2004 Annual Performance and Accountability Report

The Pension Benefit Guaranty Corporation is a federal corporation established under the Employee Retirement Income Security Act (ERISA) of 1974, as amended. It currently guarantees payment of basic pension benefits earned by 44.4 million American workers and retirees participating in 31,200 private-sector defined benefit pension plans. The Corporation receives no funds from general tax revenues. Operations are financed largely by insurance premiums paid by companies that sponsor defined benefit pension plans and by investment income and assets from terminated plans. The following constitutes PBGC's annual performance and accountability report for fiscal year 2004, as required under OMB Circular No. A-11, Section 230-1.

FINANCIAL STATEMENTS

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

General

The financial review that follows provides information that management believes is relevant to an assessment and understanding of the Pension Benefit Guaranty Corporation’s (PBGC) financial condition and results of operations. The discussion should be read in conjunction with the financial statements and the accompanying notes.

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 liabilities, investment performance, general economic conditions and other factors such as changes in law. PBGC’s operating results differ from those of most private insurers, especially in their variability. 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.

PBGC operated for several years with virtually no claims and then experienced a period of record-breaking claims. PBGC’s financial future is tied to the infrequent and unpredictable termination of a limited number of very large pension plans. PBGC’s financial condition is equally sensitive to market factors such as interest rates and equity returns, which are also highly volatile. Extended periods of low interest rates and falling equity returns increase the risk of more frequent and severe plan terminations.

PBGC divides its business activity into two broad categories for the purpose of financial reporting. The first category, Underwriting Activity, consists of the provision of financial guaranty insurance to the sponsors of defined benefit pension plans in return for insurance premiums. 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. The second category, Financial Activity, consists of the performance of PBGC’s assets and liabilities. Gains and losses on PBGC’s investments and changes in the value of PBGC’s benefit liabilities (e.g., actuarial charges such as changes in interest rates and passage of time) are included in this category.

Combined Results

PBGC operates two separate insurance programs for defined benefit plans. Through its single-employer program, PBGC guarantees payment of basic pension benefits when underfunded plans terminate. PBGC’s multiemployer program is funded and administered separately from the single-employer program, and the event triggering PBGC’s guarantee is the inability of a covered multiemployer plan to pay benefits when due at the guaranteed level, rather than plan termination as required in the single-employer program. The financial condition, results of operations, and cash flows of these two programs are reported separately because the programs are separate by law. Combined results are also reported to provide the reader of PBGC’s statements an overall understanding of PBGC’s financial position.

The combined programs’ underwriting and financial activities resulted in a net loss for the fiscal year of $12.042 billion and a deficit of $23.541 billion. The single-employer program posted a net loss of $12.067 billion, the largest loss in the history of the single-employer program, and a deficit of $23.305 billion. The multiemployer program reported net income of $25 million and a deficit of $236 million.

Single Employer Program

The single-employer program covers about 34.6 million workers and retirees in about 29,600 plans. In addition, PBGC oversees terminations of fully funded plans and guarantees payment of basic pension benefits when underfunded plans must be terminated. After an underfunded plan terminates, PBGC becomes trustee of the plan and administers benefits.

Results of Activities and Trends: The trend of large claims against the pension insurance system continued in FY 2004. This resulted in a net loss in 2004 of $12.067 billion compared to a net loss in 2003 of $7.600 billion. The $4.467 billion increase in the loss was primarily attributable to an increase of $9.330 billion in losses from completed and probable terminations and actuarial adjustments of $1.417 billion due to a one-time change in mortality assumptions. PBGC changed the mortality table to reflect its most current actual experience over the period 1994 through 2001. This was partially offset by decreases in actuarial charges of $5.791 billion primarily due to an increase in interest rates and increases in premium revenue of $510 million. These actuarial charges are the net of charges and credits from actuarial methods and assumptions, changes in interest rates, and passage of time (due to the shortening of the discount period as the valuation date moves forward in time, the present value of future benefits increases).

Underwriting Activity: PBGC experienced an underwriting loss of $14.977 billion in 2004, a significant increase from the loss of $4.877 billion in 2003. This $10.100 billion increase in the loss was primarily due to the largest losses from completed and probable terminations in the history of the Corporation, as well as a significant increase in actuarial adjustments due to a change in mortality assumptions, offset by an increase in premium revenue and a decrease in administrative and other charges.

Underwriting income increased largely due to an increase in premiums paid by plan sponsors from $976 million in 2003 to $1.482 billion in 2004. The $510 million change in premiums was due primarily to the increase in variable-rate premium income. Other income decreased from $28 million in 2003 to $24 million in 2004 and consists of recoveries from sponsors. Annual flat-rate premiums for the single-employer program are $19 per participant. Underfunded single-employer plans also pay variable-rate premiums of $9 per $1,000 of underfunding if not exempt (e.g., meets certain minimum funding requirements) from the variable-rate premiums. Annual flat-rate premiums for the multiemployer program are $2.60 per participant and there are no variable-rate premiums.

The Required Interest Rate (RIR) used in calculating underfunding for purposes of determining a plan’s variable-rate premium (VRP) is 85 percent of the annual yield on 30-year Treasury securities. However, temporary legislation in 2002 changed this to 100 percent of the annual yield on 30-year Treasury securities for plan years beginning in 2002 and 2003. Additional temporary legislation in 2004 changed the rate to 85 percent of a composite corporate bond yield for plan years beginning in 2004 and 2005. The resulting rates for calendar-year plans for 2003 and 2004 were 4.92% and 4.94%, respectively. The rates for non-calendar year plans were somewhat lower for 2004 than for 2003.

While the RIR did not change significantly, other factors caused a net increase in PBGC’s income from the VRP. The primary cause was that fewer plans were able to claim exemptions from the variable-rate premium. This resulted from an erosion of funding levels in some plans due to changes in the minimum funding requirements for 2002 and 2003 brought about by the 2002 temporary legislation. Although asset returns for 2003 were generally good, not all of this favorable experience was recognized in plans using asset smoothing methods in their actuarial calculations of underfunding. The net effect was an increase of more than 150 percent in the variable-rate premium revenue from 2003 to 2004.

The Corporation’s losses from completed and probable plan terminations increased from a loss of $5.377 billion in 2003 to a loss of $14.707 billion in 2004. This year the loss was primarily due to plans newly classified as probable as well as the termination of underfunded pension plans. The loss on probables for 2004 was $11.760 billion compared to a credit of $1.115 billion for 2003. The amount of future losses remains unpredictable as PBGC’s loss experience is highly sensitive to losses from large claims.

Administrative expenses decreased $8 million from $271 million in 2003 to $263 million in 2004. This was primarily due to the capitalization of the cost of internal-use software.

Financial Activity: Financial income significantly improved from a loss of $2.723 billion in 2003 to a gain of $2.910 billion in 2004. This change was primarily due to a significant decrease in actuarial charges of $5.791 billion. Actuarial charges include the effects of the changes in interest rates in 2004 and from the aging of the present value of future benefits. PBGC’s select interest factor increased from a 20-year factor of 4.4% at September 30, 2003, to a 25-year factor of 4.8% at September 30, 2004, while the ultimate factor increased from 4.5% to 5.0%, resulting in an actuarial credit of $1.619 billion in 2004.

The total return on investments was a positive 8.0% in 2004, generating $3.197 billion in investment income, compared to a positive 10.3% in 2003 ($3.349 billion). Equity investment returns in 2004 increased by $137 million over 2003 while the gain from fixed-income investments was $293 million less in 2004 than in 2003. PBGC marks its assets to market.

Multiemployer Program

A multiemployer plan is a pension plan sponsored by two or more unrelated employers who have signed collective bargaining agreements with one or more unions. Multiemployer plans cover most unionized workers in the trucking, retail food, construction, mining and garment industries. Multiemployer plans are one of the major vehicles that provide defined benefit pensions to workers in the unionized sectors of the economy. The multiemployer program, which covers about 9.8 million workers and retirees in about 1,600 insured plans, differs from the single-employer program in several significant ways. For such plans, the event triggering PBGC’s guarantee is the inability of a covered plan to pay benefits when due at the guaranteed level (insolvency), rather than plan termination as required under the single-employer program. PBGC does not become trustee of multiemployer plans; rather, it provides financial assistance through loans to insolvent plans to enable them to pay guaranteed benefits. 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. The guarantee limit and premiums due are significantly lower than for the single-employer program.

Results of Activities and Trends: The multiemployer program reported a gain of $25 million in FY 2004 compared to a loss of $419 million in FY 2003. This resulted in a negative net position of $236 million in 2004 compared to a negative net position of $261 million in FY 2003. The change in net income was primarily due to the decrease in loss from future financial assistance of $425 million and an increase in investment income of $17 million. Of the program’s assets at year-end, PBGC invested 97.4 percent in Treasury securities in 2004 and 97.5 percent in 2003.

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 themselves.

In 2004, PBGC’s cash receipts from operations of the single-employer program were not sufficient to cover its operating cash obligations of $3.2 billion, resulting in net cash used of $732 million, compared to $212 million used in 2003. However, the multiemployer program experienced positive cashflow of $81 million in 2004 and $69 million in 2003.

In 2005, PBGC anticipates $3.4 billion in benefit payments, $313 million in administrative expenses, and $30 million in financial assistance payments to multiemployer plans. With respect to underwriting income and investment gains or losses, significant factors beyond PBGC’s control (including changes in interest rates, financial markets, and contributions made by plan sponsors) pose a challenge in making projections. PBGC’s best estimate of 2005 premium receipts ranges between $1.6 billion and $1.9 billion. No estimate is made of 2005 investment income.

As of September 30, 2004, the single-employer and multiemployer programs reported deficits of $23.305 billion and $236 million, respectively. To date, neither program’s deficit has affected the Corporation’s ability to maintain liquidity and meet its obligations. However, neither program at present has the resources to fully satisfy PBGC’s long-term obligations to plan participants. The single-employer program has assets of nearly $39 billion and the multiemployer program has assets in excess of $1 billion. Sufficient liquidity exists to meet the programs’ obligations for a number of years.

Single-Employer and Multiemployer Program Exposure

Measures of risk in PBGC’s insured base of plan sponsors suggest that the single-employer deficit may continue to worsen. PBGC’s best estimate of the total underfunding in plans sponsored by companies with credit ratings below investment grade and classified by PBGC as reasonably possible of termination as of September 30, 2004 was $96 billion. The comparable estimates of reasonably possible exposure for 2003 and 2002 were $82 billion and $35 billion, respectively. These estimates are measured as of December 31 of the previous year (see Note 7). For 2004, this exposure is concentrated in the following sectors: manufacturing; transportation, communication and utilities; and wholesale and retail trade.

PBGC estimates that the total underfunding in single-employer plans exceeded $450 billion, as of September 30, 2004 and exceeded $350 billion as of September 30, 2003. A comparable estimate was not made in 2002. PBGC’s estimate of underfunding as of September 30, 2004 is largely (about 80%) based upon employers’ reports to PBGC under section 4010 of ERISA of their December 31, 2003 market value of assets and termination liability. These values were then rolled forward to September 30, 2004 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 did not adjust for contributions, benefit payments, changes in liabilities due to the passage of time, or plan amendments since this information was not readily or reliably available. PBGC’s exposure to loss is less than these amounts because of the statutory limits on insured pensions. For single-employer plans sponsored by employers that do not file with PBGC under section 4010 of ERISA, PBGC’s estimates are based on data obtained from other filings and submissions with the government and from corporate annual reports for fiscal years ended in calendar 2003.

Total underfunding of multiemployer plans is estimated to exceed $150 billion at September 30, 2004. In 2003, PBGC estimated multiemployer underfunding at $100 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 and comes only from Form 5500 filings.

PBGC estimates that, as of September 30, 2004, it is reasonably possible that multiemployer plans may require future financial assistance in the amount of $108 million. As of September 30, 2003 and 2002, these exposures were estimated at $63 million and $127 million, respectively.

There is significant volatility in plan underfunding and sponsor credit quality over time, which 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. Among the factors that will influence PBGC’s claims going forward are economic conditions affecting interest rates, financial markets, and the rate of business failures.

Investment Activities

The Corporation’s assets that are invested 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, PBGC is required to invest the revolving funds in fixed-income securities; current policy is to invest these funds only in Treasury securities. PBGC has more discretion in its management of the trust funds and uses institutional investment management firms to invest its assets, subject to PBGC oversight and consistent with the Corporation’s investment policy statement.

During 2004, PBGC adopted a new investment policy to better manage the financial risks facing the federal pension insurance program. PBGC’s new policy will reduce balance sheet volatility arising from a mismatch between assets and liabilities by increasing investment in duration-matched fixed-income securities and by decreasing the percentage of assets invested in equities to between 15 percent to 25 percent of total invested assets. PBGC is in the process of finalizing a search for fixed-income managers and expects to allocate funds to them in 2005. In anticipation of funding these managed portfolios, PBGC is liquidating equity assets from recently trusteed plans, which has resulted temporarily in high cash levels.

When fully implemented, PBGC’s investment strategy will better match PBGC’s assets and liabilities and reduce the agency’s overall risk. Through this strategy, any change in the value of PBGC liabilities should be more closely offset by a corresponding change in the value of the fixed-income assets, reducing the risk of an increased PBGC deficit resulting from interest rate changes.

As of September 30, 2004, the value of PBGC’s total investments in the single-employer and multiemployer programs, including cash and investment income, was approximately $37.5 billion. The revolving fund’s value was $16.2billion and the trust fund’s value was $21.3 billion. Cash and fixed-income securities represented 70 percent of the total assets invested at the end of the year, compared to 63 percent at the end of 2003. Equity securities represented 30 percent of total assets invested, compared to 37 percent at the end of 2003. A very small portion of the invested portfolio remains in real estate and other financial instruments.

Results for 2004 were positive for capital market investments and PBGC’s investment activities. During the year, PBGC achieved an 8.0% return on total invested funds. PBGC’s fixed-income program returned 5.6% while its equity program returned 15.0%. PBGC’s five-year returns approximated their comparable market indices, meeting PBGC’s strategic performance goal. For the year, PBGC reported a gain of about $1.0 billion from fixed-income investments and a gain of about $2.2 billion from equity investments.

Federal Managers’ Financial Integrity Act (FMFIA) Statement

Management controls in effect during fiscal year 2004 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 as defined by FMFIA during fiscal year 2004.

MANAGEMENT REPRESENTATION

PBGC’s management is responsible for the accompanying Statements of Financial Condition of the Single-Employer and Multiemployer Program Funds as of September 30, 2004 and 2003, 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.

In the opinion of management, the financial statements of the Single-Employer and Multiemployer Program Funds present fairly the financial position of PBGC at September 30, 2004, and September 30, 2003, and the results of their 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 have a material effect on the financial results being reported. Litigation has been disclosed and reported in accordance with GAAP.

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.

The Inspector General engaged PricewaterhouseCoopers LLP (PwC) to conduct the audit of the Corporation’s 2004 and 2003 financial statements. PwC issued an unqualified opinion on PBGC’s September30, 2004 and 2003 financial statements.

Bradley D. Belt
Executive Director

Hazel Broadnax
Chief Financial Officer

November 15, 2004

Financial Statements

Table - PBGC Statements of Financial 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, 2004 AND 2003

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, the Retirement Protection Act of 1994 and the Consolidated Appropriations Act, 2001. The Corporation insures the pension benefits, within statutory limits, of participants in covered single-employer and multiemployer defined benefit pension plans.

ERISA requires that PBGC programs be self-financing. The Corporation’s principal sources of revenues are premiums collected from covered plans, assets assumed from terminated plans, collection of employer liability payments due under ERISA, and investment income. ERISA provides that the U.S. Government is not liable for any obligation or liability incurred by PBGC.

As of September 30, 2004, the single-employer and multiemployer programs reported deficits of $23.305 billion and $236 million, respectively. To date, neither program’s deficit has affected the Corporation’s ability to maintain liquidity and meet its obligations. However, neither program at present has the resources to fully satisfy PBGC’s long-term obligations to plan participants. The single-employer program has assets of nearly $39 billion and the multiemployer program has assets in excess of $1 billion. Sufficient liquidity exists to meet the programs’ obligations for a number of years.

Single-Employer and Multiemployer Program Exposure

Measures of risk in PBGC’s insured base of plan sponsors suggest that the single-employer deficit may continue to worsen. PBGC’s best estimate of the total underfunding in plans sponsored by companies with credit ratings below investment grade and classified by PBGC as reasonably possible of termination as of September 30, 2004 was $96 billion. The comparable estimates of reasonably possible exposure for 2003 and 2002 were $82 billion and $35 billion, respectively. These estimates are measured as of December 31 of the previous year (see Note 7). For 2004, this exposure is concentrated in the following sectors: manufacturing; transportation, communication and utilities; and wholesale and retail trade.

PBGC estimates that the total underfunding in single-employer plans exceeded $450 billion (unaudited), as of September 30, 2004 and exceeded $350 billion (unaudited) as of September 30, 2003. A comparable estimate was not made in 2002. PBGC’s estimate of underfunding as of September 30, 2004 is largely (about 80%) based upon employers’ reports to PBGC under section 4010 of ERISA of their December 31, 2003 market value of assets and termination liability. These values were then rolled forward to September 30, 2004 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 did not adjust for contributions, benefit payments, changes in liabilities due to the passage of time, or plan amendments since this information was not readily or reliably available. PBGC’s exposure to loss is less than these amounts because of the statutory limits on insured pensions. For single-employer plans sponsored by employers that do not file with PBGC under section 4010 of ERISA, PBGC’s estimates are based on data obtained from other filings and submissions with the government and from corporate annual reports for fiscal years ended in calendar 2003.

Total underfunding of multiemployer plans is estimated to exceed $150 billion (unaudited) at September 30, 2004. In 2003, PBGC estimated multiemployer underfunding at $100 billion (unaudited). 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 and comes only from Form 5500 filings.

PBGC estimates that, as of September 30, 2004, it is reasonably possible that multiemployer plans may require future financial assistance in the amount of $108 million. As of September 30, 2003 and 2002, these exposures were estimated at $63 million and $127 million, respectively.

There is significant volatility in plan underfunding and sponsor credit quality over time, which 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. Among the factors that will influence PBGC’s claims going forward are economic conditions affecting interest rates, financial markets, and the rate of business failures.

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 payable by PBGC 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.

Valuation Method: A primary objective of PBGC’s financial statements is to provide information that is useful in assessing PBGC’s present and future ability to ensure that defined benefit pension plan beneficiaries receive benefits when due. Accordingly, PBGC values its financial assets at estimated fair value, consistent with the standards for pension plans contained in Statement of Financial Accounting Standards (FAS) No. 35 ("Accounting and Reporting by Defined Benefit Pension Plans"). PBGC values its liabilities for the present value of future benefits and present value of nonrecoverable future financial assistance using assumptions derived from annuity prices from insurance companies, as described in the Statement of Actuarial Opinion. As described in Paragraph 21 of FAS No. 35, the assumptions are "those assumptions that are inherent in the estimated cost at the (valuation) date to obtain a contract with an insurance company to provide participants with their accumulated plan benefits." Also, in accordance with Paragraph 21 of FAS No. 35, PBGC selects assumptions for expected retirement ages and the cost of administrative expenses in accordance with its best estimate of anticipated experience.

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 the revolving fund where premiums are collected and held. The assets in the revolving fund are used to cover deficits incurred by plans trusteed and provides funds for financial assistance. The trust fund supports the operational functions of PBGC. The Pension Protection Act of 1987 created a single-employer revolving (7th) fund that is credited with all premiums in excess of $8.50 per participant, including all penalties and interest charged on these amounts, and its share of earnings from investments. 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 it becomes trustee.

Allocation of Revolving and Trust Funds: PBGC allocates 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 investment income is allocated on the basis of each program’s average cash and investments available 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.

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 market 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. In addition, PBGC invests in and discloses its derivative investments in accordance with the guidance contained in FAS No. 133 ("Accounting for Derivative Instruments and Hedging Activities"), as amended. 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 first in first out for the revolving fund and average cost for the trust fund. PBGC marks the plan’s assets to market and 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.

Sponsors of Terminated Plans, Receivables: The amounts due from sponsors of terminated plans or members of their controlled group represent the settled, but uncollected, claims for employer liability (underfunding as of date of plan termination) and for contributions due their plan less an allowance for estimated 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 in the period they are realizable. Income and expenses related to amounts due from sponsors are reported in the underwriting section of the Statements of Operations and Changes in Net Position. Interest earned on settled claims for employer liability and due and unpaid employer contributions (DUEC) is reported as "Income: Other." The change in the allowances for uncollectible employer liability and DUEC is reported as "Expenses: Other."

Premiums: Premiums receivable represent the estimated 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. The liability for unearned premiums represents an estimate of payments received during the fiscal year that cover the portion of a plan’s year after PBGC’s fiscal year-end. Premium income represents actual and estimated revenue generated from self-assessments from defined benefit pension plans as required by Title IV of ERISA (see Note 9).

Capitalized Assets: Capitalized assets include furniture and fixtures, EDP equipment and internal-use software. Beginning in Fiscal Year 2004, PBGC, in compliance with AICPA Statement Of Position 98-1 and FASB EITF 97-13 began to account for the cost of computer software developed for internal use. This includes costs for internally developed software incurred during the application development stage (system design including software configuration and software interface, coding, testing including parallel processing phase). These costs are shown net of depreciation and amortization.

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 the participants of 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 as of the date of the financial statements. 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). PBGC uses 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 includes anticipated expenses to settle the benefit obligation in the determination of the PVFB. PBGC’s benefit payments to participants represent a reduction to the PVFB liability.

The values of the PVFB are particularly sensitive to changes in underlying estimates and assumptions. These estimates and assumptions could change and the impact of these changes may be material to PBGC’s financial statements (see Note 4).

(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 – In accordance with Statement of Financial Accounting Standards No. 5 (Accounting for Contingencies) PBGC recognizes net claims for probable terminations which represent PBGC’s best estimate 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 loss. Criteria used for classifying a specific plan as a probable termination include, but are not limited to, one or more of the following conditions: the plan sponsor is in liquidation or comparable state insolvency proceeding with no known solvent controlled group member; sponsor filed or intends to file for distress plan termination; or PBGC seeks involuntary plan termination. In addition, Management takes into account other economic events and factors in making judgements regarding the classification of a plan as a probable termination. These events and factors may include, but are not limited to: the plan sponsor is in bankruptcy or has indicated that a bankruptcy filing is imminent; the plan sponsor has stated that plan termination is likely; the plan sponsor has received a going concern opinion from its independent auditors; or the plan sponsor is in default under existing credit agreement(s).

In addition, a reserve for large unidentified probable losses is recorded based on actual PBGC experience, as well as the historical industry bond default rates. This reserve has been developed by segregating plan sponsors with aggregate underfunding equal to or greater than $5 million into risk bands which reflect their level of credit risk. A reserve for small unidentified probable losses and incurred but not reported claims is also recorded based on an actuarial loss development methodology (triangulation) (see Note 4).

(5) PBGC identifies certain plans as high risk if the plan sponsor meets one or more criteria that include, but are not limited to, the following conditions: sponsor is in Chapter 11 proceedings; sponsor received a minimum funding waiver within the past five years; sponsor granted security to an unsecured creditor as part of a renegotiation of debt within the past two years; sponsor is known to have been in default on existing debt within the past two years (regardless of whether it received a waiver of default); or sponsor’s unsecured debt is rated CCC+/Caa1 or lower by S&P or Moody’s respectively. PBGC specifically reviews each plan identified as high risk and classifies those plans as probable if, based on available evidence, PBGC concludes that plan termination is likely. Otherwise, high risk plans are classified as reasonably possible.

(6) In accordance with Statement of Financial Accounting Standards No. 5 (Accounting for Contingencies), PBGC’s exposure to losses from plans of companies that are classified as reasonably possible is disclosed in footnotes. Criteria used for classifying a company as a reasonably possible include, but are not limited to, one or more of the following conditions: the plan sponsor is in Chapter 11 reorganization; funding waiver pending or outstanding with the Internal Revenue Service (IRS); sponsor missed minimum funding contribution; sponsor’s bond rating is below-investment-grade for Standard & Poor’s (BB+) or Moody’s’s (Ba1); sponsor has no bond rating but unsecured debt is below investment grade; or sponsor has no bond rating but the ratio of long-term debt plus unfunded benefit liability to market value of shares is 1.5 or greater (see Note 7).

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).

A liability for a particular plan is included in the Present Value of Nonrecoverable Future Financial Assistance when it is determined that the plan is currently, or will likely become in the future, insolvent and will require assistance to pay the participants their guaranteed benefit. Determining insolvency requires considering several complex factors, such as an estimate of future cash flows, future mortality rates, and age of participants not in pay status.

Other Expenses: These expenses represent an estimate of the net amount of receivables deemed to be uncollectible during the period. 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 actual or expected 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 PBGC’s 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 adjustments are the result of the movement of plans from one valuation methodology to another (e.g., nonseriatim to seriatim) and of new data (e.g., deaths, revised participant data). 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 and Amortization: PBGC calculates depreciation on the straight-line basis over estimated useful lives of 5 years for equipment and 10 years for furniture and fixtures. PBGC calculates amortization for capitalized software, which includes certain costs incurred for purchasing and developing software for internal use, on the straight-line basis over estimated useful lives not to exceed 5 years, commencing on the date that the Corporation determines that the internal-use software is implemented. Routine maintenance and leasehold improvements (the amounts of which are not material) are charged to operations as incurred.

Reclassification: Certain amounts in the 2003 financial statements have been reclassified to be consistent with the 2004 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 (e.g., recoveries from sponsors) 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 as well as related investment profile data. 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. PBGC marks the plan’s assets to market and 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. Note 11 provides the components of investment income.

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

Table - Investments of Multiemployer Revolving Funds and Multiemployer Trusteed Plans

Table - Investment Profile

Derivative Investments: Derivatives are accounted for at market value in accordance with Statement of Financial Accounting Standards No. 133, as amended. Derivatives are marked to market with changes in value reported within financial income. The standard requires disclosure of fair value of these instruments. During fiscal years 2003 and 2004, PBGC invested in investment products, which used various U.S. and non-U.S. derivative instruments including but not limited to: equity index futures contracts, money market and government bond futures contracts, swap contracts, swaption contracts, stock warrants and rights, debt option contracts and foreign currency forward and option contracts. Some of these derivatives are traded on organized exchanges and thus bear minimal credit risk. The counterparties to PBGC’s non-exchange-traded derivative contracts are major financial institutions. PBGC has never experienced non-performance by any of its counterparties.

Futures are exchange-traded contracts specifying a future date of delivery or receipt of a certain amount of a specific tangible or intangible product. The futures exchange’s clearinghouses clear, settle, and guarantee transactions occurring through its facilities. Institutional investors hold these future contracts on behalf of PBGC as efficient and liquid substitutes for purchases and sales of financial market indices and securities. Open futures positions are marked to market daily. An initial margin of generally 1 to 6 percent is maintained with the broker in Treasury bills or similar instruments. In addition, futures contracts require daily settlement of variation margin resulting from the marks to market. 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.

The table below summarizes the Corporation’s financial futures positions at September 30, 2004 and 2003. The table includes the notional and fair value of the instrument. The notional is the theoretical cost of a futures contract defined as the number of contracts held times trade price times a multiplier. The fair value is the market value (amount needed to settle) of a financial instrument contract.

Foreign currency forward and option contracts are used 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. Other investments held by the Corporation include swap contracts and swaption (i.e., option on swap) contracts. A swap is an agreement between two parties to exchange different financial returns on a notional investment amount. For example, an interest rate swap involves exchanges of fixed rate and floating rate interest. There is no exchange of the underlying principal. PBGC uses swap and swaption contracts to adjust exposure to interest rates, fixed income securities exposure, and to generate income based on the investment views of the portfolio managers regarding interest rates, indices and debt issues. Stock warrants and rights allow PBGC to purchase securities at a stipulated price within a specified time limit. For the fiscal years ended September 30, 2004 and September 30, 2003 gains and losses from settled margin calls are reported in Investment income on the Statements of Operations and Changes in Net Position.

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, 2004, and September 30, 2003, was $622 million and $213 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, 2004 and 2003.

For FY 2004, PBGC used a 25-year select interest factor of 4.8% followed by an ultimate factor of 5.0% for the remaining years and for FY 2003, a 20-year select interest factor of 4.4% followed by an ultimate factor of 4.5% for the remaining years. These factors were determined to be those needed, given the mortality assumptions, to continue to match the survey of annuity prices provided by the American Council of Life Insurers (ACLI). PBGC’s regulations state that both the interest factor 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 administrative expenses) could be settled in the market at September 30, for the respective year, for single-premium nonparticipating group annuities issued by private insurers. Many factors, including Federal Reserve policy, may impact these rates.

For September 30, 2004, PBGC used the 1994 Group Annuity Mortality (GAM) Static Table (with margins), set forward 1 year and projected 20 years to 2014 using Scale AA. For September 30, 2003, PBGC used the same table, set forward two years but projected 18 years to 2012 using Scale AA. The number of years that PBGC projects the mortality table reflects the number of years from the 1994 base year of the table to the end of the fiscal year (10 years in 2004 versus 9 years in 2003) plus PBGC’s calculated duration of its liabilities (10 years in 2004 versus 9 years in 2003). PBGC’s procedure is based on the procedures recommended by the Society of Actuaries UP-94 Task Force (which developed the GAM94 table) for taking into account future mortality improvements.

During FY 2004, PBGC conducted a mortality study. The study showed that the mortality assumptions used in FY 2003 reflected higher mortality than was realized in PBGC’s seriatim population. Therefore, PBGC adopted a base mortality table (i.e., GAM94 set forward one year instead of GAM94 set forward two years) that better reflects past mortality experience. The ACLI survey of annuity prices, when combined with the mortality table, provides the basis for determining the interest factors used in calculating the PVFB. The insurance annuity prices, when combined with the stronger mortality table, result in a higher interest factor. The increase in the liability due to the change in the mortality table is included in the actuarial adjustments. There is a compensating decrease in the actuarial charge due to the change in interest rates.

The reserve for administrative expenses in the 2004 and 2003 valuations 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 expense assumption was based on a study performed for PBGC in 2000 by a major accounting firm. The factors to determine the additional reserves were based on case size, number of participants and time since trusteeship.

The present values of future benefits for trusteed multiemployer plans for 2004 and 2003 reflect the payment of assistance and the changes in interest and mortality 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.

Table - Reconciliation of the Present Value of Future Benefits for Years Ended September 30, 2004 and 2003

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

The following table itemizes the probable exposure by industry:

Table - Probables Exposure by Industry

The following table shows what has happened to plans classified as probables. This table does not capture or include those plans that were not initially classified as probable.

Table - Probables Experience

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 Multiemployer Financial Assistance

The losses from financial assistance reflected in the Statements of Operations and Changes in Net Position include period changes in the estimated present value of nonrecoverable future financial assistance.

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 single-employer plans that are sponsored by companies whose credit quality is below investment grade which poses a greater risk of being terminated. In addition, there are some multiemployer plans that may require future financial assistance. The amounts disclosed below represent the Corporation’s best estimates of the possible losses in these plans given the inherent uncertainties about these plans.

In accordance with Statement of Financial Accounting Standards No. 5, PBGC classified a number of these companies as reasonably possible terminations as the sponsors’ financial condition and other factors did not indicate that termination of their plans was likely as of year-end. The best estimate of aggregate unfunded vested benefits exposure to PBGC for the companies’ single-employer plans classified as reasonably possible with an underfunding of $5 million or greater as of September 30, 2004, was $96 billion.

The estimated unfunded vested benefits exposure has been calculated as of December 31, 2003. PBGC calculated this estimate as in previous years by using data obtained from filings and submissions with the government and from corporate annual reports for fiscal years ending in calendar 2003. The Corporation adjusted the value reported for liabilities to the December 31, 2003, PBGC select interest rate of 4.0% (the liabilities are not valued at September 30 as the information is not available). When available, data were adjusted to a consistent set of mortality assumptions. The underfunding associated with these sponsors’ plans would generally tend to be greater at September 30, 2004, because of the economic conditions (e.g., lower interest rate factors and/or low investment returns on plan assets) that existed between December 31, 2003, and September 30, 2004. The Corporation did not adjust the estimate for events that occurred between December 31, 2003, and September 30, 2004.

The following table itemizes the reasonably possible exposure by industry:

Table - Reasonably Possible Exposure by Industry (Principal Categories)

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 $108 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, 2004, or the projected (or actual, if known) date of plan insolvency, discounted back to September 30, 2004. The Corporation’s identification of plans that are likely to require such assistance and estimation of related amounts required consideration of many complex factors, such as an estimate of future cash flows, future mortality rates, and age of participants not in pay status. 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 4.8% for the first 25 years after the valuation date and 5.0% thereafter. The Corporation also used the 1994 Group Annuity Mortality Static Table (with margins), set forward 1 year, projected 20 years to 2014 using Scale AA.

Note 8 -- Commitments

PBGC leases its office facility under a commitment that began on December 11, 1993, and expires December10, 2008. However, a new lease will take effect on January 1, 2005. The new lease agreement was entered into because of the need for additional office space. 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 2013. The minimum future lease payments for office facilities having noncancellable terms in excess of one year as of September30, 2004, are as follows:

Table - Commitments: Future Lease Payments

Lease expenses were $15.6 million in 2004 and $14.6 million in 2003.

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 portion of or underpayment of premiums. Interest continues to accrue until the premium and the interest due are paid. The amount of penalty that can be levied is capped at 100 percent of the premium late payment or underpayment. Annual flat- rate premiums for the single-employer program are $19 per participant. Underfunded single-employer plans also pay variable-rate premiums of $9 per $1,000 of underfunding if not exempt from the variable-rate premiums. Annual flat-rate premiums for the multiemployer program are $2.60 per participant and there are no variable-rate premiums. PBGC recorded premium income, excluding interest and penalty, of approximately $677 million in flat-rate premiums and $804 million in variable-rate premiums for fiscal year 2004, and approximately $676 million in flat-rate premiums and $301 million in variable-rate premiums for fiscal year 2003.

Note 10 -- Losses from Completed and Probable Terminations

Amounts reported as losses are the present value of future benefits 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 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 2004 was 7.0 percent of base pay for those employees covered by that system. For FY 2003, the rate for the first three months was 7.5 percent and 7.0 percent for the remainder of that year. For those employees covered by FERS, the Corporation’s contribution was 10.7 percent of base pay for both 2004 and 2003. 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 $10 million in both 2004 and 2003.

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

Legal challenges to PBGC policies and positions continued in 2004. At the end of the fiscal year, PBGC had 158 active cases in state and federal courts and 698 bankruptcy cases. 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. PBGC estimates that possible losses in the range of $26 - $30 million could be incurred in the event that PBGC does not prevail in these matters. These possible losses are not recognized in the financial statements.

Note 15 -- Subsequent Events

Subsequent to September 30, 2004, business and financial conditions significantly deteriorated for a sponsor of a large single-employer plan that may terminate. This plan will be added as probable or to the terminated inventory in FY 2005. Had these plan sponsor events occurred prior to FY2004 year-end, PBGC’s financial statements would have reflected an increase of $25 million in the Net loss and a decrease in the Net position in the same amount.

There was no subsequent event to report on the multiemployer program.

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