GAO Designates PBGC 'High Risk'

July 23, 2003 ( - The General Accounting Office (GAO) has its critical eyes on the Pension Benefit Guaranty Corporation (PBGC) after designating the federal agency "high risk."

With the designation, the GAO has now grouped the PBGC into its assembly of federal agencies “that need urgent attention and transformation to ensure that our national government functions in the most economical, efficient and effective manner possible,” according to the GAO news release.   Typically, the agencies with the “high risk” label receive greater attention from GAO and are assessed in regular biennial reports.

Not surprisingly, the GAO points to the large and growing accumulated deficit at the PBGC as the reason for concern.    After the PBGC’s surplus reached a historic high of $9.7 billion in 2000, the agency, in tandem with the entire private pension system, came under pressure from a plethora of sources including trends in interest rates, declining asset values, and a growing number of troubled pension plans in the private sector. This culminated in a $3.6 billion accumulated deficit in fiscal year 2002. As of April 2003, the program’s unaudited deficit was an estimated $5.4 billion, the largest in PBGC history, afterhalf of the 10 largest claims against the nation’s private pension plan insurer have arose in the past three years (See  Steel, Airlines Weigh on PBGC ).

Yet, the looming shortfall has been anticipated.  Last fall, Steven Kandarian (See  Steve Kandarian ), executive director of the PBGC, dubbed the coming crisis a “a perfect storm”:  a large number of underfunded pension plans that terminated, a slumping stock market which erodes the market value of pension plan assets, and record low interest rates that inflate the projected value of future liabilities (See PBGC Exec: Pension Insurer Hit by ‘Perfect Storm’). 

In fact, 2002 was a particularly vicious maelstrom for the PBGC after a deluge in the number of pension funds it maintains.   Overall, the agency assumed control over a record 144 pension plans covering 187,000 people and paid a record $1.5 billion in benefits, nearly 50% higher than 2001.  Looking at the totals at the end of 2002, the agency was covering 783,000 pensioners in more than 3,100 plans. 

It was trends like the past few years that really had GAO concerned, as the agency looked toward the degree of underfunding in the private pension system.   The GAO said that with the dramatic increase in pension underfunding in the last couple of years, more severe losses may be on the horizon.   Evidence of this were such factors as a shift away from active workers among the PBGC’s insured participant base and insured plans becoming concentrated in manufacturing firms.

Congressional Response

In response to the GAO’s recent designation, US House of Representatives   Education & the Workforce Committee Chairman John Boehner (R-Ohio) and Employer-Employee Relations Subcommittee Chairman Sam Johnson (R-Texas) announced plans to hold a hearing to examine the financial health of the PBGC when Congress reconvenes in the first week of September.

“Today’s announcement confirms the alarming trend of underfunded defined benefit pension plans that threatens the retirement security of millions of workers who rely on the safe and secure benefits that these pension plans provide,” said Boehner in a news release.  “The financial health of defined benefit pension plans is a critical issue for American workers, and our hearing will take a close look at the PBGC and the challenges facing the agency and its future.”

The hearing will be the third in a series on the future of the defined benefit pension system that the Committee has been planning since January.   “Providing greater pension security for workers means we must ensure that the Pension Benefit Guaranty Corporation is on sound financial footing, and the GAO’s designation is cause for further concern,” Boehner added.  “We have to ensure both the financial integrity of America’s defined benefit plans and the PBGC itself.”

Much like the PBGC, the congressmen saw the handwriting on the wall.   “Sadly, this horrible news comes as no surprise to me. In fact, I’m only surprised it didn’t come sooner and that the multi-employer program is not also on the list of high-risk programs,” said Johnson.  “Underfunded pension plans are a huge risk to the individuals in those plans who are hoping for income security in retirement and they are a risk to American taxpayers if the deficit at the PBGC forces that agency to ask for funds from Congress.  We have our work cut out for us in the coming months as we look at pension plan funding and PBGC funding issues.”

The PBGC was created under ERISA.  It currently guarantees payment of basic pension benefits earned by 44 million American workers and retirees participating in about 32,500 private-sector defined benefit pension plans. The agency receives no funds from general tax revenues. Operations are financed largely by insurance premiums paid by companies that sponsor pension plans and by PBGC’s investment returns.