<DOC>
[109th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:21841.wais]
H.R. 2830, THE PENSION PROTECTION ACT
=======================================================================
HEARING
before the
COMMITTEE ON EDUCATION
AND THE WORKFORCE
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
June 15, 2005
__________
Serial No. 109-22
__________
Printed for the use of the Committee on Education and the Workforce
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COMMITTEE ON EDUCATION AND THE WORKFORCE
JOHN A. BOEHNER, Ohio, Chairman
Thomas E. Petri, Wisconsin, Vice George Miller, California
Chairman Dale E. Kildee, Michigan
Howard P. ``Buck'' McKeon, Major R. Owens, New York
California Donald M. Payne, New Jersey
Michael N. Castle, Delaware Robert E. Andrews, New Jersey
Sam Johnson, Texas Robert C. Scott, Virginia
Mark E. Souder, Indiana Lynn C. Woolsey, California
Charlie Norwood, Georgia Ruben Hinojosa, Texas
Vernon J. Ehlers, Michigan Carolyn McCarthy, New York
Judy Biggert, Illinois John F. Tierney, Massachusetts
Todd Russell Platts, Pennsylvania Ron Kind, Wisconsin
Patrick J. Tiberi, Ohio Dennis J. Kucinich, Ohio
Ric Keller, Florida David Wu, Oregon
Tom Osborne, Nebraska Rush D. Holt, New Jersey
Joe Wilson, South Carolina Susan A. Davis, California
Jon C. Porter, Nevada Betty McCollum, Minnesota
John Kline, Minnesota Danny K. Davis, Illinois
Marilyn N. Musgrave, Colorado Raul M. Grijalva, Arizona
Bob Inglis, South Carolina Chris Van Hollen, Maryland
Cathy McMorris, Washington Tim Ryan, Ohio
Kenny Marchant, Texas Timothy H. Bishop, New York
Tom Price, Georgia John Barrow, Georgia
Luis G. Fortuno, Puerto Rico
Bobby Jindal, Louisiana
Charles W. Boustany, Jr., Louisiana
Virginia Foxx, North Carolina
Thelma D. Drake, Virginia
John R. ``Randy'' Kuhl, Jr., New
York
Paula Nowakowski, Staff Director
John Lawrence, Minority Staff Director
C O N T E N T S
----------
Page
Hearing held on June 15, 2005.................................... 1
Statement of Members:
Boehner, Hon. John A., Chairman, Committee on Education and
the Workforce.............................................. 1
Miller, Hon. George, Ranking Member, Committee on Education
and the Workforce.......................................... 4
Porter, Hon. Jon C., a Representative in Congress from the
State of Nevada, prepared statement of..................... 88
Statement of Witnesses:
Franzoi, Ms. Lynn, Vice President for Human Resources, Fox
Entertain Group............................................ 11
Prepared statement of.................................... 13
Ghilarducci, Dr. Teresa, Professor of Economics, University
of Notre Dame.............................................. 26
Prepared statement of.................................... 28
Lynch, Mr. Timothy P., President and CEO, Motor Freight
Carriers Association....................................... 52
Prepared statement of.................................... 53
Mazo, Ms. Judith F., Senior Vice President/Director of
Research, the Segal Company................................ 61
Prepared statement of.................................... 62
Additional material request from Mr. Scott............... 83
Pushaw, Mr. Bart, Actuary, Milliman, Inc..................... 19
Prepared statement of.................................... 22
Scoggin, Mr. Andrew J., Vice President for Labor Relations,
Albertsons, Inc............................................ 57
Prepared statement of.................................... 58
Additional Submissions:
Aitken, Mr. Herve H., Alliance President, the Multiemployer
Pension Plan Alliance (MPPA), prepared statement........... 88
American Association of Retired Persons (AARP), prepared
statement.................................................. 99
American Society of Pension Professionals & Actuaries
(ASPPA), prepared statement................................ 102
ERISA Industry Committee (ERIC), prepared statement.......... 104
H.R. 2830, THE PENSION PROTECTION ACT
----------
Wednesday, June 15, 2005
U.S. House of Representatives
Committee on Education and the Workforce
Washington, DC
----------
The committee met, pursuant to call, at 10:30 a.m., in room
2175, Rayburn House Office Building, Hon. John A. Boehner
[chairman of the committee] presiding.
Present: Representatives Boehner, Petri, McKeon, Castle,
Johnson, Souder, Norwood, Ehlers, Tiberi, Osborne, Porter,
Kline, Musgrave, Inglis, McMorris, Marchant, Price, Fortuno,
Boustany, Foxx, Drake, Kuhl, Miller, Kildee, Owens, Andrews,
Scott, Woolsey, McCarthy, Tierney, Kind, Kucinich, Wu, Holt,
Davis of California, McCollum, Davis of Illinois, Grijalva, Van
Hollen, Ryan, and Bishop.
Staff Present: Stacey Dion, Professional Staff Member;
Kevin Frank, Professional Staff Member; Ed Gilroy, Director of
Workforce Policy; Richard Hoar, Staff Assistant; Greg Maurer,
Coalitions Director; Steve Perrotta, Professional Staff Member;
Molly Salmi, Deputy Director of Workforce Policy; Deborah
Samantar, Committee Clerk/Intern Coordinator; Kevin Smith,
Senior Communications Advisor; Jo-Marie St. Martin, General
Counsel; Jody Calemine, Minority Counsel, Employer-Employee
Relations; Tylease Fitzgerald, Minority Staff Assistant; Margo
Hennigan, Minority Legislative Assistant/Labor; Michele
Varnhagen, Minority Labor Counsel/Coordinator; and Mark
Zuckerman, Minority General Counsel.
Chairman Boehner. A quorum being present, we are holding
this hearing today to hear testimony on H.R. 2830, the Pension
Protection Act of 2005.
Under committee Rule 12(b), opening statements are limited
to the chairman and ranking member. Therefore, if other members
have statements, they can be included in the hearing record.
And with that I ask for unanimous consent for the hearing
record to remain open for 14 days to allow members' statements
and other extraneous material being referenced here in today's
hearing to be included in the official hearing record. Without
objection, so ordered.
I want to thank all of you for coming and thank all of our
witnesses for their willingness to be here today.
Last week, my colleagues and I introduced the Pension
Protection Act, a legislation we have been working on for
nearly a year, to reform our private pension system. As I said
previously, our reform bill won't just tinker around the edges
of a defined benefit pension system. As promised, the bill we
introduced, as outlined, is a comprehensive solution to address
these problems.
Because of today's outdated pension rules, workers,
retirees and taxpayers all stand to lose unless we act quickly
on fundamental pension reform. The recent example of United
Airlines demonstrates the need for reform, and we plan to act
quickly over the next month.
The balance we have attempted to strike is a difficult one.
How do we preserve the defined benefit pension plan for workers
and ensure these plans are adequately and consistently funded
without making the rules so onerous it becomes more attractive
for employers to simply stop offering these benefits
altogether?
Our efforts are focused not just on ensuring PBGC solvency,
which alone will not solve the problem. Instead, we have a
broader vision of strengthening the health of defined benefit
pension plans and preserving these benefit pension plans for
workers.
Our bill adopts many of the features in the administration
proposal. It includes tough new funding requirements to ensure
that employers properly fund their plans, it provides workers
with meaningful disclosure about the status of their pension
plans, and it protects taxpayers from a possible multibillion
dollar bailout of the Pension Benefit Guaranty Corporation. As
you would expect, there are some differences, and in some cases
we solve the same problems with a slightly different approach.
While every stakeholder may not agree with each aspect of
our bill, our approach has been focused on protecting the
interests of workers, retirees and taxpayers; and I think our
proposal accomplishes the goals that we set out without
jeopardizing employers ability to offer these voluntary
benefits. So it is important to note we are at the beginning of
this process. And we plan to work with all interested parties,
including the administration, employers, labor groups and our
colleagues on the other side of the aisle as we move forward.
I would like to highlight several key aspects of the
Pension Protection Act. The bill provides a permanent interest
rate based on a modified yield curve. It also requires
employers to meet a 100 percent funding target; and, requires
additional contributions to address any funding shortfalls over
7 years, the measure also includes a key provision that
restricts executive compensation arrangements for employers
with underfunded pension plans.
Some have expressed concern that employers may smooth their
pension assets and liabilities over too long a period of time,
and I agree. That is why our bill reduces the practice of
smoothing. The complete elimination of smoothing, however,
could render employers' ability to protect and budget for
pension contribution virtually impossible. Without some degree
of predictability, the dramatic volatility we have seen will
continue and employers will simply stop offering these benefits
altogether.
Some employers have used credit balances to mask plan
underfunding. I think our bill solves this problem not just by
prohibiting the use of such balances and plans that are
underfunded but also by reforming the funding rules to ensure
that employers properly fund their plan.
The bill phases in increases in employer premiums paid to
the Pension Benefit Guaranty Corporation; and while raising
premiums alone will not solve the problem of PBGC's insolvency,
an increase is both prudent and necessary.
The measure also makes all form 4010 information filed with
the PBGC by underfunded plans available to the public.
The bill also goes beyond the administration disclosure
plan by requiring both single- and multi-employer pension plans
to notify workers and retirees about the status of their plan
within 90 days after the close of the plan year.
The introduced bill does not include any industry specific
relief. Our immediate focus has been overhauling a broken
pension system and laws that have contributed to the problems
in the airline industry and similar industries. But I would
prefer to focus on comprehensive solutions in addressing this
problem.
This is an important issue for some of our colleagues on
this committee, particularly Mr. Price, and a former member of
our committee, Mr. Isakson, our colleague in the Senate and
other members; and I have a lot of respect for what they are
trying to accomplish and understand the impact of this issue to
many of their constituents. I want to work with them on pension
reform as we move forward.
We have also included much-needed reforms to the multi-
employer pension system in our proposal. Our bill includes new
funding benchmarks, limits future benefit increases for
severely underfunded plans, and provides new disclosure for
workers and contributing employers. I am pleased that the
coalition of employers and labor groups have made significant
progress on this issue, and we are going to continue to work
with both sides as we move forward.
We all know there is a lack of personalized investment
advice readily available to workers. Our bill allows employers
to provide rank-and-file workers with access to high-quality
investment advice as an employee benefit, while making certain
a tough fiduciary and disclosure protection ensures the advice
remains solely in the workers' best interest.
This proposal has passed the House three times in the past
4 years with significant bipartisan support, and we think that
it is a commonsense way to give workers access to quality
investment advice.
The Pension Protection Act, as introduced, does not include
finalized cash balance protections. Last week, I also
introduced a stand-alone bill, the Pension Preservation and
Portability Act, as a starting point towards discussions on
efforts to resolve the legal uncertainty surrounding cash
balance plans. We are working to resolve details and expect to
finalize this issue before we report the bill from the
committee.
It is interesting to hear the reaction to our proposal.
Some of my Democrat friends are actually arguing that our bill
is too tough on employers, an argument I am not sure I've ever
heard from them. Some in the administration may argue we need
to go a little bit further. On balance, I think that that means
we have it just about right. This bill meets our objectives of
putting together requirements in place to ensure worker
protections are properly funded but does so in a real-world,
practical way that will help preserve these plans for workers
and protect the interests of taxpayers.
I want to thank all of our witnesses for being here today.
I would like to thank the members of the committee for
their assistance in drafting this bill, especially Mr. Johnson
and Mr. Kline, who have worked closely with us. We have had
bipartisan conversations on many aspects of this bill, and I
look forward to continuing to work closely with the members of
our committee on both sides and with Mr. Thomas and the members
of the Ways and Means Committee as we continue to move this
bill through the legislative process.
With that, I would like to yield to my friend, the ranking
Democrat on our committee, Mr. Miller.
Mr. Miller. Almost 3 years ago, in July of 2002, I wrote a
letter to the Bush administration warning that urgent action
was needed to reform defined benefit plans. That year the
underfunding of the private pension plans jumped 425 percent
from the previous year to $111 billion. Subsequently, the GAO
and the PBGC repeatedly warned that action by Congress was
needed. From that time that I sent the letter in 2002 urging
immediate action, private pension plan underfunding has jumped
another 425 percent to $450 billion.
I say all of this because--as a prime example of Congress
and the President ignoring the urgent needs of the American
people. Precious time has slipped away, with devastating, real
consequences. What was then an urgent matter has exploded into
a national retirement security crisis.
Today, United Airlines is about to dump $6.6 billion of
losses onto the Pension Benefit Guaranty Corporation. The
stakes for the 120,000 United Airlines employees and retirees
is very high. They face deep and permanent cuts in their
retirement benefits. United employees have always been
repeatedly asked to give wage concessions to help United to
improve its financial condition, and they have done so each and
every time.
In return for operating in good faith, United and the PBGC
cut a side deal to terminate these employees' plans. Right
before the employees were cut out of the discussions, the PBGC
itself concluded that United could afford to continue at least
one of its four plans.
I will put a letter into the record later by PBGC Executive
Director Bradley Belt, dated April 6 this year, that states,
that the PBGC continues to believe that the interests of the
participants in the pension insurance program would best be
served by the continuance of the AFA plan, the flight attendant
plan. How can the PBGC conclude one week that it is in
everyone's interest to continue the pension plan and then move
to ax it the next week? You don't have to be a student of the
business pages or the business journals to see that there is
open speculation that all other airlines will look at United
actions to see if they can cut their own costs by dumping their
workers' pension plans.
I am also very concerned--and again the speculation goes to
other industries--of whether or not those who face economic
difficulties or which have drastically underfunded their
pension plans will follow United's examples and pass the debts
on to the taxpayers and their own employees.
I am disappointed that this committee has yet to hold a
hearing on the United pension plan termination. All the hard-
working United employees were denied access to this hearing
room. Over 2,000 pilots, flight attendants, and machinists from
all over the country participated in the Democratic online
hearing 2 weeks ago. They have been given no opportunity to
tell their story to this committee, which will write the new
pension legislation.
Collectively, these employees and retirees face over $3
billion in irreplaceable retirement savings that were promised
by United. Their letters are heartbreaking, and their voices
deserve to be heard by this committee.
Two of those individuals are in the audience today. Jamie
Manley was a flight attendant for United, and Ellen Saracini,
whose husband Victor was the pilot of the plane that was flown
into the South Tower of the World Trade Center. In their
letters, they outline the economic hardship that will devastate
their families.
Mr. Chairman, I requested that an abbreviated portion of
that hearing, this online hearing, be entered into the record
today as part of my testimony.
Chairman Boehner. Reserving the right to object. I think
all of us agree that the plight of the employees of United
Airlines demonstrates the need for comprehensive pension
reform. The thousands of workers and retirees of United and
others companies who have lost a portion of their pension
benefits deserve action now. I have reintroduced a
comprehensive reform package to address this.
But I also remind my colleagues that, beginning some 2
years ago, as we were preparing and passed the Pension Funding
Equity Act that was signed into law some 15 months ago, that
included specific airline industry relief, relief that United
and others and their employees were in fact requesting. That
relief was for last calendar year and this calendar year, when
we expected to have a comprehensive reform bill ready to pass
this year.
I have to make clear that the so-called online hearing is
not a hearing. The gentleman from California and I have had
this discussion before. Our staffs have had discussions back
and forth; and I need to make clear that, while people may have
participated in an online chat conversation about this, I hope
no one was misled into believing that this was an official
hearing because, in fact, it was not.
Now, I would ask my colleague from California to, under the
rules of the House, not to refer to this publicity issue as a
hearing. Now, I understand, we are in some difficult partisan
fights around here, but--if the gentleman wants to take
people's comments, he is certainly entitled to do that, but I
don't want anyone to be misled into believing that this is
official testimony for an official hearing, and I would like to
ask my colleague if he would amend his unanimous consent
request to submit this information in a digest form. He has in
fact done that, and we will be happy to take this and put it in
the record. But, please, let's all play by the rules; and I
don't want anyone to think that in fact this was an official
hearing when in fact it wasn't.
Mr. Miller. Mr. Chairman.
Chairman Boehner. Without objection, we will accept the
comments.*
---------------------------------------------------------------------------
*Submitted and placed in permanent archive file, comments before
the U.S. House of Representatives, Committee on Education and the
Workforce (July 19, 2006).
---------------------------------------------------------------------------
Mr. Miller. I thank you for accepting this as part of the
record, part of my testimony. I think this testimony is
important. I only wish it were part of the official record of
this and this was an official hearing. Unfortunately, that
opportunity was not given to us, I thank you for accepting that
testimony----
Chairman Boehner. Will the gentleman from California yield?
Mr. Miller. Yes.
Chairman Boehner. Good. Now all of you who have been around
the committee over the last 4 years know that Mr. Miller and I
in fact have a very good relationship here. As a matter of
fact, I think I have a very good relationship with all the
members on both sides of the aisle. I want to remind my
colleague from California that there has never been a request
for a hearing on a United Airlines-specific situation. We have
had hearings over the last several years on the problems in the
airline industry in general, but there has never been a
specific request to go through the United situation
specifically.
Mr. Miller. Mr. Chairman, I would be remiss if I did not
accept that invitation to dance.
I request a hearing on the United Airlines. I think it is
absolutely critical to understand what happened in the last
weeks of the bankruptcy negotiations and the transfer of those
negotiations to the PBGC and what took place there, it is
critical to know whether or not alternatives that could have
been explored, alternatives that are being asked for by Delta
and others were a possibility. I don't know the answer to that
question.
As we consider the markup of your legislation and other
suggestions, I think it would be most important that we
understand what transpired at that time. So I hope that we can
have that hearing.
Chairman Boehner. I will take your request under
advisement.
Mr. Miller. Thank you, Mr. Chairman, but do it before the
music stops.
The point is this, that we need an independent review of
United Airlines' ability to continue its plans either as they
currently were or in a modified form. And the reason why we
need that is to see whether or not greater protection could
have been provided for the employees that have spent 30 years,
20 years, 15 years of their lives trying to make sure that this
airline continued to fly.
The employees should be full participants in the
discussions about the future of their retirement. The Congress
and the American taxpayers, who could be called upon to pay out
billions of dollars to cover pension plans that have been
underfunded and sent to the PBGC for payment, deserve accurate
information.
Last week, Representative Jan Schakowsky and I introduced
legislation, H.R. 2327, to impose a 6-month freeze on any
company in bankruptcy trying to dump its pension obligations
onto the PBGC until Congress has time to explore the
alternatives to bankruptcy and to the dumping in PBGC.
Employees should not wake up and find themselves divested of
their life savings or retirement nest eggs. We need a set of
rules in place before companies unload their liabilities.
The alternatives to termination, such as the conversion to
multi-employer plans, or cash balance plans, or the bonding of
pension plans, or the bonding of premiums, should all be
considered before we dump this onto the taxpayers. The PBGC
should have the flexibility to help struggling plans turn
around with financial help in some circumstances. The employees
should be at the table for any consideration of pension plan
termination. Our 6-month moratorium bill would give us time to
legislate these improvements in pension law.
Mr. Chairman, regrettably, the bill before us today has
many of the flawed provisions that President Bush advocated
earlier this year: heavy reliance on employee benefit cuts and
billion dollar tax hikes for employers. These actions might
seriously undermine the defined benefit plans of employees and
employers and would fail to provide the protection that
employees need for their hard-earned retirement nest egg.
The bill also fails to stop the runaway pension
terminations like United airlines. Therefore, more companies
will dump their unwanted pension liabilities onto the Federal
Government and onto pension sponsors without meeting any
significant test that they have no other choice; and that will
spread the misery and disappointment to employees, who are the
real victims of these unfair terminations.
This bill fails to hold corporate executives accountable
for the mismanagement of the company's pension plans, while
allowing the same executives to enjoy lavish retirement
benefits. Last week United Chairman, Glenn Tilton admitted that
he will keep all of his $4.5 million golden parachute, while
employees lose 30, 40, and 70 percent of their retirement. I
guess contract givebacks are only for employees, not for the
executives.
Here is how one retired pilot, John Clark of
Charlottesville, who was a United pilot for 36 years and will
have his pension reduced by 70, responded to Tilton: ``What
Tilton is saying is that United guaranteed to me, why is the
promise made to him understandable and one made to me go by the
wayside?'' We must act now to stop this unfair treatment.
This bill, finally, Mr. Chairman, also fails to help
airline pilots who take a double hit when the plan is
terminated because the pilots are forced to retire at age 60
when they get less than $46,000 a year of the maximum allowed
by PBGC.
Mr. Chairman, in conclusion, let me say this. One of the
most troubling aspects of our rush to mark up this bill is that
we all now have become painfully aware, and the members of this
committee and the records that have been submitted to them,
that these companies are allowed to keep two sets of books for
pension purposes. This bill proposes to make the secret set of
books published, and I applaud you for doing that. But this
information, referred to as the 4010 plan information, will
give employees and investors up-to-date, accurate information
about their company's pension plans. This is a good idea, and I
have proposed legislation for the last year that we do this.
This committee has in its possession the 4010 summary
information with some 850 seriously underfunded plans for 2003
and 2004. We can and we should release this information today
for the benefit of millions of employees represented by these
companies. We should also do it for the benefit of those stock
analysts, those who are investing their pension plans in these
very same companies through their mutual fund plans, through
their IRAs, through their 401(k)s. They ought to know what the
real situation is with these pension plans.
As I have said to you in a letter asking for the release of
this information, the discrepancy, in some cases, is hundreds
of millions of dollars and, in some cases, billions of dollars.
We need to know and we need to have this transparency so those
who have interest in this industry will be able to analyze
this, give us the benefit of their information, their read on
this.
Because, as you know, not speculation on our part but
within the business journals every day the question is will or
will not the remedies for pension problems hasten the dumping
and the termination of pension plans by companies that are in
difficult situations. The extent to which these plans are
underfunded I believe is a key component to whether or not
people will be able to answer that question as we write this
legislation.
So I would hope that you would join me and you join
President Bush and you would make that information available
prior markup of this legislation, and I applaud you for making
it a part of your bill. I think it is critical to the
transparency of the understanding and the negotiations around
this legislation.
Thank you very much for the opportunity, and I do realize
that you were nice enough to give me a little bit more than 5
minutes.
Chairman Boehner. Will the gentleman yield?
Mr. Miller, you understand that we, you and I, came to an
agreement on the request for the 4010 information from the
Pension Benefit Guaranty Corporation. We came to an
understanding in a bipartisan way that we would request them to
turn over the information, and we agreed that we would keep
that information for the purpose of our staffs and members to
be used in the development of our pension proposals.
While I understand the interest in disclosing this
information, I think you know as well as I know that the
current 4010 information is flawed. That is why in the bill we
clarify and make significant changes to the 4010 information
that is collected so that it is much more useful.
The problem with this information under current law is that
I think it is inherently misleading and not useful in
determining whether the plans are underfunded and pose a risk
to the PBGC. So the release of this information I don't think
is warranted. It violates the agreement that you and I came to.
When I gave you my word that I would ask for this information
in a bipartisan way, I gave you my word. I think we came to an
agreement and would I would prefer that we stick to that
agreement.
Mr. Miller. Mr. Chairman, if I may respond.
Chairman Boehner. On your time.
Mr. Miller. Thank you.
I have honored that agreement; and I appreciate you, after
we introduced the resolution of inquiry, to responding to that
resolution and arranging for the members of this committee to
have this information.
What I am saying is, now, after reviewing that information,
we may have a difference of opinion on whether it is flawed or
not flawed or to what extent it is or is not. But after
reviewing that information, and seeing the magnitude of the
discrepancies between those PBGC documents and the public
documents, I think--I don't know how we can go forward without
the public understanding that. But more importantly, the
professionals in the field understanding that and the
ramifications for this legislation. I believe that is why the
administration has asked 2 years ago that this information be
made available.
I have introduced legislation to do it, so I am not going
to violate our agreement. I am asking that you and I, as
parties to that agreement, consider the modification of that
prior to the markup of this legislation. Because it is hard for
me to see how we can go forward without that information being
on the table.
You will characterize it one way. Analysts will
characterize it another way. The companies will characterize it
another way. But it is critical information that has been
reported to the PBGC which is different from the reports in the
401(k) public statements of these very same corporations and
again draws into question of whether or not--how we balance.
You have a bill that requires and we are going to have a
process that requires this balance, the assessments and
premiums. Whether or not that pushes these companies over or
not, I think you have to know the real extent of their
liabilities. The companies will certainly be free to modify and
tell us what their current problems are and if they believe
that that information does not accurately reflect that.
Thank you very much, Mr. Chairman. Mr. Chairman, again, I
thank you for the extension.
Chairman Boehner. Mr. Miller----
Mr. Miller. Yes, I will yield to you.
Chairman Boehner.--I understand clearly your request. But I
have to say very clearly for you and for others that the
release of this information--in my view, would be totally
irresponsible on the part of myself and the members of this
committee to disclose it in the form in which it is. As I said
before, this data, as this form is currently drawn up and
currently used, is inherently flawed; and for us to release
that--all of that data to the public would be irresponsible, in
my opinion, on the part of myself and all of us.
Mr. Miller. I would just say, after reviewing it,
apparently the administration didn't think it was inherently
flawed; and I don't know the PBGC has testified or suggested
that it is inherently flawed. Maybe we will hear something new
here in these hearings. I just think it goes to whether or not
Congress has all the information. The decisions we are going to
make on your legislation--and, again, I thank you for bringing
it forward--are going to affect the livelihoods and the futures
of millions of Americans that are a part of these plans.
And, again, it is Wall Street that is making this
speculation. It is not George Miller. It is in the business
journals. It is in the analysts' statements. It is in the
discussions of these companies. And we are now, in one form or
another, going to provide for these assessments. I think we
have to know the impact of those assessments for the sake of
the future of these workers and their retirements.
I think I have exhausted my time.
Chairman Boehner. The gentleman's time has expired.
Mr. Miller. Thank you.
Chairman Boehner. Let me announce for all of you that room
2257, one floor above us, is open for overflow. We have
monitors and screens there. So if you would like to have a seat
upstairs, you are more than welcome to go to the overflow room.
We have two panels of witnesses today, the first of which
will address single-employer defined benefit system reforms;
and I want to begin by introducing our first panel.
Our first witness will be Ms. Lynn Franzoi. Ms. Franzoi is
the Senior Vice President of Benefits for Fox Entertainment
Group, where she is responsible for the designed administration
of financing of all benefit programs for over 12,000 domestic
employees and 800 foreign employees and for operation of the
Child Development Center at Fox.
Ms. Franzoi has served on the National Summits on
Retirement Savings in 1998 and 2002. She also serves as a
member of the U.S. Chamber of Commerce Health and Employee
Benefits Committee and as chairperson for the U.S. Chamber of
Commerce Qualified Plan Committee. She was appointed to a 3-
year term as a member of the Advisory Council on Employee
Welfare and Pension Benefit Plans to the Department of Labor's
Employee Benefits Security Administration in 2004.
We will then hear from Mr. Bart Pushaw. Mr. Pushaw is
consulting actuary in Milliman's Dallas office. Since entering
the field in 1995, he has worked primarily with Fortune 500
companies as a retirement advisor and account manager. Mr.
Pushaw has lead and managed compensation and benefit post
merger integration in multibillion dollar acquisitions and
helped develop and execute new total retirement programs.
He has also led asset allocation and investment policy
development projects for pension and retiree medical plans as
well as managed human resource due diligence efforts. Before
joining Milliman, Mr. Pushaw was a partner at Ernst and Young
11 years and a partner at Mercer prior to that. Mr. Pushaw has
written numerous articles and spoken before many professional
actuarial groups. He is a member of the American Academy of
Actuaries and an enrolled actuary under ERISA and an associate
with the Society of Actuaries and fellow in the Conference of
Actuaries.
We will then hear from Dr. Theresa Ghilarducci. Dr.
Ghilarducci is an Associate Professor of Economics at Notre
Dame, Director of the Higgins Labor Research Center. She is a
Fellow in the Kellogg Institute, the Kroc Institute for
International Peace Studies and Nanovic Institute for European
Studies and served as trustee of the Indiana Public Employees
Retirement Fund and an Advisory Board Member of the of Pension
Benefit Guaranty Corporation.
Professor Ghilarducci's scholarly work is on the financial
human resource aspects of pension systems, including private
and public plans and social security. Professionally she is a
trustee and advisor to pension and trust funds worth over $30
billion at the Federal and State level, and has appeared before
this committee on several occasions.
I want to remind the members of our panel, somebody has
explained the lights to you. Keep it to 5 minutes, will be
great; a little longer isn't the end of the world.
Chairman Boehner. And with that, Ms. Franzoi can begin.
STATEMENT OF LYNN FRANZOI, VICE PRESIDENT FOR HUMAN RESOURCES,
FOX ENTERTAINMENT GROUP
Ms. Franzoi. Thank you.
Good morning, Chairman Boehner, Ranking Member Miller and
members of the committee. I would like to thank you for the
opportunity to appear before you this morning to discuss an
issue that I think is critical to American employees, workers
and retirees.
My name is Lynn Franzoi, and I am the Senior Vice President
of Benefits for Fox Entertainment Group, Inc. I am testifying
today on behalf of the United States Chamber of Commerce, which
represents more than three million businesses and organizations
of every size, industry sector and geographical region. Fox
Entertainment Group is a member of the Chamber's Employee
Benefit Committee, and I serve as chairperson of the Qualified
Plans Committee. The American Benefits Council Business
Roundtable, Committee on Investment of Employee Benefit Assets,
ERISA Industry Committee, National Association of Manufacturers
and National Rural Electric Cooperative Association also join
in the themes expressed in this testimony; and some of these
groups will be submitting their own supplemental testimony.
I have over 30 years of experience--close to 30 years, not
over--in the field of employee benefits; and, as was recently
stated, I am currently serving on a 3-year term as a member of
the Advisory Council.
We appreciate the hard work that Chairman Boehner, Chairman
Thomas, Chairman Johnson and other members of the Committee on
Education and the Workforce have contributed to the issue of
pension reform which has resulted in the introduction of H.R.
2830, the Pension Protection Act of 2005. We also appreciate
the committee taking the lead on pension reform and believe
that the legislation moves the debate forward in a constructive
manner. However, we have significant concerns with important
aspects of the legislation, and that could negatively impact
the defined benefit system.
My written testimony delineates in detail a number of items
that we endorse in the bill as well as several areas of
concern. I will use my time before you to highlight some of our
more immediate concerns about the bill.
First, I must stress that employers need time to weigh the
effects of H.R. 2830. Pension issues are extremely complex. As
such, employers will expend significant time and effort
determining the impact of all of the changes proposed in H.R.
2830.
The proposed legislation fundamentally changes the current
funding regime. Analyzing these proposed rules will require
employers to examine the changes from a comprehensive and
systemic viewpoint. We ask the members of the committee to view
this legislation as the beginning of a discussion on pension
reform. All of the business organizations I represent here
today look forward to continuing to work with the committee as
our members weigh the practical impact of this legislation.
Second, the business community continues to have serious
concerns about the yield curve concept. The yield curve is
often used for things that have a definite maturity rate, such
as mortgages and loans for autos. However, pension liabilities
do not have a definite maturity due date because there are many
assumptions that are built into the maturity date such as
expected retirement date, expected work life with the company
and expected mortality. These assumptions may or may not
actually turn out as expected. Thus, a yield curve does not
present the certainty that it is advertised to have.
While we appreciate the efforts made to simplify the yield
curve through the introduction of segments, the proposal would
still engender significant complexity. The segmented rates are
more complex than the current composite corporate bond interest
rate, and there has yet to be any justification for this
additional complexity. In addition, we are concerned that the
legislation confers substantial discretion to the Treasury
Department in the construction of the proposed modified yield
curve which would make it virtually impossible for employers to
model internally as part of their corporate planning and would
be also difficult for Congress to oversee.
Third, we urge Congress to protect credit balances. While
H.R. 2830 generally keeps the credit balance concept, the bill
works in a manner that could force some employers to write off
their existing credit balances. Without the ability to use
credit balances, employers have no incentives to contribute
more than the minimum required contribution. Under H.R. 2830,
credit balances would be subtracted from assets for a number of
purposes, including benefit restriction purposes and the
determination of at-risk liability. This could result in some
companies that are adequately funded and being subject to
benefit restrictions and at-risk liability targets. We
recommend revising the bill to provide that credit balances are
not subtracted from assets for any purpose other than
determining the amortization amount for underfunding.
Fourth, on the issue of hybrid plans, we commend Chairman
Boehner for recognizing the importance of addressing the hybrid
plan issue despite the ongoing controversy surrounding cash
balance and other hybrid plans. Many employers find that these
plans offer the best designs for their workers.
One way to encourage continued participation in the defined
benefit system is to allow employers the flexibility of design.
If employers do not have design options that meet the needs of
their workforce, they will leave the defined benefit system. To
this end, H.R. 2831, the Pension Preservation and Portability
Act of 2005, moves the debate on hybrid plans forward; and
therefore, we urge Congress to include it as part of the
comprehensive pension reform.
Fifth, Congress should give very careful consideration to
increasing the PBGC premiums. Not only does the bill increase
the flat premium rate from $19 to $30, which is a 63 percent
increase, but it also indexes both the flat premium rate and
the variable rate to wages. ERISA requires the PBGC to maintain
premiums at the lowest levels possible. Including an annual
automatic increase to the PBGC premium takes away from
Congress' ability to regulate PBGC premiums because the amount
of the premiums will change without Congress reviewing the need
for such change.
We acknowledge that this is a difficult and complex public
policy area because Congress must find the right balance
between setting funding requirements which protect employees
and the PBGC but are not so overly restrictive so as to drive
employers away from this voluntary defined benefit pension
system, much less from establishing new pension plans.
The business community is committed to finding a solution
that at the end of the day will strengthen the defined benefit
system by encouraging plan sponsors to continue to maintain
their plans. We look forward to working with you, Chairman
Boehner, and with Chairman Thomas and your committee to find
such a solution.
Thank you, and I am happy to answer any questions that you
may have.
[The statement of Ms. Franzoi follows:]
Prepared Statement of Lynn Franzoi, Senior Vice President, Benefits,
Fox Entertainment Group, Inc., on Behalf of the U.S. Chamber of
Commerce
Good afternoon, Chairman Boehner, Ranking Member Miller, and
members of the Committee, I would like to thank you for the opportunity
to appear before you this morning to discuss an issue that is critical
to American employers, workers, and retirees. My name is Lynn Franzoi
and I am the Senior Vice President, Benefits, for Fox Entertainment
Group, Inc. Fox administers benefit programs for over 12,000 domestic
employees, 800 foreign employees, 1,000 retirees and over 3,000
terminated vested participants. Fox maintains defined contribution
plans, defined benefit plans, and contributes to several multiemployer
plans.
I am testifying today on behalf of the United States Chamber of
Commerce, the world's largest business federation, representing more
than three million businesses and organizations of every size, sector,
and region. Fox Entertainment Group is a member of the Chamber's
Employee Benefit Committee and I serve as Chairperson of the Qualified
Plans Subcommittee. American Benefits Council, Business Roundtable,
Committee on Investment of Employee Benefit Assets, ERISA Industry
Committee, National Association of Manufacturers, and National Rural
Electric Cooperative Association also join in the themes expressed in
this testimony and some of these groups will be submitting their own
supplemental testimony.
While I am here today on behalf of several organizations, my
testimony also reflects my years of experience in the benefits field.
In addition to over 20 years in the field of employee benefits, I am
currently serving a three-year term as a member of the Advisory Council
of Employee Welfare and Pension Benefit Plans to the Department of
Labor's Employee Benefits Security Administration. I also served on the
National Summit on Retirement Savings in 1998 and 2002.
We appreciate the hard work that Chairman Boehner, Chairman Thomas,
Chairman Johnson, and other members of the Committee on Education and
the Workforce have contributed to the issue of pension reform which has
resulted in the introduction of H.R. 2830, the Pension Protection Act
of 2005 (the ``Act''). We appreciate the Committee taking the lead on
pension reform and believe that the legislation moves the debate
forward in a constructive manner, and in many ways shores up the
viability of the defined benefit plan system. However, as outlined
below, we also have significant concerns with important aspects of the
legislation that may be counter-productive to this goal.
Defined benefit plans allow employers to provide an important
retirement benefit to workers. In a defined benefit plan, employers
bear the investment risk. In the event that plan assets are
insufficient to pay benefits, the employer and its affiliated companies
must do so. Even when a company is liquidated in bankruptcy, plan
benefits are guaranteed by the PBGC. Moreover, defined benefit plans
must offer an annuity form of payment. Annuities provide a lifetime
payment stream that ensures that retirees do not outlive their
retirement benefit. Thus, defined benefit plans provide a fixed,
guaranteed, and secure retirement benefit.
Defined benefit plans are an integral part of the national economy.
There are over 30,000 single and multiemployer defined benefit plans
that cover roughly 32 million workers.\1\ These plans paid out over
$120 billion in retirement benefits last year. Currently, there are
11.6 million retirees receiving benefits from private employer defined
benefit plans. Furthermore, defined benefit plans held $1.6 trillion in
assets as of 2002, thereby increasing the national pool of long-term
capital.
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\1\ Pension Benefit Guarantee Corporation, Pension Insurance Data
Book 2004, Spring 2005.
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Issues of Immediate Concern
Employers Need Time to Weigh the Effects of H.R. 2830
Pension issues are extremely complex and, therefore, employers are
still determining the impact of all of the changes proposed in H.R.
2830. The current timetable for consideration of the bill may not be
sufficient for a complete analysis by employers so additional issues
may continue to arise throughout this process. The proposed legislation
fundamentally changes the current funding regime. Therefore, analyzing
the proposed rules will require employers to examine the changes from a
systemic viewpoint as the entirety of the changes could have a profound
impact upon an employer's plan. Moreover, as the funding situation of
various companies differs from one to the other, the impact of the
proposal will be different on each company. Thus, the business
organizations represented today will also need time to best determine
how to approach the proposed rules in the manner best for the defined
benefit plan community. All of the business organizations listed look
forward to continuing to work with the Committee as our members weigh
the practical impact of this legislation.
Employers Will Require Transition Relief
As stated above, H.R. 2830 will implement broad changes to the
current system. Therefore, in addition to time to weigh the provisions,
employers will also need time to implement changes that are made into
law. We are concerned that H.R. 2830 does not provide adequate
transition relief. The bill replaces all of the current funding rules
with an entirely new set of rules. It is essential that Congress
provide an adequate phase-in period for employers to implement these
changes successfully.
Among the provisions that will have a significant impact are the
new rules requiring that projected lump sums be taken into account in
determining liability. Under current law, projected lump sums are not
(and cannot be) taken into account in determining current liability.
This omission generally understates a plan's true liability because
current rules for determining the minimum value of lump sum payments
are extremely generous to participants at the expense of the plan as a
whole. The bill begins to coordinate the payment rules with the
liability rules. However, there is a generous phase-in for lump sum
payment purposes but not for liability purposes. This means that many
plans will experience a sharp increase in liability without time to
adjust to such an increase.
Similarly, H.R. 2830 establishes a 100% funding target which is an
increase from the current minimum funding requirement of 90%. For many
plans, this is an effective 10% increase in liabilities that would
occur immediately. Employers will need time to fund their plans to the
increased level and without an appropriate transition period there
could be massive disruptions to their capital spending and long-term
business plans.
The Yield Curve Concept is Not Appropriate for Pension
Plans
The yield curve will add unnecessary complexity to pension
calculations. The yield curve is often used for things that have a
definite maturity date, such as mortgages and auto loans. However,
pension liabilities do not have a definite maturity date because there
are many assumptions built into the maturity date such as expected
retirement date, expected work life with the company, and expected
mortality rate. These assumptions may or may not actually turn out as
expected. Thus, the yield curve does not present the certainty that it
is advertised to have. Rather, it is just another method of estimating
pension liability and it is one that will be costly and burdensome for
employers to adopt.
While we appreciate the efforts made to simplify the yield curve
through the introduction of segments, the proposal would still engender
significant complexity and we remain 4 concerned about the impact of
the change. The segmented rates required under H.R. 2830 are more
complex than the current composite corporate bond interest rate and
there has yet to be any justification for the additional complexity. On
the contrary, critical analysis of the yield curve concept indicates
that it may be inappropriate for calculating pension liabilities.\2\
---------------------------------------------------------------------------
\2\ For example, one critic has reported that yield curves offer
only a ``Band Aid'' approach that could conceivably make liability
estimation models more reliable, but that yield curve data that is not
carefully constructed will make estimates less, not more, reliable.
(Don Mango, Structural Dependence and Stochastic Processes, American
Re-Insurance 2001 Casualty Actuarial Society DFA Seminar, available at
www.casact.org/coneduc/dfa/2001/handouts/mango1.ppt [hereinafter
Mango]. For a similar criticism of the use of yield curves in certain
liability models, see Peter Blum, Michel Dacorogna & Paul Embrechts,
Putting the Power of Modern Applied Stochastics into DFA, 2001 Casualty
Actuarial Society DFA Seminar, available at www.casact.org/coneduc/dfa/
2001/handouts/blum1.ppt.) This critic has also suggested that even the
most well constructed yield curve data sets will only address a symptom
of an otherwise internally inconsistent model.
---------------------------------------------------------------------------
In addition, we are concerned about the construction of the
proposed modified yield curve. H.R. 2830 directs the Treasury
Department to develop the modified yield curve based on investment
grade corporate bonds and confers substantial discretion onto the
Treasury Department. This type of discretionary, non-market interest
rate would be virtually impossible for employers to model internally as
part of corporate planning and would also be particularly difficult for
Congress to oversee. Moreover, the Treasury Department has complete
discretion in determining how the different classes of bonds are to be
weighted. As the bill has been drafted, Treasury could, for example,
provide that only six-year bonds will be used to determine the interest
rate on the five to 20-year segment. Alternatively, Treasury could
provide that durations from five to 10 years will be weighted at twice
the weighting of bonds from 10 to 20 years. These changes could have a
significant impact on the effective interest rate. Because the interest
rate has such a dramatic effect on pension funding, it would be
important for Congress, and not Treasury, to determine how the interest
rate for each segment is calculated.
Current Credit Balances Must be Protected and Workable
Rules Provided for the Future
While H.R. 2830 generally keeps the credit balance concept, the
bill works in a manner that could force some employers to write-off
their existing credit balances. Without the ability to use credit
balances, employers have no incentive to contribute more than the
minimum required contribution. Moreover, employers should not be
precluded from using the credit balances that they have already
accumulated. Employers pre-funded their plans with the expectation that
they would be able to credit the excess funding in future years in
which they may face difficult economic times. Employers made these
additional contributions relying upon rules that were in place at the
time. Changing these rules on them now would be unfair and could cause
employers to view the credit balance system as unreliable and, thereby,
create a disincentive for advanced funding.
Under H.R. 2830, credit balances would be subtracted from assets
for a number of purposes, including benefit restriction purposes and
the determination of at-risk liability. This requirement could have
dire consequences for some plans. For example, consider a plan that has
$100 in liabilities, $90 in assets, and $40 in credit balances. Such a
plan would be considered 50% funded for purposes of imposing benefit
restrictions and at-risk liability determinations. As a result, the
plan would have to be frozen (no new benefits for any participant),
lump sums could not be paid, and liabilities would have to be
calculated using the at-risk determination rules that require
accelerated and burdensome funding. This is entirely inappropriate
given that the plan is in fact 90% funded. We recommend revising the
bill to provide that credit balances are not subtracted from assets for
any purpose other than determining the amortization amount for
underfunding.
Hybrid Plans are Vital to the Defined Benefit Plan System
and Should be Included in Comprehensive Pension
Reform
We commend Chairman Boehner for recognizing the importance of
addressing the hybrid plan issue. Despite the ongoing controversy
surrounding cash balance and other hybrid plans, many employers find
that these plans offer the best designs for their workers. For an
increasingly mobile workforce, steady accruals under a cash balance
plan provide greater benefits than under a traditional pension plan
where accruals are back-loaded. Moreover, workers desire cash balance
plans because of the similarities to 401(k) plans. One way to encourage
continued participation in the defined benefit system is to allow
employers the flexibility of design. If employers do not have design
options that meet the needs of their workforce, they will leave the
defined benefit system.
Without statutory guidance, there will continue to be litigation
that only serves to confuse the issue even further. Such lawsuits
against plan sponsors put hybrid plans at risk and threaten the
retirement security of workers who benefit under these plans. For
reasons described more fully below, we believe that H.R. 2831, the
Pension Preservation and Portability Act of 2005, moves the debate on
hybrid plans forward and, therefore, urge Congress to include it as
part of comprehensive pension reforms, such as in H.R. 2830.
Additional Issues
As stated above, employers will need time to thoroughly review the
impact of H.R. 2830. Nonetheless, in the remainder of this testimony,
we would like to share with you some of our initial thoughts and
reactions to certain provisions in the legislation.
Pension Reform Must Contribute to the Viability of the
Defined Benefit Plan System
For the protection of workers and the defined benefit system, the
funding rules should ensure that pension benefits are appropriately
funded. As such, funding requirements should track investment practices
and choices as much as possible and allow employers freedom in making
funding choices. It is very important that funding rules not impose
unrealistic requirements or burdens that would create an administrative
and financial drain on plans or overburden employers that are already
struggling to better fund their plans.
It is extremely important that employers be encouraged to maintain
their participation in the defined benefit plan system. There are
elements of H.R. 2830 that achieve this goal. For example, the increase
in the maximum deductible contribution to 150% of current liability and
maintaining the concept of credit balances are both extremely important
in encouraging additional contributions to pension plans during good
economic times. In addition, we appreciate the recognition that the
benchmark for the interest rate assumption should be based upon
corporate bond rates and not the 30-year Treasury rate and that
smoothing over multiple years is essential to reflecting actual
investment trends and maintaining predictability.
<bullet> The Increased Maximum Deduction Limit Will Encourage Greater
Contributions
H.R. 2830 increases the deductible limit to 150% of current
liability for single-employer plans and 140% of current liability for
multiemployer plans. Increasing the maximum deductible contribution
limit is long overdue. Employers should be able to contribute more to
their plans in good times and not be forced to increase contributions
during bad economic times. Some employers with plans that are now
experiencing funding deficiencies would have liked to have increased
contributions when they had cash on hand. However, they were limited by
the maximum deductibility rules. Not only would their additional
contributions have been nondeductible, but they would have had to pay a
significant excise tax on the contributions. This cap on contributions
works against companies and plan participants by requiring
contributions when companies are financially strapped and prohibiting
contributions when companies are prosperous. Thus, companies cannot
insulate themselves and their plan participants against cyclical
changes in the economy. Therefore, we fully support the increases to
the maximum deductible contributions for defined benefit plans.
<bullet> The 30-year Treasury Bond Interest Rate is an Inappropriate
Benchmark
There has been considerable debate over the proper replacement for
the 30-year Treasury bond interest rate assumption. We believe that the
interest rate assumption should be a reliable indicator of long-term
expected returns on long-term investments for permanent defined benefit
plans and should not be subject to significant short-term fluctuation.
The Chamber believes that a composite corporate bond rate is the
appropriate replacement for the 30-year Treasury rate and addresses
these concerns. We are pleased that H.R. 2830 recognizes that the
interest rate should be based upon a corporate bond rate and not linked
to a government debt instrument.
<bullet> Smoothing of the Asset and Liability Calculations are
Necessary to Provide Predictability
Plan sponsors generally project their funding requirements over
several years and would like to have certainty about their funding
requirements over that period of time. Over a short time period, market
rates remain fairly volatile and, thus, funding assumptions based on a
short time period are unpredictable. We appreciate that H.R. 2830 will
use a long-term weighted average. However, it will decrease the average
period for asset 7 calculations from five years for assets and four
years for liabilities to three years for both. Since it is a shorter
time period than what is currently in place, there are concerns about
its practical effect. As our members analyze this change, we will
determine the impact of this decrease and whether it is a viable
change.
Permanent Funding Reform for Multiemployer Pension Plans is
Critical
Multiemployer plans must deal with many of the same funding issues
as single-employer plans, but also have other concerns that are
specific to their structure. In addition to the current economic
situation, multiemployer plans are contending with a long-term issue of
declining participation by workers and employers. Thus, as the pool of
retirees is increasing, the pool of contributing workers is decreasing.
This is causing significant burdens upon employers who continue to
participate in these plans. In addition, as bankrupt employers withdraw
from multiemployer plans, the remaining U.S. employers are left to pay
liabilities for people who never worked for them, which puts U.S.
employers at a competitive disadvantage to foreign competition in the
same industries which are not burdened by such assessments. Obviously,
this is an unfair drain of resources on these employers and their
workers.
The Pension Funding Equity Act of 2004 granted temporary funding
relief to certain multiemployer plans. Such a temporary provision that
provided only limited relief does not offer a lasting solution.
Particularly for multiemployer plans in crisis, there needs to be
permanent and fundamental funding reform.
There are several challenges facing participating employers in
multiemployer plans. Some large multiemployer plans are facing
unprecedented shortfalls that are likely to result in funding
deficiencies that will require substantial catch-up contributions by
remaining employers and create excise tax liability. In addition, some
of these same plans are experiencing shifting demographics in which
retired participants outnumber active participants and life expectancy
assumptions are proving to be inaccurate. The funding deficiency
problems could result in significant financial outlays by remaining
employers and, in extreme cases, could push an employer into
bankruptcy.
To address these issues, H.R. 2830 will ensure that multiemployer
plan sponsors and trustees have the flexibility to implement measures
that will ensure the continuation of their plans by creating various
``zones'' that depend upon the funding status of the plan. Within each
zone, there are requirements that must be met and tools that allow the
trustees to improve the funding of these plans. One important tool that
was not included in the legislation is allowing plans in critical
status to reduce accrued benefits. We understand that this is a drastic
measure but it is necessary to remedy the severe underfunding some of
these plans are experiencing. Many in the business community and labor
organizations support inclusion of this provision as a necessary tool
to save these plans. Therefore, we encourage Congress to allow
multiemployer plans that are in critical status the option to reduce
accrued benefits.
H.R. 2831 Would Resolve Key Issues in the Hybrid Plan
Debate
We would like to thank Chairman Boehner for introducing separate
legislation that addresses the cash balance and hybrid plan situation.
Cash balance and hybrid plans are the fastest growing type of defined
benefit plan and, thus, critical to the viability of the system.
Therefore, assuring the validity of these plans is extremely important.
We urge Congress to include this legislation with the other pension
reforms in H.R. 2830.
The Chamber has argued that formulaic tests may not adequately
determine age discrimination in hybrid plans and, therefore, a broader
test should be used. Calculating benefits in terms of an age-65 annuity
is not required under ERISA and is not an accurate method for
determining age discrimination in cash balance and hybrid plans.
Rather, age discrimination in such plans should be tested by looking at
the pay and interest credits received on an annual basis or by looking
at the change in an individual's account balance from year to year.
H.R. 2831 meets these criteria. By establishing a broad test for
age discrimination, it will provide realistic criteria for hybrid plans
that will protect all workers and allow employers to continue to offer
benefits through these types of plans. Moreover, the retroactive
effective date provides much needed clarification for existing hybrid
plans.
In addition, H.R. 2831 resolves the whipsaw effect issue. The
whipsaw effect prevents plan sponsors from providing a more generous
benefit because it may result in an unintended windfall for
participants who decide to take their benefit in the form of a lump
sum. Rather than penalizing plan sponsors for attempting to increase
benefits, the law should support such efforts while also ensuring that
participants receive the proper benefit. Allowing employers to use a
market rate to determine the present value of the accrued benefit will
ensure that all workers receive the benefit to which they are entitled.
Transition Options for Hybrid Plans Must Remain Flexible--
Mandates are Not a Viable Solution
We are pleased that H.R. 2831 does not impose a mandate on benefit
options. Plan sponsors have been converting traditional defined benefit
plans to cash balance and hybrid plans for over 20 years. In that time,
plan sponsors have used many different transition methods to
successfully convert their plans. Limiting transition options will only
hurt the workers participating in hybrid plans. Mandating specific safe
harbors for conversion may encourage some employers to terminate their
defined benefit plan rather than convert it to a hybrid plan. Also, for
those plans that have already converted, mandating retroactive safe
harbors would require certain employers to terminate their plans.
Mandatory choice or any other mandatory benefit imposition is
inconsistent with the voluntary nature of ERISA and should not be part
of any legislative resolution for hybrid plans.
H.R. 2830 Removes Obstacles to Providing Investment Advice
H.R. 2830 modernizes ERISA by better enabling employers to provide
workers with access to investment advice pertaining to their retirement
plan. Defined contribution plans, which largely did not exist when
ERISA was enacted in 1974, require greater employee participation than
traditional defined benefit plans, in which the employer pays for the 9
entire benefit and takes on investment risk. With defined contribution
plans, employees make investment decisions and take on that risk.
Clearly, the need for education and advice on how to invest that money
is an important complement to the defined contribution retirement
model.
H.R. 2830 clarifies existing law to allow employers to provide
employees access to investment advice from regulated professionals. To
reduce the potential for a conflict of interest should the retirement
plan service provider also be the provider of investment advice, the
legislation requires disclosure of fees as well as any potential
conflicts.
Careful Consideration Should be Given to Increases in the
PBGC Premiums
We believe that the existence of the PBGC as a viable insurance
institution is of paramount importance to the defined benefit plan
system. However, funding reform that drives healthy companies and plans
out of the system is at odds to the goal of protecting the PBGC.
Therefore, reforms such as increasing PBGC premiums should be reviewed
carefully. We are concerned that the flat-rate premium increase from
$19 to $30 under H.R. 2830 will drive some employers out of the system
and the additional increases on top of that will be even more
detrimental.
<bullet> PBGC Premiums Should Not Be Automatically Indexed
Under H.R. 2830, the amount of the flat-rate premium and the
variable rate premium will be indexed to wages. ERISA section 4002
states that the PBGC must maintain premiums ``at the lowest level
consistent with carrying out its obligations under this title.''
Therefore, increases in premiums should be made only as determined to
be necessary by Congress. Including an annual automatic increase to the
PBGC premiums takes away Congress's ability to regulate PGBC premiums
because the amount of the premiums will change without Congress
reviewing the need for such change. We recommend that the premiums not
be indexed and that Congress maintain its responsibility in regulating
the premiums.
Certain Benefit Restrictions are Unduly Burdensome
<bullet> Shut Down Benefits Should Not be Prohibited
H.R. 2830 prohibits single-employer plans from providing shut down
benefits or benefits based upon unpredictable contingent events. This
restriction severely interferes with an employer's ability to provide
benefits that are appropriate for its workforce and business situation.
Eliminating the ability of employers to provide a certain type of
benefit is unduly restrictive. There have been several alternatives put
forth to deal with the issue of shut down and contingent event benefits
and we urge Congress to consider these alternatives.
<bullet> Lump Sums Should Not be Restricted at the Levels Provided for
in H.R. 2830
H.R. 2830 will prohibit plans that are less than 80% funded from
paying out benefits in a lump sum. Currently, plans are only similarly
restricted if they have a liquidity shortfall.\3\ Clearly there is a
significant difference between a plan having a liquidity problem and
being less than 80% funded. If this limitation must be included in
pension reform, we recommend that it be included at a much lower
funding level (i.e., 60%). Another alternative is to allow employers
that are less than 80% funded to eliminate the lump sum benefit as an
option to improve its funded status. It is unduly restrictive to
participants to require employers to eliminate this option at such a
high level of funding.
---------------------------------------------------------------------------
\3\ A plan has a liquidity shortfall when it does not have enough
liquid assets to cover three times the amount of benefit disbursements
made in the previous year.
---------------------------------------------------------------------------
<bullet> Restrictions on Benefit Accruals and Deferred Compensation are
Overly Intrusive
The Act will require severely underfunded plans to cease benefit
accruals and prohibit advanced funding of deferred compensation. These
restrictions interfere with employment contracts and management-labor
relations and, therefore, are inappropriate. The ceasing of benefit
accruals effectively freezes the plan. Even if the employer is able to
improve its funded status, the workers will have lost the benefits that
would have accrued during that period. This provision obviously
intrudes into the labor-management relationship in a detrimental way.
Similarly, restricting the funding of deferred compensation impedes
upon an employer's contractual relationships with its workers. Deferred
compensation arrangements are entered into for various reasons that may
have nothing to do with retirement options. Thus, linking these items
together again intrudes upon an employer's ability to manage its
workforce. Consequently, these restrictions should not be included in
the Act.
ERISA Section 4010 Information Should Not be Disclosed
The value of disclosing ERISA Section 4010 filing information is
not readily apparent. It is not a measure of business stability or plan
viability--rather, it is an arbitrary measure of funding. Moreover,
H.R. 2830 requires that funding information for all plans in the
controlled group be made available to participants and beneficiaries
and not just those that are underfunded. Including this information
will be confusing to participants who are participating in only one
plan and may not even be aware of other plans in the controlled group.
In addition, the information should not have to be provided to all
participants in plans that are not underfunded. A worker receiving
information about a plan in which he does not participate may become
confused about the status of his or her own plan.
In addition, the Section 4010 filing requirement is currently
flawed in that it uses a fixed dollar threshold of $50 million of
underfunding. For large pension plans with billions of dollars in
assets, $50 million of underfunding is a miniscule amount of relative
underfunding. Furthermore, in the current low interest rate
environment, most every medium to large employer plan has a good chance
of being required to make this filing even if it is nearly fully
funded. Publicizing this information would perpetuate and magnify these
anomalies.
Conclusion
We acknowledge that this is a difficult, complex public policy area
because the Congress must find the right balance between setting
funding requirements which protect employees and the PBGC, but are not
so overly strict--in search of ``perfect'' funding requirements--so as
to drive employers away from continuing with defined benefit pension
plans, much less establishing new ones. Further, overly strict
requirements will divert resources away from other useful purposes such
as higher wages and capital investments.
The Pension Protection Act of 2005 advances the discussion of
pension reform. It includes a number of beneficial provisions that will
encourage employers to maintain and strengthen their plans. However,
there are also provisions that are counter-productive to that goal. We
are committed to finding a solution that, at the end of the day, will
strengthen the defined benefit plan system by encouraging plan sponsors
to continue to maintain their plans. We look forward to continuing to
work with Chairman Boehner and Chairman Thomas and their Committees to
find such a solution.
Thank you and I am happy to answer any questions that you might
have.
______
Chairman Boehner. Mr. Pushaw.
STATEMENT OF BART PUSHAW, ACTUARY, MILLIMAN, INC.
Mr. Pushaw. Thank you, Chairman Boehner, Mr. Miller,
members of the committee. Good morning. I am honored to be
before you today. Thank you for inviting me.
I would like to begin by commending the committee members
on this bill. The Pension Protection Act significantly updates
ERISA, which has been incredibly successful for over 30 years.
Those who were responsible for it should be proud of their
achievement and not sorry to see these parts changed.
Today, I am speaking as an experienced, practicing
retirement actuary enrolled under ERISA. I have been and
continue to be proud to be a part of one of our most important
institutional pillars of financial security.
The funded position of many pension plans is recovering.
The old rules indeed have worked in allowing sponsoring
companies a brief but sufficient time to begin to recover from
a recession before being required to contribute funds to plans,
though weaknesses remain.
This bill, as I mentioned, updates ERISA and greatly
simplifies relevant provisions and fixes some of these
weaknesses.
The yield curve is not a widely familiar concept, and it
has only recently begun to enter into use by the pension
industry. Thirty years after ERISA was enacted, pension plans
now have a wide range of maturity, from new plans with hordes
of new hires at young ages, to plans which have retired
population liabilities on their balance sheets which dwarf that
of the plan sponsor. These vastly differing plan profiles have,
in the past, all been treated identically for valuation
purposes, grossly and materially erring relative to market
value. Erroneous, inaccurate valuations mean no money to pay
benefits.
Using yield curves is the right answer. The market,
arguably, incorporates more information about expectations in
the yield curve than any other single measure. Capable plan
managers and actuaries will be able to extract this forward-
looking information to enhance financial forecasts, better
supporting prudent plan management, leading to higher levels of
benefit security for participants and thus strengthening the
financial security of millions.
Providing accurate estimates of future plan costs to
corporate financial managers is important, because it is those
same managers who will abandon a defined benefit pension plan
when that plan impedes them in managing the financial affairs
of the sponsor, in spite of their many valuable features. This
bill enables rather than impedes good management. Accuracy
promotes strengthened benefit security.
The modified yield curve approach in this bill is a good
simplification to ease administrative implementation by small
plans but rigorous enough to develop market-based valuations
for the largest of plans, reflective of their plan's liability
profiles and, hence, emerging cash flow needs.
These cash flow needs include paying benefit distributions
as lump sum payments. This bill brings a huge improvement with
regard to lump sums. A financial disconnect occurred when plans
were mandated to pay lump sums under artificial conditions,
having no bearing to the intent of the plan sponsor nor with
the way the plan had been funded. This bill removes that
disconnect and enables the plan to properly fund paying lump
sums to those who choose them.
Due to the formidable risks associated with lump sums, I do
not advocate them for the general population. However, lump
sums do have a valuable and important role in financial
planning when part of a comprehensive, well-designed personal
financial plan. It is in this latter regard that I believe a
limited exemption allowing lump sums to the small number of
participants at or near normal retirement age should be
granted, not limiting them in accordance with plan funded
status since the run-on-the-bank issue is now defused due to
the proposed plan/lump sum interest rate and mortality rate
harmony.
These bona fide retirees, at the end of their working
career, cannot without pain suffer such sudden changes to their
financial condition. Nor should they be asked to do so. In
tandem with this positive change in determining lump sums, it
should be noted it would indeed be in PBGC's own financial
interests that lump sums be paid out rather than become an
entry on their books with an even larger assigned value.
The benefit limitations, the amendment ban and benefit
accrual freeze are entirely appropriate and makes common sense
a required dictum again. Significant benefit enhancements
promised while sponsors face financial demise buy nothing. The
end game of funding these back room deals with taxpayer dollars
needs to end, and I commend the committee for proposing to take
this action.
Use of credit balances is corrective. First intent
reflected prepayments against long horizon schedules. These
accumulations lose relevance, resulting in use antithetical to
benefit security. More flexibility in using and accumulating
these balances, giving appropriate credit to contributing
sponsors and adjusting them for plan asset performance all
support the primacy of strengthening benefit security while
maximizing value to the sponsor.
Since the inception of the earliest pension plans at around
the turn of the last century, Americans have lived ever longer
lives, and this improvement in mortality is expected to
continue. Reflecting this expectation with regular updates of
the underlying mortality tables is crucial.
Time calls for another update, and the most recent
mortality table published by the Society of Actuaries is the
proposed table in the bill. This table, under proper projection
of mortality improvement, incorporates this increased
longevity, which results in a more accurate estimate of
expected plan payouts and liabilities. Again, tying together
the table the plan uses to estimate and fund payouts to the
actual payouts themselves is sound actuarial
finance,ameliorates distortions and adds back credibility to
defined benefit plan as a strong tool for use in retirement
plan strategy.
This bill brings a new ability and a new flexibility to
defined benefit plans which will allow prudent, well-managed
companies the ability to continue or return to relying on the
defined benefit plan as core of their retirement benefit
strategy, differentiating themselves competitively in a
positive manner to a labor force eager to gain and retain
financial security in an era of increased personal assumption
of financial risk.
I humbly thank you for your patience and the opportunity to
present my opinions to the committee.
Chairman Boehner. Thank you.
[The statement of Mr. Pushaw follows:]
Prepared Statement of Bart Pushaw, Actuary, Milliman, Inc.*
The Pension Protection Act significantly updates ERISA, which has
been incredibly successful for over 30 years--those who were
responsible for it should be proud of their achievement and not sorry
to see these parts changed. I have been and continue to be proud to be
a part of one of our most important institutional pillars of financial
security.
---------------------------------------------------------------------------
* The following comments express my own opinions and position, and
do not reflect those of Milliman, the American Academy of Actuaries or
any other organization.
---------------------------------------------------------------------------
The funded position of pension plans is recovering--the old rules
have indeed worked in allowing, through techniques of smoothing,
sponsoring companies a brief but sufficient time to recover from a
recession before being required to contribute funds to plans. But
weaknesses remain.
This bill, as mentioned, updates ERISA and also, in my belief,
greatly simplifies relevant provisions and fixes some of those
weaknesses. The updates primarily include use of the corporate spot
rate yield curve and the mortality table. The fixes relate to the
determination of lump sums and benefit limitations. The simplification
of the funding rules is significant.
Inherent in the old rules was the business environment of the day.
Contrasting against that, today's corporate finance officer manages in
a faster pace, faster changing world, as we all know. Competitive
forces, of a global fashion, have shortened planning horizons and
leaned down corporate balance sheets. This leaning-down means it can't
support plans fixated on the long horizons underlying current funding
rules any longer. This bill finally re-focuses pension plan financial
drivers to a 'Security-Now' approach.
The focus of measuring has also changed--Book Values are out,
Market Values are required. This bill successfully accomplishes this
change with pension liabilities. In the past, individual actuarial
discretion had driven the liability value of a plan, with professional
latitude wide enough to lead to valuations virtually always
significantly different than what can be considered market valuations.
The yield curve is not a widely familiar concept, and it has only
recently begun to enter into use by the pension industry. Thirty years
after ERISA was enacted, pension plans now come in a wide range of
maturity--ranging from new plans with hordes of new hires at young
ages, to plans which have retired population liabilities on their
balance sheets which dwarf that of the plan sponsor. These vastly
differing plan profiles have, in the past, all been treated identically
for valuation purposes, grossly and materially erring relative to
market value. Erroneous, inaccurate valuations mean either no money to
pay benefits or no money for corporate development and investment.
Using yield curves is the right answer. The market incorporates
more information about expectations in the yield curve than probably
any other single measure. Capable plan managers and actuaries will be
able to extract this forward looking information to enhance financial
forecasts, better supporting prudent plan management, leading to higher
levels of benefit security for participants and thus strengthening the
financial security of millions.
Providing accurate estimates of future plan costs to corporate
financial managers is important because it is those same managers who
will abandon a defined benefit pension plan when the plan impedes them
in managing the financial affairs of the sponsor, in spite of their
value-added features. This Bill enables rather than impedes good
management. Accuracy promotes strengthened benefit security.
The modified yield curve approach in this Bill is a good
simplification to ease administrative implementation by small plans but
rigorous enough to develop market-based valuations for the largest of
plans, reflective of their plan's liability profiles and hence emerging
cash flow needs.
These cash flow needs include paying benefit distributions as lump
sums. This Bill brings a huge improvement with regard to lump sum
payments. A financial disconnect occurred when plans were forced to pay
lump sums under artificial conditions; having no bearing to the intent
of the plan sponsor nor with the way the plan had been funded. This
Bill removes that disconnect and enables the plan to properly fund and
pay lump sums to those who choose them.
Much concern of pension financial integrity has been laid on the
door of the lump sum payout. While this is not the most prudent choice
of benefit selection for many, it still has its place. Additionally,
lump sums carry something of a bad reputation as 'they keep draining
trusts but can't be funded.'
The proper application of the yield curve to determine both a
plan's Current, or Target, Liability interest rate and the Lump Sum
cash out rate remedies these ails. This occurs because the lump sum
exactly equals the liability. Pension plans might have been better off
if the PBGC interest rate was never mandated.
When we say we want to use the yield curve to determine the
liability of a plan, we mean the following. Project annuity benefit
payments the plan expects to pay for a person until they die. This
gives you a stream of payments expected in each year from now to well
into the future. Do this for each person; some payments will begin
right away while others don't start until sometime in the future. Then,
add them all up. This gives you the stream of expected payments for the
entire plan, for each year, out 85 years or so.
Next, find a spot rate yield curve representing the high quality
corporate bond market. This is a series of interest rates, one for each
year out into the future.
Then, to develop the liability of the plan, discount each year's
benefit payment by applying the corresponding year's rate. Add all
these discounted benefit payments together and you end up with the plan
liability.
Here's a simplified numerical example.
In this example, the relative dollar amounts and payout periods are
irrelevant to the results. The yield curve used here is the actual
December 31, 2004 curve as published by Citigroup and posted on the
Society of Actuaries' website.
Let's say we have a plan with two participants: Mary and Bob. Mary
will retire today and receive $100 annually for ten years. Bob is
younger, will retire 10 years from now and receive the same $100 a year
for ten years. We show the plan benefits along with the current yield
curve as follows:
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total plan Discounted
Year Rate (%) Mary's benefit Bob's benefit benefits benefits
--------------------------------------------------------------------------------------------------------------------------------------------------------
1............................................................ 3.09 $100 ................ $100 $97
2............................................................ 3.40 100 ................ 100 94
3............................................................ 3.64 100 ................ 100 90
4............................................................ 3.90 100 ................ 100 86
5............................................................ 4.12 100 ................ 100 82
6............................................................ 4.33 100 ................ 100 78
7............................................................ 4.52 100 ................ 100 73
8............................................................ 4.65 100 ................ 100 70
9............................................................ 4.80 100 ................ 100 66
10........................................................... 4.94 100 ................ 100 62
11........................................................... 5.09 ................ $100 100 58
12........................................................... 5.26 ................ 100 100 54
13........................................................... 5.44 ................ 100 100 50
14........................................................... 5.58 ................ 100 100 47
15........................................................... 5.69 ................ 100 100 44
16........................................................... 5.76 ................ 100 100 41
17........................................................... 5.83 ................ 100 100 38
18........................................................... 5.89 ................ 100 100 36
19........................................................... 5.94 ................ 100 100 33
20........................................................... 5.98 ................ 100 100 31
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total...................................................... ................. $1,000 $1,000 $2,000 $1,230
--------------------------------------------------------------------------------------------------------------------------------------------------------
The plan expects to pay out $2,000 over the next 20 years and the
liability today is $1,230. The plan is economically indifferent as to
whether it pays out $1,230 today or $2,000 over 20 years. We can
compute an effective rate which is the single interest rate equivalent
to the series of rates forming the yield curve. The effective discount
rate for the plan is 5.15% in our example. That is, if you use 5.15%
each year for the entire plan, the liability would be the same $1,230
as above. Let's also say the plan has assets of $1,230.
What happens to the plan when a lump sum is paid out to Mary using
a lower interest rate to calculate her lump sum? Is Bob, the remaining
participants or PBGC, left less well off after the Mary takes her lump
sum?
The answer is NO. Let's see why not.
First, let's use a lower interest rate, say 4.30%, to determine
Mary's lump sum. We go through the same discounting process on her
benefits as follows:
----------------------------------------------------------------------------------------------------------------
Discounted
Year Rate (%) Annuity benefit benefit
----------------------------------------------------------------------------------------------------------------
1........................................................ 4.30 $100 $96
2........................................................ 4.30 100 92
3........................................................ 4.30 100 88
4........................................................ 4.30 100 84
5........................................................ 4.30 100 81
6........................................................ 4.30 100 78
7........................................................ 4.30 100 74
8........................................................ 4.30 100 71
9........................................................ 4.30 100 68
10....................................................... 4.30 100 66
----------------------------------------------------------------------------------------------------------------
Total.................................................. ................. $1,000 $798
----------------------------------------------------------------------------------------------------------------
This says Mary gets paid a lump sum of $798. Now, let's take
another look at the plan's liabilities, person by person.
To do this, let's separately discount each participant's benefits
using our yield curve.
------------------------------------------------------------------------
Mary's
Year discounted Bob's discounted
benefits benefits
------------------------------------------------------------------------
1................................... $97 $0
2................................... 94 0
3................................... 90 0
4................................... 86 0
5................................... 82 0
6................................... 78 0
7................................... 73 0
8................................... 70 0
9................................... 66 0
10.................................. 62 0
11.................................. 0 58
12.................................. 0 54
13.................................. 0 50
14.................................. 0 47
15.................................. 0 44
16.................................. 0 41
17.................................. 0 38
18.................................. 0 36
19.................................. 0 33
20.................................. 0 31
------------------------------------------------------------------------
Total............................. $798 $432
------------------------------------------------------------------------
Notice that the sum of Mary's liability of $798 and Bob's liability
of $432 equals the plan's liability of $1,230. You will also notice
that the lump sum we paid to Mary using a lower interest rate is
exactly equal to the liability the plan expected to pay her using a
different rate, a rate for the plan as a whole. And after Mary is paid,
the plan still has the $432 it holds for Bob.
Now, what if Bob wants a lump sum, too, and he wants it now? We can
pay Bob his lump sum in the same way we did for Mary, and Bob would get
exactly $432. In the end, after everyone is paid their benefit, the
plan equitably pays out exactly as was expected, $1,320.
What was the effective lump sum interest rate used to determine
Bob's lump sum amount? It was 5.63%.
What's the trick? Where did the lump sum interest rates come from
and is this result a coincident or an actuarial anomaly?
There is no trick at all. The rate used to determine the lump sum
for Mary was arrived at using the same yield curve for her benefits as
was used for the plan as a whole. Because the spot rates corresponding
to her benefit payouts are lower than the spot rates that occur in
later years, Mary's lump sum rate (ie, her effective rate) is also than
the plan's effective rate.
Is this coincidence? No, it is the logical result of using an
internally consistent methodology, applying the very same yield curve
equally to both the plan and the individual.
Result: When done correctly, the lump sum rate for a retiree is
lower than the rate used for the entire plan. In this case, 85 basis
points less.
What would have happened if we had used the plan's rate of 5.15% to
calculate Mary's lump sum? Mary would have been paid $767, or $31 less.
This would have resulted in a windfall for the plan at Mary's expense.
Result: Using the same yield curve equally is correct while using
the same interest rate is not; the lump sum is equal to the liability.
For the general population I do not advocate lump sums, due to the
formidable risks associated with them. However, lump sums do have a
valuable and important role in financial planning when part of a
comprehensive, well designed personal financial plan. It is in this
latter regard that I believe a limited exemption allowing lump sums to
the small number of participants at or near normal retirement age
should be granted--not limiting them in accordance with plan funded
status, since the 'run on the bank' issue is now happily defused due to
the proposed plan/lump sum interest rate and mortality harmony.
Some of the examples of the importance lump sums are:
1. Lump sums allow a retiring employee to collect their deferred
compensation entirely, as compared to an annuity, where in the case of
premature death, even one day after retirement, the entire benefit is
forfeited.
2. Pension plans are considered a deferral of current wages. These
wages are entirely earned in the year they are earned. Requiring
annuitization means unfairly subjecting previously earned wages to
forfeiture.
3. Lump sums allow a retiring employee to sever economic ties to
the company, plan and industry and reduce their exposure to industry
risk by collecting and self-directing their lump sum in a manner they
deem most appropriate for them.
4. An employee's lifetime earnings are subjected to market forces
specific to the industry and company she works in. Often, this
employment risk is converted into imprudent investment risk by a
company requiring undiversified ownership of company stock via its
defined contribution retirement plans. Laws which have historically
allowed employees to diversify away this company risk are currently
being strengthened. This same risk diversification ought to be allowed
in a defined benefit plan as well.
5. Collecting a lump sum allows a retiring employee better
management over their entire portfolio of assets.
6. Financial advisors promote the view of total wealth management
to optimize investment choices. Each individual investor owns different
assets in different proportions and has different needs and goals.
These needs and goals often require an asset allocation approach which
allocates pension funds other than in a level annual annuity. Unlike a
portfolio of Sec. 401(k) fund investments, pension plan investments
only facilitate self-direction when paid out in a lump sum.
7. Collecting a lump sum allows the retiring employee to choose the
appropriate time and extent of annuitization that's right for them.
8. Academic studies (e.g., the Pension Research Council at the
Wharton School of Business, University of Pennsylvania) have indicated
that the optimal age for a retiree to annuitize some part of their
personal wealth is at an age which is significantly after the plan's
normal retirement age.
9. A lump sum option facilitates retiree estate planning.
10. Some retirees prefer their earned benefit be available for use
in either bequeaths to heirs, providing liquid assets upon their deaths
or other worthwhile uses chosen by the individual. Without a lump sum
option, the death of the retiree leads to the partial or complete
forfeiture of unpaid benefits denying the retiree their choice in how
to use compensation they earned during employment.
11. A lump sum allows more varied use of portions of their total
retirement nest egg at their own discretion.
12. Anecdotally, we know many newly retired individuals look
forward to celebrating the end of their working lifetimes and new
retirement. Oftentimes, they want to pay off their mortgages, take a
well-earned trip(s) or contribute to their grandchildren's college
funds. Most individuals covered in pension plans without lump sum
access have the vast bulk of their retirement funds locked in annuities
via the plan (and Social Security). At least part of this retirement
wealth ought to be accessible to them via lump sums if they desire to
celebrate their achievement in any of these or numerous other ways.
These bonafide retirees, at the end of their working career, can
not without pain suffer such sudden changes to their financial
condition, nor should they be asked to do so. In tandem with this
positive change in determining lump sums, it should be noted, it would
indeed be in the PBGC's own financial interest that lump sums be paid
out rather than become an entry on their books at an even larger
assigned value.
When a pension plan is funded on a correct actuarial basis, a lump
sum payment does not cause undue hardship or otherwise denigrate the
plan's funded status. On the other hand, under current rules, lump sums
cost more than annuities and, sometimes, can not be funded.
Lump sums can be made to be a cost neutral benefit, as they were
prior to PBGC-mandated interest rates, by the prudent selection of an
interest rate. The yield curve approach to determining the plan
interest rate combined with an equivalent application of that yield
curve to retiring participants will result in a lump sum which is cost
neutral with no 'leakage' whatsoever.
The benefit limitations, the amendment ban and benefit accrual
freeze are entirely appropriate and makes common sense a required
dictum again. Significant benefit-enhancements promised while sponsors
face financial demise buy nothing. Vaporous agreements by leadership
faithfully relied upon by the rank and file adds to shattered trusts.
The end-game of funding these back room deals with taxpayer dollars
needs to end. And I commend the Committee for proposing to take this
action.
Since the inception of the earliest pension plans at around the
turn of the last century, Americans have lived ever longer lives and
this improvement in mortality is expected to continue. Reflecting this
expectation with regular updates of the underlying mortality tables is
crucial.
Time calls for another update and the most recent mortality table
published by the Society of Actuaries is the proposed table in the
Bill. This table, under proper projection of mortality improvement,
incorporates this increased longevity which allows for a more accurate
estimate of expected plan payouts and liabilities. Again, tying
together the table the plan uses to estimate and fund payouts to the
actual payouts themselves is sound actuarial finance, ameliorates
distortions and adds back credibility to the defined benefit plan as a
strong tool for use in retirement plan strategy.
The transition elements of the Bill are substantial. The changes
brought about by the provisions during the phase-in periods are not
dramatic, but easy. Plan sponsors will in general greet the new law
with enthusiasm, drawn by the certainty brought by finally having an
interest rate methodology in place as well as the internal cohesiveness
and financial soundness in its approach.
This Bill brings a new ability and new flexibility to defined
benefit plans which will allow prudent, well-managed companies the
ability to continue or return to relying on the defined benefit plan as
the core of their retirement benefit strategy, differentiating
themselves competitively in a positive manner to a labor force eager to
gain and retain financial security in an era of increased personal
assumption of financial risk.
I humbly thank you for the opportunity to present my opinions to
the Committee.
______
Chairman Boehner. Dr. Ghilarducci.
STATEMENT OF THERESA GHILARDUCCI, PROFESSOR OF ECONOMICS,
UNIVERSITY OF NOTRE DAME
Ms. Ghilarducci. Hello. I am also honored by the
invitation; and I hope that my research and my observations
will help your deliberations.
I evaluate all pension reform by answers to four questions.
The first one is, did this bill encourage better funding?
Believe it or not, most pension funds are well funded and
behave properly. I painstakingly developed a data set of 670
firms of over 18 years and linked them with firm profitability
data and other kinds of data. I found that the vast majority of
firms contribute more when their funds earns high returns and
they contribute less when their funds aren't doing so well. And
that is good news. It is what ERISA intended.
The bad news is that the limit on the funding ratios didn't
matter very much. So that, though it is reasonable to raise the
funded ration to 150 percent, I don't have high hopes it will
significantly improve the plan funding. Most plans were not
limited by that lower ratio. But prohibiting the use of credit
balances for underfunded plans that this bill proposes may
discourage well-funded plans from accumulating them, making bad
times worse for good DB sponsors. We need to encourage pro
cyclical accumulations.
Now freezing benefit accruals at plans that are 60 percent
funded does make sense, but I have serious problems with the
limits on benefits increasing for plans that are funded at 80
percent.
One of the reasons that the PBGC stopped publishing the
``iffy fifty'' list which publicized underfunded plans that
many plans weren't iffy at all, even if they were below the 90
percent funding ratio. But some were iffy, so I do support
making those 4010 forms public. It is absolutely crucial.
Now classifying companies by their funding ratios and not
their ability to pay could let profitable companies purposely
underfund the plan so they would have an excuse to renege on
benefits. That would supersede the intended ERISA, and it would
supersede any notions of fairness because workers paid for
their promised benefits through, indirectly or directly, by
taking less compensation in wages or other places. Real pension
protections stops, it does not encourage, this reneging.
Now everyone knows, I guess on this panel as well, that
prohibiting lump sums could improve plan funding. Findings from
behavioral economics and common sense show that they don't
result in real pensions and they bleed pension funds dry. But
this plan--actually, this bill actually encourages lump sum
payouts because they make them cheaper.
The second question I ask, is this bill fair to workers and
retirees?
Well, the lump sum provisions aren't fair. The bill raises
the valuation rates to reflect what only high-income investors
can attain. It lowers the lump sum by 27 percent in retirees
who invest in only safe money market funds.
Further, the bill lessens protection and shifts most of the
costs of funding failures to workers who had no role in the
decisions that caused the failures. Shut-down benefits make
plant closings humane. But it is very important for all of us
to realize that workers pay for those shut-down benefits
through lower wages, deferred wages. Even more unfair is that
this bill denies shut-down benefits to workers but doesn't
touch manager severance pay and executive buyouts. Eliminating
shut-down benefits often just makes the deal more profitable to
another buyer. I saw that happen in my area with the steel
companies.
This bill isn't fair because it also allows workers'
accrued benefits to be cut when the fund hits that arbitrary 80
percent of funding ratio, though manager and salary benefits
are only cut when they reach a lower ratio.
Now, the United Airlines' decision was unfair. The PBGC
bypassed the labor management negotiations, which could have
saved benefits, and cut their own deals to terminate the plan.
This bill does not encourage that from happening again.
Third question, does this bill encourage firms to stay in
the DB system?
I fear not. Besides being unfair and not improving the
funding, and it could chase companies from the DB system. The
premium cost hikes are over and above what is needed.
The advice portions tacked on the bill bias the bill
towards 401(k) plans and that is especially glaring because
there is no provision in this bill for the cash balance
provisions.
DBs are important to the economy and will be as the labor
force gets older. They reduce training costs, and they reduce
turnover costs. Older women workers are much less likely to
retire at 65 if they have a DB plan. We need those older
workers.
But this bill could raise the costs of uncertainty. The
yield curve, as already been mentioned, causes increasing
uncertainty. PBGC defaults and a surprise hike in premiums also
cause uncertainty. They may overwhelm these benefits I just
mentioned and employers would leave the system.
Does the bill help distressed companies maintain their
plans?
It doesn't do much to not prevent companies from trying to
figure out ways to not terminate it. In fact, without
provisions to slow down those terminations, it could lead to a
race to the bottom.
In sum, how could you all protect real pensions?
We need meaningful rules to structure cash balance plans.
We need to raise premiums in a nonpunitive fashion and
think out a way for PBGC to have a reassurance plan. That is
the fatal flaw in the PBGC. It was only meant to take care of
situations where a company went bankrupt, not whole industries
going through restructuring and failure.
We should help troubled companies stay in the system. You
did that with the airline bill.
You should slow down terminations.
And I say just prohibit lump sum payouts. They are not
fair.
Thank you.
[The statement of Ms. Ghilarducci follows:]
Statement of Dr. Teresa Ghilarducci, Professor of Economics, University
of Notre Dame
I appreciate the invitation, Chairman Boehner and Ranking Member
Miller, and members of the Committee, to testify on the pension reform
bill. I hope my research and observations will help your deliberations.
I evaluate pension reform by answers to four questions.\1\
1. Does this bill encourage better funding?
My research observes the same 670 pension sponsors for 18 years (no
agency or researcher has this data set) and, after controlling for most
factors\2\ determining pension contributions per participant, I
conclude the vast majority of companies responsibly fund their plans
despite popular conceptions. Firms contribute more to their funds when
the funds are doing well and the funding ratio did not inhibit funding.
That's good news. That is what ERISA intended. The bad news is that
pension funding falls when health insurance costs rise and when firms
introduce a 401(k).\3\
In sum, existing funding rules work well for the vast majority of
the funds. Raising the funded ratio to 150 percent (for qualified
contributions) is reasonable; but don't have high hopes it will
significantly improve plan funding--most firms were not limited by the
lower ratio.
Prohibiting the use of credit balances for underfunded plans may
have the unintended consequence of discouraging DB plans and making bad
times worse for DB sponsors who sincerely want to preserve their plans.
We need to encourage accumulations in good times. I doubt that the
prohibition would have prevented United's pension plan default.
Freezing benefit accruals at 60% makes sense, but I have problems
with the limits on benefits for 80% funded plans. One of the reasons
the PBGC stopped publishing the ``iffy fifty'' is that the many plans
weren't iffy at all even if they had below 90% funding ratios.\4\
Classifying companies by their funding ratios and not their ability
to pay could let profitable companies purposefully underfund the plan
as an excuse to renege on benefits that workers paid for by deferring
compensation.
Prohibiting lump sums could improve plan funding. Findings from
behavioral economics and common sense show they don't result in real
pensions and they bleed funds dry. Lump sums came about to please
management and sponsors seeing their cost may still be chary of being
the first to revoke them. Congress can help them by banning them.
2. Is the bill fair to workers and retirees by protecting benefits?
If lump sums are kept this bill is unfair. Under current law,
worker lump sums are valued using 30 year treasury rates (now at 5%).
The bill raises the rate to investment grade corporate bonds (6%) which
individuals generally do not have access to and lowers the lump sum by
27%.\5\
The whole idea of ERISA and pension protection was to ensure that
promises made and indirectly paid for by workers weren't reneged on.
But this bill steps away from protecting accrued benefits by shifting
most of the cost of funding failures to workers. Shut down benefits
make plant closings humane; but they are mostly eliminated in this
bill- even though workers gave up wages for them. Even more unfair
manager severance pay and buyouts aren't. Eliminating shut down
benefits often just makes a deal more profitable to another buyer.
The bill further moves away from pension protection by allowing
workers accrued benefits to be cut when the fund hits a 80% funding
ratios, though manager and salary plans only have to be below 60%.
The PBGC's decision in the UAL case is an example of moving away
from ERISA's intent. The agency bypassed union/company
negotiations\6\--which could have saved benefits--and cut their own
deal and involuntarily terminated the plan cutting benefits. The
decision shifted all the costs of the company's problems on the oldest
and most loyal workers caused by factors out of their control.\7\
A fair move would have been the PBGC and Congress segregating the
airline pension liabilities and paying them off with a temporary
airline ticket tax. The rationale is that low-cost, start-up carriers
and the passengers are benefiting from the legacy left by older workers
and firms so they should pay some of the legacy costs.\8\
3. Does the bill encourage firms to stay in the DB system?
I fear not. First, the bill's premium cost hikes are not only high
relative to expected losses from healthy plans but worse; companies
could expect even more hikes because the PBGC suffers from the serious
flaw of having no real plan reinsurance other than stiffing the healthy
sponsors and taxpayers of last resort. For example, a user-fee revenue
stream could reinsure the PBGC for the airline industry problems.
(Future DB sponsors need the confidence Congress could provide by
reinsuring the PBGC for a catastrophe like an industry collapse the
agency was never structured to deal with: Studebaker failed but the
U.S. car industry was doing well.)
Two, the advice portions tacked on the bill may have unintended
consequences of raising hopes that advice and education improve
401(k)s. Believe me its depressing to educators that research shows
workers who attend investment advice seminars are LESS likely to change
their contributions or allocations than those who didn't.\9\ Also by
emphasizing investment advice in this bill implies workers' ignorance
alone causes 401(k)s' limitations as a pension system.\10\
Third, the bill's bias towards 401(k)s is especially glaring since
the bill has no protection for firms wanting to provide the future of
DB plans--cash balance plans.
(I am mostly disappointed in the bill for not encouraging the PBGC
for not living up to the law\11\ that mandates the PBGC seek ways to
strengthen the defined benefit system.)
DBs are important to the economy. Firms, especially as the
workforce ages, will want DB plans; they engender worker loyalty and
reduce turnover and training costs.\12\ Older women workers are much
less likely to retire at 65 if they are in a DB plan.\13\ DB
participation is up slightly in retail and professional services.
The last question for a pension reform bill is:
4. Does the bill help companies that are in bankruptcy and/or
distressed?
The bill will not prevent firms in bankruptcy from dumping
liabilities easily. Terminations produce lemming-like behavior and a
race to the bottom.\14\ The bill should also put procedures in place
that slow down terminations and make them subject to negotiations
between workers and firms.
Pension reform should also help employers find ways to stay in the
system and survive short-term difficulties. The bill does not recognize
that companies often need to have underfunded plans for some time, e.g.
in a recession. Also penalizing companies in bad times\15\ could make
DB pension plans more vulnerable and less attractive.
In sum, how Congress can help protect real pensions?
1. We need meaningful and encouraging rules for structuring cash
balance plans--I trust you are working hard on that.
2. Raise premiums in a non-punitive fashion and provide assurances
to high performance DB sponsors that the PBGC has a thought-out
reinsurance plan, not panicked premium increases.
3. Implement funding rules that freeze benefit accruals for funds
with below 60% funding, but don't make 80% a blanket trigger. Shutdown
benefits are crucial to fair restructuring and owners should have to
reveal these costs better--your disclosure requirements will help.
4. Help troubled companies stay in the system, rather than putting
more pressure on their funding when they are least able to pay.
5. Slow down terminations to prevent race to the bottom in an
industry.
6. Prohibit lump sums from qualified plans.
7. Worker representation would be an efficient and effective way to
enforce the commendable disclosure requirements.
ENDNOTES
1. Does the reform encourage better and stable funding; is the
reform fair to workers, retirees, executives, shareholders, customers,
and tax payers; does the bill encourage the formation of ``real''
pensions; a modest stream of lifetime income; and do the proposals help
firms adjust to business cycles and industrial trauma?
2. Firm profitability, normal cost, age of plan, cost of capital,
and other determinants of funding contributions, 401(k) share of total
pension contributions. See http://www.nd.edu/?tghilard/ Choose recent
papers: ``Did ERISA Fail Us Because Firms' Pension Funding Practices
Are Perverse?''
3. Firms did not engage in perverse behavior--reducing funding when
times are good only to find a short fall and more funding requirements
when times are bad. The airline industry sponsors are exceptional they
decreased DB funding even when the rest of the economy was doing well.)
4. Because the company sponsors were viable in the medium term and
publishing their names unduly worried workers and investors.
5. It is reasonable that this bill allows the rate to vary by age--
so older folks would presume to have lower and safer returns. But
raising the interest rate substantially lowers the lump sum:
------------------------------------------------------------------------
If the interest To pay this amount
What the lump sum would be rate is for 25 years
------------------------------------------------------------------------
$99,999.98 at 3%............. $5,742.79
$73,412.08 at 6%............. $5,742.79
$52,127.50 at 10%............ $5,742.79
------------------------------------------------------------------------
Also insurance companies discriminate reduce annuities for women,
because on average they live longer. Women lose 30%. (The justification
for raising the rate is that the Treasury rate is ``artificially'' low.
This is a very curious and confusing judgment. Rates are set by
markets, which are seen to be less artificial. What is artificial about
the current market rate--it is still the best judgment of what a risk
free long-term rate is.)
6. Held under Section 1113 of the Bankruptcy Code.
7. What is happening in airlines happened in railroads in the early
1900s. The first private defined pension plans were established by
railroads in 1865, they were the airlines of their day. In 1919, the
maturing defined benefit railroad pension plans were threatening to
default for two familiar reasons. Workers were beginning to retire in
large numbers and small start-up companies, that paid low wages and
provided no benefits, invaded the legacy railroad's routes by slashing
haul rates. The nation could have chosen to allow what the PBGC and
Untied Airlines agreed to happen, let pensions default and have the
workers pay for the industrial restructuring. But the American
decision-makers viewed that solution as unfair and the government
mandated a multiemployer pension plan, the Railroad Retirement fund
that all railroads pay into. The rationale was that the low-cost,
start-up companies were taking advantage of the infrastructure the
mature, legacy railroads and their workers created and needed to pay
for the legacy benefits they were enjoying. To this day railroad
workers have a strong defined benefit plan portable anywhere in the
industry regardless of the death and birth of individual railroad
companies.
8. The agency segregates liabilities occasionally with
idiosyncratic bankruptcies like TWA. Congress and Sec. of Labor
Elizabeth Dole created a similar tax for coal to pay of miner's health
liabilities. Another creative solution is to put all airline employees
into an airline retirement fund like the railroad workers. Delta and
the airlines will keep their DB plans, not forced to follow United and
crash their plans. Once airlines are out of the PBGC and into a
multiemployer plan for the industry, the rest of the defined benefit
system will be in better shape.
9. See Steve Venti's excellent overview of 401(k) investment
behavior. http://www.dartmouth.edu/?bventi/Papers/venti--savings--12-
04.pdf
10. Instead of adding another layer of for-profit vendors why not a
worker representative on the board of trustees adds for both DB and DC
plans. Through their representative they would have a genuine link and
awareness of ongoing pension funding issues. A worker representative
would further transparency goals. This bill sensibly requires more
complete and timely Form 5500s. Pension plans must notify participants
of the funded status of their plan within 90 days and plans must
provide summary reports within 15 days of the Form 5500 filing
deadline. The act will also implement the investment advice proposal
that passed the House in the 107th and 108th Congress, which allows
employers to provide workers with a qualified investment adviser and
include fiduciary, and disclosure safeguards.
11. The Employee Retirement Income Security Act: (Title 29 Chapter
18, Subchapter 111 USC Sec. 1302) gives three duties to the Pension
Benefit Guaranty Corporation. The first is ``(1) to encourage the
continuation and maintenance of voluntary private pension plans for the
benefit of their participants.
12. It would be wrong to take away the lesson from the United
Airlines bankruptcy and pension default that the idea of pension
insurance is deeply flawed or that defined benefit pension plans are
extinct and of no further use to employers. Companies sponsor defined
benefit plans for vital economic reasons--they help retain valuable
employees, they provide long service workers with a certain pension
source that combined with Social Security and some home equity and
health insurance can carry a middle class worker into a middle class
retirement.
13. www.nd.edu/tghilard choose recent papers and click on ``The
Distribution of Retirement Leisure''
14. Shareholders and managers faced with competitors who can shift
costs to the PBGC are encouraged to mimic.
15. Higher premiums, faster and higher funding requirements, and
limited credit balance use.
______
Chairman Boehner. Well, I am glad to see everybody is on
the same page in full agreement.
I just have a question. It is kind of interesting that the
business community thinks we have gone too far, and the
professor thinks we haven't gone far enough. The administration
thinks that we have weakened their provisions, yet my phones
haven't stop ringing from businesses who think that it is just
too hard to do.
Let me explain just explain to everyone that we have a very
difficult job to do. We know that the defined benefit pension
system is in a crisis. We know that we have to do something
about it. And the administration's approach was really focused
in on saving the PBGC. But I think there is a lot more we need
to do than just saving the PBGC. That clearly is one of our
goals. But trying to keep employers in the defined benefit
system is critically important to those workers who are
entitled to those benefits. Requiring companies to actually
meet the commitments they are making to those employers are--in
fact, are important goals as well. So the vision we have with
this proposal is much broader than the administration's and I
think touches all of the goals that we need if we are truly
going to reform the defined benefit system.
Now the modified yield curve understandably is of some
concern because it requires plans to fund liabilities as they
come due, an inconvenient requirement if you don't want to pay
for what you promised. Now I don't think anyone can argue
against what we have here with a straight face. In fact, some
of the testimony we have seen says that the companies can't
tell when their liabilities are coming due. So if accuracy of
the modified yield curve is a concern, can somebody explain to
me why one rate--one rate as we used to have under the law--is
more accurate than a modified yield curve?
Ms. Franzoi, I will let you tackle that.
Ms. Franzoi. Okay. I think with the single rate, that it is
based on the corporate bond rate, it is realistic to what is
happening out there, what returns are earning. And when you
look at this modified yield curve, which is extremely complex,
it is a snapshot picture. What I see today in my plan, is not
going to be what it looks like 3 months from now. It varies
dramatically, depending on your company, depending on your
turnover, depending on the age of your employees.
Chairman Boehner. Well, the demographics of your plan
participants could not change dramatically within 3 months, I
wouldn't think.
Ms. Franzoi. It could within 6 months if you are in a
company that has high turnover, if you are a company that is in
a lot of acquisitions and divestitures, which really is
happening a lot in our businesses out there.
So when I look at plans that I have worked with over the
years, I have seen dramatic changes over like a 3- or 4-year
period of time and sometimes in a very short period of time.
So this would dramatically impact many employers to go to
this----
Chairman Boehner. But how would a single rate, let's use
what has been in law--the 30-year Treasury bond, how would that
rate--how could it be more accurate to use a rate like that
than what we have outlined in the bill where you have got three
different rates based on the maturity or the demographics of
your employees whether they are going to retire in 0 to 5
years, 5 to 20 years or over 20 years? And by blending the
interest rates applicable to those three areas you get a much
more accurate picture of what your liabilities are.
Now, Mr. Pushaw, you are the expert here, much more so than
I. So I will let you respond.
Mr. Pushaw. Thank you, Mr. Chairman.
The choice of interest rate to use to value those
liabilities is fairly irrelevant when you try and match up with
the demographics. What I mean by that, your people are going to
do what your people are going to do. Your demographics--your
people are going to retire when they retire; they are going to
die when they die. The choice of the interest rate does not
impact that.
So it comes down to, when are those cash flows going to
come due? And surprisingly perhaps, that corporate bond rate is
probably right, is probably the perfect rate for 5 percent, 7
percent of the plans out there coincidentally.
But there are other extremes of when those cash flow needs
come due, for example, in the legacy industries where there are
lots of retirees, and there are lots of deferred vested
employees and there are lots of older workers that have huge
benefit liabilities coming due. That is what will be captured
by a modified yield curve approach.
It cannot be captured by the use of a single rate. A single
rate cannot fit all. The yield curve with the flexibility built
into it with this approach is intended to be modified to better
suit the wide range of plans we have in America today, sir.
Chairman Boehner. Ms. Franzoi, you made reference to and
raised concerns about the PBGC premium increase, and I wanted
to ask you whether you prefer what we have in our bill, which
phases this in over 3 years for employers who are funded at 80
percent or above in their plans and only gives 3 years to those
who are below 80 percent--they have to get their premiums up to
$30. Or would you prefer the administration's approach, and
that is to have it all go into effect next year?
Ms. Franzoi. Well, if you are asking me if I prefer the
phased-in versus the immediate, I would support the phased-in
over the immediate.
Chairman Boehner. That is what I thought.
Now, you also raised concern about the fact that we index
these premiums to a wage indicator, and I think I have to
respond that PBGC premiums have not increased since 1991. Why?
Because Congress did not act. I think, looking back clearly, it
was irresponsible for the Congress not to have put an index in
place so that those premiums would, in fact, increase
regularly. And given the condition of the PBGC, I don't think
we have any choice but not only to increase these premiums, but
in fact to index them.
But having said that, I want to make it clear to everyone
that we do not believe--and it is clear that the premium
increase alone will not solve the problems at the PBGC--that a
lot of the policy issues that we have in this bill will, in
fact, require employers to better fund their plans, thereby
reducing the risk--the long-term risk to the PBGC.
I have overused my time. Let me recognize my colleague from
California, Mr. Miller.
Mr. Miller. Thank you, Mr. Chairman.
Dr. Ghilarducci, you supported the idea that the 4010
information should be made available. I would just like to
recount a couple of efforts in the past, what we have suffered
from this.
In 2002, the Bethlehem Steel Corporation reported that its
plan was 85 percent funded on a current liability basis. But
when it was terminated, of course, it was a $3 billion loss to
the PBGC, or to the fund.
LTV reported that its fund on a current basis was 80
percent funded, and when termination came along it, in fact,
was less than 52 percent. And USAirways reported that it was 94
percent funded on a current liability basis, and when
termination came, it turned out it was only 35 percent funded.
So the government had this information, but employees,
pensioners, investors did not have this information. And there
is a world of difference between--as it turned out there was a
world of difference between the claim of current liabilities
being 94 percent funded and at termination of, 35 percent
funded. So I appreciate and I hope that this committee will
continue to look at the question of whether or not the public,
the employees, investors and others are entitled to this
information.
I want to go to another point that you raised in your e-
testimony, when I was hearing what you were saying on that
online discussion. And that is whether or not PBGC to some
extent, even though its mandate is to protect defined benefit
plans, appears to be putting in a one-size-fits-all. We now see
Delta and Northwest and a couple of other airlines saying, We
want to modify; we would like to have a chance to stretch out
and hold on to these assets for our employees, our retirees.
Can you elaborate on other proposals that have been made
here? I know that you mentioned in your testimony that
Secretary Dole created such a fund for, what was it, the mine
workers, right?
Ms. Ghilarducci. Yes, the PBGC does have a lot of leeway to
negotiate with companies, work with them early. If the public
knew about the termination liability and the probability of
termination, that would aid the PBGC in working out a deal to
maintain benefits. That would be--that would match what the
PBGC is supposed to do under the law, which is to try to
maintain the defined benefit system.
We have had defined benefit plans since 1865 in the
railroad companies. Those legacy railroads developed defined
benefit plans, and in 1910 those workers were older and they
were retiring and those DB plans, just like now, were very
expensive. At the same time, new low-cost start-ups--these were
railroads, not airlines, but it should sound familiar because
it is exactly the same kinds of situation--were taking
advantage of the establishment of railroad travel and commerce
in the United States.
They were using their lines, but did not have unions or any
pensioners. They got the benefits of all of those legacy
workers and railroads, but they paid none of the costs. The
Congress and the employers and workers developed the railroad
retirement plan funded by all people taking advantage and using
the railroad system. They pay a tax on railroad.
Move forward to Elizabeth Dole working out a coal tax to
pay for miners' retiree health. These are the kinds of things
that PBGC could have done. It could have segregated out the
airline industry liabilities and found another revenue stream
to pay for it. The PBGC did that with the TWA bailout, and Carl
Icahn had to fund that plan specially. So there are precedents
for having creative solutions, and this PBGC did not try.
Mr. Miller. The concern in terms of much of the anecdotal
evidence we receive and what has been reported in the public
press is that somehow the opportunity to complete those
negotiations was short-circuited in the United negotiations.
Ms. Ghilarducci. Yes, I think the PBGC panicked. There were
a lot of people saying, Terminate those plans, bypass the
negotiations, do not let them work it out. And a lot of people
were saying, Give us time. The PBGC could have given them time
and those benefits could have been preserved to minimize the
losses.
Mr. Miller. We have seen--since the advent of the PBGC, the
private sector has created an enormous array of financial
facilities to make care of really huge liabilities--in some
cases, national liabilities; in some cases, corporate
liabilities, event liabilities--and they have been able to work
out these kinds of facilities. And I just wonder to what extent
in this legislation we should make that available because,
again, different companies will have different scenarios.
Different events will cause short-term/long-term
restructuring events, but the PBGC ought to have that
available. They ought to be to go to the reinsurance industry
and say, How do we work this out? We want to make this decision
a different way or we have different interests. We see our
long-term interests being different, and yet I am worried
because of the liabilities of PBGC that currently exist, the
fear of taking on additional ones.
The taxpayer exposure gets you into sort of one-size-
inside-the-box thinking. We will take these, grab a billion and
a half from United and hope things work out, when you have an
array of financial instruments and risk-sharing instruments
that have been created that we couldn't even contemplate 10
years ago.
You are shaking your head.
Mr. Pushaw. The issue of PBGC is an interesting one. It
seems distasteful to have PBGC only act as a repository to
mistakes. It seems, among the comments that I have just heard,
that their role seems better suited to employees in an advocacy
role, not in an insurer role. And I certainly do support your
comments, Mr. Miller, about there is a large private insurance
market out there that probably has a lot more experience and a
lot more success in hedging those kinds of liabilities than the
PBGC has shown us in the past 10 years. So the privatization
perhaps of the insurance aspect would be interesting.
However, also some of the numbers that we hear from PBGC, I
am quite reluctant to put much faith in them. It seems odd that
they can put their own assignment of value on these
liabilities, that happens to be different from anybody else's--
I daresay likely different from the private insurance market.
Mr. Miller. I know that we are running over, but one of the
discrepancies is the termination liability and the current
liability.
Mr. Pushaw. One of the many problems you have with
actuaries is that we have so many different measures of the
same single obligation. But you know what, the PBGC liability
is by far the largest assignment of value that you will see
anywhere else.
One of the things I think this bill does is, it collapses
some of these different measures into a single measure that in
my opinion is more accurate, more of a market value liability.
And that, I think, is the one--maybe even the at-risk liability
with its little load in there is the one that PBGC ought to be
using for their own books.
And then this other aspect of including deficits on their
books before the events have even occurred seems to rhyme a
little bit too closely for my pleasure with some of the other
accounting issues that we are seeing in the headlines for the
past couple of years. Why book a loss before the event even
takes place?
So the measure of the liability and the accounting
methodology does not seem to jibe with the rest of the
accounting industry.
Mr. Miller. That and other issues will be answered in these
hearings.
Mr. Johnson [presiding]. Thank you, Mr. Miller.
Do you each agree that pension plans should be adequately
prefunded? I think you do. And two of you argued that shutdown
benefits ought not to be eliminated, but these benefits are not
prefunded, and I don't know how you can stand on both sides of
that issue.
Shutdown benefits are just like severance payments and
ought not to be paid from underfunded pension plans. Would you
like to comment? Go ahead.
Ms. Ghilarducci. Shutdown benefits are implicitly funded.
It is a possibility that could occur in the industry. They have
caused problems before and have caused plans to be very
underfunded; but they have been paid in many other places, and
it makes the plant closure which often happens on a surprise
basis much more humane.
So there have got to be other ways to not eliminate them
outright, and also to recognize that if a plan is 90 percent
funded, it does not mean it is in danger, 80 percent funded, it
does not mean it is in danger.
When ERISA was passed and defined benefits were
constructed, the choice was not between no defined benefit
plans and 100 percent fully funded defined benefit plans. It
was no defined benefit plans and partially defined benefit
plans. So we are going--in this system going to tolerate
underfunding.
But when the company is ongoing and there are no new DB
plans being formed, that is when it becomes a problem. It is
not just the funding issue that is the problem.
Mr. Johnson. Anyone else care to comment?
Okay. I am not sure I agree with what you say. Mr. Pushaw,
while the administration's proposal eliminates credit balances
completely, the Pension Protection Act retains the use of
credit balances, but they can't be used to offset real
contributions if a plan is less than 80 percent.
What are some of the problems with the current use of
credit balances and do you believe the bill adequately
addresses some of those problems?
Mr. Pushaw. Thank you, sir. Yes, I do believe the bill
addresses them properly. One of the issues with credit balances
is that they stale and they lose relevance. A credit balance
can be due to a contribution made in excess of a minimum
requirement, and that contribution could have been made 30
years ago, it could have been made 20 years ago. And that
credit balance will grow under current law with 8 percent, 9
percent, 7 percent growth year in, year out, decade after
decade perhaps, and really have nothing to do with the
operations of the plan.
And then, I think, what we are seeing a little bit today is
that when a corporation--although these credit balances do
afford great flexibilities, when you are on that slippery slope
of declining funded status, that is not the time to reach into
your pocket for Monopoly money. It is a time to reach in for
cash.
Mr. Johnson. Thank you.
Ms. Franzoi, you argued against freezing benefits when
plans hit 60 percent funding. If neither labor nor management
can't or won't control costs in plans, don't you think Congress
has to act before the plans go to the PBGC?
Ms. Franzoi. I think that freezing benefits is really
detrimental to the employees who have been working for those
benefits. And I really do not see what purpose freezing those
benefits serves.
Mr. Johnson. Well, it keeps the company from going bankrupt
on their pension plans, that is what. And you know and I know
that a lot of plans are in trouble, and we have got to resolve
that, and you can't make the government pay for all of those
plans. That is not our responsibility. PBGC was not formed to
do that. It was a protection; you know that.
Ms. Franzoi. I know that. But I think that the estimate of
what the underfunding out there--as Mr. Pushaw said earlier--is
not a reasonable estimate of the underfunding. And from the
plans I have seen and the plans I have worked with as a plan
sponsor, our goal is to keep them well funded; and they have
been well funded.
Mr. Johnson. Thank you. Appreciate your comments.
My time has about expired, so I recognize Mr. Kildee for
whatever comments you have.
Mr. Kildee. Thank you, Mr. Chairman.
You mentioned, Ms. Franzoi, 29 years you have been involved
in this, and about the same time I have been involved. I came
to Congress 29 years ago, so we share at least the length of
time and experience. I am sure you have greater depth. As a
matter of fact, when in the early days of ERISA, I have to say
that there were only about three people in Washington who
understood it at that time. That was John Erlenborn a member of
this committee, a Republican member; Phyllis Borsi, who used to
work for the committee; and my neighbor, Don Myers, who I would
walk across the street and pick up some ideas from him. That
number has growth, obviously, but I remember those days.
Let me make this statement and ask this question: There is
a fear out there in my district and around the country that
since United Airlines dumped its $6.6 billion into the PBGC,
there is a fear, really growing fear that this may broaden out.
I have attended in the last 2 weeks labor meetings in
Saginaw, Bay City, and Flint, Michigan, and while they are
still worried about possible changes in Social Security, they
are becoming deeply concerned now about the safety of their
pension plans. They really face now--many of them face what
they feel is a double whammy--Social Security uncertainty and
now the pension plans.
Let me ask you this: What are the more timid parts of this
bill, 2830, or the more bold parts?
Or maybe put it in another way: What are the greater
deficiencies and the greater strengths? We will start with you,
Ms. Ghilarducci.
Ms. Ghilarducci. The biggest weakness in this bill is that
it does not recognize that the way to strengthen the defined
benefit system is to get new plans in with younger workers. It
does not address everything that is needed to make DB plans
more attractive. Inherently, they are. Employers will need them
as the workforce ages, but there is nothing in the bill that
expands the universe of DB plans.
Some of the best aspects of the bill are the disclosure
requirements. It is ridiculous that it takes so long to get
information from the form 5500, and the 4010s do have important
information in them.
Mr. Kildee. Mr. Pushaw?
Mr. Pushaw. Thank you, sir.
I think one of the key improvements here with this bill is
the change of focus in the rules--in the funding rules
themselves. ERISA instituted a funding methodology that looked
30 years down the road, looked very long term. And we focused
our eyes when we were developing these minimum funding
requirements on the peak of that summit so far away.
As long as we are following that path to the future, it did
not really matter under the rules what happened today.
And what this bill does is, it refocuses us from where
ERISA did, which back in 1974, that was the sign of the times
with the economics/capital markets/business environment back
then--much more stable than it is at least today.
This bill takes our focus from the long-term, short-term
bedeviled, and refocuses us on the short term, what people have
earned today. Security now; not, you know, we will be okay in
10 or 20 years when our investments earn 8 or 9 or 10 or 11
percent.
So the shift in focus from long term to short term, and
funding at 100 percent rather than what the current DRC rules
have--where 80 percent is okay, 90 percent is better, but we do
not care about anything better than that necessarily--I think
it is an improvement; followed by the other aspect of what we
would refer to as the market valuation of the liabilities using
the modified yield curve approach as opposed to leaving it to
the discretion of the individual actuary on the plan, what they
think that liability might be valued at, which is typically
again a long term, what our portfolio of assets might earn over
the next 30 years.
Mr. Kildee. Ms. Franzoi?
Ms. Franzoi. Well, I think this bill is a first--a good
first attempt. I think in many respects it does not do enough
to encourage employers to continue to maintain their plans, and
while I agree with disclosure, I have an inherent problem with
the 4010. It is based on a $50 million deficit, which when that
went into place in the early to mid-90s when they did away with
the top 50 plans, that might have been a significant number;
but I can certainly look at my pension plan and how great our
assets have increased.
And you could have a plan, a company that has multiple
plans, a large controlled group, and each plan could have $5 or
$10 million of underfunding, and they are required to file that
4010. So that could really create concern, unnecessary concern,
in employees for a plan that is well-funded.
But if you look at the overall controlled group, it is not
that I have a problem with the disclosure, but it needs to be
meaningful and it cannot create fear. And I think with the $50
million index, well, really, it is detrimental to plan
participants.
Mr. Kildee. Thank you.
Mr. Johnson. Do the other two of you agree with that
statement she just made? You do?
Ms. Ghilarducci. I just think that information that might
be confusing has to be explained. And if it does not have an
explanation, there is something wrong. So I think that is
trivial.
I just worry about this bill causing the DB system to end.
Mr. Pushaw. One of the aspects in the administration's
proposal tied some funding requirements to the credit rating of
the sponsoring organization.
Now, I agree that should be done away with here. I think it
ought to be a focus, on the other hand, of PBGC; and maybe
their variable rate premiums should be tied to the credit
rating of the organization.
Likewise, the second 4010 calculations might be tied to the
credit rating of the organization, because that is when the
rubber starts hitting the road. And on top of that, I agree
with Ms. Franzoi that $50 million for an organization that has
pension plans in the multibillions, the volatility just because
of normal operation of a defined benefit plan can swing 50
million plus or minus--that can happen in months--that dollar
amount might be looked at to change, but also the way that PBGC
approaches their business likely should change.
Mr. Johnson. I think we do agree on the full disclosure.
That is one of the landmarks.
Mr. Kline, you are recognized for 5 minutes.
Mr. Kline. Thank you, Mr. Chairman. I want to thank the
witnesses for being here. It is nice to have some real experts
in the room.
We have been working on this pretty hard in the committee,
and I think we have brought forward a pretty good bill, which
will be changed somewhat as we go forward, but the complexity
of this, I find interesting. Because when I talk to my
colleagues, we share information about what we are working on,
and I mention that we are spending a lot of time on the pension
reform, there is a common thread. People look at me, their eyes
glaze and they say, This is really complex.
And it is complex. So we appreciate your being here today.
I have got a whole bunch of questions. I want to get at a
couple of them. We have seen right here today, as the chairman
indicated earlier, that we really are not always on the same
page in our understanding of what is going on here. For
example, Professor Ghilarducci was very, very clear in saying
that lump sum payments are bad and ought to be eliminated. But
I noticed in your testimony, Mr. Pushaw, that you had some
redeeming qualities for those lump sum payments.
I think that the professor's concerns were principally that
it takes cash away from the longer-term benefits. Could you,
Mr. Pushaw, again sort of reput into digest form the redeeming
qualities of those lump sum payments?
Mr. Pushaw. Yes, sir. In addition to the comments that are
in my written statement, financial planning, when you near
retirement, it really does take on a much more important role
and a sudden change to that financial picture by a freeze on
lump sums seems detrimental to those, whose fault is not
theirs, that that funding status slipped like that. There are
probably a half-dozen or so redeeming qualities of lump sums,
at least, which include things like estate planning, which
include things like, you know, My parents did not live past 65,
I am not going to live past 65; why in the world would I take a
life annuity when I am only going to get a couple of payments
out of it? Issues like that where lump sums make more sense.
One of the issues that has been well publicized and has
gotten a lot of attention in the past couple of years in this
town are the negative aspects with lump sums. I believe some of
that negativity is due, in fact, to the PBGC. It was their
action back in the 1980s, mid-80s, that actually they stepped
in and started telling pension plans, pension plan sponsors,
that, No, we do not want you to pay a lump sum that is $100,000
for this retiree; we want you to pay $130,000 to this retiree
because that is what we think the right value is.
So it is that disconnect--and that is the disconnect I
mentioned in my verbal statement, sir--that when you have an
outside influence all of the sudden dictating what the value of
the benefit should be, compared to what the plan sponsor, what
the plan document, what the employees even expect, there are
going to be some bad things that happen.
So when you have an annuity option and a lump sum option,
the annuity option might have an actuarial value of $100,000.
But the lump sum that you are being forced to pay out at an
elevated, subsidized level of $130,000, that is how I think the
picture is formed that lump sums are a drain on assets, because
the plan is only holding 100, yet they are forced to pay out
130. That does not make any sense.
So one of the aspects of the bill that I think is very
favorable is actually linking back the valuation of what the
plan expects to pay in that lump sum based on mortality tables
and modified yield curve and using a very similar, if not the
same, mortality table and modified yield curve approach to
determine lump sums. That way, if the plan is only holding
$100,000, the lump sum and the annuity will all be the same
value. It will be $100,000.
So you cannot forget that, yes, we might pay out a lot of
money in lump sums, but also you are discharging your liability
as well on an equal basis. If a plan happens to be $100
underfunded today and tomorrow I take a lump sum under these
rules, the next day it will be $100,000; it is not going to
exacerbate the situation.
Mr. Kline. Thank you. I see I am out of time, but the
professor deserves the remaining 30 seconds.
Ms. Ghilarducci. Let me be clear. Lump sums, in my view,
don't have any place in a defined benefit system. People
accumulate lump summability in 401(k)s. The defined benefit
plan is the only place where people, with Social Security, can
get a modest income for the rest of their lives.
This bill would actually reduce the lump sump because it
raises the interest rate, and only people with a lot of income
who are very sophisticated can get that interest rate. The rest
us take that lower amount, put it in a money market and we are
in a worse way than we would be if we took an annuity.
Mr. Kline. Thank you, Mr. Chairman.
Mr. Johnson. Thank you, Mr. Kline.
The gentleman from New Jersey, Mr. Andrews.
Mr. Andrews. Thank you, Mr. Chairman. Good morning. I would
like to thank the witnesses for their outstanding testimony.
For some of you, it is a return engagement. We are glad that
you are here.
I have a strong bias on this matter and that is toward
defined benefit plans. I know they are good for the
participants. I think they are very good for employers, because
they provide a strong incentive for employees to stay with an
employer; and I know that they are good for the economy,
because they provide a very important source of income for
retirees above and beyond Social Security.
Unfortunately, my bias flies in the face of the statistical
trends. The number of plans is shrinking. The number of new
plans being created is virtually nonexistent. And I look at
this bill through the prism of what can we do to reverse that
trend.
My instinct is that there are two things that we need to
provide at the very least. The first is a greater degree of
certainty for employers' decision making about what the ground
rules will be for decisions that they must make in continuing
or starting a defined benefit plan.
And the second is the degree of flexibility that we give
the employer to deal with changing market conditions and
changing competitive demands on the employer.
I wanted to ask Ms. Franzoi the question about the modified
yield curve. I think you and I agree that despite yeoman
efforts by the chairman to improve upon the administration's
proposal, the modified yield curve proposal still raises some
concerns about its complexity and ambiguity.
What should we do instead, in your opinion, to do the
interest rate fix? What should we do instead of the modified
yield curve, assuming that we wanted to do something beside the
modified yield curve?
Ms. Franzoi. Thank you.
I think the temporary fix we have right now, tying it to
the corporate bond rate, is something that seems to be working;
and I would support that--we would support that over this
modified yield curve.
The modified yield curve, it really is very, very complex.
I am not sure how you even start explaining that, how you
calculate it. And as one other member of the committee said,
people's eyes glaze over when you start talking about
retirement plans. I think this is an area of so much
complexity, we need to simplify plans.
Mr. Andrews. My concern is not the eyes-glazing-over
problem; it is the eyes-slamming-shut problem. If there is too
much complexity, a decision-maker might say, Let's not do this
at all, because we do not know what obligations we may have.
Professor Ghilarducci--this goes to flexibility--I was
interested in your summary about how to encourage and protect
what you call ``real pensions,'' and the first point of your
summary is, we need meaningful rules for structuring cash
balance plans.
I am one of those who believes that cash balance plans can
sometimes be unfair. But they are not inherently unfair, and I
believe that the law should specifically and expressly
authorize cash balance plans. If we were to do so, give me your
opinion on the meaningful and encouraging rules that you think
we ought to adopt that would protect pensioners, but make these
plans viable.
Ms. Ghilarducci. Good cash balance plans do not have a
wear-away. They protect the benefits of older workers. They are
fairly well-known. There is a list of them. The GAO report has
good ones.
I want to emphasize that when I was at the PBGC, late
1990s, early 2000, we said around the table, the only hope for
the defined benefit system are cash balance plans. The PBGC
could have put out a model cash balance plan, could have
promoted a cash balance plan among vendors; and this PBGC did
not move on that.
Mr. Andrews. The final point I would make: I would
encourage members of the committee and the panel to think about
ways that the cost of the PBGC revenue problem be spread more
equitably to those who created it.
My sense is that 80 percent of the PBGC's problem is
attributable to permanent, deleterious conditions in two, maybe
three industries--airlines, steel, maybe automotive
manufacturing--and I don't think that those problems are the
fault of the plans in those sectors. I don't think they are the
result of cyclical changes in those sectors. I think they are
the result of 9/11 in the case of the airline industry to a
great extent, and I think they are the result of trade dynamics
with steel.
If that is the case, then I would hope we could work
together with the Ways and Means Committee and others to find a
way that those that are written, well-managed, well-funded
plans do not have to come to the rescue of those who are
unlucky enough to be in an industry that I just described.
I see my time is up, and I thank the witnesses.
Chairman Boehner [presiding]. The Chair recognizes the
gentleman from Texas, Mr. Marchant.
Mr. Marchant. Thank you, Mr. Chairman.
As far as your testimony about you do not think that it is
fair, the premium structure that has been proposed in the bill
is not fair, how would you make it fair?
Ms. Ghilarducci. There is an excellent paper done by
economists at Watson Wyatt. They pointed out that raising the
premiums so quickly--even a 3-year phase-in is still quick from
19 to 30--really penalizes healthy companies who probably will
never have to make themselves available to that insurance. It
increases their contribution to the system 340 percent of
expected losses, whereas the troubled firms only have to pay
like 100 percent, a little bit less than 100 percent.
So it is just an odd structure, and it is an odd--huge
increase. It looks as if it is punitive, punitive to these
companies because Congress did not raise their index long ago.
Mr. Marchant. And you also testified that you thought that
we should maintain the defined benefit plans for companies. And
if you were a CEO now, going into a brand-new company, could
you imagine watching these hearings and reading what you are in
the paper and going to your board and saying I think the thing
we need to do is do a defined benefit plan?
Ms. Ghilarducci. I would be really worried, and if this
bill passes, I wouldn't adopt a defined benefit plan.
I would hope that you do not go there. That you actually in
these hearings help CEOs be certain that the defined benefit
plan won't be costly or uncertain, because they know there are
benefits to it.
Most CEOs want older workers to stay on board. We are
coming into an era where we are going to have labor shortages.
You have to do more here to encourage cash balance plans and to
not penalize plans for having a DB plan. We have to encourage
them to have credit balances. Maybe they shouldn't be stale.
But we have to tell executives if they have a DB plan, they
can fund in good times and draw on it when their plans are
underfunded. This bill does not allow them to draw on those
credit balances as much as it does now when times are bad; and
that belies the purpose of those things.
Mr. Marchant. Mr. Chairman, I am going to give the balance
of my time to Mr. Price, when it is his time to come to speak,
if it is all right with the Chair.
Chairman Boehner. I am not sure how we do that.
Mr. Scott. Unanimous consent that his time be given to Mr.
Price.
Chairman Boehner. All right. The gentleman asks unanimous
consent for his additional time to be given to Mr. Price when
it is his turn. Without objection, it will be made in order.
Mr. Price. I thank the gentleman.
Chairman Boehner. The Chair recognizes the gentleman from
Virginia, Mr. Scott.
Mr. Scott. Thank you, Mr. Chairman.
Mr. Chairman, I want to get to, I guess, more basic
questions about how these things are funded to begin with,
because if we are allowing these pension funds to get into
stocks, into equities, there are naturally some ups and downs.
Equities go through cycles like 1929; 1987 was the day they
lost 25 percent of their market share. From 1993 to 2000, the
Dow doubled twice; and 2001 to 2005, it has been pretty much
where it started off.
If you had gone into some kind of yield curve or some other
prediction from 1993 to 2000, you could be almost 100 percent
too high. And 2001 and 2005, at least a third, 40 percent or
more, underfunded. That is just the nature of equities.
The risk--the employee in these defined benefit plans is
not supposed to be taking any risk in the market. That is the
whole point of a defined benefit. And we do not want them to
get a back-door defined contribution situation where they do
take some risk by allowing the plans to get woefully
underfunded.
I guess my question is, since we are talking about
annuities, what solvency requirements are imposed on insurance
companies that have promised to pay annuities and how is that
different from what we are requiring for the pension plans?
Mr. Pushaw. I am not an expert by far, sir, on the
insurance laws that are governed by State regulation, State by
State. However, the familiarity I do have with that is that the
insurance industry offers a number of different investment
vehicles that fall into the annuity category, and they range
from a guaranteed annuity all the way to a variable annuity.
A variable annuity----
Mr. Scott. It is like a defined contribution plan where the
employee or the recipient takes a risk in the market, and a
guaranteed annuity is a defined benefit plan where you are
looking for a defined benefit. If the market does well, the
insurance company does well. And if the market goes down, that
is the insurance company's problem.
Mr. Pushaw. And your comment is about how those assets are
invested at the insurance company. The variable annuities,
there are segregated accounts, separate accounts at the
insurance company if the individual chooses and does play the
market and does that to gain the upside in the equity market,
and there is some downside protection guaranteed by the
insurance company.
The guaranteed annuity, your defined benefit example, sir,
is one where the assets are invested--required to be invested
in the general fund of the insurance company, and that means
bond investments strictly.
Mr. Scott. Well, why should the pension funds be any
different in terms of what is required for solvency than what
is required of insurance companies?
Mr. Pushaw. I believe it is a matter of risk preference by
the sponsoring organization. They believe if the liabilities,
for example, are very long-term liabilities, then there is an
opportunity if they can withstand--with their balance sheet and
their revenue stream and their business, if they can withstand
the year-to-year volatility, they often will take those chances
and invest heavily, as we have seen, in the equity marketplace.
Mr. Scott. Yes, but the problem is they are taking chances,
but they are also bringing the employee, because if they go
bankrupt, the employee does not get the promised benefit.
Whereas if you had required better funding, the employee
wouldn't be at risk; they would expect a guaranteed benefit.
And if you let them kind of go the ups and downs--let me
ask another question: How often should you reevaluate the value
of the principal to tell whether or not there is enough there?
Mr. Pushaw. Sir, in part, and I will turn it over to the
professor--in part, that is what this bill does accomplish,
because right now under the ERISA rules the liability is
determined reflecting that additional risk and the expectation
of long-term, increased returns because of their allocation to
equities.
So I might be--I might have a liability, a long-term
liability of $100. But if I restate that, likely I would be
doing it with the modified yield curve, then that liability
would be higher than it would--actually, my belief is it would
encourage employers to reduce their risk because the liability
is being valued as an insurance under the solvency type of
basis.
Mr. Scott. And you can actually buy an insured vehicle--
product at that rate; you can actually buy an insured product
that an insurance company would guarantee, in addition, to the
company, the payment.
Mr. Pushaw. Notwithstanding some State taxes and profit
margins and risk margins that increase the cost to the plan
sponsor, generally speaking. Actually, back in the 1960s and
1970s, that is, where the pension industry was, is that the
plan was an annuity insurance contract; and each year, every
benefit increase, then the insurance company would reach in and
buy another little piece of a guaranteed annuity.
Chairman Boehner. Professor?
Ms. Ghilarducci. If you wanted a liability fully funded at
all times, you would have very few pensions. If you invested
your lump sum or bought your annuity at a bond rate, as you are
suggesting, it would make it safe, but it would make it a very
small benefit.
We were right, as pension funds, to go away from that and
look more long term and take more risks, because the company
would go on--not forever, but the failures would be
idiosyncratic.
I have to emphasize to everybody who might hear these
hearings and contemplate the security of their funds, the vast
majority of pension funds are well funded, that ERISA works for
a vast majority of them. We are here today because two
industries, steel and airline, have catastrophic risk. And that
is what I would like this bill to actually address, how PBGC
could be reinsured.
Chairman Boehner. The Chair recognizes the gentleman from
Georgia, Mr. Price, for 7 minutes.
Mr. Price. Thank you, Mr. Chairman. I appreciate that. A
little creative yielding, I guess.
I want to thank the chairman for this hearing and for your
bill. I commend you for your action and I have heard a couple
of folks say that we need to slow down. I am here to tell you
that we need to move with all due speed.
We are in, I think, a crisis situation as it relates to a
couple of industries, and I would like to focus a little bit on
the legacy airline carriers in the airline industry, because I
think there is where the problem is most clear.
I have introduced, as the chairman mentioned, a bill H.R.
2106, which is a mirror bill of Senator Isakson in the Senate,
that focuses on the airline carriers and allows them to adopt
new funding rules for their DB system and allows them to spread
out over 25 years their unfunded accrued liability and to pay
it down using stable, long-term assumptions and gives them, I
think, much greater flexibility.
It does not exempt them from their obligations, which would
occur should they go to the PBGC, and obviously that puts great
hardship potentially on the taxpayer. It does not provide for
any form of subsidy from the Federal Government, and taxpayers,
as I mentioned, are limited by limiting the liability of the
PBGC through the bill itself.
The airlines have lost $33 billion, $33 billion since 2000,
and the PBGC, as has been mentioned by many folks, has assumed
9.6 billion in unfunded pension liabilities from the two legacy
carriers that have gone under in the past 2 years. The pension
funds of other carriers are underfunded to the tune of $31
billion. We are in a situation where we need to act with all
new dispatch.
Last week, before the Senate Committee on Finance, the
president of Northwest Airlines, Douglas Steenland, made the
following comment: Defined benefit plans are one of the last
vestiges of the airline regulation era. Northwest has concluded
that defined benefit plans simply do not work for an industry
that is as competitive and vulnerable to forces ranging from
terrorism to international oil prices, that are largely beyond
its control, as is the airline industry.
And I would ask you, Mr. Pushaw, if you would comment on
the state of the airline industry and the viability of DB plans
within that industry.
Mr. Pushaw. Thank you, sir.
A comment was made earlier about the number of plan
terminations that we have seen over the years. Since 1986, plan
terminations have numbered a little over 100,000. Those are
startling numbers. They grab your attention. They say, Oh,
there is a dinosaur on the way out.
But when you look behind the numbers and you look at what
is going on, my belief is that the vast majority of those plan
terminations, in any case, were plan terminations of plans in
industries and companies that never had any business starting a
defined benefit plan.
Mr. Price. How about the airline industry?
Mr. Pushaw. The airline industry is due to its cyclical
nature, if nothing else, and ever-increasing competitiveness as
it has emerged from regulation. If I was the CEO of a start-up
airline today, I probably would not on day one establish a
defined benefit plan, even though I think cash balance plans,
in particular, are very worthwhile.
On the other hand, as in any start-up organization, if you
follow a company on this graph, how it is a start-up and high
growth and then maturity, any start-up company would not have
one. It might well be that airlines now are in a stage of
decline, but I think it is only a limited decline to what we
have always thought about with airlines in the legacy sense.
The airline industry is changing and it is due for more change.
The Catch-22 you all find yourself in is, how quickly do we
act to support the current level of obligation those airline
corporations have to their retirees and current employees on
promises they have been making for a long time and how far do
we push them for solutions to the solvency issue, getting PBGC
to be an advocate there?
And how far can you push them or how far can you give them
a little bit more rope to react to it themselves?
I am afraid I don't know the answer to that, sir.
Mr. Price. Do you believe that industry-specific bills or
measures to address the airline industry are appropriate at
this time in view of the legacy airline carriers' difficulties?
Mr. Pushaw. It seems to make a lot of sense that if there
are one or two bad apples--and I do not mean to say ``bad'' in
terms of malfeasance or anything like that--but if there are
one or two bad apples in the barrel, and the best of the
apples, as both of my panelists have mentioned, are really
doing very, very well, then perhaps it does make sense to deal
very surgically and in a very limited way with those industries
that you have mentioned.
Mr. Price. Thank you.
Thank you, Mr. Chairman.
Chairman Boehner. The Chair recognizes the gentlewoman from
New York, Mrs. McCarthy.
Mrs. McCarthy. Thank you, Mr. Chairman.
A number of the questions that I was going to ask have
actually been answered. But I think where I want to go is with
a lot of the businesses we are finding that they like
predictability; and you need predictability to be able to
figure out how many employees you have, what time basically are
they going to be retiring and are they going to have the funds
at this particular time. And what I also understand is that one
of the questions that was answered is that a majority of our
companies actually have enough money in their funds. It has
basically been the Tax Code that has hurt a number of the
companies; when they were earning a lot of money, they were not
allowed to put a lot of money back in. When times are bad,
obviously they do not have the money to put it into it.
So I guess what I am looking for, with the plan that we are
looking at through this committee, is that the best plan to
have the predictability down the road for basically our
corporations?
Ms. Ghilarducci. I will be short. I know that everybody
wants to say something.
I think that the way that you are treating the current
shortfall and the PBGC by hiking premiums a huge amount
actually would make a company think, oh, when another industry
goes down and the PBGC wants money, they are going to come back
to me. They will stiff the healthy companies.
I want to say that the industry approach is the only thing
that makes sense. We should segregate out the airline
industry's liabilities and pay for it. Pay it down with a $1 or
$2 ticket tax, a temporary tax on JetBlue, Southwest, on all of
the airline industry like we did with the miners.
But I am answering your question. A move like that from
Congress would signal to corporations that we have a defined
benefit plan and an insurance plan that takes care of
idiosyncratic bankruptcies. We are not going to make you take
the losses of industry collapses. And that would be a very good
signal of predictability that you could send to employers.
Mrs. McCarthy. What do you think about, as far as what we
are planning on doing here, actually forcing some companies not
to make any decisions on--maybe not do anything on their
pension plans or going into the 401(k) plans versus really a
defined benefit?
Ms. Ghilarducci. I am sorry, could you repeat that? You
think this bill actually encourages 401(k) plans?
Mrs. McCarthy. I am asking you.
Ms. Ghilarducci. Yes, that is what my written testimony
appealed to by really asking the credit balances to be
foreshortened. To actually show that the premiums can go up a
huge amount, to have a modified yield curve that may not be
explicable and therefore is unpredictable, the only place an
employer could be encouraged to go is a 401(k), and those are
not real pension plans. They shift all the risk of accumulation
onto the employees.
So if that is what you want to do, do not call it pension
protection; it is eliminating these kinds of plans.
Mrs. McCarthy. I agree with you, especially with the 401.
We are just hearing everything up here about, let's go 401. It
is great for us to save into the 401(k) plans or Thrift Savings
or anything, but it is not definite.
Thank you. I yield back the balance of my time.
Chairman Boehner. The Chair recognizes the gentleman from
New York, Mr. Kuhl.
Mr. Kuhl. Thank you, Mr. Chairman. And thank you for
scheduling this event so that we could have the benefit of the
testimony. And thank you, members of the panel, for your
contributions today.
I am curious, I have enjoyed the questions and the answers
that you have been giving, and I was noticing in your opening
statements that two of you, I think out of the three of you,
indicated that if this bill were to pass, in fact it would be a
disincentive for employers to continue with defined benefit
plans. I am curious, because I haven't heard anybody ask the
question, what would you do--I understand the benefits of a
defined benefit plan and why employers--you have talked about
older workers and retaining them and that sort of thing. But I
am curious as to what you would do, if it is such a good plan
to encourage employers--recognizing in fact that there are
significant liabilities out there that certainly we as a body
have to recognize and want to protect the people who are
enrolling in these plan--what would you do, or what would you
suggest we include in this bill, to encourage employers to not
only continue defined benefit plans, but actually think about
using them as they are opening new businesses?
Ms. Ghilarducci. This bill should have cash balance
language in it. If it is a comprehensive bill and if you do not
want to give the impression that you are encouraging 401(k)
over DB, you have to have the cash balance provision in there.
I also think that in this bill you should segregate out the
liabilities from the airline industry and find another revenue
stream to pay for it. This bill should hike premiums, but on a
much less startling basis.
This bill should have encouragements for credit balances to
be accrued. They are not there; the credit balances are
discouraged. This bill should discourage lump sum payouts and
not encourage them like this bill does.
So the points you hit in this bill are the right ones to
look at, but they are working in the opposite direction.
Ms. Franzoi. I also think that this bill, as we said
earlier, is a good start in going forward on it. But it needs
to be something that gets rid of complexity and simplifies it
for employers and helps businesses to have predictability as
they are going forward with the funding.
Once again, you get into the yield curve which, as I said
earlier, I think is like a snapshot picture. You cannot compare
it to auto loans and home mortgages, which are fixed things.
This is almost like a fictional picture of what the plan looks
like, and if employers do not have predictability and they are
going to see this up and down movement with their funding, it
is going to distract them from wanting to continue a plan or to
put a plan in if they do not have one.
Mr. Kuhl. Thank you.
Mr. Pushaw, would you care to make a contribution?
Mr. Pushaw. I agree with the professor, for example, in at
least addressing, whether it is in this bill or a separate
stand-alone bill, the cash balance attributes. They really are,
when you talk about simplification, cash balance plans, albeit
in the past from time to time they have been introduced at
companies in the wrong way, they have been misused. But as any
tool, they can be used for good as well as bad, and they have
been misused. And we have seen the headlines of those cases
where they have been misused, but that does not mean the cash
balance plans are bad.
Getting the cash balance plans, giving them a solid
foundation, is probably, I would think, my first priority.
Dealing with those airlines and steel industries probably is
the second priority.
Mr. Kuhl. I yield back the balance of my time, Mr.
Chairman.
Chairman Boehner. The Chair recognizes the gentleman from
Massachusetts, Mr. Tierney.
Mr. Tierney. Thank you, Mr. Chairman.
I thank all the witnesses today for your testimony and your
answers to this.
Let me start with two questions I want to try to get to.
One is the PBGC, at least with respect to the airline, steel--
those industries that are a problem like that ought to have
some reinsurance mechanism, and several of you have mentioned
segregating out the airlines and dealing with that separately
from this problem.
Is this something we should do structurally as we do this
bill, to not have us make each one be drawn out when it
happens, but deal with it as it goes along?
Ms. Ghilarducci. I actually do not think it should be done
structurally. Collapses of industries do not happen all the
time. But to do it on an ad hoc basis like we would, it would
send a signal that this is the way that PBGC is going to handle
it.
Mr. Pushaw. We have mentioned before, the old lists that
PBGC used to collect and publish, the ``Iffy 50,'' the 50 most
poorly funded plans in the Nation that was replaced with the
section 4010 filings. My comments earlier, I think are
appropriate in that I would rather see PBGC structurally turned
into an advocate, so that these early warning system devices
like the ``Iffy 50'' or the 4010 are then acted upon early;
that they are given enough authority to go into these
sponsoring organizations and say, What are you going to do now?
We have heard in the industry quite a bit about PBGC saying
that, if you have been, or every plan that has terminated and
dumped liabilities on our doorstep have been in junk bond
status at least 10 years.
I think that is even inherent in some of the administration
proposal language. If that is such a well known, documented
fact, then getting PBGC to the doorstep of that organization to
do something about it in year one or year two with a
combination of the indicators of underfunding and junk status,
that is the time to act.
Chairman Boehner. We feel they don't have that authority
right now.
Mr. Tierney. We don't believe they have that authority
right now.
Mr. Pushaw. I do not believe that they have that authority
if they did not act on it sufficiently.
Ms. Ghilarducci. PBGC has an award winning early warning
system where they have all the data necessary and they act on
it by basically jawboning. Especially if a company has an
underfunded plan and looks like it is going to be taken over
they kind of jawbone and get it over early. I am surprised they
are not here asking for more authority to intervene earlier. I
don't know why they are not doing that.
Mr. Tierney. Thank you. On a separate issue that we have
talked a lot about, the cash balance plans, and I think Mr.
Pushaw said it best, they have it bad now because of the way
they were implemented in certain instances, and generally I see
people shy away almost when you start saying that. Could one or
more of you just explain for me in broad terms what a good cash
balance startup would look like that people might feel
comfortable with?
Mr. Pushaw. Sir, if I can digress a little bit from your
point of your question, it is the issues that I think we have
all seen with cash balance isn't necessarily the end product.
It is not necessarily that, you know, this particular cash
balance plan credits like a 401(k) does, maybe 6 percent of pay
into my account each year, and some of these ongoing details.
The issues seem to be typical of a change from a final pay,
final pay based to defined benefit plan, and I make that
distinction because it is in the last 10 years of your career
on any of that kind of plan that your benefit value skyrockets.
Any time we change those plans, whether we are changing benefit
structure, whether we are modifying some earlier retirement
provisions, or even going to cash balance, even without going
to cash balance, any time you change those that group of people
are the ones that get hurt.
So there is almost always some grandfathering, some
protections, some transition for those folks that are so far
down the defined benefit path in their career that switching to
a 401(k), a savings share plan, or, in essence, a cash balance
plan, will be hurt severely. So it is in those transitions when
things change that we need to be particularly careful to
address limiting how those things change, who would change, who
it affects, how you communicate that to the employees because,
in fact, some of these transitions from traditional defined
benefit plans to cash balance plans were not communicated to
the employees.
Mr. Tierney. Thank you, sir.
Ms. Ghilarducci. But that only refers to change in their
traditional plans to cash balance. I think you were asking
about an initial cash balance plan. They would be liked by
young workers and old workers. They would be preferable to a
401(k) because your employer would set aside money for you in
an account and guarantee a return. That is why they are insured
by the PBGC and they are defined. But you can't get at it to
buy a new house or anything else that you do. And one of the
problems is that they are cashed out when people leave the
firm, and that has got to be actually firmed up.
But if cash balance plans were sold by vendors and they
were, they had a better reputation, I think many employers
would implement them and maybe perhaps just have a 401(k) as a
supplement.
Mr. Tierney. And you think they would be as strong as the
current DB plans in terms of at the end of a person's career?
Ms. Ghilarducci. No, they wouldn't be as strong. They
wouldn't have the skyrocketing acceleration, and you might not
get the personal benefit from it as your employer. What you
want is your older workers to stay on the job. The DB system is
doing that very well, and we are going to need that as we go
into the future as the workforce ages. So already I have
conceded that cash balance plan is our hope, but maybe some
other companies will think that traditional defined benefit
plans where they were confronted by these older workers will
implement them. Having a clear flight path for cash balance
plan doesn't mean that traditional plans won't be attractive.
Chairman Boehner. The gentleman's time has expired.
Mr. Tierney. Thank you.
Chairman Boehner. Chair recognizes the gentlelady from
Washington, Ms. McMorris.
Ms. McMorris. Thank you, Mr. Chairman, and I, too, want to
thank each of you for being here today and sharing your
perspectives. It has been very helpful. I had a question for
Ms. Franzoi. For the past few years, we have all heard that the
current funding rules are simply not working. And if you read
the newspaper or watch the news, there is more than enough
examples to choose from. In your testimony, you state that
restrictions on benefit accruals for greatly underfunded plans
are overly intrusive and that the current credit balance system
should remain virtually intact. How can you essentially defend
status quo rules which have contributed significantly to the
current state of our pension system?
Ms. Franzoi. I don't think that you could say that having
the credit balances or allowing plans to increase their benefit
have so substantially contributed to where we are at today.
There are many other factors in there that have gone to this,
and I think as the professor has testified and what I have seen
in my experience, there are a lot of really healthy plans out
there. And they developed those credit balances with one idea,
and now to turn around and change it, really puts them at a
disadvantage. I think businesses look at these plans as an
attraction and a retention tool.
It is important to business to offer that to their
employees, and most of us have been, I think, responsible plan
sponsors. And our goal is to keep those plans well funded. So
this is sort of a quick reaction to something that is happening
in the airline industry. But I don't think that is indicative
of what all of us have done or how we financed our plans or how
we have set up our asset allocations to fund these plans and
make them viable.
Ms. McMorris. Thank you.
Chairman Boehner. Any other questions for witnesses? If
not, we want to thank our first panel for their contributions
to our efforts, and we want to invite the second panel to come
forward.
And just for everyone's information we do expect to have a
series of at least five votes occur around 1 o'clock today. So
we will go as far as we can and then make some decisions about
how we proceed. So again thank you. The committee will stand in
recess for 5 minutes.
[Recess].
Chairman Boehner. I want to welcome our second panel today
who are here to discuss the multi employer reforms in our bill.
The first witness will be Mr. Timothy Lynch. Mr. Lynch holds
the position as President and CEO of Motor Freight Carriers
Association. He joined MFCA in October of 1997. MFCA is a
National Trade Association representing the business interests
of unionized general freight motor carriers. It is also the
bargaining agent for those truck companies who are signatories
of the Teamsters national master freight agreement. Prior to
joining MFCA, Mr. Lynch was Vice President, Legislative Affairs
of the American Trucking Association, where he was responsible
for directing ATA's legislative program on Capitol Hill
operations. From February of 1982 until December of 1992, Mr.
Lynch was Vice President for Government Affairs at Roadway
Services, Incorporated.
We will then hear from Mr. Andy Scoggin, and Mr. Scoggin is
Vice President of Labor Relations for Albertsons, Inc. and has
been with Albertsons since 1993. Prior to that time, Mr.
Scoggin was an attorney for a San Francisco Bay Area law firm,
and he has served on the board of trustees on a number of Taft-
Hartley trust funds over the last decade. He currently serves
as a management trustee on the Western Conference Trust Pension
Fund, one of the largest private sector Taft-Hartley pension
trust funds in the United States.
Mr. Scoggin is a member of the International Foundation of
Employee Benefit Plans. He also serves on the Pension
Legislation Task Force of the Food and Marketing Institute and
is a member of the International Foundation of Employee Benefit
Plans.
And then lastly, we will hear from Judith Mazo. Ms. Mazo is
the Senior Vice President and Director of Research for the
Segal Company with responsibility for directing research and
providing guidance on public policy, legislative and regulatory
issues. And before joining the Segal Company, Ms. Mazo was
engaged in a private law practice here in Washington
specializing in ERISA and serving as a special counsel to the
PBGC and as a consultant to the Pension Task Force on the
Committee on Education and Labor of the U.S. House of
Representatives. She was the senior attorney for the PBGC and
executive assistant to its general counsel from 1975 to 1979.
So I want to thank the three of you for coming here today
and, Mr. Lynch, you can begin.
STATEMENT OF TIMOTHY LYNCH, PRESIDENT AND CEO, MOTOR FREIGHT
CARRIERS ASSOCIATION
Mr. Lynch. Mr. Chairman and members of the committee, good
morning, or good afternoon. I want to begin by first thanking
Chairman Boehner for holding this hearing on H.R. 2830. I also
want to thank all the members of the committee and their staff
and certainly the members and staff of the Employer Employee
Relation Subcommittee for all of their hard work in developing
a legislative proposal that is the subject of today's hearing.
While I cannot speak to all of the provisions of H.R. 2830,
I can say that with respect to title II, the Funding Rules For
Multiemployer Defined Benefit Plans, the sponsors of H.R. 2830
have done something at times unique in Washington. You have
addressed a problem before it becomes a crisis. You are doing
that by providing the tools for labor, management and plan
trustees to deal with a problem without resorting to additional
government regulation. Additionally, you are dealing with a
problem before it grows so large that the only recourse is to
government intervention through the PBGC. In our view, that is
no small accomplishment, and we pledge to work with you to
ensure enactment in law.
I am here today as a representative of the Trade
Association of Trucking Industry Employers who, by virtue of
their collective bargaining agreement, are major participants
in a number of multiemployer pension plans. In addition, I was
a participant in discussions that began last October with other
industry and labor representatives that ultimately resulted in
a coalition, the Multiemployer Pension Plan Coalition, that
developed a legislative proposal addressing many of the
problems facing multiemployer pension plans.
Because H.R. 2830 contains many of the recommendations of
the Coalition, I believe it represents or presents an excellent
opportunity for legislative action. The Coalition proposal is
the only proposal that has the full support of contributing
employers, organized labor, and those responsible for the
governance and administration of multiemployer plans; in other
words, all of the parties most directly affected by the MEPA
statute.
I would like to focus my comments today on two provisions
of H.R. 2830, funding rules for multiemployer plans and
endangered status and those in critical status. Both of these
provisions are similar to recommendations that the Coalition
proposed but they contain significant differences that I would
like to highlight.
The Coalition proposal envisioned an early warning system
for plans that were at risk but not necessarily heading for
severe financial difficulties. Plans in this category would be
required to develop a benefit security plan to improve the
funding ratio. That approach can probably be described as a
soft benchmark. H.R. 2830 establishes a hard benchmark with
very stringent and time definite standards as part of the
funding improvement plan. Plans at the higher end of the
endangered category, for example, those with a funding ratio of
between 75 and 79 percent, undoubtedly will be able to meet the
one-third improvement benchmark.
Unfortunately plans at the lower end; for example, those
with a funding ratio between 66 and 69 percent, will have a
virtually impossible task. The level of benefit modifications
coupled with additional employer contributions needed to meet
that benchmark over the 10-year time frame will be very
detrimental, in our view, to both contributing employers and
plan participants. We would request that the committee give
consideration to alternative approaches, maintaining the
benchmarks, but not ones that create an insurmountable and
unreasonable financial burden on contributing employers.
With respect to the funding rules for multiemployer plans
in critical status, this provision is similar to the approach
suggested by the Coalition's category for plans with severe
funding problems or what has been referred to as the red zone.
Under the Coalition proposal, the most difficult and
controversial remedies, additional employer contributions in
the form of a mandatory surcharge and benefit modifications,
are reserved for those plans that face the severest funding
problems. This is in part designed as a strong incentive to
plan trustees to do all they can to solve the plan's problem
before entering the red zone category.
I believe it is to the credit of those in the Coalition and
the interests that they represent that they recognize the risk
and concern attendant to both additional contributions and
benefit modifications. Any significant increases in employer
contributions run the very real risk of jeopardizing the very
large pool of small employers typically involved in
multiemployer plans.
Conversely, any significant modifications in the benefit
plan raise important issues of labor management relations,
employee trust, and fundamental fairness to retirees. I say
this somewhat gingerly, but I can assure the members of this
committee that you will have no more spirited debate over this
issue than we had in the Coalition.
But we understand that you cannot solve the problems facing
a severely underfunded plan without both components. I would
urge the committee to include both concepts as requirements for
plans in the critical status category.
Mr. Chairman, I want to close by once again praising the
efforts of this committee in addressing the problems facing
multiemployer plans. We will do everything we can to ensure
final passage of a balanced and fair approach, and we believe
that H.R. 2830 starts us well on our way toward that goal.
Thank you.
Chairman Boehner. Thank you, Mr. Lynch.
[The statement of Mr. Lynch follows:]
Prepared Statement of Timothy P. Lynch, President and CEO, Motor
Freight Carriers Association
Mr. Chairman and Members of the Committee on Education and the
Workforce, good morning. My name is Timothy Lynch and I am the
President and CEO of the Motor Freight Carriers Association (MFCA). I
want to begin by thanking Chairman John Boehner for holding this
hearing on H.R. 2830, the Pension Protection Act of 2005. I also want
to thank all of the members of the Committee, their staffs and
certainly the staff of the Employer-Employee Relations Subcommittee for
all of their hard work in developing the legislative proposal that is
the subject of today's hearing.
While I cannot speak to all of the provisions of H.R. 2830, I can
say that with respect to Title II--Funding Rules for Multiemployer
Defined Benefit Plans--the sponsors of H.R. 2830 have done something at
times unique in Washington. You have addressed a problem before it
becomes a crisis. You are doing that by providing the tools for labor,
management and plan trustees to deal with a problem without resorting
to additional government regulation. Additionally, you are dealing with
a problem before it grows so large that the only recourse is to
government intervention through the Pension Benefit Guarantee
Corporation. In our view, that is no small accomplishment and we pledge
to work with you to ensure enactment into law.
I am here today as a representative of an association of trucking
industry employers who by virtue of their collective bargaining
agreement are major participants in a number of multiemployer pension
plans. In addition, I was a participant in discussions that began last
October with other industry and labor representatives that ultimately
resulted in a coalition--the Multiemployer Pension Plan Coalition--that
developed a legislative proposal addressing many of the problems facing
multiemployer pension plans.
MFCA is a national trade association representing the interests of
unionized, general freight truck companies. MFCA member companies
employ approximately 60,000 Teamsters in three basic work functions:
local pick-up and delivery drivers, over-the-road drivers and
dockworkers. All MFCA member companies operate under the terms and
conditions of the Teamsters' National Master Freight Agreement, one of
three national Teamster contracts in the transportation industry.
MFCA member companies are key stakeholders in multiemployer pension
funds. They are concerned about the current framework for multiemployer
pension plans and strongly believe that if not properly addressed, the
problems will increase and possibly jeopardize the ability of
contributing employers to finance the pension plans. The end result
could put at risk the pension benefits of their employees and retirees.
Development of Coalition Proposal
Last October, we began participating in a small working group of
trucking company and union representatives to try to develop
recommendations that would be acceptable to multiemployer plans, unions
and contributing employers. The objective was to develop a legislative
proposal that would alleviate the short-term consequences of funding
deficits and promote long-term funding reform for multiemployer plans.
As a representative of contributing employers, I entered those
discussions with a clear mission to protect the economic interests of
my membership. My union counterparts entered with a similar mission to
protect the interests of their membership.
Early on in those discussions, we agreed on several fundamental
issues that ultimately formed the basis for our recommendations.
<bullet> Because of the diversity of multiemployer plans, a one-
size-fits-all approach would not be productive. Instead remedial
programs would be targeted to those plans facing the greatest financial
problems.
<bullet> Multiemployer plans function as a quasi-PBGC, with
contributing employers assuming plan liabilities and shielding the
federal agency from that responsibility until plan bankruptcy.
Unfortunately, plan trustees don't have all the tools available to the
PBGC to address funding problems.
<bullet> Furthermore, most of the tools available to address
funding problems become available too late in the process and are often
viewed as ``last-resort'' remedies by federal agencies.
<bullet> All parties to the plans deserve more timely and
meaningful disclosure of information about the status of the plans.
<bullet> The need to establish an early warning system for ``at
risk'' plans and a separate category for ``severely underfunded''
plans.
<bullet> The burden to fix the problem of severely underfunded
plans should not be borne disproportionately by any one party to the
plans. To do otherwise would, in fact, jeopardize the continued
viability of the plan and its defined benefits.
This process ultimately was expanded to include employer and union
representatives from other industries. The result is a coalition
proposal that has the support of a wide range of business and labor
organization interests.
Recommendations for Legislative Action
From the perspective of the contributing employers, the key
elements of the coalition proposal are as follows.
Funding Rules
Under the proposal, multiemployer plans will be required to have
strong funding discipline by accelerating the amortization periods,
implementing funding targets for severely underfunded plans and
involving the bargaining parties in establishing funding that will
improve plan performance over a fixed period of time. In addition, the
proposal limits the ability for plan benefit enhancements unless the
plan reaches certain funding levels.
Funding Volatility
By virtue of their collective bargaining agreements, contributing
employers must make consistent payments regardless what gains are
achieved in the financial markets. (This is in contrast to single
employer plans that may avoid contribution payments in lieu of above-
average market returns.) However, the volatility of these plans occurs
in the form of funding deficiencies. The coalition proposal addresses
this situation by allowing the plans to use existing extension and
deferral methods to permit time for the bargaining process to address
the underfunding over a rational period of time.
Earlier Warning System
The coalition proposal establishes a ``yellow zone'' or early
warning system. The goal of the yellow zone concept is to make sure
plans are cautious in the ability to have affordable benefit levels.
Additionally, plans in the yellow zone must improve their funded status
in a responsible manner, one that does not put extreme pressure on the
benefits provided or eliminate the ability for employers to operate in
a highly competitive marketplace. The coalition proposal strikes a
reasonable balance through creation of a bright line standard for an
improving funded status but not one that creates an insurmountable and
unreasonable financial burden on contributing employers. While it is
important that yellow zone plans develop a program for funding
improvement, the burden to do so should be commensurate with the
ability to recover over a rational period of time.
Plans With Severe Funding Problems
Under the coalition proposal, plans facing severe funding problems
are in a ``red zone'' or essentially reorganization status. When a plan
is in reorganization status, extraordinary measures will be necessary
to address the funding difficulties. It is here that the concept of
shared responsibility for balancing plan assets and liabilities fully
comes into play. Reorganization contemplates a combination of
contribution increases--above those required under the collective
bargaining agreement--and benefit reductions--though benefits at normal
retirement age are fully protected--to achieve balance.
Transparency and Disclosure
The Pension Funding Stability Act of 2004 greatly improved the
transparency of multiemployer plans. The coalition proposal expands
those disclosures and places additional disclosure requirements for
plans that are severely underfunded in the red zone.
Withdrawal Liability
The coalition proposal attempts to strengthen and clarify
withdrawal liability rules to protect the remaining contributing
employers from assuming a disproportionate and unfair burden from non-
sponsored participants.
Pension Protection Act of 2005--Title II Multiemployer Plans
How then do we view Title II of H.R. 2830? We believe that H.R.
2830 addresses, in part, all of the issues that we suggested were in
need of reform. Several provisions of the legislation represent a
significant--and innovative--approach to solving the funding problems
facing multiemployer pension plans. We believe that H.R. 2830 meets the
overall objective of alleviating the short-term consequences of funding
deficits while promoting long-term funding reform for multiemployer
pension plans.
Early Warning System
H.R. 2830 contains the suggested early warning system for plans
viewed as ``at risk'' through the establishment of a category called,
``endangered plans.'' While we are in agreement with this approach
toward financially ailing plans, we have one very important--and
critical--issue that needs to be addressed in order to gain our full
support.
The coalition proposal contained what can be described as ``soft''
benchmarks for plans in the endangered category while H.R. 2830
establishes very stringent and time-definite standards. Our rationale
for a softer schedule takes into consideration that plans in this
category will vary in the ability to improve their funding status over
a defined time line. While plans at the higher end of the category
(e.g., 75-79%) undoubtedly will be able to meet the 33 1/3% improvement
benchmark, plans at the lower end (e.g., 66-70%) will have a virtually
impossible task. The level of benefit modifications coupled with
additional employer contributions needed to meet this benchmark will be
detrimental to both contributing employers and plan participants.
We would request that the Committee give consideration to
alternative approaches to the treatment of plans in the endangered
category and we would be willing to provide suggestions to accomplish
that goal. While we certainly agree that the patient needs help, we
cannot support an approach that potentially harms--if not kills--the
patient.
Plans With Severe Funding Problems
H.R. 2830 establishes a second category of plans--``critical''--
that is designed to address plans with the severest funding problems.
Under the coalition proposal, the most difficult and controversial
remedies--additional employer contributions and benefit modifications--
are reserved for those plans that face the most difficulties. The
members of the coalition recognize--and don't take lightly--the impact
of additional employer contributions and benefit modifications. Any
significant increases in employer contributions run the very real risk
of jeopardizing the large pool of small employers typically involved in
multiemployer plans. Conversely, any significant modifications in the
benefit plan raise important issues of labor/management relations,
employee trust and fundamental fairness with retirees.
However, all members of the coalition recognize that we cannot
solve the problems facing ``critical'' plans without those two tools.
Consequently, I would urge in the strongest terms possible that the
Committee give consideration to including language that puts meaningful
remedies back into the ``critical'' category of plans.
Funding Rules
H.R. 2830 will require plans to have strong funding discipline by
accelerating the amortization periods, implementing funding targets for
severely under funded plans and involving the bargaining parties in
establishing funding that will improve plan performance over a fixed
period of time. In addition, H.R. 2830 will limit the ability for plan
benefit enhancements unless the plan reaches certain funding levels.
While the legislation proposes a 15 year amortization schedule for
increases and decreases, we would ask that further consideration be
given to a 10 year schedule. We believe a 10 year schedule will provide
stronger funding discipline.
Funding Volatility
H.R. 2830 attempts to provide additional tools to plan trustees to
address the problems of a short-term funding deficiency and funding
volatility. The coalition proposal addressed this issue by allowing the
plans to use existing extension and deferral methods to permit time for
the bargaining process to address the under funding over a rational
period of time. We would urge the Committee to consider a more
expansive list of tools for plan trustees to utilize in addressing
funding volatility.
Additionally, one of the objectives of the coalition was to
preclude funding deficiencies--and the attendant penalties--from
occurring during the collective bargaining agreement cycle. In the case
of the excise tax penalty, this provides no benefit to plan funding and
represents a punitive assessment against contributing employers. We
would hope that the Committee shares that view.
Transparency and Disclosure
H.R. 2830, coupled with the earlier requirements under the Pension
Funding Stability Act, provide additional information to plan
participants, contributing employers, and employee organizations that
should improve the dissemination of important plan information.
Withdrawal Liability
H.R. 2830 strengthens and clarifies the withdrawal liability rules
to protect contributing employers from assuming a disproportionate and
unfair burden from non-sponsored participants.
Mr. Chairman, thank you for giving me the opportunity to present
the views of the Motor Freight Carriers Association. I look forward to
working with the members and staff of this Committee on the Pension
Protection Act of 2005. I would be happy to answer any questions you
may have.
______
Chairman Boehner. Mr. Scoggin.
STATEMENT OF ANDY SCOGGIN, VICE PRESIDENT FOR LABOR RELATIONS,
ALBERTSONS, INC.
Mr. Scoggin. Thank you, Mr. Chairman, members of the
committee. Thank you for allowing me to testify today. I am
testifying on behalf of Food Marketing Institute and its
pension legislation task force. FMI represents 26,000 retail
food stores across the country, many of which participate in
multiemployer plans.
As you mentioned in your outline, Mr. Chairman, my
experience is not as an actuary but as a trustee and a
collective bargainer addressing these issues at the table. I am
pleased to appear before the committee today to express our
views on H.R. 2830, the Pension Protection Act. Multiemployer
pension plans provide benefits to almost 10 million workers and
retirees in the United States.
However, the past 10 years have exposed areas in existing
law governing multiemployer pension plans that are inconsistent
with the goal of stable and long-term decision making. We
believe that responsible multiemployer plans can continue to
maintain strong and viable funds and the minority of
multiemployer plans which are facing greater risks can resolve
their issues if given the necessary tools and legislative
guidance.
Further, we believe that the best decisions will be made
when both labor and management have a full say in the outcome
and are provided with the necessary tools to accomplish that
goal. I will focus on four problem areas of current law. First,
current laws and rules that govern Taft-Hartley pension plans
trap trustees in a narrow corridor between full funding and
funding deficiencies. Much like the early computer game Pong,
the trustees are batted back and forth between two arbitrary
walls that don't encourage long-term decision making.
Second, there are no clear guidelines for multiemployer
trustees to make longer term funding decisions. Multiemployer
plans are not required to look out over a number of years to
detect potential deficiencies in the future and to adopt plans
with achievable benchmarks to avoid those deficiencies before
they approach.
Third, access to short-term funding relief after a market
downturn is good policy. It allows plans time to regain their
momentum without taking short-term extraordinary and in some
cases damaging action to head off a looming deficiency.
Provisions such as section 304 of ERISA allow for such relief.
Unfortunately, this relief has been hard for trustees to
obtain, and there are no clear guidelines for trustees or
bargaining parties today to determine when such relief will be
granted.
Finally, despite important changes in recent legislation
access to key information, what we call transparency, is still
not sufficiently able to participants and to contributing
employers.
But the multiemployer pension provisions in H.R. 2830
incorporate four principles that we believe are essential to
accomplishing fundamental reform. One, greater transparency and
greater flexibility for all plans; two, an early warning system
for what the proposed legislation terms endangered and critical
plans; three, immediate steps to stabilize these plans and,
perhaps most importantly, objective, quantifiable benchmarks
that measure the plan's funding improvement, and they provide
reasonable targets for the trustees and the bargaining parties.
H.R. 2830 recognizes the unique nature of multiemployer
plans and we appreciate that. All parties, the contributing
employers, the unions and the trustees, will be encouraged to
act responsibly on behalf of employees by taking a longer term
view and by correcting any funding problems on the horizon
before they reach a crisis stage. H.R. 2830 provides these
solutions in a manner that will maintain the collective
bargaining rights of all parties.
In summary, we in the retail food industry strongly support
efforts to reform our Nation's pension funding laws. We are
asking Congress to give us the tools to manage these plans more
effectively so that we can continue to provide solid benefits
for our millions of employees and retirees well into the future
without ever becoming a burden on the Federal Government.
Again Chairman Boehner, members of the committee, I thank
you for the opportunity to testify in this important topic and
I would be happy to answer questions.
[The statement of Mr. Scoggin follows:]
Prepared Statement of Andrew J. Scoggin, Vice President of Labor
Relations, Albertsons, on Behalf of the Food Marketing Institute
Chairman Boehner and Members of the Committee, thank you for
allowing me to testify today. My name is Andrew Scoggin, Vice President
of Labor Relations for Albertsons, Inc. Albertsons is the second
largest food and drug retailer in the United States, operating more
than 2,500 stores in 37 states and employing over 240,000 associates
nationwide. Albertsons operates under the banners of Albertsons, Acme,
Shaw's, Jewel-Osco, Sav-on Drugs, Osco Drug, and Star Markets, as well
as Super Saver and Bristol Farms, which are operated independently. We
serve more than 28 million customers each week in our stores.
During the past decade, I have also served on the Boards of
Trustees of a number of Taft Hartley multiemployer Trust Funds and I
currently serve as a management trustee on the Board of Trustees of the
Western Conference of Teamsters pension fund, one of the largest
private sector Taft-Hartley pension trust funds in the United States
with a current fund balance of $28 billion.
I am testifying today on behalf of the Food Marketing Institute
(FMI), of which Albertsons is a member. FMI represents 26,000 retail
food stores across the country and has worked with its members for a
number of years to achieve comprehensive pension reform.
Industry-wide, supermarkets employ approximately 3.5 million
Americans, providing employees with good wages and excellent benefits.
Employment in the industry is a proven path to success for the American
worker. The industry provides a variety of retirement plans among the
wide range of benefits it offers. The industry's defined benefit
pension plans include both single-employer plans (those sponsored by an
individual company and common in the steel, automotive, and airline
industries) and multi-employer plans, in which many companies join
together to fund and operate the plans (common in the grocery and
construction industries).
I am pleased to appear before the Committee today to express our
views on H.R. 2830, The Pension Protection Act.
Multiemployer Plan Regulation
Multiemployer plans are governed, in part, by the Employee
Retirement Income Security Act (ERISA), like their single-employer plan
counterparts. Unlike single-employer plans, however, multiemployer
plans are also governed by the Taft-Hartley Act, which mandates that
their Boards of Trustees have equal representation by Union and
Management Trustees. They are also governed by the Multiemployer
Pension Plan Amendments Act of 1980, which amended ERISA and provided
special rules for multiemployer pension plans.
Multiemployer Plan Impact
Multiemployer pension plans are an important part of the nation's
private sector retirement system, providing pension benefits for
approximately 9.7 million workers and retirees in the United States. In
1980, Congress recognized some of the funding and operational
differences between single-employer pension plans and multiemployer
pension plans. As a result, Congress amended ERISA and established
separate and distinct rules for multiemployer plans under the
Multiemployer Pension Plan Amendments Act of 1980.
Shortfall of Current Law
The past 10 years have exposed areas in which existing law
governing multiemployer pension plans are not consistent with a goal of
stable, long-term decision making. We believe that responsible Trustees
can continue to maintain strong and viable plans, and the minority of
plans which are facing greater difficulties can resolve their issues if
given the necessary tools and legislative guidance. Further, we
subscribe to the view that the best decisions will be made when both
management and labor have a full say in the outcome and are provided
with the necessary tools to accomplish that goal.
I will focus on four primary areas of current law that do not
contribute to responsible, long-term administration of multiemployer
pension plans.
First, the funding ceiling is too low. As the law is currently
written, any employer contributions made to a plan once the plan is
``fully funded'' are no longer deductible. Thus, the law discourages
trustees from allowing a plan, during good times, to reach full
funding. Why not? Because if the trustees come too close to a projected
``full funding'' status, given the imprecise nature of actuarial
projections the trustees could find themselves advising the
contributing employers that their contributions will no longer be
deductible. In that environment, trustees are not encouraged to make
long term, responsible decisions. This is, unfortunately,
counterproductive. During periods of strong investment return, such as
occurred in the 1990s, funds should be encouraged to build up a strong
surplus to provide them with a cushion for the difficult times.
Instead, trustees are forced to decide whether to increase retirement
benefits, sometimes to unreasonably high levels, or to suspend
contributions. Both of these approaches put funds in a much worse
position when the market turns down, as it inevitably will.
Second, there are no clear legislative guidelines provided for
multiemployer plan trustees to make longer term funding decisions.
Unless required by a collective bargaining agreement, in practice,
funds often do not ``look out'' over a specified number of years to
detect potential deficiencies and to adopt a plan to avoid those
deficiencies. Trustees aren't required to address potential
deficiencies until they are confronted by them. Although some funds
have implemented long term funding policies, it is still not a common
practice in many multiemployer funds.
Third, access to short term funding relief granted by legislation
after a market downturn is good policy because it allows trust funds
time to regain momentum without taking short-term, extraordinary, and
in some cases, damaging action to head off a looming deficiency. There
are provisions in existence today, such as Section 412(e) of the
Internal Revenue Code, that allow for such relief. Unfortunately,
relief under 412(e) has been hard to obtain, and there are no clear
guidelines for trustees or bargaining parties to determine when such
relief will be granted. This creates uncertainty in collective
bargaining and in the minds of trustees who must make significant
decisions that hinge on whether such relief will be granted.
Finally, FMI member employers represent great diversity in terms of
size and geography. In many instances, those employers are not
represented on the Boards of Trustees of the funds to which they
contribute. This puts them in a position of limited access to
information about the health and funded status of the plans. Despite
important changes in recent legislation, transparency to key
information is still not sufficiently available to participants and
contributing employers.
Need for Change
We applaud the sponsors of H.R. 2830 for recognizing that Congress
must address multiemployer pensions as part of comprehensive pension
reform legislation. Although H.R. 2830 doesn't address every proposal
in FMI's proposed legislation, we believe that it provides a reasonable
and rational framework for multiemployer pension plans to work through
the problems now facing all pension plans (both single and
multiemployer). The reforms in H.R. 2830 are not a government bail out.
Instead, the proposed legislation will provide the tools which will
allow multiemployer plans to solve our own pension problems without
direct government intervention and without putting additional financial
pressure on the Pension Benefit Guaranty Corporation. We believe, if
Congress acts now, multiemployer plans can solve their own problems so
that they do not become a burden on the federal government or the
taxpayer.
FMI Task Force
FMI has been working for the past year to develop recommendations
for comprehensive pension reform. In addition, our industry has worked
with other employer groups as well as representatives of the trucking
industry, the International Brotherhood of Teamsters, the Central
States Teamsters Pension Fund, and other union representatives to
address multiemployer pensions funding reform.
HR 2830--The Pension Protection Act
The multiemployer pension provisions in HR 2830 incorporate four
fundamental principles which FMI and its member companies believe are
essential to accomplishing fundamental reform: (i) greater transparency
and greater flexibility for all plans; (ii) an early warning system for
what the proposed legislation terms ``endangered'' and ``critical''
plans; (iii) immediate steps to stabilize these plans, and (iv) perhaps
most importantly, objective, quantifiable benchmarks that measure the
plan's funding improvement and provide reasonable targets for the
Trustees and the bargaining parties. We have focused our comments on
those provisions related to plans in what is referred to in the
legislation as the ``endangered'' category--generally speaking those
plans whose funding ratios are between 65 and 80 percent.
Funding Reforms for ``Endangered'' Plans
The requirements of current law permit, and even encourage, plans
to take a short-term, ``snapshot'' approach to determine funding
requirements and benefit formulas at the expense of long-term
projections. H.R. 2830 requires multiemployer plan actuaries and
trustees to take a longer-term look at a plan's funding status. As you
can imagine, it can take a considerable amount of time to make changes
to multibillion dollar pension funds and early intervention, and
action, is the key to reform. Under this legislation, trustees will be
required to look at the plan's current funding level, as well as seven
years into the future, to project a plan's funding outlook. As a
result, potential future funding problems are recognized early, when
there is still time to correct them in a responsible manner.
Under H.R. 2830, once an ``endangered'' plan is identified as such,
the plan's Board of Trustees will be required to prepare a Funding
Improvement Plan that stabilizes the plan during the interim period.
The Funding Improvement Plan further requires that the Trustees adopt a
schedule that will satisfy the benchmarks and allow the collective
bargaining parties to adopt contribution levels that are appropriate
for the benefits provided by the plan. The schedule would allow for
employer contribution increases, reductions in future employee benefit
accruals, or a combination of both.
We believe that creating this mechanism will accurately address the
unique nature of multiemployer plans, in which collective bargaining
agreements fix contribution rates for several years into the future and
where, under current ERISA law, Trustees are prohibited from
retroactively reducing the benefit levels for plan participants. As a
result, all parties (contributing employers, unions, and Trustees) will
have the ability to act responsibly on behalf of employees by providing
an accurate measure of expected liabilities over a longer time-frame
and by providing a schedule to correct any funding problems on the
horizon before they reach a crisis stage. We believe that H.R. 2830
provides these solutions in a manner that will also maintain the
collective bargaining rights of all the parties.
Greater Flexibility and Transparency for Multiemployer Plans
H.R. 2830 encourages employers to build strong surpluses in trust
accounts and provides greater flexibility to manage short term periods
of reduced investment returns by increasing the maximum allowable
deductibility of contributions. These proposals are critical to
allowing plans sponsors to make long term, responsible decisions and
open up the funding corridor to allow trustees more room to avoid
crises.
FMI is also concerned about the lack of transparency in
multiemployer plans. Without current and accurate financial
information, contributing employers and plan participants cannot work
with plan Trustees to address underfunding issues. The 2004 Pension
Equity Act took a step in the right direction by requiring enhanced
disclosure for multiemployer plans, but didn't go far enough toward
getting timely information to affected parties. H.R. 2830 improves on
the reforms initiated by this committee in the last Congress.
In summary, though H.R. 2830 does not address every issue contained
in FMI's proposals, we in the retail food industry strongly support
efforts to reform our nation's pension funding laws. Those of us who
contribute to and participate in multiemployer pension plans are asking
Congress to recognize the ways in which these plans differ from single-
employer pension plans, and to enact changes to existing laws that will
give us the tools to manage these plans more effectively, so that we
can continue to provide great retirement benefits for our millions of
employees and retirees well into the future without ever becoming a
burden on the federal government.
Again, Chairman Boehner and members of this Committee, I thank you
for the opportunity to testify on this important topic. I'd be happy to
answer any of your questions.
______
Chairman Boehner. Thank you. Ms. Mazo.
STATEMENT OF JUDITH F. MAZO, SENIOR VICE PRESIDENT AND DIRECTOR
OF RESEARCH, THE SEGAL COMPANY
Ms. Mazo. Mr. Chairman, members of the committee, I
appreciate the opportunity to testify here today. I am here
also like Mr. Lynch as representing part of the Coalition that
has put together its consensus proposal. I am here for the
National Coordinating Committee for Multiemployer Plans, and I
say with pride and trepidation, I have been on their working
committee for 25 years.
And I hope, given the exchanges and what you are saying
today, to welcome the supermarket industry into our coalition
and in the near future because the three of us really share
your goals, and share one another's goals, and we differ to
some extent on some of the details along the way. But we really
are in agreement both in congratulating you. I thought Tim
Lynch's point was very well taken at recognizing a problem
before it is an absolute crisis, but also congratulating you
and your staff at doing the very hard work at understanding the
distinct nature of multiemployer plans and, in fact, coming up
with special rules for them rather than try to shoehorn our
plans into a mold that may or may not work for single employer
plans, but wouldn't necessarily recognize the realities of our
industry.
With that said, as I said we agree, we think that there is
work to do both with the staff and among ourselves, we agree
with the idea of having clear steps, milestones along the way
to prevent plans from deteriorating to a crisis situation. We
are working with the Food Marketing Institute to try to come up
with agreement on what the appropriate technical measurements
would be that would be comfortable for all. As Mr. Lynch said,
it is an extremely delicate balance to get everyone in the room
agreed to exactly how far one is free to go and not to go.
I just want to summarize our philosophy on the
multiemployer plan funding reform rules, and that is basically,
we think that it is important to tighten the rules for plans,
for multiemployer plans in general, the funding rules, to avoid
preventable problems, to make sure that plans do, trustees do,
look out into the future, plan appropriately, and take future
costs into account. Along those lines, we applaud what your
bill does, which is to bring the government along in that
regard and raise the deduction limit because we estimate that
some close to 75 percent of multiemployer plans were forced to
increase benefits beyond what their trustees necessarily
believed was appropriate.
During the 1990s, to protect the employers from punitive
excise taxes and loss of tax deductions simply for living up to
their bargaining agreement, the plans were doing well in those
days. The employers were paying what they owed, and the
automatic deduction limits that were going to cut off the
employers who were living up to their promises forced trustees
to increase benefits and to dig the hole that they are now
trying to climb out of.
So we strongly applaud that reform; we believe strongly in
tightening the rules and clarifying the rules so plans won't
get into danger and, as both of my colleagues have emphasized,
coming up with appropriate tools so that when a plan does run
into problems that the parties can't control because of the
markets, because of demographics, et cetera, they can right the
ship before it founders. I went on Google yesterday to find who
said, I had this deep memory from history class in my mind,
give us the tools and we will finish the job.
And the first person was Winston Churchill in 1940. The
most recent person was the President of Tanzania. I think we
all sort of share that objective as well. So thank you.
[The statement of Ms. Mazo follows:]
Prepared Statement of Judith F. Mazo, Senior Vice President and
Director of Research, the Segal Company
Mr. Chairman and Members of the Committee, I am pleased to be here
today to discuss the provisions of H.R. 2830 that are aimed at
reforming and strengthening the funding rules that govern multiemployer
defined benefit pension plans. The Segal Company is an international
employee benefits, compensation and human resources consulting firm
that serves close to 30% of the nation's multiemployer pension plans.
Our clients provide a secure retirement income for more than half of
the workers covered by multiemployer plans.
I appear here on behalf of a broad coalition of plans, employers,
employer associations and labor organizations that sponsor
multiemployer plans. The Coalition has put forth a carefully
negotiated, balanced proposal for multiemployer pension plan reform,
which has evolved through the efforts of many of the system's largest
stakeholders. It is important to note that they represent the
overwhelming majority of employers and virtually all of the unions in
the construction, trucking, entertainment, service and food industries,
as well as the membership of the National Coordinating Committee for
Multiemployer Plans (NCCMP), which directly represents over 600
jointly-managed multiemployer pension, health, training and other trust
funds and their sponsoring organizations across the economy.
I am pleased to see that you will also be hearing today from Mr.
Timothy Lynch, President of the Motor Freight Carriers Association,
which is part of our Coalition. We are also hoping to welcome the
supermarket industry, today represented by Mr. Scroggin, to the group,
as our shared goals for multiemployer pension reform are much stronger
than our current differences over the details of how to reach them.
The NCCMP is a non-profit, non-partisan advocacy organization
formed in 1974 to protect the interests of plans and their participants
following the passage of ERISA and the increasingly complex legislative
and regulatory environment that has evolved since then. The Segal
Company has been the technical advisor to the NCCMP since its
formation; I have been a member of its Working Committee for 25 years.
Initially, I want to congratulate Chairman Boehner and his staff
for the care that you have taken to address the special issues facing
multiemployer plans as distinct from the single-employer issues and
problems. We appreciate the considerable effort that you have made to
understand the special characteristics of multiemployer plans, the
industries that support them and the labor-relations contexts in which
they function, and to shape legislation appropriate for the
multiemployer community rather than attempting to shoehorn
multiemployer plans into the very-different single-employer
requirements. We look forward to working together to refine the
multiemployer provisions to be sure they achieve your goal and ours--
stronger plans that do an even better job of meeting the needs of their
participants, their employers and the industries that foster and
sustain them.
Background
There are nearly 1600 multiemployer defined benefit pension plans
in the country today. They provide benefits to active and retired
workers and their dependents and survivors in virtually every area of
the economy. Because of their attractive portability features,
multiemployer plans are most prevalent in industries, like
construction, which are characterized by mobile workforces. According
to the latest information from the Pension Benefit Guaranty
Corporation, multiemployer plans cover approximately 9.7 million
participants, or about one in every four Americans who still have the
protection of a guaranteed income provided by a defined benefit plan.
With few exceptions, these are mature plans that were created through
the collective bargaining process 40, 50 or even 60 years ago and have
provided secure retirement income to many times the current number of
participants since their inception. Although some mistakenly refer to
them as ``union plans,'' the law has required that these plans be
jointly managed with equal representation by labor and management on
their governing boards since the passage of the Labor Management
Relations (Taft-Hartley) Act in 1947.
This active participation by both management and labor
representatives (many of whom are also participants in the plans)
provides a clear distinction between single employer and multiemployer
plans. Multiemployer plans are regulated not only under the tax and
employee benefits laws and regulations and the watchful eyes of the
Department of Labor, the Internal Revenue Service and the Pension
Benefit Guaranty Corporation, with which all private-sector benefit
plans must comply. In addition, they are subject to a second overlay of
regulation, the federal labor-relations laws. Most important among
these laws and regulations, the Taft-Hartley Act requires that the
union and management fiduciaries who serve on these joint boards
operate these plans for the ``sole and exclusive benefit'' of plan
participants. This, of course, echoes and reinforces the capstone of
ERISA, which imposes fiduciary obligations on plan fiduciaries that put
at risk the personal assets of those who fail to meet their
obligations.
It is estimated that over 65,000 employers contribute to
multiemployer pension plans. The vast majority of these are small
employers. For example, in the construction industry, which makes up
more than 50% of all multiemployer plans (but just over one-third of
the participants), it is estimated that as many as 90% of all such
employers employ fewer than 20 employees. By sponsoring these industry
plans, employers are able to ensure that their employees have access to
comprehensive health and pension benefits and, through the jointly
managed training and apprenticeship plans, the employers have access to
a readily available pool of highly skilled labor, none of which would
be feasible for individual employers to provide.
Funding for multiemployer plans comes from the negotiated wage
package agreed to in collective bargaining. For example, if the parties
agree to an increase in the wage package of $1.00 per hour over three
years, the $1.00 may be allocated as 40 cents to the health benefit
plan, 20 cents to pensions, 5 cents to the training fund and the
remaining 35 cents taken in increased wages. Although for tax purposes
the contributions that employers make to employee benefit plans are
considered to be employer contributions, the funding comes from monies
that would otherwise be paid to the employees as wages, health coverage
or the like. Through collective bargaining the employees explicitly
agree to take less in pay in order to fund the pension, so many of them
feel as though they are making the contributions.
For the overwhelming majority of contributing employers, their
regular involvement with the plans is limited to remitting their
monthly payments to the trust funds as required pursuant to their
collective bargaining agreements. For these small companies, the funds
are the perfect substitute for making a large financial commitment to
human resources functions, providing administrative services and
meeting today's complex compliance requirements while providing
economies of scale that would otherwise make such benefit plans
unaffordable for small business. In effect, the employers have
outsourced their employee benefits operations to the multiemployer
plans and their labor-management boards of trustees.
Since the passage of the Multiemployer Pension Plans Amendments Act
of 1980, participants of multiemployer plans have been covered by the
benefit guarantee provisions of the PBGC. Unlike single employer plans,
however, the PBGC is more like a reinsurer of last resort for
multiemployer plans. Instead of having PBGC pick up the pieces when an
employer goes out of business, all of the employers who contribute to
these plans self-insure against the risk of failure by one another.
Under the multiemployer rules, employers who no longer contribute, or
cease to have an obligation to contribute to the plan, must pay their
proportionate share of any unfunded vested benefits that exist at the
time of their departure. This obligation, known as withdrawal
liability, recognizes the shared obligations of employers in
maintaining an industry-wide skilled labor pool in which employees may
move among contributing employers dozens of times during their careers.
This system of shared risk has protected both the participants and
the PBGC, as evidenced by the fact that it has had to intervene in
fewer than 35 multiemployer cases over the past 25 years. The reduced
risk to the PBGC is also reflected in a much lower premium for
multiemployer plans--$2.60 per participant per year, versus $19 per
participant per year plus a variable premium for single employer plans.
The PBGC guarantees a much lower benefit for multiemployer plans. The
guarantee formula is expressed as an accrual rate, with the maximum at
$35.75 per month per year of service. This works out to $12,870 per
year for a participant with 30 years of service, compared with a
maximum guaranteed annual benefit for single employer plans of roughly
$45,000, for someone who retires at age 65. As of the last fiscal year,
PBGC's multiemployer guaranty program showed a small deficit--about
$236 million--which was in fact an improvement over the prior year. So
the multiemployer program, which covers more than 20% of the people
with PBGC-guaranteed pensions, has a projected deficit equal to about
1% of that projected for the single employer program.
The multiemployer system of pooled risk and mutual employer
financial guarantees has been both one of the greatest strengths and
major weaknesses of the multiemployer system. In the early 1980s, the
presence, or even the threat of withdrawal liability produced a
chilling effect on the growth of multiemployer plans that has persisted
in several industries despite the fact that most have had no unfunded
benefits for most of that time. On the other hand, for many, the threat
of unfunded liabilities provided an incentive to plan fiduciaries to
adopt and follow conservative funding and investment policies that, in
combination with a robust economy, led the plans to become fully
funded.
Nevertheless, rather than being able to build a buffer against
future economic downturns, this success led plans to experience
problems at the top of the funding spectrum. In the late 1980s and
throughout the 1990s, plans began to hit the full funding limits of the
tax code. Under these provisions, employers that contribute to plans in
excess of these limits were precluded from receiving current deductions
for their contributions to the plans. Compounding the situation,
employers who continued to make their contributions also faced an
excise tax for doing so, despite the fact that the collective
bargaining agreements to which they were signatory obligated them to
continue to make them. Although in rare instances the bargaining
parties negotiated ``contribution holidays,'' timing considerations and
the fact that in most cases the plan fiduciaries and bargaining parties
were different people meant that plan trustees had no choice other than
to increase plan costs by improving benefits to bring plan costs up to
the level of plan income to protect the deductibility of employer
contributions. Further, once adopted, the actions taken to improve the
plan of benefits in order to protect the employers cannot be rescinded
under the anti-cutback provisions of ERISA. We estimate that over 75%
of multiemployer defined benefit pension plans were forced to make
benefit improvements as a result of the maximum deductible limits, even
when the trustees were skeptical about being able to cover the costs in
the long term. Overall, multiemployer plans were very well funded as
the plans approached the end of the millennium, with the average funded
position for all multiemployer plans at 97% (see The Segal Company
Survey of the Funded Position of Multiemployer Plans--2000).
In the three years that followed, however, these same plans, like
all investors, suffered significant losses as the markets plunged into
a deep and prolonged contraction. For the first time since the ERISA
funding rules were adopted in 1974--in fact, for the first time since
before the beginning of World War II--the markets experienced three
consecutive year of negative performance. Not only were plans unable to
meet their long term assumed rates of return on their investments, like
just about all investors the plans saw their principal decline. For
many of these mature multiemployer plans that depend on investment
income for as much as 80% of their total income, the loss of
significant portions of the assets caused a rapid depletion of what for
most had been significant credit balances in their funding standard
accounts. The most recent Segal Company multiemployer funding report
shows a significant decline from the 97% in 2000, although the average
funded position is still relatively healthy at 83%. Nevertheless, these
investment losses have left a number of plans at all levels of funding
facing credit balances approaching zero, meaning these plans face a
funding deficiency in the near future (see The Segal Company Survey of
the Funded Position of Multiemployer Plans--2004, attached). According
to the most recent estimates, as many as 15% of all plans are projected
to have a funding deficiency by the year 2008 and an additional 13%
face the same fate by 2012 (assuming benefit levels and contribution
rates remain unchanged).
The implications of a funding deficiency for contributing
employers, the plans and their participants are potentially
devastating. Once a plan's credit balance drops below zero,
contributing employers may have to be charged additional amounts to
make up the shortage so that the plan can meet its minimum funding
requirements. This is above the amounts they have promised to pay in
their collective bargaining agreements. In addition, they are required
to pay an excise tax by the IRS equal to 5% of that assessment. It the
full shortfall is not made up in a timely fashion, the excise tax may
be increased to 100% of the shortage.
For many of the contributing employers, especially those in
industries like construction that operate through competitive bidding
and traditionally have small profit margins, they have bid their work
throughout the year based on their fixed labor costs (including the
negotiated pension contributions). For them, receiving an assessment
for what could be multiples of the total contributed for the year,
could be enough to drive them into bankruptcy. In this instance, the
concept of pooled risk among contributing employers means that the
shortage amounts as well as the excise taxes owed by the bankrupt
employers would be redistributed among the remaining employers,
invariably pulling some at the next tier into a similar fate. As more
and more employers fail, those companies that are more financially
secure begin to worry about being the ``last man standing.'' The result
is that they will also seek ways to abandon the plan before all of
their assets are at risk. When all of the employers withdraw, the
assets of the plan will be distributed in the form of benefit payments
until the assets on hand are sufficiently depleted to qualify for
assistance from the PBGC. At that point, participants' benefits will be
reduced to the maximum guaranteed levels, as noted above, which are
likely to represent only a fraction of the amount to which they would
otherwise be entitled.
A Balanced, Negotiated Industry-Wide Response
Trustees of most plans faced with the prospects of an impending
funding deficiency have already taken action to address the problem to
the extent possible. For the most part, that has involved reducing
future accrual rates or ancillary benefits that have not yet been
earned, as the current anti-cutback rules prohibit reducing benefits
that have already accrued, including all associated features such as
early retirement subsidies and the like. In many cases, this has
involved substantial reductions (e.g. 40% by the Western Conference of
Teamsters, 50% by the Sheet Metal Workers National Pension Plan and the
Central States Teamsters Pension Plan, and 75% in the case of the
Plumbers and Pipefitters National Pension Plan). But financial impact
of adjusting only future benefits is limited, especially for mature
plans that have relatively small numbers of active workers earning new
benefits. These actions on their own may be insufficient to avoid a
funding deficiency. Moreover, it can be counterproductive to take too
much away from the active workers, because they are the ones who must
agree to increase funding for the pension plan.
Additionally, the modest recovery of the investment markets
experienced in 2004 is only marginally helpful. For example, a $1
billion fund in 2000 that suffered a 20% decline in assets through 2003
would have to realize an annualized rated of return of 15% every year
for the remainder of the decade to get to the financial position by
2010 it would have had it achieved a steady rate of 7.5% for the full
ten year period. Other relief, including funding amortization
extensions under IRC Section 412(e) or the use of the Shortfall Funding
Method, have been effectively precluded as options by the IRS.
Consequently, the only alternative available requires a legislative
solution.
When the Pension Funding Equity Act of 2004 failed to give
multiemployer plans short-term relief to help them over the current
crisis, various groups began to evaluate alternatives. The objective
was to find ways to strengthen plan funding to avoid or minimize risks
that the trustees and the parties can control, and to provide
additional tools to the plan fiduciaries and bargaining parties for
plans that face imminent funding crises so that they can bring their
liabilities and resources into balance. A broad cross section of groups
that deal with many varieties of multiemployer plans from many
different perspectives entered into extensive negotiations to develop a
set of specifications for reform that all could agree on. The resulting
specifications for reform reflect a carefully conceived compromise
between employer and labor groups, undoubtedly quite different from
what either group would have designed independently, but reflective of
a desire by all parties to preserve the plans as valuable sources of
retirement income security on a cost-effective basis. The result was
the current coalition proposal, a copy of which is attached as an
addendum to this testimony. Here is a summary of that proposal:
Summary of Coalition Proposal
The proposed specifications for multiemployer reform include three
major components, supplemented with several clarifying and remedial
changes intended to make the system work more effectively for plans,
their participants and their contributing employers.
The first component is applicable to all multiemployer plans and
has two major provisions geared to strengthening funding requirements
for plan amendments that increase or decrease plan costs (specifically
unfunded actuarial accrued liabilities) related to past service and to
require that new benefits designed to be paid out over a short period,
like 13th checks, be amortized over that payout period.
The other major provision would allow plans to build a ``cushion''
against future contractions in investments, and to save for the lean
years when times are good, by increasing the maximum deductible limit
to 140% of the current limits and repealing the combined limit on
deductions for multiemployer defined benefit and defined contribution
plans.
The second component of the Coalition proposal applies to plans
that have potential funding problems, defined as those with a funded
ratio of less than 80%, using the market value of assets compared to
the actuarial value (as used for minimum funding) of its actuarial
accrued liability. Such plans would be required to develop and adopt a
``benefit security plan'' that would improve the plan's funded status.
Plans in this category would not be able to adopt amendments to improve
benefits unless the additional contributions related to such amendment
more than offset the additional costs to the plan. Amendments that
violate that restriction would be void, the participants would be
notified and the benefit increase would be cancelled.
To provide additional tools to help multiemployer plans deal with
looming funding problems, they would have ``fast track'' access to
five-year amortization extensions and the Shortfall Funding Method if
certain criteria were met. IRS authorization could be withheld only in
certain circumstances and applications would need to be acted upon
within 90 days or the approval would be automatic. Additional
restrictions that currently apply to plans with amortization extensions
would also apply, although it would be clarified that plans could
increase benefits if the result would be to improve the plan's funding
because the increase generates contributions above and beyond the
amounts needed to pay for the benefit increases.
The third and most critical component involves plans that have
severe funding problems or will be unable to pay promised benefits in
the near future. The intent is to prevent a funding deficiency that
could trigger a downward spiral of the plan and its contributing
employers and ultimately thrust the funding of the benefits onto the
PBGC. This would be accomplished by providing the bargaining parties
and plan fiduciaries with additional tools beyond those currently
available to bring the plan's liabilities and resources back into
balance.
The Coalition proposal modifies the current multiemployer-plan
reorganization rules to provide a useful mechanism for plan sponsors,
much like a Chapter 11 bankruptcy reorganization. ERISA currently has
reorganization rules governing plans that are nearing insolvency, but
those rules were adopted at a time when the major concern was a plan's
ability to meet its payment obligations to current pensioners. Today,
even those plans with the most severe funding problems have sufficient
assets to meet their obligations to current pensioners. The Coalition
proposal suggests several new triggers to reorganization that reflect
the problems of mature plans, recognizing that funding ratios below
65%, a plan's short term solvency and a plan's demographic
characteristics (i.e. the relationship between the present value of
benefits earned by inactive vested and retired participants to that of
currently active participants) can play an important role in a plan's
ability to meet its obligations to all participants, current and
future.
Once a plan is in reorganization, notice would be given to all
stakeholders and the government agencies with jurisdiction over the
plans that the plan is in reorganization and describing the possible
consequences. Once in reorganization, plans would be prohibited from
paying out full or partial lump sums, social security level income
options for people not already in pay status, or other 417(e) benefits
(except for the $5,000 small annuity cashouts). Within thirty days,
contributing employers would be required to begin paying a surcharge of
5% above their negotiated contribution rates. If the bargaining
agreement covering such contributions expires more than one year from
the date of reorganization, the surcharge would increase to 10% above
the negotiated rate and remain there until next round of bargaining.
Once in reorganization, the normal funding standard account continues
to run, but no excise taxes or supplemental contributions will be
imposed if the plan encounters a funding deficiency.
Not later than seventy-five days before the end of the first year
of reorganization, the plan fiduciaries must develop a rehabilitation
plan to take the plan out of reorganization within ten years. The plan
would set forth the combination of contribution increases, expense
reductions (including possible mergers), benefit reductions and funding
relief measures (including amortization extensions) that would need to
be adopted by the plan or bargaining parties to achieve that objective.
Annual updates to the plan of rehabilitation would need to be adopted
and reported to the affected stakeholders. Although the proposal
anticipates the loosening of the current anti-cutback rules with
respect to ancillary benefits (such as subsidized early retirement
benefits, subsidized joint and survivor benefits, and disability
benefits not yet in pay status), a participant's core retirement
benefit at normal retirement age would not be reduced. Additionally,
with one minor exception which follows current law regarding benefit
increases in effect less than 60 months, no benefit for pensioners
already in pay status would be affected. Finally benefit accruals for
active employees could not be reduced below a specified ``floor'' as a
means of ensuring that the active employees whose contributions support
all plan funding, remain committed to the plan.
The proposal anticipates that these ancillary benefits become
available as part of a menu of benefits that can modified to protect
plans from collapsing under the weight of previously adopted plan
improvements that are no longer sustainable, but that cannot be
modified under the current anti-cutback restrictions. Without such
relief participants would receive lower overall benefits on plan
termination and the plan would be eliminated for future generations of
workers. Within seventy-five days of the end of the first year a plan
is in reorganization, the plan trustees must provide the bargaining
parties with a schedule of benefit modifications and other measures
required to bring the plan out of reorganization under the current
contribution structure (excluding applicable surcharges). If benefit
reductions alone are insufficient to bring the plan out of
reorganization, the trustees shall include the amount of contribution
increases necessary to bring the plan out of reorganization
(notwithstanding the floor on benefit accruals noted above). The
trustees shall also provide any other reasonable schedule requested by
the bargaining parties they deem appropriate.
The bargaining parties will then negotiate over the appropriate
combination from among the options provided by the trustees. Under this
proposal, benefits for inactive vested participants are subject to
reduction to harmonize the impact on future benefits for this group as
well as for active participants.
The proposal includes suggestions for: bringing the current rules
on insolvency in line with the proposed reorganization rules;
strengthening withdrawal liability provisions; and providing
construction industry funds with additional flexibility currently
available to other industries to encourage additional employer
participation. It also includes provisions that address recent court
rulings. One suggested change would allow trustees to adjust the rules
under which retirees can return to work and still receive their pension
benefits and another would confirm that plans can rescind gratuitous
benefit improvements for current retirees adopted after the date they
retired and stopped generating employer contributions.
The Challenge
For more than half a century, multiemployer plans have provided
benefits for tens of millions of employees who, using standard
corporate rules of eligibility and vesting, would never have become
eligible. They offer full portability as workers move from one employer
to another, in a system that should be held out as a model for all
defined benefit plans. More importantly, the system of collective
bargaining and the checks and balances offered by joint employer--
employee management has enabled the private sector to take care of its
own without the need for government support.
Yet the current funding rules, previously untested under the
unprecedented unfavorable investment climate experienced in recent
years, have the potential not only to undermine the retirement income
security of millions of current and future workers and their
dependents, but to force large numbers of small businesses out of
business and eliminating participants' jobs.
Your Committee has an ideal opportunity to enact meaningful reform
supported by both the employer and employee communities, who have
coalesced behind a responsible proposal that will enhance plan funding
and provide safeguards to plans, participants, sponsoring employers and
the PBGC, without adding to the already burgeoning debt. We know that
our proposal is unlikely to be the last word, of course, and we embrace
the opportunity to work with the Committee and with others, including
others in the private sector with a stake in multiemployer plans, to
strengthen and polish the ultimate result. Along those lines, there are
a few points regarding the way H.R. 2830 adapts the ideas that have
been put forth that we believe deserve mention at this stage.
Section 202 of the Bill contains new funding and other requirements
for multiemployer plans that are in ``endangered'' status that go well
beyond what the Coalition has recommended for plans facing potential
funding problems (colloquially referred to as the ``Yellow Zone'').
While we think there may be some merit in further tightening the reins
on plans that may be heading for serious trouble, it is important that
the standards not be so stringent that they could create insupportable
costs for employers and thereby harm rather than help with plan
funding. With that in mind, we are continuing to work with all
concerned to come up with workable targets and correction mechanisms to
help endangered plans to recover.
Section 202 also creates a new category--multiemployer plans in
``critical'' status--which is set up to address the special problems of
plans that are near the brink of failure. As noted, the Coalition
agrees that a program like this is needed (in our proposal, it takes
the form of a redesigned approach to plan reorganization). However, the
role of plan trustees at this point is vital to plan survival and, we
believe, they need additional authority to restructure and revitalize
seriously troubled plans substantially beyond what is proposed in H.R.
2830. Again, we anticipate working with you and your staff to come up
with a suitable solution to these important policy questions, as well
as to deal with the inevitable technical issues that arise in any
legislative effort in this extraordinarily complex area.
Conclusion
The Coalition understands that whatever legislation is ultimately
passed will include some provisions that are distasteful to the
employers, the employees or both, because it will of necessity be a
compromise. Our aim is to make sure that, in the end, the environment
for multiemployer plans will be improved, so that they, their
contributing employers and their participants are all well-served. The
alternative is not the continuation of the status quo, but a much worse
fate that includes: the loss not only of accrued ancillary benefits,
but a substantial portion of a participant's normal retirement benefit
as plans are assumed by the PBGC; the demise of potentially large
numbers of small businesses and the loss, not only of pension benefits,
but the jobs from which such benefits stem; and an increase in taxpayer
exposure at the PBGC, an agency that is already overburdened.
In closing, I would like to thank you for taking the time to engage
in this important discussion and for the opportunity to be with you
here today.
Multiemployer Pension Plan Coalition: Specifications for Multiemployer
Pension Funding Proposal
I. FOR ALL MULTIEMPLOYER PLANS
A. Faster funding
<bullet> Ten-year amortization of the net increase or decrease in
unfunded actuarial accrued (past service) liability (AAL) due to a plan
amendment increasing or decreasing benefits.
<bullet> If the increase or decrease in AAL results from an
amendment adding a benefit (not payable as a life annuity) that is
payable over less than 10 years, amortization over the benefit payout
period.
B. Deductibility
<bullet> The deduction limits for negotiated employer contributions
to multiemployer pension plans would be 140% of the otherwise
applicable funding limits spelled out in IRC section 404(a)(1).
<bullet> The combined limit on deductions for defined benefit and
defined contributions would be repealed for multiemployer plans.
II. MULTIEMPLOYER PLANS WITH POTENTIAL FUNDING PROBLEMS
A. Trustee-Designed Program for Funding Improvement
<bullet> If, as of the first day of a plan year, a multiemployer
plan's funded ratio is less than 80%, the trustees shall design and
adopt a benefit-security program that is reasonably expected to improve
the plan's funded status. The benefit-security program shall be adopted
by the due date, plus extensions, and filed with the plan's Form 5500
for that first plan year, and shall be updated and modified annually
thereafter until the plan's funded ratio reaches 80% or more.
B. Restrictions on Amendments Increasing Past Service Benefits
<bullet> If a multiemployer plan's funded ratio would be below 80%
after taking into account an amendment increasing the amount or value
of the plan's AAL (benefits related to past service), the amendment is
prohibited unless----
1. the plan is not in reorganization and will not be put into
reorganization as a result of the increase, and
2. reasonably anticipated employer contributions for the plan year
equal or exceed the sum of the plan's normal cost plus the annual
payment needed to amortize either----
(a) the increase in the plan's unfunded AAL attributable to the
benefit increase over a 10-year period and the remaining (pre-
existing) unfunded AAL over a 20-year period, or
(b) interest on the plan's unfunded actuarial accrued liability
(including liability attributable to the benefit increase) and
the plan is not projected to have a funding deficiency by the
end of the 10-year period.
Technical Notes: Paragraph (a), above, is determined as if all the
provisions of the plan amendment and the current contribution rate or,
if applicable, the ultimate (last) contribution rates provided for
under the then-current collective bargaining agreements take effect on
the first day of such year.
The actuarial determinations under (a) or (b) may be based on a
reasonable estimate of the plan's AAL and normal cost as determined in
the actuarial valuation for the preceding plan year. For purposes of
applying 2), any credit balances are not taken into account.
Enforcement of benefit restrictions. A benefit increase that
violates the above restrictions would be void, and the participants
would have to be notified that the benefit increase is cancelled.
C. IRC Section 412(e) Extensions of Amortization Period
<bullet> Fast-track extensions for multiemployer plans. The
Secretary shall grant a 5-year extension of amortization periods to a
multiemployer plan that demonstrates, with such supporting
documentation as the Secretary may require, that the plan:
1. is projected, using reasonable actuarial assumptions, to have a
funding deficiency within 10 years, unless benefits are reduced,
contributions are increased and/or the amortization extension is
granted; and
2. has developed and is carrying out a formal remedial plan that,
in combination with the amortization extension, would improve the
plan's long-term funded status, including the ratio of assets to
accrued liabilities, and prevent the funding deficiency from
materializing (``Remedial Plan''); and
3. would require substantially greater benefit reductions or
contribution increases in the absence of the extension to avoid the
funding deficiency, and
4. is projected to have enough assets to meet its anticipated cash-
flow needs if the extension is granted.
<bullet> The extension shall be granted unless, within 90 days, the
IRS denies it on the ground that the submission is incomplete or that
the actuary's analysis or projections are erroneous or unreasonable.
Technical Note. If a rejected submission is resubmitted within 30
days, the initial 90-day IRS consideration period, plus an additional
45 days, applies. If a plan fails to take the steps described in its
remedial plan (including modifications in the remedial plan that are
agreed to by IRS), the fast-track amortization extension would expire
as of the first day of the plan year following the failure and the
remaining unfunded portion of each charge would be amortized over the
remainder of the original amortization period, in accordance with the
regular funding rules.
All of the conditions of IRC section 412(e) (as modified below)
apply to a fast-track extension.
<bullet> Additional provisions regarding benefit restrictions for
multiemployer plans receiving an amortization extension under IRC
section 412(e). The existing section 412(e) benefit restrictions would
apply. To encourage increased net contributions to the plan, a benefit
increase would be permissible if the enrolled actuary certifies (and
submits the supporting demonstration) that the additional charges to
the funding standard account attributable to the benefit increase would
be lower than the projected increase in credits due to a contribution
rate increase that takes effect no later than the effective date of the
benefit increase. A contribution increase can only be counted against
the cost of a benefit increase if the added contributions were not
identified in the remedial plan as a source of the plan's improved
funding or, if so identified, if the related benefit increase was
addressed in the plan as well.
D. Shortfall Funding Method
<bullet> A multiemployer plan may adopt the shortfall funding
method, or go off the shortfall method, once every five years, without
IRS permission, but only if it is not currently on a fast-track
extension of amortization period under IRC section 412(e).
Technical Note. In the legislative history to ERISA, Congress
called on the IRS to create the shortfall funding method to protect
employers from a funding deficiency between collective bargaining
sessions (but not for more than 5 years).
The proposed change would not affect the plan's ability to adopt an
IRS-approved funding method without consent, or to adopt or go off
shortfall before the end of a 5-year period with IRS consent.
<bullet> Prohibition on Benefit Increases. Amendments increasing
benefits would be restricted in a plan that elects an automatic change
to the shortfall method in the same manner that they are restricted in
a multiemployer plan that has an amortization extension under IRC
section 412(e).
III. MULTIEMPLOYER PLANS WITH SEVERE FUNDING PROBLEMS--REORGANIZATION
A. In General
<bullet> Plan reorganization is a process, like Chapter 11 of the
Bankruptcy Code for a corporation, that provides a plan with additional
tools to bring its benefit promises and resources into balance.
<bullet> A plan enters reorganization if it is expected to have a
funding deficiency or to be unable to pay promised benefits in the near
term (B, below).
<bullet> A plan in reorganization has latitude to reduce benefits
(other than core benefits payable at normal retirement age) (E., F.,
below), and employers that contribute to such a plan must make
additional contributions but are temporarily protected from
unaffordable contribution increases resulting from funding
deficiencies. (D, below).
B. Reorganization Triggers
A multiemployer plan is in reorganization as of the first day of a
plan year (and remains in reorganization for at least 2 plan years) if
the plan's actuary certifies, by a date no later than 2\1/2\ months
before the end of the prior plan year, that any one of the following
tests is reasonably projected to be met:
1. Solvency/funded-ratio test: assets at market plus anticipated
contributions equal less than 7 years' projected benefit payments plus
administrative expenses and, as of the first day of the plan year, the
plan's funded ratio is less than 65%, or
2. Short-term solvency test: assets at market plus anticipated
contributions equal less than 5 years' projected benefit payments plus
administrative expenses, or
3. Funding deficiency/funded-ratio test: plan is projected to have
a minimum funding deficiency for any of the following 3 plan years
(without regard to any applicable amortization extension under IRC
section 412(e)) and, as of the first day of the plan year, the plan's
funded ratio is less than 65%, or
4. Short-term funding deficiency test: plan is projected to have a
minimum funding deficiency for either of the following 2 plan years
(without regard to any applicable amortization extension under IRC
section 412(e)), or
5. Contribution/funding deficiency test: As of the first day of the
plan year----
<bullet> projected contributions for the year are less than the sum
of the plan's normal cost for the year plus interest on the unfunded
liabilities (regular minimum funding assumptions for assets and
liabilities), and
<bullet> the present value of the benefits of retired and
terminated-vested participants is greater than the present value of the
benefits of active participants accrued by the date of the calculation,
and
<bullet> the plan is projected to have a funding deficiency for any
of the 3 following plan years (without regard to any applicable
amortization extension under IRC section 412(e)).
Technical Note: The actuarial determinations must be reasonable
projections as of the first day of the plan year for which the plan
will be in reorganization, with the value of the plan's accrued
liabilities based on the actuarial assumptions used for ongoing plan
funding. The projections may be based on the valuation for the plan
year immediately preceding the plan year for which the determination is
being made, or, if that valuation has not been completed by the end of
the 6th month of the plan year, a reasonable projection of the
liabilities determined as of the valuation date for the plan year
preceding that one. The projected value of assets shall be the market
value of the assets as of the last day of the 6th month of the plan
year preceding the year for which the determination is being made
(based on the most reliable information available to the trustees as of
the determination date), projected forward at the plan's assumed
earnings rate.
C. Reorganization: General Requirements
<bullet> Notice would have to be given, by the end of the first
month that the plan is first in reorganization, to the participants,
contributing employers, unions, employer bargaining representatives and
the PBGC, IRS and DOL that the plan is in reorganization, with a
description of the possible consequences.
<bullet> Trustees must develop a rehabilitation plan as is
discussed in greater detail in Subsection G that would take the plan
out of reorganization within 10 plan years. The rehabilitation plan
(including the schedules described in, G, below) would describe the
combination of contribution increases, expense reductions (including
possible mergers), funding relief measures and benefit reductions
(including benefit reductions permitted because the plan is in
reorganization) that would be adopted or proposed to the bargaining
parties, to achieve this. The rehabilitation plan must be filed by 2\1/
2\ months before the end of the first plan year that the plan is in
reorganization. If within 60 days of the due date for the
rehabilitation plan the Trustees have not agreed upon a plan, then any
Trustee may require the plan to enter into an expedited dispute
resolution procedure to determine the rehabilitation plan.
<bullet> If, under all of the circumstances, emergence from
reorganization within that time frame is not reasonably possible, the
rehabilitation plan would describe the alternatives considered, explain
why emergence from reorganization is not feasible, and lay out steps to
be taken to postpone insolvency or otherwise resolve the matter.
<bullet> A summary of the rehabilitation plan and each yearly
update would have to be distributed to participants and employers with
the annual multiemployer plan funding notice. The full document would
be available to them upon request.
D. Funding Requirements for Plans in Reorganization
<bullet> Thirty days after the plan provides the contributing
employer with notice of its reorganization status, there will be
automatic employer contribution surcharges as follows:
<bullet> The first year, the surcharge is 5% of the
contribution rate required by the collective bargaining
agreement.
<bullet> The second year and thereafter while the plan is in
reorganization, the surcharge is 10% of the contribution rate
required by the collective bargaining agreement.
<bullet> The surcharge will terminate upon the execution of a
new collective bargaining agreement which adopts a schedule of
benefits published by the trustees pursuant to the
rehabilitation plan.
<bullet> The plan shall have a statutory cause of action to collect
surcharges.
<bullet> Surcharge contributions may not be the basis for benefit
accruals.
<bullet> Normal funding standard account continues to run during
reorganization except there will be no excise taxes or additional
contributions if a funding deficiency occurs while a plan is in
reorganization.
E. Benefit Restrictions for Plans in Reorganization
<bullet> Effective as of the first day of the plan year that the
plan is in reorganization, the plan shall not pay the following to
people retiring on or after that date: lump sums, partial lump sums,
social security level-income payments or other 417(e) benefits, except
for $5,000 small-benefit cashouts.
<bullet> The IRC section 412(e) restrictions on benefit increases
apply.
F. Benefit Reductions for Plans in Reorganization
<bullet> In General: Core benefits payable at normal retirement age
will be protected as provided under current law. However, the anti-
cutback rules will be revised to permit limited modifications of
certain protected benefits, as follows:
<bullet> The otherwise-prohibited benefit reductions that would be
allowed while a plan is in reorganization would be limited to:
1. ``benefits, rights and features'' (e.g., post-retirement death
benefits, 60-month guarantees, disability benefits not yet in pay
status, early retirement benefits and the like),
2. retirement-type subsidies (including, e.g., unreduced QJSA),
early retirement benefits and payment options other than the 50% joint-
and-survivor benefit and single-life annuity, and
3. as provided under current law, benefit increases that would not
be eligible for PBGC's guarantee on the first day of reorganization
because they were adopted or, if later, took effect less than 60 months
before that.
<bullet> Except as provided above, the accrued benefit at normal
retirement age could not be reduced under the plan reorganization
rules.
<bullet> Except for rescission of recent benefit increases, the
reorganization rules would not authorize reduction in protected
benefits of participants who were in pay status one year before the
first day of the year the plan enters reorganization. .
<bullet> Benefit reductions made under the special authority of
plan reorganization would be reflected in the minimum funding standard
account but not in withdrawal liability calculations; surcharges would
not be reflected in the employers withdrawal liability allocations.
G. Procedures for Benefit Modification
<bullet> By 2\1/2\ months before the end of the plan year in which
a plan goes into reorganization, the Trustees must provide to the
negotiating parties a sliding schedule of benefit modifications and
contribution increases that would meet the rehabilitation plan. At a
minimum, the Trustees must provide the parties with the following
schedules:
1. A schedule of the benefit cutbacks and other measures required
to bring the plan out of reorganization if there are no further
increases in contributions to the plan. If the plan cannot emerge from
reorganization without contribution increases, then the Trustees shall
provide a schedule showing the amount of contribution increase
necessary to bring the plan out of reorganization assuming all benefits
are cut back to the extent permitted by law, provided that future
accrual rates are not reduced below an accrual rate equivalent to a) 1%
of the contributions made with the respect to the participant's work
or, b) if the current accrual rate on the effective date is less than
1% then no less than the current accrual rate.
<bullet> In the event the parties do not adopt a schedule approved
by the trustees then the trustees shall impose this schedule as the
default schedule except that the mandatory surcharges described at
Subsection D above shall remain in effect.
<bullet> If the employer refuses to comply with the default
schedule then at the discretion of the Trustees that employer's
participation in the plan may be terminated in which case the employer
will be deemed to have withdrawn or if applicable, partially withdrawn.
2. Upon the request of the bargaining parties the trustees shall
provide a schedule of the contribution increases and other measures
required to bring the plan out of reorganization assuming there are no
cutbacks in protected benefits, and
3. The trustees may, in their discretion prepare and provide the
bargaining parties with any additional schedules that they deem
appropriate for the parties' consideration.
4. The schedules required in this Subsection shall in the
discretion of the trustees be updated periodically to reflect the
experience of the plan, but not less than once every three years. A
schedule that has been adopted by the bargaining parties through the
collective bargaining process shall remain in effect for the duration
of the collective bargaining agreement.
<bullet> For active participants, the Trustees' decision to
implement a benefit cutback would be driven by the contribution
obligation negotiated by the parties, i.e., the impact on each group
will depend on what they negotiate. The Trustees shall include an
allowance for funding other participants' benefits in the schedules
provided to the bargaining parties, and shall reduce their benefits to
the extent permitted hereunder and deemed appropriate based on the
plan's overall funding status and prospects in light of the results of
the parties' negotiations.
IV. INSOLVENCY
A. As under current law, the plan administrator would have to
perform a PBGC-prescribed solvency valuation for the first year the
plan is in reorganization and at least every 3 plan years thereafter.
If, as a result of one of these valuations, the plan is expected to
become insolvent by the end of the 5th following plan year, annual
insolvency valuations must be performed.
B. If the current market value of available plan assets (without
regard to expected contributions and earnings) is equal to no more than
5 years of projected benefit payments, accrued benefits may be reduced
to the level necessary to postpone insolvency by another 3 years, but
in no event below the PBGC-guaranteed level. Any such reductions in
accrued benefits must be matched by proportional reductions in the rate
of future accruals.
C. In the year a plan becomes insolvent, accrued benefits must be
reduced to the level supportable by the plan's available plan assets,
but not below the PBGC-guaranteed level.
D. These requirements would run parallel to the plan reorganization
rules and whatever rehabilitation measures the Trustees take pursuant
to those provisions.
V. DEFINITIONS
A. For purposes of IRC Sections 412(e), 412(f), 412(o), the plan
reorganization rules and the comparable ERISA sections plus section
204(h), ``plan amendment'', in the case of a multiemployer plan, means
an amendment to the plan or related documents adopted by the Board of
Trustees.
B. For purposes of the new provisions of the Code and ERISA added
by this legislation, unless otherwise specified,
1. except with respect to the rules in I.A., ``actuarial accrued
liability'' and ``normal cost'' are determined based on the unit credit
actuarial funding method,
2. the value of plan liabilities is determined using the actuarial
assumptions described in IRC section 412(b) that have been or are
expected to be used for the plan year for which the determination is
being made, and
3. A plan's ``funded ratio'' is the ratio of the market value of
its assets to the actuarial value of its actuarial accrued liability.
VI. WITHDRAWAL LIABILITY REFORMS
A. Strengthen and clarify withdrawal liability rules for all plans
<bullet> Repeal ERISA section 4225, which reduces or subordinates
withdrawal liability claims under various circumstances involving
employer liquidations.
<bullet> Repeal ERISA section 4219(c)(1)(B) which arbitrarily
limits an employer's withdrawal liability payments to twenty years of
payments.
<bullet> ERISA section 4205 should be amended to make clear that an
employer who performs work formerly covered by a pension plan incurs
partial withdrawal regardless of whether the employer uses employees of
a third party to perform the work.
B. Repeal the special trucking-industry rule.
C. Rationalize withdrawal liability rules for construction plans, by
extending to them the following rules applicable to other
plans.
<bullet> Ability of trustees to adopt a ``5-year free look''
<bullet> Ability to amend the withdrawal-liability allocation rules
to re-start presumptive-rule pools when plan as a whole is fully
funded, to eliminate old remnants of individual employer's liability.
VII. MISCELLANEOUS OTHER ISSUES
A. Heinz fix, modeled after Alaska Teamsters fix--trustees would be
allowed to adopt stricter benefit-suspension rules applicable to people
who retire after adoption of the stricter rule--retroactive to 1/1/
1976.
B. Sheet Metal fix: multiemployer plans can rescind benefit
increases for retirees adopted after the date of retirement.
VIII. EFFECTIVE DATES
Unless otherwise specified, the effective date would be the first
day of the first plan year beginning after enactment. New sections I.A
and II.B--tougher standards for benefit increases--would not apply to
previously negotiated benefit increases which restore benefits lost due
to benefit cuts adopted between 2000 and the date of enactment, if, in
connection with (and at the time of) the benefit reductions, the plan
document, trust agreement or related documents promised to restore lost
benefits if contributions were increased. Section II.D.--adoption of
shortfall funding method--would be effective as of the 2003 plan year
(retroactive filing of Schedule B permitted).
______
Chairman Boehner. Let me just say, I want to thank all
three of you, and the various parts of the Coalition and people
who aren't necessarily in the Coalition, for your willingness
to work with us.
We strongly believe that if we are going to do
comprehensive pension reform that it should include
multiemployers as well as single employer plans, ought to
include cash balance, ought to include investment advice and we
ought to deal with this in a meaningful way.
And I appreciate there has been an awful lot of
conversations, a lot of negotiations, but I have got to say I
am a bit disappointed that we have yet to come to some
agreement.
Now, Mr. Lynch, you referred to the benchmarks in the so-
called yellow zone as insurmountable and unreasonable for those
plans that would be moving from what we have been referring to
from the red zone into the yellow zone. And some members of the
Coalition have been critical of those benchmarks that Mr.
Scoggin believes are necessary. But over the last several
weeks, we have asked on numerous occasions for, all right, if
these benchmarks aren't the right benchmarks and this time
frame isn't the right time frame, what are the right
benchmarks, what is the appropriate time frame, and yet nobody
can share formation with us. And I have to say I am a bit
surprised. I don't want to be in the middle of your
negotiations, but we are trying to be helpful in terms of
trying to find the right mix.
I happen to believe what Mr. Scoggin and the FMI types
believe, that having clear benchmarks are the surest way to get
plans up to 100 percent funding. And we provide more
flexibility by allowing the plans to be overfunded without the
imposition of an excise tax. And so do we have some reason why
we are stuck in neutral here?
Mr. Lynch. I guess that one is for me, huh?
We had a meeting last week. It included something on the
order of 10 actuaries representing various funds. I was
disappointed I wasn't involved in that meeting.
Chairman Boehner. I am sure you were.
Mr. Lynch. They were trying to work through from a real-
life perspective. If these plans didn't exist and just started
up today, I suspect maybe those benchmarks wouldn't be as
difficult as we think they can be. But unfortunately, at some
point when this becomes law, the plans that are going to fall
in those categories, particularly, as I said, at the lower end
of that category, may have a difficult time getting up and
meeting the benchmark.
Does that mean they shouldn't meet some benchmarks? Of
course not. It is just that the particular benchmarks and how
they are calculated could result in very significant increases
to the contributing employers and further benefit modifications
to the plan beneficiaries.
Chairman Boehner. I fully understand that. I think all of
you realize that it is in the interest of, it has been in my
interest and I think in the interest of the members on both
sides that both the contributing employers and the
representatives of labor come to an agreement on this issue.
Now, we do have language in the bill currently. It is my
intent to leave that language in the bill and continue to work
with all of you to try to come up with the right formula. And I
know that--let me ask you, Mr. Scoggin, since you had supported
the benchmarks that we have in the bill, you understand the
problems of companies that are coming out of the red zone and
they are going to have a difficult enough time getting out of
the red zone into the yellow zone where then we impose these
hard benchmarks. Do you have ideas about how we can move
forward here?
Mr. Scoggin. Thank you, Mr. Chairman. Oh, I do. I think FMI
does, but to put it a little bit into perspective we have also
done quite a bit of modeling based on a number of real-life
situations with real-life funds that we have looked at to
determine whether, because obviously we are committing
ourselves to benchmarks in our industry as well, whether these
are realistic and reasonable, and to date our modeling
indicates that they are. And we would welcome, from the
Coalition or from others, modeling that may be, you know, would
show a different result so that we can understand that.
But I do understand the issues that the Coalition has
raised and I will admit that our group looked primarily at
keeping healthy funds healthy because we think that is the most
important way to take care of problems. There may be some
transitions, transitioning language or transitioning abilities
that we could provide to funds coming out of the red zone. We
certainly, from the FMI standpoint, would be willing to listen
to some of that. To date, you know, we haven't heard any of
that, but we think even with transitioning language it ought to
be solid, it ought to be firm and it ought to provide hard
guidelines, because we think that it is true that trust funds
and the bargaining parties in those funds are going to have to
make hard decisions, and some of those hard decisions are going
to be required to align contribution streams with promised
benefits.
Chairman Boehner. Well, I don't want anyone to overread my
remarks. I do appreciate the tremendous progress that we have
made between the employer groups and the labor groups and your
willingness to work with members on both sides of the aisle. It
is just that I want to make it clear that I want to keep
encouraging you to continue your conversation. We are going to
a subcommittee markup next week. We will be in full committee
markup the week after that. I don't want anyone to not be on
notice that we are going to proceed, and we want to continue to
work with you as we do that.
Chair recognizes--well, let me announce that we now do not
expect to have votes until 1:45 to 2 o'clock. So if we work
hard we will save you the problem of being gone for an hour and
then coming back.
Chair recognizes the gentlemen from Michigan.
Mr. Kildee. Thank you, Mr. Chairman. I am very concerned
about the multiemployer plans out there. I have talked to a
number of my people back home. I think we are reluctant and
perhaps unlikely to write separate plans for the grocer chains
than we would for the other, so it would be great if the three
of you could come to the table, continue your dialogue and
discussion, come to the table with a plan that would protect
those things you feel are very, very important.
I would encourage you. I think what you have done so far is
very encouraging. Mr. Boehner's bill has some differences from
the Coalition's proposal. The inclusion of the zone benchmarks
requiring plans to decrease the underfunding by one-third would
be one area of difference. And the additional benefit
restrictions in the yellow zone are tougher than the quotas in
these proposals. Do you think that there is a possibility of
you to resolve those differences and come with a single plan.
Ms. Mazo.
Ms. Mazo. I am very optimistic. Two of my actuarial
colleagues were in these marathon conference calls that Tim
Lynch described going on last week, and I think that it was
helpful for the chairman to pound some heads, frankly, and make
some people get in rooms that we might not have otherwise done.
Some our concern is not just with the specific numbers in the
benchmarks per se, but in some of the mechanisms and how they
work, and I feel I would be a little bit remiss not to point
out that the grocery industry is a tremendously important part
of the multiemployer community. It represents more than 14
percent of the participants. But the construction industry,
which represents something like 37, 38 percent of the
participants in multiemployer plans and more than half of the
plans, is structured--the plans in the industry itself are
structured very differently. The people are very mobile. They
really kind of work for the industry rather than any one given
employer. The contractors that are contributing employers, on
average, are less than 20 employees per company, and so some of
the mechanisms and the plans also tend to be much, much
smaller.
The average, more than three-quarters of the multiemployer
plans in this country are fewer than 5,000 people, something
less than half are fewer than $100 million in assets. So some
planning ideas, some forward-looking ideas, and some
bargaining-related solutions that might fit in an industry that
has major chains, largely major chains and a largely stable
workforce might not work for other industries that are in the
multiemployer world, and that is part of what we are trying to
accommodate. We too would prefer not to have a bunch of bright
mind--things as fundamental as basic funding rules, and we do
think it is important, as I said, to have safeguards that
prevent plans to the extent possible from falling into trouble.
But we are trying to accommodate the different shapes and
sizes and capabilities of the different plans.
Mr. Kildee. And there are different shapes and sizes. I
pulled wire for IBEW for a while, and of course worked out of
the hall, was assigned to an employer who needed electricians.
So there are differences. But if you can kind of bring this
together so everyone can find some satisfaction and come united
to this table, it would be very, very helpful.
Ms. Mazo. And hopefully we will be able to do that.
Mr. Kildee. Thank you very much, Mr. Chairman.
Mr. Kline [presiding]. I thank the gentleman. I am mindful
of Chairman Boehner's timetable. I would like to keep moving. I
would like to take a couple of minutes. I have a whole list of
questions.
First, I want to say that I think it is very, very
important that this committee took up multiemployer plans and I
know that the three panelists agree with that and it seems to
me that we have done a pretty good job so far. We are looking
forward to continuing the work. One of my concerns has, all
along, been in the multiemployer plans, how do the smaller
employers gain visibility and gain more ability to participate
in the decision making process?
And it could go to any of you. I have written down here by
my question Mr. Scoggin. Do you think that this bill, this
Pension Protection Act, is going to enhance the ability of
smaller employers to be involved?
Mr. Scoggin. Let me begin by pointing directly to the
transparency rules in this bill, which I think are well thought
out. And I believe that they will provide those small employers
who today maybe have more difficulty obtaining insight into the
health, the funded status of a plan, where that plan is going,
even though they are contributing to that plan.
Mr. Kline. Isn't it true that there are many small
employers who have no visibility?
Mr. Scoggin. I would agree.
Mr. Kline. I am just sorry. Just so everybody understands,
we have a situation where you have employers who are paying
benefits into a plan and they have no idea about the status of
that plan.
Mr. Scoggin. Yes, sir, that is exactly where I wanted to
go, is to point out that we have hundreds, if not thousands of
employers out there who are very good, unionized, honest
employers who make significant contributions to benefit funds
and do not have an ability to obtain direct access to
information. And in our industry and through the FMI, we
believe that the transparency rules that have been built into
this bill will provide great benefit to those employers and
certainly will allow them to address issues also in their
collective bargaining when they have more full access to
information as they engage in that collective bargaining.
Mr. Kline. Either of you have any comments on that.
Mr. Lynch. I think part of the issue there, Congressman, is
not only the lack of access to information, but I think some of
the folks who have mentioned this also have concerns about the
ability to have representation as trustees on these plans. When
you look, we contribute to something like 90 different
multiemployer plans around the country. They range in size from
the biggest, the Western Fund, the Central States Fund in the
mid $20 billion asset range, all the way down to plans that may
involve only one local in the East with a couple, $100,000 or
million dollars in assets.
We believe pretty strongly that the contributing employers
need to be better represented on the plans. It is somewhat
interesting how some of the management trustees find their way
on the plans, and that takes a process, frankly, of changing
the plan documents, and we have undertaken an effort, at least
my association has, to try and carefully look at that and try
and ensure that there is a little better cross-representation
of the contributing employer base.
Mr. Kline. Thank you.
Ms. Mazo. I guess I have a couple of, just a few little
points to say. The point that Mr. Lynch just raised, I just
want to emphasize that is exclusively a management issue, the
decision on how management trustees are selected. In fact, it
is illegal for the union side to have any input on that. So
that is something that the employers need to work out.
The other point, and I do think that transparency will help
small employers understand what they are doing, and the smaller
local plans in fact do pretty much know what is going on
because it is all kind of one community. It is the very large
plans which in fact are some of the most efficient and the most
effective ways to deliver benefits with the greatest capability
of meeting all of the administrative needs that does end up
kind of swamping the smaller local contributor. And the point
of the plans is, in fact, that both the employees and the
employers delegate their responsibilities to their
representatives to handle things.
In my testimony I mentioned that multiemployer plans for
many of the employers are really an outsourcing. The
multiemployer group, including the multiemployer bargaining
agent which the Motor Freight Carriers Association serves as,
handles the process for--in many places, for their members, the
Associated General Contractors does that. They are kind of like
a union of employers.
And so the small employers are welcome to take part, but
they may find that they regret what they wished for when they
see the documentation, the overwhelming degree of work that
goes into paying attention to this. They can't have every one
employer determine its own employee's benefits and still be
part of a big pool of benefits. That is why multiemployer plans
work.
Mr. Kline. Thank you for your comments. I must say,
however, I think it would be very useful for those employers,
large or small, to know what is going on in a plan that they
are participating in.
Ms. Mazo. And we have no concern about transparency. That I
agree with.
Mr. Kline. Thank you very much. My time has expired. The
gentleman from New Jersey, Mr. Andrews.
Mr. Andrews. Thank you, Mr. Chairman, I want the record to
reflect my appreciation for the efforts of Mr. Boehner, and Mr.
Johnson, and obviously Mr. Miller and the staffs on both sides
to try to solve this multiemployer problem. It is a significant
problem, and we need to fix it.
I frankly believe we should have fixed it last year. That
was a subject of rather intense debate around here, and I want
to commend all those involved in these very Churchillian
negotiations we went through and are continuing to go through.
I would echo Mr. Boehner's admonition that you keep at it,
try to find a way to reach accommodation with his view and
other views as well. One of the things that I would like to
make sure we get on the record is the benefits of the agreement
or something like the agreement that you have reached. There is
a lot of difficult aspects of this agreement.
No one here ever wants to say that he or she voted for a
decision making system that could result in not being able to
increase people's benefits, no one wants to do that, and
certainly no one here wants to be accused of in any way
contributing to the reduction of people's benefits, and that is
politically a volatile discussion.
The reality is, and it is a hard reality, for some
beneficiaries and some plans, I think the choice is whether
they have any benefits at all or whether their benefits are cut
dramatically or whether they can be largely preserved, and that
is a hard problem to be working on. You have my support and my
appreciation.
But I think we should also get on the record the benefits.
If we have real and meaningful relief for multiemployer plans,
we are told by Ms. Mazo's testimony that right now about 15
percent are in some trouble, and I think it was 13 percent. The
number may grow to 15 percent in 2008. What happens when we
don't do these hard things? Let's paint the most troublesome
scenario. If we don't give multiemployer plans the relief that
they need, what would happen to the people covered by these
plans that are in difficult shape? And any of you can answer
that question.
Ms. Mazo. If we were to start to have funding deficiencies
in multiemployer plans, we fear that could really be
catastrophic. First of all, it could have a domino effect based
on the loss of confidence that employers and employees would
have in their plans. A funding deficiency would mean that the
employers would be faced with contributions mandated on them
well beyond what they had promised and collective bargaining
and all the parties agreed to.
Mr. Andrews. I know all the members of the committee know
this, but I think it is important to let the record reflect,
Ms. Mazo, what happens when one or two employers in a
multiemployer plan have a hard time meeting their obligations?
What happens to the other people that are left?
Ms. Mazo. This in fact is part of what we are struggling
with now. It is the mature plan. The plans are designed to be
funded with each employer paying essentially a uniform share.
There are variations. But roughly so, it doesn't matter how old
or young their workforce is. Everybody contributes to a common
pool and that funds all of the benefits. If some employers stop
funding, they go out of business or they get seriously
delinquent, the costs still have to be met, and that rolls over
on to the other employers. And if that then makes the burden
too heavy on the other employers, some of them are likely to
tumble down, thus increasing and increasing and increasing the
burden until it becomes completely supportable for the
employers that are left.
Mr. Anderson. It sort of has a pancaking effect, doesn't
it? One leaves and that puts more stress on the group that is
left, then someone else leaves and that puts more stress, and
so on. I think it is very important that we get the word out
that the work you have done is to preserve full and robust
pensions for millions of people.
And I firmly believe if we don't give plans the tools to
deal with these problems, that we are going to have a much more
serious one. So I would reflect what Mr. Boehner said, that we
should all work as hard as we can to make sure that everyone's
interests are accommodated. There will be no perfect
compromise. I am sure that the compromise that was originally
reached and not in the bill was very difficult for a lot of
people to swallow.
But you know, I, for one, am a member that is prepared to
work with you and sustain the political blows that may come
from such a compromise in order to help. I appreciate your
efforts.
Ms. Mazo. Thank you.
Mr. Kline. Thank you. I thank the gentleman.
And the gentleman from Texas.
Mr. Marchant. Thank you, Mr. Chairman. The question I have
has to do with the companies that go to the bargaining table
for new agreements, and because it is easier, or has been in
the past, easier to offer increased benefits in many occasions
than it is to actually offer cash, is there anything in the
Pension Protection Act that you see that will disincentivize
that kind of activity or protect it?
Mr. Lynch. If I can take a stab at that, Mr. Congressman,
when we negotiate and I do the negotiations on behalf of these
companies, we don't negotiate the benefit level, we don't
negotiate an administration of the plan. We negotiate a
contribution level and then essentially it is left to the
trustees of the plan to decide how they are going to use those
assets to cover the promised benefits.
One of the things that frankly we worked on in this
Coalition proposal was a balancing act between the
responsibilities of trustees on these plans and the
responsibilities of the bargaining parties. Both the union
representatives and the management representatives felt very
strongly that you have to maintain the sanctity of the
bargaining process, and so consequently some of the difficult
choices that Congressman Andrews was referring to, they will in
fact still be issues at the bargaining table because we think
that is where we belong.
Mr. Scoggin. If I might, there are provisions within this
bill which do cause the bargaining parties to think carefully
about what sort of benefits they are committing themselves to,
and I think one is a change in the amortization that is
proposed in this bill for new benefits that are negotiated into
a plan, because it will be shortened from a current 30-year
period to a 15-year period, and I think that is responsible
because it causes those benefits to be paid in a reasonable
manner and shortens your mortgage, if you will, but it also
causes all parties to think very carefully about what benefits
are going to be promised and to ensure that contributions that
are promised and the benefit that is promised will align.
Ms. Mazo. The point that Mr. Lynch made deserves some
underscoring, and that is that the bargaining parts typically
negotiate contributions to a multiemployer plan, and then the
trustees, trustees based on the anticipated flow of
contributions plus other earnings, determine what the benefits
are.
So in the multiemployer world, it is not the case as it has
been characterized sometimes in the single employer world, that
it is cheaper for an employer to just promise benefits and pay
for them 30 years from now than it is to pay current wages,
because the employers in the multiemployer world are agreeing
to pay the cash into the plan come what may. They aren't
putting anything off and making kind of a promise and I will
see if I can pay for it tomorrow. They are promising the money
and then it is up to the trustees to arrange the plan so that
the money is spent responsibly. And as Mr. Scoggin said, the
bill tightens the rules so that in order to spend the money on
benefits, you have to have essentially more money coming in
faster to pay for them. So you can't make those promises unless
you are quite sure that you will be paying for them
responsibly. And if you are in any kind of trouble, then you
have much faster rules for--well, under the bill you can't make
additional benefit promises.
So the bill would tighten it, but also it has not been the
same kind of temptation, I think, in the multiemployer world
than it has been in the single employer world.
Mr. Marchant. We just recently, I think the country just
recently began to understand a little bit more about how the
pension guaranty fund works when it was announced at the United
pension would be basically 40 percent, or $4,000, around $4,000
cap, for many of the lower back standers, et cetera, that
covered their employees.
Do you think that the participants in the multiemployer
plans fully understand how the pension security fund interacts
with their personal pensions and what their provisions are? Are
there documents that they sign that say, we understand what
kind of pension plan we have, we understand what kind of
insurance we have on this pension plan, we understand the
maximum amount of money we can draw per month if this plan goes
under?
Ms. Mazo. If I may, the short answer to your question is
no. I doubt that any multiemployer plan participants even think
about whether their PBGC aren't immune. The PBGC guaranty for
multiemployer plans is much, much lower than it is for single
employer plans. It is roughly for somebody with 30 years of
service, it is maybe close to $13,000 a year as compared with
maybe $45,000 a year. But the guarantee also works very, very
differently in the multiemployer world, for just the reason in
fact that Mr. Andrews was identifying and that we are all here
to try to resolve, and that is in the multiemployer plan all of
the employers are sort of guarantors of one another, so that if
one person's employer goes out of business they don't lose
their pension plan. It doesn't go to PBGC. The benefits stay
there and the other employers and hopefully new employers
coming into the plan continue to fund it.
So multiemployer plans hardly ever have, in fact since
1980, 36 or so of them have had any contact with the PBGC in
terms of guaranteed benefits. They don't go to the PBGC, they
don't get their benefits cut until the plan runs out of cash
completely, and even for a severely underfunded plan that would
be a very long time. So they don't know what the level is for
their guarantee, and for most of them it really is and has been
and we hope will continue to be irrelevant.
Mr. Kline. The gentleman's time has expired. The gentlemen
from Virginia, Mr. Scott.
Mr. Scott. Thank you. Thank you, Mr. Chairman. As Mr.
Andrews from New Jersey has suggested, we are looking at this
from a perspective of what can we do to maximize the chances
that employees will actually get their promised pension, and so
we want to see how this bill affects that.
First, let me ask a question on management of these pension
funds. I haven't heard anything about fees paid for management.
Is that an issue that we should be looking at?
Mr. Scoggin. The law currently provides that, and I think
we are talking about the trustees and the fees that are paid to
the trustees? Is that the question?
Mr. Scott. Management generally. I know you pay a fee for--
mutual funds get a fee, and some charge more than others.
Mr. Scoggin. Okay, I misunderstood the question. So with
respect to the managers who would handle the funds that the
trust fund has, I think given fiduciary rules that are very,
very heavy on trustees at the trust table,at least for all the
funds I have been involved with, the trustees take those all
very seriously. Those funds, or those charges, those
administrative charges, are in line with or less than I think
what I have seen in any other given areas there. Really, truly
we fight them hard to make sure that they are as low and as
reasonable as they can be.
I turn to the panelists.
Mr. Lynch. We made a very concerted effort about 5 years
ago to try and start encouraging the people who would be
trustees on the management side to have a blend, have people
with a finance background, investment background, benefits
background. That wasn't always the case.
So I think the caliber of trustee that we are getting on
the management side has improved dramatically over the last,
say, 10 years. And consequently decisions about investment
advisors, actuarial advisors, et cetera, et cetera, has also
gone up. We also tried to institute something of a best
practices where one fund, if they think something hasn't quite
gone the way it should, we let the trustees know about that in
other funds.
Ms. Mazo. One of the points of the multiemployer plans is
that a whole lot of small employers can, as I said, basically
band together and have the fund as a larger entity handle the
investment and the benefit management. And, accordingly, in
every case the fees are much less, except you know there may be
some oddball cases, but the fees are much less than the great
majority of the employers would ever be able to get if they
tried to have their pension plans on their own.
Mr. Scott. I didn't hear any numbers as to what percentage
funds are paying for management of the accounts. One percent?
Half a percent? Two percent? Three percent? Does anybody know?
Ms. Mazo. I think it depends on the portfolio. Every
manager----
Mr. Scott. Mutual funds, and you have the EFT funds go from
anywhere from .1 percent to 2 or 3 percent.
Ms. Mazo. The funds are usually large enough to get less
than 1 percent management fee. But this is something that we
could check out and supplement the record with information if
you like.
[The information follows:]
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
Mr. Scott. What are you recommending, and what does the
bill recommend in terms of cutting benefits? And we talked
about restrictions and tools, management tools and all that,
and I think the employee is looking at benefit cuts. What kind
of cuts are proposed for those in the yellow and red zone?
Mr. Lynch. The cuts in the yellow zone that we had proposed
would really be essentially all of those tools that are
currently available to trustees now, reducing the accrual rate,
ancillary benefits in certain categories, so in that category
the tools are essentially the ones that are currently
available.
Mr. Scott. Accrual means future benefits. What you have,
what you thought you had earned and are entitled to, are
different than accruals in the future. Are you talking about
reducing what had been promised in the past?
Mr. Lynch. It would be the accrual rates. For example, you
would take the rate--funds have taken the rate from say 2
percent accrual rate down to 1 percent accrual rate, which is
what they are permitted to do now.
Mr. Scott. What does that have to do with somebody's check?
Mr. Lynch. It probably as a practical matters means that on
a sliding scale employees would have to work longer to earn
essentially the same benefit.
Mr. Scott. Now, if you have worked and you want to quit
today and you have accrued certain benefits, are you talking
about anything that could adversely affect what someone thought
they had already earned?
Mr. Lynch. No. But if they were a 20-year employee and were
planning to work 30 years, what they had earned at the 20-year
stage would not be touched. What goes forward it would be or
could be touched.
Mr. Scott. Is that everybody's understanding? That what you
have earned and kind of have in the bank will not be adversely
affected by any of these recommendations, but what you may be
able to earn in the future may be affected?
Mr. Lynch. Under the Coalition proposal the two areas that
were absolutely untouchable was benefits for in-pay status,
somebody who is already retired, and then essentially cutting
back on the accrued benefit.
Mr. Scott. Okay. That is the Coalition plan. How is that
different from what is in the bill?
Mr. Lynch. At the moment in the red zone there is not a
provision for that, but nor is there a provision for the
mandatory additional employer surcharge.
Mr. Scott. Wait a minute. You mean what is not in the bill
is a protection of what you thought you had earned? That is not
in the bill?
Ms. Mazo. If I may, the Coalition proposed that if you are
in the red zone, the trustees sub could make recommendations
that the bargaining parties could act upon to cut side
benefits, ancillary benefits, early retirement subsidies even
if they had been earned, but generally not except for very
recent benefit increases to cut the core retirement benefit at
normal retirement age. That proposal is coupled with mandatory
contribution increases for a period of time by the employers in
the Coalition proposal and protection for the employers from
funding penalties while the plan works outs its problems. The
benefit changes, the existing accrued benefit changes, and the
protections for the employers against funding penalties and the
additional surcharges, none of those really very difficult
features are in the bill as it stands now.
Mr. Scott. Mr. Chairman, my time has expired. I think it
would be helpful as we go forward to get a little chart about
how these various proposals actually affect someone's check
because that is really what--I mean, some of this discussion is
a little esoteric. The people want to know. You have been
promised benefits. Am I going get the benefit or not if this
bill passes? That would be helpful to see what the various
proposals are and how someone's check is affected.
I appreciate the extra time.
Chairman Boehner. Well, I am not sure somebody could
provide you with a specific. What has been discussed and what
has been agreed to by the Coalition would be tools available to
the trustees of a multi-employer pension plan that are in fact
in the red zone as a way of trying to protect benefits for all
of the members. And these provisions are not in the bill as we
speak because in fact they are controversial, and we wanted to
study this a little further. But I would note and congratulate
both sides of this discussion because while no one would want
to employ some of those tools, they may in fact be--I think the
trustees probably ought to have those tools in a situation
where they are trying to save the benefits for the vast
majority of their members.
Mr. Scott. Mr. Chairman, that is what we want to see
because when you say tools, some people hear cuts. And if a
little cut is necessary to avoid going to the pension fund, and
as I understand it, a lot of people are getting more from their
pensions than would be guaranteed in the pension fund, then a
little cut would be better than losing half of it and getting
just the guaranteed benefit.
Chairman Boehner. The gentleman is exactly correct.
Mr. Scott. But we want to know exactly what tools,
restrictions and all those other verbs or nouns mean so that we
know exactly what is on the table.
Chairman Boehner. I understand.
Mr. Scott. Thank you.
Chairman Boehner. Just to point out, in fairness, that
those schools that would be available to the trustees in terms
of actually reducing or adjusting ancillary benefits is coupled
with a significant increase, a surcharge and increase to be
paid by employers. And so I think we see both sides willing to
come to the table to design a way out of a very difficult
situation.
Mr. Scott. Mr. Chairman, you have used the term kind of
ancillary benefits and we have talked about core benefits. I
think we need to make sure everybody understands what that
means, what those mean too. I understand the ancillary benefits
are from time to time when the trust fund is doing well, some
extra kind of bonuses are thrown in where people can get to
retire early but that was not really promised. It is kind of
things are going well and they kind of get that. But if we are
starting to cut back, those unpromised benefits would be the
ones cut, not the promised benefit, when someone is working and
expected a core benefit pension, that is not in jeopardy. I
think that is what I mean when we talk about tools and what we
are talking about so people will understand what chance they
have of actually getting their promised benefit. And I think
under some of these proposals it is almost guaranteed, although
you might not get some of the extra things that have been
thrown in along the way. You are guaranteed under this proposal
to get your core benefit and you have the full faith and credit
of every business involved in the multi-employer plan. Unlike
the single employer plan where if that business goes under you
are in tough shape. In this situation, you have got the full
faith and credit of quite a number of different businesses
guaranteeing the fund. So it is a little bit more solvent, if
one of these tools is not going after your core benefit. That
is what we need to kind of make sure that we have got.
Chairman Boehner. I want to thank my colleague from
Virginia. I thank our witnesses today for your excellent
testimony and for helping us understand more clearly how these
reforms will affect the multi-employer plans. We look forward
to continuing to work with you.
The hearing is adjourned.
[Whereupon, at 1:45 p.m., the committee was adjourned.]
[Additional statements submitted for the record:]
Prepared Statement of Hon. Jon C. Porter, a Representative in Congress
From the State of Nevada
Good Morning, Mr. Chairman. Thank you for calling this important
hearing today. The issues that we explore in this hearing, and seek to
resolve in the legislation under examination, today are of the greatest
importance for all Americans, of all ages. I appreciate the opportunity
to continue the work that we, on this Committee and in this Congress,
need to complete in order to strengthen the retirement security of all
Americans. I look forward to the testimony of both panels here today,
and would like to thank our witnesses for appearing before us today to
offer their expert testimony.
The financial health of the defined benefit pension system is a
critical issue for the millions of workers that participate in these
plans. The funding of these plans has become more challenging for many
employers because of the unanticipated economic factors which they face
today. As a result, the number of employers offering defined benefit
pension plans has declined and some have even frozen or terminated
their traditional pension plans altogether. Congress must work to
provide an adaptable environment for these plans where employers are
able to reasonably fund the pension benefits of their employees and
retirees.
I believe that this legislation makes excellent strides in
resolving this situation. As we all work together to achieve this goal,
we must protect the American tax payer from shouldering the burden of
these plans. I am glad to see that this bill makes strong improvements
in securing the financial stability of these plans, as well as
providing the Pension Benefit Guarantee Corporation with the sound
financial footing that will protect the American tax payer.
I am also pleased at the inclusion of Multi-Employer Pension Plan
reform. This necessary step will benefit the thousands of employees and
employers who are responsible for supporting so much of the growth we
have in Southern Nevada. We rely upon these workers to complete the
transportation, infrastructure, and construction projects which make
our community one of the Nation's most vibrant.
One particularly important aspect of improving retirement security
is providing the financial savvy and intelligence of all Americans.
H.R. 2830 provides greater transparency for plan beneficiaries, as well
as providing increased access to financial advisors. Only through
allowing American workers to engage in the process that provides for
their retirement can we expect the system to be fundamentally sound.
Again, thank you Mr. Chairman, for introducing this necessary and
important legislation, and for holding this hearing today. As we strive
to improve retirement security for the American worker, we must strive
to balance the needs of beneficiaries, employers, and taxpayers. I look
forward to working with my colleagues on this committee and throughout
Congress, as we seek to improve the retirement security of all
Americans.
______
Prepared Statement of Herve H. Aitken, Alliance President, the
Multiemployer Pension Plan Alliance
Executive Summary
Chairman Boehner and members of the committee, the Multiemployer
Pension Plan Alliance appreciates your efforts to enact comprehensive
reforms to both single employer defined benefit plans and multiemployer
pension plans. While most of the attention has been focused on single
employer plans, particularly in the airline industry, there are a
number of Teamster multiemployer plans, involving the trucking
industry, that now confront a financial crisis, as well.
The MEPA Alliance was formed last year in response to financial
crisis that arose in the Central States pension plan. All our members
are long time contributing employers to that plan. It is an
understatement to say they were shocked to learn that this plan had
become so severely underfunded that it reached a deficiency in 2004
that would trigger federal excise tax penalties and additional
contributions that our small business members could not afford to pay.
Unless significant reform is enacted, multiemployer plans will
ultimately lose the fight. Rather than creating an environment that
encourages employers to grow their businesses and participate in these
plans, the law has created a death spiral with traps and penalties that
will forever drive current and prospective employers away. In fact, in
a March 5, 1982 Wall Street Journal article, George Lehr, the Executive
Director of the Central States pension plan said in a reference to
withdrawal liability: ``In theory, it's a wonderful law; in practice,
it doesn't work. In the long run, employer liability is the single most
damaging thing pension funds will be facing.'' [Exhibit 1]
The Pension Protection Act of 2005 is a significant improvement
over the current multiemployer pension laws. We appreciate that it will
now require greater transparency and disclosure by the plans. The
smaller businesses that have participated in the Central States pension
plan were kept in the dark about its financial deterioration; neither
the plan administrator nor the trustees informed us of the dire
financial condition until they needed our assistance in seeking
legislation that would allow them to postpone this deficiency.
H.R. 2830 also addresses one of the primary concerns facing smaller
business in these plans: the significant financial penalties that would
result under current law when a plan, such as the Central States plan,
reaches a funding deficiency. Simply put, the excise tax penalties and
additional contributions associated with a funding deficiency would
drive them out of business within a year or two.
The Alliance members support the bill's establishment of new
reorganization rules for severely underfunded (red zone) plans and at-
risk (yellow zone) plans. However, Congress is now delegating to the
plan trustees unprecedented authority to impose additional pension
contributions upon employers when the current collective bargaining
agreements expire. While we recognize that more contributions will be
needed in these underfunded plans, there must be some safeguards
against plan-mandated contributions, of 100 percent or more, than can
force smaller businesses into bankruptcy. We, therefore, are
recommending a 15 percent cap on plan mandated additional
contributions, which is a slight increase over the 10 percent surcharge
that is permitted upon enactment of this bill into law. It bears
emphasis that small employers lack trustees on these plans and those
trustees have historically been unresponsive to our needs and concerns.
Ideally, the withdrawal liability rules should be repealed, rather
than tightened. Short of this, we support reenactment of the law prior
to the Multiemployer Pension Plan Amendments Act of 1980 (MPPAA) that
properly and fairly held that no more than 30 percent of an employer's
net worth can be taken when it withdraws from an underfunded plan. It
is patently unfair that a family-owned company can be stripped of all
of the assets it has built up over generations notwithstanding that the
company has made all its required pension contributions. The Alliance
ask that H.R. 2830 be amended to reestablish this 30 percent rule.
This committee should remove from H.R. 2830 the changes making the
withdrawal liability rules even more onerous. UPS and the Teamsters
proposed these changes to the existing rules that would result in
withdrawal liability when a company uses independent contractors or
third party driver leasing companies to meet customer needs. The
trucking industry rule should not be repealed and the current rule that
reduces liability for a company in liquidation should be maintained. As
will be discussed, the withdrawal liability rules established in 1980
have discouraged new employers from entering these plans and have
sealed the fate of these plans by causing a declining participation
base.
The Alliance members also believe that the controlled group rules,
under current law, need to be reformed. Withdrawal liability should be
confined to the contributing employer and any related, fractionalized
entities that were separated out from the contributing employer to
avoid withdrawal liability. We also support repealing the ``pay now and
dispute later'' provisions of MPPAA.
Importantly, H.R. 2830 does establish objective funding standards
for all plans that would prohibit benefit increases when there is
insufficient income and assets to fund those benefit promises. Benefit
increases should not be allowed in plans that have a funding ratio
below 90 percent. As early as 1996, the Multiemployer Plan Solvency
Coalition reported that trustees of the Central States plan had
imprudently increased benefits beyond the means to pay for them and
that it would exacerbate the underfunding crisis. Benefit promises
should be made only when they can be paid. Similarly, the Alliance
applauds the committee for substantially increasing high end caps on
funding of the plans and permit funding up to 140% of full funding
without penalty.
We appreciate the new requirements in H.R. 2830 that will now
provide timely and accurate disclosure of the key financial information
by the plans to all participating employers, their employees and the
PBGC. There needs to be sunshine in the dark rooms of these plans that
have withheld information from contributing employers and plan
participants in the past. Too much is at stake to tolerate the
nondisclosure of this financial and actuarial data to all but the union
and the employer companies that have trustees on these plans.
The Alliance also recommends that this committee, as part of this
legislation, create a Congressional commission to objectively study and
make recommendations on how to fairly apportion and pay for the huge
underfunding that has arisen in these plans, and in particular the
benefits being paid to retirees that no longer have an employer
contributing to these plans. The Central States plan currently pays
approximately $1 billion annually to 100,000 retirees that lack a
contributing employer. Those benefits consume nearly 100 percent of the
annual contributions received by the plan from all the remaining
employers. Contributing employers can no longer shoulder this entire
burden which is mounting each year.
The Alliance members are committed to achieving these legislative
reforms for multiemployer plans to promote plan solvency, preserve
reasonable pension benefits and save our smaller companies through a
fair realignment of pension responsibilities and liabilities.
The Plight of Smaller Businesses
As hard as it may be to believe, the federal pension law created by
the Multiemployer Pension Plan Amendment Act of 1980 severely penalizes
companies for growing union jobs.
In fact, that law has also made it impossible to sell a private
company. No prudent investor is willing to inherit the mounting
liabilities that come with acquiring a unionized firm that participates
in an underfunded plan, such as the Central States plan.
Contrary to the principles of the American dream, growing a company
now significantly increases liability and wipes out any stake that is
built up in the business. Sadly, MPPAA even precludes an employer from
applying its expertise to other business ventures. Under the so-called
controlled group regulations, the assets of an affiliated company are
also at risk to pay for withdrawal liability if the owners have
controlling interest in the participating employer.
Many of you on this committee may have been owners of small
businesses or worked in a family owned business. Consider for a moment
what you would do if your family business were faced with a decision to
participate in a multiemployer pension plan like Central States? Would
you do it knowing that one day you could wake up and your family's life
work was wiped out because of it? Of course not. Yet, that is the stark
reality faced by all the Alliance members. Only Congress has the
ability to rectify the problem.
Smaller businesses lack both the capital and diversification to
weather much longer the financial crisis in these multiemployer pension
plans. They have absolutely no control over the negotiation or setting
of benefits or contributions in these plans and, as mentioned earlier,
it is difficult for them to even obtain timely and accurate financial
information from them. The trustees are not accountable to them. They
represent either the Teamsters union or one of the major national
companies that pay their salary. Smaller companies also lack the
leverage at the collective bargaining table of those national
companies. In sum, they cannot reform or change these plans from
within, or at the bargaining table. They need your assistance.
The Deteriorating Financial Condition of the Major Teamster Pension
Plans
Much of the discussion in these comments focuses on the Central
States pension plan. That is because all the Alliance members
participate in that multiemployer pension plan and it is the second
largest Teamster pension plan with over $17 billion in assets. However,
financial information on several other significant Teamster plans,
which are also severely underfunded or at risk, is attached to this
testimony. [Exhibits 2-4]. Central States may be one of the worst
plans, but it is not alone.
The deteriorating financial condition of these plans is widespread
because no new employers are willing to join and be exposed to
withdrawal liability. Deregulation of the trucking industry and the
passing of MPPAA in 1980 commenced the slow, but steady, decline of the
unionized trucking industry. Many unionized employers have ceased
operations and the Teamsters have lost over 100,000 jobs in the freight
sector. This in turn has dwindled the contribution base of these plans.
For example, there are now more retirees drawing pensions from the
Central States plan than active workers on whose behalf employers are
making contributions. [Exhibit 5]. The plan is experiencing a two
percent decline annually in the contribution base. With more and more
workers reaching retirement age, the situation worsens each year. The
average age of a union truck driver is approximate 55 years old.
Consequently, the Central States pension plan has an annual
negative cash flow of over $1 billion. It must rely on the returns on
its investments each year to cover this expanding shortfall in revenue.
For a while the rapid increases in the stock market masked these
problems. But the stock crash in 2001 caused these plans assets to
plummet and they are unlikely to change in the near or long-term
future. The Central States plan, which reached a funding deficiency in
2004, is experiencing another bad year in 2005. It is projecting
another $1.2 billion operating loss. For the first quarter 2005, it
lost $451 million and had a negative return on investments.
Since the passage of the Multiemployer Pension Plan Amendments Act
of 1980, there has been a steady decline in these multiemployer plans.
There were approximately 2200 plans in 1980 and fewer than 1700
remained by 2003. Only five new plans have been created since 1992. The
number of active participants in these plans has decreased by 1.4
million since 1980. Thus, Central States is not alone in this financial
struggle; it is however on the front burner having already reached a
funding deficiency.
The seven largest Teamster plans were collectively underfunded by
$16-23 billion in 2002, depending on the method of calculating the
assets. In 2003, the Central States plan alone was underfunded by $11.1
billion. It has been estimated that underfunding in this plan has
further increased in 2004 to $15 billion. Many of these other plans are
as financially strapped as the Central States plan, based on the 2002
data. These Teamster plans account for one quarter of the $100 billion
in total multiemployer pension plan underfunding.
However well intentioned, the changes made to the pension laws in
1980 have exacerbated the financial problems of these plans rather than
strengthened them. These plans cannot continue to exist without new
employers and more active participants. MPPAA shut the door on future
participation by imposing withdrawal liability on all employers for
plan underfunding. The problems confronting these multiemployer plans
are systemic and they will not solve themselves.
It is both shortsighted and patently unfair to propose an alleged
solution which could force smaller contributors out of business rather
than a solution that encourages them to grow their businesses, increase
union jobs and continue to make plan contributions.
The Impact of Plan Underfunding On Smaller Businesses
Underfunding in multiemployer plans creates serious financial
problems for all employers in the plans, but especially for smaller
firms that lack access to capital that is available to publicly-traded
companies.
First, there is a cash flow problem when a plan, like Central
States, reaches a funding deficiency. The employers, by law, are
obligated to pay for this deficiency to put the plan back within the
minimum funding standards of ERISA. Compounding the funding deficiency
payments are excise tax penalties that are imposed.
Exhibits 6-8 illustrate how the combination of additional
contributions and excise tax penalties would destroy the finances of a
smaller company with 100 employees. A funding deficiency of
approximately $400 million, an amount consistent with the Central
States plan's estimates for 2004, would increase this company's pension
contributions by 40 percent. It would incur an additional 5 percent
excise tax penalty that goes not to the plan but the general treasury
and therefore does not help plan solvency. This company may be able to
survive the first year of the funding deficiency. However, in the
second year, it will be forced out of business because the additional
contributions then would increase to 135 percent of current
contributions to the plan, and the excise tax penalty would be an
additional 100 percent of the prior year's deficiency.
The second way in which plan underfunding harms employers is when a
withdrawal from a plan occurs. While a cessation of operations is the
most common way in which withdrawal liability results, it can also
arise through a change in operations, a terminal shutdown, a decline in
union workers, involuntarily by strike or decertification of a union by
the employees, expulsion by the pension fund, or disclaimer of
continued representation of the bargaining unit by the union.
The financial impact of withdrawal liability is now overwhelming.
The amounts of liability, which are calculated on a pro-rata share of
underfunding, now far exceed the ability of most companies to pay; it
exceeds their entire net worth.
For the MEPA Alliance members, the costs associated with withdrawal
liability that would be owed the Central States plan can be as high as
five times their net worth and ten times the profits in their most
profitable year.
While the MEPA Alliance has focused on the harsh financial reality
of underfunding on employers, ultimately it will impact the employees'
pensions and the federal government through the PBGC. If these plans
cannot regain solvency, they face termination. The employees are only
guaranteed payments of approximately $1,000 per month, which is far
below the $3,000 a month maximum benefit under the Central States plan.
Therefore, they could lose up to two-thirds of their benefits. The PBGC
would be obligated to pay that amount, if plan assets were
insufficient.
Therefore, employers, employees and their Union representatives,
and the federal government all have a vested interest in solving this
problem promptly.
The Needed Congressional Reforms
1. Full and Timely Disclosure of Plan Financial
Information:
The time is long overdue for complete, timely and accurate
disclosure of the key financial information by these plans. The
financial condition of the Central States plan has been a guarded
secret, with only the union and four major transportation companies
privy to the most up-to-date information.
Under current law the multiemployer pension plans provide annual
reports almost nine months after the end of the current fiscal year.
Therefore, the Central States plan will release its 2004 information in
September of this year. There is simply no reason why this annual
report information in the Form 5500 cannot be disclosed much sooner,
such as within 3 months after the end of the fiscal year. The key
financial information, including the annual actuarial reports, should
be released to all participating employers and employees, by written
communication or posting it on the plan's website. The Alliance members
also believe that these pension funds, like mutual funds, should be
required to provide quarterly updates. These updates are now provided
by the Central States plan to the court overseeing the fund, so this
would not be a new or burdensome requirement.
Consideration should also be given to mandating a change in the
make-up of the Board of Trustees, which is now controlled by the union
and largest transportation companies. A rotation of employer
representation, to allow for participation by smaller employers, may be
appropriate.
2. Repeal of the Federal Excise Tax and Current Funding
Deficiency Rules is Essential:
Under current law, the combination of federal excise tax penalties
and additional mandated payments under the minimum funding standards
will drive smaller trucking companies out of business within one to two
years. They simply lack the cash to pay an additional 135 percent of
contributions. These rules should be replaced with new reorganization
procedures that apply to any plan that is severely underfunded or at
risk of becoming severely underfunded. A severely underfunded plan
should be defined as one that has a funding ratio of assets to
liabilities of 65 percent, An at-risk plan should be defined as one
with a funding ratio below 80 percent. It is simply imprudent to wait
for a plan to become severely underfunded, or near terminal, before
remedial, reorganization measures are imposed.
While the Alliance members support the general framework of H.R.
2830, safeguards need to be built into that proposal to protect smaller
employers. Under this bill, when a plan goes into reorganization,
additional contributions can be imposed on employers up to 10 percent
of the existing contribution rate of the employer. This 10 percent cap
remains until the next collective bargaining agreement is negotiated.
At that time, the pension plan will become involved in the collective
bargaining process by submitting schedules to the parties based on the
funding needs of the plans. The pension plan could submit a schedule
that requires a 40 to 100 percent, or more, increase in pension
contributions that a smaller employer cannot afford to pay. An employer
would be expelled from the plan, if it fail to pay the plan-mandated
contributions. Withdrawal liability then would be imposed, forcing
bankruptcy upon the company. This unprecedented delegation of power to
the plan to impose additional contributions needs to be restrained for
the good of all employers. The Alliance members believe that a cap on
additional contributions should be set a 15 percent above the rate
under the prior collective bargaining agreement.
3. Re-establishment of Limitations on Employer Liability:
Nothing could be more unfair or more anti-business than a law that
provides that even though you have made all of the pension payments
agreed to with your union, you still can lose all of your company's
assets if a plan becomes underfunded resulting from the actions of
others outside your control. Essentially, the changes made to the
federal multiemployer pension laws in 1980, made all contributing
employers bear the burden for the pensions of workers who never
performed any jobs for their company and for the pension obligations of
their competitors who have gone out of business. That violates the most
basic American principle, that a person and business should be allowed
to prosper from the fruits of their labor.
The Alliance members believe that Congress should restore the law
in effect prior to 1980 that limited the liability of an employer in an
underfunded plan to 30 percent of the employer's net worth. Ideally,
the concept of joint liability of all employers for plan underfunding
should be repealed. It has only served to deter new employers from
joining these plans and it has not improved the financial condition of
the plans which was the main rationale behind the concept of withdrawal
liability.
Even unions recognize this plight. As stated as early as 1982:
``The International Ladies Garment Workers Union hopes the PBGC will
permit its multiemployer plan to exempt the small entrepreneur who
simply wants to sell his business and retire. `He's tired, he wants to
quit or he has a few bad seasons and feels another bad season would
wipe him out,' observes the union's president, Sol Chaikin. 'My own
feeling is that it would be cruel and unusual punishment for our union
pension fund to demand his unfunded liabilities going back 20 years.
That would leave him without a penny.' ''
The plans will tell this Committee that they generally only collect
10 percent of the amount owed when an employer withdraws because few
assets are left when an employer ceases operations. The PBGC has
testified that they collect a comparable 10 percent amount when a
single employer goes into bankruptcy.
Just as the Federal Government has found it intolerable that 90
percent of these costs in single employer plans are passed on to the
PBGC, the employers in multiemployer plans find it intolerable that
they are made to bear this huge expense. In fact, they can no longer
shoulder this cost. No company should have all it assets on the line
for an obligation it never made to workers who were never employed by
them. The 30 percent net worth standard needs to be restored by
Congress.
4. Withdrawal Liability Rules Should Be Eliminated Not Made
More Onerous:
The current law is extremely onerous on contributing employers to
multiemployer pension plans. First, they are made liable for plan
underfunding that they had no part in the making. Then, they are
required to pay the withdrawal liability assessed by a plan before they
have the right to contest it in arbitration. Moreover, the plan's
determination and calculation of withdrawal liability is presumed
correct until proven otherwise by the employer. It is patently unfair
and contrary to normal rules of American jurisprudence to require
employers to pay this alleged liability before the liability is even
established.
Likewise, the fund can sue all the affiliated companies and
individuals that have majority ownership interest in the participating
company and affiliated companies and seek to make them jointly liable
for the withdrawal liability. All employers would be well served by
repealing these ``pay now and dispute later'' rules and controlled
group liability regulations.
Further, it is wholly inappropriate to tighten the withdrawal
liability rules. No company should be exposed to withdrawal liability
when it uses owner operators, independent contractors or third party
leasing companies to perform transportation services at its facilities.
That is contrary to federal labor law and labor policy. It will only
harm trucking companies and their customers. It will provide a basis
for these plans to expel employers and drive them into bankruptcy.
The trucking industry rule should also not be repealed. This rule
is one of the few beneficial exceptions to withdrawal liability that
Congress created in 1980. More trucking employers will only enter these
plans if they have an assurance that they will not be on the hook for
past underfunding. Congress must resist attempts to tighten the noose
of these withdrawal liability rules.
5. Pension Promises Should Be Made Only When They Can Be
Paid:
In 1992, the PBGC became aware that the alarming rise in pension
plan underfunding was due in part to benefit increases that could not
be sustained by the income to these plans. It is neither fair to the
employers nor to the employees to increase benefit levels that cannot
be sustained by the contributions to the plan and the return on the
investments. Yet that is what has occurred. Consequently, these plans
have had to make recent changes to future benefit accruals and in other
areas permitted under current law.
What is needed is an objective standard that governs future benefit
increases. In the past, bills have been introduced in Congress that
would allow a plan to increase benefits only when it is at least 90
percent funded. Such an approach makes sense and the Alliance members
support it to ensure that future benefits can be paid. Otherwise, they
are only false promises that increase the withdrawal liability of
employers.
6. The Need For A Congressional Study On Long Term
Solutions To Plan Underfunding:
While all the above reforms are vital to the short-term viability
of these plans and their contributing employers, there remains a need
for Congress to address the significant past underfunding in these
plans. The Central States plan has $11-15 billion in accumulated
underfunding. Our recommended reforms will prevent this plan from
becoming worse, but it will not solve the ills created in the past.
At best, we project that the plan, which is now about 65 percent
funded, may become 75 percent funded with our suggested changes. The
reason for this modest improvement is that cost of the benefits to the
retirees, who have no contributing employer, is consuming all the
contributions to the plan, a situation that is getting worse each year.
It is unsustainable over the long term. We believe that an objective
study is necessary to remedy the problem. A Congressional study
commission is an appropriate method to develop meaningful and fair
solutions for employers, retirees and the Government. We therefore ask
that Congress fund such a study and require a report back, with
recommendations, within one year.
Conclusion
The Alliance members recognize that defined benefit plans, both
single employer and multiemployer plans, once were the pillars for
creating a sound retirement income for workers in this country. The sad
reality today, however, is that countless numbers of businessmen and
women will not offer them to their workers because of the onerous rules
and liabilities that attach to them under ERISA and MPPAA.
The basic elements of opportunity and incentives are missing from
the equation. Meaningful reforms of the law, as discussed above, can
revitalize these plans. Without change, the plans will continue to
decline in numbers, in financial strength and as retirement vehicles
for workers.
The Alliance sincerely appreciates the important changes in the law
that this committee is making in H.R. 2830. We will do all we can to
assist you in this difficult, but critical, decision-making process.
This is the single most important legislative issue confronting
unionized trucking companies. It is not an overstatement to say change
is necessary for the very survival of the smaller, family-owned, union
trucking company members of the Alliance.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
______
Prepared Statement of the American Association of Retired Persons
(AARP)
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
Prepared Statement of the American Society of Pension Professionals &
Actuaries (ASPPA)
The American Society of Pension Professionals & Actuaries (ASPPA)
appreciates the opportunity to submit our comments to the House
Committee on Education and the Workforce on H.R. 2830, The Pension
Protection Act of 2005.
ASPPA is a national organization of almost 5,500 retirement plan
professionals who provide consulting and administrative services for
qualified retirement plans covering millions of American workers. ASPPA
members are retirement professionals of all disciplines, including
consultants, administrators, actuaries, accountants, and attorneys. Our
large and broad-based membership gives it unusual insight into current
practical problems with ERISA and qualified retirement plans, with a
particular focus on the issues faced by small to medium-sized
employers. ASPPA's membership is diverse, but united by a common
dedication to the private retirement plan system.
Small Business Defined Benefit Plans should be Exempt from Proposed New
Disclosure
Section 501 of the Pension Protection Act (PPA) of 2005 (H.R. 2830)
would require that all defined benefit plans provide participants and
the Pension Benefit Guaranty Corporation (PBGC) with an annual funding
status notice within 90 days after the end of the plan year (e.g., by
March 31 for a calendar year plan). This proposed new notice is based
on a similar notice required for multiemployer plans, but which are not
required under current law to be provided until 60 days after the due
date for the plan annual report (e.g., by December 15 for a calendar
year plan). Specifically, the notice would be required to provide:
<bullet> A statement as to whether the plan's funded current
liability percentage for the plan year is at least 100 percent;
<bullet> A reasonable estimate of the value of plan assets for the
plan year\1\, the projected liabilities for the plan as of the end of
the plan year taking into account any significant events, and the ratio
of such assets to such projected liabilities;
---------------------------------------------------------------------------
\1\ Under the PPA, most plans are required to use a valuation date
as of the first day of the plan year for plan funding purposes as well
as this notice. Small business defined benefit plans (i.e., plans with
500 or fewer participants) may use any day during the plan year for
these purposes (see sections 102 and 112 of the PPA).
---------------------------------------------------------------------------
<bullet> A summary of the rules governing termination of single-
employer plans;
<bullet> An explanation of the benefits protected by the PBGC and
any limitations on such benefits;
<bullet> The ratio as of the end of the plan year of the number of
vested participants no longer employed by the plan sponsor to the
number of active participants; and
<bullet> A statement on the funding policy of the plan and the
asset allocation of investments under the plan on a percentage basis as
of the end of the plan year.
The apparent purpose of this proposed notice is to give
participants and the PBGC rapid information about the funding status of
the plan. It is unclear what will be the practical value of such
information to participants, particularly in the non-union environment.
While some accelerated information might be helpful to provide an
early warning system to protect the PBGC, an exemption from the new
proposed notice should be made for plans sponsored by small companies.
In fact, the Administration which proposed a similar early-warning
disclosure earlier this year did provide for a small business
exception.
Small businesses would incur substantial additional administrative
costs if they were required to comply with the proposed notice. The
notice will require a material amount of actuarial work, which will
then, in many cases, have to be duplicated when the annual report
(i.e., Form 5500) is prepared in the Summer or Fall (for a calendar-
year plan). Also, the proposed new notice is required more than eight
months earlier than the current law notice applicable to multiemployer
plans. That is a particular hardship on small businesses with limited
resources. Finally, the information required in the notice may simply
not be available. For example, many small business plans invest in
hard-to-value assets (e.g., real estate; limited partnership
investments), and it may be several more months before valuations for
such assets are completed.
Small business defined benefit plans have historically not been a
burden on the PBGC since the owners are generally not covered under the
PBGC pension insurance program.\2\ A new, early notice requirement for
small business defined benefit plans that do not pose a potential risk
to the PBGC would unnecessarily increase administrative complexity and
costs for practically no benefit.
---------------------------------------------------------------------------
\2\ In other respects, the PPA recognizes the reduced risk posed by
small business defined benefit plans. Sections 102 and 112 of the bill
exempt plans with 100 or fewer participants from the quarterly
contribution requirements applicable to underfunded plans (see sections
102 and 112 of the PPA).
---------------------------------------------------------------------------
Recommendation
ASPPA recommends that only plans with more than 500 participants
should be required to comply with the proposed new notice requirements.
The definition of small business defined benefit plans for purposes of
this exemption would be the same as the definition of small business
plans used in sections 102 and 112 of the PPA for purposes of
permitting a valuation date for funding as of any day during the plan
year.
______
Prepared Statement of the ERISA Industry Committee (ERIC)
Mr. Chairman and Members of the Committee, thank you for the
opportunity to present the views of The ERISA Industry Committee (ERIC)
on H.R. 2830, The Pension Protection Act of 2005, and H.R. 2831, The
Pension Preservation and Portability Act of 2005.
ERIC is a nonprofit association committed to the advancement of the
employee retirement, health, incentive, and compensation plans of
America's major employers. ERIC's members' plans are the benchmarks
against which industry, third-party providers, consultants, and policy
makers measure the design and effectiveness of these plans. ERIC has a
strong interest in proposals affecting its members' ability to provide
employee benefits, incentive, and compensation plans, their cost and
effectiveness, and the role of these plans in the American economy.
Challenges Before the Committee
News media and other public forums, including hearings before this
Committee, have been filled for months with reports of problems
concerning the funding of defined benefit pension plans as well as
reports of court challenges to defined benefit hybrid plans. In the
midst of this surfeit of information, Congress must separate real from
perceived problems and fashion solutions that will, when enacted,
actually enhance the retirement security of American workers. Too often
today reports of problems in specific industries have led to
suggestions that the entire system needs to be reformed to meet the
most egregious circumstances. The debate has become imbalanced. The
vast majority of plans are not a threat to the PBGC--but harsh and
volatile rules are a threat to the vast majority of plans and the
businesses that sponsor them.
The introductory summary to The Pension Protection Act states:
Employers making major financial decisions must be able to predict
and budget for their pension contributions every year or they'll simply
freeze or terminate their plans and stop offering these voluntary
benefits altogether. Workers also need to know that employers are
making timely contributions to adequately fund their pension plans.
In this statement, the Chairman and the other sponsors of H..R.
2830 have correctly identified the challenge before the Committee.
Pension funding rules are perpetually challenged by the need to balance
the goals of affordability and security. These dual goals must be
premised upon a realistic view of long-term pension liabilities, which
no single snapshot can provide. Funding rules must secure benefits for
workers, but they must also enable a company to allocate cash in its
business in a way that ensures the continued viability and growth of
that business.
Similarly, the introductory summary to The Pension Preservation &
Portability Act states:
Cash balance pension plans--a type of defined benefit plan that is
employer-funded, insured by the PBGC, and portable from job to job--
represent an important component of worker retirement security....The
threat of legal liability [associated with these plans] is creating
ongoing uncertainty and undermining the retirement security of American
workers.
Again, the Chairman and other sponsors of H.R. 2831 have correctly
identified the challenge before the Committee. Without legal certainty,
innovative and popular benefits particularly suited to a mobile and
dynamic workforce, including women, will disappear--and soon.
Employers and employees will continue to want defined benefit plans
in the future. They are a very cost-effective way to provide real
retirement income to workers. If you start with the same pot of money,
larger benefits can be provided to individuals through a defined
benefit program because longevity and investment risks are pooled and
calculated over a longer period of time than any single individual's
lifespan. In addition, the benefits do not fluctuate with investment
performance or the economy. Employees appreciate and benefit from the
certainty provided by having defined benefit plans in their retirement
portfolio. Before their legal status was called into question, many
employers were turning to hybrid defined benefit plans that are well-
suited for the modern workforce, and some of these employers had never
sponsored a defined benefit plan before. Under a rational and
predictable regulatory scheme, recent declines in the numbers of
defined benefit plans can be brought to a halt and perhaps reversed.
We discuss both bills in further detail below, beginning with
H.R.2831.
H.R.2831, The Pension Preservation & Portability Act of 2005
ERIC urges in the strongest possible terms that the Committee
include the substance of H.R.2831 in the longer pension bill (H.R.2830)
when it considers these matters in the next few weeks. The Congress can
construct the most perfect funding rules possible--but without
certainty for hybrid plans those rules are likely to apply to a rapidly
dwindling universe.
Hybrid plans are important to workers' retirement security:
<bullet> Approximately 25% of defined benefit plans today are of
hybrid designs.
<bullet> They provide secure retirement benefits to over 7 million
American workers, and they are even responsible for about 20% of
premium-taxes paid to the Pension Benefit Guaranty Corporation (PBGC).
But companies cannot rationally maintain these plans in the face of
potential legal liabilities that increase by millions, or in some cases
hundreds of millions, of dollars every year and that can result in
large legal expenses even when a plan is exhonorated. The issue has
been festering for years. Time is of the essence and the time for
action is now. The cost of inaction is unacceptable.
The promise of action, however, is that employers will be able to
maintain their plans and to consider installing these plans for their
employees in the future. It bears repeating that hybrid plans are
secure retirement plans----
<bullet> They are paid for by the employer;
<bullet> The investment risk is borne by the employer;
<bullet> The benefit is determined by a formula, not by the ups and
downs of the economy;
<bullet> The benefit is guaranteed by the PBGC;
<bullet> Annuity payout forms must be offered by the plans;
<bullet> Benefits accrue ratably over time so that even shorter
service workers receive a meaningful benefit;
<bullet> Benefits are easily portable; and
<bullet> Employees like, understand, and appreciate these plans.
It is very likely that, with legal certainty, even employers who do
not now offer a defined benefit pension plan will establish hybrid
plans for their employees. If this is the result, this Committee could
rightfully be proud.
H.R.2831 recognizes, however, that legal certainty at too high a
cost is counterproductive. If a premium is charged for certainty,
employers will choose other routes to create a compensation package. In
this regard, H.R. 2831 takes the only rational approach----
<bullet> It validates hybrid plan designs without regard to whether
the plan already exists or is established in the future.
<bullet> It provides a transparent test for age discrimination in
conversions that does not mandate that a conversion follow a specific
formula and does not require additional benefits to be provided just
because the employer is changing the plan for the future.
<bullet> It also resolves a technical issue (called ``whipsaw'')
that has been used to penalize employers who provide generous interest
credits under their plan.
A few key points in the debate over hybrid plans should be
highlighted:
<bullet> The preponderance of courts have determined that hybrid
designs are legal and that they do not discriminate on account of age.
The reasoning in a district court decision that ruled otherwise has
subsequently been rejected by another district court.
<bullet> Employees have not lost earned benefits during
conversions. Under current law all benefits are protected once they are
earned and vested.
<bullet> If the ``whipsaw'' is resolved as it should be, employees
will benefit because plan sponsors will be encouraged to provide higher
interest credits under their plans.
Our Members have discovered several technical issues raised by the
wording of H.R.2831. WE will identify those issues to the Committee and
its staff shortly. In addition, there are several important technical
issues that are not presently addressed by the bill; these issues are
outlined in an attachment to this Statement, and we urge the Committee
to address them in the bill. However, let there be no doubt; we are
here principally to applaud the clarity of the vision in the bill
regarding what must be done and to urge enactment of H.R.2831 as a part
of H.R.2830.
H.R. 2830, The Pension Protection Act of 2005
ERIC Proposes Action: The ERISA Industry Committee has a proud
history of advocacy of sound pension funding. The organization came
into being in response to the government's call for assistance in
implementing the landmark 1974 Employee Retirement Income Security Act.
It was instrumental in fashioning the backstop funding rules of 1987
and in revising those rules in 1994. We do come to the current debate
both with a sense of history and an understanding of the need for
responsible action.
This year, ERIC put forward comprehensive Consensus Proposals for
Pension Funding, PBGC Reform, and Hybrid Plans. (See the complete
proposal on ERIC's web site: www.eric.org.) Key provisions of ERIC's
proposals are summarized below.
To improve funding, ERIC proposes----
<bullet> faster amortization for plan amendments that increase
benefits;
<bullet> a higher funded ratio threshold below which companies must
commence accelerated contributions;
<bullet> inclusion of lump sum benefits in the calculation of
current liability and coordination of the discount rate used for
funding with that used to calculate minimum lump sum distributions;
<bullet> preservation, with modifications, of an employer's ability
to pre-fund required contributions;
<bullet> increases in the contributions that employers can make on
a deductible basis, and
<bullet> increased incentives to fund up plans by allowing excess
assets to be used to fund savings plan contributions on behalf of the
pension plan's participants.
To improve disclosure, ERIC proposes----
<bullet> To provide participants with plan-specific information
parallel to that provided on an aggregate basis to investors, thereby
providing participants valuable information on their plans on a
dramatically accelerated schedule compared to current law.
To protect the PBGC against rapid deterioration of a plan, in
addition to the funding proposals outlined above, ERIC also proposes--
--
<bullet> Prohibiting amendments to increase benefits in sharply
underfunded plans;
<bullet> Ensuring more rapid funding of shut down benefits and
limit PBGC guarantees where opportunity to fund has been truncated by a
bankruptcy,
<bullet> At bankruptcy, restricting PBGC guarantees and limiting
payouts of lump sum and shut down benefits; and
<bullet> Provide greater incentives for employees to take benefits
in the form of an annuity.
ERIC also believes that there should be greater flexibility in
developing solutions for specific industries that will increase the
likelihood that companies will be able to restructure their enterprise
and avoid termination of their pension plans while also ensuring that
the funded status of a company's plans does not worsen.
Assessing the Problem: To determine the extent of the problem
facing it, the Committee faces the difficult task of sifting through a
confusing and sometimes misleading array of numbers describing the
current and potential future state of pension funding and of the
Pension Benefit Guaranty Corporation. The greatest danger is
overstating the problem, for that could easily lead to enactment of
harsh measures that themselves precipitate the problems they seek to
avoid.
For example:
<bullet> In September 2004, the PBGC estimated that pension plans
ensured by the agency were underfunded by $450 billion. The liabilities
in this estimate are calculated as though every company involved were
going to fail and be forced to terminate its plans. This simply is not
going to happen. A recent analysis by Goldman Sachs states, ``Quite
frankly, if all of those sponsors were to fail, pension plan
underfunding would be the least of the worries for the US economy and
the capital markets.''
<bullet> On June 7, the PBGC stated that underfunding in 1108 plans
reporting to the PBGC increased from $279 billion at the end of 2003 to
$354 billion at the end of 2004. However,
<bullet> The same report also states that the funded ratio of
these plans had remained virtually steady--69.7% at the end of
2003 and 69% at the end of 2004. Thus their funded status
actually appears to have remained virtually constant over this
period.
<bullet> From 2003 to 2004, the PBGC reduced the arbitrary
interest rate it uses to calculate liabilities from 4.7% in
2003 to 3.8% in 2004, a 90 basis point drop that dramatically
increased estimates of liabilities in plans reporting to it.
<bullet> The same report also notes that assets in these
plans increased substantially during 2004--from $914 billion to
$1.141 trillion--apparently enough to offset the increase in
liabilities due to the change to a much lower discount rate.
Use of a more reasonable discount rate would produce a
different picture. Moreover, like the $450 billion estimate,
this estimate is predicated on all 1108 plans being terminated,
an unrealistic assessment.
<bullet> The PBGC had a published deficit at the end of 2004 of $23
billion. If the agency used the yield curve interest rate proposed in
the Administration's funding proposal, its deficit reportedly would
have been $19 billion, a significant decrease.
<bullet> A June 7, 2005, Government Accountability Office report
cited a drop in funding ratios in plans from 2000 to 2002, the latest
date for which that agency had data. However, 2000-2002 includes the
impact of the recent economic downturn, so the drop in the funded
status of plans should not be a surprise. Initial evidence from 2003
and 2004, when the economy began to turn back up, presents a different
picture.
<bullet> One recent analysis shows assets of defined benefit
plans at approximately $2 trillion at the end of 1999, dropping
to $1.5 trillion at the end of 2002, but climbing back up to
$1.8 trillion at the end of 2004. That's not back to full
health yet, but the direction is encouraging.
<bullet> While assets have increased in the last two years,
some of their impact has been offset by a continued drop in
long term interest rates, which Federal Reserve Chairman Alan
Greenspan calls anomalous and unprecedented.
Avoiding Pitfalls: The sponsors of H.R.2830 have stated that, while
the Administration's proposals are focused on the PBGC, their bill aims
to provide a soundly financed system in which employers will maintain
their plans rather than freeze or terminate them. We agree that this is
the appropriate focus. Consider the following:
<bullet> Private sector defined benefit pension plans pay
approximately $110-120 billion in benefits to retirees every year. By
comparison, in 2004 the PBGC paid approximately $3 billion.
<bullet> Over 44 million Americans receive or will receive benefits
from defined benefit plans. By comparison, the PBGC's present and
future benefit population at the end of 2004 was approximately 1
million.
<bullet> The PBGC does not have a short-term crisis. At the end of
2004 it had resources sufficient to pay benefits for 20 to 25 years. In
2004 the PBGC received $1.5 billion in premiums and earned $3.2 billion
on it assets--from which it paid $3.7 billion in benefits and
administrative expenses. As new claims come in, the agency's asset base
will continue to grow and it will also receive additional premiums.
H.R.2830, in supplanting a the Administration's short-term PBGC-
focused view with a longer term objective of ensuring sound funding
along with a robust defined benefit system, has avoided several key
pitfalls in the Administration's approach.
<bullet> Averaging and Smoothing: Averaging of the funding discount
rate and smoothing of assets are two concepts that are misapprehended
in the current debate. These mechanisms were placed in the law not to
obscure the status of the plan but to accomplish critical policy
objectives. Specifically, because of current law averaging and
smoothing, (1) the plan sponsor is better able to predict--and plan
for--future cash contributions; (2) unnecessary and harmful volatility
in cash calls on the company are somewhat ameliorated; and (3)
accelerated funding requirements are less likely to occur as the
country moves into a recession. Instead, the sharp cash calls on a
company precipitated by accelerated funding waits until a short time
later, typically as the economy begins an upturn. A February 2005
independent study conducted for the Business Roundtable showed that, if
the Administration's spot rate and mark-to-market measures of assets
had been the law, kicking in accelerated funding as the economy dropped
into a recession in 2001 and 2002, the diversion of cash from business
enterprises to pension funding requirements would have cost the economy
330,000 jobs in 2003 alone. In some cases, the lack of averaging and
smoothing would have created a death spiral in companies, increasing,
rather than reducing, liabilities faced by the PBGC. H.R.2830 wisely
retains averaging and smoothing albeit for a shorter period of time
than under current law. We caution, however, that further analysis of
H.R.2830 is required to ascertain whether the funding scheme outlined
in H.R.2830 will meet the critical funding policy requirements of
predictability, stability, and economic compatibility.
<bullet> Credit Ratings: The Administration proposes that companies
that fall below investment grade be required to fund their plans as
though they were about to terminate. This is based on the faulty logic
that a company's current investment grade determines the funded status
of its plans as well as its ability to survive into the future. It does
not. To the contrary, the increased call on the company's cash can
easily precipitate the death spiral the proposal seeks to avoid.
Moreover, the proposal raises the disturbing prospect of the U.S.
government, not the marketplace, ruling on the financial soundness of
companies, an unprecedented intrusion into the free market. H.R.2830
wisely rejects this approach, retains a more appropriate focus on the
funded status of plans, and imposes additional requirements only on
plans that are significantly underfunded.
<bullet> Credit Balances: The Administration proposals abolish
credit balances, not only removing a key incentive for employers to
pre-fund future required contributions but also breaking faith with
companies that have pre-funded their obligations in the past. H.R. 2830
wisely retains the concept of providing credits for pre-funding,
including, based on our understanding from conversations with staff,
taking into account all assets in the plan, including those contributed
in advance of minimum requirements, in computing the funded status of
the plan for funding purposes. The bill addresses problems that have
arisen by ensuring that the value of the available credit matches the
underlying available assets and by limiting the use of pre-funding
credits if a plan becomes substantially underfunded. While the bill
retains this necessary component of sound funding policy, we are very
concerned that, as drafted, the bill would subtract credit balances
from available assets in determining whether certain ``non-funding''
limits are met, such as those triggering benefit cut-offs and ``at
risk'' status. This can force a waiver of a large part of a company's
existing credit balance, undermining prior pre-payments made in good
faith and discouraging pre-funding in the future. It is vital that this
result be corrected.
<bullet> Deductible Contributions: Plan sponsors face various
limitations on the contributions they can make to their plans on a tax-
deductible basis. While the Administration provided some relief in this
area, the approach in H.R.2830 is more complete and more useful to plan
sponsors. The bill both allows deductions of contributions up to 150%
of current liability and also of contributions, under certain
circumstances, in excess of 25% of compensation. This latter provision
is particularly important for so-called ``legacy'' plans where there
can be far more retirees than workers and the 25% of compensation limit
will severely limit the ability of the employer to fund the plan. ERIC
also recommends that the 10% excise tax imposed on non-deductible
contributions be abolished.
Important Actions: H.R.2830 proposes additional reforms that
Congress should enact.
<bullet> Permanent Interest Rate: H.R.2830 establishes a permanent
interest rate for calculating liabilities. Few circumstances have
caused more confusion and created a greater impediment to employers
maintaining defined benefit plans than the absence of a permanent
discount rate since 2001.
<bullet> Coordination of Lump Sum Calculations: The bill
coordinates the discount rate used for funding with that used to
calculate minimum lump sum distributions, with a phase-in to prevent
disruption of individuals' retirement planning. This is a critical step
that will ensure that plans with lump sums are not stripped of assets
when large numbers of employees leave at once. The bill, however,
should be amended to provide for plans that, under current law, rely on
rates other than the 30-year bond rate for the calculation of lump
sums.
<bullet> Phase-in of Premium Increases: The bill contains
substantial increases in premium-taxes paid to the PBGC. To ameliorate
the impact of this change, H.R.2830 phases those increases in over
time. (Note below, however, that ERIC strongly opposes indexing of
premiums in the future.)
Areas for Additional Analysis and Areas of Concern: H.R. 2830
proposes a substantially new framework for funding requirements. This
scheme must be carefully examined by real companies with real plans in
order to ensure that it results in more soundly financed plans in both
the short and the long term while making it possible--even inviting--
for employers to maintain their defined benefit plans and establish new
ones. This examination cannot be completed in less than one week.
Nevertheless, we offer the following by way of a preliminary analysis
to guide the Committee's further deliberations even as we continue our
examination of the bill's provisions.
<bullet> Long-Term Funding Rules: Sponsoring a defined benefit
pension plan is not a one-year, three-year, or even five-year
commitment. It is a commitment that spans several decades. We are
concerned that H.R.2830 repeals the long-term funding rules that form
the bedrock of ERISA, under which plans experienced real growth and
expansion, and which for decades have resulted in the vast majority of
plans being well-funded and paying all promised benefits to
participants. Maintaining the long-term perspective is vital in meeting
the goal of encouraging employers to establish and maintain defined
benefit plans and to providing a sound, predictable, and stable funding
basis for companies sponsoring pension plans. We are concerned that
repeal of these rules--and reliance solely on the short-term focus
taken by H.R.2830--is likely to result in fewer plans and less well
funded plans over time.
<bullet> Volatility & Harshness: The present current liability
funding rules have already introduced significant volatility into
funding and can confront sponsors with funding requirements that are
sudden and harsh, which makes defined benefit plans less attractive for
businesses and, during the recent downturn precipitated the freezing of
benefits in numerous plans. H.R.2830 appears to add significantly to
the volatility and harshness of current law and to loop into this
unfortunate circumstance plans that are actually very well funded.
Additional volatility and harshness is caused by: (1) reducing the
averaging and smoothing periods to three years; (2) reducing the
corridor for valuing assets; (3) establishing a modified yield curve as
the discount rate (where fluctuations in the rate and in the curve both
affect sponsors liability calculations); (4) dividing the yield curve
into three ``buckets'' each of which can fluctuate; (5) one-sided
amortization (in which experience losses increases amounts to be
amortized but the largest amortization amount is carried forward in
spite of experience gains until the plan regains a 100% funded level;
and (6) the 100% funding target itself. While the bill's four-month
``lookback'' in setting the plan's discount rate is helpful, we are
very carefully examining whether its seven-year amortization period
will work in the context of cyclical companies and we are very
concerned that the bill's provisions appear to come down hard on plans
that are extremely well funded--i.e. close to 100% funded--and are of
no threat to the PBGC. ERIC has proposed a 90% threshold for
accelerated funding. In setting an appropriate target, it is
appropriate to remember that a 10-15% swing in the funded ratio of a
plan is a normal result of economic ups and downs. If the threshold is
set too high, then plans will be significantly overfunded at the top of
the economic cycle, but will be provided no leeway for ordinary and
normal downswings. The unnecessary pressure on a company's cash makes
it less likely the company will maintain a defined benefit plan,
defeating the purpose of the legislation.
<bullet> Yield Curve: H.R.2830 contains a modified yield curve
designed to ameliorate problems stemming from the yield curve set out
in the Administration's proposals. Unfortunately it does not achieve
that goal and we remain convinced that adopting a yield curve for
pension funding purposes is a mistake. If the Congress believes it is
important to have different rates for mature and young plans, there are
much simpler ways to accomplish that goal, and we would be pleased to
discuss this further with the Committee. Some of our concerns include:
(1) The modified yield curve does not simplify required calculations
since each plan must still make estimates of future payouts for years
into the future. (2) The underlying yield curve rate is only
tangentially market-based and it is extremely opaque. A yield curve
works well for financial instruments, such as mortgages or Treasury
bonds, where the structure of the bonds is similar and the payout set.
But the corporate bond market is very diverse--and future pension
payouts are only guesses. They are not set. Moreover, at the durations
that are most important for pension plans, the bond market often is
thin or non-existent. So the Administration's yield curve actually is a
fabrication constructed by agency officials. At best there will be
errors in judgment. At worst the discount rate that must be used for a
$2 trillion program is subject to manipulation that will be impossible
for Congress to uncover. These problems are actually exacerbated by the
vagueness in H.R.2830 where the Treasury apparently would have leeway
to set rates anywhere within the three segments. (3) Use of a Treasury-
constructed yield curve obliterates companies' ability to predict
future contributions. (4) Use of a yield curve, even a modified one,
adds to the volatility of required contributions since both the
interest rate and the slope of the curve will move.
<bullet> Mortality Assumptions: While ERIC recognizes the RP2000
mortality table as published by the Society of Actuaries as a carefully
constructed table that relies on data derived from existing pension
plans, we are concerned that H.R.2830 requires use of discounts rates
that are designed to reflect more precisely than current law the
maturity of plan liabilities--but fails to allow similar precision
regarding mortality assumptions. This will result in a mis-match of
assumptions and severe inaccuracies in measuring liabilities for many
plans. ERIC has proposed that plan-specific mortality assumptions be
allowed, and the bill should be amended to make this possible.
<bullet> Effective Date: The bill assumes that plans can prepare
for a significantly new funding scheme by 2006. This is simply
unrealistic. Imposing changes of this magnitude that quickly is likely
to result in chaos, followed by significant numbers of plans being
terminated or frozen.
<bullet> Indexing of premiums: While ERIC recognizes that some
increase in PBGC premiums is likely, we very strongly oppose indexing
of the premiums in the future. This has the effect of increasing
premiums on all plan sponsors regardless of whether the agency needs
the money or not and in direct violation of the mandate contained in
ERISA (sec. 4002) that premiums be kept at the lowest possible level.
This is so that available money can go into the plan--not be diverted
unnecessarily to a government agency. The result can only be that plans
will become more unattractive to maintain over time. Moreover, under
the bill, the variable rate premium would be indexed twice. Since it is
expressed as percent (0.9%) of underfunding, the variable rate is
automatically indexed as the value of wages and benefits increase over
time. The bill would impose a second wage index on top of the one
already imbedded in the rate's structure. If Congress deems a premium
increase is necessary, we urge that it provide plan sponsors the
certainty of knowing what that increase is by setting out the amounts
required in the law.
<bullet> Benefit Cut-offs: It is important to maintain benefits for
participants in all cases where that is possible. H.R.2830, like the
Administration proposal, focuses on the PBGC and not on the
participants and, in so doing, eliminates or reduced benefits in ways
that are counterproductive and completely unnecessary. ERIC has
proposed a comprehensive set of measures that would protect both
participants and the PBGC and we strongly urge that the bill be
modified in line with those proposals. ERIC's proposals are appended to
this testimony.
<bullet> Disclosure: The bill contains several new disclosure
provisions. ERIC proposes an approach that is simpler, faster, and more
relevant. We propose that the information prepared for a company's 10-K
be provided, on a plan-by-plan basis, to plan participants. This means
that every year participants will be getting the same information as
investors--and they will be getting it 60 days after the close of the
year (90 days for smaller companies).
Conclusion: ERIC is prepared to work with the Committee toward its
goals--sound funding of defined benefit pension plans and an
environment where employers face legal certainty regarding their plans
and where they will want to establish and maintain these valuable
retirement security programs.
Addendum #1
Additional Issues Regarding H.R.2831
The following provisions should be included in H.R. 2831:
1. Amendments to Anti-backloading Rules. Legislation should amend
the anti-backloading rules, both prospectively and retroactively, to
provide that if a plan provides participants with the benefit produced
by two or more alternative formulas, the plan will comply with the
anti-backloading rules if each of the formulas, tested separately,
complies with those rules.
A. This allows an employer that converts its traditional
defined benefit plan to a hybrid formula to offer generous
transition benefits to affected plan participants.
2. Offset for Benefits Provided by Another Plan. The legislation
should also clarify, both prospectively and retroactively, that if a
plan provides for an offset for benefits provided by another plan, the
plan will comply with the anti-backloading rules if the gross benefit
formula (i.e., before application of the offset) complies with the
anti-backloading rules.
A. In the case of a floor-offset arrangement involving a
defined benefit plan and a defined contribution plan, where the
benefits under the defined benefit plan are offset by the
actuarial equivalent of the benefits under the defined
contribution plan, the defined benefit plan complies with the
anti-backloading rules if its gross benefit formula (i.e.,
before application of the offset) complies with the anti-
backloading rules.
3. Nondiscrimination Rules. The legislative history should direct
the Treasury not to revisit the nondiscrimination testing issue raised
by the proposed Internal Revenue Code sec. 401(a)(4) regulations that
the Treasury has withdrawn.
A. Because hybrid plans are defined benefit plans, it should
always be permissible to test them as defined benefit plans
under sec. 401(a)(4) as well as to cross-test them as defined
contribution plans.
4. Determination Letters. The legislative history should direct the
Treasury to begin issuing, by a date certain, determination letters to
plans that have been converted from traditional designs to hybrid
designs.
Addendum #2
Proposed Restrictions on Benefit Improvements and Payouts
1. Treat shut-down benefits as a plan amendment for funding and
guarantee purposes as of the date they are triggered. Also apply to
shut-down benefit payments the restrictions under present law and
proposed below that apply to payment of lump sums.
The Administration's proposal would needlessly jeopardize benefits
that are vital to workers, especially older workers, whose place of
employment is being shut down. While it is true that under the current
structure the PBGC's liability can be increased for shut down benefits
for which no funding has been allowed under current law, the solution
is not to abolish the benefits in all instances--including in ongoing,
well-funded, and even over-funded plans that can easily afford them.
The solution is to adjust the funding and guaranty rules to protect the
PBGC from sudden increases in its liability.
Shut down and other contingent benefits typically cannot be funded
until they are triggered by the contingent event. This makes sense
because the triggering of such benefits is nearly impossible to predict
on a reliable basis. On the other hand, under present law, shut-down
benefits are guaranteed by the PBGC. For shut downs that occur just
before an underfunded plan terminates the PBGC must assume a liability
for which there has been no opportunity for funding to occur.
Most shut down benefits are paid without imposing any liability
whatsoever on the PBGC. They are paid from an ongoing plan that is not
terminating or from a plan that is terminating but is well- or over-
funded. Thus, if shut-down benefits are treated as a plan amendment for
both funding and PBGC guarantee purposes, the PBGC's exposure is
contained while preserving the payment of shut down benefits in the
vast majority of circumstances. Moreover, such treatment would be
consistent with other types of benefits that accrue shortly before
termination but were previously unknown (i.e., plan amendments).
As an additional measure of protection, the same restrictions could
be placed on payment of shut down benefits as are proposed below
regarding payment of lump sum benefits.
2. Freeze the benefit the PBGC will guarantee at the time of
bankruptcy.
Bankruptcy proceedings can stretch out over a long period of time.
We agree with the Administration that the PBGC guarantee limit should
be frozen for a plan at the time of the bankruptcy filing.
3. Prohibit amendments that increase benefits if the plan is less
than 70% funded and has been less than 100% funded for more than a
year.
Under current law, amendments that increase benefits are prohibited
if they would reduce the plan's funded status below 60% unless
simultaneous action is taken to restore the plan at least to a 60%
funded level. The Administration proposes to raise this bar to 80%.
This is simply too high. As we noted earlier, only 3.3% of the dollar
amount of all claims received by the PBGC from 1975 through 2003 came
from plans that were funded at a 75% or higher level on a termination
basis. Plans that are reasonably well funded simply are not a threat to
the PBGC and should be allowed to operate without government
interference. Moreover, we have proposed that the amortization period
for plan amendments that increase benefits be reduced from 30 to 10
years, a very significant change that will ensure that funding for plan
amendments is significantly accelerated.
On the other hand, a plan that is 60% funded can present a
significant exposure to the PBGC. Thus we propose that the 60% level be
increased to 70%.
4. If the plan sponsor is in bankruptcy, limit the percentage of
any lump sum that can be paid to the plan's funded status.
The Administration has proposed to prohibit payment of lump sums
under a variety of circumstances in an apparent effort to curb the
depletion of assets in a plan that might be transferred to the PBGC.
Unfortunately, the PBGC's proposal is far too broad, sweeps into its
net too many plans that will not be transferred to the PBGC, and thus
will cause serious and completely unnecessary disruption for older
workers who are nearing retirement and have little chance to rearrange
their plans. Moreover, the PBGC's abrupt approach is likely to trigger
the very ``run on the bank'' it seeks to avoid as workers eligible to
take a lump sum will do so prematurely rather than risk losing it
later.
A less disruptive approach that still protects the PBGC would be to
apply restrictions only if the plan sponsor is in bankruptcy and, in
these circumstances, to limit the percentage of a lump sum that can be
paid to an individual to the plan's funded status. In other words, if
the employer is in bankruptcy and the plan is 80% funded, then eligible
individuals could receive 80% of their benefit in the form of a lump
sum.
5. Retain present law prohibitions on benefit amendments in
bankruptcy as well as present law prohibitions on lump sum and other
accelerated forms of benefit payments in the case of a plan with a
liquidity shortfall.
Bankruptcies can take several years to work through, and key to the
employer's ability to turn the business around is its ability to retain
knowledgeable and skilled employees. The Administration proposes to
freeze the company's pension plan at the start of a bankruptcy, even if
the plan is 99% funded. This hammer-blow approach will, in fact, harm
rather than protect the PBGC by making it far more likely the company
will not be able to retain the key employees it needs to effect a
recovery.
Under present law, if the employer maintaining a plan is involved
in bankruptcy proceedings, no plan amendment may be adopted that
increases the liabilities of the plan--including by an increase in
benefits or any change in the accrual of benefits or in the rate at
which benefits vest under the plan. Plans that have assets equal to
less than three years of benefit payments may not make lump sum
payments or other payments that deplete assets on an accelerated basis.
These provisions of law should be retained.
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