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

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