Pension Benefit Guaranty Corporation: More Strategic Approach Needed for Processing Complex Plans Prone to Delays and Overpayments
Released: 2009-09-16T00:00:00

Letter

Background

PBGC was created as a government corporation by the Employee Retirement Income Security Act of 1974 (ERISA) to help protect the retirement income of U.S. workers with private-sector defined benefit plans by guaranteeing their benefits up to certain legal limits. PBGC administers two separate insurance programs for these plans: a single- employer program and a multiemployer program. The single-employer program covers about 34 million participants in about 28,000 plans. The multiemployer program covers about 10 million participants in about 1,500 collectively-bargained plans that are maintained by two or more unrelated employers. If a multiemployer pension plan is unable to pay guaranteed benefits when due, PBGC will provide financial assistance to the plan, usually a loan, so that retirees continue receiving their benefit. However, if the sponsor of a single-employer plan is in financial distress and does not have sufficient assets to pay promised benefits, the plan will be terminated and PBGC will likely become the plan’s trustee, assuming responsibility for paying benefits to participants as they become due, up to the guaranteed benefit limits. As of the end of fiscal year 2008, PBGC had terminated and trusteed a total of 3,860 single-employer plans (see fig. 1). The single-employer program is financed through premiums paid by the plan sponsors, recoveries from the companies formerly responsible for the plans, and investment income from the assets that PBGC acquires when it assumes control of a plan. A three-member Board of Directors, consisting of the Secretaries of the Commerce, Labor, and Treasury, is charged with providing policy direction and oversight of PBGC’s finances and operations.

PBGC’s Pension Insurance Program Has Been Designated “High Risk”

We designated PBGC’s single-employer pension insurance program as “high risk” in 2003, including it on our list of major programs that need urgent attention and transformation. The program remains a high-risk concern due to an ongoing threat of losses from the terminations of underfunded plans. Financially, PBGC’s accumulated deficit totaled $33.5 billion at the end of the second quarter of fiscal year 2009, a $22.5 billion increase since the end of fiscal year 2008. Additionally, as we concluded in a recent report, PBGC’s governance structure and strategic management need improvement. We found that PBGC’s Board of Directors is limited in its ability to provide policy direction and oversight, and recommended that the board be expanded. Further, in two additional reports, we concluded that PBGC lacks a strategic approach to its acquisition and human capital management needs.

The Benefit Determination Process

Under the single-employer program, if a company’s pension plan has inadequate assets to pay all promised benefits, plan sponsors meeting certain criteria can voluntarily terminate a plan through a “distress” termination. PBGC may also decide to terminate an underfunded plan involuntarily to protect plan assets, and PBGC must terminate a plan if assets are insufficient to pay benefits currently due. In all these situations, PBGC generally becomes the trustee of the plan and assumes responsibility for paying benefits to the participants as they become due. Determining participants’ benefit amounts following termination, however, is a complex process (see fig. 2). It begins with gathering extensive data on plans and individuals’ work and personnel histories, and determining who is eligible for benefits under a plan, which can be complicated if the company or plan has a history of mergers, elaborate structure, or missing data. It requires understanding plan provisions that vary from plan to plan and can be numerous, applying the guarantee limitations to each individual’s benefit, and valuing plan assets and liabilities. If the participant is already retired, or retires before the process is complete, PBGC makes payments to the retiree based on an estimate of the final benefit amount. Once the process is complete, PBGC notifies each participant of the final benefit amount through a “benefit determination letter.” In cases with a final benefit that is greater than the estimated amount, retirees are likely due a backpayment for having been underpaid, which PBGC will repay in a lump sum, with interest. In cases with a final benefit that is less, the retirees are likely to have received an overpayment, which they then must repay to PBGC, with no added interest.

Guarantee Limits, Ceased Accruals, and Overpayments Can Reduce Benefits

When single-employer plans are terminated without sufficient assets to pay all promised benefits, PBGC guarantees participants’ benefits only up to certain limits, specified under statute in ERISA and related regulations. Participants whose benefits exceed these limits may have their benefits reduced to the guaranteed amounts, unless the plan has sufficient assets to pay the nonguaranteed portion of their benefits, either all or in part. These guarantee limits are commonly referred to as the maximum limit, the phase-in limit, and the accrued-at-normal limit (see table 1). One group often affected by the application of these limits is made up of those who take early retirement. The maximum limit is lowered for each year a person retires before age 65. Also, supplemental benefits—which are typically provided to early retirees as a bridge to when they become eligible for Social Security benefits—are eliminated or greatly reduced by the accrued-at-normal limit. Because many steelworkers and airline pilots retire before reaching age 65, retirees in these industries are hit particularly hard by the application of such limits.

PBGC’s benefits are set based on the amounts accrued as of the date of plan termination. When a plan terminates, accruals cease. As a result, participants who are not yet retired are likely to receive lower benefits than what they would have received under their plans if they had been able to accrue further benefits. For example, if participants work for the plan sponsor beyond the termination date, the additional service would not be credited under that plan. The dollar amount or salary level used to calculate benefits is also frozen at the level in effect as of the date of plan termination, which can cause a participant’s benefit to be substantially less than it would have been if the plan had continued. Participants can also be affected when a plan’s termination date occurs before they become eligible for certain benefits, such as early retirement or disability benefits.

For retirees and participants who retire prior to completion of the benefit determination process, estimated benefits are provided that can sometimes be greater than the final benefit amount, causing an overpayment. In addition to having benefits reduced due to the guarantee limits, some retirees’ have their monthly benefit reduced once their benefit amount is finalized because they are required to repay an overpayment that was incurred while receiving estimated benefits.

Most participants of terminated plans receive the full amount of the benefits they have earned under their plans, according to studies conducted by PBGC. PBGC does not systematically track the number of participants affected by guaranteed benefit limits or how much these limits affect benefit amounts; however, PBGC has conducted two studies on the impact of these limitations in a sample of large plans. The first study, issued in 1999, found 5.5 percent of participants were affected by the limits; and the second study, issued in 2008, found that 15.9 percent were affected. PBGC attributed the increase in the numbers affected in the second study to the inclusion of several large plans from the steel and airlines industries. Officials noted that these plans were more likely to be subject to the limits. Steel plans often provide supplements and allow retirement with unreduced benefits after 30 years of service, regardless of age, and airline plans often allow pilots to retire early and receive generous benefits. Across the different plans in both studies, participants’ reductions in benefits varied widely, from less than 5 percent for some, to over 50 percent for others.

Most Benefit Determinations Are Completed within 3 Years, but Cases with Complex Plans and Missing Data Take Longer

PBGC makes most benefit determinations within 3 years after assuming trusteeship of a plan. However, complex plans and plans with missing data have required more time to process—up to 9 years, in some instances (the full time span we examined). Most of the benefit determinations that took 4 or more years to process were for participants in just 10 plans. PBGC officials have taken steps to shorten the benefit determination process, although their initiatives have focused on ways to expedite processing of straightforward cases instead of the processing of difficult cases prone to delays.

PBGC Makes Most Benefit Determinations in Less than 3 Years

PBGC becomes the trustee of most plans within 10 months of termination and, once it has assumed trusteeship of a plan, the agency takes slightly less than 3 years to process most benefit determinations and notify participants of their final benefit amount. Following a PBGC Inspector General study, issued in 2000, that found that the majority of benefit determination letters were sent more than 5 years after PBGC assumed trusteeship of the plan, PBGC set a corporate goal of issuing benefit determinations, on average, no more than 3 years after trusteeship. Our review of the benefit determinations for participants in plans trusteed during fiscal years 2000 through 2008 indicates that PBGC has moved processing times closer to this mark. Nearly three-quarters of the benefit determinations completed for these plans were made in 3 years or less (see fig. 3). The vast majority of all completed benefit determinations—95 percent—was processed in less than 4 years’ time. On the other hand, in February 2009, more than 200,000 participants were awaiting benefit determinations that had been pending for an average of 3 or more years.

PBGC practice is to prioritize benefit determinations based on an individual’s retirement status at the time of plan termination. For example, participants who were retired when their plans terminated received their benefit determinations in about 2.0 years after PBGC assumed trusteeship, on average. Participants who had separated from employment under the plan but had some vested benefits at the time of the termination received benefit determinations in about 2.8 years, on average. All other participants received benefit determinations in about 2.8 years, on average.

Workload Affects Processing Times

Processing times have varied considerably in any given year, due in part to the number and size of plans being terminated and trusteed that year (see fig. 4). The number of plans trusteed by PBGC peaked during 2002, 2003, and 2004, although the largest influx of participants occurred in 2005. The average number of participants per plan is slightly fewer than 1,000, but some plans have many more. For example, the Bethlehem Steel plan has nearly 93,000 participants, the LTV Steel (hourly) plan has about 68,000 participants, and the Kaiser Aluminum and Chemical Corp. (hourly) plan has just over 10,000 participants.

We found that processing times were longer, on average, for those plans trusteed in peak years (see fig. 5). For example, processing times generally increased during fiscal years 2002 through 2005.

Plan Complexity and Missing Data Also Adds to Processing Times

Processing times have also increased with the complexity of plans and the unavailability of needed data. Obtaining plan documents, gaining complete participant data, and interpreting plan requirements often present difficulties. Nevertheless, nearly three-quarters of the benefit determinations that took 4 or more years to process were for participants in just 10 of the 1,089 plans terminated and trusteed during fiscal years 2000 through 2008, as shown in figure 6. These plans were sponsored by four steel companies, two mining companies, one other manufacturer, an insurance company, and a construction company.

We found that a variety of factors had contributed to the complexity of the 10 plans with these lengthier determinations. One key factor was the level of difficulty of calculating benefits. For some, a history of company or plan mergers, or other unusual or complicated benefit formulas, made determining a participant’s benefit more difficult and added to processing time. For example, the pension plan of Bethlehem Steel Corporation— which still had some benefit determinations pending as of February 2009, nearly 6 years after the plan’s trusteeship—is a product of more than 100 company mergers, consolidations, and/or spinoffs. There are eight major parts to this plan, and three of the parts have separate hourly and salaried plans. In general, if a plan has undergone a merger, participants may be covered by different plan provisions, or participants may transfer between component plans, such as moving from an hourly to salaried plan. According to PBGC, the Bethlehem Steel plan required an analysis of more than 30 sets of plan documents to make benefit determinations for the nearly 93,000 participants.

Unusual or numerous plan provisions have also made benefit determinations more challenging and, therefore, time consuming. The Cone Mills Corporation plan consists of three merged plans. In 2001, the company’s plans for long-distance drivers and salaried workers were merged into its plan for hourly workers. Yet, distinct provisions in each of the original plans remained in place for their respective members. It required time for PBGC to understand which participants belonged to each group and the provisions associated with each participant.

In other cases, an elaborate plan structure has also made it challenging for PBGC to determine the availability of plan assets and to distribute them across different categories of participants’ benefits in the asset allocation process. The Kaiser Aluminum and Chemical Corp. had 26 direct and indirect subsidiaries in its controlled group and in bankruptcy; 36 subsidiaries not in bankruptcy; and 13 operating subsidiaries and joint ventures not in the controlled group or in bankruptcy. Kaiser had eight defined benefit plans, seven of which were trusteed by PBGC, and the assets for these eight plans were commingled, which added complexity to PBGC’s audit of the plans’ net worth.

Benefit guarantee limits contributed to the complexity of several plans. PBGC must determine, on a participant-by-participant basis, the level of benefits each is entitled to under ERISA and related regulations. According to PBGC officials, these calculations can be time consuming when there are a large number of participants receiving benefit adjustments as a result of these limits. For example, there were several benefit rate increases in the LTV Steel (hourly) plan that went into effect within 5 years of the plan’s termination and, therefore, were subject to the phase-in limit. These included a plant shutdown supplement for certain participants, a surviving spouse’s special payment, and additional continuous service for participants affected by certain layoffs. In total, there were 35,279 participants whose benefits were affected by the phase- in limitation under this plan, as well as 4,850 affected by the accrued-at- normal limit, and 3,644 affected by the maximum limit.

Qualified domestic relations orders have also contributed to the complexity of making a benefit determination. When participants have domestic relations orders related to child support, alimony payments, and marital property rights, some portion of, or all of, a participant’s pension benefits may be assigned to a spouse, former spouse, child, or other dependent. In these cases, PBGC must determine whether the order is a qualified domestic relations order, a process which can entail a detailed review of legal documents. Although nearly two-thirds of the plans we examined did not have any participants with qualified domestic relations orders, several of the ten plans associated with the lengthiest processing times had numerous participants with such orders. For example, the Bethlehem Steel plan included 904 participants with qualified domestic relations orders, and the LTV Steel (hourly) plan included 609.

Missing Data

The condition of plan and participant data is also a key factor affecting processing times. When a plan terminates, PBGC tries to obtain all plan documents, such as the original plan, plan amendments, and, if applicable, negotiated agreements with unions, as well as personnel and payroll data. To do so with the termination of a large, complex plan, PBGC auditors have usually visited sponsor locations to collect data and contacted the plan’s actuarial staff, administrators, or others responsible for managing the plan’s assets. When the plan’s administration is decentralized, this process involves collecting records from different locations in the course of many site visits. For example, over a 2-month period, a PBGC audit team visited Bethlehem Steel facilities in Sparrows Point, MD; Bethlehem, PA; Coatesville, PA; Steelton, PA; Lackawanna, NY; and Burns Harbor, IN to collect records. Data were not always available in electronic form. The Bethlehem Steel Lackawanna facility, for example, did not use an electronic recordkeeping system, so PBGC collected more than 20,000 hard-copy employee record cards from the site.

According to PBGC officials, plan sponsors have frequently diverted resources away from actuarial and information technology services during rough financial periods, causing records maintenance to deteriorate before PBGC is able to take over the plan. In such situations, data become difficult to locate, key personnel with knowledge of the data leave the organization, and data systems may be inaccessible. Additionally, the data PBGC is able to collect has often been incomplete. As a result, PBGC actuaries sometimes have to make assumptions about which plan provisions apply to whom when estimating the plan’s assets and liabilities, and calculating individual participants’ benefits. When processing the Weirton Steel plan, for example, PBGC was required to calculate benefits for some participants whose average monthly earnings were missing. A PBGC official told us that they sometimes use collective bargaining agreements and board resolutions, even if their legality cannot be verified, if those documents provide the best information available.

To avoid situations where data are missing or in poor condition, PBGC officials told us they generally try to obtain data prior to taking over a plan. In most situations, they will quickly try to assess the location and condition of plan records, and take steps to preserve the records in the event that PBGC takes over the plan. However, officials acknowledged that negotiations between PBGC and plan sponsors prior to trusteeship have sometimes deterred them from using their access authority to secure records until after actually becoming the trustee. For example, the RTI case involved a lengthy legal deliberation over the plan’s termination date, and while this litigation was ongoing prior to trusteeship, PBGC’s case processing division did not pursue documents from RTI prior to trusteeship, on the advice of the agency’s and company’s counsel at the time. PBGC officials noted that when aspects of termination are being contested, it is not uncommon for company officials to be unwilling to share information until after PBGC’s trusteeship is official. In the RTI case, by the time the court case was resolved and PBGC became the trustee, a new owner had assumed control of the personnel files, documentation needed to determine benefit entitlement had been purged, and only one person remained with working knowledge of the RTI pension plan.

New Initiatives to Shorten the Benefit Determination Process Do Not Address Longest Delays

PBGC officials have taken steps to shorten the benefit determination process, although these initiatives do not specifically address complex cases. Rather, PBGC officials said that their initiatives are intended to process straightforward cases more quickly so that staff can concentrate on those that are difficult. Specifically, PBGC adopted a simplified data validation process to speed the processing of plans with fewer than 200 participants. They decided that the validation process used for large plans, which involves a full electronic data audit and a review of all data elements by an auditor, was unnecessary for smaller plans, which have fewer participants and less data, making any errors highly visible. PBGC has also prioritized benefit determinations for retirees who have been receiving benefits for some time. Such determinations are more straightforward because these retirees are less likely to have their benefits reduced by the guarantee limits. These efforts help PBGC to avoid unnecessary delays in straightforward cases. PBGC does not, however, target its changes on complex plans with benefit determinations most prone to lengthy delays. Nor does PBGC set benchmarks for complex cases or goals for decreasing the processing time for these cases. Officials acknowledged that the current tracking of timeliness focuses on average processing times only.

Overpayments Have Been Infrequent and Mostly Concentrated in a Few Complex Plans

Overpayments have been infrequent and the impact on benefit amounts has been generally minor. As with the cases that required lengthy processing times, most of the cases in which overpayment occurred have been concentrated in a small number of plans. These tended to be large plans with large numbers of retirees, as well as plans whose total asset values were difficult to determine or anticipate. Meanwhile, PBGC’s requirement for repayment of overpayments is highly amortized, thereby limiting the amount of money that PBGC will recoup. By comparison, some other federal agencies have more aggressive repayment policies, but more liberal waiver policies for cases of hardship.

Overpayments Are Infrequent and Generally Have Limited Impact on Benefits

Overpayments generally occur when a plan retiree receives estimated benefits while PBGC is in the process of making benefit determinations and the final benefit amount is less than the estimated benefit amount. Our review of plans terminated and trusteed during fiscal years 2000 through 2008 found that this happened only in a small percentage of cases (see fig. 7). Of the 1.1 million participants in plans terminated and trusteed during fiscal years 2000 through 2008, more than half were not yet retirees and, therefore, did not receive estimated benefits before the benefit determination process was complete. For most who were retirees, the estimated benefit amount received did not change when finalized. Of those whose benefit amount did change when finalized, about half received a benefit that was greater and half received a benefit that was less (about 3 percent of total participants in these plans, overall).

According to PBGC data on recoupments, 22,623 participants in plans terminated and trusteed during fiscal years 2000 through 2008 owed PBGC for overpayments. These amounts varied widely—from less than $1 to more than $150,000—but our analysis of PBGC data suggests that most owed less than $3,000. Since in most cases PBGC recoups no more than 10 percent of a participant’s final benefit each month, the impact on the participant’s benefit was limited. Per individual, the median benefit reduction due to recoupment was about $16 a month, or about 3 percent of the monthly payment amount, on average. Per case, the median amount that had been repaid, as of February 2009, was $365.

A Few Plans Accounted for Most Cases with Overpayments

Of the 1,089 plans terminated and trusteed during fiscal years 2000 through 2008, just 10 accounted for more than 65 percent all cases of overpayment (see fig. 8). Nine of these 10 plans were sponsored by steel companies trusteed by PBGC from 2001 to 2003. When PBGC assumes responsibility for a plan, retirees generally continue to receive an estimated benefit that is the same as what they had been receiving, unless PBGC determines they are subject to any of the guarantee limits, and that their estimated payments need to be reduced to reflect these limits. In such cases, overpayments can occur for two basic reasons: (1) there is a period of time when the retiree’s estimated benefit has not yet been reduced to reflect applicable limits; and (2) the retiree’s estimated benefit is adjusted to reflect applicable limits, but the estimate is still greater than the benefit amount that is ultimately determined to be correct once the benefit determination process is complete. determination process is complete.

As summarized in table 2, of the 10 plans with the greatest number of overpayments, 9 also had large numbers of participants, including many who were subject to the guarantee limits and who were retired and receiving estimated benefits. In addition, all these plans had assets or recoveries allocated to pay some, but not all, of retirees’ nonguaranteed benefits, which are generally some of the first nonguaranteed benefits to be paid from the allocation process—before, for example, future retirees’ nonguaranteed benefits. According to PBGC officials, uncertainty about how much a plan’s assets or recoveries will be able to contribute toward a retiree’s benefit that the agency does not guarantee, under law, can make it difficult to calculate an accurate benefit amount until the benefit determination process is complete.

Finally, a lengthy benefit determination process can exacerbate the impact of inaccurate estimates. The total overpayment can become substantial over a long period of time, even if the difference between the estimated and final monthly benefit amount is small. Also, when plans are terminated involuntarily, there can sometimes be lengthy delays before PBGC reduces estimated benefits to reflect guarantee limits. Among the 10 plans with the most overpayments, all were involuntary terminations, and we found that the length of time between plan termination and when estimated benefits were adjusted to reflect guarantee limits varied widely. In some cases, estimated benefits were adjusted within 9 months of termination, while in other cases, more than 6 years elapsed before estimated benefits were adjusted—and in general, the longer the delays, the larger the overpayments. In contrast, when plans are terminated at the sponsor’s request as distress terminations, the sponsors are required to impose these limits themselves so that participants’ benefits are reduced as of the date of termination.

The following examples illustrate how the above circumstances can combine to create large numbers of cases with overpayments among some plans. We chose these two case examples from among the cases sampled in the 10 plans with the most overpayments to illustrate the two types of situations that can result in overpayments outlined previously: (1) delayed adjustment of the retiree’s estimated benefit to reflect applicable limits; and (2) timely, but inaccurate adjustment of the retiree’s estimate to reflect applicable limits. We also chose these two case examples specifically because they had similar benefit amounts prior to termination.

In the RTI (USWA) plan, four large groups of participants were affected by the guarantee limits: (1) those with six different types of temporary supplements who were subject to the accrued-at-normal limit; (2) former Bar Technologies employees whose benefits were subject to a $20 or 20 percent phase-in limit; (3) those who retired or will retire with 30 years of service and were subject to a $60 or 60 percent phase-in; and (4) those who retired under the early retirement program whose benefits were subject to a $60 or 60 percent phase-in. To explore the impact of guarantee limits on the retirees who incurred overpayments, we randomly selected 5 participants from among the 1,693 subject to the phase-in limits, and found that all were retirees who had their benefits reduced between 19 percent and 63 percent from what they had been receiving prior to termination. In three cases, estimated benefits were adjusted to reflect these limits 2.3 years after termination, but in two cases, estimated benefits were not adjusted prior to issuance of the benefit determination letter, which took place more than 6 years after termination. Due to inaccurate estimated benefits that were paid over several years, all 5 had incurred overpayments, ranging from $2,000 to about $57,000, and as a result, their benefits were reduced further to recoup the amounts owed. The effect on the monthly payment for one RTI retiree, whom PBGC overpaid by a total of $23,986, is illustrated in fig. 9. Ultimately, this retiree’s payment was reduced by almost two-thirds, mostly due to guarantee limits.

In the Weirton plan, we found that large numbers of participants were subject to the accrued-at-normal limits due to various plan supplements; and were subject to the phase-in limits due to seven different types of benefit changes made within 5 years before plan termination. In addition, many participants were subject to the maximum limits, in part due to the aggregate limit imposed when participants are involved in more than one terminated plan (many participants had worked previously for National Steel or other PBGC-trusteed plans). We reviewed five randomly-selected cases from among the 1,342 participants who were subject to the accrued- at-normal limit and found that all were retirees whose estimated benefit amounts were inaccurate for at least part of the period involving the benefit determination process. One case resulted in an underpayment, with a backpayment of $11,384 to be repaid to the retiree, plus interest. The other four cases resulted in overpayments, ranging from $3,200 to just over $6,000, with reductions in benefit payments to recoup the amounts overpaid. In contrast with the five sampled RTI participants, these retirees had their benefits adjusted more quickly to reflect the guarantee limits so that, in general, the overpayments incurred were not as large. All 4 had their estimated benefits adjusted in less than 9 months. The effect on one Weirton retiree’s monthly payment is illustrated in fig. 10. As was the case in the previous example, this retiree’s payment was ultimately reduced by nearly one-half, mostly due to guarantee limits.

Large Overpayments Are Not Fully Recouped

Our analysis of PBGC data indicates that the overpayments owed by participants in plans terminated and trusteed during fiscal years 2000 through 2008 totaled almost $100 million. Of this total, about $14 million had been recouped, as of February 2009. However, PBGC’s policy of restricting recoupments to no more than 10 percent of the recipient’s monthly benefit results in a long amortization period for collection that can well exceed normal life expectancies. Since PBGC does not pursue further collection from a participant’s estate once a retiree (and any beneficiary) dies, a substantial portion of these overpayments will not be repaid. Specifically, for many of these individuals, it was projected that these debts would not be fully paid until the year 2099, PBGC’s arbitrary cutoff. Nearly 60 percent of those with future recoupments would not finish repaying these debts until the year 2020 and beyond. We analyzed the ages of retirees and/or beneficiaries at their projected end date of recoupment for all cases involving overpayments greater than $10,000. Although these cases accounted for fewer than 10 percent of those with overpayments, the amounts they owed accounted for more than 40 percent of total recoupments. We found that about 60 percent of these individuals would be age 80 or older, and over 30 percent would be age 100 or older, when their debts to PBGC would be fully repaid (see fig. 11). The life expectancy for those age 65 in 2009 is estimated to be 82 to 87 years.

Some Federal Agencies Reduce Payments More Aggressively, but Also Grant More Waivers for Overpayments

Once overpayments have been made, finding the right balance between agency fiscal responsibility and fairness to participants can be difficult to achieve. Compared with PBGC’s policy on overpayments, federal agencies such as the Social Security Administration (SSA) and the Office of Personnel Management (OPM) generally allow larger reductions to benefits when recouping overpayments, but their policies also give much greater prominence to waivers. PBGC policy stipulates that in cases with an ongoing payment, recoupment of an overpayment may not be waived unless the monthly reduction would be less than $5. Waivers for hardship are to be considered only in cases for which there is no ongoing payment to the participant. According to the agency’s general counsel and subsequent comments from agency officials, since the outset of 2009, PBGC has been receiving hardship waiver requests in recovery cases at more than twice the rate received the prior year.

In contrast, both SSA and OPM policies on overpayments allow hardship consideration for cases with ongoing payments. For overpayment of Social Security benefits, SSA will withhold the full amount of the benefit each month until the overpayment is fully recouped. However, in its fact sheet on overpayments with respect to Social Security benefits and Supplemental Security Income (SSI) benefits, available on its Web site, SSA devotes over half the document to detailing the steps participants should take if they wish to either appeal or request a waiver. For SSI benefits, SSA will withhold 10 percent of the maximum federal benefit rate each month, but the beneficiary can request a lesser withholding amount, subject to SSA approval. Further, if the beneficiary disagrees with the overpayment, he or she can appeal or request that collection be waived.

Similarly, OPM’s policy guidance on overpayments of retirement benefits devotes over half the document to the subject of waivers. Under law, OPM is directed not to recover overpayments when the beneficiary bears no responsibility for the overpayment and requiring repayment would be “against equity and good conscience.” In deciding whether to grant a waiver, errors or delays by OPM may be considered, along with financial hardship or any other basis for equity that OPM deems appropriate. Just the last 7 pages of this 34-page policy guide are devoted to policies on collections. These policies call for overpayments of federal employee retirement benefits to be collected in one lump sum, whenever feasible. If one lump-sum payment is not feasible and recoupment is by installment, the payments are to be sufficient in size and frequency to recoup the debt in no more than 3 years. The standard rate of collection is 10 percent of the net monthly annuity or $50 per month, whichever is higher; but if a 10 percent reduction will not result in full recoupment within 3 years, the reduction rate can be increased up to 50 percent.

PBGC’s Initial Communications Drew Praise, but Later Communications Were Sometimes Found Lacking

PBGC’s initial communications with participants shortly following termination—especially its on-site information sessions—generally drew praise from the pension advocacy groups and union representatives we interviewed. These groups’ concerns with PBGC’s communication efforts most often focused on the long gaps between contacts when the benefit determination process was lengthy and the complicated calculations that accompanied letters notifying participants of significant benefit reductions.

PBGC’s Initial Notification and On-Site Information Sessions Generally Drew Praise

PBGC’s first communication with participants is generally a letter informing them that their pension plan has been terminated and that PBGC has become the plan trustee. Shortly thereafter, this letter is generally followed by a more detailed letter with a packet of materials, including a DVD with an introduction to PBGC and frequently-asked questions about how the benefit determination process works. PBGC officials refer to this as a “welcome” package. Additionally, for large plans likely to have many participants affected by the guarantee limits, PBGC will hold on-site information sessions shortly after plan termination. PBGC also operates a customer service center with a toll-free number that participants can call if they have questions, provides a Web site for workers and retirees with detailed information about plans and benefits, and sends participants a newsletter with information about PBGC once or twice per year.

Nearly all pension advocacy groups and union representatives we spoke with praised PBGC’s efforts to hold information sessions with the larger plans. One union representative commended PBGC staff for going out into the field to talk with participants and answer questions even though participants are going to be angry. Other union representatives commented that they have been impressed by PBGC’s staff for staying at these sessions until they have answered every participant’s questions. While these sessions are generally viewed as helpful, some pension rights advocates noted that the information presented is difficult for participants to understand, and may not have the same meaning when talked about in generalities as when they later receive notices concerning their specific benefits. Also, since not everyone may attend these events, these advocates believe it is important for all the information presented at the sessions to be provided through written communication as well.

PBGC’s customer service center and Web site received mixed reactions from the pension rights advocates and union representatives we interviewed. A few noted that some of their members reported receiving good service from the toll-free number while others found the service frustrating or useless. One union representative said that the center’s staff use PBGC terminology, which may be different from the plan and benefit language that is familiar to their members. However, other groups we spoke with were generally more positive regarding their own direct communications with PBGC staff, describing PBGC staff as forthcoming and responsive to their inquiries. Similarly, the groups we interviewed generally found the information on PBGC’s Web site useful, but they expressed doubt that this would be the case for most of their members. They noted that many people whose plans are taken over by PBGC are not accustomed to using a computer or do not have access to the internet, and that some do not feel comfortable relying on information they find on a Web site.

Long Gaps in Communication until Completion of the Process Raised Some Concerns

Following the initial contacts, PBGC generally does not communicate with participants again until the benefit determination process is complete, which in some cases can stretch into years. Among the participants’ files we examined when the benefit determination process took 4 or more years, we found that there often was no contact from PBGC for most of this time. For example, we examined the files of five randomly selected Bethlehem Steel participants whose benefit determinations were still pending as of February 2009, and found that—aside from one instance of an acknowledgment of a form submitted by one participant—PBGC had not communicated with these participants for more than 5 years. The last PBGC-initiated communications were dated late 2003 or early 2004.

Some of the pension advocacy groups and union representatives we spoke with said that these long periods without communication are problematic for participants for several reasons. For example, retirees whose benefits are subject to the guarantee limits but who continue to receive their higher plan-level benefits for long periods of time may come to expect that these higher amounts are permanent, and then they are surprised when—years later—their benefits are suddenly reduced. Even for participants who are not yet receiving benefits, the lack of communication about the likely amount of their final benefits makes it difficult to plan for retirement.

Some groups noted that PBGC does not always provide realistic time frames for completing the benefit determination process, and does not periodically update participants on the status of benefit processing. Two groups suggested it would be helpful if PBGC provided updates at least every 6 months.

Complicated Benefit Calculations Are Not Adequately Explained

When participants are notified of a payment amount—whether estimated or final—PBGC’s letters generally provide only limited explanations for why the amount may be different from the amount provided under their plan. In complex plans, when benefit calculations are complicated, the letters do not adequately explain why benefits are being reduced, and although benefit statements are generally attached, the logic and math involved can be difficult even for pension experts.

The standard language used in these letters to explain a different estimated amount states: “We have adjusted the amount of your benefit because there are legal limits on how much we can pay.” The standard language used to explain a different final benefit amount states: “Your final monthly benefit of is the amount that the PBGC is legally allowed to pay you. It was calculated by determining the benefit you are entitled to in your plan and then applying the limits spelled out in federal pension law.” These letters generally provide no specific information about which limits apply or why. However, enclosed with each benefit letter is a detailed attachment that shows the line-by-line calculations leading to the benefit amount, referred to as a “benefit statement.” In the participant files we reviewed, these benefit statements ranged in length from 2 to 8 pages, and were very difficult to understand. In some cases, there were as many as 20 to 30 different line items that required making comparisons between the items to understand the logic of the calculations. (See sample letter provided in appendix VII.)

Some pension advocates and union representatives we spoke with said that they found the explanations in these letters to be too vague and generic, and that the letters did not provide enough information specific to the individual’s circumstances to be helpful. This was especially true in cases where participants were shocked or confused by a large benefit reduction. Moreover, some said they did not think most participants would be able to understand the accompanying benefit statements without additional information and assistance—especially for complex cases, according to one advocate. At the same time, they were generally sympathetic to the difficulty of communicating such complicated information. As one advocate acknowledged, for the letters to be accurate, they have to be complicated; this may just be “the nature of the beast.” Nevertheless, they said that PBGC could take some steps to improve the letters. For example, for those likely to incur overpayments, they suggested providing an example of how the recoupment process works. For those with complex benefit statements, they suggested that PBGC provide more text to help explain each step of the calculations, and include referrals to pension rights groups for obtaining additional information and assistance.

In addition, we found a number of errors in the correspondence with participants, although we reviewed only a small sample of letters for participants in certain complex plans. For example, we found a number of cases with corrected benefit determination letters and other correspondence that had been sent to rectify various errors, such as the failure to account for overpayments, or inaccurate end dates for recoupment. We also identified some errors in the payment amounts or other information in the letters that we brought to PBGC’s attention to be corrected.

PBGC has developed more than 500 letter formats—in both English and Spanish—to address the myriad of situations that may arise in the benefit determination process. Nevertheless, PBGC officials acknowledged that their standard letter formats may not always meet the needs of participants, especially those in complex plans, and they recently undertook a project to review and update their letters to try to better meet participant needs.

According to PBGC officials, in September 2008, they began rolling out about 50 different versions of key letters to fit different circumstances. They also noted that the amount of detail and length of the benefit statements has varied over time—sometimes longer, sometimes shorter. Most recently, they have tended toward longer. They commented, however, that they are not sure it makes a difference either way, because for the most part, participants react to the benefit amount, not to the steps PBGC has used to arrive at the amount. Finally, they also noted that while the benefit amounts in the letters are verified by actuaries, the letters are prepared manually by Field Benefit Administration staff, using the standard formats, and until recently, these letters were not reviewed. Beginning in early 2009, however, plan analysts have started to review the letters before mailing.

Restructured Appeals Process Resolves Requests More Efficiently but Key Information Is Not Readily Provided

Since streamlining its appeals process in 2003, PBGC has responded more quickly to correspondence sent to its Appeals Division (see fig. 12). It has reduced the average amount of time to decide an appeal by almost a year and has cut the average amount of time needed to resolve all appeals- related inquiries in half. At the same time, most appeals docketed since 2003 have not resulted in appellants receiving higher benefit amounts. A lack of understanding on the part of participants about how their benefits are calculated may contribute to unnecessary appeals.

Triage Approach Has Streamlined Appeals Process

PBGC’s appeals process was restructured in 2003 to create a triage system that makes more efficient use of agency resources and resolves cases more quickly. Previously, PBGC treated nearly every correspondence sent to its Appeals Division as an appeal. The agency now evaluates correspondence to determine if it raises a question about how the plan was interpreted, how the law was interpreted, or the practices of the plan’s sponsor and dockets correspondence as an appeal if it meets these criteria based on regulations. In analyzing appeals correspondence associated with plans trusteed by PBGC from fiscal year 2000 to fiscal year 2008, we found that since 2003, PBGC docketed as an appeal less than one-third of the correspondence received by the Appeals Division (see fig. 13). Correspondence concerning corrections to personal data, such as a participant’s date of hire or length of service, is now directed to PBGC’s Benefits Administration and Payment Department (Benefits Department) so that a corrected benefit determination can be issued more expeditiously. Additionally, in instances where a potential appellant requests a more detailed explanation of his or her benefit determination, the Benefits Department can quickly provide a detailed explanation based on its familiarity with the benefit calculation and relevant participant data. Further, under this triage approach, the Appeals Board staff, rather than the Appeals Board, responds to appeals received before a benefit determination has been issued or to claims that PBGC’s recovery of overpayments create a financial hardship and should be waived.

Since streamlining the appeals process, PBGC has reduced its response time for appeals and other appeals-related inquiries without increasing the size of its appeals staff. According to agency data, PBGC reduced its average time for closing docketed appeals from 2.3 years to 1.4 years since implementing this triage approach. In fact, since fiscal year 2005, PBGC has averaged a response time of less than 10 months (see fig. 14). PBGC has also reduced the average age of pending appeals from about 2 years to less than 9 months, since implementing its triage approach. We also found, on examining the 14,545 appeals-related correspondences associated with plans trusteed from fiscal year 2000 to fiscal year 2008, that PBGC responded to all correspondence in an average of less than 4 months after 2002 (fiscal years 2003 through 2009), as compared to an average of about 8 months prior to 2003 (fiscal years 2000 through fiscal year 2002). However, there were also 852 cases of correspondence which had been pending for an average of nearly 7 months, as of April 2009.

The procedural requirements of the appeals process do not appear to present barriers to appellants. Appellants are to provide a specific reason for their appeals and submit them within 45 days of their benefit determinations. Of the 3,637 closed appeals we examined, only 37 were closed because the appellant did not conform to a procedural requirement. Additionally, PBGC readily grants extensions. Within the correspondence we examined, PBGC granted 2,371 extension requests during fiscal years 2000 through 2008.

Most Appeals Have Not Resulted in Higher Benefit Amounts for Appellants

More than 80 percent of appeals resulted in appellants receiving no increase in their benefit amounts. Of the 4,337 correspondences that were docketed as appeals since the beginning of fiscal year 2003, 3,637 had been decided as of April 2009. In most of these cases, the appeal decision resulted in no change to the participant’s benefit determination amount (see fig. 15). However, appellants received a higher benefit amount in 18 percent of the cases. For example, in one of the successful appeals, a Bethlehem Steel participant submitted copies of his medical records with his appeal, convincing the Appeals Board that he was eligible to receive a “permanent incapacity” benefit. In another case, a participant in the US Airways Inc. (pilots) plan had US Airways Inc. furnish documentation to PBGC that his date of hire had been adjusted as the result of a lawsuit, and with this new date of hire, PBGC considered the participant vested.

In cases with no change in the participant’s benefit determination amount, the amount of overpayment can grow significantly during an appeal. While cases are appealed, PBGC typically places a hold on any change in benefit until the appeal is resolved. Thus, in cases where the benefit determination amount is less than the estimated amount, the participant may continue to receive the higher estimated amount during an appeal. If the lower amount is ultimately upheld, we found that these continued higher payments could add significantly to the amount of the participant’s overpayment—more than $10,000 in some cases.

PBGC Does Not Readily Provide Key Information that Could Help Avoid Unnecessary Appeals

Although some appellants have successfully used the appeals process to increase their benefits, PBGC is not readily providing key information that would be helpful to participants in deciding whether or not to pursue an appeal. For example, the information PBGC provides on how it arrives at its benefit calculations can be difficult for potential appellants to understand. Plan provisions and guarantee limitations are often complicated, and it may be difficult for the average individual to interpret PBGC’s benefit calculations, especially for complex plans. Based on Appeals Board findings, it appears that participants sometimes file appeals because they do not understand how the guarantee limitations affect their benefits. For example, the Appeals Board denied one Weirton Steel participant’s appeal by explaining that the participant’s estimated benefit included a temporary supplement that, ultimately, was not payable due to the accrued-at-normal limitation. In another case, the Appeals Board concluded that an Outboard Marine participant simply did not understand PBGC’s benefit statement and explained the accrued-at-normal, maximum, and phase-in limitations, while denying the participant’s appeal.

Even pension counselors and union representatives, who are knowledgeable about pensions and have experience filing appeals with PBGC, had difficulty understanding the materials provided to participants about their benefits . Several of the pension counselors and union representatives we interviewed told us that they have established contacts at PBGC who help them understand benefit determinations in appeals cases, and they, in turn, help convey this information to the participants they serve. Some have even held three-way calls with PBGC’s customer service center and participants, so that they can help participants understand the information provided by PBGC. Additionally, representatives from the pension counseling centers we spoke with have actuarial support they consult for help interpreting complicated benefit calculations. In some cases, by assisting participants in understanding their benefit calculations better, pension counselors told us they can also help participants avoid unnecessary appeals.

Some of those we interviewed also told us that a complete understanding of a participant’s benefit determination—which is important for an effective appeal—cannot be obtained from a benefit determination letter alone. Several of these pension counselors and union representatives commented that they routinely file Freedom of Information Act requests, on a participant’s behalf, to obtain more information about a participant’s case from PBGC when preparing an appeal because there is not sufficient information in the benefit determination letter. Although PBGC provides a guide on how to use these requests on its Web site, PBGC’s communications materials about the appeals process do not provide a description of how individuals can gain access to PBGC’s full benefit calculation records through a Freedom of Information Act request.

Conclusions

The current economic downturn has already brought a new influx of pension plan terminations to PBGC, and more are expected to follow. While our findings reveal a reasonably good record of processing beneficiary cases and assuming responsibility for the payment of benefits since 2000, the loss of jobs at this time, as well as the impending retirement of the baby boom generation, leave little room for anything short of high performance. This means acting as quickly and as efficiently as possible to value and allocate plan assets; to expedite the calculation of estimated benefits to reflect guarantee limits, as well as final benefit amounts; and to keep plan participants well-informed throughout the benefit determination process. Workers and retirees in terminated plans who stand to lose as much as one-half or more of their long-anticipated retirement income will likely have to make painful financial adjustments, and due consideration in helping to ease that pain is warranted.

The calculation of benefits according to complicated provisions that vary by plan is a challenging task. It becomes more so with the delays that can occur in valuing the assets of large and complex plans and determining how those assets are to be allocated among different groups. However, the likelihood of lengthy processing for some plans is not unpredictable, and while PBGC has taken steps to expedite the processing of small and simpler plans, its approach to large and complex plans appears less than strategic. The hope of freeing up staff to handle complex plans by processing others more quickly will probably not be sufficient by itself for tackling difficult plans in the near future. Absent a calculated effort to anticipate and plan for such terminations, the heretofore modest number of beneficiaries caught in a protracted process could, indeed, grow in the next few years.

While overpayments to those already in retirement have been infrequent, delays clearly exacerbate them. Moreover, the failure to communicate more often and clearly with participants awaiting a final determination can be disconcerting—especially when they receive the news that their final determination is “surprisingly” less than they anticipated, or when retirees learn that the estimated interim benefit they had been receiving was too high and that they owe money. PBGC’s long recoupment period—which can be even further elongated by an appeal—may be a consolation to such retirees; however, the agency itself stands to lose considerable sums under this policy. This is another peril for an agency that may well be dealing with an increasing number of plan failures. Clearer and more frequent communication with plan participants, including quicker and responsible adjustments to estimated benefits, more information about how their benefits are calculated, and where to find help if they wish to appeal, would better manage expectations, help people plan for their future, avoid unnecessary appeals, and earn good will in a trying time for all.

Recommendations

To improve PBGC’s benefit determination process, a more strategic approach is needed to prepare for and manage the calculation of benefit amounts and communications with participants in cases involving large, complex plans. Specifically, we recommend that: PBGC should set goals for timeliness and monitor the progress made in finalizing benefit determinations for large, complex plans separately from other plans.

To reduce the number and size of overpayments in large, complex plans, PBGC should prioritize the calculation of estimated benefits for retirees subject to the guarantee limits and adjust estimates, as needed, throughout the benefit determination process. To reduce increased overpayments due to appeals, PBGC should prioritize the processing of appeals for those already receiving benefits and should consider implementing the final benefit determination for retirees during the appeals process.

PBGC should develop improved procedures for adapting and reviewing letters to participants in large, complex plans, such as by (1) providing more specific information in letters to participants who receive benefit reductions describing which limits were applied and why; (2) ensuring all letters to participants involving benefit reductions are reviewed for accuracy and coherence before being sent; and (3) establishing processes to more frequently communicate with participants who are experiencing delays in receiving final benefits determinations.

PBGC should provide information or resources to help participants in large, complex plans better understand their benefit calculations and also to avoid any unnecessary appeals. Specifically, PBGC’s benefit determination letters should provide information, such as how participants can obtain additional information by using the Freedom of Information Act or other resources.

Agency Comments and Our Evaluation

We obtained written comments on a draft of this report from PBGC’s acting director, which are reproduced in appendix VIII. PBGC also provided technical comments, which are incorporated into the report where appropriate. In addition, we provided copies of the draft report to the Departments of Commerce, Labor, and Treasury.

In response to our draft report, PBGC generally concurred with our recommendations and outlined actions the agency has under way or plans to take in order to address each topic of concern. With respect to the first recommendation, PBGC agreed and noted that the agency has started to implement steps for tracking and monitoring tasks associated with processing large, complex plans. While we are pleased to learn of these steps being initiated, we would like to emphasize the importance of setting goals for processing large, complex plans and reporting progress toward meeting those goals separately from other plans. With respect to the second recommendation, PBGC agreed and commented that it generally already identifies and prioritizes cases where adjustments to estimated benefits are likely, but will continue to look for ways to improve its processes. Moreover, despite possible legal concerns with implementing final benefit determinations prior to completion of the appeals process, the agency is willing to explore options for making earlier benefit adjustments, when appropriate. With respect to the third recommendation, PBGC agreed and noted that the agency is revising the guidelines for its benefit statements to better communicate the complexities of PBGC benefits and to better manage expectations of plan participants. The comments state that the agency will evaluate and make necessary modifications to its letter review process, as well as examine ways to more frequently and clearly communicate with participants experiencing delays in receiving final benefit determinations. Finally, with respect to the fourth recommendation, PBGC agreed to amend its appeals brochure to include information about accessing records through Freedom of Information Act requests.

As agreed with your staff, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies of this report to the Acting Director of PBGC, the Secretary of Labor, the Secretary of the Treasury, and other interested parties. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512- 7215 or bovbjergb@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IX.

Appendix I: Scope and Methodology for Analysis of Automated and Imaged Data

To assess the timeliness and results of the Pension Benefit Guaranty Corporation’s (PBGC) benefit determination process, we obtained automated data from PBGC on all plans terminated and trusteed during fiscal years 2000 through 2008, as well as data for all individuals associated with those plans. Three different data sets were provided: (1) a plan level data set, (2) an individual level data set with benefit data, and (3) an individual level data set with appeals data.

The plan level data set, including 1,089 plans total, was comprised of three component groups: Group A - plans for which the valuation of assets and liabilities had been completed, as of February 2009 (909 plans).

Group B – plans for which the valuation of assets and liabilities had not been completed, as of February 2009 (83 plans). When actual values were not yet available, estimated values for assets and/or liabilities were provided. The participant count for these plans was based on audited data.

Group C – plans for which the valuation of assets and liabilities was not completed, as of February 2009 (97 plans). Estimated values for assets and/or liabilities were only available for some plans. The participant count for these plans was based on preliminary data.

We analyzed the plan level data to determine the length of time it takes PBGC to complete the valuation of a plan’s assets and liabilities, on average. We also analyzed the plan level data to identify various plan characteristics, such as the fiscal year when trusteed by PBGC and the extent to which participants’ benefits are affected by legal guarantee limits. PBGC does not systematically track the number of participants affected by one or more of the three types of guaranteed benefit limits specified under the Employee Retirement Income Security Act of 1974 (ERISA) and related regulations—which include maximum, phase-in, and accrued-at-normal limits—or how much these limits affect participants’ benefit amounts. However, PBGC does systematically track each plan’s total benefit liabilities and the amount PBGC owes, taking into account the guarantee limits. The difference between these two amounts (referred to as the amount of “unfunded nonguaranteed benefits”) provides an indicator of the magnitude of the impact of guarantee limits on participants within each plan. If the amounts are the same, it means that no participants had benefits reduced due to these limits. If total liabilities are greater, it means that at least one participant had benefits reduced due to these limits.

The individual level data set, with benefit data as of February 2009, included 1,487,679 individuals associated with 1,057,272 primary participants (the person who had earned the pension). The most common reasons for multiple individuals per case were situations where a portion of the pension was to be shared between the primary participant and another individual with a qualified domestic relations order (referred to in the data set as an “alternate payee”), or situations where a primary participant had died and the pension was being paid to a beneficiary. In our analyses, we aggregated the data so that the characterization of each case reflected the data for the primary participant, as well as all other individuals associated with that primary participant, as appropriate for the data element being analyzed.

We analyzed the individual level data on benefits, by case, to determine the length of time it takes PBGC to make benefit determinations and the extent to which overpayments affect retirees’ benefits. To assess the time required for processing, we began by identifying all those participants whose benefit determinations had been completed. We then examined the length of time between the date the participant’s plan was trusteed and the date PBGC first issued a final benefit determination letter to the participant. (Subsequent benefit determination letters are sometimes issued when corrections are needed or when a participant successfully appeals.) For participants whose benefit determinations were still pending, we calculated the length of time between the plan’s trusteeship and February 18, 2009, when these data were provided, to determine how long the determinations had been awaiting completion. We also analyzed the length of time to process benefit determinations by participants’ retirement status at the time the plan terminated.

To determine the proportion of participants possibly affected by overpayments, we first identified all those who had received estimated benefits and then compared the earliest available estimated benefit amount with the final benefit amount, by case, tabulating whether the difference was positive (indicating a likely overpayment) or negative (indicating a likely underpayment). Because estimated benefit amounts may be adjusted over time, and because the records on estimated benefits had sometimes been overwritten or deleted, we were not able to use these data to determine with certainty whether or not an overpayment or underpayment had been incurred, or the amounts involved. Instead, to assess the amount of overpayments incurred and the effect of repaying these debts on participants’ benefits, we analyzed the data on recoupments. First, we identified all those who were listed as having amounts recouped to date, by case. We then used the available data on projected benefit reductions, which included the amount of monthly reduction and the start date and end date for that reduction amount (sometimes involving up to four different reduction amounts) to calculate the amounts yet to be recouped. We determined the total amount of the overpayments, by case, by combining the data PBGC provided on amounts recouped to date with our calculation of amounts yet to be recouped.

Based on a review of selected records in PBGC’s image processing system for cases with the largest overpayments, it appears that these data are reliable for identifying whether a case has an overpayment, but not as reliable for determining the total amount of overpayments. We were able to verify that the participant with the largest overpayment, according to our analysis of these data, was correct: an LTV participant with an overpayment of about $152,000. Also, we found that that the amounts calculated using these data were very close (within 2 percent) of the overpayment amounts in the records for 15 of the 24 cases reviewed— differences small enough to be explained by rounding. However, in the remaining 9 cases, the amounts calculated varied significantly from those in the records—some greater, some less. We investigated the 3 most egregious differences and found that all 3 were due to data entry errors in the PBGC data set. In 2 cases, PBGC officials told us that the end date for recoupment had been entered as 12/1/2099 by default, which was not correct. They said that they would implement a system fix to prevent inappropriate use of this default in the future. In the third case, we found that the monthly payment amount had been inadvertently entered as the monthly reduction amount. None of these errors had resulted in inaccurate payments to participants, since all involved future recoupment amounts. However, it appears that the reliability of these data for calculating total overpayment amounts is limited.

We also analyzed the individual level data, by case, to identify various case characteristics, aggregating the data together for all individuals associated with the same case. These characteristics included the final benefit amount (with and without any benefit reduction due to recoupment), and the projected age of the youngest individual at the end of recoupment for cases with overpayments greater than $10,000.

We then combined the plan level data and individual level data, by case, to determine the number of individuals and cases associated with each plan, and identify those plans with the most cases that took 4 or more years to provide a final benefit determination, and the most cases with overpayments. We also used these data to generate lists of cases for more detailed reviews of documents in PBGC’s image processing system and examine more closely the cases that took the longest to provide a benefit determination and that had the largest overpayments and benefit reductions.

In addition to the automated data, PBGC maintains records that are individually scanned into an image processing system. The types of documents we reviewed in PBGC’s image processing system included both plan documents and participant records. On the plan level, we reviewed documents for the plans most affected by guarantee limits, by delays in processing, and by overpayments (see appendix VI). For the 10 plans ranking highest in each of these categories, we typically reviewed the “actuarial case memo,” which summarizes all the steps taken to obtain records and determine the value of assets and liabilities for each plan terminated and trusteed by PBGC. We then selected five of these plans for more detailed review of participant records in order to illustrate key trends identified in our analysis of the automated data. These five plans were: Bethlehem Steel, LTV Steel, RTI-United Steelworkers of America (USWA), US Airways, and Weirton Steel. For Bethlehem Steel, we randomly selected five participants from among those participants whose benefit determinations were still pending. For each of the other four plans, we randomly selected five participants from the lists of participants provided in the plans’ actuarial memos. Then, for each of these participants, we typically reviewed all letters sent to the participant, all benefit calculation documents, and the internal correspondence among PBGC staff about the case. We reviewed the letters to participants only to determine if they accurately conveyed information documented elsewhere in the files. We did not attempt to verify PBGC calculations of benefit amounts.

Finally, to assess the length of time it takes PBGC to provide a decision when a participant appeals, we examined PBGC data on the average time to close docketed appeals and the average age of pending appeals, by fiscal year, 2000 through 2008. We also analyzed the 14,545 appeals-related correspondences associated with plans terminated and trusteed during fiscal years 2000 through 2008 so that we could make comparisons between PBGC’s average response time, both before and after its restructuring of the appeals process. Data reflect multiple correspondences associated with individual cases. For correspondences that were pending, we calculated the amount of time between when PBGC received these correspondences and April 13, 2009, when we received these data. To describe PBGC’s triaging system, which was implemented in fiscal year 2003, we analyzed PBGC’s action taken code for each correspondence and aggregated these results into two groups: those correspondences received during fiscal years 2000 through 2002, and those received during fiscal years 2003 through 2008. Of the 4,337 correspondences that were docketed as appeals, 3,495 had been decided as of April 2009. We then tabulated the data on the outcomes of closed appeals and the reasons why these appeals were closed, which were coded to indicate whether a change to the benefit amount occurred.

Appendix II: Organizations and Participants Contacted

Organizations

American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) (http://www.aflcio.org) A voluntary federation of 56 national and international labor unions, representing 11 million members in a variety of industries.

Air Line Pilots Association (http://www.alpa.org) The largest airline pilot union in the world, representing nearly 54,000 pilots at 36 U.S. and Canadian airlines.

Association of Flight Attendants-Communications Workers of America (http://www.afanet.org) The world’s largest flight attendant labor union, organized by flight attendants for flight attendants, representing over 55,000 flight attendants at 20 airlines.

New England Pension Assistance Project (http://www.pensionaction.org/nepap.htm) One of the six regional projects funded by the Administration on Aging to provide free pension counseling services. Initially, the project served only Massachusetts residents, but in 1998, it expanded to help residents of the six-state New England region: Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont.

Ohio Pension Rights Center (http://www.proseniors.org/oh_pension.html) Part of one of the six regional projects funded by the Administration on Aging to provide free pension counseling services. The Ohio Pension Rights Center shares a grant with the Michigan Pension Rights Project and provides all types of pension assistance to people in Michigan, Ohio, Pennsylvania, Kentucky, and Tennessee.

Pension Rights Center (http://www.pensionrights.org) Provides legal consultation and training to the six regional projects funded by the Administration on Aging to provide pension counseling services for individuals who need help in understanding and enforcing their pension and retirement savings plan rights.

United Steelworkers (http://www.usw.org/) The largest industrial labor union in North America, representing 1.2 million current and retired workers in industries that include primary and fabricated metals, mining, chemicals, paper, glass, rubber, transportation, utilities, container industries, pharmaceuticals, call centers, and health care.

Participants

Members of the Reliance Group Holdings Inc. plan and the Reliance Insurance Company plan, which were among the plans most affected by long processing times.

Members of the Republic Technologies International USWA and USS/KOBE plans, which were among the plans most affected by the guarantee limits, long processing times, and/or overpayments.

Members of United Air Lines ground employees plan and pilots’ plan.

Appendix III: The Process for Allocating Assets and Recoveries to Participant Benefits

Upon the termination of a single-employer plan, plan assets are identified, valued, and then allocated to participant benefits, in accordance with the provisions in ERISA, section 4044. In addition to plan assets, any monies from company assets that PBGC recovers for unfunded benefit liabilities are allocated to participant benefits, in accordance with the provisions in ERISA, section 4022(c).

Section 4044—Allocation of Plan Assets

The amount of plan assets available to pay for participant benefits includes all plan assets remaining after the subtraction of all prior or current liabilities paid or payable from the plan. This amount includes the value of the collectible portion of any due and unpaid employer contributions. Liabilities include expenses, fees and other administrative costs, and benefit payments due before the allocation date. For plans terminated and trusteed by PBGC, assets are valued and the allocation determined based on liabilities as of the termination date.

Plan assets available to pay for benefits under the plan are allocated to participant benefits according to six priority categories, as described in Table 3. Assets are allocated to each priority category in succession, beginning with priority category 1. If the plan has sufficient assets to pay for all benefits in a priority category, the remaining assets are allocated to the next lower priority category. This process is repeated until all benefits in priority categories 1 through 6 have been provided or until all available plan assets have been allocated. Most private sector defined benefit plans do not require or allow participant contributions. Thus, in most trusteed plans, asset allocation begins with the benefits in priority category 3, that is, the benefits of those retired or eligible to retire 3 years before the plan terminated. However, it should be noted that assets are allocated based on type of benefit, not retirement status, and that many participants have benefits in more than one category.

Except for priority category 5, which includes benefits subject to the phase-in limit, if the plan assets available for allocation to any priority category are insufficient to pay for all benefits in that priority category, those assets are distributed among the participants according to the ratio that the value of each participant’s benefit or benefits in that priority category bears to the total value of all benefits in that priority category. If the plan assets available for allocation to priority category 5 are insufficient to pay for all benefits in that category, the assets are allocated by date of plan amendment, oldest to newest, until all plan assets available for allocation have been exhausted. Within each priority category, once the amount of assets to be allocated to each participant has been determined, assets are allocated first to the participant’s “basic-type” benefits (which include benefits that are guaranteed by PBGC, or that would be guaranteed but for the maximum and phase-in limits), and then to the participant’s “nonbasic-type” benefits (which include all other benefits).

Plan assets are distributed according to the process described above until all have been allocated. Thus, to the extent plan assets are available for allocation under this scheme, some participants may have some or all their nonguaranteed benefits paid. For example, in the scenario illustrated in figure 16, sufficient plan assets are available to cover all priority category 3 guaranteed and nonguaranteed benefits, as well as a portion of priority category 4 guaranteed benefits. PBGC would then pay the remaining guaranteed benefits in priority category 4, but all remaining benefits (that is, priority categories 5 and 6 benefits, which are all nonguaranteed benefits), would not be paid, and participants would have their benefits reduced accordingly, unless there are recoveries of company assets that can be allocated to benefits, as discussed below.

Section 4022(c)— Allocation of Recovered Company Assets

Section 4022(c), added to ERISA in 1987, requires PBGC to share with participants a portion of its recoveries resulting from an employer liability claim against the plan sponsor and other liable parties, usually in bankruptcy. As a result, a portion of participants’ losses of unfunded nonguaranteed benefits can be paid. Where a plan’s unfunded nonguaranteed benefits exceed $20 million, the total amount paid under §4022(c) depends on PBGC’s actual recoveries in that case. In all other cases, the amount paid is determined by an average of PBGC’s recoveries over a 5-year period.

PBGC allocates the participants’ portion of the §4022(c) amount, as described above, to participants’ unfunded nonguaranteed benefits using the same priority categories and procedures outlined above for the §4044 asset allocation process. The allocation begins with the highest priority category in which there are unfunded nonguaranteed benefits, and then to each lower priority category, in succession. If the plan §4022(c) amount to be allocated in a particular priority category is not sufficient to pay all the unfunded nonguaranteed benefits in that category, the amount will be allocated within the category as described above for the §4044 allocation process. As noted by one employee group we spoke with, it is more advantageous for participants for assets to be considered recoveries allocated under §4022(c) than plan assets allocated under §4044, because recoveries are shared between PBGC and participants. For example, to continue with the scenario introduced above, if company assets are recovered, some would be allocated to pay a portion of the guaranteed benefits in priority category 4 that PBGC would pay to participants regardless, and some would be allocated to pay a portion of priority category 5 nonguaranteed benefits that would not have been paid otherwise (see fig. 17).

To help illustrate this process, we gathered data from plan records about § 4044 and § 4022(c) asset allocation for 10 large, complex plans. The results are summarized in table 4.

Appendix IV: Limits on Guaranteed Benefits from a Participant’s Perspective

The statutory and regulatory limits on guaranteed benefits can be difficult to understand for many participants. The following schematic distills the application of these limits into a series of questions, one for each type of limit: phase-in, accrued-at-normal, and maximum.

Appendix V: Profiles of Three Large, Complex Plans

We selected three terminated pension plans to profile as examples of large, complex plans: Bethlehem Steel, RTI (USWA), and US Airways (pilots) (see appendix VI). All three were among the 10 plans most affected by the guarantee limits. In addition, both Bethlehem Steel and RTI (but not US Airways) were among the 10 plans most affected by processing delays and by overpayments.

Appendix VI: Three Categories of Large, Complex Plans

Percentage of total unfunded nonguaranteed benefits ($8,522,175,078)

National Steel Corporation (retirement plan)

Kaiser Aluminum and Chemical Corp. (hourly plan)

Kaiser Aluminum and Chemical Corp. (salaried plan)

Appendix VII: Sample Benefit Determination Letter

To illustrate the complexity of some benefit calculations, this appendix provides a sample benefit determination letter that PBGC sent to an RTI (USWA) participant, as well as a 5-page benefit statement and a recoupment summary that were provided as attachments.

Appendix IX: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, Blake L. Ainsworth, Assistant Director; Margie K. Shields, Analyst-in-Charge; Kristen W. Jones; and Wayne Turowski made significant contributions to this report. Joseph A. Applebaum, Jeffrey L. Bernstein, Susan C. Bernstein, Jena Y. Sinkfield, Walter K. Vance, and Craig H. Winslow also made important contributions.

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