[Background Material and Data on Programs within the Jurisdiction of the Committee on Ways and Means (Green Book)]
[Program Descriptions]
[Section 15. The Pension Benefit Guaranty Corporation]
[From the U.S. Government Printing Office, www.gpo.gov]






 
[1996 Green Book] SECTION 15. THE PENSION BENEFIT GUARANTY CORPORATION

                                CONTENTS

Explanation of the Corporation and Its Functions
  Administration
  Plan Termination Insurance
  Plan Termination
Financial Condition of the PBGC
  Overview
  Losses
  Financing
Budgetary Treatment
Future Financial Status of the PBGC
Legislative History
  Single-Employer Plans
  Multiemployer Plan Insurance Program

            EXPLANATION OF THE CORPORATION AND ITS FUNCTIONS

    The Pension Benefit Guaranty Corporation (PBGC) was 
established under title IV of the Employee Retirement Income 
Security Act of 1974 (ERISA) (88 Stat. 829, Public Law 93-406) 
to insure private pension beneficiaries against the complete 
loss of promised benefits if their defined benefit pension plan 
is terminated without adequate funding. The PBGC receives no 
funds from general tax revenues. Operations are financed by 
insurance premiums set by Congress and paid by sponsors of 
defined benefit plans, investment income, assets from pension 
plans trusteed by PBGC, and recoveries from the companies 
formerly responsible for the trusteed plans.

                             Administration

    The PBGC is a government-owned corporation. A three member 
board of directors, chaired by the Secretary of Labor, 
administers the Corporation. The Secretary of Commerce and the 
Secretary of the Treasury are the other directors. ERISA 
provides for a seven member Advisory Committee, appointed by 
the President, for staggered 3 year terms. The Advisory 
Committee advises the PBGC on issues such as the appointment of 
trustees in termination proceedings, investment of funds, plan 
liquidations, and other matters.

                       Plan Termination Insurance

Defined benefit and defined contribution plans
    There are two basic kinds of pension plans: ``defined 
benefit'' and ``defined contribution'' plans. Under a defined 
benefit plan, employees receive a fixed benefit at retirement 
prescribed by a formula set forth in the plan. The employer 
makes annual contributions to the plan based on actuarial 
calculations designed to ensure that the plan has sufficient 
funds to pay the benefit prescribed by the formula. Under a 
defined contribution plan, no particular benefit is promised. 
Instead, benefits are based on the balance of an individual 
account maintained for the benefit of the employee. The benefit 
received by an employee at retirement is generally dependent on 
two factors: total contributions made to the plan on the 
employee's behalf during the employee's participation in the 
plan, and the investment experience of the amounts contributed 
on the employee's behalf. Under either type of pension plan, 
employees may also be permitted to make contributions.
    Under a defined contribution plan, the employee bears all 
the risk of poor investment performance of the assets invested 
in a plan. Whether the funds are invested well or poorly, the 
employee gets at retirement only what was contributed plus the 
amount actually earned.
    Under a defined benefit plan, the employer bears more of 
the risk of loss. The Internal Revenue Code and ERISA contain 
minimum funding standards that require the employer to make 
contributions to a defined benefit plan to fund promised 
benefits. Thus, for example, if the plan experiences poor 
investment performance, actuarial miscalculations, or low 
benefit estimates, the employer will be required to make 
additional contributions to the plan. However, the minimum 
funding rules provide for funding over a period of time, and do 
not require that the plan have assets to pay all the benefits 
earned under the plan at any particular time. Thus, it is 
possible for a defined benefit plan to terminate without having 
sufficient assets to pay promised benefits. The PBGC insures 
defined benefit plan benefits up to certain limits to protect 
plan participants in the event of such a termination. However, 
the PBGC does not protect all benefits promised under a plan so 
that even under a defined benefit plan, the employees bear some 
risk of loss.
    Defined benefit plans are fewer in number than defined 
contribution plans, but cover more participants. In 1992, 
defined benefit pension plans accounted for 13 percent of all 
pension plans, but were the primary form of coverage for 57 
percent of all pension participants.
    The PBGC insures benefits only under certain defined 
benefit plans and only up to certain monthly amounts. Private 
defined benefit pension plans insured by the PBGC continue to 
be well funded in general, with more than $1 trillion in 
assets, exceeding liability by more than $100 billion. However, 
the PBGC faces substantial direct exposure from a relatively 
small number of single-employer plans, concentrated in the 
steel, airline, navigational/aeronautical instruments, 
transportation equipment, and automobile industries, with 
unfunded liabilities of $31 billion, as of December 31, 1994. 
Underfunding in multiemployer plans, as of January 1, 1993 (the 
most recent publicly available information) totaled $20 
billion. The operations of the insurance program, and insurance 
limits, are described below. Defined contribution plans are not 
insured by the PBGC.
Single-employer and multiemployer plans
    Defined benefit plans insured by the PBGC fall into two 
categories: single-employer plans and multiemployer plans. 
Multiemployer plans are collectively bargained arrangements 
maintained by more than one employer. Single-employer plans, 
whether or not collectively bargained, are each maintained by 
one employer.
    The risk to the PBGC posed by single-employer plans is 
different from that posed by multiemployer plans. Generally, 
single-employer plans are more vulnerable to the risk of 
underfunding due to financial weakness of the sponsoring 
employer; the PBGC is more vulnerable to the risk that a single 
employer will be unable to make up the difference between 
funded and promised benefits. Issues concerning insurance of 
multiemployer plans are more likely to concern the allocation 
of liabilities as firms enter and leave the participating 
group.
    The PBGC insures the benefits of 42 million pension plan 
participants, including active workers and retirees. Of these, 
79 percent, or about 33 million, are covered by approximately 
53,000 single-employer pension plans, and 21 percent, or about 
8.7 million, are covered by approximately 2,000 multiemployer 
plans.
Other requirements for PBGC coverage
    The PBGC covers only those defined benefit plans which meet 
the qualification requirements of section 401 of the Internal 
Revenue Code. These are also the requirements that plans must 
meet in order to receive the significant tax benefits available 
to pension plans.
    Generally, to be qualified under the Internal Revenue Code, 
a pension plan must be established with the intent of being a 
permanent and continuing arrangement; must provide definitely 
determinable benefits; may not discriminate in favor of highly 
compensated employees with respect to coverage, contributions 
or benefits; and must cover a minimum number of participants.
    Pension plans specifically excluded from insurance by the 
PBGC include government and church plans, defined contribution 
plans, plans of fraternal societies financed entirely by member 
contributions, and plans maintained by certain professionals 
with 25 or fewer participants.

                            Plan Termination

Single-employer plans
    An employer can voluntarily terminate a single-employer 
plan only in a standard or distress termination. The 
participants and the PBGC must be notified of the termination. 
The PBGC may involuntarily terminate a plan.
    Standard terminations.--A standard termination is permitted 
only if plan assets are sufficient to cover benefit 
liabilities. Generally, benefit liabilities equal all benefits 
earned to date by plan participants, including vested and 
nonvested benefits (which automatically become vested at the 
time of termination), and including certain early retirement 
supplements and subsidies. Benefit liabilities may also include 
certain contingent benefits (for example, plant shutdown 
benefits). If assets are sufficient to cover benefit 
liabilities (and other termination requirements, such as notice 
to employees, have not been violated), the plan distributes 
benefits to participants. The plan provides for the benefit 
payments it owes by purchasing annuity contracts from an 
insurance company, or otherwise providing for the payment of 
benefits, for example, by providing the benefits in lump sum 
distributions.
    Assets in excess of the amounts necessary to cover benefit 
liabilities may be recovered by the employer in an asset 
reversion. The asset reversion is included in the gross income 
of the employer and is also subject to a nondeductible excise 
tax. The excise tax is 20 percent of the amount of the 
reversion if the employer establishes a qualified replacement 
plan, or provides certain benefit increases in connection with 
the termination. Otherwise, the excise tax is 50 percent of the 
reversion amount.
    Distress terminations.--If assets in the plan are not 
sufficient to cover benefit liabilities, the employer may not 
terminate the plan unless the employer meets one of four 
criteria necessary for a ``distress'' termination:
  --The contributing sponsor, and every member of the 
        controlled group of which the sponsor is a member, is 
        being liquidated in bankruptcy or any similar Federal 
        law or other similar State insolvency proceedings;
  --The contributing sponsor and every member of the sponsor's 
        controlled group is being reorganized in bankruptcy or 
        similar State proceeding;
  --The PBGC determines that termination is necessary to allow 
        the employer to pay its debts when due;
  --The PBGC determines that termination is necessary to avoid 
        unreasonably burdensome pension costs caused solely by 
        a decline in the employer's work force.
    These requirements, added by the Single Employer Pension 
Plan Amendments Act of 1986 (SEPPAA) and modified by the 
Pension Protection Act of 1987 (PPA), and the Retirement 
Protection Act of 1994 (RPA) are designed to ensure that the 
liabilities of an underfunded plan remain the responsibility of 
the employer, rather than the PBGC, unless the employer meets 
strict standards of financial need indicating genuine inability 
to continue funding the plan.
    Involuntary terminations.--In order to terminate a plan 
involuntarily, the PBGC must obtain a court order. The PBGC may 
institute court proceedings only if the plan in question has 
not met the minimum funding standards, will be unable to pay 
benefits when due, has a substantial owner who has received a 
distribution greater than $10,000 (other than by reason of 
death), or may create liability for the PBGC if the plan is not 
terminated. The PBGC must terminate a plan if the plan is 
unable to pay benefits that are currently due. A court may 
order termination of the plan in order to protect the interests 
of participants, to avoid unreasonable deterioration of the 
plan's financial condition, or to avoid an unreasonable 
increase in the PBGC liability under the plan.
    PBGC trusteeship.--When an underfunded plan terminates in a 
distress or involuntary termination, the plan effectively goes 
into PBGC receivership. The PBGC becomes the trustee of the 
plan, takes control of any plan assets, and assumes 
responsibility for liabilities under the plan. The PBGC makes 
payments for benefit liabilities promised under the plan with 
assets received from two sources: assets in the plan before 
termination, and assets recovered from the employer (see 
below). The balance, if any, of guaranteed benefits owed to 
beneficiaries is paid from the PBGC's revolving funds (see 
below).
    Employer liability to the PBGC.--Following a distress or 
involuntary termination, the plan's contributing sponsor and 
every member of that sponsor's controlled group is liable to 
the PBGC for the excess of the value of the plan's liabilities 
as of the date of plan termination over the fair market value 
of the plan's assets on the date of termination. The liability 
is joint and several, meaning that each member of the 
controlled group can be held responsible for the entire 
liability. Generally, the obligation is payable in cash or 
negotiable securities to the PBGC on the date of termination. 
Failure to pay this amount upon demand by the PBGC may trigger 
a lien on the property of the contributing employer's 
controlled group for up to 30 percent of its net worth. 
Obligations in excess of this amount are to be paid on 
commercially reasonable terms acceptable to the PBGC.
    Benefit payments.--When an underfunded plan terminates, the 
benefits that the PBGC will pay depend on the statutory 
guaranty, asset allocation, and recovery on the PBGC's employer 
liability claim.
    Guaranteed benefits.--Within certain limits, the PBGC 
guarantees any retirement benefit that was nonforfeitable 
(vested) on the date of plan termination other than benefits 
that vest solely on account of the termination, and any death, 
survivor or disability benefit that was owed or was in payment 
status at the date of plan termination. Generally only that 
part of the retirement benefit that is payable in monthly 
installments (rather, than for example, lump sum benefits 
payable to encourage early retirement) is guaranteed. 
Retirement benefits that commence before the normal age of 
retirement are guaranteed, provided they meet the other 
conditions of guarantee. Contingent benefits (for example, 
early retirement benefits provided only if a plant shuts down) 
are guaranteed only if the triggering event occurs before plan 
termination.
    There is a statutory ceiling on the amount of monthly 
benefits payable to any individual that may be guaranteed. This 
ceiling, which is indexed according to changes in the Social 
Security wage base, is $2,642.05 in 1996 for a single life 
annuity payable at age 65. This limit is actuarially reduced 
for benefits payable before age 65, or payable in a different 
form.
    The reduction in the maximum guarantee for benefits paid 
before age 65 is 7 percent for each of the first 5 years under 
age 65, 4 percent for each of the next 5 years, and 2 percent 
for each of the next 10 years. The reduction in the maximum 
guarantee for benefits paid in a form other than a single life 
annuity depends on the type of benefit, and if there is a 
survivor's benefit, the percentage of the benefit continuing to 
surviving spouse and the age difference between the participant 
and spouse.
    For example, consider a retiree who, at plan termination in 
1996, is age 60 and whose spouse is 2 years younger. The 
participant is receiving a joint and 50 percent survivor's 
benefit (a benefit that continues to a surviving spouse upon 
the death of the participant at a reduced level of 50 percent). 
In this case, the maximum guarantee applicable to the 
participant is $1,514.69 per month [$2,642.05  .90 
(joint and survivor benefit)  .65 (participant age) 
 .98 (spouse 2 years younger)].
    The guarantee for any new benefit, including benefits under 
new plans and benefits provided by amendment to already 
existing plans, is phased in over 5 years following creation of 
the benefit.
    Asset allocation.--Assets of a terminated plan are 
allocated to pay benefits according to a priority schedule 
established by statute. Under this schedule, some nonguaranteed 
benefits are payable from plan assets before certain guaranteed 
benefits. For example, certain benefits that have been in pay 
status for more than 3 years have priority over guaranteed 
benefits not in pay status.
    Section 4022(c) benefits.--The PBGC is also required to pay 
participants a portion of their unfunded, nonguaranteed 
benefits based on a ratio of recovery on the employer liability 
claim to the amount of that claim.
    As a result of the asset allocation and section 4022(c) 
benefits, reimbursement to the PBGC for its payment of 
guaranteed benefits may be less than the total value of assets 
recovered from the terminated plan.
Multiemployer plans
    In the case of multiemployer plans, the PBGC insures plan 
insolvency, rather than plan termination. Accordingly, a 
multiemployer plan need not be terminated to qualify for PBGC 
financial assistance, but must be found to be insolvent. A plan 
is insolvent when its available resources are not sufficient to 
pay the plan benefits for the plan year in question, or when 
the sponsor of a plan in reorganization reasonably determines, 
taking into account the plan's recent and anticipated financial 
experience, that the plan's available resources will not be 
sufficient to pay benefits that come due in the next plan year.
    If it appears that available resources will not support the 
payment of benefits at the guaranteed level, the PBGC will 
provide the additional resources needed as a loan. The PBGC may 
provide loans to the plan year after year. If the plan recovers 
from insolvency, it must begin repaying loans on reasonable 
terms in accordance with regulations.
    The PBGC guarantees benefits under a multiemployer plan of 
the same type as those guaranteed under a single employer plan, 
but a different guarantee ceiling applies. As a result of the 
Multiemployer Pension Plan Amendments Act of 1980 (Public Law 
96-364, referred to as MPPAA), the limit for multiemployer 
plans is the sum of 100 percent of the first $5 of monthly 
benefits per year of credited service, and 75 percent of the 
next $15 of monthly benefits. (The 75 percent is reduced to 65 
percent for plans that do not meet certain pre-ERISA minimum 
funding standards.)
    MPPAA requires that PBGC conduct a study every 5 years to 
determine whether changes are needed in the multiemployer 
premium rate or guarantee. PBGC completed the third such study 
in 1996, confirming the program's financial solvency, but also 
finding that inflation had devalued the existing guarantee 
limits. In April 1996 the Clinton administration proposed to 
increase the guarantee limits for the multiemployer program to 
account for inflation since 1980. A similar proposal was made 
by the Bush administration in 1991.

                    FINANCIAL CONDITION OF THE PBGC

                                Overview

    According to its most recent annual report, the PBGC's 
multiemployer plan insurance program is in sound financial 
condition. Assets exceeded liabilities by $192 million at the 
end of the fiscal year 1995.
    However, by the end of fiscal year 1995, the larger single-
employer program was showing an accumulated deficit of $315 
million. That is, the assets in PBGC's single-employer program 
were $315 million less than the value of PBGC's liability for 
future benefit payments. PBGC's assets are comprised of 
premiums collected, assets recovered from terminated plans and 
recoveries from employers, and accumulated investment income. 
PBGC's liability for future benefit payments is the 
(discounted) present value of the stream of future benefit 
payments PBGC is obligated to pay participants and 
beneficiaries of terminated plans and plans booked as probable 
terminations.

                                 Losses

    Through the end of fiscal year 1995, the PGBC's single-
employer program had incurred net losses of $5.8 billion (see 
table 15-1). PBGC's net losses equal the portion of guaranteed 
benefit liabilities not covered by plan assets or recoverable 
employer liability. These losses will eventually have to be 
covered through higher premiums, earnings on PBGC assets, or 
other sources of revenues.
    PBGC's losses have increased considerably over its 21-year 
history. Within that trend, there has been substantial annual 
variability due to the sporadic terminations of very large 
underfunded plans. Slightly more underfunded plans terminated 
in 1995 than the previous year, but losses from terminated 
underfunded plans declined.
     Table 15-1 demonstrates the growth in net losses over the 
Corporation's history. In the 7 years from 1989 to 1995, net 
losses, not including probable terminations, exceeded the 
losses of the prior 7 years by 25 percent and were more than 
seven times greater than the losses from the first 7 years of 
PBGC's operation. PBGC also faces probable losses of $1.179 
billion for 34 plans that are expected to terminate after 
fiscal year 1995. Those probable terminations represent 20 
percent of PBGC's total net losses since inception.
    As shown by table 15-2, the number of single-employer plan 
terminations that result in claims against the PBGC is a tiny 
fraction of all plan terminations. In fiscal year 1995, PBGC 
permitted completion of 1,886 standard terminations and 50 
distress or involuntary terminations of underfunded plans. Over 
the past two decades terminations of underfunded plans made up 
less than 2 percent of all terminations. PBGC's deficit in the 
single-employer program at the end of fiscal year 1995 fell to 
$315 million, its lowest level since 1981.

                           TABLE 15-1.--LOSS EXPERIENCE FROM SINGLE-EMPLOYER PLANS \1\                          
                                              [Dollars in millions]                                             
----------------------------------------------------------------------------------------------------------------
                                                                                                        Average 
                                                                        Trust   Recoveries             net loss 
           Year of termination             Number   Benefitliability    plan       from        Net        per   
                                          of plans                     assets    employers   losses   terminated
                                                                                                         plan   
----------------------------------------------------------------------------------------------------------------
1975-81.................................       824          $742          $295       $129       $317       $0.4 
1982-88.................................       797         3,071           936        214      1,920        2.4 
1989-95.................................       463         5,082         2,263        427      2,392        5.2 
                                         -----------------------------------------------------------------------
    Subtotal............................     2,084         8,894         3,495        770      4,629  ..........
Probable future terminations............        34         2,800         1,348        273      1,179  ..........
                                         -----------------------------------------------------------------------
    Total...............................     2,118       $11,694        $4,843      1,043     $5,808  ..........
----------------------------------------------------------------------------------------------------------------
\1\ Stated amounts are subject to change until PBGC finalizes values for liabilities, assets, and recoveries of 
  terminated plans. Amounts in this table are valued as of the date of each plan's termination and differ from  
  amounts reported in PBGC's Financial Statements which are valued as of the end of the stated fiscal year.     
                                                                                                                
Note.--Numbers may not add up to totals due to rounding.                                                        
                                                                                                                
Source: Pension Benefit Guaranty Corporation fiscal year 1995 Annual Report.                                    

                               Financing

    The sources of financing for PBGC are per-participant 
premiums collected from insured plans, assets in terminated 
underfunded plans for which the PBGC has become trustee, 
investment earnings, and amounts owed to the PBGC by employers 
who have terminated underfunded plans. In addition, PBGC has 
the authority to borrow up to $100 million from the Treasury.
Single-employer premiums
    An employer that maintains a covered single-employer 
defined benefit pension plan must pay an annual premium for 
each participant under the plan. Initially set at $1 per 
participant, the per-participant premium was raised to $2.60 
beginning in 1979, and then raised again by the Single Employer 
Pension Plan Amendments Act (SEPPAA) to $8.50 beginning in 
1986. The Pension Protection Act of 1987, contained in the 
Omnibus Budget Reconciliation Act of 1987, raised the basic 
premium to $16, and imposed an additional variable rate, or 
risk-related, premium on underfunded plans. The variable rate 
premium was initially set at $6 per each $1,000 of the plan's 
unfunded vested benefits, up to a maximum of $34 per 
participant. Accordingly, the maximum premium was $50 per 
participant.
    The Omnibus Budget Reconciliation Act of 1990 (OBRA 1990) 
increased the basic premium to $19, the variable rate premium 
to $9 per each $1,000 of the plan's unfunded vested benefits, 
up to a maximum of $53 per participant. Thus, beginning in 
1991, the maximum premium is $72 per participant. OBRA 1990 did 
not change the ratio of revenue raised by the basic and 
variable rate portions of the premium.

TABLE 15-2.--TOTAL NUMBER OF TERMINATED SINGLE-EMPLOYER PLANS, NUMBER OF
         PLANS WITH CLAIMS AGAINST PBGC, AND ACCUMULATED DEFICIT        
------------------------------------------------------------------------
                                                             Accumulated
                                      Number of   Number of  deficit end
                                     terminated    claims      of year  
                                        plans      against    (millions 
                                                    PBGC     of dollars)
------------------------------------------------------------------------
Fiscal year:                                                            
    1975...........................       2,568         100        -15.7
    1976...........................       9,104         171        -41.0
    1977...........................       7,331         130        -95.3
    1978...........................       5,260         102       -137.8
    1979...........................       4,888          81       -146.4
    1980...........................       4,033         103        -94.6
    1981...........................       5,084         137       -188.8
    1982...........................       6,131         131       -332.8
    1983...........................       6,870         149       -523.3
    1984...........................       7,711          97       -462.0
    1985...........................       8,723         110     -1,325.3
    1986...........................       6,915         122     -3,826.4
    1987...........................      10,924          95     -1,548.5
    1988...........................      10,836          93     -1,543.3
    1989...........................      11,433          65     -1,123.6
    1990...........................      11,462          81     -1,912.8
    1991...........................       7,586         113     -2,510.0
    1992...........................       8,018          89     -2,737.1
    1993...........................       6,788      \1\ 54     -2,897.0
    1994...........................       4,105          45     -1,240.0
    1995...........................       1,886      \1\ 50       -315.0
                                    ------------------------------------
      Total........................     147,656       2,118  ...........
------------------------------------------------------------------------
\1\ Includes 34 plans with claims of $1 million or more that were       
  probable terminations as of the end of fiscal year 1995.              
                                                                        
Source: Pension Benefit Guaranty Corporation.                           

    The Retirement Protection Act of 1994 (RPA) did not change 
the $19 basic per participant premium. However, the $53 per 
participant variable rate premium cap is phased out over a 3-
year period beginning in 1994. By 1997, the variable rate 
premium will be completely uncapped. (Special rules apply for 
certain regulated public utility plans until 1998). RPA also 
changed the way underfunding is calculated. Effective for 1995 
plan years, liabilities have to be calculated using a standard 
mortality table. Effective for plan years beginning on or after 
July 1, 1997, liabilities are calculated using an interest rate 
of 85 percent of the spot rate for 30-year Treasury securities 
(an increase from the current 80 percent). After the year 2000, 
plans will be required to use a new mortality table prescribed 
by the Secretary of Treasury for certain funding purposes. At 
that time the interest rate will rise to 100 percent of the 
Treasury spot rate and a requirement to use fair market value 
of plan assets (rather than actuarial value) will become 
effective.
    PBGC's single-employer premium income equaled $838 million 
in 1995.
Multiemployer plan premiums
    The premium for multiemployer plans was initially $0.50 per 
participant. The Multiemployer Pension Plan Amendments Act 
raised the premium to $1.40 for years after 1980. This premium 
was set to increase gradually to its current level, $2.60. 
PBGC's multiemployer premium income equaled $22 million in 
1995.
Assets from terminated plans
    When the PBGC becomes trustee of a terminated plan, it 
receives control of any assets in the plan. These assets are 
placed in one of two trust funds (one for multiemployer plans, 
one for single-employer plans).
Employer liability
    An employer which terminates an underfunded defined benefit 
plan is liable to the PBGC for certain amounts. Before the 
changes made by SEPPAA, an employer's liability was generally 
capped at 30 percent of the employer's net worth. SEPPAA 
removed this limit, leaving employers whose liability would 
have been capped liable for an additional share of unfunded 
benefit commitments above 30 percent of net worth. The Pension 
Protection Act of 1987 further increased employer liability, 
leaving employers liable for all amounts up to 100 percent of 
unfunded benefit liabilities.
Investment income
    The PBGC maintains two separate financial programs, each 
consisting of a revolving fund and a trust fund, to sustain its 
single-employer and multiemployer plan insurance programs. Its 
revolving funds consist of collected premiums and income 
resulting from investment of the premiums. The revolving funds 
had a value of $6.4 billion as of September 30, 1995.
    The trust funds consist of assets received from all 
terminated plans of which the PBGC is or will be a trustee, and 
employer liability payments. These assets are invested in a 
diversified portfolio of investments including equities, fixed 
income securities, and real estate. The net market value of the 
trust funds was $4.1 billion as of September 30, 1995.
    Chart 15-1 diagrams the relationship between the PBGC's 
financing and its payment of guaranteed benefits to plan 
participants.

                          BUDGETARY TREATMENT

    Since 1981, administrative expenses of the PBGC and the 
benefit payments to participants in plans under the PBGC's 
trusteeship have been counted as Federal outlays. Certain 
receipts of the agency--including premium payments, interest on 
balances in the revolving fund, and transfers to the revolving 
fund from the trust fund--offset PBGC expenses in the Federal 
budget. Liabilities for future benefit payments and other 
accruals are not taken into account. In each year since 1981 
(when the program was first included in the Federal budget) the 
effect of the PBGC has been to reduce overall Federal outlays 
(see table 15-3). During this period, the PBGC reported 
receipts in excess of benefit payments and administrative costs 
by a cumulative total of about $5.2 billion. In years before 
1981, Federal accounts for the PBGC would also have shown 
annual inflows exceeding expenses in each year of program 
operation.

    CHART 15-1. FINANCIAL STRUCTURE OF THE PENSION BENEFIT GUARANTY 
                              CORPORATION 


    Source: Congressional Budget Office.

                  FUTURE FINANCIAL STATUS OF THE PBGC

    In its fiscal year 1995 annual report, PBGC estimated $31 
billion of unfunded liabilities in single-employer defined 
benefit pension plans as of December 31, 1994, a decrease from 
the $71 billion reported as of December 31, 1993. Multiemployer 
plans represent $20 billion in underfunding as of January 1, 
1993.
    The reasons for the drop in single-employer underfunding, 
the first since 1983, include higher interest rates and 
additional pension contributions.
    Not all pension underfunding represents likely claims upon 
PBGC's insurance. PBGC's most recent analyses disclose 
reasonably possible losses of about $15 to $21 billion, 
compared to last year's projection of $18 billion. PBGC's 
exposure is spread more evenly across all industrial sectors 
than in previous years, with the largest amounts in the steel, 
navigational/aeronautical instru- 
ments, transportation equipment, airline and automobile 
industries.

      TABLE 15-3.--FEDERAL BUDGETARY TREATMENT OF THE PBGC, 1975-95     
                        [In millions of dollars]                        
------------------------------------------------------------------------
                                                               Outlays  
                                                              appearing 
                              Expenses \1\     Offsetting      in  the  
                                            collections \2\    Federal  
                                                              budget \3\
------------------------------------------------------------------------
                 Not included in the Federal budget \4\                 
------------------------------------------------------------------------
Fiscal year:                                                            
    1975....................         3.2            35.5              NA
    1976....................        12.8            28.5              NA
    1977....................        21.0            41.0              NA
    1978....................        47.6            61.9              NA
    1979....................        52.3            91.5              NA
    1980....................        59.1            90.1              NA
                             -------------------------------------------
      Total.................       196.0           348.5              NA
------------------------------------------------------------------------
                   Included in the Federal budget \4\                   
------------------------------------------------------------------------
Fiscal year:                                                            
    1981....................          79             123             -29
    1982....................         104             157             -67
    1983....................         161             182             -10
    1984....................         180             190             -10
    1985....................         195             210             -19
    1986....................         272             344            -106
    1987....................         509             637             -72
    1988....................         489             560            -278
    1989....................         780           1,190            -149
    1990....................         745           1,175            -680
    1991....................         599           1,339            -787
    1992....................         766           1,491            -655
    1993....................         833           2,323          -1,508
    1994....................       1,017           1,446            -385
    1995....................         872           1,716            -430
                             -------------------------------------------
      Total.................       7,602          13,076          -5,184
------------------------------------------------------------------------
\1\ Includes primarily administrative costs and benefit payments.       
\2\ Includes primarily premium income, interest income, and transfers   
  from the pension insurance trust fund to the revolving fund.          
\3\ Outlays do not equal the difference between expenses and offsetting 
  collections because of changes in obligated program balances between  
  the beginning and the end of the fiscal year.                         
\4\ The PBGC was first included in the Federal budget in 1981, in       
  accordance with Public Law 96-364.                                    
                                                                        
NA--Not applicable.                                                     
                                                                        
Note.--This table includes both the single-employer and multiemployer   
  pension insurance programs.                                           
                                                                        
Source: Congressional Budget Office using data from the appendix to the 
  Federal budget, various years.                                        

    PBGC annually publishes a list of 50 companies with the 
largest amount of pension plan underfunding. PBGC's most recent 
listing showed unfunded vested benefits among the 50 companies 
as of December 31, 1992 of $38.0 billion, an increase of 30 
percent from the prior year. The data was verified with the 
companies named on the list and is based on publicly available 
information. Experience has indicated, however, that PBGC's 
losses after a plan terminates often exceed estimated amounts 
because of lower contributions prior to plan termination and 
more early retirements than anticipated.

   TABLE 15-4.--YEAR-BY-YEAR PROJECTIONS OF PBGC's NET POSITION UNDER   
             VARIOUS FORECASTS, SINGLE-EMPLOYER PROGRAM \1\             
          [Amounts as of September 30; in billions of dollars]          
------------------------------------------------------------------------
                                    Forecast A   Forecast B   Forecast C
------------------------------------------------------------------------
1995.............................         -0.3         -0.3         -0.3
1996.............................          0.0         -0.2         -1.0
1997.............................          0.4          0.1         -1.5
1998.............................          0.8          0.3         -2.3
1999.............................          1.2          0.5         -3.2
2000.............................          1.4          0.5         -4.3
2001.............................          1.6          0.5         -5.6
2002.............................          1.8          0.5         -6.9
2003.............................          2.0          0.4         -8.4
2004.............................          2.2          0.3        -10.0
2005.............................          2.4          0.2        -11.8
------------------------------------------------------------------------
\1\ PBGC's fiscal year-end net position equals PBGC's assets less       
  liabilities. The largest component of PBGC's total liabilities is the 
  present value of future benefit payments, including amounts owed to   
  participants in terminated plans and plans with a high probability of 
  termination.                                                          
                                                                        
Source: Pension Benefit Guaranty Corporation.                           

    The future financial condition of the pension insurance 
program is highly uncertain because it depends largely on how 
many private pension plans terminate and on the amount of 
underfunding in those plans. Both factors are hard to forecast 
accurately. Moreover, as was discussed above, a few pension 
plans with extremely large unfunded liabilities have dominated 
PBGC's past claims, and its future may likewise depend 
significantly on the fate of a few large plans, making 
liabilities even more difficult to predict. Future terminations 
will probably be influenced by overall economic conditions, by 
the prosperity of particular industries, by competition from 
abroad, and by a variety of factors that are specific to 
particular firms--such as their competitive position in the 
industry, their agreements with labor groups, and the 
assessments of their financial prospects that are necessary to 
obtain credit. In addition, PBGC's losses with respect to 
future terminations will depend on how well companies fund 
their plans, and on the PBGC's position in bankruptcy 
proceedings. Finally, pending litigation could have a material 
impact on the financial condition of the PBGC.
    The PBGC in its fiscal year 1995 annual report presented 
three different forecasts of future claims and resulting 
deficits and surpluses to indicate the potential variability of 
its financial condition (see table 15-4). Forecast A is based 
on the average annual net claim over the entire PBGC history 
($463 million per year) and projects a surplus of $2.4 billion 
by the end of fiscal year 2005. Forecast B is based on the 
average annual net claim for the most recent 14 fiscal years 
($608 million per year). Under forecast B, PBGC projects a 
surplus of $200 million by the end of fiscal year 2005. 
Forecast C assumes $1.39 billion of net claims each year and 
assumes the termination of all plans that represent reasonably 
possible losses over the next 10 years. Under forecast C, 
PBGC's deficit is projected to reach $11.8 billion by the end 
of fiscal year 2005.

                          LEGISLATIVE HISTORY

                         Single-Employer Plans

    The PBGC was established under the Employee Retirement 
Income Security Act of 1974 (ERISA) for the purpose of insuring 
benefits under defined benefit pension plans. As originally 
structured, in the case of a single-employer plan, termination 
of a plan triggered the PBGC insurance mechanism. The 
contributing employer was liable to the PBGC for unfunded 
insured benefits up to 30 percent of the net worth of the 
employer. If unfunded insured liability exceeded this amount, 
the PBGC had to absorb the excess and spread the loss over 
insured plans. Employers generally faced no restrictions on 
their ability to terminate an underfunded plan.
The Single-employer Pension Plan Amendments Act of 1986 (SEPPAA)
    Congress passed SEPPAA (enacted as title XI of the 
Consolidated Omnibus Budget Reconciliation Act of 1985 (Public 
Law 99-272)) in response to rapidly growing PBGC deficits. 
SEPPAA raised the per-participant premium from $2.60 to $8.50, 
established certain financial distress criteria that a 
sponsoring employer and every member of the employer's 
controlled group must meet in order to terminate an underfunded 
plan, expanded PBGC's employer liability claim, and created a 
new liability to plan participants for certain nonguaranteed 
benefits.
Pension Protection Act of 1987 (PPA)
    In 1987 Congress passed PPA (as part of Public Law 100-203) 
which contained additional measures to strengthen PBGC's long-
term solvency. The act increased PBGC's basic per participant 
premium to $16 and established the variable rate premium tied 
to the degree of plan underfunding. The act also expanded 
PBGC's employer liability claim to include all plan benefit 
liabilities, provided that PBGC share a portion of its 
recoveries from employers with plan participants, and required 
faster funding of plan benefits to reduce PBGC's exposure in 
the event of plan termination. The act also contained other 
provisions relating to the plan termination distress criteria, 
the bankruptcy treatment of unpaid employer contributions, 
PBGC's lien authority, and various pension funding 
requirements.
Retirement Protection Act of 1994 (RPA)
    In response to the persistent growth in pension 
underfunding, Congress passed significant reforms in RPA 
(enacted December 8, 1994 as part of the GATT legislation (The 
Uruguay Round Agreements (Public Law 103-465)). RPA provisions 
include:
 1. Minimum filing standards.--RPA strengthened the pension 
        funding rules for underfunded plans by accelerating 
        funding, eliminating double counting of certain funding 
        credits, and constraining the assumptions that may be 
        used to calculate pension contributions. RPA also 
        required severely underfunded plans to maintain minimum 
        levels of liquid assets. RPA contained certain 
        transition rules limiting annual increases in pension 
        contributions. In addition, RPA repealed the quarterly 
        funding requirement for fully funded plans and granted 
        excise tax relief for employers with both defined 
        benefit and defined contribution plans.
 2. Variable rate premium.--RPA phased in a $53 per participant 
        variable rate premium over a 3-year period as an 
        incentive to improve funding in underfunded plans and 
        made certain changes to the interest rate and mortality 
        assumptions used to calculate plan underfunding.
 3. Reporting to PBGC.--RPA requires sponsors with over $50 
        million in underfunding to provide PBGC detailed 
        actuarial information on underfunded plans and detailed 
        company financial information. It also requires 
        privately-held companies with over $50 million in 
        underfunding and an aggregate funding ratio of less 
        than 90 percent to provide advance notice to PBGC of 
        certain corporate transactions.
 4. Disclosure to participants in underfunded plans.--RPA 
        requires most employers whose plans are less than 90 
        percent funded to provide a notice to participants 
        regarding the funding status of the plan and the 
        limitations of PBGC's guarantee of participants' 
        benefit.
 5. Missing participants program.--RPA established a program 
        under which PBGC serves as a clearinghouse for benefits 
        of missing participants in plans terminating in a 
        standard (fully funded) termination.
    RPA contained other provisions relating to enforcement of 
minimum funding requirements, PBGC liens for missed pension 
contributions, PBGC membership on creditors' committees in 
bankruptcy, and limitation of benefit increases while a company 
is in bankruptcy.

                  Multiemployer Plan Insurance Program

    Coverage for multiemployer plans under ERISA was structured 
similarly to that of single-employer plans. However, the PBGC 
was not required to insure benefits of multiemployer plans that 
terminated before July 1, 1978. Congress extended the deadline 
for mandatory pension coverage several times, until enactment 
of the Multiemployer Pension Plan Amendments Act of 1980 
(MPPAA; Public Law 96-364). MPPAA required more complete 
funding for multiemployer plans, especially those in financial 
distress. It also improved the ability of plans to collect 
contributions from employers. MPPAA changed the insurable event 
that triggers PBGC protection to plan insolvency, rather than 
plan termination. Thus, if a multiemployer plan becomes 
financially unable to pay benefits at the guaranteed level when 
due, the PBGC will provide financial assistance to the plan, in 
the form of a loan. Finally, MPPAA imposed withdrawal liability 
on employers who ceased to contribute to a multiemployer plan.