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United States Government Accountability Office:
GAO: 

Testimony: 

Before the Committee on Health, Education, Labor, and Pensions, U.S. 
Senate: 

For Release on Delivery: 
Expected at 10:00 a.m. EST:
Wednesday, December 1, 2010: 

Pension Benefit Guaranty Corporation: 

Improvements Needed to Strengthen Governance Structure and Strategic 
Management: 

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

GAO-11-182T: 

GAO Highlights: 

Highlights of GAO-11-182T, a testimony before the Committee on Health, 
Education, Labor, and Pensions, U.S. Senate. 

Why GAO Prepared This Testimony: 

The Pension Benefit Guaranty Corporation (PBGC) is a self-financing 
government corporation that insures the pensions of 44 million workers 
in more than 27,000 private sector defined benefit pension plans. Yet, 
PBGC faces financial instability that could pose a future threat to 
this source of protection for Americans retirement income. As fewer 
sponsors pay premiums for fewer participants in defined benefit plans, 
and as the underfunding of large defined benefit plans increases, the 
risks to PBGCs financial future also increase. As of September 2010, 
PBGCs net accumulated financial deficit was $23 billion. GAO has 
designated PBGC and the pension insurance programs it administers as 
high risk areas in need of urgent attention and transformation to 
address economy, efficiency, or effectiveness changes. 

In this testimony, GAO discusses its recent work regarding PBGC. 
Specifically, this statement focuses on needed improvements to PBGCs 
governance structure and strategic management based on GAOs prior 
work in these areas. GAO is making no new recommendations in this 
statement, but continues to believe that Congress should consider 
expanding PBGCs board of directors and that PBGC should implement 
recommendations from prior reports that have not yet been implemented, 
such as those concerning strategic workforce management and benefit 
determination process performance measures for large, complex plans. 

What GAO Found: 

PBGC requires a strong governance structure and strategic management 
to ensure that it can meet its future financial challenges. Companies 
who pay annual premiums to PBGC and the millions of employees whose 
retirement benefits are under PBGCs protection are owed greater 
stewardship of the corporation and its funds. 

By law, PBGC is governed by a three-member board of directors composed 
of the Secretaries of the Treasury, Commerce, and Labor. Because of 
their numerous responsibilities in their roles as cabinet-level 
secretaries, the board members have historically been unable to 
dedicate consistent attention to PBGC matters. In fact, since 1980, 
the board has met only 23 times. During a critical 2-year period 
between February 2008 and February 2010, amid turbulent economic times 
and congressional investigations of certain procurement practices, the 
board did not meet at all. While the current PBGC board is meeting 
more frequently than in prior years, its members still have little 
time to devote to PBGC governance and the board remains vulnerable to 
disruptive transitions during future changes of administration. 

Figure: Number of PBGC Board Meetings Held, 1974-October 2010: 

[Refer to PDF for image: illustration] 

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

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

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

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

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

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. 

Year: 2010; 
Meeting (with quorum): 3. 

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

[End of figure] 

In addition, although PBGC management has taken steps in recent years 
to strengthen its operations, recommendations from GAOs prior work 
concerning how the corporation could improve its strategic workforce 
management and the benefit determination process have yet to be fully 
implemented. PBGCs contract workers comprise about two-thirds of its 
workforce, yet GAO found that workforce management lacked a strategic 
approach for determining the mix of contract and federal workers, and 
PBGC did not include procurement decision making in corporate-level 
strategic planning. Also, GAO found that management of PBGCs benefit 
determination process did not provide for separate reporting of 
performance measures for large, complex plans, yet these plans are 
responsible for most long delays in processing and most cases with 
overpayments. Measures that reflect averages across all plans do not 
provide sufficient incentive to improve the processing of these plans. 
The need for a more strategic approach in managing both the contract 
workforce and the benefit determination process is essential to ensure 
that PBGC is operating efficiently and effectively. 

Improvements to PBGCs governance and strategic management cannot 
correct structural weaknesses in its financial design, but it can 
better position PBGC for the challenges that lie ahead. 

View [hyperlink, http://www.gao.gov/products/GAO-11-182T] or key 
components. For more information, contact Barbara D.Bovbjerg, (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 need for improved 
governance and strategic management of the Pension Benefit Guaranty 
Corporation (PBGC). PBGC operates two pension insurance programs--the 
single-employer program and multiemployer program--that insure the 
pensions of 44 million private sector workers and retirees in more 
than 27,000 defined benefit pension plans.[Footnote 1] With the growth 
in number of large plans under its trusteeship, PBGC's 
responsibilities for administering plans and managing assets have 
increased significantly since its creation in 1974, and its financial 
portfolio is now one of the largest of any federal government 
corporation.[Footnote 2] While PBGC has sufficient assets to pay 
retirees promised benefits in the near future, PBGC has maintained an 
accumulated financial deficit for a number of years. In fact, we first 
designated PBGC's largest insurance program--the single-employer 
program--as "high risk" in 2003 due to PBGC's prior-year net deficit, 
as well as the increased likelihood of large, underfunded pension plan 
terminations.[Footnote 3] Since that time, the single-employer program 
has remained high risk because of its continued deficit and the 
structural challenges that pose a risk for future losses. In 2009, we 
designated the multiemployer program as high risk as well.[Footnote 4] 
At the end of fiscal year 2010, PBGC's deficit for both programs 
combined was approximately $23 billion. 

My statement will focus on steps PBGC could take to help meet the 
challenges of its unstable financial condition and increasing 
workloads. Specifically, I will discuss PBGC's need for (1) a stronger 
board structure and (2) a more strategic approach to managing its 
contract workforce and benefit determination process. My statement is 
based on our prior work assessing PBGC's long term financial 
prospects, and various reports we have published over the past several 
years on PBGC governance and management. Our prior work was conducted 
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. 

Background: 

PBGC was created by the Employee Retirement Income Security Act of 
1974 (ERISA)[Footnote 5] to pay benefits to participants in private 
defined benefit pension plans in the event that an employer could not. 
[Footnote 6] PBGC may pay benefits up to specified limits, if a plan 
does not have sufficient assets to pay promised benefits and the 
sponsoring company is in financial distress. As of September 2010, 
PBGC was paying monthly retirement benefits to more than 800,000 
retirees in about 4,200 terminated pension plans.[Footnote 7] 

PBGC receives no funds from general tax revenues. Instead, the 
corporation finances its activities from three main sources of funds: 
(1) insurance premiums in amounts set by Congress and paid by defined 
benefit plan sponsors, (2) assets acquired from plans that have been 
terminated and trusteed by PBGC, and (3) investment income earned on 
these assets. Under current law, the corporation has no substantial 
source of funds available to it if it were to exhaust its assets, 
except for the ability to borrow up to $100 million from the 
Department of the Treasury.[Footnote 8] The United States government 
is not liable for any obligation or liability incurred by the 
corporation.[Footnote 9] 

PBGC's deficit fluctuates due to various factors, including changes in 
interest rates, investment performance, and losses from completed and 
probable plan terminations. PBGC's deficit improved during fiscal year 
2008, but then worsened the next year with the severe market downturn. 
As of September 2010, PBGC held approximately $79.5 billion in assets 
and approximately $102.5 billion in liabilities--for an accumulated 
deficit of $23.0 billion, more than double the deficit from 2 years 
earlier (see figure 1). This growth in its deficit was due largely to 
an increase in plan terminations and a decline in interest rates used 
to value PBGC's liabilities. As a result of these plan terminations, 
PBGC became directly responsible for the pensions of more than 200,000 
additional participants in fiscal year 2009, the third highest annual 
total of new participants in PBGC's history. During this time, the 
corporation trusteed plans of companies such as Lehman Brothers, 
IndyMac Bank, Circuit City, Nortel, and Delphi Corporation. In 
addition, as of September 2010, PBGC estimated future losses from 
underfunded multiemployer plans that are unable to repay financial 
assistance provided by PBGC at about $3.0 billion--up from $1.8 
billion 2 years earlier. 

Figure 1: PBGC's Assets and Liabilities, Fiscal Years 1991 through 
2010: 

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

Year: 1990; 
Assets: $2.99 billion; 
Liabilities: $4.77 billion. 

Year: 1991; 
Assets: $5.66 billion; 
Liabilities: $8 billion. 

Year: 1992; 
Assets: $6.66 billion; 
Liabilities: $9.23 billion. 

Year: 1993; 
Assets: $8.67 billion; 
Liabilities: $11.30 billion. 

Year: 1994; 
Assets: $8.66 billion; 
Liabilities: $9.70 billion. 

Year: 1995; 
Assets: $10.85 billion; 
Liabilities: $10.97 billion. 

Year: 1996; 
Assets: $12.55 billion; 
Liabilities: $11.56 billion. 

Year: 1997; 
Assets: $15.91 billion; 
Liabilities: $12.21 billion. 

Year: 1998; 
Assets: $18.38 billion; 
Liabilities: $13.02 billion. 

Year: 1999; 
Assets: $19.12 billion; 
Liabilities: $11.89 billion. 

Year: 2000; 
Assets: $21.52 billion; 
Liabilities: $11.55 billion. 

Year: 2001; 
Assets: $22.58 billion; 
Liabilities: $14.73 billion. 

Year: 2002; 
Assets: $26.37 billion; 
Liabilities: $29.85 billion. 

Year: 2003; 
Assets: $35.02 billion; 
Liabilities: $46.52 billion. 

Year: 2004; 
Assets: $40.06 billion; 
Liabilities: $63.60 billion. 

Year: 2005; 
Assets: $57.63 billion; 
Liabilities: $80.74 billion. 

Year: 2006; 
Assets: $61.14 billion; 
Liabilities: $80.02 billion. 

Year: 2007; 
Assets: $68.44 billion; 
Liabilities: $82.50 billion. 

Year: 2008; 
Assets: $62.98 billion; 
Liabilities: $74.13 billion. 

Year: 2009; 
Assets: $69 billion; 
Liabilities: $91 billion. 

Year: 2010; 
Assets: $79.5 billion; 
Liabilities: $102.5 billion. 

Source: GAOs analysis of PBGC annual report data. 

[End of figure] 

PBGC currently has sufficient assets to make scheduled benefit 
payments for a number of years, given that benefits are paid monthly 
and spread over participants' and beneficiaries' lifetimes. However, 
in the long term, PBGC is likely to remain at financial risk due, in 
part, to several structural challenges that limit PBGC's ability to 
manage its risk.[Footnote 10] For example, statutorily prescribed 
pension funding requirements specify how much a sponsor must 
contribute to its defined benefit plans each year.[Footnote 11] 
However, these funding rules are based on assumptions about future 
liabilities that may differ from a plan's actual payouts of benefits 
over time. Similarly, PBGC's premium structure is specified in law for 
both single-and multiemployer defined benefit plans.[Footnote 12] This 
structure limits the corporation's ability to manage its financial 
risk because, unlike private insurers, PBGC cannot decline to provide 
insurance coverage or adjust premiums in response to actual or 
expected claims exposure. Meanwhile, PBGC's premium base has been 
shrinking as the number of defined benefit pension plans and active 
plan participants has been declining rapidly. In fiscal year 2010, 
PBGC insured about half the number of plans it insured 15 years 
earlier. 

Legislation enacted over the past 5 years has taken steps to address 
these concerns, but the extent to which these steps may reduce PBGC's 
risk of future losses is still unknown. For example, the Deficit 
Reduction Act of 2005 included provisions to raise flat-rate premiums 
and create a new, temporary premium for certain terminated single- 
employer plans.[Footnote 13] In addition, the Pension Protection Act 
of 2006 (PPA)[Footnote 14] included a number of provisions aimed at 
improving plan funding and PBGC finances through such measures as 
raising the funding targets defined benefit pension 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.[Footnote 15] 
However, in response to the recession, Congress enacted legislation in 
2008 to help companies better weather the economic downturn by 
granting funding relief to certain sponsors and delaying 
implementation of certain PPA provisions.[Footnote 16] Thus, the 
overall impact of PPA remains unclear. 

PBGC's insurance programs are in need of urgent congressional 
attention and agency action. We first designated the single-employer 
insurance program as "high risk" in 2003 after it moved from a $9.7 
billion accumulated surplus in fiscal year 2000 to a $3.6 billion 
accumulated deficit in fiscal year 2002.[Footnote 17] Since that time, 
the net financial position of PBGC has significantly worsened due, in 
part, to the declines in certain industries that led to PBGC having to 
assume responsibility for several large underfunded plans, and to the 
steep downturn in the financial markets. We added the high risk 
designation to the multiemployer program in 2009 in light of the 
increased risk of future losses in that program as well.[Footnote 18] 
As of September 2010, PBGC's estimated financial deficit for both 
programs combined was $23.0 billion--more than double its deficit from 
2 years earlier. 

PBGC's Board Structure Needs Strengthening: 

PBGC needs strong policy direction and oversight in the face of its 
current financial condition and long-term structural challenges, yet 
the board's structure as established by law limits the board's ability 
to provide such policy direction and oversight. ERISA specified that 
PBGC is to have a three-member board of directors consisting of the 
Secretaries of the Treasury, Commerce, and Labor. The Secretary of 
Labor serves as the Chairman of the Board.[Footnote 19] The board is 
required to direct and oversee the corporation, in part, by approving 
all policy decisions affecting American employers and workers as well 
as reviewing and approving its budget, strategic plans, and financial 
performance. Each board member can designate an official to serve on 
his or her behalf in most instances.[Footnote 20] This designee is 
referred to as the board member's "representative." In addition, ERISA 
established an Advisory Committee, whose seven members are appointed 
by the President to represent the interests of labor, employers, and 
the general public. The committee has an advisory role but has no 
statutory authority to set PBGC policy or conduct formal oversight. 
[Footnote 21] 

Our prior work has highlighted a number of limitations with this 
statutory governance structure, starting with the size and composition 
of the board. According to corporate governance guidelines published 
by The Conference Board,[Footnote 22] 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 found that other government corporations' 
boards averaged about 7 members, with one having as many as 15 (see 
table 1). None had a board as small as PBGC's. In addition, the size 
of PBGC's board also prevents the members from establishing standing 
oversight committees, which are commonly used by both government 
corporations and private corporate boards. For example, other 
government corporations, such as the Overseas Private Investment 
Corporation (OPIC) and the Federal Deposit Insurance Corporation have 
established standing committees to conduct oversight of certain 
functions, such as audits and case file reviews. 

Table 1: Board Membership of Selected Government Corporations with a 
Similar Mission: 

Government corporation: Commodity Credit Corporation; 15 U.S.C.  
714g(a); 
Members: 8; 
Description of key provisions: Board of directors consists of seven 
members, in addition to the Secretary, who are appointed by the 
President, with the advice and consent of the Senate. Board is subject 
to the general supervision and direction of the Secretary of 
Agriculture, who is an ex-officio member and chairperson. 

Government corporation: Export-Import Bank of the United States; 12 
U.S.C.  635a(c); 
Members: 5; 
Description of key provisions: Board of directors consists of the 
bank's president (as chairman), the bank's first vice president (as 
vice chairman), and three others. All members of the board are 
appointed by the President with the advice and consent of the Senate 
and serve staggered 4-year terms. 

Government corporation: Federal Crop Insurance Corporation; 7 U.S.C.  
1505(a); 
Members: 10; 
Description of key provisions: Board of directors consists of the 
manger of the corporation (serving as a nonvoting ex officio member), 
the Department of Agriculture under secretary responsible for crop 
insurance, an additional department under secretary, the department's 
Chief Economist, and six private sector members appointed by and 
holding office at the pleasure of the Secretary of Agriculture 
(including one experienced in the crop insurance business, one 
experienced in reinsurance, and four active producers, who are policy 
holders, from different geographic areas and represent an cross-
section of agricultural commodities). Board selects its own chair and 
private sector members serve staggered 4-year terms. 

Government corporation: Federal Deposit Insurance Corporation; 12 
U.S.C.  1812(a) -(c); 
Members: 5; 
Description of key provisions: Board of directors consists of the 
Comptroller of the Currency, the Director of the Office of Thrift 
Supervision, and three citizens (including one with state bank 
supervisory experience) appointed by the President with the advice and 
consent of the Senate. Chairperson and vice chairperson are designated 
by the President with the advice and consent of the Senate. Each 
member appointed for 6-year term and, if vacancies occur, others are 
appointed only to complete unfinished terms. 

Government corporation: Overseas Private Investment Corporation; 22 
U.S.C.  2193(a) and (b); 
Members: 15; 
Description of key provisions: Board of directors consists of eight 
members from the private sector and seven from the federal government. 
At least two of the private sector directors must be experienced in 
small business, one must represent organized labor, and another must 
have experience in cooperatives. Government members include the 
President of the Corporation, the Administrator of the Agency for 
International Development, the United States Trade Representative or 
Deputy U.S. Trade Representative, and four additional members who are 
principal government officers, including at least one from the 
Department of Labor. All members appointed by the President, with 
advice and consent of the Senate and serve staggered 3 year terms. 

Government corporation: Pension Benefit Guaranty Corporation; 29 U.S.C 
 1302(d); 
Members: 3; 
Description of key provisions: Board of directors consists of the 
Secretaries of Labor (as chairman), Commerce and the Treasury. 

Source: GAO Analysis of U.S. Code. 

[End of table] 

PBGC's governance structure is also vulnerable to disruptive 
transitions with each administration change. The board, its 
representatives, and the director typically change with each 
presidential transition, thus limiting the board's institutional 
knowledge of the challenges facing the corporation.[Footnote 23] Other 
government corporations have board structures with staggered terms for 
their directors, which arguably avoid gaps in their organization's 
institutional knowledge. For instance, OPIC's directors may be 
appointed for a term of no more than 3 years, and the terms of no more 
than 3 of the 15 directors can expire in any given year.[Footnote 24] 

Our prior work has also found that PBGC's board members often have 
limited time and resources to dedicate to PBGC matters given their 
numerous other responsibilities in their roles as cabinet secretaries. 
[Footnote 25] 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. However, we found that since PBGC's inception, 
the board has met infrequently, even when pressing strategic and 
operational issues were at play. In 2003, after several high-profile 
pension plan terminations, PBGC's board began meeting twice a year 
(see figure 2). But PBGC officials have told us that it is a challenge 
to find a time when all three cabinet secretaries are able to meet, 
and when they do meet, the meetings generally only last about an hour. 
The current board has recently begun to meet more frequently, meeting 
three times since February 2010. However, prior to that time, the 
board had not met since February 2008, despite pending terminations of 
several pension plans sponsored by large automakers and congressional 
investigations into certain procurement practices. 

Figure 2: Number of PBGC Board Meetings, 1974-October 2010: 

[Refer to PDF for image: illustration] 

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

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

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

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

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

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. 

Year: 2010; 
Meeting (with quorum): 3. 

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

[End of figure] 

Because PBGC's board members have generally been unable to dedicate 
consistent attention to PBGC, they have relied on their board 
representatives to conduct much of the work on their behalf. The board 
also relies on PBGC's Inspector General and management oversight 
committees to ensure that PBGC is operating effectively. However, we 
have found that the communications between these entities and the 
board may be limited and the board may not always be sufficiently 
aware of PBGC's activities. For example, PBGC's bylaws require the 
board to review any reports that the Inspector General deems 
appropriate,[Footnote 26] and the Inspector General reports to the 
board through the Chair.[Footnote 27] However, there is no formal 
protocol requiring the Inspector General to routinely meet with the 
board of directors or their representatives. Moreover, PBGC's 
oversight committees are not independent of the PBGC director nor 
required to formally report all matters to the board. Under this 
structure, it remains unclear if the board members would be aware of 
the Inspector's General findings or of significant actions taken by 
PBGC management. 

We have also noted that the PBGC Advisory Committee does not have 
formal access to the board members, potentially limiting the board 
members' knowledge of the committees' concerns and recommendations. 
PBGC's Advisory Committee typically reports only to the director, 
although officials said that the committee can submit concerns to the 
board if it believes it is warranted. In contrast, the advisory boards 
or committees of other government corporations--such as the Federal 
Deposit Insurance Corporation and Export-Import Bank--are required to 
submit formal reports to their board chair and directors.[Footnote 28] 

To address these weaknesses in PBGC's governance structure, we believe 
that Congress should consider expanding the board of directors to 
include additional members with diverse backgrounds who possess 
knowledge and expertise useful to PBGC's mission.[Footnote 29] PBGC 
hired a consulting firm to review governance models and provide a 
background report to assist the board in its review of alternative 
corporate governance structures. While the report did not advocate any 
particular governance option, the consulting firm's final report 
corroborated our findings and described the advantages and 
disadvantages of governance practices of other government corporations 
and selected private sector companies. The report concluded that there 
are several viable alternatives for strengthening PBGC's governance 
structure and practices, some of which are now being put forth in 
pending legislation.[Footnote 30] 

PBGC Needs More Strategic Management of Its Contract Workforce and 
Benefit Determination Process: 

Although PBGC management has taken steps in recent years to strengthen 
its operations, our prior work has identified ways that the 
corporation could be more strategic in its management of its contract 
workforce and the benefit determination process. The need for a 
strategic approach in these areas is essential to ensure that PBGC is 
operating as efficiently and effectively as possible to manage its 
increasing workload. 

Contract Workforce Management: 

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 in 
response to the significant number of large pension plan terminations, 
PBGC has come to rely on contractors to supplement its workforce. 
About two-thirds of PBGC's workforce consists of contract workers (see 
figure 3). 

Figure 3: PBGC Overall versus Contractor Personnel and Spending, 
Fiscal Year 2010: 

[Refer to PDF for image: stacked horizontal bar graph] 

PBGC workforce: 
1,439 contract employees: 60.5%; 
941 federal employees: 39.5%. 

PBGC appropriation: 
$278 million spent on contracts: 60%; 
Non-contract appropriations: 40%. 

Source: PBGC. 

Note: The number of contract workers is as of June 30, 2010; the 
number of federal employees is as of July 9, 2010; and the amount 
spent on contracts is for fiscal year 2010 as of September 30, 2010. 

[End of figure] 

Over the years, PBGC has taken steps to improve its workforce 
management. For example, in response to a recommendation we made in 
2000, PBGC agreed to conduct a comprehensive review of its future 
human capital needs and to use this review to better link contracting 
decisions to PBGC's long-term strategic planning process.[Footnote 31] 
After commissioning this review, PBGC developed a human capital 
strategic plan that called for aligning human capital programs with 
the corporations' strategic goals and mission. However, in 2008, we 
found that the corporation still lacked a strategic approach to 
identifying the optimal mix of federal versus contract workers and 
ensuring that the performance of its contract workforce contributes to 
the corporation's mission. 

As a matter of general best practice, our 2008 work noted that a 
strategic plan should incorporate an understanding of how acquisitions 
will be used to assist an agency in achieving its mission.[Footnote 
32] This is especially true of PBGC with its large contract workforce. 
Yet, our 2008 work found that although PBGC had made efforts to 
improve its acquisition infrastructure, it had not developed a 
strategic approach to its contracting process as envisioned in our 
2000 report. Moreover, PBGC's human capital strategic plan focused 
almost exclusively on its federal workforce. We recommended that the 
plan do more to reflect the importance of contracting and to link 
staffing and contracting decisions at the corporate level. While PBGC 
agreed that contracting should be part of its strategic planning 
process, it maintained that this is already being achieved by its 
current process. 

Since our 2008 report, PBGC has implemented new guidance and policies 
in a number of areas to improve its management of the contracting 
process and contractor oversight. In August 2009, PBGC issued 
guidelines for determining whether to use contractors or government 
employees. While useful, these procedures do not include any specific 
steps to ensure that such decisions are linked to the strategic 
planning process. Subsequently, PBGC issued its new human capital 
strategic plan for fiscal years 2010-2014. In this plan, PBGC 
acknowledges the importance of contracting and the challenges of 
balancing their workforce between federal and contract workers, but 
the plan does not provide specific actions to address such challenges 
and appears to continue to focus primarily on PBGC's federal workers. 

Our previous reports also found weaknesses in PBGC's efforts to ensure 
that the performance of its contract workforce contributes to the 
corporation's mission. In 2000, and again in 2008, we found that most 
of PBGC's contracts lacked performance incentives and methods to hold 
contractors accountable for performance outcomes linked to the 
corporation's strategic goals. In 2000, we recommended that, where 
appropriate, PBGC should utilize more fixed-price contracts and fewer 
labor-hour payment arrangements, consistent with best practices in 
performance-based contracting. In 2008, we recommended that to improve 
implementation of a performance-based approach to contracting, PBGC 
should ensure that future contracts measure performance in terms of 
outcomes, provide incentives for the accomplishment of desired 
outcomes, and ensure payment of award fees only for excellent 
performance. We also recommended that PBGC should provide 
comprehensive training on performance-based contracting for PBGC's 
procurement staff, managers, and acquisition-related workforce. 

PBGC agreed with our previous recommendations to enhance 
implementation of performance-based contracting, and stated that the 
actions recommended were already under way, including: incorporating 
performance-based measures into its future contracts and providing 
comprehensive training for PBGC staff. Further, PBGC noted that the 
use of labor-hour contracts had been restricted. However, the move to 
performance-based contracting has been difficult. For example, 
officials attempted to use performance-based contracts when making new 
awards for contracts with the field benefit administration offices, 
but these efforts were abandoned because, according to PBGC officials, 
the proposals were too complicated to evaluate and more costly than 
expected. We are examining these issues in a study currently under way 
to assess how well PBGC is managing its contracting activities and the 
steps it is taking to ensure the integrity of its contract process. We 
anticipate completing this work next summer. 

Although we commend PBGC for its improvements to contract management, 
we continue to believe that more should be done to include procurement 
decision-making in corporate-level strategic planning and to link 
contractor performance measures with the corporation's mission. 
Without a more inclusive strategic planning process that looks at the 
contract workforce and federal workforce together, PBGC cannot be 
assured that it has the optimal mix of contractor staff and federal 
employees and that it is holding its contract workforce accountable 
for helping meet its strategic goals. 

Benefit Determination Process Management: 

Finally, our prior work has also found that PBGC needs a more 
strategic approach for determining the benefits for participants in 
large, complex plans that have been terminated. In our August 2009 
report, we reviewed plans terminated with insufficient funds and 
trusteed by PBGC during fiscal years 2000 through 2008. We found that 
a small number of complex plans--especially those with large numbers 
of participants affected by limits on guaranteed benefit amounts 
[Footnote 33]--accounted for most cases with lengthy delays and 
overpayments.[Footnote 34] For example, PBGC completed most 
participants' benefit determinations in less than 3 years, but 
required more time--up to 9 years--to process determinations for 
complex plans and plans with missing data.[Footnote 35] In addition, 
while only a small percentage of participants receive overpayments of 
their estimated benefits while their final benefit amounts are being 
determined, we found that nearly two-thirds of cases with overpayments 
involved participants in just 10 large, complex plans.[Footnote 36] 

Given these findings, we recommended that PBGC develop a better 
strategy for processing benefit determinations for complex plans in 
order to reduce delays and minimize overpayments, and that PBGC set 
goals for timeliness and monitor the progress made in finalizing 
benefit determinations for large, complex plans separately from other 
plans. In response, PBGC has taken a number of steps to improve its 
procedures for communicating with participants in large, complex plans 
and to reduce overpayments. In addition, officials indicated that 
formal process improvement efforts were under way to tailor plan 
processing to plan size and streamline other aspects of work in an 
effort to reduce process times in the future. At the same time, 
officials noted that they had no plans to set any performance goals 
separately for large, complex plans as a group. Due to the 
complexities and variations with each of these plans, PBGC prefers to 
set schedules only on an individual plan basis. However, we continue 
to believe that reporting performance measures that reflect averages 
across all plans does not provide adequate weight to large versus 
small plans and does not provide sufficient incentive to improve the 
processing times for large, complex plans. 

Concluding Observations: 

In these challenging economic times, PBGC has become even more 
essential as millions of American workers and retirees have come to 
rely on the corporation for protection of their retirement income. 
PBGC is now one of the largest federal government corporations with 
nearly $80 billion in assets, yet it continues to face a future of 
financial instability. Its premium base has been eroding over time as 
fewer sponsors are paying premiums for fewer participants. In 
addition, as a result of the recession, PBGC is still at risk from the 
increased underfunding of some large defined benefit plans. To the 
extent that companies are more at risk of bankruptcy, the plans that 
they sponsor are more at risk of termination. The fact that PBGC's 
board of directors has only recently begun to meet to discuss these 
problems is less than reassuring. Moreover, even with the increased 
attentiveness of the current board, the lack of staggered terms for 
board membership means that consistency in both policy direction and 
oversight is not guaranteed in the future. PBGC needs a board that can 
offer long-term, strategic sophistication to keep the corporation as 
solvent as possible for as long as possible. 

Improvements to PBGC's governance and to its strategic management 
cannot correct the structural weaknesses of its financial design, but 
it can put PBGC in a better position to confront the challenges that 
lie ahead. It is untenable to rest the management of nearly $80 
billion in assets on a corporate board architecture that can fail to 
meet and provide strategic direction for years at a time, and that is 
vulnerable to a lack of leadership during transitions to new 
administrations. Companies that pay annual premiums to PBGC and the 
millions of employees whose retirement benefits are under PBGC's 
protection are owed greater stewardship of the corporation and its 
funds. 

Chairman Harkin and Members of the Committee, this concludes my 
prepared statement. I would be happy to respond to any questions. 

Contacts and Staff Acknowledgments: 

For further questions on this testimony, please contact me at (202) 
512-7215. Individuals who made key contributions to this testimony 
include Blake L. Ainsworth, Joseph A. Applebaum, Susan C. Bernstein, 
Jason S. Holsclaw, Charles A. Jeszeck, Kristen W. Jones, Lara L. 
Laufer, Sheila R. McCoy, Margie K. Shields, Craig H. Winslow, and 
William T. Woods. 

[End of section] 

Related GAO Products: 

Private Pensions: Changes Needed to Better Protect Multiemployer 
Pension Plans. [hyperlink, http://www.gao.gov/products/GAO-11-79]. 
Washington, D.C.: October 18, 2010. 

Private Pensions: Long-standing Challenges Remain for Multiemployer 
Pension Plans. [hyperlink, http://www.gao.gov/products/GAO-10-708T]. 
Washington, D.C.: May 27, 2010. 

Pension Benefit Guaranty Corporation: Workers and Retirees Experience 
Delays and Uncertainty when Underfunded Plans Are Terminated. 
[hyperlink, http://www.gao.gov/products/GAO-10-181T]. Washington, 
D.C.: October 29, 2009. 

Pension Benefit Guaranty Corporation: More Strategic Approach Needed 
for Processing Complex Plans Prone to Delays and Overpayments. 
[hyperlink, http://www.gao.gov/products/GAO-09-716]. Washington, D.C.: 
August 17, 2009. 

Pension Benefit Guaranty Corporation: Financial Challenges Highlight 
Need for Improved Governance and Management. [hyperlink, 
http://www.gao.gov/products/GAO-09-702T] Washington, D.C.: May 20, 
2009. 

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. 

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. 

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

[End of section] 

Footnotes: 

[1] A defined benefit plan is a pension plan that generally provides 
monthly retirement benefits based on a formula that combines salary 
and years of service to the company. 29 U.S.C. 1002 (35). In 
contrast, a defined contribution plan is a pension plan that generally 
provides retirement benefits based on the balance available in an 
individual's account that has received contributions from the 
employee, employer, or both, during the employee's years of service to 
the company. U.S.C. 1002 (34). 

[2] Federal government corporations are corporations owned or 
controlled by the federal government. 5 U.S.C.  103. In addition to 
PBGC, other examples of federal government corporations include the 
Federal Deposit Insurance Corporation and the Export-Import Bank of 
the United States. 

[3] 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). 

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

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

[6] 29 U.S.C.  1302(a)(2). 

[7] A single-employer plan is established and maintained by one 
employer. Single-employer plans can be established unilaterally by the 
sponsor of through a collective bargaining agreement with a labor 
union. 29 U.S.C.  1002(41). A multiemployer plan is a collectively 
bargained arrangement between a labor union and a group of employers 
in a particular trade or industry. Management and labor 
representatives must jointly govern multiemployer plans. 29 U.S.C.  
1002(37). 

[8] 29 U.S.C.  1305(c). 

[9] 29 U.S.C.  1302(g)(2). 

[10] 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). 

[11] Funding requirements for employer plans are generally codified at 
26 U.S.C.  412, those specific to single-employer plans at 26 U.S.C. 
 430 and multiemployer plans at 26 U.S.C.  431 and 432. 

[12] 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 was $34 per participant in insured single-employer plans. 
For multiemployer plans the flat rate premium was $9 per participant. 

[13] Pub. L. No.109-171,  8101, 120 Stat. 4, 181-83 (2006). The new 
temporary premium was not to apply to any plan terminated after 
December 2010. Congress recently provided temporary funding relief 
through the enactment of the Preservation of Access to Care for 
Medicare Beneficiaries and Pension Relief Act of 2010, which allows 
plan sponsors to amortize funding gaps over a longer period of time 
than is currently allowed and provides funding relief for up to 2 
years. Pub. L. No. 111-192,  201 and 202, 123 Stat. 1280, 1283-99. 

[14] Pub. L. No. 109-280,  101-221, 120 Stat. 780, 784-919. 

[15] For further discussion of these provisions, such as "smoothing" 
and use of "credit balances," see Patrick Purcell and Jennifer Staman, 
Summary of the Employee Retirement Income Security Act (ERISA), 
Congressional Research Service (Washington, D.C., May 19, 2009). 

[16] The Worker, Retiree, and Employer Recovery Act of 2008, Pub. L. 
No 110-455, 122. Stat. 5036. It also provided multiemployer plans with 
temporary relief from PPA requirements by allowing plans to 
temporarily freeze their funded status at the previous year's level.  
204, 122. Stat. 5118-20. 

[17] [hyperlink, http://www.gao.gov/products/GAO-03-1050SP]. 

[18] [hyperlink, http://www.gao.gov/products/GAO-09-271]. 

[19] 29 U.S.C.  1302(d). 

[20] The board representatives hold the rank of assistant secretary or 
above. The organizational level of a PBGC board representative can 
vary depending upon whom each secretary selects. As part of recent 
bylaw revisions, the board of directors more clearly defined the roles 
and responsibilities of its members, representatives, and director. 
Bylaws of the Pension Benefit Guaranty Corporation. 73 Fed. Reg. 
29,985 (May 23, 2008). For example, the new bylaws state that the 
board is responsible for establishing and overseeing the policies of 
the corporation. The new bylaws explicitly outline the board's 
responsibilities, which include approval of policy matters 
significantly affecting the pension insurance program or its 
stakeholders, approval of the corporation's investment policy, and 
review of certain management and Inspector General reports. 29 C.F.R. 
 4002.3(a)(3) (2009). In addition, the new bylaws explicitly define 
the role and responsibilities of the director and the corporation's 
senior officer positions. 29 C.F.R.  4002.9 (2009). 

[21] 29 U.S.C.  1302(h). 

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

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

[24] 22 U.S.C.  2193. 

[25] GAO, Pension Benefit Guaranty Corporation: Need for Improved 
Oversight Persists, [hyperlink, 
http://www.gao.gov/products/GAO-08-1062] (Washington, D.C.: September 
2008) and GAO-07-808. 

[26] 29 C.F.R.  4002.3(a)(3)(ix) (2009). 

[27] 29 C.F.R.  4002.3(a)(2) (2009). 

[28] In some instances, government corporations' advisory committees 
are subject to the Federal Advisory Committee Act, which defines how 
federal advisory committees operate, including open meetings, 
chartering, public involvement, and reporting for such entities. Pub. 
L. No. 92-463, 86 Stat. 770 (1972) (codified as amended at 5 U.S.C. 
appendix 2). According to PBGC officials, the corporation is exempt 
from the Federal Advisory Committee Act because of the proprietary 
nature of its work. 

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

[30] For example, the Pension Benefit Guaranty Corporation Governance 
Improvement Act of 2009, S.1544, proposes amending ERISA with respect 
to the composition of the PBGC board of directors, among other changes. 

[31] GAO, Pension Benefit Guaranty Corporation: Contracting Management 
Needs Improvement, [hyperlink, 
http://www.gao.gov/products/GAO/HEHS-00-130] (Washington, D.C.: Oct. 
18, 2000). 

[32] 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 2008). 

[33] When single-employer plans are terminated without sufficient 
assets to pay all promised benefits, PBGC guarantees participants' 
benefits only up to certain limits, specified under ERISA and related 
regulations. These limits on guaranteed benefits are commonly referred 
to as the maximum limit, the phase-in limit, and the accrued-at-normal 
limit. 29 U.S.C.  1322(b)(1), (3) and (7); 29 C.F.R.  4022.21, 
4022.23, and 4022.25 (2009). 

[34] GAO, Pension Benefit Guaranty Corporation: More Strategic 
Approach Needed for Processing Complex Plans Prone to Delays and 
Overpayments, [hyperlink, http://www.gao.gov/products/GAO-09-716] 
(Washington, D.C.: Aug. 17, 2009). 

[35] If the participant is already retired, or retires before the 
benefit determination process is complete, PBGC makes payments to the 
retiree based on an estimate of the final benefit amount. However, 
lack of certainty about their final benefit amounts can make it 
difficult for retirees to plan for retirement. 

[36] If a retiree receives an estimated benefit amount that is greater 
than the final benefit amount, then the retiree is likely to have 
received an overpayment which must be repaid. 

[End of section] 

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