[Senate Hearing 111-1159]
[From the U.S. Government Publishing Office]
S. Hrg. 111-1159
PBGC: IS STRONGER MANAGEMENT
AND OVERSIGHT NEEDED?
=======================================================================
HEARING
OF THE
COMMITTEE ON HEALTH, EDUCATION,
LABOR, AND PENSIONS
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
ON
EXAMINING THE PENSION BENEFIT GUARANTY CORPORATION, FOCUSING ON
MANAGEMENT AND OVERSIGHT
__________
DECEMBER 1, 2010
__________
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COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS
TOM HARKIN, Chairman
CHRISTOPHER J. DODD, Connecticut MICHAEL B. ENZI, Wyoming,
BARBARA A. MIKULSKI, Maryland JUDD GREGG, New Hampshire
JEFF BINGAMAN, New Mexico LAMAR ALEXANDER, Tennessee
PATTY MURRAY, Washington RICHARD BURR, North Carolina
JACK REED, Rhode Island JOHNNY ISAKSON, Georgia
BERNARD SANDERS (I), Vermont JOHN McCAIN
ROBERT P. CASEY., JR., Pennsylvania ORRIN G. HATCH, Utah
KAY R. HAGAN, North Carolina LISA MURKOWSKI, Alaska
JEFF MERKLEY, Oregan TOM COBURN, M.D., Oklahoma
AL FRANKEN, Minnesota PAT ROBERTS, Kansas
MICHAEL BENNET, Colorado
JOE MANCHIN, West Virginia
Daniel E. Smith, Staff Director and Chief Counsel
Pamela Smith, Deputy Staff Director
Frank Macchiarola, Republican Staff Director and Chief Counsel
(ii)
C O N T E N T S
__________
STATEMENTS
WEDNESDAY, DECEMBER 1, 2010
Page
Harkin, Hon. Tom, Chairman, Committee on Health, Education,
Labor, and Pensions, opening statement......................... 1
Enzi, Hon. Michael B., a U.S. Senator from the State of Wyoming,
opening statement.............................................. 2
Gotbaum, Joshua, Director, Pension Benefit Guaranty Corporation
(PBGC), Washington, DC......................................... 4
Prepared statement........................................... 6
Murray, Hon. Patty, a U.S. Senator from the State of Washington.. 14
Isakson, Hon. Johnny, a U.S. Senator from the State of Georgia... 16
Manchin, Hon. Joe, a U.S. Senator from the State of West Virginia 17
Franken, Hon. Al, a U.S. Senator from the State of Minnesota..... 19
Casey, Hon. Robert P., Jr., a U.S. Senator from the State of
Pennsylvania................................................... 21
Hagan, Hon. Kay R., a U.S. Senator from the State of Pennsylvania 22
Bovbjerg, Barbara D., Managing Director, Education, Workforce,
and Income Security, General Accounting Office (GAO),
Washington, DC................................................. 27
Prepared statement........................................... 29
Batts, Rebecca Anne, Inspector General, Pension Benefit Guaranty
Corporation (PBGC), Washington, DC............................. 38
Prepared statement........................................... 40
Porter, Ken, Actuarial and International Benefits Consultant,
American Benefits Council, Washington, DC...................... 47
Prepared statement........................................... 48
ADDITIONAL MATERIAL
Statements, articles, publications, letters, etc.:
Senator Bingaman............................................. 59
(iii)
PBGC: IS STRONGER MANAGEMENT AND OVERSIGHT NEEDED?
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WEDNESDAY, DECEMBER 1, 2010
U.S. Senate,
Committee on Health, Education, Labor, and Pensions,
Washington, DC.
The committee met, pursuant to notice, at 10:04 a.m. in
Room SD-430, Dirksen Senate Office Building, Hon. Tom Harkin,
Chairman of the committee, presiding.
Present: Senators Harkin, Murray, Casey, Hagan, Franken,
Manchin, Enzi, and Isakson.
Opening Statement of Senator Harkin
The Chairman. The committee, as I said, will resume its
sitting. I'd like to thank everyone for being here for the
second hearing in a series focusing on retirement security in
America. Today, we are going to take a hard look at the
management and administration of the Pension Benefit Guaranty
Corporation and see if we need to take steps to modernize this
agency.
In this climate of uncertainty, PBGC's role is more
important than ever. The Great Recession has taken a toll on
workers all over the country. I often talk to people who are
struggling just to make ends meet. They worry a lot about just
having a job, putting food on the table, and getting their kids
in school. The last thing they need to do is lose sleep about
whether or not they're going to have their pensions when they
retire.
That's why PBGC was created in 1974, providing workers with
a safety net so they can rest assured that even if the
company's pension plan fails, they'll get a retirement benefit.
Forty-four million American workers and their families rely on
PBGC to insure their hard-earned pensions. The agency is
responsible for making sure that $467 million in benefits get
to 801,000 retirees every single month; and that responsibility
is growing. Last year alone, PBGC assumed responsibility for
the pensions of 109,000 people. For PBGC, those are individuals
and families that would have been left with next to nothing.
Unfortunately, the future of this valuable agency is at
risk. The deficit rose again this year. Moreover, PBGC's annual
report indicates that there's a very real chance that some very
large plans could become insolvent in the near future. This
could increase PBGC's deficit tenfold and pose a significant
administrative burden.
In light of these challenges, strong and effective
leadership is crucial for the future viability of PBGC. The
Inspector General just recently released a report that raises
serious concerns about whether PBGC would be able to cope with
a sudden influx of pensions brought on by a new economic
crisis.
PBGC has also been needlessly distracted by scandals such
as those under former director Charles Millard. Mr. Millard's
inappropriate contacts with vendors and bad decisions
jeopardized the security of PBGC and cast a dark shadow over
the agency during one of the worst economic crises in our
Nation's history. Worse yet, Mr. Millard eroded the public's
trust in the agency and in the defined benefit pension system
as a whole.
Now, we're certainly starting to see some positive changes
under Mr. Gotbaum's leadership, but we need to examine whether
the agency has structural problems that a new director alone
cannot solve.
For example, the board of directors has often been
disengaged, acting as little more than a rubber stamp. Even
during the height of the recent economic crisis, when the
agency was most at risk, the board barely met. I think we ought
to take a look at the construction of the board and the number
of the board members on PBGC.
Senator Kohl of Wisconsin has put some ideas on the table.
I commend him for that.
This is, again, a matter on which I hope we can put aside
partisanship and work collaboratively to improve PBGC and
strengthen America's pension system. This hearing today is an
important step toward that goal. They have problems, but I
don't think they're insurmountable.
I thank all of you for being here today to discuss this
important issue.
I now yield to my friend from Wyoming, Senator Enzi.
Statement of Senator Enzi
Senator Enzi. Thank you, Mr. Chairman. Few people realize
that the Pension Benefit Guaranty Corporation sends nearly half
a billion dollars each month to retirees whose companies'
pensions have gone away. The magnitude of this statistic shows
how important the operation and management of PBGC is to
today's and tomorrow's retirees.
Back in 2008 the vast majority of single-employer pension
plans were nearly 100 percent funded; however, because of the
economic downturn we've seen a greater number of single-
employer pension plans taken over by the PBGC. In addition, the
Government Accountability Office, GAO, states that
approximately 400 of the 1,500 multiemployer pension plans are
less than 80 percent funded.
Clearly, the PBGC is facing some rough waters and will
continue to face them in the future.
The corporate structure of the PBGC is unlike any other in
the Federal Government. It has three cabinet secretaries on the
board of directors; former Secretary of Labor Elaine Chao
recognized the need for greater corporate governance of the
PBGC and implemented reforms, including updating and revising
the agency's bylaws.
Today, we'll hear from our witnesses to see whether further
improvement is necessary, and recommendations on how to improve
communication between the PBGC and its board of directors.
Enlarging it can be a very difficult task--but not as difficult
as it was with the private sector which had to follow Sarbanes-
Oxley Act, and the liability that could come to the private
sector directors.
However, with the shape that the PBGC is in, it may be
difficult to get people to participate on the Board.
Mr. Chairman, I'm open to legislation to improve the PBGC
corporate governance--governance similar to the reforms
Congress sought in the private companies in that Sarbanes-Oxley
Act; however, we must undertake reforms that strengthen the
PBGC and our retirement system and stay away from the so-called
reforms that might politicize or minimize the agency's ability
to do its job. In addition, I'm looking forward to hearing from
the business community about their interactions with the PBGC.
As we all know, our retirement benefit system is built upon
a voluntary partnership of companies and their employees. In
order to strengthen the defined benefit system, we need a PBGC
that can respond and work with the business community.
Otherwise, the business community will decline to participate
in the defined benefit retirement system and switch to the
401(k) plans.
Mr. Chairman, I thank you for holding this hearing, and I
look forward to the testimony of the witnesses.
The Chairman. Thank you very much, Senator Enzi.
Just to respond, I was looking at the board, and you're
right. There are three members of the board. They're all
cabinet secretaries, so I've got to believe they don't have
much time to go to board meetings.
Comparing it to other agencies that have even less
responsibility, if I can put it that way, some of these other
agencies have boards that have 7 members, 9 members--one has 15
members. They set up subcommittees--like a board of any company
would do--and then they have these different committees that
take different parts of the agency, and they're responsible for
it.
I'd like to discuss that with you. I'm sure we're going to
have some talk today about that, too, from our witnesses.
We have two panels. On the first panel is Joshua Gotbaum,
Director of the Pension Benefit Guaranty Corporation,
responsible for the agency's management, personnel,
organization, budget and investments.
Immediately prior to his appointment, Mr. Gotbaum was an
operating partner at Blue Wolf Capital, where he managed and
advised public, private, and nonprofit institutions.
Then on our second panel we have Barbara Bovbjerg, director
of education, workforce and income security issues at the U.S.
Government Accountability Office; and, also, Rebecca Anne
Batts, the Inspector General of the PBGC; and Ken Porter,
Actuarial and International Benefits Consultant, at the
American Benefits Council.
That will be our second panel.
Mr. Gotbaum, welcome to the committee. If I'm not mistaken,
I think this may be your first appearance before this
committee.
Mr. Gotbaum. Yes, sir, Mr. Chairman, it absolutely is.
The Chairman. Welcome. I read your testimony last evening,
and your testimony will be made a part of the record in its
entirety. I'd ask if you could sum it up in several minutes so
we have more chance for an exchange with the Senators. I would
appreciate it very much.
Mr. Gotbaum, welcome, and please proceed.
STATEMENT BY JOSHUA GOTBAUM, DIRECTOR, PENSION
BENEFIT GUARANTY CORPORATION (PBGC), WASHINGTON, DC
Mr. Gotbaum. Mr. Chairman, Senator Enzi, members of the
committee, I want to start, frankly, by thanking you for
supporting my nomination. I understand very well, the
consequences of elevating the PBGC Director to a presidential
appointment subject to Senate confirmation. It changes the job.
I hope that you will conclude that having done so
facilitates the very management and oversight that are the
subjects of this hearing.
I also, frankly, want to thank you for holding this, which
is my first oversight hearing--I believe in oversight; I think
it's an important part of the process--and giving me a chance
to fulfill my commitments to the committee to come back and
give my impressions.
Since the PBGC has just turned out its annual report,
copies of which have been sent to you all and provided to your
staff, I can't go chapter and verse over everything that gets
done; and frankly, after only 4 months on the job, I can't
pretend to be an expert on the workings of everything that we
do.
I'd like to report my first impressions, and just make four
points: one, is that in light of the complex tasks that ERISA
has given the agency, the PBGC performs them surprisingly well.
It has paid benefits reliably for 36 years, and despite the
incredibly complex rules it has to follow to figure out what
those benefits are, surprisingly accurately.
When a plan fails, our first priority is to make sure that
benefit payments continue without interruption. Last year newly
terminated plans covered 40,000 people. Forty thousand people
were getting checks every month from their plan that was
terminated; and every one of those 40,000 people was
transferred to PBGC's payment systems without a hitch.
I brought these charts--which I admit are hard to read--and
put them in the testimony as a reminder of how complicated the
benefit determination process is.
PBGC starts by paying an estimate of what benefits are, and
then it follows the many steps that are necessary to figure out
the legal benefit payable under ERISA. The good news is that
despite this incredibly complicated process, 90 percent of the
estimated payments are within 10 percent of the number that is
finally determined to comply with ERISA.
The bad news is that following this complicated process can
take years, and during that period of time, people are
uncertain.
Second point: that for PBGC, preserving plans is just as
important as replacing them when they fail. The most visible
part of the agency's actions are when the agency steps in after
a plan fails. First, however, the agency tries to preserve
plans, and keep pension promises in the hands of the employers
that made them.
Our view of it is that every plan that is kept by its
employer and not terminated is better for the employees, and
the pensioners, and better for the PBGC.
Last year our staff negotiated with dozens of companies,
both in bankruptcy and through our Early Warning Program, to
preserve their plans. And, partly as a result of that, last
year companies came out of bankruptcy and kept their plans;
and, included in those plans were a quarter of a million
people.
As a result of those efforts, a quarter of a million people
had their companies go through bankruptcy and came out, but
kept their plans. We think that's important.
Third point: the staff of the PBGC is, I'm pleased to
report, knowledgeable, compassionate, and committed, and I
think that's very important, because they have to meet very
high standards of stewardship and accountability.
The agency measures its performance in many ways: we
measure customer service by how quickly benefits are
determined, and by independent performance surveys; we measure
investment performance by comparison with professional, private
sector benchmarks; we meet financial reporting standards by
having, we're pleased to say, for almost two decades received a
clean opinion on the PBGC's financial statements.
That does not mean that there isn't a heck of a lot more to
be done. Like too many institutions, both in and out of
government, our IT systems are just plain not up to snuff; they
don't meet today's standards for connectivity; they don't meet
standards for security.
Like many other government agencies, we rely on contractors
without having enough sufficiently skilled contract managers
and sufficient procedures in place to manage them as well as we
should. This is a challenge for the PBGC; it's a challenge for
other agencies; it's one that we think is important, and we're
working on it.
My fourth and last point is about pensions and retirement
security generally. As this committee knows, as the Chairman
and Mr. Enzi have both mentioned, there are broad challenges to
the PBGC's insurance program and to the defined benefit system
itself.
In one sense we've been fortunate. Despite the greatest
financial turmoil in decades, fewer plans were terminated than
anyone had expected. Nonetheless, the facts are that many
sponsors remain weak; many plans remain underfunded; and, I
would have to say, the multiemployer system in particular, is
especially worrisome.
That there are challenges is undeniable; that's not
undeniable. What I believe is also undeniable is that time and
again, since ERISA was enacted some 36 years ago, the Congress
and the executive branch have worked together to deal with
them. More than a dozen times in PBGC's history, Congress has
modified ERISA to enable the agency to continue to do its job.
It made changes in who we insure, the benefits we pay, the
premiums we charge.
Congress has also undertaken other actions that affect the
pension insurance system, such as changes in funding
requirements.
ERISA charges the PBGC with being an advocate in
discussions about retirement security. Given the history of
nonpartisan cooperation to meet these challenges, we hope that
that active partnership will continue.
I want to thank the committee again for its patience, and
also for your support, and I very much look forward to hearing
your views and answering your questions.
[The prepared statement of Mr. Gotbaum follows:]
Prepared Statement of Joshua Gotbaum
Good morning Chairman Harkin, Ranking Member Enzi, and other
committee members. Let me begin by expressing my thanks to you and the
other committee members for considering and supporting my nomination.
I also want to thank you for holding this, my first oversight
hearing. It comes at an appropriate time, for PBGC has recently issued
its Fiscal Year 2010 Annual Report. When this committee held a hearing
on my nomination, I promised, if confirmed, to return and share my
views once I had an opportunity to develop them. Thank you for
providing that opportunity.
Today, I would like to describe and discuss how PBGC performs the
complex tasks that ERISA has given the agency:
Trying to preserve pension plans,
Stepping in to pay benefits when plans fail,
Working to recover what is owed those plans, and
Maintaining high standards of stewardship and
accountability.
Of course, PBGC also works with Congress and the Administration to
implement and improve pension laws.
All these activities are described in the Annual Report and so my
testimony is intended primarily to highlight them, to put them in
context, and to answer your questions. I think it is important to add
my own opinion: that the PBGC performs these complex tasks quite well.
As this committee knows only too well, in these difficult times
there are broad challenges to the pension insurance program and to the
defined benefit system itself. I would hope that the Administration and
Congress can find ways to strengthen them. Nonetheless, it is important
to reassure pensioners that PBGC continues to protect and insure
pension plans, that we are continuing to pay billions in benefits if
plans fail, and that our $80 billion in assets is more than sufficient
to continue to do so for the foreseeable future.
pbgc overview
In 1974, Congress passed the Employee Retirement Income Security
Act (``ERISA'') which, among other pension protection measures, created
PBGC to insure pensions earned by American workers under private-sector
defined benefit (``DB'') plans. PBGC now guarantees payment of basic
pension benefits earned by more than 44 million American workers
participating in more than 27,000 private-sector defined benefit
pension plans. Those benefits are financed by insurance premiums, by
the assets from terminated plans and by funds recovered from their
sponsors, and by investment income. PBGC receives no funds from general
tax revenues and by law its obligations are not backed by the full
faith and credit of the U.S. government.
PBGC operates two separate programs. The single-employer program
protects nearly 34 million workers, retirees, and beneficiaries in
about 26,000 pension plans. The smaller multiemployer program--which
covers collectively bargained plans that are maintained by two or more
unrelated employers--protects more than 10 million workers, retirees,
and beneficiaries in about 1,500 multiemployer plans.
Originally, responsibility for managing PBGC was held by the
Secretary of Labor, who delegated that responsibility to an executive
director. In 2006, the Pension Protection Act (``PPA'') placed the
executive responsibility in the newly created position of Director, who
is appointed by the President and confirmed by the Senate, and acts in
accordance with policies established by the board. The Secretary of
Labor continues to chair PBGC's three-person board whose other members
are the Secretaries of Commerce and the Treasury.
The work of the PBGC is performed by some 2,300 people, of whom
about 900 are Federal employees and about 1,400 are contractors. I have
found the staff to be impressive. They are both knowledgeable and
committed.
what pbgc does
Working with companies to keep their pension plans. The most
visible part of PBGC's efforts occurs when the agency steps in after
plans fail. First, however, the agency tries to preserve plans and keep
pension promises in the hands of the employers who make them. Every
plan retained by its sponsor is a victory both for the plan's
participants and for PBGC.
Last year, the agency continued to respond to the wave of corporate
bankruptcies by stepping up its work to protect plans. PBGC staff
negotiated with dozens of companies, both in bankruptcy and through our
Early Warning Program, to preserve their plans.
Under the Early Warning Program, PBGC monitored more than 1,000
companies to identify transactions that could threaten a company's
ability to pay pensions, and negotiated protections for the plans. When
major layoffs or plant closures threaten a plan's viability, PBGC can
step in and negotiate protection for the pension plan, including a
guarantee, posting of collateral or contributions to the plan. In this
way, last year PBGC secured an additional $250 million for participants
in 20 pension plans.
When companies do enter bankruptcy, we encourage them to keep their
plans intact. During fiscal year 2010, the agency worked with debtors
and creditors to help 38 companies who were reorganizing in bankruptcy
keep their plans. As a result, approximately 250,000 workers and
retirees continue to enjoy their full pension benefits, while
continuing to be protected by PBGC insurance coverage. This is almost
2\1/2\ times the number of participants in plans that failed.
When plans do fail, we step in and make sure benefits are paid. In
fiscal year 2010, PBGC paid $97million in financial assistance to 50
multiemployer pension plans, up from the $86 million to 43 plans in
2009. Last year, PBGC also helped seven small insolvent multiemployer
plans close out through the purchase of annuities or payment of lump
sums for participants' guaranteed benefits. Also in fiscal year 2010,
PBGC acted to partition the Chicago Truck Drivers, Helpers & Warehouse
Workers Union (Independent) Pension Fund. That action extends the
solvency of the Chicago Truck Drivers' plan and preserves full benefits
for about 3,700 workers and retirees. PBGC expects that the number of
insolvent plans will more than double over the next 5 years.
With regard to single-employer plans, despite PBGC's efforts to
preserve pensions, in fiscal year 2010, 147 underfunded single-employer
plans did terminate, most often in bankruptcy. PBGC took up
responsibility for an additional 109,000 workers, retirees, and
beneficiaries.
For the past 36 years, PBGC has stepped in to pay benefits--on
time, every month, without interruption. Last year, PBGC paid nearly
$5.6 billion to about 800,000 retirees. We are also responsible for
future benefit payments to 700,000 workers who have not yet retired.
The agency is responsible for pension benefits owed to 1.5 million
people in 4,150 failed plans.
When a plan fails, PBGC's first priority is to make sure that
benefit payments continue without interruption. Newly terminating plans
in fiscal year 2010 covered nearly 40,000 participants already
receiving monthly checks. PBGC transferred every one of them to our
payment systems without interruption. Because a participant's final
benefit amount has not been calculated when PBGC begins paying
benefits, the agency pays estimated benefits. Historically, more than
90 percent of estimated payments are within 10 percent of the final
benefit amounts.
In addition to participants who were already retired when PBGC
assumed responsibility for their plans, we also process about 3,000
benefit applications per month for new retirees. Nearly 85 percent of
applicants receive their first payments within 45 days after PBGC has
their completed applications. Over 80 percent receive their benefits by
electronic direct deposit.
When PBGC becomes responsible for a terminated plan, we must
determine the benefits owed to each plan participant. Each participant
is entitled to the greater of the guaranteed benefit amount or the
benefit amount funded by plan assets and recoveries from plan sponsors.
PBGC calculates benefits using a process spelled out in Federal
law. Actuaries calculate each participant's benefit according to the
plan's provisions; then they must apply statutory and regulatory rules
to determine how much the agency can pay. Finally, when the benefit
determination is complete, PBGC sends each participant a letter
presenting the benefit amount and how it was calculated.
By law, this benefit determination process is complex and
customized, requiring a unique calculation for each participant. As
depicted in the charts below, PBGC analyzes plan provisions, collects
participant data, and values plan assets and recoveries from plan
sponsors. After determining each participant's benefit, plan assets and
recoveries are then allocated across priority categories according to a
complex calculation to determine the maximum amount legally payable.
We work to recover assets for retirees. When pension plan sponsors
cannot maintain their plans, PBGC does more than just assume
responsibility for benefit payments. We also take over the assets of
those plans, and fight in court on behalf of participants and other
stakeholders to recover the maximum possible amount from sponsors of
those plans. These recoveries are then shared with participants as
provided by law. In fiscal year 2010 PBGC assumed $1.8 billion in
assets from failed plans, and recovered additional assets of $246
million from plan sponsors to help pay for unpaid contributions and
unfunded benefits. In its role as trustee of terminated plans, PBGC
also files other claims on behalf of the plan, such as claims against
fiduciaries for breach of their duty.
We implement pension laws and work with the Administration and
Congress to improve them. In addition to working to preserve plans and
paying benefits to retirees and beneficiaries, PBGC also works with the
Administration and with Congress to draft and implement pension laws.
In fiscal year 2010, we worked with both the private sector and other
government agencies to implement the funding provisions established
under the Pension Protection Act of 2006.
To date, PBGC has published seven final rules implementing PPA
changes that deal with premiums (two rules), disclosure (two rules),
multiemployer withdrawal liability, annual financial and actuarial
information reporting, and PBGC by-laws. We have also published two PPA
proposed rules--reportable events and benefits in plans that terminate
while the sponsor is in bankruptcy--that we expect to finalize in 2011.
PPA proposed rules on cash balance plans, shutdown benefits, and
missing participants are far along in development or external clearance
and are expected to be issued in 2011.
In addition to implementing the PPA changes, in fiscal year 2010
PBGC published a final regulation ensuring that benefits for re-
employed service members will be guaranteed for periods they served in
the armed forces. We also issued a proposed rule that provides guidance
on reporting requirements and liability under section 4062(e) when
employers have substantial cessations of operations.
PBGC is also an important source of information on defined benefit
pension plans and retirement issues generally. During fiscal year 2010,
PBGC provided expertise, in legal and actuarial analysis, and
simulation modeling, to analyze the issues affecting multiemployer
plans, and we provided technical assistance to Congress, other ERISA
agencies, the Administration, and GAO.
We are a careful steward of our resources and investments. In
fiscal year 2010, PBGC collected $2.18 billion in premiums, assumed
assets of $1.8 billion from failed pension plans, and recovered assets
of $246 million from sponsors of failed plans. As of September 30,
2010, PBGC had an investment portfolio of $66.8 billion.
As you know, our benefits are not paid for or backed by taxpayers.
We have an obligation to be an active and thoughtful steward of our
assets to ensure that funds are available to fulfill our obligations.
As it has since its inception, the agency contracts with
professional private sector investment management firms to manage the
investment of its assets. These firms make investment decisions within
the parameters of PBGC's investment policy and they are subject to PBGC
oversight. We measure the performance of these managers by comparison
with negotiated benchmarks. In fiscal year 2010, the investment firms
we chose outperformed their total fund benchmarks over 1-, 3-, and 5-
year periods. For the fiscal year, PBGC realized a 12.1 percent
annualized return on total invested funds compared with the agency's
total fund benchmark return of 11.0 percent.
As this committee knows, one of the first actions of the new PBGC
board in 2009 was to order a review of the investment practices and
policies of the past, while putting in place a temporary policy. When I
joined PBGC this July, the Board appropriately asked me to undertake my
own review and develop my own views of investment policy and practice.
I am still in the process of doing so, but I hope and expect to
complete my review this month after which the PBGC Board will complete
its review and adopt a permanent policy.
Throughout fiscal year 2010, PBGC was also a careful steward of the
agency's other resources. We increased attention to IT security,
infrastructure improvements and system performance, and documentation
of our asset valuation and benefit calculation processes to improve
accountability; we continued to streamline operations; and we attained
our 18th consecutive unqualified audit opinion on financial statements.
Much remains to be done, but I believe that PBGC is making real
progress, and doing so in a way that meets the standards we expect for
an agency that handles billions of dollars and the retirement security
of millions.
operations & financial position of the pbgc
In fiscal year 2011, PBGC expects to pay $6.7 billion in benefits
to about 800,000 retirees and beneficiaries. We also expect premium
receipts in the range of $2.4 billion to $2.7 billion and expect to
have an investment portfolio greater than $76 billion. As I noted
earlier, we can and will pay benefits for the foreseeable future.
However, over the long term our liabilities exceed our assets.
In 2011, significant factors beyond PBGC's control (including
changes in interest rates, the financial markets, plan contributions
made by sponsors, and recently enacted statutory changes) will continue
to influence PBGC's underwriting income and investment gains or losses.
No reasonable estimate can be made of 2011 terminations, effects of
changes in interest rates, or investment income.
At the close of fiscal year 2010, the single-employer and
multiemployer programs reported deficits of $21.6 billion and $1.4
billion, respectively, roughly the same as last year. As explained in
more detail in the Annual Report, the obligations (``liabilities'')
that we have and will pay in the decades to come exceed the assets
currently available to pay them. We had single-employer assets totaling
$77.8 billion, an increase of $10.2 billion from the close of the
previous fiscal year. Our single-employer liabilities (measured in
present value though they will be paid over decades) totaled $99.4
billion; this compares to total liabilities of $88.7 billion in 2009.
The net of these positions is a single-employer deficit of $21.6
billion, an increase of $500 million from the prior year. Likewise, the
multiemployer insurance program experienced a $600 million decline,
bringing its fiscal year 2010 deficit to $1.4 billion, with $1.6
billion in assets to cover about $3 billion in liabilities.
In part, PBGC's financial position is the result of inadequate plan
funding and misfortunes that have befallen plan sponsors. In part, it
is a result of the fact that the premiums the agency charges are
insufficient to pay for all the benefits that PBGC insures, and other
factors. Because our obligations are paid out over decades, we have
more than sufficient funds to pay benefits for the foreseeable future.
However, neither program at present has the resources to fully satisfy
PBGC's obligations in the long run; we cannot ignore PBGC's future
financial condition any more than we would that of the pension plans we
insure.
assessing the risk of future plan failures
When considering PBGC's financial condition, we often separate the
obligations we already have from those that we may have in the future.
In our view, the greatest challenge may well be posed by those
plans that have not yet failed, but may do so in the future. For this
reason, we analyze and report on PBGC's exposure to potential
obligations in the future.
Both the single-employer and multiemployer program exposures are
substantial. At year-end, PBGC's estimate of its single-employer
exposure from underfunding by plan sponsors whose credit ratings were
below investment grade or that met one or more financial distress
criteria totaled approximately $170 billion, slightly up from $168
billion in 2009. The agency classifies these sponsors' underfunded
plans as reasonably possible terminations.
PBGC's estimate of its multiemployer reasonably possible exposure
increased significantly from $326 million in 2009 to $20 billion in
2010. The agency classifies these multiemployer plans as reasonably
possible of requiring future financial assistance. The significant
increase in fiscal year 2010 from prior years is due to the addition of
two large plans to the reasonably possible inventory. The sponsor of
one plan, with net liability of $15.0 billion, is in the
``transportation, communication, and utilities'' industry category; the
other, with net liability of $4.8 billion, is in the ``agriculture,
mining, and construction'' industry category.
These estimates are measured as of December 31 of the previous
year. PBGC's exposure to loss may be less than these amounts because of
the statutory guarantee limits on insured pensions, but this estimate
is not available because it is difficult even to estimate prospectively
the extent and effect of the guarantee limitations.
The significant volatility in plan underfunding and sponsor credit
quality over time makes long-term estimates of PBGC's expected claims
highly uncertain. This volatility, and the concentration of claims in a
relatively small number of terminated plans, have characterized the
agency's experience to date and will likely continue. Factors such as
economic conditions affecting interest rates, financial markets, and
the rate of business failures will also influence PBGC's claims going
forward.
Multiemployer plans present a different and more immediate
challenge. Multiemployer plans are different and more complicated than
single-employer plans, and PBGC's multiemployer pension insurance works
very differently from our single-employer program. For decades,
multiemployer plans were in relatively good health, even in the face of
industry decline. Unfortunately, for many multiemployer plans, that is
no longer true. By fiscal year 2010, many multiemployer plans had
become substantially underfunded.
This will, of course, increase PBGC's obligations with respect to
such plans. However, our focus now is on what measures might preserve
them. It is not yet clear what those measures will be, but PBGC has
begun developing the tools to analyze them. In fiscal year 2010, we
developed and introduced a new multiemployer version of our simulation
Pension Insurance Modeling System (``PIMS''). We have also begun
discussions with multiemployer plans and others to secure the
information about such plans that will be necessary to develop
potential solutions.
strengthening pension insurance
In one sense, we've been fortunate. Despite the greatest financial
turmoil in many decades, fewer plans were terminated than many
observers had expected.
In part, this may be due to the PBGC's own efforts. We continued to
respond to the recent wave of corporate bankruptcies by stepping up and
stepping in. The agency worked tirelessly to convince companies, both
in and out of bankruptcy, to preserve their plans. In many instances,
this approach worked.
However, underfunding in plans sponsored by financially weak
companies remains high.
The agency's single-employer program remains on the General
Accountability Office's (GAO's) ``high-risk'' list. GAO's high-risk
designation for PBGC does not reflect concerns primarily about the
agency's management. Rather, GAO is focused on structural problems in
the private-sector defined benefit system that pose serious risks to
PBGC. The structural problems--large amounts of underfunding in the
pension system, especially among weak firms, the decline in PBGC's
premium base, and our limited tools to encourage plan preservation--are
outside the agency's control.
More than a dozen times in the PBGC's history, Congress has
modified ERISA to enable the agency to continue to do its job, with
changes in whom we insure, the benefits we pay, and the premiums we
charge. Congress has also undertaken other actions that affect the
pension insurance system, principally changes in funding requirements.
That active partnership should continue. We do not, and the
Administration does not, have any policy recommendations at this time.
We do hope, in the months ahead, for an active discussion about what
options might make sense for consideration in the future.
ERISA charged PBGC, among others, to serve as an advocate in the
discussions of the issues facing retirement security. It is an
obligation we take very seriously, and I look forward to working with
our colleagues in the Administration, with this committee, and the
Congress as a whole to do so.
Thank you again for holding this hearing. I look forward to hearing
your views, to answering your questions, and, I hope, in some way to
help preserve and protect the retirement security that Americans
deserve.
The Chairman. Thank you very much, Mr. Gotbaum, for a very
forthright statement.
I'll start off with 5-minute rounds. It'll be me, then
Senator Enzi, of course, then Senator Murray, Senator Isakson,
then Senator Manchin, Senator Franken, Senator Bingaman,
Senator Casey and Senator Hagan.
Mr. Gotbaum, on page 8 of your testimony you said,
``However, neither program at present has the resources to
fully satisfy PBGC's obligations in the long run.''
I read that last night, and I circled it and I said, ``What
is the `long run?' ''
What's the long run? You referred to that a couple times in
your written testimony, saying that things are OK now, but in
the long run you may not have issues. What's the long run? Two
years? Five years?
Mr. Gotbaum. Let's start by talking 20 years. The PBGC has
reported a financial deficit for 30 of its 36 years. What does
that mean? It means that when you compare the cash we have on
hand with the obligations that we're going to pay over the next
30 years--plus, minus--discounted at present value, the
obligations are bigger than the cash we have. That's a deficit.
Time and again what has happened is, Congress has stepped in,
in some way, shape or form, and said, ``maybe your premiums are
too low; maybe you need to change something'' and etc. As a
result, we have continued to pay benefits for all of those 36
years, on time, reliably.
Now, the deficit: as the PBGC gets larger, as its
obligation gets larger, the deficit gets larger, too. One of
the things I did is--the PBGC has a very talented group of
forecasters, and they are making something which they would
call simulations, and which I would call as very well-educated
guesses about the future.
I said to them, ``OK, let's take the program as we have
now, the law as we have now, the practices we have now, and run
your simulations over the future for the next 20 years with
different economic scenarios and collapse, and so on and so
forth; and then tell me, for all your scenarios, over the 20-
year period, in how many percentages of them do we run out of
money by the end of 20 years.''
And they came back and said, ``well, it depends in part on
what your investment practice is going to be.''
If you look at the PBGC's historical investment practice
and project forward 20 years, if Congress does nothing, maybe
there is a less than 5 percent chance that the PBGC runs out of
money 20 years from now.
The fact is, Mr. Chairman, Congress has never done nothing.
There has always been an engagement and an interaction to make
sure the PBGC has the resources it needs.
So, my view is, Senator, this is not to diminish that there
are real challenges in the system; there absolutely are, and we
ought to take them seriously. I don't think we should act
because we fear that the PBGC is imminently going to run out of
money; it's not.
The Chairman. Well later, on that page you say that,
``PBGC's estimate of its multiemployer reasonably possible
exposure increased significantly from $326 million in 2009 to
$20 billion in 2010.''
Is that a typo?
Mr. Gotbaum. No, sir. One of the things that the PBGC does,
as part of its role is, it watches the pension system. The
tools we have for doing so are not perfect, but I think they're
pretty good, and I think the people that do it are very, very
committed.
One of the things they do, time after time, is make
estimates as to which plans they think are likely, over the
next decade, to get into trouble; to get into trouble enough so
that they would become the PBGC's business.
They make several kinds of guesses: one, is, which plans we
think are likely to get into trouble; and those we put on the
PBGC's books. In other words, we say, that's something we think
is going to be liable. And, the history is, by the way, that
when we say something is likely, there's about an 80 percent
chance that we are going to end up having to deal with it
directly; about 80 percent.
We also keep track of things that it's possible, not more
likely than not, but possible. As I mentioned in my testimony,
and as this committee knows, I know very well, when you look in
the multiemployer world, the multiemployer systems work pretty
well for a very long period of time. In recent years, a
combination of the economics of the industries that they're in,
and the investment practices there have been, for a whole
combination of ingredients, they are now in a more serious
condition; and we're watching them.
So, as a result, because we keep account of the ones which
might get into trouble--not that we think it's likely, but
might get in trouble, and increasingly, some big ones are--
that's why we say, our potential exposure has gone up by a lot.
Does that make sense?
The Chairman. Sort of. I think I've got it.
Senator Enzi.
Senator Enzi. Thank you, Mr. Chairman. I thank you, Mr.
Gotbaum, for serving, and I thank you for your passion. I know
you've only been there 4 months, and I know you had a long
wait, because I know that my colleagues across the aisle had a
hold on your confirmation for quite a while. I know your job is
very challenging, so I thank you for your willingness to serve.
Now that you've been there for a few months, what steps
would you take to ensure that the board of directors is fully
engaged in the agency's activities, and what recommendations do
you have to improve the communication with the PBGC and the
board?
Mr. Gotbaum. A very good question, sir. I've worked in a
lot of institutions in my life, in government and outside, and
I've worked with large boards and small boards. I ran a
charity, the September 11 Fund; I had 27 board members. When I
ran Hawaiian Airlines, I basically had a board member of one; a
bankruptcy court judge.
I've worked with a range of them; and what I find is, what
matters more than structure is engagement in communication.
And, I will tell you that this board take their job very
seriously.
I can't speak for previous administrations; I can't speak
for previous boards. I am very well aware of the fact that in
the past there were very long periods of time when the board
didn't meet at all, but I have to tell you, that isn't this
board.
I've been on the board for 4 months, right? We've already
had two board meetings, and, we have another one next week. The
board has a set of senior officials, the board reps, who are
very actively engaged. I meet with them or talk with them at
least monthly, and communicate by phone, and sit down more
often than that, and send them memos.
I actually think there is, now, very extensive
communication--very extensive communication. I am very well
aware of the fact that in the past, that has not been the case.
I do think it's important for the committee to know what's
going on right now.
Senator Enzi. Thank you.
Several months ago, Senators Harkin, Backus, Grassley and I
sent to PBGC a letter regarding a misunderstanding between
companies and the PBGC. In the company's filings, the company
had checked one box on the PGA form to select an alternative
funding formula, but unfortunately, inadvertently, did not
check the second box that would have reaffirmed the alternative
funding formula.
The PBGC took a very hard line on those companies. I'm glad
the matter was resolved in a good common-sense manner; however,
it did show that the relationship between the PBGC and the
business community was not healthy.
As I mentioned in my opening statement, companies can drop
their defined benefit plans in favor of 401(k) plans; and I
want to know what you're doing to help build a relationship
between the agency and the business community so there aren't
more of these misunderstandings.
Mr. Gotbaum. Good question; important question. As a person
who's been in the business community myself--been on both
sides--and recognizing that the defined benefit pension
insurance system is a partnership, I take that very seriously.
I can't speak for previous directors. I can tell you what
I've done since I've come on: I've met repeatedly with the
organized business organizations that affect pensions, the
American Benefits Council, the U.S. Industry Committee, SEBA
and others.
I have made sure that the very professional staff of the
PBGC understands that part of our job is to interact and
communicate. Whether we can do something or not, it's important
that we communicate.
Now, as you mentioned the issue regarding the mistake in
checking, and I think that's a perfectly good example, sir.
As I mentioned in my testimony, what we do is pretty
complicated, and that's kind of in the nature of pensions; and
so it turned out to be the case that there were a number of
companies who, not intending to play fast and loose, just made
a mistake. As it happens, in those instances, there was
sufficient other evidence that we had that it really was an
honest mistake; nobody was playing fast and loose, etc.
What we said is, ``OK, in that case, let's recognize it's
an honest mistake and allow them to correct it.'' That's what
we did.
That's the sort of thing that I think we need to keep
doing.
Senator Enzi. Thank you.
My time has expired. I have some other questions; if we
don't go a second round, I'll submit them in writing for an
answer.
Thank you.
The Chairman. Thank you, Senator Enzi.
Senator Murray.
Statement of Senator Murray
Senator Murray. Thank you very much Mr. Chairman. I just
have a couple of questions.
I know that the PBGC doesn't get any general tax revenues,
and its obligations aren't backed by the U.S. Government, but I
do feel obligated to make sure that stewardship and
accountability of our contract workers, who are about two-
thirds of PBGC, are met when we have a lot of government
contractors today who are under investigation; we're talking
about a wage freeze for government employees.
I wanted to ask you what PBGC is doing now, to address the
issue that the GAO found in their 2008 report, that PBGC's
workforce management lacked a strategic approach to determining
the mix of contract and Federal workers.
Mr. Gotbaum. This is, as I mentioned in my testimony, one
of the challenges that the PBGC faces. Actually, I think,
having worked in a bunch of other government agencies, and in
private business, it's a challenge that everybody faces, which
is, how do you choose who ought to be a government employee;
when do you rely on contractors; how do you rely on
contractors, etc.
What we do, and what we are doing--and frankly, I can't
take credit for this; the agency started doing this before I
joined the agency--is to do several things, Senator; one is,
you need to have in place, a process for actually planning and
thinking about, in advance, what your contracting is; what your
procurement is, etc.
The agency did that, if at all informally, before. We're
now putting in place--actually saying what contracts we're
going to have, etc. That's one thing you do.
Another thing you do is to ask yourself, OK, do I have the
adequate contractor base? Do they have the competence I need?
Are they going to be around? Et cetera.
That's a separate process you engage in; that's a process
we're starting.
A third thing you do is, you look at your actual contracts
and say, does this contract hold people's feet to the fire in a
way that makes sense? Does a contract require performance and
pay them for performing, not for just showing up?
And, I've got to be honest with you, Senator, we're
starting that. In other words, what we are doing is, we are
looking at our contracts and saying--and some of our contracts,
by the way, do that right now. Some of our contracts say, we're
hiring you as a contractor, and we expect you to meet this
performance standard, but we want you to do better, so we'll
pay you more if you do better.
Others of our contracts don't. We are in the process of
trying to move to that where we can.
Those are the sorts of things we're doing.
Another thing which I should mention--I'm not going to go
into the same detail about it--is that the procurement
process--in other words, the process by which you do
contracts--is different in government than it is outside
government. So one of the things you have to do is make sure
that your procurement process is up to snuff; that it meets the
standards that you have.
Our procurement process was not. We have been working on
it, and made very real progress. We now have procedures in
place that we just plain didn't have. We're now building the
team to follow them, but we're still doing it.
This is an area where it's a necessary part to actually get
to, sensible contractor management, and we're working on it.
We're not there yet, but we are working on it.
Senator Murray. OK, I really appreciate that candid
response and look forward to your recommendations, and to watch
where you're going with that.
The other thing I wanted to ask you real quickly is to
summarize what kind of changes, legislatively, you think we
need to make in the pension insurance system, as we look at
legislation like the Pension Benefit Guaranty Corporation
Governance Improvement Act of 2009.
Mr. Gotbaum. Senator, one of the defects of having been on
the job only 4 months is that I don't, at this point, have
opinions, much less opinions that I can say the administration
as a group agrees with.
What I hope will be the case is that--one of the things I
have seen that impresses me enormously, and it's part of the
reason I felt comfortable taking the job, is that pensions are
so complicated that the only progress comes when it is
nonpartisan; not even bipartisan; nonpartisan, where there is a
consensus; we ought to do this; it's a good governmental thing
to do.
I mentioned the menu of things that have come in the past;
premiums, benefits, funding requirements, etc. Those are
clearly things that you've undertaken and that we've
implemented in the past; and those are probably the sorts of
things that are going to be on the agenda in the future.
I don't have an opinion at this point as to what the right
thing is. I do hope that, as you are facing them--we obviously
want to work with you, and reach that same kind of active
partnership that pension security has had for 36 years.
Senator Murray. OK, very good. I look forward to hearing
your opinion as we work forward, then. Thank you very much.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Murray.
Senator Isakson.
Statement of Senator Isakson
Senator Isakson. Thank you, Mr. Chairman. Mr. Gotbaum,
thank you for being here today.
The last exchange between Senator Murray and yourself was
the most important of this hearing so far, because it is going
to be critical for you to make recommendations to us, in terms
of what we need to do in the immediate future, I think, in
terms of pension legislation, because PBGC would already have
gone broke had we not done the Pension Protection Act of 2005
and the amendments by Senator Cardin and myself earlier this
year that changed the parameters of assumptions in terms of
amortization of obligation to ease and smooth the contributions
of the corporations and not take all the cash out of corporate
America to put it in a pension fund and cost even more jobs
than we have.
We still are not there yet--you got a great record and a
great history, and 4 months is not a long time. But, I would
hope you would take her question to task, and your answer.
I'll pledge to you to work in a bipartisan way, because it
does have to--those acts were both bipartisan; but we need some
good recommendations, and we need them quicker rather than
later, I think, from my standpoint.
Mr. Gotbaum. Message received, Senator. We look forward to
doing exactly that.
Senator Isakson. Because we can avoid a catastrophe, avoid
a collapse of PBGC, not by making irrational assumptions, but
by looking at reality, because the problem we have today is
none of your forecasters saw--in 2006, 2007, 2008, and 2009--it
coming. Nobody made assumptions that we were going to be in
that kind of market.
Second, who manages your assets?
Mr. Gotbaum. The PBGC, ever since it started--actually, I
think it started fully in 1975--ever since it started, the
assets are managed, intentionally, by outside professional
managers.
Senator Isakson. Good.
Mr. Gotbaum. About a quarter of our assets are in deposit
in the Treasury, so that's obviously held by the Treasury.
About three-quarters of them are managed by outside
professionals. The reason for that is really simple. We think
it is important that the PBGC not be mucking around and making
choices about investments and not be mucking around and making
choices about which stocks or bonds to buy or not to buy. So,
we don't.
We have an investment policy which is set by the board; and
then we implement it by picking managers and saying, go do your
job.
Senator Isakson. I think that is important, and I
appreciate the answer.
Looking at the GAO chart on page four of their report,
between 2006 and 2010 your assets have increased by 33 percent.
I assume that's more because of defaulted plans and less
because of the growth in assets; is that right?
Mr. Gotbaum. Yes, sir. I'm sure that--I can't tell you for
certain, but that would be my guess, too.
Senator Isakson. I was going to say, if that's not the
reason, somebody's done a good job of investment advice; I'd
like to know who they are, so we can call them up.
And last, on Senator Harkin's remarks, I appreciate
Secretary Solis and Mr. Geithner and the others who are on your
board, but I do think we ought to look seriously at working
with you to come up with a board structure that makes sense in
the challenging times ahead, because you can give good people
more work than they can handle, and something ends up falling
through the cracks. I think you need that kind of support as
well.
We demonstrated with TVA, and this committee did it, that
you can change board structure, and you can change outcomes for
the better by just giving the person responsible for running
the agency the support they need in terms of professional
advice.
I'd love to work with you on suggestions like that; and I
appreciate Senator Harkin bringing that up.
That's all the questions I have.
Thank you, Mr. Chairman.
The Chairman. Senator Manchin.
Statement of Senator Manchin
Senator Manchin. Thank you, Mr. Chairman, Senator Harkin
and Senator Enzi, thank you. It's a great honor to represent
the people of West Virginia.
I just found the button. I'm brand new here.
[Laughter.]
I want to thank you so much for being here; and also it's
my honor to represent the great people of West Virginia.
As you know, it's a hard-working State, and we have a work
ethic that's one of the best in the Nation. They do the heavy
lifting, and they work in the mine and the factories; and
they've done it for years, and years, and years. They don't ask
for much, just an opportunity to be able to provide for their
families. Then when they give a lifetime of work, they want to
make sure they're able to have a pension that's rewarding to
the work they've given. Unfortunately, that hasn't always
happened.
If I can reflect back on Weirton Steel. I went through a
situation there that was just devastating, and it just took a
tremendous toll on people's lives.
I have a hard time understanding how this can happen, when
a company goes through a bankruptcy and are able to shed all of
its liabilities, and then it still has value to it, and it's
bought by another company that comes in, completely with the
slate clean and leaves people without the pensions they were
guaranteed and worked for.
And, because of their age--and they might have started very
young, at 18-20 years of age or 50, and now they're 50, 55
years of age--they can't find a job, and they put 30 years in.
They were devalued, their assets, to the point to where they
just had to take a meaningless entry job, if you will, at a
very minimum wage, and they try to survive. It's just not fair.
With the program that you have in place here--I don't know
what types of checks and balances you have--if that would have
been foreseen, that the collapse of that company, and they
weren't in shape in order to take care of their employees, why
was that not caught?
I know you've just been there a short time, too.
As a former governor from my State I have pensions in every
State. OPEB liabilities is something that we're all dealing
with, and it's going to wreak havoc on every one of our States.
We have so many States that cannot fulfill their obligations.
And, what happens is, it's because the benefits continue to
change; there's no money going in to match, and it just doesn't
add up. So, you have to really come to grips with the hard
decisions.
When do you freeze those? Also, basically, when we have a
downturn of the market that wasn't anticipated, with that being
said, was any adjustments made on the benefit so that we could
keep it solvent; or did it go into insolvency to where,
basically, people lost everything?
What I'm trying to find out is, how do we prevent that?
You all were in place when Weirton--when it hit the skids,
if you will, and so many people were left without. A few people
got close to what their pensions would be, but many of them got
very little. Can that be prevented?
Do you all have checks and balances in place now?
Mr. Gotbaum. Yes. I don't know if you know this, Senator,
but after I left the Carter White House, my first job was as an
investment banker working for the divisional management and the
union of Weirton Steel; and I spent a year and a half walking
through every part of that mill, talking with everyone; helped
build the ESOP; working with then-Governor Rockefeller.
Senator Manchin. Right. That was back in the 1980s.
Mr. Gotbaum. So, the people of Weirton are close to me.
I've talked to them even as recently as a month ago.
It is undeniably a tragedy, and nobody can sugarcoat that.
As I mentioned in my testimony, and described more in my
further testimony, one of the things that we really try to do
is, we try to get companies--even when they go into
bankruptcy--not to terminate their plans. We do that by saying,
if you terminate your plan, we become a creditor.
Unlike most creditors, the PBGC financial analyst lawyers
are very, very good, and they're very, very tough, and they
throw their weight around on behalf of retirees.
However, they have, within bankruptcy, a limited priority.
You know, we are mostly general creditors. It is the case that
if we'd had more room maybe in the bankruptcy we could have
said, yes, you're in bankruptcy, but you can--and maybe pass on
the ownership deal without----
Senator Manchin. If I could ask just one question. I looked
when all this thing took place and I was not governor at the
time--there should have been a deal to keep them whole, and the
value was there to keep them whole, but they allowed this to go
into bankruptcy to where the people were left with nothing.
The people that came in and bought it had no liability
whatsoever, and was able to shed all that. I don't know enough
about our bankruptcy laws or pension laws to prevent that from
happening again. I don't want any State, or any employer, or
any employee in any State to go through what our people had
gone through. Do you know how devastating this has been?
Mr. Gotbaum. Oh, yes, I do. If I can, this is the sort of
thing that is not really a question for the record kind of
thing.
Senator Manchin. Right.
Mr. Gotbaum. With your permission, if some members of the
PBGC staff would talk with your staff, we could explain the
background.
Senator Manchin. I'd love to. I hope that no other Senator
ever--I can share this at a later time--but I hope you never
have to go through this.
The Chairman. I would like to know more about the facts and
the data on that. It's always occurred to me, too, that I've
seen other places, plants that go under; somebody that comes in
and they buy up all the assets and they assume liabilities, but
they don't assume this liability.
Senator Manchin. The bankruptcy court, Senator, somehow,
allows them to escape the responsibility; and there's still
value there. They can still make this an ongoing concern. This
company still--there's another company there now; it's a
foreign company that owns this, but the people in West
Virginia, the people that worked there all their lives, got
left with nothing.
The Chairman. That's right. Was the question then, how do
we prevent this?
Senator Manchin. Well, basically, I'll meet with their
staff; and then I'll come back and report to you and Senator
Enzi and tell you what we find.
The Chairman. Fine. I'm sure my staff would like to know.
I'd like to know, personally, too.
Senator Manchin. OK.
The Chairman. Senator Franken.
Statement of Senator Franken
Senator Franken. Thank you, Mr. Chairman, for helping
address this issue vital to 44 million of our country's workers
and retirees, whether PBGC has the adequate structure and the
resources to perform its job.
The PBGC's task was preserving pension plans, paying
benefits when plans fail, maximizing payments in the failed
plans, and being highly accountable to our pensioners.
There are some areas in which the PBGC has truly excelled.
Everyone here should be impressed that the PBGC has been making
uninterrupted, on-time monthly payments to beneficiaries for
decades. With some exceptions, PBGC has made relatively prudent
investment decisions and yielded satisfactory returns under
difficult conditions, especially over the past few years.
One area that concerns me is the level of accountability to
our pensioners. When I talk with pensioners in Minnesota,
especially when I'm up on the Iron Range, I hear their accounts
of working with the PBGC; I hear the frustration in their
voices when they explain that their benefit determinations have
taken years to process.
Some of them have told me that it's been years since
they've even heard from the PBGC about their determination.
This is extremely painful and disruptive for them and their
families. It's impossible for them to plan for their futures;
and I think that our pensioners deserve better than that.
I understand that much of today's focus is going to be on a
small select group of people--the board--how they should be
appointed, what numbers, members is ideal.
Those are all good questions; we need to tackle them, but
we need to keep the focus today on the people that the PBGC
serves: our Nation's pensioners, our workers, and our retirees.
I wanted to ask a question about the board. I think Senator
Enzi got to this, but, I'm sorry, I had to go to a Judiciary
Committee hearing--but, I read somewhere that between 1983 and
1992 there was not one meeting of the board; is that correct?
Mr. Gotbaum. Fortunately, for me, I was not associated with
the PBGC during that period, but I know that the GAO has in
their testimony included a graph that shows the board meetings;
and, I do know that in the past there were long periods of time
when the board just plain didn't meet.
Senator Franken. Well, that kind of underscores part of the
problem, I think, which is that, obviously, this board, being
comprised of cabinet secretaries, may not have enough time to
meet. I know a number of entities have studied this and said
that we have to have a bigger board and have members who aren't
cabinet secretaries and who can dedicate more time to this.
That's the intention here?
Mr. Gotbaum. One of the things we're trying to understand--
members of the administration have actually met with the
committee staff to try to understand what is trying to be
achieved by this.
Senator Franken. OK.
Mr. Gotbaum. As you might expect, Senator--and as I
mentioned in my testimony--from my perspective, one of the most
important changes in the governance of the PBGC was the one
that this committee and this Congress made in 2006, which was
to take the director and say, ``you're running the agency;
you're going to be appointed by the President; you're going to
be subject to Senate confirmation, which means you're going to
come back and report to this committee.'' I think that's an
important change in governance.
I also said in my testimony, or in response to the
Chairman's questions, I can't speak to what the boards in the
past did. I can tell you that this board takes their job
seriously. They meet more frequently than any board has--than
the PBGC has since it was founded in more than 30 years ago.
Senator Franken. Do you think you'd be helped by having
some board members who aren't cabinet secretaries, who would
have more time to spend on this job in all sorts of areas, in
addressing all the problems that you face, and addressing the
preventing pensions from going belly up, and figuring out what
to do about the deficits you have; about all the different
problems that you have, don't you think that a few more members
who are dedicating more of their time and effort to this would
be helpful?
Mr. Gotbaum. As I said in response to the Chairman's
question, I've worked with lots of different board structures,
and can work with them. I can work with the current structure
just fine--and have and will.
My concern, if you will, is that, beyond the questions of
boardrestructuring,there are some very real and central issues
that PBGC faces, that defined benefit pension plan's face. And
I would especially hope--you're the committee, in some
respects; you're the functional board--but what I would hope is
that there is the attention to those challenges, because I
think those are the real challenges we face.
Senator Franken. Yes. Well, my time's up.
Thank you, Mr. Chairman.
The Chairman. Senator Casey.
Statement of Senator Casey
Senator Casey. Thank you, Mr. Chairman. Thank you for
holding this hearing, I should say, on an issue that is
particularly of concern to folks in any economy, but especially
when the economy is in rough shape; just the concern that
people have about retirement security.
I have a specific question. I want to step back for a
moment and think about the grave concerns that people have
about their own retirement security; and I'm thinking about two
categories, really: one category of folks are those who have
worked and put those years in as Governor Manchin talked about,
and then have an expectation of having that security.
Also, we've got to be concerned about folks who are still
in the workforce, much younger workers who are looking down the
road; and in some ways, I think we have to--if we're going to
strike a bargain with workers--say, ``if you stay, if you get a
good education, and you work hard, and you study hard, if you
continue to improve your skills over time, our end of the
bargain is we're going to try to do everything we can to help
you on health care''--and that's a promise yet unfulfilled--
``but, we're also going to provide you some retirement
security.''
If that's the deal, you get educated, you keep your skills
up to be able to compete in the world economy, and we'll help
you with health care and retirement security.
That's kind of the goal and the ultimate good bargain for
workers and for our economy.
To get there we have to do a lot of the basics, the
fundamentals, what the football players would call the blocking
and tackling.
Senator Franken raised, and others have raised, the benefit
determination process, and I could ask you some questions about
that, and maybe I will in written form.
The one question I had was on the investment policy. You
said you're working on one, and you don't have it completed
yet. But, I'm wondering if you can do one of two things, or
both: either give us a preview of that, where you think that is
headed, in terms of what determinations you'll make as it
relates to investment policy; or if not, can you give us a
sense of how your--what are the considerations you're weighing
and developing, or what is the guidance you're using to develop
that investment policy; because the return that you'll get is
going to be very helpful in meeting that ultimate goal: giving
workers some peace of mind.
Mr. Gotbaum. I'm happy to answer questions for the record,
or with staff, etc. on benefit determinations; I think that's
really important, as you can tell from the fact I put this
chart up.
On investment policy: investment policy has been--first of
all, it's important to know that investment policy is something
which, although the director of the PBGC has always been
involved in making recommendations, is decided by the board at
the PBGC. When I came on, in July, the board said: ``OK, we've
been thinking about this for a while; why don't you do your
review and come to your own views, and then talk with us about
what you think; and then a decision will be made.''
We have a board meeting next week where I hope we'll--we're
planning to have a discussion on that. So, I don't want to
presage that, and it would be inappropriate for me to prejudge
it. I think it ought to be pretty clear, what are the major
considerations that have always been part of the investment
policy decision.
One of them has been, you need to invest in a way that
covers, as much as possible, the benefits that PBGC is
obligated to pay, and reduces the pressure to raise premiums;
so, partly you invest to maximize returns.
Another thing you do is, since the PBGC, although it uses
professional managers, is nonetheless, a government agency--you
want to make sure that the PBGC doesn't take unnecessary or
inappropriate risks.
There are plenty of people--some of whom I've invested in
myself--who can take risks that it would be inappropriate for
the PBGC to take. We're more conservative than that; we don't
do that.
The third thing that I also think matters is that whatever
the policy is, it needs to be something that we can implement
in a way that is so clean that our Inspector General, and the
GAO, and, frankly, me--because my standards, my ethical
standards, I don't think, are any lower than either of theirs--
can come to this committee and say, we can do this in a manner
that is clean.
That's what we're looking for. And, having had some
discussions already, I'm pretty confident that that's what
we'll end up with.
Senator Casey. I appreciate that. I'm out of time, but
thank you for that answer.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Casey.
Senator Hagan.
Statement of Senator Hagan
Senator Hagan. Thank you, Mr. Chairman. I, too, appreciate
this hearing today.
Mr. Gotbaum, congratulations on your nomination and
confirmation; and I know 4 months into the job you've got a lot
on your plate.
Mr. Gotbaum. Thank you.
Senator Hagan. An incredible amount. Thanks for your
testimony.
In your testimony you stated that PBGC's financial position
is a result of inadequate planned funding and misfortunes that
have befallen plan sponsors; and in part, it's a result of the
fact that premiums the agency charges are insufficient to pay
for all of the benefits that PBGC insures.
I know we were just talking a little bit about the
premiums, but what does PBGC charge in premiums, and when was
the last time that the premiums were evaluated; and tell me
about your thoughts on recalculating them.
Mr. Gotbaum. Let me summarize it at my 4-month-on-the-job
level of add detail on the record.
When the PBGC was started out, they really had no idea what
level of premiums made sense, and so they guessed.
Senator Hagan. This was 30 years ago?
Mr. Gotbaum. That's 30, 36 years ago now, ma'am, yes. they
said, for single employer plans it will be $1.00 for
participant per year, and for multiemployer plans it will be 50
cents. They didn't know. They just needed to start with
something.
Then what's happened over the years, because for most of
the PBGC's time, there has been a deficit, meaning the premiums
we take in, the cash that we have, is less than the
obligations, Congress has, time and again said, ``we're going
to change--we're going to raise premiums; we're going to change
premiums.'' There's a basic flat rate premium, and then there's
a premium that relates to the degrees of underfunding
One of the issues that has been raised in the past is
whether or not, in addition to underfunding, premiums ought to
be based on the risks that the plan terminates; not just how
underfunded it is, but what the risk is, etc.
The average premium--and if I get this way wrong, I'll
correct the record--but from that kind of $1.00 per participant
per year is now, round numbers, about $80.00 per participant
per year.
That gives you an idea by how much premiums----
Senator Hagan. What about recalculating that; and what
about evaluating that, moving forward; what's your plan?
Mr. Gotbaum. Oh, that is something which has been on the
agenda a bunch of times. I'm too new on the job even to have an
opinion as to what happened. It is precisely the sort of thing
that the committee, the PBGC, the administration have worked
and discussed.
The last time I believe it was changed was in 2006 as part
of the Pension Protection Act. My hope and expectation would
be, as we get there, as to what the options are--that, that
discussion can be part of the mix.
Senator Hagan. As the director, are you not concerned about
wanting to move forward when you're looking at these huge
deficits that you've been talking about?
Mr. Gotbaum. It's funny. No one's asked the question
exactly that way. Senator, what I have learned in my 4 months
on the job, and having watched the decisionmaking, is that
pension policy has to be consensual. Pensions are mind-
bendingly complicated, and the fact is, we don't make progress
unless we work it and guessed it.
From my perspective, what is much more important than that
we move fast, is that we engage enough so that there is a
consensus; so that nobody thinks somebody's playing fast and
loose.
The other thing is, I mentioned in my response to Chairman
Harkin is, we have $80 billion in assets. Last year we paid out
about $6 billion. We took in about $3 billion in premiums and
recoveries and other things like that, etc; so, we had a
negative cash flow of about three, but we had $80 billion in
cash.
From my perspective, there is no danger that PBGC is going
to run out of cash--when I say the foreseeable future, my very
careful and punctilious Inspector General, and folks who worry
about accounting, get nervous when I say, ``the foreseeable
future,'' but guess what? We are not going to run out of cash
in the foreseeable future. That's not my concern.
My concern is that, in the same way that the Congress
always has worked and talked and figured out what's the right
solution, that we do that, and that there's enough time to do
that.
That's something which we would like to engage in.
Senator Hagan. I was just curious: do you have a number in
the private-industry market that would compare to your $80
premium?
Mr. Gotbaum. No, Senator, we don't, because one of the
things that happens when the government takes over an insurance
function, is that most folks in the private sector don't do
that insurance function. There's no ready standard.
Most academic studies suggest that the average premium
ought to be considerably higher.
Senator Hagan. Yes.
Mr. Gotbaum. Most academic studies suggest that the premium
ought to take the risk--what the benefit actually is, into
account, and what the risk is, etc; and that's stuff which we
don't do.
It's clearly something which has been part of the
discussion in the past, and I hope will be part of the
discussion in the future.
Senator Hagan. You've used the term, ``foreseeable
future.'' I mean, I am very concerned about it; but what's your
definition of ``foreseeable future''?
Mr. Gotbaum. Oh.
Senator Hagan. Have we already asked that? Oh, sorry.
Mr. Gotbaum. No, but it's a very important question.
My definition of foreseeable future is 20 years. In other
words, one of the things we did--since I have this question,
let me just summarize and say, I asked the best people I know,
who are the people who work in the PBGC, who, every day
estimate what our cash flows are, what our obligations are,
etc; and I said, assume Congress does nothing, and the PBGC
does its job, what are the odds that 20 years from now, we'll
run out of money?
They said you hold investment policy about where it is--
maybe less than 5 percent. A less than 1 in 20 chance that we
run out of money; and that's if there's no discussion, no
engagement, no change in premiums, no nothing; etc.
My view is, for the foreseeable future, let's just say that
I expect not only to retire, but to leave this earth before the
PBGC runs out of money.
Senator Hagan. Well, when I think about all the people who
are counting on it, I think the foreseeable future needs to
have a very short definition so that we can plan appropriately
and effectively for these retirees.
Mr. Gotbaum. If I mis-spoke, Senator, then I apologize.
What I'm trying to say is, I think----
Senator Hagan. Yes.
Mr. Gotbaum, people who get benefits from the PBGC ought
not to worry about the benefits they're getting from the PBGC;
they're going to get them.
Senator Hagan. You talked a little bit about the governing
structure; and I, too, am concerned about the small size of the
board. There's also the oversight functions, the advisory
committee; do you think the advisory committee should have
statutory authority to conduct audits and case reviews? Tell me
about how you'd utilize the advisory committee.
Mr. Gotbaum. Well, thank you, Senator, because from my
perspective that's actually an important question, because the
advisory committee--as with boards in the past, advisory
committees have done different things in the past, with your
permission, I'd like to tell you how I----
Senator Hagan. I just realized I'm over time. I apologize.
Mr. Gotbaum. I'll be brief. My view of the advisory
committee is, this is a group of knowledgeable, committed
people who, every 8 weeks, come to Washington and spend a day
walking through, with the director of the PBGC and the staff,
talking about issues; they talk about investment policy issues;
they talk about the issues involving multiemployer plans; they
talk about questions of politics, etc.
My view is, this is a group of people who I can talk to,
who have a broad range of backgrounds. I think they do a good
job, and frankly, I like working with them.
The Chairman. Thank you very much. Mr. Gotbaum, the ERISA
gives PBGC three things they've got to do: No. 1, insure
pensions; No. 2, collect premiums; and No. 3, encourage the
continuation of defined benefit pension plans.
OK, insure pensions, check, you've done that; collect
premiums, check, you've done that; No. 3, encourage the
continuation of defined benefit pension plans, we've been
losing them ever since PBGC has come into being; can I assume
that you're failing on No. 3?
Mr. Gotbaum. I think no one can deny, Mr. Chairman, that
there's clearly real challenges and trouble in the defined
benefit world.
The Chairman. Why?
Mr. Gotbaum. Well, I'm sufficiently new at this, Mr.
Chairman, so I don't want to pretend that I'm definitive on
this, because I'm not, OK, but it's pretty clear to me that
part of this is that plan sponsors, companies, businesses, etc,
have decided that they don't want to offer defined benefit
plans; and for whatever reason, their employees are satisfied
with defined contribution plans, or no plan at all, or
whatever, etc.
That is clearly something which is more than the PBGC can,
in my view, affect or change by its program. I do think there
is something----
The Chairman. Yes, but you're supposed to encourage the
continuation of defined benefits.
Mr. Gotbaum. I think we are. I think we are in a couple of
senses.
The Chairman. But we're losing them all the time.
Mr. Gotbaum. We are, but it is still the fact, Mr.
Chairman, that there are some 40-plus million people who are
protected by defined benefit plans, and I mentioned in my
testimony--and I think this part is important--that from my
perspective, part of the mandate's preserved plans is what we
do when we try to convince companies not to terminate their
plans.
Part of that mandate is, when we go into a company in
bankruptcy and say, ``are you sure you want to terminate your
plan, because if you do, you're going to have to deal with
us.'' I think that is part of the way we fulfill that mandate.
The other way that we can fulfill that mandate is to engage
in the broader discussions about, how do we make sure that
whatever the form of retirement security is, it's adequate,
it's understood, and it's widely available.
The Chairman. Well, but what about a company that doesn't
go into bankruptcy; they just want to get rid of their defined
benefit pension plan?
Mr. Gotbaum. If a company does that?
One of the things that happens is, we have tools that we
can take action on, and we do. We have an Early Warning Program
and we have authorities that you have given us to engage with
companies that, when they take steps, corporate transactions,
shutdowns, closures, even sales, that we can say to the
company, we're nervous about what this does to your pension
plan; we think you should do something to shore up the pension
plan.
The thing we can't do, Senator, is if a company legally
decides it's going to terminate its plan, and it terminates it
according to ERISA, according to the law--which means it buys
annuities for all of the participants--ERISA permits a company
to do that. The PBGC has no authority to tell them not to.
If they follow ERISA, and decide not to do a DB plan,
that's not something that we can do, except to make sure--and
we do, by the way--that when they do a standard plan
termination, that they do it according to ERISA, according to
the rules; that it's done by the book. But, we can't stop them
from doing it.
The Chairman. One last thing, Do you believe that, or do
you have any opinion that you would like to voice on whether or
not in bankruptcy law, that the status of a defined benefit
plan participant should be higher on the pecking order, the
list of creditors that need to be satisfied, if a plan goes
into bankruptcy. Do you have any opinion on that?
Mr. Gotbaum. Not an informed opinion, Senator. With your
permission, let me think about it, find out the facts and
circle back.
The Chairman. Because there is some legislation here,
pending to do that; and I just didn't know if you had any
thought on that at all, but I'll give you the benefit of
thinking about it and get back to us on it. I appreciate it
very much. OK, thank you.
Senator Enzi has some follow-up questions. Anybody else
have any other questions?
Mr. Gotbaum. Mr. Chairman, I'm told that I have
misremembered the average premium; that the average premium
works out to be in the 30-plus dollar range. I will if you'll
permit me to put in the record a more detailed response, so
that I can give you the full range and what the figures
actually are, I'll be grateful.
The Chairman. Mr. Gotbaum, thank you very, very much. I
appreciate your testimony and your leadership and look forward
to working with you in the future. Through my staff, I may be
sending some additional questions to you. Obviously, other
Senators can submit questions for 10 days. I know Senator Enzi
has some also.
Thank you very much, Mr. Gotbaum.
[The information referred to may be found in Additional
Material.]
The Chairman. Now, we'll turn to our second panel. Our
second panel is Barbara Bovbjerg of the GAO, and Rebecca Anne
Batts, who is the Inspector General of the PBGC, and Mr. Ken
Porter of the American Benefits Council.
All of your testimonies will be made a part of the record
in their entirety, and I would ask, again, that if you will
just go down the line in order of which I introduced people,
we'll start with Ms. Bovbjerg. Do I say ``Bovberg'' or
``Bobverg''?
Ms. Bovbjerg. It's Bovbjerg, Mr. Chairman.
The Chairman. Bovbjerg.
Ms. Bovbjerg. I have to say that my in-laws, who are
Bovbjergs, are proud residents of Iowa City. So, Bovbjerg.
Important constituents.
The Chairman. That's a recognizable name in Iowa, I got to
tell you, Bovbjerg.
[Laughter.]
I should have known better. Anyway, we'll start with Ms.
Bovbjerg and go on down the line.
Ms. Bovbjerg, if we could all just sum it up in 5 or 7
minutes, I'd appreciate it.
Ms. Bovbjerg. I'll do that.
STATEMENT OF BARBARA D. BOVBJERG, MANAGING DIRECTOR, EDUCATION,
WORKFORCE, AND INCOME SECURITY, GOVERNMENT ACCOUNTABILITY
OFFICE (GAO), WASHING-
TON, DC
Ms. Bovbjerg. Thank you, Mr. Chairman.
The Chairman. Thank you.
Ms. Bovbjerg. Senator Enzi, members who stayed, thank you.
I'm really grateful to be invited here today to talk about the
need for improved governance and management of the PBGC.
As we've said, PBGC insures the pensions of 44 million
workers, yet it faces an accumulated deficit of $23 billion.
With the growth of large plants under its trusteeship, PBGC's
responsibilities have increased significantly since its
creation in 1974, and its financial portfolio is one of the
largest of any government corporation.
My testimony today discusses the PBGC's need for a strong
board structure, and for improved management of its contracts
and benefit determination processes.
My statement is based upon our prior work on these topics,
many of it for this committee.
First, the board: PBGC needs strong policy direction and
oversight in the face of its current financial condition and
the long-term or foreseeable structural challenges.
Our prior work has highlighted a number of limitations with
the statutory structure of the board, starting with its size
and its composition.
No other government corporation's board is as small as
PBGC's, which is comprised of three cabinet secretaries. This
is too small to allow the establishment of standing oversight
committees, which are commonly used on other boards; and its
members' other responsibilities limit the time they have to
focus on the PBGC's business.
In addition, this board's structure is vulnerable to
disruptive transitions. At each change of presidential
administration, the entire board, and the PBGC director, leaves
with the departing administration, not only limiting continuity
of PBGC, but also leaving no board-level leadership in the
event of immediate policy challenges.
For example, amid the turbulent economic times between
February 2008 and February 2010 the board did not meet at all.
GAO has previously recommended that Congress consider
expanding the PBGC board, and we suggest it be changed to
include additional members who possess knowledge and expertise
useful to PBGC's mission, and that their terms be overlapping
to assure an active board at all times.
Other Federal corporations have boards structured this way;
and these steps can improve the continuity and strength of the
PBGC oversight.
I'm pleased that this committee is now considering
legislation that would bring about such a change.
I'd like to turn now to some management issues at the PBGC.
Over the years, GAO has focused regularly on contracting in the
corporation, both in the use of contract staff and in contract
management. Since the mid-80s PBGC has had contracts covering a
wide range of services; and as its workload has grown, has come
to rely heavily on contractors to supplement its workforce.
The PBGC has taken some steps to improve its workforce
management. The corporation still lacks a strategic approach to
optimize the mix of Federal and contract workers.
Also, PBGC continues to focus its strategic management
attention almost entirely on its own Federal workforce rather
than the performance of the contractors.
Our previous work has found weaknesses in PBGC's overall
contract management, as well. We found, repeatedly, that most
of PBGC's contracts lack performance incentives or other
methods to hold contractors accountable for results.
The corporation has also relied heavily on labor-hour
payment arrangements rather than the fixed-price contracts that
we and others recommend.
Further, the corporation declined to take our
recommendation to elevate procurement in corporate strategic
planning and decisionmaking, despite the importance of this
function to PBGC operations.
We currently have additional work underway on this
important topic, and we'll be reporting that next year.
We've also made recommendations regarding PBGC's benefit
determination processes, which were, in fact, the topic of a
hearing here the last time I appeared before this committee.
When PBGC takes over a terminated plan, it must calculate
the benefits owed the participants of the plan using the
structure that was in the picture, in Mr. Gotbaum's testimony.
A small number of large and complex plans account for most
of the lengthy delays and inaccurate payments to participants.
Although the corporation has recently adopted several of our
recommendations for improvement, it has not yet incorporated
the performance measurement that we believe is necessary.
Improvements like these could help reduce the benefit
determinations that are so troubling to beneficiaries, and
unnecessarily add to their stress.
In conclusion, PBGC has become ever more essential to
American workers and retirees during the recent downturn; yet,
even with the increased attentiveness of the current board, the
body structure will leave PBGC leaderless at times, as it did
most recently in 2008 and 2009.
Engaging in more strategic management will help PBGC better
weather the storms of the future, but still, it can't overcome
the weak system of governance that we have today.
That is why the bill you're considering, that would address
these issues, is so important. Although I have to say, even
though improving the governance and oversight of PBGC doesn't
by itself solve PBGC's financial problems, actions like those
would be critical to helping PBGC manage them as they arise,
which they surely will.
I'm available for questions. That concludes my statement.
Thank you.
[The prepared statement of Ms. Bovbjerg follows:]
Prepared Statement of Barbara D. Bovbjerg
Summary--Why GAO Prepared This Testimony
The Pension Benefit Guaranty Corporation (PBGC) is a self-financing
government corporation that insures the pensions of 44 million workers
in more than 27,000 private sector defined benefit pension plans. Yet,
PBGC faces financial instability that could pose a future threat to
this source of protection for Americans' retirement income. As fewer
sponsors pay premiums for fewer participants in defined benefit plans,
and as the underfunding of large defined benefit plans increases, the
risks to PBGC's financial future also increase. As of September 2010,
PBGC's net accumulated financial deficit was $23 billion. GAO has
designated PBGC and the pension insurance programs it administers as
``high risk'' areas in need of urgent attention and transformation to
address economy, efficiency, or effectiveness changes.
In this testimony, GAO discusses its recent work regarding PBGC.
Specifically, this statement focuses on needed improvements to PBGC's
governance structure and strategic management based on GAO's prior work
in these areas. GAO is making no new recommendations in this statement,
but continues to believe that Congress should consider expanding PBGC's
board of directors and that PBGC should implement recommendations from
prior reports that have not yet been implemented, such as those
concerning strategic workforce management and benefit determination
process performance measures for large, complex plans.
Improvements Needed to Strengthen Governance Structure
and Strategic Management
what gao found
PBGC requires a strong governance structure and strategic
management to ensure that it can meet its future financial challenges.
Companies who pay annual premiums to PBGC and the millions of employees
whose retirement benefits are under PBGC's protection are owed greater
stewardship of the corporation and its funds.
By law, PBGC is governed by a three-member board of directors
composed of the Secretaries of the Treasury, Commerce, and Labor.
Because of their numerous responsibilities in their roles as cabinet-
level secretaries, the board members have historically been unable to
dedicate consistent attention to PBGC matters. In fact, since 1980, the
board has met only 23 times. During a critical 2-year period between
February 2008 and February 2010, amid turbulent economic times and
congressional investigations of certain procurement practices, the
board did not meet at all. While the current PBGC board is meeting more
frequently than in prior years, its members still have little time to
devote to PBGC governance and the board remains vulnerable to
disruptive transitions during future changes of administration.
In addition, although PBGC management has taken steps in recent
years to strengthen its operations, recommendations from GAO's prior
work concerning how the corporation could improve its strategic
workforce management and the benefit determination process have yet to
be fully implemented. PBGC's contract workers comprise about two-thirds
of its workforce, yet GAO found that workforce management lacked a
strategic approach for determining the mix of contract and Federal
workers, and PBGC did not include procurement decisionmaking in
corporate-level strategic planning. Also, GAO found that management of
PBGC's benefit determination process did not provide for separate
reporting of performance measures for large, complex plans, yet these
plans are responsible for most long delays in processing and most cases
with overpayments. Measures that reflect averages across all plans do
not provide sufficient incentive to improve the processing of these
plans. The need for a more strategic approach in managing both the
contract workforce and the benefit determination process is essential
to ensure that PBGC is operating efficiently and effectively.
Improvements to PBGC's governance and strategic management cannot
correct structural weaknesses in its financial design, but it can
better position PBGC for the challenges that lie ahead.
______
Mr. Chairman and members of the committee, I am pleased to be here
today to discuss the need for improved governance and strategic
management of the Pension Benefit Guaranty Corporation (PBGC). PBGC
operates two pension insurance programs--the single-employer program
and multiemployer program--that insure the pensions of 44 million
private-sector workers and retirees in more than 27,000 defined benefit
pension plans.\1\ With the growth in number of large plans under its
trusteeship, PBGC's responsibilities for administering plans and
managing assets have increased significantly since its creation in
1974, and its financial portfolio is now one of the largest of any
Federal Government corporation.\2\ While PBGC has sufficient assets to
pay retirees promised benefits in the near future, PBGC has maintained
an accumulated financial deficit for a number of years. In fact, we
first designated PBGC's largest insurance program--the single-employer
program--as ``high risk'' in 2003 due to PBGC's prior-year net deficit,
as well as the increased likelihood of large, underfunded pension plan
terminations.\3\ Since that time, the single-employer program has
remained high risk because of its continued deficit and the structural
challenges that pose a risk for future losses. In 2009, we designated
the multiemployer program as high risk as well.\4\ At the end of fiscal
year 2010, PBGC's deficit for both programs combined was approximately
$23 billion.
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\1\ A defined benefit plan is a pension plan that generally
provides monthly retirement benefits based on a formula that combines
salary and years of service to the company. 29 U.S.C. 1002 (35). In
contrast, a defined contribution plan is a pension plan that generally
provides retirement benefits based on the balance available in an
individual's account that has received contributions from the employee,
employer, or both, during the employee's years of service to the
company. U.S.C. 1002 (34).
\2\ Federal Government corporations are corporations owned or
controlled by the Federal Government. 5 U.S.C. 103. In addition to
PBGC, other examples of Federal Government corporations include the
Federal Deposit Insurance Corporation and the Export-Import Bank of the
United States.
\3\ GAO, Pension Benefit Guaranty Corporation Single-Employer
Insurance Program: Long-Term Vulnerabilities Warrant ``High Risk''
Designation, GAO-03-1050SP (Washington, DC: July 23, 2003).
\4\ GAO, High-Risk Series: An Update, GAO-9-271 (Washington, DC:
January 2009).
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My statement will focus on steps PBGC could take to help meet the
challenges of its unstable financial condition and increasing
workloads. Specifically, I will discuss PBGC's need for (1) a stronger
board structure and (2) a more strategic approach to managing its
contract workforce and benefit determination process. My statement is
based on our prior work assessing PBGC's long-term financial prospects,
and various reports we have published over the past several years on
PBGC governance and management. Our prior work was conducted in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
background
PBGC was created by the Employee Retirement Income Security Act of
1974 (ERISA) \5\ to pay benefits to participants in private defined
benefit pension plans in the event that an employer could not.\6\ PBGC
may pay benefits up to specified
limits, if a plan does not have sufficient assets to pay promised
benefits and the sponsoring company is in financial distress. As of
September 2010, PBGC was paying monthly retirement benefits to more
than 800,000 retirees in about 4,200 terminated pension plans.\7\
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\5\ Pub. L. No. 93-406, 88 Stat. 829 (codified, as amended, at 29
U.S.C. 1001-1461).
\6\ 29 U.S.C. 1302(a)(2).
\7\ A single-employer plan is established and maintained by one
employer. Single-employer plans can be established unilaterally by the
sponsor or through a collective bargaining agreement with a labor
union. 29 U.S.C. 1002(41). A multiemployer plan is a collectively
bargained arrangement between a labor union and a group of employers in
a particular trade or industry. Management and labor representatives
must jointly govern multiemployer plans. 29 U.S.C. 1002(37).
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PBGC receives no funds from general tax revenues. Instead, the
corporation finances its activities from three main sources of funds:
(1) insurance premiums in amounts set by Congress and paid by defined
benefit plan sponsors, (2) assets acquired from plans that have been
terminated and trusteed by PBGC, and (3) investment income earned on
these assets. Under current law, the corporation has no substantial
source of funds available to it if it were to exhaust its assets,
except for the ability to borrow up to $100 million from the Department
of the Treasury.\8\ The U.S. Government is not liable for any
obligation or liability incurred by the corporation.\9\
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\8\ 29 U.S.C. 1305(c).
\9\ 29 U.S.C. 1302(g)(2).
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PBGC's deficit fluctuates due to various factors, including changes
in interest rates, investment performance, and losses from completed
and probable plan terminations. PBGC's deficit improved during fiscal
year 2008, but then worsened the next year with the severe market
downturn. As of September 2010, PBGC held approximately $79.5 billion
in assets and approximately $102.5 billion in liabilities--for an
accumulated deficit of $23.0 billion, more than double the deficit from
2 years earlier (see fig. 1). This growth in its deficit was due
largely to an increase in plan terminations and a decline in interest
rates used to value PBGC's liabilities. As a result of these plan
terminations, PBGC became directly responsible for the pensions of more
than 200,000 additional participants in fiscal year 2009, the third
highest annual total of new participants in PBGC's history. During this
time, the corporation trusteed plans of companies such as Lehman
Brothers, IndyMac Bank, Circuit City, Nortel, and Delphi Corporation.
In addition, as of September 2010, PBGC estimated future losses from
underfunded multiemployer plans that are unable to repay financial
assistance provided by PBGC at about $3.0 billion--up from $1.8 billion
2 years earlier.
PBGC currently has sufficient assets to make scheduled benefit
payments for a number of years, given that benefits are paid monthly
and spread over participants' and beneficiaries' lifetimes. However, in
the long term, PBGC is likely to remain at financial risk due, in part,
to several structural challenges that limit PBGC's ability to manage
its risk.\10\ For example, statutorily prescribed pension funding
requirements specify how much a sponsor must contribute to its defined
benefit plans each year.\11\ However, these funding rules are based on
assumptions about future liabilities that may differ from a plan's
actual payouts of benefits over time. Similarly, PBGC's premium
structure is specified in law for both single- and multiemployer
defined benefit plans.\12\ This structure limits the corporation's
ability to manage its financial risk because, unlike private insurers,
PBGC cannot decline to provide insurance coverage or adjust premiums in
response to actual or expected claims exposure. Meanwhile, PBGC's
premium base has been shrinking as the number of defined benefit
pension plans and active plan participants has been declining rapidly.
In fiscal year 2010, PBGC insured about half the number of plans it
insured 15 years earlier.
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\10\ GAO, Private Pensions: Recent Experiences of Large Defined
Benefit Plans Illustrate Weaknesses in Funding Rules, GAO-05-294
(Washington, DC: May 31, 2005).
\11\ Funding requirements for employer plans are generally codified
at 26 U.S.C. 412, those specific to single-employer plans at 26
U.S.C. 430 and multiemployer plans at 26 U.S.C. Sec. 431 and 432.
\12\ 29 U.S.C. 1306. The flat-rate premium is a per-participant
premium that plans pay to PBGC each year. In 2009, the rate for the
flat premium was $34 per participant in insured single-employer plans.
For multiemployer plans the flat rate premium was $9 per participant.
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Legislation enacted over the past 5 years has taken steps to
address these concerns, but the extent to which these steps may reduce
PBGC's risk of future losses is still unknown. For example, the Deficit
Reduction Act of 2005 included provisions to raise flat-rate premiums
and create a new, temporary premium for certain terminated single-
employer plans.\13\ In addition, the Pension Protection Act of 2006
(PPA) \14\ included a number of provisions aimed at improving plan
funding and PBGC finances through such measures as raising the funding
targets defined benefit pension plans must meet, reducing the period
over which sponsors can ``smooth'' reported plan assets and
liabilities, and restricting sponsors' ability to substitute ``credit
balances'' for cash contributions.\15\ However, in response to the
recession, Congress enacted legislation in 2008 to help companies
better weather the economic downturn by granting funding relief to
certain sponsors and delaying implementation of certain PPA
provisions.\16\ Thus, the overall impact of PPA remains unclear.
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\13\ Pub. L. No.109-171, 8101, 120 Stat. 4, 181-83 (2006). The new
temporary premium was not to apply to any plan terminated after
December 2010. Congress recently provided temporary funding relief
through the enactment of the Preservation of Access to Care for
Medicare Beneficiaries and Pension Relief Act of 2010, which allows
plan sponsors to amortize funding gaps over a longer period of time
than is currently allowed and provides funding relief for up to 2
years. Pub. L. No. 111-192, 201 and 202, 123 Stat. 1280, 1283-99.
\14\ Pub. L. No. 109-280, 101-221, 120 Stat. 780, 784-919.
\15\ For further discussion of these provisions, such as
``smoothing'' and use of ``credit balances,'' see Patrick Purcell and
Jennifer Staman, Summary of the Employee Retirement Income Security Act
(ERISA), Congressional Research Service (Washington, DC, May 19, 2009).
\16\ The Worker, Retiree, and Employer Recovery Act of 2008, Pub.
L. No 110-455, 122. Stat. 5036. It also provided multiemployer plans
with temporary relief from PPA requirements by allowing plans to
temporarily freeze their funded status at the previous year's level.
204, 122. Stat. 5118-20.
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PBGC's insurance programs are in need of urgent congressional
attention and agency action. We first designated the single-employer
insurance program as ``high risk'' in 2003 after it moved from a $9.7
billion accumulated surplus in fiscal year 2000 to a $3.6 billion
accumulated deficit in fiscal year 2002.\17\ Since that time, the net
financial position of PBGC has significantly worsened due, in part, to
the declines in certain industries that led to PBGC having to assume
responsibility for several large underfunded plans, and to the steep
downturn in the financial markets. We added the high risk designation
to the multiemployer program in 2009 in light of the increased risk of
future losses in that program as well.\18\ As of September 2010, PBGC's
estimated financial deficit for both programs combined was $23.0
billion--more than double its deficit from 2 years earlier.
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\17\ GAO-03-1050SP.
\18\ GAO-09-271.
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pbgc's board structure needs strengthening
PBGC needs strong policy direction and oversight in the face of its
current financial condition and long-term structural challenges, yet
the board's structure as established by law limits the board's ability
to provide such policy direction and oversight. ERISA specified that
PBGC is to have a three-member board of directors consisting of the
Secretaries of the Treasury, Commerce, and Labor. The Secretary of
Labor serves as the Chairman of the Board.\19\ The board is required to
direct and oversee the corporation, in part, by approving all policy
decisions affecting American employers and workers as well as reviewing
and approving its budget, strategic plans, and financial performance.
Each board member can designate an official to serve on his or her
behalf in most instances.\20\ This designee is referred to as the board
member's ``representative.'' In addition, ERISA established an Advisory
Committee, whose seven members are appointed by the President to
represent the interests of labor, employers, and the general public.
The committee has an advisory role but has no statutory authority to
set PBGC policy or conduct formal oversight.\21\
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\19\ 29 U.S.C. 1302(d).
\20\ The board representatives hold the rank of assistant secretary
or above. The organizational level of a PBGC board representative can
vary depending upon whom each secretary selects. As part of recent
bylaw revisions, the board of directors more clearly defined the roles
and responsibilities of its members, representatives, and director.
Bylaws of the Pension Benefit Guaranty Corporation. 73 Fed. Reg. 29,985
(May 23, 2008). For example, the new bylaws state that the board is
responsible for establishing and overseeing the policies of the
corporation. The new bylaws explicitly outline the board's
responsibilities, which include approval of policy matters
significantly affecting the pension insurance program or its
stakeholders, approval of the corporation's investment policy, and
review of certain management and Inspector General reports. 29 CFR
4002.3(a)(3) (2009). In addition, the new bylaws explicitly define the
role and responsibilities of the director and the corporation's senior
officer positions. 29 CFR 4002.9 (2009).
\21\ 29 U.S.C. 1302(h).
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Our prior work has highlighted a number of limitations with this
statutory governance structure, starting with the size and composition
of the board. According to corporate governance guidelines published by
The Conference Board,\22\ corporate boards should be structured so that
the composition and skill set of a board is linked to the corporation's
particular challenges and strategic vision, and should include a mix of
knowledge and expertise targeted to the needs of the corporation. We
found that other government corporations' boards averaged about 7
members, with one having as many as 15 (see table 1). None had a board
as small as PBGC's. In addition, the size of PBGC's board also prevents
the members from establishing standing oversight committees, which are
commonly used by both government corporations and private corporate
boards. For example, other government corporations, such as the
Overseas Private Investment Corporation (OPIC) and the Federal Deposit
Insurance Corporation have established standing committees to conduct
oversight of certain functions, such as audits and case file reviews.
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\22\ Matteo Tonello and Carolyn K. Brancato, Corporate Governance
Handbook, 2007: Legal Standards and Board Practices, The Conference
Board, Research Report R-1405-07-RR, (New York, New York 2007).
Table 1.--Board Membership of Selected Government Corporations with a
Similar Mission
------------------------------------------------------------------------
Description of key
Government corporation Members provisions
------------------------------------------------------------------------
Commodity Credit Corporation; 15 8 Board of directors
U.S.C. 714g(a). consists of seven
members, in addition
to the Secretary,
who are appointed by
the President, with
the advice and
consent of the
Senate. Board is
subject to the
general supervision
and direction of the
Secretary of
Agriculture, who is
an ex-officio member
and chairperson.
Export-Import Bank of the United 5 Board of directors
States; 12 U.S.C. 635a(c). consists of the
bank's president (as
chairman), the
bank's first vice
president (as vice
chairman), and three
others. All members
of the board are
appointed by the
President with the
advice and consent
of the Senate and
serve staggered 4-
year terms.
Federal Crop Insurance Corporation; 10 Board of directors
7 U.S.C. 1505(a). consists of the
manager of the
corporation (serving
as a nonvoting ex
officio member), the
Department of
Agriculture under
secretary
responsible for crop
insurance, an
additional
department under
secretary, the
department's Chief
Economist, and six
private sector
members appointed by
and holding office
at the pleasure of
the Secretary of
Agriculture
(including one
experienced in the
crop insurance
business, one
experienced in
reinsurance, and
four active
producers, who are
policy holders, from
different geographic
areas and represent
a cross-section of
agricultural
commodities). Board
selects its own
chair and private
sector members serve
staggered 4-year
terms.
Federal Deposit Insurance 5 Board of directors
Corporation; 12 U.S.C. 1812(a) - consists of the
(c). Comptroller of the
Currency, the
Director of the
Office of Thrift
Supervision, and
three citizens
(including one with
State bank
supervisory
experience)
appointed by the
President with the
advice and consent
of the Senate.
Chairperson and vice
chairperson are
designated by the
President with the
advice and consent
of the Senate. Each
member appointed for
6-year term and, if
vacancies occur,
others are appointed
only to complete
unfinished terms.
Overseas Private Investment 15 Board of directors
Corporation; 22 U.S.C. 2193(a) consists of eight
and (b). members from the
private sector and
seven from the
Federal Government.
At least two of the
private sector
directors must be
experienced in small
business, one must
represent organized
labor, and another
must have experience
in cooperatives.
Government members
include the
President of the
Corporation, the
Administrator of the
Agency for
International
Development, the
U.S. Trade
Representative or
Deputy U.S. Trade
Representative, and
four additional
members who are
principal government
officers, including
at least one from
the Department of
Labor. All members
appointed by the
President, with
advice and consent
of the Senate and
serve staggered 3-
year terms.
Pension Benefit Guaranty 3 Board of directors
Corporation; 29 U.S.C 1302(d). consists of the
Secretaries of Labor
(as chairman),
Commerce and the
Treasury.
------------------------------------------------------------------------
Source: GAO Analysis of U.S. Code.
PBGC's governance structure is also vulnerable to disruptive
transitions with each administration change. The board, its
representatives, and the director typically change with each
presidential transition, thus limiting the board's institutional
knowledge of the challenges facing the corporation.\23\ Other
government corporations have board structures with staggered terms for
their directors, which arguably avoid gaps in their organization's
institutional knowledge. For instance, OPIC's directors may be
appointed for a term of no more than 3 years, and the terms of no more
than 3 of the 15 directors can expire in any given year.\24\
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\23\ GAO, Pension Benefit Guaranty Corporation: Governance
Structure Needs Improvement to Ensure Policy Direction and Oversight,
GAO-07-808 (Washington, DC: July 2007).
\24\ 22 U.S.C. 2193.
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Our prior work has also found that PBGC's board members often have
limited time and resources to dedicate to PBGC matters given their
numerous other responsibilities in their roles as cabinet
secretaries.\25\ According to corporate governance guidelines, boards
should meet regularly and focus principally on broader issues, such as
corporate philosophy and mission, broad policy, strategic management,
oversight and monitoring of management, and company performance against
business plans. However, we found that since PBGC's inception, the
board has met infrequently, even when pressing strategic and
operational issues were at play. In 2003, after several high-profile
pension plan terminations, PBGC's board began meeting twice a year (see
fig. 2). But PBGC officials have told us that it is a challenge to find
a time when all three cabinet secretaries are able to meet, and when
they do meet, the meetings generally only last about an hour. The
current board has recently begun to meet more frequently, meeting three
times since February 2010. However, prior to that time, the board had
not met since February 2008, despite pending terminations of several
pension plans sponsored by large automakers and congressional
investigations into certain procurement practices.
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\25\ GAO, Pension Benefit Guaranty Corporation: Need for Improved
Oversight Persists, GAO-0908-1062 (Washington, DC: September 2008) and
GAO-07-808.
Because PBGC's board members have generally been unable to dedicate
consistent attention to PBGC, they have relied on their board
representatives to conduct much of the work on their behalf. The board
also relies on PBGC's Inspector General and management oversight
committees to ensure that PBGC is operating effectively. However, we
have found that communications between these entities and the board may
be limited and the board may not always be sufficiently aware of PBGC's
activities. For example, PBGC's bylaws require the board to review any
reports that the Inspector General deems appropriate,\26\ and the
Inspector General reports to the board through the Chair.\27\ However,
there is no formal protocol requiring the Inspector General to
routinely meet with the board of directors or their representatives.
Moreover, PBGC's oversight committees are not independent of the PBGC
director nor required to formally report all matters to the board.
Under this structure, it remains unclear if the board members would be
aware of the Inspector's General findings or of significant actions
taken by PBGC management.
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\26\ 29 CFR 4002.3(a)(3)(ix) (2009).
\27\ 29 CFR 4002.3(a)(2) (2009).
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We have also noted that the PBGC Advisory Committee does not have
formal access to the board members, potentially limiting the board
members' knowledge of the committees' concerns and recommendations.
PBGC's Advisory Committee typically reports only to the director,
although officials said that the committee can submit concerns to the
board if it believes it is warranted. In contrast, the advisory boards
or committees of other government corporations--such as the Federal
Deposit Insurance Corporation and Export-Import Bank--are required to
submit formal reports to their board chair and directors.\28\
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\28\ In some instances, government corporations' advisory
committees are subject to the Federal Advisory Committee Act, which
defines how Federal advisory committees operate, including open
meetings, chartering, public involvement, and reporting for such
entities. Pub. L. No. 92-463, 86 Stat. 770 (1972) (codified as amended
at 5 U.S.C. app. 2). According to PBGC officials, the corporation is
exempt from the Federal Advisory Committee Act because of the
proprietary nature of its work.
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To address these weaknesses in PBGC's governance structure, we
believe that Congress should consider expanding the board of directors
to include additional members with diverse backgrounds who possess
knowledge and expertise useful to PBGC's mission.\29\ PBGC hired a
consulting firm to review governance models and provide a background
report to assist the board in its review of alternative corporate
governance structures. While the report did not advocate any particular
governance option, the consulting firm's final report corroborated our
findings and described the advantages and disadvantages of governance
practices of other government corporations and selected private sector
companies. The report concluded that there are several viable
alternatives for strengthening PBGC's governance structure and
practices, some of which are now being put forth in pending
legislation.\30\
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\29\ GAO-07-808.
\30\ For example, the Pension Benefit Guaranty Corporation
Governance Improvement Act of 2009, S. 1544, proposes amending ERISA
with respect to the composition of the PBGC board of directors, among
other changes.
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pbgc needs more strategic management of its contract workforce and
benefit determination process
Contract Workforce Management
Although PBGC management has taken steps in recent years to
strengthen its operations, our prior work has identified ways that the
corporation could be more strategic in its management of its contract
workforce and the benefit determination process. The need for a
strategic approach in these areas is essential to ensure that PBGC is
operating as efficiently and effectively as possible to manage its
increasing workload.
Since the mid-1980s, PBGC has had contracts covering a wide range
of services, including the administration of terminated plans, payment
of benefits, customer communication, legal assistance, document
management, and information technology. As PBGC's workload grew in
response to the significant number of large pension plan terminations,
PBGC has come to rely on contractors to supplement its workforce. About
two-thirds of PBGC's workforce consists of contract workers (see Fig.
3).
Over the years, PBGC has taken steps to improve its workforce
management. For example, in response to a recommendation we made in
2000, PBGC agreed to conduct a comprehensive review of its future human
capital needs and to use this review to better link contracting
decisions to PBGC's long-term strategic planning process.\31\ After
commissioning this review, PBGC developed a human capital strategic
plan that called for aligning human capital programs with the
corporations' strategic goals and mission. However, in 2008, we found
that the corporation still lacked a strategic approach to identifying
the optimal mix of Federal versus contract workers and ensuring that
the performance of its contract workforce contributes to the
corporation's mission.
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\31\ GAO, Pension Benefit Guaranty Corporation: Contracting
Management Needs Improvement, GAO/HEHS-00-130 (Washington, DC: Oct. 18,
2000).
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As a matter of general best practice, our 2008 work noted that a
strategic plan should incorporate an understanding of how acquisitions
will be used to assist an agency in achieving its mission.\32\ This is
especially true of PBGC with its large contract workforce. Yet, our
2008 work found that although PBGC had made efforts to improve its
acquisition infrastructure, it had not developed a strategic approach
to its contracting process as envisioned in our 2000 report. Moreover,
PBGC's human capital strategic plan focused almost exclusively on its
Federal workforce. We recommended that the plan do more to reflect the
importance of contracting and to link staffing and contracting
decisions at the corporate level. While PBGC agreed that contracting
should be part of its strategic planning process, it maintained that
this is already being achieved by its current process.
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\32\ GAO, Pension Benefit Guaranty Corporation: A More Strategic
Approach Could Improve Human Capital Management, GAO-08-624
(Washington, DC: June 2008).
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Since our 2008 report, PBGC has implemented new guidance and
policies in a number of areas to improve its management of the
contracting process and contractor oversight. In August 2009, PBGC
issued guidelines for determining whether to use contractors or
government employees. While useful, these procedures do not include any
specific steps to ensure that such decisions are linked to the
strategic planning process. Subsequently, PBGC issued its new human
capital strategic plan for fiscal years 2010-14. In this plan, PBGC
acknowledges the importance of contracting and the challenges of
balancing their workforce between Federal and contract workers, but the
plan does not provide specific actions to address such challenges and
appears to continue to focus primarily on PBGC's Federal workers.
Our previous reports also found weaknesses in PBGC's efforts to
ensure that the performance of its contract workforce contributes to
the corporation's mission. In 2000, and again in 2008, we found that
most of PBGC's contracts lacked performance incentives and methods to
hold contractors accountable for performance outcomes linked to the
corporation's strategic goals. In 2000, we recommended that, where
appropriate, PBGC should utilize more fixed-price contracts and fewer
labor-hour payment arrangements, consistent with best practices in
performance-based contracting. In 2008, we recommended that to improve
implementation of a performance-based approach to contracting, PBGC
should ensure that future contracts measure performance in terms of
outcomes, provide incentives for the accomplishment of desired
outcomes, and ensure payment of award fees only for excellent
performance. We also recommended that PBGC should provide comprehensive
training on performance-based contracting for PBGC's procurement staff,
managers, and acquisition-related workforce.
PBGC agreed with our previous recommendations to enhance
implementation of performance-based contracting, and stated that the
actions recommended were already under way, including: incorporating
performance-based measures into its future contracts and providing
comprehensive training for PBGC staff. Further, PBGC noted that the use
of labor-hour contracts had been restricted. However, the move to
performance-based contracting has been difficult. For example,
officials attempted to use performance-based contracts when making new
awards for contracts with the field benefit administration offices, but
these efforts were abandoned because, according to PBGC officials, the
proposals were too complicated to evaluate and more costly than
expected. We are examining these issues in a study currently under way
to assess how well PBGC is managing its contracting activities and the
steps it is taking to ensure the integrity of its contract process. We
anticipate completing this work next summer.
Although we commend PBGC for its improvements to contract
management, we continue to believe that more should be done to include
procurement decisionmaking in corporate-level strategic planning and to
link contractor performance measures with the corporation's mission.
Without a more inclusive strategic planning process that looks at the
contract workforce and Federal workforce together, PBGC cannot be
assured that it has the optimal mix of contractor staff and Federal
employees and that it is holding its contract workforce accountable for
helping meet its strategic goals.
Benefit Determination Process Management
Finally, our prior work has also found that PBGC needs a more
strategic approach for determining the benefits for participants in
large, complex plans that have been terminated. In our August 2009
report, we reviewed plans terminated with insufficient funds and
trusteed by PBGC during fiscal years 2000 through 2008. We found that a
small number of complex plans--especially those with large numbers of
participants affected by limits on guaranteed benefit amounts\33\--
accounted for most cases with lengthy delays and overpayments.\34\ For
example, PBGC completed most participants' benefit determinations in
less than 3 years, but required more time--up to 9 years--to process
determinations for complex plans and plans with missing data.\35\ In
addition, while only a small percentage of participants receive
overpayments of their estimated benefits while their final benefit
amounts are being determined, we found that nearly two-thirds of cases
with overpayments involved participants in just 10 large, complex
plans.\36\
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\33\ When single-employer plans are terminated without sufficient
assets to pay all promised benefits, PBGC guarantees participants'
benefits only up to certain limits, specified under ERISA and related
regulations. These limits on guaranteed benefits are commonly referred
to as the maximum limit, the phase-in limit, and the accrued-at-normal
limit. 29 U.S.C. 1322(b)(1), (3) and (7); 29 CFR 4022.21, 4022.23,
and 4022.25 (2009).
\34\ GAO, Pension Benefit Guaranty Corporation: More Strategic
Approach Needed for Processing Complex Plans Prone to Delays and
Overpayments, GAO-09-716 (Washington, DC: Aug. 17, 2009).
\35\ If the participant is already retired, or retires before the
benefit determination process is complete, PBGC makes payments to the
retiree based on an estimate of the final benefit amount. However, lack
of certainty about their final benefit amounts can make it difficult
for retirees to plan for retirement.
\36\ If a retiree receives an estimated benefit amount that is
greater than the final benefit amount, then the retiree is likely to
have received an overpayment which must be repaid.
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Given these findings, we recommended that PBGC develop a better
strategy for processing benefit determinations for complex plans in
order to reduce delays and minimize overpayments, and that PBGC set
goals for timeliness and monitor the progress made in finalizing
benefit determinations for large, complex plans separately from other
plans. In response, PBGC has taken a number of steps to improve its
procedures for communicating with participants in large, complex plans
and to reduce overpayments. In addition, officials indicated that
formal process improvement efforts were under way to tailor plan
processing to plan size and streamline other aspects of work in an
effort to reduce process times in the future. At the same time,
officials noted that they had no plans to set any performance goals
separately for large, complex plans as a group. Due to the complexities
and variations with each of these plans, PBGC prefers to set schedules
only on an individual plan basis. However, we continue to believe that
reporting performance measures that reflect averages across all plans
does not provide adequate weight to large versus small plans and does
not provide sufficient incentive to improve the processing times for
large, complex plans.
concluding observations
In these challenging economic times, PBGC has become even more
essential as millions of American workers and retirees have come to
rely on the corporation for protection of their retirement income. PBGC
is now one of the largest Federal Government corporations with nearly
$80 billion in assets, yet it continues to face a future of financial
instability. Its premium base has been eroding over time as fewer
sponsors are paying premiums for fewer participants. In addition, as a
result of the recession, PBGC is still at risk from the increased
underfunding of some large defined benefit plans. To the extent that
companies are more at risk of bankruptcy, the plans that they sponsor
are more at risk of termination. The fact that PBGC's board of
directors has only recently begun to meet to discuss these problems is
less than reassuring. Moreover, even with the increased attentiveness
of the current board, the lack of staggered terms for board membership
means that consistency in both policy direction and oversight is not
guaranteed in the future. PBGC needs a board that can offer long-term,
strategic sophistication to keep the corporation as solvent as possible
for as long as possible.
Improvements to PBGC's governance and to its strategic management
cannot correct the structural weaknesses of its financial design, but
it can put PBGC in a better position to confront the challenges that
lie ahead. It is untenable to rest the management of nearly $80 billion
in assets on a corporate board architecture that can fail to meet and
provide strategic direction for years at a time, and that is vulnerable
to a lack of leadership during transitions to new administrations.
Companies that pay annual premiums to PBGC and the millions of
employees whose retirement benefits are under PBGC's protection are
owed greater stewardship of the corporation and its funds.
Chairman Harkin and members of the committee, this concludes my
prepared statement. I would be happy to respond to any questions.
The Chairman. Thank you very much, Ms. Bovbjerg. Now we
turn to Ms. Batts. Welcome. Please proceed.
STATEMENT OF REBECCA ANNE BATTS, INSPECTOR GENERAL, PENSION
BENEFIT GUARANTY CORPORATION (PBGC), WASHINGTON, DC
Ms. Batts. Thank you. I'm Rebecca Anne Batts, and I'm the
Inspector General of Pension Benefit Guaranty Corporation,
Office of the Inspector General.
I appreciate the opportunity to testify today about the
need for strong management and oversight in the Pension Benefit
Guaranty Corporation.
The Office of Inspector General has been working diligently
to address the issues most critical to ensuring that the
corporation is meeting its mission and can continue to meet its
mission into the future.
Many of our recent reports have been quite critical of the
corporation, and in some cases, years of effort will be needed
to correct persistent problems. But, despite the many
challenges that PBGC continues to face, my message today is one
of good news.
Director Gotbaum and I communicate with one another
frequently, and I believe effectively. My office holds monthly
discussions of critical issues with the representatives of
PBGC's board members; and OIG benefits from the resulting
support.
After meetings with the board of directors, I sit in
executive sessions with the board members to address areas of
particular concern or sensitivity.
I'm happy to report that PBGC is taking many of our
reported concerns very seriously, and implementing corrective
actions.
For example, last spring my office reported issues with
PBGC's privacy program. By law, the corporation has an
affirmative responsibility to protect the confidentiality,
integrity and availability of personally identifiable
information--names and social security numbers.
PBGC took prompt, corrective action, going above and beyond
what OIG recommended, with the goal of becoming a model for
handling sensitive information; and as a result of these prompt
actions, the corporation is better positioned to protect the
personally identifiable information of the workers it serves.
While progress has been made, much remains to be done. The
corporation has committed to addressing long-standing issues,
including weaknesses in contracting and information technology
security; the two weaknesses that you've heard about over and
over today.
PBGC depends on its contractors to protect the pensions of
the American workers, historically, almost two out of every
three people doing the work of PBGC contractors; and
additionally, the corporation spends about two-thirds of its
annual operating budget through contracts.
Our work has shown that PBGC's contractors don't always
deliver goods and services as they should. Allowing a
contractor to provide a deliverable at a lesser quality than is
called for in a contract, constitutes a form of waste or abuse,
if not outright fraud.
PBGC has recently promised to take specific actions to
address long-standing problems with the integrity and
effectiveness of its contracting processes. For example, when
my office recently found that a PBGC contractor didn't exercise
due professional care in performing audits of plan assets, and
of participant information, the corporation committed to hiring
a CPA firm to re-perform the work related to two of the largest
single-employer programs claims in PBGC's history.
Further, the corporation is developing a plan for how
contractor work will be monitored, evaluated, and accepted in
the future.
In response to our recommendations in several different
audits, PBGC developed a set of standard operating procedures
to guide procurement activities and establish basic eternal
controls over the contracting process.
The corporation has committed to a series of reviews of the
staff who provide the day-to-day monitoring and supervision of
PBGC's contractors with the objective of ensuring compliance
with the newly-implemented policies and internal controls.
PBGC also depends on its computers. Almost every aspect of
PBGC is automated, from the initial operations and the Early
Warning Program through the payment of benefit checks to PBGC's
retirees. If PBGC can't use its computer, the corporation
simply can't do its job.
My office has identified issues with PBGC's information
technology practices that we believe pose an increasing and
substantial risk to PBGC's ability to carry out its mission.
The corporation has developed corrective action plans to
deal with identified weaknesses, and acknowledges that the
planned actions won't be completed for 3 to 5 years. OIG is
closely monitoring the implementation of PBGC's plans.
You may have noticed something important about the theme of
my testimony today. Much of my discussion has focused on the
future, plans for corrective action and what PBGC promises to
do to correct long-standing ills.
PBGC leadership, and all those that have oversight
responsibility for the corporation, should make certain that
PBGC is effective in executing planned corrective actions.
Mr. Chairman, that concludes my remarks, and I'd be happy
to take any questions.
[The prepared statement of Ms. Batts follows:]
Prepared Statement of Rebecca Anne Batts
Summary
My testimony today is essentially ``good news'' testimony. In some
areas, focused attention by PBGC leadership has already resulted in
effective corrective action. For example, during the past year:
PBGC implemented OIG's specific recommendations to enhance
privacy processes and also made additional improvements with the stated
goal of making PBGC a model for handling of sensitive information.
PBGC initiated actions to protect the PBGC's securities on
loan to other investors, including developing a method to validate
revenues from securities lending to eliminate reliance on the custodian
bank, and developing internal controls to better monitor the program.
In other areas, much remains to be done and full implementation of
corrective action may take years.
Sustained management attention and oversight will be
needed if PBGC is to fully implement its current plans to improve the
effectiveness and integrity of its contracting practices.
While PBGC has developed corrective action plans to
address serious weaknesses in information technology security,
execution of the plans is scheduled to take between 3 and 5 years and
many critical details have yet to be developed. During the interim,
careful review by those with oversight responsibility for PBGC will be
needed to ensure that the PBGC's plans stay on track to completion.
Though the future is difficult to predict, the possibility
that an increased number of plans and participants will be trusteed by
PBGC is very real. Therefore, OIG concluded that PBGC should prepare
strategically for the possibility of a workload surge.
conclusion
We recognize PBGC's progress in addressing numerous high priority
areas and support its efforts to address our related recommendations.
Considering the organization-wide impact of the information technology
security issues and the weaknesses in contracting practices, PBGC
leadership and those with oversight responsibility should target their
oversight efforts on the effective execution of the corrective action
plans that have been developed. Additionally, for critical weaknesses
that cannot be addressed in the near future, interim measures should be
developed and adopted to minimize the associated risks. OIG will
continue our monitoring activities until PBGC demonstrates that it has
been fully responsive to our recommendations. In addition, we plan
future audit work in the areas of highest risk to validate the
effectiveness of PBGC corrective actions.
______
Chairman Harkin, Ranking Member Enzi, and members of the committee,
thank you for inviting me here today to discuss the Pension Benefit
Guaranty Corporation's (PBGC) oversight and management of its Single
and Multi-employer Pension Insurance programs. PBGC protects the
pensions of approximately 44 million workers and retirees in more than
27,500 private-defined benefit pension plans. Under Title IV of the
Employee Retirement Income Security Act of 1974, PBGC insures, subject
to statutory limits, pension benefits of participants in covered
private defined benefit pension plans. To accomplish its mission, PBGC
relies extensively on the use of contractors and on information
technology. Internal controls over these operations are essential to
ensure the confidentiality, integrity, and availability of critical
data while reducing the risk of errors, fraud, and other illegal acts.
background
PBGC receives no funds from general tax revenues; instead PBGC is
financed by insurance premiums paid by companies that sponsor defined
benefit pension plans, investment income and assets from terminated
plans. PBGC has been in a deficit position (where current and future
commitments to participants exceed resources) for a number of years.
Inadequate minimum contributions, inadequate insurance premiums,
employer shift from defined benefit pension plans to defined
contribution pension plans and insufficient funding of terminated plans
are factors contributing to the deficit. Between the end of fiscal
years 2008 and 2009, the deficit in PBGC's single-employer insurance
program doubled in size from $10.7 billion to $21.1 billion. In fiscal
year 2010, the single-employer program's net position declined by $.52
billion, increasing the program's deficit to $21.59 billion.
PBGC currently pays monthly retirement benefits to over 800,000
retirees in 4,150 plans. Including those who have not yet retired and
participants in multiemployer plans receiving financial assistance,
PBGC is responsible for the current and future pensions of more than
1.4 million people.
the pbgc office of inspector general
The PBGC Office of Inspector General provides an independent and
objective voice that helps the Congress, the Board of Directors, and
PBGC protect the pension benefits of American workers. Like all Federal
Offices of Inspector General, the PBGC Office of Inspector General is
charged with providing leadership and recommending policies and
activities designed to prevent and detect fraud, waste, abuse, and
mismanagement; conducting and supervising independent audits and
investigations; and recommending policies to promote sound economy,
efficiency, and effectiveness. As Inspector General, I report directly
to the PBGC Board of Directors, through the PBGC Board Chair; this
reporting relationship has supported OIG's ability to audit and
investigate the aspects of PBGC operations that pose the highest risks
for fraud, waste, abuse, and mismanagement.
During the past 2 years, my office has conducted numerous
independent audits and investigations pertaining to agency programs and
operations, resulting in significant improvements and changes that
ultimately serve to protect America's pensions. Many of the reports
have been quite critical of PBGC, in some instances placing significant
stress on the relationship between the Office of Inspector General and
the Corporation. Nevertheless, the PBGC Board of Directors and PBGC
have responded appropriately and professionally to implement many of
the improvements recommended by the Office of Inspector General.
Our ongoing audit work addresses some of the most critical issues
facing PBGC. We are in the process of applying for law enforcement
authority and have begun the process of enhancing the nature and
sophistication of the investigations we conduct. Recent cases accepted
by U.S. Attorney's Offices include significant issues such as complex
multi-employer pension plan fraud. We are performing some of our
investigations in concert with other agencies, including the Department
of Labor OIG Office of Labor Racketeering and Fraud, and other Federal,
State, and local law enforcement agencies.
Over the last 5 years, we have issued 52 reports addressing PBGC's
oversight of its programs and made 359 recommendations for improvement
or recovery of questioned costs. Although PBGC has responded positively
to many of our recommendations, 176 recommendations, contained in 40
different reports, remain open as of today.
the status of pbgc actions to implement oig recommendations
The following are examples of some of PBGC's recent accomplishments
in responding to OIG recommendations, as well as areas where additional
oversight and management attention are needed.
PBGC Took Action to Protect Sensitive and Personally Identifiable
Information
Last spring my office reported concerns with PBGC's privacy
program. By law, PBGC has an affirmative responsibility to protect the
confidentiality, integrity, and availability of personally identifiable
information. PBGC's mission requires the collection, storage and
transmittal of a great deal of personally identifiable information,
such as the names, social security numbers, and earning histories of
workers in trusteed plans. In March 2010, we reported that PBGC's
Privacy Office did not properly monitor its privacy processes for
quality and compliance. Further, PBGC's process for reporting
personally identifiable information events was inaccurate and
unverifiable. Technical controls (e.g., encryption of laptop computers)
required strengthening.
To their credit, the Corporation took immediate measures to begin
addressing reported concerns. Some actions directly addressed OIG's
recommendations; for example, specific guidance and procedures were
developed for privacy staff to follow in reporting to the U.S. Computer
Emergency Readiness Team (US-CERT) security incidents involving the
disclosure of personally identifiable information. PBGC's actions went
well beyond the specific recommendations included in OIG's report. PBGC
re-examined its privacy program with the stated intention of making
PBGC a model for handling sensitive information and surveyed other
Federal agencies to identify best practices. The Privacy Office then
developed and implemented key guidance, including detailed record
keeping instructions and a requirement that all incidents involving
personally identifiable information be reported to US-CERT within 1
hour of discovery. The guidance was widely disseminated via e-mail to
all PBGC employees and contractors with PBGC e-mail accounts, as well
as to the contract service providers that handle or access personally
identifiable information at contractor facilities. PBGC followed up by
giving in-person training on privacy protection standards and reporting
requirements to those PBGC employees and contractors (e.g., staff at
Field Benefit Administration sites) who frequently handle sensitive
information.
Earlier this fall, we reviewed PBGC's corrective actions related to
PBGC's privacy program. Our testing showed that our recommendations in
this important area had been effectively implemented. The Corporation's
positive reaction to OIG's findings increased the likelihood that PBGC
will be able to properly protect the personally identifiable
information and other sensitive data with which it has been entrusted.
PBGC Initiated Actions to Protect its Securities on Loan to Other
Investors
Securities lending is a small but important component of PBGC's
overall investment program and is intended to obtain incremental
investment return. As of September 30, 2010, PBGC had about $21 billion
in securities available for lending; of this amount, about $5.7 billion
in securities was actually on loan. OIG's review of PBGC's Securities
Lending Program disclosed the general absence of written guidance at
all levels and little documentation of the procedures used to
implement, monitor, and oversee the program. Further, we reported that
PBGC was unable to independently validate that the gross and net
revenues earned through the program were correctly calculated by the
bank with custody of PBGC's loaned assets. Upon issuance of our report,
representatives of the PBGC Board of Directors and PBGC leadership
responded promptly and corrective actions were initiated.
PBGC is making progress in the implementation of the 16
recommendations included in OIG's report. For example, PBGC has
developed and is testing a method to validate the amount of revenue
earned through securities lending. That is, PBGC will soon be capable
of ``checking'' the calculations of its custodian to ensure the
Corporation receives the full amount of earnings to which it is
entitled. Reducing PBGC's dependence on the custodial bank is an
important step. Further, PBGC is in the process of implementing a
number of internal controls intended to provide effective oversight and
monitoring of the securities lending program. OIG continues to work
diligently to support PBGC in its ongoing efforts to develop needed
controls over this complex investment practice.
At the time of our review, written policies regarding the
securities lending program were virtually non-existent. PBGC has begun
the arduous process of drafting written policy guidance regarding the
establishment, investment objectives, risk tolerance, and measurement
standards and operations of the securities lending program. We have
worked closely with PBGC, reviewing several iterations of PBGC's draft
documents and offering suggestions and edits. Because the PBGC Board
has the authority and responsibility for establishing and overseeing
the investment policy and its implementation, the securities lending
guidelines proposed in our report should be submitted to the Board and
Board Representatives for review. Our recommendations for guidance will
not be considered complete until this has been done.
PBGC is Working Toward Protection of the Corporation's Ability to Carry
Out its Mission Through the use of Information Technology
OIG has focused much of its recent audit work on the serious
weaknesses in PBGC's information technology practices that pose
increasing and substantial risks to PBGC's ability to carry out its
mission. For the past 2 years, PBGC's annual financial statement audit
included an adverse opinion on internal control, based in part on
systemic information technology security control weaknesses. A report
on PBGC compliance with the Federal Information Security Management Act
described PBGC's information systems as ``a series of stovepipe
solutions built upon unplanned and poorly integrated heterogeneous
technologies with varying levels of obsolescence.''
The operations of PBGC are heavily dependent on information
technology. During the summer of 2008, shortly after I became Inspector
General at PBGC, I learned that PBGC frequently dismissed OIG's
concerns about information security. The auditors and investigators in
my office worked hard to demonstrate the need to enhance attention to
this crucial area. In the fall of 2009, we gave PBGC senior leadership
a restricted disclosure presentation on the results of penetration
testing conducted to discover weaknesses and to exploit discovered
vulnerabilities. After our presentation, new leadership was assigned to
enhance PBGC's security posture and to develop a long-term corrective
action plan to address long-standing issues. Importantly, PBGC
committed to build and manage security controls to an appropriate
National Institute of Standards and Technology (NIST) standard.
Further, PBGC made the decision to enter into an interagency agreement
with the Bureau of Public Debt to leverage its expertise in security
control. PBGC is beginning to actively address serious information
technology issues and the substantial risks they pose for PBGC's
ability to carry out its mission.
The Corporation has embarked on a coherent approach to resolving
and correcting fundamental information technology weaknesses. PBGC has
developed and is implementing multi-year corrective action plans to
address security issues at the root cause level. The corrective action
plans are an important first step that reflects the priority that PBGC
leadership places on this critical issue. However, PBGC's realistic
assessment is that a timeframe of between 3 and 5 years is needed to
achieve the objectives of the PBGC's plans. According to PBGC's
schedule, corrective action for many of OIG's recommendations will not
be complete until 2015.
Current PBGC leadership has been straightforward in acknowledging
the challenges it faces in revitalizing PBGC's information technology
processes. Implementing the corrective action plans will be difficult
and time-consuming. Some of PBGC's challenges, like the continuous
stream of new and ever-changing Federal requirements, are shared by all
Federal entities. Others are unique to PBGC. For example, PBGC still
has an acting Chief Information Officer, PBGC system security expertise
is still maturing, and trust-building is still a work-in-process for
the office that manages PBGC's information technology. Strong
leadership and effective, persistent oversight, from within the
organization as well as from the outside, will be needed if PBGC is to
ensure the security of the information technology systems that support
the PBGC mission.
PBGC Must Ensure the Integrity of the Contracting Process
PBGC relies heavily on the services of contractors to carry out its
operations, a factor that makes procurement and contracting a
significant PBGC activity. PBGC reports spending about two-thirds of
its annual operating budget through contracts. Historically, nearly two
of every three people who do the work of PBGC are contract employees,
as shown by the following table. Thus, ensuring that contractors
provide the goods and services for which they are paid is critical to
PBGC's ability to meet its mission.
OIG continues to devote a significant portion of its resources to
audits, investigations, and reviews of PBGC's procurement and
contracting activities. Forty-three open audit recommendations relate
to PBGC's contracting practices; some have remained open for more than
5 years without effective resolution. Many of the most critical issues
we are currently addressing have been caused or exacerbated by poor
contract management. Our ongoing monitoring also shows a continued need
for close management attention in this area.
While PBGC places tremendous reliance on its contractors, the
Corporation has experienced serious and costly problems with the
quality and utility of some of the contract deliverables for which it
paid. Many of these issues could have been avoided through effective
contract management, including careful contract monitoring, acceptance
of deliverables and evaluation of contractor performance. PBGC senior
leadership also needs to reinforce the idea that allowing a contractor
to provide a deliverable of a lesser quality than called for in a
contract constitutes a form of waste or abuse, if not outright fraud.
PBGC has recently committed to taking a number of important actions
to improve the effectiveness of its contracting activities. For
example:
Our on-going reviews of two of the largest Single Employer
program claims in PBGC's history show that a PBGC contractor did not
exercise due professional care in performing audits of plan assets and
of plan participant information. PBGC's oversight of the contractor was
ineffective in identifying obvious and material errors and omissions in
the work. To its credit, PBGC leadership is taking action to address
the issues, including: (1) contracting for a Certified Public
Accounting (CPA) firm to re-perform the work related to these two plan
sponsors' pension plans; (2) developing a plan for how contractor work
will be monitored, evaluated, and accepted; and (3) reviewing plan
asset evaluations completed over the last 2 years, with the objective
of using identified deficiencies to train reviewers and staff and to
update procedures.
In response to our audit recommendations, PBGC developed a
set of Standard Operating Procedures (SOP) to guide procurement
activities and establish basic internal controls over the contracting
process. Based on our review of the document, the SOPs form a useful
``first step'' toward improving procurement effectiveness. However,
PBGC leadership needs to develop a method to determine the degree to
which those with responsibility for contracting are complying with the
new procedures and to make any necessary corrections or adjustments as
needed.
During the course of a recent evaluation, we became aware
of a reduction in the minimum qualifications for contract staff at some
of PBGC's remote sites. There was no indication that PBGC sought
reduced rates when staff with lesser qualifications were provided or
that PBGC confirmed the contractors' assertions that fully qualified
staff could not be retained. Based on our discussions with PBGC
management, the Corporation solicited a contractor to provide a
thorough and objective assessment of PBGC practices associated with the
acquisition, planning and contract administration for the remote site
contracts. The resulting report, issued on October 29, 2010, confirmed
our initial observations and made 14 recommendations for improvement in
PBGC's contract modification process. PBGC leadership has committed to
implementing the report's recommendations.
OIG has repeatedly expressed the need for PBGC to be more
vigilant about the integrity and effectiveness of its contracting
processes. A special team led by the Chief Financial Officer and the
General Counsel was established to assist the Procurement Department in
responding to open audit recommendations and in enhancing PBGC's
ability to contract effectively and in compliance with relevant
guidance. As a result, many long-standing recommendations have been
closed and others are nearing completion. Additionally, plans have been
made to review the actions of the contracting officer's technical
representatives and the technical monitors who provide day-to-day
monitoring and supervision of PBGC's contractors. PBGC leadership
should ensure that these reviews are carried out carefully and that
necessary corrective actions are taken if the reviews show a lack of
compliance with established contracting practices.
PBGC Should Prepare Strategically for the Possibility of a Workload
Surge
In response to a request from the Chairman of the Senate Special
Committee on Aging, OIG reviewed PBGC's planning efforts to
strategically prepare for the potential influx of pension plans. In our
report, issued last month, we explained our conclusion that PBGC needs
to develop specific strategies and tactics to be used in the event of a
serious workload surge.
The recent global economic downturn caused financial hardships for
many businesses in a number of different sectors, which directly impact
PBGC's operations and forecasting. The risk of numerous pension plans
simultaneously terminating could cause a domino effect requiring PBGC
to assume a large number of participants in a short period of time.
Conversely, if the economy is strong, PBGC may only assume 20,000 or
40,000 participants in a given year (see the chart below).
The number of plans that PBGC assumes on a year-to-year basis
fluctuates based on numerous factors, mainly the economic strength of
the country. PBGC experienced an influx of pension plans from fiscal
year 2002-5, when PBGC became responsible for paying more than 700,000
participants from plans that were terminated and trusteed, primarily
from the airline and steel industries (see the next chart). PBGC is
experiencing one of the busiest periods in its history. In fiscal year
2009, PBGC terminated and trusteed 129 plans with more than 200,000
participants. During fiscal year 2010, PBGC assumed responsibility for
99,000 additional workers and retirees in 163 failed plans.
The Government Accountability Office lists PBGC on its High Risk
list, in part, because PBGC continues to be ``exposed to the threat of
terminations of large underfunded pension plans sponsored by
financially weak firms.'' PBGC acknowledged in its fiscal year 2010
Annual Report issued last month that no reasonable estimate could be
made of 2011 terminations.
The future is difficult to predict. The uncertainty about 2011
termination, when considered together with the exposure noted by GAO,
provides sufficient reason for PBGC to expand and enhance its planning
for possible workload surges.
To date, the Corporation has generally kept its planning activities
simplistic and linear. PBGC executive leadership explained their belief
that a ``playbook'' approach, explicitly detailing the steps to be
taken, was impractical. To their view, because a workload surge could
take many varied and unpredictable forms, the only practical option was
reliance on the Corporation's ability to develop and implement an ``ad
hoc'' approach, in the event that a workload surge materialized. Based
on our review, we identified a number of specific activities the
Corporation could take to enhance its readiness in the event of a
workload surge. These activities could be best implemented as part of
an overall strategic plan, an approach that we consider to be a best
practice. However, even in the absence of a comprehensive Workload
Surge Strategy Plan, implementing the recommendations in our report
would help position the Corporation to deal with a significant workload
surge.
The Chief Operating Officer responded to our report, noting PBGC's
conclusion that the risk of a large influx of plans is much lower now
than anticipated in fiscal year 2009. Further, his response stated
management's belief that the resources needed to address the report's
recommendations would be better used in other higher priority areas.
Accordingly, instead of implementing OIG's recommendations as written,
PBGC proposed the creation of a Large Influx Working Group (LIWG)
Planning Document as a basis for alternative actions to address the
recommendations. We will need to review the planning document PBGC
proposes to draft before we can determine whether PBGC's proposed
approach adequately addressed the report's findings.
conclusion
We recognize PBGC's progress in addressing numerous high priority
areas and support its efforts to address our related recommendations.
Considering the organization-wide impact of the information technology
security issues and the weaknesses in contracting practices, PBGC
leadership and those with oversight responsibility should target their
oversight efforts on the effective execution of the corrective action
plans that have been developed. Additionally, for critical weaknesses
that cannot be addressed in the near future, interim measures should be
developed and adopted to minimize the associated risks. OIG will
continue our monitoring activities until PBGC demonstrates that it has
been fully responsive to our recommendations. In addition, we plan
future audit work in the areas of highest risk to validate the
effectiveness of PBGC corrective actions.
Mr. Chairman, that concludes my remarks. I would be happy to answer
any questions that you or other members of the committee may have.
The Chairman. Thank you very much, Ms. Batts. And, now Mr.
Porter, welcome. Please take a seat.
STATEMENT OF KEN PORTER, INTERNATIONAL BENEFITS AND ACTUARIAL
CONSULTANT, AMERICAN BENEFITS COUNCIL, WASHINGTON, DC
Mr. Porter. Thank you, Mr. Chairman, Ranking Member Enzi,
and the members of the committee. I appreciate the opportunity
to be here today.
My name, of course, is Ken Porter. I'm Actuarial and
International Benefits Consultant with the American Benefits
Council.
Previously, I spent 35 years with the DuPont Company, where
I was the Finance Director, responsible for all corporate risk
management, as well as the financial planning and actuarial
responsibility for all employee benefits around the world.
There were 160,000 U.S. plan participants in the PBP Plan
sponsored by the company in the United States, and about $18
billion of assets covering those participants at the time.
Our focus then, on our comments today, are on the
relationship between the PBGC and defined benefit sponsor
community. The American Benefits Council represents the PBGC's
customer base. It's the premium payers. We're the business
partners to the PBGC. We appreciate the long-standing
relationship we have with the PBGC.
Throughout all of its years the PBGC has been quite open to
communicating with us and hearing what our concerns are; and we
openly welcome suggestions on how we can make that
communication even better than it is.
I have two issues that I want to just highlight today: the
first is a general observation; and we've already mentioned one
of the missions of the PBGC is to encourage the continuation
and maintenance of voluntary private pensions.
As a former corporate risk manager, I spent many hours
negotiating with insurance companies of all kinds on all kinds
of risks throughout the world; and typically, we would come up
with a win-win solution where the insurance company would
recognize the business needs of the insured, and the risks for
the insured would be paid off and the insurance company would
maintain its requirements for a profitability end, and
reserves.
Once in a while an insurance company would not be able to,
for one reason or another, recognize the needs of the business;
and the business would have to make a decision either to find a
different insurance company or to choose not to insure that
particular risk.
In the case of a defined benefit pension plan, the risk
manager has no choice. If they're going to have a defined
benefit plan, a company must use the PBGC, and must pay the
premiums that Congress ordains from time to time.
We are very concerned as plan sponsors, that the actions
and the policies of the PBGC can tend to interfere with normal
business transaction of plan sponsors; and as such, discourage
plan sponsors from maintaining plans, in addition to a lot of
other factors that have worked against the sponsorship of
employee benefits.
One example of that is the recent regs on 4062(e) that the
PBGC proposed. In those rules we believe that they could have
significant impact--have the potential of interfering with
normal business transactions of corporations even though those
transactions pose no material risk to the PBGC.
We applaud Director Gotbaum's efforts in recognizing some
of this. He's extended the comment period. We look very forward
to working with them to help them rethink what these rules
could be to achieve their goals; and at the same time, partner
with the plan-sponsor-community so as not to be disruptive to
normal business operations.
The second example is, over the last 2 years as there was
bipartisan support to provide relief for plan sponsors in
funding their plans due to the simultaneous enactment--or the
effective date of the Pension Protection Act, and the economic
downturn. During that period of time the PBGC significantly
resisted the efforts, the bipartisan efforts, to provide
smoothing to the companies.
These experiences have been very difficult for plan
sponsors and have sent up red flags.
Finally, the second issue is regarding the investment
policy. We agree with Mr. Gotbaum's comments that they need to
be well thought out and concerted. They need to take into
account all of the constituents.
From a plan sponsor perspective, we look at the PBGC's
deficits as reported and know that there's only two ways that
they can erase those deficits: one is through investment return
that exceeds their conservative measure of their liabilities;
and the second is to rely on Congress to raise the premium on
plan sponsors.
As the number of plan sponsors decline and if the policy
for investment is too conservative, the premiums being charged
through the remaining plan sponsors will become debilitating.
In conclusion it is our desire to continue working with the
PBGC openly. We value the relationship we have with them. We
want to be the clients as well as business partners to the
PBGC; and we applaud our shared view with this committee: that
the plan sponsor community needs to have the encouragement to
insure that benefit security for all Americans who are covered
by this plan.
Thank you.
[The prepared statement of Mr. Porter follows:]
Prepared Statement of Ken Porter
My name is Ken Porter and I am an Actuarial and International
Benefits Consultant for the American Benefits Council (the
``Council''). I also serve as Executive Director of the Council's
research and education affiliate, the American Benefits Institute.
Previously, I worked for 35 years for The DuPont Company, from which I
retired as the Finance Director for Corporate Insurance and Global
Benefits Financial Planning. I also served as Global Risk Manager and
Corporate Chief Actuary with responsibilities that included DuPont's
defined benefit pension plans covering more than 160,000 participants
in the United States and with about $18 billion in U.S.-defined benefit
plan assets. I also had actuarial oversight responsibility for defined-
benefit pension plans in every other country where the company
sponsored defined-benefit pension plans. In my capacity as a DuPont
employee, I served on the Council's Board of Directors and I am a
former Chairman of the Council's Board. Thank you very much for the
opportunity to testify.
The Council is a public policy organization representing
principally Fortune 500 companies and other organizations that assist
employers of all sizes in providing benefits to employees.
Collectively, the Council's members either sponsor directly or provide
services to retirement and health plans that cover more than 100
million Americans.
The Council applauds Chairman Harkin, Ranking Member Enzi, and the
members of this committee for holding this hearing to examine the
management and oversight of the Pension Benefit Guaranty Corporation
(the PBGC). The Council believes this is a topic that merits a full
public policy discussion.
The PBGC has a very challenging mission. The PBGC needs to ensure
that it has adequate funds to provide benefits to participants and
beneficiaries whose plans are terminated with insufficient assets. We
believe that the PBGC works hard to fulfill this part of its mission.
For that, we are very grateful.
The PBGC has an additional very complementary responsibility that
is critical to enabling it to meet its first goal. That is to be a
champion of the defined benefit pension plan system and to encourage
the continuation and maintenance of pension plans. In no way should
this role be viewed as at odds with the need to have adequate funds to
pay benefits to participants in terminated plans. To the contrary, the
future financial integrity of the PBGC depends upon the maintenance of
defined benefit pension plans.
I would like to focus my testimony on one key issue: the
relationship between the PBGC and the defined benefit pension plan
sponsor community. The American Benefits Council, which represents the
PBGC's customers who pay the premiums that support the agency,
appreciates its longstanding relationship with the PBGC and the
opportunities that have been afforded to share our views on a range of
issues over the years. We certainly also welcome suggestions on how we,
the plan sponsor community, can more effectively communicate with the
PBGC. It is very important that the relationship be strengthened and we
would of course like to continue working with Congress and the PBGC in
that regard, so that all parties can better understand the others'
concerns. Such strengthening is critical to fulfilling the PBGC's
statutory mission ``to encourage the continuation and maintenance of
voluntary private pension plans for the benefit of their
participants.'' We believe that this mission can be served through
better communication between the PBGC and business community.
The core problem we see is that PBGC and the business community
need to communicate more effectively about why employers are fleeing
the defined-benefit plan system, why they are freezing their plans, and
how certain well-intended PBGC policies and actions can actually
threaten business viability and increase PBGC liability. The following
examples illustrate this issue:
The PBGC recently proposed regulations regarding various
corporate transactions, including the shutdown of operations. These
proposed regulations would reverse longstanding PBGC written policy and
would impose potentially enormous liabilities with respect to routine
transactions that involve no layoffs or shutdowns and pose no threat to
the PBGC. Companies will find it extremely difficult to continue
sponsoring defined-benefit pension plans if their routine business
transactions trigger large liabilities unrelated to any risk to the
PBGC. In our view, this regulatory project is a critical test of PBGC/
business community communication. Given the depth of our concerns, we
were very encouraged recently when PBGC Director Joshua Gotbaum
recognized the importance of these proposed regulations and extended
the comment period to receive further input. We thank the Chairman and
Ranking Member of this committee for their leadership with respect to
that extension. We further hope that this hearing will lead to an open
dialogue among Congress, plan sponsors, and the PBGC so that the PBGC
rules will encourage rather than discourage plan maintenance.
The PBGC has not joined in the broad bipartisan support
that has been evidenced in both the Senate and the House of
Representatives over the past 2 years for defined benefit pension plan
funding relief. Congress has wisely recognized that pension funding
relief legislation is critical not only to saving jobs, but also to
saving pensions by forestalling the termination of underfunded plans
and thereby protecting the PBGC as well. However, the PBGC itself has
resisted the efforts to help companies recover from the economic
downturn and smooth out the extraordinary losses suffered by the plans.
The lack of support for essential relief has understandably led long-
time defined benefit plan sponsors to question their own commitment to
the system. Again, better communication might help the agency and its
customers (i.e. the plan sponsors who pay the PBGC premiums) be in
better alignment on such a critical policy matter.
We believe it is essential that there be a continuing and
open dialogue with the PBGC about:
The PBGC's economic modeling system, which has been
actively used in public policy debates but has not been made
available for public discussion.
The PBGC's investment policy, which we believe should
be based on a diversified portfolio; The investment decisions
made by the PBGC affect us all, of course, but we also believe
the trustees should have appropriate discretion in the
selection of investments because that is an important part of
their job.
The PBGC's assumptions underlying its reported
deficit. In that regard, a report was prepared for us in 2005
by former staff on the Joint Committee on Taxation that raised
questions regarding the assumptions used by PBGC in determining
that deficit. That report, Promises to Keep: The True Nature of
the Risks to the Defined Benefit Pension System, is attached to
this testimony and we ask that it be included in the official
hearing record.*
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* The report referred to may be found at http://help.senate.gov/
imo/media/doc/Porter-Report.pdf.
The PBGC has on occasion proposed that it should operate
in a manner similar to a true insurance company. However, a true
insurance company would balance its insurance business needs against
the needs of its customers. Further, an insurance company's products
would be designed to dynamically meet the changing needs of its
customers. We believe that enhanced communication with the plan sponsor
community is needed in order for the PBGC to function more like an
insurance company in these respects.
We applaud Senator Kohl for his continuing interest in addressing
PBGC governance. In our view, the theme of the Pension Benefit Guaranty
Corporation Governance Improvement Act of 2009, S. 1544, as introduced
by Senator Kohl, is to provide improved management of the PBGC through
(1) greater involvement of private sector representatives, (2)
strengthened communication among affected parties, and (3) enhanced
management consistency. We believe that these are all important first
steps.
The PBGC and the business community each play a critical role in
the defined benefit plan system and each faces many challenges. The
economic difficulties of the last several years have contributed to
erosion of the most effective communication that is needed between the
PBGC and the community with which it works. We all need to look for
opportunities to do more, through legislation or simply through open
dialogue.
Again, we thank you for the opportunity to testify and I would be
happy to answer any questions the committee may have.
The Chairman. Thank you very much, Mr. Porter.
Thank you all for your fine testimony.
I want to hit on this one issue, again, of board
membership.
In looking at Ms. Bovbjerg's testimony, and outlining all
of the different Federal departments that we have that have
boards now--the Commodity Credit Corporation--I'm familiar with
that for my Agriculture Committee work, has 8 members; Export-
Import Bank, 5; Federal Crop Insurance Corporation, 10; FDIC,
5; OPEC, 15; and Pension Benefit Guaranty Corporation, 3.
Also, it just seems, maybe it's odd to me, but in all my
years here, I don't remember having a board that consisted
simply of three appointed secretaries of departments. Usually
boards are made up of people that have some expertise and
background, and that continue on, so there's not this abrupt
change from one administration to the next.
I'm intrigued by this. I'm going to ask you again now, for
the record, just your own views from having looked at this. Mr.
Porter, you, too. I want you to think about whether the boards
should be expanded? I don't have a number in mind. It's
important to at least get some continuity that would go from
one administration to the other. I agree that everything's been
said, this is one area that--not to be political, and not to be
partisan--we ought to get the best people at all to be on the
board; and where you would have a hold-over, some rotational
kind of a system so that you keep some expertise on these
boards from one administration to the next.
I want your views on that, and how important is that right
now for us to pay attention to this, Mr. Porter?
Mr. Porter. Yes. Thank you, very much. Certainly I can't
dictate or would not want to even begin to dictate how large it
ought to be, but I agree that whatever the size of the board
is, and its constituency, it needs to be a board that has
longevity; it needs to have continuity.
The period of time during the economic turmoil, as was
mentioned, where there was effectively no board and no
executive director for a period of time, was very troubling to
the business community. We would like to--whatever. We would
support measures that would provide for continuity.
We look back at the investment policy and we see frequent
changes to the investment policy that have not always been to
the best interest in the long-term. We don't see corporate
plans changing their investment strategy frequently, and yet
that seems to have happened to the PBGC over time.
I'd like to see stability; and that's what we would be in
favor of.
The Chairman. Ms. Batts.
Ms. Batts. From the perspective of the Office of Inspector
General, there's an additional problem when we lose continuity
of the board. I might share with you--you referred to the
situation--the unfortunate situation with Former Director
Millard.
In February 2009 when my office confirmed former Director
Millard's misconduct, the former director was gone from PBGC,
but the contracts that were under question remained.
Now, I was able to speak to PBGC's acting director, once we
confirmed the misconduct--and that acting director was not part
of the problem. So, we had no issue.
Had the acting director also been part of the problem,
PBGC, OIG would have had no one to go to, with no board
members, with no confirmed Secretary of Commerce or Secretary
of Labor or Secretary of Treasury, and only one confirmed board
representative. That did represent an additional vulnerability
for us.
Fortunately, it didn't turn into a problem, but, I think
that is something else to think about in terms of ensuring
continuity of the board.
The Chairman. OK. Ms. Bovbjerg.
Ms. Bovbjerg. Well, I've already talked about this a lot,
so I won't take a lot of time, but the continuity point issue
is really important for many of the reasons already mentioned.
I do want to say that the original board--which in our
work, seems unique in the Federal Government--is there for
diversity; so labor represents workers, commerce represents
sponsors, treasury represents finance. And that's a really good
idea, but you need more of that.
In addition to more members, you know, it would be helpful
to have someone on the board who's a management expert or risk
assessment expert, or a pension finance person.
You'd have to be concerned about conflicts. You appoint
people who might be involved with the industry, but it would be
really important to continue that tradition of diversity.
I also wanted to say that the McKinsey Report--which
followed up on ours, but with regard to what boards might look
like--reported that in a survey, members of corporate boards
said they spend an average of 22 hours a month on their board
work. I just don't see how that's possible for cabinet
secretaries in the U.S. Government.
The Chairman. Thank you. Thank you all very much.
Senator Enzi.
Senator Enzi. Thank you, Mr. Chairman.
Mr. Porter, I was interested in your reference in your
testimony, to PBGC's proposed regulations imposing enormous
liabilities on companies with respect to the routine business
transactions that you say pose no threat to the PBGC.
Would you provide us with an example of that?
Mr. Porter. Certainly. Thank you, Senator.
One example, and this is sort of the nature of the game as
plan sponsors are freezing plans for a variety of reasons, the
number of active employees participating in those plans tends
to shrink over time.
You can envision many situations where the number of active
participants in a plan might be a fraction of the total active
participants of an employer. An employer might have, for
example, 10,000 employees, but perhaps only 1,000 of them are
active participants in the plan.
Under the rules, the rules impose a significant increase in
the liability and the funding requirements if 20 percent of the
active participants leave the plan sponsor.
You could have a situation where as few as 200 employees
might be involved in a divestiture, and that would only
represent 2 percent of the total workforce; but because it's 20
percent of the plan, the plan would now be subject to enormous
increases in liability.
And, because it's a legacy plan, there may well be 10, 12,
15,000 retirees in that plan, not just the 1,000 active
employees.
The impact on the plan sponsor would be enormous for simply
having a small divestiture that involves perhaps only one or
two percent of their workforce.
If that plan sponsor's plan is well-funded and the plan
sponsor is strong, that really isn't a material threat to the
PBGC's liability.
Senator Enzi. Thank you. That's very helpful with letting
us know some of the unintended consequences, and some things we
have to do or might potentially have to do. I appreciate that.
Ms. Bovbjerg, in your opinion, would the PBGC benefit from
creating a standing audit board, which could not only address
critical issues, which require more attention than the time
allowed at board meetings, but also provide oversight to the
board's interaction with the PBGC?
Also, what can be done to improve the investment board or
PBGC's advisory committee?
Ms. Bovbjerg. We didn't call for a separate audit board,
but at GAO we always like to see more auditing capacity.
Senator Enzi. As the only accountant in the Senate, I do,
too.
Ms. Bovbjerg. Yes, so what we did think about, though, is
the importance of the standing committees in the board; that we
really do think there needs to be some audit committee to work
with the external auditors and pay pretty concentrated
attention to the finances of PBGC.
We hadn't thought about a separate board, but we certainly
could consider that. I wouldn't be willing to recommend it and
get myself in trouble.
You also asked about the advisory board, which is seven
members appointed by the president; and they report to the
director right now. Most committees and boards of that nature
report directly to the board of directors, so that might be
something.
That advisory group--it was called an advisory committee in
the past, and it has a board. It was at one time the investment
advisory boards. They were only looking at investment issues.
It's changed over time, and it's been subject to what the
director wants them to be, to a great extent.
I think that having them more connected to the board might
be something to consider.
Senator Enzi. OK. Thank you.
Ms. Batts, you testified that the PBGC has developed
corrective action plans to address serious weaknesses in
information technology security and other areas; however,
critical details of those plans have yet to be developed.
Would the PBGC benefit from hiring a risk management
specialist to help the agency better prepare for future risks
facing the agency and the retirement community?
Ms. Batts. That's an interesting question. Certainly, PBGC
has hired external expertise to help with addressing many of
the areas of persistent weakness; for example, in its
information technology security work.
I'm not aware of the need for such a selection, but that's
not something I've thought about. I'm sorry. I just don't
really have a--I know that PBGC has reached out to get the
expertise that it needs, and they've reached out frequently,
through contracts. There's no hesitation to reach out to get
that expertise.
Senator Enzi. OK. I appreciate it. My time has expired.
The Chairman. Thank you.
Senator Franken.
Senator Franken. Thank you, Mr. Chairman.
I find the reporting on the relationship with the
contractors a little disturbing. I was wondering what
percentage of the workforce--and this can go to anybody--is
comprised of contractors.
Ms. Batts. It's about two-thirds. Right now it's slightly
less than two-thirds, but historically, it's run right at about
two-thirds.
Senator Franken. OK. Has there been any thought to--because
I know, like in the military now, there's a tendency now to
stop this dependence on contractors and go back to actually
using the military to do the job, because they have a loyalty
to the country and to the military; and people who are
contractors have a loyalty to making a profit, and to their
contractor.
Is there any thought about increasing the number of people
who work for the PBGC, and less reliance on contractors?
Ms. Bovbjerg. Back, in 2000 we took a look at this issue.
And, so there's arguments, sort of, on both sides. We looked at
the ramp-up in contractors at PBGC in the 1990s and the 1980s.
The bankruptcy of Eastern Airlines, Pan Am, they had to get
some people in place pretty quickly to process those benefits.
So they did that, but that structure has essentially stayed in
place.
When we were reporting on this in 2000, we said, ``we think
you should really review this. Do you need locations in places
where there were all these Eastern Airline employees, for
example?''
Maybe if you're a virtual organization it doesn't matter.
But, we thought they should consider this.
We also wondered--there's an argument for ramping up with
contractors when you need them, and then dropping off, which
you cannot do with Federal employees. There was that argument
when they thought that their workload might kind of decrease.
Senator Franken. But it hasn't. The workload hasn't
decreased, right?
Ms. Bovbjerg. It hasn't.
Senator Franken. We're not anticipating it decreasing for a
while, are we?
Ms. Bovbjerg. No. It could get much bigger.
Senator Franken. OK, so, this is like when--after the Cold
War ended there was going to be this peace dividend, and we
reduced the size of the military, and we increased contractors
as we needed them; and then found that we were in a war for 9
or 10 years, and relying so much on contractors and wasting a
tremendous amount of money on the contractors; and I'm
wondering if we're wasting a tremendous amount of money on the
contractors who--I'm not hearing great reports on the kind of
job they're doing.
Ms. Bovbjerg. OK.
Senator Franken. When----
Ms. Bovbjerg. Something we think they should look at.
They shouldn't just keep going because that's what they've
done before.
Senator Franken. Well, there are recommendations to look at
things, but who's going to look at them, if you have a board
that doesn't meet and a board that's comprised of three cabinet
secretaries?
We've talked about the continuity of the board. This is an
institutional memory. There's no institutional memory here. How
are you going to get anything done if there's no institutional
memory. This seems to have to be done soon.
Ms. Batts. Senator Franken, if I could add, our office has
some very recent audit work in this area, and we do have an
open recommendation that PBGC take a strategic look and include
both the contract and the Federal employee workforce in its
human capital planning.
To date, PBGC has provided some alternatives, but hasn't
actually agreed to implement that. It's consistent with
recommendations made by GAO in the past.
Senator Franken. OK. Can I ask about the long-term plans,
or shape of this, of the workforce of the PBGC, because, I saw
in the briefings for this hearing that there's worry about,
obviously, increased needs in terms of failures in pension
accounts; and I know that the role of the PBGC is to encourage
defined benefits, but defined benefits are going down; right,
in our society?
Is there a curve that's been projected on the role of the
PBGC that coincides with what defined benefits in our society,
the role they're going to play; in other words, is this going
to go up at a certain point and then start to come down again
as defined benefits play a lower role?
I know we're trying to encourage defined benefits, but that
doesn't seem to be happening. Is there some kind of actuarial
look at what the future of the PBGC, in terms of its
responsibilities will be, vis-a-vis what the curve of defined
benefits are?
Was that clear, because I don't know if it was.
Ms. Bovbjerg. Yes. No, they're not going out that far. As
defined benefits decline, there are fewer plans out there;
there are still some really big plans with a lot of
participants.
So, when PBGC looks at its future, it's looking at the
likelihood that those plans are going to go under, and they'll
be underfunded at the same time that they will have to take
them.
As far as they can look out, they're still paying benefits;
they're still potentially taking in underfunded plans.
Senator Franken. OK.
Ms. Bovbjerg. There could be a time, but way down the road.
Senator Franken. Way down the road. Then the idea of
perhaps relying less on contractors and bringing more Federal
employees into the PBGC as a way of saving money and getting
the job done better is not such a bad idea.
Ms. Bovbjerg. It could be a really good idea. They need to
consider it. At GAO we cannot tell----
Senator Franken. How long do you have to consider these
things? Who would consider them? Would the board consider them?
Because the board is incapable of considering much of anything.
Ms. Bovbjerg. The board should. That should be an issue for
the board; it's a long-term strategic issue.
Senator Franken. OK.
Mr. Porter. Senator, if I may, I would just add a point to
that, from a practitioner's perspective; from a plan sponsor
perspective.
Outsourcing of benefits calculations, in particular, is
perhaps one of the most complicated endeavors we have in our
society; it's terrible. So if there is a change from status quo
to something else, whether it's from one contractor to another,
or one contractor back into the government, there has to be a
transition plan that may span several years; and at which time
there will be duplicative cost and duplicative effort. That's
one point I'd like to make.
Second point I'd like to make is that the majority of the
plans that have been frozen are sponsored by healthy companies
that continue to fund their plans; they're not terminated;
they're not being turned over to the PBGC.
Certainly the PBGC has to take into their account what the
risk--that they believe the probability that they might be
turned over, but it's incumbent on us to continue, and to have
policies that encourage these companies to continue to fund
them--as they are doing today.
Even though new employees may not be participating, there
are hundreds of thousands of employees who are continuing to
participate as grandfathered employees in plans that have been
frozen. We want those to continue; and those--just because they
don't--aren't available for current employees doesn't mean that
they aren't necessarily healthy and are going to be a problem
of the PBGC.
Not all of these plans are going to come to the PBGC for
their efforts.
Senator Franken. Thank you, Mr. Chairman.
The Chairman. Senator Hagan.
Senator Hagan. Thank you, Mr. Chairman, and thanks again to
all the witnesses for your testimony.
You know, it seems apparent that we need new board and new
governance rules and obligations for the board; and also,
contract procurement issues have been raised and need to have a
lot more attention.
I've got lots of issues and questions.
Ms. Bovbjerg, I was interested in your testimony, talking
about overpayments; and you stated that the management of
PBGC's benefit determination process did not provide for
separate reporting of performance measures for large complex
plans; yet these plans are responsible for most long delays and
processing in most cases with overpayments.
Can you discuss that?
Ms. Bovbjerg. It can be a long and difficult process to
figure out what benefits are owed participants in a plan that
PBGC trustees. When we looked at this issue, because a number
of people in a former steel company were getting notices from
PBGC that they had been overpaid by as much as $50,000.
Now, the odds that they're ever going to actually repay
that are very, very slim because they would only lose a small
amount of their benefit monthly for that. They probably
wouldn't ever get to the point of having repaid it; however,
they were counting on a certain benefit level, and then
suddenly the sky falls; they're not getting the benefit level,
they're getting a lower benefit, and it's reduced a little bit
for the overpayment.
After waiting as long as 9 years for your benefit
determination, that can be a terrible----
Senator Hagan. Nine years?
Ms. Bovbjerg. The average is about 3 years, but it can go
as long as 9 years for a very large and complex plan, which
some of the steel plans were.
When we looked at what causes these overpayments, why these
things take so long, it was always these large, complicated
plans.
We thought that one way to think about--they made a number
of changes that we suggested, but that one way to really hold
their own feet to the fire on this was to just keep track of
how quickly and how accurately they're calculating benefits for
large plans separately from the overall average; and that's
something that they haven't been willing to do yet.
Senator Hagan. Well, I see that as a huge problem.
Mr. Porter, do you have any comments on the overpayment
aspect?
Mr. Porter. Overpayment is a challenge. In any defined
benefit--complex point--benefit plan, calculation of a benefit
is sometimes exacerbated by a lot of factors that might have
occurred 10, 15 years in the past.
I can see the problems; I don't think a defined benefit
plan in the private sector would be allowed to go 9 years to
fix something. Three years seems like it's outside the normal
range; but it is a very difficult challenge, and so something
needs to be done, certainly, to make these calculations more
quickly so that the people aren't held up like that. That's an
incredible amount of time.
Senator Hagan. I asked Mr. Gotbaum about the premiums. Do
you see in your report--Ms. Bovbjerg, did you all talk about
the premiums?
Ms. Bovbjerg. Some years ago we looked pretty hard at
PBGC's finances; and you know, you do the math; it's premiums--
--
Senator Hagan. Right.
Ms. Bovbjerg. Its investment incomes, or its better funding
of plans so that if a company goes out of business and the
plans come to PBGC, they're better funded; they're more assets
associated with them.
The Deficit Reduction Act of 2005, I think, raised
premiums; and so it's about--I want to say it's around $40 a
participant, the flat rate; and it moves with inflation; and
there's another part, it's about $10 for every thousand of
underfunding. The underfunded plans have to put in some more as
well.
Right after that, the Pension Protection Act in 2006
strengthened the funding rules so that employers who sponsored
defined benefit plans would have less time to get to full
funding, and had certain range of assumptions that they had to
use.
The design was that when plans came to PBGC they would be
in better shape; so you wouldn't have the Bethlehem Steels,
frankly, who were fully funded 2 years before--close to it--
before their bankruptcy. By the time of bankruptcy they were
down to 30 or 40 percent.
Those things are designed to balance what flexibility
employers need with protecting the PBGC's fiscal integrity.
The problem was, this was all designed to take place at the
time of the market meltdown, and companies were under serious
stress; so those particular provisions have been delayed in
taking effect.
Our belief is that when they do take effect, it will
improve funding, and it will mitigate the risk for PBGC. Every
paper on the issue of premiums says that they need to be more
risk-phased because no insurance company on earth would operate
the way that we operate the PBGC.
Senator Hagan. Mr. Porter, also in your testimony, you
talked about the investment policy, and then the assumptions in
an older report on the reported deficit.
Mr. Porter. OK.
Senator Hagan. About the investment policy, you believe it
should be based on a diversified portfolio.
Can you tell me what changes--or we don't really know the
investment policy.
Mr. Porter. No. I certainly don't.
Senator Hagan. Right.
Mr. Porter. So I couldn't, therefore, prognosticate on what
the changes ought to be. Clearly, there needs to be a balance
of all the risks associated; it needs to have some longevity;
it needs to be executed in a way that isn't detrimental.
Long-term investments' policies have served the pension
community generally very well; and we would like to see some
stability in it. There needs to be a balance of plan sponsor's
needs because its premiums is going to be the protection of the
participants; it has to be the public perception, because
unfortunately, PBGC is very public, and the press has a view of
what it thinks is right or wrong, as well.
That shouldn't be the driver; the driver should be the
overall balance, so that we can maximize the return at an
acceptable level of risk.
Senator Hagan. I guess I'm surprised that we don't see what
the investment policy is.
Mr. Chairman, I know my time is out, but I think you've had
a good hearing, and we obviously have a lot to do in order to
improve the PBGC with going forward; and I know our new
director is certainly working on that.
Thank you.
Ms. Bovbjerg. May I jump in for a tiny second?
The Chairman. Yes.
Ms. Bovbjerg. We have a report underway that looks at
PBGC's investment policies and practices over time, and most
recently, that's coming out the end of February; and I think
that that would answer some of your questions.
Senator Hagan. Thank you.
The Chairman. Well, thank you all very much. I thank the
panel for being here, and for your testimony, and for your
work; and I thank the Senators who have participated here.
As I said, this is another in a series of hearings that
we'll be having on this committee regarding the broad overview
of retirement programs in America, and what's happening to
retirement programs.
This is obviously one big slice of it, right here, the
defined benefit pension programs, and the financial security
and ability of the PBGC to meet its obligations.
There are other elements of retirement security that this
committee's going to be looking at, but certainly things that
have come up today regarding PBGC are things that I'm going to
be discussing with Senator Enzi and other Senators on this
committee to see what action, if any, we want to take.
I think there are some elements that have come out in the
testimony today that I think compel us to do something about
the continuity and board's expertise, and it is that type of
thing that I think we need to take a very close look at.
I'll be discussing that with Senator Enzi and others to see
what action we might want to take; not this year, of course,
but sometime down the road.
Thank you all very much.
With that, the committee will stand adjourned.
[Additional material follows.]
ADDITIONAL MATERIAL
Prepared Statement of Senator Bingaman
Mr. Chairman, thank you for convening this morning's
hearing on an issue essential to the economic security of the
nearly 44 million Americans who participate in pension plans
overseen and insured by the Pension Benefit Guaranty
Corporation.
Although the prevalence of defined benefit plans has been
on the wane, those who remain covered by a DB plan deserve
protections of a well-managed overseer. Unfortunately, in
recent years, the PBGC has not lived up to this mandate. As the
Center for Public Integrity has found, over the past 2 years,
PBGC has lost Social Security numbers stored on an unsecured
storage drive, given erroneous information to lawmakers, and
failed its own financial audit. This has led PBGC's own
Inspector General, who is with us today, to conclude that
``PBGC did not have effective internal control over financial
reporting (including safeguarding assets) and compliance with
laws and regulations and its operations.''
I am grateful for the deep analysis conducted by many
policymakers and independent agencies to identify structural
flaws in PBGC's organization that have contributed to
mismanagement.
I am particularly appreciative of Senator Kohl's commitment
to this issue. His proposal embodies critical reforms:
expanding the PBGC Board from three to seven members; requiring
the PBGC to meet at least four times yearly; granting the
PBGC's advisory committee, its inspector general, and general
counsel direct access to the board; and preventing PBGC's
director from any involvement in hiring money managers or from
``participating in any matter that may have or appear to have a
conflict of interest.'' I look forward to joining with Senator
Kohl as a cosponsor of his bill when he reintroduces it in the
112th Congress.
I also look forward to working with you, Mr. Chairman, and
with Senator Enzi and all of our colleagues on this committee
to move reform legislation forward.
[Whereupon, at 12:03 p.m., the hearing was adjourned.]