EXECUTIVE DIRECTOR'S MESSAGE
The past year was characterized by continuing changes in the defined benefit pension system and challenges for the Pension Benefit Guaranty Corporation and the federal pension insurance program. The number of defined benefit plans insured by the PBGC continued to decline, and the number of insured participants fell for the first time. Equally important, a growing roster of major American companies announced that they were “freezing” their defined benefit plans, either closing the plans to new entrants or halting accruals for current participants. Perhaps the most dramatic event of the year was United Airlines’ decision to turn its pension plans over to the PBGC, resulting in the largest corporate pension default in U.S. history. Total underfunding in United’s plans was more than $10 billion, and workers and retirees of United Airlines forfeited more than $3 billion in earned pension benefits while the insurance program incurred a loss of nearly $7 billion.
Among ongoing pension plans, the PBGC’s exposure to losses from financially troubled plan sponsors reached a record $108 billion, twenty times the amount that existed five years earlier. Similarly, in the insured pension system as a whole, comprising both single-employer and multiemployer plans, underfunding topped more than half a trillion dollars, which was also more than ten times the amount in existence at the beginning of the decade.
The Bush Administration proposed comprehensive pension reform in early 2005. The centerpiece of the proposal is a new set of funding rules that would require companies to fully fund the pension promises they have made to their workers and retirees. The Administration also proposed a new regime of pension transparency so that all of the stakeholders in the pension system—workers, retirees, investors and creditors—would have access to timely and accurate information about the financial health of corporate pension plans. The final component was a new PBGC premium structure that would more accurately reflect the risk posed by individual plan sponsors.
As of year-end, both the Senate and House had passed reform measures based upon the framework outlined by the Administration. It is critically important that legislation is enacted that ensures that companies honor their pension promises, provides greater transparency, and ensures the long-term solvency of the pension insurance program.
Large-scale bankruptcies and plan terminations, along with increased exposure to potential future losses in certain industry sectors, present extraordinary operational challenges for the PBGC. In 2005, 120 plans terminated and the PBGC became responsible for 269,000 new participants—an agency record for participant growth in a single year and an 82 percent increase over the prior year. The Corporation was involved in almost 400 active bankruptcy cases, with 46 cases newly opened in 2005. And, total assets grew to more than $57 billion, a more than 40 percent increase over the prior year.
Notwithstanding the unprecedented workload, operational challenges, and external demands, the Corporation was able to achieve its key priorities, including:
• The 13th consecutive year of a clean opinion on the financial statements and the second consecutive clean opinion on the Corporation’s internal controls.
• Favorable settlements and precedent-setting legal decisions in several high-profile cases.
• Success in filling key executive positions with highly qualified individuals.
• Advancement of comprehensive pension reform, through Congressional testimony and analysis of reform alternatives.
• Continual customer service enhancements, including an improved Web site and expanded Internet-based services.
• Issuance of a record number of final benefit determinations.
Safeguarding the Pension Insurance Program
The PBGC is a large and growing enterprise whose job is to administer two pension insurance programs and ensure prompt and accurate payment of benefits to 1.3 million beneficiaries. The agency is dealing with a growing number of high profile risks, both inside and outside of the bankruptcy process, that involve increasingly complex financial analyses and legal issues. Moreover, the PBGC has little control over the incidence and timing of actions that pose a risk of loss to the insurance program.
The PBGC implemented a number of changes in 2005 to enable it to respond to marketplace developments. One year after revising its strategic plan and operating budget to reflect better the PBGC’s lines of business, the PBGC focused on improving its first line of business—providing insurance coverage to participants in ongoing plans. The resulting organizational changes enable the PBGC to serve its customers better and improve the agency’s ability to gather, analyze and act on information in response to marketplace demands and changing circumstances. The Corporation has placed particular emphasis on dealing with insurance program risks as early as possible in order to lessen the likelihood of a claim being presented and to reduce the amount of claims that cannot be prevented.
For example, the PBGC combined personnel from several departments—actuaries, financial analysts and ERISA attorneys—in a new Insurance Program Department to provide for better coordination and staff communication on pension insurance and pre-trusteeship work. The Insurance Program Department achieved important victories in bankruptcy courts, district courts and courts of appeals. Other significant successes in the department’s first year included:
• Negotiations with United Airlines produced a settlement through which the PBGC obtained substantial financial recoveries on behalf of the pension plans and the insurance fund.
• Conclusion of lengthy negotiations with Enron Corporation, a case dating to 2004, resulted in hundreds of millions of dollars of additional funding for the company’s defined benefit plans that ensured their full funding and prevented any loss either for the company’s 17,000 participants or the insurance program.
• Negotiations outside of litigation produced more than $200 million in settlements with companies whose pension plans were significantly underfunded or had been terminated in distress proceedings.
Another new department, the Office of Risk Assessment, augments the PBGC’s capability to measure and manage risks to the pension insurance program. This office is responsible for identifying, quantifying and monitoring the various financial and operational risks to which the insurance program is exposed and providing advice regarding appropriate risk management and mitigation strategies. Throughout its first year, the office expanded its risk assessment capabilities, particularly in the area of characterizing changes in the PBGC’s contingent liabilities arising from high-risk companies with significantly underfunded pension plans.
For 2006 and beyond, the PBGC intends to proactively use the capabilities provided by its new structure, as well as its statutory authorities and enforcement powers, to protect the interests of the insurance program and its stakeholders. In particular, the agency will seek to ensure compliance with the provisions of Title IV of ERISA, prevent unnecessary and avoidable terminations of underfunded pension plans, mitigate the risk of losses to the insurance program, and enhance recoveries in bankruptcy for the benefit of plan participants and the insurance funds.
The PBGC also has implemented changes to directly address risk in its own balance sheet. The agency now has responsibility for more than $57 billion in assets—almost $18 billion more than one year ago—and there is little question that the figure will continue to grow. The agency has an obligation to make sure it prudently manages those assets in a way that minimizes the risk of loss to stakeholders. Taxpayers may also be at risk of loss in the future if Congress decides to allocate general revenues to the PBGC. To that end, the Board has adopted and the PBGC is implementing an investment policy that will reduce the Corporation’s financial risk exposure arising from a mismatch between the PBGC’s assets and liabilities.
Providing Exceptional Service
The PBGC is committed to providing the highest level of service to its customers and stakeholders. Pension plan participants, plan administrators, and the practitioners who assist them are all PBGC customers and their need for PBGC administrative services and expertise has risen to new heights in the past few years. Consider that, over the first 27 years of its history, the PBGC took responsibility for the benefits of about 23,000 new participants per year. Over the past four years, this number has increased to an average of more than 200,000 per year. In 2005 alone, the agency took in nearly 269,000 additional participants in newly trusteed plans and is committed to providing them with the same high level of efficiency, service and timeliness.
This commitment to service was visible in the PBGC’s production of benefit determinations for participants in PBGC-trusteed plans. The PBGC routinely pays benefits in estimated amounts until it is able to complete and issue its final calculation of the benefit amounts it should pay under the law. During 2005, the PBGC issued more than 178,000 final determinations, which it completed within an average of 2.4 years after the date it had trusteed the participant’s plan. This is a nearly 200 percent increase over the number of final determinations the PBGC was issuing just five years ago. Furthermore, the Corporation now routinely provides benefit estimates within 15 days of request, and 98 percent of these estimates are within 10 percent of the actual benefit it ultimately determines is due.
To continue to improve on these figures and provide the level of around-the-clock service that all of its customers expect, the PBGC takes full advantage of the capabilities offered by the most current information technology, most notably the Internet. The Corporation now offers online self-service facilities on its Web site that allow its customers—participants in PBGC-trusteed plans, pension plan administrators and pension professionals—to conduct business electronically with the PBGC any time of the day, any day of the year. The service for participants is called My Pension Benefit Account (My PBA); that for plan administrators and practitioners is called My Plan Administration Account (My PAA).
Through My PBA, participants may access, review and correct their personal information, apply for benefits, and request benefit estimates. People who are already drawing pension payments from the PBGC may sign up for electronic direct deposit of their benefit payments, change banking information, and update their federal tax withholding. Growing use of this online service will result in significant savings in operating costs while also improving customer service and satisfaction. Future enhancements will include enabling non-retired participants to calculate their own benefit estimates and to see how their benefit might be affected by such variables as different retirement dates and ages.
With My PAA, plan administrators and the practitioners who assist them have a secure means to electronically create, sign and submit premium filings and payments to the PBGC. This system, which requires no special software, offers a number of advantages over paper submissions including easier and faster filing preparation and submission, e-mail notification of required actions, an easy electronic payment process, instant electronic confirmation that the filing and payment were received by the PBGC, and access to online plan account histories. Enhancements implemented in 2005 enabled the submission of filings prepared using compatible private-sector software, the automation of certain calculations for variable-rate premium payers that previously had to be done manually, and the automated entry of information from a plan’s previous My PAA filing to reduce data entry time. While plans have had the option of filing their premiums electronically or in the more traditional paper format for the past two years, e-filing of premiums will be mandated for all plans in the future, beginning with large plans in 2006 and including smaller plans in 2007.
My PAA is just one of many steps the PBGC is taking to automate its transactions with sponsors and practitioners. During the past year, the PBGC enabled filings required under Section 4010 of ERISA to be made electronically through a secure Web-based application. Section 4010 requires reporting of actuarial and financial information by controlled groups that have significantly underfunded plans or that have missed substantial amounts of required contributions to their plans. This reporting provides the PBGC with timely information on plans representing the largest exposure to the pension insurance program and helps the PBGC focus its resources on situations that pose the greatest risks to participants and the pension system. More than 50 percent of 4010 filers used the new e-4010 application and provided overwhelmingly positive feedback on the system. Electronic filing should dramatically lessen the filing burden on reporting companies.
The agency also completed a full redesign of its Web site, www.pbgc.gov, which is now better organized, more user-friendly and easier to navigate. Redesign of the PBGC’s automated premium accounting system progressed, and deployment of the replacement system is scheduled for 2006. Final implementation of a Customer Relationship Management (CRM) system provided the PBGC with a unified system for tracking customer contacts, whether by telephone, e-mail, fax or correspondence, to ensure that customer inquiries are resolved promptly and that no inquiry goes unanswered.
Not all of the customer service initiatives in 2005 were based on technology. In the immediate aftermath of Hurricanes Katrina and Rita, the PBGC undertook a series of actions to help those affected by the disasters. The Corporation immediately waived certain penalties and extended filing deadlines for plan administrators and sponsors located in the affected areas. The PBGC also went to great lengths to assist its beneficiaries in the region, including suspending the usual ten-day waiting period for replacing lost or missed payments and arranging for next-day direct deposit transfers to replace missed checks or to send replacement checks to a new or temporary address for benefit recipients. The agency also quickly initiated a program to contact beneficiaries whose mail service was interrupted or whose direct-deposit banks were closed after the storm.
Exercising Effective Stewardship
Achieving the PBGC’s strategic goals and objectives requires the agency to effectively manage its processes, systems, and its most important resource, its personnel. The PBGC’s goal is to be an exemplar of integrity, efficient stewardship and performance excellence. This requires robust financial management systems and controls, performance-based management of human capital resources, and a reliable and secure information technology infrastructure. The PBGC will continue to seek improvements to strengthen its overall performance in these critical areas.
The PBGC received its 13th consecutive unqualified opinion on its financial statements and second consecutive unqualified opinion on its internal controls from its independent auditors. During 2005, the PBGC chartered an Internal Control Committee, chaired by its Chief Financial Officer, to oversee the PBGC’s controls. The committee formalized a control structure consisting of more than 200 key internal controls in the PBGC’s ten primary business processes.
With regard to its personnel, the PBGC has a robust succession management strategy in place, with programs to train the next generation of leaders and an in-house training institute. The agency also has established a recruitment program to seek highly skilled individuals and new graduates not only to meet current needs but also with an eye toward the future. The PBGC’s recruitment efforts acquired more urgency in the past year with the retirement or departure of a number of key executives and managers. Following extensive nationwide searches, the agency brought on board several new, highly qualified senior executives including its Chief Financial Officer, Chief Administrative Officer, General Counsel, and Director of the new Legislative and Regulatory Department. These individuals bring a great deal of public and private sector knowledge and experience and outstanding records of accomplishment with which to help fulfill the mission of the Corporation.
The Corporation has also been using The Gallup Organization’s Q12 process to measure and strengthen employee engagement, which research has shown means greater productivity, lower staff turnover and absenteeism, better customer service and greater employee job satisfaction. The results indicated that the PBGC’s staff were more actively engaged in their jobs than the general working population and other government agencies, and have a strong recognition of the PBGC’s mission. The PBGC’s organizational units will continue to use Q12 to improve the work environment and overall operational effectiveness.
The agency also is expending considerable effort to upgrade its information technology capabilities and infrastructure. In addition to the redesign of its automated premium accounting system, another project PBGC has targeted for 2006 involves the consolidation and integration of the agency’s financial systems in order to further improve internal controls and financial reporting. These and other technological investments throughout the agency will allow the PBGC to leverage its financial and human resources to achieve better performance in a cost-effective manner.
Through innovation, programs to attract, train and develop a skilled workforce, pursuit of advanced technology, and an overarching commitment to excellence, the PBGC is a results-oriented, performance-based organization. The PBGC takes pride that its efforts have been recognized by others. The Corporation was informed after the close of the year that it had been selected as a 2006 Optimas Award winner by Workforce Management magazine. The award for Managing Change recognized the PBGC’s ability to respond to a changing business environment and extraordinary challenges beyond its control.
Closing
The future of the defined benefit pension system will depend upon changes occurring in the marketplace as well as the legislation being considered by Congress. While the system will continue to evolve, it continues to be an important part of working Americans’ retirement security. Most importantly, the pension promises made to workers and retirees must be kept. The PBGC remains committed to running the insurance program effectively, monitoring risk appropriately, and paying benefits accurately. Our customers expect no less of us.
Bradley D. Belt
Executive Director
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