Pension Benefit Guaranty Corporation: Single-Employer Pension	 
Insurance Program Faces Significant Long-Term Risks (04-SEP-03,  
GAO-03-873T).							 
                                                                 
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. This testimony	 
provides GAO's observations on the factors that contributed to	 
recent changes in the single-employer pension insurance program's
financial condition, risks to the program's long-term financial  
viability, and options to address the challenges facing the	 
single-employer program.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-873T					        
    ACCNO:   A08317						        
  TITLE:     Pension Benefit Guaranty Corporation: Single-Employer    
Pension Insurance Program Faces Significant Long-Term Risks	 
     DATE:   09/04/2003 
  SUBJECT:   Financial management				 
	     Pension plan cost control				 
	     Retirement pensions				 
	     Risk management					 
	     Strategic planning 				 

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GAO-03-873T

Testimony Before the Committee on Education and the Workforce, House of
Representatives

United States General Accounting Office

GAO For Release on Delivery Expected at 10: 30 a. m. Thursday, September
4, 2003 PENSION BENEFIT

GUARANTY CORPORATION

Single- Employer Pension Insurance Program Faces Significant Long- Term
Risks

Statement of David M. Walker Comptroller General of the United States

GAO- 03- 873T

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 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 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, we have recently placed
the singleemployer insurance program on our high- risk list of agencies
with significant vulnerabilities to the federal government. While there is
not an immediate crisis, there is a serious problem that relates

to the need to protect the retirement security of millions of American
workers and retirees and should be addressed. Agency officials and others
have suggested taking a more proactive approach and have identified a
variety of options to address the challenges facing the single- employer
program that should be considered. The first, would be to improve the
transparency of information about plan funding, plan investments, and PBGC
guarantees; a second would be to strengthen funding rules to ensure that
poorly funded plans are better funded in the future; and a third would be
to reform PBGC by restructuring certain unfunded benefit guarantees, such

as so- called *shutdown benefits,* and program premiums.
__________________________________________________________________ Program
Assets, Liabilities, and Net Position, Fiscal Years 1976- 2002

Source: PBGC annual reports.

2002 dollars (in billions)

-10 -5

0 5

10 15

20 25

30 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

Assets Liabilites Net position

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.
This testimony provides GAO's observations on the factors that contributed
to recent changes in the single- employer pension

insurance program's financial condition, risks to the program's long- term
financial viability, and options to address the challenges facing the
single- employer program.

www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 873T. To view the full product,
including the scope and methodology, click on the link above. For more
information, contact Barbara Bovbjerg at (202) 512- 7215 or bovbjergb@
gao. gov.

Highlights of GAO- 03- 873T, a testimony before the Committee on Education
and the Workforce, U. S. House of Representative

September 4, 2003

PENSION BENEFIT GUARANTY CORPORATION

Single- Employer Pension Insurance Program Faces Significant Long- Term
Risks

Page 1 GAO- 03- 873T Mr. Chairman and Members of the Committee: I am
pleased to be here today to discuss the serious financial challenges

facing the Pension Benefit Guaranty Corporation*s single- employer
insurance program. This federal program insures the benefits of the more
than 34 million workers and retirees participating in private
definedbenefit pension plans. 1 Over the last few years, the finances of
PBGC*s single- employer insurance program, 2 have taken a severe turn for
the worse. From a $3.6 billion accumulated deficit in 1993, the program
registered a $10.1 billion accumulated surplus (assets exceeded
liabilities) in 2000 before returning to a $3.6 billion accumulated
deficit, in 2002 dollars. 3 More fundamentally, the long- term viability
of the program is at risk. Even after assuming responsibility for several
severely underfunded pension plans and recording over $9 billion in
estimated losses in 2002, PBGC estimates that as of September 30, 2002, it
faces exposure to approximately $35 billion in additional unfunded
liabilities from ongoing plans that are sponsored by financially weak
companies and may terminate. 4 1 A defined- benefit plan promises a
benefit that is generally based on an employee*s salary

and years of service. The employer is responsible for funding the benefit,
investing and managing plan assets, and bearing the investment risk. In
contrast, under a defined contribution plan, benefits are based on the
contributions to and investment returns on

individual accounts, and the employee bears the investment risk. 2 There
are two federal insurance programs for defined- benefit plans: one for
singleemployer plans and another for multiemployer plans. Our work was
limited to the PBGC program to insure the benefits promised by single-
employer defined- benefit pension plans. Single- employer plans provide
benefits to employees of one firm or, if plan terms are not

collectively bargained, employees of several related firms. 3 PBGC
estimates that its deficit had grown to about $5.4 billion at the end of
March 2003 based on the midyear financial report.

4 According to PBGC, for example, companies whose credit quality is below
investment grade sponsor a number of plans. PBGC classifies such plans as
reasonably possible terminations if the sponsors* financial condition and
other factors did not indicate that termination of their plans was likely
as of year- end. See PBGC 2002 Annual Report, p. 41. The independent
accountants that audited PBGC*s financial statement reported that PBGC
needs to improve its controls over the identification and measurement of
estimated liabilities for probable and reasonably possible plan
terminations. According to an official, PBGC has implemented new
procedures focused on improving these controls. See Audit of

the Pension Benefit Guaranty Corporation*s Fiscal Year 2002 and 2001
Financial Statements in PBGC Office of Inspector General Audit Report,
2003- 3/ 23168- 2 (Washington, D. C.: Jan. 30, 3003).

Page 2 GAO- 03- 873T This involves an issue beyond PBGC*s current and
future financial condition it also relates to the need to protect the
retirement security of

millions of American workers and retirees. I hope my testimony will help
clarify some of the key issues in the debate about how to respond to the
financial challenges facing the federal insurance program for
singleemployer defined- benefit plans. As you requested, I will discuss
(1) the factors that contributed to recent changes in the single- employer
pension insurance program*s financial condition, (2) risks to the
program*s longterm financial viability, and (3) options to address the
challenges facing the single- employer program.

To identify the factors that contributed to recent changes in the
singleemployer 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 $4.2 billion in

losses to the program at plan termination. In particular, I will focus on
the experience of the Bethlehem Steel plan because it provides such a
vivid illustration of the immediate and long- term challenges to the
program and

the need for additional reforms. To identify the primary risks to the
longterm 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 of the Department
of Labor, and in the private sector and reviewed analyses and other
documents provided by them.

Let me first summarize my responses to your questions. The termination, or
expected termination, of several severely underfunded pension plans was
the major reason for PBGC*s single- employer pension insurance program*s
return to an accumulated deficit in 2002. Several underlying factors
contributed to the severity of plans* underfunded condition at
termination, including a sharp decline in the stock market, which reduced
plan asset values, and a general decline in interest rates, which
increased the cost of terminating defined- benefit pension plans. Falling
stock prices

and interest rates can dramatically reduce plan funding as the sponsor
approaches bankruptcy. For example, while annual reports indicated the
Bethlehem Steel Corporation pension plan was almost fully funded in 1999
based on reports to IRS, PBGC estimates that the value of the plan*s
assets was less than 50 percent of the value of its guaranteed liabilities
by the

Page 3 GAO- 03- 873T time it was terminated in 2002. The current minimum
funding rules and other rules designed to encourage sponsors to fully fund
their plans were

not effective at preventing it from being severely underfunded at
termination.

Two primary risks could affect the long- term financial viability of the
single- employer program. First, and most worrisome, the high level of
losses experienced in 2002, due to the bankruptcy of companies with large
underfunded defined- benefit pension plans, could continue or accelerate.
This could occur if the economy recovers slowly or weakly, returns on

plan investments remain poor, interest rates remain low, or the structural
problems of particular industries with pension plans insured by PBGC
result in additional bankruptcies. Second, PBGC might not receive
sufficient revenue from premium payments and its own investments to offset
the losses experienced to date or those that may occur in subsequent
years. This could happen if participation in the singleemployer program
falls or if PBGC*s return on assets falls below the rate it uses to
calculate the present value of benefits promised in the future.

Because of its current financial weaknesses, as well as the serious,
longterm risks to the program*s future viability, we recently placed
PBGC*s single- employer insurance program on our high- risk list.

While there is not an immediate crisis, there is a serious problem that
needs to be addressed. Some pension professionals have suggested a *wait
and see* approach, betting that brighter economic conditions might
ameliorate PBGC*s financial challenges. However, the recent trends in the
single- employer program*s financial condition illustrate the fragility of

PBGC*s insured plans and suggest that an improvement in plan finances due
to economic recovery may not address certain fundamental weaknesses and
risks facing the single- employer insurance program. Agency officials and
other pension professionals have suggested taking a more proactive
approach and have identified a variety of options to address the
challenges facing PBGC*s single- employer program. In our view, several
types of reforms should be considered. The first would be to improve the
availability of information available to plan participants and others
about plan funding, plan investments, and PBGC guarantees. A second would
be to strengthen funding rules applicable to poorly funded plans to help
ensure plans are better funded should they be terminated in the future. A
third would be to reform PBGC by restructuring its benefit guarantees and
premiums. Guarantees for certain unfunded benefits, such as so- called
*shutdown benefits,* could be modified. With respect to variable- rate
premiums, in addition to the plan*s funding status, consideration should
be given to the economic strength of the plan*s

Page 4 GAO- 03- 873T sponsor, the allocation of the plan*s investment
portfolio, the plan*s benefit structure, and participant demographics.
These options are not

mutually exclusive, either in combination or individually and several
variations exist within each. Each option also has advantages and
disadvantages. In any event, any changes adopted to address the challenge
facing PBGC should improve the transparency of the plan*s financial
information, provide plan sponsors with incentives to increase plan
funding, and provide a means to hold sponsors accountable for adequately
funding their plans.

Before enactment of the Employee Retirement and Income Security Act
(ERISA) of 1974, few rules governed the funding of defined- benefit
pension plans, and there were no guarantees that participants of
definedbenefit plans would receive the benefits they were promised. When
Studebaker*s pension plan failed in the 1960s, for example, many plan
participants lost their pensions. 5 Such experiences prompted 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. 6 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. 7 Under ERISA, the
termination of a single- employer defined- benefit plan results in an
insurance claim with the single- employer program if the plan does not
have sufficient assets to pay all benefits accrued under the plan

5 The company and the union agreed to terminate the plan along the lines
set out in the collective bargaining agreement: retirees and retirement-
eligible employees over age 60 received full pensions and vested employees
under age 60 received a lump- sum payment worth about 15 percent of the
value of their pensions. Employees whose benefit accruals had not vested,
including all employees under age 40, received nothing. James A. Wooten,
**The Most Glorious Story of Failure in Business: * The Studebaker *
Packard Corporation and the Origins of ERISA.* Buffalo Law Review, vol. 49
(Buffalo, NY: 2001): 731.

6 Some defined- benefit plans are not covered by PBGC insurance; for
example, plans sponsored by professional service employers, such as
physicians and lawyers, with 25 or fewer employees. 7 See section 4002( a)
of P. L. 93- 406, Sep. 2, 1974. Background

Page 5 GAO- 03- 873T up to the date of plan termination. 8 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. 9 Additionally,
benefit increases in the 5 years immediately preceding plan termination
are not fully guaranteed, though PBGC will pay a portion of these
increases. 10 The guarantee is limited to certain benefits, including
socalled *shut- down 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. (See app I.) For example, sponsors
could voluntarily terminate their underfunded plans only if they were
bankrupt or generally unable to pay their debts without the termination.

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

8 The termination of a fully funded defined- benefit pension plan is
termed a standard termination. Plan sponsors may terminate fully funded
plans by purchasing a group annuity contract from an insurance company
under which the insurance company agrees to pay all accrued benefits or by
paying lump- sum benefits to participants if permissible. The termination
of an underfunded plan is termed a distress termination if the plan
sponsor requests the termination or an involuntary termination if PBGC
initiates the termination. PBGC may institute proceedings to terminate a
plan if, among other things, the plan will be unable to pay benefits when
due or the possible long- run loss to PBGC with respect to the plan may
reasonably be expected to increase unreasonably if the plan is not
terminated.

See 29 U. S. C. 1342( a). 9 The amount guaranteed by PBGC is reduced for
participants under age 65. 10 The guaranteed amount of the benefit
increase is calculated by multiplying the number of years the benefit
increase has been in effect, not to exceed 5 years, by the greater of (1)
20 percent of the monthly benefit calculated in accordance with PBGC
regulations or (2) $20 per month. See 29 C. F. R. 4022.25( b).

Page 6 GAO- 03- 873T plan sponsors calculate each plan*s current
liability, 11 and make additional contributions to the plan if it is
underfunded to the extent defined in the

law. 12 As discussed in a report 13 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. 14
Despite the 1987 amendments to ERISA, concerns about PBGC*s financial

condition persisted. In 1990, as part of our effort to call attention to
highrisk areas in the federal government, we noted that weaknesses in the
single- employer insurance program*s financial condition threatened

11 Under the IRC, current liability means all liabilities to employees and
their beneficiaries under the plan. See 26 U. S. C. 412( l)( 7)( A). In
calculating current liabilities, the IRC requires plans to use an interest
rate from within a permissible range of rates. See 26

U. S. C. 412( b)( 5)( B). In 1987, the permissible range was not more than
10 percent above, and not more than 10 percent below, the weighted average
of the rates of interest on 30- year Treasury bond securities during the
4- year period ending on the last day before the beginning of the plan
year. The top of the permissible range was gradually reduced by 1

percent per year beginning with the 1995 plan year to not more than 5
percent above the weighted average rate effective for plan years beginning
in 1999. The top of the permissible range was increased to 20 percent
above the weighted average rate for 2002 and 2003. The weighted average
rate is calculated as the average yield over 48 months with rates for the
most recent 12 months weighted by 4, the second most recent 12 months
weighted by 3, the third most recent 12 months weighted by 2, and the
fourth weighted by 1.

12 Under the additional funding rule, a single- employer plan sponsored by
an employer with more than 100 employees in defined- benefit plans is
subject to a deficit reduction contribution for a plan year if the value
of plan assets is less than 90 percent of its current liability. However,
a plan is not subject to the deficit reduction contribution if the value
of plan assets (1) is at least 80 percent of current liability and (2) was
at least 90 percent of current liability for each of the 2 immediately
preceding years or each of the second and

third immediately preceding years. To determine whether the additional
funding rule applies to a plan, the IRC requires sponsors to calculate
current liability using the highest interest rate allowable for the plan
year. See 26 U. S. C. 412( l)( 9)( C).

13 U. S. General Accounting Office, Private Pensions: Process Needed to
Monitor the Mandated Interest Rate for Pension Calculations, GAO- 03- 313
(Washington, D. C.: Feb. 27, 2003).

14 The Pension Preservation and Savings Expansion Act of 2003, H. R. 1776,
introduced April 11, 2003, would make a number of changes to the IRC to
address retirement savings and private pension issues, including replacing
the interest rate used for current liability calculations (currently, the
rate on 30- year Treasury bonds) with a rate based on an index or indices
of conservatively invested, long- term corporate bonds. In July of 2003,
the Department of the Treasury unveiled The Administration Proposal to
Improve the

Accuracy and Transparency of Pension Information. Its stated purpose is to
improve the accuracy of the pension liability discount rate, increase the
transparency of pension plan information, and strengthen safeguards
against pension underfunding.

Page 7 GAO- 03- 873T PBGC*s long- term viability. 15 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
singleemployer program, at risk. 16 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. 17 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; 18 in 2000, we
reported that contracting weaknesses at PBGC, if uncorrected, could result
in PBGC paying too much for required services; 19 and this year, we
reported that weaknesses in the PBGC budgeting process limited its control
over administrative expenses. 20 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

15 Letter to the Chairman, Senate Committee on Governmental Affairs and
House Committee on Government Operations, GAO/ OCG- 90- 1, Jan. 23, 1990.
GAO*s high risk program has increasingly focused on those major programs
and operations that need urgent attention and transformation to ensure
that our national government functions in the most economical, efficient,
and effective manner. Agencies or programs receiving a *high risk*
designation receive greater attention from GAO and are assessed in regular
reports, which

generally coincide with the start of each new Congress. 16 U. S. General
Accounting Office, High Risk Series: Pension Benefit Guaranty Corporation,
GAO/ HR- 93- 5 (Washington, D. C.: Dec. 1992).

17 U. S. General Accounting Office, High- Risk Series: An Overview, GAO/
HR- 95- 1 (Washington, D. C.: Feb. 1995). 18 U. S. General Accounting
Office, Pension Benefit Guaranty Corporation: Financial Condition
Improving but Long- Term Risks Remain, GAO/ HEHS- 99- 5 (Washington, D.
C.: Oct. 16, 1998). 19 U. S. General Accounting Office, Pension Benefit
Guaranty Corporation: Contracting Management Needs Improvement, GAO/ HEHS-
00- 130 (Washington, D. C.: Sep. 18, 2000). 20 U. S. General Accounting
Office, Pension Benefit Guaranty Corporation: Statutory Limitation on
Administrative Expenses Does Not Provide Meaningful Control, GAO- 03- 301
(Washington, D. C.: Feb. 28, 2003).

Page 8 GAO- 03- 873T during bankruptcy proceedings. 21 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. 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. 22 (See fig. 1.) Income from the variable- rate premium
fluctuated widely over that period.

21 According to PBGC officials, PBGC files a claim for all unfunded
benefits in bankruptcy proceedings. However, PBGC generally recovers only
a small portion of the total unfunded benefit amount in bankruptcy
proceedings, and the recovered amount is split between PBGC (for unfunded
guaranteed benefits) and participants (for unfunded nonguaranteed
benefits).

22 In 2002 dollars, flat- rate premium income rose from $605 million in
1993 to $654 million in 2002.

Page 9 GAO- 03- 873T Figure 1: Flat- and Variable- Rate Premium Income for
the Single- Employer Pension Insurance Program, Fiscal Years 1975- 2002
Note: We adjusted PBGC data using the Consumer Price Index for All Urban
Consumers: All Items.

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.)

Income (2002 dollars in millions)

0 200

400 600

800 1,000

1,200 1,400

1975 1978 1981 1984 1987 1990 1993 1996 1999 2002

Variable- rate premiums Flat- rate premiums Source: PBGC.

Fiscal year

Page 10 GAO- 03- 873T Figure 2: Participants and Plans Covered by the
Single- Employer Insurance Program, 1980- 2002

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. 23 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

23 See section 405, P. L. 107- 147, Mar. 9, 2002. Number of participants
(millions)

0 5

10 15

20 25

30 35

40 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993
1994 1995 1996 1997 1998 1999 2000 2001 2002

Number of plans (thousands)

0 10

20 30

40 50

60 70

80 90

100 110

120

Insured participants Plans Source: PBGC.

Fiscal year

Page 11 GAO- 03- 873T assets. 24 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 Treasury securities. (See fig. 3.)

24 PBGC accounts for single- employer program assets in separate trust and
revolving funds. PBGC accounts for the assets of terminated plans and plan
sponsors in a trust fund, which, according to PBGC, may be invested in
equities, real estate, or other securities. PBGC

accounts for single- employer program premiums in two revolving funds. One
revolving fund is used for all variable- rate premiums, and that portion
of the flat- rate premium attributable to the flat- rate in excess of
$8.50. The law states that PBGC may invest this revolving fund in such
obligations as it considers appropriate. See 29 U. S. C. 1305( f). The
second revolving fund is used for the remaining flat- rate premiums, and
the law restricts the investment of this revolving fund to obligations
issued or guaranteed by the United

States. See 29 U. S. C. 1305( b)( 3).

Page 12 GAO- 03- 873T Figure 3: Market Value of Single- Employer Program
Assets in Revolving and Trust Funds at Year End, Fiscal Years 1990- 2002

Note: We adjusted PBGC data using the Consumer Price Index for All Urban
Consumers: All Items.

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.

Market value (2002 dollars in billions)

0 5

10 15

20 25

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Other Equities Government securities Source: PBGC annual reports.

Page 13 GAO- 03- 873T Figure 4: Total Return on the Investment of Single-
Employer Program Assets, Fiscal Years 1990- 2002

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. 25 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. 26 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

25 In 2002, PBGC used an interest rate factor of 5.70 percent for benefit
payments through 2027 and a factor of 4. 75 percent for benefit payments
in the remaining years. 26 Under Statement of Financial Accounting
Standard Number 5, loss contingencies are classified as probable if the
future event or events are likely to occur.

Total return (percent)

-10 -5

0 5

10 15

20 25

30 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

-3.9 24.4

11.2 27.7

-6.4 24.1

8.5 21.9

14.4 3.6

13.2 -3.3

2.1 Source: PBGC annual reports.

Fiscal year

Page 14 GAO- 03- 873T 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.

Figure 5: Assets, Liabilities, and Net Position of the Single- Employer
Pension Insurance Program, Fiscal Years 1976- 2002

Note: Amounts for 1986 do not include plans subsequently returned to a
reorganized LTV Corporation. We adjusted PBGC data using the Consumer
Price Index for All Urban Consumers: All Items.

2002 dollars in billions -10

-5 0

5 10

15 20

25 30

Assets Liabilities Net position

1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Source: PBGC annual reports.

Page 15 GAO- 03- 873T 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. 27 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 due to the actual
or probable termination of underfunded plans increased from $1.5 billion
in fiscal year 2001 to $9.3 billion in fiscal year 2002, in 2002 dollars.
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. Some 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 to 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 27 U. S.
General Accounting Office, Pension Plans: Hidden Liabilities Increase
Claims

Against Government Insurance Programs, GAO/ HRD- 93- 7 (Washington, D. C.:
Dec. 30, 1992). Termination of

Severely Underfunded Plans Was Primary Factor in Financial Decline of
SingleEmployer Program

PBGC Assumed Responsibility for Several Severely Underfunded Plans in 2002

Page 16 GAO- 03- 873T 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. Plan Unfunded Liabilities

Were Increased by Stock Market and Interest Rate Declines

Page 17 GAO- 03- 873T Figure 6: Assets, Liabilities, and Funded Status of
the Bethlehem Steel Corporation Pension Plan, 1992- 2002

Note: Assets and liabilities for 1992 through 2001 are as of the beginning
of the plan year. During that period, the interest rate used by Bethlehem
Steel to value current liabilities decreased from 9.26 percent to 6.21
percent. Assets and liabilities for 2002 are PBGC estimates at termination
in December 2002. Termination liabilities were valued using a rate of 5
percent.

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. 28 28
2002 U. S. Investment Management Study, Greenwich Associates, Greenwich,
CT.

Dollars in billions 0 1.0

2.0 3.0

4.0 5.0

6.0 7.0

8.0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Assets Current liabilities Funded percentage Source: Annual form 5500
reports and PBGC.

Percent 0 20

40 60

80 100

120

Page 18 GAO- 03- 873T Figure 7: Total Return on Stocks in the S& P 500
Index, 1992- 2002

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, 29 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. 30 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

29 Pensions & Investments, Vol. 29, Issue 2 (Chicago; Jan. 22, 2001). 30
According to the survey, the Bethlehem Steel Corporation pension plan made
benefit payments of $587 million between Sept. 30, 2000, and Sept. 30,
2001. Pensions and Investments, www. pionline. com/ pension/ pension. cfm
(downloaded on June 13, 2003). Total return (percent)

-30 -25

-20 -15

-10 -5

0 5

10 15

20 25

30 35

40 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

7.6 10.1 1.3

37.6 23.0

33.4 28.6

21.0 -9.1

-11.9 -22.1

Source: Standard and Poor's.

Page 19 GAO- 03- 873T 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. 31 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. 32 Relevant interest rates may have declined 3
percentage points or more since 1990. 33 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.)

31 Present value calculations reflect the time value of money: a dollar in
the future is worth less than a dollar today because the dollar today can
be invested and earn interest. The calculation requires an assumption
about the interest rate, which reflects how much could

be earned from investing today*s dollars. Assuming a lower interest rate
increases the present value of future payments.

32 The magnitude of an increase or decrease in plan liabilities associated
with a given change in discount rates would depend on the demographic and
other characteristics of each plan.

33 To terminate a defined- benefit pension plan without submitting a claim
to PBGC, the plan sponsor determines the benefits that have been earned by
each participant up to the time of plan termination and purchases a
single- premium group annuity contract from an insurance company, under
which the insurance company guarantees to pay the accrued benefits when
they are due. Interest rates on long- term, high- quality fixed- income
securities are an important factor in pricing group annuity contracts
because insurance companies tend to invest premiums in such securities to
finance annuity payments. Other factors that would have affected group
annuity prices include changes in insurance company assumptions about
mortality rates and administrative costs.

Page 20 GAO- 03- 873T Figure 8: Interest Rates on Long- Term High- Quality
Corporate Bonds, 1990- 2002

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
singleemployer 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. 34 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. 35 Additionally, plans can earn funding

credits, which can be used to offset minimum funding contributions in 34
Minimum funding rules permit certain plan liabilities, such as past
service liabilities, to be amortized over specified time periods. See 26
U. S. C. 412( b)( 2)( B). Past service liabilities occur when benefits are
granted for service before the plan was set up or when benefit increases
after the set up date are made retroactive.

35 For the analysis, PBGC used termination liabilities reported to it
under 29 C. F. R. sec 4010. Minimum Funding Rules

and Variable- Rate Premiums Did Not Prevent Plans from Being Severely
Underfunded

0 5

6 7

8 9

10 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
Interest rate (percent)

Source: Moody's Investor Services.

Month of January

Page 21 GAO- 03- 873T 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. 36 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.

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 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
singleemployer 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

36 See 26 U. S. C. 412( b).

Page 22 GAO- 03- 873T contribution to the plan. 37 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 application of any
contributions and credit balances in the funding standard account. Each of
these four plans met this criterion.

Two primary risks threaten the long- term financial viability of the
singleemployer 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. 37 See 26 U. S. C. 404( a)( 1) and 26 U. S. C. 412( c)( 7).
The sponsor might have been able to make a contribution to the plan had it
selected a lower interest rate for valuing current liabilities. Polaroid
used the highest interest rate permitted by law for its calculations. PBGC
Faces LongTerm

Financial Risks from a Potential Imbalance of Assets and Liabilities

Page 23 GAO- 03- 873T 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 and 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. 38 Clearly, the future
direction of the stock

market is very difficult to forecast. From the end of 1999 through the end
of 2002, the stock market, as measured by the S& P 500, declined by about
40 percent, but has since partially recovered those losses, increasing by
over 13 percent (of a smaller base) during 2003, as of August. From
January 1975, the beginning of the first year following the passage of
ERISA, through July 2003, the S& P 500 grew at an average compounded
nominal annual rate of 9.8 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 interest rate on 30- year U. S. Treasury securities, from which
discount rates to value plan current liabilities are derived, has remained
below 5 percent since September 2002, its lowest level in over 25 years.
39 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 38
2002 U. S. Investment Management Study, Greenwich Associates, Greenwich,
CT. 39 The U. S. Treasury stopped publishing a 30- year Treasury bond rate
in February 2002, but the Internal Revenue Service publishes rates for
pension calculations based on rates for the last- issued bonds in February
2001. Interest rates to calculate plan liabilities must be within a
*permissible range* around a 4- year weighted average of 30- year Treasury
bond rates; the permissible range for plan years beginning in 2002 and
2003 was 90 to 120 percent of this 4-

year weighted average. Several Factors Affect the

Degree to Which Plans Are Underfunded and the Likelihood That Plan
Sponsors Will Go Bankrupt

Page 24 GAO- 03- 873T purchase. 40 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. 41 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; that is, 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.

40 A potentially offsetting effect of falling interest rates is the
possible increased return on fixed- income assets that plans, or PBGC,
hold. When interest rates fall, the value of existing fixed- income
securities with time left to maturity rises.

41 The last three recessions on record in the United States occurred
during 1981, 1990- 91, and 2001. (See www. bea. gov/ bea/ dn/ gdpchg.
xls.)

Page 25 GAO- 03- 873T 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. 42 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. 43 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

42 This estimate comprises *reasonably possible* terminations, which
include plans sponsored by companies with credit quality below investment
grade that may terminate, though likely not by year- end. Plan
participants have a nonforfeitable right to vested benefits, as opposed to
nonvested benefits, for which participants have not yet completed
qualification requirements.

43 PBGC began using PIMS to project its future financial condition in
1998. Prior to this, PBGC provided low-, medium-, and high- loss
forecasts, which were extrapolations from the agency*s claims experience
and the economic conditions of the previous 2 decades. Revenue from
Premiums and Investments May Not

Offset Program*s Current Deficit or Possible Future Losses

Page 26 GAO- 03- 873T zero. (See fig. 9.) In 2001, total premium and
investment was negative and in 2002 equaled approximately $1 billion.

Figure 9: PBGC Premium and Investment Income, 1976- 2002

Note: We adjusted PBGC data using the Consumer Price Index for All Urban
Consumers: All Items.

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
PBGCinsured plans has decreased steadily from approximately 110,000 in
1987

Income (2002 dollars in millions)

-1.0 -0.5

0 0.5

1.0 1.5

2.0 2.5

3.0 3.5

Premium income Investment income

1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Source: PBGC annual financial reports.

Page 27 GAO- 03- 873T to around 30,000 in 2002. 44 While the number of
total participants in PBGCinsured 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
definedbenefit 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 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. 45 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.

44 In contrast, defined- contribution plans have grown significantly over
a similar period* from 462, 000 plans in 1985 to 674,000 plans in 1998. 45
If a plan sponsor purchases an annuity for a retiree from an insurance
company to pay benefits, this would also remove the retiree from the
participant pool, which would have the same effect on flat- rate premiums.

Page 28 GAO- 03- 873T Figure 10: Distribution of PBGC- Insured
Participants by Industry, 2001

Note: Percentages do not sum to 100 due to rounding.

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 some plans that showed credit balances
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.

7% 12% 47%

8% 12% 15%

Transportation and public utilities Information

Finance, insurance, and real estate Other

Manufacturing Services

Source: PBGC.

Page 29 GAO- 03- 873T Also, it may be difficult for PBGC to diversify its
pool of insured plans among strong and weak sponsors and plans. In
addition to facing firmspecific

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. 46 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 would 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
singleemployer 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. 47 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.

46 Boyce, Steven and Richard A. Ippolito, *The Cost of Pension Insurance,*
The Journal of Risk and Insurance, (2002) Vol. 69, No. 2, p. 121- 170. 47
The return on fixed- income assets sold before maturity may also be
affected by capital gains (or losses). The price of a bond moves in the
opposite direction as interest rates, and so if interest rates fall,
bondholders may reap capital gains.

Page 30 GAO- 03- 873T 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 concern 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.

Although some pension professionals have suggested a *wait and see*
approach, betting that brighter economic conditions improving PBGC*s
future financial condition are imminent, agency officials and other
pension professionals have suggested taking a more prudent, proactive
approach, identifying a variety of options that could address the
challenges facing PBGC*s single- employer program. In our view, several
types of reforms

should be considered. The first would be to improve the availability of
information about plan funding, plan investments, and PBGC guarantees
available to plan participants and others. A second would be to strengthen
funding rules applicable to poorly funded plans to help ensure plans are

better funded should they be terminated in the future. A third would be to
reform PBGC by restructuring its benefit guarantees and premiums.
Guarantees for certain unfunded benefits, such as so- called shutdown
benefits, could be modified. With respect to variable- rate premiums, in
addition to the plan*s funding status, consideration should be given to
the economic strength of the plan*s sponsor, the allocation of the plan*s
investment portfolio, the plan*s benefit structure, and participant
demographics. Several variations exist within these options and each
option has advantages and disadvantages. In any event, the changes adopted
to address the challenges facing PBGC should improve the transparency of
the plan*s financial information, provide plan sponsors with incentives to
increase plan funding, and provide a means to hold sponsors accountable
for adequately funding their plans.

To address challenges to PBGC*s financial condition include, we could:
Options That Address

Challenges to PBGC Have Advantages and Disadvantages

Page 31 GAO- 03- 873T Increase transparency of plan information. Improving
the availability of information to plan participants and others about plan
funding, plan investments, and PBGC guarantees may give plan sponsors
additional

incentives to increase plan funding and make participants better able to
plan for their retirement.

ERISA could be amended to require:  Disclosing termination liability.
Under a recent administration proposal, 48 sponsors would be required to
report plan termination liability annually. Under current law, sponsors
are required to report a plan*s current liability for funding purposes,
which often can be less than termination liability. In addition, only
participants in plans below a certain funding threshold * based on current
liability rather than termination liability * receive annual notices of
the funding status of their plans. In either case, plan participants may
be unaware of the degree to which their plan is underfunded until it
terminates. However, representatives of plan sponsors have stated that
financially strong companies that are able to make good on their pension
promises should not be burdened with additional complex and costly
disclosure requirements that could be confusing or irrelevant to plan
participants.

 Disclosing plan investments. Disclosing plan asset allocation
information may give plan sponsors an incentive to increase funding of
underfunded plans or limit the level of equity investments in their plans.
Currently, only participants in plans below a certain funding threshold
receive annual notices of the funding status of their plans, and the
information plans currently must provide does not reflect how the plan*s
assets are invested. For example, notices to participants could include
how much is invested in the sponsor*s securities.

 Disclosing plan funding status and benefit guarantee limitations to
additional participants. Expanding the circumstances under which sponsors
must notify participants of plan underfunding and PBGC guarantee
limitations might give sponsors an additional incentive to increase plan
funding and would enable more participants to better plan their
retirement. The ERISA requirement that plan sponsors notify participants
and beneficiaries of the plan*s funding status and limits on the PBGC
guarantee currently goes into effect

48 The Administration Proposal to Improve the Accuracy and Transparency of
Pension Information. (July 8, 2003).

Page 32 GAO- 03- 873T when plans are required to pay variable- rate
premiums and meet certain other requirements. 49 As a result, many plan
participants,

including participants of the Bethlehem Steel pension plan, have not
received such notifications in the years immediately preceding plan
termination. 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 US Airways plan was terminated in 2003, while the maximum
PBGC- guaranteed benefit at age 60 is $28,600 per year. 50 Strengthen
funding rules. Funding rules could be strengthened to

increase minimum contributions to underfunded plans and to allow 49 See 29
U. S. C. 1311 and 29 C. F. R. 4011. 3. 50 However, the actual benefit paid
by PBGC depends on a number of factors and may exceed the maximum
guaranteed benefit. For example, PBGC expects that the average annual
benefit paid to U. S. Airways pilots who are 59 years of age with 29 years
of service will be about $85,000, including nonguaranteed amounts. PBGC
said that many US Airways pilots will receive more that the $28,600
maximum limit because, according to priorities established under ERISA,
pension plan participants may receive benefits in excess of the guaranteed
amounts if there are enough assets or recoveries from the plan sponsors.
For example, a participant who could have retired three years prior to
plan termination (but did not) may be eligible to receive both guaranteed
and nonguaranteed amounts. PBGC letter in response to follow- up questions
from the Committee on Finance, United States Senate (Washington, D. C.:
Apr. 1, 2003).

Page 33 GAO- 03- 873T additional contributions to fully funded plans. 51
This approach would improve plan funding over time, while limiting the
losses PBGC would

incur when a plan is terminated. However, even if funding rules were to be
strengthened immediately, it could take years for the change to have a
meaningful effect on PBGC*s financial condition. In addition, such a
change would require some sponsors to allocate additional resources to
their pension plans, which may cause the plan sponsor of an underfunded
plan to provide less generous wage or other benefits than would otherwise
be provided. The IRC could be amended to strengthen the funding rules by:
 Basing minimum contributions on termination liabilities. One

way to strengthen funding rules is to require plans to base minimum
funding contributions and full- funding limits on plan termination
liabilities, rather than current liabilities. Since plan termination
liabilities are typically higher than current liabilities, such a change
would likely reduce potential claims against PBGC. One problem with

51 If the Congress chooses to replace the 30- year Treasury rate used to
calculate pension plan liabilities, the level of the interest rate
selected can also affect plan funding. For example, if a rate that is
higher than the current rate is selected, plan liabilities would appear
better funded, thereby decreasing minimum and maximum employer
contributions. In addition, some plans would reach full- funding
limitations and avoid having to pay variable- rate premiums. Therefore,
PBGC would receive less revenue. Conversely, a lower

rate would likely improve PBGC*s financial condition. In 1987, when the
30- year Treasury rate was adopted for use in certain pension
calculations, the Congress intended that the interest rate used for
current liability calculations would, within certain parameters, reflect

the price an insurance company would charge to take responsibility for the
plans pension payments. However, in the late 1990s, when fewer 30- year
Treasury bonds were issued and economic conditions increased demand for
the bonds, the 30- year Treasury rate diverged from other long- term
interest rates, an indication that it also may have diverged from group

annuity purchase rates. In 2001, Treasury stopped issuing these bonds
altogether, and in March 2002, the Congress enacted temporary measures to
alleviate employer concerns that low interest rates on the remaining 30-
year Treasury bonds were affecting the reasonableness of the interest rate
for employer pension calculations. Selecting a replacement rate is
difficult because little information exists on which to base the
selection. Other than the survey conducted for PBGC, no mechanism exists
to collect information on actual group annuity purchase rates. Compared to
other alternatives, the PBGC interest rate factors may have the most
direct connection to the group annuity market, but PBGC factors are less
transparent than market- determined alternatives. Longterm market rates
may track changes in group annuity rates over time, but their proximity to
group annuity rates is also uncertain. For example, an interest rate based
on a long- term market rate, such as corporate bond indexes, may need to
be adjusted downward to better

reflect the level of group annuity purchase rates. However, as we stated
in our report earlier this year, establishing a process for regulatory
adjustments to any rate selected may make it more suitable for pension
plan liability calculations. See GAO- 03- 313.

Page 34 GAO- 03- 873T this approach is the difficulty plan sponsors would
have determining the appropriate interest rate to use in valuing
termination liabilities. As

we reported, selecting an appropriate interest rate is difficult because
little information exists on which to base the selection. 52 In addition,
requiring financially strong sponsors to fund a plan's termination
liabilities may encourage them to curtail or terminate those plans.

 Strengthening minimum funding rules. Altering the threshold for the
additional funding rule or the accumulation and use of credit balances
would likely increase contribution requirements for some underfunded
plans. To determine whether the additional funding rule applies to a plan,
the IRC requires sponsors to calculate current liability using the highest
interest rate allowable for the plan year, which results in the lowest
possible value for current liability. Basing the threshold on a
termination liability rate rather than the highest possible current
liability rate, might help prevent the sponsor of an underfunded plan to
avoid making an additional contribution. In addition, if a sponsor makes a
contribution in any given year that exceeds the minimum required
contribution, the excess plus interest would be credited against future
required contributions. Limiting the use of credit balances to offset
contribution requirements might also prevent sponsors of significantly
underfunded plans from avoiding contributions. Such limitations might also
be applied on the basis of the plan sponsor*s poor cash flow position or
credit rating. However, significantly reducing the existing funding
flexibility of financially strong sponsors might encourage them to curtail
or terminate their plans.

 Raising full- funding limitations. Raising full- funding limitations may
help decrease the level of underfunding in pension plans. The IRC and
ERISA impose full- funding limitations that restrict certain taxdeductible
contributions to prevent plan sponsors from contributing more to their
plan than is necessary to cover accrued future benefits. 53 The advantage
to raising these limitations is that such additional

contributions might result in pension plans being better funded,
decreasing the likelihood that they will be underfunded should they
terminate. In addition, increasing full- funding limitations may be

52 GAO- 03- 313. 53 Employers are generally subject to an excise tax for
failure to make required contributions or for making contributions in
excess of the greater of the maximum

deductible amount or the ERISA full- funding limit.

Page 35 GAO- 03- 873T advantageous to plan sponsors because contributions
made during times of prosperity may carry over, allowing them to avoid
minimum

funding contributions during less prosperous times. For example, the
current limitation on tax- deductible contributions for plans with assets
at 100 percent of current liability could be increased. 54 The
disadvantage of raising the full- funding limitations is that the federal
government would receive less tax revenue because of increases in
taxdeductible contributions.

Reform PBGC*s benefit guarantee and premium structure. Reduce benefit
guarantees. Reducing certain guaranteed benefits that plan sponsors are
not currently required to fund 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. In addition, 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 force financially healthy
companies out of the defined- benefit system and discourage other plan
sponsors from entering the system. Various actions could be taken to
reduce guaranteed benefits. These include:

 Phasing- 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

54 For example, one way to do this would be to allow deductions within a
corridor of up to 130 percent of current liabilities. Gebhardtsbauer, Ron.
American Academy of Actuaries testimony before the Subcommittee on
Employer- Employee Relations, Committee on Education and the Workforce, U.
S. House of Representatives, Hearing on Strengthening Pension Security:
Examining the Health and Future of Defined Benefit Pension Plans.
(Washington, D. C.: June 4, 2003), 9.

Page 36 GAO- 03- 873T PBGC from underfunded plans. 55 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.

 Eliminating or reducing unfunded benefit increases. Currently, plan
sponsors must meet certain conditions before increasing the benefits of
plans that are less than 60 percent funded. 56 Eliminating benefit
increases or increasing this percentage 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. Two actions that could be taken to change
premiums are

 Increasing 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.

 Increasing or restructuring variable- rate premium. The current
variable- rate premium of $9 per $1,000 of unfunded liability could be

55 Currently, some measures exist to limit the losses incurred by PBGC
from newly terminated plans. PBGC is responsible for only a portion of all
benefit increases that the sponsor adds in the 5 years leading up to
termination.

56 IRC provides generally that a plan less than 60 percent funded on a
current liability basis may not increase benefits without either
immediately funding the increase or providing security. See 26 U. S. C.
401( a)( 29).

Page 37 GAO- 03- 873T 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, 57 shutdown benefit, and flooroffset
provisions. 58 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 riskbased could also
be more challenging for PBGC to administer.

The current financial challenges facing PBGC and the array of policy
options to address those challenges are more appropriately viewed within
the context of the agency*s overall mission. In 1974, ERISA placed three
important charges on PBGC: first, protect the pension benefits so
essential to the retirement security of hard working Americans; second,
minimize the pension insurance premiums and other costs of carrying out
the agency*s obligations; and finally, foster the health of the private
definedbenefit pension plan system. While addressing one or even two of
these goals would be a challenge, it is a far more formidable endeavor to
fulfill all three. In any event, any changes adopted to address the
challenges facing PBGC should provide plan sponsors with incentives to
increase plan funding, improve the transparency of the plan*s financial
information, and provide a means to hold sponsors accountable for funding
their plans adequately. Ultimately, however, for any insurance program,
including the

single- employer pension insurance program, to be self- financing, there
must be a balance between premiums and the program's exposure to losses.

57 For example, a plan that allows a lump- sum option* as is often found
in a cash- balance and other hybrid plan* may pose a different level of
risk to PBGC than a plan that does not. 58 Under the floor- offset
arrangement, the benefit computed under the final pay formula is

"offset" by the benefit amount that the account of another plan, such as
an Employee Stock Ownership Plan, could provide. Conclusion

Page 38 GAO- 03- 873T A variety of options are available to the Congress
and PBGC to address the short- term vulnerabilities of the single-
employer insurance program.

Congress will have to weigh carefully the strengths and weaknesses of each
option as it crafts the appropriate policy response. However, to
understand the program*s structural problems, it helps to understand how
much the world has changed since the enactment of ERISA. In 1974, the
long- term decline that our nation*s private defined- benefit pension
system

has experienced since that time might have been difficult for some to
envision. Although there has been some absolute growth in the system since
1980, active workers have comprised a declining percentage of program
participants, and defined- benefit plan coverage has declined as a
percentage of the national private labor force. The causes of this long-
term decline are many and complex and have turned out to be more systemic,
more structural in nature, and far more powerful than the resources and
bully pulpit that PBGC can bring to bear.

This trend has had important implications for the nature and the magnitude
of the risk that PBGC must insure. Since 1987, as employers, both large
and small, have exited the system, newer firms have generally chosen other
vehicles to help their employees provide for their retirement

security. This has left PBGC with a risk pool of employers that is
concentrated in sectors of the economy, such as air transportation and
automobiles, which have become increasingly vulnerable. As of 2002, almost
half of all defined- benefit plan participants were covered by plans
offered by firms in manufacturing industries. The secular decline and
competitive turmoil already experienced in industries like steel and air

transportion could well extend to the other remaining strongholds of
defined- benefit plans in the future, weakening the system even further.
Thus, the long- term financial health of PBGC and its ability to protect

workers* pensions is inextricably bound to this underlying change in the
nature of the risk that it insures, and implicitly to the prospective
health of the defined- benefit system. Options that serve to revitalize
the definedbenefit

system could stabilize PBGC*s financial situation, although such options
may be effective only over the long term. Our greater challenge is to a
more fundamental consideration of the manner in which the federal
government protects the defined- benefit pensions of workers in this

increasingly risky environment. We look forward to working with the
Congress on this crucial subject.

Page 39 GAO- 03- 873T As part of the Employee Retirement and Income
Security Act (ERISA) of 1974, the Congress established the Pension Benefit
Guaranty Corporation

(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).
Table 1: Key Legislative Changes to the Single- Employer Insurance Program
Since ERISA Was Enacted Year Law Number Key provisions 1974 ERISA P. L.
93- 406 Created a federal pension insurance program and

established a flat- rate premium and minimum and maximum funding rules.

1986 Single- Employer Pension Plan Amendments Act of 1986 enacted as Title
XI of the Consolidated Omnibus Budget Reconciliation Act of 1985

P. L. 99- 272 Raised the flat- rate premium and established financial
distress criteria that sponsoring employers must meet to terminate an
underfunded plan.

1987 Pension Protection Act enacted as part of the Omnibus Budget
Reconciliation Act of 1987 P. L. 100- 203 Increased the flat- rate premium
and added a variablerate premium based on 80 percent of the 30- year
Treasury rate. In addition, established a permissible range around the 30-
year Treasury rate as the basis for current liability calculations,
increased the minimum funding standards, and established a fullfunding

limitation based on 150 percent of current liability.

1994 Retirement Protection Act enacted as part of the Uruguay Rounds
Agreements Act, also referred to as the General Agreement on Tariffs and
Trade P. L. 103- 465 Raised the basis for variable- rate premium
calculation

from 80 percent to 85 percent of the 30- year Treasury rate (effective
July 1997). Phased out the cap on the variable- rate premium. Strengthened
funding requirements by narrowing the permissible range of the allowable
interest rates and standardizing mortality assumptions for the current
liability calculation. Also, established 90 percent as the minimum full-
funding limitation.

2001 The Economic Growth and Tax Relief Reconciliation Act of 2001 P. L.
107- 16 Accelerated the phasing out of the 160 percent fullfunding
limitation and repealed it for plan years

beginning in 2004 and thereafter. 2002 The Job Creation and Worker
Assistance Act of 2002 P. L. 107- 147 Temporarily expanded the permissible
range of the

statutory interest rates for current liability calculations and
temporarily increased the PBGC variable- rate premium calculations to 100
percent of the 30- year Treasury rate for plan years beginning after
December 31, 2001, and before January 1, 2004.

Source: Public Law.

Appendix I: Key Legislative Changes That Affect the Single- Employer
Insurance Program

(130284)

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