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Testimony: 

Before the Special Committee on Aging, U.S. Senate: 

United States Government Accountability Office: 
GAO: 

For Release on Delivery: 
Expected at 2:00 p.m. EDT:
Wednesday, May 20, 2009: 

Pension Benefit Guaranty Corporation: 

Financial Challenges Highlight Need for Improved Governance and 
Management: 

Statement of Barbara D. Bovbjerg, Director: 
Education, Workforce, and Income Security: 

GAO-09-702T: 

GAO Highlights: 

Highlights of GAO-09-702T, a testimony before the Senate Special 
Committee on Aging, U.S. Senate. 

Why GAO Did This Study: 

The Pension Benefit Guaranty Corporation (PBGC) insures the retirement 
future of nearly 44 million people in over 29,000 private-sector 
defined benefit pension plans. 

In July 2003, GAO designated PBGCs single-employer pension insurance 
programits largest insurance programas high risk, including it on 
GAOs list of major programs that need urgent Congressional attention 
and agency action. The program remains on the list today with a 
financial deficit of just over $11 billion, as of September 2008. 

The committee asked GAO to discuss our recent work on PBGC. 
Specifically, this testimony addresses two issues: (1) PBGCs financial 
vulnerabilities, and (2) the governance, oversight, and management 
challenges PBGC faces. 

To address these objectives, we are relying on our prior work assessing 
PBGCs long-term financial challenges, and several reports that we have 
published over the last two years on PBGC governance and management. 
GAO has made a number of recommendations and identified matters for 
Congressional consideration in these reports, and PBGC is implementing 
some of these recommendations. No new recommendations are being made as 
part of this testimony. 

What GAO Found: 

Financial and economic conditions have deteriorated since we last 
reported on PBGCs finances. While PBGCs deficit improved for fiscal 
year 2008, the fiscal year ended just prior to the severe market 
downturn, and this lower deficit may be a product of conditions that no 
longer exist. As a result, it is likely that PBGCs net position looks 
different today. Other recent events have also added to PBGCs 
financial challenges. These events include: recent legislation that 
grants funding relief to certain sponsors, developments with PBGCs 
investment policy, and a concern that a wide array of industry sectors
including the automotive sectorare under financial distress and may 
expose PBGC to future claims. As a result, the potential for automaker 
pension plan terminations could dramatically increase not only PBGCs 
deficit, but also its administrative workload. 

With mounting financial challenges and the potential for PBGCs 
workload to dramatically increase, our concerns about PBGC governance 
and strategic management have become acute, and improvements are 
needed, now more than ever. PBGCs board has limited time and resources 
to provide policy direction and oversight. The three-member board 
includes the Secretary of Labor, as the Chair of the Board, and the 
Secretaries of Commerce and Treasury. These board members have numerous 
other responsibilities and are unable to dedicate consistent and 
comprehensive attention to PBGC. With only 3 members, PBGCs board may 
not be large enough to include the knowledge needed to direct and 
oversee PBGC. In fact, the new board members have yet to meet, and 
there has not been a face-to-face board meeting in the last 15 months. 
In addition, without an appointed director, PBGCs governance structure 
is further exposed to challenges. Further, PBGC continues to lack a 
fully-adopted strategic approach to its acquisition and human capital 
management needs. Although contract employees comprise two-thirds of 
PBGCs workforce, PBGCs strategic planning generally does not 
recognize contracting as a major aspect of PBGC activities. 

Figure: Number of PBGC Board Meetings 1974 to May 2009: 

[Refer to PDF for image: illustrated timeline] 

Year: 1974; 
Meeting (with quorum): 1. 

Year: 1975; 
Meeting (with quorum): 5. 

Year: 1976; 
Meeting (with no quorum): 4; 
Meeting (with quorum): 2. 

Year: 1977; 
Meeting (with no quorum): 3; 
Meeting (with quorum): 3. 

Year: 1978; 
Meeting (with no quorum): 1; 
Meeting (with quorum): 2. 

Year: 1979; 
Meeting (with quorum): 2. 

Year: 1981; 
Meeting (with quorum): 1. 

Year: 1982; 
Meeting (with quorum): 1. 

Year: 1987; 
Teleconference: 1. 

Year: 1992; 
Meeting (with quorum): 1. 

Year: 1993; 
Teleconference: 2. 

Year: 1994; 
Meeting (with quorum): 1. 

Year: 1995; 
Meeting (with quorum): 1. 

Year: 2003; 
Meeting (with quorum): 1. 

Year: 2004; 
Meeting (with quorum): 2; 
Teleconference: 1. 

Year: 2005; 
Meeting (with quorum): 3. 

Year: 2006; 
Meeting (with quorum): 2. 

Year: 2007; 
Meeting (with quorum): 2. 

Year: 2008; 
Meeting (with quorum): 1. 

Source: GAO analysis of PBGC documents and board meeting minutes. 

Note: 2009 board meeting data is as of May 7, 2009. 

[End of figure] 

View [hyperlink, http://www.gao.gov/products/GAO-09-702T] or key 
components. For more information, contact Barbara Bovbjerg at (202) 512-
7215 or bovbjergb@gao.gov. 

[End of section] 

Mr. Chairman and Members of the Committee: 

I am pleased to be here today to discuss the financial and operational 
challenges facing the Pension Benefit Guaranty Corporation (PBGC). PBGC 
operates two pension insurance programs that protect the retirement 
income of nearly 44 million American workers in over 29,000 private- 
sector defined benefit (DB) pension plans. We last testified on the 
challenges facing PBGC in September. At that time we noted that many of 
the challenges, particularly the financial challenges, facing PBGC are 
long-term and structural in nature. In fact, we designated PBGC's 
single-employer pension insurance program, its largest insurance 
program, as "high risk" in 2003 because of these financial challenges. 
[Footnote 1] The program remains on the list today with a projected 
deficit of just over $11 billion, as of September 2008. However, recent 
events, particularly the steep downturn in the financial markets and 
worsening economic conditions, have likely further eroded PBGC's 
financial position and have also likely increased the risk that PBGC 
will have to assume responsibility for the underfunded plans of large, 
financially-weak employers. 

My statement will discuss the (1) PBGC's financial vulnerabilities, and 
(2) the governance, oversight, and management challenges also facing 
PBGC. My statement is based on our prior work assessing PBGC's long- 
term financial challenges, and several reports we have published over 
the past two years on PBGC governance and management. We conducted our 
work in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives. 

In summary, financial and economic conditions have likely only worsened 
since we last reported on PBGC's finances. While PBGC's deficit 
improved for fiscal year 2008, the fiscal year ended just prior to the 
severe market downturn, and it is likely that their net position looks 
different today. Other events have occurred that also added to PBGC's 
financial challenges. These events include: recent legislation that 
grants funding relief to certain sponsors, developments with PBGC's 
investment policy, and a concern that a wide array of industry sectors-
-including the highly visible automotive sector--are under financial 
distress and may expose PBGC to future claims. As a result, the 
potential for automaker pension plan terminations could dramatically 
increase PBGC's deficit, as well as its administrative workload. 

With mounting financial challenges and the potential for PBGC's 
workload to dramatically increase, our concerns about PBGC governance 
and strategic management have become acute, and improvements are 
needed, now more than ever. PBGC's board has limited time and resources 
to provide policy direction and oversight. The board includes the 
Secretary of Labor, as the Chair of the Board, and the Secretaries of 
Commerce and Treasury. These board members have numerous other 
responsibilities, and are unable to dedicate consistent and 
comprehensive attention to PBGC. With only 3 members, PBGC's board may 
not be large enough to include the knowledge needed to direct and 
oversee PBGC. In fact, the new board members have yet to meet, and 
there has not been a face-to-face board meeting in the last 15 months. 
PBGC's governance structure is further exposed to challenges as it does 
not yet have an appointed director. Further, although contract 
employees comprise two-thirds of PBGC's workforce, PBGC's strategic 
planning generally does not recognize contracting as a major aspect of 
PBGC activities. PBGC still lacks a fully-adopted strategic approach to 
its acquisition and human capital management needs. 

Background: 

PBGC was created by the Employee Retirement Income Security Act of 1974 
(ERISA)[Footnote 2] to pay benefits to participants in private DB plans 
in the event that an employer could not. PBGC may pay benefits, up to 
specified limits, if a plan does not have sufficient assets itself to 
pay promised benefits and the sponsoring company is in financial 
distress. PBGC's single-employer insurance program guarantees benefits 
up to $4,500 per month for age-65 retirees of plans terminating in 
2009, with lower guarantees for those who retire before age 65. 
Currently, PBGC insurance covers 44 million participants, including 
retirees, in over 29,000 DB plans. PBGC pays monthly retirement 
benefits to more than 640,000 retirees in 3,860 pension plans that have 
ended, and is responsible for the current and future pensions of about 
1.3 million people. ERISA also requires PBGC to encourage the 
continuation and maintenance of voluntary private pension plans. 

PBGC receives no funds from general tax revenues. Operations are 
financed by insurance premiums set by Congress and paid by sponsors of 
DB plans, recoveries from the companies formerly responsible for the 
plans, and investment income of assets from pension plans taken over, 
or "trusteed," by PBGC. Under current law, other than statutory 
authority to borrow up to $100 million from the Treasury Department, 
[Footnote 3] no substantial source of funds is available to PBGC if it 
runs out of money. In the event that PBGC were to exhaust all of its 
holdings, benefit payments would have to be drastically cut unless 
Congress were to take action to provide support.[Footnote 4] 

The assets and liabilities that PBGC accumulates from trusteeing plans 
has increased rapidly over the last 6 years or so. This is largely due 
to the termination, typically through bankruptcies, of a number of very 
large, underfunded plan sponsors.[Footnote 5] In fact, 8 of the top 10 
firms presenting claims against PBGC did so from 2003 to 2007. These 
top 10 claims alone currently account for over 60 percent of all of 
PBGC's claims and are concentrated among firms representing the steel 
and airline industries. Overall, these industries accounted for about 
three-quarters of PBGC's total claims and single-employer benefit 
payments in 2007. 

In 2003, GAO designated PBGC's single-employer program as high-risk, 
meaning that the program needs urgent Congressional attention and 
agency action. We specifically noted PBGC's prior-year net deficit, as 
well as the risk of the termination among large, underfunded pension 
plans, as reasons for the program's high-risk designation. 

As part of our monitoring of PBGC as a high-risk agency we have 
highlighted additional challenges faced by the single-employer program. 
Among these concerns were the serious weaknesses that existed with 
respect to plan funding rules[Footnote 6] and that PBGC's premium 
structure and guarantees needed to be re-examined to better reflect the 
risk posed by various plans.[Footnote 7] Additionally, the number of 
single-employer insured DB plans has been rapidly declining, and, among 
the plans still in operation, many have frozen benefits to some or all 
participants.[Footnote 8] Further, the prevalence of plans that are 
closed to new participants seems to imply that PBGC is likely to see a 
decline in insured participants, especially as insured participants 
seem increasingly likely to be retired (as opposed to active or 
current) workers. 

PBGC has remained high-risk with each subsequent report in 2005, 2007, 
and, most recently, 2009. In our 2007 high risk update we noted that 
major pension legislation had been enacted which addressed many of the 
concerns articulated in our previous reports and testimonies on PBGC's 
financial condition. The Deficit Reduction Act of 2005 (DRA) was signed 
into law on February 8, 2006 and included provisions to raise flat-rate 
premiums and create a new, temporary premium for certain terminated 
single-employer plans.[Footnote 9] Later that year the Pension 
Protection Act of 2006 (PPA) was enacted; it included a number of 
provisions aimed at improving plan funding and PBGC finances.[Footnote 
10] The provisions aimed at improving plan funding included such 
measures as raising the funding targets DB plans must meet, reducing 
the period over which sponsors can "smooth" reported plan assets and 
liabilities, and restricting sponsors' ability to substitute "credit 
balances" for cash contributions. Reforms aimed at shoring up PBGC 
revenues included a termination premium for some bankrupt sponsors, and 
limiting PBGC's guarantee to pay certain benefits. However, the overall 
impact of PPA remains unclear; PPA did not fully close potential plan 
funding gaps, and provided special relief to plan sponsors in troubled 
industries. PBGC's net financial position improved from 2005 to 2006 
because some very large plans that were previously classified as 
probable terminations were reclassified to a reasonably possible 
designation as a result of the relief granted to troubled industries 
such as the airlines. 

PBGC's Financial Condition Has Likely Worsened Since September 2008: 

While PBGC's deficit improved for fiscal year 2008, the fiscal year 
ended just prior to the severe market downturn, and it is likely that 
their net position looks different today. Since we last reported to 
Congress on PBGC,[Footnote 11] PBGC issued its fiscal year 2008 
financials and reported that the net deficit for its insurance programs 
was $11.2 billion.[Footnote 12] In some ways, this was good news. 
PBGC's net deficit reached a peak of $23.5 billion in 2004 largely as a 
result of a number of realized and probable claims that occurred during 
that year.[Footnote 13] However, the lower 2008 deficit may be a 
product of conditions that no longer exist. For example, PBGC's net 
deficit is a resulting difference between its assets and its 
liabilities.[Footnote 14] (See figure 1 for the difference between PBGC 
assets and liabilities for both insurance programs from 1990 to 2008.) 
As of PBGC's September 30, 2008 financial statement--even before the 
severe market downturn in October--PBGC saw an investment return of - 
6.5 percent over the year, which contributed to diminishing its assets 
from the prior year by about $5.5 billion. The net deficit improved, 
despite the performance of its assets, because of the decrease in its 
liabilities. According to PBGC, the improvement was due largely to 
successful negotiations in bankruptcy proceedings, a favorable change 
in interest factors used to value PBGC's liabilities, and the fact that 
PBGC saw significant reductions to its liabilities for probable 
terminations. PBGC has likely seen its net financial condition hurt by 
increased exposure due to declines in funding levels of many large 
plans, from the termination of underfunded plans, and by an increase in 
its liabilities due to a likely decrease in the interest rates used to 
value its liabilities.[Footnote 15] 

Figure 1: PBGC Assets and Liabilities, Fiscal Year 1990 to 2008: 

[Refer to PDF for image: combined line and vertical bar graph] 

Year: 1990; 
Assets:	$3 billion; 
Liabilities: $4.8 billion. 

Year: 1991; 
Assets:	$5.7 billion; 
Liabilities: $8 billion. 

Year: 1992; 
Assets:	$6.7 billion; 
Liabilities: $9.2 billion. 

Year: 1993; 
Assets:	$8.7 billion; 
Liabilities: $11.3 billion. 

Year: 1994; 
Assets:	$8.7 billion; 
Liabilities: $9.7 billion. 

Year: 1995; 
Assets:	$10.8 billion; 
Liabilities: $11 billion; 

Year: 1996; 
Assets:	$12.5 billion; 
Liabilities: $11.6 billion; 

Year: 1997; 
Assets:	$15.9 billion; 
Liabilities: $12.2 billion. 

Year: 1998; 
Assets:	$18.4 billion; 
Liabilities: $13 billion. 

Year: 1999; 
Assets:	$19.1 billion; 
Liabilities: $11.9 billion. 

Year: 2000; 
Assets:	$21.5 billion; 
Liabilities: $11.6 billion. 

Year: 2001; 
Assets:	$22.6 billion; 
Liabilities: $14.7 billion. 

Year: 2002; 
Assets:	$26.4 billion; 
Liabilities: $29.9 billion. 

Year: 2003; 
Assets:	$35 billion; 
Liabilities: $46.5 billion. 

Year: 2004; 
Assets:	$40 billion; 
Liabilities: $63.6 billion. 

Year: 2005; 
Assets:	$57.6 billion; 
Liabilities: $80.7 billion. 

Year: 2006; 
Assets:	$61.1 billion; 
Liabilities: $80 billion. 

Year: 2007; 
Assets:	$68.4 billion; 
Liabilities: $82.5 billion. 

Year: 2008; 
Assets:	$63 billion; 
Liabilities: $74.1 billion. 

Source: GAO analysis of PBGC annual report data. 		 

Note: Figure includes assets and liabilities of single-employer program 
and multi-employer program. The single-employer program accounts for 
over 94 percent of all assets and liabilities within each year over 
this period. 

[End of figure] 

The current economic environment has likely increased the exposure PBGC 
faces from financially distressed sponsors with large, underfunded 
plans. The funding of many large plans has likely eroded as a result of 
the lowered financial health of many sponsors, thereby potentially 
increasing PBGC's exposure to probable terminations,[Footnote 16] 
developments that the most recent estimates may not reflect. Estimating 
PBGC's future claims has always been difficult to predict over the long-
term due to the significant volatility in plan underfunding and sponsor 
credit quality over time. However, the current economic environment 
seems to have put sponsors under particular stress. 

There is likely a wide range of industry sectors that have been 
affected by the current economic environment, and particularly the 
automotive sector. For example, the pension plans of Chrysler and 
General Motors (GM) today pose considerable financial uncertainty to 
PBGC. In the event that Chrysler or GM cannot continue to maintain 
their pension plans--such as in the case of liquidation or an asset 
sale--PBGC may be required to take responsibility for paying the 
benefits for the plans, which, as of the most current publicly 
available information, are underfunded by a total of about $29 billion. 
[Footnote 17],[Footnote 18] 

Although it is impossible to know what the exact claims to PBGC would 
be if it took over Chrysler's and GM's pension plans, doing so would 
likely strain PBGC's resources, because the automakers' plans represent 
a significant portion of the benefits it insures. Further, from an 
administrative standpoint, PBGC would be presented with an 
unprecedented number of assets to manage as well as benefit liabilities 
to administer. For example, GM's and Chrysler's plans include roughly 
900,000 participants, both those receiving benefits now and those who 
have earned benefits payable in the future, which would increase the 
total number of PBGC's current or future beneficiaries by nearly 80 
percent.[Footnote 19] Even with Chrysler's bankruptcy and concern about 
GM's viability, it is not certain that PBGC would take over 
responsibility for either plan. For example, a number of auto parts 
suppliers in Chapter 11 with collectively bargained pension plans have 
emerged from reorganization without terminating their pension plans. 

While the events surrounding the automakers and their pension plans are 
clearly an area of concern for the PBGC, the recession has likely 
affected many industry sectors. Although, PBGC's past claims have been 
concentrated to industries like steel and airlines, there is cause for 
concern that future claims will come from a much broader array of 
industries. 

PBGC's insurance programs held $63 billion in assets as of September 
30, 2008, and the Corporation has stated it has sufficient liquidity to 
meet its obligations for a number of years. However, to the extent 
additional claims from vulnerable industries markedly increase PBGC's 
accumulated deficit and decrease its long-run liquidity, there could be 
pressure for the federal government to provide PBGC financial 
assistance to avoid reductions in guaranteed payments to retirees or 
unsustainable increases in the premium burden on sponsors of ongoing 
plans. 

PBGC's overall exposure has increased for additional reasons. The 
Worker, Retiree, and Employer Recovery Act of 2008 (WRERA),[Footnote 
20] passed in December, grants funding relief to certain sponsors and 
delays the implementation of certain aspects of the PPA. WRERA makes 
several technical corrections to PPA and contains provisions designed 
to help pension plans and plan participants weather the current 
economic downturn. For a number of sponsors, this legislation may mean 
lower plan contributions than they would otherwise have had to pay 
under the phase-in of PPA and, at least temporarily, potentially 
increase levels of plan underfunding. As we noted in our 2009 high-risk 
update on PBGC, this legislation is likely to increase PBGC's risk 
exposure, perhaps significantly. 

Finally, PBGC's newly-adopted investment policy may expose the 
Corporation to additional risk. The new policy reduces the proportion 
of PBGC assets allocated to fixed-income investments, such as Treasury 
and corporate bonds; increases its proportional holdings in 
international equities; and introduces new asset classes, such as 
private equity, emerging market debt and equities, high-yield fixed 
income, and private real estate. While the investment policy adopted in 
2008 aimed to reduce PBGC's deficit by investing in assets with a 
greater expected return, in a report last summer, we found that the new 
allocation will likely carry more risk than acknowledged by PBGC's 
analysis.[Footnote 21] 

Our assessment found that, although returns are indeed likely to grow 
with the new allocation, the risks are likely higher as well. Although 
it is important that the PBGC consider ways to optimize its portfolio, 
including higher return and diversification strategies, the agency 
faces unique challenges, such as PBGC's need for access to cash in the 
short-term to pay benefits, which could further increase the risks it 
faces with any investment strategy that allocates significant portions 
of the portfolio to volatile or illiquid assets. According to PBGC the 
new allocation will be sufficiently diversified to mitigate the 
expected risks associated with the higher expected return. PBGC also 
asserted that it should involve less risk than the previous policy. The 
Congressional Budget Office has also pointed out such risks, saying 
that "the new strategyincreases the risk that PBGC will not have 
sufficient assets to cover retirees' benefit payments when the economy 
and financial markets are weak."[Footnote 22] 

PBGC has only implemented portions of the policy. PBGC told us that it 
has begun the process of reducing the percentage of its assets in fixed-
income investments, but it has not yet begun to increase its portfolio 
of certain asset classes, specifically private equity and real estate. 
PBGC also told us that the process it follows for its current 
implementation of the investment policy follows industry best practices 
for large transactions.[Footnote 23] However, PBGC officials also told 
us that the intended asset allocation targets set by the current 
implementation of this policy could easily be derailed if PBGC is 
required to assume the assets of very large and severely underfunded 
sponsors. 

Improvements Needed to PBGC's Governance and Management: 

PBGC's Governance Structure Needs Improvement: 

PBGC's board has limited time and resources to provide policy direction 
and oversight.[Footnote 24] PBGC's three-member board, established by 
ERISA, includes only the Secretary of Labor, as the Chair of the Board, 
and the Secretaries of Commerce and Treasury. We noted that the board 
members have designated officials and staff within their respective 
agencies to conduct much of the work on their behalf and relied mostly 
on PBGC's management to inform these board members' representatives of 
pending issues. PBGC's board members have numerous other 
responsibilities in their roles as cabinet secretaries and have been 
unable to dedicate consistent and comprehensive attention to PBGC. 

Since PBGC's inception, the board has met infrequently. In 2003, after 
several high-profile pension plan terminations, PBGC's board began 
meeting twice a year (see figure 2). PBGC officials told us that it is 
a challenge to find a time when all three cabinet secretaries are able 
to meet, and in several instances the board members' representatives 
officially met in their place. Currently, the PBGC board has not met 
face-to-face in over one year--since February 2008. 

Figure 2: Number of PBGC Board Meetings 1974 to May 2009: 

[Refer to PDF for image: illustrated timeline] 

Year: 1974; 
Meeting (with quorum): 1. 

Year: 1975; 
Meeting (with quorum): 5. 

Year: 1976; 
Meeting (with no quorum): 4; 
Meeting (with quorum): 2. 

Year: 1977; 
Meeting (with no quorum): 3; 
Meeting (with quorum): 3. 

Year: 1978; 
Meeting (with no quorum): 1; 
Meeting (with quorum): 2. 

Year: 1979; 
Meeting (with quorum): 2. 

Year: 1981; 
Meeting (with quorum): 1. 

Year: 1982; 
Meeting (with quorum): 1. 

Year: 1987; 
Teleconference: 1. 

Year: 1992; 
Meeting (with quorum): 1. 

Year: 1993; 
Teleconference: 2. 

Year: 1994; 
Meeting (with quorum): 1. 

Year: 1995; 
Meeting (with quorum): 1. 

Year: 2003; 
Meeting (with quorum): 1. 

Year: 2004; 
Meeting (with quorum): 2; 
Teleconference: 1. 

Year: 2005; 
Meeting (with quorum): 3. 

Year: 2006; 
Meeting (with quorum): 2. 

Year: 2007; 
Meeting (with quorum): 2. 

Year: 2008; 
Meeting (with quorum): 1. 

Source: GAO analysis of PBGC documents and board meeting minutes. 

Note: 2009 board meeting data is as of May 7, 2009. 

[End of figure] 

While the PBGC board has met more frequently since 2003, very little 
time is spent on addressing strategic and operational issues. According 
to corporate governance guidelines, boards should meet regularly and 
focus principally on broader issues, such as corporate philosophy and 
mission, broad policy, strategic management, oversight and monitoring 
of management, and company performance against business plans.[Footnote 
25] However, our review of the board's recorded minutes found that 
although some meetings devoted a portion of time to certain strategic 
and operational issues, such as investment policy, the financial status 
of PBGC's insurance programs, and outside audit reviews, the board 
meetings generally only lasted about an hour. 

The size and composition of PBGC's board does not meet corporate 
governance guidelines. According to corporate governance guidelines 
published by The Conference Board,[Footnote 26] corporate boards should 
be structured so that the composition and skill set of a board is 
linked to the corporation's particular challenges and strategic vision, 
and should include a mix of knowledge and expertise targeted to the 
needs of the corporation. We did not identify any other government 
corporations with boards as small as at PBGC. Government corporations' 
boards averaged about 7 members, with one having as many as 15. In 
addition, PBGC is also exposed to challenges as the board, board 
members' representatives, and the director have changed with the recent 
presidential transition, limiting the board's institutional knowledge 
of the Corporation. 

The revision of PBGC's investment policy provides an example of the 
need for an active board to help oversee the Corporation's challenges 
and strategic vision.[Footnote 27] We found that PBGC board's 2004 and 
2006 investment policy was not fully implemented. While the board 
assigned responsibility to PBGC for reducing equity holdings to a range 
of 15 to 25 percent of total investment, by 2008 the policy goal had 
not been met. Although the PBGC director and staff kept the board 
apprised of investment performance and asset allocation, we found no 
indication that the board had approved the deviation from its 
established policy or expected PBGC to continue to meet policy 
objectives. While PBGC's Board revised the investment policy in 
February 2008, the board has not held a meeting to discuss the new 
policy's implementation even though there has been a serious downturn 
in investment markets. In May 2009, PBGC officials told us that they 
have kept the new Board members--the Secretary of Labor, along with 
officials from the Departments of Commerce and Treasury--apprised of 
the progress in implementing the new investment policy. 

In our July 2007 report on PBGC's governance structure, we asked 
Congress to consider expanding PBGC's board of directors, to appoint 
additional members who possess knowledge and expertise useful to PBGC's 
responsibilities and can provide needed attention.[Footnote 28] 
Further, dedicating staff that are independent of PBGC's executive 
management and have relevant pension and financial expertise to solely 
support the board's policy and oversight activities may be warranted. 
In response to our finding, PBGC contracted with a consulting firm to 
identify and review governance models and provide a background report 
to assist the board in its review of alternative corporate governance 
structures. The consulting firm's final report describes the advantages 
and disadvantages of the corporate board structures and governance 
practices of other government corporations and select private sector 
companies, and concludes that there are several viable alternatives for 
PBGC's governance structure and practices. 

As PBGC Relies Heavily on Its' Contractor and Federal Workforce, A More 
Strategic Approach Is Needed: 

Although two-thirds of PBGC's workforce includes contractor employees, 
PBGC's strategic planning generally does not recognize contracting as a 
major aspect of PBGC activities (see figure 3).[Footnote 29] Since the 
mid-1980s, PBGC has had contracts covering a wide range of services, 
including the administration of terminated plans, payment of benefits, 
customer communication, legal assistance, document management, and 
information technology. As PBGC's workload grew due to the significant 
number of large pension plan terminations, PBGC relied on contractors 
to supplement its workforce, acknowledging that it has difficulty 
anticipating workloads due to unpredictable economic conditions. 

Figure 3: PBGC Overall Versus Contractor Spending and Personnel, Fiscal 
Year 2007: 

[Refer to PDF for image: horizontal bar graph] 

Employees: 
Contractor: 1,502 (64.9%); 
Federal: 811 (34.1%); 
Total: 2,313 (100%). 

PBGC appropriation: 
Contractor: $297 million spent on contracts (74.6%); 
Federal: $101 million (25.4%); 
Total: $398 million (100%). 

Source: PBGC. 

[End of figure] 

Last summer we reported that PBGC had begun to improve some of its 
contracting practices by to updating contracting policies and 
processes, upgrading the skills of Procurement Department staff, and 
better tracking contracting data. While we reported that PBGC had begun 
to implement performance-based contracting that offers the potential 
for better contract outcomes, PBGC officials recently told us that the 
new field benefit administration contracts will not be performance- 
based. 

PBGC lacks a strategic approach to its acquisition and human capital 
management needs. PBGC's strategic plan does not document how the 
acquisition function supports the agency's missions and goals. Further, 
although contracting is essential to PBGC's mission, we found that the 
Procurement Department is not included in corporate-level strategic 
planning. Based on these findings, we recommended that PBGC revise its 
strategic plan to reflect the importance of contracting and to project 
its vision of future contract use, and ensure that PBGC's procurement 
department is included in agency-wide strategic planning. (Appendix I 
includes selected GAO recommendations on PBGC Governance and 
Management). PBGC disagreed with our recommendation to reflect the 
importance of contracting and incorporate its vision for future 
contractor use in its strategic planning documents, as it believes its 
recently issued strategic plan is sufficiently comprehensive. However, 
PBGC's strategic plan only briefly mentions performance-based 
contracting, flexible staffing, and metrics for specific contracts, and 
therefore we believe that it does not reflect the important role 
contracting is playing in achieving PBGC's mission. 

PBGC also needs a more strategic approach for improving human capital 
management. We found that PBGC's draft strategic human capital plan 
does not provide detailed plans for obtaining contract support or 
managing the workload fluctuations. While PBGC has made progress in its 
human capital management approach by taking steps to improve its human 
capital planning and practices--such as drafting a succession 
management plan--the Corporation lacked a formal, comprehensive human 
capital strategy, articulated in a formal human capital plan that 
includes human capital policies, programs, and practices. PBGC is 
generally able to hire staff in its key occupations--such as 
accountants, actuaries, and attorneys--and retain them at rates similar 
to those of the rest of the federal government. However, PBGC has had 
some difficulty hiring and retaining staff for specific occupations and 
positions, including executives and senior financial analysts. Since 
our report, PBGC officials told us that they have provided a human 
capital plan to the Office of Personnel Management (OPM) and are 
awaiting OPM feedback. 

The need for a strategic approach to acquisition and human capital 
management is essential to ensure that PBGC is able to manage the 
administrative fluctuations of a pension insurance corporation. As 
noted earlier, General Motor's and Chrysler's plans include roughly 
900,000 participants, both those receiving benefits now and those who 
have earned benefits payable in the future. These participants, if 
brought under PBGC administration, would raise the number of PBGC's 
current or future beneficiary population by roughly 80 percent. While 
it is uncertain whether an automaker plan would ever be assumed by 
PBGC, the concentration of large numbers of plan beneficiaries among 
just two sponsors illustrates the potential for a sudden and 
unprecedented administrative workload at PBGC. 

Conclusions: 

While PBGC has been on our High Risk list since 2003--and many of its 
challenges are long-term in nature--the recession and market down-turn 
has magnified the challenges it faces. When we last reported on PBGC's 
financial challenges in September, we specifically mentioned the change 
in investment policy as a key challenge going forward. This is still 
the case, but even more recent events, such as legislative changes and 
the plight of the automakers and other financially weak sponsors in 
other industries, have the potential to expose PBGC to claims of a 
potentially unprecedented magnitude. 

While many of the financial challenges are a result of long-term 
weaknesses that are in many ways structural, PBGC does have some degree 
of control over challenges it faces with respect to governance, 
oversight, and management. GAO has made many recommendations in these 
areas, but given the potentially immense financial challenges the 
Corporation faces, the need to act is only growing. It is unfortunate 
that, during a time of financial crisis, the PBGC board has not met in 
15 months. However, PBGC not only needs a board that meets regularly, 
but also a board that can be active and commit the time to 
understanding the weight and urgency of the issues facing the 
Corporation. Ideally, a more robust board structure would be in place 
as soon as possible so that the board can address current challenges 
and anticipate new ones. The current situation has important 
implications for all PBGC stakeholders: plan sponsors, insured 
participants, insured beneficiaries, as well as the government and, 
ultimately, the taxpayers. PBGC should not have to take on significant, 
additional claims from severely underfunded pension plans before 
situation is recognized. 

Chairman Kohl, Senator Martinez, and Members of the Committee, this 
concludes my prepared statement. I would be happy to respond to any 
questions you may have. 

[End of section] 

Appendix I: Selected GAO Recommendations on PBGC Governance and 
Strategic Management: 

Table 1: GAO Governance Recommendations and PBGC's Actions Taken: 

GAO Observation: PBGC has heavy use of contractors--with three-quarters 
of its operational budget currently being spent on contracting. While 
PBGC has made efforts to improve its acquisition infrastructure, it has 
not developed a strategic approach to its contracting process; 
GAO Recommendation to PBGC: The Director of PBGC revise its strategic 
plan to reflect PBGC's use of contractors, project its vision of future 
contractor use, and better link staffing and contracting decisions at 
the corporate level; 
PBGC Actions: 
* PBGC believes its current strategic plan is sufficiently 
comprehensive to address the recommendation. In response, GAO stated 
that the strategic plan only briefly mentions performance-based 
contracting, flexible staffing and metrics for specific contracts, and 
therefore it does not reflect the important role contracting is playing 
in achieving PBGC's mission. 

GAO Observation: The degree of the risk associated with PBGC's new 
investment policy is unclear. Implementing PBGC's new investment policy 
requires that the board have useful accountability measures to conduct 
careful oversight and to ensure that PBGC achieves its policy goals, 
such as protecting the pension benefits of retirees; 
GAO Recommendation to PBGC: 
* The PBGC board should require PBGC director to formally submit an 
implementation plan that outlines accountability measure for carrying 
out the new investment policy; 
PBGC Actions: 
* The PBGC director has submitted the implementation plan to the PBGC 
board. 

GAO Observation: The degree of the risk associated with PBGC's new 
investment policy is unclear. Implementing PBGC's new investment policy 
requires that the board have useful accountability measures to conduct 
careful oversight and to ensure that PBGC achieves its policy goals, 
such as protecting the pension benefits of retirees; 
GAO Recommendation to PBGC: 
* Document the board's agreement or disagreement with any deviations 
from the policy implementation plan; 
PBGC Actions: 
* The Board has not met since the new policy was approved. 

GAO Observation: The degree of the risk associated with PBGC's new 
investment policy is unclear. Implementing PBGC's new investment policy 
requires that the board have useful accountability measures to conduct 
careful oversight and to ensure that PBGC achieves its policy goals, 
such as protecting the pension benefits of retirees; 
GAO Recommendation to PBGC: 
* The PBGC board should require the PBGC director to report 
periodically on the progress towards meeting the objectives, 
milestones, and time frames in the plan; 
PBGC Actions: 
* PGBC officials told us they are keeping the Secretary of Labor, as 
well as officials at the Departments of Treasury and Commerce, apprised 
of their progress. 

GAO Observation: The degree of the risk associated with PBGC's new 
investment policy is unclear. Implementing PBGC's new investment policy 
requires that the board have useful accountability measures to conduct 
careful oversight and to ensure that PBGC achieves its policy goals, 
such as protecting the pension benefits of retirees; 
GAO Recommendation to PBGC: 
* PBGC should conduct sensitivity analyses before implementing the new 
policy. These analyses should use a variety of assumptions of the risks 
and returns of the new allocation that incorporates assets, 
liabilities, and funded position; 
PBGC Actions: 
* PBGC officials report they are implementing a risk management system 
and plan to stress-test once it is in place. 

GAO Observation: PBGC may face workforce challenges regarding key staff 
experience, retirement eligibility, and compensation limitations. It 
has taken some steps to strategically manage its workforce, but has not 
prepared for possible workforce and compensation challenges; 
GAO Recommendation to PBGC: 
* Integrate formal workforce and succession planning components as part 
of the Corporation's efforts in developing a formal strategic planning 
approach to managing its workforce; 
* Systematically collect and analyze workforce data and integrate the 
results of such analyses into its workforce planning efforts; 
* Fully explore with the Office of Personnel Management and Office of 
Management and Budget all compensation options currently available to 
determine and document what options are appropriate and applicable 
within its statutory authority; 
PBGC Actions: * PBGC officials report that a human capital plan and 
student-loan certification are with the Office of Personnel Management 
and the agency is waiting for feedback. 

GAO Observation: PBGC is directed and overseen by one of the smallest 
and least diverse boards of directors, even though it is financially 
one of the largest Corporations within the federal government; 
GAO Recommendation to PBGC: 
* Establish policies, procedures, and mechanisms for providing 
oversight of PBGC that are consistent with corporate governance 
guidelines; 
PBGC Actions: 
* PBGC contracted with a firm to identify and review governance models 
and provide a background report to assist the board in its review of 
alternative government structures. 

GAO Observation: PBGC is directed and overseen by one of the smallest 
and least diverse boards of directors, even though it is financially 
one of the largest Corporations within the federal government; 
GAO Recommendation to PBGC: 
* Establish formal guidelines that articulate the authorities of the 
Board Chair and the Department of Labor, the other board members and 
their respective departments, and PBGC's Director; 
PBGC Actions: 
* PBGC revised the Corporation's bylaws, specifically delineating the 
roles and responsibilities of board members, representatives, director, 
and senior management. 

[End of table] 

[End of section] 

Appendix II: Selected GAO Reports and Testimonies Related to the 
Pension Benefit Guaranty Corporation: 

High Risk Series: An Update. [hyperlink, 
http://www.gao.gov/products/GAO-09-271]. Washington, D.C.: January 
2009. 

Pension Benefit Guaranty Corporation: Improvements Needed to Address 
Financial and Management Challenges. [hyperlink, 
http://www.gao.gov/products/GAO-08-1162T]. Washington, D.C.: September 
24, 2008. 

Pension Benefit Guaranty Corporation: Need for Improved Oversight 
Persists. [hyperlink, http://www.gao.gov/products/GAO-08-1062]. 
Washington, D.C.: September 10, 2008. 

Pension Benefit Guaranty Corporation: Some Steps Have Been Taken to 
Improve Contracting, but a More Strategic Approach Is Needed. 
[hyperlink, http://www.gao.gov/products/GAO-08-871]. Washington, D.C.: 
August 18, 2008. 

PBGC Assets: Implementation of New Investment Policy Will Need Stronger 
Board Oversight. [hyperlink, http://www.gao.gov/products/GAO-08-667]. 
Washington, D.C.: July 17, 2008. 

Pension Benefit Guaranty Corporation: A More Strategic Approach Could 
Improve Human Capital Management. [hyperlink, 
http://www.gao.gov/products/GAO-08-624]. Washington, D.C.: June 12, 
2008. 

High Risk Series: An Update. [hyperlink, 
http://www.gao.gov/products/GAO-07-310]. Washington, D.C.: January 
2007. 

Pension Benefit Guaranty Corporation: Governance Structure Needs 
Improvements to Ensure Policy Direction and Oversight. [hyperlink, 
http://www.gao.gov/products/GAO-07-808] Washington, D.C.: July 6, 2007. 

PBGC's Legal Support: Improvement Needed to Eliminate Confusion and 
Ensure Provision of Consistent Advice. [hyperlink, 
http://www.gao.gov/products/GAO-07-757R]. Washington, D.C.: May 18, 
2007. 

Private Pensions: Questions Concerning the Pension Benefit Guaranty 
Corporation's Practices Regarding Single-Employer Probable Claims. 
[hyperlink, http://www.gao.gov/products/GAO-05-991R]. Washington, D.C.: 
September 9, 2005. 

Private Pensions: The Pension Benefit Guaranty Corporation and Long- 
Term Budgetary Challenges. [hyperlink, 
http://www.gao.gov/products/GAO-05-772T]. Washington, D.C.: June 9, 
2005. 

Private Pensions: Recent Experiences of Large Defined Benefit Plans 
Illustrate Weaknesses in Funding Rules. [hyperlink, 
http://www.gao.gov/products/GAO-05-294]. Washington, D.C.: May 31, 
2005. 

Pension Benefit Guaranty Corporation: Single-Employer Pension Insurance 
Program Faces Significant Long-Term Risks. [hyperlink, 
http://www.gao.gov/products/GAO-04-90. Washington, D.C.: October 29, 
2003. 

Pension Benefit Guaranty Corporation Single-Employer Insurance Program: 
Long-Term Vulnerabilities Warrant 'High Risk' Designation. [hyperlink, 
http://www.gao.gov/products/GAO-03-1050SP]. Washington, D.C.: July 23, 
2003. 

Pension Benefit Guaranty Corporation: Statutory Limitation on 
Administrative Expenses Does Not Provide Meaningful Control. 
[hyperlink, http://www.gao.gov/products/GAO-03-301]. Washington, D.C.: 
February 28, 2003. 

GAO Forum on Governance and Accountability: Challenges to Restore 
Public Confidence in U.S. Corporate Governance and Accountability 
Systems. [hyperlink, http://www.gao.gov/products/GAO-03-419SP]. 
Washington, D.C.: January 2003. 

[End of section] 

Appendix III: Contacts and Staff Acknowledgments: 

For further questions about this statement, please contact Barbara D. 
Bovbjerg at (202) 512-7215. Individuals making key contributions to 
this statement include Blake Ainsworth, Charles Ford, Jennifer Gregory, 
Craig Winslow, and Susannah Compton. 

[End of section] 

Footnotes: 

[1] GAO, Pension Benefit Guaranty Corporation Single-Employer Insurance 
Program: Long-Term Vulnerabilities Warrant "High Risk" Designation, 
[hyperlink, http://www.gao.gov/products/GAO-03-1050SP] (Washington, 
D.C.: July 23, 2003). 

[2] Pub. L. No. 93-406, 88 Stat. 829 (codified, as amended, at 29 
U.S.C.  1001-1461). 

[3] 29 U.S.C.  1305(c). 

[4] 29 U.S.C.  1302(g)(2). 

[5] The termination of a fully funded DB plan is called a standard 
termination. 29 U.S.C.  1341(b). 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, termed a distress 
termination, is allowed if the plan sponsor requests the termination 
and the sponsor satisfies other criteria. 29 U.S.C.  1341(c). 
Alternatively, PBGC may initiate an "involuntary" termination. PBGC may 
institute proceedings to terminate a plan if the plan has not met the 
minimum funding standard, the plan will be unable to pay benefits when 
due, a reportable event has occurred, 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. 29 U.S.C.  1342(a). 

[6] GAO, Private Pensions: Recent Experiences of Large Defined Benefit 
Plans Illustrate Weaknesses in Funding Rules, [hyperlink, 
http://www.gao.gov/products/GAO-05-294] (Washington, D.C.: May 31, 
2005). 

[7] GAO, Pension Benefit Guaranty Corporation: Single-Employer Pension 
Insurance Program Faces Significant Long-Term Risks, [hyperlink, 
http://www.gao.gov/products/GAO-04-90] (Washington, D.C.: Oct. 29, 
2003). 

[8] A plan freeze is an amendment to the plan to limit some or all 
future pension accruals for some or all plan participants. See GAO, 
Defined Benefit Pensions: Plan Freezes Affect Millions of Participants 
and Pose Retirement Income Challenges, [hyperlink, 
http://www.gao.gov/products/GAO-08-817] (Washington, D.C.: July 21, 
2008) and GAO, Private Pensions: Timely and Accurate Information Is 
Needed to Identify and Track Frozen Defined Benefit Plans, [hyperlink, 
http://www.gao.gov/products/GAO-04-200R] (Washington, D.C.: Dec. 17, 
2003). 

[9] Pub. L. No. 109-171,  8101, 120 Stat. 4, 180-83 (codified, as 
amended, at 29 U.S.C.  1306). The flat-rate premium is a per- 
participant premium that plans pay to PBGC each year. In 2009, the rate 
for the flat premium is $34 per participant in insured single-employer 
plans. For multiemployer plans the flat rate premium is $9 per 
participant. These rates are adjusted annually by an average-national- 
wage index. The legislation created a new premium for sponsors of plans 
that are terminated on an involuntary or distressed termination basis. 
The required payment is $1,250 per plan participant, per year, for 
three years after the termination. For sponsors whose plans were 
terminated while the program was being reorganized under chapter 11 of 
the bankruptcy code, the premium would be levied after the sponsor 
emerges from bankruptcy. Under DRA the premium would not apply to firms 
that are liquidated by a bankruptcy court or to terminations after 
December 2010. 

[10] Pub. L. No. 109-280, 120 Stat. 780. 

[11] GAO, Pension Benefit Guaranty Corporation: Improvements Needed to 
Address Financial and Management Challenges. [hyperlink, 
http://www.gao.gov/products/GAO-08-1162T] (Washington, D.C.: Sept. 24, 
2008). 

[12] Pension Benefit Guaranty Corporation, Annual Management Report 
Fiscal Year 2008, (Wash. D.C.: Nov. 17, 2008). 

[13] Claims are the net cost of terminating a pension plan--the gap 
between its assets and its liabilities. 

[14] PBGCs assets are composed of insurance income from sponsors 
(largely from premiums), income from its investments, and the assets it 
assumes from failed plans. PBGCs liabilities include the benefit 
obligations in the form of monthly payments to participants and 
beneficiaries in terminated defined benefit plans, financial assistance 
to multiemployer plans, as well as PBGCs operating expenses. 

[15] Liability valuations reflect the time value of money--that a 
dollar in the future is worth less than a dollar today, because the 
dollar today can be invested and earn interest. Using a lower interest 
rate will increase the present value of a stream of payments because it 
implies that, as a smaller amount of investment income will be 
received, a higher level of assets today will be needed to fund those 
future payments. 

[16] Probable terminations represent PBGC's best estimate of claims for 
plans that are likely to terminate in a future year. 

[17] Chrysler LLC is currently undergoing reorganization under Chapter 
11 of the Bankruptcy Code and will receive financial assistance from 
the federal government to fund its operations during bankruptcy. 
According to the Administration, Chrysler's pension plans will be 
preserved. The Department of Treasury is also providing financial 
assistance to GM to assist its restructuring efforts, and has given the 
company until June 1 to develop a credible strategy for achieving 
viability. 

[18] Estimates of pension funding levels vary based on the methods and 
assumptions used. According to PBGC, GM's plans were underfunded by $20 
billion and Chrysler's by $9.3 billion on a termination basis as of 
November 30, 2008, for GM and January 1, 2009, for Chrysler. 
Termination liability reflects the cost to a company of paying an 
insurer to meet its pension obligations should the plan terminate. This 
is calculated by using actuarial assumptions PBGC makes including 
interest and mortality. Termination liability is often higher than 
liability calculated for other purposes. According to GM's financial 
statements, its U.S. pension plans were underfunded by $13.6 billion as 
of December 31, 2008; according to information provided by Chrysler, 
its U.S. pension plans were underfunded by $3.6 billion as of December 
31, 2008. 

[19] Additionally, PBGC would pay all the plans' benefit promises, up 
to certain limits set by statute. These limits mean that some 
individuals, typically younger retirees, would see reduced benefits. 

[20] Pub. L. No 110-455, 122. Stat. 5036. 

[21] GAO, PBGC Assets: Implementation of New Investment Policy Will 
Need Stronger Board Oversight, [hyperlink, 
http://www.gao.gov/products/GAO-08-667] (Washington, D.C.: July 17, 
2008). 

[22] Congressional Budget Office, "A Review of the Pension Benefit 
Guaranty Corporation's New Investment Strategy," Letter to the 
Honorable George Miller (Wash. D.C.: April 24, 2008). 

[23] These best practices include Chartered Financial Analyst 
Institute's Global Investment Performance Standards. 

[24] GAO, Pension Benefit Guaranty Corporation: Governance Structure 
Needs Improvements to Ensure Policy Direction and Oversight, 
[hyperlink, http://www.gao.gov/products/GAO-07-808] (Washington, D.C.: 
July 6, 2007). 

[25] Matteo Tonello and Carolyn K. Brancato, Corporate Governance 
Handbook, 2007: Legal Standards and Board Practices, Research Report R- 
1405-07-RR, The Conference Board (New York, New York: 2007). 

[26] Corporate Governance Handbook, 2007, Research Report R-1405-07-RR. 
The Conference Board is a global business membership and research 
organization that creates and disseminates knowledge about management 
and the marketplace. 

[27] See [hyperlink, http://www.gao.gov/products/GAO-08-667]. 

[28] See [hyperlink, http://www.gao.gov/products/GAO-07-808]. 

[29] GAO, Pension Benefit Guaranty Corporation: Some Steps Have Been 
Taken to Improve Contracting, but a More Strategic Approach Is Needed, 
[hyperlink, http://www.gao.gov/products/GAO-08-871] (Washington, D.C.: 
Aug. 18, 2008) and GAO, Pension Benefit Guaranty Corporation: A More 
Strategic Approach Could Improve Human Capital Management, [hyperlink, 
http://www.gao.gov/products/GAO-08-624] (Washington, D.C.: June 12, 
2008). 

[End of section] 

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