Inspector General Faults PBGC's "Systemic" Failures

Following another report that finds fault with the Pension Benefit Guaranty Corp.'s audit processes and valuation of plan assets, the agency has cut most of its ties with one auditor and has promised to change procedures so that errors are prevented -- or corrected. Critics say it's about time the agency responded to problems.

Thursday, January 12, 2012
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The Pension Benefit Guaranty Corp.'s failures to conduct proper audits of plan assets of terminated pension plans are broadly based and are not limited to the handful of "significantly flawed" audits that have already been made public.

That's the finding of the agency's Inspector General Rebecca Ann Batts, whose report calls the agency's audits of valuations in United Airlines' terminated pension-plan assets "seriously deficient."

"It's not just the United Airlines plan," says Deborah Stover-Springer, deputy inspector general for PBGC. "Enough work has now been done to know that it is a systemic issue."

Further, the Inspector General finds that the PBGC -- after it admitted it erred in plan-asset audits and promised to mend its ways -- cannot seem to accurately correct its erroneous evaluations.

The failure to properly audit plan assets has led to incorrect and sometimes inadequate benefit payments, and poses a risk for litigation from plan beneficiaries against the agency, experts say.

The failures have created concern among advocates for retirees.

"I don't know of any other federal agency that has screwed up so many times and been so unprofessional in getting a system down right," says Paul Edwards, a Springfield, Mass.-based pension activist and past chairman of the now-inactive Coalition for Retirement Security.

"It is absolutely mind-boggling the many errors that have affected so many retirees with bad calculations," he says.

Batts, who has been IG since 2008, first brought the matter of errors and omissions in the UAL plans to the attention of the agency in mid-2010, according to Vince Snowbarger, deputy director for operations at PBGC and former acting director.

"We've known about these issues for quite some time," he says. "We've been working with [the IG] probably a year and a half on these and related issues."

The PBGC's auditing and administration failures stem in part from its persistent and significant reliance on a single contractor, Integrated Management Resources Group Inc., according to the IG's UAL report, which was issued in November 2010.

The Lanham, Md.-based company, led by founder and President Myrna Cooks, also has offices in Chicago, Atlanta, and Oakland, Calif.

"PBGC used the same contractor to perform hundreds of plan-asset and participant-data audits during the last decade, including eight of the 10 largest pension-plan terminations in PBGC's history," the report states.

PBGC Director Joshua Gotbaum acknowledged the agency's failure to accurately evaluate plan assets shortly after his arrival in mid-2010, launching an internal assessment of its Benefits Administration and Payment Department, which hired IMRG for auditing and other work.

Even before his arrival, the PBGC, in April 2011, had begun to revisit the work of IMRG in plan-asset audits done from 2001 to 2010, with the aim of detecting and correcting errors.

After reviewing and assessing 20 audits, the agency agreed with the IG that its plan audits were seriously flawed.

Accounting Errors

Plan participants have complained for decades about long delays in the calculation of benefits -- which can be lower than those promised in the terminated plans. The time between PBGC's "initial determination" of a participant's benefit and the "final determination" can sometimes continue for years, experts say.

But, if the PBGC determines a beneficiary has been overpaid, he or she must repay the excess benefits -- and has only 30 days to appeal the final benefit determination, they say.

In an effort to address errors and omissions in IMRG's valuation of UAL plan assets, PBGC hired an unnamed accounting firm to do a "re-valuation."

Unfortunately, that effort had its own shortcomings. The IG report finds that the accounting firm's re-valuation -- and, by extension, the PBGC's corrective efforts -- failed to produce an accurate tally of the asset value.

PBGC failed to ask the accounting firm to follow fair-market-valuation methods required by federal regulation, according to the IG. The agency also failed to provide adequate oversight and review of the re-valuation work and, thus, failed to detect errors by the accounting firm.

"As a result of these issues, the four reports completed by the [certified public accountant] firm that were intended to replace the seriously flawed plan-assets audits performed by IMRG were also themselves significantly flawed," the IG's UAL report states.

In at least one instance -- the terminated UAL plan for ground employees -- the mistake in valuing assets led to lower benefits calculations for retirees, according to the IG.

PBGC has also admitted its failure to correct past errors in valuations of UAL plan assets.

"There were problems with the contracts we used, as well as our oversight of those contractors," Snowbarger says. "Not only are we reviewing the past work to make sure we get it accurate, we are reviewing procedures, organizations, structure, skill competencies and all those kinds of things in causing the problem."

IMRG is no longer doing asset valuations for plan terminations for the PBGC, he says. The consulting company continues, however, to run two Benefits Administration offices, in Coraopolis, Pa., and Pueblo, Colo.

IMRG's chief financial officer Melanie Bilal offers "no comment at this time" on the IG's report, referring inquiries to the firm's counsel, David Kuhnsman of Enterprise Business Law in McLean, Va.

When asked about the criticisms of IMRG in the IG report, Kuhnsman says, "IMRG Inc.'s consistent position has been that it worked hand and hand with PBGC staff in performing the contract and followed PBGC's instruction."

Kuhnsman claims the IG report corroborates IMRG's position that much of the instruction for the work they did was verbal, rendering the contract "science fiction," as an unnamed source at IMRG is quoted in the IG report.

Kuhnsman also points out a sentence in the IG report which states: "Other information developed as part of our review tended to corroborate IMGR's assertions." The sentence refers to IMRG's claims about its personnel integrating their work with PBGC and following the verbal instructions of PBGC personnel.

A Continuing Problem

For PBGC, the current focus on its failures is not its first. In a September 2007 review of the agency's audits, Hewitt Associates concluded that auditors at both the agency's Benefits Administration and Payment Department, and its contractor IMRG "lack many of the traditional audit skills necessary to adequately perform their roles."

In December 2007, the IG agreed, finding that two IMRG employees working as senior auditors for PBGC lacked the education and experience required for their jobs.

While the PBGC acknowledged its failures and set out to remedy them, there has been no real progress thus far, according to the IG report, which finds that "a review of current work shows that many of these same conditions continue to exist, unabated since 2007."

For now, PBGC is focused on efforts to re-valuate plan assets at United Airlines and National Steel, Snowbarger says. "We're focused on getting those plans correct. Then we'll go back and look at other plans that IMRG got wrong."

He says he was given the assignment in June 2011 of responding to the IG's criticisms of the agency and of correcting valuations in plan audits. He was also given "responsibility for a strategic review of this whole [Benefits Administration and Payment] Department and the benefits-processing process," Snowbarger says.

"We're looking at the department from top to bottom, how we do the processing, what things cost us extra time, what resources we need to resolve those [issues], and changes in process that need to be made," he says. "One of the issues we're looking at in this strategic review is how to establish better quality-control mechanisms."

But getting the process right is not going to be easy for the agency, he says.

"Some of this is perhaps affected by the organizational structure" at PBGC, he says, noting that he wants to look at the processing of payments to "see what's necessary, and cut down on what we've required in the past without sacrificing quality or accuracy."

Some of the problems with contractors, he says, can be addressed by writing better contracts that "ask more specifically for the kind of [work] product we expect."

Contracts are done by the agency's procurement department, based on advice from general counsel for the PBGC, Snowbarger says. "We need to make sure we have the right benchmarks ... in terms of requirements" in the contract.

PBGC has responsibility for 4,000 plans, he says.

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"They are all different. Each time we take over a plan, we make sure we understand the plan and understand the way the plan has been administered in the past," he says. "We then gather data to make sure we are paying the right people the right amount."

The agency also makes sure there is no fiduciary breach of the assets, Snowbarger says.

"Frankly, we want to get corrections made, so people can have confidence in the decisions made" in the determination of benefits for UAL, United Steel and other plans handled by IMRG over the last decade, he says.

"That task, although not easy, is fairly straightforward," he says. "A lot of hard work is needed to get it accomplished. It's doable and I can see light at the end of the tunnel."

As for revamping the processes at the Benefits Administration and Payment Department, Snowbarger is more cautious about the prospects for a turnaround.

"The director for that department [Bennie Hagans] has announced his retirement, and so we're hiring a new director; and, that should have a great impact if we hire correctly," he says.

But, he notes, "it will take a period of years to change the culture."

The retirement of Hagans is good news to pension advocate Edwards, who has criticized the cozy relationship between Hagans at PBGC and Cooks at IMRG. "They were very, very close. It wasn't an arm's length relationship."

Edwards, however, is also skeptical about putting all the blame on IMRG and not on PBGC, where he thinks it belongs. "They hire these people. They were working under the direction of PBGC," he says.

In response to complaints from retirees in terminated pension plans, Snowbarger says, plan beneficiaries find out quickly their preliminary benefit determination from the PBGC.

"When we first take over a plan, we're taking over people already in pay status," he says. "There are also people retiring on a regular basis. The final benefit determination is where everything gets trued up [or reconciled]."

If the initial determination is too high, plan beneficiaries do not have to pay interest on the overpayment when there is a final determination, Snowbarger says. "We don't collect it all in a lump sum." Instead the agency "reduces payments going forward, but by no more than 10 percent."

Need for Increased Transparency

The employer community is also concerned about the way PBGC calculates benefits. "Part of the problem is the underlying assumptions they use," says Lynn Dudley, senior vice president for policy at the American Benefits Council, an employer lobby based in Washington.


"They estimate liabilities high and assets low, and people end up losing benefits," she says. These same assumptions also make the deficit at the PBGC appear to be higher than it probably is, she says.

Dudley is calling for more light to be shed on the processes and assumptions used by the PBGC to determine the value of plan assets and participant benefits. "One of the things we recommend is that there be a lot of public hearings, rather than people being aghast after the fact," she says.

One of the most high-profile challenges to PBGC's (and IMRG's) evaluations of plan assets dates back to the 1991 termination of pension plans at Pan American Airways. Final determination letters sent out in 1997, based on the work of IMRG, notified some beneficiaries they owed hefty overpayments that would have to be paid in a lump sum, creating a firestorm of protests.

Unhappy PanAm plan beneficiaries joined together to form the Association of Former Pan Am Employees Inc. Under its former president, the late Richard Brooks, the association sued PBGC and IMRG, and managed to get Sen. Charles Grassley, R-Iowa, to hold hearings before the Select Committee on Aging in 2000 on PBGC's handling of terminated pension plans.

In a letter to Grassley after those hearings, Brooks contended the trustees of terminated plans should be viewed as plan fiduciaries -- and put the interest of plan beneficiaries first and foremost.

Brooks argued that, given PBGC's poor track record of acting as a proper fiduciary, it should appoint a third party instead of itself as the trustee of terminated plans.

Harvey Katz, an attorney with Fox Rothschild in New York, who brought lawsuits against both PBGC and IMRG on behalf of beneficiaries of the terminated PanAm pension plans, has long faulted the "arrogance" of the agency toward plan participants.

The case of Al Pineiro, Richard Brooks and Leonard Beaumont vs. PBGC, which Katz litigated, was ultimately abandoned in 2003 after adverse rulings for the plaintiffs in the United States District Court for the Southern District of New York, he says.

"It's about time" PBGC recognized it has failed to protect plan participants, Katz says.

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