From less  than $50 billion as of December 31, 2000, the total underfunding in single- employer plans grew to more than $400 billion as of December 31, 2002,  and still exceeds $350 billion according to recent estimates by PBGC. 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. Interest rates are a key assumption in calculating the  present value of future pension benefits: while all sponsors calculate  current liabilities using a rate based on the 30-year Treasury bond rate,  ERISA requires sponsors of some underfunded plans to report plan  termination liability information to PBGC. Strengthening Plan Funding Rules Can Help Sponsors Maintain Well-Funded Plans

Several types of reforms might be considered to improve the funding of  defined-benefit pension plans. Some options for reform would directly  address funding requirements and related rules. Defined-benefit pension plans may offer participants the  option of receiving their benefit in a lump-sum payment. Other Reforms Might Enhance Sponsor Incentives to Maintain Plan Funding

In addition to direct changes to the funding rules, other reforms may result  in improved plan funding by improving incentives for sponsors to maintain  proper funding in their plans. These measures may prevent plans from  terminating with severely underfunded balances, thus better protecting  workers, retirees, and PBGC. ERISA could be amended to:
Require Greater Disclosure of Information on Plan Investments. Conclusion

Widespread underfunding in the defined-benefit pension system  potentially threatens the retirement security of millions of American  workers. The termination of severely underfunded plans can significantly  reduce the benefits promised to workers and retirees. Such action would be aimed towards the  improvement of the long-term funding status of plans and the  accountability of plan sponsors, especially those that represent a clear risk  to PBGC, plan participants, and their beneficiaries. Undoubtedly, unfavorable economic conditions have contributed to  widespread underfunding and conspired to place well-meaning sponsors  in very difficult positions to maintain their plans’ funding. Although  comprehensive reform should include improving plan funding as the key  vehicle to stabilize and enhance the long-term health of the defined-benefit  system, Congress may seek to balance improvements in funding and  accountability against the short-term needs of some sponsors who may  have difficulty making contributions to their plans. It is important to keep in mind that the factors contributing to the  deterioration of pension plan funding go beyond the effects of the recent  economic downturn. The private defined-benefit pension system is at a  crossroads, facing a threat of continued financial erosion and decline.
Why GAO Did This Study

Over the last few years, the total underfunding in the defined-benefit pension system has deteriorated to the point where the Pension Benefit Guaranty Corporation (PBGC), the federal agency responsible for protecting private sector defined benefit plan benefits, estimates that total plan underfunding grew to more than $400 billion as of December 31, 2002, and still exceeded $350 billion as of September 4, 2003. PBGC itself faced an estimated $8.8 billion accumulated deficit as of August 31, 2003. Deficiencies in current funding and related regulations have contributed to several large plans recently terminating with severely underfunded pension plans. This testimony provides GAO's observations on a variety of regulatory and legislative reforms that aim to improve plan funding and better protect the benefits of millions of American workers and retirees while minimizing the burden to plan sponsors of maintaining defined-benefit plans.

What GAO Found

Recent terminations of severely underfunded pension plans suggest that current funding rules do not provide adequate mechanisms for maintaining adequate funding of pension plans. Funding inadequacies place the retirement security of millions of American workers and retirees, along with PBGC, at risk. While external factors, such as falling stock prices, low interest rates, and slow economic growth, have contributed to widespread pension underfunding, the defined-benefit system also faces structural problems that extend beyond cyclical economic conditions. Stagnant growth of the defined-benefit system, along with several large recent terminations of underfunded pension plans, has left PBGC in a precarious financial condition as the insurer of pension benefits. There are two general approaches to funding reform that may improve the funding of defined-benefit pension plans. The first approach would change the funding requirements directly. These measures could address reforms to the use of termination liability instead of current liability, additional funding requirements, and lump-sum distributions. The second, more indirect approach would seek to improve plan funding by providing better incentives for sponsors to keep their plans better funded. Options in this category could include requirements broadening the disclosure of plan investments and termination liability information to plan participants and their representatives. These reforms, as part of a comprehensive package, could increase the likelihood that workers and retirees receive promised benefits, while not creating an undue regulatory or financial burden on sponsors. Recent unfavorable economic conditions have contributed to widespread underfunding and conspired to place well-meaning plan sponsors in difficult positions. Although comprehensive reform should include improving plan funding as the key vehicle to stabilize the long-term health of the defined-benefit system, Congress may seek to balance improvements in funding and accountability against the short-term needs of some sponsors who may have difficulty making plan contributions.