1. Case Processing. The Corporation's principle objective for
the remainder of FY 1976 (including the transition period) is to
process to completion approximately 3,300 pension plan termination
cases. Of this total, approximately 700 plans will have funding
insufficiencies and an estimated 17,500 vested participants will
have to have all or part of their pensions secured by PBGC. In
FY 1977, the numbers will increase to approximately 4,200 total
plans, of which 1,550 will be insufficient involving 38,775 vested
participants.

2. Contingent Employer Liability Insurance. The development of an
insurance program to protect employers against liability for unfunded
guaranteed benefits in terminated plans will be a major activity
during FY 1976 and FY 1977. This effort will involve the resolution
of various legal and policy issues underlying the determination of
the mandatory or voluntary nature of the program, levels of coverage
to be made available, terms and conditions of the insurance, and
the basis for premium rates. Activity will also include an effort
to develop reliable estimates of the basic cost of operating the
program and the premium revenue required.

In order to mitigate the financial impact of any uncertainty as
to how the program is to be implemented, the Corporation intends
to define and explain the contingent employer liability insurance
program well in advance of the September 2, 1977, date required
by ERISA. It is expected that this advance knowledge of program
coverage may be of assistance to employers for whom the potential
liabilities of a plan termination have an impact on their ability
to finance operations. This information may also assist employers
and unions in their consideration of plan improvements.

Discussions concerning program objectives and requirements will continue with employers and employee representatives. In addition, contact with private insurers will continue in an effort to determine their financial capability and future involvement in the program.

3.

Alternate Premium. A third major effort, already underway, is development of alternate premium proposals for the basic insurance program. Such a premium, if approved, would apply to plan years beginning on or after September 2, 1976, as permitted by Section 4006 of ERISA. Present efforts have focused on policy and legal issues involved in developing equitable rate structures

that satisfy income needs. The possibility of adopting a premium which can be calculated without detailed current actuarial information in order to ease the administrative burden on small plans is being considered.

4. Determination of Employer Net Worth. Section 4062 establishes the maximum employer liability for unfunded guaranteed benefits as 30 percent of net worth determined on a basis chosen by the Corporation as best reflecting the current status of the employer's "operations and prospects." This differs from the more customary "book value" method which does not consider an employer's prospects. The prescribed approach requires development of new policies and concepts. A regulation is expected to be issued in proposed form in February 1976, detailing and inviting comments on the Corporation's methods for determining net worth.

5. Coordination with Other Agencies. The Corporation is continuing to work closely with the Department of Labor and the Internal Revenue Service to avoid duplication and to minimize the administrative burden of reporting requirements and to coordinate policies and procedures regarding plan terminations. An important objective involves the development, with the Internal Revenue Service, of interagency procedures for the treatment of partial termination of plans, plan mergers and consolidations, and transfers of plan assets.

Coordinated procedures must also be developed with the Internal Revenue Service and the Department of Labor to obtain the verification of the universe of approximately 120,000 defined benefit plans and the review of new plan applications to determine coverage and compliance. Criteria for identifying plans which represent a potential significant liability to the PBGC are being studied to establish systems for early interagency determinations with respect to such plans.

6.

Computer Systems. The design of computer software, and related forms and procedural manuals, will continue to be of high priority. In the area of actuarial support, software will be developed if possible, which will allow: (a) a continuous updating of PBGC valuation factors and close-out rates to keep them consistent with current market trends and conditions; and (b) an automated allocation of plan assets.

The initial computer systems for processing premiums will be
redesigned to permit faster processing of premium payments and

the timely identification of over- and underpayments and the resulting
refund or billing actions, as well as the maintenance of a complete
plan history. Other important systems include those for: (a) benefit
payment and services; (b) asset accounting; (c) case tracking; and
(d) financial modeling.

7.

Financial Management. With advice from the Advisory Committee and the recently established Investment Panel, the Corporation has devised a strategy for managing the assets of plans terminating with insufficient assets. That strategy includes the selection of a custodian bank and a number of investment management organizations to assist PBGC in controlling the assets of small, insufficiently funded terminating plans which will be held in a commingled trust account. With this approach, the earnings on assets can be optimized and the trustee related costs minimized through economies of scale. These investment management organizations under contract will have the responsibility to manage the assets allocated to their supervision in accordance with the goals and objectives mutually agreed upon by the money management organizations and the Corporation. At the outset of the program, there will be three money managers: fixed income manager and two common stock managers. One common stock manager will concentrate on growth stocks. The other equity manager will apply his expertise to the management of a portfolio of common stocks, the characteristics of which are predominately not analogous to the characteristics of "growth stocks. This diversification is for the purpose of assuring that PBGC will decrease its vulnerability at any given time to the same market valuation influences. As assets accumulate over time, the Corporation will consider adding additional money managers when it appears to be in its advantage to do so.

a

An additional element of the investment management system will be
the custodian bank. This bank, operating under contract to PBGC,
will act as the central depository for the assets of terminated
pension plans for which PBGC becomes trustee. In addition, the
custodian bank will be vested with the responsibility of assisting
the Corporation in the ongoing management and/or liquidation of such
nonmarketable assets that may accrue to PBGC. As assets accumulate
over time, the Corporation will add an additional custodian bank
if it appears to be in its advantage to do so.

The final elements of this system provide for the use of a performance measurement organization and a transaction audit organization. These organizations, chosen from the private sector of the investment community, will be under contract to assist the Corporation staff in measuring relative performance to like pools of assets with like risk criteria and size,

and the review of transactions as reported by the custodian
bank, money managers and broker dealers for accuracy and
completeness.

8. Benefit Payment System. Apart from the computer system,
mentioned above, needed to support this system, a very
detailed plan must be developed and implemented to insure
that benefit payment checks are issued in accurate amounts,
on a timely basis, to legitimate participants of plans
terminating without sufficient assets to cover guaranteed
benefits, and that such participants are provided prompt
service when problems or questions arise concerning their
benefits. The task here is more involved than would be
present in an ordinary payroll system or a single large
retirement system. Rather than resulting from a single
set of benefit provisions, the bases for the benefits
paid under ERISA will be those contained in original
plan documents . requiring, therefore, long-term
reliance on a large and growing number of separate plans
and plan abstracts to respond to participants' questions.

...

H. FISCAL YEAR 1976 REAPPORTIONMENT

Principally because of a four-fold increase in pension plan terminations over the level on which the Corporation's budget was based, PBGC requested a reapportionment from OMB. OMB approved an increase of $5,435,000 over the Corporation's original FY 1976 budget of $9,337,000 increasing the FY 1976 apportionment for administration to $14,772,000. This new funding level supports an increase of 162 positions over the original FY 1976 ceiling of 305. The new ceiling is thus 467.

I. BASIS FOR THE FY 1977 BUDGET

The major justification supporting PBGC's increase in approved budget levels for FY 1977 is the above mentioned upswing in the Corporation's primary workload factor, plan termination notices, which, at the time of OMB action, were being received at three to four times the annual rate upon which PBGC's initial planning estimates were based. Actual experience to date is shown in Figure 3 and a longer range projection of terminations is illustrated in Figure 4. The most recent experience plotted on Figure 4, i.e., actual termination notice activity for October-December, 1975, was not considered by OMB in setting the FY 1976 and FY 1977 budget levels. Before we conclude that it will impact on budget requirements, we must complete an analysis of the make up and reasons for this unexpected workload. Figure 5 illustrates that based on what our long-term assumptions were at the time of budget development, we considered the projected downturn in terminations to avoid overstaffing for future requirements.