[Senate Hearing 111-153]
[From the U.S. Government Publishing Office]
S. Hrg. 111-153
NO GUARANTEES: AS PENSION PLANS CRUMBLE, CAN PBGC DELIVER?
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HEARING
before the
SPECIAL COMMITTEE ON AGING
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
WASHINGTON, DC
__________
MAY 20, 2009
__________
Serial No. 111-6
Printed for the use of the Special Committee on Aging
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
index.html
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SPECIAL COMMITTEE ON AGING
HERB KOHL, Wisconsin, Chairman
RON WYDEN, Oregon MEL MARTINEZ, Florida
BLANCHE L. LINCOLN, Arkansas RICHARD SHELBY, Alabama
EVAN BAYH, Indiana SUSAN COLLINS, Maine
BILL NELSON, Florida BOB CORKER, Tennessee
ROBERT P. CASEY, Jr., Pennsylvania ORRIN HATCH, Utah
CLAIRE McCASKILL, Missouri SAM BROWNBACK, Kansas
SHELDON WHITEHOUSE, Rhode Island LINDSEY GRAHAM, South Carolina
MARK UDALL, Colorado
MICHAEL BENNET, Colorado
KIRSTEN GILLIBRAND, New York
ARLEN SPECTER, Pennsylvania
Debra Whitman, Majority Staff Director
Michael Bassett, Ranking Member Staff Director
(ii)
C O N T E N T S
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Page
Opening Statement of Senator Herb Kohl........................... 1
Statement of Senator Mel Martinez................................ 4
Panel of Witnesses
Charles E. F. Millard, Former Director, Pension Benefit Guaranty
Corporation, Washington, DC.................................... 3
Dallas Salisbury, President & CEO, Employee Benefits Research
Institute, Washington, DC...................................... 5
Statement of Barbara Bovbjerg, Director, Education, Workforce and
Income Security, U.S. Government Accountability Office,
Washington, DC................................................. 14
Statement of Rebecca Anne Batts, Inspector General, Pension
Benefit Guaranty Corporation, Washington, DC................... 39
Statement of Vincent Snowbarger, Acting Director, Pension Benefit
Guaranty Corporation, Washington, DC........................... 80
APPENDIX
Testimony submitted by Douglas J. Elliott, Center on Federal
Financial Institutions on A Guide to the Pension Benefit
Guaranty Corporation........................................... 107
(iii)
NO GUARANTEES: AS PENSION PLANS CRUMBLE, CAN PBGC DELIVER?
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WEDNESDAY, MAY 20, 2009
U.S. Senate,
Special Committee on Aging,
Washington, DC.
The Committee met, pursuant to notice, at 2:10 p.m. in room
SR-428A, Russell Senate Office Building, Hon. Herb Kohl
(chairman of the committee) presiding.
Present: Senators Kohl [presiding], Specter, Martinez,
Bennett, and McCaskill.
OPENING STATEMENT OF SENATOR HERB KOHL, CHAIRMAN
The Chairman. Good afternoon, and thank you all for being
here today. Today we are going to take a hard look at the
Pension Benefit Guaranty Corporation, which is responsible for
insuring the pensions of nearly 44 million Americans. The
Committee has grave concerns about PBGC's viability and whether
this agency currently has effective financial oversight.
Given the state of the economy, the question of PBGC's
viability is more urgent than ever. One in seven Americans
count on this agency to pay out their pension in the event that
their employer is unable to due to bankruptcy. As General
Motors teeters on the edge of insolvency, hundreds of thousands
of workers' pensions could soon become the responsibility of
PBGC, and though Chrysler has managed to maintain its pension
plan despite filing for bankruptcy, it may only be a matter of
time before PBGC will have to accept responsibility for that
pension plan as well.
PBGC is currently underfunded by over $33 billion, while
their duty to manage and pay out benefits is expanding.
Decisions made by PBGC management and a lack of oversight and
governance by previous PBGC boards have contributed to the
agency's financial condition. The Government Accountability
Office has indicated for years that the PBGC board members do
not have enough time or resources to provide the necessary
policy direction and oversight.
In 28 years, the full board has met only 20 times. The fact
that we could not get a representative of the PBGC board to
come to this hearing is a prime example of this. But the role
of PBGC is too crucial to allow its governance to slip through
the cracks.
The PBGC Inspector General released a report last week
detailing allegations that former PBGC Director Charles Millard
was improperly involved in the awarding of $100 million
contract to Wall Street firms. But the allegations against Mr.
Millard are merely a symptom of the bigger problem. I will soon
be introducing legislation to significantly improve the PBGC
board's governance oversight structure.
In the meantime, PBGC should reopen the bidding process for
the controversial $100 million contract, a process which
appears to have been improperly influenced the first time
around. Yesterday, I received a letter from Secretary of Labor
Hilda Solis, indicating that they are lucky to do so, which I
will enter into this hearing's record.
If the contract is not rebid, we will ask GAO Special
Investigations Unit to assist us in reviewing copies of PBGC-
related communication the committee has obtained from the Wall
Street firms that won the first contract. Finance Chairman Max
Baucus and Health Chairman Ted Kennedy, along with Ranking
Members Chuck Grassley and Mike Enzi, have also noted this
issue closely and will keep a close watch to ensure that PBGC
carries out the recommendations of its Inspector General. They
also have requested a further investigation into Millard's
involvement with these companies.
The role of the PBGC is a vital one, now more than ever.
For 44 million Americans with defined benefit pension plans,
PBGC is the only thing that stands between the secure
retirement they have worked so hard for and the prospect of
living without retirement security. So we must get the PBGC
back on track or face the possibility of absorbing these
obligations on behalf of taxpayers all over our country.
So we thank you all for being here today. We look forward
to your testimony. I will at this point introduce the witnesses
for this panel.
Our first witness will be Charles Millard, the former
Director of the PBGC. Prior to being appointed as PBGC's
Director, Mr. Millard held executive positions at investment
firms, such as Lehman Brothers and Broadway Partners. He was
also a member of the New York City Council, representing the
Upper East Side of Manhattan.
Our next witness will be Dallas Salisbury, the CEO and
President of the Employee Benefit Research Institute. He's
considered an expert on economic security and has served on the
ERISA Advisory Council, the PBGC Advisory Committee, the U.S.
Advisory Panel on Medicare Education, and the Board of
Directors of the National Academy of Social Insurance.
Next we'll be hearing from Barbara Bovbjerg of the U.S.
Government Accountability Office. Ms. Bovbjerg is a Director of
the Education Workforce and Income Security team, where she
oversees evaluative studies on aging and retirement income
policy, as well as the operators of the Social Security
Administration, the PBGC, and the Employee Benefit Security
Administration of the Department of Labor.
Then we'll hear from Rebecca Anne Batts, the Inspector
General for the Pension Benefit Guaranty Corporation. As
Inspector General, she directs the office charged with
overseeing PBGC's operations. Prior to her appointment, Ms.
Batts held various senior executive positions at the U.S.
Department of Transportation's Officer of Inspector General.
Our witness finally will be Vincent Snowbarger. Mr.
Snowbarger is the Acting Director of the Pension Benefit
Guaranty Corporation. Since joining the PBGC in 2002, he has
served in several executive positions, including Deputy
Director for Policy, and is currently the Deputy Director for
Operations.
Because we're taking testimony with regard to matters of
fact in this controversy, I'll be asking each of our witnesses
to take the oath, and so I ask you please to stand and raise
your right hand.
[Whereupon, the witnesses were duly sworn.]
The Chairman. Do you all swear that the testimony you're
about to give is the truth, the whole truth, and nothing but
the truth, so help you God? Thank you.
Mr. Millard, I'll turn to you first. I want to recognize
that you are here today with your attorneys, and we welcome
them here also with you. You have an opening statement, Mr.
Millard.
TESTIMONY OF CHARLES E.F. MILLARD, FORMER DIRECTOR, PENSION
BENEFIT GUARANTY CORPORATION, WASHINGTON, DC
Mr. Millard. I do not have an opening statement, Mr.
Chairman.
The Chairman. Thank you. Mr. Millard, what was your role at
PBGC, and how long were you employed there?
Mr. Millard. I've been advised by my counsel that I should
invoke my constitutional rights and decline to answer any and
all questions from the committee on this matter, Mr. Chairman.
The Chairman. Mr. Millard, it has been said that the
investment strategy you spearheaded at PBGC is overly risky.
What steps did you take to mitigate the risk associated with
the strategy?
Mr. Millard. I've been advised by my counsel, Mr. Chairman,
that I should invoke my constitutional rights and decline to
answer any and all questions from the committee on this matter.
The Chairman. Mr. Millard, the Inspector General has
reported that you were inappropriately involved in the
contracting process at PBGC. Would you respond to these
assertions?
Mr. Millard. I've been advised by my counsel, Mr. Chairman,
that I should invoke my constitutional rights and decline to
answer any and all questions from the committee on this matter.
The Chairman. We need to be sure that you, and not your
counsel, are asserting the right, and that you're clear that
you're invoking your right under the Fifth Amendment against
self-incrimination, being a witness against yourself, and
you're not using a formulation that leaves that overly vague.
You do understand that. I'm sure you do. So we do understand
from your responses that you will invoke your Fifth Amendment
right in response to all questions from this committee on this
subject.
Mr. Millard. Yes, sir.
The Chairman. Thank you, Mr. Millard. Let the record
reflect that you have availed yourself of the privilege
afforded you under the Fifth Amendment of the Constitution not
to give testimony that might incriminate you, and you certainly
have that right. The invocation of that right by every American
citizen should not and does not impose any guilt.
The committee respects your constitutional right to decline
and answer questions on that ground, although we certainly
would have liked to have been able to hear from you today. You
are correspondingly excused at this time.
Mr. Millard. Thank you.
The Chairman. Thank you, Mr. Millard. Before we move on to
our next witness, I would like to welcome Mel Martinez, the
Ranking Member on this committee, and ask him for his
statement.
STATEMENT OF SENATOR MEL MARTINEZ, RANKING MEMBER
Senator Martinez. Thank you very much, Mr. Chairman. Thank
you very much. I apologize for being a little tardy. The
Commerce Committee was also meeting. We appreciate your calling
this hearing today. One of the biggest concerns among seniors
today is a need to protect their pensions, especially given the
state of our economy. Every senior has a right to know whether
they will receive the benefits they were promised. Current
economic uncertainties has highlighted a need to address the
risk posed by several large firms teetering on the brink of
insolvency.
As lawmakers, we cannot stand by as the fate of the
pensions of many Americans remains uncertain. Fortunately, most
pensions are protected by the Pension Benefit Guaranty
Corporation. The PBGC is the pension manager of last resort and
has the unenviable task of cleaning up where others have
failed. Insolvent pensions that are turned over to the PBGC are
significantly underfunded, leaving the future benefit levels at
risk.
What I would like to see is fewer pensions being
underfunded and fewer pensions taken over by the PBGC. These
underfunded pensions have resulted in a $409 billion funding
shortfall in the U.S. pension system. The pensions of those
working for the Big 3 in Detroit, for instance, which include
auto manufacturers and the 46 largest suppliers, are
underfunded by $65 billion, with 2.1 million Americans relying
on these plans.
Seniors in Florida are at risk as well. Florida's the home
to more than 2 million seniors with pensions that could be
impacted by factors beyond their control, including a depressed
stock market and relaxed corporate governance.
How we got here and what led to these pensions being
underfunded is an open question that is being addressed by
other committees today. I look forward to hearing from the PBGC
acting director about what contingency plans are in place in
the event of further economic collapse. If one or more of the
Big 3 pensions winds up being taken over by the PBGC, what
plans are in place to ensure continued solvency and minimal
disruption to the pensioners?
The systems we've seen is not healthy in its current form
of legislation, such as--were to pass, the resulting increase
in pensions would only perpetuate these underfunded
multiemployer plans. The issue is only one of many concerns I
have with the bill.
Peripheral, but significant, and relevant to the hearing
today is the controversy involving the Director of PBGC, and we
have just seen his testimony today, or his inability to testify
today. While we face uncertainty in the near term, I applaud
the efforts by the PBGC in the wake of the previous challenges,
including the collapse of the steel industry. Collectively, we
can find solutions to these problems without placing a greater
burden on the taxpayers whose pensions remain insolvent or who
have no pension at all. Thank you, Mr. Chairman.
The Chairman. Thank you very much, Senator Martinez. We'll
now turn to our first witness, Dallas Salisbury, who I said is
the CEO and President of the Employee Benefit Research
Institute. We would appreciate if you would keep your remarks
to 5 minutes. If you have more to enter into the record, we'd
be happy to do that. Mr. Salisbury.
STATEMENT OF DALLAS SALISBURY, PRESIDENT & CEO, EMPLOYEE
BENEFITS RESEARCH INSTITUTE, WASHINGTON, DC
Mr. Salisbury. Chairman Kohl, Senator Martinez, it's a
pleasure to be here. I appreciate the invitation and the
opportunity to speak on a topic that is very important. As you
have noted, I started my career in Washington at the Department
of Labor in the Pension Benefit Guaranty Corporation.
The Chairman. Is your mic on?
Mr. Salisbury. It is on. I'll pull it closer. As you well
know, the PBGC is a guaranty program in its name, and I only
stress that point because unlike the FDIC and unlike most
insurers, the PBGC is not in a position on its own to create
underwriting standards to put funding requirements on plans and
other things.
In fact, when I was early at PBGC, we took a study under
advisement from the Congress called the Contingent Employer
Liability Insurance Program Study. We went to 102 insurance
companies around the world, including Lloyd's of London, and
all of them said that the program designed by the U.S. Congress
could not be underwritten by any insurer without very
significant changes, and as a result, that program was repealed
by the Congress.
In the early 1980's, as part of a privatization taskforce
of the advisory council of the PBGC, appointed by then-
President Reagan and chaired by two private sector insurance
executives, an effort was made to, in fact, privatize PBGC,
eliminate it as a governmental program, and move it into the
private market.
Again, over 100 insurance companies were invited to
describe to this group the underwriting standards that would be
necessary to, in essence, insure pension failures and to insure
essentially the solvency of American corporations. The two
insurance executives asked the White House to end the taskforce
efforts once they saw the underwriting standards, because it
became clear that this program could not be a workable
insurance program, as traditionally defined. It could be a
guarantee program, and the title underlines that.
I note that also, because of one point I make in my
testimony, which is that one of the primary causes of pension
unfunded liabilities, and as the PBGC testimony underlines, a
reason for a $7 billion increase that they've now announced in
the PBGC deficit is the actions by the Federal Reserve Board.
The holding down to near zero the interest rates available to
pension funds and available to the market created hundreds of
billions of dollars of total system liability.
So if the government and the Federal Reserve wanted pension
liabilities to go away, frankly, they would only need to raise
interest rates, and that would eliminate the $7 billion, plus
many billions more.
Thus it is the inability of pension fund sponsors, both to
control interest rates they use to value liabilities and to
command the equity markets to go up that led to the issues
faced today.
The PBGC, as noted, is responsible for a total system that
has unfunded liabilities that, by various estimates, ranged
between $400 and $500 billion. That underlines the future
challenges that will be faced by the PBGC. But the ultimate and
most important challenge is whether private employers will
continue to sponsor defined benefit retirement plans.
You ask in your question list whether strong employers were
likely to continue those programs, and I've underlined in the
testimony that numerous private sector surveys of employers
suggest that the movement that began 30 years ago away from
defined benefit plans, toward defined contribution plans, is
likely to continue in this country, as it is continuing in
nations around the world.
Ultimately, those surveys underline that even with the
Pension Protection Act of 2006's new funding standards, that
with interest rate fluctuations being managed by the Fed and
the government and held down, today's papers suggest the Fed
may hold interest rates to near zero for another two years.
Should they do that, you can anticipate and project in advance
there will be significant additional increases in the deficit
of the PBGC and in the unfunded status of private defined
benefit pension plans. Those will turn around if and when the
government changes interest rate policies.
So, in conclusion, defined benefit plans currently as noted
provide income to 23 percent of those over age 65. For those 65
to 69, 19 percent report such income. Average payments are
$2,500 per year. Medium payments are $9,000 per year. These are
an important and critical supplement to Social Security and
must be maintained.
There is a great deal of discussion about whether the
pension system can be maintained. The challenge for the
government is to manage interest rates and the economy while
recognizing they're intertwining with both PBGC liability and
pension liability. Thank you, sir.
[The prepared statement of Mr. Salisbury follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The Chairman. Thank you very much, Mr. Salisbury. Next,
we'll hear from Barbara Bovbjerg of the U.S. Government
Accountability Office. Ms. Bovbjerg.
STATEMENT OF BARBARA BOVBJERG, DIRECTOR, EDUCATION, WORKFORCE
AND INCOME SECURITY, U.S. GOVERNMENT ACCOUNTABILITY OFFICE,
WASHINGTON, DC
Ms. Bovbjerg. Thank you, Mr. Chairman. Good afternoon,
Senator Martinez, Senator Bennett. I'm pleased you invited me
here today to speak about the PBGC's financial challenges and
issues regarding its governance.
Created in ERISA in 1974, PBGC today insures the retirement
benefits of about 40 million Americans. My statement today is
based on reports that we've prepared over the last several
years on these topics, updated for new information. But first,
let me speak about the financial challenges.
Starting in 2002, PBGC's largest insurance program, the
single-employer program, was beset by claims resulting from
employer bankruptcies and the associated terminations of large
underfunded plans. Indeed, we put this program on our high-risk
list in 2003 and by 2004, the deficit exceeded $23 billion.
Since then, and until recently, economic conditions
favorable to employers and plans helped to reduce the PBGC net
deficit, and the 2006 passage of the Pension Protection Act had
the potential to strengthen plan funding in the future. Indeed,
as of September 2008, PBGC reported its deficit had shrunk to
around $11 billion. However, this lower deficit figure reflects
conditions that no longer exist. The financial market meltdown
and economic recession have increased the exposure PBGC faces
from financially distressed sponsors with large underfunded
plans, whereas in 2008, PBGC anticipated relatively few new
distress terminations.
By now, the picture is significantly worse. For example,
the pension plans of Chrysler and GM today pose considerable
financial uncertainty for PBGC. In the event that these
automakers cannot continue to maintain their plans--as in, say,
a bankruptcy scenario--PBGC may be required to take both the
plans and the responsibility for paying the benefits they owe.
The plans are thought to be underfunded by roughly $30
billion, which would increase PBGC's deficit substantially.
Further, absorbing these plans would almost double the number
of participants PBGC must serve and the assets that PBGC must
manage.
These aren't the only underfunded plans PBGC faces in the
next year or so. Plan sponsors are reeling from the economic
downturn, and their plan funding has doubtlessly weakened as
the value of financial assets has fallen. As Dallas points out,
liabilities have risen.
Further, although the Pension Protection Act was designed
to improve plan funding levels, legislation passed last
December delayed the implementation of the stricter funding
requirements. Although the change was intended to help
companies weather the current economic storm, still, plan
funding will be lower than it would otherwise have been, and
this too increases PBGC's exposure.
Also, PBGC recently altered its investment policy to
improve returns, but our work suggests that the higher risk
associated with such a policy needs more attention. For all
these reasons, we believe PBGC's financial challenges are
growing.
Let me now turn to PBGC's governance. Although PBGC has
taken some actions in response to our management
recommendations in the contracting and human capital areas, the
remaining unaddressed management issues will complicate the
corporation's ability to grapple effectively with the financial
difficulties ahead.
This makes governance all the more important, yet PBGC's
board, which is comprised of three Cabinet Secretaries, has
limited time and resources to devote to providing the policy
direction and oversight needed for this growing and
increasingly challenged corporation.
Although the board last year approved a new set of bylaws,
some critical decisions and processes go undocumented,
including approval and oversight of the various changes in
investment policies made over the years. Further, the
composition of the board means that the entire board turns
over, along with the PBGC director, when a new administration
takes office, which, of course, happened in January.
It's now May 2009. The last board meeting was in February
2008, meaning the new board has yet to meet. In 2007, we
recommended that the Congress restructure the board to expand
membership, stagger terms, and diversify expertise, and this
action continues to be urgently needed.
In conclusion, PBGC acts as crucial support for Americans'
retirement income security. The corporation will be challenged
as never before as it faces a deepening financial hole,
combined with an overwhelming administrative burden that will
doubtlessly require more PBGC staff and more contractors.
Yet, PBGC still has not made some of the strategic
improvements needed in its human capital management or its
contracting program, and its board is not yet positioned to
provide the attentive and sustained policy guidance that is
needed. So although improving PBGC governance will not by
itself solve the corporation's financial problems, such actions
could be critical to helping PBGC manage them. We urge Congress
to consider legislating these needed improvements as, indeed, I
understand you will be.
That concludes my statement, Mr. Chairman.
[The prepared statement of Ms. Bovbjerg follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The Chairman. Thank you very much, Ms. Bovbjerg. Now we'll
hear from Rebecca Ann Batts, who is the Inspector General for
the Pension Benefit Guaranty Corporation. Ms. Batts.
STATEMENT OF REBECCA ANNE BATTS, INSPECTOR GENERAL, PENSION
BENEFIT GUARANTY CORPORATION, WASHINGTON, DC
Ms. Batts. Good afternoon, Chairman Kohl, Ranking Member
Martinez, and Senator Bennett. My name's Rebecca Ann Batts, and
I'm the Inspector General of the Pension Benefit Guaranty
Corporation, Office of Inspector General. Thank you for the
opportunity to testify today about the work being done by our
office.
PBGC is facing many challenges, including the need to
address a potentially unprecedented influx of large defined
benefit pension plans. In my full written statement, I
acknowledgement PBGC's senior leadership for its engagement in
planning for the potential wave of new pension plan
trusteeships.
We appreciate your interest in this issue, as well as your
request that we monitor and report on PBGC's preparedness
strategy. We've initiated an audit in response to your request,
and plan to fast-track the most time-sensitive results of our
work to ensure that we provide PBGC, the PBGC board, and
Congress with timely and relevant information.
Last week, my office issued an audit report addressing the
serious misconduct of the former PBGC Director, Charles
Millard, in contracting for lucrative strategic partnerships.
The PBGC board reacted quickly and appropriately to our report,
and we concur in the corrective actions proposed by the board.
As requested by the committee, I'm providing the following
information to inform your committee and others about the
issues we identified in our audit.
Beginning with planning for the development of a new
investment policy, former PBGC Director Charles Millard became
intimately involved in the day-to-day details of the contracts
through which the new investment policy would be developed and
implemented.
Against the advice of senior leadership, Mr. Millard served
on evaluation panels with subordinate employees. Against the
advice of senior leadership, he participated directly in
developing the criteria for picking the winners of the
strategic partnership contracts. These three strategic
partnership contracts for the management of $2.5 billion in
assets went to three firms: Black Rock, Goldman Sachs, and
JPMorgan.
At the same time, he continued to represent PBGC before the
investment community and engaged in extensive phoning and
emailing with various Wall Street firms, including hundreds of
calls logged with the successful bidders for the strategic
partnership contracts.
Mr. Millard wanted big Wall Street firms for PBGC's
strategic partners. As part of his effort to establish the
criteria to be a successful bidder, he consulted with a Black
Rock managing directory about establishing a floor on the
number of employees that a firm needed to have in order to
compete for a strategic partnership. Mr. Millard explained that
he needed a cutoff figure so that he could wittle the field.
In response, the Black Rock executive proposed a specific
number and strategized about a way to eliminate certain types
of firms from consideration. Establishing standards
specifically to eliminate some firms from competition is
inconsistent with the former director's responsibility
established in regulation to conduct business with complete
impartiality.
Even though Mr. Millard should not have been talking to
bidders at the same time he was evaluating their proposals, he
communicated with some of them by phone and email. Mr. Millard
said these contacts were OK because these were his friends, but
that creates another problem and raises questions about
impartiality. The PBGC Ethics Handbook specifically notes
evaluating the bid of a friend as an example of behavior that
raises an ethical concern.
After the award of the strategic partnership contracts, a
Goldman Sachs executive provided extensive assistance to the
former director in his search for post-PBGC employment. The
assistance, which is documented in at least 29 emails, tracks
the Goldman Sachs executive's efforts to aid Mr. Millard
through personal meetings, strategic advice, introductions to
potential employers, and help with meeting arrangements.
Our audit results are largely based on documentary
evidence, primarily in the form of phone records and email
traffic. However, the impetus for our review of many of the
specific issues I've discussed today was a whistleblower
complaint. Reporting concerns about fraud, waste, or abuse to
the Inspector General requires a lot of courage. The task is
even more difficult when the issues of concern are subjective,
involving questions of fairness, if impartiality, or of
appearance.
I am grateful to the whistleblower who first reported the
questionable actions of the former director to my office. This
person made a choice that will help the PBGC board and PBGC
leadership make the changes needed to maintain the public's
trust. This person deserves our gratitude and thanks.
That concludes my statement, Mr. Chairman. I will be happy
to answer any questions you or the other members have.
[The prepared statement of Ms. Batts follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The Chairman. Thank you, Ms. Batts. Our final witness today
will be Vincent Snowbarger, who is the Acting Director of the
Pension Benefit Guaranty Corporation.
STATEMENT OF VINCENT SNOWBARGER, ACTING DIRECTOR, PENSION
BENEFIT GUARANTY CORPORATION, WASHINGTON, DC
Mr. Snowbarger. Thank you, Chairman Kohl, Ranking Member
Martinez, Senator McCaskill, and Senator Bennett. My name is
Vince Snowbarger and I'm the Acting Director of the Pension
Benefit Guaranty Corporation, or PBGC. I want to thank you for
the opportunity to appear today to discuss PBGC's financial
condition and its readiness to take on new challenges in these
turbulent economic times.
I want to emphasize that despite the current economic
slowdown and an increasing deficit, the corporation is able to
meet its benefit payment obligations, and will be able to for
many years to come. This is because benefits are paid in the
form of annuities, and over the lifetime of retirees, not as
lump sums. Nevertheless, over the long term, the deficit must
be addressed.
My testimony today will focus on four issue areas: PBGC's
governance structure, the agency's pension insurance program,
the deficit position PBGC currently faces, and its preparedness
to deal with a potential influx of plan terminations.
PBGC is a wholly owned Federal corporation with a three-
member board: the Secretary of Labor, who is our Chair, the
Secretaries of Commerce and the Treasury. PBGC is self-financed
and receives no tax revenues. PBGC guarantees pensions when
underfunded defined pension benefit plans terminate. PBGC
insures 44 million workers and retirees in 30,000 pension
plans. At the end of Fiscal Year 2008, PBGC was paying benefits
of about $4.3 billion per year to 640,000 individuals, and
another 634,000 will be eligible to receive benefits in the
future.
PBGC has been in a deficit position for most of its 35-year
history. At the end of Fiscal Year 1908, PBGC had an $11
billion deficit, with $75 billion in liabilities, and $64
billion in assets.
Unaudited results for the first 6 months of Fiscal Year
2009 show that our deficit has tripled to $33.5 billion. That
change in the deficit is primarily due to about $11 billion in
completed and probably terminations, $7 billion from a decrease
in the interest factor used to value liabilities, $3 billion in
investment losses, and $2 billion in actuarial charges for the
passage of time.
Large plan terminations have always been and continue to be
the most important factor in determining PBGC's workload as
well as its financial condition. Over the years, we have
adapted our processes to meet the challenges of a cyclical
workload, including the ability to scale up when we experience
a rapid increase in plan terminations. There were relatively
terminations in Fiscal Year 2008. However, during the first
half of Fiscal Year 2009, PBGC took in 75,000 new participants,
over three times the number for all of last year.
Still, this workload is far less than the record influx of
more than 800,000 new participants in the 4-year period from
2002 to 2005. Those terminations included a number of large
steel and airline plans. PBGC met the challenge of that
increased workload.
However, to give you some idea of the potential magnitude
of the future workload, if the plans of some of the troubled
auto companies are terminated, the number of new participants
coming to PBGC in Fiscal Year 2009 or Fiscal Year 2010 could
exceed $1 million. Those terminations would almost double the
number of participants PBGC serves and significantly increase
the trust fund assets and PBGC deficit.
The cyclical nature of terminations and the impact of large
terminations have required PBGC to develop mechanisms to handle
major workload fluctuations. Contracts with our paying agent,
field benefit administration offices, actuarial firms, and
customer contact center allow us to adjust staffing based on
workload, and historically, this has worked well.
When we take over very large plans, we often retain the
services of staff for the prior plan administrator in order to
ensure a smooth transition. Currently, PBGC departments are
preparing for an increase in contracting activity, additional
hiring, and additional space and equipment needs. PBGC's
technology systems have been analyzed to verify that they're
ready to handle large workload increases, and we've developed
specialized team approaches to process and administer the auto
plans, should that become necessary.
Finally, we are collecting and reviewing plan documents of
large potential terminations to become familiar with the
benefit provisions. PBGC's Fiscal Year 1909 and 1910 budgets
provide for additional spending authority if we take in more
than 100,000 new participants. We are working closely with OMB
in anticipation that we will need to use that authority for the
first time.
While PBGC has the capability to take on large plans,
continuation of a plan is generally best for all stakeholders.
We closely monitor troubled companies with underfunded plans
and negotiate for plan protections that will limit participant
and PBGC exposure and keep the pension plans going.
Companies that sponsor pension plans have a responsibility
to live up to the promises they make to their workers and
retirees. However, when a company can no longer keep its
promises, workers and retirees need the assurance of a strong
and prepared PBGC.
Thank you, Mr. Chairman, and I would be happy to answer
questions.
[The prepared statement of Mr. Snowbarger follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The Chairman. Thank you very much, Mr. Snowbarger. We'll
now hear from Senator Martinez, then Senator Bennett, and then
Senator McCaskill.
Senator Martinez. Thank you, Mr. Chairman. Ms. Bovbjerg,
GAO made recommendations to the PBGC's Board of Directors on
the appropriateness of the investment strategy and asset mix
that the agency is currently employing. Is this normal in the
course of what you do into your analysis of their portfolios
and so forth, or are there circumstances that brought you to do
that?
Ms. Bovbjerg. What we were asked to do by the Senate Help
and Finance Committees was to look at the process by which the
investment policies had been developed and implemented. As we
were doing that work, this new policy was being developed, and
so we looked at what the contractor had done in performing
their estimates on risks and returns.
The concern that we had was actually not about the return
side. We tested the model and felt that the return estimates
were robust. It was the risk side that we felt was really not
being acknowledged. So we had tried different assumptions and
could see that risk might vary widely, depending on what
assumptions you used.
Our concern more fundamentally was that that risk was not
acknowledged. Only the return side was acknowledged. It wasn't
a balanced presentation. The board then would have made a
decision to go with the investment policy without having all
the information on the potential impact of that investment
policy.
Senator Martinez. Do you think that this is just emblematic
of the culture of PBGC, or was this just a moment in time,
given the new guidelines, or why do you think there was that
unawareness, I guess, or reticence to acknowledge risk?
Ms. Bovbjerg. The information was not provided to the
board, as we understand it. I think that a more active board
might perhaps have delved into that more closely. We also
documented that prior boards had not really overseen the
implementation of the policy, so when an investment policy
changed, it wasn't always implemented for a variety of reasons,
very quickly, but none of that was really documented, that the
agency had gone to the board and briefed them on this and
received permission to do that.
Our concern was that the board was not involved enough in
this very important decision, and we do think that changes in
the governance structure would help. But I do want to emphasize
that our concern about the investment policy is really a long-
term concern. We do think that they should reevaluate with the
information about risk, as well as returns. But they should
think about it as a long-term strategy and not simply something
that changes every few years in response to market changes.
Senator Martinez. So you think they need to have a long-
term approach that is sound and in keeping with good investment
practices, but not one that is temporal in terms of changing,
depending on what market conditions may exist from month to
month or year to year?
Ms. Bovbjerg. We think that they should make the decision
that way. But I want to call to your attention that the PBGC
investment policy has changed every four to six years in the
past, so it has swung between a focus on equities to a focus on
bonds. We think also that if there was more stability on the
board and not just political appointees from the
administration, that there were staggered terms, that it would
be less likely that that would happen.
Senator Martinez. Good point. Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Martinez. Senator Bennett.
Senator Bennett. Mr. Chairman, thank you. I'm sorry I was
late. Thank you for holding this hearing. It's of great
importance to my state, Colorado. Ten percent, roughly, of the
employees in our workforce are employed by companies that the
PBGC insures.
Thank you all for being here today. I appreciate it. I
wanted to start with Ms. Batts. I echo your expression of
gratitude for the whistleblower in this case, and I--it's very
hard to stick your neck out in the face of supervisors who can
control your career and your livelihood. I wonder whether or
not you can assure the committee that steps have been taken to
protect this whistleblower in this particular situation.
Ms. Batts. Yes, sir, we can. We're very cognizant of our
responsibility to ensure protection of our whistleblowers.
Senator Bennett. OK. This person is a hero for bringing
this forward, and we need more, not less, of this. When I read
your testimony, I found it particularly troubling that it
appears that the prior director was trying to change the
criteria for the size of the firms that could solicit--or
respond to the RFP after the RFP had already been written; is
that correct?
Ms. Batts. Let me clarify. The efforts to work on the size
of the firm, the communications with Black Rock about what size
firm would be appropriate, were made before the mandatory
criteria for the RFP were developed. These were communications
that occurred before they were developed.
Senator Bennett. OK. Thank you. I just wondered, Ms.
Bovbjerg's observation about the governance structure seems
almost--I think can't be disputed. I mean, having three Cabinet
Secretaries be the board of the institution seems to me to be
imagining a world that we don't really exist in, and I wonder
whether the others here have any view on that and what we might
think about, in terms of governance structure. Mr. Salisbury.
Mr. Salisbury. Senator, I'll just speak to my time at the
agency, both as an employee, and then when I was on the
advisory committee. The structure in this is true today, but
it's been true since 1975. Essentially, each of the Cabinet
members has designated a so-called board representative who,
during the early years, was generally the general counsel of
the Department of Labor, Commerce, and the Assistant Secretary
Financial Markets at Treasury.
That then shifted over time. In the most recent time
period, for example, at the Department of Labor, it became the
Assistant Secretary for the Employee Benefit Security
Administration, which one could argue creates its own set of
conflicts, because at that point, the person responsible for
administering Titles I and II of ERISA is also essentially, one
could argue, supervising the PBGC on behalf of the Secretary of
Labor, who chairs the board.
But in all of the times I've been involved with the agency,
the board meets, as has been pointed out, very little. Most of
the activity is with these individuals. In the case of the last
administration, because it went to the Assistant Secretary
level, it actually was people who had Senate confirmation. For
most of the history of the agency, it was individuals who had
never had Senate confirmation. It was fairly low-level staff
members that were doing the coordination.
You could go back to making this a formal part of an
executive branch agency, which would put it into a more normal
governance structure. One of the proposals that was looked at
by an advisory council about 18 years ago was to actually have
it become a commission model. All of the SEC or the FTC, the
FEC, which would be two or three appointed commissioners, to
give it a more permanent governance structure.
If I might, the one other thing I'd comment on is the
investment policy issue. Having been at the agency during the
first two revisions, and having been on the advisory committee
during another revision of that policy, I think the most common
determination of that flipping in policy is whether the
executive director of the agency has a background in insurance
or has a background in active equity investment management.
When Jim Lockhart, now the head of the agency overseeing
Fannie and Freddie, was the head of the agency, he had come out
of an insurance background. He moved the agency toward what is
termed a more bond immunization match liabilities to the
asset's philosophy, which is more traditional for an insurance
company and how they would function relative to life annuities,
which is what PBGC is, in essence.
As opposed to the last two executive directors, the current
director came straight out of the private equity active
investment field; his predecessor, who had sort of a split
life, is now at a large insurance company. The most extreme
policy was the most recent move to a much more heavy equity
strategy.
So I think the appointment of the executive director and
the background of the executive director, in the time I've been
involved with the agency, which is since two months after it
was first created, has been heavily influenced, almost
overwhelmingly by the background of the executive director. It
is also influenced by the background of the individuals at the
Treasury Department, which is the primary agency involved in
setting investment policy, as one would argue is appropriate.
Senator Bennett. Mr. Snowbarger, do you have a view? I know
I'm putting you in a difficult position, but I--
Mr. Snowbarger. Thank you for recognizing that, Senator.
Well, we cooperated fully with the GAO report when it came out,
and actually, at the request of the Chairman of our board, we
also hired a private consultant to come in and do the similar
kind of study, which that report came out, I believe it was
about--well, I mean, it was last summer, and it pointed out
different alternatives for doing it.
I think you would find this rather unique in our structure
within the Federal Government. There are a number of Federal
corporations, there are a number of commissions, as was pointed
out by Mr. Salisbury, but we're rather unique. When you look at
the composition of our board structure, both in terms of its
size and its composition, it's rather unusual.
Senator Bennett. Thank you, Mr. Chairman.
The Chairman. Thank you very much, Senator Bennett. Senator
McCaskill.
Senator McCaskill. Thank you. First let me start with the
notion to our intrepid Inspector General. Congratulations on
this work. This is the kind of report that makes your
professional challenges worthwhile. Thank you. The rules that
were broken allegedly by the former director, I assume that the
people that were on the other end of those conversations were
breaking rules also, correct?
Ms. Batts. In our audit report, we make it clear that as
part of the audit, we did not identify any evidence of criminal
activity on the part of the bidders. One of the things that
made this situation very unusual was the unusual role that Mr.
Millard had taken. Normally conversations with the Director of
PBGC would not be inappropriate, because normally the Director
of PBGC would not have taken this intimate involvement in the
procurement process. So--
Senator McCaskill. Well, wouldn't the person at Black Rock,
if the head of PBGC is talking to them and says, ``Give me a
floor. I'm trying to wittle these people out,'' wouldn't that--
I mean, people at Black Rock, I would think, knowing all of the
rules and regulations surrounding--
Ms. Batts. You would think.
Senator McCaskill [continuing]. These kinds of processes,
wouldn't there be some kind of need on their part to blow a
whistle on somebody?
Ms. Batts. It's a good question.
Senator McCaskill. Well, I think we should ask that
question. Can you identify who the people are at Black Rock
that were part of this conversation and the people at the other
firms that were having these conversations? I think we've got
investments in a lot of them right now.
Ms. Batts. Yes.
Senator McCaskill. We're shareholders, the American people,
in some of them.
Ms. Batts. As I mentioned in my written statement in
response to a bipartisan request from Senators Kennedy and Enzi
of the Health Education and Labor and Pension Committee, and
Senators Baucus and Grassley from the Finance Committee, they
requested that we open an investigation. We take the concerns
they expressed very seriously, and we've done so. We've had
discussions with the Department of Justice on the matter, and
it's not appropriate for us to go forward with it.
Senator McCaskill. OK. Let me talk about contracting a
little bit. There has been a secret growth in the size of the
Federal Government through contractors. PBGC is a great example
of the growth in contractors. There's hundreds--more than 130,
I think, different audit recommendations that have been ignored
over the years as it relates to contracting processes and
procedures.
I'm looking at various charts and graphs in the GAO report
that I think is over a year old now. Yeah. Well, it's not quite
a year old. The excuse that's given for contracting is that
your workload is unpredictable. But yet, in the same report, it
acknowledges that your workload always goes up one to two years
after an economic crunch.
I assume, Mr. Snowbarger, you all are anticipating your
workload going up.
Mr. Snowbarger. Yes.
Senator McCaskill. Significantly?
Mr. Snowbarger. Yes.
Senator McCaskill. So do you have plans right now to add
employees as opposed to contractors?
Mr. Snowbarger. I wouldn't say as opposed to contractors.
We'll probably add both employees and contractors.
Senator McCaskill. Why is it--I assume the contractors
working side-by-side, like in most government agencies, are
making more than the government employees?
Mr. Snowbarger. I really couldn't speak to that. I don't
know.
Senator McCaskill. Who would know, if you don't?
Mr. Snowbarger. Our contracting officer and our personnel--
Senator McCaskill. Well, that would be something I think
the committee should be interested in and I'm certainly
interested in. Two employees doing the exact same function at
nearby desks, and I'm looking at one of these. I think in your
org chart, you have 933 contractors under the Chief Operating
Officer, under the COO, which means your benefits,
administration, and payments department, your actuarial
services division, your retirement services division, your
processing division, and your problem resolution office, you
have four times as many contractors as you have FTEs.
I would like to know how much those contractors are making
as opposed to the government employees. I think it's a notion
that makes--it sounds good, but in reality, I think we don't
drill down far enough to see if these contract employees are
saving anybody money. Let me look specifically at your lawyers.
Do you have internal counsel?
Mr. Snowbarger. Yes.
Senator McCaskill. How many do you have?
Mr. Snowbarger. We have two divisions of lawyers. They're
primarily lawyers. We have an Office of Chief Counsel that
handles all our litigation. I believe--about 45 lawyers in the
Office of Chief Counsel. Chief counsel handles our litigation
on cases and does our negotiation on cases, as well.
We have an Office of General Counsel that basically
provides the general law advice for the firm, about 30 lawyers
in that department.
Senator McCaskill. How much do you spend annually on
outside counsel?
Mr. Snowbarger. We spend a considerable amount of money on
outside counsel because we are facing outside counsel from the
companies that are going under. In other words, you might take
the Chrysler situation for example. There are all kinds of
special lawyers--not just Chrysler's lawyers, but Chrysler's
bankruptcy lawyers and Chrysler's merger and acquisition
lawyers, et cetera. There are certain kinds of expertise that
it is less expensive for us to hire through counsel than it is
to maintain on staff.
Senator McCaskill. I would love--have you done a cost-
benefit analysis on that?
Mr. Snowbarger. I believe we have.
Senator McCaskill. I'd love to see that cost-benefit
analysis. Because I know what those outside lawyers are
charging you an hour, and I know how much lawyers make in
government, and I have a bias there, since I've been a lawyer
in government most of my legal career. There are some really
smart lawyers that are in government that are great value, and
you all are going to need specific expertise going forward, I
think, over the next 5 to 10 years, and I would love to see
what you're spending on inside counsel versus outside counsel
and the cost-benefit analysis that's been done in that regard.
Mr. Snowbarger. Sure.
Senator McCaskill. Tell me what your plans are in terms of
the use of contractors going forward. Have you looked at the
recommendations that have been made by GAO, and do you have
plans going forward that would actually begin to implement
these recommendations in terms of contracting?
Mr. Snowbarger. Partial. There are some of the
recommendations that we disagreed with. I don't know that I
could go through those right now, but we can provide you with
our response to the GAO's report. But yes, we've already
started implementing a lot of those. We've restructured our
procurement department, for instance. We have those divisions
set up now so that we've got people looking solely at the
policy about whether or not we hire contractors or not and on
what basis, plus the side of the contracting department that
would actually be doing the procurements and the administration
of those procurements.
Senator McCaskill. OK. I'll stick around, Mr. Chairman, and
ask some more questions later. Thank you.
The Chairman. Thank you very much, Senator McCaskill. Ms.
Batts, on the findings in your report, do you think the
investment services contract that was awarded to Goldman Sachs,
JPMorgan, and Black Rock should be rebid?
Ms. Batts. We have not done audit work specifically to
assess whether the strategic partnership contracts are the best
way to assist in accomplishing PBGC's investment objectives,
although that is one of the objectives of ongoing work.
In a comprehensive implementation plan for its investment
policy, PBGC needs to figure out whether the strategic
partnerships fit in their overall strategy.
The Chairman. So you're saying they should be rebid, should
not, you're not sure, you haven't recommended, what?
Ms. Batts. OK, I'm sorry. I'm very troubled by the
contracts, and our recommendation to the board was that they
consider seriously whether the contracts needed to be
terminated. I think that's what you're referring to by being
rebid.
The Chairman. Yes.
Ms. Batts. I was pleased to see Mr. Snowbarger's
recommendation that the three contracts be terminated. In terms
of rebid, I don't know whether strategic partnerships are the
way to go or whether PBGC might choose some other way to move
forward.
The Chairman. I'll get back to you in a second. Mr.
Snowbarger, do you concur with what Ms. Batts has said?
Mr. Snowbarger. Well, as she indicated, I did recommend to
the board that the contracts be terminated. In terms of a
rebid, I think it's a little early to know whether or not that
fits into the new board's investment policy strategy. They want
to take time and naturally want to review what was done over
the past, and once they've made that determination, strategic
partnerships may or may not fit into achieving those overall
goals.
I think that being the case, it's probably just better at
this point to terminate them, and if the board decides that
strategic partnerships are a tool for implementing a new
investment policy, then we can go back out and rebid.
The Chairman. OK. Ms. Batts, PBGC has 130 pending
recommendations from you. Why hasn't PBGC taken action to
implement these recommendations? Have you taken steps to inform
the Board of Directors of all your recommendations?
Ms. Batts. There are many reasons as to why PBGC hasn't
implemented the 130. Many will take a length of time to
complete and are in process. We've recently begun a concerted
effort with PBGC management to ensure that appropriate
corrective action plans have been developed. For example, PBGC
needs to integrate its financial systems, and this will require
a number of changes in systems. I would note, however, that
this recommendation was first raised in the 1997 financial
statement audit.
In the interest of streamlining processes, my predecessor
made a decision to rely upon PBGC to track recommendations and
follow-up. Though this can and does work in many Offices of
Inspector General, we found that it did not work well for us.
This spring, we returned to the prior method where the Office
of Inspector General controls the tracking of the
recommendations, and have established our own tracking system
for open recommendations.
Some of the recommendations have been briefed to the board
in the past. For example, many relate to the significant
deficiencies in the financial statement audit internal control
report. We ordinarily would not brief many of the
recommendations to the board, only those that are most
significant.
The Chairman. Thank you. Mr. Salisbury, given the current
economic situation, do you believe PBGC will be able to meet
its financial obligations today and on into the future?
Mr. Salisbury. Senator, I think that as even the revised
numbers from the PBGC indicate, and even if you take the
testimony today describing the worst case, with all of the auto
industry plans coming in, and then you look at the annuity
nature of the payouts, the fact is that there are participants
in these programs that are, let's say, 30 years of age, who
wouldn't be eligible for a benefit for 35 years, and that's
when payments would come. Does PBGC, even under the most dire
scenarios, have assets that will grow sufficiently to pay
benefits for some number of decades, at least two decades,
possibly longer?
The issue is, in the very long term, related to whether
there will be other defined benefit plans that continue to
exist that are able to continue paying some level of premiums.
The real problem for PBGC is when the assets run out, which I
see as occurring a long time in the future. That doesn't say
that one should wait to look at it, but it does create that
temptation.
The second issue that relates to this is why I mentioned
the interest rate environment; if one were to simply revalue
PBGC's liabilities and defined benefit pension liabilities,
based on the assumption of moving back to more traditional
market interest rates, including Federal Reserve policy, that
alone would dramatically improve the funded status of many
pension plans.
For lack of a better example, one large U.S. company that
before the market meltdown was 137 percent funded, by January,
was 98 percent funded. Based on its public statements, if you
simply moved the government interest rate back up, that plan
would instantly move to 114 percent funded simply because the
interest rate changed.
So I think that until we know where the economy comes out
after 11, 10, and 11, and where interest rates level out,
there's an awful lot of uncertainty in what the status of PBGC
is, and frankly, what the status of defined benefit plans, per
se, is.
The Chairman. Thank you. Ms. Bovbjerg, as you said, the
board has not met since February of 2008. Of course, a lot has
happened in our economy since then that has an impact on PBGC.
In your opinion, what steps does Congress need to take to be
sure that the board is, in fact, able to discharge its
obligations, which I assume you regard as essential?
Ms. Bovbjerg. Well, absolutely. I think we said in my
statement, now more than ever. We really--there are two issues
really with the current board structure. One is that it's not
structured for members to give the kind of attention and
oversight that we think the corporation needs. It's the number.
There's only three. It's that they're Cabinet Secretaries,
although, as Dallas points out, they do have appointees under
them who represent them when there are board meetings. They
have staff who work with them.
The Big 3 are really not able to give the corporation the
kind of attention that it deserves and now increasingly needs.
We looked at a number of other government boards. They average
seven members. Also, PBGC commissioned a study from McKinsey
that looked at all these different options for different types
of boards. Nearly all of them have a little more horsepower on
them.
The other thing is that everyone's term ends
simultaneously. There's no continuity, and that's really a
problem for this corporation. If the deputy position had not
been made permanent about a year ago, we wouldn't have Mr.
Snowbarger here to run PBGC either. So it's really important to
have staggered terms.
We also think that the intent of the three Cabinet
Secretaries was to provide a diversity of perspective. You have
Labor there to represent workers, Commerce to represent
business, Treasury to represent finance. That's a really good
idea. In fact, we think that there should be more diversity on
the board to include certain types of expertise from other
areas--financial expertise, labor expertise, governance.
We think that it would enhance greatly the board's ability
to oversee, for example, contract issues, because if there is a
director who is at least giving an appearance of a not
transparent fair contracting process, the board needs to be
alert to that and should not have to rely solely on a
whistleblower to bring that information to the floor.
The Chairman. Thank you. Senator Martinez?
Senator Martinez. I've got to tell you, I agree completely
with your assertion regarding the board. I don't believe that a
Cabinet officer is ever going to be in a position to be hands-
off enough to be an effective member of a board such as PBGC
needs to have. This is not a board where it's merely policy
setting. This is a board about oversight and nuts and bolts of
a large investment operation.
So I really believe that that is a key element here in
what, going forward, needs to occur, which is a hands-on board
that is not Cabinet officers, who I know, from personal
experience, are incapable of giving the kind of time and
attention that a board like this would need. As you said,
they'll delegate it to someone within the department who might
not be senior enough to really have the stature, perhaps, to be
an effective board member. Plus you leave it only on three, and
that's not very many to be overseeing such a large amount of
money with such an important responsibility.
But to that effort, let me just say on the audit report, it
appears pretty clear that the fundamental PBGC that you
uncovered was a merger of functions between being the executive
director and then immersing himself in the procurement process
and, in a very detailed way, impacting it. As part of his job,
he would have to talk to people that, by necessity, once he
became also the procurement officer, he was then prohibited
from really being in contact with.
I understand that that is a policy recommendation, and I
want to ask Mr. Snowbarger whether that situation has been now
clearly defined, because I also saw a letter from Mr. Millard
where he alleges that he consulted with the counsel at the time
and was told that there was no reason why he could not do all
of that. I find that hard to understand, but given that
situation, I just wondered if this is now corrected and is no
longer an issue. I see that the board said that it agreed with
a recommendation and will work with PBGC to develop appropriate
guidelines. Are those guidelines now in place?
Mr. Snowbarger. Since the letter just came out yesterday,
the answer is no, but there is no problem. This acting director
will not be involved in the contracting process.
Senator Martinez. I understand.
Mr. Snowbarger. It's just a matter of papering up. We agree
with the recommendation of the Inspector General, and we'll
work with the board to paper that decision.
Ms. Batts. To speak to the comment that you made about Mr.
Millard's comment about the legal review that was performed by
general counsel, it's important to remember that at the time
the general counsel did that legal review, she was not aware
that he was having contact with bidders. She was not aware of
some of the events that had occurred before the RFP was
developed. So--
Senator Martinez. Well, I wasn't trying to judge Mr.
Millard's actions here--
Ms. Batts. Certainly. Certainly.
Senator Martinez [continuing]. Because I think there will
be other forums for that. I was just trying to make sure that
we had in place policies, since there seemed to be some
confusion on his part, and I saw the recommendation, and I
wanted to make sure that it would be followed upon.
Ms. Batts. Certainly.
Senator Martinez. That's all. Thank you very much.
The Chairman. Thanks, Senator Martinez. Senator McCaskill?
Senator McCaskill. Mr. Salisbury, what worries me the most
about this whole sit--and, by the way, Mr. Snowbarger, you do
have a really hard job, because you took over, and there is no
board, right, at the moment you took over?
Mr. Snowbarger. At the moment I took over, there was no
board. We obviously have a board at this point in time.
Senator McCaskill. You have a board now. But taking over
this agency with literally no board is rocky terrain,
especially under the circumstances which you took over. So I am
cognizant of the challenges you faced.
I'm curious, Mr. Salisbury, I think most people in business
would say that defined benefit plans are going away, that we're
not going to have many companies 20, 30, 40 years from now that
have defined benefit plans. As more and more defined benefit
plans go away, then, as you mentioned, the source of funding
for this agency goes away.
Have there been--are you aware or is anyone else on the
panel aware of any of the long-term studies that have been
done, assuming, worst-case scenario, that we no longer have
defined benefit plans in our major automobile manufacturers,
and that most of that liability is shifted over to this agency?
Assuming that we continue on the same track, I don't recall
ever seeing statistics of what the drop-off has been over the
last 5 years, but I know it's been significant.
What is--who's going to pay the premiums to keep this
agency going 30, 40 years from now? Where is that revenue
source going to be?
Mr. Salisbury. You end up, Senator, with a couple of
interesting statistical quirks. One is that even though the
number of defined benefit pension plans which, at its high
point was at about 185,000, and is now down at about 29,000, or
a little less than that, in spite of that amount of decline,
the total number of participants on whom PBGC has been
collecting premiums has actually gone up very slightly and is
now just short of 44 million.
Senator McCaskill. Because of mergers and acquisitions?
Mr. Salisbury. It's a combination of mergers, of
acquisitions, of premiums being paid on so-called deferred
vested participants that represent about 25 percent of those on
whom premiums are being paid. Another 25 percent are those in
retirement on whose behalf the plan still pays. When I was at
the Labor Department, it was a 95/5 rule: 95 percent of
participants were in 5 percent of the plans. It's almost that
pronounced today.
Second factor, in the last 20 years, many of the defined
benefit plans, the Pension Benefit Guaranty Corporation, and
the Internal Revenue Service made a ruling, which has since
been endorsed by Congress, that so-called cash balance plans
that look like a defined contribution plan to the participant,
would legally be declared to be defined benefit plans. This is
because of the way the benefit accrues, even though almost
everyone who leaves those plans gets a single-sum distribution,
not a life income annuity.
Those plans promise very low benefits. The contribution
rates are very, very low. On a conference call earlier today I
was told by one of the consulting firms that most of the
companies sponsoring those plans have reduced the additional
interest crediting they give to individual participant accounts
to zero in order to hold down the PPA 2006 liabilities and
costs. Some plans are being frozen, but most of them are being
continued.
The interesting thing is that with about 30 percent of PBGC
participants now in those types of very, very low-cost plans
low cost means low benefits--there is a significant premium
flow, an area where the cost of the plans can be very
effectively managed by the employer. This is unlike traditional
DB plans, the other 70 percent of the universe, where the
employer doesn't have this ability.
In that realm, the large employer plans, we have seen
enterprises like IBM freeze all of those defined benefit plans.
But IBM, at least based on stock value and what the market's
done, looks like it will be a secure company; it is likely to
maintain those plans, as will many other companies.
They keep them for an interesting reason. They tend to keep
them because they essentially have gone to insurance companies,
in many cases when the plan is overfunded--there's more than
enough money to pay all the benefits. They ask the insurance
company, ``If we simply give you money so that you take over
all of the funding obligation--that would cause premium
responsibilities to disappear as well--how much would you
charge us?''
The insurance companies generally would charge them far
more than what the companies believe it will cost them to
maintain the plan themselves. So you have many companies with
frozen plans that do not do that. Now, the reason I note that
is because right now, interest rates are being fairly heavily
managed by the Federal Reserve. One would argue they always
are, but they're being managed very low right now. If the
market for interest rates come back, the economy comes back,
plans move back to overfunded status, and we were to have a
spike in interest rates such that companies, as they have done
twice before in the last 30 years, hit a so-called interest
rate sweet spot, suddenly there would be a tremendous financial
advantage in doing a so-called sufficient termination of the
plan. Then everybody gets their pensions, the company is done
with the obligation, PBGC has no liability, but they now lose
the guaranteed premium flow. You could see a significant loss
of plans that are currently frozen, a very significant
proportion that hit that sweet spot, plans would go away.
Senator McCaskill. What percentage would you say are frozen
right now that, if that sweet spot was attained, that--
Mr. Salisbury. Depending on which--the government data is
now about 3 years old, but the last time the government looked
at it, it was about 30 percent of what would be the premium
base.
Senator McCaskill. Mr. Snowbarger, is there--internally are
there discussions about the premium flow into the future? I
mean, is this something that your organization is down in the
weeds, trying to figure this out?
Mr. Snowbarger. Well, again, because our premiums and our
client base are all determined by Congress, it would be a
matter of just looking at, well, what's really going to hit and
when? We don't have much control over how that occurs. We have
asked Congress for higher premiums, and we got some increase in
premiums in the Pension Protection Act. We've also asked for
authority to set premiums so that we could adjust those
premiums based on the risk that the company actually poses to
us, and we've not had that authority given to us.
So, I mean, there are requests that we've made to try to
manage that deficit over time. At this point, again, Congress
has not responded to those in a positive way.
Senator McCaskill. Going--
Senator, if I could just quickly note, I mentioned in my
testimony a former chief economist of the PBGC, Richard
Ippolito, and he did do a book and has done a lot of work
looking at what he describes is the death spiral that would
occur here.
So there is work that has been done, including so-called
Monte Carlo modeling, looking at these issues. The PBGC, in its
PIMS model that is mentioned in their testimony, does have a
reasonable capability to model for the types of scenarios
you're describing, where that's something that you desire to
have done, speaking on behalf of the agency.
Senator McCaskill. He loves it, I can tell. Mr. Snowbarger,
finally, clearly according to Mr. Salisbury, we've had an
investment strategy that was driven, to some extent, by the
experience of the director. I'm not sure, based on my knowledge
of organizations and their investment strategy, if that is the
wisest course. What is your--I know that you are struggling
with whether or not to cancel these contracts and reevaluate,
but what is your recommendation going to be to the board about
what the investment strategy should be going forward, and where
should that recommendation actually come from?
Mr. Snowbarger. Well, again, I've--in my term at PBGC, I've
had directors that have gone both ways, more fixed-income-based
and more equity-based. As Mr. Salisbury pointed out, it kind of
swings back and forth. It swings back and forth with particular
leaders. It doesn't necessarily follow party lines. It really
has more to do with the experience.
I think part of what you're getting at with board structure
and part of what GAO is getting at with a continuity in a board
structure would give you a little more stability, so that any
new director coming in is going to have some direction from
above, OK, if you want to tweak, we can go a little bit this
way or a little bit that way, but you wouldn't have these 180-
degree swings in the investment policy itself.
In terms of what my recommendation might be to the board,
I'm going to wait for the new director to come on board. I've
not had discussions with my current board about what their
concerns are about this investment policy. Again, it is not
that unusual, if you look back across PBGC's history, to have a
more equity-based kind of investment policy.
I think the questions that were raised by the GAO when the
policy first was announced, the Congressional attention that it
garnered after that report, and then the economy last fall, I
think it clearly brought into question, wow, is this a good
economic strategy?
Well, if you take the admonition, again, of Mr. Salisbury,
if you think about this over a long period of time and you make
certain assumptions about PBGC's responsibility to fill that
hole, and you make certain assumptions about whether or not
PBGC will ever get the authority to use premiums to fill that
hole, I'm not sure what other alternative you're left with. In
fact, I think Peter Orszag, when he was the director of the
Congressional Budget Office, in doing his analysis of PBGC's
strategy, was very similar to the conclusions that GAO came up
with, but he did raise the question, if you don't have premium
authority and you don't have underwriting authority, and you
have this hole, how do you fill it?
Senator McCaskill. Right. Well, I have thousands of auto
workers in my state that are out of work, and it is a tragedy,
what is happening to them and their families. When I see them,
a lot of them grab me, physically grab me, and look in my eyes,
and say, ``Is my pension OK?'' Not to put any pressure, but I
look at them and I say, ``Your pension's OK.''
I think the responsibility of this agency is very intense.
Over the next 24 to 48 months, you need to be a rock, because
these families are looking for one to cling to. They've worked
hard. They deserve what they've been promised. I hope that all
of the recommendations that have been made by the IG and the
GAO are taken as a priority, and that your agency moves forward
through this obviously little bit of a black mark here, as we
make sure we're there for these folks. It's only right.
Mr. Snowbarger. I'm sure.
Senator McCaskill. Thank you for having the hearing, Mr.
Chairman.
The Chairman. Thank you very much, Senator McCaskill. I
want to thank you very much for being here today, folks. The
Pension Benefit Guaranty Corporation is obviously a very
important, critically important government entity. We need to
be certain that it's sound heading into the future, that its
governance and administrative structure really does work on
behalf of the American people.
You've contributed a lot today to getting us on that path,
and we are going to follow through on your recommendations,
along with some of our own. I'd like to hope that better days
are ahead for the PBGC. Thank you so much for being here. Thank
you all for coming.
[Whereupon, at 3:30 p.m., the hearing was adjourned.]
A P P E N D I X
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