[Background Material and Data on Programs within the Jurisdiction of the Committee on Ways and Means (Green Book)]
[Program Descriptions]
[Section 14. The Pension Benefit Guaranty Corporation]
[From the U.S. Government Printing Office, www.gpo.gov]



Explanation of the Corporation and Its Functions
	Plan Termination Insurance
	Plan Termination
Financial Condition of the PBGC
	Claims from Underfunded Plans
Budgetary Treatment
Future Financial Status of the PBGC
Legislative History
	Single-Employer Plans
	Multiemployer Plan Insurance Program


	The Pension Benefit Guaranty Corporation (PBGC) was 
established under title IV of the Employee Retirement Income Security 
Act of 1974 (ERISA) (88 Stat. 829, Public Law 93-406) to insure 
private pension beneficiaries against the complete loss of promised 
benefits if their defined benefit pension plan is terminated without 
adequate funding. The PBGC receives no funds from general tax 
revenues. Operations are financed by insurance premiums set by
Congress and paid by sponsors of defined benefit plans, investment 
income, assets from pension plans trusteed by PBGC, and recoveries 
from the companies formerly responsible for the trusteed plans.


	The PBGC is a government-owned corporation. A three-member 
board of directors, chaired by the Secretary of Labor, administers 
the Corporation. The Secretary of Commerce and the Secretary of the 
Treasury are the other directors. ERISA provides for a seven-member 
Advisory Committee, appointed by the President, for staggered 3-year 
terms. The Advisory Committee advises the PBGC on issues such as 
investment of funds, plan liquidations, and other matters.


Defined Benefit and Defined Contribution Plans
	There are two basic kinds of pension plans: "defined benefit" 
and "defined contribution" plans. Under a defined benefit plan, 
employees receive a fixed benefit at retirement prescribed by a 
formula set forth in the plan. The employer makes annual contributions 
to the plan based on actuarial calculations designed to ensure that 
the plan has sufficient funds to pay the benefit prescribed by the 
formula. Under a defined contribution plan, no particular benefit 
is promised. Instead, benefits are based on the balance of an 
individual account maintained for the benefit of the employee. The 
benefit received by an employee at retirement is generally dependent 
on two factors: total contributions made to the plan on the 
employee's behalf during the employee's participation in the plan, 
and the investment experience of the amounts contributed on the 
employee's behalf.  Under either type of pension plan, employees also 
may be permitted to make contributions.
	Under a defined contribution plan, the employee bears all the 
risk of poor investment performance of the assets invested in a plan. 
Whether the funds are invested well or poorly, the employee gets at 
retirement only what was contributed plus the amount actually earned.
	Under a defined benefit plan, the employer bears more of the 
risk of loss. The Internal Revenue Code and ERISA contain minimum 
funding standards that require the employer to make contributions to 
a defined benefit plan to fund promised benefits. Thus, for example, 
if the plan experiences poor investment performance, actuarial 
miscalculations, or low benefit estimates, the employer will be 
required to make additional contributions to the plan. However, the 
minimum funding rules provide for funding over a period of time, and 
do not require that the plan have assets to pay all the benefits 
earned under the plan at any particular time. Thus, it is possible 
for a defined benefit plan to terminate without having sufficient 
assets to pay promised benefits. The PBGC insures defined benefit 
plan benefits up to certain limits to protect plan participants in 
the event of such a termination. However, the PBGC may not protect 
all benefits promised under a plan so that even under a defined 
benefit plan, the employees bear some risk of loss.  An additional 
benefit available to plan participants aged 55-64 who are receiving 
pensions from PBGC is a tax credit equal to 65 percent of the premiums 
they pay for health insurance.
	The total number of private defined benefit plans is less 
than the number of private defined contribution plans.
	Beginning in the early-1990s, participants in defined 
contribution plans exceeded those in defined benefit plans.  
Similarly, in the mid-1990s, assets held in defined contribution plans 
surpassed those held in defined benefit plans.
	The operations of the insurance program, and insurance limits, 
are described below. Defined contribution plans are not insured by 
the PBGC.

Single-Employer and Multiemployer Plans
	Defined benefit plans insured by the PBGC fall into two
categories: single-employer plans and multiemployer plans. 
Multiemployer plans are collectively bargained arrangements maintained 
by more than one employer. Single-employer plans, whether or not 
collectively bargained, are each maintained by one employer. Non-
collectively-bargained plans maintained by more than one employer are 
classified as single-employer plans.

	The risk to the PBGC posed by single-employer plans is 
different from that posed by multiemployer plans. Generally, single-
employer plans are more vulnerable to the risk of underfunding due 
to financial weakness of the sponsoring employer; the PBGC is more 
vulnerable to the risk that a single employer will be unable to make up 
the difference between funded and promised benefits. Issues concerning 
insurance of multiemployer plans are more likely to concern the 
allocation of liabilities as firms enter and leave the participating 
	The PBGC insures the benefits of nearly 44 million pension 
plan participants, including active workers and retirees. Of these, 
78 percent, or just over 34 million, are covered by approximately 
31,000 single-employer pension plans, and 22 percent, or about 
9.5 million, are covered by approximately 1,700 multiemployer plans.

Other Requirements for PBGC Coverage
	The PBGC covers only those defined benefit plans that meet 
the qualification requirements of section 401 of the Internal Revenue 
Code. These are also the requirements that plans must meet in order 
to receive the significant tax benefits available to qualified 
pension plans.
	Generally, to be qualified under the Internal Revenue Code, a 
pension plan must be established with the intent of being a permanent 
and continuing arrangement; must provide definitely determinable 
benefits; may not discriminate in favor of highly compensated 
employees with respect to coverage, contributions or benefits; and 
must cover a minimum number or percentage of employees.
	Pension plans specifically excluded from insurance by the PBGC 
include government and church plans, defined contribution plans, plans 
of fraternal societies financed entirely by member contributions, 
plans maintained by certain professionals with 25 or fewer 
participants, and plans established and maintained exclusively for 
substantial owners.


Single-Employer Plans

An employer can voluntarily terminate a single-employer plan only in 
a standard or distress termination. The participants and the PBGC 
must be notified of the termination. The PBGC may involuntarily 
terminate a plan.

Standard Terminations --A standard termination is permitted only if 
plan assets are sufficient to cover benefit liabilities. Generally, 
benefit liabilities equal all benefits earned to date by plan 
participants, including vested and nonvested benefits (which 
automatically become vested at the time of termination), and 
including certain early retirement supplements and subsidies. Benefit 
liabilities also may include certain contingent benefits (for 
example, plant shutdown benefits). If assets are sufficient to cover 
benefit liabilities (and other termination requirements, such as 
notice to employees, have not been violated), the plan distributes 
benefits to participants. The plan provides for the benefit payments 
it owes by purchasing annuity contracts from an insurance company, 
or otherwise providing for the payment of benefits, for example, by 
providing the benefits in lump sum distributions.
	Assets in excess of the amounts necessary to cover benefit 
liabilities may be recovered by the employer in an asset reversion. 
The asset reversion is included in the gross income of the employer 
and also is subject to a nondeductible excise tax. The excise tax is 
20 percent of the amount of the reversion if the employer establishes 
a qualified replacement plan, or provides certain benefit increases 
in connection with the termination. Otherwise, the excise tax is 
50 percent of the reversion amount.

Distress Terminations--If assets in the plan are not sufficient to 
cover benefit liabilities, the employer may not terminate the plan 
unless the employer meets one of four criteria necessary for a 
"distress" termination:

	The contributing sponsor, and every member of the controlled 
group of which the sponsor is a member, has filed or had filed 
against it a petition seeking liquidation in bankruptcy or any 
similar Federal law or other similar State insolvency proceedings;

	The contributing sponsor and every member of the sponsor's 
controlled group has filed or had filed against it a petition to 
reorganize in bankruptcy or similar State proceedings.  This criteria 
also is met if the bankruptcy court (or other appropriate court) 
determines that, unless the plan is terminated, the employer will be 
unable to continue in business outside the reorganization process and 
approves the plan termination;

	The PBGC determines that termination is necessary to allow 
the employer to pay its debts when due; or

	The PBGC determines that termination is necessary to avoid 
unreasonably burdensome pension costs caused solely by a decline in 
the employer's work force.

	These requirements, added by the Single Employer Pension Plan 
Amendments Act of 1986 (SEPPAA) and modified by the Pension Protection 
Act of 1987 (PPA), and the Retirement Protection Act of 1994 (RPA) are 
designed to ensure that the liabilities of an underfunded plan remain 
the responsibility of the employer, rather than the PBGC, unless the 
employer meets strict standards of financial need indicating genuine 
inability to continue funding the plan.

Involuntary Terminations--The PBGC may terminate a plan involuntarily, 
either by agreement with the plan sponsor or pursuant to a court 
order. The PBGC may institute such proceedings only if the plan in 
question has not met the minimum funding standards, will be unable to 
pay benefits when due, has a substantial owner who has received a 
distribution greater than $10,000 (other than by reason of death), or 
the long-run loss to the PBGC with respect to the plan may reasonably 
be expected to increase unreasonably if the plan is not terminated. 
The PBGC must terminate a plan if the plan is unable to pay benefits 
that are currently due. A court may order termination of the plan in 
order to protect the interests of participants, to avoid unreasonable 
deterioration of the plan's financial condition, or to avoid an 
unreasonable increase in the PBGC liability under the plan.

PBGC Trusteeship--When an underfunded plan terminates in a distress 
or involuntary termination, the plan effectively goes into PBGC 
receivership. The PBGC becomes the trustee of the plan, takes control 
of any plan assets, and assumes responsibility for liabilities under 
the plan. The PBGC makes payments for benefit liabilities promised 
under the plan with assets received from two sources: assets in the 
plan before termination, and assets recovered from employers. The
balance, if any, of guaranteed benefits owed to beneficiaries is paid 
from the PBGC's revolving funds (see below).

Employer Liability to the PBGC--Following a distress or involuntary 
termination, the plan's contributing sponsor and every member of that 
sponsor's controlled group is liable to the PBGC for the excess of 
the value of the plan's liabilities as of the date of plan termination 
over the fair market value of the plan's assets on the date of 
termination. The liability is joint and several, meaning that each 
member of the controlled group can be held responsible for the entire 
liability. Generally, the obligation is payable in cash or negotiable 
securities to the PBGC on the date of termination. Failure to pay 
this amount upon demand by the PBGC may trigger a lien on the 
property of the contributing employer's controlled group for up 
to 30 percent of its net worth. Obligations in excess of this amount 
are to be paid on commercially reasonable terms acceptable to 
the PBGC.

Benefit Payments--When an underfunded plan terminates, the benefits 
that the PBGC will pay depend on the statutory guaranty, asset 
allocation, and recovery on the PBGC's employer liability claim.

Guaranteed Benefits--Within certain limits, the PBGC guarantees any 
retirement benefit that was nonforfeitable (vested) on the date of 
plan termination other than benefits that vest solely on account of 
the termination, and any death, survivor or disability benefit that 
was owed or was in payment status at the date of plan termination. 
Generally only that part of the retirement benefit that is payable 
in monthly installments (rather than, for example, lump sum benefits 
payable to encourage early retirement) is guaranteed. Retirement 
benefits that commence before the normal age of retirement are 
guaranteed, provided they meet the other conditions of guarantee. 
Contingent benefits (for example, early retirement benefits provided 
only if a plant shuts down) are guaranteed only if the triggering 
event occurs before plan termination.

	There is a statutory ceiling on the amount of monthly 
benefits payable to any individual that may be guaranteed. This 
ceiling, which is indexed according to changes in the Social Security 
wage base, is $3,664.77 for the year 2003 for a single life annuity 
payable at age 65. This limit is actuarially reduced for benefits 
payable before age 65, or payable in a different form.

	The reduction in the maximum guarantee for benefits paid 
before age 65 is 7 percent for each of the first 5 years under age 
65, 4 percent for each of the next 5 years, and 2 percent for each 
of the next 10 years. The reduction in the maximum guarantee for 
benefits paid in a form other than a single life annuity depends on 
the type of benefit, and if there is a survivor's benefit, the 
percentage of the benefit continuing to the surviving spouse and the 
age difference between the participant and spouse.

	For example, consider a retiree who, at plan termination in 
2003, is age 60 and whose spouse is 2 years younger. The participant 
is receiving a joint and 50 percent survivor's benefit (a benefit that 
continues to a surviving spouse upon the death of the participant at 
a reduced level of 50 percent). In this case, the maximum guarantee 
applicable to the participant is $2,101.01 per month [$3,664.77 X 0.90 
(joint and survivor benefit) X 0.65 (participant age) X 0.98 (spouse 
2 years younger)].

	The guarantee for any new benefit, including benefits under 
new plans and benefits provided by amendment to already existing plans, 
is phased in over 5 years following creation of the benefit.

Asset Allocation--Assets of a terminated plan are allocated to pay 
benefits according to a priority schedule established by statute. 
Under this schedule, some nonguaranteed benefits are payable from 
plan assets before certain guaranteed benefits. For example, benefits 
of participants who have been in pay status for more than 3 years 
have priority over guaranteed benefits of participants not in pay 
status. Section 4022(c) Benefits--The PBGC also is required to pay 
participants a portion of their unfunded, nonguaranteed benefits 
based on a ratio of recovery on the employer liability claim to the 
amount of that claim.

	As a result of the asset allocation and section 4022(c) 
benefits, reimbursement to the PBGC for its payment of guaranteed 
benefits may be less than the total value of assets recovered from 
the terminated plan.

Multiemployer Plans
	In the case of multiemployer plans, the PBGC insures plan 
insolvency, rather than plan termination. Accordingly, a 
multiemployer plan need not be terminated to qualify for PBGC 
financial assistance, but must be found to be insolvent. A plan is 
insolvent when its available resources are not sufficient to pay the 
plan benefits for the plan year in question, or when the sponsor of a 
plan in reorganization reasonably determines, taking into account the 
plan's recent and anticipated financial experience, that the plan's 
available resources will not be sufficient to pay benefits that come 
due in the next plan year.

	If it appears that available resources will not support the 
payment of benefits at the guaranteed level, the PBGC will provide 
the additional resources needed as a loan. The PBGC may provide loans 
to the plan year after year. If the plan recovers from insolvency, it 
must begin repaying loans on reasonable terms in accordance with 
	The PBGC guarantees benefits under a multiemployer plan of the 
same type as those guaranteed under a single-employer plan, but a 
different guarantee ceiling applies. The Multiemployer Pension Plan 
Amendments Act of 1980 (Public Law 96-364, referred to as MPPAA), 
established a benefit guarantee limit for participants in 
multiemployer plans equal to the participant=s years of service 
multiplied by the sum of (1) 100 percent of the first $5 of the 
monthly benefit accrual rate and (2) 75 percent of the next $15 of 
the accrual rate. For a participant with 30 years of service under the 
plan, the maximum PBGC-guaranteed benefit was $5,850 per year. The 
Consolidated Appropriations Act of 2001 (Public Law 106-554), signed 
into law on December 21, 2000, increased the benefit guarantee in 
multiemployer plans to the product of a participant=s years of 
service multiplied by the sum of (1) 100 percent of the first $11 of 
the monthly benefit accrual rate and (2) 75 percent of the next $33 
of the accrual rate. For someone with 30 years of service, this raised 
the guaranteed limit to $12,870. The old benefit guarantee formula 
remains in effect for participants in multiemployer plans that 
received financial assistance from PBGC at any time during the 
period from December 22, 1999, to December 21, 2000.
	The MPPAA requires that PBGC conduct a study every 5 years 
to determine whether changes are needed in the multiemployer premium 
rate or guarantee. The next study is due in 2005.



	According to its most recent annual report, the PBGC's 
multiemployer plan insurance program is in sound financial condition. 
Assets exceeded liabilities by $158 million at the end of fiscal 
year 2002.
	However, the larger single-employer program suffered its 
largest 1-year financial loss in the 28-year history of the 
Corporation. The net loss of $11.4 billion for the year caused the 
program to swing from a surplus position of $7.7 billion in fiscal 
year 2001 to a deficit position of $3.6 billion for fiscal year 2002. 
This is the result of several large plan terminations in 2002.
	The PBGC=s assets are comprised of premiums collected, assets 
recovered from terminated plans and recoveries from employers, and 
accumulated investment income. The PBGC=s liability for future 
benefit payments is the (discounted) present value of the stream of 
future benefit payments PBGC is obligated to pay participants and 
beneficiaries of terminated plans and plans booked as probable 
terminations. The current deficit does not create an immediate 
crisis for the PBGC, which will be able to continue paying benefits 
for a number of years.


	Through the end of fiscal year 2002, the PBGC's single-
employer program had incurred net claims of $9.8 billion (see 
table 14-1). This includes PBGC's largest single loss of about 
$1.9 billion with the termination of the LTV pension plans.
	The PBGC's net claims equal the portion of guaranteed benefit 
liabilities not covered by plan assets or recoverable employer 
liability. These claims will eventually have to be covered through 
premiums, earnings on PBGC assets, or other sources of revenue.
	The claims against PBGC have increased considerably over its 
history. Within that trend, there has been substantial annual 
variability due to the sporadic terminations of very large 
underfunded plans.  Two major industrial sectors-steel and airline 
transportation-have produced over half of all claims in the single-
employer program and represent 8 of the top 10 claims against the 



	Table 14-1 demonstrates the growth in net claims over the 
Corporation's history. PBGC reported net claims, not including 
probable terminations, of $3.2 billion in 2002. This represents over 
32 percent of all net claims in the single-employer program and is an 
increase of almost 3 times the level in 2001.

	In addition, PBGC faces probable net claims of $6.3 billion 
for 41 plans that are expected to terminate after fiscal year 2002. 
This includes the termination of plans of two major steel companies 
in December 2002BNational Steel and Bethlehem Steel, with claims of 
$1.3 and $3.7 billion respectively. If the remainder of the net 
probable claims actually terminate in 2003, PBGC will report a second 
record year and total net claims will exceed $15 billion.
	As shown by table 14-2, the number of single-employer plan 
terminations that result in claims against the PBGC is a tiny 
fraction of all plan terminations. Over PBGC=s history, terminations 
of underfunded plans have made up less than 2 percent of all 


	The sources of financing for PBGC are per-participant 
premiums collected from insured plans, assets in terminated 
underfunded plans for which the PBGC has become trustee, investment 
earnings, and amounts owed to the PBGC by employers who have 
terminated underfunded plans. In addition, PBGC has the authority to 
borrow up to $100 million from the Treasury.

Single-Employer Premiums
	An employer that maintains a covered single-employer defined 
benefit pension plan must pay an annual premium for each participant 
under the plan. Initially set at $1 per participant, the per-
participant premium was raised to $2.60 beginning in 1979, and then 
raised again by SEPPAA to $8.50 beginning in 1986. The PPA, contained 
in the Omnibus Budget Reconciliation Act of 1987, raised the basic 
premium to $16, and imposed an additional variable rate, or risk-
related, premium on underfunded plans. The variable rate premium was 
initially set at $6 per each $1,000 of the plan's unfunded vested 
benefits, up to a maximum of $34 per participant. Accordingly, the 
maximum premium was $50 per participant.	

	The Omnibus Budget Reconciliation Act of 1990 (OBRA 1990) 
increased the basic premium to $19, and the variable rate premium to 
$9 per each $1,000 of the plan's unfunded vested benefits, up to a 
maximum of $53 per participant. Thus, beginning in 1991, the maximum 
premium was $72 per participant. OBRA 1990 did not change the ratio of 
revenue raised by the basic and variable rate portions of the premium.

	The Retirement Protection Act of 1994 (RPA) did not change 
the $19 basic per participant premium. However, the $53 per 
participant variable rate premium cap was phased out over a 3-year 
period beginning in 1994. The variable rate premium is now completely 
uncapped. RPA also changed the way underfunding is calculated. 
Effective for 1995 plan years, liabilities have to be calculated 
using a standard mortality table. Effective for plan years beginning 
on or after July 1, 1997, liabilities are calculated using an 
interest rate of 85 percent of the spot rate for 30-year Treasury 
securities (an increase from the current 80 percent).  In the future, 
plans will be required to use a new mortality table to be prescribed 
by the Secretary of Treasury for certain funding purposes. At that 
time the interest rate will rise to 100 percent of the Treasury spot 
rate and a requirement to use fair market value of plan assets 
(rather than actuarial value) will become effective. The Job Creation 
and Worker Assistance Act of 2002 increased the interest rate to 
100 percent of the rate for 30-year Treasury securities for plan years 
beginning after December 31, 2001, and before January 1, 2004.

PBGC's single-employer premium income equaled $787 million in 2002.

Multiemployer Plan Premiums
	The premium for multiemployer plans was initially $0.50 per 
participant. The MPPAA raised the premium to $1.40 for years after 
1980. This premium was set to increase gradually to its current 
level, $2.60. The PBGC=s multiemployer premium income equaled 
$25 million in 2002. 



Assets from Terminated Plans
	When the PBGC becomes trustee of a terminated plan, it 
receives control of any assets in the plan. These assets are placed 
in one of two trust funds (one for multiemployer plans, one for 
single-employer plans).

Employer Liability

	An employer that terminates an underfunded defined benefit 
plan is liable to the PBGC for certain amounts. Before the changes 
made by SEPPAA, an employer's liability was generally capped at 
30 percent of the employer's net worth. SEPPAA removed this limit, 
leaving employers whose liability would have been capped liable for 
an additional share of unfunded benefit commitments above 30 percent 
of net worth. The PPA further increased employer liability, leaving 
employers liable for all amounts up to 100 percent of unfunded 
benefit liabilities.

Investment Income
	The PBGC maintains two separate financial programs, each 
consisting of a revolving fund and a trust fund, to sustain its 
single-employer and multiemployer plan insurance programs. Its 
revolving funds consist of collected premiums and income resulting 
from investment of the premiums and is constrained to investments 
in U.S. Treasury securities. The revolving funds had a value of 
$1.7 billion as of September 30, 2002.
	The trust funds consist of assets received from all terminated 
plans of which the PBGC is or will be a trustee, and employer 
liability payments. These assets are constrained to investment in 
domestic equities and real estate (up to a 5-percent maximum). The 
net market value of the trust funds was $9 billion as of September 
30, 2002.
	Chart 14-1 diagrams the relationship between the PBGC's 
financing and its payment of guaranteed benefits to plan participants.


	Since 1981, administrative expenses of the PBGC and the 
benefit payments to participants in plans under the PBGC's trusteeship 
have been counted as Federal outlays. Certain receipts of the 
agency--including premium payments, interest on balances in the 
revolving fund, and transfers to the revolving fund from the trust 
fund--offset PBGC expenses in the Federal budget. Liabilities for 
future benefit payments and other accruals are not taken into account. 
In each year since 1981 (when the program was first included in the 
Federal budget) the effect of the PBGC has been to reduce overall 
Federal outlays (see table 14-3).  During this period, the PBGC 
reported receipts in excess of benefit payments and administrative 
costs by a cumulative total of about $12.3 billion. In years before 
1981, Federal accounts for the PBGC also would shown annual inflows 
exceeding expenses in each year of program operation.


	At the end of fiscal year 2002, the single-employer program 
recorded its single largest loss with the termination of the LTV 
pension plans. The program also reported its largest 1-year financial 
loss of $11.4 billion. While the deficit of $3.6 billion already 
includes the losses absorbed from the National Steel and Bethlehem 
Steel pension plans, there is the potential for additional losses from 
underfunding  in plans sponsored by financially weak companies.

	Not all pension underfunding represents likely claims upon 
PBGC's insurance. The PBGC's analyses disclose reasonably possible 
losses of just over $35 billion as of September 30, 2002, compared 
to the previous year's projection of $11 billion. In both years, over 
one-half of the potential exposure was attributable to the air 
transportation and the steel sectors. These two industrial categories 
represent combined reasonably possible losses of $17 billion in 
fiscal year 2002 compared with just over $6 billion in fiscal 
year 2001.



	The future financial condition of the pension insurance 
program is highly uncertain because it depends largely on how many 
private pension plans terminate and on the amount of underfunding in 
those plans. Both factors are hard to forecast accurately. Moreover, 
as was discussed above, a few pension plans with extremely large 
unfunded liabilities have dominated the PBGC=s past claims, and its 
future may likewise depend significantly on the fate of a few large 
plans, making liabilities even more difficult to predict. Future 
terminations will be influenced by overall economic conditions, by 
the prosperity of particular industries, by competition from abroad, 
and by a variety of factors that are specific to particular firms - 
such as their competitive position in the industry, their agreements 
with labor groups, and the assessments of their financial prospects 
that are necessary to obtain credit. In addition, PBGC's losses with 
respect to future terminations will depend on how well companies 
fund their plans, and on the PBGC's position in bankruptcy 



PBGC uses a stochastic model--the Pension Insurance Modeling System 
(PIMS) to evaluate its exposure and expected claims. PIMS portrays 
future underfunding under current funding rules as a function of a 
variety of economic parameters. The model recognizes the uncertainty 
in companies' chances of future bankruptcy and the uncertainty in key 
economic parameters (particularly interest rates and stock returns). 
It simulates the claims that could develop under thousands of 
combinations of economic parameters and bankruptcy rates.

	Under the model, median claims over the next 10 years will 
be about $1.85 billion per year (expressed in today=s dollars); that 
is, half of the simulations show claims above that amount and half 
below. The mean level of claims (or average claim) is higher, at 
approximately $2.25 billion per year, because there is a chance under 
some scenarios that claims could reach very high levels. For example, 
under the model there is a 10 percent chance that claims could exceed 
$4.3 billion per year.
	PIMS projects PBGC's potential future financial position by 
combining simulated claims with simulated premiums, expenses, and 
investment returns. The median outcome is a $9.6 billion deficit in 
2012 (in present value terms), while the mean outcome is a $12.6 
billion deficit.
	The median projected financial position is considerably 
lower than that reported in 2001 ($8.4 billion surplus in 2011 in 
present value terms). The actual experience of the last year 
approaches the most severe end of the range of possible outcomes. 
For example, last year's combination of poor financial returns in 
PBGC-covered plans with a decline in interest rates generated an 
increase in underfunding that was exceeded in less than 5 percent of 
last year's simulations of the year 2002.
	The model also shows the wide range of outcomes that are 
possible for PBGC over the next 10 years. In particular, it estimates 
nearly a 10 percent chance that the deficit could be as large as 
$43.8 billion and a 10 percent chance that PBGC could have a surplus 
of $15.6 billion or more. Adverse outcomes are most likely if the 
economy performs poorly, in which case PBGC may experience both large 
claims and investment losses.



	The PBGC was established under the Employee Retirement Income 
Security Act of 1974 (ERISA) for the purpose of insuring benefits 
under defined benefit pension plans. As originally structured, in the 
case of a single-employer plan, termination of a plan triggered the 
PBGC insurance mechanism. The contributing employer was liable to the 
PBGC for unfunded insured benefits up to 30 percent of the net worth
of the employer. If unfunded insured liability exceeded this amount, 
the PBGC had to absorb the excess and spread the loss over insured 
plans. Employers generally faced no restrictions on their ability 
to terminate an underfunded plan.

The Single Employer Pension Plan Amendments Act of 1986 (SEPPAA)
	Congress passed SEPPAA (enacted as title XI of the 
Consolidated Omnibus Budget Reconciliation Act of 1985 (Public Law 
99-272)) in response to rapidly growing PBGC deficits. SEPPAA raised 
the per-participant premium from $2.60 to $8.50, established certain 
financial distress criteria that a sponsoring employer and every 
member of the employer's controlled group must meet in order to 
terminate an underfunded plan, expanded PBGC's employer liability 
claim, and created a new liability to plan participants for certain 
nonguaranteed benefits.

Pension Protection Act of 1987 (PPA)
	In 1987 Congress passed the Pension Protection Act of 1987 
(PPA; as part of Public Law 100-203) which contained additional 
measures to strengthen PBGC's long-term solvency. The act increased 
PBGC's basic per participant premium for single-employer plans to 
$16 and added a variable rate premium for these plans tied to the 
degree of plan underfunding (capped at $53 per participant). The act 
also expanded PBGC's employer liability claim to include all plan 
benefit liabilities, provided that PBGC share a portion of its 
ecoveries from employers with plan participants, and required 
faster funding of plan benefits to reduce PBGC's exposure in the 
event of plan termination. The act also contained other provisions 
relating to the plan termination distress criteria, the bankruptcy 
treatment of unpaid employer contributions, PBGC's lien authority, 
and various pension funding requirements.

Retirement Protection Act of 1994 (RPA)
	In response to the persistent growth in pension underfunding, 
Congress passed significant reforms in the Retirement Protection Act 
(RPA enacted December 8, 1994) as part of the GATT legislation (the 
Uruguay Round Agreements (Public Law 103-465)). RPA provisions 

1.	Minimum Funding Standards--RPA strengthened the pension 
funding rules for underfunded plans by accelerating funding, 
eliminating double counting of certain funding credits, and 
constraining the assumptions that may be used to calculate pension 
contributions. RPA also required severely underfunded plans to 
maintain minimum levels of liquid assets. RPA contained certain 
transition rules limiting annual increases in pension contributions. 
In addition, RPA repealed the quarterly funding requirement for 
fully funded plans and granted excise tax relief for employers with 
both defined benefit and defined contribution plans.

2.	Variable Rate Premium--RPA phased out the $53 per participant 
cap on the variable rate premium over a 3-year period as an incentive 
to improve funding in underfunded plans and made certain changes to 
the interest rate and mortality assumptions used to calculate plan 

3.	Reporting to PBGC--RPA requires sponsors with over 
$50 million in underfunding to provide PBGC detailed actuarial 
information on underfunded plans and detailed company financial 
information. It also requires privately-held companies with over
$50 million in underfunding and an aggregate funding ratio of less 
than 90 percent to provide advance notice to PBGC of certain 
corporate transactions.

4.	Disclosure to Participants in Underfunded Plans--RPA requires 
most employers whose plans are less than 90 percent funded to provide 
a notice to participants regarding the funding status of the plan and 
the limitations of PBGC's guarantee of participants' benefits.

5.	Missing Participants Program--RPA established a program under 
which PBGC serves as a clearinghouse for benefits of missing 
participants in plans terminating in a standard (fully funded) 
termination. RPA contained other provisions relating to enforcement 
of minimum funding requirements, PBGC liens for missed pension 
contributions, and limitation of benefit increases while a company 
is in bankruptcy.


	Coverage for multiemployer plans under ERISA was structured 
similarly to that of single-employer plans. However, the PBGC was not 
required to insure benefits of multiemployer plans that terminated 
before July 1, 1978. Congress extended the deadline for mandatory 
pension coverage several times, until enactment of the MPPAA (Public 
Law 96-364). The MPPAA required more complete funding for 
multiemployer plans, especially those in financial distress. It 
also improved the ability of plans to collect contributions from 
employers. The MPPAA changed the insurable event that triggers PBGC 
protection to plan insolvency, rather than plan termination. Thus, if 
a multiemployer plan becomes financially unable to pay benefits at 
the guaranteed level when due, the PBGC will provide financial 
assistance to the plan, in the form of a loan. Finally, MPPAA 
imposed withdrawal liability on employers who ceased to contribute 
to a multiemployer plan.

The Consolidated Appropriations Act of 2001 (Public Law 106-554), 
signed into law on December 21, 2000, increased the benefit guarantee 
in multiemployer plans to the product of a participant=s years of 
service multiplied by the sum of (1) 100 percent of the first $11 of 
the monthly benefit accrual rate and (2) 75 percent of the next $33 
of the accrual rate.

The Trade Act of 2002 (Public Law 107-210) provided a tax credit 
equal to 65 percent of the premiums they pay for health insurance as 
an additional benefit available to plan participants aged 55 to 64 
who are receiving pensions from either program of the PBGC.