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Pension Benefit Guarantee Corporation Investigated

Wed, 10/25/2000 - 12:00am — Karen Stevenson
Description: 

The Senate Aging Committee held a hearing on the performance of the Pension Benefit Guarantee Corporation (PBGC). The Employee Retirement Income Security Act of 1974 created PBGC as a self-financing, nonprofit, wholly owned government corporation, which protects participants in private pension plans from losing promised benefits due to the termination of underfunded plans. The PBGC collects premiums from sponsors of defined benefit pension plans to insure against default assumes administration of plans that terminate or become insolvent. When plans default, PBGC assumes control of plan assets, calculates benefit amounts, and pays pension plan beneficiaries.

In 1975 the PBGC administered three pension plans with a total of 400 participants. By 1999 the PBGC had assumed responsibility for more than 2,700 pension plans with a total of more than 500,000 participants. Beginning in the mid-1980s, several large unexpected bankruptcies greatly increased the number of plans and participants under PBGC control, including those of LTV Steel, Wheeling Pittsburgh Steel, Eastern Airlines, and Pan American Airlines.

The PBGC issues beneficiaries an Initial Determination Letter (IDL) which states the amount of his or her benefit at "Normal Retirement Age." If the Participant is already receiving a pension, an IDL confirms or refutes the amount that is being paid. An IDL is the most important document that the participant will receive from the PBGC, since it officially establishes the amount of pension which is due.

Until the IDL is issued, beneficiaries receive a monthly check for an estimated benefit amount. Once the correct amount is determine, the participant will either be paid the additional amount due them, or will receive a notice that they must refund the overpayment back to the PBGC. The longer it takes for an IDL to be issued, the larger that potential refund may be. In the meantime, the beneficiary has no idea what amount they are really due, or what their potential liability could be.

In response to a government request, the PBGC Inspector General reviewed the timeliness of the PBGC benefit determination process, and found that they have taken an average of 5.7 years to give participants their final benefit determinations, with half having to wait over seven years, but some determinations take from 15 to 20 years.

There were other issues raised, too. The PBGC relies heavily on the services of contractors whose employees account for almost half of its workforce and about $100 million of its $160 million budget, but the General Accounting Office is investigating allegations of improprieties in the way that contracts have been awarded and the level of oversight over contractors.

A report by the Inspector General found that the PBGC could not attest that IDLs have been issued to all participants, could not accurately account for the number of IDLs yet to be issued, did not have a timeliness performance measure for IDL processing. They found that the number of IDLs that PBGC reported as actually issued did not match the number of IDLs recorded in their computer database, and the number of IDLs that PBGC reported as issued was not the number it used to compute the average length of time to issue IDLs.

David Strauss, PBGC Executive Director, pointed out that some improvements have been made. The PBGC is off the GAO and OMB High Risk Lists, a $3 billion deficit has become a $7 billion surplus.

The Senate Aging Committee held a hearing on the performance of the Pension Benefit Guarantee Corporation (PBGC). The Employee Retirement Income Security Act of 1974 created PBGC as a self-financing, nonprofit, wholly owned government corporation, which protects participants in private pension plans from losing promised benefits due to the termination of underfunded plans. The PBGC collects premiums from sponsors of defined benefit pension plans to insure against default assumes administration of plans that terminate or become insolvent. When plans default, PBGC assumes control of plan assets, calculates benefit amounts, and pays pension plan beneficiaries.

In 1975 the PBGC administered three pension plans with a total of 400 participants. By 1999 the PBGC had assumed responsibility for more than 2,700 pension plans with a total of more than 500,000 participants. Beginning in the mid-1980s, several large unexpected bankruptcies greatly increased the number of plans and participants under PBGC control, including those of LTV Steel, Wheeling Pittsburgh Steel, Eastern Airlines, and Pan American Airlines.

The PBGC issues beneficiaries an Initial Determination Letter (IDL) which states the amount of his or her benefit at "Normal Retirement Age." If the Participant is already receiving a pension, an IDL confirms or refutes the amount that is being paid. An IDL is the most important document that the participant will receive from the PBGC, since it officially establishes the amount of pension which is due.

Until the IDL is issued, beneficiaries receive a monthly check for an estimated benefit amount. Once the correct amount is determine, the participant will either be paid the additional amount due them, or will receive a notice that they must refund the overpayment back to the PBGC. The longer it takes for an IDL to be issued, the larger that potential refund may be. In the meantime, the beneficiary has no idea what amount they are really due, or what their potential liability could be.

In response to a government request, the PBGC Inspector General reviewed the timeliness of the PBGC benefit determination process, and found that they have taken an average of 5.7 years to give participants their final benefit determinations, with half having to wait over seven years, but some determinations take from 15 to 20 years.

There were other issues raised, too. The PBGC relies heavily on the services of contractors whose employees account for almost half of its workforce and about $100 million of its $160 million budget, but the General Accounting Office is investigating allegations of improprieties in the way that contracts have been awarded and the level of oversight over contractors.

A report by the Inspector General found that the PBGC could not attest that IDLs have been issued to all participants, could not accurately account for the number of IDLs yet to be issued, did not have a timeliness performance measure for IDL processing. They found that the number of IDLs that PBGC reported as actually issued did not match the number of IDLs recorded in their computer database, and the number of IDLs that PBGC reported as issued was not the number it used to compute the average length of time to issue IDLs.

David Strauss, PBGC Executive Director, pointed out that some improvements have been made. The PBGC is off the GAO and OMB High Risk Lists, a $3 billion deficit has become a $7 billion surplus.