GAO Report Calls Out PBGC Expenses

April 1, 2003 ( - The General Accounting Office (GAO) says the Pension Benefit Guaranty Corp. (PBGC) is increasingly dipping into pension fund accounts to pay for administrative fees, an accusation the agency contends does not take into account the increased pension takeover volume of the past few years.

In 1985 Congress began setting annual limits on PBGC’s administrative costs.   However, a few years later some exceptions were granted that were funded by pension trust funds. In 1987, the agency spent $7.3 million in trust fund money beyond the $35.8 million administrative limit approved by Congress. By 2002, that had grown to $214 million, while the congressional limit on spending had dropped to $11.6 million.

Within this process, the GAO found “significant problems with the way PBGC develops its proposed budget estimates.”   Specifically, i t does not reliably calculate expense estimates, which “are not meaningful and thus are ineffective in controlling administrative costs.”

Expense “Account”

In order to provide cost information to assist Congress in its oversight of PBGC’s expenses and for congressional decision making about whether or to what extent it should continue to use an expense limitation in its oversight of PBGC, the GAO recommended that the agency:

  • Employ a systematic review, including both quantitative and qualitative measures, to develop a methodology for assigning the direct expenses related to its major categories of activities
  • Develop a method of allocating indirect costs to each activity using a logical, reasonable, and consistent basis
  • Develop a method for accounting for actual direct and indirect expenses for its major activities.

Last year the PBGC, an agency that receives no taxpayer funding, exhausted its entire $7.7 billion surplus and rang up a $3.6 billion deficit, for a net loss of $11.37 billion, the highest in the agency’s 28-year history (See  PBGC Reports Record Loss ), according to the GAO report.

However, the PBGC is quick to point out that of the $11.37 billion in losses for 2002, completed and probable pension plan terminations accounted for $9.31 billion, or more than 80%, of the total.  Further, the agency points to the decline in interest rates as a key factor, increasing the program’s liabilities by $1.65 billion.

Take Over

Last year   was a banner year for the PBGC in the increased 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.  

Comparatively, in 1985, PBGC had responsibility for 171,000 pensioners in 1,300 plans. In fact, half of the 10 largest claims against the nation’s private pension plan insurer have arisen in the past three years (See  Steel, Airlines Weigh on PBGC ).

PBGC Response

In the response letter by John Seal, PBGC's chief management officer (CMO), the PBGC agreed with the overall results of the report. GAO acknowledged "the Corporation had reached a conclusion similar to ours about the clarity of PBGC's current budget structure and stated that the budget structure must change."  

In fact, the PBGC said it   proposed a new budget structure for its fiscal year 2004 congressional budget submission that would restructure its budget program and financing activity line items so that they match up with PBGC's lines of business. Also, the PBGC will consider establishing an internal review process in which budget, finance, auditing, and legal staff will examine all budget lines at midyear to ensure their correct classification to the new activities.

However, the PBGC said congressional investigators failed to consider that the agency incurs numerous indirect costs when it terminates a pension plan and that expenses have grown in relation to the pension plans it controls.    "More termination work meant more work in information technology, procurement, human resources and most other areas of administration," the response letter said.   Further, the PBGC's CMO disagreed with the conclusion that PBGC's reporting processes are not based on actual data.

Red Line

Running in the red is not a new experience for the PBGC, however.   According to the 2001 PBGC Data and Trends, the agency's single-employer program was in deficit until 1996, with the highest reported deficit at $2.9 billion in 1993. As with many of the nation's private pension plans, that deficit turned into a surplus, lifted by a shift in how the agency's premiums were determined as well as the surging stock market. 

The PBGC's surplus reached a historic high of $9.7 billion in 2000, but, along with the private pension system, has come under pressure since then by trends in interest rates, asset values, and a growing number of troubled pension plans in the private sector.  In 2001, PBGC paid out more than $1 billion in monthly pension and lump sum benefit payments to retired plan participants or their beneficiaries (see  PBGC Opens up 2001 Data Book ).


Not that the looming shortfall has been unanticipated.  Last fall, Steven 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' ). 

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.

The full GAO report can be found at