Pension Benefit Guaranty Corporation: Governance Structure Needs Improvements to Ensure Policy Direction and Oversight
Published: 2007-07-06T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Pension Benefit Guaranty Corporation (PBGC) insures the pensions of millions of private sector workers and retirees in certain employer-sponsored pension plans. It is governed by a board of directors consisting of the Secretaries of the Treasury, Labor, and Commerce, who are charged with providing PBGC with policy direction and oversight. This report assesses (1) the extent to which PBGC's governance structure provides PBGC with policy direction and oversight, and (2) whether administrative responsibilities among the PBGC board, Department of Labor (DOL), and PBGC management are clearly defined. We examined corporate governance practices, select federal government corporations, and reviewed documents on PBGC's structure. We interviewed officials from all board member agencies and PBGC, among others.
section_title: What GAO Found
paragraphs: Although PBGC's board has provided greater attention to PBGC since 2003, the board has limited time and resources to provide policy direction and oversight and has not established comprehensive written procedures and mechanisms to monitor PBGC operations. Because PBGC's board is composed of three cabinet secretaries, who have numerous other responsibilities, the board structure does not guarantee that PBGC's board is active and diverse. For example, since 1980, a span of 27 years, there were only 18 official board meetings. Further, the board has not established formal procedures to ensure that PBGC management provides it information on all policy matters nor has it developed standing committees to oversee operations. Instead, the board relies on PBGC's Inspector General and management's oversight committees to ensure that PBGC is operating effectively. However, there are no formal protocols concerning the Inspector General's interaction with the board, and PBGC internal management are not independent and are not required to routinely report all matters to the board. Even though PBGC uses informal channels of communication to inform its board members, the board's oversight may be limited, because it cannot be certain that it is receiving high quality and timely information about all significant matters facing the corporation. PBGC's lack of formal guidelines to articulate the administrative roles and responsibilities among the board, the Secretary of Labor as the board chair, board members' agencies, and the PBGC Director has led, at times, to confusion and inefficiencies. The board has not addressed uncertainty over the extent to which PBGC is a separate and distinct executive agency, a fact that has resulted in confusion over when DOL has the authority to manage PBGC's operations. Further, neither DOL nor PBGC has developed formal policies and procedures to define the board's authorities and responsibilities. Instead, PBGC officials typically react to DOL's periodic written and oral communications, which PBGC officials said sometimes become a part of PBGC's operational framework. For example, PBGC is required to incorporate its budget request with DOL's budget request, and over the years, DOL has taken a more active role in reviewing PBGC's budget. However, PBGC officials believe that DOL has in some cases overstepped its role. For instance, DOL and PBGC officials disagreed over the inclusion of a funding request in PBGC's fiscal year 2007 budget.

section_title: Letter
paragraphs: The Pension Benefit Guaranty Corporation (PBGC) insures the pensions  of more than 44 million private sector workers and retirees in over 30,000  employer-sponsored pension plans. Since its creation in 1974, PBGC’s  assets have increased significantly, and its financial portfolio is now one of  the largest of any federal government corporation. In addition, PBGC has  become responsible for a number of large terminated pension plans, which  have brought the corporation record numbers of claims from plan  participants. In fact, between fiscal year 2000 and 2005, the number of  participants to whom PBGC has paid benefits increased from around  243,000 to almost 700,000, with another half million expected to receive  benefits from PBGC when they become eligible to retire. To strengthen  pension plan funding, Congress passed the Pension Protection Act of 2006  (PPA). However, PBGC still shows an accumulated $18 billion deficit for  its single-employer insurance program.
Established as a self-financing government corporation, PBGC is governed  by a three-member board of directors consisting of the Secretaries of the  Treasury, Labor, and Commerce. PBGC board members are charged with  providing policy direction and oversight of PBGC’s finances and  operations. Because of concerns about PBGC’s long-term financial  condition, in 2003, we added PBGC’s single-employer pension insurance  program—its largest insurance program—to our high-risk list; a group of  federal programs that need urgent attention and transformation. PBGC’s  insurance program remains on the high-risk list today. We reviewed  PBGC’s governance and management structure to determine whether  PBGC is well positioned to address current and growing fiscal and  operational challenges. Specifically, this report assesses (1) the extent to  which PBGC’s governance structure provides PBGC management with  policy direction and oversight, and (2) whether the administrative  responsibilities among PBGC’s board, the Department of Labor (DOL), and  PBGC’s management are clearly defined.
To identify the extent to which PBGC’s governance structure provides  policy direction and oversight, we reviewed the Employee Retirement  Income Security Act of 1974 (ERISA) and PPA to understand the authority  of PBGC’s board of directors as well as the administrative responsibilities  of PBGC’s Director. We examined private sector corporate governance  guidelines and those of similar federal government corporations to  determine the extent to which other corporations have similar policy  mandates, structures, and oversight functions. We selected similar federal  government corporations with similar missions and designations as listed  under the Government Corporation Control Act (GCCA). To determine  the extent to which PBGC’s administrative structure has affected PBGC’s  internal operations, we collected and reviewed documents related to  PBGC’s organizational structure and administrative reporting  requirements, such as its relationship with DOL and the Office of  Management and Budget (OMB). In addition, we reviewed the work of  PBGC’s Office of the Inspector General and GAO to determine what  weaknesses or inefficiencies resulted from the corporation’s governance  and organizational structure. We met with officials from PBGC; the  Departments of the Treasury, Labor, and Commerce; and OMB; as well as  with former PBGC executive directors, former general counsels, and  former PBGC staff. While we met with the board representatives and their  staff, we did not meet with the cabinet secretaries who constitute the  board.
We conducted our work between November 2006 and May 2007 in  accordance with generally accepted government auditing standards.  Appendix I discusses our scope and methodology in further detail.
subsections: section_title: Background
paragraphs: Congress passed ERISA to protect the rights and interests of participants  and beneficiaries of private sector employee benefit plans. Before the  enactment of ERISA, few rules governed the funding of defined benefit  pension plans, and participants had no guarantee that they would receive  promised benefits. Title IV of ERISA created PBGC to insure plan  participants’ benefits and to encourage the continuation and maintenance  of private sector defined benefit pension plans by providing timely and  uninterrupted payment of pension benefits. Through its two insurance  programs, PBGC covers certain private sector defined benefit plans.  PBGC is funded through insurance premiums from employers that sponsor  insured pension plans as well as investment income and assets from  terminated pension plans.
ERISA established a governance structure consisting of a board of  directors, with the Secretary of Labor as the Chairman of the Board.  ERISA provided the Secretary of Labor with responsibility for  administering PBGC’s operations, personnel, and budget. The Secretary  delegated the responsibility for administering PBGC to an Executive  Director through a series of chairman’s orders describing the Executive  Director’s responsibilities. For example, one order issued in 1984  authorized the Executive Director to make final decisions addressing legal  matters on behalf of the corporation. In 2006, PPA replaced the Chairman  of the Board as PBGC’s administrator with a Senate-confirmed director.  The PPA established the director position at the same level of the  executive schedule as two of the PBGC board representatives—Under  Secretaries of Commerce and Treasury as well as the heads of other  federal government corporations, such as the Federal Deposit Insurance  Corporation (FDIC) and the Export-Import Bank of the United States. In  addition, the corporation is aided by a seven-member Advisory Committee  appointed by the President to represent the interests of labor, employers,  and the general public. This committee has an advisory role but has no  statutory authority to set PBGC policy or conduct formal oversight.
Under the GCCA, PBGC is a wholly owned government corporation—that  is, the government holds all its assets and liabilities. However, the United  States is not liable for any obligation or liability incurred by the  corporation. (See app. II for a list of selected government corporations).  According to public administration experts, a government corporation is  appropriate for the administration of governmental programs that    are predominately of a business nature,    produce revenue and potentially are self-sustaining,  involve a large number of business-type transaction with the public,  and  require greater budget flexibility than a government department or  agency.
Under ERISA, PBGC is also empowered to sue and be sued; appoint and  fix the compensation of officers, employees, attorneys, and agents; and  utilize the personnel and facilities of any other agency or department of  the U.S. government with or without reimbursement (with its head’s  consent). Figure 1 illustrates some of the differences among traditional  government departments/agencies, government corporations, government- sponsored enterprises (GSE), and private corporations.
With the financial collapse of several large corporations over the past  years and the passage of the Sarbanes-Oxley Act of 2002, which outlined  a framework for more effective corporate governance, many private sector  companies have reassessed their corporate governance practices.  Although the Sarbanes-Oxley Act is intended to strengthen the corporate  governance of private sector entities, certain corporate governance  elements from it may also be relevant to government corporations and  government-sponsored enterprises. For example, corporate governance  practices suggest that corporations headed by boards of directors should  have people in place with the appropriate qualifications, independence,  and resources to conduct their responsibilities effectively. (See table 1 for  examples of corporate governance practices.) Additional information on  corporate governance practices is included in appendix III.
PBGC’s financial outlook has improved since 2004, when it reported an  accumulated deficit of $23 billion, but PBGC still projects large deficits for  its single-employer program. Despite PPA’s provisions to strengthen  defined benefit plan funding, PBGC reported an accumulated deficit of  $18.1 billion as of September 30, 2006. While PBGC currently has assets  exceeding $60 billion, sufficient to meet its responsibilities in the coming  years, the single-employer program has had an accumulated deficit for  much of its existence—the value of its program assets is less than the  present value of benefits and other obligations (see fig. 2).
section_title: Board Structure Provides Limited Attention and Mechanisms for Overseeing PBGC
paragraphs: PBGC’s board has limited time and resources to provide policy direction  and oversight and has not established procedures and mechanisms to  monitor PBGC operations. Although PBGC’s board members have met  more frequently since 2003, the three cabinet secretaries composing the  board have numerous other responsibilities, and have been unable to  dedicate consistent and comprehensive attention to PBGC. In fact, we  found that between 1980 and May 2007, a span of 27 years, there were only  18 board meetings, 10 of which were since 2003. The three-member board  is also not large enough to ensure diverse skills, such as knowledge in  strategic risk assessment and management, are included to direct and  oversee PBGC. Since the board has limited time to direct and oversee  PBGC, the members have designated officials within their respective  agencies to conduct much of the work on their behalf. However, these  officials also have limited resources to dedicate to PBGC. Further, the  board has not established important mechanisms, such as the use of  standing committees, to monitor and review PBGC operations and  programs. Instead, the board mostly relies on the Inspector General and  PBGC’s management oversight committees to ensure that PBGC is  operating effectively. However, there are no formal protocols requiring the  Inspector General to routinely meet with the board or its representatives  and staff, and PBGC’s management committees are neither independent of  PBGC, nor are they required to routinely report all matters to the board.  As a result, the effectiveness of the board’s oversight may be limited,  because it cannot be certain that it is receiving high-quality and timely  information about all significant matters facing the corporation, even  though PBGC officials report that they informally communicate with the  board representatives weekly.
subsections: section_title: PBGC’s Board Structure Limits Board Members’ Ability to Direct and Oversee PBGC
paragraphs: PBGC’s board members have numerous other responsibilities in their roles  as cabinet secretaries and have been unable to dedicate consistent and  comprehensive attention to PBGC. ERISA charges the PBGC board with  directing and overseeing PBGC management in several ways. The board is  required to approve final decisions on policy matters that could affect  many American employers and their workers. The board is also  responsible for reviewing and approving PBGC’s budget, monitoring  financial performance, approving the corporation’s strategic plan, and  evaluating the effectiveness of its managers, among other responsibilities.  Beyond their roles as heads of executive agencies and sitting on PBGC’s  board, two of the cabinet secretaries are also members of other boards.  For example, the Secretary of the Treasury serves on the boards of the  Millennium Challenge Corporation, the Community Development  Financial Institutions Fund, and is a managing trustee of the Social  Security and Medicare trust funds. The Secretary of Commerce is on the  board of the Export-Import Bank of the United States. The Secretary of  Labor is also a trustee of the Social Security and Medicare trust funds.
According to some corporate governance guidelines, boards should have  no fewer than 5 members and no more than 15. With only 3 members,  PBGC’s board may not be large enough to include the knowledge needed  to direct and oversee PBGC, such as expertise in accounting, management,  or strategic risk assessment. According to corporate governance  guidelines, the board of directors should be large enough to provide the  necessary skill sets, but also small enough to promote cohesion, flexibility,  and effective participation. We did not identify any other government  corporations with a similar board size as PBGC. Government corporations’  boards averaged about 7 board members, with one having as many as 15.  For example, the Overseas Private Investment Corporation’s board of  directors consists of 15 members—8 from the private sector and 7 from  the federal government, as shown in table 2.
PBGC’s board structure does not guarantee that the board represents a  diverse set of interests and contains areas of expertise particular to PBGC.  According to corporate governance guidelines published by The  Conference Board, corporate boards should be structured so that the  composition and skill set of a board is linked to the corporation’s  particular challenges and strategic vision, and should include a mix of  knowledge and expertise targeted to the needs of the corporation. Boards  of directors should include certain expertise in accounting and finance,  strategic risk assessment, management, and industry knowledge, among  other factors. PBGC’s board members represent the interests of three  government agencies—DOL and the Treasury share responsibility for  ERISA, and Commerce represents the interests of business and economic  sectors. While having these interests represented on PBGC’s board is  important and the members can draw on the expertise within their  respective agencies, PBGC’s governance structure does not necessarily  guarantee that board members will have a range of diverse expertise  needed to specifically address PBGC’s policy and oversight because the  current structure only consists of members who serve by virtue of their  position in the federal government.
Our review of other governance structures found that many government  corporations’ boards of directors consist of a variety of individuals  reflecting a mix of knowledge, perspectives, and political affiliations. For  instance, the FDIC board includes a full-time Chairman as well as the  directors of the Office of the Comptroller of the Currency, the Office of  Thrift Supervision, and two other directors with specific banking  expertise, such as state bank supervision. In addition, because PBGC’s  board is composed of cabinet secretaries, PBGC’s board members  typically change with each administration, limiting the board’s institutional  knowledge of the corporation. Other government corporations have  integrated staggered term limits to avoid such gaps. For example, OPIC’s  directors may be appointed for a term of no more than 3 years, and the  terms of no more than 3 of the 15 directors can expire in any 1 year.
Since PBGC’s inception, the board has met infrequently. While corporate  governance guidelines do not specify either frequency or duration of board  meetings, the literature states that the appropriate number of hours to be  spent by a director on his or her duties and the frequency and length of the  meetings depend largely on the complexity of the corporation and its  operations. Longer meetings may permit directors to explore key issues  in more depth, whereas shorter but more frequent meetings may help the  directors stay up to date on emerging corporate trends and business and  regulatory developments. However, as shown in figure 3, PBGC has only  recently begun to meet regularly. In 2003, after several high-profile  pension plan terminations and with the urging of PBGC’s Executive  Director, PBGC’s board agreed to begin meeting twice a year to discuss  PBGC matters. As a result, between July 2003 and May 2007, the PBGC  board met 10 times. PBGC officials told us that it is a challenge to find a  time when all three cabinet secretaries are able to meet. As a result, the  board members’ representatives officially met in their place 3 of the 10  times. Government corporations’ boards vary in the number of times they  meet, but our review found that on average many government  corporations meet about 5 times per year, with some meeting more often.  For example, we found that the Export-Import Bank of the United States’  board generally met more than twice a month between 2004 and 2006.
While the PBGC board is now meeting twice a year, it appears that very  little time is spent on addressing PBGC’s strategic and operational issues.  According to corporate governance guidelines, boards should meet  regularly and focus principally on broader issues, such as corporate  philosophy and mission, broad policy, strategic management, oversight  and monitoring of management, and company performance against  business plans. However, our review of the board’s recorded minutes  found that although some meetings devoted a portion of time to certain  strategic and operational issues, such as investment policy, the financial  status of PBGC’s insurance programs, and outside audit reviews, the board  meetings generally only lasted about an hour.
Since the board members have limited time to direct and oversee PBGC,  they have designated officials and staff within their respective agencies to  conduct much of the work on their behalf. These officials are referred to  as board representatives and act as liaisons between their cabinet  secretaries and PBGC. They hold the rank of assistant secretary or above.  Yet PBGC’s board representatives have no policy-making authority under  ERISA. Under PBGC’s bylaws, however, a representative may represent a  board member at a board meeting, and take action on behalf of the board  member if the board member ratifies the representative’s actions in  writing within a reasonable time.
PBGC officials told us that the board representatives meet regularly— several times a year—and generally provide staff with broad policy  direction and oversight on behalf of the cabinet secretaries. They also  receive briefings on emerging issues and matters requiring the board’s  attention. However, we found limited documentation of such meetings. In  fact, we were informed that no formal minutes were kept of these  meetings, and the only documentary evidence we found of the board  representatives’ meeting was when they represented their respective  board members at select board meetings. Each representative has a  dedicated staff person whose assignments include working on PBGC  matters. Although the board representatives can draw on the expertise of  other staff within their respective agencies as needed, these staff persons  have other job responsibilities, which could limit the amount of time they  can dedicate to PBGC. Consequently, limited time and attention may be  dedicated to PBGC matters.
section_title: Board Lacks Mechanisms to Monitor and Review PBGC Operations and Programs
paragraphs: Neither the board nor PBGC has developed formal procedures to ensure  information is elevated to the board on all pertinent policy matters.  Further, likely because of its small size, the board has not established  standing oversight committees. As a result, the board may be unaware of  significant PBGC management actions. According to corporate  governance guidelines, corporate boards should have mechanisms to  monitor and review operations, assess progress against performance  measures, and manage risks to the institution, and boards should operate  using committees to assist them. The board has not established formal  policies and procedures describing the types of policy matters that should  be raised to the board’s attention. Rather, the board relies mostly on  PBGC’s management to inform the board of pending issues when  management believes it’s appropriate, which is done through weekly  communications to the board representatives. While officials believe that  this process has generally worked well, in some cases board members  have not received information in a timely manner. For example, in 2005,  PBGC’s Inspector General found that the board members and their  representatives were not told of certain actions taken by PBGC’s  management regarding a large bankruptcy settlement until after the case  had been settled. In response, PBGC drafted a protocol to govern  communications with the board representatives about potential  settlements. At this writing, the board is also revising the PBGC’s bylaws,  which establish board governing procedures. However, since there are no  formal policies and procedures describing what other policy matters  should be elevated to the board’s attention, the board may be unaware of  other significant actions of PBGC’s management.
The board has not established standing committees, such as audit and  ethics committees, to perform certain oversight and monitoring functions.  A committee structure permits the board to address key areas in more  depth than may be possible in a full board meeting. In prior years, the  board established certain committees—staffed with individuals from  PBGC’s Advisory Committee—to probe specific issues. However, the  board has not used this approach since the early 1990s. Instead, the board  has generally relied on PBGC’s Inspector General and its executive  management to provide oversight of PBGC’s operations.
As of May 2007, PBGC’s Inspector General reports directly to the board  and conducts reviews of PBGC’s operations and financial condition and  monitors PBGC’s contractors. Even though the current board has required  the Inspector General to brief it at its now semiannual meetings, there are  no formal protocols describing the Inspector General’s interaction with  the board or its representatives and staff. Consequently, if the Inspector  General or the board were to change, it is unclear whether the Inspector  General or the board would be aware of this informal protocol. Further,  the board relies on PBGC’s executive management committees and  working groups for monitoring and reviewing PBGC’s operations.  However, these committees and working groups are not independent of  PBGC’s management and are not required to routinely report to the board.  Some government corporations, such as FDIC, the Export-Import Bank of  the United States, the Overseas Private Investment Corporation, and the  National Railroad Passenger Corporation (Amtrak), have established  standing committees to conduct certain oversight functions to assist their  boards of directors. For example, FDIC’s board of directors established  standing committees, such as the Case Review Committee and the Audit  Committee, to conduct certain oversight functions. FDIC’s committees are  governed by formal rules that cover areas such as membership, functions  and duties, and, in some cases, submission of activity reports to the board.
section_title: Lack of Protocols for Administering PBGC Can Result in Confusion and Inefficiencies
paragraphs: While ERISA provides the board, the Secretary of Labor as Chair, and  PBGC’s Director the authority to oversee and administer PBGC, no formal  guidelines articulate the different roles and responsibilities of the board  and PBGC management. ERISA established PBGC “within the Department  of Labor” and provided the Secretary of Labor administrative authority  over the corporation. As a consequence, the Secretary has been  responsible for overseeing PBGC’s operations, including overall  supervision of PBGC’s personnel, organization, and budget practices. As a  result, DOL officials consider PBGC to be a DOL agency and have required  the corporation to follow its policies and procedures. However, under its  authorities, PBGC has also developed its own policies, procedures,  directives, and systems separate from DOL, and it does not rely on DOL- wide services, such as legal, procurement, and information technology. As  a result, DOL and PBGC disagree over the extent to which PBGC is a  separate and distinct executive agency.
A November 2005 PBGC memorandum stated that Congress’ intention in  placing PBGC within DOL was to provide PBGC with a physical location  and was not meant in an organizational or operational sense. Some PBGC  managers now view the language as an anachronism. One former PBGC  Executive Director also noted that PBGC could not be just like any other  DOL agency, because if it were, the Secretaries of the Treasury and  Commerce, by a two-vote majority, could theoretically direct policies of  another federal cabinet department. Further, federal agencies, including  DOL, recognize PBGC’s separateness either directly or indirectly through  various types of reporting requirements that are required of PBGC and the  board. For example, PBGC is responsible for representing itself in matters  before other agencies, such as the Equal Employment Opportunity  Commission, the Federal Labor Relations Authority, and the Merit Systems  Protection Board. In another instance, DOL’s Office of the Solicitor stated  in a March 2007 letter to the Department of Justice that while PBGC was  “within the Department of Labor,” the two agencies have historically  operated with separate administrative structures and should be  considered separate for matters relating to postemployment ethics.
The uncertainty of PBGC’s status has resulted in confusion over the extent  to which DOL has the authority to manage PBGC’s operations. According  to our internal control standards, agencies should ensure that key areas  of authority and responsibilities are defined and communicated. However,  neither the board, DOL, nor PBGC has developed formal policies and  procedures to define its authorities and responsibilities. Instead, PBGC  officials typically react to DOL’s periodic written and oral  communications, which PBGC officials said sometimes become a part of  PBGC’s operational framework. DOL and PBGC provided us with  memorandums and e-mail correspondence outlining some of these  administrative requirements. The following are examples of the confusion  and disagreement resulting from the uncertainty related to PBGC’s status:  In December 2006, the Office of the Secretary of Labor, without  consulting with officials from the Departments of the Treasury or  Commerce, orally directed PBGC to obtain DOL’s clearance before it  could advertise for or select individuals to fill three vacant executive  management positions, even though DOL had not required this in prior  years. According to PBGC officials, this resulted in hiring delays. DOL  officials stated that this requirement was needed to oversee PBGC’s  hiring activities only while PBGC has an interim director.
A May 2006 DOL memorandum to all its agency heads, including PBGC,  provided guidance for the preparation and submission of information  technology investments in DOL’s fiscal year 2008 budget request.  However, because OMB considers PBGC’s information technology  program independent from DOL’s, there has been confusion not only  between DOL and PBGC officials, but also among DOL officials, over  the role that DOL’s Chief Information Officer has in PBGC’s  information technology program and whether DOL’s guidance is  applicable to PBGC on this issue.
DOL and PBGC have also disagreed on management approaches to  PBGC’s operations. For example:    During the fiscal year 2007 budget process, DOL and PBGC officials  disagreed over the amount of money included in PBGC’s budget for the  development of a new system for pension plan sponsors to file their  required annual reports to DOL electronically. While PBGC benefits  from these annual reports, PBGC’s Inspector General reviewed PBGC’s  fiscal year 2007 budget request, which included $7 million to cover   these costs. After investigating, the Inspector General concluded that  the requested increase was disproportionate to PBGC’s usage of the  annual reports. However, DOL officials disagreed with the Inspector  General’s findings and said that the Inspector General’s methodology  for determining the percentage usage was flawed. Further, the board  representatives from the Departments of the Treasury and Commerce  were unaware of DOL and PBGC’s actions until they were brought to  their attention by PBGC’s Inspector General. In May 2007, the direction  to transfer funds was enacted by Congress and PBGC is providing $7  million to DOL as part of a fiscal year 2007 supplemental  appropriation.
In January 2007, DOL officials orally directed PBGC to have no direct  contact with OMB without DOL’s approval, a condition that PBGC  officials believe has strained the relationship between DOL and PBGC  budget offices. In previous years, PBGC’s budget office worked directly  with OMB examiners to resolve matters related to its annual budget  submissions, even though PBGC submitted its budget to OMB through  DOL’s Office of the Assistant Secretary for Administration and  Management. DOL now closely monitors PBGC’s interactions with  OMB by attending meetings and participating in telephone calls. DOL  officials said that such action is needed to coordinate with PBGC in  order to provide OMB examiners with a consistent message. OMB  officials said that DOL’s review of PBGC’s budget submission was  useful.
DOL and PBGC officials have also disagreed over PBGC’s authority to  explore and establish an independent compensation system for its  employees. In the early 1990s, PBGC officials requested approval from  DOL to establish a new compensation system (outside of the federal  government’s “general schedule” pay system and merit pay), arguing  that PBGC employees should be exempt from these pay systems  because their compensation was not wholly from appropriated funds.  In a 1992 memorandum, DOL cited the absence of an explicit exception  for PBGC employees, the legislative history of ERISA, and prior rulings  by the Federal Labor Relations Authority and the United States Court  of Appeals for the District of Columbia to argue against such an  exemption. Consequently, some PBGC officials believe PBGC is limited  in attracting and retaining the types of expert financial and actuarial  staff it needs.
section_title: Conclusions
paragraphs: As PBGC continues to navigate the challenges presented by the changing  defined benefit pension environment, ensuring that the corporation is  soundly governed and efficiently managed is essential to the thousands of  Americans who rely on PBGC for their retirement income. Since 1974, the  private sector pension industry has evolved and corporate governance  models have changed. Yet, PBGC is still directed and overseen by one of  the smallest and least diverse boards of directors, even though it is  financially one of the largest corporations within the federal government.
While the current board members recognize PBGC’s importance and are  meeting more frequently than before, the limited amount of time they can  dedicate to PBGC is troubling. In fact, if PBGC’s board of directors were  held to private sector standards, the corporation could be considered  vulnerable to mismanagement. Because the Secretaries change with each  administration, the board may also have limited institutional knowledge.  This could weaken PBGC’s governance further, since the ever-changing  board membership may not understand the corporation’s business or the  vulnerabilities it faces. Even though each agency has a variety of staff who  may be able to fill the gaps in institutional knowledge, each board agency  has only assigned a board representative and one staff person, both of  whom have other job responsibilities, a fact that may limit the time and  attention given to PBGC. As a result, oversight of this $60 billion  corporation that provides pension benefits to over a half a million  participants in terminated pension plans may be limited.
Because the Secretary of Labor has historically had the authority to  administer PBGC, DOL has, in some ways, filled the void in accountability.  However, the confusion resulting from the lack of clarity over who is  responsible for certain matters has raised additional questions about the  extent to which DOL should be involved in directing PBGC’s activities.  Board representatives from the Departments of Commerce and the  Treasury have often deferred to DOL on administrative matters and not  generally questioned DOL on its actions. Perhaps some aspects of the  relationship between DOL and PBGC could be clarified in the revised  bylaws currently being prepared, but it remains essential that the board  exercise its authority to oversee PBGC and coordinate with DOL and each  other not only on major policy issues, but also on the oversight of PBGC’s  activities. PBGC’s management staff should also work with the board to  ensure that all significant matters are formally elevated to the board’s  attention. This will become even more critical in the coming months as the  new Senate-confirmed Director begins to work with the board to clarify  the Director’s role in administering PBGC.
section_title: Matter for Congressional Consideration
paragraphs: To strengthen PBGC’s policy direction and oversight, Congress should  consider expanding PBGC’s board of directors. If Congress decides to  expand the board, it would be helpful to appoint additional members of  diverse backgrounds who possess knowledge and expertise useful to  PBGC’s responsibilities and can provide the attention that would be  needed. This revised board structure could resemble those at other  government corporations, such as the Federal Deposit Insurance  Corporation, the Export-Import Bank of the United States, or the Federal  Crop Insurance Corporation. Further, dedicating staff, independent of  PBGC’s executive management, with relevant pension and financial  expertise, to solely support the revised board’s policy and oversight  activities may be warranted.
section_title: Recommendations for Executive Action
paragraphs: To improve overall accountability and oversight of PBGC, we recommend  that the Secretaries of the Treasury, Labor, and Commerce, as PBGC’s  board of directors,    establish policies, procedures, and mechanisms for providing oversight  of PBGC that are consistent with corporate governance guidelines and    establish formal guidelines that articulate the authorities of the Board  Chair and the Department of Labor, the other board members and their  respective departments, and PBGC’s Director.
section_title: Agency Comments and Our Evaluation
paragraphs: We obtained written comments on a draft report from the Secretary of  Labor, on behalf of the PBGC board of directors, and from the interim  director of PBGC. Their comments are reproduced in appendixes IV and V,  respectively. In addition, the Departments of the Treasury, Labor, and  Commerce, as well as PBGC, provided technical comments, which were  incorporated in the report where appropriate.
In response to our draft report, the PBGC board of directors recognized  that the current law establishes an unusual corporate structure for PBGC,  and stated that a number of corporate structures are possible for  addressing PBGC’s unique purpose and authority under the law. The board  members added that if Congress considers making changes to PBGC  corporate structure, they would be pleased to discuss the merits of various  corporate governance proposals. Further, the board reiterated its  continued commitment to improving the corporate governance of PBGC  within the current statutory structure, and stated that in addition to the  board members meeting regularly, the board representatives and their  staffs of resident experts in pension and financial matters meet frequently  throughout the year to address PBGC matters. The board also stated that  the review and revisions of PBGC bylaws will help delineate the respective  roles, responsibilities, and authorities of PBGC’s board and Director in the  management of PBGC.  The PBGC interim director stated that PBGC  management is committed to working with the board to enhance PBGC’s  governance processes on issues identified in our review.
As agreed with your offices, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days after its  issue date. At that time, we will send copies of this report to the   Secretaries of the Treasury, Labor, and Commerce as well as the Director  of PBGC and other interested parties. We will also make copies available  to others on request. If you or your staff have any questions concerning  this report, please contact me on (202) 512-7215. Key contributors are  listed in appendix VI.
section_title: Appendix I: Scope and Methodology
paragraphs: To address Pension Benefit Guaranty Corporation’s (PBGC) governance  structure, we interviewed board representatives, board agency officials,  former PBGC Executive Directors, former PBGC General Counsels, senior  PBGC management officials, former and current Executive Directors,  officials from the Office of Management and Budget, and outside experts  to obtain their perspectives on the board’s governance structure and its  effect on management and operations. To encourage open  communication, we met with many officials separately, and in all cases,  subordinate employees were interviewed separately from their managers.  Additionally, we spoke to PBGC’s Inspector General as well as PBGC’s  union representatives. We were unable to attend a PBGC board meeting to  observe what types of issues the board members discussed during their  biannual meetings, because the PBGC board does not open its meetings to  the public or others.
To identify the extent to which PBGC’s governance structure provides  policy direction and oversight, we reviewed previous GAO work on the  governance of private sector and government corporations and PBGC’s  single-employer and multiemployer insurance programs and management  challenges. We also identified key provisions of the Employee Retirement  and Income Security Act of 1974 (ERISA), the Pension Protection Act of  2006 (PPA), and the Government Corporation Control Act (GCCA) that  outline the authority of PBGC’s board of directors as well as the  administrative responsibilities of PBGC’s Director. Further, our review  examined the governance structures of similar federal government  corporations listed in the GCCA to determine the extent to which they had  similar sizes, compositions, activities, policy mandates, and oversight  functions. In addition, we also reviewed our reports and other available  literature, such as The Conference Board’s Corporate Governance  Handbook 2005, on the characteristics of private sector boards of  directors to identify common practices. We also consulted our standards  for internal control in the federal government to determine how  delegations of authority affect an agency’s internal control environment.
To understand the board of directors’ role, we reviewed documentation  related to the board members’ activities. We collected and reviewed  available board meeting minutes from 2000 to 2006 to identify what types  of actions the board members had considered and taken. In addition, we  requested documentation on board representative meetings, however, we  were told that no formal documentation existed. Also, we reviewed board  meeting information dating back to 1974, including summations of board  resolutions. We also collected and reviewed memorandums from PBGC  officials and other information concerning previous efforts by PBGC staff  to evaluate the issue of PBGC’s governance structure.
To assess how PBGC’s governance structure affects its ability to conduct  efficient operations, we identified and reviewed key legal interpretations  of ERISA, PPA, and corresponding regulations that outline the relationship  between PBGC’s board of directors, the Secretary of Labor as Board Chair,  and PBGC’s Director. We reviewed available policies and procedures  regarding PBGC’s interaction with the board members’ agencies, and we  collected and reviewed the policies and procedures from PBGC and DOL.  Given the Secretary of Labor’s role as Board Chair, we reviewed available  documentation on DOL and PBGC protocols to determine the extent to  which guidance existed on how they should interact on specific  administrative activities.
section_title: Appendix II: List of Selected Federal Government Corporations
paragraphs: Appendix II: List of Selected Federal  Government Corporations Created to stabilize, support, and protect farm income and prices. CCC also helps  maintain balanced and adequate supplies of agricultural commodities and aids in  their orderly distribution.
Assists in financing the export of goods and services between the United States and  international markets. The Export-Import Bank of the United States is the official  export credit agency of the United States.
Improves the economic stability of agriculture through a sound system of crop  insurance and provides the means for the research and experience helpful in  devising and establishing such insurance.
Preserves and promotes public confidence in the U.S. financial system by insuring  deposits in banks and thrift institutions for up to $100,000 per depositor; by  identifying, monitoring and addressing risks to the deposit insurance funds; and by  limiting the effect on the economy and the financial system when a bank or thrift  institution fails.
Established to centralize and reduce the cost of federal borrowing, as well as  federally assisted borrowing from the public.
To employ and provide skills training to the greatest practicable number of inmates  confined within the Federal Bureau of Prisons and produce goods for sale to the  federal government.
The Financing Corporation (FICO) serves as a financing vehicle for the Federal  Savings and Loan Insurance Corporation (FSLIC) Resolution Fund (formerly the  Federal Savings and Loan Insurance Corporation) by issuing debentures, bonds, and  other obligations.
A corporation that guarantees, with the full faith and credit of the U.S. government,  full and timely payment of all monthly principal and interest payments on the  mortgage-backed securities of registered holders.
National Railroad Passenger Corporation  (AMTRAK)
Provides passenger train service in the United States.
Helps U.S. businesses invest overseas, fosters economic development in new and  emerging markets, assists the private sector in managing risks associated with  foreign direct investment, and supports U.S. foreign policy.
Established to encourage the continuation and maintenance of private sector defined  benefit pension plans, provide timely and uninterrupted payment of pension benefits,  and keep pension insurance premiums at a minimum.
Established to protect, preserve, and enhance the Presidio as a resource for the  American public and as a national historic landmark.
Established by Congress to raise funds for the activities of the Resolution Trust  Corporation.
Established in 1971 to obtain supplemental funds for use in making loans to eligible  telecommunications companies and cooperatives.
Established to construct deep water navigation works in the Saint Lawrence Seaway.
Created in May 1933 to provide navigation, flood control, electricity generation,  fertilizer manufacturing, and economic development in the Tennessee Valley.
Established to provide postal service to the United States.
Created to manage, provide administrative services, collect funds, and coordinate  with federal and state governments on behalf of the Valles Caldera National  Preserve.
In February 2005, the President’s fiscal year 2006 budget proposed the dissolution of the Rural  Telephone Bank. After 6 months of discussion and deliberation, the board of directors unanimously  approved resolutions to liquidate and dissolve the bank. On November 10, 2005, the liquidation and  dissolution process was initiated with the enactment of the 2006 agriculture appropriations bill.
section_title: Appendix III: Examples of Corporate Governance Practices
paragraphs: Appendix III: Examples of Corporate  Governance Practices In carrying out their duties, directors should fulfill their fiduciary duties of care, loyalty, and  good faith, and act in the best interests of the corporation and its shareholders. Boards  usually delegate the day-to-day management of the company to the chief executive officer  (CEO) and other senior management, but the board retains responsibilities for oversight and  monitoring of these delegated functions.
A director’s actions must fulfill three fiduciary duties:  the duty of care to make decision that are informed,  the duty of loyalty to act without conflict and always to put the interests of the  corporation before those of the individual director, and  the duty to act in good faith in accordance with evolving corporate governance best  practices.
A strong and effective board should have a clear view of its role in relationship to  management. How a board organizes itself and structures its processes will vary with the  nature of the business, business strategy, size and maturity of the company, and talents and  personalities of the chief executive officer and the board. The board should focus principally  on guidance and strategic issues, choice of the CEO, other senior management, oversight  and monitoring of management and company performance, and adherence to legal  requirements.
The board should have a set of written guidelines in place to articulate corporate governance  principles and the roles and responsibilities of the board and management. These guidelines  should be reviewed at least annually and help the board and individual directors understand  their obligations and the general boundaries within which they will operate.
A constructed set of governance guidelines will, in part,    delineate responsibilities of the board, management, directors, and committees;    be reviewed regularly, at least annually, and revised as appropriate; and    be made publicly available.
Guidelines should also include information on director orientation and continuing education.  Such orientation should entail a thorough briefing on the company and its businesses and  industries, organizations, people, strategies, key issues, and risks. Further, guidelines should  include continuing education requirements for board members, which can be fulfilled through  the use of subject matter experts or belonging to professional organizations that offer training  courses and publish information pertaining to their industry’s operating environment.
The effectiveness of the board depends on the quality and timeliness of the information each  director receives. The board and management should agree on the important information  needed for board oversight and monitoring and to enable the board to make informed  decisions.
Directors’ access to management and, as necessary and appropriate, independent advisors.  For purposes of having information that is timely and relevant, boards need to have both  formal and informal channels of communication with the appropriate officers and other  individuals within the company that enable directors to perform their oversight functions.
Boards should consider the following best practices to generally ensure effective decision  making and exchange of information and ideas:    Directors should be able to place items on the agenda, with time for adequate  discussion and consideration.
The lead director should take responsibility to surfacing issues that affect the business.
Management should provide information that effectively explains the corporation’s  operating and financial status, as well as other significant issues facing the corporation  and the board.
Meetings should be structured to encourage participation and dialogue among the  directors.
Directors should attempt to attend all board meetings and actively participate in the  meetings, including asking hard questions of management.    should promote open dialogue among the members and free exchange of ideas,  perspectives, and information,    have a ‘feedback’ mechanism to the CEO for important issues that may arise, and    be supplemented by additional off-line informational channels to help build trust and  relationships among the directors.
The composition and skill set of the board should be linked to the company’s particular  challenges and strategic vision. As companies develop and experience changed  circumstances, the desired composition of the board may be different and should be  reviewed.
Regardless of their mix of background and skills, all directors should:    possess knowledge and expertise to fulfill an appropriate role given the mix of    exercise diligence, including attending board and committee meetings and coming  prepared to provide thoughtful input at the meetings and during communications  between meetings; and     be independent in their judgment and committed to the long-term interests of the  company.
The composition of the board should be tailored to meet the needs of the company at its  stage of development, but there should be a mix of director knowledge and expertise in areas  such as  The size of the board will vary depending on the corporation’s needs and requirements.  Boards need to be large enough to accommodate the necessary skill sets, but small enough  to promote cohesion, flexibility, and effective participation. According to a private sector  research center, in 2004, the median private sector board size ranged from 11 to 15 total  members, with the number of outside directors ranging from 8 to 9.
Boards should adopt a structure that provides the nonmanagement directors with the  leadership necessary for them to act independently as well as function effectively. This  structure could include separating the positions of chairman and CEO, creating a lead  independent director, or appointing a presiding director from among the independent  directors.
Any structural alternative, a private sector board wishes to adopt should    strengthen the independence and oversight role of the board;    provide the nonmanagement directors with the ultimate authority over information flow  to the board; and  improve the relationship and flow of information between the board, CEO, and senior  management.
Boards should establish committees that will enhance the overall effectiveness of the board  by ensuring focus and oversight on matters of particular concern. Committees can enhance  board effectiveness by permitting closer focus, oversight, and monitoring of sensitive areas.  In the private sector, certain statutes and standards require that companies maintain a  number of standing committees, such as an audit committee, a nominating committee, and a  compensation committee. In addition, boards have established committees, such as risk,  technology, pension and benefits, public policy, and corporate governance, which focus on  substantive issues or particular concerns to the company or the board.
Audit committee: Is responsible for the appointment, compensation, and oversight of  the work of any registered public accounting firm employed by that issuer; and must be  composed entirely of independent directors, meaning that a director may not, other than  in his or her capacity as member of the audit committee, the board of directors, or any  other board committee, accept any consulting, advisory, or other compensatory fee  from the issuer or be an affiliated person of the issuer or its subsidiary.
Governance committee: Is designed for the purpose of monitoring and implementing  the governance structure of the corporation. This committee of independent directors is  charged, in part, with ensuring that the board is informed of new and emerging  governance practice being employed.
Boards must play an active role in the area of internal controls by ensuring that the company  has an effective internal control framework in place. This should include the assessment and  management of key financial and nonfinancial risks and an effective monitoring and oversight  process, supported by timely and accurate information and clear communication channels.
Internal controls are processes designed to provide reasonable assurance that an  organization is achieving its objectives by helping to    ensure it is not overly exposed to risk,  improve the reliability of internal and external reporting,    promote compliance with applicable laws and regulations, and  improve the effectiveness and efficiency of operations.
section_title: Appendix IV: Comments from the Pension Benefit Guaranty Corporation Board of Directors
section_title: Appendix V: Comments from the Pension Benefit Guaranty Corporation
section_title: Appendix VI: Contacts and Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: The following team members made key contributions to this report: Blake  Ainsworth, Assistant Director; Jason Holsclaw; Joe Applebaum; Kisha  Clark; Monika Gomez; Jean McSween; Charles Willson; and Craig  Winslow.
section_title: GAO Related Products
paragraphs: PBGC’s Legal Support: Improvement Needed to Eliminate Confusion and  Ensure Provision of Consistent Advice. GAO-07-757R. Washington, D.C.:  May 18, 2007.
Federal Deposit Insurance Corporation: Human Capital and Risk  Assessment Programs Appear Sound, but Evaluations of Their  Effectiveness Should Be Improved. GAO-07-255. Washington, D.C.:  February 2007.
High Risk Series: An Update. GAO-07-310. Washington, D.C.: January  2007.
Corporate Governance: NCUA’s Controls and Related Procedures for  Board Independence and Objectivity Are Similar to Other Financial  Regulators, but Opportunities Exist to Enhance Its Governance  Structure. GAO-07-72R. Washington, D.C.: November 30, 2006.
Private Pensions: Questions Concerning the Pension Benefit Guaranty  Corporation’s Practices Regarding Single-Employer Probable Claims.  GAO-05-991R. Washington, D.C.: September 9, 2005.
Private Pensions: The Pension Benefit Guaranty Corporation and Long- Term Budgetary Challenges. GAO-05-772T. Washington, D.C.: June 9,  2005.
Government-Sponsored Enterprises: A Framework for Strengthening  GSE Governance and Oversight. GAO-04-269T. Washington, D.C.:  February 10, 2004.
Pension Benefit Guaranty Corporation: Single-Employer Pension  Insurance Program Faces Significant Long-Term Risks. GAO-04-90.  Washington, D.C.: October 2003.
Pension Benefit Guaranty Corporation: Statutory Limitation on  Administrative Expenses Does Not Provide Meaningful Control.   GAO-03-301. Washington, D.C.: February 2003.
GAO Forum on Governance and Accountability: Challenges to Restore  Public Confidence in U.S. Corporate Governance and Accountability  Systems. GAO-03-419SP. Washington, D.C.: January 2003.
Pension Benefit Guaranty Corporation: Contracting Management Needs  Improvement. GAO/HEHS-00-130. Washington, D.C.: September 2000.
Government Corporations: Profiles of Existing Government  Corporations. GAO/GGD-96-14. Washington, D.C.: December 1995.