Questions Concerning the Pension Benefit Guaranty Corporation's Practices Regarding Single-Employer Probable Claims
GAO-05-991R, Sep 9, 2005
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The Pension Benefit Guaranty Corporation's (PBGC) single-employer insurance program is a federal program that insures certain benefits of the more than 34 million worker, retiree, and separated vested participants of over 29,000 private sector defined benefit pension plans. In 2003, we placed PBGC's single-employer insurance program on our high-risk list of agencies and programs that need broad-based transformations to address major challenges because of our concerns about the program's long-term viability. In recent years, because of unfavorable economic conditions and the collapse of large underfunded pension plans sponsored by well-known firms like Bethlehem Steel, U.S. Airways, and United Airlines, the program's financial condition has worsened significantly. From a $9.7 billion surplus at the end of fiscal year 2000, the program reported a $23.3 billion deficit as of September 2004, including a $12.1 billion loss for fiscal year 2004. While 73 percent ($16.9 billion) of this deficit is due to PBGC's estimated liability for its probable claims (claims from plans that PBGC deems likely to terminate in the future), historically over 95 percent of claims so classified by the PBGC have subsequently terminated and become direct obligations of the agency. We are providing answers to several Congressional questions about single-employer probable claims regarding (1) PBGC's methodology for determining single-employer probable claims, (2) PBGC's efforts to monitor probable claims, and (3) PBGC's practices for disclosing financial information about these claims.
There are three concurrent steps to PBGC's process for determining single-employer probable claims: (1) identifying underfunded defined benefit plans insured by PBGC, (2) classifying underfunded plans as to the probability of a loss to PBGC, and (3) estimating the potential loss to PBGC. According to PBGC officials, the 2004 Annual Report expanded the footnote disclosure describing PBGC's method for selecting probable plans but stressed that this did not reflect a change in methodology. PBGC officials stated that the 2004 report was intended to provide a more explicit description of the specific criteria PBGC uses. These officials also emphasized that PBGC has consistently used a specific identification method as required by FAS No. 5 for its identification of probables. PBGC officials stated that they have not made any changes to PBGC's method for selecting probable claims. If PBGC were to make changes to its procedures or methodologies, these officials told us that they would use a multifaceted approach to review and consider those changes. PBGC regularly monitors, reclassifies, and revalues estimates of exposure on all at-risk plans. Any changes proposed would go through PBGC's internal review process, which includes a review and concurrence by PBGC's Contingency Working Group and Chief Financial Officer. Probable claims can progress in a number of ways after a plan is initially added to the list, which is updated three times a year. At each update, a plan can remain on the list, be removed from the list because of termination, or be deleted from the list if an upgrade in classification is warranted based on a settlement with the sponsor to fund and retain the plan or termination risk is otherwise reduced. If the plan does not terminate, and PBGC continues to consider the plan as probable, the plan remains on the list. If a plan is progressing toward termination, PBGC closely monitors the bankruptcy proceedings (if the sponsor is in bankruptcy) for PBGC claims determinations and also monitors the criteria for distress termination and PBGC-initiated termination. If the plan terminates, PBGC removes the plan from its list of probable claims and adjusts the previously recorded loss to reflect the actual loss on the date of plan terminations. According to PBGC officials, the agency does not release the amount of its previously-booked claims in its press releases for fear of compromising PBGC's position in litigation and of negatively affecting a company's financial condition. These officials said that releasing its previously-booked claim amounts would enable someone to make a comparison between PBGC's booked liability for a particular plan and the amount of underfunding for that plan. Publicizing this information could affect PBGC's ability to recover the full amount of a plan's claims in litigation because companies would resist a settlement with PBGC for more than the amount of PBGC's previously-booked losses. Another consideration is that this information could also have a negative impact on a company's ability to obtain additional financing and could worsen its financial condition. Although releasing this information to the public would help interested parties understand the potential impact, if any, on PBGC's net financial position with regard to particular plans mentioned in PBGC's press releases, officials believe that the potential adverse impact on PBGC and affected companies has outweighed this potential benefit. PBGC officials have stated that they are reviewing this policy. During fiscal years 2004 and 2005, PBGC issued press releases for several large financially troubled pension plans that it had taken over. Once the final data are available, PBGC officials stated they recalculate the plan's liability amounts and make the proper adjustments to reflect the actual loss incurred at the date of plan terminations.