[Senate Hearing 111-153]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 111-153

       NO GUARANTEES: AS PENSION PLANS CRUMBLE, CAN PBGC DELIVER?

=======================================================================

                                HEARING

                               before the

                       SPECIAL COMMITTEE ON AGING
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             WASHINGTON, DC

                               __________

                              MAY 20, 2009

                               __________

                            Serial No. 111-6

         Printed for the use of the Special Committee on Aging



  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
                               index.html




                  U.S. GOVERNMENT PRINTING OFFICE
52-779 PDF                WASHINGTON : 2009
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC 
area (202) 512-1800 Fax: (202) 512-2104  Mail: Stop IDCC, Washington, DC 
20402-0001







                       SPECIAL COMMITTEE ON AGING

                     HERB KOHL, Wisconsin, Chairman
RON WYDEN, Oregon                    MEL MARTINEZ, Florida
BLANCHE L. LINCOLN, Arkansas         RICHARD SHELBY, Alabama
EVAN BAYH, Indiana                   SUSAN COLLINS, Maine
BILL NELSON, Florida                 BOB CORKER, Tennessee
ROBERT P. CASEY, Jr., Pennsylvania   ORRIN HATCH, Utah
CLAIRE McCASKILL, Missouri           SAM BROWNBACK, Kansas
SHELDON WHITEHOUSE, Rhode Island     LINDSEY GRAHAM, South Carolina
MARK UDALL, Colorado
MICHAEL BENNET, Colorado
KIRSTEN GILLIBRAND, New York
ARLEN SPECTER, Pennsylvania
                 Debra Whitman, Majority Staff Director
             Michael Bassett, Ranking Member Staff Director

                                  (ii)




                            C O N T E N T S

                              ----------                              
                                                                   Page
Opening Statement of Senator Herb Kohl...........................     1
Statement of Senator Mel Martinez................................     4

                           Panel of Witnesses

Charles E. F. Millard, Former Director, Pension Benefit Guaranty 
  Corporation, Washington, DC....................................     3
Dallas Salisbury, President & CEO, Employee Benefits Research 
  Institute, Washington, DC......................................     5
Statement of Barbara Bovbjerg, Director, Education, Workforce and 
  Income Security, U.S. Government Accountability Office, 
  Washington, DC.................................................    14
Statement of Rebecca Anne Batts, Inspector General, Pension 
  Benefit Guaranty Corporation, Washington, DC...................    39
Statement of Vincent Snowbarger, Acting Director, Pension Benefit 
  Guaranty Corporation, Washington, DC...........................    80

                                APPENDIX

Testimony submitted by Douglas J. Elliott, Center on Federal 
  Financial Institutions on A Guide to the Pension Benefit 
  Guaranty Corporation...........................................   107

                                 (iii)

  

 
       NO GUARANTEES: AS PENSION PLANS CRUMBLE, CAN PBGC DELIVER?

                              ----------                              --



                        WEDNESDAY, MAY 20, 2009

                                       U.S. Senate,
                                Special Committee on Aging,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 2:10 p.m. in room 
SR-428A, Russell Senate Office Building, Hon. Herb Kohl 
(chairman of the committee) presiding.
    Present: Senators Kohl [presiding], Specter, Martinez, 
Bennett, and McCaskill.

        OPENING STATEMENT OF SENATOR HERB KOHL, CHAIRMAN

    The Chairman. Good afternoon, and thank you all for being 
here today. Today we are going to take a hard look at the 
Pension Benefit Guaranty Corporation, which is responsible for 
insuring the pensions of nearly 44 million Americans. The 
Committee has grave concerns about PBGC's viability and whether 
this agency currently has effective financial oversight.
    Given the state of the economy, the question of PBGC's 
viability is more urgent than ever. One in seven Americans 
count on this agency to pay out their pension in the event that 
their employer is unable to due to bankruptcy. As General 
Motors teeters on the edge of insolvency, hundreds of thousands 
of workers' pensions could soon become the responsibility of 
PBGC, and though Chrysler has managed to maintain its pension 
plan despite filing for bankruptcy, it may only be a matter of 
time before PBGC will have to accept responsibility for that 
pension plan as well.
    PBGC is currently underfunded by over $33 billion, while 
their duty to manage and pay out benefits is expanding. 
Decisions made by PBGC management and a lack of oversight and 
governance by previous PBGC boards have contributed to the 
agency's financial condition. The Government Accountability 
Office has indicated for years that the PBGC board members do 
not have enough time or resources to provide the necessary 
policy direction and oversight.
    In 28 years, the full board has met only 20 times. The fact 
that we could not get a representative of the PBGC board to 
come to this hearing is a prime example of this. But the role 
of PBGC is too crucial to allow its governance to slip through 
the cracks.
    The PBGC Inspector General released a report last week 
detailing allegations that former PBGC Director Charles Millard 
was improperly involved in the awarding of $100 million 
contract to Wall Street firms. But the allegations against Mr. 
Millard are merely a symptom of the bigger problem. I will soon 
be introducing legislation to significantly improve the PBGC 
board's governance oversight structure.
    In the meantime, PBGC should reopen the bidding process for 
the controversial $100 million contract, a process which 
appears to have been improperly influenced the first time 
around. Yesterday, I received a letter from Secretary of Labor 
Hilda Solis, indicating that they are lucky to do so, which I 
will enter into this hearing's record.
    If the contract is not rebid, we will ask GAO Special 
Investigations Unit to assist us in reviewing copies of PBGC-
related communication the committee has obtained from the Wall 
Street firms that won the first contract. Finance Chairman Max 
Baucus and Health Chairman Ted Kennedy, along with Ranking 
Members Chuck Grassley and Mike Enzi, have also noted this 
issue closely and will keep a close watch to ensure that PBGC 
carries out the recommendations of its Inspector General. They 
also have requested a further investigation into Millard's 
involvement with these companies.
    The role of the PBGC is a vital one, now more than ever. 
For 44 million Americans with defined benefit pension plans, 
PBGC is the only thing that stands between the secure 
retirement they have worked so hard for and the prospect of 
living without retirement security. So we must get the PBGC 
back on track or face the possibility of absorbing these 
obligations on behalf of taxpayers all over our country.
    So we thank you all for being here today. We look forward 
to your testimony. I will at this point introduce the witnesses 
for this panel.
    Our first witness will be Charles Millard, the former 
Director of the PBGC. Prior to being appointed as PBGC's 
Director, Mr. Millard held executive positions at investment 
firms, such as Lehman Brothers and Broadway Partners. He was 
also a member of the New York City Council, representing the 
Upper East Side of Manhattan.
    Our next witness will be Dallas Salisbury, the CEO and 
President of the Employee Benefit Research Institute. He's 
considered an expert on economic security and has served on the 
ERISA Advisory Council, the PBGC Advisory Committee, the U.S. 
Advisory Panel on Medicare Education, and the Board of 
Directors of the National Academy of Social Insurance.
    Next we'll be hearing from Barbara Bovbjerg of the U.S. 
Government Accountability Office. Ms. Bovbjerg is a Director of 
the Education Workforce and Income Security team, where she 
oversees evaluative studies on aging and retirement income 
policy, as well as the operators of the Social Security 
Administration, the PBGC, and the Employee Benefit Security 
Administration of the Department of Labor.
    Then we'll hear from Rebecca Anne Batts, the Inspector 
General for the Pension Benefit Guaranty Corporation. As 
Inspector General, she directs the office charged with 
overseeing PBGC's operations. Prior to her appointment, Ms. 
Batts held various senior executive positions at the U.S. 
Department of Transportation's Officer of Inspector General.
    Our witness finally will be Vincent Snowbarger. Mr. 
Snowbarger is the Acting Director of the Pension Benefit 
Guaranty Corporation. Since joining the PBGC in 2002, he has 
served in several executive positions, including Deputy 
Director for Policy, and is currently the Deputy Director for 
Operations.
    Because we're taking testimony with regard to matters of 
fact in this controversy, I'll be asking each of our witnesses 
to take the oath, and so I ask you please to stand and raise 
your right hand.
    [Whereupon, the witnesses were duly sworn.]
    The Chairman. Do you all swear that the testimony you're 
about to give is the truth, the whole truth, and nothing but 
the truth, so help you God? Thank you.
    Mr. Millard, I'll turn to you first. I want to recognize 
that you are here today with your attorneys, and we welcome 
them here also with you. You have an opening statement, Mr. 
Millard.

  TESTIMONY OF CHARLES E.F. MILLARD, FORMER DIRECTOR, PENSION 
          BENEFIT GUARANTY CORPORATION, WASHINGTON, DC

    Mr. Millard. I do not have an opening statement, Mr. 
Chairman.
    The Chairman. Thank you. Mr. Millard, what was your role at 
PBGC, and how long were you employed there?
    Mr. Millard. I've been advised by my counsel that I should 
invoke my constitutional rights and decline to answer any and 
all questions from the committee on this matter, Mr. Chairman.
    The Chairman. Mr. Millard, it has been said that the 
investment strategy you spearheaded at PBGC is overly risky. 
What steps did you take to mitigate the risk associated with 
the strategy?
    Mr. Millard. I've been advised by my counsel, Mr. Chairman, 
that I should invoke my constitutional rights and decline to 
answer any and all questions from the committee on this matter.
    The Chairman. Mr. Millard, the Inspector General has 
reported that you were inappropriately involved in the 
contracting process at PBGC. Would you respond to these 
assertions?
    Mr. Millard. I've been advised by my counsel, Mr. Chairman, 
that I should invoke my constitutional rights and decline to 
answer any and all questions from the committee on this matter.
    The Chairman. We need to be sure that you, and not your 
counsel, are asserting the right, and that you're clear that 
you're invoking your right under the Fifth Amendment against 
self-incrimination, being a witness against yourself, and 
you're not using a formulation that leaves that overly vague. 
You do understand that. I'm sure you do. So we do understand 
from your responses that you will invoke your Fifth Amendment 
right in response to all questions from this committee on this 
subject.
    Mr. Millard. Yes, sir.
    The Chairman. Thank you, Mr. Millard. Let the record 
reflect that you have availed yourself of the privilege 
afforded you under the Fifth Amendment of the Constitution not 
to give testimony that might incriminate you, and you certainly 
have that right. The invocation of that right by every American 
citizen should not and does not impose any guilt.
    The committee respects your constitutional right to decline 
and answer questions on that ground, although we certainly 
would have liked to have been able to hear from you today. You 
are correspondingly excused at this time.
    Mr. Millard. Thank you.
    The Chairman. Thank you, Mr. Millard. Before we move on to 
our next witness, I would like to welcome Mel Martinez, the 
Ranking Member on this committee, and ask him for his 
statement.

       STATEMENT OF SENATOR MEL MARTINEZ, RANKING MEMBER

    Senator Martinez. Thank you very much, Mr. Chairman. Thank 
you very much. I apologize for being a little tardy. The 
Commerce Committee was also meeting. We appreciate your calling 
this hearing today. One of the biggest concerns among seniors 
today is a need to protect their pensions, especially given the 
state of our economy. Every senior has a right to know whether 
they will receive the benefits they were promised. Current 
economic uncertainties has highlighted a need to address the 
risk posed by several large firms teetering on the brink of 
insolvency.
    As lawmakers, we cannot stand by as the fate of the 
pensions of many Americans remains uncertain. Fortunately, most 
pensions are protected by the Pension Benefit Guaranty 
Corporation. The PBGC is the pension manager of last resort and 
has the unenviable task of cleaning up where others have 
failed. Insolvent pensions that are turned over to the PBGC are 
significantly underfunded, leaving the future benefit levels at 
risk.
    What I would like to see is fewer pensions being 
underfunded and fewer pensions taken over by the PBGC. These 
underfunded pensions have resulted in a $409 billion funding 
shortfall in the U.S. pension system. The pensions of those 
working for the Big 3 in Detroit, for instance, which include 
auto manufacturers and the 46 largest suppliers, are 
underfunded by $65 billion, with 2.1 million Americans relying 
on these plans.
    Seniors in Florida are at risk as well. Florida's the home 
to more than 2 million seniors with pensions that could be 
impacted by factors beyond their control, including a depressed 
stock market and relaxed corporate governance.
    How we got here and what led to these pensions being 
underfunded is an open question that is being addressed by 
other committees today. I look forward to hearing from the PBGC 
acting director about what contingency plans are in place in 
the event of further economic collapse. If one or more of the 
Big 3 pensions winds up being taken over by the PBGC, what 
plans are in place to ensure continued solvency and minimal 
disruption to the pensioners?
    The systems we've seen is not healthy in its current form 
of legislation, such as--were to pass, the resulting increase 
in pensions would only perpetuate these underfunded 
multiemployer plans. The issue is only one of many concerns I 
have with the bill.
    Peripheral, but significant, and relevant to the hearing 
today is the controversy involving the Director of PBGC, and we 
have just seen his testimony today, or his inability to testify 
today. While we face uncertainty in the near term, I applaud 
the efforts by the PBGC in the wake of the previous challenges, 
including the collapse of the steel industry. Collectively, we 
can find solutions to these problems without placing a greater 
burden on the taxpayers whose pensions remain insolvent or who 
have no pension at all. Thank you, Mr. Chairman.
    The Chairman. Thank you very much, Senator Martinez. We'll 
now turn to our first witness, Dallas Salisbury, who I said is 
the CEO and President of the Employee Benefit Research 
Institute. We would appreciate if you would keep your remarks 
to 5 minutes. If you have more to enter into the record, we'd 
be happy to do that. Mr. Salisbury.

   STATEMENT OF DALLAS SALISBURY, PRESIDENT & CEO, EMPLOYEE 
          BENEFITS RESEARCH INSTITUTE, WASHINGTON, DC

    Mr. Salisbury. Chairman Kohl, Senator Martinez, it's a 
pleasure to be here. I appreciate the invitation and the 
opportunity to speak on a topic that is very important. As you 
have noted, I started my career in Washington at the Department 
of Labor in the Pension Benefit Guaranty Corporation.
    The Chairman. Is your mic on?
    Mr. Salisbury. It is on. I'll pull it closer. As you well 
know, the PBGC is a guaranty program in its name, and I only 
stress that point because unlike the FDIC and unlike most 
insurers, the PBGC is not in a position on its own to create 
underwriting standards to put funding requirements on plans and 
other things.
    In fact, when I was early at PBGC, we took a study under 
advisement from the Congress called the Contingent Employer 
Liability Insurance Program Study. We went to 102 insurance 
companies around the world, including Lloyd's of London, and 
all of them said that the program designed by the U.S. Congress 
could not be underwritten by any insurer without very 
significant changes, and as a result, that program was repealed 
by the Congress.
    In the early 1980's, as part of a privatization taskforce 
of the advisory council of the PBGC, appointed by then-
President Reagan and chaired by two private sector insurance 
executives, an effort was made to, in fact, privatize PBGC, 
eliminate it as a governmental program, and move it into the 
private market.
    Again, over 100 insurance companies were invited to 
describe to this group the underwriting standards that would be 
necessary to, in essence, insure pension failures and to insure 
essentially the solvency of American corporations. The two 
insurance executives asked the White House to end the taskforce 
efforts once they saw the underwriting standards, because it 
became clear that this program could not be a workable 
insurance program, as traditionally defined. It could be a 
guarantee program, and the title underlines that.
    I note that also, because of one point I make in my 
testimony, which is that one of the primary causes of pension 
unfunded liabilities, and as the PBGC testimony underlines, a 
reason for a $7 billion increase that they've now announced in 
the PBGC deficit is the actions by the Federal Reserve Board. 
The holding down to near zero the interest rates available to 
pension funds and available to the market created hundreds of 
billions of dollars of total system liability.
    So if the government and the Federal Reserve wanted pension 
liabilities to go away, frankly, they would only need to raise 
interest rates, and that would eliminate the $7 billion, plus 
many billions more.
    Thus it is the inability of pension fund sponsors, both to 
control interest rates they use to value liabilities and to 
command the equity markets to go up that led to the issues 
faced today.
    The PBGC, as noted, is responsible for a total system that 
has unfunded liabilities that, by various estimates, ranged 
between $400 and $500 billion. That underlines the future 
challenges that will be faced by the PBGC. But the ultimate and 
most important challenge is whether private employers will 
continue to sponsor defined benefit retirement plans.
    You ask in your question list whether strong employers were 
likely to continue those programs, and I've underlined in the 
testimony that numerous private sector surveys of employers 
suggest that the movement that began 30 years ago away from 
defined benefit plans, toward defined contribution plans, is 
likely to continue in this country, as it is continuing in 
nations around the world.
    Ultimately, those surveys underline that even with the 
Pension Protection Act of 2006's new funding standards, that 
with interest rate fluctuations being managed by the Fed and 
the government and held down, today's papers suggest the Fed 
may hold interest rates to near zero for another two years. 
Should they do that, you can anticipate and project in advance 
there will be significant additional increases in the deficit 
of the PBGC and in the unfunded status of private defined 
benefit pension plans. Those will turn around if and when the 
government changes interest rate policies.
    So, in conclusion, defined benefit plans currently as noted 
provide income to 23 percent of those over age 65. For those 65 
to 69, 19 percent report such income. Average payments are 
$2,500 per year. Medium payments are $9,000 per year. These are 
an important and critical supplement to Social Security and 
must be maintained.
    There is a great deal of discussion about whether the 
pension system can be maintained. The challenge for the 
government is to manage interest rates and the economy while 
recognizing they're intertwining with both PBGC liability and 
pension liability. Thank you, sir.
    [The prepared statement of Mr. Salisbury follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
    The Chairman. Thank you very much, Mr. Salisbury. Next, 
we'll hear from Barbara Bovbjerg of the U.S. Government 
Accountability Office. Ms. Bovbjerg.

 STATEMENT OF BARBARA BOVBJERG, DIRECTOR, EDUCATION, WORKFORCE 
  AND INCOME SECURITY, U.S. GOVERNMENT ACCOUNTABILITY OFFICE, 
                         WASHINGTON, DC

    Ms. Bovbjerg. Thank you, Mr. Chairman. Good afternoon, 
Senator Martinez, Senator Bennett. I'm pleased you invited me 
here today to speak about the PBGC's financial challenges and 
issues regarding its governance.
    Created in ERISA in 1974, PBGC today insures the retirement 
benefits of about 40 million Americans. My statement today is 
based on reports that we've prepared over the last several 
years on these topics, updated for new information. But first, 
let me speak about the financial challenges.
    Starting in 2002, PBGC's largest insurance program, the 
single-employer program, was beset by claims resulting from 
employer bankruptcies and the associated terminations of large 
underfunded plans. Indeed, we put this program on our high-risk 
list in 2003 and by 2004, the deficit exceeded $23 billion.
    Since then, and until recently, economic conditions 
favorable to employers and plans helped to reduce the PBGC net 
deficit, and the 2006 passage of the Pension Protection Act had 
the potential to strengthen plan funding in the future. Indeed, 
as of September 2008, PBGC reported its deficit had shrunk to 
around $11 billion. However, this lower deficit figure reflects 
conditions that no longer exist. The financial market meltdown 
and economic recession have increased the exposure PBGC faces 
from financially distressed sponsors with large underfunded 
plans, whereas in 2008, PBGC anticipated relatively few new 
distress terminations.
    By now, the picture is significantly worse. For example, 
the pension plans of Chrysler and GM today pose considerable 
financial uncertainty for PBGC. In the event that these 
automakers cannot continue to maintain their plans--as in, say, 
a bankruptcy scenario--PBGC may be required to take both the 
plans and the responsibility for paying the benefits they owe.
    The plans are thought to be underfunded by roughly $30 
billion, which would increase PBGC's deficit substantially. 
Further, absorbing these plans would almost double the number 
of participants PBGC must serve and the assets that PBGC must 
manage.
    These aren't the only underfunded plans PBGC faces in the 
next year or so. Plan sponsors are reeling from the economic 
downturn, and their plan funding has doubtlessly weakened as 
the value of financial assets has fallen. As Dallas points out, 
liabilities have risen.
    Further, although the Pension Protection Act was designed 
to improve plan funding levels, legislation passed last 
December delayed the implementation of the stricter funding 
requirements. Although the change was intended to help 
companies weather the current economic storm, still, plan 
funding will be lower than it would otherwise have been, and 
this too increases PBGC's exposure.
    Also, PBGC recently altered its investment policy to 
improve returns, but our work suggests that the higher risk 
associated with such a policy needs more attention. For all 
these reasons, we believe PBGC's financial challenges are 
growing.
    Let me now turn to PBGC's governance. Although PBGC has 
taken some actions in response to our management 
recommendations in the contracting and human capital areas, the 
remaining unaddressed management issues will complicate the 
corporation's ability to grapple effectively with the financial 
difficulties ahead.
    This makes governance all the more important, yet PBGC's 
board, which is comprised of three Cabinet Secretaries, has 
limited time and resources to devote to providing the policy 
direction and oversight needed for this growing and 
increasingly challenged corporation.
    Although the board last year approved a new set of bylaws, 
some critical decisions and processes go undocumented, 
including approval and oversight of the various changes in 
investment policies made over the years. Further, the 
composition of the board means that the entire board turns 
over, along with the PBGC director, when a new administration 
takes office, which, of course, happened in January.
    It's now May 2009. The last board meeting was in February 
2008, meaning the new board has yet to meet. In 2007, we 
recommended that the Congress restructure the board to expand 
membership, stagger terms, and diversify expertise, and this 
action continues to be urgently needed.
    In conclusion, PBGC acts as crucial support for Americans' 
retirement income security. The corporation will be challenged 
as never before as it faces a deepening financial hole, 
combined with an overwhelming administrative burden that will 
doubtlessly require more PBGC staff and more contractors.
    Yet, PBGC still has not made some of the strategic 
improvements needed in its human capital management or its 
contracting program, and its board is not yet positioned to 
provide the attentive and sustained policy guidance that is 
needed. So although improving PBGC governance will not by 
itself solve the corporation's financial problems, such actions 
could be critical to helping PBGC manage them. We urge Congress 
to consider legislating these needed improvements as, indeed, I 
understand you will be.
    That concludes my statement, Mr. Chairman.
    [The prepared statement of Ms. Bovbjerg follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
    The Chairman. Thank you very much, Ms. Bovbjerg. Now we'll 
hear from Rebecca Ann Batts, who is the Inspector General for 
the Pension Benefit Guaranty Corporation. Ms. Batts.

  STATEMENT OF REBECCA ANNE BATTS, INSPECTOR GENERAL, PENSION 
          BENEFIT GUARANTY CORPORATION, WASHINGTON, DC

    Ms. Batts. Good afternoon, Chairman Kohl, Ranking Member 
Martinez, and Senator Bennett. My name's Rebecca Ann Batts, and 
I'm the Inspector General of the Pension Benefit Guaranty 
Corporation, Office of Inspector General. Thank you for the 
opportunity to testify today about the work being done by our 
office.
    PBGC is facing many challenges, including the need to 
address a potentially unprecedented influx of large defined 
benefit pension plans. In my full written statement, I 
acknowledgement PBGC's senior leadership for its engagement in 
planning for the potential wave of new pension plan 
trusteeships.
    We appreciate your interest in this issue, as well as your 
request that we monitor and report on PBGC's preparedness 
strategy. We've initiated an audit in response to your request, 
and plan to fast-track the most time-sensitive results of our 
work to ensure that we provide PBGC, the PBGC board, and 
Congress with timely and relevant information.
    Last week, my office issued an audit report addressing the 
serious misconduct of the former PBGC Director, Charles 
Millard, in contracting for lucrative strategic partnerships. 
The PBGC board reacted quickly and appropriately to our report, 
and we concur in the corrective actions proposed by the board. 
As requested by the committee, I'm providing the following 
information to inform your committee and others about the 
issues we identified in our audit.
    Beginning with planning for the development of a new 
investment policy, former PBGC Director Charles Millard became 
intimately involved in the day-to-day details of the contracts 
through which the new investment policy would be developed and 
implemented.
    Against the advice of senior leadership, Mr. Millard served 
on evaluation panels with subordinate employees. Against the 
advice of senior leadership, he participated directly in 
developing the criteria for picking the winners of the 
strategic partnership contracts. These three strategic 
partnership contracts for the management of $2.5 billion in 
assets went to three firms: Black Rock, Goldman Sachs, and 
JPMorgan.
    At the same time, he continued to represent PBGC before the 
investment community and engaged in extensive phoning and 
emailing with various Wall Street firms, including hundreds of 
calls logged with the successful bidders for the strategic 
partnership contracts.
    Mr. Millard wanted big Wall Street firms for PBGC's 
strategic partners. As part of his effort to establish the 
criteria to be a successful bidder, he consulted with a Black 
Rock managing directory about establishing a floor on the 
number of employees that a firm needed to have in order to 
compete for a strategic partnership. Mr. Millard explained that 
he needed a cutoff figure so that he could wittle the field.
    In response, the Black Rock executive proposed a specific 
number and strategized about a way to eliminate certain types 
of firms from consideration. Establishing standards 
specifically to eliminate some firms from competition is 
inconsistent with the former director's responsibility 
established in regulation to conduct business with complete 
impartiality.
    Even though Mr. Millard should not have been talking to 
bidders at the same time he was evaluating their proposals, he 
communicated with some of them by phone and email. Mr. Millard 
said these contacts were OK because these were his friends, but 
that creates another problem and raises questions about 
impartiality. The PBGC Ethics Handbook specifically notes 
evaluating the bid of a friend as an example of behavior that 
raises an ethical concern.
    After the award of the strategic partnership contracts, a 
Goldman Sachs executive provided extensive assistance to the 
former director in his search for post-PBGC employment. The 
assistance, which is documented in at least 29 emails, tracks 
the Goldman Sachs executive's efforts to aid Mr. Millard 
through personal meetings, strategic advice, introductions to 
potential employers, and help with meeting arrangements.
    Our audit results are largely based on documentary 
evidence, primarily in the form of phone records and email 
traffic. However, the impetus for our review of many of the 
specific issues I've discussed today was a whistleblower 
complaint. Reporting concerns about fraud, waste, or abuse to 
the Inspector General requires a lot of courage. The task is 
even more difficult when the issues of concern are subjective, 
involving questions of fairness, if impartiality, or of 
appearance.
    I am grateful to the whistleblower who first reported the 
questionable actions of the former director to my office. This 
person made a choice that will help the PBGC board and PBGC 
leadership make the changes needed to maintain the public's 
trust. This person deserves our gratitude and thanks.
    That concludes my statement, Mr. Chairman. I will be happy 
to answer any questions you or the other members have.
    [The prepared statement of Ms. Batts follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
    The Chairman. Thank you, Ms. Batts. Our final witness today 
will be Vincent Snowbarger, who is the Acting Director of the 
Pension Benefit Guaranty Corporation.

   STATEMENT OF VINCENT SNOWBARGER, ACTING DIRECTOR, PENSION 
          BENEFIT GUARANTY CORPORATION, WASHINGTON, DC

    Mr. Snowbarger. Thank you, Chairman Kohl, Ranking Member 
Martinez, Senator McCaskill, and Senator Bennett. My name is 
Vince Snowbarger and I'm the Acting Director of the Pension 
Benefit Guaranty Corporation, or PBGC. I want to thank you for 
the opportunity to appear today to discuss PBGC's financial 
condition and its readiness to take on new challenges in these 
turbulent economic times.
    I want to emphasize that despite the current economic 
slowdown and an increasing deficit, the corporation is able to 
meet its benefit payment obligations, and will be able to for 
many years to come. This is because benefits are paid in the 
form of annuities, and over the lifetime of retirees, not as 
lump sums. Nevertheless, over the long term, the deficit must 
be addressed.
    My testimony today will focus on four issue areas: PBGC's 
governance structure, the agency's pension insurance program, 
the deficit position PBGC currently faces, and its preparedness 
to deal with a potential influx of plan terminations.
    PBGC is a wholly owned Federal corporation with a three-
member board: the Secretary of Labor, who is our Chair, the 
Secretaries of Commerce and the Treasury. PBGC is self-financed 
and receives no tax revenues. PBGC guarantees pensions when 
underfunded defined pension benefit plans terminate. PBGC 
insures 44 million workers and retirees in 30,000 pension 
plans. At the end of Fiscal Year 2008, PBGC was paying benefits 
of about $4.3 billion per year to 640,000 individuals, and 
another 634,000 will be eligible to receive benefits in the 
future.
    PBGC has been in a deficit position for most of its 35-year 
history. At the end of Fiscal Year 1908, PBGC had an $11 
billion deficit, with $75 billion in liabilities, and $64 
billion in assets.
    Unaudited results for the first 6 months of Fiscal Year 
2009 show that our deficit has tripled to $33.5 billion. That 
change in the deficit is primarily due to about $11 billion in 
completed and probably terminations, $7 billion from a decrease 
in the interest factor used to value liabilities, $3 billion in 
investment losses, and $2 billion in actuarial charges for the 
passage of time.
    Large plan terminations have always been and continue to be 
the most important factor in determining PBGC's workload as 
well as its financial condition. Over the years, we have 
adapted our processes to meet the challenges of a cyclical 
workload, including the ability to scale up when we experience 
a rapid increase in plan terminations. There were relatively 
terminations in Fiscal Year 2008. However, during the first 
half of Fiscal Year 2009, PBGC took in 75,000 new participants, 
over three times the number for all of last year.
    Still, this workload is far less than the record influx of 
more than 800,000 new participants in the 4-year period from 
2002 to 2005. Those terminations included a number of large 
steel and airline plans. PBGC met the challenge of that 
increased workload.
    However, to give you some idea of the potential magnitude 
of the future workload, if the plans of some of the troubled 
auto companies are terminated, the number of new participants 
coming to PBGC in Fiscal Year 2009 or Fiscal Year 2010 could 
exceed $1 million. Those terminations would almost double the 
number of participants PBGC serves and significantly increase 
the trust fund assets and PBGC deficit.
    The cyclical nature of terminations and the impact of large 
terminations have required PBGC to develop mechanisms to handle 
major workload fluctuations. Contracts with our paying agent, 
field benefit administration offices, actuarial firms, and 
customer contact center allow us to adjust staffing based on 
workload, and historically, this has worked well.
    When we take over very large plans, we often retain the 
services of staff for the prior plan administrator in order to 
ensure a smooth transition. Currently, PBGC departments are 
preparing for an increase in contracting activity, additional 
hiring, and additional space and equipment needs. PBGC's 
technology systems have been analyzed to verify that they're 
ready to handle large workload increases, and we've developed 
specialized team approaches to process and administer the auto 
plans, should that become necessary.
    Finally, we are collecting and reviewing plan documents of 
large potential terminations to become familiar with the 
benefit provisions. PBGC's Fiscal Year 1909 and 1910 budgets 
provide for additional spending authority if we take in more 
than 100,000 new participants. We are working closely with OMB 
in anticipation that we will need to use that authority for the 
first time.
    While PBGC has the capability to take on large plans, 
continuation of a plan is generally best for all stakeholders. 
We closely monitor troubled companies with underfunded plans 
and negotiate for plan protections that will limit participant 
and PBGC exposure and keep the pension plans going.
    Companies that sponsor pension plans have a responsibility 
to live up to the promises they make to their workers and 
retirees. However, when a company can no longer keep its 
promises, workers and retirees need the assurance of a strong 
and prepared PBGC.
    Thank you, Mr. Chairman, and I would be happy to answer 
questions.
    [The prepared statement of Mr. Snowbarger follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
    The Chairman. Thank you very much, Mr. Snowbarger. We'll 
now hear from Senator Martinez, then Senator Bennett, and then 
Senator McCaskill.
    Senator Martinez. Thank you, Mr. Chairman. Ms. Bovbjerg, 
GAO made recommendations to the PBGC's Board of Directors on 
the appropriateness of the investment strategy and asset mix 
that the agency is currently employing. Is this normal in the 
course of what you do into your analysis of their portfolios 
and so forth, or are there circumstances that brought you to do 
that?
    Ms. Bovbjerg. What we were asked to do by the Senate Help 
and Finance Committees was to look at the process by which the 
investment policies had been developed and implemented. As we 
were doing that work, this new policy was being developed, and 
so we looked at what the contractor had done in performing 
their estimates on risks and returns.
    The concern that we had was actually not about the return 
side. We tested the model and felt that the return estimates 
were robust. It was the risk side that we felt was really not 
being acknowledged. So we had tried different assumptions and 
could see that risk might vary widely, depending on what 
assumptions you used.
    Our concern more fundamentally was that that risk was not 
acknowledged. Only the return side was acknowledged. It wasn't 
a balanced presentation. The board then would have made a 
decision to go with the investment policy without having all 
the information on the potential impact of that investment 
policy.
    Senator Martinez. Do you think that this is just emblematic 
of the culture of PBGC, or was this just a moment in time, 
given the new guidelines, or why do you think there was that 
unawareness, I guess, or reticence to acknowledge risk?
    Ms. Bovbjerg. The information was not provided to the 
board, as we understand it. I think that a more active board 
might perhaps have delved into that more closely. We also 
documented that prior boards had not really overseen the 
implementation of the policy, so when an investment policy 
changed, it wasn't always implemented for a variety of reasons, 
very quickly, but none of that was really documented, that the 
agency had gone to the board and briefed them on this and 
received permission to do that.
    Our concern was that the board was not involved enough in 
this very important decision, and we do think that changes in 
the governance structure would help. But I do want to emphasize 
that our concern about the investment policy is really a long-
term concern. We do think that they should reevaluate with the 
information about risk, as well as returns. But they should 
think about it as a long-term strategy and not simply something 
that changes every few years in response to market changes.
    Senator Martinez. So you think they need to have a long-
term approach that is sound and in keeping with good investment 
practices, but not one that is temporal in terms of changing, 
depending on what market conditions may exist from month to 
month or year to year?
    Ms. Bovbjerg. We think that they should make the decision 
that way. But I want to call to your attention that the PBGC 
investment policy has changed every four to six years in the 
past, so it has swung between a focus on equities to a focus on 
bonds. We think also that if there was more stability on the 
board and not just political appointees from the 
administration, that there were staggered terms, that it would 
be less likely that that would happen.
    Senator Martinez. Good point. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Martinez. Senator Bennett.
    Senator Bennett. Mr. Chairman, thank you. I'm sorry I was 
late. Thank you for holding this hearing. It's of great 
importance to my state, Colorado. Ten percent, roughly, of the 
employees in our workforce are employed by companies that the 
PBGC insures.
    Thank you all for being here today. I appreciate it. I 
wanted to start with Ms. Batts. I echo your expression of 
gratitude for the whistleblower in this case, and I--it's very 
hard to stick your neck out in the face of supervisors who can 
control your career and your livelihood. I wonder whether or 
not you can assure the committee that steps have been taken to 
protect this whistleblower in this particular situation.
    Ms. Batts. Yes, sir, we can. We're very cognizant of our 
responsibility to ensure protection of our whistleblowers.
    Senator Bennett. OK. This person is a hero for bringing 
this forward, and we need more, not less, of this. When I read 
your testimony, I found it particularly troubling that it 
appears that the prior director was trying to change the 
criteria for the size of the firms that could solicit--or 
respond to the RFP after the RFP had already been written; is 
that correct?
    Ms. Batts. Let me clarify. The efforts to work on the size 
of the firm, the communications with Black Rock about what size 
firm would be appropriate, were made before the mandatory 
criteria for the RFP were developed. These were communications 
that occurred before they were developed.
    Senator Bennett. OK. Thank you. I just wondered, Ms. 
Bovbjerg's observation about the governance structure seems 
almost--I think can't be disputed. I mean, having three Cabinet 
Secretaries be the board of the institution seems to me to be 
imagining a world that we don't really exist in, and I wonder 
whether the others here have any view on that and what we might 
think about, in terms of governance structure. Mr. Salisbury.
    Mr. Salisbury. Senator, I'll just speak to my time at the 
agency, both as an employee, and then when I was on the 
advisory committee. The structure in this is true today, but 
it's been true since 1975. Essentially, each of the Cabinet 
members has designated a so-called board representative who, 
during the early years, was generally the general counsel of 
the Department of Labor, Commerce, and the Assistant Secretary 
Financial Markets at Treasury.
    That then shifted over time. In the most recent time 
period, for example, at the Department of Labor, it became the 
Assistant Secretary for the Employee Benefit Security 
Administration, which one could argue creates its own set of 
conflicts, because at that point, the person responsible for 
administering Titles I and II of ERISA is also essentially, one 
could argue, supervising the PBGC on behalf of the Secretary of 
Labor, who chairs the board.
    But in all of the times I've been involved with the agency, 
the board meets, as has been pointed out, very little. Most of 
the activity is with these individuals. In the case of the last 
administration, because it went to the Assistant Secretary 
level, it actually was people who had Senate confirmation. For 
most of the history of the agency, it was individuals who had 
never had Senate confirmation. It was fairly low-level staff 
members that were doing the coordination.
    You could go back to making this a formal part of an 
executive branch agency, which would put it into a more normal 
governance structure. One of the proposals that was looked at 
by an advisory council about 18 years ago was to actually have 
it become a commission model. All of the SEC or the FTC, the 
FEC, which would be two or three appointed commissioners, to 
give it a more permanent governance structure.
    If I might, the one other thing I'd comment on is the 
investment policy issue. Having been at the agency during the 
first two revisions, and having been on the advisory committee 
during another revision of that policy, I think the most common 
determination of that flipping in policy is whether the 
executive director of the agency has a background in insurance 
or has a background in active equity investment management.
    When Jim Lockhart, now the head of the agency overseeing 
Fannie and Freddie, was the head of the agency, he had come out 
of an insurance background. He moved the agency toward what is 
termed a more bond immunization match liabilities to the 
asset's philosophy, which is more traditional for an insurance 
company and how they would function relative to life annuities, 
which is what PBGC is, in essence.
    As opposed to the last two executive directors, the current 
director came straight out of the private equity active 
investment field; his predecessor, who had sort of a split 
life, is now at a large insurance company. The most extreme 
policy was the most recent move to a much more heavy equity 
strategy.
    So I think the appointment of the executive director and 
the background of the executive director, in the time I've been 
involved with the agency, which is since two months after it 
was first created, has been heavily influenced, almost 
overwhelmingly by the background of the executive director. It 
is also influenced by the background of the individuals at the 
Treasury Department, which is the primary agency involved in 
setting investment policy, as one would argue is appropriate.
    Senator Bennett. Mr. Snowbarger, do you have a view? I know 
I'm putting you in a difficult position, but I--
    Mr. Snowbarger. Thank you for recognizing that, Senator. 
Well, we cooperated fully with the GAO report when it came out, 
and actually, at the request of the Chairman of our board, we 
also hired a private consultant to come in and do the similar 
kind of study, which that report came out, I believe it was 
about--well, I mean, it was last summer, and it pointed out 
different alternatives for doing it.
    I think you would find this rather unique in our structure 
within the Federal Government. There are a number of Federal 
corporations, there are a number of commissions, as was pointed 
out by Mr. Salisbury, but we're rather unique. When you look at 
the composition of our board structure, both in terms of its 
size and its composition, it's rather unusual.
    Senator Bennett. Thank you, Mr. Chairman.
    The Chairman. Thank you very much, Senator Bennett. Senator 
McCaskill.
    Senator McCaskill. Thank you. First let me start with the 
notion to our intrepid Inspector General. Congratulations on 
this work. This is the kind of report that makes your 
professional challenges worthwhile. Thank you. The rules that 
were broken allegedly by the former director, I assume that the 
people that were on the other end of those conversations were 
breaking rules also, correct?
    Ms. Batts. In our audit report, we make it clear that as 
part of the audit, we did not identify any evidence of criminal 
activity on the part of the bidders. One of the things that 
made this situation very unusual was the unusual role that Mr. 
Millard had taken. Normally conversations with the Director of 
PBGC would not be inappropriate, because normally the Director 
of PBGC would not have taken this intimate involvement in the 
procurement process. So--
    Senator McCaskill. Well, wouldn't the person at Black Rock, 
if the head of PBGC is talking to them and says, ``Give me a 
floor. I'm trying to wittle these people out,'' wouldn't that--
I mean, people at Black Rock, I would think, knowing all of the 
rules and regulations surrounding--
    Ms. Batts. You would think.
    Senator McCaskill [continuing]. These kinds of processes, 
wouldn't there be some kind of need on their part to blow a 
whistle on somebody?
    Ms. Batts. It's a good question.
    Senator McCaskill. Well, I think we should ask that 
question. Can you identify who the people are at Black Rock 
that were part of this conversation and the people at the other 
firms that were having these conversations? I think we've got 
investments in a lot of them right now.
    Ms. Batts. Yes.
    Senator McCaskill. We're shareholders, the American people, 
in some of them.
    Ms. Batts. As I mentioned in my written statement in 
response to a bipartisan request from Senators Kennedy and Enzi 
of the Health Education and Labor and Pension Committee, and 
Senators Baucus and Grassley from the Finance Committee, they 
requested that we open an investigation. We take the concerns 
they expressed very seriously, and we've done so. We've had 
discussions with the Department of Justice on the matter, and 
it's not appropriate for us to go forward with it.
    Senator McCaskill. OK. Let me talk about contracting a 
little bit. There has been a secret growth in the size of the 
Federal Government through contractors. PBGC is a great example 
of the growth in contractors. There's hundreds--more than 130, 
I think, different audit recommendations that have been ignored 
over the years as it relates to contracting processes and 
procedures.
    I'm looking at various charts and graphs in the GAO report 
that I think is over a year old now. Yeah. Well, it's not quite 
a year old. The excuse that's given for contracting is that 
your workload is unpredictable. But yet, in the same report, it 
acknowledges that your workload always goes up one to two years 
after an economic crunch.
    I assume, Mr. Snowbarger, you all are anticipating your 
workload going up.
    Mr. Snowbarger. Yes.
    Senator McCaskill. Significantly?
    Mr. Snowbarger. Yes.
    Senator McCaskill. So do you have plans right now to add 
employees as opposed to contractors?
    Mr. Snowbarger. I wouldn't say as opposed to contractors. 
We'll probably add both employees and contractors.
    Senator McCaskill. Why is it--I assume the contractors 
working side-by-side, like in most government agencies, are 
making more than the government employees?
    Mr. Snowbarger. I really couldn't speak to that. I don't 
know.
    Senator McCaskill. Who would know, if you don't?
    Mr. Snowbarger. Our contracting officer and our personnel--
    Senator McCaskill. Well, that would be something I think 
the committee should be interested in and I'm certainly 
interested in. Two employees doing the exact same function at 
nearby desks, and I'm looking at one of these. I think in your 
org chart, you have 933 contractors under the Chief Operating 
Officer, under the COO, which means your benefits, 
administration, and payments department, your actuarial 
services division, your retirement services division, your 
processing division, and your problem resolution office, you 
have four times as many contractors as you have FTEs.
    I would like to know how much those contractors are making 
as opposed to the government employees. I think it's a notion 
that makes--it sounds good, but in reality, I think we don't 
drill down far enough to see if these contract employees are 
saving anybody money. Let me look specifically at your lawyers. 
Do you have internal counsel?
    Mr. Snowbarger. Yes.
    Senator McCaskill. How many do you have?
    Mr. Snowbarger. We have two divisions of lawyers. They're 
primarily lawyers. We have an Office of Chief Counsel that 
handles all our litigation. I believe--about 45 lawyers in the 
Office of Chief Counsel. Chief counsel handles our litigation 
on cases and does our negotiation on cases, as well.
    We have an Office of General Counsel that basically 
provides the general law advice for the firm, about 30 lawyers 
in that department.
    Senator McCaskill. How much do you spend annually on 
outside counsel?
    Mr. Snowbarger. We spend a considerable amount of money on 
outside counsel because we are facing outside counsel from the 
companies that are going under. In other words, you might take 
the Chrysler situation for example. There are all kinds of 
special lawyers--not just Chrysler's lawyers, but Chrysler's 
bankruptcy lawyers and Chrysler's merger and acquisition 
lawyers, et cetera. There are certain kinds of expertise that 
it is less expensive for us to hire through counsel than it is 
to maintain on staff.
    Senator McCaskill. I would love--have you done a cost-
benefit analysis on that?
    Mr. Snowbarger. I believe we have.
    Senator McCaskill. I'd love to see that cost-benefit 
analysis. Because I know what those outside lawyers are 
charging you an hour, and I know how much lawyers make in 
government, and I have a bias there, since I've been a lawyer 
in government most of my legal career. There are some really 
smart lawyers that are in government that are great value, and 
you all are going to need specific expertise going forward, I 
think, over the next 5 to 10 years, and I would love to see 
what you're spending on inside counsel versus outside counsel 
and the cost-benefit analysis that's been done in that regard.
    Mr. Snowbarger. Sure.
    Senator McCaskill. Tell me what your plans are in terms of 
the use of contractors going forward. Have you looked at the 
recommendations that have been made by GAO, and do you have 
plans going forward that would actually begin to implement 
these recommendations in terms of contracting?
    Mr. Snowbarger. Partial. There are some of the 
recommendations that we disagreed with. I don't know that I 
could go through those right now, but we can provide you with 
our response to the GAO's report. But yes, we've already 
started implementing a lot of those. We've restructured our 
procurement department, for instance. We have those divisions 
set up now so that we've got people looking solely at the 
policy about whether or not we hire contractors or not and on 
what basis, plus the side of the contracting department that 
would actually be doing the procurements and the administration 
of those procurements.
    Senator McCaskill. OK. I'll stick around, Mr. Chairman, and 
ask some more questions later. Thank you.
    The Chairman. Thank you very much, Senator McCaskill. Ms. 
Batts, on the findings in your report, do you think the 
investment services contract that was awarded to Goldman Sachs, 
JPMorgan, and Black Rock should be rebid?
    Ms. Batts. We have not done audit work specifically to 
assess whether the strategic partnership contracts are the best 
way to assist in accomplishing PBGC's investment objectives, 
although that is one of the objectives of ongoing work.
    In a comprehensive implementation plan for its investment 
policy, PBGC needs to figure out whether the strategic 
partnerships fit in their overall strategy.
    The Chairman. So you're saying they should be rebid, should 
not, you're not sure, you haven't recommended, what?
    Ms. Batts. OK, I'm sorry. I'm very troubled by the 
contracts, and our recommendation to the board was that they 
consider seriously whether the contracts needed to be 
terminated. I think that's what you're referring to by being 
rebid.
    The Chairman. Yes.
    Ms. Batts. I was pleased to see Mr. Snowbarger's 
recommendation that the three contracts be terminated. In terms 
of rebid, I don't know whether strategic partnerships are the 
way to go or whether PBGC might choose some other way to move 
forward.
    The Chairman. I'll get back to you in a second. Mr. 
Snowbarger, do you concur with what Ms. Batts has said?
    Mr. Snowbarger. Well, as she indicated, I did recommend to 
the board that the contracts be terminated. In terms of a 
rebid, I think it's a little early to know whether or not that 
fits into the new board's investment policy strategy. They want 
to take time and naturally want to review what was done over 
the past, and once they've made that determination, strategic 
partnerships may or may not fit into achieving those overall 
goals.
    I think that being the case, it's probably just better at 
this point to terminate them, and if the board decides that 
strategic partnerships are a tool for implementing a new 
investment policy, then we can go back out and rebid.
    The Chairman. OK. Ms. Batts, PBGC has 130 pending 
recommendations from you. Why hasn't PBGC taken action to 
implement these recommendations? Have you taken steps to inform 
the Board of Directors of all your recommendations?
    Ms. Batts. There are many reasons as to why PBGC hasn't 
implemented the 130. Many will take a length of time to 
complete and are in process. We've recently begun a concerted 
effort with PBGC management to ensure that appropriate 
corrective action plans have been developed. For example, PBGC 
needs to integrate its financial systems, and this will require 
a number of changes in systems. I would note, however, that 
this recommendation was first raised in the 1997 financial 
statement audit.
    In the interest of streamlining processes, my predecessor 
made a decision to rely upon PBGC to track recommendations and 
follow-up. Though this can and does work in many Offices of 
Inspector General, we found that it did not work well for us. 
This spring, we returned to the prior method where the Office 
of Inspector General controls the tracking of the 
recommendations, and have established our own tracking system 
for open recommendations.
    Some of the recommendations have been briefed to the board 
in the past. For example, many relate to the significant 
deficiencies in the financial statement audit internal control 
report. We ordinarily would not brief many of the 
recommendations to the board, only those that are most 
significant.
    The Chairman. Thank you. Mr. Salisbury, given the current 
economic situation, do you believe PBGC will be able to meet 
its financial obligations today and on into the future?
    Mr. Salisbury. Senator, I think that as even the revised 
numbers from the PBGC indicate, and even if you take the 
testimony today describing the worst case, with all of the auto 
industry plans coming in, and then you look at the annuity 
nature of the payouts, the fact is that there are participants 
in these programs that are, let's say, 30 years of age, who 
wouldn't be eligible for a benefit for 35 years, and that's 
when payments would come. Does PBGC, even under the most dire 
scenarios, have assets that will grow sufficiently to pay 
benefits for some number of decades, at least two decades, 
possibly longer?
    The issue is, in the very long term, related to whether 
there will be other defined benefit plans that continue to 
exist that are able to continue paying some level of premiums. 
The real problem for PBGC is when the assets run out, which I 
see as occurring a long time in the future. That doesn't say 
that one should wait to look at it, but it does create that 
temptation.
    The second issue that relates to this is why I mentioned 
the interest rate environment; if one were to simply revalue 
PBGC's liabilities and defined benefit pension liabilities, 
based on the assumption of moving back to more traditional 
market interest rates, including Federal Reserve policy, that 
alone would dramatically improve the funded status of many 
pension plans.
    For lack of a better example, one large U.S. company that 
before the market meltdown was 137 percent funded, by January, 
was 98 percent funded. Based on its public statements, if you 
simply moved the government interest rate back up, that plan 
would instantly move to 114 percent funded simply because the 
interest rate changed.
    So I think that until we know where the economy comes out 
after 11, 10, and 11, and where interest rates level out, 
there's an awful lot of uncertainty in what the status of PBGC 
is, and frankly, what the status of defined benefit plans, per 
se, is.
    The Chairman. Thank you. Ms. Bovbjerg, as you said, the 
board has not met since February of 2008. Of course, a lot has 
happened in our economy since then that has an impact on PBGC. 
In your opinion, what steps does Congress need to take to be 
sure that the board is, in fact, able to discharge its 
obligations, which I assume you regard as essential?
    Ms. Bovbjerg. Well, absolutely. I think we said in my 
statement, now more than ever. We really--there are two issues 
really with the current board structure. One is that it's not 
structured for members to give the kind of attention and 
oversight that we think the corporation needs. It's the number. 
There's only three. It's that they're Cabinet Secretaries, 
although, as Dallas points out, they do have appointees under 
them who represent them when there are board meetings. They 
have staff who work with them.
    The Big 3 are really not able to give the corporation the 
kind of attention that it deserves and now increasingly needs. 
We looked at a number of other government boards. They average 
seven members. Also, PBGC commissioned a study from McKinsey 
that looked at all these different options for different types 
of boards. Nearly all of them have a little more horsepower on 
them.
    The other thing is that everyone's term ends 
simultaneously. There's no continuity, and that's really a 
problem for this corporation. If the deputy position had not 
been made permanent about a year ago, we wouldn't have Mr. 
Snowbarger here to run PBGC either. So it's really important to 
have staggered terms.
    We also think that the intent of the three Cabinet 
Secretaries was to provide a diversity of perspective. You have 
Labor there to represent workers, Commerce to represent 
business, Treasury to represent finance. That's a really good 
idea. In fact, we think that there should be more diversity on 
the board to include certain types of expertise from other 
areas--financial expertise, labor expertise, governance.
    We think that it would enhance greatly the board's ability 
to oversee, for example, contract issues, because if there is a 
director who is at least giving an appearance of a not 
transparent fair contracting process, the board needs to be 
alert to that and should not have to rely solely on a 
whistleblower to bring that information to the floor.
    The Chairman. Thank you. Senator Martinez?
    Senator Martinez. I've got to tell you, I agree completely 
with your assertion regarding the board. I don't believe that a 
Cabinet officer is ever going to be in a position to be hands-
off enough to be an effective member of a board such as PBGC 
needs to have. This is not a board where it's merely policy 
setting. This is a board about oversight and nuts and bolts of 
a large investment operation.
    So I really believe that that is a key element here in 
what, going forward, needs to occur, which is a hands-on board 
that is not Cabinet officers, who I know, from personal 
experience, are incapable of giving the kind of time and 
attention that a board like this would need. As you said, 
they'll delegate it to someone within the department who might 
not be senior enough to really have the stature, perhaps, to be 
an effective board member. Plus you leave it only on three, and 
that's not very many to be overseeing such a large amount of 
money with such an important responsibility.
    But to that effort, let me just say on the audit report, it 
appears pretty clear that the fundamental PBGC that you 
uncovered was a merger of functions between being the executive 
director and then immersing himself in the procurement process 
and, in a very detailed way, impacting it. As part of his job, 
he would have to talk to people that, by necessity, once he 
became also the procurement officer, he was then prohibited 
from really being in contact with.
    I understand that that is a policy recommendation, and I 
want to ask Mr. Snowbarger whether that situation has been now 
clearly defined, because I also saw a letter from Mr. Millard 
where he alleges that he consulted with the counsel at the time 
and was told that there was no reason why he could not do all 
of that. I find that hard to understand, but given that 
situation, I just wondered if this is now corrected and is no 
longer an issue. I see that the board said that it agreed with 
a recommendation and will work with PBGC to develop appropriate 
guidelines. Are those guidelines now in place?
    Mr. Snowbarger. Since the letter just came out yesterday, 
the answer is no, but there is no problem. This acting director 
will not be involved in the contracting process.
    Senator Martinez. I understand.
    Mr. Snowbarger. It's just a matter of papering up. We agree 
with the recommendation of the Inspector General, and we'll 
work with the board to paper that decision.
    Ms. Batts. To speak to the comment that you made about Mr. 
Millard's comment about the legal review that was performed by 
general counsel, it's important to remember that at the time 
the general counsel did that legal review, she was not aware 
that he was having contact with bidders. She was not aware of 
some of the events that had occurred before the RFP was 
developed. So--
    Senator Martinez. Well, I wasn't trying to judge Mr. 
Millard's actions here--
    Ms. Batts. Certainly. Certainly.
    Senator Martinez [continuing]. Because I think there will 
be other forums for that. I was just trying to make sure that 
we had in place policies, since there seemed to be some 
confusion on his part, and I saw the recommendation, and I 
wanted to make sure that it would be followed upon.
    Ms. Batts. Certainly.
    Senator Martinez. That's all. Thank you very much.
    The Chairman. Thanks, Senator Martinez. Senator McCaskill?
    Senator McCaskill. Mr. Salisbury, what worries me the most 
about this whole sit--and, by the way, Mr. Snowbarger, you do 
have a really hard job, because you took over, and there is no 
board, right, at the moment you took over?
    Mr. Snowbarger. At the moment I took over, there was no 
board. We obviously have a board at this point in time.
    Senator McCaskill. You have a board now. But taking over 
this agency with literally no board is rocky terrain, 
especially under the circumstances which you took over. So I am 
cognizant of the challenges you faced.
    I'm curious, Mr. Salisbury, I think most people in business 
would say that defined benefit plans are going away, that we're 
not going to have many companies 20, 30, 40 years from now that 
have defined benefit plans. As more and more defined benefit 
plans go away, then, as you mentioned, the source of funding 
for this agency goes away.
    Have there been--are you aware or is anyone else on the 
panel aware of any of the long-term studies that have been 
done, assuming, worst-case scenario, that we no longer have 
defined benefit plans in our major automobile manufacturers, 
and that most of that liability is shifted over to this agency? 
Assuming that we continue on the same track, I don't recall 
ever seeing statistics of what the drop-off has been over the 
last 5 years, but I know it's been significant.
    What is--who's going to pay the premiums to keep this 
agency going 30, 40 years from now? Where is that revenue 
source going to be?
    Mr. Salisbury. You end up, Senator, with a couple of 
interesting statistical quirks. One is that even though the 
number of defined benefit pension plans which, at its high 
point was at about 185,000, and is now down at about 29,000, or 
a little less than that, in spite of that amount of decline, 
the total number of participants on whom PBGC has been 
collecting premiums has actually gone up very slightly and is 
now just short of 44 million.
    Senator McCaskill. Because of mergers and acquisitions?
    Mr. Salisbury. It's a combination of mergers, of 
acquisitions, of premiums being paid on so-called deferred 
vested participants that represent about 25 percent of those on 
whom premiums are being paid. Another 25 percent are those in 
retirement on whose behalf the plan still pays. When I was at 
the Labor Department, it was a 95/5 rule: 95 percent of 
participants were in 5 percent of the plans. It's almost that 
pronounced today.
    Second factor, in the last 20 years, many of the defined 
benefit plans, the Pension Benefit Guaranty Corporation, and 
the Internal Revenue Service made a ruling, which has since 
been endorsed by Congress, that so-called cash balance plans 
that look like a defined contribution plan to the participant, 
would legally be declared to be defined benefit plans. This is 
because of the way the benefit accrues, even though almost 
everyone who leaves those plans gets a single-sum distribution, 
not a life income annuity.
    Those plans promise very low benefits. The contribution 
rates are very, very low. On a conference call earlier today I 
was told by one of the consulting firms that most of the 
companies sponsoring those plans have reduced the additional 
interest crediting they give to individual participant accounts 
to zero in order to hold down the PPA 2006 liabilities and 
costs. Some plans are being frozen, but most of them are being 
continued.
    The interesting thing is that with about 30 percent of PBGC 
participants now in those types of very, very low-cost plans 
low cost means low benefits--there is a significant premium 
flow, an area where the cost of the plans can be very 
effectively managed by the employer. This is unlike traditional 
DB plans, the other 70 percent of the universe, where the 
employer doesn't have this ability.
    In that realm, the large employer plans, we have seen 
enterprises like IBM freeze all of those defined benefit plans. 
But IBM, at least based on stock value and what the market's 
done, looks like it will be a secure company; it is likely to 
maintain those plans, as will many other companies.
    They keep them for an interesting reason. They tend to keep 
them because they essentially have gone to insurance companies, 
in many cases when the plan is overfunded--there's more than 
enough money to pay all the benefits. They ask the insurance 
company, ``If we simply give you money so that you take over 
all of the funding obligation--that would cause premium 
responsibilities to disappear as well--how much would you 
charge us?''
    The insurance companies generally would charge them far 
more than what the companies believe it will cost them to 
maintain the plan themselves. So you have many companies with 
frozen plans that do not do that. Now, the reason I note that 
is because right now, interest rates are being fairly heavily 
managed by the Federal Reserve. One would argue they always 
are, but they're being managed very low right now. If the 
market for interest rates come back, the economy comes back, 
plans move back to overfunded status, and we were to have a 
spike in interest rates such that companies, as they have done 
twice before in the last 30 years, hit a so-called interest 
rate sweet spot, suddenly there would be a tremendous financial 
advantage in doing a so-called sufficient termination of the 
plan. Then everybody gets their pensions, the company is done 
with the obligation, PBGC has no liability, but they now lose 
the guaranteed premium flow. You could see a significant loss 
of plans that are currently frozen, a very significant 
proportion that hit that sweet spot, plans would go away.
    Senator McCaskill. What percentage would you say are frozen 
right now that, if that sweet spot was attained, that--
    Mr. Salisbury. Depending on which--the government data is 
now about 3 years old, but the last time the government looked 
at it, it was about 30 percent of what would be the premium 
base.
    Senator McCaskill. Mr. Snowbarger, is there--internally are 
there discussions about the premium flow into the future? I 
mean, is this something that your organization is down in the 
weeds, trying to figure this out?
    Mr. Snowbarger. Well, again, because our premiums and our 
client base are all determined by Congress, it would be a 
matter of just looking at, well, what's really going to hit and 
when? We don't have much control over how that occurs. We have 
asked Congress for higher premiums, and we got some increase in 
premiums in the Pension Protection Act. We've also asked for 
authority to set premiums so that we could adjust those 
premiums based on the risk that the company actually poses to 
us, and we've not had that authority given to us.
    So, I mean, there are requests that we've made to try to 
manage that deficit over time. At this point, again, Congress 
has not responded to those in a positive way.
    Senator McCaskill. Going--
    Senator, if I could just quickly note, I mentioned in my 
testimony a former chief economist of the PBGC, Richard 
Ippolito, and he did do a book and has done a lot of work 
looking at what he describes is the death spiral that would 
occur here.
    So there is work that has been done, including so-called 
Monte Carlo modeling, looking at these issues. The PBGC, in its 
PIMS model that is mentioned in their testimony, does have a 
reasonable capability to model for the types of scenarios 
you're describing, where that's something that you desire to 
have done, speaking on behalf of the agency.
    Senator McCaskill. He loves it, I can tell. Mr. Snowbarger, 
finally, clearly according to Mr. Salisbury, we've had an 
investment strategy that was driven, to some extent, by the 
experience of the director. I'm not sure, based on my knowledge 
of organizations and their investment strategy, if that is the 
wisest course. What is your--I know that you are struggling 
with whether or not to cancel these contracts and reevaluate, 
but what is your recommendation going to be to the board about 
what the investment strategy should be going forward, and where 
should that recommendation actually come from?
    Mr. Snowbarger. Well, again, I've--in my term at PBGC, I've 
had directors that have gone both ways, more fixed-income-based 
and more equity-based. As Mr. Salisbury pointed out, it kind of 
swings back and forth. It swings back and forth with particular 
leaders. It doesn't necessarily follow party lines. It really 
has more to do with the experience.
    I think part of what you're getting at with board structure 
and part of what GAO is getting at with a continuity in a board 
structure would give you a little more stability, so that any 
new director coming in is going to have some direction from 
above, OK, if you want to tweak, we can go a little bit this 
way or a little bit that way, but you wouldn't have these 180-
degree swings in the investment policy itself.
    In terms of what my recommendation might be to the board, 
I'm going to wait for the new director to come on board. I've 
not had discussions with my current board about what their 
concerns are about this investment policy. Again, it is not 
that unusual, if you look back across PBGC's history, to have a 
more equity-based kind of investment policy.
    I think the questions that were raised by the GAO when the 
policy first was announced, the Congressional attention that it 
garnered after that report, and then the economy last fall, I 
think it clearly brought into question, wow, is this a good 
economic strategy?
    Well, if you take the admonition, again, of Mr. Salisbury, 
if you think about this over a long period of time and you make 
certain assumptions about PBGC's responsibility to fill that 
hole, and you make certain assumptions about whether or not 
PBGC will ever get the authority to use premiums to fill that 
hole, I'm not sure what other alternative you're left with. In 
fact, I think Peter Orszag, when he was the director of the 
Congressional Budget Office, in doing his analysis of PBGC's 
strategy, was very similar to the conclusions that GAO came up 
with, but he did raise the question, if you don't have premium 
authority and you don't have underwriting authority, and you 
have this hole, how do you fill it?
    Senator McCaskill. Right. Well, I have thousands of auto 
workers in my state that are out of work, and it is a tragedy, 
what is happening to them and their families. When I see them, 
a lot of them grab me, physically grab me, and look in my eyes, 
and say, ``Is my pension OK?'' Not to put any pressure, but I 
look at them and I say, ``Your pension's OK.''
    I think the responsibility of this agency is very intense. 
Over the next 24 to 48 months, you need to be a rock, because 
these families are looking for one to cling to. They've worked 
hard. They deserve what they've been promised. I hope that all 
of the recommendations that have been made by the IG and the 
GAO are taken as a priority, and that your agency moves forward 
through this obviously little bit of a black mark here, as we 
make sure we're there for these folks. It's only right.
    Mr. Snowbarger. I'm sure.
    Senator McCaskill. Thank you for having the hearing, Mr. 
Chairman.
    The Chairman. Thank you very much, Senator McCaskill. I 
want to thank you very much for being here today, folks. The 
Pension Benefit Guaranty Corporation is obviously a very 
important, critically important government entity. We need to 
be certain that it's sound heading into the future, that its 
governance and administrative structure really does work on 
behalf of the American people.
    You've contributed a lot today to getting us on that path, 
and we are going to follow through on your recommendations, 
along with some of our own. I'd like to hope that better days 
are ahead for the PBGC. Thank you so much for being here. Thank 
you all for coming.
    [Whereupon, at 3:30 p.m., the hearing was adjourned.]


                            A P P E N D I X

                              ----------                              


    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                 
