FINANCIAL STATEMENTS

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

The following discussion and analysis provide information that management believes is relevant to an assessment and understanding of the Corporation's financial condition and results of operations. The discussion should be read in conjunction with the financial statements and notes thereto.

PBGC's operating results are subject to significant fluctuation from year to year depending on the frequency and severity of losses from terminating pension plans, general economic conditions and other factors such as changes in law. Consequently, certain traditional financial ratios and measurements are not meaningful and, therefore, not presented.

Combined Results

For 2001, PBGC's combined underwriting and financial activities resulted in a net loss of $2.123 billion. The single-employer and multiemployer programs reported net losses of $1.972 billion and $151 million respectively. By law, these two programs are separate.

Single-Employer Program

Results of Activities and Trends: The net loss in 2001 was $1.972 billion compared to net income of $2.666 billion in 2000. The $4.638 billion decrease was primarily attributable to the net change in losses from completed and probable terminations (an increase of $785 million) and in financial activity (a decrease of $3.755 billion).

UNDERWRITING ACTIVITY: The gain of $59 million in 2001 was a significant decrease from the gain of $942 million in 2000. This $883 million decrease was primarily due to an increase in losses from completed and probable terminations.

Underwriting income increased from $812 million in 2000 to $844 million in 2001. The $32 million change related primarily to the increase in interest income on employer liability settlements.

The Corporation's losses from completed and probable plan terminations increased from a credit of $80 million in 2000 to a loss of $705 million in 2001. The loss was primarily due to new plans classified as probable and the termination of the two Northwestern Steel pension plans. Future losses remain unpredictable.

Operating costs increased $19 million over 2000. This was primarily due to an increase of costs in insurance operations and information technology.

FINANCIAL ACTIVITY: Financial income decreased from $1.724 billion in 2000 to a loss of $2.031 billion in 2001. This change was primarily due to the loss from equity securities and the effect that the change in interest rates had on the present value of future benefits.

The total return on investments was -3.3% in 2001, compared to 13.2% in 2000. Fixed-income investment returns in 2001 increased by $588 million over 2000 while equity investment returns were $3.819 billion less in 2001 than in 2000. PBGC, in accordance with accounting principles generally accepted in the United States of America (GAAP), marks its assets and liabilities to market.

Actuarial charges primarily resulted from the aging of the present value of future benefits. The select interest rate decreased from 7.00% at September 30, 2000, to 6.70% at September 30, 2001, while the ultimate rate decreased from 6.75% to 5.25%.

Liquidity and Capital Resources: The single-employer program's net position declined in 2001 to approximately $7.7 billion primarily because of losses on equity investments and completed and probable terminations. Approximately $21.2 billion (97 percent) of the program's total assets of $21.8 billion were in marketable assets.

PBGC's primary sources of cash are from premium receipts and investment activities. If funds generated from these sources are insufficient to meet fixed charges in any period, the Corporation has available a $100 million line of credit from the U.S. Treasury for liquidity purposes. PBGC did not use this borrowing authority in 2000 or 2001 and has no plans to use it in the future.

Benefit payments and administrative expenses will approximate $1.5 billion in 2002. Due to significant factors beyond PBGC's control (e.g., fluctuations in interest rates, contributions made to PBGC-insured plans by sponsors, etc.), it is difficult to project premium revenue with a high degree of certainty.

The Corporation is subject to litigation that could have considerable impact on its financial condition. The total underfunding in large plans that are sponsored by companies with below-investment-grade bond ratings was approximately $11 billion. Losses from these plans are not probable at this time but GAAP requires the exposure to be disclosed in the footnotes to the financial statements. This exposure was principally in primary metals and fabricated metal products, air transportation, general merchandise stores, paper and allied products, stone, clay, glass and concrete products, electronic and other electrical equipment and transportation equipment industries.

The single-employer program's positive net position of approximately $7.7 billion at year-end will help provide the financial foundation needed to support the Corporation's long-term responsibilities under the Employee Retirement Income Security Act. A properly managed insurance program must have the resources to provide for unforeseen losses from terminating pension plans.

Multiemployer Program

Results of Activities and Trends: The 2001 multiemployer results of operations culminated in a positive net position of $116 million. The program reported a loss of $151 million in 2001 compared to a net gain of $68 million in 2000. The change in net income was due to the $269 million in losses from future financial assistance which was partially offset by $95 million of investment income. Premium income remained constant at $24 million. Of the program's assets, PBGC invested 97.6 percent in Treasury securities in 2001 and 98.3 percent in 2000. Liquidity and Capital Resources: As the multiemployer program has a positive net position and most assets are highly liquid Treasury securities, PBGC has sufficient resources to meet its liquidity requirements. In 2002, premium receipts will approximate $24 million while benefit payments and financial assistance are expected to be about $6 million.

Federal Managers' Financial Integrity Act Statement

Management controls in effect during fiscal year 2001 provided reasonable assurance that assets were safeguarded from material loss and that transactions were executed in accordance with management's authority and with significant provisions of selected laws and regulations. Furthermore, PBGC management controls provided reasonable assurance that transactions were properly recorded, processed and summarized to permit the preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and to maintain accountability for assets among funds. PBGC did not identify any material weaknesses during fiscal year 2001.

MANAGEMENT REPRESENTATION

PBGC's management is responsible for the accompanying Statements of Financial Condition as of September 30, 2001 and 2000, the related Statements of Operations and Changes in Net Position and the Statements of Cash Flows for the years then ended. PBGC's management is also responsible for establishing and maintaining systems of internal accounting and administrative controls that provide reasonable assurance that the control objectives, i.e., preparing reliable financial statements, safeguarding assets and complying with laws and regulations, are achieved.

The Inspector General engaged PricewaterhouseCoopers LLP (PwC) to conduct the audit of the Corporation's 2001 and 2000 financial statements. In its opinion on PBGC's financial statements, PwC reported that the Statements of Financial Condition as of September 30, 2001 and 2000, and the Statements of Operations and Changes in Net Position and Statements of Cash Flows for the fiscal years ended September 30, 2001 and 2000, were fairly stated in all material respects.

In the opinion of management, the financial statements present fairly the financial position of PBGC at September 30, 2001, and September 30, 2000, and the results of operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America (GAAP) and actuarial standards applied on a consistent basis.

Estimates of probable terminations, nonrecoverable future financial assistance, amounts due from employers and the present value of future benefits may have a material effect on the financial results being reported. In addition to litigation that has been properly disclosed and reported in accordance with GAAP, other litigation may have an effect on the financial condition of the Corporation.

As a result of the aforementioned, PBGC has based these statements, in part, upon informed judgments and estimates for those transactions not yet complete or for which the ultimate effects cannot be precisely measured, or for those that are subject to the effects of any pending litigation.

Steven A. Kandarian
Executive Director

Hazel Broadnax
Deputy Executive Director
and Chief Financial Officer

January 24, 2002.

Financial Statements

Table - PBGC Statements of Fianancial Condition - Assets

Table - PBGC Statements of Financial Condition - Liabilities

Table - PBGC Statements of Operations and Changes in Net Position

Table - PBGC Statements of Cash Flows

NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2001 AND 2000

Note 1 -- Organization and Purpose The Pension Benefit Guaranty Corporation (PBGC or the Corporation) is a federal corporation created by Title IV of the Employee Retirement Income Security Act of 1974 (ERISA) and is subject to the provisions of the Government Corporation Control Act. Its activities are defined in ERISA as amended by the Multiemployer Pension Plan Amendments Act of 1980, the Single-Employer Pension Plan Amendments Act of 1986, the Pension Protection Act of 1987, and the Retirement Protection Act of 1994. The Corporation insures pensions, within statutory limits, of participants in covered single-employer and multiemployer defined benefit pension plans that meet the criteria specified in Section 4021 of ERISA. ERISA requires that PBGC programs be self-financing. The Corporation finances its operations through premiums collected from covered plans, assets assumed from terminated plans, collection of employer liability payments due under ERISA as amended and investment income. In addition, PBGC may borrow up to $100 million from the U.S. Treasury to finance its operations. The Corporation did not use this borrowing authority during the years ended September 30, 2001, or September 30, 2000, nor is use of this authority currently planned. ERISA provides that the U.S. Government is not liable for any obligation or liability incurred by PBGC. Under the single-employer program, PBGC is liable for the payment of guaranteed benefits with respect only to underfunded terminated plans. An underfunded plan may terminate only if PBGC or a bankruptcy court finds that one of the four conditions for a distress termination, as defined in ERISA, is met or if PBGC involuntarily terminates a plan under one of five specified statutory tests. The net liability assumed by PBGC is generally equal to the present value of the future benefits (including amounts owed under Section 4022(c) of ERISA) less (1) the amounts that are provided by the plan's assets and (2) the amounts that are recoverable by PBGC from the plan sponsor and members of the plan sponsor's controlled group, as defined by ERISA. Under the multiemployer program, if a plan becomes insolvent, it receives financial assistance from PBGC to allow the plan to continue to pay participants their guaranteed benefits. PBGC recognizes assistance as a loss to the extent that the plan is not expected to be able to repay these amounts from future plan contributions, employer withdrawal liability or investment earnings.

Note 2 -- Significant Accounting Policies Basis of Presentation: The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates and assumptions may change over time as new information is obtained or subsequent developments occur. Actual results could differ from those estimates. Revolving and Trust Funds: PBGC accounts for its single-employer and multiemployer programs' revolving and trust funds on an accrual basis. Each fund is charged its portion of the benefits paid each year. PBGC has combined the revolving and trust funds for presentation purposes in the financial statements. The single-employer and multiemployer programs are separate programs by law and, therefore, PBGC reports them separately. ERISA provides for the establishment of revolving funds that are to be used by PBGC in carrying out its duties. The revolving funds support the operational and administrative functions of PBGC and fund any deficits incurred by PBGC in trusteeing plans or providing financial assistance. Premiums collected from ongoing plans are accounted for through the revolving funds. The Pension Protection Act of 1987 created a single-employer revolving fund that is credited with all premiums in excess of $8.50 per participant, including all penalties and interest charged on these amounts, as well as investment income. This fund may not be used to pay PBGC's administrative costs or the benefits of any plan terminated prior to October 1, 1988, unless no other amounts are available. The trust funds reflect accounting activity associated with: (1) trusteed plans -- plans for which PBGC has legal responsibility, (2) plans pending trusteeship -- terminated plans for which PBGC has not become legal trustee by fiscal year-end, and (3) probable terminations -- plans that PBGC determines are likely to terminate and be trusteed by PBGC. PBGC cannot exercise legal control over a plan's assets until PBGC becomes trustee, which may be several years after the date of plan termination. Allocation of Revolving and Trust Funds: PBGC allocates revolving and trust fund assets, liabilities, income and expenses to each program's revolving and trust funds to the extent that such amounts are not directly attributable to a specific fund. Revolving fund income is allocated on the basis of each program's average cash available for investment during the year while the expenses are allocated on the basis of each program's present value of future benefits. Revolving fund assets and liabilities are allocated on the basis of the year-end equity of each program's revolving funds. The plan assets acquired by PBGC and commingled at PBGC's custodian bank are credited directly to the appropriate fund while the earnings and expenses on the commingled assets are allocated to each program's trust funds on the basis of each trust fund's value, relative to the total value of the commingled fund. Valuation Method: Consistent with accounting principles generally accepted in the United States of America outlined in Statements of Financial Accounting Standards Nos. 35 ("Accounting and Reporting by Defined Benefit Pension Plans"), 60 ("Accounting and Reporting by Insurance Enterprises"), 87 ("Employers' Accounting for Pensions") and 133 ("Accounting for Derivative Instruments and Hedging Activities"), as amended, PBGC reports its assets and liabilities at fair value. A primary objective of PBGC's financial statements is to provide financial information that is useful in assessing PBGC's present and future ability to ensure that defined benefit pension plan beneficiaries receive benefits when due. PBGC believes that measuring its assets and liabilities at fair value provides the most relevant information to the reader. Cash and Cash Equivalents: Cash includes cash on hand and demand deposits. Cash equivalents are securities with a maturity of one business day. Investment Valuation and Income: PBGC bases fair values on the last sale of a listed security, on the mean of the "bid-and-asked" for nonlisted securities or on a valuation model in the case of fixed-income securities that are not actively traded. These valuations are determined as of the end of each fiscal year. Purchases and sales of securities are recorded on the trade date. Investment income is accrued as earned. Dividend income is recorded on the ex-dividend date. Realized gains and losses on sales of investments are calculated using an average cost basis. Any increase or decrease in the market value of a plan's assets occurring after the date on which the plan is terminated must, by law, be credited to or suffered by PBGC (see Notes 3, 4, and 11). Sponsors of Terminated Plans, Receivables: The amounts due from sponsors of terminated plans or members of their controlled group represent the settled claims for employer liability (underfunding as of date of plan termination) and for contributions due their plan less an allowance for uncollectible amounts. PBGC discounts any amounts expected to be received beyond one year for time and risk factors. Some agreements between PBGC and plan sponsors provide for contingent payments based on future profits of the sponsors. The Corporation will report any such future amounts realized in the period in which they accrue or are received. Premiums: Premiums receivable represent the earned but unpaid portion of the premiums for plans that have a plan year commencing before the end of PBGC's fiscal year and past due premiums deemed collectible, including collectible penalties and interest. Unearned premiums represent an estimate of payments received during the fiscal year that cover the portion of a plan's year after the Corporation's fiscal year-end. Premium income represents revenue generated from self-assessments from defined benefit pension plans as required by Title IV of ERISA (see Note 9). Present Value of Future Benefits (PVFB): The PVFB is the estimated liability for future pension benefits that PBGC is or will be obligated to pay with respect to trusteed plans and terminated plans pending trusteeship. This liability is stated as the actuarial present value of estimated future benefits less the present value of estimated recoveries from sponsors and members of their controlled group and the assets of terminated plans pending trusteeship. PBGC also includes the estimated liabilities attributable to probable future plan terminations as a separate line item in the PVFB (net of estimated recoveries and assets). To measure the actuarial present value, PBGC used assumptions to adjust the value of those future payments to reflect the time value of money (by discounting) and the probability of payment (by means of decrements, such as for death or retirement). PBGC also included anticipated expenses to settle the benefit obligation in the determination of the PVFB. (1) Trusteed Plans -- represents the present value of future benefit payments less the present value of expected recoveries (for which a settlement agreement has not been reached with sponsors and members of their controlled group) for plans that have terminated and been trusteed by PBGC prior to fiscal year-end. (2) Terminated Plans Pending Trusteeship -- represents the present value of future benefit payments less the plans' net assets (at fair value) anticipated to be received and the present value of expected recoveries (for which a settlement agreement has not been reached with sponsors and members of their controlled group) for plans that have terminated but have not been trusteed by PBGC prior to fiscal year-end. (3) Settlements and Judgments -- represents estimated liabilities related to settled litigation. (4) Net Claims for Probable Terminations -- includes reasonable estimates of the losses, net of plan assets and the present value of expected recoveries (from sponsors and members of their controlled group) for plans that are likely to terminate in a future year. These estimated losses are based on conditions that existed as of PBGC's fiscal year-end. Management believes it is likely that one or more events subsequent to PBGC's fiscal year-end will occur, confirming the fact of the loss. PBGC's benefit payments to participants represent a reduction to the PVFB (see Note 4). Present Value of Nonrecoverable Future Financial Assistance: In accordance with Title IV of ERISA, PBGC provides financial assistance to multiemployer plans, in the form of loans, to enable the plans to pay guaranteed benefits to participants and reasonable administrative expenses. These loans, issued in exchange for interest-bearing promissory notes, constitute an obligation of each plan. The present value of nonrecoverable future financial assistance represents the estimated nonrecoverable payments to be provided by PBGC in the future to multiemployer plans that will not be able to meet their benefit obligations. The present value of nonrecoverable future financial assistance is based on the difference between the present value of future guaranteed benefits and expenses and the market value of plan assets, including the present value of future amounts expected to be paid by employers, for those plans that are expected to require future assistance. The amount reflects the rates at which, in the opinion of management, these liabilities (net of expenses) could be settled in the market for single-premium nonparticipating group annuities issued by private insurers (see Note 5). Other Expenses: These expenses represent a current period estimate of the net amount of receivables deemed to be uncollectible. The estimate is based on the most recent status of the debtor (e.g., sponsor), the age of the receivables and other factors that indicate the element of uncollectibility in the receivables outstanding. Losses from Completed and Probable Terminations: Amounts reported as losses from completed and probable terminations represent the difference as of the date of plan termination between the present value of future benefits (including amounts owed under Section 4022(c) of ERISA) assumed, or expected to be assumed, by PBGC, less related plan assets and the present value of expected recoveries from sponsors and members of their controlled group (see Note 10). In addition, the plan's net income from date of plan termination to the beginning of the fiscal year is included as a component of losses from completed and probable terminations for plans with termination dates prior to the year in which they were added to PBGC's inventory of terminated plans. Actuarial Adjustments and Charges (Credits): PBGC classifies actuarial adjustments related to changes in method and the effect of experience as underwriting activity. Actuarial charges (credits) related to changes in interest rates and passage of time are classified as financial activity. These adjustments and charges (credits) represent the change in the PVFB that results from applying actuarial assumptions in the calculation of future benefit liabilities (see Note 4). Depreciation: PBGC calculates depreciation of its furniture and equipment on a straight-line basis over the estimated useful lives of the assets. The useful lives range from 5 to 10 years. Routine maintenance and leasehold improvements (the amounts of which are not material) are charged to operations as incurred. Reclassifications: Certain amounts in the 2000 financial statements have been reclassified to be consistent with the 2001 presentation.

Note 3 -- Investments Premium receipts are invested in securities issued by the U.S. Government. The trust funds include assets PBGC acquires or expects to acquire with respect to terminated plans and investment income thereon. These assets generally are held by custodian banks. The basis and market value of the investments by type are detailed below. The basis indicated is cost of the asset if acquired after the date of plan termination or the market value at date of plan termination if the asset was acquired as a result of a plan's termination. Realized and unrealized gains and losses, in addition to interest and dividends earned on these investments, are disclosed in Note 11.

Table - Investments of Single-Employer Revolving Funds and Single-Employer Trusteed Plans

Table - Investments of Multi-Employer Revolving Funds and Multi-Employer Trusteed Plans

Derivative Investments: Financial Accounting Standard No. 133, as amended, is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. PBGC elected early adoption beginning with fiscal year 2000. During fiscal years 2000 and 2001, PBGC invested in an investment product that contained Standard & Poor's (S&P) 500 financial futures contracts. The objective of this investment strategy is to exceed, net of fees, the total rate of return of the S&P 500 Index while maintaining a very similar risk level to that of the index. S&P 500 Index futures are used to obtain cost-effective equity exposure for the strategy. In 2001 PBGC also invested in an investment product that contained U.S. Treasury bond futures contracts, Euro government bond futures contracts and foreign currency forward contracts. The objective of this investment strategy is to exceed, net of fees, the total rate of return of a customized benchmark for a global balanced mandate while maintaining a very similar risk level to that benchmark. U.S. Treasury Note futures were held in a portfolio to affect sector allocation and to adjust interest rate exposure (duration). Foreign futures were held in a portfolio to obtain government debt exposure (duration) in a timely and efficient manner. Foreign currency forwards were held in a portfolio to hedge currency exposure (i.e., minimize currency risk) of certain assets and to adjust overall currency exposure to reflect the investment views of the portfolio managers regarding relationships between currencies. PBGC is accomplishing these objectives typically, but not exclusively, by holding long and short positions in stock index futures, government bond futures, foreign currency forward contracts and other derivative instruments. The counterparties to PBGC's foreign currency exchange contracts are major financial institutions. PBGC has never experienced non-performance by any of its counterparties. In addition to the initial margin of generally 1 to 6 percent maintained with the broker in Treasury bills or similar instruments, financial futures contracts require daily settlement of variation margin. For the fiscal years ended September 30, 2001, and September 30, 2000, gains and losses from settled margin calls are reported in Investment Income on the Statements of Operations and Changes in Net Position. PBGC limits its investment in these derivative instruments to the investments in two portfolios. At September 30, 2001, and September 30, 2000, the notional cost amount (not an amount actually at risk, nor is it an amount that is actually exchanged) of the financial futures contracts was approximately $253 million and $371 million, respectively. Open currency forward contracts as of September 30, 2001, in U.S. dollar terms were approximately $120 million long U.S. dollar/short foreign currencies and approximately $75 million long foreign currencies/short U.S. dollar. The fair value of the derivative instruments (the amount needed to settle at September 30) reported on the Statements of Financial Condition was approximately $5 million in Receivables, net: Other at September 30, 2001, and $5 million in Accounts payable and accrued expenses at September 30, 2000.
Financial futures contracts are traded on organized exchanges and thus bear minimal credit risk. The exchange clears, settles and guarantees transactions occurring through its facilities. Institutional investors hold these futures contracts on behalf of PBGC and mark to market daily. In periods of extreme volatility, margin calls may create a high liquidity demand on the underlying portfolio. To mitigate this, PBGC maintains adequate liquidity in its portfolio to meet these margin calls.
Security Lending: PBGC participates in a security lending program administered by its custodian bank. The custodian bank requires collateral that equals 102 percent to 105 percent of the securities lent. The collateral is held by the custodian bank. In addition to the lending program managed by the custodian bank, some of PBGC's investment managers are authorized to invest in repurchase agreements and reverse repurchase agreements. The manager either receives cash as collateral or pays cash out to be used as collateral. Any cash collateral received is invested. The total value of securities on loan at September 30, 2001, and September 30, 2000, was $119 million and $109 million, respectively.

Note 4 -- Present Value of Future Benefits

The following table summarizes the actuarial adjustments, charges and credits that explain how the Corporation's single-employer program liability for the present value of future benefits changed for the years ended September 30, 2001 and 2000.

Table - Reconciliation of the Present Value of Future Benefits for 2001 and 2000

PBGC used a 20-year select interest rate of 6.70% followed by an ultimate rate of 5.25% for 2001 and a 25-year select interest rate of 7.00% followed by an ultimate rate of 6.75% for 2000. These rates were determined to be those needed to continue to match the survey of annuity prices provided by the American Council of Life Insurers. PBGC's regulations state that both the interest rate and the length of the select period may vary to produce the best fit with these prices. The prices reflect rates at which, in the opinion of management, the liabilities (net of expenses) could be settled in the market at September 30, for single-premium nonparticipating group annuities issued by private insurers. Many factors, including Federal Reserve policy, may impact these rates.

For September 30, 2001, PBGC used the 1994 Group Annuity Mortality (GAM) Static Table (with margins), set forward two years and projected 15 years to 2009 using Scale AA. For September 30, 2000, PBGC used the same table, set forward two years but projected 14 years to 2008 using Scale AA.

The reserve for administrative expenses in the 2001 and 2000 valuation was assumed to be 1.18 percent of benefit liabilities plus additional reserves for cases whose plan asset determinations, participant database audits and actuarial valuations were not yet complete. The factors to determine the additional reserves were based on case size, number of participants and time since trusteeship. PBGC updated the expense model in 2000 based on a study prepared by an independent consultant.

The present values of future benefits for trusteed multiemployer plans for 2001 and 2000 reflect the payment of benefits and the changes in interest assumptions, passage of time and the effect of experience.

The resulting liability represents PBGC's best estimate of the measure of anticipated experience under these programs.

The following table details the assets that make up single-employer terminated plans pending trusteeship:

Table - Assets of Single-Employer Terminated Plans Pending Trusteeship,Net

Net Claims for Probable Terminations: Factors that are presently not fully determinable may be responsible for these claim estimates differing from actual experience. Included in net claims for probable terminations is a provision for future benefit liabilities for plans not specifically identified.

The values recorded in the following reconciliation table have been adjusted to the expected dates of termination.

Table - Reconciliation of Net Claims for Probable Terminations

Note 5 -- Multiemployer Financial Assistance

PBGC provides financial assistance to multiemployer defined benefit pension plans in the form of loans. An allowance is set up to the extent that repayment of these loans is not expected.

Table - Notes Receivable Multi-Employer Financial Assistance

The losses from financial assistance reflected in the Statements of Operations and Changes in Net Position include annual changes in the estimated present value of nonrecoverable future financial assistance and assistance granted that was not previously accrued.

Table - Present Value of Nonrecoverable Future Financial Assistance and Losses From Financial Assistance

Note 6 -- Accounts Payable and Accrued Expenses

The following table itemizes accounts payable and accrued expenses reported in the Statements of Financial Condition:

Table - Accounts Payable and Accrued Expenses

Note 7 -- Contingencies

There are a number of large single-employer plans that may terminate. In addition, there are some multiemployer plans that may require future financial assistance. The amounts disclosed below represent the Corporation's best estimates given the inherent uncertainties about these plans.

PBGC estimated that total unfunded vested benefits on termination of single-employer plans that represented reasonably possible exposure as of September 30, 2001, was approximately $11 billion. This exposure was principally in primary metals and fabricated metal products, air transportation, general merchandise stores, paper and allied products, stone, clay, glass and concrete products, electronic and other electrical equipment and transportation equipment industries. PBGC calculated this estimate as in previous years by using data obtained from filings with the government and corporate annual reports for fiscal years ending in calendar 2000. The Corporation adjusted the value reported for liabilities to the December 31, 2000, PBGC select interest rate of 6.40%. When available, data were adjusted to a consistent set of mortality assumptions. The Corporation eliminated plans not insured by PBGC from the data. PBGC made no provision for the possible failure of the plan sponsor to make subsequent contributions or for plan liabilities that would be incurred after that date.

PBGC included amounts in the liability for the present value of nonrecoverable future financial assistance (see Note 5) for multiemployer plans that PBGC estimated may require future financial assistance. In addition, PBGC currently estimates that it is reasonably possible that other multiemployer plans may require future financial assistance in the amount of $2 million.

The Corporation calculated the future financial assistance liability for each multiemployer plan identified as probable or reasonably possible as the present value of guaranteed future benefit and expense payments net of any future contributions or withdrawal liability payments as of the later of September 30, 2001, or the projected (or actual, if known) date of plan insolvency, discounted back to September 30, 2001, using interest only. The Corporation's identification of plans that are likely to require such assistance and estimation of related amounts require consideration of many complex factors. These factors are affected by future events, including actions by plans and their sponsors, most of which are beyond the Corporation's control.

PBGC used select and ultimate interest rate assumptions of 6.70% for the first 20 years after the valuation date and 5.25% thereafter. The Corporation also used the 1994 Group Annuity Mortality Static Table (with margins), set forward two years, projected 15 years to 2009 using Scale AA.

Note 8 -- Commitments

PBGC leases its office facility under a commitment that began on December 11, 1993, and expires December 10, 2008. The lease provides for periodic rate increases based on increases in operating costs and real estate taxes over a base amount. In addition, PBGC is leasing space for field benefit administrators. These leases began in 1996 and expire in 2010. The minimum future lease payments for office facilities having noncancellable terms in excess of one year as of September 30, 2001, are as follows:

Table - Commitments: Future Lease Payments

Lease expenditures were $12.1 million in 2001 and $11.8 million in 2000.

Note 9 -- Premiums

For both the single-employer and multiemployer programs, ERISA provides that PBGC shall continue to guarantee basic benefits despite the failure of a plan administrator to pay premiums when due. PBGC assesses interest and penalties on the unpaid amount for late payment or underpayment of premiums. Late payment interest continues to accrue until the premium and the interest due are paid, while the amount of penalty that can be levied is capped at 100 percent of the premium late payment or underpayment. Annual premiums for the single-employer program are $19 per participant for a fully funded plan. Underfunded single-employer plans pay an additional variable-rate charge, based on funding levels. The multiemployer premium is $2.60 per participant.

Note 10 -- Losses (Credits) from Completed and Probable Terminations

Amounts reported as losses are the present value of future benefits (including amounts owed under Section 4022(c)) less related plan assets and the present value of expected recoveries from sponsors. The following table details the components that make up the losses:

Table - Losses (Credits) From Completed And Probable Terminations -- Single-employer Program

Note 11 -- Financial Income

The following table details the combined financial income by type of investment for both the single-employer and multiemployer programs:

Table - Financial Income

Note 12 -- Employee Benefit Plans

All permanent full-time and part-time PBGC employees are covered by the Civil Service Retirement System (CSRS) or the Federal Employees Retirement System (FERS). Full-time and part-time employees with less than five years service under CSRS and hired after December 31, 1983, are automatically covered by both Social Security and FERS. Employees hired before January 1, 1984, participate in CSRS unless they elected and qualified to transfer to FERS.

The Corporation's contribution to the CSRS plan, for both 2001 and 2000, was 8.51 percent of base pay for those employees covered by that system. For those employees covered by FERS, the Corporation's contribution was 10.7 percent of base pay for both 2001 and 2000. In addition, for FERS-covered employees, PBGC automatically contributes 1 percent of base pay to the employee's Thrift Savings account, matches the first 3 percent contributed by the employee and matches one-half of the next 2 percent contributed by the employee. Total retirement plan expenses amounted to $8 million in 2001 and 2000.

These financial statements do not reflect CSRS or FERS assets or accumulated plan benefits applicable to PBGC employees. These amounts are reported by the U.S. Office of Personnel Management (OPM) and are not allocated to the individual employers. OPM accounts for federal health and life insurance programs for those eligible retired PBGC employees who had selected federal government-sponsored plans. PBGC does not offer other supplemental health and life insurance benefits to its employees.

Note 13 -- Cash Flows

The following is a reconciliation between the net income as reported in the Statements of Operations and Changes in Net Position and net cash provided by operating activities as reported in the Statements of Cash Flows.

Table - Reconciliation of Net Income to Net Cash Provided by Operating Activities

Note 14 -- Litigation

PBGC records as a liability on its financial statements an estimated cost for unresolved litigation to the extent that losses in such cases are probable and estimable in amount. Management believes that any losses from litigation will not have a material impact on the financial statements.

Note 15 -- Subsequent Event

Subsequent to September 30, 2001, business and financial conditions significantly deteriorated for some sponsors of large single-employer plans that may terminate. Consequently, PBGC reclassified the likely termination of these pension plans to probable. Had these plan sponsor events occurred prior to year-end, PBGC's financial statements would reflect an increase in the Net loss of $1.9 billion and a decrease in the Net position of the same amount.

Additionally, PBGC received notices that two multiemployer plans were terminated by amendment in January 2002. Had these events occurred prior to September 30, 2001, PBGC's financial statements would reflect a decrease in the Net loss of $18 million and an increase in the Net position of the same amount.

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