3.) 5.) In fiscal year 1996, the  program had its first accumulated surplus, and by fiscal year 2000, the  accumulated surplus had increased to almost $10 billion, in 2002 dollars. Termination of Severely Underfunded Plans Was Primary Factor in Financial Decline of Single- Employer Program

The financial condition of the single-employer pension insurance program  returned to an accumulated deficit in 2002 largely due to the termination,  or expected termination, of several severely underfunded pension plans. For example, in December 2002, PBGC involuntarily terminated an  underfunded Bethlehem Steel Corporation pension plan, which resulted in  the single-employer program assuming responsibility for about $7.2 billion  in PBGC-guaranteed liabilities, about $3.7 billion of which was not funded  at termination. Plan Unfunded Liabilities Were Increased by Stock Market and Interest Rate Declines

The termination of underfunded plans in 2002 occurred after a sharp  decline in the stock market had reduced plan asset values and a general  decline in interest rates had increased plan liability values, and the  sponsors did not make the contributions necessary to adequately fund the  plans before they were terminated. 6.) PBGC Faces Long- Term Financial Risks from a Potential Imbalance of Assets and Liabilities

Two primary risks threaten the long-term financial viability of the single- employer program. The greater risk concerns the program’s liabilities:  large losses, due to bankrupt firms with severely underfunded pension  plans, could continue or accelerate. On the asset side,  PBGC also faces the risk that it may not receive sufficient revenue from  premium payments and investments to offset the losses experienced by  the single-employer program in 2002 or that this program may experience  in the future. Particularly troubling may be structural weaknesses in  certain industries with large underfunded defined-benefit plans. 9.) Nevertheless,  because of serious risks to the program’s viability, we have placed the  PBGC single-employer insurance program on our high-risk list. Several Reforms Might Reduce the Risks to the Program’s Financial Viability

Several types of reforms might be considered to reduce the risks to the  single-employer program’s long-term financial viability. These reforms  could be made to  strengthen funding rules applicable to poorly funded plans;  improve the availability of information about plan investments,  termination funding status, and program guarantees. Shutdown  benefits provide additional benefits, such as significant early retirement  benefit subsidies to participants affected by a plant closing or a permanent  layoff. Expand restrictions on unfunded benefit increases. Various actions could be taken to reduce guaranteed  benefits. Disclose benefit guarantees to additional participants. Conclusion

While the recent decline in the single-employer program’s financial  condition is not an immediate crisis, threats to the program’s long-term  viability should be addressed. PBGC estimates that, collectively,  the plans represented over $4 billion in losses to the program at plan  termination. 1. 3.
Why GAO Did This Study

More than 34 million participants in 30,000 single-employer defined benefit pension plans rely on a federal insurance program managed by the Pension Benefit Guaranty Corporation (PBGC) to protect their pension benefits, and the program's long-term financial viability is in doubt. Over the last decade, the program swung from a $3.6 billion accumulated deficit (liabilities exceeded assets), to a $10.1 billion accumulated surplus, and back to a $3.6 billion accumulated deficit, in 2002 dollars. Furthermore, despite a record $9 billion in estimated losses to the program in 2002, additional severe losses may be on the horizon. PBGC estimates that financially weak companies sponsor plans with $35 billion in unfunded benefits, which ultimately might become losses to the program.

What GAO Found

The single-employer pension insurance program returned to an accumulated deficit in 2002 largely due to the termination, or expected termination, of several severely underfunded pension plans. Factors that contributed to the severity of the plans' underfunded condition included a sharp stock market decline, which reduced plan assets, and an interest rate decline, which increased plan termination costs. For example, PBGC estimates losses to the program from terminating the Bethlehem Steel pension plan, which was nearly fully funded in 1999 based on reports to the Internal Revenue Service (IRS), at $3.7 billion when it was terminated in 2002. The plan's assets had decreased by over $2.5 billion, while its liabilities had increased by about $1.4 billion since 1999. The single-employer program faces two primary risks to its long-term financial viability. First, the large losses in 2002 could continue or accelerate if, for example, structural problems in particular industries result in additional bankruptcies. Second, revenue from premiums and investments might be inadequate to offset program losses. Participant-based premium revenue might fall, for example, if the number of program participants decreases. Because of these risks, GAO has recently placed the single-employer insurance program on its high-risk list of agencies with significant vulnerabilities to the federal government. While the recent decline in the single-employer program's financial condition is not an immediate crisis, the threats to the program's long-term viability should be addressed. Several reforms might be considered to reduce the risks to the program's long-term financial viability. These include strengthening funding rules applicable to poorly funded plans, modifying program guarantees, restructuring premiums, and improving the availability of information about plan investments, termination funding, and program guarantees. Under each reform, several possible actions could be taken. For example, one way to modify program guarantees is to phase-in certain unfunded benefits, such as "shutdown benefits," which may provide significant early retirement benefit subsidies to participants affected by a plant closing or a permanent layoff.