (2) the transparency of pension plan 

information, (3) safeguards against pension underfunding, and 

(4) comprehensive funding reforms. Subsequent congressional testimony 

by the Treasury Department and the U.S. Labor Department highlighted 

other areas of the pension system that the administration is considering 

reforming. 

1. Improving the Accuracy of the Pension Liability Discount Rate 

Sponsors must use a discount rate to calculate the current value of their 

plans’ pension obligations and of lump-sum withdrawals.1

 Currently, this 

rate is based on the rate of 30-year Treasury bonds, securities that have 

not been newly issued since 2001. There is concern that too high a 

discount rate would lead to pension underfunding, while too low a rate 

would cause businesses to have to put more money into their pension 

funds to pay promised benefits. The administration recommended 

replacing the 30-year Treasury bond rate with a yield curve based on highquality, long-term corporate bond rates. It claims that pension discount 

rates should reflect the risk embodied in assets held by insurance 

companies to make group annuity payments, and that these assets consists 

largely of highly rated corporate-issued bonds. 

Similarly, the administration proposed using the same yield curve to 

discount lump-sum distributions from plans. Currently, lump sums are 

calculated using the 30-year Treasury rate, a rate that may differ from the 

one used to calculate current plan liabilities. The administration proposal 

would have plans discounting lump sums and plan liabilities at the same 

rate. For both lump sums and liabilities, the administration proposes 

phasing in the yield curve beginning in the third year, with the phase-in 

complete by the fifth year. 

Sponsors would compute liabilities by choosing rates along the yield curve 

based on when the plan is due to make benefit payments. Thus, sponsors 

would discount benefits due farther in the future at a longer-term rate than 

those paid in the near future. Since long-term rates tend to exceed short1

GAO-03-313. 

Page 46 GAO-04-90 Pension Benefit Guaranty Corporation 
Appendix III: The Administration Proposal 

for Pension Reform 

term rates, this would imply that plans with a higher proportion of older 

workers and retirees would use lower rates to discount their liabilities 

than those with younger workers. Similarly, the proposal would also have 

plans use a discount rate along the yield curve for lump sums that reflects 

the life expectancy of retirees, with lump sums for older workers 

discounted at a shorter-term rate than those for younger workers. 

To further increase pension discount rate accuracy, the administration 

further proposed reducing the use of smoothing in calculating plan 

liabilities. Sponsors currently use a discount rate on plan liabilities based 

on a 4-year moving average of interest rates. The administration claimed 

that such smoothing reduces the accuracy of liability measures because 

the discount rate is not necessarily based on current market conditions, 

which may mask changes in plan solvency. The proposal would reduce the 

smoothing period, over a 3-year phase-in beginning in the third year, to a 

90-day moving average. 

2. Increasing the Transparency of Pension Plan Information 

To increase transparency, the administration proposal calls for plans to 

disclose liabilities on a termination basis, as well as on a current liability 

basis, in their annual reporting. Currently, a sponsor must disclose its 

plan’s current liability, which is intended to reflect the value of liabilities in 

an ongoing plan, using a discount rate based on the 30-year Treasury bond 

rate. Termination liability reflects the cost to a company of paying an 

insurer to meet its pension obligations should the plan terminate. This is 

calculated by using a PBGC interest factor, which is based on a survey of 

insurance companies and may reflect group annuity purchase rates, rather 

than by using the 30-year Treasury bond rate. Termination liability is often 

higher than current liability. 

The proposal would also have pension plans with more than $50 million of 

underfunding make public their plan assets, liabilities, and funding ratios, 

information that PBGC already collects. Currently, section 4011 of the 

ERISA, as amended, requires that sponsors of plans that are less than 

90 percent funded send notices to workers and retirees describing the 

plan’s funding status and the limits of PBGC guarantees.2 

2

In addition, section 4010 of ERISA requires that plan sponsors with more than $50 million 

in plan underfunding file annual financial and actuarial information with PBGC, though this 

information is not made public. 

Page 47 GAO-04-90 Pension Benefit Guaranty Corporation 
Appendix III: The Administration Proposal 

for Pension Reform 

The proposal would also have plans disclose liabilities calculated by using 

a duration-matched yield curve, even before the yield curve is fully phased 

in for funding purposes. That is, sponsors would disclose the value of their 

liabilities by using a discount rate on the yield curve that reflects the 

duration of its plan liabilities, with a plan with more benefits owed far in 

the future using a longer-term discount rate than one with more benefits 

owed in the near future. 

3. Strengthening Safeguards against Pension Underfunding 

Currently, a plan generally may not provide unfunded or unsecured benefit 

increases greater than $10 million if the plan’s funding ratio falls below 

60 percent of current liability. To strengthen pension funding, the 

administration proposed prohibiting benefit increases by the plan 

sponsored by firms with a credit rating below investment grade and with 

a funding ratio below 50 percent of termination, as opposed to current 

liability. In addition, the plan would also be frozen—with no accruals 

resulting from additional service, age or salary growth—and lump-sum 

payments would also be prohibited unless the employer contributed cash 

or provided security to fully fund any added benefits. For firms already in 

bankruptcy, the administration would fix the benefit guarantee as of the 

date the plan sponsor filed for bankruptcy. 

4. Supporting Comprehensive Funding Reforms 

In addition to the reforms above, the proposal states that the 

administration is exploring additional reforms to improve the funding 

status of defined benefit plans. These include: 

• 	 Changing rules regarding minimum contributions of underfunded 

plans. 

• Raising limits on tax-deductible contributions. 

• Limiting the use of credit balances. 

• Reducing new benefit amortization periods. 

• Updating mortality tables. 

• Making retirement assumptions accurate. 

• Making lump-sum estimates accurate. 

• Limit or eliminate certain unfunded benefit guarantees. 

• Restructuring PBGC premiums to reflect risk. 

• 	 Applying the same principles of accuracy and transparency to the 

multiemployer pension program. 

Page 48 GAO-04-90 Pension Benefit Guaranty Corporation 
Appendix IV: Differences in I rest Rate Appendix IV: Differences in Interest Rate 

Calculations Contribute to Differences 

between Termination and Current Liabilities 

A plan’s termination liability measures the value of accrued benefits using 

assumptions appropriate for a terminating plan, while its current liability 

measures the value of accrued benefits using assumptions specified in 

applicable laws and regulations. Interest rates are a key assumption in 

calculating the present value of future pension benefits, and the degree 

that the interest rates used to calculate termination and current liabilities 

differ would contribute to the degree that the two liability measures differ. 

Generally: 

• 	 Liabilities determined on a termination basis should be calculated using an 

interest rate that reflects the factors that insurance companies consider in 

pricing the group annuities they sell to pension plan sponsors who 

terminate their defined benefit plans. However, information needed to 

determine actual group annuity purchase rates is not available since 

annuity purchases are private transactions between insurance companies 

and purchasers. Instead, under PBGC regulations, sponsors who are 

required by ERISA, as amended, to report plan termination liability 

information to PBGC, calculate that liability using a rate published by 

PBGC.1

 PBGC determines that rate based on surveys of insurance 

companies performed by the American Council of Life Insurers. 

• 	 Current liabilities are to be calculated using an interest rate from within a 

range of permissible rates based on 30-year Treasury rates, as specified in 

the Internal Revenue Code.2 

Figure 11 shows that funding ratios using termination liabilities were 

typically lower than funding ratios using current liabilities, for plans 

reporting termination liabilities to PBGC under section 4010 of ERISA, as 

amended. In 1996, for example, the average funding ratio based on 

termination liability was 69 percent, but the average funding ratio based 

1

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

other things, the aggregate unfunded vested benefits at the time of the preceding plan year 

of plans maintained by the contributing sponsor and the members of its controlled group 

exceed $50 million, disregarding plans with no unfunded benefits. See 29 U.S.C. 1310(b). 

Among the information to be provided to PBGC is the value of benefit liabilities determined 

using the assumptions applicable to the valuation of benefits to be paid as annuities in 

trusteed plans terminating at the end of the plan year. See 29 C.F.R. 4010(8)(d)(2). 

2

See footnote 10. 

Page 49 GAO-04-90 Pension Benefit Guaranty Corporation 
Appendix IV: Differences in Interest Rate 

Calculations Contribute to Differences 

between Termination and Current Liabilities 

on current liability was 99 percent.3 Termination liability funding ratios are 

typically lower than current liability funding ratios because termination 

liabilities are typically greater than current liabilities. 

Figure 11: Average Termination and Current Liability Funding Ratios for Plans 

Submitting Termination Liability Data to PBGC under Section 4010 of ERISA, Plan 

Years 1996 –2001 

Funding ratio 

99 100 

90 

80 

70 

60 

50 

40 

30 

20 

10 

0 

1996 1997 1998 1999 2000 2001 

Plan year 

69 71 

95 

72 

97 

75 

95 

74 

92 

82 

86 

4010 termination liability funding ratio 

5500 current liability funding ratio 

Source: PBGC. 

Note: Current liability is reported as of the beginning of the plan year, and termination liability is 

reported as of the end of the plan year. Therefore, in figure 11, current liability funding ratios are as of 

the beginning of the plan year, and termination liabilities are as of the end of the preceding plan year. 

As a result, any changes in plan benefits that went into effect at the beginning of a plan year would be 

reflected in that year’s current liability funding ratio but not its termination liability funding ratio. 

Funding ratios are calculated by dividing assets by liabilities. 

Figure 12 shows that the PBGC rate used to calculate termination 

liabilities, and the maximum and minimum rates used to calculate current 

3

We have reported averages for the plans submitting termination liability information to 

PBGC, instead of ratios for specific plans, because ERISA generally precludes the 

disclosure of the information submitted by plans to PBGC as part of the 4010 process. See 

13 U.S.C. 1310(c). 

Page 50 GAO-04-90 Pension Benefit Guaranty Corporation 
Appendix IV: Differences in Interest Rate 

Calculations Contribute to Differences 

between Termination and Current Liabilities 

liabilities, varied considerably 1996 through 2001. In the first 3 years, 

PBGC termination liability rates were typically less than current liability 

rates, but in the following 2 years, termination liability rates were typically 

higher than current liability rates. Lower interest rates result in higher 

liability values, and higher rates result in lower liability values.4

 As a result, 

when the PBGC termination rate was high, relative to the current liability 

rate, termination liabilities would be reduced relative to current liabilities, 

causing the gap between the two funding ratios to narrow, as it did in 

2001. 

4

When interest rates are lower, for example, more money is needed today to finance future 

benefits because it will earn less income when invested. To illustrate the effect of a change 

in interest rates on the present value of a stream of future payments: at a 6 percent interest 

rate, a promise to pay $1.00 per year for the next 30 years has a present value of about 

$14. If the interest rate is reduced to 1.0 percent, however, the present value of $1.00 per 

year for 30 years increases to about $26. 

Page 51 GAO-04-90 Pension Benefit Guaranty Corporation 
Appendix IV: Differences in Interest Rate 

Calculations Contribute to Differences 

between Termination and Current Liabilities 

Figure 12: PBGC Termination, and Highest and Lowest Current Liability, Interest 

Rates, 1996-2002 

Interest rate


8


7


6


5


0


1/1996 1/1997 1/1998 1/1999 1/2000 1/2001 1/2002


Month 

PBGC termination liability rate 

Maximum current liability rate 

Minimum current liability rate 

Source: PBGC and the IRS. 

Note: PBGC published two rates, one for the first 20 to 25 years of a valuation period and another for 

the remaining years. The figure shows the PBGC rate for the first part of the valuation period. 

Page 52 GAO-04-90 Pension Benefit Guaranty Corporation 
Appendix V: Comments from the Pension 

Benefit Guaranty Corporation 

Page 53 GAO-04-90 Pension Benefit Guaranty Corporation 
Appendix VI: GAO Contacts and Staff 

Acknowledgments 

Contacts 

Staff 

Acknowledgments 

(130248) 

Charles A. Jeszeck, Assistant Director (202) 512-7036 

Daniel F. Alspaugh, Analyst-in-Charge (425) 904-2177 

In addition to those named above, Joseph Applebaum, Mark M. Glickman, 

Corinna Nicolaou, David Noguera, John M. Schaefer, George A. Scott, and 

Roger J. Thomas made important contributions to this report. 

Page 54 GAO-04-90 Pension Benefit Guaranty Corporation 
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