collectable employer liability. In the first 4 years of the Insurance Program-July 1, 1974 to September 30, 1978-the average annual net claim was about $35 million; in the next three years-October 1, 1978 to September 30, 1981-about $68 million; and in the most recent years-October 1, 1981 to September 30, 1984-about $163 million. This growth in annual net claims is attributable in large part to continued growth in the number of and size of a few very large individual terminations. For example, in the most recent 3 years there were eight net claims over $10 million each-what we term "jumbo" net claims-totaling $373 million just for the eight claims, compared to six totaling $164 million in the preceding 41⁄2 year period. About two-thirds of the PBGC's total dollar net claims to date have come from such jumbo net claims. The program is extremely sensitive to such large terminations which are in and of themselves extremely difficult to forecast. This has made the projection of our premium needs very difficult. When we first requested the Congress to increase the premium in 1977, the deficit was $41 million and it was anticipated that it would be eliminated by the end of 1987. It also was anticipated that the $2.60 premium request would be sufficient to assure full funding of future claims in the year incurred, at least through 1982. However, because of the unanticipated growth of these large insufficient terminations, the deficit continued to grow and reached $95 million by the end of fiscal year 1980. Our last premium study conducted by the PBGC in May 1982 showed that a $6 premium would be needed beginning in January 1983 to meet the deficit elimination target of December 31, 1987. Unfortunately, no action was taken on that or subsequent requests. The most recent 3 years' experience has been somewhat enigmatic. In fiscal year 1982 and 1983 net claims were $264 million and $189 million respectively; whereas the highest annual net claim for any prior year was $92 million in fiscal year 1980. In contrast, net claims in fiscal year 1984 were $36 million, the lowest since fiscal year 1977. The current request is for a premium of $7.50 per participant per plan year, effective for plan years beginning on or after January 1, 1985. The required premium includes about $5 to pay projected future claims as they are incurred, $1.50 to retire the accumulated deficit of $462 million over a 15-year period, and $1 for administrative expenses. These figures assume a plateau of 30.6 million participants in the single-employer program during fiscal year 1985, an additional million in fiscal year 1986 due to the Retirement Equity Act, and a gradual return to the historical average annual increase of 1.1 million by fiscal year 1989. About 80 percent of the claims against the insurance program occur in connection with reorganization or liquidation of the plan sponsor. As I previously mentioned, because of the sensitivity of the program to large claims the PBGC has found it difficult to derive any statistical relationship with any economic variables to use as a basis for projecting future claims. Therefore, the best basis we have been able to find to project future net claims is our past experience. In this regard, the projections that underlie the premium requests are based on our historical trends with the exception that we have sought to address the abnormal claims experience of 1982, 1983, and 1984 by spreading that experience uniformly over the prior period. The results mean that we expect an annual net claims of some $185 million over the next 15 years. This figure does not per se include any contingency reserve for any abnormally large claims. At the present time, by using a 15-year projection period we are allowing ourselves some flexibility for fluctuations in claims during individual years, as we have experienced recently without requiring us to come back to the Congress to request any additional premium increases in the near future. The request assumes that net claims will be funded in the year incurred consistent with the immediate full-funding policy adopted by the Congress in its approval of the premium increase in 1977. The current request would amortize the existing defict of $462 million over 15 years, which is the longest period that we consider responsible under the circumstances. While the program is not in any immediate danger of being unable to pay benefits when due, cash-flow in the single-employer program turned negative for the first time in fiscal year 1984. Beginning in early fiscal year 1985, the PBGC for the first time began adding to the size of the Federal deficit. We estimate that without a premium increase we will be adding $10 to $20 million to the fiscal year 1985 Federal deficit. However, with the premium increase we would be reducing the Federal deficit by some $154 million during fiscal year 1985, and continuing on a prospective base. The deficit situation would worsen very rapidly unless a premium increase is enacted, not only the defict in the program but also the adverse impact on the Federal deficit which we are all concerned about. Relative to administrative expenses we assume $1 per participant moving into the future over the next 15 years. We feel this request is extremely urgent and while the increase is large in percentage terms, we feel it is a modest figure in absolute terms, especially relative to total labor cost. For example, our $7.50 per participant is about one-tenth of 1 percent of a typical employer's annual payment for employee benefits. Without the higher premium, however, the consequences to the insurance program could become catastrophic. The most likely forecast shows a decline in the program's asset-to-liability ratio to 54 percent at the end of fiscal year 1989, from 70 percent at the end of fiscal year 1984. There would be a concomitant increase in the deficit to $1.3 billion by the end of 1989, and to $5.5 billion by the end of 1999. Therefore, failure to act would put the program at risk in the not too distanct future, and would create pressure for general revenue funding. In addition, failure to act will only compound the problem and serve to increase the premium amount needed to insure the financial integrity of the single-employer insurance program. I would like to briefly state some of the legislative reforms that were also mentioned in the President's fiscal year 1986 budget. The President's budget did contain a request for certain legislative reforms to a single-employer program, as well as, a premium in crease. The purpose of the reforms would be to limit the circumstances under which the the PBGC would accept an insufficient plan termination to cases of sponsor financial distress, and would increase the current 30 percent of net worth limit on employer liability for companies that successfully emerge from a financial crisis. This will be accomplished through providing the PBGC an interest in the future profits of an ongoing sponsor for a stated period. The forms also will help plans and the PBGC collect on large unpaid or waived contributions by creating a lien in favor of the plan for those amounts, except in situations where such a lien would be unnecessary or counter-productive. In addition, we are requesting that an express provision be added to the law to clarify that ERISA prohibits abusive shifts of unfunded liabilities to the insurance program though transfers from stronger to weaker companies that subsequently fail. The proposed provision will indemnify the program for losses due to such abusive tranfers but will not disrupt normal business transactions. In summary, the President's 1986 budget proposes both a premium increase and the necessary legislative reforms be passed as a single package. Although it is impossible to put a price tag on the reforms, it is clear that without them the program costs and related premium needs would be higher. For example, under current law about 20 percent of the net claims that we have experienced historically have come from ongoing costs that have not been through any type of bankruptcy proceeding. Many of these companies were in weak financial condition and might ultimately have entered bankruptcy proceedings and terminated their plans. However, without the reforms, companies that can afford to continue their plans may nonetheless find it financially advantageous to terminate them. Thus while savings from reforms cannot be estimated it is clear that they would sharply reduce the incentive for terminations, especially unwarranted terminations, and in fact, would increase the recovery that we could have against such insufficient terminations. The reforms would also provide for more equitable and fair treatment of our premium payers by assuring that those plans that terminate with unfunded liabilities pay their fair share of any resulting loss to the insurance system. Similarly, the minimum funding lien provision will both serve as a disincentive for sponsors to, in effect, borrow from a plan by obtaining funding waivers, and provide a means for plans to collect more on a claim for unpaid contributions in bankruptcy, which may reduce PBGC's net claims significantly in some cases. Another reform that provides better benefit security to plan participants and indirectly may benefit the PBGC will require plans to become fully funded for all accrued benefits before making a final distribution of assets, unless the plan terminates in a "distress termination" under the bill. This insures that healthy sponsors meet their commitments to provide all promised benefits before closing out the plan. Of course, sponsors will retain the right as under current law to freeze benefit accruals at current levels. In summary, the PBGC Insurance Program is in a desperate need of a premium increase and fundamental reforms in order to assure that we will be able to meet the promises that Congress made when the program was created. In addition, passage of the previously mentioned legislative reforms will significantly reduce the need for any future premium in creases. We look forward to working with the Congress in addressing this important matter. I will be happy to answer any questions you have and the committee members may have in this regard at this time. [The prepared statement follows:] TESTIMONY OF DAVID M. WALKER ACTING EXECUTIVE DIRECTOR PENSION BENEFIT GUARANTY CORPORATION BEFORE THE COMMITTEE ON WAYS AND MEANS UNITED STATES HOUSE OF REPRESENTATIVES JUNE 19, 1985 Mr. Chairman: I am pleased to appear before you today to testify on behalf of the Administration in support of an increase in the premium for single-employer plan termination insurance to $7.50 per participant per year, effective January 1, 1985, and related program reforms. In 1974, as a part of the Employee Retirement Income Security Act (ERISA), the Congress created a much needed insurance program to guarantee payment of vested benefits in terminating defined benefit plans that do not have sufficient assets to provide the promised benefits. Two insurance funds were created for this basic benefits guarantee program, one for single-employer plans and one for multiemployer plans. My testimony today addresses only the single-employer program. The Congress legislated changes in the multiemployer program, including premiums, in September, 1980, and no further premium adjustment is needed in that program at this time. In the single-employer program, as of the end of FY 1984, the PBGC was responsible for payment of benefits to about |