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S. HRG. 111–1159 

PBGC: IS STRONGER MANAGEMENT 

AND OVERSIGHT NEEDED? 

HEARING 

OF THE

COMMITTEE ON HEALTH, EDUCATION, 

LABOR, AND PENSIONS 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

ON

EXAMINING THE PENSION BENEFIT GUARANTY CORPORATION, 

FOCUSING ON MANAGEMENT AND OVERSIGHT 

DECEMBER 1, 2010 

Printed for the use of the Committee on Health, Education, Labor, and Pensions 

( 

Available via the World Wide Web: http://www.gpoaccess.gov/congress/senate 
COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS 

TOM HARKIN, Chairman 

CHRISTOPHER J. DODD, Connecticut 

BARBARA A. MIKULSKI, Maryland 

JEFF BINGAMAN, New Mexico 

PATTY MURRAY, Washington 

JACK REED, Rhode Island 

BERNARD SANDERS (I), Vermont 

ROBERT P. CASEY., JR., Pennsylvania 

KAY R. HAGAN, North Carolina 

JEFF MERKLEY, Oregan 

AL FRANKEN, Minnesota 

MICHAEL BENNET, Colorado 

JOE MANCHIN, West Virginia 

MICHAEL B. ENZI, Wyoming, 

JUDD GREGG, New Hampshire 

LAMAR ALEXANDER, Tennessee 

RICHARD BURR, North Carolina 

JOHNNY ISAKSON, Georgia 

JOHN MCCAIN 

ORRIN G. HATCH, Utah 

LISA MURKOWSKI, Alaska 

TOM COBURN, M.D., Oklahoma 

PAT ROBERTS, Kansas 

DANIEL E. SMITH, Staff Director and Chief Counsel 

PAMELA SMITH, Deputy Staff Director 

FRANK MACCHIAROLA, Republican Staff Director and Chief Counsel 

(II) 
C O N T E N T S 

STATEMENTS 

WEDNESDAY, DECEMBER 1, 2010 

Page 

Harkin, Hon. Tom, Chairman, Committee on Health, Education, Labor, and 

Pensions, opening statement ............................................................................... 1 

Enzi, Hon. Michael B., a U.S. Senator from the State of Wyoming, opening 

statement .............................................................................................................. 2 

Gotbaum, Joshua, Director, Pension Benefit Guaranty Corporation (PBGC), 

Washington, DC ................................................................................................... 4 

Prepared statement .......................................................................................... 6 

Murray, Hon. Patty, a U.S. Senator from the State of Washington ................... 14 

Isakson, Hon. Johnny, a U.S. Senator from the State of Georgia ....................... 16 

Manchin, Hon. Joe, a U.S. Senator from the State of West Virginia .................. 17 

Franken, Hon. Al, a U.S. Senator from the State of Minnesota .......................... 19 

Casey, Hon. Robert P., Jr., a U.S. Senator from the State of Pennsylvania ...... 21 

Hagan, Hon. Kay R., a U.S. Senator from the State of Pennsylvania ................ 22 

Bovbjerg, Barbara D., Managing Director, Education, Workforce, and Income 

Security, General Accounting Office (GAO), Washington, DC ......................... 27 

Prepared statement .......................................................................................... 29 

Batts, Rebecca Anne, Inspector General, Pension Benefit Guaranty Corporation (PBGC), Washington, DC ............................................................................. 38 

Prepared statement .......................................................................................... 40 

Porter, Ken, Actuarial and International Benefits Consultant, American Benefits Council, Washington, DC .............................................................................. 47 

Prepared statement .......................................................................................... 48 

ADDITIONAL MATERIAL 

Statements, articles, publications, letters, etc.: 

Senator Bingaman ............................................................................................ 59 

(III) 

(1) 

PBGC: IS STRONGER MANAGEMENT AND 

OVERSIGHT NEEDED? 

WEDNESDAY, DECEMBER 1, 2010 

U.S. SENATE, 

COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS, 

Washington, DC. 

The committee met, pursuant to notice, at 10:04 a.m. in Room 

SD–430, Dirksen Senate Office Building, Hon. Tom Harkin, Chairman of the committee, presiding. 

Present: Senators Harkin, Murray, Casey, Hagan, Franken, 

Manchin, Enzi, and Isakson. 

OPENING STATEMENT OF SENATOR HARKIN

The CHAIRMAN. The committee, as I said, will resume its sitting. 

I’d like to thank everyone for being here for the second hearing in 

a series focusing on retirement security in America. Today, we are 

going to take a hard look at the management and administration 

of the Pension Benefit Guaranty Corporation and see if we need to 

take steps to modernize this agency. 

In this climate of uncertainty, PBGC’s role is more important 

than ever. The Great Recession has taken a toll on workers all over 

the country. I often talk to people who are struggling just to make 

ends meet. They worry a lot about just having a job, putting food 

on the table, and getting their kids in school. The last thing they 

need to do is lose sleep about whether or not they’re going to have 

their pensions when they retire. 

That’s why PBGC was created in 1974, providing workers with 

a safety net so they can rest assured that even if the company’s 

pension plan fails, they’ll get a retirement benefit. Forty-four million American workers and their families rely on PBGC to insure 

their hard-earned pensions. The agency is responsible for making 

sure that $467 million in benefits get to 801,000 retirees every single month; and that responsibility is growing. Last year alone, 

PBGC assumed responsibility for the pensions of 109,000 people. 

For PBGC, those are individuals and families that would have been 

left with next to nothing. 

Unfortunately, the future of this valuable agency is at risk. The 

deficit rose again this year. Moreover, PBGC’s annual report indicates that there’s a very real chance that some very large plans 

could become insolvent in the near future. This could increase 

PBGC’s deficit tenfold and pose a significant administrative burden. 
2 

In light of these challenges, strong and effective leadership is 

crucial for the future viability of PBGC. The Inspector General just 

recently released a report that raises serious concerns about whether PBGC would be able to cope with a sudden influx of pensions 

brought on by a new economic crisis. 

PBGC has also been needlessly distracted by scandals such as 

those under former director Charles Millard. Mr. Millard’s inappropriate contacts with vendors and bad decisions jeopardized the security of PBGC and cast a dark shadow over the agency during one 

of the worst economic crises in our Nation’s history. Worse yet, Mr. 

Millard eroded the public’s trust in the agency and in the defined 

benefit pension system as a whole. 

Now, we’re certainly starting to see some positive changes under 

Mr. Gotbaum’s leadership, but we need to examine whether the 

agency has structural problems that a new director alone cannot 

solve. 

For example, the board of directors has often been disengaged, 

acting as little more than a rubber stamp. Even during the height 

of the recent economic crisis, when the agency was most at risk, 

the board barely met. I think we ought to take a look at the construction of the board and the number of the board members on 

PBGC. 

Senator Kohl of Wisconsin has put some ideas on the table. I 

commend him for that. 

This is, again, a matter on which I hope we can put aside partisanship and work collaboratively to improve PBGC and strengthen America’s pension system. This hearing today is an important 

step toward that goal. They have problems, but I don’t think 

they’re insurmountable. 

I thank all of you for being here today to discuss this important 

issue. 

I now yield to my friend from Wyoming, Senator Enzi. 

STATEMENT OF SENATOR ENZI

Senator ENZI. Thank you, Mr. Chairman. Few people realize that 

the Pension Benefit Guaranty Corporation sends nearly half a billion dollars each month to retirees whose companies’ pensions have 

gone away. The magnitude of this statistic shows how important 

the operation and management of PBGC is to today’s and tomorrow’s retirees. 

Back in 2008 the vast majority of single-employer pension plans 

were nearly 100 percent funded; however, because of the economic 

downturn we’ve seen a greater number of single-employer pension 

plans taken over by the PBGC. In addition, the Government Accountability Office, GAO, states that approximately 400 of the 

1,500 multiemployer pension plans are less than 80 percent funded. 

Clearly, the PBGC is facing some rough waters and will continue 

to face them in the future. 

The corporate structure of the PBGC is unlike any other in the 

Federal Government. It has three cabinet secretaries on the board 

of directors; former Secretary of Labor Elaine Chao recognized the 

need for greater corporate governance of the PBGC and imple-
3 

mented reforms, including updating and revising the agency’s bylaws. 

Today, we’ll hear from our witnesses to see whether further improvement is necessary, and recommendations on how to improve 

communication between the PBGC and its board of directors. Enlarging it can be a very difficult task—but not as difficult as it was 

with the private sector which had to follow Sarbanes-Oxley Act, 

and the liability that could come to the private sector directors. 

However, with the shape that the PBGC is in, it may be difficult 

to get people to participate on the Board. 

Mr. Chairman, I’m open to legislation to improve the PBGC corporate governance—governance similar to the reforms Congress 

sought in the private companies in that Sarbanes-Oxley Act; however, we must undertake reforms that strengthen the PBGC and 

our retirement system and stay away from the so-called reforms 

that might politicize or minimize the agency’s ability to do its job. 

In addition, I’m looking forward to hearing from the business community about their interactions with the PBGC. 

As we all know, our retirement benefit system is built upon a 

voluntary partnership of companies and their employees. In order 

to strengthen the defined benefit system, we need a PBGC that can 

respond and work with the business community. Otherwise, the 

business community will decline to participate in the defined benefit retirement system and switch to the 401(k) plans. 

Mr. Chairman, I thank you for holding this hearing, and I look 

forward to the testimony of the witnesses. 

The CHAIRMAN. Thank you very much, Senator Enzi. 

Just to respond, I was looking at the board, and you’re right. 

There are three members of the board. They’re all cabinet secretaries, so I’ve got to believe they don’t have much time to go to 

board meetings. 

Comparing it to other agencies that have even less responsibility, 

if I can put it that way, some of these other agencies have boards 

that have 7 members, 9 members—one has 15 members. They set 

up subcommittees—like a board of any company would do—and 

then they have these different committees that take different parts 

of the agency, and they’re responsible for it. 

I’d like to discuss that with you. I’m sure we’re going to have 

some talk today about that, too, from our witnesses. 

We have two panels. On the first panel is Joshua Gotbaum, Director of the Pension Benefit Guaranty Corporation, responsible for 

the agency’s management, personnel, organization, budget and investments. 

Immediately prior to his appointment, Mr. Gotbaum was an operating partner at Blue Wolf Capital, where he managed and advised public, private, and nonprofit institutions. 

Then on our second panel we have Barbara Bovbjerg, director of 

education, workforce and income security issues at the U.S. Government Accountability Office; and, also, Rebecca Anne Batts, the 

Inspector General of the PBGC; and Ken Porter, Actuarial and 

International Benefits Consultant, at the American Benefits Council. 

That will be our second panel. 
4 

Mr. Gotbaum, welcome to the committee. If I’m not mistaken, I 

think this may be your first appearance before this committee. 

Mr. GOTBAUM. Yes, sir, Mr. Chairman, it absolutely is. 

The CHAIRMAN. Welcome. I read your testimony last evening, and 

your testimony will be made a part of the record in its entirety. I’d 

ask if you could sum it up in several minutes so we have more 

chance for an exchange with the Senators. I would appreciate it 

very much. 

Mr. Gotbaum, welcome, and please proceed. 

STATEMENT BY JOSHUA GOTBAUM, DIRECTOR, PENSION 

BENEFIT GUARANTY CORPORATION (PBGC), WASHINGTON, DC 

Mr. GOTBAUM. Mr. Chairman, Senator Enzi, members of the 

committee, I want to start, frankly, by thanking you for supporting 

my nomination. I understand very well, the consequences of elevating the PBGC Director to a presidential appointment subject to 

Senate confirmation. It changes the job. 

I hope that you will conclude that having done so facilitates the 

very management and oversight that are the subjects of this hearing. 

I also, frankly, want to thank you for holding this, which is my 

first oversight hearing—I believe in oversight; I think it’s an important part of the process—and giving me a chance to fulfill my commitments to the committee to come back and give my impressions. 

Since the PBGC has just turned out its annual report, copies of 

which have been sent to you all and provided to your staff, I can’t 

go chapter and verse over everything that gets done; and frankly, 

after only 4 months on the job, I can’t pretend to be an expert on 

the workings of everything that we do. 

I’d like to report my first impressions, and just make four points: 

one, is that in light of the complex tasks that ERISA has given the 

agency, the PBGC performs them surprisingly well. It has paid 

benefits reliably for 36 years, and despite the incredibly complex 

rules it has to follow to figure out what those benefits are, surprisingly accurately. 

When a plan fails, our first priority is to make sure that benefit 

payments continue without interruption. Last year newly terminated plans covered 40,000 people. Forty thousand people were getting checks every month from their plan that was terminated; and 

every one of those 40,000 people was transferred to PBGC’s payment systems without a hitch. 

I brought these charts—which I admit are hard to read—and put 

them in the testimony as a reminder of how complicated the benefit determination process is. 

PBGC starts by paying an estimate of what benefits are, and 

then it follows the many steps that are necessary to figure out the 

legal benefit payable under ERISA. The good news is that despite 

this incredibly complicated process, 90 percent of the estimated 

payments are within 10 percent of the number that is finally determined to comply with ERISA. 

The bad news is that following this complicated process can take 

years, and during that period of time, people are uncertain. 

Second point: that for PBGC, preserving plans is just as important as replacing them when they fail. The most visible part of the 
5 

agency’s actions are when the agency steps in after a plan fails. 

First, however, the agency tries to preserve plans, and keep pension promises in the hands of the employers that made them. 

Our view of it is that every plan that is kept by its employer and 

not terminated is better for the employees, and the pensioners, and 

better for the PBGC. 

Last year our staff negotiated with dozens of companies, both in 

bankruptcy and through our Early Warning Program, to preserve 

their plans. And, partly as a result of that, last year companies 

came out of bankruptcy and kept their plans; and, included in 

those plans were a quarter of a million people. 

As a result of those efforts, a quarter of a million people had 

their companies go through bankruptcy and came out, but kept 

their plans. We think that’s important. 

Third point: the staff of the PBGC is, I’m pleased to report, 

knowledgeable, compassionate, and committed, and I think that’s 

very important, because they have to meet very high standards of 

stewardship and accountability. 

The agency measures its performance in many ways: we measure 

customer service by how quickly benefits are determined, and by 

independent performance surveys; we measure investment performance by comparison with professional, private sector benchmarks; we meet financial reporting standards by having, we’re 

pleased to say, for almost two decades received a clean opinion on 

the PBGC’s financial statements. 

That does not mean that there isn’t a heck of a lot more to be 

done. Like too many institutions, both in and out of government, 

our IT systems are just plain not up to snuff; they don’t meet today’s standards for connectivity; they don’t meet standards for security. 

Like many other government agencies, we rely on contractors 

without having enough sufficiently skilled contract managers and 

sufficient procedures in place to manage them as well as we 

should. This is a challenge for the PBGC; it’s a challenge for other 

agencies; it’s one that we think is important, and we’re working on 

it. 

My fourth and last point is about pensions and retirement security generally. As this committee knows, as the Chairman and Mr. 

Enzi have both mentioned, there are broad challenges to the 

PBGC’s insurance program and to the defined benefit system itself. 

In one sense we’ve been fortunate. Despite the greatest financial 

turmoil in decades, fewer plans were terminated than anyone had 

expected. Nonetheless, the facts are that many sponsors remain 

weak; many plans remain underfunded; and, I would have to say, 

the multiemployer system in particular, is especially worrisome. 

That there are challenges is undeniable; that’s not undeniable. 

What I believe is also undeniable is that time and again, since 

ERISA was enacted some 36 years ago, the Congress and the executive branch have worked together to deal with them. More than 

a dozen times in PBGC’s history, Congress has modified ERISA to 

enable the agency to continue to do its job. It made changes in who 

we insure, the benefits we pay, the premiums we charge. 

Congress has also undertaken other actions that affect the pension insurance system, such as changes in funding requirements. 
6 

ERISA charges the PBGC with being an advocate in discussions 

about retirement security. Given the history of nonpartisan cooperation to meet these challenges, we hope that that active partnership will continue. 

I want to thank the committee again for its patience, and also 

for your support, and I very much look forward to hearing your 

views and answering your questions. 

[The prepared statement of Mr. Gotbaum follows:] 

PREPARED STATEMENT OF JOSHUA GOTBAUM

Good morning Chairman Harkin, Ranking Member Enzi, and other committee 

members. Let me begin by expressing my thanks to you and the other committee 

members for considering and supporting my nomination. 

I also want to thank you for holding this, my first oversight hearing. It comes at 

an appropriate time, for PBGC has recently issued its Fiscal Year 2010 Annual Report. When this committee held a hearing on my nomination, I promised, if confirmed, to return and share my views once I had an opportunity to develop them. 

Thank you for providing that opportunity. 

Today, I would like to describe and discuss how PBGC performs the complex tasks 

that ERISA has given the agency: 

• Trying to preserve pension plans, 

• Stepping in to pay benefits when plans fail, 

• Working to recover what is owed those plans, and 

• Maintaining high standards of stewardship and accountability. 

Of course, PBGC also works with Congress and the Administration to implement 

and improve pension laws. 

All these activities are described in the Annual Report and so my testimony is 

intended primarily to highlight them, to put them in context, and to answer your 

questions. I think it is important to add my own opinion: that the PBGC performs 

these complex tasks quite well. 

As this committee knows only too well, in these difficult times there are broad 

challenges to the pension insurance program and to the defined benefit system 

itself. I would hope that the Administration and Congress can find ways to strengthen them. Nonetheless, it is important to reassure pensioners that PBGC continues 

to protect and insure pension plans, that we are continuing to pay billions in benefits if plans fail, and that our $80 billion in assets is more than sufficient to continue to do so for the foreseeable future. 

PBGC OVERVIEW

In 1974, Congress passed the Employee Retirement Income Security Act 

(‘‘ERISA’’) which, among other pension protection measures, created PBGC to insure 

pensions earned by American workers under private-sector defined benefit (‘‘DB’’) 

plans. PBGC now guarantees payment of basic pension benefits earned by more 

than 44 million American workers participating in more than 27,000 private-sector 

defined benefit pension plans. Those benefits are financed by insurance premiums, 

by the assets from terminated plans and by funds recovered from their sponsors, 

and by investment income. PBGC receives no funds from general tax revenues and 

by law its obligations are not backed by the full faith and credit of the U.S. government. 

PBGC operates two separate programs. The single-employer program protects 

nearly 34 million workers, retirees, and beneficiaries in about 26,000 pension plans. 

The smaller multiemployer program—which covers collectively bargained plans that 

are maintained by two or more unrelated employers—protects more than 10 million 

workers, retirees, and beneficiaries in about 1,500 multiemployer plans. 

Originally, responsibility for managing PBGC was held by the Secretary of Labor, 

who delegated that responsibility to an executive director. In 2006, the Pension Protection Act (‘‘PPA’’) placed the executive responsibility in the newly created position 

of Director, who is appointed by the President and confirmed by the Senate, and 

acts in accordance with policies established by the board. The Secretary of Labor 

continues to chair PBGC’s three-person board whose other members are the Secretaries of Commerce and the Treasury. 

The work of the PBGC is performed by some 2,300 people, of whom about 900 

are Federal employees and about 1,400 are contractors. I have found the staff to 

be impressive. They are both knowledgeable and committed. 
7 

WHAT PBGC DOES

Working with companies to keep their pension plans. The most visible part 

of PBGC’s efforts occurs when the agency steps in after plans fail. First, however, 

the agency tries to preserve plans and keep pension promises in the hands of the 

employers who make them. Every plan retained by its sponsor is a victory both for 

the plan’s participants and for PBGC. 

Last year, the agency continued to respond to the wave of corporate bankruptcies 

by stepping up its work to protect plans. PBGC staff negotiated with dozens of companies, both in bankruptcy and through our Early Warning Program, to preserve 

their plans. 

Under the Early Warning Program, PBGC monitored more than 1,000 companies 

to identify transactions that could threaten a company’s ability to pay pensions, and 

negotiated protections for the plans. When major layoffs or plant closures threaten 

a plan’s viability, PBGC can step in and negotiate protection for the pension plan, 

including a guarantee, posting of collateral or contributions to the plan. In this way, 

last year PBGC secured an additional $250 million for participants in 20 pension 

plans. 

When companies do enter bankruptcy, we encourage them to keep their plans intact. During fiscal year 2010, the agency worked with debtors and creditors to help 

38 companies who were reorganizing in bankruptcy keep their plans. As a result, 

approximately 250,000 workers and retirees continue to enjoy their full pension benefits, while continuing to be protected by PBGC insurance coverage. This is almost 

21⁄2 times the number of participants in plans that failed. 

When plans do fail, we step in and make sure benefits are paid. In fiscal 

year 2010, PBGC paid $97million in financial assistance to 50 multiemployer pension plans, up from the $86 million to 43 plans in 2009. Last year, PBGC also 

helped seven small insolvent multiemployer plans close out through the purchase 

of annuities or payment of lump sums for participants’ guaranteed benefits. Also in 

fiscal year 2010, PBGC acted to partition the Chicago Truck Drivers, Helpers & 

Warehouse Workers Union (Independent) Pension Fund. That action extends the 

solvency of the Chicago Truck Drivers’ plan and preserves full benefits for about 

3,700 workers and retirees. PBGC expects that the number of insolvent plans will 

more than double over the next 5 years. 

With regard to single-employer plans, despite PBGC’s efforts to preserve pensions, 

in fiscal year 2010, 147 underfunded single-employer plans did terminate, most 

often in bankruptcy. PBGC took up responsibility for an additional 109,000 workers, 

retirees, and beneficiaries. 

For the past 36 years, PBGC has stepped in to pay benefits—on time, every 

month, without interruption. Last year, PBGC paid nearly $5.6 billion to about 

800,000 retirees. We are also responsible for future benefit payments to 700,000 

workers who have not yet retired. The agency is responsible for pension benefits 

owed to 1.5 million people in 4,150 failed plans. 

When a plan fails, PBGC’s first priority is to make sure that benefit payments 

continue without interruption. Newly terminating plans in fiscal year 2010 covered 

nearly 40,000 participants already receiving monthly checks. PBGC transferred 

every one of them to our payment systems without interruption. Because a participant’s final benefit amount has not been calculated when PBGC begins paying benefits, the agency pays estimated benefits. Historically, more than 90 percent of estimated payments are within 10 percent of the final benefit amounts. 

In addition to participants who were already retired when PBGC assumed responsibility for their plans, we also process about 3,000 benefit applications per month 

for new retirees. Nearly 85 percent of applicants receive their first payments within 

45 days after PBGC has their completed applications. Over 80 percent receive their 

benefits by electronic direct deposit. 

When PBGC becomes responsible for a terminated plan, we must determine the 

benefits owed to each plan participant. Each participant is entitled to the greater 

of the guaranteed benefit amount or the benefit amount funded by plan assets and 

recoveries from plan sponsors. 

PBGC calculates benefits using a process spelled out in Federal law. Actuaries 

calculate each participant’s benefit according to the plan’s provisions; then they 

must apply statutory and regulatory rules to determine how much the agency can 

pay. Finally, when the benefit determination is complete, PBGC sends each participant a letter presenting the benefit amount and how it was calculated. 

By law, this benefit determination process is complex and customized, requiring 

a unique calculation for each participant. As depicted in the charts below, PBGC 

analyzes plan provisions, collects participant data, and values plan assets and recoveries from plan sponsors. After determining each participant’s benefit, plan assets 
8 

and recoveries are then allocated across priority categories according to a complex 

calculation to determine the maximum amount legally payable. 

We work to recover assets for retirees. When pension plan sponsors cannot 

maintain their plans, PBGC does more than just assume responsibility for benefit 

payments. We also take over the assets of those plans, and fight in court on behalf 

of participants and other stakeholders to recover the maximum possible amount 

from sponsors of those plans. These recoveries are then shared with participants as 

provided by law. In fiscal year 2010 PBGC assumed $1.8 billion in assets from failed 

plans, and recovered additional assets of $246 million from plan sponsors to help 

pay for unpaid contributions and unfunded benefits. In its role as trustee of terminated plans, PBGC also files other claims on behalf of the plan, such as claims 

against fiduciaries for breach of their duty. 

We implement pension laws and work with the Administration and Congress to improve them. In addition to working to preserve plans and paying bene-
9 

fits to retirees and beneficiaries, PBGC also works with the Administration and 

with Congress to draft and implement pension laws. In fiscal year 2010, we worked 

with both the private sector and other government agencies to implement the funding provisions established under the Pension Protection Act of 2006. 

To date, PBGC has published seven final rules implementing PPA changes that 

deal with premiums (two rules), disclosure (two rules), multiemployer withdrawal 

liability, annual financial and actuarial information reporting, and PBGC by-laws. 

We have also published two PPA proposed rules—reportable events and benefits in 

plans that terminate while the sponsor is in bankruptcy—that we expect to finalize 

in 2011. PPA proposed rules on cash balance plans, shutdown benefits, and missing 

participants are far along in development or external clearance and are expected to 

be issued in 2011. 

In addition to implementing the PPA changes, in fiscal year 2010 PBGC published 

a final regulation ensuring that benefits for re-employed service members will be 

guaranteed for periods they served in the armed forces. We also issued a proposed 

rule that provides guidance on reporting requirements and liability under section 

4062(e) when employers have substantial cessations of operations. 

PBGC is also an important source of information on defined benefit pension plans 

and retirement issues generally. During fiscal year 2010, PBGC provided expertise, 

in legal and actuarial analysis, and simulation modeling, to analyze the issues affecting multiemployer plans, and we provided technical assistance to Congress, 

other ERISA agencies, the Administration, and GAO. 

We are a careful steward of our resources and investments. In fiscal year 

2010, PBGC collected $2.18 billion in premiums, assumed assets of $1.8 billion from 

failed pension plans, and recovered assets of $246 million from sponsors of failed 

plans. As of September 30, 2010, PBGC had an investment portfolio of $66.8 billion. 

As you know, our benefits are not paid for or backed by taxpayers. We have an 

obligation to be an active and thoughtful steward of our assets to ensure that funds 

are available to fulfill our obligations. 

As it has since its inception, the agency contracts with professional private sector 

investment management firms to manage the investment of its assets. These firms 

make investment decisions within the parameters of PBGC’s investment policy and 

they are subject to PBGC oversight. We measure the performance of these managers 

by comparison with negotiated benchmarks. In fiscal year 2010, the investment 

firms we chose outperformed their total fund benchmarks over 1-, 3-, and 5-year periods. For the fiscal year, PBGC realized a 12.1 percent annualized return on total 

invested funds compared with the agency’s total fund benchmark return of 11.0 percent. 

As this committee knows, one of the first actions of the new PBGC board in 2009 

was to order a review of the investment practices and policies of the past, while putting in place a temporary policy. When I joined PBGC this July, the Board appropriately asked me to undertake my own review and develop my own views of investment policy and practice. I am still in the process of doing so, but I hope and expect 

to complete my review this month after which the PBGC Board will complete its 

review and adopt a permanent policy. 

Throughout fiscal year 2010, PBGC was also a careful steward of the agency’s 

other resources. We increased attention to IT security, infrastructure improvements 

and system performance, and documentation of our asset valuation and benefit calculation processes to improve accountability; we continued to streamline operations; 

and we attained our 18th consecutive unqualified audit opinion on financial statements. Much remains to be done, but I believe that PBGC is making real progress, 

and doing so in a way that meets the standards we expect for an agency that handles billions of dollars and the retirement security of millions. 

OPERATIONS & FINANCIAL POSITION OF THE PBGC

In fiscal year 2011, PBGC expects to pay $6.7 billion in benefits to about 800,000 

retirees and beneficiaries. We also expect premium receipts in the range of $2.4 billion to $2.7 billion and expect to have an investment portfolio greater than $76 billion. As I noted earlier, we can and will pay benefits for the foreseeable future. However, over the long term our liabilities exceed our assets. 

In 2011, significant factors beyond PBGC’s control (including changes in interest 

rates, the financial markets, plan contributions made by sponsors, and recently enacted statutory changes) will continue to influence PBGC’s underwriting income and 

investment gains or losses. No reasonable estimate can be made of 2011 terminations, effects of changes in interest rates, or investment income. 

At the close of fiscal year 2010, the single-employer and multiemployer programs 

reported deficits of $21.6 billion and $1.4 billion, respectively, roughly the same as 
10 

last year. As explained in more detail in the Annual Report, the obligations (‘‘liabilities’’) that we have and will pay in the decades to come exceed the assets currently 

available to pay them. We had single-employer assets totaling $77.8 billion, an increase of $10.2 billion from the close of the previous fiscal year. Our single-employer 

liabilities (measured in present value though they will be paid over decades) totaled 

$99.4 billion; this compares to total liabilities of $88.7 billion in 2009. The net of 

these positions is a single-employer deficit of $21.6 billion, an increase of $500 million from the prior year. Likewise, the multiemployer insurance program experienced a $600 million decline, bringing its fiscal year 2010 deficit to $1.4 billion, with 

$1.6 billion in assets to cover about $3 billion in liabilities. 

In part, PBGC’s financial position is the result of inadequate plan funding and 

misfortunes that have befallen plan sponsors. In part, it is a result of the fact that 

the premiums the agency charges are insufficient to pay for all the benefits that 

PBGC insures, and other factors. Because our obligations are paid out over decades, 

we have more than sufficient funds to pay benefits for the foreseeable future. However, neither program at present has the resources to fully satisfy PBGC’s obligations in the long run; we cannot ignore PBGC’s future financial condition any more 

than we would that of the pension plans we insure. 

ASSESSING THE RISK OF FUTURE PLAN FAILURES

When considering PBGC’s financial condition, we often separate the obligations 

we already have from those that we may have in the future. 

In our view, the greatest challenge may well be posed by those plans that have 

not yet failed, but may do so in the future. For this reason, we analyze and report 

on PBGC’s exposure to potential obligations in the future. 

Both the single-employer and multiemployer program exposures are substantial. 

At year-end, PBGC’s estimate of its single-employer exposure from underfunding by 

plan sponsors whose credit ratings were below investment grade or that met one 

or more financial distress criteria totaled approximately $170 billion, slightly up 

from $168 billion in 2009. The agency classifies these sponsors’ underfunded plans 

as reasonably possible terminations. 

PBGC’s estimate of its multiemployer reasonably possible exposure increased significantly from $326 million in 2009 to $20 billion in 2010. The agency classifies 

these multiemployer plans as reasonably possible of requiring future financial assistance. The significant increase in fiscal year 2010 from prior years is due to the 

addition of two large plans to the reasonably possible inventory. The sponsor of one 

plan, with net liability of $15.0 billion, is in the ‘‘transportation, communication, 

and utilities’’ industry category; the other, with net liability of $4.8 billion, is in the 

‘‘agriculture, mining, and construction’’ industry category. 

These estimates are measured as of December 31 of the previous year. PBGC’s 

exposure to loss may be less than these amounts because of the statutory guarantee 

limits on insured pensions, but this estimate is not available because it is difficult 

even to estimate prospectively the extent and effect of the guarantee limitations. 

The significant volatility in plan underfunding and sponsor credit quality over 

time makes long-term estimates of PBGC’s expected claims highly uncertain. This 

volatility, and the concentration of claims in a relatively small number of terminated plans, have characterized the agency’s experience to date and will likely continue. Factors such as economic conditions affecting interest rates, financial markets, and the rate of business failures will also influence PBGC’s claims going forward. 

Multiemployer plans present a different and more immediate challenge. 

Multiemployer plans are different and more complicated than single-employer plans, 

and PBGC’s multiemployer pension insurance works very differently from our single-employer program. For decades, multiemployer plans were in relatively good 

health, even in the face of industry decline. Unfortunately, for many multiemployer 

plans, that is no longer true. By fiscal year 2010, many multiemployer plans had 

become substantially underfunded. 

This will, of course, increase PBGC’s obligations with respect to such plans. However, our focus now is on what measures might preserve them. It is not yet clear 

what those measures will be, but PBGC has begun developing the tools to analyze 

them. In fiscal year 2010, we developed and introduced a new multiemployer version 

of our simulation Pension Insurance Modeling System (‘‘PIMS’’). We have also begun 

discussions with multiemployer plans and others to secure the information about 

such plans that will be necessary to develop potential solutions. 
11 

STRENGTHENING PENSION INSURANCE

In one sense, we’ve been fortunate. Despite the greatest financial turmoil in many 

decades, fewer plans were terminated than many observers had expected. 

In part, this may be due to the PBGC’s own efforts. We continued to respond to 

the recent wave of corporate bankruptcies by stepping up and stepping in. The agency worked tirelessly to convince companies, both in and out of bankruptcy, to preserve their plans. In many instances, this approach worked. 

However, underfunding in plans sponsored by financially weak companies remains high. 

The agency’s single-employer program remains on the General Accountability Office’s (GAO’s) ‘‘high-risk’’ list. GAO’s high-risk designation for PBGC does not reflect 

concerns primarily about the agency’s management. Rather, GAO is focused on 

structural problems in the private-sector defined benefit system that pose serious 

risks to PBGC. The structural problems—large amounts of underfunding in the pension system, especially among weak firms, the decline in PBGC’s premium base, and 

our limited tools to encourage plan preservation—are outside the agency’s control. 

More than a dozen times in the PBGC’s history, Congress has modified ERISA 

to enable the agency to continue to do its job, with changes in whom we insure, the 

benefits we pay, and the premiums we charge. Congress has also undertaken other 

actions that affect the pension insurance system, principally changes in funding requirements. That active partnership should continue. We do not, and the Administration does not, have any policy recommendations at this time. We do hope, in the 

months ahead, for an active discussion about what options might make sense for 

consideration in the future. 

ERISA charged PBGC, among others, to serve as an advocate in the discussions 

of the issues facing retirement security. It is an obligation we take very seriously, 

and I look forward to working with our colleagues in the Administration, with this 

committee, and the Congress as a whole to do so. 

Thank you again for holding this hearing. I look forward to hearing your views, 

to answering your questions, and, I hope, in some way to help preserve and protect 

the retirement security that Americans deserve. 

The CHAIRMAN. Thank you very much, Mr. Gotbaum, for a very 

forthright statement. 

I’ll start off with 5-minute rounds. It’ll be me, then Senator Enzi, 

of course, then Senator Murray, Senator Isakson, then Senator 

Manchin, Senator Franken, Senator Bingaman, Senator Casey and 

Senator Hagan. 

Mr. Gotbaum, on page 8 of your testimony you said, ‘‘However, 

neither program at present has the resources to fully satisfy 

PBGC’s obligations in the long run.’’ 

I read that last night, and I circled it and I said, ‘‘What is the 

‘long run?’ ’’ 

What’s the long run? You referred to that a couple times in your 

written testimony, saying that things are OK now, but in the long 

run you may not have issues. What’s the long run? Two years? Five 

years? 

Mr. GOTBAUM. Let’s start by talking 20 years. The PBGC has reported a financial deficit for 30 of its 36 years. What does that 

mean? It means that when you compare the cash we have on hand 

with the obligations that we’re going to pay over the next 30 

years—plus, minus—discounted at present value, the obligations 

are bigger than the cash we have. That’s a deficit. Time and again 

what has happened is, Congress has stepped in, in some way, 

shape or form, and said, ‘‘maybe your premiums are too low; maybe 

you need to change something’’ and etc. As a result, we have continued to pay benefits for all of those 36 years, on time, reliably. 

Now, the deficit: as the PBGC gets larger, as its obligation gets 

larger, the deficit gets larger, too. One of the things I did is—the 

PBGC has a very talented group of forecasters, and they are mak-
12 

ing something which they would call simulations, and which I 

would call as very well-educated guesses about the future. 

I said to them, ‘‘OK, let’s take the program as we have now, the 

law as we have now, the practices we have now, and run your simulations over the future for the next 20 years with different economic scenarios and collapse, and so on and so forth; and then tell 

me, for all your scenarios, over the 20-year period, in how many 

percentages of them do we run out of money by the end of 20 

years.’’ 

And they came back and said, ‘‘well, it depends in part on what 

your investment practice is going to be.’’ 

If you look at the PBGC’s historical investment practice and 

project forward 20 years, if Congress does nothing, maybe there is 

a less than 5 percent chance that the PBGC runs out of money 20 

years from now. 

The fact is, Mr. Chairman, Congress has never done nothing. 

There has always been an engagement and an interaction to make 

sure the PBGC has the resources it needs. 

So, my view is, Senator, this is not to diminish that there are 

real challenges in the system; there absolutely are, and we ought 

to take them seriously. I don’t think we should act because we fear 

that the PBGC is imminently going to run out of money; it’s not. 

The CHAIRMAN. Well later, on that page you say that, ‘‘PBGC’s 

estimate of its multiemployer reasonably possible exposure increased significantly from $326 million in 2009 to $20 billion in 

2010.’’ 

Is that a typo? 

Mr. GOTBAUM. No, sir. One of the things that the PBGC does, as 

part of its role is, it watches the pension system. The tools we have 

for doing so are not perfect, but I think they’re pretty good, and I 

think the people that do it are very, very committed. 

One of the things they do, time after time, is make estimates as 

to which plans they think are likely, over the next decade, to get 

into trouble; to get into trouble enough so that they would become 

the PBGC’s business. 

They make several kinds of guesses: one, is, which plans we 

think are likely to get into trouble; and those we put on the 

PBGC’s books. In other words, we say, that’s something we think 

is going to be liable. And, the history is, by the way, that when we 

say something is likely, there’s about an 80 percent chance that we 

are going to end up having to deal with it directly; about 80 percent. 

We also keep track of things that it’s possible, not more likely 

than not, but possible. As I mentioned in my testimony, and as this 

committee knows, I know very well, when you look in the multiemployer world, the multiemployer systems work pretty well for a 

very long period of time. In recent years, a combination of the economics of the industries that they’re in, and the investment practices there have been, for a whole combination of ingredients, they 

are now in a more serious condition; and we’re watching them. 

So, as a result, because we keep account of the ones which might 

get into trouble—not that we think it’s likely, but might get in 

trouble, and increasingly, some big ones are—that’s why we say, 

our potential exposure has gone up by a lot. 
13 

Does that make sense? 

The CHAIRMAN. Sort of. I think I’ve got it. 

Senator Enzi. 

Senator ENZI. Thank you, Mr. Chairman. I thank you, Mr. 

Gotbaum, for serving, and I thank you for your passion. I know 

you’ve only been there 4 months, and I know you had a long wait, 

because I know that my colleagues across the aisle had a hold on 

your confirmation for quite a while. I know your job is very challenging, so I thank you for your willingness to serve. 

Now that you’ve been there for a few months, what steps would 

you take to ensure that the board of directors is fully engaged in 

the agency’s activities, and what recommendations do you have to 

improve the communication with the PBGC and the board? 

Mr. GOTBAUM. A very good question, sir. I’ve worked in a lot of 

institutions in my life, in government and outside, and I’ve worked 

with large boards and small boards. I ran a charity, the September 

11 Fund; I had 27 board members. When I ran Hawaiian Airlines, 

I basically had a board member of one; a bankruptcy court judge. 

I’ve worked with a range of them; and what I find is, what matters more than structure is engagement in communication. And, I 

will tell you that this board take their job very seriously. 

I can’t speak for previous administrations; I can’t speak for previous boards. I am very well aware of the fact that in the past 

there were very long periods of time when the board didn’t meet 

at all, but I have to tell you, that isn’t this board. 

I’ve been on the board for 4 months, right? We’ve already had 

two board meetings, and, we have another one next week. The 

board has a set of senior officials, the board reps, who are very actively engaged. I meet with them or talk with them at least monthly, and communicate by phone, and sit down more often than that, 

and send them memos. 

I actually think there is, now, very extensive communication— 

very extensive communication. I am very well aware of the fact 

that in the past, that has not been the case. I do think it’s important for the committee to know what’s going on right now. 

Senator ENZI. Thank you. 

Several months ago, Senators Harkin, Backus, Grassley and I 

sent to PBGC a letter regarding a misunderstanding between companies and the PBGC. In the company’s filings, the company had 

checked one box on the PGA form to select an alternative funding 

formula, but unfortunately, inadvertently, did not check the second 

box that would have reaffirmed the alternative funding formula. 

The PBGC took a very hard line on those companies. I’m glad the 

matter was resolved in a good common-sense manner; however, it 

did show that the relationship between the PBGC and the business 

community was not healthy. 

As I mentioned in my opening statement, companies can drop 

their defined benefit plans in favor of 401(k) plans; and I want to 

know what you’re doing to help build a relationship between the 

agency and the business community so there aren’t more of these 

misunderstandings. 

Mr. GOTBAUM. Good question; important question. As a person 

who’s been in the business community myself—been on both 
14 

sides—and recognizing that the defined benefit pension insurance 

system is a partnership, I take that very seriously. 

I can’t speak for previous directors. I can tell you what I’ve done 

since I’ve come on: I’ve met repeatedly with the organized business 

organizations that affect pensions, the American Benefits Council, 

the U.S. Industry Committee, SEBA and others. 

I have made sure that the very professional staff of the PBGC 

understands that part of our job is to interact and communicate. 

Whether we can do something or not, it’s important that we communicate. 

Now, as you mentioned the issue regarding the mistake in checking, and I think that’s a perfectly good example, sir. 

As I mentioned in my testimony, what we do is pretty complicated, and that’s kind of in the nature of pensions; and so it 

turned out to be the case that there were a number of companies 

who, not intending to play fast and loose, just made a mistake. As 

it happens, in those instances, there was sufficient other evidence 

that we had that it really was an honest mistake; nobody was playing fast and loose, etc. 

What we said is, ‘‘OK, in that case, let’s recognize it’s an honest 

mistake and allow them to correct it.’’ That’s what we did. 

That’s the sort of thing that I think we need to keep doing. 

Senator ENZI. Thank you. 

My time has expired. I have some other questions; if we don’t go 

a second round, I’ll submit them in writing for an answer. 

Thank you. 

The CHAIRMAN. Thank you, Senator Enzi. 

Senator Murray. 

STATEMENT OF SENATOR MURRAY

Senator MURRAY. Thank you very much Mr. Chairman. I just 

have a couple of questions. 

I know that the PBGC doesn’t get any general tax revenues, and 

its obligations aren’t backed by the U.S. Government, but I do feel 

obligated to make sure that stewardship and accountability of our 

contract workers, who are about two-thirds of PBGC, are met when 

we have a lot of government contractors today who are under investigation; we’re talking about a wage freeze for government employees. 

I wanted to ask you what PBGC is doing now, to address the 

issue that the GAO found in their 2008 report, that PBGC’s workforce management lacked a strategic approach to determining the 

mix of contract and Federal workers. 

Mr. GOTBAUM. This is, as I mentioned in my testimony, one of 

the challenges that the PBGC faces. Actually, I think, having 

worked in a bunch of other government agencies, and in private 

business, it’s a challenge that everybody faces, which is, how do 

you choose who ought to be a government employee; when do you 

rely on contractors; how do you rely on contractors, etc. 

What we do, and what we are doing—and frankly, I can’t take 

credit for this; the agency started doing this before I joined the 

agency—is to do several things, Senator; one is, you need to have 

in place, a process for actually planning and thinking about, in advance, what your contracting is; what your procurement is, etc. 
15 

The agency did that, if at all informally, before. We’re now putting in place—actually saying what contracts we’re going to have, 

etc. That’s one thing you do. 

Another thing you do is to ask yourself, OK, do I have the adequate contractor base? Do they have the competence I need? Are 

they going to be around? Et cetera. 

That’s a separate process you engage in; that’s a process we’re 

starting. 

A third thing you do is, you look at your actual contracts and 

say, does this contract hold people’s feet to the fire in a way that 

makes sense? Does a contract require performance and pay them 

for performing, not for just showing up? 

And, I’ve got to be honest with you, Senator, we’re starting that. 

In other words, what we are doing is, we are looking at our contracts and saying—and some of our contracts, by the way, do that 

right now. Some of our contracts say, we’re hiring you as a contractor, and we expect you to meet this performance standard, but 

we want you to do better, so we’ll pay you more if you do better. 

Others of our contracts don’t. We are in the process of trying to 

move to that where we can. 

Those are the sorts of things we’re doing. 

Another thing which I should mention—I’m not going to go into 

the same detail about it—is that the procurement process—in other 

words, the process by which you do contracts—is different in government than it is outside government. So one of the things you 

have to do is make sure that your procurement process is up to 

snuff; that it meets the standards that you have. 

Our procurement process was not. We have been working on it, 

and made very real progress. We now have procedures in place 

that we just plain didn’t have. We’re now building the team to follow them, but we’re still doing it. 

This is an area where it’s a necessary part to actually get to, sensible contractor management, and we’re working on it. We’re not 

there yet, but we are working on it. 

Senator MURRAY. OK, I really appreciate that candid response 

and look forward to your recommendations, and to watch where 

you’re going with that. 

The other thing I wanted to ask you real quickly is to summarize 

what kind of changes, legislatively, you think we need to make in 

the pension insurance system, as we look at legislation like the 

Pension Benefit Guaranty Corporation Governance Improvement 

Act of 2009. 

Mr. GOTBAUM. Senator, one of the defects of having been on the 

job only 4 months is that I don’t, at this point, have opinions, much 

less opinions that I can say the administration as a group agrees 

with. 

What I hope will be the case is that—one of the things I have 

seen that impresses me enormously, and it’s part of the reason I 

felt comfortable taking the job, is that pensions are so complicated 

that the only progress comes when it is nonpartisan; not even bipartisan; nonpartisan, where there is a consensus; we ought to do 

this; it’s a good governmental thing to do. 

I mentioned the menu of things that have come in the past; premiums, benefits, funding requirements, etc. Those are clearly 
16 

things that you’ve undertaken and that we’ve implemented in the 

past; and those are probably the sorts of things that are going to 

be on the agenda in the future. 

I don’t have an opinion at this point as to what the right thing 

is. I do hope that, as you are facing them—we obviously want to 

work with you, and reach that same kind of active partnership that 

pension security has had for 36 years. 

Senator MURRAY. OK, very good. I look forward to hearing your 

opinion as we work forward, then. Thank you very much. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator Murray. 

Senator Isakson. 

STATEMENT OF SENATOR ISAKSON

Senator ISAKSON. Thank you, Mr. Chairman. Mr. Gotbaum, 

thank you for being here today. 

The last exchange between Senator Murray and yourself was the 

most important of this hearing so far, because it is going to be critical for you to make recommendations to us, in terms of what we 

need to do in the immediate future, I think, in terms of pension 

legislation, because PBGC would already have gone broke had we 

not done the Pension Protection Act of 2005 and the amendments 

by Senator Cardin and myself earlier this year that changed the 

parameters of assumptions in terms of amortization of obligation to 

ease and smooth the contributions of the corporations and not take 

all the cash out of corporate America to put it in a pension fund 

and cost even more jobs than we have. 

We still are not there yet—you got a great record and a great 

history, and 4 months is not a long time. But, I would hope you 

would take her question to task, and your answer. 

I’ll pledge to you to work in a bipartisan way, because it does 

have to—those acts were both bipartisan; but we need some good 

recommendations, and we need them quicker rather than later, I 

think, from my standpoint. 

Mr. GOTBAUM. Message received, Senator. We look forward to 

doing exactly that. 

Senator ISAKSON. Because we can avoid a catastrophe, avoid a 

collapse of PBGC, not by making irrational assumptions, but by 

looking at reality, because the problem we have today is none of 

your forecasters saw—in 2006, 2007, 2008, and 2009—it coming. 

Nobody made assumptions that we were going to be in that kind 

of market. 

Second, who manages your assets? 

Mr. GOTBAUM. The PBGC, ever since it started—actually, I think 

it started fully in 1975—ever since it started, the assets are managed, intentionally, by outside professional managers. 

Senator ISAKSON. Good. 

Mr. GOTBAUM. About a quarter of our assets are in deposit in the 

Treasury, so that’s obviously held by the Treasury. About threequarters of them are managed by outside professionals. The reason 

for that is really simple. We think it is important that the PBGC 

not be mucking around and making choices about investments and 

not be mucking around and making choices about which stocks or 

bonds to buy or not to buy. So, we don’t. 
17 

We have an investment policy which is set by the board; and 

then we implement it by picking managers and saying, go do your 

job. 

Senator ISAKSON. I think that is important, and I appreciate the 

answer. 

Looking at the GAO chart on page four of their report, between 

2006 and 2010 your assets have increased by 33 percent. I assume 

that’s more because of defaulted plans and less because of the 

growth in assets; is that right? 

Mr. GOTBAUM. Yes, sir. I’m sure that—I can’t tell you for certain, 

but that would be my guess, too. 

Senator ISAKSON. I was going to say, if that’s not the reason, 

somebody’s done a good job of investment advice; I’d like to know 

who they are, so we can call them up. 

And last, on Senator Harkin’s remarks, I appreciate Secretary 

Solis and Mr. Geithner and the others who are on your board, but 

I do think we ought to look seriously at working with you to come 

up with a board structure that makes sense in the challenging 

times ahead, because you can give good people more work than 

they can handle, and something ends up falling through the cracks. 

I think you need that kind of support as well. 

We demonstrated with TVA, and this committee did it, that you 

can change board structure, and you can change outcomes for the 

better by just giving the person responsible for running the agency 

the support they need in terms of professional advice. 

I’d love to work with you on suggestions like that; and I appreciate Senator Harkin bringing that up. 

That’s all the questions I have. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Senator Manchin. 

STATEMENT OF SENATOR MANCHIN

Senator MANCHIN. Thank you, Mr. Chairman, Senator Harkin 

and Senator Enzi, thank you. It’s a great honor to represent the 

people of West Virginia. 

I just found the button. I’m brand new here. 

[Laughter.] 

I want to thank you so much for being here; and also it’s my 

honor to represent the great people of West Virginia. 

As you know, it’s a hard-working State, and we have a work 

ethic that’s one of the best in the Nation. They do the heavy lifting, 

and they work in the mine and the factories; and they’ve done it 

for years, and years, and years. They don’t ask for much, just an 

opportunity to be able to provide for their families. Then when they 

give a lifetime of work, they want to make sure they’re able to have 

a pension that’s rewarding to the work they’ve given. Unfortunately, that hasn’t always happened. 

If I can reflect back on Weirton Steel. I went through a situation 

there that was just devastating, and it just took a tremendous toll 

on people’s lives. 

I have a hard time understanding how this can happen, when a 

company goes through a bankruptcy and are able to shed all of its 

liabilities, and then it still has value to it, and it’s bought by another company that comes in, completely with the slate clean and 
18 

leaves people without the pensions they were guaranteed and 

worked for. 

And, because of their age—and they might have started very 

young, at 18–20 years of age or 50, and now they’re 50, 55 years 

of age—they can’t find a job, and they put 30 years in. They were 

devalued, their assets, to the point to where they just had to take 

a meaningless entry job, if you will, at a very minimum wage, and 

they try to survive. It’s just not fair. 

With the program that you have in place here—I don’t know 

what types of checks and balances you have—if that would have 

been foreseen, that the collapse of that company, and they weren’t 

in shape in order to take care of their employees, why was that not 

caught? 

I know you’ve just been there a short time, too. 

As a former governor from my State I have pensions in every 

State. OPEB liabilities is something that we’re all dealing with, 

and it’s going to wreak havoc on every one of our States. We have 

so many States that cannot fulfill their obligations. And, what happens is, it’s because the benefits continue to change; there’s no 

money going in to match, and it just doesn’t add up. So, you have 

to really come to grips with the hard decisions. 

When do you freeze those? Also, basically, when we have a downturn of the market that wasn’t anticipated, with that being said, 

was any adjustments made on the benefit so that we could keep 

it solvent; or did it go into insolvency to where, basically, people 

lost everything? 

What I’m trying to find out is, how do we prevent that? 

You all were in place when Weirton—when it hit the skids, if you 

will, and so many people were left without. A few people got close 

to what their pensions would be, but many of them got very little. 

Can that be prevented? 

Do you all have checks and balances in place now? 

Mr. GOTBAUM. Yes. I don’t know if you know this, Senator, but 

after I left the Carter White House, my first job was as an investment banker working for the divisional management and the union 

of Weirton Steel; and I spent a year and a half walking through 

every part of that mill, talking with everyone; helped build the 

ESOP; working with then-Governor Rockefeller. 

Senator MANCHIN. Right. That was back in the 1980s. 

Mr. GOTBAUM. So, the people of Weirton are close to me. I’ve 

talked to them even as recently as a month ago. 

It is undeniably a tragedy, and nobody can sugarcoat that. 

As I mentioned in my testimony, and described more in my further testimony, one of the things that we really try to do is, we try 

to get companies—even when they go into bankruptcy—not to terminate their plans. We do that by saying, if you terminate your 

plan, we become a creditor. 

Unlike most creditors, the PBGC financial analyst lawyers are 

very, very good, and they’re very, very tough, and they throw their 

weight around on behalf of retirees. 

However, they have, within bankruptcy, a limited priority. You 

know, we are mostly general creditors. It is the case that if we’d 

had more room maybe in the bankruptcy we could have said, yes, 
19 

you’re in bankruptcy, but you can—and maybe pass on the ownership deal without—— 

Senator MANCHIN. If I could ask just one question. I looked when 

all this thing took place and I was not governor at the time—there 

should have been a deal to keep them whole, and the value was 

there to keep them whole, but they allowed this to go into bankruptcy to where the people were left with nothing. 

The people that came in and bought it had no liability whatsoever, and was able to shed all that. I don’t know enough about our 

bankruptcy laws or pension laws to prevent that from happening 

again. I don’t want any State, or any employer, or any employee 

in any State to go through what our people had gone through. Do 

you know how devastating this has been? 

Mr. GOTBAUM. Oh, yes, I do. If I can, this is the sort of thing that 

is not really a question for the record kind of thing. 

Senator MANCHIN. Right. 

Mr. GOTBAUM. With your permission, if some members of the 

PBGC staff would talk with your staff, we could explain the background. 

Senator MANCHIN. I’d love to. I hope that no other Senator 

ever—I can share this at a later time—but I hope you never have 

to go through this. 

The CHAIRMAN. I would like to know more about the facts and 

the data on that. It’s always occurred to me, too, that I’ve seen 

other places, plants that go under; somebody that comes in and 

they buy up all the assets and they assume liabilities, but they 

don’t assume this liability. 

Senator MANCHIN. The bankruptcy court, Senator, somehow, allows them to escape the responsibility; and there’s still value there. 

They can still make this an ongoing concern. This company still— 

there’s another company there now; it’s a foreign company that 

owns this, but the people in West Virginia, the people that worked 

there all their lives, got left with nothing. 

The CHAIRMAN. That’s right. Was the question then, how do we 

prevent this? 

Senator MANCHIN. Well, basically, I’ll meet with their staff; and 

then I’ll come back and report to you and Senator Enzi and tell you 

what we find. 

The CHAIRMAN. Fine. I’m sure my staff would like to know. I’d 

like to know, personally, too. 

Senator MANCHIN. OK. 

The CHAIRMAN. Senator Franken. 

STATEMENT OF SENATOR FRANKEN

Senator FRANKEN. Thank you, Mr. Chairman, for helping address 

this issue vital to 44 million of our country’s workers and retirees, 

whether PBGC has the adequate structure and the resources to 

perform its job. 

The PBGC’s task was preserving pension plans, paying benefits 

when plans fail, maximizing payments in the failed plans, and 

being highly accountable to our pensioners. 

There are some areas in which the PBGC has truly excelled. Everyone here should be impressed that the PBGC has been making 

uninterrupted, on-time monthly payments to beneficiaries for dec-
20 

ades. With some exceptions, PBGC has made relatively prudent investment decisions and yielded satisfactory returns under difficult 

conditions, especially over the past few years. 

One area that concerns me is the level of accountability to our 

pensioners. When I talk with pensioners in Minnesota, especially 

when I’m up on the Iron Range, I hear their accounts of working 

with the PBGC; I hear the frustration in their voices when they explain that their benefit determinations have taken years to process. 

Some of them have told me that it’s been years since they’ve 

even heard from the PBGC about their determination. 

This is extremely painful and disruptive for them and their families. It’s impossible for them to plan for their futures; and I think 

that our pensioners deserve better than that. 

I understand that much of today’s focus is going to be on a small 

select group of people—the board—how they should be appointed, 

what numbers, members is ideal. 

Those are all good questions; we need to tackle them, but we 

need to keep the focus today on the people that the PBGC serves: 

our Nation’s pensioners, our workers, and our retirees. 

I wanted to ask a question about the board. I think Senator Enzi 

got to this, but, I’m sorry, I had to go to a Judiciary Committee 

hearing—but, I read somewhere that between 1983 and 1992 there 

was not one meeting of the board; is that correct? 

Mr. GOTBAUM. Fortunately, for me, I was not associated with the 

PBGC during that period, but I know that the GAO has in their 

testimony included a graph that shows the board meetings; and, I 

do know that in the past there were long periods of time when the 

board just plain didn’t meet. 

Senator FRANKEN. Well, that kind of underscores part of the 

problem, I think, which is that, obviously, this board, being comprised of cabinet secretaries, may not have enough time to meet. 

I know a number of entities have studied this and said that we 

have to have a bigger board and have members who aren’t cabinet 

secretaries and who can dedicate more time to this. 

That’s the intention here? 

Mr. GOTBAUM. One of the things we’re trying to understand— 

members of the administration have actually met with the committee staff to try to understand what is trying to be achieved by 

this. 

Senator FRANKEN. OK. 

Mr. GOTBAUM. As you might expect, Senator—and as I mentioned in my testimony—from my perspective, one of the most important changes in the governance of the PBGC was the one that 

this committee and this Congress made in 2006, which was to take 

the director and say, ‘‘you’re running the agency; you’re going to be 

appointed by the President; you’re going to be subject to Senate 

confirmation, which means you’re going to come back and report to 

this committee.’’ I think that’s an important change in governance. 

I also said in my testimony, or in response to the Chairman’s 

questions, I can’t speak to what the boards in the past did. I can 

tell you that this board takes their job seriously. They meet more 

frequently than any board has—than the PBGC has since it was 

founded in more than 30 years ago. 
21 

Senator FRANKEN. Do you think you’d be helped by having some 

board members who aren’t cabinet secretaries, who would have 

more time to spend on this job in all sorts of areas, in addressing 

all the problems that you face, and addressing the preventing pensions from going belly up, and figuring out what to do about the 

deficits you have; about all the different problems that you have, 

don’t you think that a few more members who are dedicating more 

of their time and effort to this would be helpful? 

Mr. GOTBAUM. As I said in response to the Chairman’s question, 

I’ve worked with lots of different board structures, and can work 

with them. I can work with the current structure just fine—and 

have and will. 

My concern, if you will, is that, beyond the questions of 

boardrestructuring,there are some very real and central issues that 

PBGC faces, that defined benefit pension plan’s face. And I would 

especially hope—you’re the committee, in some respects; you’re the 

functional board—but what I would hope is that there is the attention to those challenges, because I think those are the real challenges we face. 

Senator FRANKEN. Yes. Well, my time’s up. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Senator Casey. 

STATEMENT OF SENATOR CASEY

Senator CASEY. Thank you, Mr. Chairman. Thank you for holding this hearing, I should say, on an issue that is particularly of 

concern to folks in any economy, but especially when the economy 

is in rough shape; just the concern that people have about retirement security. 

I have a specific question. I want to step back for a moment and 

think about the grave concerns that people have about their own 

retirement security; and I’m thinking about two categories, really: 

one category of folks are those who have worked and put those 

years in as Governor Manchin talked about, and then have an expectation of having that security. 

Also, we’ve got to be concerned about folks who are still in the 

workforce, much younger workers who are looking down the road; 

and in some ways, I think we have to—if we’re going to strike a 

bargain with workers—say, ‘‘if you stay, if you get a good education, and you work hard, and you study hard, if you continue to 

improve your skills over time, our end of the bargain is we’re going 

to try to do everything we can to help you on health care’’—and 

that’s a promise yet unfulfilled—‘‘but, we’re also going to provide 

you some retirement security.’’ 

If that’s the deal, you get educated, you keep your skills up to 

be able to compete in the world economy, and we’ll help you with 

health care and retirement security. 

That’s kind of the goal and the ultimate good bargain for workers 

and for our economy. 

To get there we have to do a lot of the basics, the fundamentals, 

what the football players would call the blocking and tackling. 

Senator Franken raised, and others have raised, the benefit determination process, and I could ask you some questions about 

that, and maybe I will in written form. 
22 

The one question I had was on the investment policy. You said 

you’re working on one, and you don’t have it completed yet. But, 

I’m wondering if you can do one of two things, or both: either give 

us a preview of that, where you think that is headed, in terms of 

what determinations you’ll make as it relates to investment policy; 

or if not, can you give us a sense of how your—what are the considerations you’re weighing and developing, or what is the guidance 

you’re using to develop that investment policy; because the return 

that you’ll get is going to be very helpful in meeting that ultimate 

goal: giving workers some peace of mind. 

Mr. GOTBAUM. I’m happy to answer questions for the record, or 

with staff, etc. on benefit determinations; I think that’s really important, as you can tell from the fact I put this chart up. 

On investment policy: investment policy has been—first of all, 

it’s important to know that investment policy is something which, 

although the director of the PBGC has always been involved in 

making recommendations, is decided by the board at the PBGC. 

When I came on, in July, the board said: ‘‘OK, we’ve been thinking 

about this for a while; why don’t you do your review and come to 

your own views, and then talk with us about what you think; and 

then a decision will be made.’’ 

We have a board meeting next week where I hope we’ll—we’re 

planning to have a discussion on that. So, I don’t want to presage 

that, and it would be inappropriate for me to prejudge it. I think 

it ought to be pretty clear, what are the major considerations that 

have always been part of the investment policy decision. 

One of them has been, you need to invest in a way that covers, 

as much as possible, the benefits that PBGC is obligated to pay, 

and reduces the pressure to raise premiums; so, partly you invest 

to maximize returns. 

Another thing you do is, since the PBGC, although it uses professional managers, is nonetheless, a government agency—you want 

to make sure that the PBGC doesn’t take unnecessary or inappropriate risks. 

There are plenty of people—some of whom I’ve invested in myself—who can take risks that it would be inappropriate for the 

PBGC to take. We’re more conservative than that; we don’t do that. 

The third thing that I also think matters is that whatever the 

policy is, it needs to be something that we can implement in a way 

that is so clean that our Inspector General, and the GAO, and, 

frankly, me—because my standards, my ethical standards, I don’t 

think, are any lower than either of theirs—can come to this committee and say, we can do this in a manner that is clean. 

That’s what we’re looking for. And, having had some discussions 

already, I’m pretty confident that that’s what we’ll end up with. 

Senator CASEY. I appreciate that. I’m out of time, but thank you 

for that answer. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator Casey. 

Senator Hagan. 

STATEMENT OF SENATOR HAGAN

Senator HAGAN. Thank you, Mr. Chairman. I, too, appreciate this 

hearing today. 
23 

Mr. Gotbaum, congratulations on your nomination and confirmation; and I know 4 months into the job you’ve got a lot on your 

plate. 

Mr. GOTBAUM. Thank you. 

Senator HAGAN. An incredible amount. Thanks for your testimony. 

In your testimony you stated that PBGC’s financial position is a 

result of inadequate planned funding and misfortunes that have 

befallen plan sponsors; and in part, it’s a result of the fact that premiums the agency charges are insufficient to pay for all of the benefits that PBGC insures. 

I know we were just talking a little bit about the premiums, but 

what does PBGC charge in premiums, and when was the last time 

that the premiums were evaluated; and tell me about your 

thoughts on recalculating them. 

Mr. GOTBAUM. Let me summarize it at my 4-month-on-the-job 

level of add detail on the record. 

When the PBGC was started out, they really had no idea what 

level of premiums made sense, and so they guessed. 

Senator HAGAN. This was 30 years ago? 

Mr. GOTBAUM. That’s 30, 36 years ago now, ma’am, yes. they 

said, for single employer plans it will be $1.00 for participant per 

year, and for multiemployer plans it will be 50 cents. They didn’t 

know. They just needed to start with something. 

Then what’s happened over the years, because for most of the 

PBGC’s time, there has been a deficit, meaning the premiums we 

take in, the cash that we have, is less than the obligations, Congress has, time and again said, ‘‘we’re going to change—we’re going 

to raise premiums; we’re going to change premiums.’’ There’s a 

basic flat rate premium, and then there’s a premium that relates 

to the degrees of underfunding 

One of the issues that has been raised in the past is whether or 

not, in addition to underfunding, premiums ought to be based on 

the risks that the plan terminates; not just how underfunded it is, 

but what the risk is, etc. 

The average premium—and if I get this way wrong, I’ll correct 

the record—but from that kind of $1.00 per participant per year is 

now, round numbers, about $80.00 per participant per year. 

That gives you an idea by how much premiums—— 

Senator HAGAN. What about recalculating that; and what about 

evaluating that, moving forward; what’s your plan? 

Mr. GOTBAUM. Oh, that is something which has been on the 

agenda a bunch of times. I’m too new on the job even to have an 

opinion as to what happened. It is precisely the sort of thing that 

the committee, the PBGC, the administration have worked and discussed. 

The last time I believe it was changed was in 2006 as part of the 

Pension Protection Act. My hope and expectation would be, as we 

get there, as to what the options are—that, that discussion can be 

part of the mix. 

Senator HAGAN. As the director, are you not concerned about 

wanting to move forward when you’re looking at these huge deficits 

that you’ve been talking about? 
24 

Mr. GOTBAUM. It’s funny. No one’s asked the question exactly 

that way. Senator, what I have learned in my 4 months on the job, 

and having watched the decisionmaking, is that pension policy has 

to be consensual. Pensions are mind-bendingly complicated, and 

the fact is, we don’t make progress unless we work it and guessed 

it. 

From my perspective, what is much more important than that we 

move fast, is that we engage enough so that there is a consensus; 

so that nobody thinks somebody’s playing fast and loose. 

The other thing is, I mentioned in my response to Chairman 

Harkin is, we have $80 billion in assets. Last year we paid out 

about $6 billion. We took in about $3 billion in premiums and recoveries and other things like that, etc; so, we had a negative cash 

flow of about three, but we had $80 billion in cash. 

From my perspective, there is no danger that PBGC is going to 

run out of cash—when I say the foreseeable future, my very careful 

and punctilious Inspector General, and folks who worry about accounting, get nervous when I say, ‘‘the foreseeable future,’’ but 

guess what? We are not going to run out of cash in the foreseeable 

future. That’s not my concern. 

My concern is that, in the same way that the Congress always 

has worked and talked and figured out what’s the right solution, 

that we do that, and that there’s enough time to do that. 

That’s something which we would like to engage in. 

Senator HAGAN. I was just curious: do you have a number in the 

private-industry market that would compare to your $80 premium? 

Mr. GOTBAUM. No, Senator, we don’t, because one of the things 

that happens when the government takes over an insurance function, is that most folks in the private sector don’t do that insurance 

function. There’s no ready standard. 

Most academic studies suggest that the average premium ought 

to be considerably higher. 

Senator HAGAN. Yes. 

Mr. GOTBAUM. Most academic studies suggest that the premium 

ought to take the risk—what the benefit actually is, into account, 

and what the risk is, etc; and that’s stuff which we don’t do. 

It’s clearly something which has been part of the discussion in 

the past, and I hope will be part of the discussion in the future. 

Senator HAGAN. You’ve used the term, ‘‘foreseeable future.’’ I 

mean, I am very concerned about it; but what’s your definition of 

‘‘foreseeable future’’? 

Mr. GOTBAUM. Oh. 

Senator HAGAN. Have we already asked that? Oh, sorry. 

Mr. GOTBAUM. No, but it’s a very important question. 

My definition of foreseeable future is 20 years. In other words, 

one of the things we did—since I have this question, let me just 

summarize and say, I asked the best people I know, who are the 

people who work in the PBGC, who, every day estimate what our 

cash flows are, what our obligations are, etc; and I said, assume 

Congress does nothing, and the PBGC does its job, what are the 

odds that 20 years from now, we’ll run out of money? 

They said you hold investment policy about where it is—maybe 

less than 5 percent. A less than 1 in 20 chance that we run out 
25 

of money; and that’s if there’s no discussion, no engagement, no 

change in premiums, no nothing; etc. 

My view is, for the foreseeable future, let’s just say that I expect 

not only to retire, but to leave this earth before the PBGC runs out 

of money. 

Senator HAGAN. Well, when I think about all the people who are 

counting on it, I think the foreseeable future needs to have a very 

short definition so that we can plan appropriately and effectively 

for these retirees. 

Mr. GOTBAUM. If I mis-spoke, Senator, then I apologize. 

What I’m trying to say is, I think—— 

Senator HAGAN. Yes. 

Mr. Gotbaum, people who get benefits from the PBGC ought not 

to worry about the benefits they’re getting from the PBGC; they’re 

going to get them. 

Senator HAGAN. You talked a little bit about the governing structure; and I, too, am concerned about the small size of the board. 

There’s also the oversight functions, the advisory committee; do you 

think the advisory committee should have statutory authority to 

conduct audits and case reviews? Tell me about how you’d utilize 

the advisory committee. 

Mr. GOTBAUM. Well, thank you, Senator, because from my perspective that’s actually an important question, because the advisory committee—as with boards in the past, advisory committees 

have done different things in the past, with your permission, I’d 

like to tell you how I—— 

Senator HAGAN. I just realized I’m over time. I apologize. 

Mr. GOTBAUM. I’ll be brief. My view of the advisory committee is, 

this is a group of knowledgeable, committed people who, every 8 

weeks, come to Washington and spend a day walking through, with 

the director of the PBGC and the staff, talking about issues; they 

talk about investment policy issues; they talk about the issues involving multiemployer plans; they talk about questions of politics, 

etc. 

My view is, this is a group of people who I can talk to, who have 

a broad range of backgrounds. I think they do a good job, and 

frankly, I like working with them. 

The CHAIRMAN. Thank you very much. Mr. Gotbaum, the ERISA 

gives PBGC three things they’ve got to do: No. 1, insure pensions; 

No. 2, collect premiums; and No. 3, encourage the continuation of 

defined benefit pension plans. 

OK, insure pensions, check, you’ve done that; collect premiums, 

check, you’ve done that; No. 3, encourage the continuation of defined benefit pension plans, we’ve been losing them ever since 

PBGC has come into being; can I assume that you’re failing on No. 

3? 

Mr. GOTBAUM. I think no one can deny, Mr. Chairman, that 

there’s clearly real challenges and trouble in the defined benefit 

world. 

The CHAIRMAN. Why? 

Mr. GOTBAUM. Well, I’m sufficiently new at this, Mr. Chairman, 

so I don’t want to pretend that I’m definitive on this, because I’m 

not, OK, but it’s pretty clear to me that part of this is that plan 

sponsors, companies, businesses, etc, have decided that they don’t 
26 

want to offer defined benefit plans; and for whatever reason, their 

employees are satisfied with defined contribution plans, or no plan 

at all, or whatever, etc. 

That is clearly something which is more than the PBGC can, in 

my view, affect or change by its program. I do think there is something—— 

The CHAIRMAN. Yes, but you’re supposed to encourage the continuation of defined benefits. 

Mr. GOTBAUM. I think we are. I think we are in a couple of 

senses. 

The CHAIRMAN. But we’re losing them all the time. 

Mr. GOTBAUM. We are, but it is still the fact, Mr. Chairman, that 

there are some 40-plus million people who are protected by defined 

benefit plans, and I mentioned in my testimony—and I think this 

part is important—that from my perspective, part of the mandate’s 

preserved plans is what we do when we try to convince companies 

not to terminate their plans. 

Part of that mandate is, when we go into a company in bankruptcy and say, ‘‘are you sure you want to terminate your plan, because if you do, you’re going to have to deal with us.’’ I think that 

is part of the way we fulfill that mandate. 

The other way that we can fulfill that mandate is to engage in 

the broader discussions about, how do we make sure that whatever 

the form of retirement security is, it’s adequate, it’s understood, 

and it’s widely available. 

The CHAIRMAN. Well, but what about a company that doesn’t go 

into bankruptcy; they just want to get rid of their defined benefit 

pension plan? 

Mr. GOTBAUM. If a company does that? 

One of the things that happens is, we have tools that we can 

take action on, and we do. We have an Early Warning Program 

and we have authorities that you have given us to engage with 

companies that, when they take steps, corporate transactions, shutdowns, closures, even sales, that we can say to the company, we’re 

nervous about what this does to your pension plan; we think you 

should do something to shore up the pension plan. 

The thing we can’t do, Senator, is if a company legally decides 

it’s going to terminate its plan, and it terminates it according to 

ERISA, according to the law—which means it buys annuities for all 

of the participants—ERISA permits a company to do that. The 

PBGC has no authority to tell them not to. 

If they follow ERISA, and decide not to do a DB plan, that’s not 

something that we can do, except to make sure—and we do, by the 

way—that when they do a standard plan termination, that they do 

it according to ERISA, according to the rules; that it’s done by the 

book. But, we can’t stop them from doing it. 

The CHAIRMAN. One last thing, Do you believe that, or do you 

have any opinion that you would like to voice on whether or not 

in bankruptcy law, that the status of a defined benefit plan participant should be higher on the pecking order, the list of creditors 

that need to be satisfied, if a plan goes into bankruptcy. Do you 

have any opinion on that? 

Mr. GOTBAUM. Not an informed opinion, Senator. With your permission, let me think about it, find out the facts and circle back. 
27 

The CHAIRMAN. Because there is some legislation here, pending 

to do that; and I just didn’t know if you had any thought on that 

at all, but I’ll give you the benefit of thinking about it and get back 

to us on it. I appreciate it very much. OK, thank you. 

Senator Enzi has some follow-up questions. Anybody else have 

any other questions? 

Mr. GOTBAUM. Mr. Chairman, I’m told that I have 

misremembered the average premium; that the average premium 

works out to be in the 30-plus dollar range. I will if you’ll permit 

me to put in the record a more detailed response, so that I can give 

you the full range and what the figures actually are, I’ll be grateful. 

The CHAIRMAN. Mr. Gotbaum, thank you very, very much. I appreciate your testimony and your leadership and look forward to 

working with you in the future. Through my staff, I may be sending some additional questions to you. Obviously, other Senators can 

submit questions for 10 days. I know Senator Enzi has some also. 

Thank you very much, Mr. Gotbaum. 

[The information referred to may be found in Additional Material.] 

The CHAIRMAN. Now, we’ll turn to our second panel. Our second 

panel is Barbara Bovbjerg of the GAO, and Rebecca Anne Batts, 

who is the Inspector General of the PBGC, and Mr. Ken Porter of 

the American Benefits Council. 

All of your testimonies will be made a part of the record in their 

entirety, and I would ask, again, that if you will just go down the 

line in order of which I introduced people, we’ll start with Ms. 

Bovbjerg. Do I say ‘‘Bovberg’’ or ‘‘Bobverg’’? 

Ms. BOVBJERG. It’s Bovbjerg, Mr. Chairman. 

The CHAIRMAN. Bovbjerg. 

Ms. BOVBJERG. I have to say that my in-laws, who are Bovbjergs, 

are proud residents of Iowa City. So, Bovbjerg. Important constituents. 

The CHAIRMAN. That’s a recognizable name in Iowa, I got to tell 

you, Bovbjerg. 

[Laughter.] 

I should have known better. Anyway, we’ll start with Ms. 

Bovbjerg and go on down the line. 

Ms. Bovbjerg, if we could all just sum it up in 5 or 7 minutes, 

I’d appreciate it. 

Ms. BOVBJERG. I’ll do that. 

STATEMENT OF BARBARA D. BOVBJERG, MANAGING DIRECTOR, EDUCATION, WORKFORCE, AND INCOME SECURITY, 

GOVERNMENT ACCOUNTABILITY OFFICE (GAO), WASHINGTON, DC 

Ms. BOVBJERG. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Ms. BOVBJERG. Senator Enzi, members who stayed, thank you. 

I’m really grateful to be invited here today to talk about the need 

for improved governance and management of the PBGC. 

As we’ve said, PBGC insures the pensions of 44 million workers, yet it faces an accumulated deficit of $23 billion. With the growth 

of large plants under its trusteeship, PBGC’s responsibilities have 
28 

increased significantly since its creation in 1974, and its financial 

portfolio is one of the largest of any government corporation. 

My testimony today discusses the PBGC’s need for a strong 

board structure, and for improved management of its contracts and 

benefit determination processes. 

My statement is based upon our prior work on these topics, many 

of it for this committee. 

First, the board: PBGC needs strong policy direction and oversight in the face of its current financial condition and the long-term 

or foreseeable structural challenges. 

Our prior work has highlighted a number of limitations with the 

statutory structure of the board, starting with its size and its composition. 

No other government corporation’s board is as small as PBGC’s, 

which is comprised of three cabinet secretaries. This is too small 

to allow the establishment of standing oversight committees, which 

are commonly used on other boards; and its members’ other responsibilities limit the time they have to focus on the PBGC’s business. 

In addition, this board’s structure is vulnerable to disruptive 

transitions. At each change of presidential administration, the entire board, and the PBGC director, leaves with the departing administration, not only limiting continuity of PBGC, but also leaving 

no board-level leadership in the event of immediate policy challenges. 

For example, amid the turbulent economic times between February 2008 and February 2010 the board did not meet at all. 

GAO has previously recommended that Congress consider expanding the PBGC board, and we suggest it be changed to include 

additional members who possess knowledge and expertise useful to 

PBGC’s mission, and that their terms be overlapping to assure an 

active board at all times. 

Other Federal corporations have boards structured this way; and 

these steps can improve the continuity and strength of the PBGC 

oversight. 

I’m pleased that this committee is now considering legislation 

that would bring about such a change. 

I’d like to turn now to some management issues at the PBGC. 

Over the years, GAO has focused regularly on contracting in the 

corporation, both in the use of contract staff and in contract management. Since the mid-80s PBGC has had contracts covering a 

wide range of services; and as its workload has grown, has come 

to rely heavily on contractors to supplement its workforce. 

The PBGC has taken some steps to improve its workforce management. The corporation still lacks a strategic approach to optimize the mix of Federal and contract workers. 

Also, PBGC continues to focus its strategic management attention almost entirely on its own Federal workforce rather than the 

performance of the contractors. 

Our previous work has found weaknesses in PBGC’s overall contract management, as well. We found, repeatedly, that most of 

PBGC’s contracts lack performance incentives or other methods to 

hold contractors accountable for results. 
29 

The corporation has also relied heavily on labor-hour payment 

arrangements rather than the fixed-price contracts that we and 

others recommend. 

Further, the corporation declined to take our recommendation to 

elevate procurement in corporate strategic planning and decisionmaking, despite the importance of this function to PBGC operations. 

We currently have additional work underway on this important 

topic, and we’ll be reporting that next year. 

We’ve also made recommendations regarding PBGC’s benefit determination processes, which were, in fact, the topic of a hearing 

here the last time I appeared before this committee. 

When PBGC takes over a terminated plan, it must calculate the 

benefits owed the participants of the plan using the structure that 

was in the picture, in Mr. Gotbaum’s testimony. 

A small number of large and complex plans account for most of 

the lengthy delays and inaccurate payments to participants. Although the corporation has recently adopted several of our recommendations for improvement, it has not yet incorporated the 

performance measurement that we believe is necessary. 

Improvements like these could help reduce the benefit determinations that are so troubling to beneficiaries, and unnecessarily 

add to their stress. 

In conclusion, PBGC has become ever more essential to American 

workers and retirees during the recent downturn; yet, even with 

the increased attentiveness of the current board, the body structure 

will leave PBGC leaderless at times, as it did most recently in 2008 

and 2009. 

Engaging in more strategic management will help PBGC better 

weather the storms of the future, but still, it can’t overcome the 

weak system of governance that we have today. 

That is why the bill you’re considering, that would address these 

issues, is so important. Although I have to say, even though improving the governance and oversight of PBGC doesn’t by itself 

solve PBGC’s financial problems, actions like those would be critical to helping PBGC manage them as they arise, which they surely will. 

I’m available for questions. That concludes my statement. Thank 

you. 

[The prepared statement of Ms. Bovbjerg follows:] 

PREPARED STATEMENT OF BARBARA D. BOVBJERG

SUMMARY—WHY GAO PREPARED THIS TESTIMONY

The Pension Benefit Guaranty Corporation (PBGC) is a self-financing government 

corporation that insures the pensions of 44 million workers in more than 27,000 private sector defined benefit pension plans. Yet, PBGC faces financial instability that 

could pose a future threat to this source of protection for Americans’ retirement income. As fewer sponsors pay premiums for fewer participants in defined benefit 

plans, and as the underfunding of large defined benefit plans increases, the risks 

to PBGC’s financial future also increase. As of September 2010, PBGC’s net accumulated financial deficit was $23 billion. GAO has designated PBGC and the pension 

insurance programs it administers as ‘‘high risk’’ areas in need of urgent attention 

and transformation to address economy, efficiency, or effectiveness changes. 

In this testimony, GAO discusses its recent work regarding PBGC. Specifically, 

this statement focuses on needed improvements to PBGC’s governance structure 

and strategic management based on GAO’s prior work in these areas. GAO is mak-
30 

1 A defined benefit plan is a pension plan that generally provides monthly retirement benefits 

based on a formula that combines salary and years of service to the company. 29 U.S.C. §1002 

(35). In contrast, a defined contribution plan is a pension plan that generally provides retirement benefits based on the balance available in an individual’s account that has received contributions from the employee, employer, or both, during the employee’s years of service to the 

company. U.S.C. §1002 (34). 

ing no new recommendations in this statement, but continues to believe that Congress should consider expanding PBGC’s board of directors and that PBGC should 

implement recommendations from prior reports that have not yet been implemented, such as those concerning strategic workforce management and benefit determination process performance measures for large, complex plans. 

IMPROVEMENTS NEEDED TO STRENGTHEN GOVERNANCE STRUCTURE

AND STRATEGIC MANAGEMENT

WHAT GAO FOUND

PBGC requires a strong governance structure and strategic management to ensure that it can meet its future financial challenges. Companies who pay annual 

premiums to PBGC and the millions of employees whose retirement benefits are 

under PBGC’s protection are owed greater stewardship of the corporation and its 

funds. 

By law, PBGC is governed by a three-member board of directors composed of the 

Secretaries of the Treasury, Commerce, and Labor. Because of their numerous responsibilities in their roles as cabinet-level secretaries, the board members have historically been unable to dedicate consistent attention to PBGC matters. In fact, 

since 1980, the board has met only 23 times. During a critical 2-year period between 

February 2008 and February 2010, amid turbulent economic times and congressional investigations of certain procurement practices, the board did not meet at all. 

While the current PBGC board is meeting more frequently than in prior years, its 

members still have little time to devote to PBGC governance and the board remains 

vulnerable to disruptive transitions during future changes of administration. 

In addition, although PBGC management has taken steps in recent years to 

strengthen its operations, recommendations from GAO’s prior work concerning how 

the corporation could improve its strategic workforce management and the benefit 

determination process have yet to be fully implemented. PBGC’s contract workers 

comprise about two-thirds of its workforce, yet GAO found that workforce management lacked a strategic approach for determining the mix of contract and Federal 

workers, and PBGC did not include procurement decisionmaking in corporate-level 

strategic planning. Also, GAO found that management of PBGC’s benefit determination process did not provide for separate reporting of performance measures for 

large, complex plans, yet these plans are responsible for most long delays in processing and most cases with overpayments. Measures that reflect averages across all 

plans do not provide sufficient incentive to improve the processing of these plans. 

The need for a more strategic approach in managing both the contract workforce 

and the benefit determination process is essential to ensure that PBGC is operating 

efficiently and effectively. 

Improvements to PBGC’s governance and strategic management cannot correct 

structural weaknesses in its financial design, but it can better position PBGC for 

the challenges that lie ahead. 

Mr. Chairman and members of the committee, I am pleased to be here today to 

discuss the need for improved governance and strategic management of the Pension 

Benefit Guaranty Corporation (PBGC). PBGC operates two pension insurance programs—the single-employer program and multiemployer program—that insure the 

pensions of 44 million private-sector workers and retirees in more than 27,000 defined benefit pension plans.1 With the growth in number of large plans under its 
31 

2Federal Government corporations are corporations owned or controlled by the Federal Government. 5 U.S.C. §103. In addition to PBGC, other examples of Federal Government corporations include the Federal Deposit Insurance Corporation and the Export-Import Bank of the 

United States. 3GAO, Pension Benefit Guaranty Corporation Single-Employer Insurance Program: Long-Term 

Vulnerabilities Warrant ‘‘High Risk’’ Designation, GAO–03–1050SP (Washington, DC: July 23, 

2003). 4GAO, High-Risk Series: An Update, GAO–9–271 (Washington, DC: January 2009). 5Pub. L. No. 93–406, 88 Stat. 829 (codified, as amended, at 29 U.S.C. §§1001–1461). 6 29 U.S.C. §1302(a)(2). 7 A single-employer plan is 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. 29 U.S.C. §1002(41). A multiemployer plan is a collectively bargained 

arrangement 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). 

8 29 U.S.C. §1305(c). 9 29 U.S.C. §1302(g)(2). 

trusteeship, PBGC’s responsibilities for administering plans and managing assets 

have increased significantly since its creation in 1974, and its financial portfolio is 

now one of the largest of any Federal Government corporation.2 While PBGC has 

sufficient assets to pay retirees promised benefits in the near future, PBGC has 

maintained an accumulated financial deficit for a number of years. In fact, we first 

designated PBGC’s largest insurance program—the single-employer program—as 

‘‘high risk’’ in 2003 due to PBGC’s prior-year net deficit, as well as the increased 

likelihood of large, underfunded pension plan terminations.3 Since that time, the 

single-employer program has remained high risk because of its continued deficit and 

the structural challenges that pose a risk for future losses. In 2009, we designated 

the multiemployer program as high risk as well.4 At the end of fiscal year 2010, PBGC’s deficit for both programs combined was approximately $23 billion. 

My statement will focus on steps PBGC could take to help meet the challenges 

of its unstable financial condition and increasing workloads. Specifically, I will discuss PBGC’s need for (1) a stronger board structure and (2) a more strategic approach to managing its contract workforce and benefit determination process. My 

statement is based on our prior work assessing PBGC’s long-term financial prospects, and various reports we have published over the past several years on PBGC 

governance and management. Our prior work was conducted 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 that the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives. 

BACKGROUND

PBGC was created by the Employee Retirement Income Security Act of 1974 

(ERISA) 5 to pay benefits to participants in private defined benefit pension plans in 

the event that an employer could not.6 PBGC may pay benefits up to specified 

limits, if a plan does not have sufficient assets to pay promised benefits and the 

sponsoring company is in financial distress. As of September 2010, PBGC was paying monthly retirement benefits to more than 800,000 retirees in about 4,200 terminated pension plans.7

PBGC receives no funds from general tax revenues. Instead, the corporation finances its activities from three main sources of funds: (1) insurance premiums in 

amounts set by Congress and paid by defined benefit plan sponsors, (2) assets acquired from plans that have been terminated and trusteed by PBGC, and (3) investment income earned on these assets. Under current law, the corporation has no substantial source of funds available to it if it were to exhaust its assets, except for 

the ability to borrow up to $100 million from the Department of the Treasury.8 The 

U.S. Government is not liable for any obligation or liability incurred by the corporation.9

PBGC’s deficit fluctuates due to various factors, including changes in interest 

rates, investment performance, and losses from completed and probable plan terminations. PBGC’s deficit improved during fiscal year 2008, but then worsened the 

next year with the severe market downturn. As of September 2010, PBGC held approximately $79.5 billion in assets and approximately $102.5 billion in liabilities— 

for an accumulated deficit of $23.0 billion, more than double the deficit from 2 years 

earlier (see fig. 1). This growth in its deficit was due largely to an increase in plan 

terminations and a decline in interest rates used to value PBGC’s liabilities. As a 
32 

10GAO, Private Pensions: Recent Experiences of Large Defined Benefit Plans Illustrate Weaknesses in Funding Rules, GAO–05–294 (Washington, DC: May 31, 2005). 11Funding requirements for employer plans are generally codified at 26 U.S.C. §§412, those 

specific to single-employer plans at 26 U.S.C. §430 and multiemployer plans at 26 U.S.C. § 431 

and 432. 12 29 U.S.C. §1306. The flat-rate premium is a per-participant premium that plans pay to PBGC each year. In 2009, the rate for the flat premium was $34 per participant in insured single-employer plans. For multiemployer plans the flat rate premium was $9 per participant. 13Pub. L. No.109–171, §8101, 120 Stat. 4, 181–83 (2006). The new temporary premium was 

not to apply to any plan terminated after December 2010. Congress recently provided temporary 

funding relief through the enactment of the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010, which allows plan sponsors to amortize funding gaps 

over a longer period of time than is currently allowed and provides funding relief for up to 2 

years. Pub. L. No. 111–192, §§201 and 202, 123 Stat. 1280, 1283–99. 

result of these plan terminations, PBGC became directly responsible for the pensions of more than 200,000 additional participants in fiscal year 2009, the third 

highest annual total of new participants in PBGC’s history. During this time, the 

corporation trusteed plans of companies such as Lehman Brothers, IndyMac Bank, 

Circuit City, Nortel, and Delphi Corporation. In addition, as of September 2010, 

PBGC estimated future losses from underfunded multiemployer plans that are unable to repay financial assistance provided by PBGC at about $3.0 billion—up from 

$1.8 billion 2 years earlier. 

PBGC currently has sufficient assets to make scheduled benefit payments for a 

number of years, given that benefits are paid monthly and spread over participants’ 

and beneficiaries’ lifetimes. However, in the long term, PBGC is likely to remain at 

financial risk due, in part, to several structural challenges that limit PBGC’s ability 

to manage its risk.10 For example, statutorily prescribed pension funding requirements specify how much a sponsor must contribute to its defined benefit plans each 

year.11 However, these funding rules are based on assumptions about future liabilities that may differ from a plan’s actual payouts of benefits over time. Similarly, 

PBGC’s premium structure is specified in law for both single- and multiemployer 

defined benefit plans.12 This structure limits the corporation’s ability to manage its 

financial risk because, unlike private insurers, PBGC cannot decline to provide insurance coverage or adjust premiums in response to actual or expected claims exposure. Meanwhile, PBGC’s premium base has been shrinking as the number of defined benefit pension plans and active plan participants has been declining rapidly. 

In fiscal year 2010, PBGC insured about half the number of plans it insured 15 

years earlier. 

Legislation enacted over the past 5 years has taken steps to address these concerns, but the extent to which these steps may reduce PBGC’s risk of future losses 

is still unknown. For example, the Deficit Reduction Act of 2005 included provisions 

to raise flat-rate premiums and create a new, temporary premium for certain terminated single-employer plans.13 In addition, the Pension Protection Act of 2006 
33 

14Pub. L. No. 109–280, §§101–221, 120 Stat. 780, 784–919. 15For further discussion of these provisions, such as ‘‘smoothing’’ and use of ‘‘credit balances,’’ 

see Patrick Purcell and Jennifer Staman, Summary of the Employee Retirement Income Security 

Act (ERISA), Congressional Research Service (Washington, DC, May 19, 2009). 16The Worker, Retiree, and Employer Recovery Act of 2008, Pub. L. No 110–455, 122. Stat. 

5036. It also provided multiemployer plans with temporary relief from PPA requirements by allowing plans to temporarily freeze their funded status at the previous year’s level. §204, 122. 

Stat. 5118–20. 17GAO–03–1050SP. 18GAO–09–271. 19 29 U.S.C. §1302(d). 20The board representatives hold the rank of assistant secretary or above. The organizational 

level of a PBGC board representative can vary depending upon whom each secretary selects. 

As part of recent bylaw revisions, the board of directors more clearly defined the roles and responsibilities of its members, representatives, and director. Bylaws of the Pension Benefit Guaranty Corporation. 73 Fed. Reg. 29,985 (May 23, 2008). For example, the new bylaws state that 

the board is responsible for establishing and overseeing the policies of the corporation. The new 

bylaws explicitly outline the board’s responsibilities, which include approval of policy matters 

significantly affecting the pension insurance program or its stakeholders, approval of the corporation’s investment policy, and review of certain management and Inspector General reports. 

29 CFR §4002.3(a)(3) (2009). In addition, the new bylaws explicitly define the role and responsibilities of the director and the corporation’s senior officer positions. 29 CFR §4002.9 (2009). 21 29 U.S.C. §1302(h). 22Matteo Tonello and Carolyn K. Brancato, Corporate Governance Handbook, 2007: Legal 

Standards and Board Practices, The Conference Board, Research Report R–1405–07–RR, (New 

York, New York 2007). 

(PPA) 14 included a number of provisions aimed at improving plan funding and 

PBGC finances through such measures as raising the funding targets defined benefit pension plans must meet, reducing the period over which sponsors can ‘‘smooth’’ 

reported plan assets and liabilities, and restricting sponsors’ ability to substitute 

‘‘credit balances’’ for cash contributions.15 However, in response to the recession, 

Congress enacted legislation in 2008 to help companies better weather the economic 

downturn by granting funding relief to certain sponsors and delaying implementation of certain PPA provisions.16 Thus, the overall impact of PPA remains unclear. 

PBGC’s insurance programs are in need of urgent congressional attention and 

agency action. We first designated the single-employer insurance program as ‘‘high 

risk’’ in 2003 after it moved from a $9.7 billion accumulated surplus in fiscal year 

2000 to a $3.6 billion accumulated deficit in fiscal year 2002.17 Since that time, the 

net financial position of PBGC has significantly worsened due, in part, to the declines in certain industries that led to PBGC having to assume responsibility for 

several large underfunded plans, and to the steep downturn in the financial markets. We added the high risk designation to the multiemployer program in 2009 in 

light of the increased risk of future losses in that program as well.18 As of September 2010, PBGC’s estimated financial deficit for both programs combined was 

$23.0 billion—more than double its deficit from 2 years earlier. 

PBGC’S BOARD STRUCTURE NEEDS STRENGTHENING

PBGC needs strong policy direction and oversight in the face of its current financial condition and long-term structural challenges, yet the board’s structure as established by law limits the board’s ability to provide such policy direction and oversight. ERISA specified that PBGC is to have a three-member board of directors consisting of the Secretaries of the Treasury, Commerce, and Labor. The Secretary of 

Labor serves as the Chairman of the Board.19 The board is required to direct and 

oversee the corporation, in part, by approving all policy decisions affecting American 

employers and workers as well as reviewing and approving its budget, strategic 

plans, and financial performance. Each board member can designate an official to 

serve on his or her behalf in most instances.20 This designee is referred to as the 

board member’s ‘‘representative.’’ In addition, ERISA established an Advisory Committee, whose seven members are appointed by the President to represent the interests of labor, employers, and the general public. The committee has an advisory role 

but has no statutory authority to set PBGC policy or conduct formal oversight.21

Our prior work has highlighted a number of limitations with this statutory governance structure, starting with the size and composition of the board. According 

to corporate governance guidelines published by The Conference Board,22 corporate 

boards should be structured so that the composition and skill set of a board is linked 

to the corporation’s particular challenges and strategic vision, and should include 

a mix of knowledge and expertise targeted to the needs of the corporation. We found 

that other government corporations’ boards averaged about 7 members, with one 

having as many as 15 (see table 1). None had a board as small as PBGC’s. In addi-
34 

23GAO, Pension Benefit Guaranty Corporation: Governance Structure Needs Improvement to 

Ensure Policy Direction and Oversight, GAO–07–808 (Washington, DC: July 2007). 

tion, the size of PBGC’s board also prevents the members from establishing standing oversight committees, which are commonly used by both government corporations and private corporate boards. For example, other government corporations, 

such as the Overseas Private Investment Corporation (OPIC) and the Federal Deposit Insurance Corporation have established standing committees to conduct oversight of certain functions, such as audits and case file reviews. 

Table 1.—Board Membership of Selected Government Corporations with a Similar Mission 

Government corporation Members Description of key provisions 

Commodity Credit Corporation; 15 U.S.C. 

§714g(a).

8 Board of directors consists of seven members, in addition to 

the Secretary, who are appointed by the President, with the 

advice and consent of the Senate. Board is subject to the 

general supervision and direction of the Secretary of Agriculture, who is an ex-officio member and chairperson. 

Export-Import Bank of the United States; 

12 U.S.C. §635a(c).

5 Board of directors consists of the bank’s president (as chairman), the bank’s first vice president (as vice chairman), 

and three others. All members of the board are appointed 

by the President with the advice and consent of the Senate 

and serve staggered 4-year terms. 

Federal Crop Insurance Corporation; 7 

U.S.C. §1505(a).

10 Board of directors consists of the manager of the corporation 

(serving as a nonvoting ex officio member), the Department 

of Agriculture under secretary responsible for crop insurance, an additional department under secretary, the department’s Chief Economist, and six private sector members appointed by and holding office at the pleasure of the Secretary of Agriculture (including one experienced in the crop 

insurance business, one experienced in reinsurance, and 

four active producers, who are policy holders, from different 

geographic areas and represent a cross-section of agricultural commodities). Board selects its own chair and private 

sector members serve staggered 4-year terms. 

Federal Deposit Insurance Corporation; 12 

U.S.C. §1812(a) –(c).

5 Board of directors consists of the Comptroller of the Currency, 

the Director of the Office of Thrift Supervision, and three 

citizens (including one with State bank supervisory experience) appointed by the President with the advice and consent of the Senate. Chairperson and vice chairperson are 

designated by the President with the advice and consent of 

the Senate. Each member appointed for 6-year term and, if 

vacancies occur, others are appointed only to complete unfinished terms. 

Overseas Private Investment Corporation; 

22 U.S.C. §2193(a) and (b).

15 Board of directors consists of eight members from the private 

sector and seven from the Federal Government. At least two 

of the private sector directors must be experienced in small 

business, one must represent organized labor, and another 

must have experience in cooperatives. Government members 

include the President of the Corporation, the Administrator 

of the Agency for International Development, the U.S. Trade 

Representative or Deputy U.S. Trade Representative, and 

four additional members who are principal government officers, including at least one from the Department of Labor. 

All members appointed by the President, with advice and 

consent of the Senate and serve staggered 3-year terms. 

Pension Benefit Guaranty Corporation; 29 

U.S.C §1302(d).

3 Board of directors consists of the Secretaries of Labor (as 

chairman), Commerce and the Treasury. 

Source: GAO Analysis of U.S. Code. 

PBGC’s governance structure is also vulnerable to disruptive transitions with 

each administration change. The board, its representatives, and the director typically change with each presidential transition, thus limiting the board’s institutional 

knowledge of the challenges facing the corporation.23 Other government corporations 

have board structures with staggered terms for their directors, which arguably avoid 

gaps in their organization’s institutional knowledge. For instance, OPIC’s directors 
35 

24 22 U.S.C. §2193. 25GAO, Pension Benefit Guaranty Corporation: Need for Improved Oversight Persists, GAO– 

0908–1062 (Washington, DC: September 2008) and GAO–07–808. 26 29 CFR §4002.3(a)(3)(ix) (2009). 27 29 CFR §4002.3(a)(2) (2009). 28 In some instances, government corporations’ advisory committees are subject to the Federal 

Advisory Committee Act, which defines how Federal advisory committees operate, including 

open meetings, chartering, public involvement, and reporting for such entities. Pub. L. No. 92– 

463, 86 Stat. 770 (1972) (codified as amended at 5 U.S.C. app. 2). According to PBGC officials, 

the corporation is exempt from the Federal Advisory Committee Act because of the proprietary 

nature of its work. 29GAO–07–808. 

may be appointed for a term of no more than 3 years, and the terms of no more 

than 3 of the 15 directors can expire in any given year.24

Our prior work has also found that PBGC’s board members often have limited 

time and resources to dedicate to PBGC matters given their numerous other responsibilities in their roles as cabinet secretaries.25 According to corporate governance 

guidelines, boards should meet regularly and focus principally on broader issues, 

such as corporate philosophy and mission, broad policy, strategic management, oversight and monitoring of management, and company performance against business 

plans. However, we found that since PBGC’s inception, the board has met infrequently, even when pressing strategic and operational issues were at play. In 2003, 

after several high-profile pension plan terminations, PBGC’s board began meeting 

twice a year (see fig. 2). But PBGC officials have told us that it is a challenge to 

find a time when all three cabinet secretaries are able to meet, and when they do 

meet, the meetings generally only last about an hour. The current board has recently begun to meet more frequently, meeting three times since February 2010. 

However, prior to that time, the board had not met since February 2008, despite 

pending terminations of several pension plans sponsored by large automakers and 

congressional investigations into certain procurement practices. 

Because PBGC’s board members have generally been unable to dedicate consistent attention to PBGC, they have relied on their board representatives to conduct much of the work on their behalf. The board also relies on PBGC’s Inspector 

General and management oversight committees to ensure that PBGC is operating 

effectively. However, we have found that communications between these entities 

and the board may be limited and the board may not always be sufficiently aware 

of PBGC’s activities. For example, PBGC’s bylaws require the board to review any 

reports that the Inspector General deems appropriate,26 and the Inspector General 

reports to the board through the Chair.27 However, there is no formal protocol requiring the Inspector General to routinely meet with the board of directors or their 

representatives. Moreover, PBGC’s oversight committees are not independent of the 

PBGC director nor required to formally report all matters to the board. Under this 

structure, it remains unclear if the board members would be aware of the Inspector’s General findings or of significant actions taken by PBGC management. 

We have also noted that the PBGC Advisory Committee does not have formal access to the board members, potentially limiting the board members’ knowledge of 

the committees’ concerns and recommendations. PBGC’s Advisory Committee typically reports only to the director, although officials said that the committee can submit concerns to the board if it believes it is warranted. In contrast, the advisory 

boards or committees of other government corporations—such as the Federal Deposit Insurance Corporation and Export-Import Bank—are required to submit formal reports to their board chair and directors.28

To address these weaknesses in PBGC’s governance structure, we believe that 

Congress should consider expanding the board of directors to include additional 

members with diverse backgrounds who possess knowledge and expertise useful to 

PBGC’s mission.29 PBGC hired a consulting firm to review governance models and 

provide a background report to assist the board in its review of alternative corporate 
36 

30For example, the Pension Benefit Guaranty Corporation Governance Improvement Act of 

2009, S. 1544, proposes amending ERISA with respect to the composition of the PBGC board 

of directors, among other changes. 31GAO, Pension Benefit Guaranty Corporation: Contracting Management Needs Improvement, 

GAO/HEHS–00–130 (Washington, DC: Oct. 18, 2000). 32GAO, Pension Benefit Guaranty Corporation: A More Strategic Approach Could Improve 

Human Capital Management, GAO–08–624 (Washington, DC: June 2008). 

governance structures. While the report did not advocate any particular governance 

option, the consulting firm’s final report corroborated our findings and described the 

advantages and disadvantages of governance practices of other government corporations and selected private sector companies. The report concluded that there are 

several viable alternatives for strengthening PBGC’s governance structure and practices, some of which are now being put forth in pending legislation.30

PBGC NEEDS MORE STRATEGIC MANAGEMENT OF ITS CONTRACT WORKFORCE AND

BENEFIT DETERMINATION PROCESS

Contract Workforce Management 

Although PBGC management has taken steps in recent years to strengthen its 

operations, our prior work has identified ways that the corporation could be more 

strategic in its management of its contract workforce and the benefit determination 

process. The need for a strategic approach in these areas is essential to ensure that 

PBGC is operating as efficiently and effectively as possible to manage its increasing 

workload. 

Since the mid-1980s, PBGC has had contracts covering a wide range of services, 

including the administration of terminated plans, payment of benefits, customer 

communication, legal assistance, document management, and information technology. As PBGC’s workload grew in response to the significant number of large 

pension plan terminations, PBGC has come to rely on contractors to supplement its 

workforce. About two-thirds of PBGC’s workforce consists of contract workers (see 

Fig. 3). 

Over the years, PBGC has taken steps to improve its workforce management. For 

example, in response to a recommendation we made in 2000, PBGC agreed to conduct a comprehensive review of its future human capital needs and to use this review to better link contracting decisions to PBGC’s long-term strategic planning 

process.31 After commissioning this review, PBGC developed a human capital strategic plan that called for aligning human capital programs with the corporations’ 

strategic goals and mission. However, in 2008, we found that the corporation still 

lacked a strategic approach to identifying the optimal mix of Federal versus contract 

workers and ensuring that the performance of its contract workforce contributes to 

the corporation’s mission. 

As a matter of general best practice, our 2008 work noted that a strategic plan 

should incorporate an understanding of how acquisitions will be used to assist an 

agency in achieving its mission.32 This is especially true of PBGC with its large contract workforce. Yet, our 2008 work found that although PBGC had made efforts to 

improve its acquisition infrastructure, it had not developed a strategic approach to 

its contracting process as envisioned in our 2000 report. Moreover, PBGC’s human 

capital strategic plan focused almost exclusively on its Federal workforce. We rec-
37 

33When single-employer plans are terminated without sufficient assets to pay all promised 

benefits, PBGC guarantees participants’ benefits only up to certain limits, specified under 

ERISA and related regulations. These limits on guaranteed benefits are commonly referred to 

as the maximum limit, the phase-in limit, and the accrued-at-normal limit. 29 U.S.C. 

§1322(b)(1), (3) and (7); 29 CFR §§4022.21, 4022.23, and 4022.25 (2009). 34GAO, Pension Benefit Guaranty Corporation: More Strategic Approach Needed for Processing 

Complex Plans Prone to Delays and Overpayments, GAO–09–716 (Washington, DC: Aug. 17, 

2009). 

ommended that the plan do more to reflect the importance of contracting and to link 

staffing and contracting decisions at the corporate level. While PBGC agreed that 

contracting should be part of its strategic planning process, it maintained that this 

is already being achieved by its current process. 

Since our 2008 report, PBGC has implemented new guidance and policies in a 

number of areas to improve its management of the contracting process and contractor oversight. In August 2009, PBGC issued guidelines for determining whether 

to use contractors or government employees. While useful, these procedures do not 

include any specific steps to ensure that such decisions are linked to the strategic 

planning process. Subsequently, PBGC issued its new human capital strategic plan 

for fiscal years 2010–14. In this plan, PBGC acknowledges the importance of contracting and the challenges of balancing their workforce between Federal and contract workers, but the plan does not provide specific actions to address such challenges and appears to continue to focus primarily on PBGC’s Federal workers. 

Our previous reports also found weaknesses in PBGC’s efforts to ensure that the 

performance of its contract workforce contributes to the corporation’s mission. In 

2000, and again in 2008, we found that most of PBGC’s contracts lacked performance incentives and methods to hold contractors accountable for performance outcomes linked to the corporation’s strategic goals. In 2000, we recommended that, 

where appropriate, PBGC should utilize more fixed-price contracts and fewer laborhour payment arrangements, consistent with best practices in performance-based 

contracting. In 2008, we recommended that to improve implementation of a performance-based approach to contracting, PBGC should ensure that future contracts 

measure performance in terms of outcomes, provide incentives for the accomplishment of desired outcomes, and ensure payment of award fees only for excellent performance. We also recommended that PBGC should provide comprehensive training 

on performance-based contracting for PBGC’s procurement staff, managers, and acquisition-related workforce. 

PBGC agreed with our previous recommendations to enhance implementation of 

performance-based contracting, and stated that the actions recommended were already under way, including: incorporating performance-based measures into its future contracts and providing comprehensive training for PBGC staff. Further, PBGC 

noted that the use of labor-hour contracts had been restricted. However, the move 

to performance-based contracting has been difficult. For example, officials attempted 

to use performance-based contracts when making new awards for contracts with the 

field benefit administration offices, but these efforts were abandoned because, according to PBGC officials, the proposals were too complicated to evaluate and more 

costly than expected. We are examining these issues in a study currently under way 

to assess how well PBGC is managing its contracting activities and the steps it is 

taking to ensure the integrity of its contract process. We anticipate completing this 

work next summer. 

Although we commend PBGC for its improvements to contract management, we 

continue to believe that more should be done to include procurement decisionmaking 

in corporate-level strategic planning and to link contractor performance measures 

with the corporation’s mission. Without a more inclusive strategic planning process 

that looks at the contract workforce and Federal workforce together, PBGC cannot 

be assured that it has the optimal mix of contractor staff and Federal employees 

and that it is holding its contract workforce accountable for helping meet its strategic goals. 

Benefit Determination Process Management 

Finally, our prior work has also found that PBGC needs a more strategic approach for determining the benefits for participants in large, complex plans that 

have been terminated. In our August 2009 report, we reviewed plans terminated 

with insufficient funds and trusteed by PBGC during fiscal years 2000 through 

2008. We found that a small number of complex plans—especially those with large 

numbers of participants affected by limits on guaranteed benefit amounts33—ac- counted for most cases with lengthy delays and overpayments.34 For example, 

PBGC completed most participants’ benefit determinations in less than 3 years, but 

required more time—up to 9 years—to process determinations for complex plans and 
38 

35 If the participant is already retired, or retires before the benefit determination process is 

complete, PBGC makes payments to the retiree based on an estimate of the final benefit 

amount. However, lack of certainty about their final benefit amounts can make it difficult for 

retirees to plan for retirement. 36 If a retiree receives an estimated benefit amount that is greater than the final benefit 

amount, then the retiree is likely to have received an overpayment which must be repaid. 

plans with missing data.35 In addition, while only a small percentage of participants 

receive overpayments of their estimated benefits while their final benefit amounts 

are being determined, we found that nearly two-thirds of cases with overpayments 

involved participants in just 10 large, complex plans.36

Given these findings, we recommended that PBGC develop a better strategy for 

processing benefit determinations for complex plans in order to reduce delays and 

minimize overpayments, and that PBGC set goals for timeliness and monitor the 

progress made in finalizing benefit determinations for large, complex plans separately from other plans. In response, PBGC has taken a number of steps to improve 

its procedures for communicating with participants in large, complex plans and to 

reduce overpayments. In addition, officials indicated that formal process improvement efforts were under way to tailor plan processing to plan size and streamline 

other aspects of work in an effort to reduce process times in the future. At the same 

time, officials noted that they had no plans to set any performance goals separately 

for large, complex plans as a group. Due to the complexities and variations with 

each of these plans, PBGC prefers to set schedules only on an individual plan basis. 

However, we continue to believe that reporting performance measures that reflect 

averages across all plans does not provide adequate weight to large versus small 

plans and does not provide sufficient incentive to improve the processing times for 

large, complex plans. 

CONCLUDING OBSERVATIONS

In these challenging economic times, PBGC has become even more essential as 

millions of American workers and retirees have come to rely on the corporation for 

protection of their retirement income. PBGC is now one of the largest Federal Government corporations with nearly $80 billion in assets, yet it continues to face a future of financial instability. Its premium base has been eroding over time as fewer 

sponsors are paying premiums for fewer participants. In addition, as a result of the 

recession, PBGC is still at risk from the increased underfunding of some large defined benefit plans. To the extent that companies are more at risk of bankruptcy, 

the plans that they sponsor are more at risk of termination. The fact that PBGC’s 

board of directors has only recently begun to meet to discuss these problems is less 

than reassuring. Moreover, even with the increased attentiveness of the current 

board, the lack of staggered terms for board membership means that consistency in 

both policy direction and oversight is not guaranteed in the future. PBGC needs a 

board that can offer long-term, strategic sophistication to keep the corporation as 

solvent as possible for as long as possible. 

Improvements to PBGC’s governance and to its strategic management cannot correct the structural weaknesses of its financial design, but it can put PBGC in a better position to confront the challenges that lie ahead. It is untenable to rest the 

management of nearly $80 billion in assets on a corporate board architecture that 

can fail to meet and provide strategic direction for years at a time, and that is vulnerable to a lack of leadership during transitions to new administrations. Companies that pay annual premiums to PBGC and the millions of employees whose retirement benefits are under PBGC’s protection are owed greater stewardship of the 

corporation and its funds. 

Chairman Harkin and members of the committee, this concludes my prepared 

statement. I would be happy to respond to any questions. 

The CHAIRMAN. Thank you very much, Ms. Bovbjerg. Now we 

turn to Ms. Batts. Welcome. Please proceed. 

STATEMENT OF REBECCA ANNE BATTS, INSPECTOR GENERAL, PENSION BENEFIT GUARANTY CORPORATION (PBGC), 

WASHINGTON, DC 

Ms. BATTS. Thank you. I’m Rebecca Anne Batts, and I’m the Inspector General of Pension Benefit Guaranty Corporation, Office of 

the Inspector General. 
39 

I appreciate the opportunity to testify today about the need for 

strong management and oversight in the Pension Benefit Guaranty 

Corporation. 

The Office of Inspector General has been working diligently to 

address the issues most critical to ensuring that the corporation is 

meeting its mission and can continue to meet its mission into the 

future. 

Many of our recent reports have been quite critical of the corporation, and in some cases, years of effort will be needed to correct 

persistent problems. But, despite the many challenges that PBGC 

continues to face, my message today is one of good news. 

Director Gotbaum and I communicate with one another frequently, and I believe effectively. My office holds monthly discussions of critical issues with the representatives of PBGC’s board 

members; and OIG benefits from the resulting support. 

After meetings with the board of directors, I sit in executive sessions with the board members to address areas of particular concern or sensitivity. 

I’m happy to report that PBGC is taking many of our reported 

concerns very seriously, and implementing corrective actions. 

For example, last spring my office reported issues with PBGC’s 

privacy program. By law, the corporation has an affirmative responsibility to protect the confidentiality, integrity and availability 

of personally identifiable information—names and social security 

numbers. 

PBGC took prompt, corrective action, going above and beyond 

what OIG recommended, with the goal of becoming a model for 

handling sensitive information; and as a result of these prompt actions, the corporation is better positioned to protect the personally 

identifiable information of the workers it serves. 

While progress has been made, much remains to be done. The 

corporation has committed to addressing long-standing issues, including weaknesses in contracting and information technology security; the two weaknesses that you’ve heard about over and over 

today. 

PBGC depends on its contractors to protect the pensions of the 

American workers, historically, almost two out of every three people doing the work of PBGC contractors; and additionally, the corporation spends about two-thirds of its annual operating budget 

through contracts. 

Our work has shown that PBGC’s contractors don’t always deliver goods and services as they should. Allowing a contractor to 

provide a deliverable at a lesser quality than is called for in a contract, constitutes a form of waste or abuse, if not outright fraud. 

PBGC has recently promised to take specific actions to address 

long-standing problems with the integrity and effectiveness of its 

contracting processes. For example, when my office recently found 

that a PBGC contractor didn’t exercise due professional care in performing audits of plan assets, and of participant information, the 

corporation committed to hiring a CPA firm to re-perform the work 

related to two of the largest single-employer programs claims in 

PBGC’s history. 

Further, the corporation is developing a plan for how contractor 

work will be monitored, evaluated, and accepted in the future. 
40 

In response to our recommendations in several different audits, 

PBGC developed a set of standard operating procedures to guide 

procurement activities and establish basic eternal controls over the 

contracting process. 

The corporation has committed to a series of reviews of the staff 

who provide the day-to-day monitoring and supervision of PBGC’s 

contractors with the objective of ensuring compliance with the 

newly-implemented policies and internal controls. 

PBGC also depends on its computers. Almost every aspect of 

PBGC is automated, from the initial operations and the Early 

Warning Program through the payment of benefit checks to 

PBGC’s retirees. If PBGC can’t use its computer, the corporation 

simply can’t do its job. 

My office has identified issues with PBGC’s information technology practices that we believe pose an increasing and substantial 

risk to PBGC’s ability to carry out its mission. 

The corporation has developed corrective action plans to deal 

with identified weaknesses, and acknowledges that the planned actions won’t be completed for 3 to 5 years. OIG is closely monitoring 

the implementation of PBGC’s plans. 

You may have noticed something important about the theme of 

my testimony today. Much of my discussion has focused on the future, plans for corrective action and what PBGC promises to do to 

correct long-standing ills. 

PBGC leadership, and all those that have oversight responsibility 

for the corporation, should make certain that PBGC is effective in 

executing planned corrective actions. 

Mr. Chairman, that concludes my remarks, and I’d be happy to 

take any questions. 

[The prepared statement of Ms. Batts follows:] 

PREPARED STATEMENT OF REBECCA ANNE BATTS

SUMMARY

My testimony today is essentially ‘‘good news’’ testimony. In some areas, focused 

attention by PBGC leadership has already resulted in effective corrective action. For 

example, during the past year: 

• PBGC implemented OIG’s specific recommendations to enhance privacy processes and also made additional improvements with the stated goal of making PBGC 

a model for handling of sensitive information. 

• PBGC initiated actions to protect the PBGC’s securities on loan to other investors, including developing a method to validate revenues from securities lending to 

eliminate reliance on the custodian bank, and developing internal controls to better 

monitor the program. 

In other areas, much remains to be done and full implementation of corrective action may take years. 

• Sustained management attention and oversight will be needed if PBGC is to 

fully implement its current plans to improve the effectiveness and integrity of its 

contracting practices. 

• While PBGC has developed corrective action plans to address serious weaknesses in information technology security, execution of the plans is scheduled to 

take between 3 and 5 years and many critical details have yet to be developed. During the interim, careful review by those with oversight responsibility for PBGC will 

be needed to ensure that the PBGC’s plans stay on track to completion. 

• Though the future is difficult to predict, the possibility that an increased number of plans and participants will be trusteed by PBGC is very real. Therefore, OIG 

concluded that PBGC should prepare strategically for the possibility of a workload 

surge. 
41 

CONCLUSION

We recognize PBGC’s progress in addressing numerous high priority areas and 

support its efforts to address our related recommendations. Considering the organization-wide impact of the information technology security issues and the weaknesses 

in contracting practices, PBGC leadership and those with oversight responsibility 

should target their oversight efforts on the effective execution of the corrective action plans that have been developed. Additionally, for critical weaknesses that cannot be addressed in the near future, interim measures should be developed and 

adopted to minimize the associated risks. OIG will continue our monitoring activities until PBGC demonstrates that it has been fully responsive to our recommendations. In addition, we plan future audit work in the areas of highest risk to validate 

the effectiveness of PBGC corrective actions. 

Chairman Harkin, Ranking Member Enzi, and members of the committee, thank 

you for inviting me here today to discuss the Pension Benefit Guaranty Corporation’s (PBGC) oversight and management of its Single and Multi-employer Pension 

Insurance programs. PBGC protects the pensions of approximately 44 million workers and retirees in more than 27,500 private-defined benefit pension plans. Under 

Title IV of the Employee Retirement Income Security Act of 1974, PBGC insures, 

subject to statutory limits, pension benefits of participants in covered private defined benefit pension plans. To accomplish its mission, PBGC relies extensively on 

the use of contractors and on information technology. Internal controls over these 

operations are essential to ensure the confidentiality, integrity, and availability of 

critical data while reducing the risk of errors, fraud, and other illegal acts. 

BACKGROUND

PBGC receives no funds from general tax revenues; instead PBGC is financed by 

insurance premiums paid by companies that sponsor defined benefit pension plans, 

investment income and assets from terminated plans. PBGC has been in a deficit 

position (where current and future commitments to participants exceed resources) 

for a number of years. Inadequate minimum contributions, inadequate insurance 

premiums, employer shift from defined benefit pension plans to defined contribution 

pension plans and insufficient funding of terminated plans are factors contributing 

to the deficit. Between the end of fiscal years 2008 and 2009, the deficit in PBGC’s 

single-employer insurance program doubled in size from $10.7 billion to $21.1 billion. In fiscal year 2010, the single-employer program’s net position declined by $.52 

billion, increasing the program’s deficit to $21.59 billion. 

PBGC currently pays monthly retirement benefits to over 800,000 retirees in 

4,150 plans. Including those who have not yet retired and participants in multiemployer plans receiving financial assistance, PBGC is responsible for the current and 

future pensions of more than 1.4 million people. 

THE PBGC OFFICE OF INSPECTOR GENERAL

The PBGC Office of Inspector General provides an independent and objective 

voice that helps the Congress, the Board of Directors, and PBGC protect the pension 

benefits of American workers. Like all Federal Offices of Inspector General, the 

PBGC Office of Inspector General is charged with providing leadership and recommending policies and activities designed to prevent and detect fraud, waste, abuse, 

and mismanagement; conducting and supervising independent audits and investigations; and recommending policies to promote sound economy, efficiency, and effectiveness. As Inspector General, I report directly to the PBGC Board of Directors, 

through the PBGC Board Chair; this reporting relationship has supported OIG’s 

ability to audit and investigate the aspects of PBGC operations that pose the highest risks for fraud, waste, abuse, and mismanagement. 

During the past 2 years, my office has conducted numerous independent audits 

and investigations pertaining to agency programs and operations, resulting in significant improvements and changes that ultimately serve to protect America’s pensions. Many of the reports have been quite critical of PBGC, in some instances placing significant stress on the relationship between the Office of Inspector General 

and the Corporation. Nevertheless, the PBGC Board of Directors and PBGC have 

responded appropriately and professionally to implement many of the improvements 

recommended by the Office of Inspector General. 

Our ongoing audit work addresses some of the most critical issues facing PBGC. 

We are in the process of applying for law enforcement authority and have begun 

the process of enhancing the nature and sophistication of the investigations we con-
42 

duct. Recent cases accepted by U.S. Attorney’s Offices include significant issues such 

as complex multi-employer pension plan fraud. We are performing some of our investigations in concert with other agencies, including the Department of Labor OIG 

Office of Labor Racketeering and Fraud, and other Federal, State, and local law enforcement agencies. 

Over the last 5 years, we have issued 52 reports addressing PBGC’s oversight of 

its programs and made 359 recommendations for improvement or recovery of questioned costs. Although PBGC has responded positively to many of our recommendations, 176 recommendations, contained in 40 different reports, remain open as of 

today. 

THE STATUS OF PBGC ACTIONS TO IMPLEMENT OIG RECOMMENDATIONS

The following are examples of some of PBGC’s recent accomplishments in responding to OIG recommendations, as well as areas where additional oversight and 

management attention are needed. 

PBGC Took Action to Protect Sensitive and Personally Identifiable Information 

Last spring my office reported concerns with PBGC’s privacy program. By law, 

PBGC has an affirmative responsibility to protect the confidentiality, integrity, and 

availability of personally identifiable information. PBGC’s mission requires the collection, storage and transmittal of a great deal of personally identifiable information, such as the names, social security numbers, and earning histories of workers 

in trusteed plans. In March 2010, we reported that PBGC’s Privacy Office did not 

properly monitor its privacy processes for quality and compliance. Further, PBGC’s 

process for reporting personally identifiable information events was inaccurate and 

unverifiable. Technical controls (e.g., encryption of laptop computers) required 

strengthening. 

To their credit, the Corporation took immediate measures to begin addressing reported concerns. Some actions directly addressed OIG’s recommendations; for example, specific guidance and procedures were developed for privacy staff to follow in 

reporting to the U.S. Computer Emergency Readiness Team (US-CERT) security incidents involving the disclosure of personally identifiable information. PBGC’s actions went well beyond the specific recommendations included in OIG’s report. 

PBGC re-examined its privacy program with the stated intention of making PBGC 

a model for handling sensitive information and surveyed other Federal agencies to 

identify best practices. The Privacy Office then developed and implemented key 

guidance, including detailed record keeping instructions and a requirement that all 

incidents involving personally identifiable information be reported to US-CERT 

within 1 hour of discovery. The guidance was widely disseminated via e-mail to all 

PBGC employees and contractors with PBGC e-mail accounts, as well as to the contract service providers that handle or access personally identifiable information at 

contractor facilities. PBGC followed up by giving in-person training on privacy protection standards and reporting requirements to those PBGC employees and contractors (e.g., staff at Field Benefit Administration sites) who frequently handle sensitive information. 

Earlier this fall, we reviewed PBGC’s corrective actions related to PBGC’s privacy 

program. Our testing showed that our recommendations in this important area had 

been effectively implemented. The Corporation’s positive reaction to OIG’s findings 

increased the likelihood that PBGC will be able to properly protect the personally 

identifiable information and other sensitive data with which it has been entrusted. 

PBGC Initiated Actions to Protect its Securities on Loan to Other Investors 

Securities lending is a small but important component of PBGC’s overall investment program and is intended to obtain incremental investment return. As of September 30, 2010, PBGC had about $21 billion in securities available for lending; of 

this amount, about $5.7 billion in securities was actually on loan. OIG’s review of 

PBGC’s Securities Lending Program disclosed the general absence of written guidance at all levels and little documentation of the procedures used to implement, 

monitor, and oversee the program. Further, we reported that PBGC was unable to 

independently validate that the gross and net revenues earned through the program 

were correctly calculated by the bank with custody of PBGC’s loaned assets. Upon 

issuance of our report, representatives of the PBGC Board of Directors and PBGC 

leadership responded promptly and corrective actions were initiated. 

PBGC is making progress in the implementation of the 16 recommendations included in OIG’s report. For example, PBGC has developed and is testing a method 

to validate the amount of revenue earned through securities lending. That is, PBGC 

will soon be capable of ‘‘checking’’ the calculations of its custodian to ensure the Corporation receives the full amount of earnings to which it is entitled. Reducing 
43 

PBGC’s dependence on the custodial bank is an important step. Further, PBGC is 

in the process of implementing a number of internal controls intended to provide 

effective oversight and monitoring of the securities lending program. OIG continues 

to work diligently to support PBGC in its ongoing efforts to develop needed controls 

over this complex investment practice. 

At the time of our review, written policies regarding the securities lending program were virtually non-existent. PBGC has begun the arduous process of drafting 

written policy guidance regarding the establishment, investment objectives, risk tolerance, and measurement standards and operations of the securities lending program. We have worked closely with PBGC, reviewing several iterations of PBGC’s 

draft documents and offering suggestions and edits. Because the PBGC Board has 

the authority and responsibility for establishing and overseeing the investment policy and its implementation, the securities lending guidelines proposed in our report 

should be submitted to the Board and Board Representatives for review. Our recommendations for guidance will not be considered complete until this has been 

done. 

PBGC is Working Toward Protection of the Corporation’s Ability to Carry Out its 

Mission Through the use of Information Technology 

OIG has focused much of its recent audit work on the serious weaknesses in 

PBGC’s information technology practices that pose increasing and substantial risks 

to PBGC’s ability to carry out its mission. For the past 2 years, PBGC’s annual financial statement audit included an adverse opinion on internal control, based in 

part on systemic information technology security control weaknesses. A report on 

PBGC compliance with the Federal Information Security Management Act described 

PBGC’s information systems as ‘‘a series of stovepipe solutions built upon unplanned and poorly integrated heterogeneous technologies with varying levels of obsolescence.’’ 

The operations of PBGC are heavily dependent on information technology. During 

the summer of 2008, shortly after I became Inspector General at PBGC, I learned 

that PBGC frequently dismissed OIG’s concerns about information security. The 

auditors and investigators in my office worked hard to demonstrate the need to enhance attention to this crucial area. In the fall of 2009, we gave PBGC senior leadership a restricted disclosure presentation on the results of penetration testing conducted to discover weaknesses and to exploit discovered vulnerabilities. After our 

presentation, new leadership was assigned to enhance PBGC’s security posture and 

to develop a long-term corrective action plan to address long-standing issues. Importantly, PBGC committed to build and manage security controls to an appropriate 

National Institute of Standards and Technology (NIST) standard. Further, PBGC 

made the decision to enter into an interagency agreement with the Bureau of Public 

Debt to leverage its expertise in security control. PBGC is beginning to actively address serious information technology issues and the substantial risks they pose for 

PBGC’s ability to carry out its mission. 

The Corporation has embarked on a coherent approach to resolving and correcting 

fundamental information technology weaknesses. PBGC has developed and is implementing multi-year corrective action plans to address security issues at the root 

cause level. The corrective action plans are an important first step that reflects the 

priority that PBGC leadership places on this critical issue. However, PBGC’s realistic assessment is that a timeframe of between 3 and 5 years is needed to achieve 

the objectives of the PBGC’s plans. According to PBGC’s schedule, corrective action 

for many of OIG’s recommendations will not be complete until 2015. 

Current PBGC leadership has been straightforward in acknowledging the challenges it faces in revitalizing PBGC’s information technology processes. Implementing the corrective action plans will be difficult and time-consuming. Some of 

PBGC’s challenges, like the continuous stream of new and ever-changing Federal requirements, are shared by all Federal entities. Others are unique to PBGC. For example, PBGC still has an acting Chief Information Officer, PBGC system security 

expertise is still maturing, and trust-building is still a work-in-process for the office 

that manages PBGC’s information technology. Strong leadership and effective, persistent oversight, from within the organization as well as from the outside, will be 

needed if PBGC is to ensure the security of the information technology systems that 

support the PBGC mission. 

PBGC Must Ensure the Integrity of the Contracting Process 

PBGC relies heavily on the services of contractors to carry out its operations, a 

factor that makes procurement and contracting a significant PBGC activity. PBGC 

reports spending about two-thirds of its annual operating budget through contracts. 

Historically, nearly two of every three people who do the work of PBGC are contract 
44 

employees, as shown by the following table. Thus, ensuring that contractors provide 

the goods and services for which they are paid is critical to PBGC’s ability to meet 

its mission. 

OIG continues to devote a significant portion of its resources to audits, investigations, and reviews of PBGC’s procurement and contracting activities. Forty-three 

open audit recommendations relate to PBGC’s contracting practices; some have remained open for more than 5 years without effective resolution. Many of the most 

critical issues we are currently addressing have been caused or exacerbated by poor 

contract management. Our ongoing monitoring also shows a continued need for close 

management attention in this area. 

While PBGC places tremendous reliance on its contractors, the Corporation has 

experienced serious and costly problems with the quality and utility of some of the 

contract deliverables for which it paid. Many of these issues could have been avoided through effective contract management, including careful contract monitoring, acceptance of deliverables and evaluation of contractor performance. PBGC senior 

leadership also needs to reinforce the idea that allowing a contractor to provide a 

deliverable of a lesser quality than called for in a contract constitutes a form of 

waste or abuse, if not outright fraud. 

PBGC has recently committed to taking a number of important actions to improve 

the effectiveness of its contracting activities. For example: 

• Our on-going reviews of two of the largest Single Employer program claims in 

PBGC’s history show that a PBGC contractor did not exercise due professional care 

in performing audits of plan assets and of plan participant information. PBGC’s 

oversight of the contractor was ineffective in identifying obvious and material errors 

and omissions in the work. To its credit, PBGC leadership is taking action to address the issues, including: (1) contracting for a Certified Public Accounting (CPA) 

firm to re-perform the work related to these two plan sponsors’ pension plans; (2) 

developing a plan for how contractor work will be monitored, evaluated, and accepted; and (3) reviewing plan asset evaluations completed over the last 2 years, with 

the objective of using identified deficiencies to train reviewers and staff and to update procedures. 

• In response to our audit recommendations, PBGC developed a set of Standard 

Operating Procedures (SOP) to guide procurement activities and establish basic internal controls over the contracting process. Based on our review of the document, 

the SOPs form a useful ‘‘first step’’ toward improving procurement effectiveness. 

However, PBGC leadership needs to develop a method to determine the degree to 

which those with responsibility for contracting are complying with the new procedures and to make any necessary corrections or adjustments as needed. 
45 

• During the course of a recent evaluation, we became aware of a reduction in 

the minimum qualifications for contract staff at some of PBGC’s remote sites. There 

was no indication that PBGC sought reduced rates when staff with lesser qualifications were provided or that PBGC confirmed the contractors’ assertions that fully 

qualified staff could not be retained. Based on our discussions with PBGC management, the Corporation solicited a contractor to provide a thorough and objective assessment of PBGC practices associated with the acquisition, planning and contract 

administration for the remote site contracts. The resulting report, issued on October 

29, 2010, confirmed our initial observations and made 14 recommendations for improvement in PBGC’s contract modification process. PBGC leadership has committed to implementing the report’s recommendations. 

• OIG has repeatedly expressed the need for PBGC to be more vigilant about the 

integrity and effectiveness of its contracting processes. A special team led by the 

Chief Financial Officer and the General Counsel was established to assist the Procurement Department in responding to open audit recommendations and in enhancing PBGC’s ability to contract effectively and in compliance with relevant guidance. 

As a result, many long-standing recommendations have been closed and others are 

nearing completion. Additionally, plans have been made to review the actions of the 

contracting officer’s technical representatives and the technical monitors who provide day-to-day monitoring and supervision of PBGC’s contractors. PBGC leadership 

should ensure that these reviews are carried out carefully and that necessary corrective actions are taken if the reviews show a lack of compliance with established contracting practices. 

PBGC Should Prepare Strategically for the Possibility of a Workload Surge 

In response to a request from the Chairman of the Senate Special Committee on 

Aging, OIG reviewed PBGC’s planning efforts to strategically prepare for the potential influx of pension plans. In our report, issued last month, we explained our conclusion that PBGC needs to develop specific strategies and tactics to be used in the 

event of a serious workload surge. 

The recent global economic downturn caused financial hardships for many businesses in a number of different sectors, which directly impact PBGC’s operations 

and forecasting. The risk of numerous pension plans simultaneously terminating 

could cause a domino effect requiring PBGC to assume a large number of participants in a short period of time. Conversely, if the economy is strong, PBGC may 

only assume 20,000 or 40,000 participants in a given year (see the chart below). 

The number of plans that PBGC assumes on a year-to-year basis fluctuates based 

on numerous factors, mainly the economic strength of the country. PBGC experienced an influx of pension plans from fiscal year 2002–5, when PBGC became responsible for paying more than 700,000 participants from plans that were terminated and trusteed, primarily from the airline and steel industries (see the next 

chart). PBGC is experiencing one of the busiest periods in its history. In fiscal year 

2009, PBGC terminated and trusteed 129 plans with more than 200,000 partici-
46 

pants. During fiscal year 2010, PBGC assumed responsibility for 99,000 additional 

workers and retirees in 163 failed plans. 

The Government Accountability Office lists PBGC on its High Risk list, in part, 

because PBGC continues to be ‘‘exposed to the threat of terminations of large underfunded pension plans sponsored by financially weak firms.’’ PBGC acknowledged in 

its fiscal year 2010 Annual Report issued last month that no reasonable estimate 

could be made of 2011 terminations. 

The future is difficult to predict. The uncertainty about 2011 termination, when 

considered together with the exposure noted by GAO, provides sufficient reason for 

PBGC to expand and enhance its planning for possible workload surges. 

To date, the Corporation has generally kept its planning activities simplistic and 

linear. PBGC executive leadership explained their belief that a ‘‘playbook’’ approach, 

explicitly detailing the steps to be taken, was impractical. To their view, because 

a workload surge could take many varied and unpredictable forms, the only practical option was reliance on the Corporation’s ability to develop and implement an 

‘‘ad hoc’’ approach, in the event that a workload surge materialized. Based on our 

review, we identified a number of specific activities the Corporation could take to 

enhance its readiness in the event of a workload surge. These activities could be 

best implemented as part of an overall strategic plan, an approach that we consider 

to be a best practice. However, even in the absence of a comprehensive Workload 

Surge Strategy Plan, implementing the recommendations in our report would help 

position the Corporation to deal with a significant workload surge. 

The Chief Operating Officer responded to our report, noting PBGC’s conclusion 

that the risk of a large influx of plans is much lower now than anticipated in fiscal 

year 2009. Further, his response stated management’s belief that the resources 

needed to address the report’s recommendations would be better used in other higher priority areas. Accordingly, instead of implementing OIG’s recommendations as 

written, PBGC proposed the creation of a Large Influx Working Group (LIWG) Planning Document as a basis for alternative actions to address the recommendations. 

We will need to review the planning document PBGC proposes to draft before we 

can determine whether PBGC’s proposed approach adequately addressed the report’s findings. 

CONCLUSION

We recognize PBGC’s progress in addressing numerous high priority areas and 

support its efforts to address our related recommendations. Considering the organization-wide impact of the information technology security issues and the weaknesses 

in contracting practices, PBGC leadership and those with oversight responsibility 

should target their oversight efforts on the effective execution of the corrective action plans that have been developed. Additionally, for critical weaknesses that cannot be addressed in the near future, interim measures should be developed and 
47 

adopted to minimize the associated risks. OIG will continue our monitoring activities until PBGC demonstrates that it has been fully responsive to our recommendations. In addition, we plan future audit work in the areas of highest risk to validate 

the effectiveness of PBGC corrective actions. 

Mr. Chairman, that concludes my remarks. I would be happy to answer any questions that you or other members of the committee may have. 

The CHAIRMAN. Thank you very much, Ms. Batts. And, now Mr. 

Porter, welcome. Please take a seat. 

STATEMENT OF KEN PORTER, INTERNATIONAL BENEFITS 

AND ACTUARIAL CONSULTANT, AMERICAN BENEFITS COUNCIL, WASHINGTON, DC 

Mr. PORTER. Thank you, Mr. Chairman, Ranking Member Enzi, 

and the members of the committee. I appreciate the opportunity to 

be here today. 

My name, of course, is Ken Porter. I’m Actuarial and International Benefits Consultant with the American Benefits Council. 

Previously, I spent 35 years with the DuPont Company, where 

I was the Finance Director, responsible for all corporate risk management, as well as the financial planning and actuarial responsibility for all employee benefits around the world. 

There were 160,000 U.S. plan participants in the PBP Plan spon- sored by the company in the United States, and about $18 billion 

of assets covering those participants at the time. 

Our focus then, on our comments today, are on the relationship 

between the PBGC and defined benefit sponsor community. The 

American Benefits Council represents the PBGC’s customer base. 

It’s the premium payers. We’re the business partners to the PBGC. 

We appreciate the long-standing relationship we have with the 

PBGC. 

Throughout all of its years the PBGC has been quite open to 

communicating with us and hearing what our concerns are; and we 

openly welcome suggestions on how we can make that communication even better than it is. 

I have two issues that I want to just highlight today: the first 

is a general observation; and we’ve already mentioned one of the 

missions of the PBGC is to encourage the continuation and maintenance of voluntary private pensions. 

As a former corporate risk manager, I spent many hours negotiating with insurance companies of all kinds on all kinds of risks 

throughout the world; and typically, we would come up with a winwin solution where the insurance company would recognize the 

business needs of the insured, and the risks for the insured would 

be paid off and the insurance company would maintain its requirements for a profitability end, and reserves. 

Once in a while an insurance company would not be able to, for 

one reason or another, recognize the needs of the business; and the 

business would have to make a decision either to find a different 

insurance company or to choose not to insure that particular risk. 

In the case of a defined benefit pension plan, the risk manager 

has no choice. If they’re going to have a defined benefit plan, a 

company must use the PBGC, and must pay the premiums that 

Congress ordains from time to time. 

We are very concerned as plan sponsors, that the actions and the 

policies of the PBGC can tend to interfere with normal business 
48 

transaction of plan sponsors; and as such, discourage plan sponsors 

from maintaining plans, in addition to a lot of other factors that 

have worked against the sponsorship of employee benefits. 

One example of that is the recent regs on 4062(e) that the PBGC 

proposed. In those rules we believe that they could have significant 

impact—have the potential of interfering with normal business 

transactions of corporations even though those transactions pose no 

material risk to the PBGC. 

We applaud Director Gotbaum’s efforts in recognizing some of 

this. He’s extended the comment period. We look very forward to 

working with them to help them rethink what these rules could be 

to achieve their goals; and at the same time, partner with the plansponsor-community so as not to be disruptive to normal business 

operations. 

The second example is, over the last 2 years as there was bipartisan support to provide relief for plan sponsors in funding their 

plans due to the simultaneous enactment—or the effective date of 

the Pension Protection Act, and the economic downturn. During 

that period of time the PBGC significantly resisted the efforts, the 

bipartisan efforts, to provide smoothing to the companies. 

These experiences have been very difficult for plan sponsors and 

have sent up red flags. 

Finally, the second issue is regarding the investment policy. We 

agree with Mr. Gotbaum’s comments that they need to be well 

thought out and concerted. They need to take into account all of 

the constituents. 

From a plan sponsor perspective, we look at the PBGC’s deficits 

as reported and know that there’s only two ways that they can 

erase those deficits: one is through investment return that exceeds 

their conservative measure of their liabilities; and the second is to 

rely on Congress to raise the premium on plan sponsors. 

As the number of plan sponsors decline and if the policy for investment is too conservative, the premiums being charged through 

the remaining plan sponsors will become debilitating. 

In conclusion it is our desire to continue working with the PBGC 

openly. We value the relationship we have with them. We want to 

be the clients as well as business partners to the PBGC; and we 

applaud our shared view with this committee: that the plan sponsor community needs to have the encouragement to insure that 

benefit security for all Americans who are covered by this plan. 

Thank you. 

[The prepared statement of Mr. Porter follows:] 

PREPARED STATEMENT OF KEN PORTER

My name is Ken Porter and I am an Actuarial and International Benefits Consultant for the American Benefits Council (the ‘‘Council’’). I also serve as Executive 

Director of the Council’s research and education affiliate, the American Benefits Institute. Previously, I worked for 35 years for The DuPont Company, from which I 

retired as the Finance Director for Corporate Insurance and Global Benefits Financial Planning. I also served as Global Risk Manager and Corporate Chief Actuary 

with responsibilities that included DuPont’s defined benefit pension plans covering 

more than 160,000 participants in the United States and with about $18 billion in 

U.S.-defined benefit plan assets. I also had actuarial oversight responsibility for defined-benefit pension plans in every other country where the company sponsored defined-benefit pension plans. In my capacity as a DuPont employee, I served on the 

Council’s Board of Directors and I am a former Chairman of the Council’s Board. 

Thank you very much for the opportunity to testify. 
49 

The Council is a public policy organization representing principally Fortune 500 

companies and other organizations that assist employers of all sizes in providing 

benefits to employees. Collectively, the Council’s members either sponsor directly or 

provide services to retirement and health plans that cover more than 100 million 

Americans. 

The Council applauds Chairman Harkin, Ranking Member Enzi, and the members of this committee for holding this hearing to examine the management and 

oversight of the Pension Benefit Guaranty Corporation (the PBGC). The Council believes this is a topic that merits a full public policy discussion. 

The PBGC has a very challenging mission. The PBGC needs to ensure that it has 

adequate funds to provide benefits to participants and beneficiaries whose plans are 

terminated with insufficient assets. We believe that the PBGC works hard to fulfill 

this part of its mission. For that, we are very grateful. 

The PBGC has an additional very complementary responsibility that is critical to 

enabling it to meet its first goal. That is to be a champion of the defined benefit 

pension plan system and to encourage the continuation and maintenance of pension 

plans. In no way should this role be viewed as at odds with the need to have adequate funds to pay benefits to participants in terminated plans. To the contrary, the 

future financial integrity of the PBGC depends upon the maintenance of defined 

benefit pension plans. 

I would like to focus my testimony on one key issue: the relationship between the 

PBGC and the defined benefit pension plan sponsor community. The American Benefits Council, which represents the PBGC’s customers who pay the premiums that 

support the agency, appreciates its longstanding relationship with the PBGC and 

the opportunities that have been afforded to share our views on a range of issues 

over the years. We certainly also welcome suggestions on how we, the plan sponsor 

community, can more effectively communicate with the PBGC. It is very important 

that the relationship be strengthened and we would of course like to continue working with Congress and the PBGC in that regard, so that all parties can better understand the others’ concerns. Such strengthening is critical to fulfilling the PBGC’s 

statutory mission ‘‘to encourage the continuation and maintenance of voluntary private pension plans for the benefit of their participants.’’ We believe that this mission 

can be served through better communication between the PBGC and business community. 

The core problem we see is that PBGC and the business community need to communicate more effectively about why employers are fleeing the defined-benefit plan 

system, why they are freezing their plans, and how certain well-intended PBGC 

policies and actions can actually threaten business viability and increase PBGC liability. The following examples illustrate this issue: 

• The PBGC recently proposed regulations regarding various corporate transactions, including the shutdown of operations. These proposed regulations would reverse longstanding PBGC written policy and would impose potentially enormous liabilities with respect to routine transactions that involve no layoffs or shutdowns 

and pose no threat to the PBGC. Companies will find it extremely difficult to continue sponsoring defined-benefit pension plans if their routine business transactions 

trigger large liabilities unrelated to any risk to the PBGC. In our view, this regulatory project is a critical test of PBGC/business community communication. Given 

the depth of our concerns, we were very encouraged recently when PBGC Director 

Joshua Gotbaum recognized the importance of these proposed regulations and extended the comment period to receive further input. We thank the Chairman and 

Ranking Member of this committee for their leadership with respect to that extension. We further hope that this hearing will lead to an open dialogue among Congress, plan sponsors, and the PBGC so that the PBGC rules will encourage rather 

than discourage plan maintenance. • The PBGC has not joined in the broad bipartisan support that has been evidenced in both the Senate and the House of Representatives over the past 2 years 

for defined benefit pension plan funding relief. Congress has wisely recognized that 

pension funding relief legislation is critical not only to saving jobs, but also to saving pensions by forestalling the termination of underfunded plans and thereby protecting the PBGC as well. However, the PBGC itself has resisted the efforts to help 

companies recover from the economic downturn and smooth out the extraordinary 

losses suffered by the plans. The lack of support for essential relief has understandably led long-time defined benefit plan sponsors to question their own commitment 

to the system. Again, better communication might help the agency and its customers (i.e. the plan sponsors who pay the PBGC premiums) be in better alignment 

on such a critical policy matter. 

• We believe it is essential that there be a continuing and open dialogue with the 

PBGC about: 
50 

* The report referred to may be found at http://help.senate.gov/imo/media/doc/Porter-Report.pdf. 

• The PBGC’s economic modeling system, which has been actively used in public policy debates but has not been made available for public discussion. 

• The PBGC’s investment policy, which we believe should be based on a diversified portfolio; The investment decisions made by the PBGC affect us all, of 

course, but we also believe the trustees should have appropriate discretion in 

the selection of investments because that is an important part of their job. 

• The PBGC’s assumptions underlying its reported deficit. In that regard, a report was prepared for us in 2005 by former staff on the Joint Committee on 

Taxation that raised questions regarding the assumptions used by PBGC in 

determining that deficit. That report, Promises to Keep: The True Nature of 

the Risks to the Defined Benefit Pension System, is attached to this testimony 

and we ask that it be included in the official hearing record.* 

• The PBGC has on occasion proposed that it should operate in a manner similar 

to a true insurance company. However, a true insurance company would balance its 

insurance business needs against the needs of its customers. Further, an insurance 

company’s products would be designed to dynamically meet the changing needs of 

its customers. We believe that enhanced communication with the plan sponsor community is needed in order for the PBGC to function more like an insurance company 

in these respects. 

We applaud Senator Kohl for his continuing interest in addressing PBGC governance. In our view, the theme of the Pension Benefit Guaranty Corporation Governance Improvement Act of 2009, S. 1544, as introduced by Senator Kohl, is to provide 

improved management of the PBGC through (1) greater involvement of private sector representatives, (2) strengthened communication among affected parties, and (3) 

enhanced management consistency. We believe that these are all important first 

steps. 

The PBGC and the business community each play a critical role in the defined 

benefit plan system and each faces many challenges. The economic difficulties of the 

last several years have contributed to erosion of the most effective communication 

that is needed between the PBGC and the community with which it works. We all 

need to look for opportunities to do more, through legislation or simply through open 

dialogue. 

Again, we thank you for the opportunity to testify and I would be happy to answer 

any questions the committee may have. 

The CHAIRMAN. Thank you very much, Mr. Porter. 

Thank you all for your fine testimony. 

I want to hit on this one issue, again, of board membership. 

In looking at Ms. Bovbjerg’s testimony, and outlining all of the 

different Federal departments that we have that have boards 

now—the Commodity Credit Corporation—I’m familiar with that 

for my Agriculture Committee work, has 8 members; Export-Import 

Bank, 5; Federal Crop Insurance Corporation, 10; FDIC, 5; OPEC, 

15; and Pension Benefit Guaranty Corporation, 3. 

Also, it just seems, maybe it’s odd to me, but in all my years 

here, I don’t remember having a board that consisted simply of 

three appointed secretaries of departments. Usually boards are 

made up of people that have some expertise and background, and 

that continue on, so there’s not this abrupt change from one administration to the next. 

I’m intrigued by this. I’m going to ask you again now, for the 

record, just your own views from having looked at this. Mr. Porter, 

you, too. I want you to think about whether the boards should be 

expanded? I don’t have a number in mind. It’s important to at least 

get some continuity that would go from one administration to the 

other. I agree that everything’s been said, this is one area that— 

not to be political, and not to be partisan—we ought to get the best 

people at all to be on the board; and where you would have a hold- 
51 

over, some rotational kind of a system so that you keep some expertise on these boards from one administration to the next. 

I want your views on that, and how important is that right now 

for us to pay attention to this, Mr. Porter? 

Mr. PORTER. Yes. Thank you, very much. Certainly I can’t dictate 

or would not want to even begin to dictate how large it ought to 

be, but I agree that whatever the size of the board is, and its constituency, it needs to be a board that has longevity; it needs to 

have continuity. 

The period of time during the economic turmoil, as was mentioned, where there was effectively no board and no executive director for a period of time, was very troubling to the business community. We would like to—whatever. We would support measures that 

would provide for continuity. 

We look back at the investment policy and we see frequent 

changes to the investment policy that have not always been to the 

best interest in the long-term. We don’t see corporate plans changing their investment strategy frequently, and yet that seems to 

have happened to the PBGC over time. 

I’d like to see stability; and that’s what we would be in favor of. 

The CHAIRMAN. Ms. Batts. 

Ms. BATTS. From the perspective of the Office of Inspector General, there’s an additional problem when we lose continuity of the 

board. I might share with you—you referred to the situation—the 

unfortunate situation with Former Director Millard. 

In February 2009 when my office confirmed former Director 

Millard’s misconduct, the former director was gone from PBGC, but 

the contracts that were under question remained. 

Now, I was able to speak to PBGC’s acting director, once we confirmed the misconduct—and that acting director was not part of 

the problem. So, we had no issue. 

Had the acting director also been part of the problem, PBGC, 

OIG would have had no one to go to, with no board members, with 

no confirmed Secretary of Commerce or Secretary of Labor or Secretary of Treasury, and only one confirmed board representative. 

That did represent an additional vulnerability for us. 

Fortunately, it didn’t turn into a problem, but, I think that is 

something else to think about in terms of ensuring continuity of 

the board. 

The CHAIRMAN. OK. Ms. Bovbjerg. 

Ms. BOVBJERG. Well, I’ve already talked about this a lot, so I 

won’t take a lot of time, but the continuity point issue is really important for many of the reasons already mentioned. 

I do want to say that the original board—which in our work, 

seems unique in the Federal Government—is there for diversity; so 

labor represents workers, commerce represents sponsors, treasury 

represents finance. And that’s a really good idea, but you need 

more of that. 

In addition to more members, you know, it would be helpful to 

have someone on the board who’s a management expert or risk assessment expert, or a pension finance person. 

You’d have to be concerned about conflicts. You appoint people 

who might be involved with the industry, but it would be really important to continue that tradition of diversity. 
52 

I also wanted to say that the McKinsey Report—which followed 

up on ours, but with regard to what boards might look like—reported that in a survey, members of corporate boards said they 

spend an average of 22 hours a month on their board work. I just 

don’t see how that’s possible for cabinet secretaries in the U.S. Government. 

The CHAIRMAN. Thank you. Thank you all very much. 

Senator Enzi. 

Senator ENZI. Thank you, Mr. Chairman. 

Mr. Porter, I was interested in your reference in your testimony, 

to PBGC’s proposed regulations imposing enormous liabilities on 

companies with respect to the routine business transactions that 

you say pose no threat to the PBGC. 

Would you provide us with an example of that? 

Mr. PORTER. Certainly. Thank you, Senator. 

One example, and this is sort of the nature of the game as plan 

sponsors are freezing plans for a variety of reasons, the number of 

active employees participating in those plans tends to shrink over 

time. 

You can envision many situations where the number of active 

participants in a plan might be a fraction of the total active participants of an employer. An employer might have, for example, 10,000 

employees, but perhaps only 1,000 of them are active participants 

in the plan. 

Under the rules, the rules impose a significant increase in the liability and the funding requirements if 20 percent of the active 

participants leave the plan sponsor. 

You could have a situation where as few as 200 employees might 

be involved in a divestiture, and that would only represent 2 percent of the total workforce; but because it’s 20 percent of the plan, 

the plan would now be subject to enormous increases in liability. 

And, because it’s a legacy plan, there may well be 10, 12, 15,000 

retirees in that plan, not just the 1,000 active employees. 

The impact on the plan sponsor would be enormous for simply 

having a small divestiture that involves perhaps only one or two 

percent of their workforce. 

If that plan sponsor’s plan is well-funded and the plan sponsor 

is strong, that really isn’t a material threat to the PBGC’s liability. 

Senator ENZI. Thank you. That’s very helpful with letting us 

know some of the unintended consequences, and some things we 

have to do or might potentially have to do. I appreciate that. 

Ms. Bovbjerg, in your opinion, would the PBGC benefit from creating a standing audit board, which could not only address critical 

issues, which require more attention than the time allowed at 

board meetings, but also provide oversight to the board’s interaction with the PBGC? 

Also, what can be done to improve the investment board or 

PBGC’s advisory committee? 

Ms. BOVBJERG. We didn’t call for a separate audit board, but at 

GAO we always like to see more auditing capacity. 

Senator ENZI. As the only accountant in the Senate, I do, too. 

Ms. BOVBJERG. Yes, so what we did think about, though, is the 

importance of the standing committees in the board; that we really 

do think there needs to be some audit committee to work with the 
53 

external auditors and pay pretty concentrated attention to the finances of PBGC. 

We hadn’t thought about a separate board, but we certainly 

could consider that. I wouldn’t be willing to recommend it and get 

myself in trouble. 

You also asked about the advisory board, which is seven members appointed by the president; and they report to the director 

right now. Most committees and boards of that nature report directly to the board of directors, so that might be something. 

That advisory group—it was called an advisory committee in the 

past, and it has a board. It was at one time the investment advisory boards. They were only looking at investment issues. It’s 

changed over time, and it’s been subject to what the director wants 

them to be, to a great extent. 

I think that having them more connected to the board might be 

something to consider. 

Senator ENZI. OK. Thank you. 

Ms. Batts, you testified that the PBGC has developed corrective 

action plans to address serious weaknesses in information technology security and other areas; however, critical details of those 

plans have yet to be developed. 

Would the PBGC benefit from hiring a risk management specialist to help the agency better prepare for future risks facing the 

agency and the retirement community? 

Ms. BATTS. That’s an interesting question. Certainly, PBGC has 

hired external expertise to help with addressing many of the areas 

of persistent weakness; for example, in its information technology 

security work. 

I’m not aware of the need for such a selection, but that’s not 

something I’ve thought about. I’m sorry. I just don’t really have a— 

I know that PBGC has reached out to get the expertise that it 

needs, and they’ve reached out frequently, through contracts. 

There’s no hesitation to reach out to get that expertise. 

Senator ENZI. OK. I appreciate it. My time has expired. 

The CHAIRMAN. Thank you. 

Senator Franken. 

Senator FRANKEN. Thank you, Mr. Chairman. 

I find the reporting on the relationship with the contractors a little disturbing. I was wondering what percentage of the workforce— 

and this can go to anybody—is comprised of contractors. 

Ms. BATTS. It’s about two-thirds. Right now it’s slightly less than 

two-thirds, but historically, it’s run right at about two-thirds. 

Senator FRANKEN. OK. Has there been any thought to—because 

I know, like in the military now, there’s a tendency now to stop 

this dependence on contractors and go back to actually using the 

military to do the job, because they have a loyalty to the country 

and to the military; and people who are contractors have a loyalty 

to making a profit, and to their contractor. 

Is there any thought about increasing the number of people who 

work for the PBGC, and less reliance on contractors? 

Ms. BOVBJERG. Back, in 2000 we took a look at this issue. And, 

so there’s arguments, sort of, on both sides. We looked at the rampup in contractors at PBGC in the 1990s and the 1980s. 
54 

The bankruptcy of Eastern Airlines, Pan Am, they had to get 

some people in place pretty quickly to process those benefits. So 

they did that, but that structure has essentially stayed in place. 

When we were reporting on this in 2000, we said, ‘‘we think you 

should really review this. Do you need locations in places where 

there were all these Eastern Airline employees, for example?’’ 

Maybe if you’re a virtual organization it doesn’t matter. But, we 

thought they should consider this. 

We also wondered—there’s an argument for ramping up with 

contractors when you need them, and then dropping off, which you 

cannot do with Federal employees. There was that argument when 

they thought that their workload might kind of decrease. 

Senator FRANKEN. But it hasn’t. The workload hasn’t decreased, 

right? 

Ms. BOVBJERG. It hasn’t. 

Senator FRANKEN. We’re not anticipating it decreasing for a 

while, are we? 

Ms. BOVBJERG. No. It could get much bigger. 

Senator FRANKEN. OK, so, this is like when—after the Cold War 

ended there was going to be this peace dividend, and we reduced 

the size of the military, and we increased contractors as we needed 

them; and then found that we were in a war for 9 or 10 years, and 

relying so much on contractors and wasting a tremendous amount 

of money on the contractors; and I’m wondering if we’re wasting a 

tremendous amount of money on the contractors who—I’m not 

hearing great reports on the kind of job they’re doing. 

Ms. BOVBJERG. OK. 

Senator FRANKEN. When—— 

Ms. BOVBJERG. Something we think they should look at. 

They shouldn’t just keep going because that’s what they’ve done 

before. 

Senator FRANKEN. Well, there are recommendations to look at 

things, but who’s going to look at them, if you have a board that 

doesn’t meet and a board that’s comprised of three cabinet secretaries? 

We’ve talked about the continuity of the board. This is an institutional memory. There’s no institutional memory here. How are you 

going to get anything done if there’s no institutional memory. This 

seems to have to be done soon. 

Ms. BATTS. Senator Franken, if I could add, our office has some 

very recent audit work in this area, and we do have an open recommendation that PBGC take a strategic look and include both the 

contract and the Federal employee workforce in its human capital 

planning. 

To date, PBGC has provided some alternatives, but hasn’t actually agreed to implement that. It’s consistent with recommendations made by GAO in the past. 

Senator FRANKEN. OK. Can I ask about the long-term plans, or 

shape of this, of the workforce of the PBGC, because, I saw in the 

briefings for this hearing that there’s worry about, obviously, increased needs in terms of failures in pension accounts; and I know 

that the role of the PBGC is to encourage defined benefits, but defined benefits are going down; right, in our society? 
55 

Is there a curve that’s been projected on the role of the PBGC 

that coincides with what defined benefits in our society, the role 

they’re going to play; in other words, is this going to go up at a 

certain point and then start to come down again as defined benefits 

play a lower role? 

I know we’re trying to encourage defined benefits, but that 

doesn’t seem to be happening. Is there some kind of actuarial look 

at what the future of the PBGC, in terms of its responsibilities will 

be, vis-a ́-vis what the curve of defined benefits are? 

Was that clear, because I don’t know if it was. 

Ms. BOVBJERG. Yes. No, they’re not going out that far. As defined 

benefits decline, there are fewer plans out there; there are still 

some really big plans with a lot of participants. 

So, when PBGC looks at its future, it’s looking at the likelihood 

that those plans are going to go under, and they’ll be underfunded 

at the same time that they will have to take them. 

As far as they can look out, they’re still paying benefits; they’re 

still potentially taking in underfunded plans. 

Senator FRANKEN. OK. 

Ms. BOVBJERG. There could be a time, but way down the road. 

Senator FRANKEN. Way down the road. Then the idea of perhaps 

relying less on contractors and bringing more Federal employees 

into the PBGC as a way of saving money and getting the job done 

better is not such a bad idea. 

Ms. BOVBJERG. It could be a really good idea. They need to consider it. At GAO we cannot tell—— 

Senator FRANKEN. How long do you have to consider these 

things? Who would consider them? Would the board consider them? 

Because the board is incapable of considering much of anything. 

Ms. BOVBJERG. The board should. That should be an issue for the 

board; it’s a long-term strategic issue. 

Senator FRANKEN. OK. 

Mr. PORTER. Senator, if I may, I would just add a point to that, 

from a practitioner’s perspective; from a plan sponsor perspective. 

Outsourcing of benefits calculations, in particular, is perhaps one 

of the most complicated endeavors we have in our society; it’s terrible. So if there is a change from status quo to something else, 

whether it’s from one contractor to another, or one contractor back 

into the government, there has to be a transition plan that may 

span several years; and at which time there will be duplicative cost 

and duplicative effort. That’s one point I’d like to make. 

Second point I’d like to make is that the majority of the plans 

that have been frozen are sponsored by healthy companies that 

continue to fund their plans; they’re not terminated; they’re not 

being turned over to the PBGC. 

Certainly the PBGC has to take into their account what the 

risk—that they believe the probability that they might be turned 

over, but it’s incumbent on us to continue, and to have policies that 

encourage these companies to continue to fund them—as they are 

doing today. 

Even though new employees may not be participating, there are 

hundreds of thousands of employees who are continuing to participate as grandfathered employees in plans that have been frozen. 

We want those to continue; and those—just because they don’t— 
56 

aren’t available for current employees doesn’t mean that they 

aren’t necessarily healthy and are going to be a problem of the 

PBGC. 

Not all of these plans are going to come to the PBGC for their 

efforts. 

Senator FRANKEN. Thank you, Mr. Chairman. 

The CHAIRMAN. Senator Hagan. 

Senator HAGAN. Thank you, Mr. Chairman, and thanks again to 

all the witnesses for your testimony. 

You know, it seems apparent that we need new board and new 

governance rules and obligations for the board; and also, contract 

procurement issues have been raised and need to have a lot more 

attention. 

I’ve got lots of issues and questions. 

Ms. Bovbjerg, I was interested in your testimony, talking about 

overpayments; and you stated that the management of PBGC’s 

benefit determination process did not provide for separate reporting of performance measures for large complex plans; yet these 

plans are responsible for most long delays and processing in most 

cases with overpayments. 

Can you discuss that? 

Ms. BOVBJERG. It can be a long and difficult process to figure out 

what benefits are owed participants in a plan that PBGC trustees. 

When we looked at this issue, because a number of people in a 

former steel company were getting notices from PBGC that they 

had been overpaid by as much as $50,000. 

Now, the odds that they’re ever going to actually repay that are 

very, very slim because they would only lose a small amount of 

their benefit monthly for that. They probably wouldn’t ever get to 

the point of having repaid it; however, they were counting on a certain benefit level, and then suddenly the sky falls; they’re not getting the benefit level, they’re getting a lower benefit, and it’s reduced a little bit for the overpayment. 

After waiting as long as 9 years for your benefit determination, 

that can be a terrible—— 

Senator HAGAN. Nine years? 

Ms. BOVBJERG. The average is about 3 years, but it can go as 

long as 9 years for a very large and complex plan, which some of 

the steel plans were. 

When we looked at what causes these overpayments, why these 

things take so long, it was always these large, complicated plans. 

We thought that one way to think about—they made a number 

of changes that we suggested, but that one way to really hold their 

own feet to the fire on this was to just keep track of how quickly 

and how accurately they’re calculating benefits for large plans separately from the overall average; and that’s something that they 

haven’t been willing to do yet. 

Senator HAGAN. Well, I see that as a huge problem. 

Mr. Porter, do you have any comments on the overpayment aspect? 

Mr. PORTER. Overpayment is a challenge. In any defined benefit—complex point—benefit plan, calculation of a benefit is sometimes exacerbated by a lot of factors that might have occurred 10, 

15 years in the past. 
57 

I can see the problems; I don’t think a defined benefit plan in the 

private sector would be allowed to go 9 years to fix something. 

Three years seems like it’s outside the normal range; but it is a 

very difficult challenge, and so something needs to be done, certainly, to make these calculations more quickly so that the people 

aren’t held up like that. That’s an incredible amount of time. 

Senator HAGAN. I asked Mr. Gotbaum about the premiums. Do 

you see in your report—Ms. Bovbjerg, did you all talk about the 

premiums? 

Ms. BOVBJERG. Some years ago we looked pretty hard at PBGC’s 

finances; and you know, you do the math; it’s premiums—— 

Senator HAGAN. Right. 

Ms. BOVBJERG. Its investment incomes, or its better funding of 

plans so that if a company goes out of business and the plans come 

to PBGC, they’re better funded; they’re more assets associated with 

them. 

The Deficit Reduction Act of 2005, I think, raised premiums; and 

so it’s about—I want to say it’s around $40 a participant, the flat 

rate; and it moves with inflation; and there’s another part, it’s 

about $10 for every thousand of underfunding. The underfunded 

plans have to put in some more as well. 

Right after that, the Pension Protection Act in 2006 strengthened 

the funding rules so that employers who sponsored defined benefit 

plans would have less time to get to full funding, and had certain 

range of assumptions that they had to use. 

The design was that when plans came to PBGC they would be 

in better shape; so you wouldn’t have the Bethlehem Steels, frankly, who were fully funded 2 years before—close to it—before their 

bankruptcy. By the time of bankruptcy they were down to 30 or 40 

percent. 

Those things are designed to balance what flexibility employers 

need with protecting the PBGC’s fiscal integrity. 

The problem was, this was all designed to take place at the time 

of the market meltdown, and companies were under serious stress; 

so those particular provisions have been delayed in taking effect. 

Our belief is that when they do take effect, it will improve funding, and it will mitigate the risk for PBGC. Every paper on the 

issue of premiums says that they need to be more risk-phased because no insurance company on earth would operate the way that 

we operate the PBGC. 

Senator HAGAN. Mr. Porter, also in your testimony, you talked 

about the investment policy, and then the assumptions in an older 

report on the reported deficit. 

Mr. PORTER. OK. 

Senator HAGAN. About the investment policy, you believe it 

should be based on a diversified portfolio. 

Can you tell me what changes—or we don’t really know the investment policy. 

Mr. PORTER. No. I certainly don’t. 

Senator HAGAN. Right. 

Mr. PORTER. So I couldn’t, therefore, prognosticate on what the 

changes ought to be. Clearly, there needs to be a balance of all the 

risks associated; it needs to have some longevity; it needs to be executed in a way that isn’t detrimental. 
58 

Long-term investments’ policies have served the pension community generally very well; and we would like to see some stability 

in it. There needs to be a balance of plan sponsor’s needs because 

its premiums is going to be the protection of the participants; it has 

to be the public perception, because unfortunately, PBGC is very 

public, and the press has a view of what it thinks is right or wrong, 

as well. 

That shouldn’t be the driver; the driver should be the overall balance, so that we can maximize the return at an acceptable level of 

risk. 

Senator HAGAN. I guess I’m surprised that we don’t see what the 

investment policy is. 

Mr. Chairman, I know my time is out, but I think you’ve had a 

good hearing, and we obviously have a lot to do in order to improve 

the PBGC with going forward; and I know our new director is certainly working on that. 

Thank you. 

Ms. BOVBJERG. May I jump in for a tiny second? 

The CHAIRMAN. Yes. 

Ms. BOVBJERG. We have a report underway that looks at PBGC’s 

investment policies and practices over time, and most recently, 

that’s coming out the end of February; and I think that that would 

answer some of your questions. 

Senator HAGAN. Thank you. 

The CHAIRMAN. Well, thank you all very much. I thank the panel 

for being here, and for your testimony, and for your work; and I 

thank the Senators who have participated here. 

As I said, this is another in a series of hearings that we’ll be having on this committee regarding the broad overview of retirement 

programs in America, and what’s happening to retirement programs. 

This is obviously one big slice of it, right here, the defined benefit 

pension programs, and the financial security and ability of the 

PBGC to meet its obligations. 

There are other elements of retirement security that this committee’s going to be looking at, but certainly things that have come up 

today regarding PBGC are things that I’m going to be discussing 

with Senator Enzi and other Senators on this committee to see 

what action, if any, we want to take. 

I think there are some elements that have come out in the testimony today that I think compel us to do something about the continuity and board’s expertise, and it is that type of thing that I 

think we need to take a very close look at. 

I’ll be discussing that with Senator Enzi and others to see what 

action we might want to take; not this year, of course, but sometime down the road. 

Thank you all very much. 

With that, the committee will stand adjourned. 

[Additional material follows.] 
59 

ADDITIONAL MATERIAL 

PREPARED STATEMENT OF SENATOR BINGAMAN

Mr. Chairman, thank you for convening this morning’s hearing 

on an issue essential to the economic security of the nearly 44 million Americans who participate in pension plans overseen and insured by the Pension Benefit Guaranty Corporation. 

Although the prevalence of defined benefit plans has been on the 

wane, those who remain covered by a DB plan deserve protections 

of a well-managed overseer. Unfortunately, in recent years, the 

PBGC has not lived up to this mandate. As the Center for Public 

Integrity has found, over the past 2 years, PBGC has lost Social 

Security numbers stored on an unsecured storage drive, given erroneous information to lawmakers, and failed its own financial audit. 

This has led PBGC’s own Inspector General, who is with us today, 

to conclude that ‘‘PBGC did not have effective internal control over 

financial reporting (including safeguarding assets) and compliance 

with laws and regulations and its operations.’’ 

I am grateful for the deep analysis conducted by many policymakers and independent agencies to identify structural flaws in 

PBGC’s organization that have contributed to mismanagement. 

I am particularly appreciative of Senator Kohl’s commitment to 

this issue. His proposal embodies critical reforms: expanding the 

PBGC Board from three to seven members; requiring the PBGC to 

meet at least four times yearly; granting the PBGC’s advisory committee, its inspector general, and general counsel direct access to 

the board; and preventing PBGC’s director from any involvement 

in hiring money managers or from ‘‘participating in any matter 

that may have or appear to have a conflict of interest.’’ I look forward to joining with Senator Kohl as a cosponsor of his bill when 

he reintroduces it in the 112th Congress. 

I also look forward to working with you, Mr. Chairman, and with 

Senator Enzi and all of our colleagues on this committee to move 

reform legislation forward. 

[Whereupon, at 12:03 p.m., the hearing was adjourned.] 

Æ