Before enactment of the Employee Retirement and Income Security Act (ERISA) of 1974, few rules governed the funding of defined-benefit pension plans, and participants had no guarantees that they would receive the benefits promised. When Studebaker’s pension plan failed in the 1960s, for example, many plan participants lost their pensions. Such experiences prompted the passage of ERISA to better protect the retirement savings of Americans covered by private pension plans. Along with other changes, ERISA established PBGC to pay the pension benefits of participants, subject to certain limits, in the event that an employer could not. 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. Under ERISA, the termination of a single-employer defined-benefit plan results in an insurance claim with the single-employer program if the plan has insufficient assets to pay all benefits accrued under the plan up to the date of plan termination. PBGC may pay only a portion of the claim because ERISA places limits on the PBGC benefit guarantee. For example, PBGC generally does not guarantee annual benefits above a certain amount, currently about $44,000 per participant at age 65. Additionally, benefit increases in the 5 years immediately preceding plan termination are not fully guaranteed, though PBGC will pay a portion of these increases. The guarantee is limited to certain benefits, including so-called shutdown benefits—significant subsidized early retirement benefits—that are triggered by layoffs or plant closings that occur before plan termination. The guarantee does not generally include supplemental benefits, such as the temporary benefits that some plans pay to participants from the time they retire until they are eligible for Social Security benefits. Following enactment of ERISA, however, concerns were raised about the potential losses that PBGC might face from the termination of underfunded plans. To protect PBGC, ERISA was amended in 1986 to require that plan sponsors meet certain additional conditions before terminating an underfunded plan. For example, sponsors could voluntarily terminate their underfunded plans only if they were bankrupt or generally unable to pay their debts without the termination. Key amendments to ERISA affecting the single-employer program are listed in appendix II. Concerns about PBGC finances also resulted in efforts to strengthen the minimum funding rules incorporated by ERISA in the Internal Revenue Code (IRC). In 1987, for example, the IRC was amended to require that plan sponsors calculate each plan’s current liability, and make additional contributions to the plan if it is underfunded to the extent defined in the law. As discussed in a report we issued earlier this year, concerns that the 30-year Treasury bond rate no longer resulted in reasonable current liability calculations has led both the Congress and the administration to propose alternative rates for these calculations. Despite the 1987 amendments to ERISA, concerns about PBGC’s financial condition persisted. In 1990, as part of our effort to call attention to high- risk areas in the federal government, we noted that weaknesses in the single-employer insurance program’s financial condition threatened PBGC’s long-term viability. We stated that minimum funding rules still did not ensure that plan sponsors would contribute enough for terminating plans to have sufficient assets to cover all promised benefits. In 1992, we also reported that PBGC had weaknesses in its internal controls and financial systems that placed the entire agency, and not just the single- employer program, at risk. Three years later, we reported that legislation enacted in 1994 had strengthened PBGC’s program weaknesses and that we believed improvements had been significant enough for us to remove the agency’s high-risk designation. Since that time, we have continued to monitor PBGC’s financial condition and internal controls. For example, in 1998, we reported that adverse economic conditions could threaten PBGC’s financial condition despite recent improvements; in 2000, we reported that contracting weaknesses at PBGC, if uncorrected, could result in PBGC paying too much for required services; and this year, we reported that weaknesses in the PBGC budgeting process limited its control over administrative expenses. 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 federal insurance programs, including the single-employer pension insurance program. This is true because, generally, cost is only recognized in the budget when claims are paid rather than when the commitment is made. The cost of pension insurance is further obscured in the budget because while its annual net cash flows reduce the budget deficit, PBGC’s growing long-term commitment to pay pension benefits has no effect on the deficit. For example, the liabilities from terminated underfunded pension plans taken over by PBGC are not recognized in the budget. 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. We also stated, however, that agencies, such as PBGC, might need to develop and test methodologies that would enable them to generate reasonable and unbiased cost estimates of the risk assumed by the government, which are critical to the successful implementation of accrual-based budgeting for insurance programs. As such, as a first step toward developing an accrual-based budget, we recommended that the Office of Managemetn and Budget (OMB) encourage agencies to develop methodologies and provide cost information on a risk-assumed basis in the budget document along side the cash-based budget information it currently provides. OMB agreed with our conclusions and noted that they would like to pursue such improvements but was not doing so because it did not have the expertise that would be required. PBGC receives no direct federal tax dollars to support the single-employer pension insurance program. The program receives the assets of terminated underfunded plans and any of the sponsor’s assets that PBGC recovers during bankruptcy proceedings. PBGC finances the unfunded liabilities of terminated plans with (1) premiums paid by plan sponsors and (2) income earned from the investment of program assets. Initially, plan sponsors paid only a flat-rate premium of $1 per participant per year; however, the flat rate has been increased over the years and is currently $19 per participant per year. To provide an incentive for sponsors to better fund their plans, a variable-rate premium was added in 1987. The variable-rate premium, which started at $6 for each $1,000 of unfunded vested benefits, was initially capped at $34 per participant. The variable rate was increased to $9 for each $1,000 of unfunded vested benefits starting in 1991, and the cap on variable-rate premiums was removed starting in 1996. Figure 1 shows that, after increasing sharply in the 1980s, flat-rate premium income declined from $753 million in 1993 to $654 million in 2002, in constant 2002 dollars. Income from the variable- rate premium fluctuated widely over that period. The slight decline in flat-rate premium revenue over the last decade, in real dollars, indicates that the increase in insured participants has not been sufficient to offset the effects of inflation over the period. Essentially, while the number of participants has grown since 1980, growth has been sluggish. Additionally, after increasing during the early 1980s, the number of insured single-employer plans has decreased dramatically since 1986. (See fig. 2.) The decline in variable-rate premiums in 2002 may be due to a number of factors. For example, all else equal, an increase in the rate used to determine the present value of benefits reduces the degree to which reports indicate plans are underfunded, which reduces variable-rate premium payments. The Job Creation and Worker Assistance Act of 2002 increased the statutory interest rate for variable-rate premium calculations from 85 percent to 100 percent of the interest rate on 30-year U.S. Treasury securities for plan years beginning after December 31, 2001, and before January 1, 2004. Investment income is also a large source of funds for the single-employer insurance program. The law requires PBGC to invest a portion of the funds generated by flat-rate premiums in obligations issued or guaranteed by the United States, but gives PBGC greater flexibility in the investment of other assets. For example, PBGC may invest funds recovered from terminated plans and plan sponsors in equities, real estate, or other securities and funds from variable-rate premiums in government or private fixed-income securities. According to PBGC, however, by policy, it invests all premium income in Treasury securities. As a result of the law and investment policies, the majority of the single-employer program’s assets are invested in U.S. government securities. (See fig. 3.) Since 1990, except for 3 years, PBGC has achieved a positive return on the investments of single-employer program assets. (See fig 4.) According to PBGC, over the last 10 years, the total return on these investments has averaged about 10 percent. For the most part, liabilities of the single-employer pension insurance program are comprised of the present value of insured participant benefits. PBGC calculates present values using interest rate factors that, along with a specified mortality table, reflect annuity prices, net of administrative expenses, obtained from surveys of insurance companies conducted by the American Council of Life Insurers. In addition to the estimated total liabilities of underfunded plans that have actually terminated, PBGC includes in program liabilities the estimated unfunded liabilities of underfunded plans that it believes will probably terminate in the near future. PBGC may classify an underfunded plan as a probable termination when, among other things, the plan’s sponsor is in liquidation under federal or state bankruptcy laws. The single-employer program has had an accumulated deficit—that is, program assets have been less than the present value of benefits and other liabilities—for much of its existence. (See fig. 5.) In fiscal year 1996, the program had its first accumulated surplus, and by fiscal year 2000, the accumulated surplus had increased to almost $10 billion, in 2002 dollars. However, the program’s finances reversed direction in 2001, and at the end of fiscal year 2002, its accumulated deficit was about $3.6 billion. PBGC estimated that this deficit had grown to $8.8 billion by August 31, 2003. Despite this large deficit, according to a PBGC analysis, the single- employer program was estimated to have enough assets to pay benefits through 2019, given the program’s conditions and PBGC assumptions as of the end of fiscal year 2002. Losses since that time may have shortened the period over which the program will be able to cover promised benefits. The financial condition of the single-employer pension insurance program returned to an accumulated deficit in 2002 largely due to the termination, or expected termination, of several severely underfunded pension plans. In 1992, we reported that many factors contributed to the degree plans were underfunded at termination, including the payment at termination of additional benefits, such as subsidized early retirement benefits, which have been promised to plan participants if plants or companies ceased operations.These factors likely contributed to the degree that plans terminated in 2002 were underfunded. Factors that increased the severity of the plans’ unfunded liability in 2002 were the recent sharp decline in the stock market and a general decline in interest rates. The current minimum funding rules and variable-rate premiums were not effective at preventing those plans from being severely underfunded at termination. Total estimated losses in the single-employer program reported in PBGC annual reports increased from $705 million in fiscal year 2001 to $9.3 billion in fiscal year 2002. In addition to $3.0 billion in losses from the unfunded liabilities of terminated plans, the $9.3 billion included $6.3 billion in losses from the unfunded liabilities of plans that were expected to terminate in the near future. Nearly all of the terminations considered probable at the end of fiscal year 2002 have already occurred. For example, in December 2002, PBGC involuntarily terminated an underfunded Bethlehem Steel Corporation pension plan, which resulted in the single-employer program assuming responsibility for about $7.2 billion in PBGC-guaranteed liabilities, about $3.7 billion of which was not funded at termination. Much of the program’s losses resulted from the termination of underfunded plans sponsored by failing steel companies. PBGC estimates that in 2002, underfunded steel company pension plans accounted for 80 percent of the $9.3 billion in program losses for the year. The three largest losses in the single-employer program’s history resulted from the termination of underfunded plans sponsored by failing steel companies: Bethlehem Steel, LTV Steel, and National Steel. All three plans were either completed terminations or listed as probable terminations for 2002. Giant vertically integrated steel companies, such as Bethlehem Steel, have faced extreme economic difficulty for decades, and efforts to salvage their defined-benefit plans have largely proved unsuccessful. According to PBGC’s executive director, underfunded steel company pension plans have accounted for 58 percent of PBGC single-employer losses since 1975. The termination of underfunded plans in 2002 occurred after a sharp decline in the stock market had reduced plan asset values and a general decline in interest rates had increased plan liability values, and the sponsors did not make the contributions necessary to adequately fund the plans before they were terminated. The combined effect of these factors was a sharp increase in the unfunded liabilities of the terminating plans. According to annual reports (Annual Return/Report of Employee Benefit Plan, Form 5500) submitted by Bethlehem Steel Corporation, for example, in the 7 years from 1992 to 1999, the Bethlehem Steel pension plan went from 86 percent funded to 97 percent funded. (See fig. 6.) From 1999 to plan termination in December 2002, however, plan funding fell to 45 percent as assets decreased and liabilities increased, and sponsor contributions were not sufficient to offset the changes. A decline in the stock market, which began in 2000, was a major cause of the decline in plan asset values, and the associated increase in the degree that plans were underfunded at termination. For example, while total returns for stocks in the Standard and Poor’s 500 index (S&P 500) exceeded 20 percent for each year from 1995 through 1999, they were negative starting in 2000, with negative returns reaching 22.1 percent in 2002. (See fig. 7.) Surveys of plan investments by Greenwich Associates indicated that defined-benefit plans in general had about 62.8 percent of their assets invested in U.S. and international stocks in 1999. A stock market decline as severe as the one experienced from 2000 through 2002 can have a devastating effect on the funding of plans that had invested heavily in stocks. For example, according to a survey,the Bethlehem Steel defined-benefit plan had about 73 percent of its assets (about $4.3 billion of $6.1 billion) invested in domestic and foreign stocks on September 30, 2000. One year later, assets had decreased $1.5 billion, or 25 percent, and when the plan was terminated in December 2002, its assets had been reduced another 23 percent to about $3.5 billion—far less than needed to finance an estimated $7.2 billion in PBGC-guaranteed liabilities. Over that same general period, stocks in the S&P 500 had a negative return of 38 percent. In addition to the possible effect of the stock market’s decline, a drop in interest rates likely had a negative effect on plan funding levels by increasing plan termination costs. Lower interest rates increase plan termination liabilities by increasing the present value of future benefit payments, which in turn increases the purchase price of group annuity contracts used to terminate defined-benefit pension plans. For example, a PBGC analysis indicates that a drop in interest rates of 1 percentage point, from 6 percent to 5 percent, increased the termination liabilities of the Bethlehem Steel pension plan by about 9 percent, which indicates the cost of terminating the plan through the purchase of a group annuity contract would also have increased. Relevant interest rates may have declined 3 percentage points or more since 1990. For example, interest rates on long-term high-quality corporate bonds approached 10 percent at the start of the 1990s, but were below 7 percent at the end of 2002. (See fig. 8.) IRC minimum funding rules and ERISA variable rate premiums, which are designed to ensure plan sponsors adequately fund their plans, did not have the desired effect for the terminated plans that were added to the single- employer program in 2002. The amount of contributions required under IRC minimum funding rules is generally the amount needed to fund benefits earned during that year plus that year’s portion of other liabilities that are amortized over a period of years. Also, the rules require the sponsor to make an additional contribution if the plan is underfunded to the extent defined in the law. However, plan funding is measured using current liabilities, which a PBGC analysis indicates have been typically less than termination liabilities. Additionally, plans can earn funding credits, which can be used to offset minimum funding contributions in later years, by contributing more than required according to minimum funding rules. Therefore, sponsors of underfunded plans may avoid or reduce minimum funding contributions to the extent their plan has a credit balance in the account, referred to as the funding standard account, used by plans to track minimum funding contributions. While minimum funding rules may encourage sponsors to better fund their plans, the rules require sponsors to assess plan funding using current liabilities, which a PBGC analysis indicates have been typically less than termination liabilities. Current and termination liabilities differ because the assumptions used to calculate them differ. For example, some plan participants may retire earlier if a plan is terminated than they would if the plan continues operations, and lowering the assumed retirement age generally increases plan liabilities, especially if early retirement benefits are subsidized. With respect to two of the terminated underfunded pension plans that we examine, for example, a PBGC analysis indicates: The retirement age assumption for the Anchor Glass pension plan on an ongoing plan basis was 65 for separated vested participants. However, the retirement age assumption appropriate for those participants on a termination basis was 58—a decrease of 7 years. According to PBGC, changing retirement age assumptions for all participants, including separated vested participants, resulted in a net increase in plan liabilities of about 4.6 percent. The retirement age assumption for the Bethlehem Steel pension plan on an ongoing plan basis was 62 for those active participants eligible for unreduced benefits after 30 years of service. On the other hand, the retirement age assumption for them on a plan termination basis was 55—the earliest retirement age. According to PBGC, decreasing the assumed retirement age from 62 to 55 approximately doubled the liability for those participants. As shown in appendix IV, changes in the interest rates used to calculate termination and current liabilities also play a role in determining to what extent termination liabilities differ from current liabilities. Other aspects of minimum funding rules may limit their ability to affect the funding of certain plans as their sponsors approach bankruptcy. According to its annual reports, for example, Bethlehem Steel contributed about $3.0 billion to its pension plan for plan years 1986 through 1996. According to the reports, the plan had a credit balance of over $800 million at the end of plan year 1996. Starting in 1997, Bethlehem Steel reduced its contributions to the plan and, according to annual reports, contributed only about $71.3 million for plan years 1997 through 2001. The plan’s 2001 actuarial report indicates that Bethlehem Steel’s minimum required contribution for the plan year ending December 31, 2001, would have been $270 million in the absence of a credit balance; however, the opening credit balance in the plan’s funding standard account as of January 1, 2001, was $711 million. Therefore, Bethlehem Steel was not required to make any cash contributions during the year. Other IRC funding rules may have prevented some sponsors from making contributions to plans that in 2002 were terminated at a loss to the single- employer program. For example, on January 1, 2000, the Polaroid pension plan’s assets were about $1.3 billion compared to accrued liabilities of about $1.1 billion—the plan was more than 100 percent funded. The plan’s actuarial report for that year indicates that the plan sponsor was precluded by the IRC funding rules from making a tax-deductible contribution to the plan. In July 2002, PBGC terminated the Polaroid pension plan, and the single-employer program assumed responsibility for $321.8 million in unfunded PBGC-guaranteed liabilities for the plan. The plan was about 67 percent funded, with assets of about $657 million to pay estimated PBGC-guaranteed liabilities of about $979 million. Another ERISA provision, concerning the payment of variable-rate premiums, is also designed to encourage employers to better fund their plans. As with minimum funding rules, the variable-rate premium did not provide sufficient incentives for the sponsors of the plans that we reviewed to make the contributions necessary to adequately fund their plans. None of the three underfunded plans that we reviewed, which became losses to the single-employer program in 2002 and 2003, paid a variable-rate premium in the 2001 plan year. Plans are exempt from the variable-rate premium if they are at the full-funding limit in the year preceding the premium payment year, in this case 2000, after applying any contributions and credit balances in the funding standard account. Each of these three plans met this criterion. Two primary risks threaten the long-term financial viability of the single- employer program. The greater risk concerns the program’s liabilities: large losses, due to bankrupt firms with severely underfunded pension plans, could continue or accelerate. This could occur if returns on investment remain poor, interest rates stay low, and economic problems persist. More troubling for liabilities is the possibility that structural weaknesses in industries with large underfunded plans, including those greatly affected by increasing global competition, combined with the general shift toward defined-contribution pension plans, could jeopardize the long-term viability of the defined-benefit system. On the asset side, PBGC also faces the risk that it may not receive sufficient revenue from premium payments and investments to offset the losses experienced by the single-employer program in 2002 or that this program may experience in the future. This could happen if program participation falls or if PBGC earns a return on its assets below the rate it uses to value its liabilities. Plan terminations affect the single-employer program’s financial condition because PBGC takes responsibility for paying benefits to participants of underfunded terminated plans. Several factors would increase the likelihood that sponsoring firms will go bankrupt, and therefore will need to terminate their pension plans, and the likelihood that those plans will be underfunded at termination. Among these are poor investment returns, low interest rates, and continued weakness in the national economy or specific sectors. Particularly troubling may be structural weaknesses in certain industries with large underfunded defined-benefit plans. Poor investment returns from a decline in the stock market can affect the funding of pension plans. To the extent that pension plans invest in stocks, the decline in the stock market will increase the chance that plans will be underfunded should they terminate. A Greenwich Associates survey of defined-benefit plan investments indicates that 59.4 percent of plan assets were invested in stocks in 2002. Clearly, the future direction of the stock market is very difficult to forecast. From the end of 1999 through the end of 2002, total cumulative returns in the stock market, as measured by the S&P 500, were negative 37.6 percent. In 2003, the S&P 500 has partially recovered those losses, with total returns (from a lower starting point) of 14.7 percent through the end of September. From January 1975, the beginning of the first year following the passage of ERISA, through September 2003, the average annual compounded nominal return on the S&P 500 equaled 13.5 percent. A decline in asset values can be particularly problematic for plans if interest rates remain low or fall, which raises plan liabilities, all else equal. The highest allowable discount rate for calculating current plan liabilities, based on the 30-year U.S. Treasury bond rate, has been no higher than 7.1 percent since April, 1998, lower than any previous point during the 1990s. Falling interest rates raise the price of group annuities that a terminating plan must purchase to cover its promised benefits and increase the likelihood that a terminating plan will not have sufficient assets to make such a purchase. An increase in liabilities due to falling interest rates also means that companies may be required under the minimum funding rules to increase contributions to their plans. This can create financial strain and increase the chances of the firm going bankrupt, thus increasing the risk that PBGC will have to take over an underfunded plan. Economic weakness can also lead to greater underfunding of plans and to a greater risk that underfunded plans will terminate. For many firms, slow or declining economic growth causes revenues to decline, which makes contributions to pension plans more difficult. Economic sluggishness also raises the likelihood that firms sponsoring pension plans will go bankrupt. Three of the last five annual increases in bankruptcies coincided with recessions, and the record economic expansion of the 1990s is associated with a substantial decline in bankruptcies. Annual plan terminations resulting in losses to the single-employer program rose from 83 in 1989 to 175 in 1991, and after declining to 65 in 2000, the number reached 93 in 2001. Weakness in certain industries, particularly the airline and automotive industries, may threaten the viability of the single-employer program. Because PBGC has already absorbed most of the pension plans of steel companies, it is the airline industry, with $26 billion of total pension underfunding, and the automotive sector, with over $60 billion in underfunding, that currently represent PBGC’s greatest future financial risks. In recent years, profit pressures within the U.S. airline industry have been amplified by severe price competition, recession, terrorism, the war in Iraq, and the outbreak of Severe Acute Respiratory Syndrome (SARS), creating recent bankruptcies and uncertainty for the future financial health of the industry. As one pension expert noted, a potentially exacerbating risk in weak industries is the cumulative effect of bankruptcy: if a critical mass of firms go bankrupt and terminate their underfunded pension plans, others, in order to remain competitive, may also declare bankruptcy to avoid the cost of funding their plans. Because the financial condition of both firms and their pension plans can eventually affect PBGC’s financial condition, PBGC tries to determine how many firms are at risk of terminating their pension plans and the total amount of unfunded vested benefits. According to PBGC’s fiscal year 2002 estimates, the agency is at potential risk of taking over $35 billion in unfunded vested benefits from plans that are sponsored by financially weak companies and could terminate. Almost one-third of these unfunded benefits, about $11.4 billion, are in the airline industry. Additionally, PBGC estimates that it could become responsible for over $15 billion in shutdown benefits in PBGC-insured plans. PBGC uses a model called the Pension Insurance Modeling System (PIMS) to simulate the flow of claims to the single-employer program and to project its potential financial condition over a 10-year period. This model produces a very wide range of possible outcomes for PBGC’s future net financial position. To be viable in the long term, the single-employer program must receive sufficient income from premiums and investments to offset losses due to terminating underfunded plans. A number of factors could cause the program’s revenues to fall short of this goal or decline outright. For example, fixed-rate premiums would decline if the number of participants covered by the program decreases, which may happen if plans leave the system and are not replaced. Additionally, the program’s financial condition would deteriorate to the extent investment returns fall below the assumed interest rate used to value liabilities. Annual PBGC income from premiums and investments averaged $1.3 billion from 1976 to 2002, in 2002 dollars, and $2 billion since 1988, when variable-rate premiums were introduced. Since 1988, investment income has on average equaled premium income, but has varied more than premium income, including 3 years in which investment income fell below zero. (See fig. 9.) Premium revenue for PBGC would likely decline if the total number of plans and participants terminating their defined-benefit plans exceeded the new plans and participants joining the system. This decline in participation would mean a decline in PBGC’s flat-rate premiums. If more plans become underfunded, this could possibly raise the revenue PBGC receives from variable-rate premiums, but would also be likely to raise the overall risk of plans terminating with unfunded liabilities. Premium income, in 2002 dollars, has fallen every year since 1996, even though the Congress lifted the cap on variable-rate premiums in that year. The decline in the number of plans PBGC insures may cast doubt on its ability to increase premium income in the future. The number of PBGC- insured plans has decreased steadily from approximately 110,000 in 1987 to around 30,000 in 2002. While the number of total participants in PBGC-insured single-employer plans has grown approximately 25 percent since 1980, the percentage of participants who are active workers has declined from 78 percent in 1980 to 53 percent in 2000. Manufacturing, a sector with virtually no job growth in the last half century, accounted for almost half of PBGC’s single-employer program participants in 2001, suggesting that the program needs to rely on other sectors for any growth in premium income. (See fig 10.) In addition, a growing percentage of plans have recently become hybrid plans, such as cash-balance plans, that incorporate characteristics of both defined-contribution and defined- benefit plans. Hybrid plans are more likely than traditional defined-benefit plans to offer participants the option of taking benefits as a lump-sum distribution. If the proliferation of hybrid plans increases the number of participants leaving the program by taking lump sums instead of retirement annuities, over time this would reduce the number of plan participants, thus potentially reducing PBGC’s flat-rate premium revenue.Unless something reverses these trends, PBGC may have a shrinking plan and participant base to support the program in the future and that base may be concentrated in certain, potentially more vulnerable industries. Even more problematic than the possibility of falling premium income may be that PBGC’s premium structure does not reflect many of the risks that affect the probability that a plan will terminate and impose a loss on PBGC. While PBGC charges plan sponsors a variable-rate premium based on the plan’s level of underfunding, premiums do not consider other relevant risk factors, such as the economic strength of the sponsor, plan asset investment strategies, the plan’s benefit structure, or the plans demographic profile. Because these affect the risk of PBGC having to take over an underfunded pension plan, it is possible that PBGC’s premiums will not adequately and equitably protect the agency against future losses. The recent terminations of Bethlehem Steel, Anchor Glass, and Polaroid, plans that paid no variable-rate premiums shortly before terminating with large underfunded balances, lend some evidence to this possibility. Sponsors also pay flat-rate premiums in addition to variable-rate premiums, but these reflect only the number of plan participants and not other risk factors that affect PBGC’s potential exposure to losses. Full- funding limitations may exacerbate the risk of underfunded terminations by preventing firms from contributing to their plans during strong economic times when asset values are high and firms are in the best financial position to make contributions. It may also be difficult for PBGC to diversify its pool of insured plans among strong and weak sponsors and plans. In addition to facing firm- specific risk that an individual underfunded plan may terminate, PBGC faces market risk that a poor economy may lead to widespread underfunded terminations during the same period, which potentially could cause very large losses for PBGC. Similarly, PBGC may face risk from insuring plans concentrated in vulnerable industries that may suffer bankruptcies over a short time period, as has happened recently in the steel and airline industries. One study estimates that the overall premiums collected by PBGC amount to about 50 percent of what a private insurer would charge because its premiums do not account for this market risk. The net financial position of the single-employer program also depends heavily on the long-term rate of return that PBGC achieves from the investment of the program’s assets. All else equal, PBGC’s net financial condition could improve if its total net return on invested assets exceeded the discount rate it used to value its liabilities. For example, between 1993 and 2000 the financial position of the single-employer program benefited from higher rates of return on its invested assets and its financial condition improved. However, if the rate of return on assets falls below the discount rate, PBGC’s finances would worsen, all else equal. As of September 30, 2002, PBGC had approximately 65 percent of its single- employer program investments in U.S. government securities and approximately 30 percent in equities. The high percentage of assets invested in Treasury securities, which typically earn low yields because they are considered to be relatively “risk-free” assets, may limit the total return on PBGC’s portfolio. Additionally, PBGC bases its discount rate on surveys of insurance company group annuity prices, and because PBGC invests differently than do insurance companies, we might expect some divergence between the discount rate and PBGC’s rate of return on assets. PBGC’s return on total invested funds was 2.1 percent for the year ending September 30, 2002, and 5.8 percent for the 5-year period ending on that date. For fiscal year 2002, PBGC used an annual discount rate of 5.70 percent to determine the present value of future benefit payments through 2027 and a rate of 4.75 percent for payments made in the remaining years. The magnitude and uncertainty of these long-term financial risks pose particular challenges for the PBGC’s single-employer insurance program and potentially for the federal budget. In 1990, we began a special effort to review and report on the federal program areas we considered high risk because they were especially vulnerable to waste, fraud, abuse, and mismanagement. In the past, we considered PBGC to be on our high-risk list because of concerns about the program’s viability and about management deficiencies that hindered that agency’s ability to effectively assess and monitor its financial condition. The current challenges to PBGC’s single-employer insurance program concern immediate as well as long-term financial difficulties, which are more structural weaknesses rather than operational or internal control deficiencies. Nevertheless, because of serious risks to the program’s viability, we have placed the PBGC single-employer insurance program on our high-risk list. Several types of reforms might be considered to reduce the risks to the single-employer program’s long-term financial viability. These reforms could be made to strengthen funding rules applicable to poorly funded plans; improve the availability of information about plan investments, termination funding status, and program guarantees. Several variations exist within these options. GAO-03-313. more to their plan than is necessary to cover accrued future benefits.Raising these limitations might result in pension plans being better funded, decreasing the likelihood that they will be underfunded should they terminate. Modifying certain guaranteed benefits could decrease losses incurred by PBGC from underfunded plans. This approach could preserve plan assets by preventing additional losses that PBGC would incur when a plan is terminated. However, participants would lose benefits provided by some plan sponsors. ERISA could be amended to: Phase in the guarantee of shutdown benefits. PBGC is concerned about its exposure to the level of shutdown benefits that it guarantees. Shutdown benefits provide additional benefits, such as significant early retirement benefit subsidies to participants affected by a plant closing or a permanent layoff. Such benefits are primarily found in the pension plans of large unionized companies in the auto, steel, and tire industries. In general, shutdown benefits cannot be adequately funded before a shutdown occurs. Phasing in guarantees from the date of the applicable shutdown could decrease the losses incurred by PBGC from underfunded plans.However, modifying these benefits would reduce the early retirement benefits for participants who are in plans with such provisions and are affected by a plant closing or a permanent layoff. Dislocated workers, particularly in manufacturing, may suffer additional losses from lengthy periods of unemployment or from finding reemployment only at much lower wages. Expand restrictions on unfunded benefit increases. Currently, plan sponsors must meet certain conditions before increasing the benefits of plans that are less than 60 percent funded. Increasing this threshold, or restricting benefit increases or accruals when plans reach the threshold, could decrease the losses incurred by PBGC from underfunded plans. Plan sponsors have said that the disadvantage of such changes is that they would limit an employer’s flexibility with regard to setting compensation, making it more difficult to respond to labor market developments. For example, a plan sponsor might prefer to offer participants increased pension payments or shutdown benefits instead of offering increased wages because pension benefits can be deferred—providing time for the plan sponsor to improve its financial condition—while wage increases have an immediate effect on the plan sponsor’s financial condition. PBGC’s premium rates could be increased or restructured to improve PBGC’s financial condition. Changing premiums could increase PBGC’s revenue or provide an incentive for plan sponsors to better fund their plans. However, premium changes that are not based on the degree of risk posed by different plans may prompt financially healthy companies to exit the defined-benefit system and discourage other plan sponsors from entering the system. Various actions could be taken to reduce guaranteed benefits. ERISA could be amended to: Increase or restructure variable-rate premium. The current variable- rate premium of $9 per $1,000 of unfunded liability could be increased. The rate could also be adjusted so that plans with less adequate funding pay a higher rate. Premium rates could also be restructured based on the degree of risk posed by different plans, which could be assessed by considering the financial strength and prospects of the plan’s sponsor, the risk of the plan’s investment portfolio, participant demographics, and the plan’s benefit structure—including plans that have lump-sum, shutdown benefit, and floor-offset provisions. One advantage of a rate increase or restructuring is that it might improve accountability by providing for a more direct relationship between the amount of premium paid and the risk of underfunding. A disadvantage is that it could further burden already struggling plan sponsors at a time when they can least afford it, or it could reduce plan assets, increasing the likelihood that underfunded plans will terminate. A program with premiums that are more risk-based could also be more challenging for PBGC to administer. Increase fixed-rate premium. The current fixed rate of $19 per participant annually could be increased. Since the inception of PBGC, this rate has been raised four times, most recently in 1991 when it was raised from $16 to $19. Such increases generally raise premium income for PBGC, but the current fixed-rate premium has not reflected the changes in inflation since 1991. By indexing the rate to the consumer price index, changes to the premium would be consistent with inflation. However, any increases in the fixed-rate premium would affect all plans regardless of the adequacy of their funding. Improving the availability of information to plan participants and others about plan investments, termination funding status, and PBGC guarantees may give plan sponsors additional incentives to better fund their plans, making participants better able to plan for their retirement. ERISA could be amended to: Disclose information on plan investments. Information on the allocation of plan investments among asset classes—such as equity or fixed income—is available from Form 5500s prepared by plan sponsors, but that information is not affirmatively furnished to participants and beneficiaries. Additionally, some plan investments may be made through common and collective trusts, master trusts, and registered investment companies, and asset allocation information for these investments might need to be obtained from Form 5500s prepared by those entities or from their prospectuses. Improving the accessibility of plan asset allocation information may give plan sponsors an incentive to increase funding of underfunded plans or limit riskier investments. Moreover, only participants in plans below a certain funding threshold receive annual notices regarding the funding status of their plans, and the information plans must currently provide does not reflect how the plan’s assets are invested. One way to enhance notices provided to participants could be to include information on how much of plan assets are invested in the sponsor’s own securities. This would be of concern because should the sponsor becomes bankrupt, the value of the securities could be expected to drop significantly, reducing plan funding. Although this information is currently provided in the plan’s Form 5500, it is not readily accessible to participants. Additionally, if the defined-benefit plan has a floor- offset arrangement and its benefits are contingent on the investment performance of a defined-contribution plan, then information provided to participants could also disclose how much of that defined- contribution plan’s assets are invested in the sponsor’s own securities. Disclose plan termination funding status. Under current law, sponsors are required to report a plan’s current liability for funding purposes, which often can be lower than termination liability. In addition, only participants in plans below a certain funding threshold receive annual notices of the funding status of their plans. As a result, many plan participants, including participants of the Bethlehem Steel pension plan, did not receive such notifications in the years immediately preceding the termination of their plans. Expanding the circumstances under which sponsors must notify participants of plan underfunding might give sponsors an additional incentive to increase plan funding and would enable more participants to better plan their retirement. Under the administration’s proposal, all sponsors would be required to disclose the value of pension plan assets on a termination basis in their annual reporting. The administration proposes that all companies disclose the value of their defined benefit pension plan assets and liabilities on both a current liability and termination liability basis in their Summary Annual Report. Disclose benefit guarantees to additional participants. As with the disclosure of plan funding status, only participants of plans below the funding threshold receive notices on the level of program guarantees should their plan terminate. Termination of a severely underfunded plan can significantly reduce the benefits participants receive. For example, 59-year old pilots were expecting annual benefits of $110,000 per year on average when the U.S. Airways plan was terminated in 2003, while the maximum PBGC-guaranteed benefit at age 60 is $28,600 per year. Expanding the circumstances under which plan sponsors must notify participants of PBGC guarantees may enable more participants to better plan for their retirement. Additionally, in 1997, we reported that the current cash-based budget for federal insurance programs, such as the single-employer pension insurance program generally provides incomplete and misleading information on the cost and fiscal impact of those programs. We stated that accrual-based reporting would recognize the cost of the insurance commitment when the decision is made to provide the insurance, regardless of when the cash flows occur. This earlier recognition of the cost of the government’s commitment would, among other things, provide an opportunity to control costs and build budget reserves for future claims. However, we also reported that agencies, such as PBGC, might need to develop and test methodologies to generate the risk-assumed cost estimates critical to the successful implementation of accrual-based budgeting for insurance programs. In its comments on our report, OMB stated that, while it agreed with our conclusions and would like to pursue such improvements, it was not doing so because it did not have the expertise that would be required. Given the record losses that the single- employer pension insurance program sustained in 2002 and the deteriorating financial condition of PBGC it is more important than ever to acquire the necessary expertise and invest in the development of loss estimation methodologies and tools. While the recent decline in the single-employer program’s financial condition is not an immediate crisis, threats to the program’s long-term viability should be addressed. The insolvency of PBGC potentially threatens the retirement security of millions of Americans because termination of severely underfunded plans can significantly reduce the benefits participants receive. It also poses risks to the general taxpaying public who ultimately would be made responsible for paying benefits that PBGC is unable to afford. These risks require that meaningful, if perhaps difficult, steps be taken that improve the long-term funding status of plans and accountability of plan sponsors, especially those that represent a clear risk to PBGC and plan participants and their beneficiaries. In contrast, reforms intended to provide immediate relief to struggling plan sponsors— such as exempting plans from the additional funding requirement or increasing the discount rate—might actually increase the risk that plan sponsors terminate with severely underfunded plans in the not so distant future if the economic fortunes of those sponsors do not improve. The factors contributing to the deterioration of PBGC’s financial condition go beyond the effects of the recent economic downturn. For example, current funding rules do not provide adequate protection to PBGC or workers and retirees against losses from financially weak sponsors with significantly unfunded benefits, leaving PBGC to pay benefits at least to guaranteed levels. In addition, PBGC guarantees other types of benefits, such as shutdown benefits, that employers have promised their employees but are not required to fund until shutdown occurs. Furthermore, the premiums paid by pension sponsors to participate in the single-employer program do not account for all the risks posed by plans and, therefore, some sponsors may not be paying enough to compensate PBGC for the risks it undertakes. Although these issues can affect employee retirement funds, employers who are going bankrupt may not be required to notify pension participants of the funding status of their pensions, leaving participants unable to plan for a future that may include less income than they were anticipating. In addition to the reforms in the administration’s proposal, the Treasury Department, Labor Department, and PBGC are considering several areas— funding rules, actuarial assumption, and other areas such as PBGC premiums—for reform. However, the challenges facing PBGC suggest that a broader, more comprehensive response is needed. For example, as we stated in an earlier report, the interest rate used for current liability calculation should reflect the group annuity purchase rate. However, any changes to the interest rate should consider related provisions such as averaging, minimum and maximum rates, and changes to the mortality table. Furthermore, irrespective of the discount rate chosen, differences in plan cash flows should be given consideration in making any changes to the current funding standards. Without a comprehensive approach, efforts to improve the long-term financial condition of PBGC may not be effective. Given the multidimensional and serious nature of the financial risks to PBGC’s single-employer insurance program, to millions of pension plan participants and potentially to the federal budget, the Congress should consider pension reform that is comprehensive in scope and balanced in effect. Such a comprehensive response should include changes to strengthen plan funding, especially for underfunded plans, and improve the transparency of plan information as well as consider proposals to restructure program guarantees, for example those concerning shutdown benefits. In addition, PBGC’s premium structure should be re-examined to see whether premiums can better reflect the risk posed by various plans to the pension system. In any case, reforms in these areas should be based on a thorough analysis of their effects on the potentially competing interests of protecting retirees’ pensions and minimizing the burden on sponsors. Essential elements of this reform would include proposals to require plans to calculate liabilities on a termination basis and disclose this information to all participants annually. Particularly with regard to disclosure, the Congress should consider requiring that all participants receive information about plan investments and the minimum benefit amount that PBGC guarantees should their plan be terminated. To improve the transparency of the potential cost to the government and taxpayers of the PBGC’s pension guarantees, the Congress may also wish to encourage the development and reporting of accrual based risk- assumed cost estimates in the federal budget in conjunction with the current cash-based estimates. Such forward looking estimates could more clearly reflect the financial condition of the program and provide information and incentives necessary to assess the future implications of programmatic decisions. We provided a draft of this report to Labor, Treasury, and PBGC. PBGC also provided written comments, which appear in appendix V, that incorporate comments from the Treasury and Labor Departments and represent the views of the Commerce Department. Labor, Treasury, and PBGC also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the Secretary of Labor, the Secretary of the Treasury, and the Executive Director of the PBGC, 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 or Charles A. Jeszeck at (202) 512-7036. Other contacts and acknowledgments are listed in appendix VI. To identify the changes in the financial condition of the single-employer program, we reviewed and analyzed Pension Benefit Guaranty Corporation (PBGC) financial statements for 1991 through 2002, and obtained additional financial information on the program from PBGC for 1974 through 1990. To identify the factors that contributed to recent changes in the single-employer program’s financial condition, we discussed with PBGC officials, and examined annual reports and other available information related to, the funding and termination of three pension plans: the Anchor Glass Container Corporation Service Retirement Plan, the Pension Plan of Bethlehem Steel Corporation and Subsidiary Companies, and the Polaroid Pension Plan. We selected these plans because they represented the largest losses to PBGC in their respective industries in fiscal year 2002. PBGC estimates that, collectively, the plans represented over $4 billion in losses to the program at plan termination. We also reviewed analyses of the program’s financial condition and plan funding issues prepared by actuaries and other pension professionals. To examine the difference between termination and current liability, and identify the factors that cause that difference, we obtained summary level termination liability data, and limited data for specific plans, submitted by plans to PBGC under section 4010 of the Employee Retirement and Income Security Act (ERISA) of 1974, as amended. To identify the primary risks to the long-term viability of the program and options to address the challenges facing the single-employer program, we interviewed pension experts at PBGC, at the Employee Benefits Security Administration (EBSA) of the Department of Labor, and in the private sector and reviewed analyses and other documents provided by them. These include data on PBGC’s income, cash flows, premium structure and base, investments, and assets and liabilities. To obtain additional information as to the risks facing PBGC from certain industries, we discussed with PBGC, and reviewed annual and actuarial reports for, the 2003 distress termination of the U.S. Airways pension plan for pilots. To determine what changes to the single-employer program might be considered to reduce the risks that it faces, we reviewed and analyzed proposals from the administration, the American Academy of Actuaries, and various pension plan organizations and legislative proposals introduced during the 108th Congress. We also spoke with officials from PBGC, EBSA, and the Department of the Treasury; research actuaries; and individuals from organizations that represent plan sponsors. We performed our work at PBGC and EBSA from April through September 2003 in accordance with generally accepted government auditing standards. As part of the ERISA, the Congress established PBGC to administer the federal insurance program. Since 1974, the Congress has amended ERISA to improve the financial condition of the insurance program and the funding of single-employer plans (see table 1). On July 8, 2003, the U.S. Treasury Department announced “The Administration Proposal to Improve the Accuracy and Transparency of Pension Information.” The proposal presented four areas of change in order to improve pension security for Americans: (1) the accuracy of the pension liability discount rate, (2) the transparency of pension plan information, (3) safeguards against pension underfunding, and (4) comprehensive funding reforms. Subsequent congressional testimony by the Treasury Department and the U.S. Labor Department highlighted other areas of the pension system that the administration is considering reforming. 1. Improving the Accuracy of the Pension Liability Discount Rate Sponsors must use a discount rate to calculate the current value of their plans’ pension obligations and of lump-sum withdrawals. Currently, this rate is based on the rate of 30-year Treasury bonds, securities that have not been newly issued since 2001. There is concern that too high a discount rate would lead to pension underfunding, while too low a rate would cause businesses to have to put more money into their pension funds to pay promised benefits. The administration recommended replacing the 30-year Treasury bond rate with a yield curve based on high- quality, long-term corporate bond rates. It claims that pension discount rates should reflect the risk embodied in assets held by insurance companies to make group annuity payments, and that these assets consists largely of highly rated corporate-issued bonds. Similarly, the administration proposed using the same yield curve to discount lump-sum distributions from plans. Currently, lump sums are calculated using the 30-year Treasury rate, a rate that may differ from the one used to calculate current plan liabilities. The administration proposal would have plans discounting lump sums and plan liabilities at the same rate. For both lump sums and liabilities, the administration proposes phasing in the yield curve beginning in the third year, with the phase-in complete by the fifth year. Sponsors would compute liabilities by choosing rates along the yield curve based on when the plan is due to make benefit payments. Thus, sponsors would discount benefits due farther in the future at a longer-term rate than those paid in the near future. Since long-term rates tend to exceed short- term rates, this would imply that plans with a higher proportion of older workers and retirees would use lower rates to discount their liabilities than those with younger workers. Similarly, the proposal would also have plans use a discount rate along the yield curve for lump sums that reflects the life expectancy of retirees, with lump sums for older workers discounted at a shorter-term rate than those for younger workers. To further increase pension discount rate accuracy, the administration further proposed reducing the use of smoothing in calculating plan liabilities. Sponsors currently use a discount rate on plan liabilities based on a 4-year moving average of interest rates. The administration claimed that such smoothing reduces the accuracy of liability measures because the discount rate is not necessarily based on current market conditions, which may mask changes in plan solvency. The proposal would reduce the smoothing period, over a 3-year phase-in beginning in the third year, to a 90-day moving average. 2. Increasing the Transparency of Pension Plan Information To increase transparency, the administration proposal calls for plans to disclose liabilities on a termination basis, as well as on a current liability basis, in their annual reporting. Currently, a sponsor must disclose its plan’s current liability, which is intended to reflect the value of liabilities in an ongoing plan, using a discount rate based on the 30-year Treasury bond rate. Termination liability reflects the cost to a company of paying an insurer to meet its pension obligations should the plan terminate. This is calculated by using a PBGC interest factor, which is based on a survey of insurance companies and may reflect group annuity purchase rates, rather than by using the 30-year Treasury bond rate. Termination liability is often higher than current liability. The proposal would also have pension plans with more than $50 million of underfunding make public their plan assets, liabilities, and funding ratios, information that PBGC already collects. Currently, section 4011 of the ERISA, as amended, requires that sponsors of plans that are less than 90 percent funded send notices to workers and retirees describing the plan’s funding status and the limits of PBGC guarantees. The proposal would also have plans disclose liabilities calculated by using a duration-matched yield curve, even before the yield curve is fully phased in for funding purposes. That is, sponsors would disclose the value of their liabilities by using a discount rate on the yield curve that reflects the duration of its plan liabilities, with a plan with more benefits owed far in the future using a longer-term discount rate than one with more benefits owed in the near future. 3. Strengthening Safeguards against Pension Underfunding Currently, a plan generally may not provide unfunded or unsecured benefit increases greater than $10 million if the plan’s funding ratio falls below 60 percent of current liability. To strengthen pension funding, the administration proposed prohibiting benefit increases by the plan sponsored by firms with a credit rating below investment grade and with a funding ratio below 50 percent of termination, as opposed to current liability. In addition, the plan would also be frozen—with no accruals resulting from additional service, age or salary growth—and lump-sum payments would also be prohibited unless the employer contributed cash or provided security to fully fund any added benefits. For firms already in bankruptcy, the administration would fix the benefit guarantee as of the date the plan sponsor filed for bankruptcy. 4. Supporting Comprehensive Funding Reforms In addition to the reforms above, the proposal states that the administration is exploring additional reforms to improve the funding status of defined benefit plans. These include: Changing rules regarding minimum contributions of underfunded plans. Raising limits on tax-deductible contributions. Limiting the use of credit balances. Reducing new benefit amortization periods. Updating mortality tables. Making retirement assumptions accurate. Making lump-sum estimates accurate. Limit or eliminate certain unfunded benefit guarantees. Restructuring PBGC premiums to reflect risk. Applying the same principles of accuracy and transparency to the multiemployer pension program. A plan’s termination liability measures the value of accrued benefits using assumptions appropriate for a terminating plan, while its current liability measures the value of accrued benefits using assumptions specified in applicable laws and regulations. Interest rates are a key assumption in calculating the present value of future pension benefits, and the degree that the interest rates used to calculate termination and current liabilities differ would contribute to the degree that the two liability measures differ. Generally: Liabilities determined on a termination basis should be calculated using an interest rate that reflects the factors that insurance companies consider in pricing the group annuities they sell to pension plan sponsors who terminate their defined benefit plans. However, information needed to determine actual group annuity purchase rates is not available since annuity purchases are private transactions between insurance companies and purchasers. Instead, under PBGC regulations, sponsors who are required by ERISA, as amended, to report plan termination liability information to PBGC, calculate that liability using a rate published by PBGC. PBGC determines that rate based on surveys of insurance companies performed by the American Council of Life Insurers. Current liabilities are to be calculated using an interest rate from within a range of permissible rates based on 30-year Treasury rates, as specified in the Internal Revenue Code. Figure 11 shows that funding ratios using termination liabilities were typically lower than funding ratios using current liabilities, for plans reporting termination liabilities to PBGC under section 4010 of ERISA, as amended. In 1996, for example, the average funding ratio based on termination liability was 69 percent, but the average funding ratio based on current liability was 99 percent. Termination liability funding ratios are typically lower than current liability funding ratios because termination liabilities are typically greater than current liabilities. Figure 12 shows that the PBGC rate used to calculate termination liabilities, and the maximum and minimum rates used to calculate current liabilities, varied considerably 1996 through 2001. In the first 3 years, PBGC termination liability rates were typically less than current liability rates, but in the following 2 years, termination liability rates were typically higher than current liability rates. Lower interest rates result in higher liability values, and higher rates result in lower liability values. As a result, when the PBGC termination rate was high, relative to the current liability rate, termination liabilities would be reduced relative to current liabilities, causing the gap between the two funding ratios to narrow, as it did in 2001. In addition to those named above, Joseph Applebaum, Mark M. Glickman, Corinna Nicolaou, David Noguera, John M. Schaefer, George A. Scott, and Roger J. Thomas made important contributions to this report.

Summary: More than 34 million participants in 30,000 single-employer defined benefit pension plans rely on a federal insurance program managed by the Pension Benefit Guaranty Corporation (PBGC) to protect their pension benefits, and the program's long-term financial viability is in doubt. Over the last decade, the program swung from a $3.6 billion accumulated deficit (liabilities exceeded assets), to a $10.1 billion accumulated surplus, and back to a $3.6 billion accumulated deficit, in 2002 dollars. Furthermore, despite a record $9 billion in estimated losses to the program in 2002, additional severe losses may be on the horizon. PBGC estimates that financially weak companies sponsor plans with $35 billion in unfunded benefits, which ultimately might become losses to the program. The single-employer pension insurance program returned to an accumulated deficit in 2002 largely due to the termination, or expected termination, of several severely underfunded pension plans. Factors that contributed to the severity of the plans' underfunded condition included a sharp stock market decline, which reduced plan assets, and an interest rate decline, which increased plan termination costs. For example, PBGC estimates losses to the program from terminating the Bethlehem Steel pension plan, which was nearly fully funded in 1999 based on reports to the Internal Revenue Service (IRS), at $3.7 billion when it was terminated in 2002. The plan's assets had decreased by over $2.5 billion, while its liabilities had increased by about $1.4 billion since 1999. The single-employer program faces two primary risks to its long-term financial viability. First, the large losses in 2002 could continue or accelerate if, for example, structural problems in particular industries result in additional bankruptcies. Second, revenue from premiums and investments might be inadequate to offset program losses. Participant-based premium revenue might fall, for example, if the number of program participants decreases. Because of these risks, GAO has recently placed the single-employer insurance program on its high-risk list of agencies with significant vulnerabilities to the federal government. While the recent decline in the single-employer program's financial condition is not an immediate crisis, the threats to the program's long-term viability should be addressed. Several reforms might be considered to reduce the risks to the program's long-term financial viability. These include strengthening funding rules applicable to poorly funded plans, modifying program guarantees, restructuring premiums, and improving the availability of information about plan investments, termination funding, and program guarantees. Under each reform, several possible actions could be taken. For example, one way to modify program guarantees is to phase-in certain unfunded benefits, such as "shutdown benefits," which may provide significant early retirement benefit subsidies to participants affected by a plant closing or a permanent layoff.