PENSION BENEFIT 

GUARANTY 

CORPORATION

Redesigned Premium 

Structure Could Better 

Align Rates with Risk 

from Plan Sponsors

Report to the Chairman, Committee on 

Health, Education, Labor, and 

Pensions, U.S. Senate

November 2012

GAO-13-58

United States Government Accountability Office

GAO
United States Government Accountability Office

Highlights of GAO-13-58, a report to the 

Chairman, Committee on Health, Education, 

Labor, and Pensions, U.S. Senate

November 2012

PENSION BENEFIT GUARANTY CORPORATION

Redesigned Premium Structure Could Better Align 

Rates with Risk from Plan Sponsors

Why GAO Did This Study

At the end of fiscal year 2011, PBGC 

insured the pension benefits of 44 

million U.S. workers, retirees, and 

beneficiaries in about 27,000 private 

defined benefit plans. PBGC’s 2011 

net accumulated deficit of $26 billion, 

coupled with future risks posed by plan 

sponsors and their plans, threatens 

PBGC’s solvency. To help contain 

PBGC’s deficit, Congress recently 

passed legislation increasing PBGC 

premiums. Beyond simply increasing 

rates, the administration has proposed 

granting PBGC authority to redesign its 

premium structure to more fully reflect 

the risk of new claims. To better 

understand the issues involved, GAO 

was asked to examine (1) the options 

available to adjust premiums to 

improve PBGC’s financial condition; (2)

the potential implications of adjusting 

premiums; and (3) the potential 

implementation challenges in moving 

to a more risk-based premium 

structure.

To conduct this work, GAO reviewed 

relevant legislation, analyzed PBGC 

premium data, and interviewed officials 

implementing other risk-based 

premium structures in this country and 

the United Kingdom, as well as 

numerous experts and plan sponsors 

reflecting a broad spectrum of 

perspectives on the topic.

What GAO Recommends

GAO suggests that Congress consider 

revising PBGC’s premium structure to 

better reflect the agency’s risk from 

individual plans and sponsors, and 

recommends that PBGC further 

develop its analyses of possible 

redesign options. PBGC agreed with 

our recommendation.

What GAO Found

Various options are available to make the Pension Benefit Guaranty 

Corporation’s (PBGC) premium structure more risk-based and better reflect the 

risk of future claims. Historically, PBGC’s premiums have not fully reflected the 

risks PBGC insures against—chiefly that a plan sponsor with an underfunded 

plan will become bankrupt, forcing the termination of the plan and imposing a 

claim on PBGC. PBGC’s current structure relies largely on a flat-rate premium 

that is based on the number of plan participants and that assesses rates equally 

per plan participant across all sponsors. PBGC also charges a variable-rate 

premium that is based on just one risk factor, plan underfunding. One available 

option is to further increase rates within this current structure; however, plan 

underfunding alone is a poor proxy for the risk of new claims. An alternative 

option is to redesign premiums to incorporate additional risk factors, such as a 

sponsor’s financial strength (as currently being explored by PBGC) or a plan’s 

investment strategy (as is currently done in the United Kingdom). 

Moving to a more risk-based system would shift premium costs among sponsors. 

To analyze the potential effects of different premium structures, PBGC developed 

a model using data from a sample of about 2,700 plans. Under one possible 

option explored by PBGC that incorporated an additional risk factor for a 

sponsor’s financial health, financially healthier sponsors would tend to pay less 

and financially riskier sponsors more—as much as $257 more per participant, 

depending on their assigned risk level. Some pension experts and plan sponsors 

we spoke with raised concerns about this potential redistribution of costs. For 

example, some believe that plan terminations would increase. However, prior 

work from GAO and others indicates that other factors—including sponsor size, 

collective bargaining agreements, and overall plan cost—are more important in 

sponsors’ decisions to freeze their plans. Some pension experts and plan 

sponsors also noted that a more risk-based system could lead to premium 

increases during poor economic conditions when sponsors are least able to pay, 

and that it is inequitable for current sponsors to pay higher rates to address costs 

resulting from prior plan terminations. However, experts also made suggestions 

about how to address such concerns within a redesigned premium structure, 

such as by capping premium levels and averaging sponsors’ funding levels over 

multiple years to reduce volatility.

The process of redesigning and implementing a more risk-based premium 

structure poses potential data and administrative challenges. To help address 

these challenges, PBGC’s model could be further developed to evaluate the 

implications of incorporating additional risk factors, such as company financial

health and plan investment mix. Such efforts could include identifying any 

additional data needs, as well as exploring the effects on sponsors, including any 

potentially disproportional hardships on smaller companies resulting from 

redistributing higher rates to riskier sponsors based on a redesigned structure. 

Although PBGC is uniquely situated to take on additional rate-setting 

responsibilities, if Congress were to relinquish some authority in this area, certain 

safeguards still may be required to help mitigate concerns about PBGC’s 

governance, oversight, and transparency. These safeguards could include 

additional congressional oversight, soliciting public feedback, and establishing an 

appeals process for sponsors who wish to challenge their assessment.

View GAO-13-58. For more information, 

contact Charles Jeszeck at (202) 512-7215 or 

jeszeckc@gao.gov.
Page i GAO-13-58 PBGC Premiums

Letter 1 

Background 4

Various Options Are Available for More Risk-Based Premiums 13

Moving to a More Risk-Based Structure Shifts Premium Costs to 

Riskier Sponsors 26

Moving to a Risk-Based Premium Structure Poses Various 

Challenges 38

Conclusions 47

Matters for Congressional Consideration 49

Recommendation for Executive Action 50

Agency Comments and Our Evaluation 50

Appendix I Recent Legislation Related to the Pension Benefit Guaranty 

Corporation 53

Appendix II President’s Fiscal Year 2013 Budget Proposal for PBGC 57

Appendix III Further GAO Analyses of a Risk-Based Premium Option 61

Appendix IV The United Kingdom’s Pension Protection Fund’s Premium 

Structure 64

Appendix V Overview of Pension Benefit Guaranty Corporation’s Process for 

Calculating Its Deficit 68

Appendix VI Overview of Pension Benefit Guaranty Corporation’s Pension 

Insurance Modeling System 75

Appendix VII Plan Sponsors and Pension Experts Interviewed 82

Contents
Page ii GAO-13-58 PBGC Premiums

Appendix VIII History of Pension Benefit Guaranty Corporation Premiums for the 

Single-Employer Program, Fiscal Years 1974 to 2012 84

Appendix IX Comments from Pension Benefit Guaranty Corporation 85

Appendix X GAO Contact and Staff Acknowledgments 88

Tables

Table 1: Premium Rates under MAP-21 10

Table 2: PBGC’s Risk Exposure 11

Table 3: Various Estimates of PBGC’s Total Risk Exposure 12

Table 4: Rates under MAP-21 Compared to a Hypothetical Option 

to Adjust PBGC Premiums under the Current Structure 14

Table 5: Different Options to Incorporate Additional Risk Factors 

into Premiums 17

Table 6: Total Premium Rates per Participant (Flat + Variable) 

under a Hypothetical Risk-Based Option 20

Table 7: Hypothetical Risk-Based Option Premium Rates Compared 

to Rates in Plan Year 2010 and in Plan Year 2015 under 

MAP-21 27

Table 8: Options Suggested by Experts to Address PBGC’s Past 

Deficit Costs 37

Table 9: Preliminary Joint Committee on Taxation Score of 

Revenue Changes Caused by Surface Transportation 

Conference Report Related to Pension Funding 

Stabilization and PBGC Premium Provisions, Fiscal Years 

2012-2022 56

Table 10: Proposed Budget Savings Listed under PBGC 58

Table 11: Increase in Premium Rates for the Single-Employer 

Program Estimated by PBGC for the President’s Fiscal 

Year 2013 Budget, Fiscal Years 2013-2022 59

Table 12: Distribution of Plans by Financial Health and Funded 

Status under a Hypothetical Risk-Based Option 61

Table 13: Number and Percentage of Participants with Premium 

Rate Changes under One Hypothetical Risk-Based Option 62

Table 14: Number and Percentage of Plans with Premium Rate 

Changes under One Hypothetical Risk-Based Option 63
Page iii GAO-13-58 PBGC Premiums

Table 15: Components of the United Kingdom’s Pension Protection 

Fund’s Premium Formula, Plan Year 2012/13 65

Table 16: Main Components of Assets and Liabilities Included in 

PBGC’s Statements of Financial Condition 69

Table 17: PBGC Statements of Financial Condition for its SingleEmployer and Multiemployer Programs, Fiscal Year 2011 73

Figures

Figure 1: PBGC’s Annual Premium Revenue Compared to New 

Claims for the Single-Employer Program, Fiscal Years 

2000-2011 7

Figure 2: Percentage of Sample Sponsors with Premium Rate 

Changes under PBGC’s Hypothetical Risk-Based Option 

Compared with Estimated Rates in Plan Year 2015 under 

MAP-21 29

Figure 3: PBGC’s Surplus/Deficit for the Single-Employer Program, 

Fiscal Years 1980-2011 74

Figure 4: PBGC Actual and Projected Net Financial Position for the 

Single-Employer Program, Fiscal Years 2001-2020 80
Page iv GAO-13-58 PBGC Premiums

Abbreviations

CAMELS capital, asset quality, management, earnings, liquidity, and 

 sensitivity to market risk

CBO Congressional Budget Office

DB defined benefit

ERISA Employee Retirement Income Security Act of 1974

FDIC Federal Deposit Insurance Corporation

MAP-21 Moving Ahead for Progress in the 21st Century Act

PBGC Pension Benefit Guaranty Corporation

PIMS Pension Insurance Modeling System

PPA Pension Protection Act of 2006

PPF Pension Protection Fund

UK United Kingdom

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Page 1 GAO-13-58 PBGC Premiums

United States Government Accountability Office

Washington, DC 20548

November 7, 2012

The Honorable Tom Harkin

Chairman

Committee on Health, Education, Labor, and Pensions

United States Senate

Dear Mr. Chairman:

The Pension Benefit Guaranty Corporation (PBGC) is a government 

corporation established under the Employee Retirement Income Security 

Act of 1974 (ERISA)1 to protect the pension benefits of American 

workers. As of the end of fiscal year 2011, PBGC was responsible for 

insuring the benefits of nearly 44 million workers, retirees, and 

beneficiaries participating in about 27,000 private sector defined benefit 

(DB) plans, but faced an accumulated deficit of $26 billion. The bulk of 

this deficit ($23 billion) is attributable to PBGC’s single-employer 

program,2 reflecting the disparity between the value of future benefits 

owed to participants of terminated plans insured under this program and 

the funds available to pay for these benefits. PBGC’s deficit has 

increased over the last decade—mostly due to the termination of a few 

large, underfunded single-employer DB plans, as well as investment 

losses and declines in interest rates following the economic downturn. At 

the same time, PBGC’s financial condition has been adversely affected 

by long-standing structural challenges—including a steady decline in the 

number of private employers sponsoring DB plans and a statutory 

premium structure that does not adequately reflect the risk of future 

claims from plan terminations.3

 

1

Pub. L. No. 93-406, § 4002(a), 88 Stat. 829, 1004 (codified as amended at 29 U.S.C. § 

1302(a)).

2

PBGC administers two separate insurance programs: a single-employer program and a 

multiemployer program. The single-employer program, comprised of about 25,000 DB 

plans, insures each plan established and maintained by one employer. The much smaller 

multiemployer program, comprised of about 1,500 plans, insures plans that are arranged 

through collective bargaining between one or more labor unions and a group of employers 

in a particular trade or industry. This report focuses on the challenges facing PBGC’s 

single-employer program. 

3

Generally speaking, a claim occurs when a plan sponsor with an underfunded plan goes 

bankrupt. 

 
 

Page 2 GAO-13-58 PBGC Premiums

Congress has periodically increased premium rates for plan sponsors 

within the current premium structure to help put the agency on a firmer 

financial footing, most recently in the Pension Protection Act of 2006 

(PPA)4 and the Moving Ahead for Progress in the 21st Century Act (MAP21), enacted July 6, 2012.5

One proposal to help address the agency’s deficit—specified in the 

President’s fiscal year 2013 budget—would give PBGC the authority to 

move to a more risk-based premium structure for plan sponsors 

participating in the single-employer program. To gain a better 

understanding of the advantages and disadvantages of such a proposal, 

you asked us to examine (1) the options that are available to adjust 

premiums to improve PBGC’s long-term financial condition, (2) the 

potential implications of these options for plan sponsors and participants, 

and (3) the potential implementation challenges in moving to a risk-based 

premium structure.

Nevertheless, PBGC still faces a substantial 

deficit from past claims and exposure to risk of losses from future claims 

that could potentially lead to the agency’s insolvency.

To determine what options are available to adjust PBGC’s premium 

structure to improve its future financial condition, we first reviewed 

relevant federal laws pertaining to PBGC’s current premiums, including 

increases to premiums made under MAP-21 (see app. I), and PBGC 

policies for collecting premiums for the single-employer program. We then 

reviewed the President’s proposal for more risk-based premiums (see 

app. II), as well as various academic and policy papers that suggest other 

approaches that might be considered in redesigning PBGC’s premium 

structure. We also obtained data from a model PBGC developed to 

illustrate different premium options. We assessed the validity of the 

model’s formulas and assessed the reliability of the model’s data set of 

2,699 plans. We used the model’s data set, which represented 81 percent 

of the DB population in plan year 2010, to conduct further analyses of 

 

4

Pub. L. No. 109-280, 120 Stat. 780. 

5

Pub. L. No. 112-141, § 40221, 126 Stat. 404, 850-52 (2012). Although primarily about 

funding highways, MAP-21 also included several pension-related provisions, requiring 

changes to the funding rules for DB plan sponsors, strengthening PBGC governance 

practices, as well as increasing premium rates for DB plans covered by PBGC’s singleemployer and multiemployer insurance programs. Pub. L. No. 112-141, § 40221, 126 Stat. 

404, 846-59 (2012). (See app. I for more information on the pension-related provisions 

included in MAP-21.)
 

Page 3 GAO-13-58 PBGC Premiums

various options (see app. III). In addition, we interviewed PBGC officials 

and other federal officials from the Department of Commerce, Federal 

Deposit Insurance Corporation (FDIC), the Department of Labor (Labor), 

and the Department of the Treasury about these options, as well as 

pension officials from the United Kingdom’s (UK) Pension Protection 

Fund (PPF)—an agency that provides benefit insurance to participants in 

DB plans and charges risk-based premiums to plans sponsors in the UK 

(see app. IV).6 To better understand how PBGC determines its risk 

exposure for future claims and losses, we obtained information about how 

PBGC calculates its deficit (see app. V) and how PBGC uses the Pension 

Insurance Modeling System (PIMS), one of the modeling tools the agency 

uses to make estimates of its future financial condition and evaluate 

premium options (see app. VI). While PBGC’s Inspector General found 

problems with some detailed data generated by PIMS,7 we reviewed the 

PIMS data provided to us and conducted a meeting with PBGC officials to 

discuss the reliability of these data. We determined that the PIMS data 

provided to us and used by PBGC in its 2010 exposure report8

To obtain information about the potential implications of different premium 

options for plan sponsors and participants and the potential 

implementation challenges of moving to a risk-based premium structure, 

we interviewed a small judgmental sample of nine plan sponsors, 

selected to reflect an array of characteristics including plan size, sponsor 

financial condition, and union involvement. We also conducted interviews 

with a broad range of pension experts including academics, actuaries, 

business organizations, and labor officials. (See app. VII for a list of plan 

sponsors and organizations we contacted.)

were 

sufficiently reliable to provide information on the approximate magnitude 

of PBGC’s future financial condition and to generally understand the 

mechanics of premium options.

 

6

We did not conduct independent legal analysis to verify the information about PPF’s 

premium framework, but rather relied on a review of publicly available PPF documents 

and discussions with PPF officials. See appendix IV for a description of the risk factors 

PPF has incorporated into its premium structure in the UK.

7

In May 2012, PBGC’s Inspector General released a report finding that PIMS lacks key 

internal controls to ensure the integrity of the model’s reported results. See PBGC Office 

of Inspector General, Ensuring the Integrity of Policy Research and Analysis Department’s 

Actuarial Calculations, PA-12-87 (Washington, D.C.: May 2012). 

8

Pension Benefit Guaranty Corporation, 2010 PBGC Annual Exposure Report. 

(Washington, D.C.: November 2011). 
 

Page 4 GAO-13-58 PBGC Premiums

We conducted this performance audit between July 2011 and November 

2012 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.

PBGC was established under ERISA, in part, to insure the pension 

benefits of participants in qualified DB plans and pay participants up to 

certain statutory limits should their plans be terminated with insufficient 

funds.9

PBGC has a three-member board of directors, consisting of the 

Secretaries of the Departments of Commerce, Labor, and the Treasury, 

that is charged with providing policy direction and oversight of PBGC’s 

finances and operations. PBGC’s Director is appointed by the President 

and subject to Senate confirmation.

DB plans provide a benefit that is determined by a formula based 

on various factors specified in the plan, such as an employee’s salary, 

years of service, and age at retirement.

10

 

9

29 U.S.C. §§ 1302(a)(2) and 1361. The guaranteed benefit limits for participants in 

single-employer plans cannot exceed the statutory maximum, adjusted annually, at the 

time the plan terminates. For 2012, the maximum is $54,000 per year for a person retiring 

at age 65 with no survivor benefit (that is, a single-life annuity). The maximum is lower for 

those retiring under age 65 or with a survivor benefit. 29 U.S.C. § 1322(b)(3); 29 C.F.R. § 

4022.23 (2012). Other guaranteed benefit limits for participants in single-employer plans 

include the phase-in limit and accrued-at-normal limit. Under the phase-in limit, for any 

benefit increase implemented through a plan amendment that has been in effect for less 

than 5 years, only a pro-rata portion can be guaranteed. 29 U.S.C. § 1322(b)(1) and (7); 

29 C.F.R. § 4022.25 (2012). Under the accrued-at-normal limit, the monthly guaranteed 

benefit cannot be greater than the monthly benefit available at the plan’s normal 

retirement age provided as a straight-life annuity (that is, a periodic payment for the life of 

the retiree), with no additional payments to survivors. 29 C.F.R. § 4022.21 (2012).

Consistent with our previous 

1029 U.S.C. § 1302(d). Prior to the enactment of the PPA, ERISA charged the Secretary of 

Labor, as the chair of PBGC’s board, with administering PBGC. The Secretary has, in 

turn, historically delegated the responsibility for administering PBGC to an executive 

director. Since the enactment of PPA, the director has replaced the chair of the board as 

PBGC administrator. § 411(a), 120 Stat. 935.

Background 
 

Page 5 GAO-13-58 PBGC Premiums

recommendations concerning challenges to PBGC’s governance,11 the 

recently enacted MAP-21 included numerous provisions to strengthen 

PBGC’s board and governance structure overall (see app. I).12

PBGC administers two separate insurance programs: a single-employer 

program and a multiemployer program13 and is charged with encouraging 

continuation of private pension plans, providing for timely and 

uninterrupted payment of participants’ pension benefits (up to the insured 

limits) should plans be terminated with insufficient funds, and maintaining 

premiums established under the statute at the lowest level consistent with 

its obligations under ERISA.14

 

11We have previously reported concerns regarding PBGC’s board, including limitations in 

its ability to provide policy direction and oversight to PBGC, and the need for the 

implementation of certain types of reporting requirements—such as congressional 

notifications and reporting protocols for advisory committees—to ensure effective 

communication between PBGC and Congress. See GAO, Pension Benefit Guaranty 

Corporation: Governance Structure Needs Improvements to Ensure Policy Direction and 

Oversight, 

PBGC-insured DB plans have been in 

decline since the 1980s. As of 2011, PBGC insured about 25,500 singleemployer DB plans covering about 34 million participants, down from 

nearly 92,000 plans in 1990. During this period, many sponsors have 

voluntarily terminated their plans as “standard” terminations. Standard 

terminations occur when sponsors 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 

GAO-07-808 (Washington, D.C.: July 6, 2007) and Pension Benefit Guaranty 

Corporation: Improvements Needed to Strengthen Governance Structure and Strategic 

Management, GAO-11-182T (Washington, D.C.: Dec. 1, 2010).

12§ 40231, 126 Stat.853-56.

1329 U.S.C. §§ 1322 and 1322a. The single-employer program insures plans established 

and maintained by one employer. Single-employer plans can be established unilaterally by 

the sponsor or through a collective bargaining agreement with a labor union. The 

multiemployer program insures plans that are arranged through collective bargaining 

between a labor union and a group of employers in a particular trade or industry. 

Management and labor representatives must jointly govern multiemployer plans. 29 

U.S.C. § 1002(37).

1429 U.S.C. § 1302(a).
 

Page 6 GAO-13-58 PBGC Premiums

paying lump-sum benefits to participants if permissible.15 An event 

preceding at least some of these terminations was a so-called plan 

“freeze”—an amendment to the plan to limit some or all future pension 

accruals for some or all plan participants.16

To finance its operations, PBGC has three key sources of funds: (1) 

pension assets obtained from underfunded, terminated single-employer 

plans which it takes over;17 (2) premiums paid by both single-employer 

and multiemployer plan sponsors; and (3) investment income and net 

gains and losses generated from the investment of these funds.18

 

1529 U.S.C. § 1341(b). If the sponsor of a single-employer plan meets the statutory 

requirements for financial distress and the plan does not have sufficient assets to pay 

promised (“vested accrued”) benefits, the plan cannot be terminated as a standard 

termination. Instead, the plan will be terminated as distress or involuntary termination, and 

PBGC will likely become the plan’s trustee, assuming responsibility for paying benefits to 

participants as they become due, up to the guaranteed benefit limits. 29 U.S.C. § 1341(c). 

PBGC may initiate an “involuntary” termination if a plan has not met minimum funding 

standards, a plan will be unable to pay benefits when due, a reportable event has 

occurred, or the possible long-run loss to PBGC with respect to a plan may reasonably be 

expected to increase if the plan is not terminated. 29 U.S.C. § 1342(a).

Figure 

1 shows that the annual amount of PBGC’s new claims in the singleemployer program has fluctuated dramatically during the last 12 years—

sometimes exceeding the amount of premiums and thereby contributing 

16For example, a pension plan may close to new participants, or a plan may opt to prohibit 

existing participants from earning pension benefits in the future.

17The PPA included provisions to modify funding rules and increase premiums for 

sponsors of single-employer plans. §§ 101, 102, 111, and 112, and 401 and 405, 120 

Stat. 784-809, 820-846, and 922 and 928-29. However, Congress has provided sponsors 

with funding relief in the last few years and revised some provisions to help mitigate the 

effects of the recent economic downturn. Worker, Retiree, and Employer Recovery Act of 

2008, Pub. L. No. 110-458, §§ 101, 102, 121 and 122, 122 Stat. 5092, 5093-5103, 5113-

14, Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 

2010, Pub. L. No. 111-192, tit. II, 124 Stat.1280, 1283-1306, and MAP-21, § 40221, 126 

Stat. 850-52.

1829 U.S.C. § 1305(b). Throughout this report we refer to all funds generated through the 

investment of assets as investment income. For further discussion of PBGC’s investment 

strategy; see GAO, Pension Benefit Guaranty Corporation: Asset Management Needs 

Better Stewardship, GAO-11-271 (Washington, D.C.: June 30, 2011).

PBGC Funding and Deficit
 

Page 7 GAO-13-58 PBGC Premiums

to persistent deficits.19

Figure 1: PBGC’s Annual Premium Revenue Compared to New Claims for the 

Single-Employer Program, Fiscal Years 2000-2011 

In contrast, as illustrated in figure 1, the amount of 

premium revenue PBGC has collected from plans in the single-employer 

program has been much less volatile, growing fairly steadily over the last 

10 years from $967 million in fiscal year 2002 (adjusted for inflation) to 

nearly $2.1 billion in fiscal year 2011.

Note: Data adjusted for inflation.

a

 

19PBGC officials noted that where present values are meaningful, such as in calculating 

PBGC’s deficit, it is important to consider PBGC’s current financial position in determining 

the adequacy of future premiums. In addition, they also noted that the adequacy of any 

premium structure is highly dependent on investment income that (a) can improve 

PBGC’s financial position over long periods if PBGC’s assets are expected to earn more 

than the discount rate on its liabilities, as has been the case; (b) can and has created 

significant gains and losses in PBGC’s financial position due to market fluctuations and 

the impact on PBGC’s and insured plan’s asset returns; and (c) cannot reduce the growth 

of the existing deficit to the extent that liabilities exceed assets. 

New claims for fiscal year 2000 were $110 million.
 

Page 8 GAO-13-58 PBGC Premiums

As of the end of fiscal year 2011, PBGC’s single-employer program had 

an accumulated deficit of just over $23 billion, which is the result of 

comparing the value of its assets with the value of its liabilities for claims 

incurred to date.20 Although there are differing views about the 

appropriateness of the assumptions PBGC uses in calculating its deficit,21

PBGC has reported a net accumulated deficit since 2002. As a result of 

these deficits and structural issues impeding PBGC’s ability to adequately 

fund its insurance programs, including the likelihood of large, unfunded 

pension plan terminations, we have designated PBGC’s single-employer 

program as high risk since 2003.

there is general agreement that failure to address various structural 

challenges could have consequences for both PBGC’s long-term financial 

condition and the health of the DB system. Market performance and low 

interest rates affect PBGC’s financial position, but so, too, have various 

structural challenges, including historically inadequate plan funding 

requirements and premium levels for private DB plan sponsors. To help 

address these structural challenges, PPA attempted to strengthen plan 

funding requirements, but these changes were modified or postponed due 

to the economic downturn, resulting in reduced funding for plans. In 

addition, MAP-21 included provisions to increase premium rates effective 

beginning in 2013, but left the current premium structure intact.

22

 

20The value of liabilities is equal to the actuarial present value of projected future benefit 

payments, which is determined by use of certain assumptions about interest rates, among 

other things, to adjust the amount of future benefit payments to reflect the time value of 

money (by discounting) and the probability of payment (by means of decrements, such as 

for death or retirement). PBGC also includes the estimated liabilities in excess of assets 

for new claims that it deems probable.

PBGC receives no funds from general 

tax revenue. However, if at some point in the future the agency were to 

exhaust all of its assets and become insolvent, its commitments would not 

21See appendix V for a more detailed description of how PBGC calculates its deficit.

22GAO, Pension Benefit Guaranty Corporation: Long-Term Vulnerabilities Warrant “High 

Risk”, GAO-03-1050SP (Washington, D.C.: July 23, 2003); High-Risk Series: An Update, 

GAO-09-271 (Washington, D.C.: January 2009); and High-Risk Series: An Update, 

GAO-11-278 (Washington, D.C.: February 2011), 150-153. Although we designated 

PBGC’s single-employer program as a “high-risk” program in 2003, we first designated 

PBGC as a high-risk area in 1990, citing taxpayers’ exposure to potential losses from the 

termination of large, underfunded plans. In 1995, we removed PBGC from our list of highrisk areas due to congressional and agency actions that we believed would reduce 

PBGC’s exposure to losses. In 2009, we also designated the multiemployer program as 

high risk.
 

Page 9 GAO-13-58 PBGC Premiums

be backed by the full faith and credit of the federal government,23 and the 

agency would only have premium revenue to rely on to pay its benefit 

obligations. As a consequence, PBGC could be forced to dramatically cut 

benefit payments to participants, seek federal assistance, or raise 

premiums significantly to meet its benefit commitments. In previous 

reports on PBGC, we have recommended that PBGC’s premium structure 

be re-examined to explore whether premiums could better reflect the risk 

posed by various plans to the pension system.24

Under the current premium structure for its single-employer program, 

PBGC collects from sponsors a per participant flat-rate premium and a 

variable-rate premium that is based on a plan’s level of underfunding.

25

PBGC also collects a termination premium from sponsors of singleemployer plans that terminate their plans under certain criteria.26

 

23Historically under ERISA, PBGC was granted a $100 million line of credit from the 

federal government. ERISA, § 4005(c), 88 Stat. 1010. Under MAP-21, enacted in July 

2012, this line of credit was discontinued. § 40234, 126 Stat. 858.

While 

conceptually, PBGC uses the flat-rate premium as a proxy for exposure 

based on the number of participants, to the extent that the premium 

structure relies on flat-rate premiums, sponsors with greater numbers of 

participants pay more toward the cost of covering risk than sponsors with 

smaller numbers of participants, regardless of the ages of the 

participants, the average level of plan benefits, or other risk-related

differences. To the extent that the premium structure relies on variablerate premiums, sponsors with more underfunded plans pay more toward 

the cost of covering risk than sponsors with better funded plans, 

24GAO, Pension Benefit Guaranty Corporation: Single-Employer Pension Insurance 

Program Faces Significant Long-Term Risks, GAO-04-90 (Washington, D.C.: October 29, 

2003).

25The nearly $2.1 billion in premium revenue in fiscal year 2011 consisted of $1.1 billion in 

flat-rate premiums and $929 million in variable-rate premiums.

2629 U.S.C. § 1306(a)(3)(A)(1), (E) and (F). A termination premium of $1,250 per 

participant per year for 3 years generally applies when a single-employer plan terminates 

in a distress termination under 29 U.S.C. § 1341(c)(2)(B)(ii) or (iii) or in an involuntary 

termination under 29 U.S.C. § 1342. 29 U.S.C. § 1306(a)(7)(A). However, this premium 

does not apply in the case of a plan terminated under 29 U.S.C. §§ 1341(c)(2)(B)(ii) or 

1342 during the pendency of a bankruptcy reorganization (29 U.S.C. § 1306(7)(b)), or to 

any plan termination during the pendency of any bankruptcy reorganization filed before 

October 18, 2005 (Deficit Reduction Act of 2005, Pub. L. No. 109-171, § 8101(b) and (d), 

120 Stat. 181-22 and 183 (2006)).

PBGC’s Current Premium 

Structure 
 

Page 10 GAO-13-58 PBGC Premiums

regardless of the riskiness of the plan assets or the financial health of the 

plan sponsor. As a result, there is concern that the current statutory 

premium structure does not allocate premiums to match the variation in 

risk posed by different plan sponsors. In fact, the heavy focus on the flatrate premium tends to create a cross-subsidy paid by financially healthy 

sponsors to cover the risks posed by sponsors that are less financially 

strong.

For plan years beginning in 2006, the base flat rate was $30 per 

participant, increasing with inflation adjustments to $35 for 2012, while the 

base variable rate remained at $9 for every $1,000 of plan underfunding. 

Under provisions enacted in MAP-21, rates were increased within this 

same premium structure. The flat-rate premium begins to rise in 2013, 

and then the variable-rate premium begins to rise in 2014. Beginning in 

2013, the variable-rate premium is also subject to a $400 per participant 

limit (see table 1).27

Table 1: Premium Rates under MAP-21

Rates by plan year

Rate type 2011 2012 2013 2014 2015

Flat rate (per participant) $35 $35 a $42 a $49 $49 or more based 

on indexing

Variable rate (per $1,000 of unfunded vested 

benefits)

b

c $9 $9 $9 or more 

based on 

indexing

$13 or more 

based on 

indexing c

$18 or more based 

on indexing c

Sources: MAP-21, Pub. L. No. 112-141, § 40221, 126 Stat. 405, 850-52.

c 

a

This reflects the base rate of $30 adjusted for inflation.

b

After 2014, rates will be indexed based on increases in the national average wage index, as 

determined by the Social Security Administration, and then rounded to the nearest whole dollar.

c

Though calculated based on the amount of underfunding, the variable rate is subject to a per 

participant limit of $400 for 2013, with indexing based on increases in the national average wage 

index, as determined by the Social Security Administration. In addition, MAP-21 provided for an 

additional $4 increase in plan year 2014, plus an additional $5 increase in plan year 2015.

 

27§ 40221(b)(3), 126 Stat. 852 (codified at 29 U.S.C. § 1306(a)(3)(E)(i)(II)).
 

Page 11 GAO-13-58 PBGC Premiums

Historically, PBGC’s premiums have not fully reflected the risks PBGC 

insures against—chiefly that a plan sponsor with an underfunded plan will 

become bankrupt, forcing the termination of the plan and imposing a 

claim on PBGC.28

Table 2: PBGC’s Risk Exposure

Risks related to potential new claims depend largely on 

plan sponsor behavior, while PBGC’s risks post-termination depend 

largely on the agency’s own investment strategy, among other things (see 

table 2).

Type of risk Description

New claims risk PBGC exposure is based on several factors:

• plan sponsor behavior with regard to maintaining plans, funding plans, and investment strategy 

(allocation of plan assets)

• size of new claims

• economic conditions, including the level of bankruptcies, market returns, and interest rates

• adequacy of premium levels, either set by Congress or by PBGC if granted such authority 

• impact of plan freezes

• deterioration in performance of particular industries

• participant longevity improvements greater than expected 

PBGC financial risk PBGC exposure is based on several factors:

• PBGC’s investment strategy 

• market returns and interest rate movements

• participant longevity improvements greater than expected 

Source: GAO analysis of PBGC’s 2010 exposure report. 

PBGC has estimated that if premium rates were kept at fiscal year 2011 

levels,29

 

28See appendix VIII for a summary of historical PBGC premium rates, 1974 to 2012.

total premium revenue from single-employer plans over the next 

10 years would be less than the amount of expected new claims. In 

addition, many pension experts and the administration believe that PBGC 

premiums have been much lower than what a private financial institution 

would charge for insuring the same risk and are insufficient for PBGC to 

meet its long-term obligations. Indeed, one study estimated that the 

overall premiums collected by PBGC are equal to about 50 percent of 

29For the purpose of this projection, PBGC assumed that the flat rate would increase each 

year over the current rate by approximately $1 to account for an annual increase in the 

wage growth index and that the variable rate would remain the same as current law for the 

period. 

Historical Premium Rates 

Have Been Inadequate to 

Cover Claims
 

Page 12 GAO-13-58 PBGC Premiums

what a private insurer would charge because its premiums do not 

adequately account for risks.30

Table 3: Various Estimates of PBGC’s Total Risk Exposure

To set premiums at a level sufficient to 

cover PBGC’s total risk exposure would require an analysis of total risk. 

Several methods have been used to estimate PBGC’s total risk exposure 

with widely varying results, as described in table 3.

Estimation method Description

Credit ratings of sponsors with 

underfunded plans

Estimate risk exposure from underfunding by plan sponsors whose credit ratings are below 

investment grade or that meet one or more financial distress criteria. PBGC already performs 

this analysis by classifying these sponsors’ underfunded plans as reasonably possible 

terminations. 

Market value of insurance Estimate risk exposure from the price a private insurer would charge. In a 2005 report, the 

Congressional Budget Office (CBO) estimated PBGC’s risk exposure using this method based 

on the price that a private insurer would charge to accept the insurance obligations of PBGC for 

all plans that terminate over a given time period.

Total unfunded liabilities Estimate PBGC’s risk exposure by calculating the agency’s total potential liabilities from 

underfunding in all PBGC-insured plans, whether these unfunded liabilities are vested or not, 

and estimate the risk associated with those liabilities. 

Source: GAO analysis of reports and data related to PBGC’s total risk exposure.

Each method provides quantifiable insight into the extent of PBGC’s risk 

exposure. For example, in fiscal year 2011, PBGC estimated that its risk 

exposure to reasonably possible terminations in its single-employer 

program totaled approximately $227 billion, an increase from $170 billion 

the previous year. Further, PBGC estimated that the total unfunded 

liabilities in all PBGC-insured plans were $415 billion in fiscal year 2010.31

CBO estimated that in 2005, the present value of PBGC’s net costs for 

DB pension insurance for single-employer plans over 10 years was about 

$87 billion. Total costs for the insurance for 15- and 20-year time horizons 

were $119 billion and $142 billion, respectively.32

 

30See Steven Boyce and Richard A. Ippolito, “The Cost of Pension Insurance,” The 

Journal of Risk and Insurance, vol. 69, no. 2 (2002): 121-170.

31PBBC’s estimated total unfunded liabilities are based on all plan liabilities, whether 

vested or not.

32See U.S. Congressional Budget Office, The Risk Exposure of the Pension Benefit 

Guaranty Corporation (Washington, D.C.: September 2005).
 

Page 13 GAO-13-58 PBGC Premiums

In addition, the CBO has proffered several methods for establishing the 

target level of premium revenue to be generated. One possibility is to 

adopt what CBO describes as an “actuarially fair premium structure”—

that is, one that would equate the present value of expected premium 

revenues with the present value of expected costs to PBGC. Notably, 

based on CBO’s 2005 analysis, a uniform risk premium—one that 

increases both the flat- and variable-rate portions of current-law 

premiums by a fixed proportion33—would yield premium charges that 

were 6.5 times larger than rates in effect in 2005, with a flat rate of 

$123.50 per participant per year and a variable rate of $58.50 per $1,000 

of underfunding. This increase would have made rates comparable to 

premiums charged in a private insurance market to cover PBGC’s 

insurance obligations at that time.

Various options are available to make PBGC’s statutory premium 

structure more risk-based to better reflect the risk of future claims and 

improve PBGC’s financial condition. The variable-rate component of the 

premium reflects plan and sponsor risk to some extent, but has been 

based solely on just one risk factor, plan underfunding. There are 

numerous options available for incorporating additional risk factors into 

the variable rate to account for greater levels of risk posed to PBGC by 

certain plans and sponsors, as is done by other insurance agencies in the 

United States and abroad. For example, the FDIC, which provides 

deposits insurance, has used a risk-based premium system since 1993. 

In addition, the UK’s pension insurer determines its premiums based on a 

risk factor for a plan’s asset investment mix, as well as the sponsor’s 

financial strength.

Even within the current structure, rates could be adjusted to become 

more risk-based and help PBGC to increase its revenues. Historically, the 

bulk of premium revenue has been generated from the flat-rate 

component of the premium (tied to the number of plan participants) that 

assesses rates equally per capita across all sponsors regardless of risk, 

rather than the variable-rate component that reflects risk based on level of 

plan underfunding. By increasing the proportion of revenues generated 

from the variable rate and increasing rates overall—such as provided 

 

33The uniform premium also does not vary according to sponsor or plan characteristics.

Various Options Are 

Available for More 

Risk-Based Premiums

Adjusting Premiums within 

the Current Structure
 

Page 14 GAO-13-58 PBGC Premiums

under MAP-2134

Table 4: Rates under MAP-21 Compared to a Hypothetical Option to Adjust PBGC Premiums under the Current Structure

—higher premium costs are shifted more to sponsors 

with plans that are more underfunded (see table 4). Such changes, even 

under the current structure, make premiums more risk-based than in the 

past, and could help reduce the growth of PBGC’s deficit while providing 

greater incentive to sponsors to fully fund their plans.

Premium option

Flat rate per 

participant

Variable rate per $1000 

of plan underfunding Description

New premium 

structure provided 

for in the Moving 

Ahead for Progress 

in the 21st Century 

Act

$49 by plan year 

2014 indexed 

thereafter

a

$18 by plan year 2015 

indexed thereafter

• Phase-in of rate increase

• Revenue estimated over 10 years

• The variable rate is limited to $400 per participant for 

plan year 2013 with indexing thereafter

• $9 billion in additional premium revenue generated

• 58% of additional premium revenue attributable to 

increase in flat rate

b

• 42% of additional premium revenue attributable to 

increase in variable rate

Option to increase 

rates under the 

current structure

Flat rate increased 

so that the increase 

to total premium 

revenue is evenly 

distributed between 

the flat rate and 

variable rate

c

Variable rate increased so 

that the increase to total 

premium revenue is 

evenly distributed between 

the flat rate and variable 

rate 

• No phase-in of rate increase

• Revenue estimated on annual basis over 8 years

• $16 billion in additional premium revenue generated ($2 

billion annually)

• 50% of additional premium revenue attributable to the 

flat rate

d

• 50% of additional premium revenue attributable to the 

variable rate

Source: GAO analysis of documents related to PBGC premiums.

a

MAP-21, § 40221, 126 Stat. 405, 850-852 (2012).

b

Revenue increase compared to plan year 2012 rates.

c

For this option, rates were generated by PBGC using a hypothetical model created to explore the 

effects of different premium options on rates and premium revenue. PBGC’s hypothetical model used 

plan year 2010 data from PBGC’s premium database and did not incorporate any projections about 

future levels of plan funding or participant counts. This hypothetical option increases rates within the 

current premium structure without incorporating additional risk factors.

d

 

34On July 6, 2012, the President signed into law MAP-21, which included provisions calling 

for rate increases within PBGC’s current premium structure for all single-employer plan 

sponsors insured by PBGC. § 40221, 126 Stat. 446-448 (2012). The act also provided for 

rate increases for all multiemployer plan sponsors insured by PBGC. Pub. L. No. 112-141, 

§ 40222, 126 Stat. 852-53.

Revenue increase compared with estimates under plan year 2010 rates.
 

Page 15 GAO-13-58 PBGC Premiums

To explore this option, PBGC developed a model to illustrate the various 

ways premiums could be adjusted to meet different revenue targets over 

varying lengths of time by increasing either the flat rate or the variable 

rate, or both, by certain percentages.35 The model used standard 

quantitative techniques to show how different premium options would 

affect rates and generate premium revenue over time without a rate 

phase-in. PBGC officials stressed that the model did not use PIMS for its 

calculations, and that the model is purely hypothetical and not intended 

as a policy proposal. However, by way of illustration, PBGC used the 

model to generate one scenario whereby the additional revenue would be 

obtained in equal amounts from increases in both the flat and variable 

rates over 8 years to meet the administration’s proposed $16 billion 

premium revenue target. Under this scenario, PBGC estimated that to 

reach the annual $2 billion revenue target in the first year without a rate 

phase-in, premium revenue from both the flat rate and variable rate would 

have to increase by 77 and 76 percent, respectively. We estimated that 

under this option, the flat rate would increase to $62 per participant and 

the variable rate to nearly $16 per $1,000 of plan underfunding.36

 

35In constructing its model, PBGC selected a sample of plans from its 2010 premium 

database that had readily available data regarding either the sponsor’s credit rating or Dun 

& Bradstreet score. The resulting sample included 1,114 sponsors of 2,699 DB plans 

covering 27.5 million participants. The model covered 81 percent of all PBGC-insured 

participants (33.8 million) in 2010. We validated the model by reviewing the formulas 

PBGC used to analyze the 2010 premium data and assessed the reliability of the data 

used in the model. Where we found problems with formulas or other points of information 

used in the model’s analysis, we discussed these issues with PBGC officials and made 

corrections to their analysis. 

Under 

this option, 50 percent of the premium revenue increase is attributable to 

the variable rate compared to 42 percent under MAP-21 rates. However, 

the only risk factor incorporated into the variable rate under both MAP-21 

and PBGC’s model scenario described above is plan underfunding, and

as discussed further below, PBGC has concluded from its analyses that 

plan underfunding is a poor proxy for the risk of a new claim.

36For the purpose of its analysis in the premium model, PBGC estimated a combined flat 

and variable rate on a per participant basis for the hypothetical option to increase rates 

under the current structure in order to make comparisons to per participant rates under 

other options. Under the hypothetical option to increase rates under the current structure, 

PBGC estimated that the combined per participant rate (i.e., the flat rate, plus the amount 

collected from the variable rate divided by the number of plan participants) ranged from 

$60 to $4,367. By way of comparison, PBGC calculated that combined premium rates 

under the structure in place for fiscal year 2010 ranged from $35 per participant to $2,481.
 

Page 16 GAO-13-58 PBGC Premiums

Other premium options could more fully take into account the agency’s 

exposure to the risk of new claims by incorporating other risk factors. 

Specifically, PBGC’s risk could be better mitigated through alternative 

premium options that incorporate other risk factors into the variable rate 

to more fully take into account the agency’s exposure to the risk of future 

losses. Because the variable-rate premium is currently based solely on 

plan underfunding, it does not capture the agency’s overall risk as well as 

it could if additional risk factors were also taken into consideration, such 

as a plan’s investment strategies, benefit structure and benefit level, 

demographic profile, or the plan sponsor’s financial strength.37

PBGC has conducted analyses showing that measures of underfunding 

are poor predictors of plan termination. In these analyses, PBGC 

reviewed funding levels for plans that had terminated from fiscal years 

2009 to 2011,

With 

congressional action, these additional risk factors could be incorporated 

into PBGC’s rates, providing proportionally greater amounts of revenue 

from plan sponsors posing greater risk to the agency, and better 

alignment with the continuum of risk facing the agency.

38

Much like premiums set by insurance companies,

and found the average termination funding level was 

about 54 percent on the date of termination. For the year previous to 

termination, the average funding level measurement on which the 

variable-rate premium was calculated for these plans was about 84 

percent. Because of the differences found in a plan’s funding-level 

measurements, PBGC officials believe that measures of a sponsor’s 

financial strength—determined using credit scores or Dun & Bradstreet 

scores—are better predictors of whether plans terminate than are 

measures of underfunding.

39

 

3729 U.S.C. § 1306(a)(3)(E). 

PBGC premium rates 

could be set based on individual risk profiles for sponsors and their plans. 

Such incorporation of additional risk factors into premiums could help 

PBGC to better manage risk by raising proportionally greater amounts of 

38Data for fiscal year 2011 were through April 2011.

39Two pension experts we spoke with believe that PBGC is not a true insurance program, 

since it is statutorily required to insure all DB plans. These experts instead believe that this 

makes PBGC more of a social protection program, providing participants a social safety 

net by obligating the payment of pension benefits up to certain limits for underfunded 

plans that terminate. 

Alternative Options to 

Incorporate Additional 

Risk Factors into 

Premiums
 

Page 17 GAO-13-58 PBGC Premiums

revenue from financially riskier sponsors whose plans are underfunded, 

and provide an incentive to sponsors to fully fund their plans and reduce 

other risk factors under their control, such as through less risky plan asset 

allocation. In addition, as with any premium structure, risk-based 

premiums could be designed to address only the risk of new costs that 

PBGC will incur from future claims, or they could be designed to help 

address PBGC’s risk of future insolvency, which also reflects deficit costs 

from past terminations. Possible approaches for incorporating additional 

risk factors into PBGC’s premium structure are described further below, 

along with information on the approach used by the FDIC for banking 

institutions and by PPF for pension plans in the UK (see table 5).

Table 5: Different Options to Incorporate Additional Risk Factors into Premiums 

Premium option Flat rate 

Variable rate with additional 

risk factors Description

Option to incorporate 

additional risk factor for 

sponsor financial 

health

$44 per 

participant

a

Variable rate incorporates 

additional risk factor for sponsor 

financial health 

• No phase-in of rate increase

• Variable rate calculated on a per participant basis

• Rates capped at four times plan year 2010 rates 

on a per participant basis

• Revenue estimated on annual basis over 8 years

• $16 billion in additional premium revenue 

generated ($2 billion annually)

• 16% of additional premium revenue attributable to 

the flat rate

b

• 84% of additional premium revenue attributable to 

the variable rate

c

Option to use different 

methods to calculate 

premiums based on 

size of institution 

(FDIC) 

d

Not applicable Risk premium incorporates risk 

factors for size and financial 

strength 

• Different methods used to calculate premiums 

based on the size of the institution

• Premiums are generally set based on a bank’s 

aggregate assets (funding level) and supervisory 

rating (financial strength)

• Premiums based on bank placement into one of 

four risk categories

• Premiums range set to meet annual revenue 

target needed to insure against identified risk

• Premium rates can change quarterly through 

monitoring of bank capitalization and supervisory 

data 
 

Page 18 GAO-13-58 PBGC Premiums

Premium option Flat rate 

Variable rate with additional 

risk factors Description

Option to incorporate 

additional risk factor for 

plan investment 

strategy (UK’s PPF)

Plan-based 

premium 

(comparable to 

PBGC flat- rate 

premium) 

targeted to meet 

revenue estimate

Risk-based premium 

(comparable to PBGC variablerate premium) incorporates risk 

factors for plan underfunding, 

sponsor insolvency, and plan 

asset investment risk 

• Both a plan-based (flat) and risk-based premium 

charged to sponsors

• Premium rates set for 3 years

• Scaling factor used to adjust risk-based premiums 

to meet 3-year revenue target

• 10% of premium revenue attributable to planbased premium and 90% attributable to risk-based 

premium

• Smoothing techniques used to adjust premium 

rates to account for adverse economic conditions

Source: GAO analysis of documents related to PBGC, FDIC, and PPF premiums.

a

For this option, rates were generated by PBGC using a hypothetical model created to explore the 

effects of different premium options on rates and premium revenue. PBGC’s hypothetical model used 

plan year 2010 data from PBGC’s premium database and did not incorporate any projections about 

future levels of plan funding or participant counts.

b

Revenue increase compared with estimates under plan year 2010 rates.

c

These percentages are for revenue increases attributable to the flat and variable rate before applying 

the President’s proposed cap of four times the per participant rate for plan year 2010.

d

PPF refers to plans as schemes and premiums as levies. For the purpose of this report, we continue 

to use plans and premiums when discussing PPF’s premium framework.

The President’s 2013 budget proposes to reform how PBGC premiums 

are determined by giving the PBGC board the authority to take into 

account the risks that different sponsors pose to their retirees and to 

PBGC. The President’s budget proposes raising $16 billion in additional 

premium revenue over a 10-year period, from 2013 to 2022, and would 

require a year of study and public comment before any implementation 

and the gradual phasing in of any increases due to changes in the 

premium structure. To reach this target over this period, the 

administration proposed limiting the premium increase to $4 billion in 

additional flat-rate premiums and $12 billion in additional variable-rate 

premiums. By way of comparison, the increases under MAP-21 are 

estimated to generate $5.1 billion from the flat rate and $3.8 billion from 

the variable rate over the same period. By relying more heavily on 

variable-rate premiums than under MAP-21, the President’s proposal 

would result in sponsors posing greater risk to PBGC paying higher 

premiums, and sponsors posing less risk to PBGC paying lower 

premiums.

PBGC used its model to explore one possible approach to incorporating 

an additional risk factor into the variable-rate premium and illustrate how 

Modeling More Risk-Based 

Options under the 

President’s Proposal
 

Page 19 GAO-13-58 PBGC Premiums

the mechanics of a more risk-based option might work. Under this option, 

the financial health of a plan sponsor would be taken into account in 

tandem with the funded level of a plan to enhance the extent to which risk 

is accounted for in the premium structure. To accomplish this, PBGC 

calculated the variable-rate premium for each plan based on a 

combination of both plan underfunding and sponsor financial health, to 

meet the President’s $16 billion premium revenue target. For the financial 

health factor, PBGC assigned a measure on a scale of 1 to 5 based on 

the lower of the sponsor’s Standard & Poor’s or Moody’s credit ratings, or, 

if credit ratings were unavailable, a sponsor’s Dun & Bradstreet credit risk 

ranking. PBGC then combined these scores with scores based on the 

plan’s level of funding to assign a corresponding variable rate used for 

calculating the premium.

In developing this hypothetical risk-based option, PBGC set rates to reach 

the $16 billion target over 8 years by raising an additional $2 billion in 

premium revenue over plan year 2010 premiums without a phase-in 

period. To accomplish this, PBGC constructed a scenario whereby the flat 

rate would increase from $35 to $44 per participant, and the variable rate 

would increase on a per participant basis rather than on the dollar amount 

of plan underfunding. Specifically, PBGC weighted the variable rate on a 

sliding scale that increased as plan funding weakened and decreased 

with stronger financial health of the sponsor (see table 6). The flat and 

variable rates were combined into a single rate and then capped on a per 

participant basis, as under the President’s proposal, so that the result 

would not be more than four times the premium rates in plan year 2010.40

 

40The President had also proposed in his September 2011 deficit reduction plan that total 

PBGC premiums for any plan would not exceed four times the amount payable with 

respect to the plan for the 2010 plan year, on a per participant basis. Under PBGC’s riskbased option, PBGC estimates that 84 percent of the total increase in premium revenue 

over 2010 levels would be attributable to the increase in the variable rate for sponsors. 

See Office of Management and Budget, “Living Within Our Means and Investing in the 

Future, The President’s Plan for Economic Growth and Deficit Reduction,” (September 

2011). 

(See appendix III for additional GAO analyses of this premium option.)
 

Page 20 GAO-13-58 PBGC Premiums

Table 6: Total Premium Rates per Participant (Flat + Variable) under a Hypothetical Risk-Based Option

Funded status

(1) (2) (3) (4) 

Financial health ≥120% funded ≥90 to under 120% funded 75% to under 90% funded <75% funded

Extremely healthy (1) $44 $44 $69 $94 

Very healthy (2) $44 $44 $94 $144 

Healthy (3) $74 $104 $119 $194 

Risky (4) $124 $204 $244 $444 

Very risky (5) $134 $224 $269 $494 

Source: PBGC.

However, PBGC’s estimates under the risk-based option could be 

adjusted in various ways. For example, the premium rates shown in table 

6 that are used in the model could be changed based on the same 

underfunding and financial strength risk factors, but using different 

weights. Any combination of weighting could be applied to test different 

policy options—for example, greater weight could be placed on the rate 

for financial weakness. The model’s rates could be set to track with the 

actual risk of new claims based on an analysis of historical funding and 

financial health data correlated with actual claim patterns. In each case, 

rates would vary for certain sponsors who pose greater risk to PBGC

based on financial health. 

The risk-based option could also be adjusted to take into account other 

risk factors associated with different plans’ asset investment mixes, the 

size of a plan relative to the size of its sponsor, and the level of plan 

benefits and demographic profile of plan participants,

41

 

41This particular premium design assesses the variable rate portion of the premium—

which reflects both plan underfunding and sponsor financial health—on a per participant 

basis. An alternative would be to assess the variable rate portion as a percentage of the 

plan’s liability—which would reflect the fact that two plans with the same number of 

participants could have different levels of plan liability, and therefore risk exposure, per 

participant, because of differences in the level of benefits provided by the plan and in the 

ages of plan participants.

as well as to take 

into account changes in assumptions over time. As with the hypothetical 

option to increase rates under the current structure, the rates generated 

by the model under the risk-based option are based on plan year 2010 

plan funding and participant counts, and do not include any phase-in of 
 

Page 21 GAO-13-58 PBGC Premiums

rates or changes to assumptions to reflect changes that may occur over 

time. Thus, to further fine tune the distribution of the combined 

underfunding and financial health scores and the associated premium 

rates, PBGC could incorporate these other risk factors into the model, 

and change funding and participant count assumptions to allow a rate 

phase-in. While acknowledging these possibilities, PBGC officials 

emphasized that the purpose of generating this option was purely to 

illustrate one hypothetical scenario of how rates could be redesigned to 

incorporate the additional risk factor of a sponsor’s financial health to 

raise additional premium revenue and to distribute premiums more in line 

with the risk posed by different plan sponsors—it is not a policy proposal, 

and the agency has no plans at this time to conduct further analyses to 

incorporate additional risk factors. 

FDIC, a federal corporation that insures the deposits of all federally 

insured depository institutions, has long used risk-based premiums to 

help insure depositors against the risk of loss. In 1993, FDIC adopted a 

risk-related premium system, which was designed to reduce the crosssubsidy that stronger banks implicitly provided to weaker banks under its 

previous flat-rate premium system. The new system was intended to 

provide proper incentives for risk taking, whereby banks who pose a 

higher risk have a higher premium rate. Under FDIC’s risk-based 

premium system, banks are first categorized on two factors: aggregate 

assets and a composite supervisory rating reflecting capital, asset quality, 

management, earnings, liquidity, and sensitivity to market risk (referred to 

as “CAMELS”).42 FDIC sets assessment (premium) rates to achieve a 

target “designated reserve ratio” based on the ratio of the deposit 

insurance fund to insured deposits.43

 

42For more information on FDIC’s efforts to tie premiums to the estimated risk a bank 

poses to the agency, see GAO, Deposit Insurance: Assessment of Regulators’ Use of 

Prompt Corrective Action Provisions and FDIC’s New Deposit Insurance System 

Most banks—specifically, those 

under $10 billion in assets—are placed in four risk categories on the basis 

of their capital (which is roughly equivalent to a bank’s funding level) and 

CAMELS rating (which is roughly equivalent to a bank’s financial health). 

Following the economic crisis of 2008, FDIC began to reconsider riskGAO-07-242 (Washington, D.C.: Feb. 15, 2007). 

43The designated reserve ratio is currently set at 2 percent. According to FDIC officials, 

regulations implemented in 2010 allow the FDIC to set assessment rates at moderate 

levels when the designated reserve ratio exceeds 1.15 percent and progressively lower 

assessment rates when the reserve ratio exceeds 2 percent and 2.5 percent.

FDIC’s Risk-Based Premiums
 

Page 22 GAO-13-58 PBGC Premiums

based pricing methods for large banks, taking into account the risks that 

caused severe problems for large banks. Effective in the second quarter 

of 2011, FDIC began using different methodologies to set assessment 

rates for small and large banks. Both systems attempt to have riskier 

banks pay higher premiums at the time they assume the risk rather than 

waiting until conditions deteriorate. However, the FDIC charges a higher 

premium rate for large banks with high asset concentrations and less 

stable balance sheet liquidity.

At least one country has already moved to a more risk-based system for 

determining premium rates. The UK’s Pension Protection Fund (PPF)—

the government corporation responsible for insuring benefits to 

participants of DB plans—incorporates additional risk factors into its 

premium structure.44 PPF’s premium structure has two components: a 

risk-based premium and a plan-based premium.45 The risk-based 

premium is based on the likelihood of a plan making a claim on PPF 

(which PPF terms “insolvency risk”) and the potential size of that claim 

(which PPF terms “underfunding risk”). PPF uses the Dun & Bradstreet 

failure score—a measure of the likelihood of sponsor bankruptcy—as the 

risk factor for determining a sponsor’s insolvency risk.46 PPF uses 

information about the value of plan assets and liabilities, supplied to the 

agency by sponsors through an exchange, to calculate a sponsor’s 

underfunding risk.

47

 

44We did not conduct independent legal analysis to verify the information on UK’s DB 

premium framework, but rather relied on a review of publicly available PPF documents 

and discussions with PPF officials. 

Beginning with plan year 2012/13, PPF will also 

consider a plan’s investment strategy to adjust underfunding risk when 

calculating a plan’s premium. (See appendix IV for a description of the 

45PPF refers to plans as schemes and premiums as levies. For the purpose of this report, 

we continue to use plans and premiums when discussing PPF’s premium framework.

46In the UK, the Dun & Bradstreet failure score predicts the likelihood that a company will 

obtain legal relief from its creditors or cease operations over the next 12-month period. It 

is presented as a ranking score ranging from 1-100: 1 indicates the highest risk of failure 

and 100 the lowest level of risk. Businesses with the same failure score have the same 

risk of failure.

47According to PPF officials, the funding position of plans is reported through an exchange 

system on a consistent basis, as specified in PPF guidance, and transformed to a 

consistent date by rolling forward the assets and liabilities notified to a consistent date. 

The exchange is maintained by the UK’s Pensions Regulator, the agency responsible for 

regulating pension plans in the UK. The exchange allows sponsors to upload information 

about their plans and make premium payments electronically.

The UK’s DB Premium 

Framework 
 

Page 23 GAO-13-58 PBGC Premiums

components of PPF’s premium formula.) PPF then uses a premium 

scaling factor to calculate a plan’s premium to meet a certain revenue 

target.48

The changes adopted for plan year 2012/2013 affect how PPF will 

calculate both the risk-based premium and the plan-based premium. For 

example, before these changes, for plan year 2011/12, all sponsors with 

plans funded up to 155 percent paid a risk-based premium based on an 

underfunding risk factor that decreased as a plan’s funding level 

increased. Sponsors whose plans were funded at or above 155 percent 

did not pay a risk-based premium. For the 2012/13 plan year, plan 

underfunding will be calculated using 5-year financial market indexes—

referred to as smoothing49—for plan assets and liabilities, and will for the 

first time take a plan’s investment strategy into account, adjusting a plan’s 

underfunding risk based on the plan’s level of investment risk. The riskbased premium is also capped to protect the most vulnerable plans.50

 

48PPF’s annual revenue target is based on estimates of the funds required to meet certain 

future financial goals. Beginning in August 2010, PPF has published its funding strategy, 

which sets out how the agency intends to have the financial resources needed to pay 

existing levels of compensation to current and future PPF participants and become 

financially self-sufficient by 2030. For plan year 2012/13, the premium scaling factor is set 

to scale down risk-based premiums so that together with the plan-based premiums, PPF 

will collect revenue sufficient to meet its target ($864 million) for the year. 

In 

addition, prior to the 2012/13 plan year, the plan-based premium was 

based on a plan’s estimated liabilities to its participants. Starting with the 

2012/13 plan year, the plan-based premium will be based on a plan’s 

smoothed liabilities to its participants and on a premium multiplier to cover 

the costs to the agency of capping the highest risk-based premiums. As a 

result, the plan-based premium will account for a smaller percentage of 

49To reduce the impact of short-term volatility in the financial markets, and to ensure that 

all plans are treated on a consistent basis, for plan year 2012/13, PPF will smooth the 

value of the assets and liabilities that a plan reports using 5-year financial market 

averages up to March 30, 2012.

50The cap for 2012/13 is 75 basis points (0.75 percent) of smoothed liabilities. Where the 

risk-based premium calculated using the above formula exceeds 0.75 percent of a plan’s 

liabilities, the cap is applied and the premium is decreased accordingly.
 

Page 24 GAO-13-58 PBGC Premiums

the total premium, decreasing its portion of the total premium from 20 

percent to an estimated 10 percent.51

Beyond these basics, PPF’s premium framework differs from PBGC’s 

current premium structure and from other proposals to redesign PBGC 

premiums in a number of more subtle ways as well. Key features include 

the following:

• Equitable basis of PPF’s plan-based levy. The plan-based premium used 

prior to the 2012/13 plan year can be considered, essentially, PPF’s 

version of PBGC’s flat-rate premium. The difference is that PBGC’s flatrate premium is calculated on a per participant basis, whereas PPF’s 

plan-based premium is a percentage of the liability owed to participants. 

The percentage of liability approach is a more equitable distribution in the 

sense that it is based on the total liability owed by a plan to its 

participants, rather than on a plan’s participant count (a plan could have 

many participants but a relatively small liability, or few participants but a 

very large liability, so that the number of participants per se has 

limitations as a measure of exposure). For example, consider two plans 

with the same number of participants, but one has a liability twice as 

large as the other (either because of more generous benefits or costlier 

demographics). Although, all other things being equal, the plan with 

greater liability is riskier, under its current premium structure, PBGC 

would charge both plans the same fixed premium, whereas PPF would 

have charged a larger plan-based premium to the plan with greater 

liabilities.

• Proportionality in PPF’s underfunding factor. In the risk-based premium 

option modeled by PBGC, a plan’s funded status is represented by its 

funded ratio (the ratio of plan assets to plan liabilities). The variable rate 

applied to that plan is, in part, determined using that ratio to assign the 

sponsor to one of the designated risk premium categories and the rate is 

then applied on a per participant basis. In contrast, PPF represents 

 

51While the premium cap applies only to some plans’ risk-based premiums, the multiplier 

is spread across all plans’ plan-based premiums to help meet PPF’s revenue target. PPF 

contends that this approach also makes the necessary cross-subsidy in the plan-based 

premium more transparent as it ends the practice of scaling up risk-based premiums to 

cover the cost of capping. In essence, PPF is minimizing the amount of crosssubsidization in the plan-based premium by limiting it to only cover premiums lost via the 

capping on risk-based premiums. In contrast, in the previous plan year (2011/12), a 

multiplier was applied to every plan so that plan-based premiums accounted for an 

estimated 20 percent of the total pension protection premium estimate for the year.
 

Page 25 GAO-13-58 PBGC Premiums

funded status by the actual financial value of the unfunded liability of 

each plan and does not assign a plan to a funded category, but instead 

applies a premium directly to the unfunded amount (similar to the current 

PBGC variable-rate premium), so that the premium charged is more 

proportional to the individual unfunded exposure of the plan. By being 

directly linked to the level of underfunding in each individual plan, PPF’s 

premium may more accurately reflect the level of risk posed by plans 

than the hypothetical approach modeled by PBGC.

• Linkage of PPF premiums to long-term funding strategy. PPF publishes a 

long-term funding strategy, which sets out how the agency intends to 

have the financial resources needed to pay existing levels of 

compensation to current and future PPF participants and become 

financially self-sufficient by 2030.52 Integral to its funding strategy, PPF 

monitors how its premiums might need to change under different 

economic circumstances in order to meet its funding target.53 Although 

PBGC publishes an annual exposure report—which estimates future 

claims and premium revenues—it does not currently have the statutory 

authority to change rates based on these estimates to meet specific 

revenue targets.

• Proportionality and effectiveness of including plan asset allocation as a 

risk factor. Although new for PPF and therefore untested, incorporating 

this significant risk factor into rates could better align premiums with risk 

and could also provide an incentive for sponsors to use less risky asset 

allocations.

 

52PPF defines self-sufficiency as a level of assets 10 percent in excess of its liabilities. In 

addition to being fully funded, PPF’s goal is to eliminate its exposure to interest rate 

fluctuation, inflation, and other market risks. PPF also wants to build a reserve to further 

protect itself against future claims and the impact of members living longer than it 

estimates. Most recently, PPF’s latest assessments show that the probability of achieving 

self-sufficiency measured on its base case has improved from 83 percent in March 2010 

to 87 percent in March 2011.

53To help reduce volatility for plan sponsors, PPF’s risk-based premium is now fixed for 3 

years. Beginning with the 2012/13 plan year, PPF revised its funding strategy to reflect a 

“bottom up” approach in which risk factor parameters will be fixed for 3 years and, ideally, 

remain stable between each 3-year review. Under this approach, PPF intends to keep the 

risk-based premium scaling factor and the plan-based multiplier fixed for 3 years—a 

sponsor’s risk-based premium will only change if its risk level changes. Previous to plan 

year 2012/13, PPF’s model reflected a “top down” approach in which PPF would decide 

upon the premium that it deemed appropriate in a given year, and then set the premium 

parameters accordingly on an annual basis. 
 

Page 26 GAO-13-58 PBGC Premiums

In addition, there are differences related to risk premium caps between 

PPF’s framework and PBGC’s proposed risk-based premium that could 

potentially have distributional effects on rates and premium levels. The 

cap on PPF’s risk-based premium is 75 basis points (0.75 percent) of the 

plan’s liability to its participants. This compares to the administration’s 

proposal for a different type of cap for PBGC whereby premiums would 

be limited to four times a sponsor’s plan year 2010 premiums on a per 

participant basis and the new $400 per participant variable-rate limit set 

by MAP-21. How premium caps are calculated could change the 

distributional pattern of the amount of premiums sponsors would pay 

under different premium options, and could adjust the total amount of 

revenue collected by PBGC under these options.

Compared to the distribution of costs under the current structure, 

premium costs would be redistributed to those sponsors posing greater 

risk to PBGC under a more risk-based structure. For example, if the 

financial health of the plan sponsor were included as a risk factor, 

financially risky sponsors would pay more, while financially healthy 

sponsors would pay less. A more risk-based structure such as this would 

decrease the cross-subsidization present in the current premium structure 

that relies largely on the flat rate charged to all sponsors based on 

number of participants no matter the level of risk they pose. Pension 

experts and plan sponsors we spoke with raised various concerns about 

this redistribution of costs. For example, some voiced concerns that the 

higher premiums for some plan sponsors might increase the frequency of 

plan freezes and terminations; 54

 

54A plan freeze is an amendment to the plan to limit some or all future pension accruals for 

some or all of the plan participants. For example, a pension plan may close to new 

participants, or a plan may opt to prohibit existing participants from earning pension 

benefits in the future.

however, our previous work indicates 

that, generally, this would be unlikely. Some noted that depending on the 

way risk is incorporated, premiums could rise during recessions when 

financially weak companies are least able to bear the costs, especially 

smaller companies. Some also expressed concern about the equity of 

various premium redesign options, especially those that require current 

sponsors to pay higher premiums to address PBGC’s deficit for prior plan 

terminations. Experts and officials suggested various ways to address 

such concerns.

Moving to a More 

Risk-Based Structure 

Shifts Premium Costs 

to Riskier Sponsors
 

Page 27 GAO-13-58 PBGC Premiums

Under a more risk-based structure that included sponsor financial health 

as a risk factor, premium costs would be redistributed to better reflect the 

risk posed by each plan sponsor. To better understand the implications of 

moving to one such more risk-based structure, we analyzed the data 

provided in PBGC’s sample of 2,699 plans to determine the range of per 

participant rates sponsors would pay under PBGC’s hypothetical riskbased option compared with rates in plan year 2010 and the increases 

scheduled to be in place in 2015 as a result of MAP-21. As summarized 

in table 7, compared with rates in 2010, minimum rates are higher across 

the board under both the act and the more risk-based option, while the 

maximum rates are lower due to the adoption of a variable-rate limit (four 

times the per participant rate paid in plan year 2010 for the hypothetical 

risk-based option and no more than $400 per participant under MAP-21). 

In a comparison of rates under the risk-based option with estimated rates 

under MAP-21 in plan year 2015, those with plans that are well funded 

(that is, funded at 120 percent or more) could see their rates decrease 

slightly ($44 vs. $49) if they are financially healthy, while their rates could 

more than double ($134 vs. $49) if they are categorized as very risky. 

Among those with plans that are poorly funded (that is, funded at less 

than 75 percent), sponsors could see higher rates under the more riskbased structure depending on whether they are financially healthy or not 

($94 to $494 vs. $57 to $449). For example, a poorly funded plan that is 

categorized as very risky could see its rates increase as much as $257 

per participant. PBGC officials noted, however, that while technically 

correct, few plans are likely to have variable-rate premiums near these 

upper-end caps.

Table 7: Hypothetical Risk-Based Option Premium Rates Compared to Rates in Plan Year 2010 and in Plan Year 2015 under 

MAP-21

Dollars per participant

Range of per participant premium rates among plans in samplea

>120% 

funded

>90% to under 120% 

funded

75% to under 

90% funded

<75% 

funded

Plan year 2010 ratesb $35 $35-$315 $38-$708 $39-$2,481

Plan year 2015 rates under MAP-21 (estimated)c 49 49-449 54-449 57-449

PBGC’s hypothetical risk-based option 

(incorporates additional risk factor for financial 

health)d 44-134 44-224 69-269 94-494

Source: GAO analysis of PBGC data from a sample of defined benefit plans used in PBGC’s hypothetical premium model.

a

Financially Risky Sponsors 

Would Be Charged Higher 

Premiums

For the most part, PBGC’s model used plan year 2010 data from a sample of 2,699 DB plans 

covering 27.5 million participants. The model covered 81 percent of all PBGC-insured participants 

(33.8 million) in 2010. However, in some instances, PBGC used 2009 data to calculate per participant 
 

Page 28 GAO-13-58 PBGC Premiums

rates for sponsors. In those instances, the lower bound of the per participant rate was $34, since the 

flat rate was $34 per participant in 2009. Thus, we chose to limit our analysis of PBGC’s model to 

data from 2010.

b

To calculate the per participant rates for plan year 2010, PBGC divided the total premiums each plan 

paid in plan year 2010 by the participant count for that plan. To calculate the range of premium rates 

by funding level, we grouped PBGC’s per participant rates data for each plan into the four funding 

categories PBGC used in its hypothetical premiums model.

c

Pub. L. No. 112-141, 126 Stat. 405 (2012). Rates under MAP-21 for 2015 are estimated using data 

from PBGC’s premium model, including participant and underfunding levels from 2010. We estimated 

rates by placing a limit of $400 on the variable rate on a per participant basis as required under the 

act and by grouping per participant rates data for each plan into the four funding categories PBGC 

used in its hypothetical premiums model. 

d

Rates under this option are affected by both the aggregate funding level for a sponsor’s plan and the 

sponsor’s financial health rating. To calculate the per participant rates for the risk-based option, 

PBGC used plans’ funding levels and participant counts from its plan year 2010 premium database 

and incorporated financial health data for each sponsor. Based on a plan’s funding level and the 

financial health of the plan’s sponsor, PBGC assigned each plan to a risk category that carried a 

specific per participant rate. To calculate the range of premium rates by funding level, we grouped 

PBGC’s per participant rates data for each plan into the four funding categories PBGC used for this 

option in its hypothetical premiums model.

To determine how these rate changes would be redistributed at the 

company level, rather than at the plan level, we aggregated the data in 

PBGC’s sample by sponsor. We found that the 2,699 plans in the sample 

were sponsored by 1,114 different companies. As summarized in figure 2, 

our analysis suggests that for the two-thirds of companies that were 

ranked more financially healthy (that is, sponsors whose financial health 

is considered extremely healthy, very healthy, or healthy), premiums 

would decrease for a majority (71 percent of sample companies). These 

decreases were largely due to the lower flat rate under the risk-based 

option compared to the MAP-21 rate. In contrast, for the companies that 

were ranked less financially healthy (that is, sponsors whose financial 

health is considered either risky or very risky), premiums could increase 

for most (92 percent of these sample companies). The increases were 

mainly due to how the financial health risk factor affects per participant 

rates under the risk-based option for these companies, regardless of level 

of plan underfunding. 
 

Page 29 GAO-13-58 PBGC Premiums

Figure 2: Percentage of Sample Sponsors with Premium Rate Changes under 

PBGC’s Hypothetical Risk-Based Option Compared with Estimated Rates in Plan 

Year 2015 under MAP-21

Because rates under the risk-based option are calculated on a per 

participant basis, the magnitude of these changes will vary by company 

depending on the number of participants in the plan or plans that they 

sponsor. For example, among the 143 least financially healthy companies 

with increases in premiums under PBGC’s risk-based option, the number 

of plans and participants for companies varied widely. On the small end of 

the spectrum, one company sponsored a plan with 825 participants. This 

company’s estimated total premium cost would be $407,550 under 

PBGC’s risk-based premium, compared with $370,425 under MAP-21 in 

plan year 2015, a 10 percent increase. On the large end, another 

company sponsored a plan with 327,463 participants. This company’s 

estimated total premium cost would be $100.9 million under PBGC’s riskbased premium, compared with $43.2 million under MAP-21 in plan year 

2015, a 133 percent increase, even with the cap.
 

Page 30 GAO-13-58 PBGC Premiums

Although plan sponsors and experts expressed varying opinions about 

how moving to a more risk-based premium structure might influence plan 

sponsors, our previous work on the subject found that increases in 

premium costs were not a significant reason for sponsors to freeze or 

terminate their DB plans. Among the many reasons sponsors cited in our 

2008 report for freezing their largest plans, the most often cited were the 

impact of annual contributions on their firm’s cash flows and the 

unpredictability of plan funding. The factors that were most likely to 

influence implementing a hard freeze—that is, a freeze that ceases all 

future benefit accruals—were sponsor size and the extent to which a 

sponsor’s plans are subject to collective bargaining agreements.55 A more 

recent survey of DB plan sponsors by Towers Watson reported similar 

findings.56 Sponsors cited reducing cost and minimizing cost volatility as 

the primary reasons for freezing plans or converting plans to some other 

type of retirement savings instrument. PBGC premium increases were not 

mentioned by sponsors as a factor for freezing or converting their plans.57

 

55As of 2008, larger sponsors, those with 10,000 or more total participants, were 

significantly less likely than smaller sponsors to have implemented a hard freeze. 

Similarly, firms with some or all plans subject to collective bargaining are significantly less 

likely to implement hard freezes than sponsors with no plans subject to collective 

bargaining. See GAO, Defined Benefit Pensions: Plan Freezes Affect Millions of 

Participants and May Pose Retirement Income Challenges, GAO-08-817 (Washington, 

D.C.: July 21, 2008).

56Towers Watson conducted the survey from October 2011 to December 2011 and 

included responses from 424 DB plan sponsors at midsize and large organizations. 

Respondents were asked about changes to their retirement plans over the past 10 years, 

their motivations behind those changes and their future retirement offerings. See Towers 

Watson, Pensions in Transition: Retirement Plan Changes and Employer Motivations

(New York, N.Y.: May 2012).

57While higher premiums were not cited as a reason to freeze or terminate a plan, lower 

premiums were cited as a potential reason to reopen a plan after it had been frozen. Ibid. 

Premium Changes Have 

Not Been Key Factors in 

Decisions to Freeze or 

Terminate Plans
 

Page 31 GAO-13-58 PBGC Premiums

Moreover, according to PBGC officials, premiums generally account for a 

small percentage of compensation costs.58

Nevertheless, several experts and others we spoke with pointed out that 

increased premium costs could have negative implications for DB plan 

sponsors. For example, some commented that increased premiums might 

divert funds that sponsors would have otherwise used to fund their 

pension plans or other company priorities such as job creation and 

business investment. A few told us they viewed a potential increase in 

PBGC premiums simply as a tax increase on companies that sponsor DB 

pension plans. One sponsor we spoke with commented that DB pension 

plans are already in duress because of historically low interest rates for 

plan funding obligations, and that increased premium costs would add 

another challenge to sponsors. Another noted that it is increasingly more 

difficult to justify the costs of DB pension plans to management, and 

increased premiums may be the final factor in a sponsors’ decision to 

freeze or terminate their plan. However, another sponsor said that given 

all the other challenges facing pension plans, increasing premiums is 

unlikely to have a significant effect.

Pension experts we spoke with also differed in their opinion on whether 

implementing a new premium structure would lead to plan freezes or 

terminations. Several—including, five business professionals, three 

academics, one labor representative, one actuary, and one federal 

official—noted that increased premium costs may cause an increase in 

plan freezes or terminations, which could result in negative implications 

 

58According to PBGC’s analysis of Bureau of Labor Statistics data, premiums account for 

about 1 cent per hour of total average compensation costs. This analysis was based on 

data that indicated that, on average, private industry employers spend approximately 3.6 

percent of total compensation costs on retirement and savings expenses, and of this, 

PBGC premiums generally account for approximately 3.4 percent of total pension costs. 

However, PBGC’s analysis does not take into account that only about 10 percent of 

private companies offer access to DB plans. A more accurate calculation would need to 

reflect the cost of premiums compared to compensation costs among just those firms 

offering DB plans, but the Bureau of Labor Statistics does not provide a breakdown of 

data to allow such an analysis. 
 

Page 32 GAO-13-58 PBGC Premiums

for the retirement security of plan participants.59

Nevertheless, pension plan freezes and terminations have become more 

common in recent years, weakening the DB system. Plan freezes 

increased nearly 50 percent from 2003 to 2008. Specifically, PBGC 

reported that as of the end of 2009, approximately 27 percent of all 

PBGC-insured plans were hard frozen.

As one academic noted, 

under a risk-based premium structure, premium costs for financially 

healthy plans and sponsors may decrease, while financially unhealthy 

plans and sponsors will likely have increased premium costs, further 

worsening their financial position and potentially causing these plan 

sponsors to exit the DB system. However, others stated that they 

believed that increased premiums will not increase plan freezes and 

terminations. For example, an agency official said that premiums 

historically have been set low, and premium increases are unlikely to 

cause plan freezes or terminations. Additionally, another agency official 

noted that since there are many factors influencing plan sponsors’ 

decisions to terminate a plan, premium increases will likely have little 

impact.

60

 

59Our previous work on the topic noted that plan freezes and terminations may impact 

participants’ retirement security by reducing future benefits, though this may be somewhat 

or entirely offset by increases in other benefits or a replacement retirement-savings plan. 

Additionally, under a plan termination, it takes PBGC about 3 years, on average, to 

complete the benefit determination process and provide participants their finalized benefit 

amounts. Long delays and uncertainty over final benefit amounts in a plan termination 

make it difficult for workers to plan for retirement, and for retirees who have come to 

depend on a certain level of monthly income. See 

Voluntary standard terminations 

have also increased in recent years, with an approximately 29 percent 

GAO-08-817 and GAO, Pension Benefit 

Guaranty Corporation: Workers and Retirees Experience Delays and Uncertainty when 

Underfunded Plans Are Terminated, GAO10-181T (Washington, D.C.: Oct. 29, 2009).

60A hard freeze—the most common type of freeze—occurs when all future benefit 

accruals cease. PBGC officials noted that freezes have occurred disproportionately in 

smaller plans and that a more accurate metric may be the number of workers affected by 

a freeze. According to PBGC, just over 75 percent of all active employees participating in 

PBGC-insured single-employer DB plans are still accruing benefits and are in plans that 

still cover new employees, indicating that less than 25 percent are in plans that have been 

affected by a freeze.
 

Page 33 GAO-13-58 PBGC Premiums

increase from fiscal year 2003 to 2010.61 Data provided by PBGC indicate 

that, from 2000 to 2010, about 1.2 million participants were in plans that 

ceased to exist because of standard plan terminations.62 The Towers 

Watson survey found that approximately two-thirds of sponsors that once 

offered a DB plan to new hires no longer offer these benefits; however, 

the survey also found that many active DB sponsors remain committed to 

offering a DB plan in the future.63

Rather than inducing plan sponsors to freeze or terminate their plans, 

several pension experts—as well as PBGC officials—expressed the hope 

that moving to a more risk-based premium system would encourage less 

risky behavior among plan sponsors. For example, when faced with 

increased premiums for increased risk, sponsors might adopt safer asset 

allocation practices or contribute more to their plans to keep funding 

levels higher. In an attempt to quantify this incentive, one pension actuary 

has noted that the current variable-rate premium can have an economic 

effect equivalent to an additional return on investment. For example, 

when, in 2015, the variable rate reaches $18 per year per $1,000 of 

underfunding, an additional $100 contributed to an underfunded plan will 

reduce annual premiums by $1.80, or 1.80 percent, and so can be viewed 

as boosting investment return by almost 2 percent— which is a potentially 

stronger incentive to fund the plan than what exists currently. Similarly, 

the new premium assessment in the UK based on the riskiness of plan 

asset allocation could possibly induce plan sponsors to shift to somewhat 

 

61However, voluntary standard plan terminations can be costly, as plan sponsors must 

fully fund all benefits, either by distributing lump-sum payments (to the extent allowed 

under the plan and elected by participants) or by purchasing annuities to secure 

participants’ benefits into the future. 29 U.S.C. § 1341(b). An underfunded plan cannot be 

terminated unless the sponsor demonstrates it cannot fund the plan, usually through a 

bankruptcy proceeding. Thus, when a healthy sponsor terminates an underfunded plan, it 

first must fully fund the plan prior to termination. When PBGC initiates the termination of a 

plan, it is because it determines the sponsor will be unable to fund the plan, and it 

intervenes to protect participants’ benefits. 

62At the same time, PBGC officials noted that in 2010, standard terminations were just 

about 5 percent lower than the average of 1369 standard terminations for the previous 10 

years. PBGC officials also indicated that on average, these plans covered about 80 

participants, and of those 1.2 million participants, about half were workers. 

63The Towers Watson study also found that larger DB plan sponsors are less likely to 

move away from a DB design than their smaller counterparts and that certain industries 

(e.g., utilities, health care) are more likely to depend on DB benefits as a vital component 

of reward packages to attract and retain skilled workers.

Other Potential Behavioral 

Effects Cited, but Impact 

Uncertain
 

Page 34 GAO-13-58 PBGC Premiums

less risky asset allocations. Either effect—increased funding or less risky 

asset allocations—would, in turn, reduce the risk to the pension 

insurer. Little is yet known about the likelihood or magnitude of these 

potential effects, however, and PBGC does not include any behavioral 

impacts in its modeling.

Some pension experts we spoke with raised concerns about the potential 

for premiums to rise when companies are least able to bear the costs, as 

could be the case during recessions. Depending on how risk factors are 

incorporated into rates, premiums could have a pro-cyclical effect—that 

is, they would increase during economic downturns. As economic 

conditions worsen, more companies would fall into the less financially 

healthy categories, and more plans would become less well-funded, 

resulting in higher premiums. This could lead to financially weaker firms 

being required to pay higher premiums at precisely the time that they can 

least afford to do so. 

However, increases in premiums under the current premium structure are 

already pro-cyclical. For example, the increases in the variable rate under 

MAP-21, enacted in July 2012, would cause rates to increase to the 

extent that plan underfunding increased during a recession when firms 

are least capable of paying higher premiums. Recognizing that such 

increased premium costs could prove a hardship for some sponsors, 

Congress included a cap on premium increases under MAP-21, and the 

President’s proposal also included a cap.64

 

64As noted earlier, under MAP-21, per participant premium rates are capped at no more 

than $400 beginning in 2013. Similarly, under the President’s deficit reduction proposal, 

per participant rates for premiums are capped at no more than four times the rates paid in 

plan year 2010. 

Additional steps could be 

taken to address such concerns with cyclicality under a more risk-based 

premium structure. For example, PBGC officials said that, in addition to 

caps, they would consider supporting the use of an average of a 

Concerns Raised That 

Risk-Based Premiums 

Could Increase during 

Recessions
 

Page 35 GAO-13-58 PBGC Premiums

sponsor’s 5-year funding levels to help smooth the impact that economic 

cycles would have on risk-based premium rates.65

FDIC faced similar concerns when designing its new premium system for 

financial institutions in 2006. To address these concerns, the FDIC 

capped premiums for its riskiest category of institutions at 60 percent 

below what the premium amount would be under a purely risk-based 

system.

 

66

The impact of having to pay higher rates under a new premium structure 

also may pose more of a challenge for some smaller companies than 

some larger ones, as they may have fewer resources to draw from for 

these added costs. The data in PBGC’s premium model do not include 

information on company size, such as a sponsor’s assets, revenue, 

operating costs, or payroll expenditures. Without such data, it is unclear 

the extent to which smaller companies may experience a greater hardship 

under the risk-based option compared with larger companies. However, 

consideration of company size could be incorporated into a redesigned 

premium structure. For example, in designing its premium system, the 

FDIC created a structure that differentiates between large and small 

institutions. Large institutions are priced using one of two “scorecards”—

one for the majority of large institutions, and a separate scorecard for very 

large institutions that are structurally and operationally complex or that 

In adopting this cap, FDIC sought to address long-standing 

concerns of the industry, regulators, and others that premiums should not 

be set so high as to prevent an institution that is troubled and seeking to 

rebuild its health from doing so. As a result of the cap, however, some 

degree of cross-subsidy still exists in the premium system between 

financially healthier institutions and troubled institutions.

 

65During the recent economic downturn and current economic situation, Congress took 

similar steps to mitigate the effects of the PPA provisions requiring increased contributions 

to underfunded plans, allowing sponsors to amortize increases to their contributions over 

a longer period, postponing implementation of the increased funding requirements for 

some firms, and averaging market interest rates over a 25-year period to provide relief 

against the current low interest rate environment. Preservation of Access to Care for 

Medicare Beneficiaries and Pension Relief Act of 2010, Pub. L. No. 111-192, 124 Stat. 

1280,1283-1306, §§ 201-211; and Worker, Retiree, and Employer Recovery Act of 2008, 

Pub. L. No. 110-458, §§ 101, 102, 121 and 122, 122 Stat. 5092, 5093-5103, 5113-14, and 

MAP-21, § 40221, 126 Stat. 850-52. 

66In 2006, FDIC officials noted that the number of institutions in this highest category is 

small and thus the trade-off between lower premiums for troubled institutions and 

potentially larger losses for FDIC later would not be significant. See GAO-07-242. 
 

Page 36 GAO-13-58 PBGC Premiums

pose unique challenges and risks in case of failure. Each scorecard 

combines a performance score and a loss severity score. The scorecard 

for large and complex institutions incorporates various measures of 

market risk. Smaller institutions have their premiums based on financial 

ratios, such as an institution’s capital, past-due loans, and income, and its 

CAMELS ratings. For smaller institutions, FDIC data show that the higher 

on the CAMELS scale institutions are rated, the higher the rate of failure. 

Plan sponsors and others we spoke with also raised some concerns 

about the equity of increasing premiums under a more risk-based 

structure. In particular, several raised concerns about having current 

sponsors pay higher premiums to pay for PBGC’s liabilities from plans 

terminated in the past. Further, the amount of revenue currently being 

proposed to be raised through increased premiums is unlikely to cover 

the full amount of future claims, let alone help to address liabilities due to 

past claims. 

These concerns are not unique to a more risk-based premium structure. 

Increasing rates under the current premium structure also gives rise to 

concerns about equity implications, and is the reason for adopting 

premium caps.

67 However, such provisions do not alleviate the equity 

concerns of how to deal with “legacy costs” from plans terminated in the 

past. To further address such equity concerns, several pension experts 

noted the need to separate PBGC’s existing liabilities from the projected 

cost of future claims, and they suggested various alternative surcharges 

for accomplishing this goal (see table 8).68

 

67As noted earlier, to help address such concerns, Congress included provisions in MAP21 to limit the extent of increases in the variable-rate premium. The administration has 

also proposed limiting the extent of increases by setting a maximum per participant limit to 

the total amount of a sponsor’s increase under a more risk-based premium structure.

 These surcharges attempt to 

raise revenue to pay existing liabilities more equitably by targeting 

companies that have re-emerged from bankruptcy, that are in industries 

with the largest previous claims, and that are past as well as current 

sponsors. However, as noted in the table, each has drawbacks that limit 

its effectiveness as a potential revenue-raising tool for this purpose.

68See also, American Academy of Actuaries, Examining the PBGC Premium Structure, 

(Washington, D.C.: April 2012). This issue brief describes how PBGC costs could be 

divided into two distinct categories: (1) going-forward costs, which are associated with the 

risks of ongoing coverage by PBGC; and (2) past costs, which are associated with existing 

or imminent claims on PBGC for terminated plans. 

General Concerns about 

Equity Implications of 

Increasing Premiums Also 

Raised
 

Page 37 GAO-13-58 PBGC Premiums

Table 8: Options Suggested by Experts to Address PBGC’s Past Deficit Costs

Bankruptcy Re-Emergence 

Surcharge 

A surcharge could be levied against sponsors whose plans terminate in bankruptcy, but re-emerge 

after turning over their liabilities to PBGC. The surcharge would be separate from, and in addition to, 

the termination premium, which is levied on plan sponsors that terminate an underfunded pension 

plan.a

Industry-Specific Surcharge 

Such a surcharge could promote greater accountability among plan sponsors responsible for 

PBGC’s deficit, but may place a serious financial burden on these formerly bankrupt companies.

A surcharge could be levied on those industries that have accounted for a disproportionate amount 

of PBGC’s deficit. For example, the government could impose a fee on airline tickets that would 

cover the underfunded airline plans that have been taken over by PBGC. This surcharge may 

incentivize plan sponsors within certain industries to manage their plans more responsibly. However, 

it may also place a financial burden on these companies or their customers through increased prices, 

and these companies would not be the same companies that contributed to PBGC’s deficit by 

terminating their plans in the past.

Retirement Sponsor 

Surcharge

A surcharge could be levied on an ongoing basis across all DB plan participants, and/or a one-time 

surcharge could be levied on any past or present sponsor that provides a DB retirement plan. This 

approach recognizes that all DB plan sponsors have a stake in the health of the DB retirement 

system, and PBGC’s insurance program that helps protect its participants. However, this surcharge 

would place an additional cost on healthy plan sponsors who are less likely to be responsible for 

contributing to PBGC’s deficit by terminating their plans in the future.

Source: GAO interviews with pension experts.

a

29 U.S.C. 1306(a)(7). Specifically, a termination premium of $1,250 per participant per year for 3 

years generally applies when a single-employer plan terminates in a distress termination under 29 

U.S.C. § 1341(c)(2)(B)(ii) or (iii) or in an involuntary termination under 29 U.S.C. § 1342. However, 

this premium does not apply in the case of a plan terminated under 29 U.S.C. §§ 1341(c)(2)(B)(ii) or 

1342 during the pendency of a bankruptcy reorganization (29 U.S.C. § 1306(7)(b)), or to any plan 

termination during the pendency of any bankruptcy reorganization filed before October 18, 2005 

(Deficit Reduction Act of 2005, Pub. L. No. 109-171, § 8101(b) and (d), 120 Stat. 181-22 and 183 

(2006)).

In addition, some plan sponsors and others we spoke with voiced 

concerns about whether potential risk-based factors could equitably 

represent the future risk of particular sponsors and their plans to PBGC or 

could have other adverse consequences for sponsors. For example, 

some sponsors expressed concern about including a risk factor 

measuring plan asset investment mix, in particular, because, as noted by 

one sponsor, it is important for plan sponsors to invest assets according 

to their individual needs and priorities. Some experts also expressed 

equity concerns about the potential inclusion of a creditworthiness factor. 

One expert stated that if information about the financial status of DB plan 

sponsors were made public, it could put these companies at a competitive 
 

Page 38 GAO-13-58 PBGC Premiums

disadvantage compared to companies that do not sponsor DB plans.69

Finally, some sponsor advocates we spoke with questioned the need to 

increase premiums at all. These advocates believe if more appropriate 

interest rates were used, the deficit would disappear, and no increase in 

premiums would be warranted.

A 

few plan sponsors said that risk-based premiums are conceptually 

appealing, but that fairly measuring risk may not be feasible. For 

example, one sponsor said that it would be difficult to fairly measure and 

assess the risk factors used in setting risk-based premium rates and to 

make the results of these measurements transparent.

70 

The process of redesigning and implementing a more risk-based premium 

structure poses a number of operational challenges. Additional data and 

analysis would be needed on the selected risk factors, with regular 

monitoring to ensure that the data are accurate and up-to-date. PBGC is 

uniquely situated to take on this complex task, but if granted the statutory 

authority to do so, the agency could then face a number of additional 

administrative challenges concerning governance, transparency, and 

sponsor recourse.

The rate-setting entity responsible for implementation of a risk-based 

premium structure likely would require access to financial and other firmspecific information to provide a sound technical basis for the underlying 

parameters of a risk-based premium regime. The specific types of 

information needed would depend on the specific factors selected, but the 

 

69PBGC officials noted, however, that commercial measures, such as a company’s credit 

ratings, have been used to estimate the risk of default for individual companies for over a 

century. Information on creditworthiness on public companies is readily available, and 

credit scores on private companies are available for purchase from entities such as Dun & 

Bradstreet.

70They believe that the artificially low interest rates following the economic downturn of 

2008 have, in turn, artificially inflated PBGC’s deficit. Instead of using annuity prices to set 

interest rates for valuing its future liabilities, these advocates believe it would be more

accurate to use a “dollar cost averaging” approach that would set interest rates looking 

forward over 30 years based on historical interest rates over the last 30 years—much like 

the approach Congress took in changing funding requirements governing interest rates for 

DB plans recently in MAP-21, § 40211, 126 Stat. 846-50. For further details on how PBGC 

calculates its deficit, see appendix V.

Moving to a RiskBased Premium 

Structure Poses 

Various Challenges

Additional Data and 

Analysis Would Be Needed
 

Page 39 GAO-13-58 PBGC Premiums

information currently being collected may not be sufficient in some cases. 

For example, PBGC currently obtains information about plans from data 

reported by plan sponsors on the Form 5500 and under section 4010 of 

ERISA. Plan sponsors are required to submit the Form 5500 annually to 

Labor, Internal Revenue Service, and PBGC.71 This form includes 

information about the level of plan underfunding (which is currently 

captured in the variable-rate premium) and the investment mix of plan 

assets (which is a potential risk factor that could be incorporated). The 

other main source of information, data reported under section 4010 of 

ERISA, is submitted to PBGC by plan sponsors only if certain criteria are 

met.72 The PPA revised those criteria, and according to PBGC officials, 

some plans are no longer required to provide information under section 

4010 of ERISA even though they still pose an increased risk to PBGC.73

PBGC also obtains information about the financial health of plan sponsors 

through its Early Warning Program, which is responsible for monitoring 

companies that are deemed to pose a greater risk to PBGC because they 

are financially troubled or have a significantly underfunded pension 

plan.74

 

7129 U.S.C. §§ 1021(b)(1) and 1023.

This program uses information from a variety of sources in 

conducting its work, including credit ratings, financial information services, 

news databases, and information from Labor, the Internal Revenue 

Service, and the Securities and Exchange Commission. While information 

gathered through the Early Warning Program would be relevant to the 

potential risk factor of a company’s financial health, the program does not 

systematically gather data for all plan sponsors, and PBGC may be 

7229 U.S.C. § 1310. Specifically, plan sponsors and members of its controlled group are 

required to report financial and actuarial information to PBGC for plans if the (1) the 

funding target at the end of the preceding plan year is less than 80 percent, (2) certain 

conditions for imposition of a lien have been met, or (3) minimum funding waivers in 

excess of $1 million have been granted with respect to any plan maintained by a sponsor 

or member of its controlled group, and any portion is still outstanding.

73Pub. L. No. 109-280, § 505(a), 120 Stat. 946. 

74According to PBGC’s fact sheet on the program, the Early Warning Program identifies 

potential business transactions that could jeopardize the pension insurance program, and 

PBGC works with plans sponsors to negotiate additional contributions or security (which 

may include letters of credit or financial guarantees) for underfunded pensions within the 

context of the transaction. PBGC states that it will work with the company to tailor a 

settlement that is appropriate to the business transaction and financially feasible for the 

company.
 

Page 40 GAO-13-58 PBGC Premiums

limited in its ability to use some credit rating data to assess risk within a 

redesigned premium structure.75

Other government agencies with risk-based premiums have established 

reliable sources of needed information to support their premium 

structures. For example, the FDIC relies entirely on pre-existing sources 

of information and technical resources to assess risk for its risk-based 

premiums. FDIC obtains information on institutions’ aggregate assets 

from the quarterly reports submitted by each bank. FDIC’s CAMELS 

ratings are developed during on-site examinations of each institution, 

during which regulators more closely assess institutions’ exposure to risk. 

These quarterly reports and on-site examinations existed prior to FDIC’s 

shift to risk-based premiums, so FDIC did not need to gather additional 

information or develop new expertise when it implemented its risk-based 

premium structure. 

Alternatively, in the UK, PPF (the UK’s pension insurance agency) relies 

on information obtained annually through an online exchange for the 

information needed to implement the risk-based premium structure.76

 

75Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, federal 

agencies are to review their regulations and remove any reference to or requirement of 

reliance on credit ratings and substitute other appropriate standards of creditworthiness. 

Pub. L. No. 111-203, § 939A, 124 Stat. 1376, 1887 (2010). Thus, PBGC would be 

required to establish its own standard of creditworthiness rather than use credit ratings to 

assess the risk of plan sponsors in its premium structure. 

PPF 

calculates its risk-based premiums based on three risk factors: level of 

underfunding, risk posed by the plan’s investment strategy, and risk of 

sponsor insolvency (or bankruptcy). The exchange provides the agency 

with information on a plan’s level of underfunding and how plan assets 

are allocated across investments with different levels of risk. According to 

a PPF May 2011 policy statement, beginning with plan year 2012/13, very 

large plan sponsors—those with plan liabilities of £1.5 billion or greater 

(about $2.35 billion in U.S. dollars)—are required to submit additional 

information about their investments, while submission is optional for 

smaller plans. To assess sponsors’ risk of insolvency, PPF currently 

relies on Dun & Bradstreet’s failure scores—a measure of the likelihood 

76The exchange is maintained by The Pensions Regulator, the agency responsible for 

regulating pension plans in the UK. The exchange enables sponsors to upload information 

about their plans and make premium payments electronically. The Pensions Regulator 

works closely with PPF to monitor high-risk plans, minimize claims, and ensure that 

employers do not take advantage of the insurance provided by PPF. 
 

Page 41 GAO-13-58 PBGC Premiums

of sponsor bankruptcy—and applies its own schedule of premium rates 

for differing Dun & Bradstreet scores. These rates build in a risk margin

equivalent to the charge an insurer would make for costs of capital held 

for unexpected claims.77

However, PBGC’s lack of similar regulatory authority compared with FDIC 

and UK’s PPF could limit wholesale applicability of these other entities’ 

premium frameworks for PBGC. For example, according to PBGC 

officials, the agency has virtually no regulatory authority and no 

examination authority, and thus cannot routinely obtain the information 

that the FDIC has at its disposal as a regulator. Similarly, PPF functions 

as part of a larger pension regulatory structure, which includes The 

Pensions Regulator—the agency responsible for regulating pension plans 

in the UK. One of The Pensions Regulator’s stated objectives is to reduce 

the risk that PPF will need to take on unfunded liabilities. On its website, 

The Pensions Regulator lists examples of the regulatory actions it can 

take against plan sponsors to protect the security of participants’ benefits. 

In contrast, the oversight of pensions in the United States is more diffused 

with different authorities residing within the Employee Benefits Security 

Administration, the Internal Revenue Service, and PBGC. PBGC officials 

noted that the President’s proposal for a more risk-based premium 

structure called for an analysis and public comment process, in part, to 

help address PBGC’s limited authority regarding the additional data and 

analysis needed to implement such a structure. 

Other differences between PBGC and the UK’s PPF may also limit the 

applicability of PPF’s premium framework for PBGC. For example, the 

governance structure of U.S. single-employer pensions and UK pensions 

differ significantly. According to The Pensions Regulator’s website, UK 

pension law requires that at least one-third of individuals responsible for 

administering the plan, or plan trustees, must be selected by plan 

participants. In contrast, there is no requirement for stakeholder 

representation among fiduciaries of U.S. single-employer plans.78

 

77The Dun & Bradstreet failure score is designed to predict the likelihood that a company 

will cease operations without paying all creditors over the next 12 months. This includes 

the onset of failure such as a meeting of creditors, administrator appointments, 

bankruptcy, receiver appointments, petitions for winding-up and other legal events. 

 

78Fiona Stewart and Juan Yermo, “Pension Fund Governance: Challenges and Potential 

Solutions,” OECD Working Papers on Insurance and Private Pensions, no. 18. (OECD 

publishing, Paris, France: June 2008.) 
 

Page 42 GAO-13-58 PBGC Premiums

Implementing a more risk-based premium structure creates governance 

challenges whether authority for premium setting rests with Congress, 

PBGC, or another entity. Premiums for PBGC’s single-employer 

program—both the flat-rate premium and the variable-rate premium— are 

currently set by statute and PBGC lacks the statutory authority to modify 

premium rates and structures on its own.79

In moving to more risk-based premium structure, Congress could decide 

to enact new premium rates directly. For example, Congress could 

establish a formula under which both financial risk and underfunding 

would jointly determine a plan’s premium (as shown earlier on table 6). 

The legislation could include fixed dollar caps (as in MAP-21) or limits on 

the annual percentage change in premiums. 

Although legislation has been 

enacted to periodically adjust the level of premiums, this process has 

resulted in rates that do not adequately reflect the risk to PBGC’s financial 

condition.

But even if Congress were to decide to delegate authority over setting 

premium rates under a new structure, it could still maintain an important 

role in the process. For example, some experts we spoke with suggested 

that Congress could establish the broad framework for incorporating 

additional risk factors into PBGC’s premium structure, while leaving the 

detailed mechanics of how to construct such a structure to others with 

greater technical expertise. In addition, a number of pension experts we 

spoke with said that congressional oversight would be useful during the 

premium redesign process. Many supported regular reporting by PBGC to 

Congress on progress in developing and implementing a risk-based 

premium structure, with some going further to suggest that PBGC report 

 

7929 U.S.C. § 1306(a)(3)(A)(i), (E) and (F).

Stronger Governance and 

Oversight Would Be 

Needed
 

Page 43 GAO-13-58 PBGC Premiums

its proposed changes to the Congress with changes taking effect only if 

enacted into law.80

While Congress has the authority to set and change premiums, PBGC 

has considerable expertise in reviewing relevant data to assist with 

designing a more risk-based premium structure. In many ways, as the 

implementing agency of the current premium structure, PBGC is uniquely 

situated to obtain and analyze the complex data needed to design and 

implement a more risk-based premium structure. However, if PBGC were 

granted statutory authority to redesign its premium structure, stronger 

governance and oversight of the agency may be required. MAP-21, 

enacted in July 2012, included certain changes to strengthen PBGC’s 

governance structure. For example, the act requires the Board of 

Directors to meet at least four times a year and convene one joint 

meeting per year with the PBGC Advisory Committee. It also requires the 

addition of a PBGC risk management officer,

 

81 a participant and plan 

sponsor advocate,82 and a study of the governing structure of PBGC.83

MAP-21 also requires the Board of Directors to establish a policy to 

identify and mitigate potential conflicts of interest.84

However, even with the recent legislative changes, concerns with PBGC’s 

governance structure with respect to implementing a risk-based premium 

structure would persist. Our prior work has found that the current size of 

PBGC’s board is not sufficient to include the diverse set of interests or 

 

80The President’s deficit reduction proposal to incorporate additional risk factors into the 

PBGC premium structure included a provision that would expressly provide for any 

regulation incorporating risk factors to be subject to congressional review under section 

251 of the Contract with America Act of 1996, commonly referred to as the Congressional 

Review Act (Review Act). Pub. L. No. 104-121, § 251, 110 Stat. 847, 868-74 (codified at 5 

U.S.C. §§ 801-805). Under the Review Act, federal agencies promulgating a major rule 

must submit a copy to GAO and both houses of Congress before it can take effect and 

Congress may enact a joint resolution of disapproval that is sent to the President, 

becoming law if he signs it. We report to the Congress on each major rule, summarizing 

and assessing the procedural steps taken by the federal agencies in promulgating them. 

Moreover, Congress always has the option of seeking to overrule any regulation through 

the usual legislative process.

81§ 40231(a)(2) and (c), 126 Stat. 854-56 (codified at 29 U.S.C. § 1302(e) and (k)).

82§ 40232, 126 Stat. 857.

83§ 40231(f), 126 Stat. 855-56.

84§ 40231(b), 126 Stat. 854-55 (codified at 29 U.S.C. § 1302j).
 

Page 44 GAO-13-58 PBGC Premiums

expertise needed to provide policy direction for PBGC.85

At the same time, some experts we spoke with also noted that certain 

safeguards could be put in place to help mitigate such concerns. For 

example, special temporary commissions—such as an independent 

advisory committee comprised of a range of stakeholders and experts—

are a tool that can be used to formulate recommendations for specific 

policy areas.

Some of the 

pension experts we spoke with maintained that PBGC’s current board 

structure is adequate to provide sufficient oversight, while others echoed 

our concerns, commenting that the Board of Directors needs to be more 

active and reflect a wider range of technical expertise and stakeholder 

interests should it be granted additional statutory authority with respect to 

implementing a more risk-based premium structure.

86 Along these lines, some pension experts we spoke with 

suggested establishing an independent advisory committee—comprised 

of knowledgeable representatives from a range of fields including 

academics, actuarial and labor experts—to play a formal role in the 

premium redesign process. Such an advisory committee could help 

ensure that the premium redesign process reflects stakeholder concerns 

and needed expertise.87

 

85In 

A number of redesign suggestions from various 

stakeholder groups have already emerged, such as setting caps on 

premium increases, offering a transition period for new rates, using an 

independent third-party measure of creditworthiness, and reducing 

adverse effects on sponsors produced by economic downturns and 

higher premiums by smoothing (averaging) premium rates over several 

years to reduce volatility.

GAO-07-808, we recommended that PBGC’s board should (1) establish formal 

guidelines that articulate the authorities of the board members, their respective 

departments, and PBGC’s Director and (2) PBGC’s board should establish policies, 

procedures, and mechanisms for providing oversight of PBGC that are consistent with 

corporate governance guidelines. These recommendations have been implemented. For 

example, PBGC promulgated a final rule revising the board’s bylaws to specifically 

delineate roles and responsibilities of involved parties. 73 Fed. Reg. 29,985 (May 23, 

2008). However, some of our more recent work shows that while the board has been 

meeting more often during the last few years compared to prior years, its members still 

have little time to devote to PBGC. See GAO-11-182T. 

86GAO, 21st Century Challenges: Reexamining the Base of the Federal Government, 

GAO-05-325SP (Washington, D.C.: February 2005).

87Similarly, the President’s recent proposal on deficit reduction called for the PBGC board 

to consult with individuals or organizations representing the interest of employees, plan 

sponsors, and the general public in designing a more risk-based premium structure.
 

Page 45 GAO-13-58 PBGC Premiums

A more risk-based premium structure would likely spur demand for 

procedures to increase the transparency of PBGC’s policies and technical 

work to bolster confidence in the agency’s ability to effectively implement 

such a system, including procedures for recourse in the event of the 

assessment of excessive or inaccurate premiums. Various concerns have 

been raised about the agency’s lack of transparency, especially related to 

the technical tools used to inform policy changes. Such a perceived lack 

of transparency could hamper public confidence in the agency’s efforts to 

implement a redesigned premium structure. 

More specifically, some pension experts and plan sponsors we spoke 

with expressed concerns that PBGC’s operations are not clear or easily 

understandable, making it difficult to assess the accuracy and 

reasonableness of its estimates. Some pointed to the PIMS model, which 

is used to project the possible impact of policy changes on the agency’s 

finances. Although PIMS has undergone several external reviews by 

academics and the Society of Actuaries, among others,88 concerns about 

the model persist. In May 2012, such concerns were exacerbated by 

release of a PBGC Inspector General report critical of PIMS’ internal 

controls.89 The issues surrounding PIMS have contributed to a lack of 

confidence in the agency and its public estimates among some in the plan 

sponsor and business communities.90

 

88Among the academic peer reviews of PIMS, most notable is the PIMS Technical Review 

Panel in November 1996 (sponsored by the Pension Research Council at the Wharton 

School, University of Pennsylvania). More recently, the Society of Actuaries, used PIMS to 

prepare a report on pension contributions, published in 2011. PBGC officials also noted 

that in 2003, PIMS was reviewed by a major investment bank, which was tasked by PBGC 

with quantifying the value of the PBGC put. Initially, the bank’s analytic team planned to 

use its own models to perform this analysis. However, after reviewing PIMS and 

determining that PIMS produced results consistent with their models, the lead consultant 

decided to use PIMS for the project rather than their own models.

89Specifically, the Inspector General found that PBGC had published erroneous and 

inconsistent results in its 2010 exposure report and that PBGC’s Policy Research and 

Analysis Department failed to conduct documented reviews of the underlying support used 

for the report and lacked quality control policies to ensure the integrity of reported 

estimates. See PBGC Office of Inspector General, Ensuring the Integrity of Policy 

Research and Analysis Department’s Actuarial Calculations, PA-12-87 (Washington, D.C.: 

May 2012). For further details, see appendix VI. 

90Our prior work has noted that the ultimate success of a major policy change—such as 

the redesign of PBGC’s statutory premium structure—depends, in part, on having reliable 

data and credible analysis to provide a compelling rationale for the proposed change. See 

GAO-05-325SP. 

Greater Transparency and 

Provisions for Recourse 

Would Be Necessary
 

Page 46 GAO-13-58 PBGC Premiums

To increase the transparency of any processes that PBGC may be 

authorized to use to calculate risk factors, experts we spoke with

generally supported adopting various other safeguards,91

• Disclosing the methodology for creating risk profiles. Require publication 

of the methodology used to create sponsors’ risk profiles, while 

continuing to safeguard any non-publicly available information used in 

actually calculating risk-based premiums.

including the 

following:

92

• Publishing a risk-based premium schedule. Require publication of a 

schedule that includes information such as premium rates and key dates 

for plan sponsors.

• Soliciting public feedback. In redesigning the premium structure, include 

a mechanism for soliciting public feedback—either through a public 

comment period or by holding public hearings—to improve the 

transparency of the process.93

• Increasing congressional reporting and oversight. Require PBGC to 

regularly report to Congress—either through testimony or written report—

on progress made on implementing a risk-based premium structure. 

Such reports could contain specific information related to risk-based 

premiums, such as risk measures, cross indicators, and premiums by 

industry.

Finally, it is also important to bolster confidence in a redesigned premium 

structure by including provisions for recourse if a sponsor wishes to 

appeal its risk assessment. For example, PPF officials told us that in the 

UK, they were required to implement an appeals process allowing plan 

 

91The President’s deficit reduction proposal included safeguards similar to the suggestions 

outlined here. See Office of Management and Budget, “Living Within Our Means and 

Investing in the Future, The President’s Plan for Economic Growth and Deficit Reduction,” 

(September 2011). 

92The President’s 2013 budget proposal to incorporate additional risk into the PBGC 

premium structure would prohibit publicly disclosing information used to determine 

premiums for plan sponsors, and PBGC already protects confidential information. 

93In previous work, we found that for policy reconsideration efforts of this scale, success 

depends, in part, on including a clear and transparent process for engaging the broader 

public in the debate over recommended changes. See GAO-05-325SP. 
 

Page 47 GAO-13-58 PBGC Premiums

sponsors to request a review of their case if they believed there was a 

mistake in the calculation of the plan-based premium or the underfunding 

component of the risk-based premium.94 They also noted that in the initial 

year during which risk-based premiums were levied (2006/07), sponsors 

filed approximately 200 appeals (or approximately 3 percent of an 

estimated 7,800 plans).95 However, 5 years later, in the most recent 

premium year (2011/12), the number of appeals had dropped to 70 (or 

approximately 1 percent of an estimated 6,550 plans),96 suggesting that 

sponsor confidence in PPF has grown.

PBGC faces a number of challenges in its role as insurer and protector of 

pension benefits under DB systems that millions of Americans depend on 

for their retirement security. To remain financially solvent, PBGC relies on 

returns on its investments as well as premiums. However, the number of 

DB plans has been falling and premium rates have not adequately 

reflected the level of risk posed to PBGC for losses resulting from new 

claims. If PBGC’s current financial challenges are not addressed, the 

agency could ultimately face insolvency, potentially resulting in a need for 

legislative changes either to make painful reductions to participant 

benefits or significant additional increases in premiums, or to provide for 

taxpayers to cover these costs. A key objective of redesigning PBGC’s 

premium structure would be to ensure that premium revenue keeps pace 

with future claims and that the new structure is designed to decrease 

cross-subsidization between financially healthy and unhealthy sponsors. 

By adopting a structure that allows rates to better align with the risk posed 

by individual plans and sponsors, Congress has an opportunity to help 

PBGC contain its deficit and strengthen PBGC’s ability to remain solvent 

into the future.

 

94According to PPF’s website, plan sponsors have 28 days to appeal their premium 

invoice. If a plan sponsor believes its failure score is inaccurate, they are instructed to 

contact Dun & Bradstreet directly. 

95This includes the number of appeals directed to PPF. Total number of appeals, including 

those relating to the Dun & Bradstreet failure score, was 1,500 in 2006/7 and 560 in 

2011/12. 

96This figure reflects the number of PPF-insured plans as of March 31, 2011, the most 

recently available data.

Conclusions 
 

Page 48 GAO-13-58 PBGC Premiums

Determining whether—and if so, how—to redesign and implement a more 

risk-based premium structure will require new tools, new data, and new 

processes. PBGC’s hypothetical model created to illustrate different 

premium options and its analyses of the effects of incorporating an 

additional risk factor are extremely useful tools for informing the debate 

on how PBGC’s premium structure might be redesigned. However, these 

efforts are only a first step. As illustrated by other risk-based premium 

structures implemented in this country by the FDIC and abroad by the 

UK’s pension insurance fund, options exist to establish risk-based 

premiums using a broad array of financial data. Much like these agencies’ 

premium structures, PBGC premiums could be designed to identify each 

individual sponsor’s unique risk profile and charge each sponsor a 

specific risk premium sufficient to cover that sponsor’s risk. To ensure 

that any changes to PBGC’s premium structure are designed and 

implemented in a reliable and fair way, decisions will need to be informed 

by a wide range of perspectives. The continuing involvement of 

stakeholders in the form of an advisory committee to assist with 

implementing these changes could be helpful in improving the 

transparency and legitimacy of the new system, whether Congress 

retains its premium-setting authority or determines that the authority for 

premium setting should rest with PBGC or another entity.

Moreover, should a more risk-based premium structure be adopted, it will 

be important for the responsible rate-setting entity to have access to the 

right information and expertise to adequately assess risk to incorporate 

any new risk factors into the process on an ongoing basis. Revising 

sponsors’ financial reporting requirements—such as the reporting 

required under section 4010 of ERISA—could improve PBGC’s ability to 

collect key information that may be necessary to help the agency 

estimate its risk exposure to future claims and strengthen implementation 

of any changes to the premium structure. It will also be important to 

ensure that the rate-setting entity has adequate expertise to conduct 

rational evaluations of the future risk posed by plan sponsors in order to 

provide a sound basis for setting premiums accordingly in alignment with 

that risk. To this end, Congress has taken an important step with MAP-21 

by establishing quality control requirements for PBGC, including an 

annual peer review of PIMS. Ensuring that this annual peer review 

includes review of the inputs and assumptions used in PIMS projections 

and resulting outputs, specifically as they relate to projecting PBGC’s 

future financial condition, would further enhance the transparency and 

credibility of any calculations used to support a more risk-based premium 

structure.
 

Page 49 GAO-13-58 PBGC Premiums

Also, should a more risk-based premium structure be adopted, it will be 

important to identify the financial impact that risk-based premiums would 

have on plan sponsors and on the future of the DB system. A more fully 

risk-based premium structure would presumably redistribute costs onto 

plan sponsors posing the greatest risk to PBGC—sponsors who may be 

financially weak. Congress and PBGC will need to consider the impact of 

this added burden on these plan sponsors, particularly during weak 

economic periods.

To help strengthen the PBGC insurance program, Congress should 

consider the following action:

1. Authorize redesign of PBGC’s premium structure to more fully reflect 

the risk posed by plans and sponsors to the agency, such as by 

providing for the incorporation of additional risk factors.

In addition, to improve PBGC’s ability to collect key information that may 

be necessary to help the agency estimate its risk exposure to future 

claims and strengthen implementation of any changes to the premium 

structure, Congress should consider the following action:

2. Provide PBGC with access to additional information needed to assess 

risk and assist in setting premiums, such as by expanding the criteria 

requiring plan sponsors to report under section 4010 of ERISA. 

Moreover, to better understand the mechanics of how best to incorporate 

additional risk factors, improve transparency, and help inform the 

evaluation of the various redesign options, Congress should consider the 

following action:

3. Establish an independent premiums advisory committee reflecting a 

range of perspectives—including, for example, representatives from

federal agencies, sponsors, actuaries, private insurers, and labor 

groups—to assist with such activities as developing the mechanics for 

incorporating additional risk factors and implementing new rates, as 

well as delineating a variety of alternative methods to address 

PBGC’s deficit.

Matters for 

Congressional 

Consideration 
 

Page 50 GAO-13-58 PBGC Premiums

To enhance understanding and better inform debate on the possible 

effects of moving to a more risk-based premium structure, during 

consideration of various redesign options and after a redesign may be 

authorized, we recommend that the Director of PBGC take the following 

action:

1. Continue to develop PBGC’s hypothetical model, analyzing various 

premium redesign options and their impacts on sponsors, and report

the results to Congress. As part of these analyses, PBGC should 

evaluate the potential effects on sponsors of incorporating additional 

risk factors, such as company financial health and plan investment 

mix, and include an assessment to identify any potentially 

disproportional hardships on smaller companies that may result from 

the redistribution of higher rates to riskier sponsors.

We obtained written comments on a draft of this report from PBGC (see 

appendix IX). PBGC generally agreed with our findings and conclusions. 

PBGC believes that basing premiums on the actual risk of plan 

terminations would encourage and reward companies to keep DB plans, 

and that under a more risk-based approach, many financially sound 

companies would see their premiums decrease. PBGC also agrees with 

our finding that moving to more risk-based premiums is not likely to drive 

sponsors to abandon their DB plans, but characterized our analysis as 

showing that such claims have no evidence to support them. We would 

like to clarify that, in our previous work, we found that sponsors 

mentioned factors other than excessive premiums as the primary reasons 

for freezing or terminating their DB plans. We did not intend to imply that 

such concerns about the potential effects of risk-based premiums were 

unfounded or without any supporting evidence.

PBGC agrees with our finding that there are important implementation 

concerns in moving to a more risk-based premium structure and 

characterized our suggested ways to address these concerns as 

constructive, warranting further discussion. For example, some of these 

concerns could be addressed by Congress simply establishing a more 

comprehensive risk-based approach statutorily rather than delegating 

premium-setting authority to another entity such as PBGC. 

PBGC supports our recommendation for agency action—specifically, that 

PBGC should conduct further analyses of premium options. PBGC notes 

that it is committed to continued development of the databases, models, 

and analyses of various premium redesign options and their impacts on 

Recommendation for 

Executive Action

Agency Comments 

and Our Evaluation
 

Page 51 GAO-13-58 PBGC Premiums

sponsors, and to report the results of these analyses to Congress. We 

welcome this commitment, as we believe that such efforts can contribute 

to adoption of a more effective and equitable rate-setting system, 

especially if these efforts include an evaluation of the potential for any 

disproportional hardships on smaller companies that may result from a 

more comprehensive risk-based structure. 

PBGC supported our matters for congressional consideration in its letter 

and technical comments, with respect to authorizing a more risk-based 

premium structure, providing PBGC with improved access to key 

information concerning plan sponsors’ financial health, and establishing 

an independent premiums advisory committee reflecting a range of 

perspectives to improve transparency in the premium redesign process. 

The Department of the Treasury also provided technical comments, which 

are incorporated into the report where appropriate. In addition, we 

received technical comments on certain segments of the draft report from 

PPF and FDIC, and have incorporated their comments where 

appropriate, as well. 

As arranged with your offices, unless you publicly announce its contents 

earlier, we plan no further distribution of this report until 30 days from the 

date of this letter. At that time, we will send copies to the Secretaries of 

Commerce, Labor, and the Treasury, and other interested parties. In 

addition, the report will be available at no charge on the GAO website at 

www.gao.gov. 
 

Page 52 GAO-13-58 PBGC Premiums

If you or your staff have any questions about this report, please contact 

me at (202) 512-7215 or jeszeckc@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on 

the last page of this report. GAO staff that made key contributions to this 

report are listed in appendix X.

Sincerely yours,

Charles A. Jeszeck

Director, Education, Workforce, and Income Security Issues
Appendix I: Recent Legislation Related to the 

Pension Benefit Guaranty Corporation

Page 53 GAO-13-58 PBGC Premiums

On July 6, 2012, the President signed into law the Moving Ahead for 

Progress in the 21st Century Act (MAP-21).1

PART I—PENSION FUNDING STABILIZATION

Although pensions were not 

the primary purpose of the act, it included several provisions that pertain 

to the Pension Benefit Guaranty Corporation (PBGC). For example, the 

act changed the process for determining defined benefit (DB) plan

funding requirements, increased premium rates for sponsors of singleemployer and multiemployer DB plans insured by PBGC, and included 

several provisions to improve the governance of PBGC. Sections of the 

act related to PBGC are briefly summarized below, along with a table 

detailing the preliminary revenue scoring by the Joint Committee on 

Taxation for these changes.

Sec. 40211. Pension funding stabilization.

The act changed how the minimum funding required for a single-employer 

plan may be determined. Specifically, it provided for adjustment of 

interest rates to be used in determining a plan’s funding target. Plans that 

take advantage of this provision in determining their required minimum 

funding must provide information on the impact of electing to do so in 

their annual funding notices.

PART II—PBGC PREMIUMS

Sec. 40221. Single-employer plan annual premium rates.

Sec. 40222. Multiemployer annual premium rates.

The act increases PBGC premium rates for both single-employer and 

multiemployer DB plans.

Effective beginning in 2013, the act changes the flat and variable 

premium rates and puts a cap on the variable-rate premium. Each flat or 

variable rate is subject to a different inflation adjustment, and the variablerate premium cap has its own inflation adjustment.

 

1

Pub. L. No. 112-141, 125 Stat. 405 (2012). The legislation was enacted primarily to 

authorize funds for highways, highway safety programs, transit programs and for other 

purposes.

Appendix I: Recent Legislation Related to the 

Pension Benefit Guaranty Corporation
Appendix I: Recent Legislation Related to the 

Pension Benefit Guaranty Corporation

Page 54 GAO-13-58 PBGC Premiums

PART III—IMPROVEMENTS OF PBGC

Sec. 40231. Pension Benefit Guaranty Corporation Governance 

Improvement.

The act amended the Employee Retirement Income Security Act of 1974 

(ERISA) provisions relating to the PBGC Board of Directors, Advisory 

Committee, Director and other PBGC officials in various ways. Among 

other things, with respect to the Board of Directors, it established that a 

majority of its members constitutes a quorum and the vote of a majority of 

board members present shall be an act of the board. Under the provision, 

the board is to meet no less than four times a year with not fewer than 

two members present. At least one of those meetings must be with the 

PBGC Advisory Committee. It also provided that the PBGC Inspector 

General is to report to the board and at least twice a year attend a board 

meeting to report on PBGC operations. Furthermore, the provision 

clarifies the role of the General Counsel, and expressly provides that the 

Inspector General and the Inspector General legal counsel are 

independent of PBGC management and its General Counsel. The act 

includes specific requirements to PBGC’s Board of Directors and Director

to avoid conflicts of interest and provides for PBGC to have a risk 

management officer. It expressly provided that the PBGC Board of 

Directors is ultimately responsible for overseeing PBGC and that the 

Director is directly accountable to the Board of Directors and can be 

removed by the Board of Directors or the President. It also set the 

Director’s term at 5 years unless removed before the expiration of the 

term by the President or the Board of Directors.

The act also stated the sense of Congress that (1) the Board of Directors 

should form committees, including an Audit Committee and an Investment 

Committee composed of at least two members, to enhance the overall 

effectiveness of the board, and (2) the Advisory Committee should 

provide the board with policy recommendations regarding changes to law 

that would be beneficial to PBGC or the voluntary private pension system.

The act also directs PBGC, not later than 90 days after enactment, to 

contract with the National Academy of Public Administration to conduct a 

study to include (1) a review of governance structures of organizations 

analogous to PBGC and (2) recommendations with respect to various 

topics relating to the Board of Directors, such as composition, 

procedures, and policies to enhance congressional oversight. The results 

of the study are to be reported within a year of initiation of the study to the 

to the Committee on Health, Education, Labor, and Pensions and the 
Appendix I: Recent Legislation Related to the 

Pension Benefit Guaranty Corporation

Page 55 GAO-13-58 PBGC Premiums

Committee on Finance in the Senate; and the Committee on Education 

and the Workforce and the Committee on Ways and Means in the House 

of Representatives. 

Sec. 40232. Participant and plan sponsor advocate.

The act requires the Board of Directors to choose a Participant and Plan 

Sponsor Advocate from the candidates nominated by the PBGC Advisory 

Committee. Among other things, this advocate is to act as a liaison 

between PBGC and participants in terminated pension plans, ensure that 

participants receive everything they are entitled to under law, and provide 

plan sponsors with assistance in resolving disputes with PBGC. Each 

year, the advocate will provide a report on these activities to the 

Committee on Health, Education, Labor, and Pensions and the 

Committee on Finance in the Senate; and the Committee on Education 

and the Workforce and the Committee on Ways and Means in the House 

of Representatives. The report is to summarize the issues raised by 

participants and plan sponsors, making recommendations for changes to 

improve the system.

Sec. 40233. Quality control procedures for the Pension Benefit Guaranty 

Corporation.

The act requires PBGC to contract with a capable agency or organization 

independent from PBGC, such as the Social Security Administration, to 

conduct an annual peer review of PBGC’s Single-Employer and 

Multiemployer Pension Insurance Modeling Systems (PIMS). The first 

reviews must be initiated no later than 3 months after enactment of the 

act.

The act also requires PBGC to develop written quality review policies and 

procedures for all modeling and actuarial work performed by PBGC’s 

Policy, Research, and Analysis Department, and conduct a record 

management and record keeping review. Finally, it requires PBGC to 

provide a timetable for addressing outstanding recommendations made 

by the Inspector General relating to the Policy, Research, and Analysis 

Department and the Benefits Administration and Payment Department.
Appendix I: Recent Legislation Related to the 

Pension Benefit Guaranty Corporation

Page 56 GAO-13-58 PBGC Premiums

Sec. 40234. Line of credit repeal.

The act repeals section 4005(c) of ERISA,2

Table 9: Preliminary Joint Committee on Taxation Score of Revenue Changes Caused by Surface Transportation Conference 

Report Related to Pension Funding Stabilization and PBGC Premium Provisions, Fiscal Years 2012-2022

which permitted PBGC to 

issue notes or other obligations in an amount up to $100,000,000.

Category 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

2012-

2017

2012-

2022

Pension 

funding 

stabilization 595 2391 4576 5144 3765 1671 274 -807 -2328 -3121 -2766 18142 9394

Cap singleemployer 

variable rate 0 0 -140 -260 -280 -130 -60 -20 -10 -10 -10 -810 -920

Increased flatrate premiums 0 200 400 400 500 530 570 600 630 630 670 2030 5130

Variable-rate 

premiums 0 0 0 760 1190 810 570 370 290 330 330 2760 4710

Multiemployer 

programs 0 20 15 15 25 25 25 30 30 30 40 100 255

Interaction 0 0 0 50 227 231 256 208 209 159 110 508 1450

Extension for 

Transfers/420 

for life 

insurance 0 0 20 41 42 43 44 45 47 18 24 145 354

Net total 

revenue 

increases 595 2611 4871 6150 5469 3180 1679 426 -1132 -1964 -1602 22875 20373

Source: Joint Committee on Taxation.

 

2

29 U.S.C. § 1305.
Appendix II: President’s Fiscal Year 2013 

Budget Proposal for PBGC

Page 57 GAO-13-58 PBGC Premiums

The Budget of the United States Government, Fiscal Year 2013, includes 

information on the President’s budget priorities organized by agency. 

Administratively, PBGC is an entity within of the Department of Labor. In 

the President’s budget, one of the funding highlights for the Department 

of Labor includes the following: “Safeguards workers’ pensions by 

encouraging companies to fully fund their employees’ promised pension 

benefits and assuring the long-term solvency of the Federal pension 

insurance system.” The President proposes accomplishing this by (1) 

raising $16 billion in additional premium revenue over 10 years through 

phased-in increases to PBGC’s flat- and variable-rate premiums, and (2) 

giving the PBGC’s Board of Directors the authority to adjust premiums.1

(1) The administration proposed raising $16 billion in additional premium 

revenue over 10 years by raising $4 billion in additional flat-rate premiums 

and $12 billion in additional variable-rate premiums (see table 10). 

Relevant excerpts from the budget proposal are provided below.

• Strengthen the Safety Net for Workers’ Retirement Benefits. All 

Americans deserve a secure retirement. . . . The Pension Benefit 

Guaranty Corporation (PBGC), which protects the retirement security of 

44 million workers in defined benefit pension plans, is also critical to the 

success of a robust pension system. When underfunded plans terminate, 

PBGC assumes responsibility for paying the insured benefits. PBGC is 

responsible for paying current and future retirement benefits to more than 

1.5 million workers and retirees. PBGC receives no taxpayer financing 

and relies primarily on premiums paid by insured plans. PBGC premiums 

are currently much lower than what a private financial institution would 

charge for insuring the same risk and are insufficient for PBGC to meet 

its long-term obligations. As of the end of September 2011, PBGC faced 

a $26 billion deficit. The Administration proposes to encourage 

companies to fully fund their pension benefits and ensure PBGC’s 

continued financial soundness by giving the PBGC Board the authority to 

 

1

The President also suggested various more specific ideas for changing PBGC’s premium 

structure in his deficit reduction plan. See Office of Management and Budget, “Living 

Within Our Means and Investing in the Future, The President’s Plan for Economic Growth 

and Deficit Reduction,” (September 2011). For example, in this plan, the President called 

for the PBGC board to consult with individuals or organizations representing the interest of 

employees, plan sponsors, and the general public in designing a more risk-based 

premium structure, and specified that total PBGC premiums for any plan would not exceed 

four times the amount payable with respect to the plan for the 2010 plan year, on a per 

participant basis.

Appendix II: President’s Fiscal Year 2013 

Budget Proposal for PBGC

Excerpts from the 

President’s Budget 

Proposal 
Appendix II: President’s Fiscal Year 2013 

Budget Proposal for PBGC

Page 58 GAO-13-58 PBGC Premiums

adjust premiums to better account for the risk the agency is insuring. This 

proposal consists of two parts: a gradual increase in the single-employer 

flat-rate premium that will raise approximately $4 billion by 2022; and 

PBGC Board discretion to increase the single-employer variable-rate 

premium to raise $12 billion by 2022. This proposal would save $16 

billion over the next decade. (p. 146)

Table 10: Proposed Budget Savings Listed under PBGC

Deficit increases (+) or decreases (–) in millions of dollars

Totals

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

2013-

2017

2013- 

2022

Improve PBGC 

solvency 

— -81 -1,828 -2,275 -2,316 -2,067 -1,713 -1,616 -1,874 -2,210 -6,500 -15,980

Source: Budget proposal, p. 231, Table S–9. Mandatory and Receipt Proposals (excerpt under Labor).

(2) The President’s fiscal year 2013 budget proposes giving the PBGC 

Board of Directors the authority to adjust premiums. Relevant excerpts 

from the budget proposal are provided below.

• Shores Up the Pension Benefit Guaranty Corporation to Protect 

Worker Pensions. The Pension Benefit Guaranty Corporation (PBGC) 

acts as a backstop to protect pension payments for workers whose 

companies have failed. Currently, the PBGC’s pension insurance system 

is itself underfunded, and the PBGC’s liabilities exceed its assets. The 

PBGC receives no taxpayer funds and its premiums are currently much 

lower than what a private financial institution would charge for insuring 

the same risk. The Budget proposes to give the PBGC Board the 

authority to adjust premiums and directs PBGC to take into account the 

risks that different sponsors pose to their retirees and to PBGC. This will 

both encourage companies to fully fund their pension benefits and ensure 

the continued financial soundness of PBGC. In order to ensure that these 

reforms are undertaken responsibly during challenging economic times, 

the Budget would require a year of study and public comment before any 

implementation and the gradual phasing-in of any premium increases. 

This proposal is estimated to save $16 billion over the next decade. (p. 

147)

PBGC estimated the increases in the flat and variable rates that would be 

needed to reach the administration’s revenue targets over the 10-year 

period. PBGC estimated that the flat rate would need to double from the 

Rate Increases under the 

President’s Proposal
Appendix II: President’s Fiscal Year 2013 

Budget Proposal for PBGC

Page 59 GAO-13-58 PBGC Premiums

current rate of $35 per participant to $71 in 2022, and the variable rate 

would increase almost eight-fold from its current rate of $9 per $1,000 of 

underfunding to $71 in 2022 (see table 11).

Table 11: Increase in Premium Rates for the Single-Employer Program Estimated by PBGC for the President’s Fiscal Year 

2013 Budget, Fiscal Years 2013-2022 

Premium rates 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Flat rate (dollars charged per 

participant)a

 $36.00 40.00 44.00 48.00 52.00 56.00 60.00 63.00 67.00 71.00

Variable rate (dollars charged per 

$1,000 of underfunding) $9.00 b 15.88 22.76 29.64 36.53 43.41 50.29 57.17 64.05 70.93

Source: GAO analysis of PBGC data.

a

The flat-rate premium is calculated on a per participant basis. Under current law, the flat rate for 

fiscal year 2012 is $35 per participant, and is indexed to increases in the national average wage 

index, as determined by the Social Security Administration. 29 U.S.C. § 1306(a)(3)(A) and (F).

b

This estimate is based on PBGC’s projections that assume plan 

participant levels would remain unchanged

The variable-rate premium is calculated based a plan’s level of underfunding whereby every $1,000 

of underfunding is multiplied by the rate. Under current law, the variable rate is $9 per every $1,000 of 

plan underfunding. 29 U.S.C. § 1306(a)(3)(F).

2 and unfunded vested benefit 

levels would decline significantly over the next decade,

3

 

2

To estimate the flat-rate premium for the single-employer program for fiscal years 2013 to 

2022, PBGC projected that the total participant count in its insured DB plans in this 

program would remain unchanged. However, PBGC’s projection on the level of plan 

participants over the period stands in contrast to a decline in participants that PBGC has 

reported beginning in fiscal year 2005. We estimate that on average, participant levels 

have declined by about a quarter percentage point each year since 2005. Using a higher 

projected participant count would tend to overstate revenues for the period based on a per 

participant premium. 

and that do not 

incorporate any additional risk factors into the variable rate. PBGC 

projected this decrease in underfunding (increase in funding) due to 

3

PBGC estimates that unfunded vested benefit levels would decrease from nearly $283 

billion in fiscal year 2013 to just over $24 billion by fiscal year 2019, remaining close to 

that level for the remainder of the period. Based on this assumption, PBGC projects that 

even with rate increases proposed under the President’s budget, annual revenues from 

the variable rate will decrease from $2.2 billion in fiscal year 2013 to $1.7 billion in fiscal 

year 2022. The actual level of unfunded vested benefits in future years would depend on, 

among other factors, capital market factors such as stock market returns. Changes in 

PBGC’s assumptions about unfunded vested benefit levels could significantly affect the 

amount of revenue estimated to be collected through the variable rate. 
Appendix II: President’s Fiscal Year 2013 

Budget Proposal for PBGC

Page 60 GAO-13-58 PBGC Premiums

several factors,4 including PPA funding requirements that will tend to 

bolster plan funding over this period.5

However, PBGC used PIMS to make assumptions about future unfunded 

vested benefit levels for estimating premium rates for the President’s 

proposal, and PBGC officials recognize that uncertainty exists in the 

many economic factors and underlying assumptions used for this 

projection. In addition, the agency’s Inspector General recently identified 

internal control deficiencies related to actuarial estimates used in the 

agency’s PIMS model.6

Using the same assumptions PBGC used to estimate rates for the 

President’s fiscal year 2013 budget, we estimated the increases in rates 

that would be needed to reach a revenue target of $23 billion, the current 

level of PBGC’s deficit in the single-employer program. This scenario 

illustrates the increases in rates that would be required if no other sources 

of revenue were available to help address PBGC’s deficit, such as returns 

on investment. We found that under this scenario, the flat-rate premium 

would need to increase to $75 and the variable-rate premium to $106 by 

fiscal year 2022.

We reviewed the PIMS data provided to us and 

conducted a meeting with PBGC officials to discuss the reliability of these 

data and some of the data used in its 2010 exposure report. We 

determined that the PIMS data provided to us and used by PBGC in its 

report were sufficiently reliable to provide information on the approximate 

magnitude of PBGC’s future financial condition and the mechanics of 

premium options.

 

4

PBGC uses PIMS to estimate future underfunding under current and future funding rules 

as a function of a variety of economic parameters. PIMS models the effect of the PPA 

funding requirements and establishes a baseline for equity returns and interest rates over 

this period for the underfunding projection. See appendix VI for a description of PIMS. 

5

Pub. L. No. 109-280, §§ 101, 102, 111, and 112, 120 Stat. 784-809 and 820-846. PPA 

introduced new funding requirements for single-employer DB plans beginning in 2008. It 

requires plan funding to be equal to 100 percent of the plan’s liabilities (these PPA funding 

target liabilities are not calculated using the same assumptions and methods as the 

liabilities to determine unfunded vested benefits for purposes of determining variable-rate 

premiums). The 100 percent funding target is phased in at 92 percent in 2008, 94 percent 

in 2009, 96 percent in 2010, and 100 percent in 2011 and later years. Any unfunded 

liability will have to be amortized—paid with interest—over 7 years. 

6

See Pension Benefit Guaranty Corporation Office of Inspector General, Ensuring the 

Integrity of Policy Research and Analysis Department’s Actuarial Calculations

(Washington, D.C.: May 2012). 
Appendix III: Further GAO Analyses of a RiskBased Premium Option

Page 61 GAO-13-58 PBGC Premiums

To better understand the impact on rates under one hypothetical riskbased option, we conducted additional analyses using data provided to us 

by PBGC from a premium option model PBGC designed to illustrate 

different premium scenarios. PBGC’s model used 2010 data from a 

sample of 2,699 DB plans covering 27.5 million participants. The model 

covered 81 percent of all PBGC insured participants (33.8 million) in 

2010.

First, we analyzed the sample data to determine how the plans would be 

distributed based on their financial health and funded status. Results are 

summarized in table 12.

Table 12: Distribution of Plans by Financial Health and Funded Status under a Hypothetical Risk-Based Option

Source: GAO analysis of PBGC data from a sample of 2,699 defined benefit plans used in PBGC’s hypothetical premium model.

Next, we analyzed the effect of the rate changes under this option on the 

sample based on the number of participants in the sample of plans used 

in PBGC’s model, as shown in table 13. In total, we estimate that rates 

would decrease under the risk-based option over 2015 rates for plans 

covering a majority of participants in the sample when considering the per 

participant costs for sponsors, regardless of the funding status of a

participant’s plan or the financial health of the participant’s sponsor.

Appendix III: Further GAO Analyses of a 

Risk-Based Premium Option

Funded status

Financial health ≥120% ≥90% to under 120% 75% to under 90% <75% Total plans

Extremely healthy (1) 21 110 59 6 196

Very healthy (2) 58 349 155 24 586

Healthy (3) 55 527 367 68 1017

Risky (4) 20 215 203 85 523

Very risky (5) 15 118 178 66 377

Total 169 1319 962 249 2699
Appendix III: Further GAO Analyses of a RiskBased Premium Option

Page 62 GAO-13-58 PBGC Premiums

Table 13: Number and Percentage of Participants with Premium Rate Changes 

under One Hypothetical Risk-Based Option

Premium rate change over 2015 per participant rate

Plan funded status

Number of participants in 

plans with increased rates

(percent)

Number of participants in 

plans with decreased rates 

(percent)

≥120% 904,921

(42%)

1,238,648

(58%)

≥90% to under 

120%

7,158,249

(42)

9,948,743

(58)

75% to under 90% 2,355,025

(37)

4,033,812

(63)

<75% 1,375,433

(74)

491,817

(26)

Plan financial health

Extremely healthy 

(1) 

5,160

(less than 1%)

2,684,969

(100%)

Very healthy (2) 67,446

(1) 

9,340,587

(99)

Healthy (3) 4,858,897

(61)

3,083,163

(39)

Risky (4) 3,603,325

(90)

390,053

(10)

Very risky (5) 3,258,800

(94)

214,248

(6) 

More financially 

healthy (1-3)

4,931,503

(25)

15,108,719

(75)

Less financially 

healthy (4-5)

6,862,125

(92)

604,301

(8) 

Source: GAO analysis of PBGC data from a sample of 2,699 defined benefit plans used in PBGC’s hypothetical premium model.

We further analyzed the effect of the rate changes under this option on 

plans in PBGC’s sample. As table 14 shows, the distributional effect of 

premium changes for plans using this option varies based on a sponsor’s 

financial health and plan funding levels. We estimate that premiums for a 

majority of plans categorized as more financially healthy would decrease, 

due in part to the proposed increase in the flat rate to $49 per participant 

under the act compared to $44 per participant under this option. In the 

model, PBGC assumed that plans with 90 percent or greater funding 

levels and rated as either extremely healthy or very healthy for financial 

health would be considered as low risk for plan termination and would 

therefore not have a variable rate included in their premium calculation. 

We estimated that two-thirds of plans considered financially healthy would 
Appendix III: Further GAO Analyses of a RiskBased Premium Option

Page 63 GAO-13-58 PBGC Premiums

have their rates decreased and that nearly all plans considered less 

financially healthy would experience a rate increase under this option.

Table 14: Number and Percentage of Plans with Premium Rate Changes under One 

Hypothetical Risk-Based Option

Premium rate change over 2015 per participant rate

Plan funded status Number of plans with 

increased rates

(percent)

Number of plans with 

decreased rates

(percent)

>120% 90

(53%)

79

(47%)

>90% to under 120% 770

(58)

549

(42)

75% to under 90% 408

(42)

554

(58)

<75% 169

(68)

80

(32)

Plan financial health

Extremely healthy (1) 2 

(1%)

194

(99%)

Very healthy (2) 16

(3) 

570

(97)

Healthy (3) 598

(59)

419

(41)

Risky (4) 478

(91)

45

(9) 

Very risky (5) 343

(91)

34

(9) 

More financially healthy 

(1-3)

616

(34)

1183

(66)

Less financially healthy 

(4-5)

821

(91)

79

(9) 

Source: GAO analysis of PBGC data from a sample of 2,699 defined benefit plans used in PBGC’s hypothetical premium model.
Appendix IV: The United Kingdom’s Pension 

Protection Fund’s Premium Structure

Page 64 GAO-13-58 PBGC Premiums

The United Kingdom’s (UK) Pension Protection Fund (PPF) employs a 

premium structure—which it refers to as a levy1

— that includes a riskbased premium to help mitigate risk presented by sponsors of defined 

benefit (DB) plans.2 Beginning with its second plan year in 2006/07, risk 

factors have been incorporated into premium rates. PPF has experienced 

a surplus in its net financial position when comparing its assets and its 

liabilities. As of March 31, 2011, PPF had a $1.08 billion surplus, an 

increase of $480 million over the previous year.

PPF sets a premium revenue target based on a long-term funding 

strategy of accumulating assets that are 10 percent larger than its 

liabilities. To meet its revenue target, PPF collects two types of premiums 

from plan sponsors: a risk-based premium and a plan-based premium. 

The risk-based premium is based on three risk factors-—a plan’s asset 

investment mix, a plan’s funding level, and risk of sponsor bankruptcy, 

which PPF refers to as insolvency risk. The plan-based premium is based 

on the size of a plan and its liabilities. For plan year 2012/13, PPF is 

using the following formula to calculate the plan-based and risk-based 

premiums:

Risk-based premium

underfunding risk modified by investment risk stress (U*Inv) x insolvency risk (P) x levy 

scaling factor (C)

Plan-based premium

.000085 (h) x smoothed liabilities (L)

Table 15 describes the different components of PPF’s premium formula 

for plan year 2012/13.

 

1

PPF refers to plans as schemes and premiums as levies. For the purpose of this report, 

we continue to use plans and premiums when discussing PPF’s premium framework. 

2

We did not conduct independent legal analysis to verify the information in this section of 

the report but rather relied on a review of publicly available PPF documents and 

discussions with PPF officials.

Appendix IV: The United Kingdom’s Pension 

Protection Fund’s Premium Structure

Features of PPF’s Premium 

Structure 
Appendix IV: The United Kingdom’s Pension 

Protection Fund’s Premium Structure

Page 65 GAO-13-58 PBGC Premiums

Table 15: Components of the United Kingdom’s Pension Protection Fund’s Premium Formula, Plan Year 2012/13

Risk-based premium 

components

Description

Underfunding risk (U) Represents the potential size of a plan’s claim on PPF. U is the underfunding amount of the plan 

determined by using the plan’s assets and liabilities, taking account of any valid contingent asset 

arrangements and deficit-reduction contributions. Contingent assets are assets that a sponsor puts 

forth to reduce potential losses to PPF.a

Investment risk (INV)

Asset and liability values used in calculating underfunding risk 

are adjusted based on an investment risk methodology (see below.) 

An adjustment made to underfunding risk that takes into account risk posed by a sponsor’s investment 

strategy for its plans’ assets. Different asset classes used for investing—such as bonds, equities, 

commodities, and hedge funds—are stressed according to risk and the value of assets in each asset 

class is increased or decreased as appropriate by the corresponding asset stress percentage INV. 

Insolvency risk (P) Represents the likelihood of a plan’s sponsor becoming insolvent and the plan potentially becoming a 

claim on PPF. P is a measure of risk of insolvency of the sponsor, taking into account the plan 

structure. Measures of risk insolvency are provided to PPF by Dun & Bradstreet. P may be modified 

where there is a Type A contingent asset, which is a parent or group company guarantee to cover 

PPF losses should the plan terminate. PPF uses Dun & Bradstreet failure scores to estimate a 

sponsor’s insolvency risk. Based on this score, a sponsor is placed in one of 10 premium bands, with 

each band assigned an associated premium rate. The premium rate for each band combines a 

component based on the Dun & Bradstreet probabilities of insolvency for the failure scores in that 

band plus a risk margin based on unexpected risk for that band. 

Premium scaling factor (C) Scales down risk-based premium so that together with the plan-based levies, PPF will ensure that the 

total premium collected matches the premium estimate, which is based on long-term risk exposure. In 

the premium formula, this is represented as C and is .89 for 2012/13.

Plan-based premium 

components

Multiplier (H) H is a plan-based premium multiplier applied to every plan to cover the costs of cappingb

Liabilities (L)

the highest 

risk-based premiums—about 10% of the premium.

L is the plan’s estimated liabilities as of a certain date. 

Source: GAO analysis of PPF data.

a

PPF describes contingent assets as those assets that occur when another company under the same 

corporate umbrella as a plan sponsor guarantees a portion of the plan’s liabilities, thereby reducing 

the plan sponsor’s risk of entering bankruptcy. Continent assets can also occur when a plan sponsor 

(or a company under the same corporate umbrella) pledges assets—a bank account, land, or 

securities—that will go to the pension plans if a sponsor enters bankruptcy or when a party outside 

the sponsor’s corporate umbrella guarantees a portion of the plan’s liabilities, either through a letter of 

credit or a bank guarantee.

b

PPF allows plan sponsors to lower their premium by pledging contingent 

assets, which can be used to cover potential losses from underfunded 

plans that terminate and reduce the risk posed to PPF, and thus reduce 

their risk-based premium. PPF defines contingent assets in a number of 

ways. Type A contingent assets occur when another company under the 

same corporate umbrella as a plan sponsor guarantees a portion of the 

The risk-based premium is also capped to protect the most vulnerable plans. The cap for 2012/13 is 

75 basis points (0.75 percent) of smoothed liabilities. Where the risk-based premium calculated using 

the above formula exceeds 0.75 percent of a plan’s liabilities, the cap is applied and the premium is 

decreased accordingly.
Appendix IV: The United Kingdom’s Pension 

Protection Fund’s Premium Structure

Page 66 GAO-13-58 PBGC Premiums

plan’s liabilities, thereby reducing the plan sponsor’s risk of entering 

bankruptcy. Type B continent assets occur when a plan sponsor (or a 

company under the same corporate umbrella) pledges assets—a bank 

account, land, or securities—that will go to the pension plans if a sponsor 

enters bankruptcy. Type C contingent assets occur when a party outside 

the sponsor’s corporate umbrella guarantees a portion of the plan’s 

liabilities, either through a letter of credit or a bank guarantee. Both Type 

B and C contingent assets lower the liabilities that PPF would take over in 

the event that the sponsor was to enter bankruptcy and transfer its plan(s) 

to the agency.

PPF’s funding strategy is formulated to meet the agency’s stated longterm goal of accumulating assets that are 10 percent larger than the 

agency’s liabilities by 2030, which represents a state of self-sufficiency.3

Initially, the premium estimate (the amount PPF aims to collect) reflected 

a “top down” approach in which PPF would decide upon the total level of 

premiums that it deemed appropriate in a given year, and adjusted the 

premium parameters accordingly on an annual basis. Beginning with the 

2012/13 plan year, the funding strategy is revised to reflect a “bottom up” 

approach in which the parameters will be fixed for 3 years and, ideally,

remain stable for 3 years between reviews, with the amount collected, 

floating with changes in risk.

Specific components of PPF’s premium structure—such as use of 

additional risk factors for sponsor financial health and plan investment 

strategy, setting rates based on long-term budget estimates, and 

smoothing techniques—might have applicability for PBGC.4

 

3

The 10 percent margin is to cover the risk of longevity improvements greater than what 

PPF describes as its best estimate, and also the residual risk of future claims. The year 

2030 is chosen as being the time at which the level of risk from future insolvencies is 

projected to be relatively low compared with the size of PPF. 

However, 

there are substantial regulatory and fiduciary differences between PPF 

and PBGC. For example, PPF functions as part of a larger pension 

regulatory structure, which includes The Pension Regulator. One of The 

Pensions Regulator’s stated objectives is to reduce the risk that PPF will 

need to take on unfunded liabilities, and the agency has statutory 

4

This was discussed in more detail on pages 22-26 and 40-41 of this report. 

PPF’s Funding Strategy

Potential Applicability of 

PPF’s Premium Structure 

for PBGC
Appendix IV: The United Kingdom’s Pension 

Protection Fund’s Premium Structure

Page 67 GAO-13-58 PBGC Premiums

authority to work with plan sponsors to mitigate these risks through 

increasing plan funding levels and other measures. In addition, UK 

pension law requires that at least one-third of individuals responsible for 

administering the plan, or plan trustees, must be selected by plan 

participants, while there is no requirement for stakeholder representation 

among fiduciaries of U.S. plans.
Appendix V: Overview of Pension Benefit 

Guaranty Corporation’s Process for 

Calculating Its Deficit

Page 68 GAO-13-58 PBGC Premiums

As required under ERISA,1 each year, PBGC calculates the corporation’s 

net financial position by determining the values of its assets, offset by the 

value of its liabilities, for the single-employer and multiemployer programs 

combined. According to PBGC, a primary objective of its financial 

statements, and specifically its net financial position, is to provide 

information that is useful in assessing the agency’s present and future 

ability to ensure that its plan beneficiaries receive benefits when due. 

Although long-term projections inherently contain a significant degree of 

uncertainty, a surplus net financial position signifies that, based on the 

assumptions used, PBGC estimates that it has sufficient assets to pay all 

current and future guaranteed benefit obligations; a deficit net financial 

position signifies that its assets are not sufficient to pay all future 

obligations. The deficit is calculated in conformance with generally 

accepted accounting principles, which, among other things, require 

making estimates and assumptions that affect the reported amounts of 

liabilities as of the date of the statement and that may change over time. 

In particular, liabilities included in the single-employer deficit calculation 

include those from claims already incurred and claims deemed probable 

in the near term, but not future claims beyond that.2 The main 

components of PBGC’s assets and liabilities and descriptions of how 

PBGC determines the values for each of those components are 

summarized in table 16. The amounts of assets and liabilities in these 

various categories, for fiscal year-end 2011, can be found in table 17 later 

in this section.

 

1

29 U.S.C. § 1308.

2

Plans of companies with credit ratings below investment grade and multiemployer plans 

that may require future financial assistance are classified as “reasonably possible” 

terminations, rather than “probable” terminations. Although PBGC uses the estimates for 

reasonably possible plan terminations to assist with understanding the agency’s future 

financial condition, these estimates are not included in PBGC’s calculation of its deficit.

Appendix V: Overview of Pension Benefit 

Guaranty Corporation’s Process for 

Calculating Its Deficit 
Appendix V: Overview of Pension Benefit 

Guaranty Corporation’s Process for 

Calculating Its Deficit

Page 69 GAO-13-58 PBGC Premiums

Table 16: Main Components of Assets and Liabilities Included in PBGC’s Statements of Financial Condition

Asset components Description of valuation

Investments, at market Investment assets are valued based on market prices, specifically, on the last sale of a listed 

security, on the mean of the “bid-and-ask” for nonlisted securities, or on a valuation model in the 

case of fixed income securities that are not actively traded.a

Receivables, net (including 

premiums and investment 

income)

These valuations are determined as of 

the end of each fiscal year. Purchases and sales of securities are recorded on the trade date. PBGC 

marks a plan’s assets to market and any increase or decrease in the market value of a plan’s assets 

occurring after the date on which the plan is terminated must, by law, be credited to or suffered by 

PBGC. 

Premiums receivable represent the estimated earned but unpaid portion of premiums and past due 

premiums deemed collectible, including penalties and interest. Investment income is accrued as 

earned. b

Cash and cash equivalents Cash includes cash on hand and demand deposits. Cash equivalents are investments with original 

maturities of 1 business day and highly liquid investments that are readily convertible into cash 

within 1 business day.

Securities lending collateral PBGC’s custodian bank requires collateral that equals 102% to 105% of the securities lent. The 

custodian bank either receives cash or noncash as collateral or returns collateral to cover mark-tomarket changes.

Capitalized assets, net Capitalized assets include furniture and fixtures, electronic processing equipment and internal-use 

software. These costs are shown net of accumulated depreciation and amortization.

Liability components

Total present value of future 

benefits, net 

Net liabilities for future pension benefits that PBGC is or will be obligated to pay the participants of 

single-employer plans terminated and trusteed, in accordance with the limits specified in ERISA, 

and plans that have $50 million or more of underfunding that PBGC believes will probably terminate 

in the near future.c

Total present value of 

nonrecoverable future financial 

assistance 

 

The estimated value of nonrecoverable future financial assistance to multiemployer plans that are 

not able to meet their benefit obligations.

d 

Payables, net (including 

unearned premiums, amounts 

due for purchases of securities 

and derivative contracts)

including probable insolvent plans. 

The liability for unearned premiums represents an estimate of payments received during the fiscal 

year that cover the portion of a plan’s year after PBGC’s fiscal year-end. Securities sold under 

repurchase agreements are valued at the amounts at which the securities well be subsequently 

reacquired. b

Net position (loss) Total assets minus total liabilities.

Source: PBGC’s 2011 Annual Report.

a

An investment valuation model is a widely accepted method used in finance to compute the current 

value of an asset based on statistical inputs for cash flow expectations.

b

In addition, derivative financial instruments are recorded at fair value and are included on the 

Statements of Financial Condition as investments and derivative contracts. Swaps are netted rather 

than recorded at gross levels for the individual contracts as “Receivables, net – Derivative contracts” 

and “Derivative contracts” (liabilities). PBGC invests in and discloses its derivative investments in 

accordance with the guidance contained in the FASB Accounting Standards Codification Section 815, 

Derivatives and Hedging.

c

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.

d

In accordance with Title IV of ERISA, PBGC provides financial assistance to multiemployer plans, in 

the form of loans, to enable the plans to pay guaranteed benefits to participants and reasonable 

administrative expenses. 29 U.S.C. § 1431. These loans, issued in exchange for interest-bearing 

promissory notes, constitute an obligation of each plan.
Appendix V: Overview of Pension Benefit 

Guaranty Corporation’s Process for 

Calculating Its Deficit

Page 70 GAO-13-58 PBGC Premiums

Changes to the underlying assumptions used to value liabilities can have 

a material effect on PBGC’s net financial position and on any conclusions 

drawn about PBGC’s ability to pay all current and future guaranteed 

benefit obligations (from claims already incurred and those deemed 

probable in the near term) from assets on hand. According to PBGC, 

liabilities under the single-employer program are valued by estimating the 

present value of future benefits expected to be paid—that is, PBGC uses 

certain assumptions to adjust the value of future benefit payments to 

reflect the time value of money (by discounting) and the probability of 

payment (by means of decrements, such as for death or retirement). 

According to agency officials, the method the agency uses to account for 

liabilities is similar to the “mark to market” practices being required of 

private sector sponsors of single-employer DB plans, in accordance with 

FASB.3 The calculation requires an assumption about interest rates, 

which reflects how much could be earned in the future from investing 

today’s dollars. Assuming a lower interest rate increases the present 

value of future payments or benefits.4

PBGC develops its assumptions on discount rates based on group 

annuity prices,5

 

3

Mark to market is the practice of basing values on current market prices. 

identified through a group annuity survey conducted by 

the American Council of Life Insurers. PBGC maintains that the annuity 

prices found on the survey reflect rates at which its liabilities (net of 

administrative expenses) could be settled in the market at September 30 

4

In addition to the present value of future benefits calculated for the single-employer 

program, PBGC values the liabilities for the multiemployer program by calculating the 

present value of estimated nonrecoverable future financial assistance—that is, estimated 

nonrecoverable payments to be provided in the future to multiemployer plans that are not 

able to meet their benefit obligations.

5

A single-premium nonparticipating group annuity is a contract between an insured entity, 

such as a plan sponsor, and an insurance company that transfers pension obligations 

from the plan sponsor or other insured entity to the insurance company, in return for a 

one-time payment to the insurance company. The insurance company thereby takes on 

the investment risk, longevity risk, and other risks inherent in pension obligations. 

PBGC’s Assumptions in 

Valuing Future Benefit 

Payments
Appendix V: Overview of Pension Benefit 

Guaranty Corporation’s Process for 

Calculating Its Deficit

Page 71 GAO-13-58 PBGC Premiums

for the respective year via single-premium nonparticipating group 

annuities issued by private insurers.6

PBGC notes that many factors, including Federal Reserve policy, 

changing expectations about longevity risk, and competitive market 

conditions may affect these survey rates. Using data from the annuity 

survey, PBGC establishes two interest rate factors to compute estimates 

of the present value of its liabilities—the “select” and “ultimate” rates.7

PBGC also notes that, over time, actuarial adjustments may occur as the 

result of new data (e.g., mortality experience, revised participant data), as 

well as from changes in valuation methodology, such as estimating 

liabilities on a group basis (“nonseriatum”) versus calculating a separate 

liability for each person (“seriatum”). Liabilities also will grow with the 

passage of time (as future benefit payments draw closer to payment), will 

decrease as benefits are paid out (discharging part of the liability), and 

will change with changes in interest rates and changes in other actuarial 

assumptions. These adjustments represent the change in the present 

A 

decline in PBGC’s asset values can be particularly problematic if these 

interest rates remain low or fall, which raises PBGC’s liabilities, all else 

equal.

 

6

GAO has reported that 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 other, more direct 

market-determined alternatives, such as published, high-quality bond interest rates. Such 

long term bond rates may track changes in group annuity rates over time, but their 

proximity to group annuity rates is also uncertain. For example, a high-quality long-term 

bond interest rate may need to be adjusted downward to better reflect the level of group 

annuity purchase rates. GAO, Pension Benefit Guaranty Corporation: Single-Employer 

Pension Insurance Program Faces Significant Long-Term Risks, GAO-03-873T 

(Washington, D.C.: Sept. 4, 2003). PBGC officials noted that they recently had analyzed 

the relationship between group annuity rates and long term corporate bond rates and 

found that there was only a low correlation (0.377 with an r-square of 0.142) between the 

two over an 8-year observation period from December 2000 to September 2008.

7

These rates—also known as discount rates—effectively form a two-segment yield curve 

where cash flows that occur during the initial period are discounted by the “select” interest 

rate and those occurring after the initial period are discounted by the “ultimate” interest 

rate. For more on these rates see http://www.pbgc.gov/prac/interest.html.
Appendix V: Overview of Pension Benefit 

Guaranty Corporation’s Process for 

Calculating Its Deficit

Page 72 GAO-13-58 PBGC Premiums

value of future benefits that results from applying actuarial assumptions in 

the calculation of liabilities.8

For fiscal year-end 2011, PBGC reported net accumulated deficit of 

approximately $26.04 billion. To estimate the present value of future 

benefits, PBGC used a 20-year select interest factor of 4.31 percent 

followed by an ultimate factor of 4.26 percent for the remaining years. 

PBGC strengthened its mortality assumptions in 2011 (that is, it assumed 

longer life expectancy), which resulted in higher interest factors than 

would have been estimated under the previous mortality assumption.9 In 

addition, PBGC has estimated that as of September 30, 2011, 135 

multiemployer plans10 will exhaust plan assets and need financial 

assistance from PBGC to pay guaranteed benefits and plan 

administrative expenses.11

 

8

PBGC recently changed the actuarial assumptions on participant mortality it uses to 

estimate present value of future benefits. For September 30, 2010, PBGC reported using 

the 1994 Group Annuity Mortality 94 Static Table set forward 1 year, projected 26 years to 

2020 using scale AA. Based on a 2011 study of PBGC’s participant mortality, PBGC 

reported adopting new healthy lives mortality tables for the June 30, 2011, and 

subsequent valuations. For June 30, 2011, PBGC used the Retirement Plan-2000 

Combined Healthy (RP-2000 CH) Male and Female Tables, each set back 1 year and 

projected 21 years to 2021 using Scale AA. The number of years that PBGC projects the 

mortality table reflects the number of years from the 2000 base year of the table to the end 

of the fiscal year (11 years in fiscal year 2011) plus PBGC’s calculated duration of its 

liabilities (10 years in fiscal year 2011). PBGC reported that the study also recommended 

changes in the mortality assumptions for disabled lives which will also be implemented in 

the June 30, 2011, and subsequent valuations. 

A summary of PBGC’s deficit calculation for 

fiscal year-end 2011 is found in table 17.

9

Annuity prices are based on both underlying interest rate and mortality assumptions. 

When greater longevity is assumed, a higher interest assumption is then needed to 

produce annuity rates that match those in the American Council of Life Insurers survey.

10The 135 plans fall into three categories—plans currently receiving financial assistance; 

plans that have terminated but have not yet started receiving financial assistance from 

PBGC; and ongoing plans (not terminated) that the corporation expects will require 

financial assistance in the future. 

11PBGC does not provide assistance for the full amount of these multiemployer plans’ 

liabilities, and not all of PBGC’s financial assistance to multiemployer plans is 

nonrecoverable. But, as we have reported previously, only 1 of the 62 plans that received 

PBGC financial assistance between 1981 and 2009 had repaid its loan as of 2010. See 

GAO, Private Pensions: Changes Needed to Better Protect Multiemployer Pension 

Benefits, GAO-11-79 (Washington, D.C.: Oct. 18, 2010).

PBGC’s Fiscal Year 2011 

Financial Statement
Appendix V: Overview of Pension Benefit 

Guaranty Corporation’s Process for 

Calculating Its Deficit

Page 73 GAO-13-58 PBGC Premiums

Table 17: PBGC Statements of Financial Condition for its Single-Employer and 

Multiemployer Programs, Fiscal Year 2011

Dollars in millions

Singleemployer 

program

Multiemployer 

program

Singleemployer and 

multiemployer 

combined

Assets: 

Investments, at market $66,271 $1,720 $67,991

Receivables, net (including 

premiums)

3,049 13 3,062

Cash and cash equivalents 5,021 5 5,026

Securities lending collateral 4,587 0 4,587

Capitalized assets, net 32 1 33

Total assets 78,960 1,739 80,699

Liabilities: 

Total present value of future 

benefits, net

92,953 1 92,954

Total present value of 

nonrecoverable future financial 

assistance

0 4,475 4,475

Total payables 9,273 33 9,306

Total liabilities 102,226 4,509 106,735

Net position (loss) (23,266) (2,770) (26,036)

Source: PBGC’s 2011 Annual Report.

Over the last 20 years, PBGC has experienced marked swings in its 

annual net financial position for its single-employer program (see fig. 3). 

For example, by fiscal year-end 1990, PBGC experienced a $3.0 billion 

(in 2011 dollars) accumulated deficit, but by fiscal year-end 2000, PBGC’s 

deficit had shifted to a nearly $12.5 billion surplus (in 2011 dollars), in part 

due to fewer new claims, higher interest rates used to value liabilities, and 

investment gains. In recent years, PBGC has again reported growing 

deficits. Between fiscal year-ends 2008 and 2011, the single-employer 

program’s deficit grew from just over $11 billion (in 2011 dollars) to just 

over $23 billion. Much of this recent increase in its accumulated deficit 

was the result of investment losses and declines in interest rates in the 

wake of the economic downturn and the termination of a relatively small 

number of very large underfunded plans.

PBGC’s Historical Net 

Financial Position
Appendix V: Overview of Pension Benefit 

Guaranty Corporation’s Process for 

Calculating Its Deficit

Page 74 GAO-13-58 PBGC Premiums

Figure 3: PBGC’s Surplus/Deficit for the Single-Employer Program, Fiscal Years 1980-2011

Note: Data adjusted for inflation.
Appendix VI: Overview of Pension Benefit 

Guaranty Corporation’s Pension Insurance 

Modeling System

Page 75 GAO-13-58 PBGC Premiums

In 1998, PBGC began to use its Pension Insurance Modeling System 

(PIMS) to help the agency better understand and quantify its long-term 

risk and exposure to loss under different economic conditions and policy 

alternatives. Much like insurers of catastrophic risk (natural disasters), 

PBGC is vulnerable to large losses that occur with relatively low 

probabilities. With these types of insurance, the historic pattern of claims 

is not an adequate predictor of future experience. Instead, it is more 

informative to examine the underlying processes that give rise to claims 

and assess their likelihood of occurring. PIMS is a stochastic (randomly 

determined) simulation model designed to quantify the amount of risk 

facing PBGC’s two insurance programs. The model does not predict 

future claims. Rather, by fully exploiting the historic relationships of key 

economic variables, the model assigns probabilities to various levels of 

potential claims. PBGC uses this information to estimate its potential 

future financial positions. PIMS is also used to assess various policy 

alternatives—such as changes in plan funding requirements or PBGC’s 

premium structure—and their impact on PBGC’s financial condition. PIMS 

is not used to calculate the current deficit. (See appendix V for 

information on how PBGC calculates its deficit.)

PIMS randomly simulates elements in PBGC’s financial statement. The 

random effects in the simulation are based on measures of the historical 

volatility in key factors that underlie the pension insurance, including 

interest rates, stock market returns, and corporate bankruptcy rates. For 

each year in a simulation, the model randomly selects values for each 

element and, combining these factors, determines PBGC’s financial 

condition under that scenario. The model generates thousands of 

multiyear projections of PBGC’s future financial condition. The results 

from the different scenarios are compiled to show how frequently different 

types of outcomes are simulated. The frequency with which an outcome 

is simulated (for example, that PBGC attains a surplus in the next 10 

years) estimates the likelihood of that outcome’s actual occurrence.

To project a range of PBGC’s possible future financial positions, PIMS 

must begin by modeling some of the underlying mechanics and 

relationships that feed into the simulated outcomes. These portions of the 

model include macroeconomic factors, corporate sponsor behavior, and 

pension plan behavior.

According to PBGC, the most important variables in PIMS are two 

macroeconomic factors: stock returns and interest rates. Stock returns 

are modeled to fluctuate in the short-term but revert to a long-term 

Appendix VI: Overview of Pension Benefit 

Guaranty Corporation’s Pension Insurance 

Modeling System

Step 1: Modeling the 

Underlying Mechanics

Macroeconomic Factors
Appendix VI: Overview of Pension Benefit 

Guaranty Corporation’s Pension Insurance 

Modeling System

Page 76 GAO-13-58 PBGC Premiums

average, so each year’s S&P 500 return is equal to 10.4 percent plus a 

random disturbance. The disturbance is randomly selected to represent 

the historic distribution of stock returns. Interest rates, unlike stock 

returns, are correlated over time. To model interest rates, PIMS uses a 

simple random walk process whereby this year’s interest rate equals last 

year’s interest rate plus a random disturbance. Because stock returns are 

more likely to be high when factors related to the interest rate are falling, 

PIMS uses historical estimates to correlate the random disturbances that 

affect stock returns and interest rates.

For plan sponsors, PIMS models measures of financial health and, from 

that, the probability of bankruptcy. The measures of financial health 

include financial ratios (i.e., equity-to-debt and cash flow-to-asset ratios), 

employment levels, and equity values. Financial ratios are modeled as a 

regression to long-term averages of these measures, with random 

disturbances. Employment and equity levels are modeled using a random 

walk process, and values for both measures are correlated based on their 

historical relationship. To model plan sponsor bankruptcy, PIMS 

measures the historical relationship between the probability of bankruptcy 

and firms’ employment levels and financial ratios. These factors, taken 

together, determine the probability that a sponsor will enter bankruptcy 

during a given period.

To model pension plan behavior, PIMS uses a database with detailed 

information about a non-representative sample of 450 of the 28,000 plans 

covered by PBGC. These 450 plans represented about half of PBGC’s 

insurance exposure in the single-employer DB system.1

• Asset returns. PIMS uses historical information of individual plans’ 

returns based on correlations with stock returns and interest rates. Each 

plan’s asset returns also has a random element that is not correlated to 

the simulated economic scenario.

The plans in the 

sample are weighted based on funding ratios to represent all plans 

insured by PBGC. Plan information in the PIMS database includes asset 

returns, sponsor contributions, participant composition, and benefit and 

salary levels.

 

1

As measured by Form 5500 filings. 

Plan Sponsor Behavior

Pension Plan Behavior
Appendix VI: Overview of Pension Benefit 

Guaranty Corporation’s Pension Insurance 

Modeling System

Page 77 GAO-13-58 PBGC Premiums

• Sponsor contributions. PIMS models sponsor contributions in two 

different ways: (1) for projecting future claims, sponsors are assumed to 

make the minimum contribution required by Internal Revenue Code; and 

(2) for projecting variable-rate premium collections, a higher level of 

contributions reflects historical data on PBGC premium collections.

• Participant composition. PIMS models participant composition by 

simulating participants’ retirement, separation from employment, and 

death based on actuarial assumptions. In addition, the number of active 

participants in each plan fluctuates according to the sponsor’s total 

employment level.

• Benefit and salary levels. PIMS models benefit level growth as equal to 

the rate of inflation plus a fixed parameter to represent productivity 

growth. To model salaries paid, PIMS assumes that salaries grow with 

age and service to reflect merit and promotion, and average salary levels 

for a given age and service level grow at the rate of inflation plus 

productivity growth.

In a simulation, PIMS uses these components of its model to project 

possible outcomes. PIMS first draws a series of stock returns and interest 

rates—called an economic scenario—one for each simulated year. Next, 

plan sponsors and pension plans are all subjected to the economic 

scenario to determine how they react and, ultimately, how it affects 

PBGC. To create a distribution of possible future outcomes, PIMS draws 

500 unique economic scenarios and runs plan sponsors through each 

economic scenario 10 times for a total of 5,000 different simulations.

Each plan sponsor is brought through the series of economic scenarios. 

The model draws new financial ratios and employment levels for each 

sponsor in each simulated year and, based on that, assigns each sponsor 

a probability of bankruptcy. PIMS uses this probability to determine 

whether a sponsor enters bankruptcy during each scenario. To illustrate, 

PIMS models a sponsor’s chances of bankruptcy as a lottery urn filled 

with balls. If a sponsor has a 1 percent probability of bankruptcy during an 

economic scenario, its urn contains one ball to represent bankruptcy and 

99 balls to represent survival to the next period. PIMS draws a ball from 

the urn for each of the times a firm is cycled through the model’s 

Step 2: Combining 

Components into 

Simulated Scenarios

Plan Sponsors’ Risk of 

Bankruptcy
Appendix VI: Overview of Pension Benefit 

Guaranty Corporation’s Pension Insurance 

Modeling System

Page 78 GAO-13-58 PBGC Premiums

simulated economic scenarios.2

PIMS brings each pension plan through the economic scenario, with 

equity returns, interest rates, and its sponsor’s simulated employment 

level and plan demographics all affecting the plan’s assets and liabilities. 

By including minimum funding rules to simulations, PIMS calculates 

possible paths in underfunding within the constraints of existing funding 

rules. In addition, plan sponsors will be assessed PBGC premiums and 

make contributions to the plan. For purposes of modeling future claims in 

PIMS, it is assumed that employers will contribute the minimum required 

amount each year and that any credit balance remaining when any new 

funding rules take effect will be used to the maximum extent permitted 

until the balance is completely depleted.

A sponsor enters bankruptcy during any 

simulation where PIMS draws the ball that represents bankruptcy. Plans 

sponsored by bankrupt sponsors are assumed to present a claim to 

PBGC if they are less than 80 percent funded. Otherwise a standard 

termination is assumed.

Finally, PBGC is brought through the economic scenario. This includes 

effects on PBGC’s existing assets and liabilities from previously 

terminated plans, both from investment returns and from revaluations of 

liabilities due to changes in interest rates. The agency also makes benefit 

payments to trusteed participants and collects premiums from sponsors. 

To determine premium revenue, PIMS estimates revenue associated with 

flat-rate premiums (based on each plan’s projected participant level) and 

variable-rate premiums (based on each plan’s projected funding level). 

PBGC may also experience a new claim associated with sponsor 

bankruptcy. When a plan sponsor enters bankruptcy, PIMS estimates the 

level of underfunding for benefits that PBGC guarantees; any plan funded 

at 80 percent or less becomes a claim on PBGC.

To project PBGC’s future financial condition, PIMS uses a detailed 

database of about 450 actual plans, sponsored by about 330 firms, which 

represent about half of PBGC’s insurance exposure in the singleemployer DB system measured from the Form 5500 filings. The database 

includes the plan demographics, plan benefit structure, asset values, 

liabilities, and actuarial assumptions. It also includes key financial 

 

2

A typical simulation consists of 5,000 different scenarios (500 unique economic 

scenarios, which PBGC and each plan and sponsor experience 10 times).

Pension Plans’ Risk of 

Underfunding

PBGC’s Financial Position and 

Risk of Loss
Appendix VI: Overview of Pension Benefit 

Guaranty Corporation’s Pension Insurance 

Modeling System

Page 79 GAO-13-58 PBGC Premiums

information about the employer sponsoring the plan. The PIMS database 

contains pension plan information from Schedule B of the Form 5500 

(Annual Return/Report of Employee Benefit Plan). In addition, more 

recent data available from filings under section 4010 of ERISA3 is utilized 

for certain large underfunded plans.

In its 2010 exposure report,4

However, because some simulations result in very large deficits for the 

program, the average (mean) outcome is a decline in the program’s 

position from a deficit of $21.3 in fiscal year 2011 to a deficit of $24.2 

billion (present value as of 2010) by fiscal year 2020 (see fig. 4). PIMS 

offers a range of probable outcomes, with high and low values calculated 

for each year. Although PBGC projects a zero percent probability that its 

single-employer program will be insolvent by the end of fiscal year 2020, 

as the figure shows, the high and low value estimates—which represent 

the 85th and 15th percentiles for the projections—ranges from a surplus 

of $4 billion to a deficit of nearly $53 billion for that fiscal year.

PBGC estimates that of out of 5,000 

simulations, none project that PBGC’s single-employer program will run 

out of money within the next 10 years (fiscal year 2020). In the PIMS 

projection for the PBGC 2010 Annual Report, 2.5 percent of the 

simulations project that the program will run out of money by fiscal year 

2030. A slight majority of the simulations result in improved or unchanged 

positions.

5

 

3

29 U.S.C. § 1310.

4

Pension Benefit Guaranty Corporation, 2010 PBGC Annual Exposure Report. 

(Washington, D.C.: November 2011). 

5

The mean projection for the single-employer program is based on a range of possible 

outcomes. For example, while the set of all single-employer results for this period includes 

“tail” financial positions from a surplus of $55 billion to a deficit of $157 billion, the 

difference between the projection’s high and low values ranges from a $4.0 billion surplus 

to a $52.5 billion deficit, significantly less than the full range.

Step 3: Summarizing the 

Results 
Appendix VI: Overview of Pension Benefit 

Guaranty Corporation’s Pension Insurance 

Modeling System

Page 80 GAO-13-58 PBGC Premiums

Figure 4: PBGC Actual and Projected Net Financial Position for the Single-Employer 

Program, Fiscal Years 2001-2020

Note: The projected net financial positions for future fiscal years after 2010 are calculated as present 

values as of 2010.

PIMS is not a predictive model and it does not attempt to anticipate 

behavioral responses by a company to changed circumstances, such as 

changes to the premium structure. For example, the model has not been 

used to anticipate a sponsor’s behavioral reaction—such as voluntarily 

terminating or freezing their plans, or increasing plan funding above the 

minimum required, or changing plan asset allocation—to an increase in 

premiums or to the introduction of risk factors to premium rates. Various 

paths of underfunding can occur in the future, and PIMS does not allow 

PBGC to know which particular path of underfunding might occur or which 

particular firms might enter bankruptcy. However, PBGC assumes that 

the process that generates historical volatility in key variables is 

reasonably representative of the process that governs future volatility,

and that PIMS provides for a reasonable evaluation of the likelihood that 

various economic scenarios can develop. By modeling real pension plans 

and incorporating minimum funding rules, PBGC uses PIMS to quantify 

the likelihood that various levels of exposure can develop under these 

conditions.

Limitations of PIMS
Appendix VI: Overview of Pension Benefit 

Guaranty Corporation’s Pension Insurance 

Modeling System

Page 81 GAO-13-58 PBGC Premiums

In May 2012, PBGC’s Inspector General identified internal control 

deficiencies related to the agency’s PIMS model.6 PBGC’s Inspector 

General reported that the agency published its 2010 exposure report with 

erroneous and inconsistent results from its PIMS model. Furthermore, the 

Inspector General reported that PBGC’s Policy Research and Analysis 

Department did not conduct any documented review of the underlying 

support used for the report and lacks quality control policies to ensure the 

integrity of reported estimates. The report made several 

recommendations to ensure the quality of this department’s actuarial work 

products, including establishing policies and procedures to review 

contractor work performed with PIMS; establishing policies and 

procedures to retain supporting documentation of work done by 

department actuaries and actuarial contractors; and developing and 

documenting a strategic review of the process of creating actuarial 

reports to identify critical control points to increase quality control. 

PBGC’s response to the Inspector General’s findings includes a 

commitment to strengthening and documenting the quality assurance 

process, to posting a corrected report on PBGC’s website, and to noting 

the errors in the forthcoming fiscal year 2011 exposure report. Relevant to 

these deficiencies, Congress also made improvements to PBGC in MAP21.7 Under those amendments, PBGC is to contract with an outside 

agency or organization to conduct an annual review of PIMS, and PBGC 

officials noted that at their request, the Social Security Administration has 

agreed to conduct the review. The first reviews will be initiated no later 

than 3 months after the enactment of the act. Further, PBGC is also 

required to establish written quality control procedures for modeling and 

actuarial work done in the Policy Research and Analysis Department, 

including a record management review to determine records that must be 

retained. Within two months, PBGC is required to submit a report to 

Congress detailing a timetable for addressing recommendations from the 

Inspector General’s recent report on the department, which was provided 

on September 6, 2012.

 

6

Pension Benefit Guaranty Corporation Office of Inspector General, Ensuring the Integrity 

of Policy Research and Analysis Department’s Actuarial Calculations (Washington, D.C.: 

May 2012).

7

Pub. L. No. 112-141, § 40233, 126 Stat. 857-58, and S. Rep. No. 112-557, at 664 (2012).
Appendix VII: Plan Sponsors and Pension 

Experts Interviewed 

Page 82 GAO-13-58 PBGC Premiums

We conducted interviews with a small judgmental sample of nine plan 

sponsors, selected to reflect a range of attributes, including company 

financial health, plan funded status, size of plan (based on the market 

value of the plan’s assets), number of participants, status of plan (active 

or frozen), and union involvement.1

• Comerica Incorporated, Dallas, Texas (financial services)

• Exelon Corporation, Chicago, Illinois (energy provider)

• General Electric Company, Fairfield, Connecticut (multiple industries)

• Lockheed Martin Corporation, Bethesda, Maryland 

(aeronautics/electronics)

• R.R. Donnelley & Sons Company, Chicago, Illinois (communications)

• The McClatchy Company, Sacramento, California (publishing)

• Tomkins PLC, London, United Kingdom (engineering/manufacturing)

• TOTAL S.A., Courbevoie, France (energy provider)

• Whirlpool Corporation, Benton Harbor, Michigan (home appliances)

 

1

To assist in identifying our sample of plan sponsors to be interviewed, we requested a 

random list of 180 plans from PBGC with certain descriptive information about each of the 

plans. According to PBGC, the spreadsheet of 180 plans they provided was randomly 

selected from a listing of all plans in PBGC’s 2010 premium database that had readily 

available data regarding either the sponsor’s credit rating for publicly traded companies or 

Dun & Bradstreet’s score for private companies. PBGC officials said they sorted the list of 

plans in alphabetical order by company and then selected every 15th row to create the 

random sample of plans. PBGC provided information on company financial health and 

each plan’s funded status, number of participants, market value of assets, and whether 

the plan was frozen or partially frozen. We added information on union involvement based 

on what we could discern from the plan names. We then selected an initial list of 18 plans, 

and another back-up list of 18 plans, that represented an array of characteristics for 

potential interviews. We were ultimately able to complete interviews with nine sponsors, 

listed here.

Appendix VII: Plan Sponsors and Pension 

Experts Interviewed

Plan Sponsors
Appendix VII: Plan Sponsors and Pension 

Experts Interviewed

Page 83 GAO-13-58 PBGC Premiums

We also conducted interviews with pension experts reflecting a range of 

academic, actuarial, business, and labor perspectives from the institutions 

and organizations listed below.2

• American Benefits Council

• AFL-CIO

• American Academy of Actuaries

• American Enterprise Institute

• American Society of Pension Professionals and Actuaries

• Boston University

• Brookings Institution

• Covington & Burling

• Davis and Harman Drexel University

• Employee Benefit Research Institute

• ERISA Industry Committee

• Massachusetts Institute of Technology

• National Institute on Retirement Security

• The New School

• Pennsylvania State University

• Pension Rights Center

• Society of Actuaries

• Towers Watson

• United Auto Workers

• U.S. Chamber of Commerce

 

2

To identify experts to contact, we began with the list of participants from a GAO forum 

held in 2005, and updated the list with suggestions from agency officials. See GAO, 

Highlights of a GAO Forum: The Future of the Defined Benefit System and the Pension 

Benefit Guaranty Corporation, GAO-05-578SP (Washington, D.C.: June 2005). 

Pension Experts
Appendix VIII: History of Pension Benefit 

Guaranty Corporation Premiums for the 

Single-Employer Program, Fiscal Years 1974 to 

2012

Page 84 GAO-13-58 PBGC Premiums

For plan years 

beginning

Flat-rate 

premium (per 

participant)

Variable-rate premium 

(per $1000 of unfunded 

vested benefits)

Termination premium 

(per participant per 

year for 3 years) b

1974-1977

b

$1.00 - - 

1978-1985 2.60 - - 

1986-1987 8.50 - - 

1988-1990 16.00 $6 - 

1994-2005 19.00 9 - 

2006 30.00 9 a $1,250

2007 31.00 9 1,250

2008 33.00 9 1,250

2009 34.00 9 1,250

2010-2012 35.00 9 1,250

Source: GAO analysis of PBGC data.

a

For each plan year beginning after 2006, this amount is adjusted annually based on changes in the 

national average wage index, as defined in section 209(k)(1) of the Social Security Act, (42 U.S.C. § 

409(k)(1)). 29 U.S.C. § 1306(a)(3)(F). The premium rate will not decline even if the national average 

wage index declines. The adjusted premium rate is rounded to the nearest multiple of $1.

b

Where dashes are shown, the variable-rate premium and termination premium did not yet exist. 

Appendix VIII: History of Pension Benefit 

Guaranty Corporation Premiums for the 

Single-Employer Program, Fiscal Years 1974 

to 2012
Appendix IX: Comments from Pension Benefit 

Guaranty Corporation

Page 85 GAO-13-58 PBGC Premiums

Appendix IX: Comments from Pension 

Benefit Guaranty Corporation
Appendix IX: Comments from Pension Benefit 

Guaranty Corporation

Page 86 GAO-13-58 PBGC Premiums

Now on pp. 43-48.

Now on p. 30.
Appendix IX: Comments from Pension Benefit 

Guaranty Corporation

Page 87 GAO-13-58 PBGC Premiums
Appendix X: GAO Contact and Staff 

Acknowledgments

Page 88 GAO-13-58 PBGC Premiums

Charles A. Jeszeck, (202) 512-7215 or jeszeckc@gao.gov

In addition to the contact named above, Margie K. Shields (Assistant 

Director), Ted A. Burik (Analyst-in-Charge), Margaret H. Childs, and 

Isabella Johnson were key contributors to this report. Also contributing to 

this report were David M. Chrisinger, Holly A. Dye, Edda EmmanuelliPerez, Kimberly M. Granger, Gene G. Kuehneman Jr., Kathy D. Leslie, 

Thomas J. McCool, Sheila R. McCoy, Mimi Nguyen, Steven J. Sebastian, 

Salvatore F. Sorbello Jr., Cynthia S. Taylor, Frank Todisco, Walter K. 

Vance, John C (Jack) Warner, Orice M. Williams, and Craig H. Winslow. 

Appendix X: GAO Contact and Staff 

Acknowledgments 

GAO Contact

Staff 

Acknowledgments 

(131098)
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