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. However, the program’s finances reversed direction in 2001, and at the end  of fiscal year 2002, its accumulated deficit was about $3.6 billion. PBGC  estimates that this deficit grew to $5.7 billion by July 31, 2003. 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. PBGC estimates  that in 2002, underfunded steel company pension plans accounted for 80  percent of the $9.3 billion in program losses for the year. 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. 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. 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. Nevertheless,  because of serious risks to the program’s viability, we have placed the  PBGC single-employer insurance program on our high-risk list. In our view, 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; modify program guarantees;  improve the availability of information about plan investments,  termination funding, and program guarantees. In any event, any changes adopted to address the challenge  facing PBGC should provide a means to hold sponsors accountable for  adequately funding their plans, provide plan sponsors with incentives to  increase plan funding, and improve the transparency of the plan’s financial  information. Disclose benefit guarantees to additional participants. In 1974, ERISA placed three  important charges on PBGC: first, protect the pension benefits so essential  to the retirement security of hard working Americans; second, minimize  the pension insurance premiums and other costs of carrying out the  agency’s obligations; and finally, foster the health of the private defined- benefit pension plan system. Ultimately, however, for any insurance program, including the  single-employer pension insurance program, to be self-financing, there  must be a balance between premiums and the program’s exposure to  losses.
Why GAO Did This Study

More than 34 million workers and retirees 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. This testimony provides GAO's observations on the factors that contributed to recent changes in the single-employer pension insurance program's financial condition, risks to the program's long-term financial viability, and changes to the program that might be considered to reduce those risks.

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 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 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 losses experienced 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 experienced to date or those that occur in the future. Revenue from premiums might fall, for example, if the number of program participants decreases. Because of these risks, we recently placed the single-employer insurance program on our high-risk list of agencies with significant vulnerabilities to the federal government. While there is not an immediate crisis, there is a serious problem threatening the retirement security of millions of American workers and retirees. Several reforms might reduce the risks to the program's longterm financial viability. Such changes 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. Any changes adopted to address the challenge facing PBGC should provide a means to hold plan sponsors accountable for adequately funding their plans, provide plan sponsors with incentives to increase plan funding, and improve the transparency of plan information.