Employers sponsor two broad categories of pension plans: (1) defined benefit plans (DB)—in which employers generally maintain a fund to provide a specified level of monthly retirement income based on a formula specified in the plan—or (2) defined contribution plans (DC)—in which retirement income is based on employer and employee contributions and the performance of investments in individual employee accounts. Historically, DB benefits have typically been paid as a lifetime annuity (although lump sum options have increased in prevalence). Properly- funded DB plans can shield participants from numerous risks that participants face in DC plans, including eligible employees not enrolling in the plan; employees enrolling but contributing amounts likely to be insufficient, together with other sources of retirement income, to provide adequate overall retirement income; “leakage” of plan assets through withdrawals for purposes other than retirement; investment risks; and the “longevity risk” of outliving one’s savings. Participants in DC plans must save a sufficient amount through contributions and investment returns to meet future retirement needs, and must adequately manage both the “accumulation phase” of building up assets prior to retirement and the “decumulation phase” of spending down assets during retirement. On the other hand, while DB plans can shield participants from numerous risks, they can sometimes be less advantageous than DC plans for workers who change employers one or more times before retirement. There are several major DB-plan sectors in the United States: (1) “public plans,” which cover state and local government employees; (2) private sector single-employer plans; (3) private sector multiemployer plans, which generally cover union employees who work for participating employers in a particular trade or industry; and (4) nonqualified plans, which do not meet the applicable requirements for tax-qualification under the Internal Revenue Code and are typically maintained by employers primarily for the purpose of providing deferred compensation for select groups of management or highly-compensated employees. We will not discuss nonqualified plans in this report because sponsors of such plans typically do not have to satisfy laws and regulations requiring a minimum level of benefits or contributions. For most private sector single-employer and multiemployer pension plans, the Pension Benefit Guaranty Corporation (PBGC) insures plan benefits, up to certain statutory limits, under separate insurance programs for these two types of plans. PBGC was established under ERISA to insure the pension benefits of participants in qualified DB plans and pay participants up to the statutory limits, should their plans be terminated with insufficient funds or become insolvent. The statutory limits on insured benefits are much lower for multiemployer plans than for single- employer plans. In recent years, PBGC has faced large net accumulated deficits coupled with future risks posed by plan sponsors and their plans that have threatened its solvency. PBGC recently reported that while its single-employer program is likely to remain in net deficit over the next 10 years, some improvement is projected. However, there is significant variation in projected results under PBGC’s single- employer Pension Insurance Modeling System, with a worsening of the financial position of the single-employer program also possible. In contrast, the financial status of some multiemployer plans is deteriorating. PBGC reports that the insurance fund for its multiemployer program is more likely than not to be exhausted within the next 8 years, and 90 percent likely to be exhausted by 2025, which would result in benefits for participants in insolvent plans being cut to a small fraction of current guarantees. PBGC uses a discount rate assumption, discussed later, to determine the present value of projected future pension benefits to be paid to the participants of single-employer plans it has taken over, and the present value of projected financial assistance payments to multiemployer plans. In the public sector, DB plans still provide primary pension benefits for most state and local government workers. In contrast, DB plan coverage in the private sector has declined as these employers continued to shift away from sponsoring DB plans toward sponsoring DC plans. About 78 percent of state and local government employees participated in DB plans in 2013, compared with only 16 percent of private sector employees. few states offer DC or other types of plans as the primary retirement plan. For the same period, there were about 19 million state and local government employees and over 106 million private sector employees. See U.S. Department of Labor, U.S. Bureau of Labor Statistics, National Compensation Survey: Employee Benefits in the United States, March 2013 (Washington, D.C.: Sept. 2013). Social Security taxes on these earnings.pension benefits for such noncovered employees are generally higher than for employees covered by Social Security, and employee and employer contributions are generally higher as well. Also, unlike private sector employees with DB plans, state and local government employees generally contribute to their DB plans. As a result, employer-provided ERISA established minimum standards for pension plans in the private sector and, through the Internal Revenue Code, provides extensive rules on the federal tax effects of transactions associated with employee benefit plans. ERISA protects the interests of employee benefit plan participants and their beneficiaries by requiring the disclosure of financial and other information concerning the plan, establishing standards of conduct for plan fiduciaries, and providing for appropriate remedies and access to the federal courts, among other things. Since its enactment in 1974, ERISA has been amended many times, including by the Pension Protection Act of 2006 (PPA), which changed minimum funding standards for private sector single-employer defined benefit pension plans by, among other things, changing the measurement of a plan’s funding target (including the discount rate used) and shortening the period of time over which the funding target should be attained. Minimum funding standard provisions have since been further revised by subsequent legislation. PPA also included provisions requiring private sector multiemployer plans in poor financial shape to take action to improve their financial condition over the long term. The federal government has not imposed the same funding and reporting requirements on state and local government pension plans as it has on private sector pension plans. State and local government plans are specifically exempted from ERISA funding requirements, in part, because of the presumption that state and local governments can rely on their taxing power to pay for DB plan benefits. These plans are also not insured by the PBGC as private DB plans are. However, in order for participants to receive preferential tax treatment (that is, for contributions and investment earnings to be tax-deferred), state and local government pension plans must comply with certain requirements of the Internal Revenue Code. State and local governments also follow different standards than the private sector for financial reporting. The accounting standards for financial reporting by public and private sector pension plan sponsors are promulgated by two independent organizations. For the public sector, the GASB has been designated by the American Institute of Certified Public Accountants as the accounting standard-setter to establish generally accepted accounting principles for U.S. state and local governmental entities. GASB’s standards are not federal laws or regulations and GASB does not have enforcement authority. However, compliance with its standards is required through laws of some individual states and is integrated into the audit process, whereby auditors render opinions on the fair presentation of state and local governments’ financial statements in accordance with generally accepted accounting principles. For the private sector, the FASB has been designated by the American Institute of Certified Public Accountants as the accounting standard-setter to establish generally accepted accounting principles for nongovernmental entities. Those standards are officially recognized as “generally accepted” for the purposes of federal securities laws by the Securities and Exchange Commission (SEC), and companies registered with the SEC are required to comply with those standards in preparing financial statements filed with the SEC. In addition to the standards above, actuarial standards of practice are promulgated by the Actuarial Standards Board, whose mission is to identify what an actuary should consider, document, and disclose when performing an actuarial assignment. Actuaries work with plans to develop economic and demographic assumptions. For DB pension plans, the discount rate is used in converting projected future benefits into their “present value” and is an integral part of estimating a plan’s liabilities. A pension liability generally includes two pieces: (1) the present value of all projected future benefits for current retirees, as well as for former employees not yet retired but who have a vested right to a future pension, plus (2) the present value of a portion of the projected future benefits for current employees, based on their service to date (with each additional year of service adding to the liability, such that approximately the full cost of benefits is accrued when employees reach retirement). The increase in the liability that arises from an additional year of employee service is called the “normal cost,” which can also be thought of as the pension cost attributable to employees’ work in a single year. Both the liability and the normal cost depend on the discount rate, as they both represent the present value of some portion of future benefits. The higher the discount rate, the lower the plan’s estimate of its liability and normal cost (see fig. 1). In addition, the further into the future that the projected benefit payments occur, the more pronounced is the effect of the discount rate, because it is applied over a greater number of years. As a result, a pension liability for current workers is typically more sensitive to changes in the discount rate than is a pension liability for retirees. Methods for determining a plan’s discount rate can be categorized into two primary approaches—the assumed-return and bond-based approaches. The first approach—the “assumed-return approach”— bases the discount rate on a long-term assumed average rate of return on the pension plan’s assets (which includes expected long-term stock market returns to the extent plan assets are so invested, and which, in recent years, and as employed by U.S. public plan sponsors, often would produce discount rates between 7 and 8 percent).