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PBGC Director Joshua Gotbaum; Illustration by Arthur Mount

A YEAR AGO, IN THE WEEK AFTER THANKSGIVING, AMR Corp., parent of American Airlines, gave its 130,000 employees and retirees something to be less than grateful for: The third-largest U.S. airline filed a Chapter 11 petition to restructure the company via bankruptcy court. Like Delta Air Lines, Northwest Airlines Corp. and United Airlines parent UAL Corp. before it, American contended it would need to unload its four defined benefit pension plans to return to profitability. If the company succeeded, a total of about $8.3 billion in assets to help cover $18.5 billion in promised benefits could have vanished from its books. No company had ever tried to escape pension obligations as large.

The ink on the AMR filing was barely dry when the Pension Benefit Guaranty Corp., the federal pension insurance agency, swung into action. Leading the charge: PBGC director Joshua Gotbaum.

The prospect of giant American Airlines leaving taxpayers with the bill for its pension promises gave Gotbaum a high-profile perch from which to begin the job of remaking the federal pension insurance corporation, which now oversees $107 billion in obligations. Appointed by President Barack Obama in July 2010, the 61-year-old Gotbaum soon found himself on a mission to repair an agency damaged by annual threats of looming insolvency, constant turnover at the top, years of poor oversight by long-entrenched staff in key roles, questionable governance practices and a truckload of scathingly critical reports by its inspector general and the Government Accountability Office.

But fixing the PBGC’s problems is not Gotbaum’s primary goal. As the head of what is fast becoming the defined benefit pension provider of last resort, he has joined the ranks of industry leaders out to remake the U.S. retirement system. “As a first principle, we need to find a way to make it easier and less expensive for employers and enable employees to achieve secure retirements,” says Gotbaum. If done correctly, that would ultimately put the agency out of business.

Established under the Employee Retirement Income Security Act of 1974, the PBGC is charged above all with saving pensions. According to the omnibus pension law, a company in bankruptcy must show proof in court that it cannot honor its pension promises to its employees and retirees before it is allowed to terminate its plan. Nonbankruptcy pension terminations are permitted only after a thorough accounting. PBGC staff have long endeavored to carry out this charge, often working through the courts, but highly publicized bankruptcies and pension fund terminations by major U.S. corporations in the first decade of this century have cast doubt on the agency’s ability to do so. As one former PBGC director confided to Institutional Investor, “The bankruptcy industry sees the PBGC as rolling over in a bankruptcy.”

To build bargaining muscle in the AMR case, the PBGC director and his staff contacted the airline’s creditors to determine whether they too would be served by avoiding the termination of American’s pension plans. They also worked the press and Congress.

“If American Airlines terminated its pension plan, the PBGC would’ve been the largest creditor, at $9 billion,” Gotbaum explains. “So we went to the other creditors and said, ‘Folks, we think American Airlines can afford not to terminate its pensions.’ ” By January the agency had filed 76 liens against AMR  assets that were not part of the bankruptcy. Next, while preparing for the possible assumption of billions in new obligations, Gotbaum approached news outlets to build a public case against the terminations. “One of the issues with the PBGC is that no one knows what it does,” he complains.

By early March of this year, American had backed down and agreed to freeze three of its plans. The fate of the fourth — the pilots’ plan — is currently being worked out.

In the wake of two major financial downturns in this new century, two rounds of pension funding relief from Congress and a massive inflow of terminated pensions, the PBGC has reached a unique position as the largest public trustee of private pension assets. In addition to its $107 billion in liabilities, the agency manages $81 billion in assets, for a net deficit, or underfunding, of $26 billion — numbers that have swelled tenfold over the past decade. The PBGC now pays out $6 billion a year in pension benefits to 900,000 retirees in 4,300 failed plans; they range from airline baggage handlers and supermarket employees to steelworkers in a Taft-Hartley plan. If you add in all the active workers in the PBGC system, there are a total of 1.5 million people whose benefits will be paid by the agency.

There are also more than 33 million actively employed participants in close to 26,000 insurance-paying single-employer plans. A separate multiemployer program for Taft-Hartley union plans covers more than 10 million plan participants in about 1,500 active plans. The single-employer program has a higher premium and distributes a higher benefit to participants than the Taft-Hartley program. Retirees whose pensions are trusteed in the single-employer program receive a maximum guaranteed payment of about $56,000 at age 65, while those in the multiemployer program can receive only a paltry $12,870 for 30 years of service.

The DoL's Phyllis Borzi:
"I think it's worth exploring new plans"
“The PBGC is a reflection of the economic challenges that face the country,” observes Phyllis Borzi, assistant secretary for employee benefits security at the Department of Labor and director of its Employee Benefit Security Administration in Washington.

Borzi oversees pension and PBGC issues for her boss, Labor Secretary Hilda Solis, who is the ERISA-designated chairman of the PBGC board, which also includes Treasury Secretary Timothy Geithner and Acting Commerce Secretary Rebecca Blank and now meets once every quarter. Their staffs oversee the day-to-day functioning of the agency and generally fill in for the secretaries at the board meetings. “I spend an extraordinary amount of time on the PBGC,” says Borzi. That degree of attention is a relatively recent phenomenon.

Until Congress in July passed MAP-21, or the Moving Ahead for Progress in the 21st Century Act, also known as the highway bill, 16 years could elapse without a single meeting. For 13 years, from 1990 through 2003, the board held a total of six. To bring the PBGC’s governance in line with that of other public institutions that oversee more than $80 billion in fiduciary assets and liabilities, Congress recommended, at the close of its 2012 session, expanding the board to include both audit and investment committees.

The pension insurance program itself has suffered criticism for years over the moral hazards created by the agency’s original structure. Because the PBGC protects both employers and employees when a pension is shed, employers have less motivation to retain their commitments to these benefits. Unlike those of public insurance corporations like the Federal Deposit Insurance Corp. or most private insurance companies, PBGC’s premiums are set by Congress without regard to plan sponsor risk. The agency cannot set its own underwriting standards and has to provide coverage whether or not premiums are paid or contributions made to a plan.

“The design of the PBGC and many of the underpinnings of ERISA are inherently flawed,” says former PBGC director Bradley Belt, who is now head of the Washington office of the Milken Institute, a Santa Monica, California–based think tank.

It does not help that the PBGC operates at a competitive disadvantage in recruiting and retaining personnel relative to agencies like the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission, which unlike the PBGC have been given pay flexibility. Today its salaries average $60,000 less than the SEC’s and the CFTC’s for top executive and certain professional positions, and $13,000 less for other senior positions. “We lose people every year because salaries go up 5 percent at other agencies,” explains PBGC general counsel Judith Starr, who adds that the agency’s private sector peers earn between 40 and 80 percent more, depending on seniority. She believes that dedication to the mission keeps people at the PBGC.

The agency’s own inspector general, Rebecca Anne Batts, has been publishing volumes of negative reports since her arrival in 2008. During Gotbaum’s first week on the job, in July 2010, Batts briefed him on what she saw as the most egregious problems at the agency. “An audit services contractor had done horrifically substandard work,” Batts explains. The contractor, Integrated Management Resources Group, based in Lanham, Maryland, had been entrenched for a decade but not professionally qualified to audit plan assets, she says. The firm was terminated after Gotbaum took over.

Moreover, PBGC staff were not trained to oversee the contract work, nor was audit management aware of a problem. “They have a whole department that doesn’t know what it’s doing,” Batts continues, and “an absence of basic knowledge and skills.” According to the inspector general, there are still 195 recommendations to PBGC management by her office, with an average age of 27 months.

To deal with this overload, Gotbaum has targeted three areas for urgent remediation: putting a consensus investment policy in place; improving the agency’s connection with its constituencies, including pension recipients, plan sponsors, business and labor, Congress and the public; and admitting and correcting errors, then making changes to ensure they don’t recur. “The mistakes the IG found are real and embarrassing,” says Gotbaum. “The PBGC hasn’t spent a lot of time trying to explain that.”

“It will be a real challenge for the PBGC to change,” says Batts. “Josh has had a number of dragons to fight since he got here.”

But Gotbaum has discovered that he will have to do more than slay the agency’s dragons. Once he began to learn about the broader retirement security landscape, Gotbaum realized that the PBGC’s woes were often symptomatic of a larger one.

IN JULY 2003, GOTBAUM WAS ON A PLANE HEADED TO Hawaii for a two-year stay. Having recently left the highly charged atmosphere of the September 11th Fund in New York — a charitable fund created by United Way and the New York Community Trust that raised $500 million to benefit victims of the terrorist attacks, where he had served for two years as CEO — Gotbaum was about to step into his new role as bankruptcy-court-appointed trustee, effectively CEO, of Hawaiian Airlines. “I was no one’s first choice,” recalls Gotbaum, who became the failed airline’s second trustee after John Monahan, now CEO of the Hawaiian Visitors and Convention Bureau, exited just a few weeks into the March 2003 bankruptcy. “Boeing [Co., which owned Hawaiian’s fleet] wanted someone who had run an airline, and the unions wanted someone who knew Hawaii.” But Gotbaum’s experience in the 1980s and early ’90s at Lazard Frères & Co., where he worked on the Eastern Air Lines, Pan American World Airways and Braniff bankruptcies and advised British Airways, Air France and the Air Line Pilots Association, made him an acceptable fit.

Gotbaum, who says he likes to fix companies, had a particularly acrimonious case to handle in the Hawaiian Airlines bankruptcy. After the new trustee requested that the federal judge defer a $4.25 million payment to the pilots’ pension fund, a company pilot threw Gotbaum off his plane. (The funds were later fully restored.) His negotiations with Boeing were lengthy, angering other creditors, while former CEO John Adams, whom the court had removed just ahead of Gotbaum’s arrival, was sued by his replacement to recover $28 million in compensation. (Adams later agreed to return $3.6 million to the company.)

While at Hawaiian, Gotbaum met with then–PBGC director Steven Kandarian, now chairman and CEO of MetLife, to work on saving the pilots’ pension plan (three other plans had been terminated in Hawaiian’s previous bankruptcy, in 1993) and eventually oversaw the company’s purchase by a group of hedge fund firms that already owned most of the equity. All of the creditors received 100 percent on the dollar, while the pilots’ renegotiated contract put their pay above the scale of United Airlines and American Airlines for the first time.

“It was a very successful bankruptcy,” says Gotbaum. Yet when he requested an $8 million personal bonus from the bankruptcy judge, he had to settle for $250,000. “After the deal was done, equityholders went to court and said I didn’t deserve a dime,” he recalls. In a formal objection made to the bankruptcy court in Hawaii, the unsecured creditors protested that much of the outcome’s success resulted from the work of others, which had begun before Gotbaum’s arrival.

Still, the Hawaiian bankruptcy gave Gotbaum insight into the issues raised by the later American Airlines bankruptcy. “I think the Hawaiian Air experience does set him apart,” says Assistant Labor Secretary Borzi.

The restructuring professional got an early immersion in labor-management negotiations and public service from his father, union leader Victor Gotbaum, who played a critical role in helping New York City avoid bankruptcy in 1975. Born in Brooklyn in 1951 (his mother, Sarah, was a social worker), Josh Gotbaum was part of a family that moved frequently, with stints in Washington; Ankara, Turkey; Evanston, Illinois; and Westchester County, New York, where he graduated in 1969 from Scarsdale High School. An aptitude for science and guidance from high school teachers led Gotbaum to a biochemistry major at Stanford University. But by the time he graduated in 1973, his plans for a future in science had been displaced by an interest in public service.

The new graduate headed to Harvard University, where he earned a JD from the law school and a master’s in public policy from the John F. Kennedy School of Government, both in 1978. Then he was on to a junior position in the Carter administration. After Ronald Reagan’s election in 1980, Felix Rohatyn, over the objection of several partners, helped Gotbaum secure a berth at Lazard Frères that lasted 14 years, including five as partner. Victor Gotbaum, former executive director of District Council 37 of the American Federation of State, County and Municipal Employees, had befriended Rohatyn in the mid-1970s when the two worked together to return New York City to financial solvency.

In 1994, Josh Gotbaum, who five years earlier had married Joyce Thornhill, a Canadian citizen who worked at J.P. Morgan & Co., moved back to Washington, where he was the first noneconomist to serve as assistant treasurer of economic policy in the Treasury Department. He later moved to the Office of Management and Budget as executive associate director and controller.

Soon after September 11, 2001, and with a Republican back in the White House, Gotbaum was tapped to help develop and run the September 11th Fund. Two years later he was off to Hawaii. After Hawaiian Airlines exited its bankruptcy in May 2005, and after he’d had some time to regroup, Gotbaum accepted a job in 2006 at New York–based restructuring consulting firm Blue Wolf Capital Management, which invests in middle-market companies, specializing in complex situations involving government, labor unions and financial and operational distress.

In June 2009, Obama tapped Gotbaum to take on the director’s role at PBGC. Uncertain that he wanted to make the commitment, he turned to three industry friends for advice. They ranged from a Republican management-side attorney to the head of a major labor union, but their advice was the same. As one, William Kilberg, a partner at Gibson, Dunn & Crutcher in Washington, put it, “It’s probably a bad thing for you and good for the country.” (Kilberg was involved in the development of ERISA, served as chairman of the task force that created the PBGC and represented Gotbaum when he was a this rustee for Hawaiian Airlines.)

After a particularly long, drawn-out nomination process, including a recess appointment in July 2010 and Senate confirmation the following September, Gotbaum took over the director’s K Street office, which had been vacant since his predecessor Charles Millard left in January of the previous year.

SINCE ITS 1974 INCEPTION THE PBGC has had the only statutory authority to shut down pension funds in the U.S. Its mission, however, is to save them. That was the idea when, in the final leg of a seven-year project sponsored by Jacob Javits, a liberal Republican senator from New York, the ERISA architects cobbled together Title IV. According to James Wooten, professor at SUNY Buffalo Law School, in his seminal book, The Employee Retirement Income Security Act of 1974: A Political History, a study ordered by then-President Nixon revealed that 5,000 to 9,000 workers a year lost a total of $20 million to $30 million in benefits as a result of plan terminations. Nixon and Congress sought a safety net, and the national pension insurance agency was created, over the strenuous opposition of some policymakers.

Despite the noble goal of saving pensions, the idea ­­— and reality — of sponsors’ paying insurance premiums against the possibility of their plans’ termination has from the beginning created a perverse incentive for the PBGC’s sponsors to bail out of their pension promises, or at least not worry about the possibility of that event. As Wooten points out, this moral hazard was anticipated early on by those opposed to termination insurance, including then–Labor Secretary W. Willard Wirtz, who said it “could have the effect of subsidizing imprudent procedures and inadequate funding.” Or, as Ronald Gebhardtsbauer, a former PBGC chief actuary (1986–’94), says today, the moral hazard is known in some quarters as “the PBGC put,” as in, “a company ‘puts’ its pension liability to the PBGC like a stock option.”

A giant conflict of interest was baked into the agency when it was tasked with serving four different constituencies: pension participants in active plans, participants in terminated plans, private companies ­— the plan sponsors that are the insurance program’s “customers” — and the U.S. taxpayer, whom the PBGC theoretically protects from paying for terminated plans. The agency operates on three sources of income: insurance premiums that it does not set, investment income and recoveries in bankruptcies. This sets up another conflict, as each bankruptcy adds assets with which to pay out the now-$6 billion in annual pension benefits. Rounding it all out is the question that hasn’t been resolved since the PBGC’s inception, says general counsel Starr: “Is it a social welfare program or an insurance program?”

When Belt stepped down from the director’s role in May 2006 after two years at the helm, he sent four separate memos to the PBGC board, then chaired by former Labor secretary Elaine Chao and the directors of the Office of Management and Budget and the National Economic Council. “I will state this as plainly as I can — the current governance structure is flawed in design and execution,” wrote Belt. “It is ambiguous at best; it leads to confusion about roles and responsibilities; it can engender conflict among PBGC, the board agencies and the OMB; it can impede effective timely response to marketplace developments; it impairs efficient administration of the insurance programs and operations of the corporation; and it unnecessarily exposes the corporation, the board and the Administration to legal and reputational risk.”

ERISA experts have formed a chorus of criticism of their own. “I’ve been concerned about the mission of the PBGC and the very problematic way Congress established it,” says John Langbein, a professor at Yale Law School. “All of the investment blunders that get made by pension plans don’t affect the beneficiaries. As long as the PBGC is on the hook, it’s the PBGC that is affected.”

Asset managers have their own view. “Like an unstoppable freight train, pension liabilities keep growing and growing,” notes David Oaten, CEO of Pacific Global Advisors (formerly JPMorgan Chase & Co.’s pension advisory group) in New York. “It’s become like a death spiral.”

The growth in pension liabilities, even at healthy companies that have billions of dollars in pension assets, has been largely responsible for more than a decade of record-breaking pension terminations. Companies made big benefit promises based on overly optimistic actuarial projections of future growth rates. Labor unions accepted ever-escalating benefits instead of wage increases. And in the 1980s and early ’90s, Congress repeatedly imposed taxes on pension overfunding to bring in revenue, thereby preventing rainy-day savings from accumulating during the bull market. The result: Pension liabilities are being transferred in great number to the agency that insures them.

ERISA’s authors could not have envisioned in 1974 that a wave of terminations 25 to 35 years later by some of the largest U.S. pension sponsors would transform the pension insurance agency into a major financial institution that serves as trustee for billions of dollars of assets — and liabilities. By 1975 the new agency had trusteed three terminated plans with 386 participants and $22.9 million in assets. A year later that had increased to 48 plans with 6,435 participants and $55.2 million in assets. And there’s been no looking back since then.

As the pot of terminated pension assets grew, managing them demanded more staff attention. Investment policy frequently whipsawed, as new directors arrived at about two-year intervals. Those who saw the agency as an insurance program favored a fixed-income-heavy allocation. Others, believing the underfunded pension assets needed a boost in returns, raised the equity allocation. In 2004, for example, director Belt instituted a liability-driven investment model, with board approval, only to have that policy shifted by his replacement, Charles Millard, who took over in December 2007 and exited in January 2009. “Investment policy was [our] biggest focus,” explains Millard, now head of pension relations at Citigroup in New York.

Belt had favored a bond allocation of between 75 and 85 percent. Millard, who like Belt knew very little about the agency at the time he took over, got board approval to cut bonds to 45 percent, raise equity to 45 percent and add two new allocations of 5 percent each to private equity and real estate.

Millard, who had previously advised wealthy families, turned to Norwalk, Connecticut–based Rocaton Investment Advisors, known for favoring hedge funds in pension and endowment portfolios, for investment advice. Millard had history on his side: Former PBGC director Martin Slate, a friend of former president and first lady Bill and Hillary Clinton from their Yale days, grew the equity allocation from 17 percent when he took over in 1993 to 32 percent in 1995 and oversaw record fund performance of 31.4 percent. During Slate’s tenure “there were five years of beach days,” agrees general counsel Starr, who was hired by Belt in 2005 — about the only surplus in its 37-year history.

The timing of Millard’s equity increase was fortuitous, says equity head Jennifer Byrnes, a 19-year veteran of the agency, as share prices became depressed in the sudden market downturn of 2008. But the strategy was put on hold in the second quarter of 2009 when a whistle-blower told Inspector General Batts that Millard had been spending too much time communicating with the asset managers who were bidding to manage the expanded equity portfolio. Although he was exonerated in March 2010 of accusations that he had interfered with the vendor hiring process, after invoking his Fifth Amendment rights on Capitol Hill, Millard’s equity-enhancing scheme barely got off the ground.

The investment policy languished for two years, getting neither the board’s nor the director’s attention during the presidential transition from Bush to Obama, new cabinet appointments and Gotbaum’s lengthy approval process.

Finally, in May 2011, Labor Secretary Solis, Treasury Secretary Geithner and then–Commerce Secretary Gary Locke approved a new policy that allocates 70 percent to fixed income, half of it in Treasury bonds, and 30 percent to equity — 80 percent of which is in passive instruments — and other non-fixed-income investments, including alternatives. “The secretary of the Treasury has tended to believe that the PBGC funds should be held at the Treasury, not in the market,” says Gotbaum.

A team of 15 investment professionals oversees external managers that include 15 in fixed income running 28 different mandates, most of them active. According to the agency’s annual report for the year ended September 30, 2011 (the latest figures available), 23 percent of the PBGC portfolio was in equity, down from 31 percent at the end of the previous fiscal year. Cash and fixed income represented about 74 percent of the total investable assets at the end of the fiscal year, up from 66 percent at the end of the previous fiscal year. Most of the remaining 3 percent of assets is invested in alternatives, including private equity, private debt and real estate, that were inherited with incoming pension plan assets. Despite all the policy changes over the years, the PBGC investment portfolio, under the direction of John Greenberg, the agency’s first CIO, hired by Millard in 2008, was up 12.6 percent for the year ended September 30, 2012. Annual returns were 9.9 percent over three years and 7.1 percent over five years.

As big a job as managing an $80 billion portfolio is, the PBGC must also maintain a stable of ERISA attorneys and bankruptcy experts, now numbering about 60. “We’re a unique ERISA bankruptcy litigation shop,” says Israel Goldowitz, chief counsel in the PBGC’s Office of Negotiations & Restructuring, which includes four subunits. One, the Corporate Finance & Restructuring Department, has 30 financial analysts and 10 actuaries, who focus on monitoring companies that sponsor large defined benefit plans. They will open a case and talk to a company if they believe it is considering bankruptcy. “With American Airlines the bankruptcy happened sooner than we expected,” says acting director Jennifer Messina.

There are between 50 and 200 new corporate bankruptcies a year, according to Michael Rae, acting chief of the ONR. His office’s goal is to either work with companies to keep their plans or be an aggressive creditor to maximize the recovery of pension assets. “Companies aren’t permitted to simply terminate their pension plans because they want to,” says Rae. “There’s a standard.” It’s ultimately a matter of proof in court, adds Goldowitz. The fact that AMR contributed $2 billion less to its pension plans than it should have, despite receiving funding relief from Congress on three separate occasions during the mid-2000s, proved to be a very effective argument, he explains. Because the PBGC’s claim is so large, it dwarfs those of other creditors. That has helped the PBGC save plans such as AMR’s.

Like a pair of conjoined twins, the PBGC and the defined benefit plan are intimately entwined. Their futures will reflect that of the entire U.S. retirement income system. Actuaries, asset managers, policymakers, industry groups and think tanks are among those offering ideas for solving the PBGC’s problems. Solutions range from ending the program to changing the retirement income security landscape — as Gotbaum would like to see happen.

With $107 billion in future obligations, the PBGC is becoming America’s pension fund of last resort. Among those who have suggested changing the system is Lawrence Pollack, a former actuary with consulting firm Towers Perrin. In a 2005 paper for the Society of Actuaries, Pollack argued that, from the plan sponsor’s view, the PBGC termination insurance premiums are a tax; the higher the tax, the fewer plans will exist, and over the years the balance has tipped from the PBGC supporting pension plans to the plans supporting the PBGC. Healthy sponsors are motivated by higher premiums to fund up their plans and exit the defined benefit system, leaving behind the weaker plans, says Pollack, now senior actuary with Pacific Global Advisors in New York. One solution: Terminate the insurance program and set up an administrator to oversee the plans managed by the agency. Then, says Pollack, “the focus of pension reform could migrate back to providing retirement benefits, versus the current obsession with avoiding a PBGC bailout.”

In his memos to the PBGC board, former director Belt laid out a number of what he now terms “out-of-the-box” recommendations for the agency, covering the full spectrum of pension and PBGC issues. For starters, Belt tells II, the Dutch pension system is viewed as one of the best in the world, partly because it maintains a very conservative funding requirement that precludes the need for termination insurance. If underfunding occurs, as it has following the recent financial crisis, the system has a balanced means of equalizing it: Pensioners, employers and employees all either put a bit more in or take a little less out. Belt also points to capital market tools like reinsurance that could mitigate some of the agency’s risk, and the creation of separate plan sponsor risk pools, similar to the good bank/bad bank model, that would clean up the PBGC’s balance sheet and allow for structured workouts, as used at savings and loans in the late 1980s.

In an April 2011 report, the Milken Institute took the risk pool idea a step further. It suggested stress-testing plan sponsors, taking into account factors like the health of the company and the macroeconomic environment, as well as the plan’s funding ratio, then placing them in risk categories. The report found that a number of large companies with underfunded plans had plenty of assets to cover their plans’ liabilities.

While external observers formulate systemic changes, Gotbaum has been dealing with more-immediate problems. After meeting with Inspector General Batts and reviewing her numerous findings of poor pension audits, particularly in the United Airlines and National Steel Corp. terminations, Gotbaum put Vincent Snowbarger, deputy director of operations, on the task of dealing with the problems Batts identified. Snowbarger, the agency’s three-time acting director, who has logged more days in that role than Belt, Millard and Gotbaum combined, oversaw the Benefits Administration and Payment Department, which manages the termination process, provides participant services for PBGC-trusteed plans, values terminated plans’ assets and liabilities, and determines participant benefit entitlements. “The real value is trying to structure our practice going forward so we don’t make errors” in auditing terminated pension plans, Snowbarger says. In September, Gotbaum brought on Philip Langham, former executive director of the $500 million Richmond (Virginia) Retirement System and a retired Air Force lieutenant colonel, to take over the BAPD. A brand-new department of quality management has also been put in place.

As it does a few times a decade, Congress included PBGC rule changes in its recent highway bill. It amends ERISA with three changes to the PBGC: funding relief, premium increases and governance modifications, including a five-year term for the director. As the presidential election approaches, Gotbaum is hedging his bets regarding his future. “If I think from this position I can contribute to improving the retirement security of this nation, I would be very happy to stay in this position,” he allows. How does he think he has done so far? “I think I’ve helped raise some issues. I think we have a long way to go to solve them.”

Some people will be disappointed if he leaves. “I think Josh Gotbaum has done an extraordinary job reaching out to the customers,” says James Klein, president of the American Benefits Council, speaking of his constituents, employers such as United States Steel Corp., Xerox Corp. and Weyerhaeuser. “He has created an opportunity for us to go in and talk to the agency anytime.”

Still, Klein has his own criticisms of the agency. In recent years employers have had to cope with detrimental changes in premium filings that took a long time to fix. Currently, some employers are struggling with gray areas in the definition of a trigger event, which results in the need to post a bond to protect the agency. “The agency has taken a very aggressive position in this kind of situation,” reports Klein. Representative Richard Neal, a Democrat from Massachusetts, has introduced a bill to remedy this issue.

In its last session Congress recommended that the PBGC board of directors be changed to include a majority-­independent board with two committees — an audit committee and an investment committee, composed of at least two members each — to enhance the overall effectiveness of the board. These advisory committees would provide the board with policy recommendations regarding changes to ERISA that would be beneficial to the PBGC or to the voluntary private pension system.

But critics say such changes miss the point. As modifications have been made to ERISA over the years, “the primary focus of pension legislation has become saving the PBGC, as opposed to helping the overall pension system,” says actuary Pollack. Now the question is, can U.S. policymakers find the will to focus on creating a 21st-century retirement policy?

Perhaps the best thing they can do is put the agency out of business with a wholesale change to the pension benefit landscape. Until they do, Gotbaum sees a different future for pensions and the PBGC. “It certainly is conventional wisdom that defined benefit pension funds are going away,” he acknowledges. “But what people seem to ignore is that 75 million Americans still participate in defined benefit plans.” He sees three challenges to securing retirement for the U.S. workforce. The first is to preserve defined benefit plans — his primary job. The second is to improve the defined contribution universe so there are better models that offer a greater chance of lifetime income. That includes creating new pension designs that provide professional longevity and investment risk management.

“The idea that participants can ever be as expert as people who manage traditional defined benefit assets is a fantasy,” says Gotbaum. “So inherent in the defined contribution model is a loss of retirement security.”

The third challenge outlined by the PBGC director is to find ways to make it possible for tens of millions of people in businesses who don’t have any retirement plans to obtain them. “We’ve created a regulatory regime that is leading employers to get out of pensions entirely,” he says. “But if employers had more flexibility and more options in defined benefit plans, more employers would stick with them. We need to make it easier for them to do so.” Rather than relying on workplace savings plans as pension substitutes, Gotbaum supports creating new ways to deliver more-pensionlike benefits. “What set of tax and regulatory provisions would allow companies to use hybrid plans instead of switching only to 401(k)s?” he asks.

While EBSA has been focusing on improving 401(k) plans for workers — enhancing fee disclosure and looking at lifetime income options — Assistant Labor Secretary Borzi says it may need to do more. “I think it’s worth exploring new plans that can be set up that combine elements of defined benefit and defined contribution plans,” she explains. “We can’t lose sight of the main mission, which is to protect workers and retirees.”

Slowly, change is coming to pension benefit design and delivery. On September 28, California Governor Jerry Brown signed the first private sector retirement bill into law, creating the California Secure Choice Retirement Savings Trust. A private-public partnership, the Secure Choice plan would open up more-pension-style asset management and longevity risk mitigation features to previously uncovered Californians. On Capitol Hill, Iowa Democratic Senator Tom Harkin recently proposed the USA Retirement Fund, which, like the Secure Choice, offers a new way to bring pensionlike benefits to the U.S. workforce. If these benefits catch on, private pensions, the third leg of the retirement income stool — along with Social Security and savings, including 401(k)s — could be sturdy once again, finally putting the PBGC out of its misery.  •  •

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