2006 Annual Report Highlights

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Pension Benefit Guaranty Corporation (the PBGC) is mandated under Title IV of the Employee Retirement Income Security Act of 1974 (ERISA) to insure, under statutory limits, pension benefits of participants in covered private defined benefit pension plans in the United States. As of September 30, 2006, between its combined programs, the PBGC covered 44 million workers in over 30,000 active plans and was directly responsible for the future benefits of 1.3 million active and retired workers whose plans had failed. The PBGC receives no taxpayer monies and its obligations are not backed by the full faith and credit of the United States Government.
The following is a discussion and analysis of the financial statements and other statistical data that management believes will enhance the understanding of the PBGC’s financial condition and results of operations. This discussion should be read in conjunction with the financial statements beginning on page 35 and the accompanying notes.
For financial statement purposes, the PBGC divides its business activity into two broad areas – Underwriting Activity and Financial Activity – covering both single-employer and multiemployer program segments. The PBGC’s Underwriting Activity provides financial guaranty insurance in return for insurance premiums. Actual and expected probable losses that result from the termination of underfunded pension plans are included in this category, as are actuarial adjustments based on changes in actuarial assumptions, such as mortality. Financial Activity consists of the performance of the PBGC’s assets and liabilities. The PBGC’s assets consist of premiums collected from defined benefit plan sponsors, assets from distress or involuntarily terminated plans that the PBGC has insured, and recoveries from the former sponsors of those terminated plans. The PBGC’s future benefit liabilities consist of those future benefits, under statutory limits, that the PBGC has assumed following distress or involuntary terminations. Gains and losses on the PBGC’s investments and changes in the value of the PBGC’s future benefit liabilities (e.g., actuarial charges such as changes in interest rates and passage of time) are included in this area.

Financial and Program Risks
The PBGC’s operating results are subject to significant fluctuation from year to year depending on the severity of losses from plan terminations, changes in the interest factors used to discount future benefit payments, investment performance, general economic conditions and other factors such as changes in law. The PBGC’s operating results differ from those of most private insurers, especially in their variability. The PBGC provides mandatory insurance of catastrophic risk. Most private insurers are able to diversify or reinsure their catastrophic risks or to apply traditional insurance underwriting methods to these risks. The PBGC’s risks are concentrated in certain industries, and the Corporation is not able to decline providing insurance coverage regardless of the potential risk of loss posed by an insured. Private insurers also are able to adjust premiums in response to actual or expected claims exposure. In contrast, the PBGC’s premiums are defined by statute.
The PBGC operated for several years with low levels of claims and then experienced a period of record-breaking claims from FY 2002 through FY 2005. The PBGC’s future results will continue to depend largely on the infrequent and unpredictable termination of a limited number of very large pension plans. The PBGC’s financial condition is also sensitive to market risk such as interest rates and equity returns, including those embedded in plans the PBGC insures, which can also be highly volatile.

The Deficit Reduction Act of 2005 (DRA): This legislation, enacted February 8, 2006, increased the PBGC’s flat-rate premium for the 2006 plan year to $30 per participant for single-employer plans and to $8.00 per participant for multiemployer plans. Total flat-rate premium income for FY 2006 increased by approximately 40% as a result. The DRA provides for these premium rates to be adjusted each year for inflation, based on changes in the national average wage index. The 2007 flat-rate premium for single-employer plans will increase to $31.00 per participant and the flat-rate premium for multiemployer plans will remain at $8.00 per participant. The DRA also created a new premium that applies in the case of certain plan terminations occurring after 2005 and before 2011. A premium of $1,250 per participant is payable for the year of termination and each of the following two years. The 2011 sunset date was rescinded by the Pension Protection Act of 2006.
Pension Protection Act of 2006 (PPA): This legislation, enacted August 17, 2006, makes the PBGC’s variable-rate premium payable by all underfunded plans, reforms the pension funding rules, imposes benefit restrictions on underfunded plans, establishes new limits on the PBGC’s guarantee (e.g., shut down benefits), provides funding relief to certain companies particularly those in the airline industry, and imposes new reporting and disclosure requirements. The PPA expands the PBGC’s missing participants program to cover terminated defined contribution plans, multiemployer plans, and plans of small professional corporations. It also provides a cap on the variable-rate premium for plans maintained by small employers and permits the PBGC to pay interest on refunds of overpaid premiums. The PBGC will provide regulations and other guidance to implement these changes. Provisions of the PPA led to the reduction in probables exposure of the agency in fiscal year 2006. The PPA also made permanent the termination premium enacted in the Deficit Reduction Act of 2005.
Estimates of Underfunding: In 2006, companies sponsoring underfunded single-employer pension plans that were subject to the requirements of section 4010 of ERISA reported a shortfall of $339.9 billion in their latest filings with the PBGC. This represented a 4.3% decrease from the $355.2 billion in underfunding reported a year earlier ($353.7 billion adjusted subsequently for late filings and data corrections). The 2006 statistics are based on 2005 information filed with the PBGC from 1,111 plans covering about 15 million workers and retirees. These underfunded plans had $875.0 billion in assets to cover more than $1.21 trillion in liabilities, for an average funded ratio of 72 percent. The filings under ERISA section 4010 are required only of companies with more than $50 million in unfunded pension liabilities. As of September 30, 2006, the PBGC estimated that the total shortfall in all insured single-employer pension plans was approximately $350 billion. This amount, in total, represents a 22% decrease from our estimate as of September 30, 2005 due to improved economic conditions.

Discussion of Insurance Programs

The PBGC operates two separate insurance programs for defined benefit plans involving both the underwriting and financial activity areas of the business. The PBGC’s single-employer program guarantees payment of basic pension benefits should underfunded plans terminate. The PBGC’s multiemployer program is funded and administered separately from the single-employer program. The event triggering the PBGC’s multiemployer guarantee is the inability of a covered plan to pay benefits when due at the statutorily guaranteed level. Plan termination is the insured event in the single-employer program. The financial condition, results of operations, and cash flows of these two programs are reported as different business segments because the programs are separate by law.

Single-Employer Program
The single-employer program covers about 34.0 million workers and retirees in about 28,800 plans, down from 34.2 million workers in 2005. The PBGC oversees the terminations of fully funded plans and guarantees payment of basic pension benefits when underfunded plans terminate. When a covered underfunded plan terminates, the PBGC becomes trustee of the plan, applies statutorily defined limitations on payouts, and administers future benefit payments thereafter.

RESULTS OF ACTIVITIES AND TRENDS: There was a net gain in 2006 of $4.634 billion compared to a net gain in 2005 of $529 million. The $4 billion year-to-year change in net income was primarily attributable to (1) a decrease of $10.1 billion in losses from completed and probable terminations, $8 billion of which was due to reclassification of several plans from probable to reasonably possible terminations as a result of airline relief options available in the PPA (see Note 10) and (2) a decrease of $644 million in actuarial adjustments both offset by (3) a $5.0 billion increase in actuarial charges largely due to lower interest rates and (4) a $1.7 billion decrease in investment income. See also “Statements of Operations and Changes in Net Position” on page 37.
Actuarial charges and adjustments arise from gains and losses from mortality and retirement assumptions,changes in interest factors,and passage of time(due to the annual shortening of the discount period covering future benefits). It is important to note that the ability of the PBGC’s assets to counter the two primary actuarial charges, i.e., passage of time and changes in interest factors, remains constrained by the PBGC’s deficit.

Underwriting Activity: The PBGC’s single-employer program experienced a net gain to underwriting income of $7.746 billion in 2006, a significant improvement from the loss of $3.067 billion in 2005. This $10.813 billion year-to-year improvement was primarily due to the credit in 2006 to losses from new and previously accrued probable terminations, as well as the year- to-year decrease in the 2005 underwriting actuarial adjustment (charge) of $644 million.
Underwriting income increased slightly from $1.495 billion to $1.521 billion in 2006. Premium income from plan sponsors decreased slightly from $1.451 billion in 2005 to $1.442 billion in 2006. Other income, consisting of interest income on recoveries from sponsors, increased from $44 million in 2005 to $79 million in 2006.
Annual flat-rate premiums for the single-employer program increased to $30 per participant and income increased for 2006, bringing the total for flat-rate premiums to approximately $883 million. Annual Variable-Rate Premiums (VRP) paid by underfunded single-employer plans at a rate of $9 per $1,000 of underfunding if not exempt (e.g., meets certain minimum funding requirements) decreased to a total of $550 million.
The Required Interest Rate (RIR) used in calculating underfunding for purposes of determining a VRP had previously been 85 percent of the annual yield on 30-year Treasury securities; however, temporary legislation in 2004 changed the basis for plan years beginning in 2004 and 2005 to 85 percent of a composite corporate bond yield. This use of a corporate bond rate was continued by the Pension Protection Act of 2006 for two additional years. The resulting rates for calendar-year plans for 2005 and 2006 were 4.73% and 4.86%, respectively. An increase in the RIR generally leads to decreases in VRP premiums. The VRP premium income accruals for plan year 2006 were lower by approximately $237 million. This is primarily due to the higher RIR, more plans meeting the VRP exemption requirements, termination of large plans with prior year VRP payments and other factors in the actuarial calculation of underfunding. PPA eliminated the funding exemption from the VRP for plan years beginning in 2008.

The Corporation’s losses from completed and probable plan terminations decreased from a loss of $3.954 billion in 2005 to a net credit of $6.155 billion in 2006. This decrease in 2006 was led by the credit related to thereclassification of the large probable plans (accrued) to reasonably possible (not accrued), offset by losses related to new probables of $3.1 billion. Additional plans did become probable and were recorded as new losses in 2006; however the amounts ofsuch new probable claims were lower in 2006 than for the comparable period in 2005. Reasonably possibles are plans that are not likely to terminate within twelve months of the financial statement date.
This credit also led to overall reductions in claims for probable terminations in the liabilities section of the Statements of Financial Condition. The net claim for probable terminations as of September 30, 2006, is $4.9 billion, while the net claim as of September 30, 2005, was $10.5 billion. This $5.6 billion reduction resulted primarily from the transfer of $8.0 billion (see Note 4) of previously accrued claims to a non-accrual status (i.e., reasonably possible), offset by the addition of new probable claims of $3.1 billion. The amount of future losses remains unpredictable as the PBGC’s loss experience is highly sensitive to losses from large claims.
Administrative expenses increased $41 million from $311 million in 2005 to $352 million in 2006 due to expenses incurred in both one-time costs of managing large bankruptcy cases as well as higher ongoing expenses to administer recently terminated large pension plans in 2006. The FY 2006 expense of $2 million in “Expenses: Other” was due to the write-off of premium and other receivables.

Financial Activity: Though single-employer underwriting income increased for 2006, single-employer financial net income decreased from $3.596 billion in 2005 to $(3.112) billion in 2006. This reduction was primarily due to the effects of rising interest rates in the fixed income market and increases in annuity prices causing interest factors to decrease in the annuity market, which led to increases in actuarial charges.
Actuarial charges under Financial activity increased due to the combined effects of changes in interest rates and the passage of time. In 2006, passage of time charges increased due to the increase in the PBGC’s liabilities from newly trusteed plans. Charges due to change in interest rates also increased substantially due to the decrease in the applicable interest factors.

The PBGC discounts its liabilities for future benefits with interest factors that, together with the mortality table used by the PBGC, will approximate the price in the private-sector annuity market at which a plan sponsor or the PBGC could settle its obligations. The PBGC surveys life insurance industry annuity prices through the American Council of Life Insurers (ACLI) to obtain input needed to determine interest factors and then derives interest factors that will best match the private-sector prices from the surveys. The interest factors are often referred to as select and ultimate interest rates. Any pair of interest factors will generate liability amounts that differ from the survey prices, which cover 14 different ages or benefit timings. The PBGC process derives the interest factor pair that differs least over the range of prices in the survey. The PBGC’s select interest factor (which operates over the first 25 years) decreased to 4.85% at September 30, 2006, from 5.2% at September 30, 2005. The ultimate factor (which is applied for all years after the first 25) increased to 4.82% from 4.5% over the same period.
The total return on investments was 4.2% in 2006, generating $2.184 billion in investment income, compared to 8.9% in 2005 and $3.897 billion of income. Equity investments within the single-employer program returned 10.7% in 2006. There wasa slight decrease of $321 million in equity income compared to 2005. Fixed income investments within the single-employer program returned 1.4% in 2006, which resulted in a decrease of $1.361 billion in fixed income in 2006 from 2005.
In 2006, the PBGC’s investments underperformed its liabilities by $3.112 billion. This was primarily due to the difference in the interest rate behavior between rates prevailing in the fixed income market and prices prevailing in the annuity market. The PBGC marks its assets to market.

Multiemployer Program

A multiemployer plan is a pension plan sponsored by two or more unrelated employers under collective bargaining agreements with one or more unions. Multiemployer plans cover most unionized workers in the trucking, retail food, construction, mining and garment industries. The multiemployer program, which covers about 9.9 million workers and retirees (approximately the same number of covered workers as in 2005) in about 1,540 insured plans, differs from the single-employer program in several significant ways. For multiemployer plans, the event triggering the PBGC’s guarantee is the inability of a covered plan to pay benefits when due at the statutorily guaranteed level (i.e., the plan is statutorily insolvent). Unlike the single-employer plans, the PBGC does not usually become trustee of multiemployer plans; rather, it provides financial assistance through loans to insolvent plans to enable them to pay guaranteed benefits. During fiscal 2006, the PBGC paid $70million in financial assistance to 33 insolvent plans. Once begun, these loans (which are typically not repaid) generally continue year after year until the plan no longer needs assistance or has paid all promised benefits at the guaranteed level. For a worker with 30 years under a plan, the maximum annual benefit guarantee is $12,870, which is much lower than for the participants under the single-employer program. Accordingly, multiemployer premium rates are significantly lower than for the single-employer program as well. Annual flat-rate premiums for the multiemployer program increased to $8.00 per participant for plan year 2006 pursuant to the DRA and there are no variable-rate premiums.

RESULTS OF ACTIVITIES AND TRENDS: The multiemployer program reported a net loss of $404 million in FY 2006 compared to a net loss of $99 million in FY 2005. This resulted in a negative net position of $739 million in FY 2006 compared to a negative net position of $335 million in FY 2005. The change in net income was primarily due to the increase in expected loss from future financial assistance of $257 million plus a decrease in investment income of $80 million, partially offset by an increase in premium income of $32 million.
The multiemployer program reported a net loss from underwriting activity of $403 million in FY 2006 compared to a net loss of $178 million in FY 2005. This change in the net loss of $225 million was attributed to the increase in losses from financial assistance of $257 million (due to the addition of ten plans to the multiemployer probable inventory and changes in estimates) partially offset by the increase in premium income of $32 million. Financial activity reflected financial loss of $1 million from earnings on fixed income investments in 2006, compared to a gain of $79 million in 2005. Multiemployer program assets at year-end were invested 99.4 percent in Treasury securities, as compared to 97.8 percent in Treasury securities in 2005.

Overall Capital and Liquidity
The PBGC’s obligations include monthly payments to participants and beneficiaries in terminated defined benefit plans, financial assistance to multiemployer plans, and the operating expenses of the Corporation. The financial resources available to pay these obligations are underwriting income received from insured plan sponsors (largely premiums), the income earned on the PBGC’s investments, and the assets taken over from failed plans.
In 2006, the PBGC’s cash receipts from operations of the single-employer program improved somewhat but were still insufficient to cover its operating cash disbursements of $4.4billion, resulting in net cash used of $139million, compared to $189million used in 2005. The multiemployer program experienced positive cash flow of $50million in2006 compared to $75million in 2005.

Combinedpremium cash receipts totaled $1.7billion in FY 2006, a modest increase of approximately $34million from 2005. Most of this increase pertained to the statutorily increased premiums that were fully paid in FY 2006 butwere partially applicable to FY 2007. In 2006, net cash flow used by investments was $318 million versus $1.3 billion provided by investments in 2005.

Outlook
For FY 2007, the PBGC estimates $4.8billion in single-employer benefit payments and $93 million in financialassistance payments to multiemployer plans. The FY 2007 President’s Budget request includes $402 million for the PBGC’s administrative expenses. The PBGC’s expenses for FY 2006 were $381 million.
The PBGC is a self-financing government corporation funded by premiums and the assets of plans it trustees, not general tax revenues. Unlike other Federal programs, which rely on annual appropriations for funding and spending authority, ERISA gives the PBGC its spending authority. Pursuant to Office of Management and Budget (OMB) policy, the PBGC’s spending is reviewed by the Department of Labor (DOL), approved by OMB, and remains subject to Congressional oversight.
In2007, underwriting income and investment gains or losses will continue to be influenced by significant factors beyond the PBGC’s control (including changes in interest rates, financial markets, contributions made by plan sponsors as well as recently enacted statutory changes). Absent a change in law, the PBGC’s best estimate of 2007 premium receipts ranges between $1.5 billion and $1.7 billion. No reasonable estimate can be made of 2007 terminations, effects of changes in interest rates, or investment income.
As of September 30, 2006, the single-employer and multiemployer programs reported deficits of $18.142billion and $739million, respectively. The single-employer program had assets of nearly $60.0billion which is offset by total liabilities of $78.1 billion, which includes a total present value of future benefits (PVFB) of approximately $69.1 billion. As of September 30, 2006, the multiemployer program had assets of approximately $1.2 billion offset by approximately $1.9 billion in present value of nonrecoverable future financial assistance. Notwithstanding these deficits, the Corporation has sufficient liquidity to meet its obligations for a number of years; however, neither program at present has the resources to fully satisfy the PBGC’s long-term obligations to plan participants.

Single-Employer and Multiemployer Program Exposure
Measures of risk in the PBGC’s insured base of plan sponsors suggest that there may continue to be large claims against the single-employer pension insurance program. The PBGC’s best estimate of its loss exposureto underfunded plans sponsored by companies with credit ratings below investment grade and classified by the PBGC as reasonably possible of termination as of September 30, 2006, was $73 billion. The comparable estimates of reasonably possible exposure for 2005 and 2004 were $108 billion and $96 billion, respectively. The PBGC’s exposure to loss may be less than these amounts because of the statutory limits on insured pensions, but this estimate is also not available because it is difficult to prospectively determine the extent and effect of the statutory limitations. These estimates are measured as of December 31 of the previous year (see Note 7). For 2006, this exposure is concentrated in the following sectors: manufacturing; transportation, communication and utilities; services/other; and wholesale and retail trade.
The PBGC’s estimate of the total underfunding in single-employer plans is approximately $350 billion as of September 30, 2006 (see Note 1) compared to estimates that exceeded $450 billion as of September 30, 2005. The PBGC’s estimate of underfunding as of September 30, 2006, is largely (about 80%) based upon employers’ reports to the PBGC under section 4010 of ERISA of their December 31, 2005, market value of assets and termination liabilities. These values were then rolled forward to September 30, 2006, on a plan-by-plan basis using an average pension asset return from published reports, an average benefit accrual increment, and a liability adjustment factor to reflect the change in interest factors. The roll forward does not adjust for contributions, benefit payments, changes in liabilities due to the passage of time, or plan amendments that may have occurred in 2006 since this information was not readily or reliably available. For single-employer plans sponsored by employers that do not file with the PBGC under section 4010 of ERISA, the PBGC’s estimates of total underfunding are based on data obtained from other filings and submissions to the government and from corporate annual reports for comparable periods. The PBGC does not have a reasonably possible exposure to termination from all of these plans as of the end of 2006 because many are sponsored by companies that had investment grade credit ratings or otherwise had not filed any reportable events.

Total underfunding of multiemployer plans is estimated to exceed $150 billion at September 30, 2006 (see Note 1). In 2005, the PBGC estimated multiemployer underfunding exceeded $200 billion. Multiemployer plan data is much less current and complete than single-employer data - it is generally two years older and in some cases three years older than single-employer data since it comes only from Form 5500 filings.
The PBGC estimates that, as of September 30, 2006, it is reasonably possible that multiemployer plans may require future financial assistance in the amount of $83 million. As of September 30, 2005 and 2004, this exposure was estimated at $418 million and $108 million, respectively.
There is significant volatility in plan underfunding and sponsor credit quality over time, which makes long-term estimates of the PBGC’s expected claims difficult. This volatility, and the concentration of claims in a relatively small number of terminated plans, have characterized the PBGC’s experience to date and will likely continue. Among the factors that will influence the PBGC’s claims going forward are economic conditions affecting interest rates, financial markets, and the rate of business failures.

Investment Activities
The Corporation’s invested assets consist of premium revenues, accounted for in the revolving funds, and assets from terminated plans and their sponsors, accounted for in the trust funds. By law, the PBGC is required to invest certain of the revolving funds (i.e., Funds 1 and 2) in obligations issued or guaranteed by the United States of America. Portions of the other revolving fund (i.e., Fund 7) can be invested in other debt obligations. Current policy is to invest the revolving funds only in Treasury securities. The PBGC uses institutional investment management firms to invest trust fund assets, subject to the PBGC oversight and consistent with the Corporation’s investment policy statement.
As of September 30, 2006, the value of the PBGC’s total investments in the single-employer and multiemployer programs, including cash and investment income, including $6.5 billion of cash collateral from securities lending, was approximately $59.2 billion. The cash collateral is held separately and is reported as part of the PBGC’s total “Cash and cash equivalents” of $8.5 billion as of September 30, 2006. The revolving fund’s value was $15.2 billion and the trust fund’s value was $44.0 billion. Cash and fixed income securities represent approximately 77% of the total assets invested at the end of the year, compared to 75% at the end of 2005. Equity securities represent approximately 23% of total assets, compared to 25% at the end of 2005. A very small portion of the invested portfolio remains in real estate and other financial instruments.

As a result of the PBGC’s biannual investment policy review process, the PBGC adopted enhancements in 2006 to its investment policy to better manage the financial risks facing the federal pension insurance program. The investment policy continues the PBGC’s investment focus of limiting financial risk exposure by investing the majority of the PBGC’s assets in long duration fixed income securities in order to reduce balance sheet volatility. The primary enhancement to the policy in 2006 allows the PBGC to further diversify its investment portfolio by including international investments.
During FY 2006 the PBGC extended the dollar duration of its assets relative to its liabilities in order to better match the interest rate sensitivity of its liabilities. The PBGC’s trusteed liabilities were 85% matched on a dollar duration basis at fiscal year end 2006 compared to 69% matched at the end of fiscal year 2005. However, even though the interest rate sensitivities of the PBGC’s assets and liabilities were 85% matched in dollar duration terms, the PBGC’s ability to limit the volatility of its assets versus its liabilities continues to be significantly affected by basic remaining differences between 1) the interest factors derived from annuity prices on which the PBGC’s liabilities are valued, and 2) the interest rates reflected in the fixed income market which determine the value of the PBGC’s fixed income assets. In contrast with fixed income prices, annuity prices also reflect the costs of mortality guarantees, administrative and marketing expenses, statutory reserves and surplus requirements, and other expense and profit items. These differences have had and can be expected in the future to have a material impact on the Corporation’s ability to fully match off its interest rate risk, despite high levels of dollar duration matching.
During the year, the PBGC’s return on trusteed liabilities was 9% due to the significant decline in the PBGC’s liability valuation interest factors (i.e., the select rate dropped from 5.2% on September 30, 2005 to 4.85% on September 30, 2006). A positive liability return implies an increase in the PBGC’s trusteed liabilities. This major effect is captured in the actuarial charge, which increased $5.0 billion for the year.

The 9% liability return compares to a total return on the PBGC’s invested assets of 4.2% which resulted in $2.2 billion in investment income. Rising market interest rates negatively affected the PBGC’s fixed income portfolio. Nevertheless, the fixed income portfolio was able to earn a positive 1.4% and contribute $393 million in investment income due to the coupon income generated by the portfolio. The revolving fund investments, which have the longest duration, were most negatively affected by the rising interest rate environment and returned only 0.6% for the year. However, equities continued their strong performance and returned 10.7%, contributing $1.8 billion, or 82%, of the $2.2 billion total investment income.
As stated above, liability valuation interest factors and market based interest rates moved in opposite directions for 2006. The decline in the PBGC’s interest factors increased the PBGC’s liabilities while at the same time rising market interest rates negatively affected the PBGC’s assets. The PBGC’s total investment income of $2.2 billion was only able to match approximately 40% of the $5.3 billion financial expense (includes the total of investment fees and actuarial charges) resulting in a FY 2006 financial loss of $3.1 billion. The $3.1 billion financial loss largely resulted because the annuity and fixed income market interest factors were uncorrelated for the year. These uncorrelated differences continue to limit the PBGC’s overall ability to minimize the volatility of its assets versus its liabilities, and thus reduce balance sheet volatility for the year. However, strong equity returns in 2006 mitigated this year’s financial loss.

The PBGC Management Assurances and Internal Controls
The PBGC places a significant emphasis on its Internal Controls Program, which is designed to meet the requirements of the Federal Managers’ Financial Integrity Act (FMFIA) and Office of Management and Budget (OMB) Circular A-123. The PBGC has put into place a comprehensive process supporting the PBGC’s FMFIA Assurance Statement below, and including the activities described as follows:

FMFIA Assurance Statement Process

In support of the PBGC Interim Director’s FMFIA Assurance Statement, members of the PBGC’s senior management were required to prepare and submit an annual assurance statement advising whether functions and processes under their areas of responsibility were operating as intended. As input to this decision, reports issued under the PBGC’s Internal Control Program, known control deficiencies, (e.g., existing reportable conditions), and other related sources of information were considered. For Fiscal Year 2006, all the required assurances were positive.

The PBGC Internal Control Committee

The PBGC Internal Control Committee (ICC) provides corporate oversight and accountability regarding internal controls over the PBGC operations, financial reporting, and compliance with laws and regulations. Chaired by the Chief Financial Officer, the committee’s membership represents a cross-section of the agency and includes a representative from the PBGC Office of Inspector General (OIG) as a non-voting member. The ICC approves major changes to the PBGC processes and systems, reviews identified internal control deficiencies and related issues, and monitors the status of management’s corrective actions.

Documentation and Testing of Key Financial Reporting Controls

The PBGC has identified 10 major business process cycles which have a significant impact on the PBGC’s financial reporting processes. These include Benefit Payments, Benefit Determinations, Premiums, Investments/Treasury, Losses on Completed and Probable Terminations, Single-Employer Contingent Liability, Non-Recoverable Future Financial Assistance, Budget, Present Value of Future Benefits and Financial Reporting cycles. As of the end of FY 2006, the PBGC’s Internal Control Committee had approved 159 key controls over financial reporting within these major business cycles. As part of the PBGC Internal Control Program, these controls were documented and evaluated for the adequacy of control design, and regularly tested to determine operating effectiveness throughout the year. In addition, the PBGC maintained logs documenting control execution, and provided written representations, on a quarterly basis, regarding the performance of these key controls over financial reporting.

Documentation and Testing of Entity-Wide and General Information Technology Controls

The PBGC’s Internal Control Committee approved 42 key entity-wide controls which have an overarching impact on the agency’s internal control processes as a whole. In addition, the PBGC management identified 34 key General Information Technology controls to provide an appropriate control environment for the operation of the PBGC computer systems
and applications. As part of the PBGC Internal Control Program, these controls were documented and tested for the adequacy of control design and operating effectiveness.

Assessment of Improper Payment Risk

Consistent with the objectives of the Improper Payments Information Act of 2002, the PBGC conducted a risk assessment (based on guidance issued by the Office of Management and Budget) to determine whether any of its programs were considered susceptible to significant improper payments. This risk assessment included an evaluation of outgoing payments processes, and discussions with and representations from appropriate PBGC management officials. Based on this risk assessment and using OMB thresholds as criteria, the PBGC’s benefit payments, premium refunds, payroll and travel disbursements, vendor payments, or other payment processes are not believed to be susceptible to significant improper payment risk.

Audit Follow-up Program

In accordance with the Office of Management and Budget (OMB) Circular A-50, the Corporation has established policies and procedures to assure the efficient resolution and implementation of audit recommendations contained in audit reports issued by the OIG and the Government Accountability Office (GAO). The PBGC works closely with both the OIG and GAO to ensure effective communication about the work needed to address the audit findings and recommendations. The PBGC regularly monitors implementation efforts to help ensure timely completion and closure of recommendations.

The PBGC maintains a Compendium of Legal Authority which provides a list of laws and other requirements which may impact significantly our financial statements or impose a significant requirement of the PBGC. This list identifies the applicable requirement, provides a short description, and cites the responsible entity within the PBGC and a point of contact. The PBGC annually updates this list and distributes this list to the PBGC management representatives to promote awareness of and help ensure compliance with legal authority.

In accordance with the Federal Managers’ Financial Integrity Act and OMB Circular A-123, the PBGC is pleased to present its FMFIA Assurance Statement for FY 2006:

Federal Managers’ Financial Integrity Act Assurance Statement
The PBGC’s management is responsible for establishing and maintaining effective internal control and financial management systems that meet the objectives of the Federal Managers’ Financial Integrity Act (FMFIA). The PBGC conducted its assessment of the effectiveness of internal control over the effectiveness and efficiency of operations and compliance with applicable laws and regulations in accordance with OMB Circular A-123, Management’s Responsibility for Internal Control. Based on the results of this evaluation, the PBGC can provide reasonable assurance that its internal control over the effectiveness and efficiency of operations and compliance with applicable laws and regulations as of September 30, 2006, was operating effectively and no material weaknesses were found in the design or operation of the internal controls.
In addition, the PBGC conducted its assessment of the effectiveness of internal control over financial reporting, which includes safeguarding of assets and compliance with applicable laws and regulations, in accordance with the requirements of Appendix A of OMB Circular A-123. Based on the results of this evaluation, the PBGC can provide reasonable assurance that its internal control over financial reporting as of September 30, 2006, was operating effectively and no material weaknesses were found in the design or operation of the internal control over financial reporting.