2006 Annual Report Highlights

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

I. Introduction
PBGC management believes that the following discussion and analysis of the Corporation’s financial statements and other statistical data will enhance the reader’s understanding of PBGC’s financial condition and results of operations. This discussion should be read in conjunction with the financial statements beginning on page 39 and with the accompanying notes.

II. Financial and Program Risks
PBGC’s operating results can change markedly 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. Operating results may be more variable than those of most private insurers, in part because PBGC must provide insurance of catastrophic risk, but must do so without all the tools available to private insurers. Most private insurers are able to diversify or reinsure their catastrophic risks or to apply traditional insurance underwriting methods to these risks. The Corporation cannot decline insurance coverage regardless of the potential risk posed by an insured. Private insurers can also adjust premiums in response to actual or expected claims exposure. In contrast, PBGC’s premiums are defined by statute and the Congress must approve any premium changes.
Claims against PBGC’s insurance programs are highly variable. A single large pension plan termination may result in a more significant claim against the Corporation than the termination of many smaller plans. Future results will continue to depend largely on the infrequent and unpredictable termination of a limited number of very large plans. Additionally, PBGC’s risks are concentrated in certain industries. Finally, PBGC’s financial condition is also sensitive to market risk associated with interest rates and equity returns, as those risks apply both to PBGC’s own assets and liabilities and to those of PBGC-insured plans.

III. Recent Developments
Pension Protection Act of 2006 (PPA): This legislation, signed into law in 2006, by President George W. Bush, made a number of changes to the pension insurance system, including changes to premiums, guarantee rules, reporting and disclosure, multiemployer plan withdrawal liability, and the missing participants program.

During FY 2008, PBGC continued developing the numerous rules necessary to implement and comply with the PPA. In developing these regulations, PBGC seeks to ease and simplify employer compliance whenever possible, taking into account the needs of small businesses. In line with these principles, PBGC published two final rules implementing premium changes. The first implemented the new termination premium applicable to certain plan terminations, which the PPA made permanent, and the new cap on the variable-rate premium for plans of small employers. The second implemented the new provisions for calculating the variable-rate premium, effective for 2008 plan years. These final rules completed a major portion of PBGC’s PPA implementation plan.

During FY 2008, PBGC also published proposed rules on PPA changes to annual financial and actuarial information reporting under ERISA section 4010, multiemployer withdrawal liability, disclosure of termination information, and payment of benefits in PBGC-trusteed plans (where the plan terminates while the sponsor is in bankruptcy). PBGC expects to finalize these rules in FY 2009. PBGC also issued significant guidance in FY 2008 on several PPA implementation issues, including lump sum calculations in terminating plans.

During FY 2009, PBGC expects to publish proposed and/or final rules implementing the expanded missing participants program and PPA changes to terminating cash balance plans and PBGC’s guarantee of shutdown benefits.

IV. Discussion of Insurance Programs
PBGC operates two separate insurance programs for defined benefit plans. PBGC’s single-employer program guarantees payment of basic pension benefits when underfunded plans terminate. The insured event in the single-employer program is plan termination. By contrast, in the multiemployer program, the insured event is plan insolvency. PBGC’s multiemployer program financially assists insolvent covered plans to pay benefits at the statutorily guaranteed level. By law, the two programs are funded and administered separately, and their financial conditions, results of operations, and cash flows are reported separately.

IV.A Single-Employer Program Results of Activities and Trends
The single-employer program covers about 33.8 million participants, down from 33.9 million participants in 2007. The number of covered plans decreased from about 29,300 in 2007 to about 27,900 in 2008 (2007 numbers were revised from those reported last year). Most covered terminated plans had sufficient funding to cover future benefits. Most of these plans distributed all plan benefits as insurance company annuities or lump sums pursuant to the standard termination rules of ERISA. In contrast when a covered underfunded plan terminates, PBGC becomes trustee of the plan, applies legal limits on payouts, and pays benefits.

In FY 2008 the drivers of the net income of $2.433 billion included the following: a credit of $7.564 billion due to a favorable change in interest factors; $1.402 billion in premium income; completed and probable terminations credit of $826 million; and $649 million in actuarial adjustments. These amounts were offset by investment losses of $4.164 billion and a $3.400 billion actuarial charge due to passage of time.

PBGC’s single-employer program realized a net gain of $2.433 billion compared to a net gain in 2007 of $5.031 billion. The $2.598 billion year-to-year change in net income was primarily attributable to (1) a $4.755 billion decrease in actuarial charges due to higher interest rates, (2) an increase of $1.225 billion in credits from completed and probable terminations, and (3) an increase in credits from actuarial adjustments of $535 million offset by (4) an investment loss of $4.164 billion in FY 2008 down from a gain of $4.737 billion in FY 2007 and (5) a $74 million decrease in premium income. Actuarial charges and adjustments arise from gains and losses from mortality and retirement assumptions, changes in interest factors, and passage of time. Passage of time refers to the interest that is assumed to be earned during the fiscal year; future benefit payments for terminated plans are discounted using an assumed interest factor which must then be earned during the year.

Underwriting Activity: PBGC’s single-employer program realized a net gain to underwriting income of $2.483 billion in 2008, a significant improvement from the gain of $804 million in 2007. This $1.679 billion year-to-year increase was primarily due to $1.225 billion in credits from completed and probable terminations, as well as the year-to-year increase in credits from underwriting actuarial adjustments of $535 million, offset by decreases in single-employer premium income of $74 million.

Income from underwriting activity decreased (from $1.531 billion in 2007 to $1.425 billion in 2008), mirroring a decrease in premium income from plan sponsors (from $1.476 billion in 2007 to $1.402 billion in 2008). Other income, consisting of interest on recoveries from sponsors, decreased from $55 million in 2007 to $23 million in 2008.

Annual flat-rate premiums for the single-employer program increased to $33 per participant. Flat-rate premium income increased to approximately $1.19 billion in 2008. Annual VRP decreased by $117 million to a total of $241 million. Underfunded single-employer plans subject to the VRP paid VRP at a rate of $9 per $1,000 of underfunding (plans that meet certain minimum funding requirements are exempt from the VRP).

The Required Interest Rate (RIR) used in calculating underfunding for purposes of determining a VRP is 100 percent of a composite corporate bond yield, which resulted in a rate of 5.75% for 2007 calendar-year plans compared to a rate of 4.86% for 2006 calendar-year plans.
For calendar-year 2008 plans, PPA eliminated the full-funding VRP exemption and changed the interest rate rules for determining a plan’s present value of vested benefits for VRP purposes. Under PPA, the present value is determined using three “segment” rates. The first of these applies to benefits expected to be paid within five years of the first day of the plan year, the second applies to the following 15 years, and the third applies to benefits expected to be paid after that.

The Secretary of the Treasury determines each segment rate monthly using the portion of a corporate bond yield curve that is based on corporate bonds maturing during that segment rate period. The corporate bond yield curve, also prescribed on a monthly basis by the Secretary of the Treasury, reflects the yields for the previous month on investment-grade corporate bonds with varying maturities that are in the top three quality levels. For comparison, the segment rates for January, 2008 calendar-year plans were 4.93%, 6.13%, and 6.69% for the first, second, and third segments, respectively. For plan year 2008, the VRP has remained steady in spite of the PPA changes and elimination of the VRP exemptions. However, the VRP from fiscal year 2007 to 2008 declined due to the higher RIR, new rate structure, stronger economy, and the effects of lower plan funding liabilities.

The Corporation’s losses from completed and probable plan terminations improved from a charge of $399 million in 2007 to a credit of $826 million in 2008. This was primarily due to the reduction in probable claims of $632 million.

The net claim for probable terminations as of September 30, 2008, is $3.154 billion, while the net claim as of September 30, 2007, was $3.786 billion. This $632 million reduction resulted primarily from the transfer of $148 million of previously accrued claims to a termination status (see note 5), and a decrease in net claims of $706 million for plans remaining in the probable classification from 2007, offset by the addition of 20 new probables with net claims of $233 million. The actual amount of future losses remains unpredictable.

Administrative expenses increased $22 million from $328 million in 2007 to $350 million in 2008. The FY 2008 expense of $67 million in “Expenses: Other” includes a write-off of uncollectible premiums owed by terminated plans and a reserve for disputed or doubtful post-termination premiums.

Financial Activity: In FY 2008 all but $50 million of the single-employer net investment losses of $4.164 billion were absorbed by the net actuarial credits of $4.114 billion for the passage of time and changes in interest rates. Single-employer financial net income decreased significantly from a gain of $4.227 billion in 2007 to a loss of $50 million in 2008. The Corporation had an investment loss of $4.164 billion in FY 2008, compared with investment income of $4.737 billion in FY 2007, leading to the year-over-year decline. This was offset by a year-over-year decrease of $4.624 billion in actuarial charges. PBGC marks its assets to market.

Actuarial charges under financial activity represent the effects of changes in interest rates and the passage of time on the present value of future benefits. The passage of time charges are due to the shortening of the discount period as the valuation date moves forward in time. The increase in passage of time charges is due primarily to the different interest factors in effect at the beginning of FY 2008 and FY 2007, 5.31% and 4.85%, respectively. Charges due to change in interest rates decreased substantially due to the increase in the applicable interest factors.

PBGC discounts its liabilities for future benefits with interest factors that, together with the mortality table used by PBGC, approximate the price in the private-sector annuity market at which a plan sponsor or PBGC could settle its obligations. PBGC’s select interest factor increased to 6.66% (for the first 20 years after the valuation date) at September 30, 2008, from 5.31% for the first 20 years at September 30, 2007. The ultimate factor increased to 6.47% at September 30, 2008, after the first 20 years from 4.88% at September 30, 2007.

PBGC’s single-employer PVFB (Present Value of Future Benefits) decreased from $69.235 billion at September 30, 2007 to $59.996 billion at September 30, 2008. PVFB comprises the vast majority of PBGC's combined total liabilities on its Statements of Financial Condition of $74.126 billion.

IV.B Multiemployer Program Results of Activities and Trends

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 covers about 10.1 million participants (up from 10.0 million participants in 2007) in about 1,500 insured plans. PBGC does not trustee multiemployer plans. Under this program, PBGC financially assists insolvent multiemployer plans through loans that enable them to pay guaranteed benefits. Once begun, these loans generally continue year after year until the plan no longer needs assistance or has paid all promised benefits at the guaranteed level. These loans are rarely repaid.

In 2008 the multiemployer program’s present value of nonrecoverable future financial assistance decreased to $1.768 billion, a decrease of $356 million. During the fiscal year, PBGC paid $85 million in financial assistance to 42 insolvent plans.

The multiemployer program reported a net gain of $482 million in FY 2008 compared to a net loss of $216 million in FY 2007. This resulted in a negative net position of $473 million in FY 2008 compared to a negative net position of $955 million in FY 2007. The change in net income was primarily due to the decrease in expected loss from future financial assistance of $590 million, an increase in investment income of $98 million, and an increase in premium income of $9 million.

The multiemployer program reported a net gain from underwriting activity of $361 million in FY 2008 compared to a net loss of $239 million in FY 2007. This improvement of $600 million was primarily attributed to the decrease in losses from financial assistance of $590 million (due to the deletion of nine plans from the multiemployer probable inventory and the increase in interest factors, offset by the addition of five plans) and the increase in premium income of $9 million. Financial activity reflected financial income of $121 million from earnings on fixed income investments in 2008, compared to income of $23 million in 2007. Multiemployer program investments originate primarily from the cash receipts for premiums due from insured plans. By law, PBGC is required to invest these premiums in obligations issued or guaranteed by the United States of America. Multiemployer program assets at year-end were invested 98.3 percent in Treasury securities, as compared to 99.3 percent in Treasury securities in 2007.

V. Overall Capital and Liquidity
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 PBGC’s investments, and the assets taken over from failed plans.
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 PBGC’s long-term obligations to plan participants.
FY 2008 combined premium cash receipts totaled $1.4 billion, a decrease of $250 million from $1.7 billion in 2007. Net cash flow provided by investment activity decreased to $1.1 billion versus $1.2 billion provided in 2007.
In 2008, PBGC’s cash receipts of $3.9 billion from operating activities of the single-employer program were insufficient to cover its operating cash obligations of $5.3 billion. This resulted in net cash underperformance from operating activities of $1.4 billion (as compared to underperformance of $1.0 billion in 2007). When the single-employer cash provided through investing activities of $1.1 billion is added to this net cash underperformance, the single-employer program in the aggregate experienced a net cash decrease of $295 million. In the multiemployer program, cash receipts of $140 million from operating activities were sufficient to cover its operating cash obligations of $117 million, resulting in net cash provided by operations of $23 million, and an overall net cash increase of $13 million.
During FY 2008, PBGC recovered approximately $66 million through agreements with sponsors of terminated plans for unpaid contributions and unfunded benefits. A portion of PBGC’s recoveries is paid out as additional benefits to plan participants with nonguaranteed benefits according to statutory priorities.
In 2008, PBGC’s combined net decrease in cash and cash equivalents amounted to $282 million, arising from a decrease of $295 million for the single-employer program and an increase of $13 million for the multiemployer program.

VI. Outlook
For FY 2009, PBGC estimates $4.8 billion in single-employer benefit payments and $97 million in financial assistance payments to multiemployer plans. Under a continuing resolution for FY09, which will be in effect through March 6, 2009, PBGC will operate on 43 percent of its FY08 administrative budget of $411 million during this period.
In 2009, significant factors beyond PBGC’s control (including changes in interest rates, the financial markets, plan contributions made by sponsors, and recently enacted statutory changes) will continue to influence PBGC’s underwriting income and investment gains or losses. PBGC’s best estimate of 2009 premium receipts ranges between $1.4 billion and $1.6 billion. No reasonable estimate can be made of 2009 terminations, effects of changes in interest rates, or investment income.
As of September 30, 2008, the single-employer and multiemployer programs reported deficits of $10.7 billion and $473 million, respectively. Notwithstanding these deficits, the Corporation has $63 billion in assets and will be able to meet its obligations for a number of years. However, neither program at present has the resources to fully satisfy PBGC’s obligations in the long run.

VII. Single-Employer and Multiemployer Program Exposure
PBGC estimates its loss exposure to reasonably possible terminations (e.g., underfunded plans sponsored by companies with credit ratings below investment grade) at approximately $47 billion on September 30, 2008, and $66 billion on September 30, 2007. The comparable estimate of reasonably possible exposure for 2006 was approximately $73 billion. PBGC’s exposure to loss may be less than these amounts because of the statutory guarantee limits on insured pensions, but this estimate is not available because it is difficult to prospectively determine the extent and effect of the guarantee limitations. These estimates are measured as of December 31 of the previous year (see Note 8). For FY 2008, this exposure was concentrated in the following sectors: manufacturing (primarily automobile/auto parts, and primary and fabricated metals), transportation (primarily airlines), and wholesale and retail trade.
The Corporation estimates that, as of September 30, 2008, it is reasonably possible that multiemployer plans may require future financial assistance of approximately $30 million. As of September 30, 2007 and 2006, these exposures were estimated at approximately $73 million and $83 million, respectively.
The significant volatility in plan underfunding and sponsor credit quality over time makes long-term estimates of PBGC’s expected claims difficult. This volatility, and the concentration of claims in a relatively small number of terminated plans, have characterized PBGC’s experience to date and will likely continue. Factors such as economic conditions affecting interest rates, financial markets, and the rate of business failures will also influence PBGC’s claims going forward.
Total underfunding reported under Section 4010 of ERISA is the most current source of individual plan underfunding information; it has accounted for over 75 percent of the estimates of total underfunding reported in the recent past. Prior to PPA, section 4010 required that companies annually provide PBGC with information on their underfunded plans if the firm’s aggregate underfunding exceeds $50 million or there is an outstanding lien for missed contributions exceeding $1 million or an outstanding funding waiver of more than $1 million. However, changes to reporting requirements including some imposed by PPA that take effect for 2008 have degraded PBGC’s ability to estimate total underfunding. As a result PBGC is no longer publishing estimates of total underfunding in the Annual Management Report. However, the Corporation will continue to publish Table S-47, "Various Estimates of Underfunding in PBGC-Insured Plans," in its Pension Insurance Data Book where the limitations of the estimates can be fully and appropriately described.

VIII. Investment Activities
PBGC uses institutional investment management firms to invest its assets, subject to PBGC’s oversight and consistent with the Corporation’s investment policy statement approved by its Board of Directors. PBGC does not determine the specific investments to be made but instead relies entirely on its investment managers’ discretion in executing investments appropriate for their assigned investment mandate. PBGC does ensure that each investment manager adheres to PBGC prescribed investment guidelines associated with each investment mandate.

PBGC’s investment assets consist of premium revenues, accounted for in the revolving funds, and assets from trusteed plans and their sponsors, accounted for in the trust funds. By law, PBGC is required to invest certain 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, but under PBGC’s investment policy these revolving funds are invested solely in Treasury securities. Total revolving fund investments, including cash and investment income, at September 30, 2008, were approximately $14.97 billion ($0.21 billion for Fund 1, $1.33 billion for Fund 2, and $13.43 billion for Fund 7). PBGC has never established funds 3, 4, 5 or 6, which ERISA authorized for special discretionary purposes. Trust fund investments totaled $35.80 billion as of September 30, 2008. At the end of FY 2008, PBGC's total investments consisting of cash and cash equivalents, investments, and investment income receivable as shown on the Statements of Financial Condition were $50.77 billion.

PBGC’s investment program, with assets under management of approximately $49.76 billion as of September 30, 2008, is responsible for managing the vast majority of PBGC’s assets utilizing private sector investment management firms. A small percentage of PBGC’s investments included on the balance sheet but not managed within the investment program represent assets that are in transition from newly terminated trusteed plans or other special holdings not subject to PBGC’s investment policy. The following asset allocation percentages refer to the investments within PBGC’s investment program, and subject to the corporation’s investment policy.

Cash and fixed income securities totaled approximately 71 percent of total assets invested at the end of FY 2008, compared to 68 percent for FY 2007. Equity securities represented 27 percent of total assets invested at the end of FY 2008, compared to 32 percent for FY 2007. The total return on investments for FY 2008 was -6.5% compared to 7.2% in 2007. Alternative investments, comprised largely of private equity acquired from trusteed plans, represented 2% of investments at the end of FY 2008.

During FY 2008, PBGC completed an investment program and policy review. As a result, PBGC adopted a new investment policy in February 2008 that utilizes a more diversified investment structure. The new investment policy allocates 45 percent to equities, 45 percent to fixed income, 5 percent to real estate, and 5 percent to private equity. The objectives of PBGC’s new investment policy are: to prudently maximize investment returns; to take advantage of PBGC’s long-term investment horizon; and to increase the probability of closing its current funding gap and of meeting its future obligations.
PBGC has taken a careful and deliberate approach to the implementation of this new policy. At the end of FY 2008, the Corporation had selected investment managers for its fixed income and equity allocations, and had initiated an exhaustive search for strategic partners to assist in managing PBGC’s investments in both private equity and real estate.

In FY 2008, PBGC continued to hold a large portion of its investments in long duration fixed income securities, while working to transition the assets into the new target allocations. PBGC will continue to take a prudent and careful approach to the phased implementation of this long-term policy in FY 2009 and beyond.

PBGC also appointed a new Chief Investment Officer and added technical staff resources to facilitate the implementation process and to support the ongoing oversight of its investment program.

During FY 2008, there were unprecedented market developments led by the difficulties in the sub-prime mortgage market and the overall de-leveraging of the U.S. financial markets. These events triggered a spiral of significant write-downs and declines in almost all asset values. Financial markets experienced both a severe credit crunch and a liquidity crisis, which resulted in unprecedented Government interventions in the capital markets.

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.

Investment Performance (Annual Rates of Return)
			Three and Five
September 30, Years Ended
	2008	2007	September 30, 2008
			3 yrs	5 yrs

Total Invested Funds	(6.5)%	7.2%	1.5%	4.2%

Equities	(23.2)	16.5	(0.3)	5.6
Fixed Income	1.6	3.4	2.2	3.7

Trust Funds	(11.8)	9.5	0.9	4.7
Revolving Funds	8.3	2.0	3.6	4.6

Indices
Dow Jones Wilshire 5000	(21.3)	17.0	0.6	6.0
MSCI All Country World ex-U.S.	(30.3)	30.5	2.6	11.3
S&P 500 Stock Index	(22.0)	16.4	0.2	5.2
Lehman Long Gov’t/Credit	(0.4)	3.7	2.0	3.7
Fixed Income Composite Benchmark*	0.8	3.2	1.8	3.3
Global Equity Composite Benchmark**	(22.3)	17.9	0.4 5.9
Total Fund Benchmark***	(6.6)	7.5	1.5 4.1
The Fixed Income Composite Benchmark is a dynamically weighted benchmark based upon the weights of PBGC’s fixed income managers and the returns of their respective benchmarks. The Global Equity Composite Benchmark is a dynamically weighted benchmark utilizing both the Dow Jones Wilshire 5000 Index and the MSCI All Country World ex-U.S. Index. **The Total Fund Benchmark is a dynamically weighted benchmark based upon the weights of the equity, fixed income and cash benchmarks.

The Dow Jones Wilshire 5000 Index returned -21.3% at the end of FY 2008, and the MSCI All Country World ex-US Index returned -30.3%. The Lehman Long Government/Credit Index returned -0.4%. PBGC’s fixed income investments earned a 1.6% return and contributed $698 million in investment income. PBGC’s equity investments returned -23.2%, reducing investment income by $4.788 billion. PBGC’s total invested fund return of -6.5% for the one-year period compares to a total fund composite benchmark return of -6.6%. The total invested fund return and total fund benchmark return are weighted average returns representing the asset allocation of the entire investment portfolio.

PBGC Management Assurances and Internal Controls Program
PBGC’s Internal Controls Program provides for compliance with the Federal Managers’ Financial Integrity Act (FMFIA) and Office of Management and Budget (OMB) Circular A-123 requirements. This program and the other activities described below support the Director’s Assurance Statement for FY 2008:

FMFIA Assurance Statement Process
In support of the Director’s Assurance Statement, members of PBGC’s executive and senior management prepared and submitted annual assurance statements regarding whether internal controls within their respective areas of responsibility were operating as intended and provided for compliance with FMFIA. For FY 2008, each member of PBGC’s executive and senior management provided a positive assurance statement.

Internal Control Committee
The PBGC Internal Control Committee (ICC) provided corporate oversight and accountability regarding internal controls over PBGC operations, financial reporting, and compliance with laws and regulations. Chaired by the Chief Financial Officer, the committee’s membership includes staff from each major area of the agency, including a non-voting member of PBGC’s Office of Inspector General (OIG). The ICC approves major changes to key financial reporting controls and PBGC systems, monitors the status of internal control deficiencies and related corrective actions, and considers other matters, including controls designed to prevent or detect fraud.

Documentation and Testing of Key Financial Reporting Controls
PBGC has identified 12 major business process cycles which have a significant impact on PBGC’s financial reporting processes, as follows: Benefit Payments Processing, Benefit Determinations, Budget, Financial Reporting, Investments, Losses on Completed and Probable Terminations, Non-Recoverable Future Financial Assistance, Payables, Payroll, Premiums, Single-Employer Contingent Liability, and Present Value of Future Benefits. As of the end of FY 2008, PBGC had identified 157 key controls over financial reporting within these major business cycles. Employees responsible for performance of these controls maintained logs documenting control execution, and provided quarterly representations regarding the performance of those controls. These controls were also evaluated for the adequacy of control design and regularly tested to determine operating effectiveness of the controls
during the year. Reports regarding results of testing were provided to PBGC management and ICC members for consideration under FMFIA.

Documentation and Testing of Entity-Wide and Information Technology Controls
Entity-wide controls are overarching controls that support the overall effectiveness of PBGC’s internal control environment. As of the end of FY 2008, PBGC had identified 42 key entity-wide controls within the following six components of its internal control environment: control environment, risk assessment, control activities, information and communication, monitoring, and anti-fraud.

Federal Information Processing Standards Publication 200 (FIPS 200) – “Minimum Security Requirements for Federal Information and Information Systems” requires that PBGC implement information technology and other controls that protect the confidentiality, integrity, and availability of federal information systems and the information processed, stored, and transmitted by those systems. National Institute of Standards and Technology Special Publication No. 800-53 (NIST 800-53) provides agencies guidance on implementation and testing of internal controls that correspond to FIPS 200 Processing Standards. During FY 2008, PBGC made a concerted effort to document and assign operational responsibility for 65 NIST 800-53 controls. The documentation and assignment of additional controls specified under NIST 800-53 will continue.

Both entity-wide and information technology controls were assessed from both a design and operating effectiveness perspective, and reports regarding results of testing were provided to PBGC management and ICC members for consideration under FMFIA.

Assessment of Improper Payment Risk
Consistent with the objectives of the Improper Payments Information Act (IPIA) of 2002, PBGC conducted a risk assessment to determine whether any of its programs were considered susceptible to significant improper payments. In performing its mission, PBGC processes a variety of different types of outgoing payments, including benefit payments, financial assistance payments to certain multiemployer plans, premium insurance refunds, payroll and travel disbursements, and payments to vendors. PBGC has established internal controls over each form of outgoing payments to prevent improper payments or detect them in a timely manner. Given OMB reporting thresholds, our risk assessment efforts focused on outgoing benefit payments. PBGC had issued more than $4.2 billion in payments to over 600,000 participants and beneficiaries during FY 2008. Our assessment included a review of selected benefit payments, electronic analysis of our participant database, and discussions with appropriate PBGC management officials. PBGC has concluded that its payment processes are not susceptible to significant improper payments risks.

Audit Coordination and Follow-up Program
During FY 2008, PBGC completed a major update to guidance provided to PBGC managers and employees in regard to the coordination and follow-up of audits of PBGC performed by the Office of Inspector General (OIG) and Government Accountability Office (GAO). A cross-section of PBGC management, as well as OIG representatives, provided input to a revised directive which implements OMB Circular A-50 requirements. PBGC views the performance of independent audits as essential to promoting its accountability to PBGC stakeholders and remains committed to timely resolution and implementation of agreed-upon recommendations. During the year, both the OIG and GAO issued a number of reports containing recommendations for PBGC management to consider, and PBGC is in the process of implementing appropriate corrective actions. To facilitate timely completion and closure of recommendations, PBGC regularly monitors implementation efforts, including regular distribution of status reports via an electronic portal and formal submission of documentation as recommendations are completed.

Compendium of Legal Authority
PBGC maintains a Compendium of Legal Authority that lists laws, regulations, and other requirements that may have a significant impact on PBGC’s financial statements or PBGC operations. This list identifies applicable requirements, provides a description, and details the contact point and entity within PBGC that have primary compliance responsibility. PBGC annually updates and distributes this list to PBGC management to help ensure compliance with legal authority.

In accordance with the Federal Managers’ Financial Integrity Act and OMB Circular A-123, the Director’s Assurance Statement for FY 2008 is presented below:

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). 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, 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, 2008, was operating effectively and no material weaknesses were found in the design or operation of the internal controls.

In addition, 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, PBGC can provide reasonable assurance that its internal control over financial reporting as of September 30, 2008, was operating effectively and no material weaknesses were found in the design or operation of the internal control over financial reporting.