14-1 

SECTION 14 - THE PENSION BENEFIT GUARANTY CORPORATION 

CONTENTS 

Explanation of the Corporation and Its Functions 

Administration 

 Plan Termination Insurance 

 Plan Termination 

Financial Condition of the PBGC 

 Overview 

 Claims from Underfunded Plans 

 Financing 

Budgetary Treatment 

Future Financial Status of the PBGC 

Legislative History 

 Single-Employer Plans 

 Multiemployer Plan Insurance Program

EXPLANATION OF THE CORPORATION AND ITS FUNCTIONS

 The Pension Benefit Guaranty Corporation (PBGC) was established under 

title IV of the Employee Retirement Income Security Act of 1974 (ERISA) (88 Stat. 

829, Public Law 93-406) to insure private pension beneficiaries against the 

complete loss of promised benefits if their defined benefit pension plan is 

terminated without adequate funding. The PBGC receives no funds from general tax 

revenues. Operations are financed by insurance premiums set by Congress and paid 

by sponsors of defined benefit plans, investment income, assets from pension plans 

trusteed by PBGC, and recoveries from the companies formerly responsible for the 

trusteed plans. 

ADMINISTRATION 

 The PBGC is a government-owned corporation. A three-member board of 

directors, chaired by the Secretary of Labor, administers the Corporation. The 

Secretary of Commerce and the Secretary of the Treasury are the other directors. 

ERISA provides for a seven-member Advisory Committee, appointed by the 

President, for staggered 3-year terms. The Advisory Committee advises the PBGC 

on issues such as investment of funds, plan liquidations, and other matters. 

PLAN TERMINATION INSURANCE 

Defined Benefit and Defined Contribution Plans

 There are two basic kinds of pension plans: "defined benefit" and "defined 

contribution" plans. Under a defined benefit plan, employees receive a fixed benefit 
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at retirement prescribed by a formula set forth in the plan. The employer makes 

annual contributions to the plan based on actuarial calculations designed to ensure 

that the plan has sufficient funds to pay the benefit prescribed by the formula. 

Under a defined contribution plan, no particular benefit is promised. Instead, 

benefits are based on the balance of an individual account maintained for the benefit 

of the employee. The benefit received by an employee at retirement is generally 

dependent on two factors: total contributions made to the plan on the employee's 

behalf during the employee's participation in the plan, and the investment 

experience of the amounts contributed on the employee's behalf. Under either type 

of pension plan, employees also may be permitted to make contributions. 

 Under a defined contribution plan, the employee bears all the risk of poor 

investment performance of the assets invested in a plan. Whether the funds are 

invested well or poorly, the employee gets at retirement only what was contributed 

plus the amount actually earned. 

 Under a defined benefit plan, the employer bears more of the risk of loss. 

The Internal Revenue Code and ERISA contain minimum funding standards that 

require the employer to make contributions to a defined benefit plan to fund 

promised benefits. Thus, for example, if the plan experiences poor investment 

performance, actuarial miscalculations, or low benefit estimates, the employer will 

be required to make additional contributions to the plan. However, the minimum 

funding rules provide for funding over a period of time, and do not require that the 

plan have assets to pay all the benefits earned under the plan at any particular time. 

Thus, it is possible for a defined benefit plan to terminate without having sufficient 

assets to pay promised benefits. The PBGC insures defined benefit plan benefits up 

to certain limits to protect plan participants in the event of such a termination. 

However, the PBGC may not protect all benefits promised under a plan so that even 

under a defined benefit plan, the employees bear some risk of loss. An additional 

benefit available to plan participants aged 55-64 who are receiving pensions from 

PBGC is a tax credit equal to 65 percent of the premiums they pay for health 

insurance. 

 The total number of private defined benefit plans is less than the number of 

private defined contribution plans. 

 Beginning in the early-1990s, participants in defined contribution plans 

exceeded those in defined benefit plans. Similarly, in the mid-1990s, assets held in 

defined contribution plans surpassed those held in defined benefit plans. 

 The operations of the insurance program, and insurance limits, are described 

below. Defined contribution plans are not insured by the PBGC. 

Single-Employer and Multiemployer Plans

 Defined benefit plans insured by the PBGC fall into two categories: 

single-employer plans and multiemployer plans. Multiemployer plans are 

collectively bargained arrangements maintained by more than one employer. 

Single-employer plans, whether or not collectively bargained, are each maintained 

by one employer. Non-collectively-bargained plans maintained by more than one 

employer are classified as single-employer plans. 
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 The risk to the PBGC posed by single-employer plans is different from that 

posed by multiemployer plans. Generally, single-employer plans are more 

vulnerable to the risk of underfunding due to financial weakness of the sponsoring 

employer; the PBGC is more vulnerable to the risk that a single employer will be 

unable to make up the difference between funded and promised benefits. Issues 

concerning insurance of multiemployer plans are more likely to concern the 

allocation of liabilities as firms enter and leave the participating group. 

 The PBGC insures the benefits of nearly 44 million pension plan 

participants, including active workers and retirees. Of these, 78 percent, or just over 

34 million, are covered by approximately 31,000 single-employer pension plans, 

and 22 percent, or about 9.5 million, are covered by approximately 1,700 

multiemployer plans. 

Other Requirements for PBGC Coverage

 The PBGC covers only those defined benefit plans that meet the qualification 

requirements of section 401 of the Internal Revenue Code. These are also the 

requirements that plans must meet in order to receive the significant tax benefits 

available to qualified pension plans. 

 Generally, to be qualified under the Internal Revenue Code, a pension plan 

must be established with the intent of being a permanent and continuing 

arrangement; must provide definitely determinable benefits; may not discriminate in 

favor of highly compensated employees with respect to coverage, contributions or 

benefits; and must cover a minimum number or percentage of employees. 

 Pension plans specifically excluded from insurance by the PBGC include 

government and church plans, defined contribution plans, plans of fraternal 

societies financed entirely by member contributions, plans maintained by certain 

professionals with 25 or fewer participants, and plans established and maintained 

exclusively for substantial owners. 

PLAN TERMINATION 

Single-Employer Plans

An employer can voluntarily terminate a single-employer plan only in a 

standard or distress termination. The participants and the PBGC must be notified of 

the termination. The PBGC may involuntarily terminate a plan. 

Standard Terminations --A standard termination is permitted only if plan assets 

are sufficient to cover benefit liabilities. Generally, benefit liabilities equal all 

benefits earned to date by plan participants, including vested and nonvested benefits 

(which automatically become vested at the time of termination), and including 

certain early retirement supplements and subsidies. Benefit liabilities also may 

include certain contingent benefits (for example, plant shutdown benefits). If assets 

are sufficient to cover benefit liabilities (and other termination requirements, such 

as notice to employees, have not been violated), the plan distributes benefits to 

participants. The plan provides for the benefit payments it owes by purchasing 

annuity contracts from an insurance company, or otherwise providing for the 
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payment of benefits, for example, by providing the benefits in lump sum 

distributions. 

 Assets in excess of the amounts necessary to cover benefit liabilities may be 

recovered by the employer in an asset reversion. The asset reversion is included in 

the gross income of the employer and also is subject to a nondeductible excise tax. 

The excise tax is 20 percent of the amount of the reversion if the employer 

establishes a qualified replacement plan, or provides certain benefit increases in 

connection with the termination. Otherwise, the excise tax is 50 percent of the 

reversion amount. 

Distress Terminations--If assets in the plan are not sufficient to cover benefit 

liabilities, the employer may not terminate the plan unless the employer meets one 

of four criteria necessary for a "distress" termination: 

 The contributing sponsor, and every member of the controlled group of 

which the sponsor is a member, has filed or had filed against it a petition 

seeking liquidation in bankruptcy or any similar Federal law or other 

similar State insolvency proceedings; 

 The contributing sponsor and every member of the sponsor's controlled 

group has filed or had filed against it a petition to reorganize in 

bankruptcy or similar State proceedings. This criteria also is met if the 

bankruptcy court (or other appropriate court) determines that, unless the 

plan is terminated, the employer will be unable to continue in business 

outside the reorganization process and approves the plan termination; 

 The PBGC determines that termination is necessary to allow the employer 

to pay its debts when due; or 

 The PBGC determines that termination is necessary to avoid unreasonably 

burdensome pension costs caused solely by a decline in the employer's 

work force. 

These requirements, added by the Single Employer Pension Plan 

Amendments Act of 1986 (SEPPAA) and modified by the Pension Protection Act 

of 1987 (PPA), and the Retirement Protection Act of 1994 (RPA) are designed to 

ensure that the liabilities of an underfunded plan remain the responsibility of the 

employer, rather than the PBGC, unless the employer meets strict standards of 

financial need indicating genuine inability to continue funding the plan. 

Involuntary Terminations--The PBGC may terminate a plan involuntarily, 

either by agreement with the plan sponsor or pursuant to a court order. The PBGC 

may institute such proceedings only if the plan in question has not met the 

minimum funding standards, will be unable to pay benefits when due, has a 

substantial owner who has received a distribution greater than $10,000 (other than 

by reason of death), or the long-run loss to the PBGC with respect to the plan may 

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

PBGC must terminate a plan if the plan is unable to pay benefits that are currently 

due. A court may order termination of the plan in order to protect the interests of 

participants, to avoid unreasonable deterioration of the plan's financial condition, or 

to avoid an unreasonable increase in the PBGC liability under the plan. 

PBGC Trusteeship--When an underfunded plan terminates in a distress or 
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involuntary termination, the plan effectively goes into PBGC receivership. The 

PBGC becomes the trustee of the plan, takes control of any plan assets, and 

assumes responsibility for liabilities under the plan. The PBGC makes payments for 

benefit liabilities promised under the plan with assets received from two sources: 

assets in the plan before termination, and assets recovered from employers. The 

balance, if any, of guaranteed benefits owed to beneficiaries is paid from the 

PBGC's revolving funds (see below). 

Employer Liability to the PBGC--Following a distress or involuntary 

termination, the plan's contributing sponsor and every member of that sponsor's 

controlled group is liable to the PBGC for the excess of the value of the plan's 

liabilities as of the date of plan termination over the fair market value of the plan's 

assets on the date of termination. The liability is joint and several, meaning that 

each member of the controlled group can be held responsible for the entire liability. 

Generally, the obligation is payable in cash or negotiable securities to the PBGC on 

the date of termination. Failure to pay this amount upon demand by the PBGC may 

trigger a lien on the property of the contributing employer's controlled group for up 

to 30 percent of its net worth. Obligations in excess of this amount are to be paid on 

commercially reasonable terms acceptable to the PBGC. 

Benefit Payments--When an underfunded plan terminates, the benefits that 

the PBGC will pay depend on the statutory guaranty, asset allocation, and recovery 

on the PBGC's employer liability claim. 

Guaranteed Benefits--Within certain limits, the PBGC guarantees any 

retirement benefit that was nonforfeitable (vested) on the date of plan termination 

other than benefits that vest solely on account of the termination, and any death, 

survivor or disability benefit that was owed or was in payment status at the date of 

plan termination. Generally only that part of the retirement benefit that is payable in 

monthly installments (rather than, for example, lump sum benefits payable to 

encourage early retirement) is guaranteed. Retirement benefits that commence 

before the normal age of retirement are guaranteed, provided they meet the other 

conditions of guarantee. Contingent benefits (for example, early retirement benefits 

provided only if a plant shuts down) are guaranteed only if the triggering event 

occurs before plan termination. 

 There is a statutory ceiling on the amount of monthly benefits payable to 

any individual that may be guaranteed. This ceiling, which is indexed according 

to changes in the Social Security wage base, is $3,664.77 for the year 2003 for a 

single life annuity payable at age 65. This limit is actuarially reduced for 

benefits payable before age 65, or payable in a different form. 

 The reduction in the maximum guarantee for benefits paid before age 65 is 7 

percent for each of the first 5 years under age 65, 4 percent for each of the next 5 

years, and 2 percent for each of the next 10 years. The reduction in the maximum 

guarantee for benefits paid in a form other than a single life annuity depends on the 

type of benefit, and if there is a survivor's benefit, the percentage of the benefit 

continuing to the surviving spouse and the age difference between the participant 

and spouse. 

 For example, consider a retiree who, at plan termination in 2003, is age 60 
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and whose spouse is 2 years younger. The participant is receiving a joint and 50 

percent survivor's benefit (a benefit that continues to a surviving spouse upon the 

death of the participant at a reduced level of 50 percent). In this case, the maximum 

guarantee applicable to the participant is $2,101.01 per month [$3,664.77 X 0.90 

(joint and survivor benefit) X 0.65 (participant age) X 0.98 (spouse 2 years 

younger)]. 

 The guarantee for any new benefit, including benefits under new plans and 

benefits provided by amendment to already existing plans, is phased in over 5 years 

following creation of the benefit. 

Asset Allocation--Assets of a terminated plan are allocated to pay benefits 

according to a priority schedule established by statute. Under this schedule, some 

nonguaranteed benefits are payable from plan assets before certain guaranteed 

benefits. For example, benefits of participants who have been in pay status for more 

than 3 years have priority over guaranteed benefits of participants not in pay status. 

Section 4022(c) Benefits--The PBGC also is required to pay participants a 

portion of their unfunded, nonguaranteed benefits based on a ratio of recovery on 

the employer liability claim to the amount of that claim. 

 As a result of the asset allocation and section 4022(c) benefits, 

reimbursement to the PBGC for its payment of guaranteed benefits may be less than 

the total value of assets recovered from the terminated plan. 

Multiemployer Plans

 In the case of multiemployer plans, the PBGC insures plan insolvency, rather 

than plan termination. Accordingly, a multiemployer plan need not be terminated to 

qualify for PBGC financial assistance, but must be found to be insolvent. A plan is 

insolvent when its available resources are not sufficient to pay the plan benefits for 

the plan year in question, or when the sponsor of a plan in reorganization 

reasonably determines, taking into account the plan's recent and anticipated 

financial experience, that the plan's available resources will not be sufficient to pay 

benefits that come due in the next plan year. 

 If it appears that available resources will not support the payment of benefits 

at the guaranteed level, the PBGC will provide the additional resources needed as a 

loan. The PBGC may provide loans to the plan year after year. If the plan recovers 

from insolvency, it must begin repaying loans on reasonable terms in accordance 

with regulations. 

 The PBGC guarantees benefits under a multiemployer plan of the same type 

as those guaranteed under a single-employer plan, but a different guarantee ceiling 

applies. The Multiemployer Pension Plan Amendments Act of 1980 (Public Law 

96-364, referred to as MPPAA), established a benefit guarantee limit for 

participants in multiemployer plans equal to the participant=s years of service 

multiplied by the sum of (1) 100 percent of the first $5 of the monthly benefit 

accrual rate and (2) 75 percent of the next $15 of the accrual rate. For a participant 

with 30 years of service under the plan, the maximum PBGC-guaranteed benefit 

was $5,850 per year. The Consolidated Appropriations Act of 2001 (Public Law 

106-554), signed into law on December 21, 2000, increased the benefit guarantee in 
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multiemployer plans to the product of a participant=s years of service multiplied by 

the sum of (1) 100 percent of the first $11 of the monthly benefit accrual rate and 

(2) 75 percent of the next $33 of the accrual rate. For someone with 30 years of 

service, this raised the guaranteed limit to $12,870. The old benefit guarantee 

formula remains in effect for participants in multiemployer plans that received 

financial assistance from PBGC at any time during the period from December 22, 

1999, to December 21, 2000. 

 The MPPAA requires that PBGC conduct a study every 5 years to determine 

whether changes are needed in the multiemployer premium rate or guarantee. The 

next study is due in 2005. 

FINANCIAL CONDITION OF THE PBGC

OVERVIEW 

 According to its most recent annual report, the PBGC's multiemployer plan 

insurance program is in sound financial condition. Assets exceeded liabilities by 

$158 million at the end of fiscal year 2002. 

 However, the larger single-employer program suffered its largest 1-year 

financial loss in the 28-year history of the Corporation. The net loss of $11.4 billion 

for the year caused the program to swing from a surplus position of $7.7 billion in 

fiscal year 2001 to a deficit position of $3.6 billion for fiscal year 2002. This is the 

result of several large plan terminations in 2002. 

 The PBGC=s assets are comprised of premiums collected, assets recovered 

from terminated plans and recoveries from employers, and accumulated investment 

income. The PBGC=s liability for future benefit payments is the (discounted) 

present value of the stream of future benefit payments PBGC is obligated to pay 

participants and beneficiaries of terminated plans and plans booked as probable 

terminations. The current deficit does not create an immediate crisis for the PBGC, 

which will be able to continue paying benefits for a number of years. 

CLAIMS FROM UNDERFUNDED PLANS 

 Through the end of fiscal year 2002, the PBGC's single-employer program 

had incurred net claims of $9.8 billion (see table 14-1). This includes PBGC=s 

largest single loss of about $1.9 billion with the termination of the LTV pension 

plans. 

 The PBGC's net claims equal the portion of guaranteed benefit liabilities not 

covered by plan assets or recoverable employer liability. These claims will 

eventually have to be covered through premiums, earnings on PBGC assets, or 

other sources of revenue. 

 The claims against PBGC have increased considerably over its history. 

Within that trend, there has been substantial annual variability due to the sporadic 

terminations of very large underfunded plans. Two major industrial sectorsBsteel 

and airline transportationBhave produced over half of all claims in the single-
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employer program and represent 8 of the top 10 claims against the PBGC. 

TABLE 14-1-- CLAIM EXPERIENCE FROM SINGLE-EMPLOYER PLANS, 

1975-2002 AND PROBABLE FUTURE TERMINATIONS 1 [Dollars in Millions]

Year of Termination Number 

of Plans 

Benefit 

Liability 

Trust Plan 

Assets 

Recoveries 

from 

Employers

Net Claims

Average Net 

Claim Per 

Terminated Plan 

1975-1979 586 $397.4 $152.2 $58.9 $186.3 $0.3 

1980-1984 621 $1,257.3 $517.1 $159.7 $580.5 $0.9 

1985-1989 537 $2,351.4 $652.4 $162.0 $1,537.0 $2.9 

1990-1994 692 $5,116.5 $2,277.6 $459.3 $2,379.6 $3.4 

1995-1999 435 $2,196.5 $1,410.7 $68.6 $717.2 $1.6 

2000-2002 251 $11,885.3 $7,160.0 $306.5 $4,418.8 $17.6 

Subtotal 3122 $23,204.4 $12,170.1 $1,215.0 $9,819.3 $3.1 

Probable Future 

Terminations 41 $12,391.7 $6,070.1 $0.0 $6,321.6 -- 

Total 3163 $35,596.1 $18,240.2 $1,215.0 $16,140.9 -- 

1

Stated amounts are subject to change until PBGC finalizes values for liabilities, assets, and recoveries 

of terminated plans. Amounts in this table are valued as of the date of each plan's termination and differ 

from amounts reported in PBGC's Financial Statements which are valued as of the end of the State fiscal 

year. 

Note: Numbers may not add up to totals due to rounding. 

Source: Pension Benefit Guaranty Corporation. 

 

 Table 14-1 demonstrates the growth in net claims over the Corporation's 

history. PBGC reported net claims, not including probable terminations, of $3.2 

billion in 2002. This represents over 32 percent of all net claims in the singleemployer program and is an increase of almost 3 times the level in 2001. 

 In addition, PBGC faces probable net claims of $6.3 billion for 41 plans that 

are expected to terminate after fiscal year 2002. This includes the termination of 

plans of two major steel companies in December 2002BNational Steel and 

Bethlehem Steel, with claims of $1.3 and $3.7 billion respectively. If the remainder 

of the net probable claims actually terminate in 2003, PBGC will report a second 

record year and total net claims will exceed $15 billion. 

 As shown by table 14-2, the number of single-employer plan terminations 

that result in claims against the PBGC is a tiny fraction of all plan terminations. 

Over PBGC=s history, terminations of underfunded plans have made up less than 2 

percent of all terminations. 

FINANCING 

 The sources of financing for PBGC are per-participant premiums collected 

from insured plans, assets in terminated underfunded plans for which the PBGC has 

become trustee, investment earnings, and amounts owed to the PBGC by employers 
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who have terminated underfunded plans. In addition, PBGC has the authority to 

borrow up to $100 million from the Treasury. 

Single-Employer Premiums

 An employer that maintains a covered single-employer defined benefit 

pension plan must pay an annual premium for each participant under the plan. 

Initially set at $1 per participant, the per-participant premium was raised to $2.60 

beginning in 1979, and then raised again by SEPPAA to $8.50 beginning in 1986. 

The PPA, contained in the Omnibus Budget Reconciliation Act of 1987, raised the 

basic premium to $16, and imposed an additional variable rate, or risk-related, 

premium on underfunded plans. The variable rate premium was initially set at $6 

per each $1,000 of the plan's unfunded vested benefits, up to a maximum of $34 per 

participant. Accordingly, the maximum premium was $50 per participant. 

 The Omnibus Budget Reconciliation Act of 1990 (OBRA 1990) increased 

the basic premium to $19, and the variable rate premium to $9 per each $1,000 of 

the plan's unfunded vested benefits, up to a maximum of $53 per participant. Thus, 

beginning in 1991, the maximum premium was $72 per participant. OBRA 1990 

did not change the ratio of revenue raised by the basic and variable rate portions of 

the premium. 

 The Retirement Protection Act of 1994 (RPA) did not change the $19 basic 

per participant premium. However, the $53 per participant variable rate premium 

cap was phased out over a 3-year period beginning in 1994. The variable rate 

premium is now completely uncapped. RPA also changed the way underfunding is 

calculated. Effective for 1995 plan years, liabilities have to be calculated using a 

standard mortality table. Effective for plan years beginning on or after July 1, 1997, 

liabilities are calculated using an interest rate of 85 percent of the spot rate for 

30-year Treasury securities (an increase from the current 80 percent). In the future, 

plans will be required to use a new mortality table to be prescribed by the Secretary 

of Treasury for certain funding purposes. At that time the interest rate will rise to 

100 percent of the Treasury spot rate and a requirement to use fair market value of 

plan assets (rather than actuarial value) will become effective. The Job Creation and 

Worker Assistance Act of 2002 increased the interest rate to 100 percent of the rate 

for 30-year Treasury securities for plan years beginning after December 31, 2001, 

and before January 1, 2004. 

 PBGC's single-employer premium income equaled $787 million in 2002. 

Multiemployer Plan Premiums

 The premium for multiemployer plans was initially $0.50 per participant. The 

MPPAA raised the premium to $1.40 for years after 1980. This premium was set to 

increase gradually to its current level, $2.60. The PBGC=s multiemployer premium 

income equaled $25 million in 2002. 
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TABLE 14-2-- TOTAL NUMBER OF TERMINATED 

SINGLE-EMPLOYER PLANS, NUMBER OF PLANS 

WITH CLAIMS AGAINST PBGC, AND NET POSITION, 

 1975-2002 

Fiscal Year Number of Terminated

 Plans 

Number of Plans with Claims

 Against PBGC 

Net Position at End of Year 

 (in millions of dollars) 

1975 2,570 100 -16 

1976 9,103 171 -41 

1977 7,332 130 -95 

1978 5,261 103 -138 

1979 4,892 82 -146 

1980 4,037 104 -95 

1981 5,086 137 -189 

1982 6,134 131 -333 

1983 6,880 150 -523 

1984 7,720 99 -462 

1985 8,751 116 -1,325 

1986 6,961 132 -2,026 

1987 10,972 107 -1,549 

1988 10,889 99 -1,543 

1989 11,483 83 -1,124 

1990 11,901 101 -1,913 

1991 8,775 175 -2,503 

1992 6,827 157 -2,737 

1993 5,444 124 -2,897 

1994 4,085 135 -1,240 

1995 3,991 121 -315 

1996 3,905 96 869 

1997 3,579 82 3,481 

1998 2,537 62 5,012 

1999 2,043 74 7,038 

2000 1,947 65 9,704 

2001 1,658 93 7,732 

2002 1,307 93 -3,638 

Total 166,070 3,122 -- 

Source: Pension Benefit Guaranty Corporation. 

Assets from Terminated Plans

 When the PBGC becomes trustee of a terminated plan, it receives control of 

any assets in the plan. These assets are placed in one of two trust funds (one for 

multiemployer plans, one for single-employer plans). 

Employer Liability

 An employer that terminates an underfunded defined benefit plan is liable to 

the PBGC for certain amounts. Before the changes made by SEPPAA, an 

employer's liability was generally capped at 30 percent of the employer's net worth. 

SEPPAA removed this limit, leaving employers whose liability would have been 

capped liable for an additional share of unfunded benefit commitments above 30 

percent of net worth. The PPA further increased employer liability, leaving 
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employers liable for all amounts up to 100 percent of unfunded benefit liabilities. 

Investment Income

 The PBGC maintains two separate financial programs, each consisting of a 

revolving fund and a trust fund, to sustain its single-employer and multiemployer 

plan insurance programs. Its revolving funds consist of collected premiums and 

income resulting from investment of the premiums and is constrained to 

investments in U.S. Treasury securities. The revolving funds had a value of $1.7 

billion as of September 30, 2002. 

 The trust funds consist of assets received from all terminated plans of which 

the PBGC is or will be a trustee, and employer liability payments. These assets are 

constrained to investment in domestic equities and real estate (up to a 5-percent 

maximum). The net market value of the trust funds was $9 billion as of 

 September 30, 2002. 

 Chart 14-1 diagrams the relationship between the PBGC's financing and its 

payment of guaranteed benefits to plan participants. 

BUDGETARY TREATMENT 

 Since 1981, administrative expenses of the PBGC and the benefit payments 

to participants in plans under the PBGC's trusteeship have been counted as Federal 

outlays. Certain receipts of the agency--including premium payments, interest on 

balances in the revolving fund, and transfers to the revolving fund from the trust 

fund--offset PBGC expenses in the Federal budget. Liabilities for future benefit 

payments and other accruals are not taken into account. In each year since 1981 

(when the program was first included in the Federal budget) the effect of the PBGC 

has been to reduce overall Federal outlays (see table 14-3). During this period, the 

PBGC reported receipts in excess of benefit payments and administrative costs by a 

cumulative total of about $12.3 billion. In years before 1981, Federal accounts for 

the PBGC also would shown annual inflows exceeding expenses in each year of 

program operation. 

FUTURE FINANCIAL STATUS OF THE PBGC

 At the end of fiscal year 2002, the single-employer program recorded its 

single largest loss with the termination of the LTV pension plans. The program also 

reported its largest 1-year financial loss of $11.4 billion. While the deficit of $3.6 

billion already includes the losses absorbed from the National Steel and Bethlehem 

Steel pension plans, there is the potential for additional losses from underfunding 

in plans sponsored by financially weak companies. 

Not all pension underfunding represents likely claims upon PBGC's 

insurance. The PBGC's analyses disclose reasonably possible losses of just over 

$35 billion as of September 30, 2002, compared to the previous year's projection of 

$11 billion. In both years, over one-half of the potential exposure was attributable to 

the air transportation and the steel sectors. These two industrial categories represent 
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combined reasonably possible losses of $17 billion in fiscal year 2002 compared 

with just over $6 billion in fiscal year 2001. 

 

 The future financial condition of the pension insurance program is highly 

uncertain because it depends largely on how many private pension plans terminate 

and on the amount of underfunding in those plans. Both factors are hard to forecast 

accurately. Moreover, as was discussed above, a few pension plans with extremely 

large unfunded liabilities have dominated the PBGC=s past claims, and its future 

may likewise depend significantly on the fate of a few large plans, making 

liabilities even more difficult to predict. Future terminations will be influenced by 

overall economic conditions, by the prosperity of particular industries, by 

competition from abroad, and by a variety of factors that are specific to particular 

firms – such as their competitive position in the industry, their agreements with 

labor groups, and the assessments of their financial prospects that are necessary to 

obtain credit. In addition, PBGC's losses with respect to future terminations will 

depend on how well companies fund their plans, and on the PBGC's position in 

bankruptcy proceedings. 

Partial reimbursement for benefit payment and 

program administration

TRUST FUND 

 (Invested by private 

money managers)

Program 

administration 

REVOLVING FUND 

(Invested in 

government 

securities)

SOURCES OF FUNDS 

Premium 

income 

Federal 

borrowing 

Benefit payment to 

Participants in terminated 

underfunded plans

Assets of terminated 

underfunded plans

Recoveries from 

sponsors of 

terminated 

underfunded 

plans 

Source: Congressional Budget Office. 

PAYMENTS 

CHART 14-1-- FINANCIAL STRUCTURE OF THE 

PENSION BENEFIT GUARANTY CORPORATION
14-13 

PBGC uses a stochastic model--the Pension Insurance Modeling System 

TABLE 14-3--FEDERAL BUDGETARY TREATMENT OF THE PENSION 

BENEFIT GUARANTY CORPORATION, 1975-2002 

[In millions of dollars]

Fiscal Year Expenses1 Offsetting 

Collections2

Outlays Appearing in the 

Federal Budget3

Not Included in the Federal Budget4

1975 $3 $36 NA 

1976 13 29 NA

1977 21 41 NA

1978 48 62 NA

1979 52 92 NA

1980 59 90 NA

Total $196 $349 NA

Included in the Federal Budget4

1981 79 123 -$29 

1982 104 157 -67 

1983 161 182 -10 

1984 180 190 -10 

1985 195 210 -19 

1986 272 344 -106 

1987 509 637 -72 

1988 489 560 -278 

1989 780 1,190 -149 

1990 745 1,175 -680 

1991 599 1,339 -787 

1992 766 1,491 -655 

1993 833 2,323 -1,508 

1994 1,017 1,446 -385 

1995 872 1,716 -430 

1996 1,011 1,812 -851 

1997 930 2,147 -1,197 

1998 1,001 2,252 -1,218 

1999 1,372 1,866 -665 

2000 1,160 2,510 -1,144 

2001 1,292 2,398 -1,065 

2002 2,108 3,058 -965 

Total $16,475 $29,126 -$12,290 1

Includes primarily administrative costs and benefit payments. 2

Includes primarily premium income, interest income, and transfers from the pension insurance 

trust fund to the revolving fund. 

3

Outlays do not equal the difference between expenses and offsetting collections because of 

changes in obligated program balances between the beginning and the end of the fiscal year. 

4

The Pension Benefit Guaranty Corporation was first included in the Federal Budget in 1981, in 

accordance with Public Law 96-364. 

NA - Not applicable. 

Note: This table includes both the single-employer and multiemployer pension insurance programs. 

Source: Congressional Budget Office using data from the appendix to the Federal Budget, various 

years. 
14-14 

(PIMS) to evaluate its exposure and expected claims. PIMS portrays future 

underfunding under current funding rules as a function of a variety of economic 

parameters. The model recognizes the uncertainty in companies' chances of future 

bankruptcy and the uncertainty in key economic parameters (particularly interest 

rates and stock returns). It simulates the claims that could develop under thousands 

of combinations of economic parameters and bankruptcy rates. 

 Under the model, median claims over the next 10 years will be about $1.85 

billion per year (expressed in today=s dollars); that is, half of the simulations show 

claims above that amount and half below. The mean level of claims (or average 

claim) is higher, at approximately $2.25 billion per year, because there is a chance 

under some scenarios that claims could reach very high levels. For example, under 

the model there is a 10 percent chance that claims could exceed $4.3 billion per 

year. 

 PIMS projects PBGC's potential future financial position by combining 

simulated claims with simulated premiums, expenses, and investment returns. The 

median outcome is a $9.6 billion deficit in 2012 (in present value terms), while the 

mean outcome is a $12.6 billion deficit. 

 The median projected financial position is considerably lower than that 

reported in 2001 ($8.4 billion surplus in 2011 in present value terms). The actual 

experience of the last year approaches the most severe end of the range of possible 

outcomes. For example, last year=s combination of poor financial returns in PBGCcovered plans with a decline in interest rates generated an increase in underfunding 

that was exceeded in less than 5 percent of last year=s simulations of the year 2002. 

 The model also shows the wide range of outcomes that are possible for 

PBGC over the next 10 years. In particular, it estimates nearly a 10 percent chance 

that the deficit could be as large as $43.8 billion and a 10 percent chance that PBGC 

could have a surplus of $15.6 billion or more. Adverse outcomes are most likely if 

the economy performs poorly, in which case PBGC may experience both large 

claims and investment losses. 

LEGISLATIVE HISTORY

SINGLE-EMPLOYER PLANS 

 The PBGC was established under the Employee Retirement Income Security 

Act of 1974 (ERISA) for the purpose of insuring benefits under defined benefit 

pension plans. As originally structured, in the case of a single-employer plan, 

termination of a plan triggered the PBGC insurance mechanism. The contributing 

employer was liable to the PBGC for unfunded insured benefits up to 30 percent of 

the net worth of the employer. If unfunded insured liability exceeded this amount, 

the PBGC had to absorb the excess and spread the loss over insured plans. 

Employers generally faced no restrictions on their ability to terminate an 

underfunded plan. 
14-15 

The Single Employer Pension Plan Amendments Act of 1986 (SEPPAA)

 Congress passed SEPPAA (enacted as title XI of the Consolidated Omnibus 

Budget Reconciliation Act of 1985 (Public Law 99-272)) in response to rapidly 

growing PBGC deficits. SEPPAA raised the per-participant premium from $2.60 to 

$8.50, established certain financial distress criteria that a sponsoring employer and 

every member of the employer's controlled group must meet in order to terminate an 

underfunded plan, expanded PBGC's employer liability claim, and created a new 

liability to plan participants for certain nonguaranteed benefits. 

Pension Protection Act of 1987 (PPA)

 In 1987 Congress passed the Pension Protection Act of 1987 (PPA; as part of 

Public Law 100-203) which contained additional measures to strengthen PBGC's 

long-term solvency. The act increased PBGC's basic per participant premium for 

single-employer plans to $16 and added a variable rate premium for these plans tied 

to the degree of plan underfunding (capped at $53 per participant). The act also 

expanded PBGC's employer liability claim to include all plan benefit liabilities, 

provided that PBGC share a portion of its recoveries from employers with plan 

participants, and required faster funding of plan benefits to reduce PBGC's exposure 

in the event of plan termination. The act also contained other provisions relating to 

the plan termination distress criteria, the bankruptcy treatment of unpaid employer 

contributions, PBGC's lien authority, and various pension funding requirements. 

Retirement Protection Act of 1994 (RPA)

 In response to the persistent growth in pension underfunding, Congress 

passed significant reforms in the Retirement Protection Act (RPA enacted 

December 8, 1994) as part of the GATT legislation (the Uruguay Round 

Agreements (Public Law 103-465)). RPA provisions include: 

1. Minimum Funding Standards--RPA strengthened the pension funding 

rules for underfunded plans by accelerating funding, eliminating double 

counting of certain funding credits, and constraining the assumptions that 

may be used to calculate pension contributions. RPA also required 

severely underfunded plans to maintain minimum levels of liquid assets. 

RPA contained certain transition rules limiting annual increases in pension 

contributions. In addition, RPA repealed the quarterly funding requirement 

for fully funded plans and granted excise tax relief for employers with 

both defined benefit and defined contribution plans. 

2. Variable Rate Premium--RPA phased out the $53 per participant cap on 

the variable rate premium over a 3-year period as an incentive to improve 

funding in underfunded plans and made certain changes to the interest rate 

and mortality assumptions used to calculate plan underfunding. 

3. Reporting to PBGC--RPA requires sponsors with over $50 million in 

underfunding to provide PBGC detailed actuarial information on 

underfunded plans and detailed company financial information. It also 

requires privately-held companies with over $50 million in underfunding 

and an aggregate funding ratio of less than 90 percent to provide advance