Restructuring the Pension Benefit Guaranty Corporation’s Board

The Pension Benefit Guaranty Corporation (PBGC) is a federal corporation which insures the pensions of employees and retirees who work in the private sector and are at risk of having their employers become bankrupt at the same time as their pension funds are under-funded. Unfortunately, the PGBC itself is chronically underfunded, with a deficit that is currently estimated at $33 billion and which could rise to $100 billion over time. (Please see “A Guide to the PBGC” for a detailed explanation of the PBGC, its situation, and options to restore it to financial balance.)

One step towards remedying the PBGC’s chronic problems would be to increase the effectiveness of its Board of Directors (Board). It currently has a small Board that meets relatively infrequently and lacks certain attributes, such as committee structures, that would make it easier to dive into greater depth on the key issues. Comparisons of the PBGC’s Board structure with that of analogous public entities demonstrates that its three-person Board format and sparse meeting schedule is unusual. The remainder of this paper will discuss potential changes that could improve the Board’s effectiveness.



It must be emphasized that changes to the Board structure, while useful, will go only partway towards solving the PBGC’s difficulties. The PBGC’s financial problems are principally caused by much deeper structural issues that are largely out of its control. Congress directly sets the pension funding rules that principally determine the PBGC’s risks and the premium levels that represent a significant part of its income. Private corporations, for their part, make the investment and business decisions that determine whether their pension plans become underfunded and whether the sponsoring corporation goes broke, triggering the need for coverage from the PBGC. The overall economic and financial environment has a major influence on whether the risks turn into actual losses.



However, the PBGC is big enough and complicated enough to warrant a real, active Board. It manages over $60 billion of assets, mostly financial investments, and pays out more than $4 billion in claims each year. Equally importantly, a strong Board with solid outside representation could also help to keep a spotlight on the deeper structural problems until Congress and the administration act to solve them.



The rest of this paper will address the following questions:

  • How is the PBGC’s Board of Directors structured today?
  • How does this compare with other analogous public entities?
  • What should be done to increase the Board’s effectiveness?

The author is indebted to the Government Accountability Office for focusing attention on this topic in an earlier report1 and for a McKinsey and Company report commissioned by the PBGC which examined in detail how other analogous public purpose corporations structure their Boards2. The latter report is referenced extensively throughout this paper.

How is the PBGC’s Board structured today?
The Board and management structure has not changed significantly since the PBGC was established by the Employee Retirement Income Security Act (ERISA) in 1974. There is a three member Board chaired by the Secretary of Labor, with the other members being the Secretaries of Treasury and Commerce. Although not stated explicitly, it appears that Labor and Commerce were included to ensure that the voices of labor and business were heard, while Treasury was viewed as a protector of the taxpayers, as well as a source of financial expertise.

According to McKinsey, “[t]he PBGC Board has historically met infrequently,” but in recent years has met twice a year. Representatives of the Board members have generally spoken about once a month in recent times.

How does this compare with other analogous public entities?
The McKinsey study was commissioned specifically to compare the structure and activity of the PBGC’s Board to that of the most analogous other entities. It was requested to make factual comparisons and list viable alternatives, without making recommendations. The study followed on an analysis by the Government Accountability Office suggesting that the Board structure could be improved, especially by expanding the Board. The McKinsey study specifically found:

Board size. The organizations with Boards all had at least seven members and the average was over ten, compared to the three that the PBGC has. (The Government National Mortgage Association has no Board and will be excluded from the rest of the discussion.) A larger statistical analysis by McKinsey of government corporations showed an average of 7.5 Board members.

Board composition. Many of the entities have ex officio members, but they never make up a majority of the Board, whereas the PBGC Board members are all ex officio. In many cases there are explicit requirements that certain members be chosen on the basis of relevant experience and in most others this is done as a matter of good practice even if not formally required.

Schedule of meetings. All of the Boards meet at least 4 times a year and at least half of them had monthly meetings. The PBGC Board met infrequently for most of its history, but in the last administration moved to meeting roughly semi-annually with monthly meetings by phone or in person of senior representatives of the Board.

Use of committees. All of the Boards studied used a committee structure in order to allow more in-depth understanding of the issues. The PBGC Board, with only three members, has never had reason for a committee structure.

Board terms. Board members who are not members by virtue of their office served for terms ranging from one to seven years, although, “in practice, most are re-elected and serve for more than five years.” The PBGC Board has only ex officio members. I suspect the average tenure historically was roughly two years, based on the usual turnover in Cabinet positions. In addition, Cabinet members normally leave office whenever a new President is elected, creating a continuity issue.

What should we do differently?
The PBGC is simply too large, complex, and important for us to keep the governance system that was set in place when the organization was expected to be small and simple to operate. In addition, now that there is a $33 billion deficit and reason to expect that figure to grow over time, we are playing with the taxpayers’ money, not just premiums from the private sector augmented by the assets taken over from failed pension plans. It is reasonable to have significantly greater oversight to provide the effectiveness and transparency the taxpayers deserve, given the likelihood that they will eventually be called on to rescue the PBGC.

There are compelling arguments for aligning the PBGC’s governance with that of most other government corporations and analogous entities like public pension funds. The following changes should help:

Board size. Seven to nine members seems to provide a good balance between the benefits of adding expertise and viewpoints and the problems created by having too many people in the same room.

Board composition. It is reasonable to retain the three Cabinet members, who are roughly aligned with the three important constituencies of labor, business, and the taxpayers. They also bring with them the expertise resident in their departments. One practical issue is that Cabinet members are very busy people. It would make sense to formalize the role of appointed designees who would have the full power to represent their department, including voting rights, when the Cabinet secretary cannot attend.

Beyond the three Cabinet members, it would be useful for all other members to come from outside the government and to represent those same three constituencies more explicitly. In my view, it is important that taxpayers be treated as one of those constituencies, given the likelihood of an eventual federal bailout. In addition, the PBGC is an insurance and money management firm by nature and would benefit from outside expertise in those two areas.

Schedule of meetings. There should be a requirement to meet at least four times a year, with the Board free to schedule additional meetings.

Use of committees. The larger Board size would enable the use of committees to study key issues in greater depth. It seems particularly desirable to have an audit committee and an investment committee. The latter’s role should include an explicit recognition that investments ought to be considered not just in terms of their individual risk/reward characteristics, but in terms of how well the portfolio is matched to the pension liabilities.

Board terms. The terms of members who are not there on an ex officio basis should be for three or four years and should be staggered so that there will be considerable continuity across the gaps otherwise created by Presidential elections.

1Government Accountability Office, “Pension Benefit Guaranty Corporation: Governance Structure Needs Improvements to Ensure Policy Direction and Oversight”, July 6, 2007
2 McKinsey & Company report for the PBGC, “Board Structure and Governance,” September 2008