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S. HRG. 111–153 

NO GUARANTEES: AS PENSION PLANS CRUMBLE, 

CAN PBGC DELIVER? 

HEARING 

BEFORE THE

SPECIAL COMMITTEE ON AGING 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

WASHINGTON, DC 

MAY 20, 2009 

Serial No. 111–6 

Printed for the use of the Special Committee on Aging 

( 

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html 

SPECIAL COMMITTEE ON AGING 

HERB KOHL, Wisconsin, Chairman 

RON WYDEN, Oregon 

BLANCHE L. LINCOLN, Arkansas 

EVAN BAYH, Indiana 

BILL NELSON, Florida 

ROBERT P. CASEY, Jr., Pennsylvania 

CLAIRE McCASKILL, Missouri 

SHELDON WHITEHOUSE, Rhode Island 

MARK UDALL, Colorado 

MICHAEL BENNET, Colorado 

KIRSTEN GILLIBRAND, New York 

ARLEN SPECTER, Pennsylvania 

MEL MARTINEZ, Florida 

RICHARD SHELBY, Alabama 

SUSAN COLLINS, Maine 

BOB CORKER, Tennessee 

ORRIN HATCH, Utah 

SAM BROWNBACK, Kansas 

LINDSEY GRAHAM, South Carolina 

DEBRA WHITMAN, Majority Staff Director 

MICHAEL BASSETT, Ranking Member Staff Director 

(II) 

C O N T E N T S 

Page 

Opening Statement of Senator Herb Kohl ............................................................. 1 

Statement of Senator Mel Martinez ....................................................................... 4 

PANEL OF WITNESSES

Charles E. F. Millard, Former Director, Pension Benefit Guaranty Corporation, Washington, DC ........................................................................................... 3 

Dallas Salisbury, President & CEO, Employee Benefits Research Institute, 

Washington, DC ................................................................................................... 5 

Statement of Barbara Bovbjerg, Director, Education, Workforce and Income 

Security, U.S. Government Accountability Office, Washington, DC ................ 14 

Statement of Rebecca Anne Batts, Inspector General, Pension Benefit Guaranty Corporation, Washington, DC .................................................................... 39 

Statement of Vincent Snowbarger, Acting Director, Pension Benefit Guaranty 

Corporation, Washington, DC ............................................................................. 80 

APPENDIX 

Testimony submitted by Douglas J. Elliott, Center on Federal Financial Institutions on A Guide to the Pension Benefit Guaranty Corporation .................. 107 

(III) 

(1) 

NO GUARANTEES: AS PENSION PLANS 

CRUMBLE, CAN PBGC DELIVER? 

WEDNESDAY, MAY 20, 2009 

U.S. SENATE, SPECIAL COMMITTEE ON AGING, Washington, DC. 

The Committee met, pursuant to notice, at 2:10 p.m. in room 

SR–428A, Russell Senate Office Building, Hon. Herb Kohl (chairman of the committee) presiding. 

Present: Senators Kohl [presiding], Specter, Martinez, Bennett, 

and McCaskill. 

OPENING STATEMENT OF SENATOR HERB KOHL, CHAIRMAN 

The CHAIRMAN. Good afternoon, and thank you all for being here 

today. Today we are going to take a hard look at the Pension Benefit Guaranty Corporation, which is responsible for insuring the 

pensions of nearly 44 million Americans. The Committee has grave 

concerns about PBGC’s viability and whether this agency currently 

has effective financial oversight. 

Given the state of the economy, the question of PBGC’s viability 

is more urgent than ever. One in seven Americans count on this 

agency to pay out their pension in the event that their employer 

is unable to due to bankruptcy. As General Motors teeters on the 

edge of insolvency, hundreds of thousands of workers’ pensions 

could soon become the responsibility of PBGC, and though Chrysler 

has managed to maintain its pension plan despite filing for bankruptcy, it may only be a matter of time before PBGC will have to 

accept responsibility for that pension plan as well. PBGC is currently underfunded by over $33 billion, while their 

duty to manage and pay out benefits is expanding. Decisions made 

by PBGC management and a lack of oversight and governance by 

previous PBGC boards have contributed to the agency’s financial 

condition. The Government Accountability Office has indicated for 

years that the PBGC board members do not have enough time or 

resources to provide the necessary policy direction and oversight. 

In 28 years, the full board has met only 20 times. The fact that 

we could not get a representative of the PBGC board to come to 

this hearing is a prime example of this. But the role of PBGC is 

too crucial to allow its governance to slip through the cracks. 

The PBGC Inspector General released a report last week detailing allegations that former PBGC Director Charles Millard was improperly involved in the awarding of $100 million contract to Wall 

Street firms. But the allegations against Mr. Millard are merely a 

symptom of the bigger problem. I will soon be introducing legislaVerDate Nov 24 2008 14:00 Nov 13, 2009 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 H:\DOCS\52779.TXT SAG PsN: JOYCE
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tion to significantly improve the PBGC board’s governance oversight structure. 

In the meantime, PBGC should reopen the bidding process for 

the controversial $100 million contract, a process which appears to 

have been improperly influenced the first time around. Yesterday, 

I received a letter from Secretary of Labor Hilda Solis, indicating 

that they are lucky to do so, which I will enter into this hearing’s 

record. 

If the contract is not rebid, we will ask GAO Special Investigations Unit to assist us in reviewing copies of PBGC-related communication the committee has obtained from the Wall Street firms 

that won the first contract. Finance Chairman Max Baucus and 

Health Chairman Ted Kennedy, along with Ranking Members 

Chuck Grassley and Mike Enzi, have also noted this issue closely 

and will keep a close watch to ensure that PBGC carries out the 

recommendations of its Inspector General. They also have requested a further investigation into Millard’s involvement with 

these companies. 

The role of the PBGC is a vital one, now more than ever. For 44 

million Americans with defined benefit pension plans, PBGC is the 

only thing that stands between the secure retirement they have 

worked so hard for and the prospect of living without retirement 

security. So we must get the PBGC back on track or face the possibility of absorbing these obligations on behalf of taxpayers all over 

our country. 

So we thank you all for being here today. We look forward to 

your testimony. I will at this point introduce the witnesses for this 

panel. 

Our first witness will be Charles Millard, the former Director of 

the PBGC. Prior to being appointed as PBGC’s Director, Mr. Millard held executive positions at investment firms, such as Lehman 

Brothers and Broadway Partners. He was also a member of the 

New York City Council, representing the Upper East Side of Manhattan. 

Our next witness will be Dallas Salisbury, the CEO and President of the Employee Benefit Research Institute. He’s considered 

an expert on economic security and has served on the ERISA Advisory Council, the PBGC Advisory Committee, the U.S. Advisory 

Panel on Medicare Education, and the Board of Directors of the 

National Academy of Social Insurance. 

Next we’ll be hearing from Barbara Bovbjerg of the U.S. Government Accountability Office. Ms. Bovbjerg is a Director of the Education Workforce and Income Security team, where she oversees 

evaluative studies on aging and retirement income policy, as well 

as the operators of the Social Security Administration, the PBGC, 

and the Employee Benefit Security Administration of the Department of Labor. 

Then we’ll hear from Rebecca Anne Batts, the Inspector General 

for the Pension Benefit Guaranty Corporation. As Inspector General, she directs the office charged with overseeing PBGC’s operations. Prior to her appointment, Ms. Batts held various senior executive positions at the U.S. Department of Transportation’s Officer of Inspector General. 

3 

Our witness finally will be Vincent Snowbarger. Mr. Snowbarger 

is the Acting Director of the Pension Benefit Guaranty Corporation. 

Since joining the PBGC in 2002, he has served in several executive 

positions, including Deputy Director for Policy, and is currently the 

Deputy Director for Operations. 

Because we’re taking testimony with regard to matters of fact in 

this controversy, I’ll be asking each of our witnesses to take the 

oath, and so I ask you please to stand and raise your right hand. 

[Whereupon, the witnesses were duly sworn.] 

The CHAIRMAN. Do you all swear that the testimony you’re about 

to give is the truth, the whole truth, and nothing but the truth, so 

help you God? Thank you. 

Mr. Millard, I’ll turn to you first. I want to recognize that you 

are here today with your attorneys, and we welcome them here 

also with you. You have an opening statement, Mr. Millard. 

TESTIMONY OF CHARLES E.F. MILLARD, FORMER DIRECTOR, 

PENSION BENEFIT GUARANTY CORPORATION, WASHINGTON, DC 

Mr. MILLARD. I do not have an opening statement, Mr. Chairman. 

The CHAIRMAN. Thank you. Mr. Millard, what was your role at 

PBGC, and how long were you employed there? 

Mr. MILLARD. I’ve been advised by my counsel that I should invoke my constitutional rights and decline to answer any and all 

questions from the committee on this matter, Mr. Chairman. 

The CHAIRMAN. Mr. Millard, it has been said that the investment 

strategy you spearheaded at PBGC is overly risky. What steps did 

you take to mitigate the risk associated with the strategy? 

Mr. MILLARD. I’ve been advised by my counsel, Mr. Chairman, 

that I should invoke my constitutional rights and decline to answer 

any and all questions from the committee on this matter. 

The CHAIRMAN. Mr. Millard, the Inspector General has reported 

that you were inappropriately involved in the contracting process 

at PBGC. Would you respond to these assertions? 

Mr. MILLARD. I’ve been advised by my counsel, Mr. Chairman, 

that I should invoke my constitutional rights and decline to answer 

any and all questions from the committee on this matter. 

The CHAIRMAN. We need to be sure that you, and not your counsel, are asserting the right, and that you’re clear that you’re invoking your right under the Fifth Amendment against self-incrimination, being a witness against yourself, and you’re not using a formulation that leaves that overly vague. You do understand that. 

I’m sure you do. So we do understand from your responses that you 

will invoke your Fifth Amendment right in response to all questions from this committee on this subject. 

Mr. MILLARD. Yes, sir. 

The CHAIRMAN. Thank you, Mr. Millard. Let the record reflect 

that you have availed yourself of the privilege afforded you under 

the Fifth Amendment of the Constitution not to give testimony that 

might incriminate you, and you certainly have that right. The invocation of that right by every American citizen should not and does 

not impose any guilt. 

4 

The committee respects your constitutional right to decline and 

answer questions on that ground, although we certainly would 

have liked to have been able to hear from you today. You are correspondingly excused at this time. 

Mr. MILLARD. Thank you. 

The CHAIRMAN. Thank you, Mr. Millard. Before we move on to 

our next witness, I would like to welcome Mel Martinez, the Ranking Member on this committee, and ask him for his statement. 

STATEMENT OF SENATOR MEL MARTINEZ, RANKING MEMBER 

Senator MARTINEZ. Thank you very much, Mr. Chairman. Thank 

you very much. I apologize for being a little tardy. The Commerce 

Committee was also meeting. We appreciate your calling this hearing today. One of the biggest concerns among seniors today is a 

need to protect their pensions, especially given the state of our 

economy. Every senior has a right to know whether they will receive the benefits they were promised. Current economic uncertainties has highlighted a need to address the risk posed by several 

large firms teetering on the brink of insolvency. 

As lawmakers, we cannot stand by as the fate of the pensions of 

many Americans remains uncertain. Fortunately, most pensions 

are protected by the Pension Benefit Guaranty Corporation. The 

PBGC is the pension manager of last resort and has the unenviable 

task of cleaning up where others have failed. Insolvent pensions 

that are turned over to the PBGC are significantly underfunded, 

leaving the future benefit levels at risk. 

What I would like to see is fewer pensions being underfunded 

and fewer pensions taken over by the PBGC. These underfunded 

pensions have resulted in a $409 billion funding shortfall in the 

U.S. pension system. The pensions of those working for the Big 3 

in Detroit, for instance, which include auto manufacturers and the 

46 largest suppliers, are underfunded by $65 billion, with 2.1 million Americans relying on these plans. 

Seniors in Florida are at risk as well. Florida’s the home to more 

than 2 million seniors with pensions that could be impacted by factors beyond their control, including a depressed stock market and 

relaxed corporate governance. 

How we got here and what led to these pensions being underfunded is an open question that is being addressed by other committees today. I look forward to hearing from the PBGC acting director about what contingency plans are in place in the event of 

further economic collapse. If one or more of the Big 3 pensions 

winds up being taken over by the PBGC, what plans are in place 

to ensure continued solvency and minimal disruption to the pensioners? 

The systems we’ve seen is not healthy in its current form of legislation, such as—were to pass, the resulting increase in pensions 

would only perpetuate these underfunded multiemployer plans. 

The issue is only one of many concerns I have with the bill. 

Peripheral, but significant, and relevant to the hearing today is 

the controversy involving the Director of PBGC, and we have just 

seen his testimony today, or his inability to testify today. While we 

face uncertainty in the near term, I applaud the efforts by the 

PBGC in the wake of the previous challenges, including the colVerDate Nov 24 2008 14:00 Nov 13, 2009 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 H:\DOCS\52779.TXT SAG PsN: JOYCE
5 

lapse of the steel industry. Collectively, we can find solutions to 

these problems without placing a greater burden on the taxpayers 

whose pensions remain insolvent or who have no pension at all. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you very much, Senator Martinez. We’ll 

now turn to our first witness, Dallas Salisbury, who I said is the 

CEO and President of the Employee Benefit Research Institute. We 

would appreciate if you would keep your remarks to 5 minutes. If 

you have more to enter into the record, we’d be happy to do that. 

Mr. Salisbury. 

STATEMENT OF DALLAS SALISBURY, PRESIDENT & CEO, EMPLOYEE BENEFITS RESEARCH INSTITUTE, WASHINGTON, DC 

Mr. SALISBURY. Chairman Kohl, Senator Martinez, it’s a pleasure 

to be here. I appreciate the invitation and the opportunity to speak 

on a topic that is very important. As you have noted, I started my 

career in Washington at the Department of Labor in the Pension 

Benefit Guaranty Corporation. 

The CHAIRMAN. Is your mic on? 

Mr. SALISBURY. It is on. I’ll pull it closer. As you well know, the 

PBGC is a guaranty program in its name, and I only stress that 

point because unlike the FDIC and unlike most insurers, the PBGC 

is not in a position on its own to create underwriting standards to 

put funding requirements on plans and other things. 

In fact, when I was early at PBGC, we took a study under advisement from the Congress called the Contingent Employer Liability Insurance Program Study. We went to 102 insurance companies 

around the world, including Lloyd’s of London, and all of them said 

that the program designed by the U.S. Congress could not be underwritten by any insurer without very significant changes, and as 

a result, that program was repealed by the Congress. 

In the early 1980’s, as part of a privatization taskforce of the advisory council of the PBGC, appointed by then-President Reagan 

and chaired by two private sector insurance executives, an effort 

was made to, in fact, privatize PBGC, eliminate it as a governmental program, and move it into the private market. 

Again, over 100 insurance companies were invited to describe to 

this group the underwriting standards that would be necessary to, 

in essence, insure pension failures and to insure essentially the solvency of American corporations. The two insurance executives 

asked the White House to end the taskforce efforts once they saw 

the underwriting standards, because it became clear that this program could not be a workable insurance program, as traditionally 

defined. It could be a guarantee program, and the title underlines 

that. 

I note that also, because of one point I make in my testimony, 

which is that one of the primary causes of pension unfunded liabilities, and as the PBGC testimony underlines, a reason for a $7 billion increase that they’ve now announced in the PBGC deficit is the 

actions by the Federal Reserve Board. The holding down to near 

zero the interest rates available to pension funds and available to 

the market created hundreds of billions of dollars of total system 

liability. 

6 

So if the government and the Federal Reserve wanted pension liabilities to go away, frankly, they would only need to raise interest 

rates, and that would eliminate the $7 billion, plus many billions 

more. 

Thus it is the inability of pension fund sponsors, both to control 

interest rates they use to value liabilities and to command the equity markets to go up that led to the issues faced today. 

The PBGC, as noted, is responsible for a total system that has 

unfunded liabilities that, by various estimates, ranged between 

$400 and $500 billion. That underlines the future challenges that 

will be faced by the PBGC. But the ultimate and most important 

challenge is whether private employers will continue to sponsor defined benefit retirement plans. 

You ask in your question list whether strong employers were 

likely to continue those programs, and I’ve underlined in the testimony that numerous private sector surveys of employers suggest 

that the movement that began 30 years ago away from defined benefit plans, toward defined contribution plans, is likely to continue 

in this country, as it is continuing in nations around the world. 

Ultimately, those surveys underline that even with the Pension 

Protection Act of 2006’s new funding standards, that with interest 

rate fluctuations being managed by the Fed and the government 

and held down, today’s papers suggest the Fed may hold interest 

rates to near zero for another two years. Should they do that, you 

can anticipate and project in advance there will be significant additional increases in the deficit of the PBGC and in the unfunded status of private defined benefit pension plans. Those will turn around 

if and when the government changes interest rate policies. 

So, in conclusion, defined benefit plans currently as noted provide income to 23 percent of those over age 65. For those 65 to 69, 

19 percent report such income. Average payments are $2,500 per 

year. Medium payments are $9,000 per year. These are an important and critical supplement to Social Security and must be maintained. 

There is a great deal of discussion about whether the pension 

system can be maintained. The challenge for the government is to 

manage interest rates and the economy while recognizing they’re 

intertwining with both PBGC liability and pension liability. Thank 

you, sir. 

[The prepared statement of Mr. Salisbury follows:] 

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The CHAIRMAN. Thank you very much, Mr. Salisbury. Next, we’ll 

hear from Barbara Bovbjerg of the U.S. Government Accountability 

Office. Ms. Bovbjerg. 

STATEMENT OF BARBARA BOVBJERG, DIRECTOR, EDUCATION, WORKFORCE AND INCOME SECURITY, U.S. GOVERNMENT ACCOUNTABILITY OFFICE, WASHINGTON, DC 

Ms. Bovbjerg. Thank you, Mr. Chairman. Good afternoon, Senator Martinez, Senator Bennett. I’m pleased you invited me here 

today to speak about the PBGC’s financial challenges and issues 

regarding its governance. 

Created in ERISA in 1974, PBGC today insures the retirement 

benefits of about 40 million Americans. My statement today is 

based on reports that we’ve prepared over the last several years on 

these topics, updated for new information. But first, let me speak 

about the financial challenges. 

Starting in 2002, PBGC’s largest insurance program, the singleemployer program, was beset by claims resulting from employer 

bankruptcies and the associated terminations of large underfunded 

plans. Indeed, we put this program on our high-risk list in 2003 

and by 2004, the deficit exceeded $23 billion. 

Since then, and until recently, economic conditions favorable to 

employers and plans helped to reduce the PBGC net deficit, and 

the 2006 passage of the Pension Protection Act had the potential 

to strengthen plan funding in the future. Indeed, as of September 

2008, PBGC reported its deficit had shrunk to around $11 billion. 

However, this lower deficit figure reflects conditions that no longer 

exist. The financial market meltdown and economic recession have 

increased the exposure PBGC faces from financially distressed 

sponsors with large underfunded plans, whereas in 2008, PBGC 

anticipated relatively few new distress terminations. 

By now, the picture is significantly worse. For example, the pension plans of Chrysler and GM today pose considerable financial 

uncertainty for PBGC. In the event that these automakers cannot 

continue to maintain their plans—as in, say, a bankruptcy scenario—PBGC may be required to take both the plans and the responsibility for paying the benefits they owe. 

The plans are thought to be underfunded by roughly $30 billion, 

which would increase PBGC’s deficit substantially. Further, absorbing these plans would almost double the number of participants PBGC must serve and the assets that PBGC must manage. 

These aren’t the only underfunded plans PBGC faces in the next 

year or so. Plan sponsors are reeling from the economic downturn, 

and their plan funding has doubtlessly weakened as the value of 

financial assets has fallen. As Dallas points out, liabilities have 

risen. 

Further, although the Pension Protection Act was designed to 

improve plan funding levels, legislation passed last December delayed the implementation of the stricter funding requirements. Although the change was intended to help companies weather the 

current economic storm, still, plan funding will be lower than it 

would otherwise have been, and this too increases PBGC’s exposure. 

15 

Also, PBGC recently altered its investment policy to improve returns, but our work suggests that the higher risk associated with 

such a policy needs more attention. For all these reasons, we believe PBGC’s financial challenges are growing. 

Let me now turn to PBGC’s governance. Although PBGC has 

taken some actions in response to our management recommendations in the contracting and human capital areas, the remaining 

unaddressed management issues will complicate the corporation’s 

ability to grapple effectively with the financial difficulties ahead. 

This makes governance all the more important, yet PBGC’s 

board, which is comprised of three Cabinet Secretaries, has limited 

time and resources to devote to providing the policy direction and 

oversight needed for this growing and increasingly challenged corporation. 

Although the board last year approved a new set of bylaws, some 

critical decisions and processes go undocumented, including approval and oversight of the various changes in investment policies 

made over the years. Further, the composition of the board means 

that the entire board turns over, along with the PBGC director, 

when a new administration takes office, which, of course, happened 

in January. 

It’s now May 2009. The last board meeting was in February 

2008, meaning the new board has yet to meet. In 2007, we recommended that the Congress restructure the board to expand 

membership, stagger terms, and diversify expertise, and this action 

continues to be urgently needed. 

In conclusion, PBGC acts as crucial support for Americans’ retirement income security. The corporation will be challenged as 

never before as it faces a deepening financial hole, combined with 

an overwhelming administrative burden that will doubtlessly require more PBGC staff and more contractors. 

Yet, PBGC still has not made some of the strategic improvements needed in its human capital management or its contracting 

program, and its board is not yet positioned to provide the attentive and sustained policy guidance that is needed. So although improving PBGC governance will not by itself solve the corporation’s 

financial problems, such actions could be critical to helping PBGC 

manage them. We urge Congress to consider legislating these needed improvements as, indeed, I understand you will be. 

That concludes my statement, Mr. Chairman. 

[The prepared statement of Ms. Bovbjerg follows:] 

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The CHAIRMAN. Thank you very much, Ms. Bovbjerg. Now we’ll 

hear from Rebecca Ann Batts, who is the Inspector General for the 

Pension Benefit Guaranty Corporation. Ms. Batts. 

STATEMENT OF REBECCA ANNE BATTS, INSPECTOR GENERAL, PENSION BENEFIT GUARANTY CORPORATION, WASHINGTON, DC 

Ms. BATTS. Good afternoon, Chairman Kohl, Ranking Member 

Martinez, and Senator Bennett. My name’s Rebecca Ann Batts, and 

I’m the Inspector General of the Pension Benefit Guaranty Corporation, Office of Inspector General. Thank you for the opportunity to testify today about the work being done by our office. 

PBGC is facing many challenges, including the need to address 

a potentially unprecedented influx of large defined benefit pension 

plans. In my full written statement, I acknowledgement PBGC’s 

senior leadership for its engagement in planning for the potential 

wave of new pension plan trusteeships. 

We appreciate your interest in this issue, as well as your request 

that we monitor and report on PBGC’s preparedness strategy. 

We’ve initiated an audit in response to your request, and plan to 

fast-track the most time-sensitive results of our work to ensure 

that we provide PBGC, the PBGC board, and Congress with timely 

and relevant information. 

Last week, my office issued an audit report addressing the serious misconduct of the former PBGC Director, Charles Millard, in 

contracting for lucrative strategic partnerships. The PBGC board 

reacted quickly and appropriately to our report, and we concur in 

the corrective actions proposed by the board. As requested by the 

committee, I’m providing the following information to inform your 

committee and others about the issues we identified in our audit. 

Beginning with planning for the development of a new investment policy, former PBGC Director Charles Millard became intimately involved in the day-to-day details of the contracts through 

which the new investment policy would be developed and implemented. 

Against the advice of senior leadership, Mr. Millard served on 

evaluation panels with subordinate employees. Against the advice 

of senior leadership, he participated directly in developing the criteria for picking the winners of the strategic partnership contracts. 

These three strategic partnership contracts for the management of 

$2.5 billion in assets went to three firms: Black Rock, Goldman 

Sachs, and JPMorgan. 

At the same time, he continued to represent PBGC before the investment community and engaged in extensive phoning and 

emailing with various Wall Street firms, including hundreds of 

calls logged with the successful bidders for the strategic partnership contracts. 

Mr. Millard wanted big Wall Street firms for PBGC’s strategic 

partners. As part of his effort to establish the criteria to be a successful bidder, he consulted with a Black Rock managing directory 

about establishing a floor on the number of employees that a firm 

needed to have in order to compete for a strategic partnership. Mr. 

Millard explained that he needed a cutoff figure so that he could 

wittle the field. 

40 

In response, the Black Rock executive proposed a specific number 

and strategized about a way to eliminate certain types of firms 

from consideration. Establishing standards specifically to eliminate 

some firms from competition is inconsistent with the former director’s responsibility established in regulation to conduct business 

with complete impartiality. 

Even though Mr. Millard should not have been talking to bidders 

at the same time he was evaluating their proposals, he communicated with some of them by phone and email. Mr. Millard said 

these contacts were OK because these were his friends, but that 

creates another problem and raises questions about impartiality. 

The PBGC Ethics Handbook specifically notes evaluating the bid of 

a friend as an example of behavior that raises an ethical concern. 

After the award of the strategic partnership contracts, a Goldman Sachs executive provided extensive assistance to the former 

director in his search for post-PBGC employment. The assistance, 

which is documented in at least 29 emails, tracks the Goldman 

Sachs executive’s efforts to aid Mr. Millard through personal meetings, strategic advice, introductions to potential employers, and 

help with meeting arrangements. 

Our audit results are largely based on documentary evidence, 

primarily in the form of phone records and email traffic. However, 

the impetus for our review of many of the specific issues I’ve discussed today was a whistleblower complaint. Reporting concerns 

about fraud, waste, or abuse to the Inspector General requires a lot 

of courage. The task is even more difficult when the issues of concern are subjective, involving questions of fairness, if impartiality, 

or of appearance. 

I am grateful to the whistleblower who first reported the questionable actions of the former director to my office. This person 

made a choice that will help the PBGC board and PBGC leadership 

make the changes needed to maintain the public’s trust. This person deserves our gratitude and thanks. 

That concludes my statement, Mr. Chairman. I will be happy to 

answer any questions you or the other members have. 

[The prepared statement of Ms. Batts follows:] 

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The CHAIRMAN. Thank you, Ms. Batts. Our final witness today 

will be Vincent Snowbarger, who is the Acting Director of the Pension Benefit Guaranty Corporation. 

STATEMENT OF VINCENT SNOWBARGER, ACTING DIRECTOR, 

PENSION BENEFIT GUARANTY CORPORATION, WASHINGTON, DC 

Mr. SNOWBARGER. Thank you, Chairman Kohl, Ranking Member 

Martinez, Senator McCaskill, and Senator Bennett. My name is 

Vince Snowbarger and I’m the Acting Director of the Pension Benefit Guaranty Corporation, or PBGC. I want to thank you for the 

opportunity to appear today to discuss PBGC’s financial condition 

and its readiness to take on new challenges in these turbulent economic times. 

I want to emphasize that despite the current economic slowdown 

and an increasing deficit, the corporation is able to meet its benefit 

payment obligations, and will be able to for many years to come. 

This is because benefits are paid in the form of annuities, and over 

the lifetime of retirees, not as lump sums. Nevertheless, over the 

long term, the deficit must be addressed. 

My testimony today will focus on four issue areas: PBGC’s governance structure, the agency’s pension insurance program, the 

deficit position PBGC currently faces, and its preparedness to deal 

with a potential influx of plan terminations. 

PBGC is a wholly owned Federal corporation with a three-member board: the Secretary of Labor, who is our Chair, the Secretaries 

of Commerce and the Treasury. PBGC is self-financed and receives 

no tax revenues. PBGC guarantees pensions when underfunded defined pension benefit plans terminate. PBGC insures 44 million 

workers and retirees in 30,000 pension plans. At the end of Fiscal 

Year 2008, PBGC was paying benefits of about $4.3 billion per year 

to 640,000 individuals, and another 634,000 will be eligible to receive benefits in the future. 

PBGC has been in a deficit position for most of its 35-year history. At the end of Fiscal Year 1908, PBGC had an $11 billion deficit, with $75 billion in liabilities, and $64 billion in assets. 

Unaudited results for the first 6 months of Fiscal Year 2009 

show that our deficit has tripled to $33.5 billion. That change in 

the deficit is primarily due to about $11 billion in completed and 

probably terminations, $7 billion from a decrease in the interest 

factor used to value liabilities, $3 billion in investment losses, and 

$2 billion in actuarial charges for the passage of time. 

Large plan terminations have always been and continue to be the 

most important factor in determining PBGC’s workload as well as 

its financial condition. Over the years, we have adapted our processes to meet the challenges of a cyclical workload, including the 

ability to scale up when we experience a rapid increase in plan terminations. There were relatively terminations in Fiscal Year 2008. 

However, during the first half of Fiscal Year 2009, PBGC took in 

75,000 new participants, over three times the number for all of last 

year. 

Still, this workload is far less than the record influx of more than 

800,000 new participants in the 4-year period from 2002 to 2005. 

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Those terminations included a number of large steel and airline 

plans. PBGC met the challenge of that increased workload. 

However, to give you some idea of the potential magnitude of the 

future workload, if the plans of some of the troubled auto companies are terminated, the number of new participants coming to 

PBGC in Fiscal Year 2009 or Fiscal Year 2010 could exceed $1 million. Those terminations would almost double the number of participants PBGC serves and significantly increase the trust fund assets and PBGC deficit. 

The cyclical nature of terminations and the impact of large terminations have required PBGC to develop mechanisms to handle 

major workload fluctuations. Contracts with our paying agent, field 

benefit administration offices, actuarial firms, and customer contact center allow us to adjust staffing based on workload, and historically, this has worked well. 

When we take over very large plans, we often retain the services 

of staff for the prior plan administrator in order to ensure a smooth 

transition. Currently, PBGC departments are preparing for an increase in contracting activity, additional hiring, and additional 

space and equipment needs. PBGC’s technology systems have been 

analyzed to verify that they’re ready to handle large workload increases, and we’ve developed specialized team approaches to process and administer the auto plans, should that become necessary. 

Finally, we are collecting and reviewing plan documents of large 

potential terminations to become familiar with the benefit provisions. PBGC’s Fiscal Year 1909 and 1910 budgets provide for additional spending authority if we take in more than 100,000 new participants. We are working closely with OMB in anticipation that we 

will need to use that authority for the first time. 

While PBGC has the capability to take on large plans, continuation of a plan is generally best for all stakeholders. We closely 

monitor troubled companies with underfunded plans and negotiate 

for plan protections that will limit participant and PBGC exposure 

and keep the pension plans going. 

Companies that sponsor pension plans have a responsibility to 

live up to the promises they make to their workers and retirees. 

However, when a company can no longer keep its promises, workers and retirees need the assurance of a strong and prepared 

PBGC. 

Thank you, Mr. Chairman, and I would be happy to answer questions. 

[The prepared statement of Mr. Snowbarger follows:] 

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The CHAIRMAN. Thank you very much, Mr. Snowbarger. We’ll 

now hear from Senator Martinez, then Senator Bennett, and then 

Senator McCaskill. 

Senator MARTINEZ. Thank you, Mr. Chairman. Ms. Bovbjerg, 

GAO made recommendations to the PBGC’s Board of Directors on 

the appropriateness of the investment strategy and asset mix that 

the agency is currently employing. Is this normal in the course of 

what you do into your analysis of their portfolios and so forth, or 

are there circumstances that brought you to do that? 

Ms. Bovbjerg. What we were asked to do by the Senate Help and 

Finance Committees was to look at the process by which the investment policies had been developed and implemented. As we 

were doing that work, this new policy was being developed, and so 

we looked at what the contractor had done in performing their estimates on risks and returns. 

The concern that we had was actually not about the return side. 

We tested the model and felt that the return estimates were robust. It was the risk side that we felt was really not being acknowledged. So we had tried different assumptions and could see that 

risk might vary widely, depending on what assumptions you used. 

Our concern more fundamentally was that that risk was not acknowledged. Only the return side was acknowledged. It wasn’t a 

balanced presentation. The board then would have made a decision 

to go with the investment policy without having all the information 

on the potential impact of that investment policy. 

Senator MARTINEZ. Do you think that this is just emblematic of 

the culture of PBGC, or was this just a moment in time, given the 

new guidelines, or why do you think there was that unawareness, 

I guess, or reticence to acknowledge risk? 

Ms. Bovbjerg. The information was not provided to the board, as 

we understand it. I think that a more active board might perhaps 

have delved into that more closely. We also documented that prior 

boards had not really overseen the implementation of the policy, so 

when an investment policy changed, it wasn’t always implemented 

for a variety of reasons, very quickly, but none of that was really 

documented, that the agency had gone to the board and briefed 

them on this and received permission to do that. 

Our concern was that the board was not involved enough in this 

very important decision, and we do think that changes in the governance structure would help. But I do want to emphasize that our 

concern about the investment policy is really a long-term concern. 

We do think that they should reevaluate with the information 

about risk, as well as returns. But they should think about it as 

a long-term strategy and not simply something that changes every 

few years in response to market changes. 

Senator MARTINEZ. So you think they need to have a long-term 

approach that is sound and in keeping with good investment practices, but not one that is temporal in terms of changing, depending 

on what market conditions may exist from month to month or year 

to year? 

Ms. Bovbjerg. We think that they should make the decision that 

way. But I want to call to your attention that the PBGC investment policy has changed every four to six years in the past, so it 

has swung between a focus on equities to a focus on bonds. We 

95 

think also that if there was more stability on the board and not 

just political appointees from the administration, that there were 

staggered terms, that it would be less likely that that would happen. 

Senator MARTINEZ. Good point. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator Martinez. Senator Bennett. 

Senator BENNETT. Mr. Chairman, thank you. I’m sorry I was 

late. Thank you for holding this hearing. It’s of great importance 

to my state, Colorado. Ten percent, roughly, of the employees in 

our workforce are employed by companies that the PBGC insures. 

Thank you all for being here today. I appreciate it. I wanted to 

start with Ms. Batts. I echo your expression of gratitude for the 

whistleblower in this case, and I—it’s very hard to stick your neck 

out in the face of supervisors who can control your career and your 

livelihood. I wonder whether or not you can assure the committee 

that steps have been taken to protect this whistleblower in this 

particular situation. 

Ms. BATTS. Yes, sir, we can. We’re very cognizant of our responsibility to ensure protection of our whistleblowers. 

Senator BENNETT. OK. This person is a hero for bringing this forward, and we need more, not less, of this. When I read your testimony, I found it particularly troubling that it appears that the 

prior director was trying to change the criteria for the size of the 

firms that could solicit—or respond to the RFP after the RFP had 

already been written; is that correct? 

Ms. BATTS. Let me clarify. The efforts to work on the size of the 

firm, the communications with Black Rock about what size firm 

would be appropriate, were made before the mandatory criteria for 

the RFP were developed. These were communications that occurred 

before they were developed. 

Senator BENNETT. OK. Thank you. I just wondered, Ms. 

Bovbjerg’s observation about the governance structure seems almost—I think can’t be disputed. I mean, having three Cabinet Secretaries be the board of the institution seems to me to be imagining 

a world that we don’t really exist in, and I wonder whether the others here have any view on that and what we might think about, 

in terms of governance structure. Mr. Salisbury. 

Mr. SALISBURY. Senator, I’ll just speak to my time at the agency, 

both as an employee, and then when I was on the advisory committee. The structure in this is true today, but it’s been true since 

1975. Essentially, each of the Cabinet members has designated a 

so-called board representative who, during the early years, was 

generally the general counsel of the Department of Labor, Commerce, and the Assistant Secretary Financial Markets at Treasury. 

That then shifted over time. In the most recent time period, for 

example, at the Department of Labor, it became the Assistant Secretary for the Employee Benefit Security Administration, which one 

could argue creates its own set of conflicts, because at that point, 

the person responsible for administering Titles I and II of ERISA 

is also essentially, one could argue, supervising the PBGC on behalf of the Secretary of Labor, who chairs the board. 

But in all of the times I’ve been involved with the agency, the 

board meets, as has been pointed out, very little. Most of the activity is with these individuals. In the case of the last administration, 

96 

because it went to the Assistant Secretary level, it actually was 

people who had Senate confirmation. For most of the history of the 

agency, it was individuals who had never had Senate confirmation. 

It was fairly low-level staff members that were doing the coordination. 

You could go back to making this a formal part of an executive 

branch agency, which would put it into a more normal governance 

structure. One of the proposals that was looked at by an advisory 

council about 18 years ago was to actually have it become a commission model. All of the SEC or the FTC, the FEC, which would 

be two or three appointed commissioners, to give it a more permanent governance structure. 

If I might, the one other thing I’d comment on is the investment 

policy issue. Having been at the agency during the first two revisions, and having been on the advisory committee during another 

revision of that policy, I think the most common determination of 

that flipping in policy is whether the executive director of the agency has a background in insurance or has a background in active equity investment management. 

When Jim Lockhart, now the head of the agency overseeing 

Fannie and Freddie, was the head of the agency, he had come out 

of an insurance background. He moved the agency toward what is 

termed a more bond immunization match liabilities to the asset’s 

philosophy, which is more traditional for an insurance company 

and how they would function relative to life annuities, which is 

what PBGC is, in essence. 

As opposed to the last two executive directors, the current director came straight out of the private equity active investment field; 

his predecessor, who had sort of a split life, is now at a large insurance company. The most extreme policy was the most recent move 

to a much more heavy equity strategy. 

So I think the appointment of the executive director and the 

background of the executive director, in the time I’ve been involved 

with the agency, which is since two months after it was first created, has been heavily influenced, almost overwhelmingly by the 

background of the executive director. It is also influenced by the 

background of the individuals at the Treasury Department, which 

is the primary agency involved in setting investment policy, as one 

would argue is appropriate. 

Senator BENNETT. Mr. Snowbarger, do you have a view? I know 

I’m putting you in a difficult position, but I— 

Mr. SNOWBARGER. Thank you for recognizing that, Senator. Well, 

we cooperated fully with the GAO report when it came out, and actually, at the request of the Chairman of our board, we also hired 

a private consultant to come in and do the similar kind of study, 

which that report came out, I believe it was about—well, I mean, 

it was last summer, and it pointed out different alternatives for 

doing it. 

I think you would find this rather unique in our structure within 

the Federal Government. There are a number of Federal corporations, there are a number of commissions, as was pointed out by 

Mr. Salisbury, but we’re rather unique. When you look at the composition of our board structure, both in terms of its size and its 

composition, it’s rather unusual. 

97 

Senator BENNETT. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you very much, Senator Bennett. Senator 

McCaskill. 

Senator MCCASKILL. Thank you. First let me start with the notion to our intrepid Inspector General. Congratulations on this 

work. This is the kind of report that makes your professional challenges worthwhile. Thank you. The rules that were broken allegedly by the former director, I assume that the people that were on 

the other end of those conversations were breaking rules also, correct? 

Ms. BATTS. In our audit report, we make it clear that as part of 

the audit, we did not identify any evidence of criminal activity on 

the part of the bidders. One of the things that made this situation 

very unusual was the unusual role that Mr. Millard had taken. 

Normally conversations with the Director of PBGC would not be inappropriate, because normally the Director of PBGC would not 

have taken this intimate involvement in the procurement process. 

So— 

Senator MCCASKILL. Well, wouldn’t the person at Black Rock, if 

the head of PBGC is talking to them and says, ‘‘Give me a floor. 

I’m trying to wittle these people out,’’ wouldn’t that—I mean, people at Black Rock, I would think, knowing all of the rules and regulations surrounding— 

Ms. BATTS. You would think. 

Senator MCCASKILL [continuing]. These kinds of processes, 

wouldn’t there be some kind of need on their part to blow a whistle 

on somebody? 

Ms. BATTS. It’s a good question. 

Senator MCCASKILL. Well, I think we should ask that question. 

Can you identify who the people are at Black Rock that were part 

of this conversation and the people at the other firms that were 

having these conversations? I think we’ve got investments in a lot 

of them right now. 

Ms. BATTS. Yes. 

Senator MCCASKILL. We’re shareholders, the American people, in 

some of them. 

Ms. BATTS. As I mentioned in my written statement in response 

to a bipartisan request from Senators Kennedy and Enzi of the 

Health Education and Labor and Pension Committee, and Senators 

Baucus and Grassley from the Finance Committee, they requested 

that we open an investigation. We take the concerns they expressed very seriously, and we’ve done so. We’ve had discussions 

with the Department of Justice on the matter, and it’s not appropriate for us to go forward with it. 

Senator MCCASKILL. OK. Let me talk about contracting a little 

bit. There has been a secret growth in the size of the Federal Government through contractors. PBGC is a great example of the 

growth in contractors. There’s hundreds—more than 130, I think, 

different audit recommendations that have been ignored over the 

years as it relates to contracting processes and procedures. 

I’m looking at various charts and graphs in the GAO report that 

I think is over a year old now. Yeah. Well, it’s not quite a year old. 

The excuse that’s given for contracting is that your workload is unpredictable. But yet, in the same report, it acknowledges that your 

98 

workload always goes up one to two years after an economic 

crunch. 

I assume, Mr. Snowbarger, you all are anticipating your workload going up. 

Mr. SNOWBARGER. Yes. 

Senator MCCASKILL. Significantly? 

Mr. SNOWBARGER. Yes. 

Senator MCCASKILL. So do you have plans right now to add employees as opposed to contractors? 

Mr. SNOWBARGER. I wouldn’t say as opposed to contractors. We’ll 

probably add both employees and contractors. 

Senator MCCASKILL. Why is it—I assume the contractors working side-by-side, like in most government agencies, are making 

more than the government employees? 

Mr. SNOWBARGER. I really couldn’t speak to that. I don’t know. 

Senator MCCASKILL. Who would know, if you don’t? 

Mr. SNOWBARGER. Our contracting officer and our personnel— 

Senator MCCASKILL. Well, that would be something I think the 

committee should be interested in and I’m certainly interested in. 

Two employees doing the exact same function at nearby desks, and 

I’m looking at one of these. I think in your org chart, you have 933 

contractors under the Chief Operating Officer, under the COO, 

which means your benefits, administration, and payments department, your actuarial services division, your retirement services division, your processing division, and your problem resolution office, 

you have four times as many contractors as you have FTEs. 

I would like to know how much those contractors are making as 

opposed to the government employees. I think it’s a notion that 

makes—it sounds good, but in reality, I think we don’t drill down 

far enough to see if these contract employees are saving anybody 

money. Let me look specifically at your lawyers. Do you have internal counsel? 

Mr. SNOWBARGER. Yes. 

Senator MCCASKILL. How many do you have? 

Mr. SNOWBARGER. We have two divisions of lawyers. They’re primarily lawyers. We have an Office of Chief Counsel that handles 

all our litigation. I believe—about 45 lawyers in the Office of Chief 

Counsel. Chief counsel handles our litigation on cases and does our 

negotiation on cases, as well. 

We have an Office of General Counsel that basically provides the 

general law advice for the firm, about 30 lawyers in that department. 

Senator MCCASKILL. How much do you spend annually on outside counsel? 

Mr. SNOWBARGER. We spend a considerable amount of money on 

outside counsel because we are facing outside counsel from the 

companies that are going under. In other words, you might take 

the Chrysler situation for example. There are all kinds of special 

lawyers—not just Chrysler’s lawyers, but Chrysler’s bankruptcy 

lawyers and Chrysler’s merger and acquisition lawyers, et cetera. 

There are certain kinds of expertise that it is less expensive for us 

to hire through counsel than it is to maintain on staff. 

Senator MCCASKILL. I would love—have you done a cost-benefit 

analysis on that? 

99 

Mr. SNOWBARGER. I believe we have. 

Senator MCCASKILL. I’d love to see that cost-benefit analysis. Because I know what those outside lawyers are charging you an hour, 

and I know how much lawyers make in government, and I have a 

bias there, since I’ve been a lawyer in government most of my legal 

career. There are some really smart lawyers that are in government that are great value, and you all are going to need specific 

expertise going forward, I think, over the next 5 to 10 years, and 

I would love to see what you’re spending on inside counsel versus 

outside counsel and the cost-benefit analysis that’s been done in 

that regard. 

Mr. SNOWBARGER. Sure. 

Senator MCCASKILL. Tell me what your plans are in terms of the 

use of contractors going forward. Have you looked at the recommendations that have been made by GAO, and do you have 

plans going forward that would actually begin to implement these 

recommendations in terms of contracting? 

Mr. SNOWBARGER. Partial. There are some of the recommendations that we disagreed with. I don’t know that I could go through 

those right now, but we can provide you with our response to the 

GAO’s report. But yes, we’ve already started implementing a lot of 

those. We’ve restructured our procurement department, for instance. We have those divisions set up now so that we’ve got people 

looking solely at the policy about whether or not we hire contractors or not and on what basis, plus the side of the contracting department that would actually be doing the procurements and the 

administration of those procurements. 

Senator MCCASKILL. OK. I’ll stick around, Mr. Chairman, and 

ask some more questions later. Thank you. 

The CHAIRMAN. Thank you very much, Senator McCaskill. Ms. 

Batts, on the findings in your report, do you think the investment 

services contract that was awarded to Goldman Sachs, JPMorgan, 

and Black Rock should be rebid? 

Ms. BATTS. We have not done audit work specifically to assess 

whether the strategic partnership contracts are the best way to assist in accomplishing PBGC’s investment objectives, although that 

is one of the objectives of ongoing work. 

In a comprehensive implementation plan for its investment policy, PBGC needs to figure out whether the strategic partnerships 

fit in their overall strategy. 

The CHAIRMAN. So you’re saying they should be rebid, should 

not, you’re not sure, you haven’t recommended, what? 

Ms. BATTS. OK, I’m sorry. I’m very troubled by the contracts, and 

our recommendation to the board was that they consider seriously 

whether the contracts needed to be terminated. I think that’s what 

you’re referring to by being rebid. 

The CHAIRMAN. Yes. 

Ms. BATTS. I was pleased to see Mr. Snowbarger’s recommendation that the three contracts be terminated. In terms of rebid, I 

don’t know whether strategic partnerships are the way to go or 

whether PBGC might choose some other way to move forward. 

The CHAIRMAN. I’ll get back to you in a second. Mr. Snowbarger, 

do you concur with what Ms. Batts has said? 

100 

Mr. SNOWBARGER. Well, as she indicated, I did recommend to the 

board that the contracts be terminated. In terms of a rebid, I think 

it’s a little early to know whether or not that fits into the new 

board’s investment policy strategy. They want to take time and 

naturally want to review what was done over the past, and once 

they’ve made that determination, strategic partnerships may or 

may not fit into achieving those overall goals. 

I think that being the case, it’s probably just better at this point 

to terminate them, and if the board decides that strategic partnerships are a tool for implementing a new investment policy, then we 

can go back out and rebid. 

The CHAIRMAN. OK. Ms. Batts, PBGC has 130 pending recommendations from you. Why hasn’t PBGC taken action to implement these recommendations? Have you taken steps to inform the 

Board of Directors of all your recommendations? 

Ms. BATTS. There are many reasons as to why PBGC hasn’t implemented the 130. Many will take a length of time to complete 

and are in process. We’ve recently begun a concerted effort with 

PBGC management to ensure that appropriate corrective action 

plans have been developed. For example, PBGC needs to integrate 

its financial systems, and this will require a number of changes in 

systems. I would note, however, that this recommendation was first 

raised in the 1997 financial statement audit. 

In the interest of streamlining processes, my predecessor made 

a decision to rely upon PBGC to track recommendations and followup. Though this can and does work in many Offices of Inspector 

General, we found that it did not work well for us. This spring, we 

returned to the prior method where the Office of Inspector General 

controls the tracking of the recommendations, and have established 

our own tracking system for open recommendations. 

Some of the recommendations have been briefed to the board in 

the past. For example, many relate to the significant deficiencies 

in the financial statement audit internal control report. We ordinarily would not brief many of the recommendations to the board, 

only those that are most significant. 

The CHAIRMAN. Thank you. Mr. Salisbury, given the current economic situation, do you believe PBGC will be able to meet its financial obligations today and on into the future? 

Mr. SALISBURY. Senator, I think that as even the revised numbers from the PBGC indicate, and even if you take the testimony 

today describing the worst case, with all of the auto industry plans 

coming in, and then you look at the annuity nature of the payouts, 

the fact is that there are participants in these programs that are, 

let’s say, 30 years of age, who wouldn’t be eligible for a benefit for 

35 years, and that’s when payments would come. Does PBGC, even 

under the most dire scenarios, have assets that will grow sufficiently to pay benefits for some number of decades, at least two 

decades, possibly longer? 

The issue is, in the very long term, related to whether there will 

be other defined benefit plans that continue to exist that are able 

to continue paying some level of premiums. The real problem for 

PBGC is when the assets run out, which I see as occurring a long 

time in the future. That doesn’t say that one should wait to look 

at it, but it does create that temptation. 

101 

The second issue that relates to this is why I mentioned the interest rate environment; if one were to simply revalue PBGC’s liabilities and defined benefit pension liabilities, based on the assumption of moving back to more traditional market interest rates, 

including Federal Reserve policy, that alone would dramatically improve the funded status of many pension plans. 

For lack of a better example, one large U.S. company that before 

the market meltdown was 137 percent funded, by January, was 98 

percent funded. Based on its public statements, if you simply 

moved the government interest rate back up, that plan would instantly move to 114 percent funded simply because the interest 

rate changed. 

So I think that until we know where the economy comes out after 

11, 10, and 11, and where interest rates level out, there’s an awful 

lot of uncertainty in what the status of PBGC is, and frankly, what 

the status of defined benefit plans, per se, is. 

The CHAIRMAN. Thank you. Ms. Bovbjerg, as you said, the board 

has not met since February of 2008. Of course, a lot has happened 

in our economy since then that has an impact on PBGC. In your 

opinion, what steps does Congress need to take to be sure that the 

board is, in fact, able to discharge its obligations, which I assume 

you regard as essential? 

Ms. Bovbjerg. Well, absolutely. I think we said in my statement, 

now more than ever. We really—there are two issues really with 

the current board structure. One is that it’s not structured for 

members to give the kind of attention and oversight that we think 

the corporation needs. It’s the number. There’s only three. It’s that 

they’re Cabinet Secretaries, although, as Dallas points out, they do 

have appointees under them who represent them when there are 

board meetings. They have staff who work with them. 

The Big 3 are really not able to give the corporation the kind of 

attention that it deserves and now increasingly needs. We looked 

at a number of other government boards. They average seven members. Also, PBGC commissioned a study from McKinsey that looked 

at all these different options for different types of boards. Nearly 

all of them have a little more horsepower on them. 

The other thing is that everyone’s term ends simultaneously. 

There’s no continuity, and that’s really a problem for this corporation. If the deputy position had not been made permanent about a 

year ago, we wouldn’t have Mr. Snowbarger here to run PBGC either. So it’s really important to have staggered terms. 

We also think that the intent of the three Cabinet Secretaries 

was to provide a diversity of perspective. You have Labor there to 

represent workers, Commerce to represent business, Treasury to 

represent finance. That’s a really good idea. In fact, we think that 

there should be more diversity on the board to include certain 

types of expertise from other areas—financial expertise, labor expertise, governance. 

We think that it would enhance greatly the board’s ability to 

oversee, for example, contract issues, because if there is a director 

who is at least giving an appearance of a not transparent fair contracting process, the board needs to be alert to that and should not 

have to rely solely on a whistleblower to bring that information to 

the floor. 

102 

The CHAIRMAN. Thank you. Senator Martinez? 

Senator MARTINEZ. I’ve got to tell you, I agree completely with 

your assertion regarding the board. I don’t believe that a Cabinet 

officer is ever going to be in a position to be hands-off enough to 

be an effective member of a board such as PBGC needs to have. 

This is not a board where it’s merely policy setting. This is a board 

about oversight and nuts and bolts of a large investment operation. 

So I really believe that that is a key element here in what, going 

forward, needs to occur, which is a hands-on board that is not Cabinet officers, who I know, from personal experience, are incapable 

of giving the kind of time and attention that a board like this 

would need. As you said, they’ll delegate it to someone within the 

department who might not be senior enough to really have the 

stature, perhaps, to be an effective board member. Plus you leave 

it only on three, and that’s not very many to be overseeing such 

a large amount of money with such an important responsibility. 

But to that effort, let me just say on the audit report, it appears 

pretty clear that the fundamental PBGC that you uncovered was 

a merger of functions between being the executive director and 

then immersing himself in the procurement process and, in a very 

detailed way, impacting it. As part of his job, he would have to talk 

to people that, by necessity, once he became also the procurement 

officer, he was then prohibited from really being in contact with. 

I understand that that is a policy recommendation, and I want 

to ask Mr. Snowbarger whether that situation has been now clearly 

defined, because I also saw a letter from Mr. Millard where he alleges that he consulted with the counsel at the time and was told 

that there was no reason why he could not do all of that. I find 

that hard to understand, but given that situation, I just wondered 

if this is now corrected and is no longer an issue. I see that the 

board said that it agreed with a recommendation and will work 

with PBGC to develop appropriate guidelines. Are those guidelines 

now in place? 

Mr. SNOWBARGER. Since the letter just came out yesterday, the 

answer is no, but there is no problem. This acting director will not 

be involved in the contracting process. 

Senator MARTINEZ. I understand. 

Mr. SNOWBARGER. It’s just a matter of papering up. We agree 

with the recommendation of the Inspector General, and we’ll work 

with the board to paper that decision. 

Ms. BATTS. To speak to the comment that you made about Mr. 

Millard’s comment about the legal review that was performed by 

general counsel, it’s important to remember that at the time the 

general counsel did that legal review, she was not aware that he 

was having contact with bidders. She was not aware of some of the 

events that had occurred before the RFP was developed. So— 

Senator MARTINEZ. Well, I wasn’t trying to judge Mr. Millard’s 

actions here— 

Ms. BATTS. Certainly. Certainly. 

Senator MARTINEZ [continuing]. Because I think there will be 

other forums for that. I was just trying to make sure that we had 

in place policies, since there seemed to be some confusion on his 

part, and I saw the recommendation, and I wanted to make sure 

that it would be followed upon. 

103 

Ms. BATTS. Certainly. 

Senator MARTINEZ. That’s all. Thank you very much. 

The CHAIRMAN. Thanks, Senator Martinez. Senator McCaskill? 

Senator MCCASKILL. Mr. Salisbury, what worries me the most 

about this whole sit—and, by the way, Mr. Snowbarger, you do 

have a really hard job, because you took over, and there is no 

board, right, at the moment you took over? 

Mr. SNOWBARGER. At the moment I took over, there was no 

board. We obviously have a board at this point in time. 

Senator MCCASKILL. You have a board now. But taking over this 

agency with literally no board is rocky terrain, especially under the 

circumstances which you took over. So I am cognizant of the challenges you faced. 

I’m curious, Mr. Salisbury, I think most people in business would 

say that defined benefit plans are going away, that we’re not going 

to have many companies 20, 30, 40 years from now that have defined benefit plans. As more and more defined benefit plans go 

away, then, as you mentioned, the source of funding for this agency 

goes away. 

Have there been—are you aware or is anyone else on the panel 

aware of any of the long-term studies that have been done, assuming, worst-case scenario, that we no longer have defined benefit 

plans in our major automobile manufacturers, and that most of 

that liability is shifted over to this agency? Assuming that we continue on the same track, I don’t recall ever seeing statistics of what 

the drop-off has been over the last 5 years, but I know it’s been 

significant. 

What is—who’s going to pay the premiums to keep this agency 

going 30, 40 years from now? Where is that revenue source going 

to be? 

Mr. SALISBURY. You end up, Senator, with a couple of interesting 

statistical quirks. One is that even though the number of defined 

benefit pension plans which, at its high point was at about 185,000, 

and is now down at about 29,000, or a little less than that, in spite 

of that amount of decline, the total number of participants on 

whom PBGC has been collecting premiums has actually gone up 

very slightly and is now just short of 44 million. 

Senator MCCASKILL. Because of mergers and acquisitions? 

Mr. SALISBURY. It’s a combination of mergers, of acquisitions, of 

premiums being paid on so-called deferred vested participants that 

represent about 25 percent of those on whom premiums are being 

paid. Another 25 percent are those in retirement on whose behalf 

the plan still pays. When I was at the Labor Department, it was 

a 95/5 rule: 95 percent of participants were in 5 percent of the 

plans. It’s almost that pronounced today. 

Second factor, in the last 20 years, many of the defined benefit 

plans, the Pension Benefit Guaranty Corporation, and the Internal 

Revenue Service made a ruling, which has since been endorsed by 

Congress, that so-called cash balance plans that look like a defined 

contribution plan to the participant, would legally be declared to be 

defined benefit plans. This is because of the way the benefit accrues, even though almost everyone who leaves those plans gets a 

single-sum distribution, not a life income annuity. 

104 

Those plans promise very low benefits. The contribution rates are 

very, very low. On a conference call earlier today I was told by one 

of the consulting firms that most of the companies sponsoring those 

plans have reduced the additional interest crediting they give to individual participant accounts to zero in order to hold down the PPA 

2006 liabilities and costs. Some plans are being frozen, but most of 

them are being continued. 

The interesting thing is that with about 30 percent of PBGC participants now in those types of very, very low-cost plans low cost 

means low benefits—there is a significant premium flow, an area 

where the cost of the plans can be very effectively managed by the 

employer. This is unlike traditional DB plans, the other 70 percent 

of the universe, where the employer doesn’t have this ability. 

In that realm, the large employer plans, we have seen enterprises like IBM freeze all of those defined benefit plans. But IBM, 

at least based on stock value and what the market’s done, looks 

like it will be a secure company; it is likely to maintain those 

plans, as will many other companies. 

They keep them for an interesting reason. They tend to keep 

them because they essentially have gone to insurance companies, 

in many cases when the plan is overfunded—there’s more than 

enough money to pay all the benefits. They ask the insurance company, ‘‘If we simply give you money so that you take over all of the 

funding obligation—that would cause premium responsibilities to 

disappear as well—how much would you charge us?’’ 

The insurance companies generally would charge them far more 

than what the companies believe it will cost them to maintain the 

plan themselves. So you have many companies with frozen plans 

that do not do that. Now, the reason I note that is because right 

now, interest rates are being fairly heavily managed by the Federal 

Reserve. One would argue they always are, but they’re being managed very low right now. If the market for interest rates come 

back, the economy comes back, plans move back to overfunded status, and we were to have a spike in interest rates such that companies, as they have done twice before in the last 30 years, hit a socalled interest rate sweet spot, suddenly there would be a tremendous financial advantage in doing a so-called sufficient termination 

of the plan. Then everybody gets their pensions, the company is 

done with the obligation, PBGC has no liability, but they now lose 

the guaranteed premium flow. You could see a significant loss of 

plans that are currently frozen, a very significant proportion that 

hit that sweet spot, plans would go away. 

Senator MCCASKILL. What percentage would you say are frozen 

right now that, if that sweet spot was attained, that— 

Mr. SALISBURY. Depending on which—the government data is 

now about 3 years old, but the last time the government looked at 

it, it was about 30 percent of what would be the premium base. 

Senator MCCASKILL. Mr. Snowbarger, is there—internally are 

there discussions about the premium flow into the future? I mean, 

is this something that your organization is down in the weeds, trying to figure this out? 

Mr. SNOWBARGER. Well, again, because our premiums and our 

client base are all determined by Congress, it would be a matter 

of just looking at, well, what’s really going to hit and when? We 

105 

don’t have much control over how that occurs. We have asked Congress for higher premiums, and we got some increase in premiums 

in the Pension Protection Act. We’ve also asked for authority to set 

premiums so that we could adjust those premiums based on the 

risk that the company actually poses to us, and we’ve not had that 

authority given to us. 

So, I mean, there are requests that we’ve made to try to manage 

that deficit over time. At this point, again, Congress has not responded to those in a positive way. 

Senator MCCASKILL. Going— 

Senator, if I could just quickly note, I mentioned in my testimony 

a former chief economist of the PBGC, Richard Ippolito, and he did 

do a book and has done a lot of work looking at what he describes 

is the death spiral that would occur here. 

So there is work that has been done, including so-called Monte 

Carlo modeling, looking at these issues. The PBGC, in its PIMS 

model that is mentioned in their testimony, does have a reasonable 

capability to model for the types of scenarios you’re describing, 

where that’s something that you desire to have done, speaking on 

behalf of the agency. 

Senator MCCASKILL. He loves it, I can tell. Mr. Snowbarger, finally, clearly according to Mr. Salisbury, we’ve had an investment 

strategy that was driven, to some extent, by the experience of the 

director. I’m not sure, based on my knowledge of organizations and 

their investment strategy, if that is the wisest course. What is 

your—I know that you are struggling with whether or not to cancel 

these contracts and reevaluate, but what is your recommendation 

going to be to the board about what the investment strategy should 

be going forward, and where should that recommendation actually 

come from? 

Mr. SNOWBARGER. Well, again, I’ve—in my term at PBGC, I’ve 

had directors that have gone both ways, more fixed-income-based 

and more equity-based. As Mr. Salisbury pointed out, it kind of 

swings back and forth. It swings back and forth with particular 

leaders. It doesn’t necessarily follow party lines. It really has more 

to do with the experience. 

I think part of what you’re getting at with board structure and 

part of what GAO is getting at with a continuity in a board structure would give you a little more stability, so that any new director 

coming in is going to have some direction from above, OK, if you 

want to tweak, we can go a little bit this way or a little bit that 

way, but you wouldn’t have these 180-degree swings in the investment policy itself. 

In terms of what my recommendation might be to the board, I’m 

going to wait for the new director to come on board. I’ve not had 

discussions with my current board about what their concerns are 

about this investment policy. Again, it is not that unusual, if you 

look back across PBGC’s history, to have a more equity-based kind 

of investment policy. 

I think the questions that were raised by the GAO when the policy first was announced, the Congressional attention that it garnered after that report, and then the economy last fall, I think it 

clearly brought into question, wow, is this a good economic strategy? 

106 

Well, if you take the admonition, again, of Mr. Salisbury, if you 

think about this over a long period of time and you make certain 

assumptions about PBGC’s responsibility to fill that hole, and you 

make certain assumptions about whether or not PBGC will ever 

get the authority to use premiums to fill that hole, I’m not sure 

what other alternative you’re left with. In fact, I think Peter 

Orszag, when he was the director of the Congressional Budget Office, in doing his analysis of PBGC’s strategy, was very similar to 

the conclusions that GAO came up with, but he did raise the question, if you don’t have premium authority and you don’t have underwriting authority, and you have this hole, how do you fill it? 

Senator MCCASKILL. Right. Well, I have thousands of auto workers in my state that are out of work, and it is a tragedy, what is 

happening to them and their families. When I see them, a lot of 

them grab me, physically grab me, and look in my eyes, and say, 

‘‘Is my pension OK?’’ Not to put any pressure, but I look at them 

and I say, ‘‘Your pension’s OK.’’ 

I think the responsibility of this agency is very intense. Over the 

next 24 to 48 months, you need to be a rock, because these families 

are looking for one to cling to. They’ve worked hard. They deserve 

what they’ve been promised. I hope that all of the recommendations that have been made by the IG and the GAO are taken as 

a priority, and that your agency moves forward through this obviously little bit of a black mark here, as we make sure we’re there 

for these folks. It’s only right. 

Mr. SNOWBARGER. I’m sure. 

Senator MCCASKILL. Thank you for having the hearing, Mr. 

Chairman. 

The CHAIRMAN. Thank you very much, Senator McCaskill. I want 

to thank you very much for being here today, folks. The Pension 

Benefit Guaranty Corporation is obviously a very important, critically important government entity. We need to be certain that it’s 

sound heading into the future, that its governance and administrative structure really does work on behalf of the American people. 

You’ve contributed a lot today to getting us on that path, and we 

are going to follow through on your recommendations, along with 

some of our own. I’d like to hope that better days are ahead for the 

PBGC. Thank you so much for being here. Thank you all for coming. 

[Whereupon, at 3:30 p.m., the hearing was adjourned.] 

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