Pension Benefit Guaranty Corporation: Improvements Needed to Address Financial and Management Challenges
Published: 2008-09-24T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Pension Benefit Guaranty Corporation (PBGC) insures the retirement future of nearly 44 million people in more than 30,000 private-sector defined benefit pension plans. In July 2003, GAO designated PBGC's single-employer pension insurance program--its largest insurance program--as "high risk," including it on GAO's list of major programs that need urgent attention and transformation. The program remains on the list today with a projected financial deficit of just over $13 billion, as of September 2007. Because Congress exercises oversight of PBGC, GAO was asked to testify today on 1) the critical role PBGC plays in protecting the pension benefits of workers and how PBGC is funded, 2) the financial challenges facing PBGC, and 3) the PBGC's governance, oversight and management challenges. To address these objectives, we are relying on our reports from the last several years that, as part of our designation of PBGC's single-employer program as high-risk, explored the financial and management challenges facing the agency. GAO has made a number of recommendations and matters for Congressional consideration in these past reports. PBGC generally agreed with these past recommendations and is implementing many of them. No new recommendations are being made as part of this testimony.
section_title: What GAO Found
paragraphs: PBGC administers the current or future pension benefits for a growing number of participants of plans that have been taken over by the agency--from 500,000 in fiscal year 2000 to 1.3 million participants in fiscal year 2007. PBGC is financed by insurance premiums set by Congress and paid by sponsors of defined benefit (DB) plans, investment income, assets from pension plans trusteed by PBGC, and recoveries from the companies formerly responsible for those trusteed plans; PBGC receives no funds from general revenues. The treatment of PBGC in the federal budget is complicated by the use of two accounts--an on-budget revolving fund and a non-budgetary trust fund. Ultimately this budget treatment can be confusing--especially in the short-term--as on-budget gains may be offset by long-term liabilities that are not reported to on-budget accounts. PBGC's single-employer program faces financial challenges from a history of weak plan funding rules that left it susceptible to claims from sponsors of large, severely underfunded pension plans. PBGC had seen recent improvements to its net financial position due to generally better economic conditions and from statutory changes that raised premiums and took measures designed to strengthen plan funding and PBGC guarantees. However, certain improvements have only just begun phasing-in and the changes did not completely address a number of the risks that PBGC faces going forward. Further, PBGC just began implementing a new investment policy that, while offering the potential for higher returns, also adds significant variability and risk to the assets it manages. Also, changing economic conditions could further expose PBGC to future claims. Improvements are needed to PBGC's governance structure and to its strategic approach to program management. PBGC's three member board of directors is limited in its ability to provide policy direction and oversight. PBGC may also be exposed to challenges as the board, its representatives, and the director will likely change with the upcoming presidential transition in January. In addition, PBGC lacks a strategic approach to its acquisition and human capital management needs. Three-quarters of PBGC's administrative budget is spent on contractors, yet PBGC's strategic planning generally does not recognize contracting as a major aspect of PBGC activities.

section_title: Letter
paragraphs: I am pleased to be here today to discuss the financial and operational  challenges facing the Pension Benefit Guaranty Corporation (PBGC).  PBGC operates two pension insurance programs that protect the  retirement income of nearly 44 million workers in over 30,000 private- sector defined benefit pension plans. In July 2003, GAO designated PBGC’s  single-employer pension insurance program—its largest insurance  program—as “high risk,” including it on GAO’s list of major programs that  need urgent attention and transformation. The program remains on the  list today with a projected financial deficit of just over $13 billion, as of  September 2007.
PBGC was created as a self-financing, wholly owned government  corporation by the Employee Retirement Income Security Act of 1974  (ERISA). PBGC is managed by a presidentially-appointed, Senate- confirmed director, and governed by a three-member board of directors,  consisting of the Secretaries of the Treasury, Labor, and Commerce, that is  charged with providing policy direction and oversight of PBGC’s finances  and operations. PBGC’s primary responsibilities are to collect premiums  from the sponsors of defined benefit plans to insure against default and to  assume administration of underfunded plans that terminate. In the event  of a plan default, PBGC assumes control of plan assets (including amounts  due and payable from the plan sponsor), calculates benefit amounts due  plan participants, and pays recipients as benefits are due.
My statement is based on our prior work assessing PBGC’s long-term  financial challenges, and several reports that we have published over the  past two years on PBGC governance and management. Specifically, my  statement will discuss the (1) critical role PBGC plays in protecting the  pension benefits of workers and how PBGC is funded, (2) financial  challenges facing PBGC, and (3) PBGC’s governance, oversight and  management challenges.
In summary, PBGC administers the current or future pension benefits for a  growing number of participants of plans that have been taken over by the  agency—from 500,000 in fiscal year 2000 to 1.3 million participants in  fiscal year 2007. PBGC is financed by insurance premiums set by Congress  and paid by sponsors of defined benefit (DB) plans, investment income,  assets from pension plans trusteed by PBGC, and recoveries from the  companies formerly responsible for those trusteed plans; PBGC receives  no funds from general revenues. The treatment of PBGC in the federal  budget is complicated by the use of two accounts—an on–budget  revolving fund and a non-budgetary trust fund. This budget treatment can  be confusing—especially in the short-term—as on-budget gains may be  offset by long-term liabilities that are not reported to on-budget accounts.
PBGC’s insurance programs, and specifically the single-employer program,  face financial challenges from a history of weak plan funding rules that left  it susceptible to claims from sponsors of large, severely underfunded  pension plans. We designated PBGC’s single-employer insurance program  as “high risk” in 2003, because of its longstanding financial challenges.  PBGC had seen recent improvements to its net financial position due to  generally better economic conditions and from statutory changes that  raised premiums and took measures designed to strengthen plan funding  and PBGC guarantees. However, certain improvements have only just  begun phasing-in and the changes did not completely address a number of  the risks that PBGC faces going forward. Further, PBGC just began  implementing a new investment policy that, while offering the potential for  higher returns, also adds significant variability and risk to the assets it  manages.
Improvements are needed to PBGC’s governance structure, to oversight of  the corporation, and to its strategic approach to program management.  PBGC’s three-member board of directors is limited in its ability to provide  policy direction and oversight. The three cabinet secretaries who comprise  the board have numerous other responsibilities, and are unable to dedicate  consistent and comprehensive attention to PBGC. With only 3 members,  PBGC’s board may not be large enough to include the knowledge needed  to direct and oversee PBGC. 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. PBGC may also be exposed to challenges as  the board, its representatives, and the director will likely change with the  upcoming presidential transition in January, limiting the board’s  institutional knowledge of the corporation. In addition, we found that  PBGC lacks a strategic approach to its acquisition and human capital  management needs. Although three-quarters of PBGC’s administrative  budget is spent on contractors, PBGC’s strategic planning generally does  not recognize contracting as a major aspect of PBGC activities. PBGC also  lacks formal, comprehensive human capital policies, programs and  practices and does not routinely target workforce data to understand its  current and future workforce needs.
subsections: section_title: PBGC Guarantees Pension Benefits for Millions and is Funded by Premiums and Assets of Terminated Plans
paragraphs: PBGC plays a critical role in protecting the pension benefits of private  sector workers—it is responsible for administering current or future  pension benefit payments to just over 1.3 million plan participants. Its  budget operations flow through two accounts, one that appears in the  federal budget and one that does not. PBGC’s budget can be confusing,  especially in the short-term, as apparent federal budget gains may be offset  by long-term liabilities that are not reported to on-budget accounts.
subsections: section_title: PBGC Plays a Critical Role in Protecting Pension Benefits
paragraphs: PBGC plays a critical role in protecting the pension benefits of private  sector workers. PBGC administers current or future pension benefit  payments to a growing number of plan participants, from just under one- half million in fiscal year 2000 to 1.3 million in fiscal year 2007. Figure 1  shows the breakdown of recipients of benefit payments from PBGC’s  single-insurance program.
PBGC benefits are insured up to certain limits—up to $51,750 per year  (about $4300 per month) for participants aged 65, with lower benefits for  younger participants. While the actual annual benefits paid to participants  are not adjusted for inflation, the initial maximum levels are set by law and  are indexed for inflation. Covered benefits include pension benefits  accrued at normal retirement age, most early retirement benefits, and  survivor and disability benefits. PBGC pays these benefits when a plan is  terminated and the plan has insufficient assets to pay all benefits accrued  under the plan up to the date of plan termination. In 2006, PBGC paid over  622,000 people a median benefit of about $296 per month.
The vast majority of the participants in PBGC-trusteed plans receive all the  benefits they were promised by their plan. Benefits for some participants  may be reduced if 1) their benefits exceed PBGC’s maximum guarantee  limit, 2) a benefit increase occurred (or became payable due to a plant  shutdown) within five years of the plan’s termination, or 3) a part of their  benefit is a supplemental benefit. In addition to paying guaranteed  benefits, PBGC may pay certain non-guaranteed benefits in limited  circumstances involving asset recoveries from employers.
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 of assets from pension plans  trusteed by PBGC ($4.8 billion in investment income from $68.4 billion in  assets for its combined programs in 2007) and recoveries from the  companies formerly responsible for the plans. Under current law, other  than statutory authority to borrow up to $100 million from the Treasury  Department (sometimes referred to as a $100 million line of credit), no  substantial source of funds is available to PBGC if it runs out of money. In  the event that PBGC were to exhaust all of its holdings, benefit payments  would have to be drastically cut unless Congress were to take positive  action to provide support.
In 2007, PBGC received over $1.5 billion in premium income. An insured  plan in the single employer program was required to pay PBGC a yearly  premium of $31 per participant for pension benefit insurance coverage in  2007. This per-participant premium rate is adjusted annually to wage  inflation. Plans that are underfunded as specified by ERISA must pay  PBGC an additional premium of $9 per $1,000 of underfunding. Some  terminating plans have to pay an “exit” premium of $1,250 per participant  per year for three years if they undergo a distress or PBGC-initiated plan  termination on or after January 1, 2006.
PBGC also insures multiemployer defined benefit pensions through its  multiemployer program. Multiemployer plans are established through  collective bargaining agreements involving two or more unrelated  employers and are common in industries such as construction, trucking,  mining, the hotel trades, and segments of the grocery business. The  multiemployer program is far smaller than the PBGC single employer  program, insuring about 10 million participants in about 1,530 plans. Like  the single employer program, PBGC collects premiums from sponsoring  employers and insures multiemployer participant benefits up to a limit,  although both the level of premiums and the maximum insured limit are  far lower than those for the single employer program. Further, unlike the  single-employer program, a multiemployer plan termination does not  trigger the PBGC benefit guarantee. A terminated multiemployer plan  continues to pay full plan benefits so long as it has sufficient assets to do  so.
section_title: PBGC’s Budget Only Partly Flows through the Federal Government
paragraphs: The treatment of PBGC in the federal budget is complicated by the use of  two accounts—an on–budget revolving fund and a non-budgetary trust  fund. Some activities flow through the federal budget and other activities  are outside the federal budget. Not only is PBGC’s budget structure  complex, it can also result in confusing signals about the financial health  of PBGC and create unintended policy incentives.
PBGC’s receipts and disbursements are required by law to be included in  the federal budget. These cash flows are reported in the budget in a single  revolving fund account. The cash flows include premiums paid, interest  income on federal securities, benefit payments, administrative expenses,  and reimbursements from PBGC’s non-budgetary trust fund. The non- budgetary trust fund includes assets obtained from terminated plans and is  managed by private money-managers. Because the trust fund is a non- budgetary account, the transfer of assets from terminated plans to PBGC  is not considered a receipt to the government. Likewise, the liabilities  PBGC incurs when it takes over an underfunded plan or other changes in  PBGC’s assets and liabilities are not reflected in the budget. Figure 2  provides an overview of PBGC’s budgetary and non-budgetary cash flows.
When an insured pension plan is terminated, assets are transferred to  PBGC’s non-budgetary trust fund. Neither these assets nor the benefit  liabilities appear on the federal balance sheet and PBGC’s net loss is not  recorded in the federal government’s income statement. Assets in the non- budgetary trust fund are commingled and no longer identified with  particular plans. PBGC has broad authority to oversee and administer  pension assets held in its trust fund and is free to invest and expend the  funds as if it were a private fiduciary of the trust fund’s holdings. PBGC  can invest the assets in whatever way it chooses, as long as it acts in the  best financial interest of beneficiaries.
In addition to the non-budgetary trust fund, PBGC has an on-budget  revolving fund. Premium income and transfers from the trust fund for both  benefit payments and administrative expenses are deposited to the  revolving funds as offsetting collections (that is, offsets to outlays). Unlike  the trust fund, the revolving fund appears on the federal government’s  balance sheet and provides PBGC with permanent spending authority to  carry out its activities. In years that premium income and trust fund  reimbursements exceed benefit payment and administrative costs, the  revolving fund would show negative outlays, thus improving the overall  fiscal balance of the federal government. Any funds that are not used to  pay benefits or expenses are considered unobligated balances and are  available for expenditure in the next year. By law, unobligated funds in the  revolving fund must be held in Treasury securities and earn interest  income.
PBGC transfers funds from the non-budgetary trust fund to its on-budget  revolving fund to pay a portion of retirement annuities and certain  administrative costs. Such transfers are referred to as reimbursements and  are recorded as offsetting collections in the budget. Generally, the  proportion of benefit payments that is reimbursed from the trust fund  depends on the aggregate funding level of the plans that PBGC has taken  over and is adjusted periodically. In other words, if the average funding  ratio of all plans taken over by PBGC is 50 percent, then half of all benefit  payments originate from the non-budgetary trust fund. In addition to  financing benefits, trust fund assets are also transferred to the revolving  fund to pay for PBGC’s administrative expenses related to terminations.  PBGC’s other administrative expenses are paid directly from the revolving  fund.
Insurance programs with long-term commitments, such as PBGC, may  distort the budget’s fiscal balance by looking like revenue generators in  years that premium collections exceed benefit payments and  administrative expenses because the programs’ long-term expected costs  are not reported. For example, in 2004 when PBGC’s losses measured on  an accrual basis ballooned and its deficit grew from $11 billion to $23  billion, PBGC’s cash flow reported in the budget was positive and reduced  the federal government’s budget deficit.
GAO has reported previously that the cash-based federal budget, which  focuses on annual cash flows, does not adequately reflect the cost of  pension and other 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,  beneficiaries then receive benefit payments for the rest of their lives. As a  result, there can be years in which PBGC’s current cash collections exceed  current cash payments, regardless of the expected long-term cost to the  government.
section_title: PBGC Continues to Face Financial Challenges
paragraphs: PBGC’s single-employer program faces financial challenges both from past  claims resulting from bankruptcies and plan termination, which have been  concentrated in a few industrial sectors, and structural problems such as  weak plan funding rules and a premium structure that does not fully  reflect the various risks posed by plans. Because of these financial  challenges, GAO designated the single-employer program as “high risk” in  2003, and it remains so today. PBGC has seen recent improvements to its  net financial position and recent legislative changes have raised premiums,  changed certain plan funding rules and limited PBGC guarantees.  However, the legislation has only been recently implemented and it did not  completely address a number of the risks that PBGC faces going forward.  Further, PBGC has recently implemented a new investment policy which  adds significant variability and risk to the assets it manages.
PBGC’s net deficit for the single-employer program, which is currently  $13.1 billion, reached a peak of $23.3 billion (or $23.5 billion for both  insurance programs combined) in 2004 largely as a result of a number of  realized and probable claims that occurred during that year. See figure 3  for the difference between PBGC assets and liabilities for both insurance  programs from 1991 to 2007. GAO has generally focused its work on the  single-employer pension insurance program with respect to PBGC’s  overall financial challenges. This is because the single-employer program  represents nearly all of the assets and liabilities held by PBGC.
The assets and liabilities that PBGC accumulates from taking over, or  “trusteeing,” plans has increased rapidly over the last 5 years or so. This is  largely due to the termination, typically through bankruptcies, of a number  of very large, underfunded plan sponsors. In fact, eight of the top 10  largest firms that have presented claims to PBGC did so from 2002 to 2005.  (See table 1).
These top 10 claims alone currently account for nearly two-thirds of all of  PBGC’s claims and are concentrated among firms representing the steel  and airline industries. Overall, these industries account for about three- quarters of PBGC’s total claims and total single-employer benefit  payments in 2006.
While the claims presented by the steel and airline industries were due in  some part to restructuring and competitive pressures in those industries, it  is important to recognize other economic and regulatory factors affected  PBGC and DB plan sponsors as a whole. For example, when we reported  on airline pension plan underfunding in late 2004 we noted that several  problems contributed to the broad underfunding of DB plans. These  problems included cyclical factors like the so called “perfect storm” of key  economic conditions, in which declines in stock prices lowered the value  of pension assets used to pay benefits, while at the same time a decline in  interest rates inflated the value of pension liabilities. The combined  “bottom line” result was that many plans were underfunded at the time  and had insufficient resources to pay all of their future promised benefits.  Figure 4 shows the underfunding of PBGC’s single-employer plans from  1991 to 2007.
Underfunding among large plans (as reuired by ERISA section 4010)
In 2003, GAO designated PBGC’s single-employer program as high-risk, or  as a program that needs urgent Congressional attention and agency action.  We specifically noted PBGC’s prior-year net deficit as well as the risk of  the termination among large, underfunded pension plans, as reasons for  the programs high-risk designation. As part of our monitoring of PBGC as  a high-risk agency we have highlighted additional challenges faced by the  single-employer program. Among these concerns were the serious  weaknesses that existed with respect to plan funding rules and that  PBGC’s premium structure and guarantees needed to be re-examined to  better reflect the risk posed by various plans. Additionally the number of  single-employer insured DB plans has been rapidly declining, and, among  the plans still in operation, many have frozen benefits to some or all  participants.  Additionally the prevalence of plans that are closed to new  participants seems to imply that PBGC is likely to see a decline in insured  participants, especially as insured participants seem increasingly likely to  be retired (as opposed to active or current) workers.
There have been a number of developments with respect to PBGC’s  situation since we issued our most recent high risk updates in 2005 and  2007. At least until fairly recently, key economic conditions have been  generally favorable for DB plan sponsors and plan funding has generally  improved. In addition, major pension legislation was enacted which  addressed many of the concerns articulated in our previous reports and  testimonies on PBGC’s financial condition. The Deficit Reduction Act of  2005 (DRA) was signed in to law on February 8, 2006 and included  provisions to raise flat-rate premiums and created a new, temporary  premium for certain terminated single-employer plans. Later that year the  Pension Protection Act of 2006 (PPA) was signed into law and included a  number of provisions aimed at improving plan funding and PBGC finances.  However, PPA did not fully close plan funding gaps, did not adjust  premiums in a way that fully reflected risk from financially distressed  sponsors and provided special relief to plan sponsors in troubled  industries, particularly those in the airline industries. PBGC’s net financial  position improved from 2005 to 2006 because some very large plans that  were previously classified as probable terminations were reclassified to a  reasonably possible designation as a result of the relief granted to troubled  industries. Since this provision has only been implemented for a few years,  it is still too early to determine how much risk of new claims these  reclassified plans still represent to PBGC. As many of the provisions in  PPA are still phasing-in, we will continue to monitor the status of the  single-employer program with respect to PPA and will be updating our  high risk series in early 2009.
GAO recently reported on a newly developing financial challenge facing  PBGC due to the recent change to its investment policy. While the  investment policy adopted in 2008 aims to reduce PBGC’s $14 billion  deficit by investing in assets with a greater expected return, GAO found  that the new allocation will likely carry more risk than acknowledged by  PBGC’s analysis. According to PBGC the new allocation will be  sufficiently diversified to mitigate the expected risks associated with the  higher expected return. They also asserted that it should involve less risk  than the previous policy. However, GAO’s assessment found that, although  returns are indeed likely to grow with the new allocation, the risks are  likely higher as well. Although it is important that the PBGC consider ways  to optimize its portfolio, including higher return and diversification  strategies, the agency faces unique challenges, such as PBGC’s need for  access to cash in the short-term to pay benefits, which could further  increase the risks it faces with any investment strategy that allocates  significant portions of the portfolio to volatile or illiquid assets.
section_title: Improvements Needed to PBGC’s Governance, Oversight and Management
paragraphs: Improvements are needed to PBGC’s governance structure, to oversight of  the corporation, and to its strategic approach to program management.  PBGC’s three member board of directors is limited in its ability to provide  policy direction and oversight. 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. PBGC may also be exposed to challenges as  the board, its representatives, and the director will likely change with the  upcoming presidential transition in January, limiting the board’s  institutional knowledge of the corporation. In addition, Congressional  oversight of PBGC in recent years has ranged from formal congressional  hearings to the use of its support agencies, such as GAO, the  Congressional Budget Office, and the Congressional Research Service.  However, unlike some other government corporations, PBGC does not  have certain reporting requirements for providing additional information  to Congress. Finally, we found that PBGC lacks a strategic approach to its  acquisition and human capital management needs.
subsections: section_title: PBGC’s Governance Structure Needs Improvement
paragraphs: PBGC’s board has limited time and resources to provide policy direction  and oversight and had not established comprehensive written procedures  and mechanisms to monitor PBGC’s operations. PBGC’s three-member  board, established by ERISA, includes the Secretary of Labor as the Chair  of the Board and the Secretaries of Commerce and Treasury. We noted  that the board members have designated officials and staff within their  respective agencies to conduct much of the work on their behalf and  relied mostly on PBGC’s management to inform these board members’  representatives of pending issues. 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.
Since PBGC’s inception, the board has met infrequently. In 2003, after  several high-profile pension plan terminations, PBGC’s board began  meeting twice a year (see figure 5). PBGC officials told us that it is a  challenge to find a time when all three cabinet secretaries are able to meet,  and in several instances the board members’ representatives officially met  in their place. While the PBGC board is now meeting twice a year, very  little time is spent on addressing 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.
The size and composition of PBGC’s board does not meet corporate  governance guidelines. 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. We did not identify any other government corporations with  boards as small as at PBGC. Government corporations’ boards averaged  about 7 members, with one having as many as 15. In addition, PBGC may  also be exposed to challenges as the board, board members’  representatives, and the director will likely change with the upcoming  presidential transition in January 2009, limiting the board’s institutional  knowledge of the corporation.
The recent revision of PBGC’s investment policy provides an example of  the need for a more active board. We found that PBGC board’s 2004 and  2006 investment policy was not fully implemented. While the board  assigned responsibility to PBGC for reducing equity holdings to a range of  15 to 25 percent of total investment, by 2008 the policy goal had not been  met. Although the PBGC director and staff kept the board apprised of  investment performance and asset allocation, we found no indication that  the board had approved the deviation from its established policy or  expected PBGC to continue to meet policy objectives.
We previously recommended that Congress consider expanding PBGC’s  board of directors, to appoint additional members who possess knowledge  and expertise useful to PBGC’s responsibilities and can provide needed  attention. Further, dedicating staff that are independent of PBGC’s  executive management and have relevant pension and financial expertise  to solely support the board’s policy and oversight activities may be  warranted. In response to our finding, PBGC contracted with a consulting  firm to identify and review governance models and provide a background  report to assist the board in its review of alternative corporate governance  structures. The consulting firm’s final report describes the advantages and  disadvantages of the corporate board structures and governance practices  of other government corporations and select private sector companies,  and concludes that there are several viable alternatives for PBGC’s  governance structure and practices.
Along with the board’s limited time and resources, we found that the  board had not established comprehensive written procedures and  mechanisms to monitor PBGC’s operations. There were no formal  protocols concerning the Inspector General’s interactions with the board,  and PBGC internal management were not required to routinely report all  matters to the board. Even though PBGC used informal communication to  inform the board, it could not be certain that it received high quality and  timely information about all significant matters facing the corporation. As  a result we recommended that PBGC’s board of directors establish formal  guidelines that articulate the authorities of the board, Department of  Labor, other board members and their respective representatives. In May  2008 PBGC revised its bylaws. As part of its bylaw revision, the board of  directors more explicitly defined the role and responsibilities of the  director and the corporation’s senior officer positions, and outlined the  board’s responsibilities, which include approval of policy matters  significantly affecting the pension insurance program or its stakeholders;  approval of the corporation’s investment policy; and review of certain  management and Inspector General reports.
section_title: Congress Has Overseen PBGC in Several Ways and Some other Government Corporations have Additional Reporting Requirements
paragraphs: Since 2002, PBGC officials have testified 20 times before various  congressional committees—mostly on broad issues related to the status of  the private sector defined benefit pension policy and its effect on PBGC— and, in 2007, the Senate conducted confirmation hearings of PBGC’s  director. PBGC must annually submit reports to Congress on its prior  fiscal year’s financial and operational matters, which include information  on PBGC’s financial statements, internal controls, and compliance with  certain laws and regulations. In addition, through its support agencies— GAO, the Congressional Budget Office, and the Congressional Research  Service—Congress has also provided oversight and reviewed PBGC.  Specifically, Congress has asked GAO to conduct assessments of policy,  management, and the financial condition of PBGC. For example, we  conducted more than 10 reviews of PBGC over the past 5 years, including  assessments related to PBGC’s 2005 corporate reorganization and  weaknesses in its governance structure, human capital management, and  contracting practices. Our work also raised concerns about PBGC’s  financial condition and the state of the defined benefit industry.
Some government corporations have additional reporting requirements for  notifying Congress of significant actions. For example, the Millennium  Challenge Corporation is required to formally notify the appropriate  congressional committees 15 days prior to the allocation or transfer of  funds related to the corporation’s activities. The Commodity Credit  Corporation is subject to a similar requirement. These examples  demonstrate how Congress has required additional reporting requirements  for certain activities conducted by government corporations. PBGC  generally has no requirements to formally notify Congress prior to taking  any significant financial or operational actions.
section_title: A More Strategic Approach Could Improve Contracting and Human Capital Management at PBGC
paragraphs: As reported in our recent work on PBGC contracting and human capital  management, contracting plays a central role in helping PBGC achieve its  mission and address unpredictable workloads. Three-quarters of PBGC’s  budget was spent on contracts and nearly two-thirds of its personnel are  contractors, as shown in figure 6. Since the mid-1980s, PBGC has had  contracts covering a wide range of services, including the administration  of terminated plans, payment of benefits, customer communication, legal  assistance, document management, and information technology. From  fiscal year 2000 through 2007, PBGC’s contract spending increased steadily  along with its overall budget and workload, and its use of contract  employees outpaced its hiring of federal employees. As PBGC workload  grew due to the significant number of large pension plan terminations,  PBGC relied on contractors to supplement its workforce, acknowledging  that it has difficulty anticipating workloads due to unpredictable economic  conditions.
In 2000, we recommended that PBGC develop a strategic approach to  contracting by conducting a comprehensive review of PBGC’s future  human capital needs and using this review to better link contracting  decisions to PBGC’s long-term strategic planning process. PBGC took  some initial steps to implement our recommendation, and in August 2008,  we reported that PBGC had recently renewed its efforts and drafted a  strategic human capital plan.
In addition to drafting a strategic human capital plan, PBGC recently  issued its strategic plan; however this plan does not document how the  acquisition function supports the agency’s missions and goals. Although  contracting is essential to PBGC’s mission, we found that the Procurement  Department is not included in corporate-level strategic planning. Further,  PBGC’s draft strategic human capital plan acknowledges the need for  contractor support, but does not provide detailed plans for how the  contract support will be obtained. While PBGC’s workload can expand and  contract depending on the state of plan terminations, planning documents  do not include strategies for managing the fluctuations. Based on these  findings, we recommended that PBGC revise its strategic plan to reflect  the importance of contracting and to project its vision of future contract  use, and ensure that PBGC’s procurement department is included in  agency-wide strategic planning.
PBGC also needs a more strategic approach for improving human capital  management. While PBGC has made progress in its human capital  management approach by taking steps to improve its human capital  planning and practices—such as drafting a succession management plan— the corporation still lacks a formal, comprehensive human capital strategy,  articulated in a formal human capital plan that includes human capital  policies, programs, and practices. PBGC has initiatives for the  management of human capital, such as ensuring employees have the skills  and competencies needed to support its mission and establishing a  performance-based culture within the corporation, and has made some  progress toward these goals. However, PBGC has not routinely and  systematically targeted and analyzed all necessary workforce data—such  as attrition rates, occupational skill mix, and trends—to understand its  current and future workforce needs.
PBGC is generally able to hire staff in its key occupations—such as  accountants, actuaries, and attorneys—and retain them at rates similar to  those of the rest of the federal government. However, PBGC has had some  difficulty hiring and retaining staff for specific occupations and positions,  including executives and senior financial analysts. PBGC has made use of  various human capital flexibilities in which the corporation has  discretionary authority to provide direct compensation in certain  circumstances to support its recruitment and retention efforts, such as  recruitment and retention incentives, superior qualification pay-setting  authority, and special pay rates for specific occupations. However, PBGC  officials said that they had not recently explored additional flexibilities  that required the approval of OPM and OMB to determine whether they  would be applicable or appropriate for the corporation.
section_title: Conclusions
paragraphs: PBGC clearly faces many challenges. The impact of PPA is still unclear,  but in any case difficult decisions for the future still remain. While PBGC’s  net financial position has improved along with economic conditions that  until recently had been favorable to plan sponsors, we are concerned that  such conditions are changing and could leave PBGC exposed to another  spate of claims from sponsors of very large severely underfunded plans.  The challenges PBGC faces are acutely illustrated by its recent changes to  its asset investment policy. The aim of the change to the policy is to  reduce the current deficit through greater returns, but, holding all else  equal, the potential for greater returns comes with greater risk. This  greater risk may or may not be warranted, but the uncertain results of the  policy could have important implications for all PBGC stakeholders: plan  sponsors, insured participants, insured beneficiaries, as well as the  government and ultimately taxpayers.
One thing that is certain: PBGC will continue to require prudent  management and diligent oversight going forward. However, PBGC faces  challenges with its board structure, which will only become more apparent  in the coming months as the board, its representatives, and the  corporation’s director will likely be entirely replaced by a new president.  Without adequate information and preparation, this transition could limit  not only the progress made by the current board, its representatives, and  director, but may also hinder the corporation’s ability to insure and deliver  retirement benefits to millions of Americans that rely on the corporation.  As this transition highlights, an improved board structure is critical in  helping PBGC manage the daunting, and in many ways fundamental, long- term financial challenges it faces, which is why we have recommended the  Congress restructure the Board.
Chairman Lewis, Congressman Ramstad, and Members of the  Subcommittee, this concludes my prepared statement. I would be happy to  respond to any questions you may have.
section_title: Contacts and Staff Acknowledgments
paragraphs: For further questions about this statement, please contact Barbara D.  Bovbjerg at (202) 512-7215. Individuals making key contributions to this  statement include Blake Ainsworth, Charles Jeszeck, Jay McTigue, Charles  Ford, Monika Gomez, Craig Winslow, and Susannah Compton.
section_title: Appendix I: List of Selected GAO Reports and Testimonies Related to the Pension Benefit Guaranty Corporation
paragraphs: Pension Benefit Guaranty Corporation: Need for Improved Oversight  Persists, GAO-08-1062. Washington, D.C.: September 10, 2008.
Pension Benefit Guaranty Corporation: Some Steps Have Been Taken to  Improve Contracting, but a More Strategic Approach Is Needed. GAO-08- 871. Washington, D.C.: August 18, 2008.
PBGC Assets: Implementation of New Investment Policy Will Need  Stronger Board Oversight. GAO-08-667. Washington, D.C.: July 17, 2008.
Pension Benefit Guaranty Corporation: A More Strategic Approach  Could Improve Human Capital Management. GAO-08-624. Washington,  D.C.: June 12, 2008.
High Risk Series: An Update. GAO-07-310. Washington, D.C.: January  2007.
Pension Benefit Guaranty Corporation: Governance Structure Needs  Improvements to Ensure Policy Direction and Oversight. GAO-07-808  Washington, D.C.: July 6, 2007.
PBGC’s Legal Support: Improvement Needed to Eliminate Confusion and  Ensure Provision of Consistent Advice. GAO-07-757R. Washington, D.C.:  May 18, 2007.
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.
Private Pensions: Recent Experiences of Large Defined Benefit Plans  Illustrate Weaknesses in Funding Rules. GAO-05-294. Washington, D.C.:  May 31, 2005.
Pension Benefit Guaranty Corporation: Single-Employer Pension  Insurance Program Faces Significant Long-Term Risks. GAO-04-90.  Washington, D.C.: October 29, 2003.
Pension Benefit Guaranty Corporation Single-Employer Insurance  Program: Long-Term Vulnerabilities Warrant ‘High Risk’ Designation.  GAO-03-1050SP. Washington, D.C.: July 23, 2003.
Pension Benefit Guaranty Corporation: Statutory Limitation on  Administrative Expenses Does Not Provide Meaningful Control. GAO-03- 301. Washington, D.C.: February 28, 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.
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