Private Pensions: Changing Funding Rules and Enhancing Incentives Can Improve Plan Funding Page: 2 of 25
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- GAO
SAccountability- Integrity* Reliability
Highlights
Highlights of GAO-04-176T, a report to the
Committee on Education and the
Workforce, House of RepresentativesWhy GAO Did This Study
Over the last few years, the total
underfunding in the defined-benefit
pension system has deteriorated to
the point where the Pension
Benefit Guaranty Corporation
(PBGC), the federal agency
responsible for protecting private
sector defined benefit plan
benefits, estimates that total plan
underfunding grew to more than
$400 billion as of December 31,
2002, and still exceeded $350
billion as of September 4, 2003.
PBGC itself faced an estimated $8.8
billion accumulated deficit as of
August 31, 2003. Deficiencies in
current funding and related
regulations have contributed to
several large plans recently
terminating with severely
underfunded pension plans.
This testimony provides GAO's
observations on a variety of
regulatory and legislative reforms
that aim to improve plan funding
and better protect the benefits of
millions of American workers and
retirees while minimizing the
burden to plan sponsors of
maintaining defined-benefit plans.www.gao.gov/cgi-bin/getrpt?GAO-04-176T.
To view the full product, including the scope
and methodology, click on the link above.
For more information, contact Barbard D.
Bovbjerg at (202) 512-7215 or
bovbjergb@gao.gov..PRIVATE PENSIONS
Changing Funding Rules and Enhancing
Incentives Can Improve Plan FundingWhat GAO Found
Recent terminations of severely underfunded pension plans suggest that
current funding rules do not provide adequate mechanisms for maintaining
adequate funding of pension plans. Funding inadequacies place the
retirement security of millions of American workers and retirees, along with
PBGC, at risk. While external factors, such as falling stock prices, low
interest rates, and slow economic growth, have contributed to widespread
pension underfunding, the defined-benefit system also faces structural
problems that extend beyond cyclical economic conditions. Stagnant growth
of the defined-benefit system, along with several large recent terminations of
underfunded pension plans, has left PBGC in a precarious financial
condition as the insurer of pension benefits.
There are two general approaches to funding reform that may improve the
funding of defined-benefit pension plans. The first approach would change
the funding requirements directly. These measures could address reforms to
the use of termination liability instead of current liability, additional funding
requirements, and lump-sum distributions. The second, more indirect
approach would seek to improve plan funding by providing better incentives
for sponsors to keep their plans better funded. Options in this category could
include requirements broadening the disclosure of plan investments and
termination liability information to plan participants and their
representatives. These reforms, as part of a comprehensive package, could
increase the likelihood that workers and retirees receive promised benefits,
while not creating an undue regulatory or financial burden on sponsors.
Recent unfavorable economic conditions have contributed to widespread
underfunding and conspired to place well-meaning plan sponsors in
difficult positions. Although comprehensive reform should include
improving plan funding as the key vehicle to stabilize the long-term
health of the defined-benefit system, Congress may seek to balance
improvements in funding and accountability against the short-term needs
of some sponsors who may have difficulty making plan contributions.
Figure 2: Total Underfunding in PBGC-lnsured Single-Employer Plans, 1980-2003
Dollars in billions1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Source PBGC
Note: Figure for 2003 is an estimate, as of September 4, 2003.
United States General Accounting Office
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United States. General Accounting Office. Private Pensions: Changing Funding Rules and Enhancing Incentives Can Improve Plan Funding, text, October 29, 2003; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metadc291782/m1/2/: accessed May 10, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.