PBGC Programs Designated High-risk by GAO

January 23, 2009 (PLANSPONSOR.com) - The Government Accountability Office (GAO) has designated the Pension Benefit Guaranty Corporation (PBGC) and the pension insurance programs that it administers as one of the federal government areas that need urgent attention and transformation.

In an update of its listing of high-risk areas, first detailed in January 2007, GAO said that although the combined net financial condition of PBGC’s single- and multi-employer insurance programs has recently improved, the programs and the agency are designated high risk because of the ongoing threat of losses from the termination of underfunded plans.

GAO cited a new list of risks adding to its previous criticisms of the PBGC’s governance structure and program management (see GAO to PBGC: Good Improvements so far but More Work Needed ). According to the current report: “PBGC’s board of directors is limited in its ability to provide policy direction and oversight. Further, PBGC lacks a strategic approach to its acquisition and human capital management needs.”

In its report, the GAO suggests that Congress may need to carefully monitor the financial health of PBGC’s programs and of DB plans generally, and may need to take additional action to safeguard the private pension system’s role in national retirement security.

The GAO report pointed out that as of fiscal year-end 2008, PBGC's accumulated deficit totaled $11.2 billion, down from $14.1 billion in 2007. However, the GAO noted that the recent financial crisis has likely eroded the funding of many large plans and lowered the credit rating of many sponsors, developments that PBGC's recent estimates may not reflect (see PBGC Funding Deficit Narrows, But… ).

The GAO also noted that in 2008, PBGC decided to change its investment policy to increase its allocation of assets invested in equities and other, new asset classes, while decreasing its fixed-income investment allocation (see Millard Defends PBGC Investment Policy Change ). According to the report, while this change may help the agency meet its long-term financial obligations, it also increases the risk of large investment losses.

The report also pointed out that company decisions to terminate pension programs and the lack of adoption of new programs continues to erode PBGC's premium base, with PBGC insuring about 65% fewer plans than it did 15 years ago.

New developments that will likely increase PBGC's risk exposure cited in the GAO report included recent legislation that gives funding relief to certain sponsors and delays implementation of certain aspects of the Pension Protection Act and the uncertain financial fate of the Detroit automakers, which sponsor very large DB plans (see Outgoing Pension Insurer Director Cautions about Carmaker Shortfalls ).

The GAO report is here .