Private Pensions: Opportunities Exist to Further Improve the Transparency of PBGC's Financial Disclosures
Published: 2006-03-27T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Pension Benefit Guaranty Corporation's (PBGC) single-employer insurance program insures the pension benefits of over 34 million participants in almost 29,000 private sector defined benefit pension plans. The increase in PBGC's probable claims has raised questions about PBGC's monitoring and financial disclosure practices, including whether the information that PBGC discloses is sufficient for interested parties to understand the effect on PBGC's financial condition. GAO examined (1) the steps that PBGC takes to monitor and ensure the accuracy of its probable claims, (2) how PBGC's financial liability reporting compares with those of publicly traded companies, and (3) the steps PBGC has taken to improve the transparency of its financial reporting and whether additional improvement is needed.
section_title: What GAO Found
paragraphs: PBGC takes steps to monitor and ensure the accuracy of its single-employer probable claims forecasts. PBGC reported it monitors its probable claims on an ongoing basis by contacting plan sponsors to obtain certain plan financial information, reviewing filings submitted by probable plans to conduct a risk analysis, and performing valuations to determine the present value of net probable claims and expected date of probable plan termination. To ensure the accuracy of its probable claims, PBGC reported that it uses an automated system and available plan financial data to calculate the assets and liabilities for probable plans. PBGC and public companies have different practices for disclosing certain information about liability settlements, including probable losses, that arise from the differences between PBGC's responsibilities and disclosure policies, and the Security and Exchange Commission's (SEC) requirements for public companies. While PBGC and public companies follow the same accounting standards for recording probable losses in their annual financial statements, they each follow different policies and requirements when reporting information about probable losses throughout the fiscal year. When reporting information on liability settlements, public companies are required to follow the standards set forth by SEC requirements, while PBGC, which is not subject to SEC requirements, follows its own set of policies and procedures. GAO found that PBGC's disclosure practices regarding probable losses are more comparable to those of the Federal Deposit Insurance Corporation (FDIC). PBGC has made efforts to improve the transparency of the information it discloses about its financial condition, but pension experts, financial analysts, and others believe that additional improvements are still needed. PBGC has recently taken steps to include more information about its methodology for determining probable claims in its annual reports and make more detailed information on its financial condition available on its Web site. However, pension experts, analysts, and industry association representatives still have concerns about transparency. Many stated that the press releases PBGC issues that announce newly terminated plans do not provide the public with enough information to determine the financial impact of such plans on PBGC's published deficit. In addition, these parties expressed concern about the lack of transparency regarding the methodology PBGC uses to determine its interest rate its uses to calculate its liabilities. Specifically, these parties told us the fact that PBCG does not widely disclose the interest rate methodology contributes to ambiguity about PBGC's assumptions and means that these parties are unable to fully assess PBGC's financial condition.

section_title: Letter
paragraphs: The Pension Benefit Guaranty Corporation’s (PBGC) single-employer  insurance program is a federal program that insures certain benefits of the  more than 34 million workers and retirees covered by almost 29,000  private sector defined benefit pension plans. In recent years, because of  the collapse of several large underfunded pension plans, the program’s  financial condition has deteriorated from a $9.7 billion cumulative surplus  at the end of fiscal year 2000, to a $22.8 billion cumulative deficit as of the  end of fiscal year 2005. PBGC’s liabilities include liabilities incurred from  plans that have already terminated and, as required under Generally  Accepted Accounting Principles (GAAP), estimated losses incurred from  “probable” terminations, also referred to as “probable claims.” A plan is  classified as a probable claim if PBGC determines that it is likely to  terminate in the future. Forty-six percent ($10.4 billion) of PBGC’s  cumulative deficit as of the end of fiscal year 2005 represents PBGC’s  estimated liability for its probable claims. PBGC cites the deteriorating  financial position of a number of PBGC-insured plans and the companies  that sponsor them as a primary reason for the increase in the amount  booked as probable claims. GAO has previously reported on this and other  structural problems facing PBGC’s single-employer program. In 2003, we  placed PBGC’s single-employer insurance program on our high-risk list of  agencies and programs that need broad-based transformations to address  major challenges, because of our concerns about the program’s long-term  viability.
PBGC’s financial condition is determined by comparing the values of its  assets and its liabilities. PBGC’s assets consist primarily of accumulated  premiums paid by covered plans (invested in Treasury securities) and plan  assets assumed by PBGC when it takes over a plan. PBGC’s liabilities  consist primarily of future benefit payment obligations for plans it takes  over and for plans that it believes will probably terminate in the near  future.
The increase in PBGC’s probable claims in recent years has raised  questions about PBGC’s monitoring and financial disclosure practices,  including whether the information that PBGC discloses is sufficient for  interested parties to understand the net effect of such claims and  ultimately terminations. In September 2005, we provided detailed  information about PBGC’s process for determining single-employer  probable claims and some information about PBGC’s practices for  disclosing information about these claims. To address further questions  about the transparency of PBGC’s probable claims process and its  disclosure practices, we are reporting on (1) the steps that PBGC takes to  monitor and ensure the accuracy of its probable claims forecasts, (2) how  PBGC’s financial liability reporting compares with that of publicly traded  companies, and (3) the steps PBGC has taken to improve the transparency  of its financial reporting on its probable claims and financial condition and  whether additional improvement is needed.
To determine the steps PBGC takes to monitor and ensure the accuracy of  its probable claims forecasts, we reviewed PBGC documents and  interviewed PBGC officials about the methods they use, including the  information sources used to monitor claims. We also reviewed the  agency’s process and internal controls for ensuring the accuracy of claims  and analyzed PBGC’s historical data about its probable claims, but we did  not test its controls to ensure that they are effective. To determine and  compare PBGC and public company practices for making financial  disclosures, we reviewed applicable Generally Accepted Accounting  Principles, Financial Accounting Standards Board (FASB) standards,  Financial Accounting Standards Advisory Board (FASAB) standards,  Securities and Exchange Commission (SEC) disclosure requirements, and  the financial disclosures that PBGC and public companies issue. To  determine the steps PBGC has taken to improve the transparency of its  financial disclosures and whether additional improvement is needed, we  identified PBGC initiatives aimed at improving disclosure and interviewed  industry association representatives, financial analysts, and pension  experts to determine what further improvements could be made. We  conducted our work from September 2005 through February 2006 in  accordance with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: PBGC’s single-employer insurance program is a federal program that  protects the retirement incomes of more than 34 million workers and  retirees covered by almost 29,000 private sector defined benefit pension  plans. Defined benefit pension plans promise to pay a specified monthly  benefit at retirement, commonly based on salary and years on the job.  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 taken  over by PBGC, and recoveries from the companies formerly responsible  for the plans it took over. In addition, PBGC uses Form 5500  information—the primary source of information for both the federal  government and the private sector regarding the operation, funding,  assets, and investments of private pension plans--to monitor single- employer defined benefit pension plan activities, focusing on assets,  liabilities, number of participants, and funding levels. Form 5500  information is also used to forecast PBGC's potential liabilities.
The Employee Retirement Income Security Act of 1974 (ERISA)  established PBGC to insure the pension benefits of participants, subject to  certain limits, in the event that an employer cannot pay its promised  benefits. ERISA also required PBGC to encourage the continuation and  maintenance of voluntary private pension plans and to maintain premiums  set by the corporation at the lowest level consistent with carrying out its  obligations. PBGC may pay only a portion of a participant’s accrued  benefit because of limits on the PBGC benefit guarantee; PBGC generally  does not guarantee benefits above a certain amount, currently   $47,659 annually per participant at age 65. Additionally, benefit increases  arising from plan amendments in the 5 years immediately preceding plan  termination are not fully guaranteed, although PBGC will pay a portion of  these increases. Finally, sponsors of PBGC-insured defined benefit plans  pay annual premiums to PBGC for their coverage.
PBGC prepares its financial statements in accordance with FASB  standards, as permitted by the Federal Accounting Standards Advisory  Board. For procedures on how to record and report contingencies,  FASB’s Statement of Financial Accounting Standards No. 5, Accounting  for Contingencies (FAS No. 5), specifically requires that a liability for loss  contingency be recorded if two conditions are met: (1) information  available prior to issuance indicates that it is probable that a liability has  been incurred at the date of the financial statements, and (2) the amount  of the loss can be reasonably estimated. For fiscal year 2005, PBGC  received its 13th consecutive clean or unqualified audit opinion from its  independent auditors.
As a wholly-owned government corporation, PBGC is subject to the  financial and internal control reporting requirements of Chapter 91 of Title  31 of the U.S. Code (commonly known as the Government Corporation  Control Act). The Office of Management and Budget (OMB) issues  guidance to the heads of federal agencies and government corporations  that sets out the annual process for them to make a statement as to the  adequacy of their entity’s internal controls. In light of new requirements  for publicly-traded companies relating specifically to internal controls  over financial reporting and management’s related responsibilities,  contained in the Sarbanes-Oxley Act of 2002, OMB recently revised its  guidance to adopt enhanced requirements for internal controls over  financial reporting by major federal agencies. Specifically, OMB added an  entirely new appendix to its existing guidance requiring that these  agencies establish a formal process for assessing their internal controls  over financial reporting. This new requirement, however, applies only to  the 24 CFO Act agencies, and thus these specific requirements do not  apply to PBGC.
To estimate the present value of its future liabilities, PBGC develops  interest rate factors, similar to interest rates, to use for these calculations,  based on surveys of insurance companies conducted by the American  Council of Life Insurers (ACLI) for PBGC and the Internal Revenue Service  (IRS). The survey asks insurers to provide the net annuity price for  annuity contracts for plan terminations. PBGC develops interest rate  factors, similar to interest rates, from the survey results that together with  PBGC’s other actuarial assumptions produce prices in line with those of  the private sector insurers surveyed, which are adjusted to the end of the  year using an average of the Moody’s Corporate Bond Indices for Aa and  A-rated corporate bonds for the last 5 trading days of the month. The  adjusted interest rate factors are published in mid-December for use in  January. The interest rate factors are then further adjusted each  subsequent month of the year on the basis of the average of the Moody’s  bond indices. All other things being equal, when interest rates are lower,  more money is needed today to finance future benefits because this money  will earn less income when invested. Therefore, lower interest rate  assumptions result in higher liability amounts, while higher interest rate  assumptions result in lower liability amounts.
In 1997, we reported that the cash-based federal budget, which focuses on  annual cash flows, does not adequately reflect the cost or the economic  impact of PBGC’s single-employer pension insurance program and other  federal insurance programs. Generally, cost is only recognized in the  budget when claims are paid rather than when the commitment is made.  Benefit payments of terminated plans assumed by PBGC may not be made  for years, even decades, because plan participants generally are not  eligible to receive pension benefits until they reach age 65. Once eligible,  these benefits are paid over a period of years or even decades.  As a result,  there can be years in which PBGC's current cash collections are estimated  to exceed current cash payments, regardless of the expected long-term  cost to the government. We concluded that the use of accrual concepts in  the budget for PBGC and other insurance programs has the potential to  better inform budget choices.
SEC, the principal federal regulator of the U.S. securities markets, requires  public companies to disclose meaningful financial and other information  to the public. SEC’s mission is to protect investors, maintain fair orderly  and efficient markets, and facilitate capital formation. Public companies  are required to submit reports to SEC on Form 8-K, the “current report”  companies must file with SEC to announce certain major events that  shareholders should know about, including any expected losses that are  considered to be material. In addition, public companies must submit  annual reports on Form 10-K and quarterly reports on Form 10-Q. These  disclosures are designed to keep the public informed about any  information that could be considered important for investors. This  provides a common pool of knowledge for all investors to use to judge for  themselves whether to buy, sell, or hold a particular security.
FDIC is a government corporation. In addition to its roles as primary  federal regulator of state-chartered banks that are not members of the  Federal Reserve System and back-up regulator for all insured depository  institutions, FDIC said it promotes public confidence and stability in the  U.S. financial system by insuring deposits in banks and thrift institutions;  by examining and supervising financial institutions; 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. Similar to PBGC, FDIC receives no congressional  appropriations; it is funded by premiums that banks and thrift institutions  pay for deposit insurance coverage and from earnings on investments in  U.S. Treasury securities.
section_title: PBGC Has a Process in Place to Monitor and Ensure the Accuracy of Its Single- Employer Probable Claims Forecasts
paragraphs: PBGC reports that it monitors its probable claims on an ongoing basis by  contacting plan sponsors to obtain certain plan financial information,  reviewing filings submitted by probable plans to conduct a risk analysis,  and performing valuations to determine, among other things, the present  value of net probable claims and expected date of probable plan  termination. PBGC also regularly updates and reviews its list of probable  claims that it monitors. PBGC also takes certain steps to ensure the  accuracy of its probable claims, such as using an automated system for  estimating probable claims and the most currently available data when  calculating its estimates. We found that PBGC’s probable claims estimates  are reasonable because they are generally close to the final claim amounts  that are determined for these plans that PBGC ultimately takes over.
subsections: section_title: PBGC Has Procedures in Place to Monitor Single- Employer Probable Claims on a Year-round Basis
paragraphs: PBGC assesses underfunded plans to determine which plans should be  classified as probable claims and monitored on an ongoing basis. To be  classified as a probable claim, a plan must meet at least one of the seven  criteria PBGC uses, five of which it characterizes as objective, and two as  subjective. According to PBGC officials, objective criteria are used when  substantial evidence exists to indicate that the plan sponsor is in  liquidation or insolvency proceedings or will meet the requirements for a  distress or involuntary termination. Subjective criteria involve  management judgment. Table 1 shows the different applications of the  objective and subjective criteria used to classify plans as probable claims.
Once probable plans are identified, PBGC uses certain information to  more closely monitor such plans and the future claims they represent. To  accomplish this, PBGC primarily relies on information it receives from  plan sponsors, information from Section 4010 filings, reportable event and  distress termination filings, and other sources.
Information from plan sponsors: PBGC officials said they contact plan  sponsors in order to monitor the case and obtain any required information  not submitted by the plan sponsor, such as the plan’s most recent Form  5500 filing and actuarial valuation report. PBGC officials said they also  make an assessment of the potential for termination. This is part of a  process that encompasses (1) querying the plan sponsor about the  intentions with regard to its pension plans, (2) obtaining estimates of due  and unpaid employer contributions and unfunded benefits, and   (3) performing a risk analysis.
Section 4010 filings: These filings provide PBGC with actuarial and  other information on some underfunded plans and financial information  for companies that meet certain criteria. PBGC said that these filings are  an important component of PBGC’s monitoring activities. Section 4010 of  ERISA requires the reporting of plan actuarial and company financial  information by employers with plans that have aggregate unfunded vested  benefits in excess of $50 million, missed required contributions in excess  of $1 million, or outstanding minimum funding waivers in excess of $1  million. The information required to be filed includes (1) plan identifying  information, (2) information regarding the fair market value of plan assets  and the value of benefit liabilities on a PBGC termination liability basis,  and (3) financial information, such as financial statements.
Reportable event and distress termination filings: The major types of  reportable event filings that PBGC uses to monitor underfunded plans  include the inability of a plan to pay participants the benefits due them in  the form prescribed by the plan, bankruptcy or insolvency proceedings,  liquidation proceedings or the dissolving of the plan sponsor, and failing to  meet the minimum funding standards. According to PBGC officials, PBGC  is notified of reportable events affecting approximately   300 plans per year. On average, 200 of these plans either undergo standard  terminations or continue without termination, resulting in PBGC not  taking over the plan. The remaining 100 plans eventually become distress  terminations or involuntary terminations.
Other sources: PBGC uses Form 5500 information to monitor plan  funding. PBGC also monitors news sources (e.g., Bloomberg, Livedgar,  and NewsEdge) to identify transactions that could adversely affect plan  funding status and ultimately PBGC. In addition, PBGC contracts with Dun  and Bradstreet’s First Alert Service, which reports on bankruptcy filings  within several days of the filing.
As part of its monitoring process, all probable claims are reviewed by  PBGC’s Contingency Working Group (CWG), which is composed of  representatives from various departments and divisions within PBGC. The  CWG is responsible for approving probable plan classifications and  probable loss amounts. PBGC updates its probable claims three times per  year, and performs valuations for financial reporting purposes on all plans  on the probable claims list. For each financial reporting date (March 31,  June 30, and September 30), PBGC actuaries prepare a preliminary list of  probable claims that also contains the estimated date of plan termination  and the present value of the each plan’s net claim. For each period, the  Contingency Working Group reviews and approves the finalized list of  probable claims.
section_title: PBGC Takes Steps to Ensure the Accuracy of Its Probable Claims
paragraphs: PBGC reports that it takes certain steps to help ensure the accuracy of its  probable claims. One of PBGC’s key controls to help ensure accuracy is an  automated system for estimating probable claims. The Integrated Present  Value of Future Benefits (IPVFB) system estimates the probable losses  and does so according to GAAP and FAS No. 5 standards. To calculate the  fiscal year end financial statement assets and liabilities for probable plans,  plan information such as Form 5500 filings, asset statements, annuity  purchases, contributions, and estimated dates of plan termination are  entered into the IPVFB system as of the estimated date of plan termination  and fiscal year end. This system adjusts the liabilities from the plan’s  assumptions, such as mortality, interest, and expected retirement age, to  standard assumptions used by PBGC, and then produces a report that  provides PBGC staff with information on how the assets and liabilities are  brought forward from the Actuarial Valuation Report date to the date of  the financial statements. PBGC officials reported that the agency’s process  for estimating its probable claims is reviewed by its financial auditors as  part of its annual audit of its financial statements. As noted earlier, the  auditors have issued unqualified audit opinions for the last 13 years.
PBGC officials also told us they help ensure high levels of accuracy by  using the most current data available as the starting point in their  valuation process, but there’s room for improving the timeliness of the  data. For example, PBGC has 4010 data for the largest plans that it  designates as probable claims, but even those data are 3 ½ months old  when received, and they are received only once per year. On occasion,  PBGC is able to obtain more current actuarial valuation reports, but it is  not able to do this regularly for all plans on the probables list.
PBGC officials also said since single-employer probable claims are  estimates, factors that are not fully determinable can cause the actual  claims PBGC receives to differ from its probable estimates. According to  these officials, when they calculate their probable estimates, they usually  do not have complete data on the provisions of the plan, the  characteristics of plan participants, the exact date of plan termination, the  precise value of plan assets and liabilities at that termination date, or the  level of recoveries from the plan’s sponsor, all of which may change over  time. Additionally, potential changes in PBGC’s valuations, knowledge of  specific plan provisions, and participant characteristics combine in ways  that can cause the actual claims from these plans to deviate from the  estimates, regardless of the timeliness of the data used in preparing the  estimates. When a probable claim becomes an actual claim, PBGC officials  said they adjust the probable claim estimate to that of the actual claim  amount as of the date of plan termination. If a plan is removed from the  probables list for a reason other than termination, the previously  estimated claim is removed from the probable claims total and  reclassified, often as a reasonably possible claim.
PBGC data showed its total probable claims estimates ($21.8 billion) for  all plans that eventually terminated were within one percentage point of  the actual claim amount ($21.9 billion).  Ninety-five percent of the   $22.9 billion in resolved probable claims was in plans that terminated with  PBGC. In addition, historically the vast majority of probable claims   (76%) subsequently become actual claims, as shown in figure 1.
Moreover, of the $16.9 billion of probable net claims that were reported in  the financial statements as of the end of fiscal year 2004, more than   $10 billion was in plans that terminated during fiscal year 2005.
section_title: PBGC and Public Companies Follow Different Reporting Requirements when Reporting Liability Settlements, Including Probable Losses
paragraphs: PBGC and public companies have different practices for disclosing  information about liability settlements, including probable losses.  Although PBGC and public companies follow the same accounting  standards for recording probable losses in their annual financial  statements, they each follow different policies and requirements when  reporting information about probable losses throughout the fiscal year.  When reporting information on liability settlements, PBGC follows its own  set of policies and procedures, while public companies are required to  follow the standards set forth by SEC requirements. PBGC’s disclosure  practices regarding financial liabilities are similar to those of other  government corporations, namely FDIC, which operates similar programs  and faces similar risks.
subsections: section_title: Differences in PBGC and Public Company Liability Settlement Reporting Result from Differences between PBGC Disclosure Policies and SEC Requirements
paragraphs: PBGC and publicly traded companies have different practices for  disclosing information on liability settlements, including probable losses.  Both PBGC and public companies follow the same accounting standards  for recording probable losses in their annual financial statements. For  example, PBGC announces an estimated liability from probable claims in  its annual report, and public companies report similar information about  probable losses in their annual reports. However, when reporting  information about probable losses throughout the fiscal year, PBGC and  public companies have different practices, which result from the different  policies and requirements of each entity.
PBGC’s reporting in its annual report, or elsewhere, is meant to avoid the  disclosure of any information on specific plans classified as probable in  order to prevent harm to the economic health of the plan sponsor. When a  plan is classified as a probable claim and has not yet terminated, PBGC’s  policy precludes the disclosure of any information indicating that a  specific plan has been classified as a probable claim. In its annual report,  PBGC reports its probable claim estimates as an aggregated total value of  net claims in order to conceal exactly which plans are included in the  figure. PBGC also identifies its probable claim estimates by industry in its  financial statements. PBGC officials said their policy of not disclosing any  information on plans so classified is meant to avoid causing more  economic distress to the plan sponsor, because such plans usually have  plan sponsors that are already economically weak. According to these  officials, this policy exists so that disclosure does not unnecessarily   (1) compromise a company’s ability to continue as a going concern and   (2) influence a sponsor’s decision whether to maintain or terminate its  pension plans. For example, if investors knew that PBGC had classified a  particular plan as a probable claim, this could encourage additional  negative speculation about the financial health of the plan sponsor and  trigger activity that might further the financial instability of the company.
When PBGC takes over a plan, it typically issues a press release  announcing the liability PBGC expects to incur, without indicating if the  terminated plan had already been booked as a probable claim and  consequently included in its previously announced deficit in its year-end  financial report. According to PBGC officials, PBGC does not release the  amount of its previously booked probable claims in its press releases for  fear of compromising PBGC’s position in litigation and of negatively  affecting a company’s financial condition. These officials said that  releasing its previously booked probable claim amounts would enable  someone to make a comparison between PBGC’s booked liability for a  particular plan and the amount of underfunding for that plan. Publicizing  this information could affect PBGC’s ability to recover the full amount of a  plan’s claims in litigation because companies are likely to resist a  settlement with PBGC for more than the amount of PBGC’s previously  booked losses. In addition, announcing the previously booked liability also  has a negative impact on a company’s ability to obtain additional financing  and may worsen its financial condition.
In contrast, public companies must follow SEC requirements for  disclosing information on financial liability settlements, including  probable claims. Federal securities laws enforced by SEC require that  public companies disclose information on liabilities booked as a probable  loss. Public companies must submit current reports to SEC on Form 8-K  for a number of specified events, including any material event that might  affect the investment decisions of shareholders. For example, when a  public company books a material liability as “probable,” the company is  required to file a Form 8-K with SEC. Often companies issue such  information in a press release, which they may attach to the 8-K.
Although SEC requires public companies, under certain conditions, to  disclose information about a probable loss, there is much variability in  how these companies choose to disclose this information. According to  SEC officials, some companies choose to provide as much information as  possible concerning their probable losses, while other companies choose  to release less information. For example, some companies release the  specific amount of a probable loss in an 8-K, and after the liability has  changed from a probable claim to a certainty, these companies choose to  redisclose the previously booked quantity to fully demonstrate the total  financial impact of the liability on the company. Other companies choose  to be more general in their disclosure of probable liabilities by disclosing  information about these quantities in general terms, such as announcing a  range instead of a specific number.
Pension experts, financial analysts, SEC officials, and others said that the  different reporting practices and policies of PBGC and public companies  are a consequence of the different risks and responsibilities faced by each  entity. They agreed that there would likely be further economic distress  for plan sponsors if PBGC divulged which plans are classified as probable  before those plans terminate. These experts also noted that while PBGC  has an obligation to not disclose information on its probable claims, public  companies have a responsibility to report as much information as possible,  including probable claims, in order to keep investors informed and able to  make knowledgeable decisions. Finally, they said that the unique risks of  PBGC as a government corporation make its disclosure responsibilities  distinctively different from those of public companies.
section_title: PBGC’s Liability Settlement Reporting Practices Are More Comparable to Those of FDIC
paragraphs: We found that PBGC’s reporting practices are more comparable to those  of government corporations like FDIC than they are to those of public  companies. Both corporations operate similar types of programs, and both  agencies have a responsibility to ensure the stability of the programs they  operate. Unlike public companies, PBGC and FDIC are not subject to SEC  requirements. In our discussions with PBGC and FDIC officials, we found  that both agencies have adopted similar disclosure policies when reporting  probable losses.
According to officials from PBGC and FDIC, both agencies follow the  same accounting standards and face similar risks when disclosing  information about probable losses. For example, officials from both  agencies said they do not disclose case-specific, detailed information on  probable claims in order to protect the entities under their jurisdictions  from further economic distress. Just as PBGC avoids exacerbating the  economic situation faced by plan sponsors whose plans are booked as  probable, FDIC avoids any financial statement disclosure action that might  cause further economic distress for the institutions it insures. In addition,  PBGC follows a policy of not disclosing probable claim amounts in its  press releases announcing the termination of a plan. FDIC officials said  that the agency issues a press release on the day of institution failure that  may or may not, depending on the nature and timing of the failure, include  an estimated cost to the Insurance Fund. The unique responsibilities of  each entity heavily influence the nature and content of the disclosures.
section_title: PBGC’S Financial Disclosures Have Improved, but Transparency in Some Areas Remains an Issue
paragraphs: Over the years, PBGC has made efforts to improve the transparency of its  disclosures, including revising its annual report to include more detailed  information about its methodology for determining probable claims, and it  has published more detailed information about its financial condition on  its Web site. Despite PBGC’s efforts to improve the transparency of its  disclosures, pension experts and others told us that they would like to see  more information disclosed when PBGC announces the termination of a  new plan in its press releases and that they have some uncertainty about  PBGC’s methodology for calculating its interest rate. In addition, pension  experts, financial analysts, and industry association representatives told us  that PBGC’s disclosures are likely to become increasingly important in  light of upcoming changes in the pension accounting rules for plan  sponsors.
subsections: section_title: PBGC Has Taken Steps to Improve the Transparency of Its Financial Disclosures
paragraphs: PBGC officials told us they regularly review the agency’s policies for  disclosing information related to its financial condition and revise their  disclosure documents as needed. According to PBGC officials, when  making decisions to revise its disclosures, PBGC takes into consideration,  among other things, current changes in the private pension environment  that affect the agency’s financial condition and information that would  help the public better understand PBGC’s current financial condition.
Over the last several years PBGC took the following actions to improve the  transparency of its disclosures:  it published a fact sheet on its Web site that provides answers to questions  that have been raised about PBGC financial condition, including its deficit,  the true cost of its insurance program, and pension underfunding; it revised its annual report to include more detailed information about its  methodology for determining probable claims; it revised its Pension Insurance Data Book 2003 , which has detailed  statistics for the agency’s insurance programs, to include information  related to PBGC’s claims experiences in order to provide more historical  data on the number and size of claims by the year the plans terminated,  the funding levels of the plans at termination, and the size of the plans at  termination; it released extensive data about PBGC’s financial condition, as well as  explanatory and white papers about how to understand PBGC’s financial  condition, reports, and methods available on its Web site (www.pbgc.gov);  and it revised the agency’s Web site to make it more user-friendly.
PBGC officials also said they conduct a range of educational outreach  activities with their various stakeholders, including plan participants,  experts, policy makers, and the press. For example, PBGC discusses its  financial condition at various meetings with plan participants held each  year. PBGC officials also regularly give speeches at gatherings of  actuaries, lawyers, financial officers, benefit specialists, and other  members of the plan sponsor community. PBGC also issues press releases  regarding its current financial condition, in connection with the annual  financial statements.
section_title: Pension Experts, Financial Analysts, and Others Have Concerns about the Transparency of PBGC’s Disclosures
paragraphs: Some pension experts and others have expressed concern that some  aspects of PBGC’s disclosures are still unclear. For example, PBGC does  not include sufficient information to determine the financial impact of new  terminations on PBGC’s financial position when it issues a press release.  When announcing the termination of a new plan in its press releases,  PBGC does not announce whether or not the terminated plan was  previously booked as a probable and already included in its reported  deficit and reported in its annual financial statement. For example, when a  large plan is terminated, PBGC puts out a press release announcing the  following information about the terminated plan:  the type of termination and reason for termination;   plan information, including the amount of assets, amount of liability, level  of funding, and the number of employees covered by the plan; the current estimate of PBGC’s liability; and   a review of pension rules and guarantee limits.
When announcing a plan’s termination, PBGC does not disclose whether  the plan was previously booked as a probable claim, and experts and  others said this practice leads some to believe that PBGC is assuming a  wholly new liability, in addition to the large deficit already reported by  PBGC in its annual report. According to PBGC officials, in the case of  most large terminations, PBGC has already recorded a major part of the  announced liability in its reported deficit as a probable claim. Thus, when  PBGC issues a press release, it may appear that PBGC is assuming a  considerable liability with the termination of a large underfunded pension  plan when in fact most of the announced liability has been previously  recorded in PBGC’s annual financial statement and is already reflected in  its previously reported deficit. Pension experts and financial analysts said  that PBGC’s press releases include PBGC’s best estimate of the financial  liability facing PBGC without any mention of how much of this liability has  already been recorded as a probable claim in its annual financial  statement. Experts and others told us that when PBGC puts out a press  release announcing the termination of a new plan, they regularly receive  telephone calls from the media and others asking if this announced  liability is a new liability added to PBGC’s deficit. By revealing whether the  newly terminated plan was previously recorded as a probable claim, PBGC  would give policy makers and others better information to understand the  impact on PBGC’s financial condition.
Pension experts and financial analysts were also concerned that they  remain uncertain about PBGC’s methodology for calculating the interest  rate it uses to discount its long-term liabilities and would like to see more  information disclosed about this process. The interest rate used by PBGC  to calculate its liabilities has a significant effect on the reported financial  condition of PBGC. For instance, if PBGC reduced its interest rate, the  value of its liabilities would increase, and conversely, if PBGC increased  its interest rate, the value of PBGC’s liabilities would decrease. Pension  experts said that because PBGC’s interest rate choice has a large impact  on its reported financial position, they are troubled that the assumptions  surrounding the interest rate decision are not transparent. Pension experts  and financial analysts said that they are uncertain of the exact calculations  used by PBGC to calculate its rate, and they believe that PBGC could do  more to clarify its interest rate assumptions and the effect of this rate on  its reported financial position.
According to PBGC officials, information about their interest rate  calculations is available upon request but is not provided in its annual  financial disclosure documents. Although PBGC discloses its interest rate  factors and some of its actuarial assumptions in its annual financial  statement, it does not disclose its entire interest rate methodology. PBGC  officials also told us that in 2003, during bankruptcy proceedings for US  Airways, the court reviewed PBGC’s interest rate. During these  proceedings, PBGC submitted a detailed presentation on how the rate is  calculated, which is now part of the public record. The court upheld  PBGC’s use of its interest rate. PBGC officials told us they distribute  documentation of their methodology when it is requested. However, while  the assumptions and calculations PBGC uses to calculate its interest rate  are public information, such information is not readily accessible to  experts, plan sponsors, plan participants, or lawmakers because they may  not know that this information is available upon request.
Pension experts and others also had additional concerns about PBGC’s  methodology and practices that PBGC has addressed. Specifically, they  were concerned that PBGC’s practices and disclosures overstate PBGC’s  economic distress by (1) including estimated probable claim liabilities in  its deficit, (2) not publishing a projected date of PBGC’s insolvency, and  (3) using a low interest rate. For more information on these concerns and  PBGC’s responses to these concerns, see appendix III.
Concerns about the transparency of information on the financial condition  of the PBGC are not new. As we previously reported, the cash-basis of the  federal budget contributes to a lack of transparency about PBGC and  other federal insurance programs that may delay recognition of emerging  financial problems. Furthermore, current budget reporting may not  provide policy makers with information or incentives to address potential  funding shortfalls before claim payments come due.  Generally costs are  recorded in the budget too late for policy makers to control them or even  ensure that adequate resources will be available to cover them. The  delayed budget recognition of these costs can reduce the number of viable  options available to policy makers and may ultimately increase the cost to  the government.
Finally, many of the pension experts, financial analysts, and industry  association representatives we consulted observed that PBGC’s  disclosures are likely to become increasingly important if changes to the  pension accounting rules currently under discussion are made, as these  could have an effect on defined benefit plans covered by PBGC. The  primary accounting rule change that is being discussed is likely to move  the disclosure of the funding status of pension plans from the footnotes to  the balance sheet of the employer’s financial statement. According to  FASB, this change is intended to make an employer’s pension obligations  more visible on the balance sheet and income statement in order to  increase the transparency of the plan sponsor’s financial position.  Financial analysts and others told us that there are many potential effects  to this expected change that do not directly influence PBGC but are likely  to indirectly affect PBGC’s financial condition. For example, pension  experts and analysts said that the new FASB changes could have a positive  effect on PBGC’s future financial condition by promoting greater  contributions and higher funding levels from plan sponsors, thus reducing  PBGC’s exposure to financially troubled plans.
section_title: Conclusions
paragraphs: The information that PBGC reports on its probable claims and financial  liabilities is the main source of information that policy makers and  interested parties have to evaluate the financial condition of PBGC.  The  more transparent PBGC is about the impact of new terminations on  PBGC’s financial positions and the methodology it uses to determine its  interest rate, the less ambiguity there will be about PBGC’s financial  condition and the more beneficial PBGC’s financial reporting will be for  policy makers and others.  Public understanding of PBGC’s financial  condition will become even more important in the near future if  the  proposed changes to pension accounting rules are made, potentially  affecting PBGC’s financial condition.
The risks faced by PBGC when disclosing information about probable  claims are not the same as those faced by public companies.  PBGC must  be careful not to release information that can negatively affect the  sponsors of the plans it insures or its ability to recover assets from the  sponsors of the plans that it takes over. Public companies’ disclosures are  aimed at providing necessary information to investors.  Improving the  transparency of the financial information released by PBGC will require  finding a solution that does not hinder the agency’s ability to make  recoveries from plan sponsors for the losses it incurs.
section_title: Recommendations
paragraphs: We recognize that PBGC believes that there are reasons for withholding  certain information about its probable claims.  As we reported, PBGC does  not disclose the names and liability amounts for newly terminated plans  that were classified as probable claims because of its concerns of  compromising PBGC’s position during litigation and negatively affecting  the economic health of plan sponsors.  However, PBGC could better  describe the impact of new claims on its reported net financial position  when announcing new plan terminations in its press releases.  Therefore,  we recommend that PBGC consider disclosing, in its press releases,  whether a newly terminated plan was classified as a probable and already  included in its reported deficit in its annual financial statement.
To improve the transparency of the interest rate assumptions PBGC uses  to calculate its liabilities, we recommend that PBGC makes it interest rate  methodology more widely available to the public. In doing so, PBGC  should considering making this information available on its Web site.
section_title: Agency Comments
paragraphs: We provided a draft of this report to PBGC, FDIC, the Department of  Labor (Labor), SEC, and the Department of the Treasury (Treasury).  PBGC provided written comments, which appear in appendix I. PBGC’s  comments agreed with the findings and conclusions of our report. SEC  provided written comments which appear in appendix II. SEC’s comments  generally agreed with our findings related to SEC’s Form 8-K and material  liabilities.  The agency’s comments also provided additional information  that is related to Form 8-K requirements and financial statement disclosure  of loss contingencies. PBGC and FDIC also provided technical comments  on the draft. We did not receive any comments from Labor and Treasury.  We incorporated each agency’s comments as appropriate.
As arranged with your office, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days from the  issue date. At that time, we will send copies of this report to the Secretary  of Labor, the Secretary of the Treasury, and the Executive Director of the  Pension Benefit Guaranty Corporation; appropriate congressional  committees; and other interested parties. We will also make copies  available to others on request. In addition, the report will be available at  no charge on GAO’s Web site at http://www.gao.gov.
If you have any questions concerning this report, please contact me at  (202) 512-7215. Other contacts and acknowledgments are listed in  appendix IV.
section_title: Appendix I: Comments from the Pension Benefit Guaranty Corporation
section_title: Appendix II: Comments from the Securities and Exchange Commission
section_title: Appendix III: Other Concerns Regarding the Information PBGC Discloses about Its Financial Condition
paragraphs: Pension experts and others had additional concerns about the Pension  Benefit Guaranty Corporation’s (PBGC) methodology and practices that  have been addressed by PBGC. Pension experts and industry association  representatives told us they are also concerned that PBGC’s practices and  disclosures overstate its economic distress by (1) including estimated  probable claim liabilities in its deficit, (2) not publishing a projected date  of insolvency, and (3) using a low interest rate. Each of these concerns has  already been addressed by PBGC.
subsections: section_title: Estimated Probable Claim Liabilities in Its Deficit
paragraphs: PBGC includes estimated net losses incurred from probable terminations  in its liabilities when calculating its deficit. Some experts are concerned  that PBGC’s deficit is largely composed of liabilities from probable claims  that might never terminate. In addition, these parties told us that by only  booking the net claim, instead of booking the assets and liabilities  separately, PBGC is making its own funded ratio look worse. PBGC  officials agreed that this practice may make their funded ratio lower but  said it has no impact on the size of its deficit. However, PBGC officials  said that according to FAS 5, PBGC is required to include the expected net  claims from probable claims in its financial statement if the loss is  probable and the amount of the loss can be reasonably estimated.  Furthermore, the accounting standards do not permit PBGC to separately  book plan assets and liabilities of probable claims until PBGC takes over  the plan.
section_title: Projected Date of Insolvency
paragraphs: Pension experts and industry association representatives also told us that  PBGC publicizes its large financial deficit without publishing an estimated  date of insolvency. While some experts we spoke to understand that PBGC  has enough assets to pay its promised obligations for a number of years,  they are concerned that by not announcing a date of insolvency, PBGC  leaves the impression that participants are at imminent risk of not  receiving their benefits. PBGC officials told us that a projected date of  insolvency for the single-employer program is not calculated because  there are many uncertain variables that will affect PBGC’s future cash  flows, and it is not possible to reasonably project a date of insolvency with  any accuracy. The uncertainty of when PBGC will trustee new plans, how  those claims will affect PBGC’s future cash flows, and of PBGC’s revenue  from investment returns make it impossible to make reasonable  predictions of the date of PBGC’s insolvency. However, PBGC officials  reported that the agency’s analysis has shown that there is less than a 10  percent chance that its single-employer program will not have sufficient  assets to pay guaranteed benefits through 2020.
section_title: Interest Rate Level
paragraphs: Some pension experts, industry association representatives, and financial  analysts disagree with PBGC’s choice of interest rate used when  calculating the value of its liabilities and argue that this interest rate is  unrealistically low, thereby overstating the value of its reported deficit.  These experts said that PBGC should be using a higher interest rate that is  more in line with current corporate economic conditions. According to  PBGC officials, the agency’s interest factors are based on the rate at which  a private insurance company would charge plan sponsors to take on a  plan’s promised benefits. The survey ensures that PBGC’s termination  values reflect the current market price of terminating a plan. PBGC  officials also noted that its auditors have issued unqualified opinions on its  financial statements, which include its liabilities for probable losses and  the interest factors used to calculate these liabilities. In addition, the  American Academy of Actuaries conducted a study that found its  procedures accurately reflected annuity prices.
section_title: Appendix IV: GAO Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: Tamara Cross, Assistant Director; Raun Lazier, Analyst-in-Charge; Diana  Blumenfeld; Joseph Applebaum; Richard Burkard; Robert Dacey; Kimberly  McGatlin; Jonathan McMurray; James McTigue Jr.; and Roger J. Thomas  made important contributions to this report.
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