[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



 
     EXAMINING PENSION SECURITY AND DEFINED BENEFIT PLANS: THE BUSH 
                 ADMINISTRATION'S PROPOSAL TO REPLACE 
                       THE 30-YEAR TREASURY RATE 
=======================================================================
                             JOINT HEARING

                               before the

              SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS

                                 of the

                COMMITTEE ON EDUCATION AND THE WORKFORCE

                                and the

                SUBCOMMITTEE ON SELECT REVENUE MEASURES

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 15, 2003

                               __________

                           Serial No. 108-26

               (Committee on Education and the Workforce)

                           Serial No. 108-26

                     (Committee on Ways and Means)

         Printed for the use of the Committee on Ways and Means





                   U.S. GOVERNMENT PRINTING OFFICE
91-780                       WASHINGTON : 2004
_______________________________________________________________________
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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
CASS BALLENGER, North Carolina       MAJOR R. OWENS, New York
PETER HOEKSTRA, Michigan             DONALD M. PAYNE, New Jersey
HOWARD P. ``BUCK'' MCKEON,           ROBERT E. ANDREWS, New Jersey
California                           LYNN C. WOOLSEY, California
MICHAEL N. CASTLE, Delaware          RUBEN HINOJOSA, Texas
SAM JOHNSON, Texas                   CAROLYN MCCARTHY, New York
JAMES C. GREENWOOD, Pennsylvania     JOHN F. TIERNEY, Massachusetts
CHARLIE NORWOOD, Georgia             RON KIND, Wisconsin
FRED UPTON, Michigan                 DENNIS J. KUCINICH, Ohio
VERNON J. EHLERS, Michigan           DAVID WU, Oregon
JIM DEMINT, South Carolina           RUSH D. HOLT, New Jersey
JOHNNY ISAKSON, Georgia              SUSAN A. DAVIS, California
JUDY BIGGERT, Illinois               BETTY MCCOLLUM, Minnesota
TODD RUSSELL PLATTS, Pennsylvania    DANNY K. DAVIS, Illinois
PATRICK J. TIBERI, Ohio              ED CASE, Hawaii
RIC KELLER, Florida                  RAUL M. GRIJALVA, Arizona
TOM OSBORNE, Nebraska                DENISE L. MAJETTE, Georgia
JOE WILSON, South Carolina           CHRIS VAN HOLLEN, Maryland
TOM COLE, Oklahoma                   TIM RYAN, Ohio
JON C. PORTER, Nevada                TIMOTHY H. BISHOP, New York
JOHN KLINE, Minnesota
JOHN R. CARTER, Texas
MARILYN N. MUSGRAVE, Colorado
MARSHA BLACKBURN, Tennessee
PHIL GINGREY, Georgia
MAX BURNS, Georgia

                    Paula Nowakowski, Chief of Staff
                 John Lawrence, Minority Staff Director

                                 ______

              SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS

                      SAM JOHNSON, Texas, Chairman

JIM DEMINT, South Carolina, Vice     ROBERT E. ANDREWS, New Jersey
Chairman                             DONALD M. PAYNE, New Jersey
JOHN A. BOEHNER, Ohio                CAROLYN MCCARTHY, New York
CASS BALLENGER, North Carolina       DALE E. KILDEE, Michigan
HOWARD P. ``BUCK'' MCKEON,           JOHN F. TIERNEY, Massachusetts
California                           DAVID WU, Oregon
TODD RUSSELL PLATTS, Pennsylvania    RUSH D. HOLT, New Jersey
PATRICK J. TIBERI, Ohio              BETTY MCCOLLUM, Minnesota
JOE WILSON, South Carolina           ED CASE, Hawaii
TOM COLE, Oklahoma                   RAUL M. GRIJALVA, Arizona
JOHN KLINE, Minnesota                GEORGE MILLER, California, ex 
JOHN R. CARTER, Texas                officio
MARILYN N. MUSGRAVE, Colorado
MARSHA BLACKBURN, Tennessee

                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
E. CLAY SHAW, JR., Florida           FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut        ROBERT T. MATSUI, California
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM MCCRERY, Louisiana               JIM MCDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. MCNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHIL ENGLISH, Pennsylvania           LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona               EARL POMEROY, North Dakota
JERRY WELLER, Illinois               MAX SANDLIN, Texas
KENNY C. HULSHOF, Missouri           STEPHANIE TUBBS JONES, Ohio
SCOTT MCINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin
ERIC CANTOR, Virginia

                    Allison H. Giles, Chief of Staff
                  Janice Mays, Minority Chief Counsel

                                 ______

                SUBCOMMITTEE ON SELECT REVENUE MEASURES

                    JIM MCCRERY, Louisiana, Chairman

J.D. HAYWORTH, Arizona               MICHAEL R. MCNULTY, New York
JERRY WELLER, Illinois               WILLIAM J. JEFFERSON, Louisiana
RON LEWIS, Kentucky                  MAX SANDLIN, Texas
MARK FOLEY, Florida                  LLOYD DOGGETT, Texas
KEVIN BRADY, Texas                   STEPHANIE TUBBS JONES, Ohio
PAUL RYAN, Wisconsin
MAC COLLINS, Georgia

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.














                            C O N T E N T S

                              ----------                              
                                                                   Page
Advisory of July 8, 2003, announcing the hearing.................     2

                               WITNESSES

U.S. Department of the Treasury, Hon. Peter R. Fisher, Under 
  Secretary for Domestic Finance.................................    14
U.S. Department of Labor, Hon. Ann L. Combs, Assistant Secretary 
  for Employee Benefits Security.................................    22

                                 ______

American Benefits Council, Business Roundtable, Committee on 
  Investment of Employee Benefit Assets, ERISA Industry 
  Committee, Financial Executives International, National 
  Association of Manufacturers, U.S. Chamber of Commerce, and 
  DuPont Company, Kenneth W. Porter..............................    51
Economic Policy Institute, Christian E. Weller...................    66
Times-Picayune, Ashton Phelps, Jr................................    63
Watson Wyatt Worldwide, Ken Steiner..............................    57

                       SUBMISSIONS FOR THE RECORD

AARP, Michael W. Naylor, letter and attachment...................    84
Allied Pilots Association, Fort Worth, TX, statement.............    89
American Federation of Labor and Congress of Industrial 
  Organizations, statement.......................................    95
American Society of Pension Actuaries, Arlington, VA, statement..    97
Boehner, Hon. John A., a Representative in Congress from the 
  State of Ohio, statement.......................................   100
International Union, United Automobile, Aerospace & Agricultural 
  Implement Workers of America, Alan Reuther, letter.............   101
March of Dimes, Marina L. Weiss, letter..........................   102
United Airlines Master Executive Council of the Air Line Pilots 
  Association, International, Rosemont, IL, Paul Whiteford, 
  statement......................................................   103











                     EXAMINING PENSION SECURITY AND
                    DEFINED BENEFIT PLANS: THE BUSH
                      ADMINISTRATION'S PROPOSAL TO
                   REPLACE THE 30-YEAR TREASURY RATE

                              ----------                              


                         Tuesday, July 15, 2003

             U.S. House of Representatives,
          Committee on Education and the Workforce,
               Subcommittee on Employer-Employee Relations,

                              and

                       Committee on Ways and Means,
                   Subcommittee on Select Revenue Measures,
                                                    Washington, DC.
    The Subcommittees met, pursuant to notice, at 2:00 p.m., in 
room 2175, Rayburn House Office Building, Hon. Sam Johnson and 
Hon. Jim McCrery (Chairmen of the Subcommittees) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                SUBCOMMITTEE ON SELECT REVENUE MEASURES

                                                CONTACT: (202) 226-5911
FOR IMMEDIATE RELEASE
July 08, 2003
SRM-3

              McCrery Announces Joint Hearing on Examining

              Pension Security and Defined Benefit Plans:

                 The Bush Administration's Proposal to

                   Replace the 30-Year Treasury Rate

    Congressman Jim McCrery (R-LA), Chairman, Subcommittee on Select 
Revenue Measures of the Committee on Ways and Means, today announced 
that the Subcommittee will hold a joint hearing with the Subcommittee 
on Employer-Employee Relations of the Committee on Education and the 
Workforce on the Administration's proposal to replace the 30-year 
Treasury rate. The hearing will take place on Tuesday, July 15, 2003, 
in 2175 Rayburn House Office Building, beginning at 2:00 p.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be heard from invited witnesses only. 
However, any individual or organization not scheduled for an oral 
appearance may submit a written statement for consideration by the 
Committee and for inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    Under present law, pension plans are required to use the 30-year 
Treasury bond rate for a variety of defined benefit pension 
calculations. For example, the 30-year Treasury rate is used to 
calculate funding requirements, certain premium payments to the Pension 
Benefit Guaranty Corporation (PBGC), and lump sum distributions.
      
    As a result of the U.S. Department of the Treasury's debt buyback 
program and the subsequent discontinuation of the 30-year Treasury 
bond, the interest rate on outstanding 30-year bonds has fallen 
significantly. Businesses have expressed concerns that this very low 
rate results in an overstatement of their actual liabilities, thus 
forcing them to make artificially inflated payments to their pension 
plans and to the PBGC.
      
    In 2002, the Congress enacted temporary relief in the Job Creation 
and Worker Assistance Act (P.L. 107-147). The new law temporarily 
raises the permissible interest rate which may be used to calculate a 
plan's current liability and variable rate PBGC premiums. The provision 
applies to plan years 2002 and 2003.
      
    On April 30, the Subcommittee held a hearing to explore options for 
a permanent and comprehensive replacement. At the hearing, the U.S. 
Department of the Treasury recommended extending the temporary relief 
provided under P.L. 107-147 by an additional two years to give the 
Administration additional time to formulate a permanent and 
comprehensive solution.
      
    On July 7, the Administration formally announced a permanent 
solution. The solution would replace the 30-year Treasury rate used for 
pension calculations and would implement other funding reforms.
      
    In announcing the hearing, Chairman McCrery stated, ``At the April 
hearing before the Subcommittee on Select Revenue Measures, there was 
bi-partisan agreement that the current method of calculating future 
pension plan liabilities is unsustainable. At the time, both Members of 
Congress and witnesses expressed frustration that the Treasury 
Department was proposing only a temporary extension of the existing 
formula. I am pleased they have joined us in recognizing this problem 
requires a permanent, comprehensive solution. This hearing will provide 
the Congress with an opportunity to analyze the Administration's 
recently unveiled plan. Given the exigencies of this issue, I am 
hopeful the hearing will pave the way for swift legislative action.''
      

FOCUS OF THE HEARING:

      
    The focus of the hearing is to examine the Administration's 
proposal to replace the 30-year Treasury rate with a yield curve 
discount rate and to implement other pension funding reforms.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Due to the change in House mail policy, any person or 
organization wishing to submit a written statement for the printed 
record of the hearing should send it electronically to 
[email protected], along with a fax copy to 
(202) 225-2610, by the close of business, Tuesday, July 29, 2003. Those 
filing written statements that wish to have their statements 
distributed to the press and interested public at the hearing should 
deliver their 200 copies to the Subcommittee on Select Revenue Measures 
in room 1135 Longworth House Office Building, in an open and searchable 
package 48 hours before the hearing. The U.S. Capitol Police will 
refuse sealed-packaged deliveries to all House Office Buildings.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. Due to the change in House mail policy, all statements and any 
accompanying exhibits for printing must be submitted electronically to 
[email protected], along with a fax copy to 
(202) 225-2610, in WordPerfect or MS Word format and MUST NOT exceed a 
total of 10 pages including attachments. Witnesses are advised that the 
Committee will rely on electronic submissions for printing the official 
hearing record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. Any statements must include a list of all clients, persons, or 
organizations on whose behalf the witness appears. A supplemental sheet 
must accompany each statement listing the name, company, address, 
telephone and fax numbers of each witness.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov.
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.

                                


    Chairman JOHNSON. Good afternoon. A quorum being present, a 
joint hearing, and I emphasize joint, of the Subcommittee on 
Employer-Employee Relations of the Committee on Education and 
the Workforce, and the Subcommittee on Select Revenue Measures 
of the Committee on Ways and Means will come to order. I would 
like to thank my colleague from Louisiana, the Chairman of the 
Subcommittee on Select Revenue Measures, Chairman McCrery, 
agreeing to hold this joint hearing on examining pension 
security and defined benefit plans. That is also the Bush plan 
to replace the 30-year Treasury rate.
    So we can get to our witnesses, we have agreed to limit 
opening statements to the Chairmen and Ranking Members of each 
Subcommittee. With that, I ask unanimous consent that the 
record remain open for 14 days to allow Members to insert 
extraneous material into the official hearing record. Without 
objection, so ordered. We are going to continue here without 
Mr. McNulty, who is on his way and will arrive shortly. I wish 
you a good afternoon, and welcome to a historic hearing on a 
very important issue before these two Subcommittees, the 
Subcommittee on Employer-Employee Relations of the Committee on 
Education and the Workforce and the Subcommittee on Select 
Revenue Measures of the Committee on Ways and Means.
    I would like to, at this point, welcome my Co-Chairman, Jim 
McCrery, who is sitting to my left, and our Ranking Member, Rob 
Andrews. Later hopefully, Mike McNulty. As a Member of both 
full Committees, I particularly appreciate the efforts of 
Chairman Boehner and Chairman Thomas to work together on issues 
of joint jurisdiction, and especially on this critical issue of 
pension security for American workers. Today, we are eager to 
hear the Members of the administration explain their recent 
proposal regarding defined benefit pension rules, and this 
hearing is the second in a series of hearings that this 
Subcommittee has held on the issue of defined benefit plans.
    As we learned in our previous hearing, the number of 
defined benefit plans has been declining for years, in part, 
due to overregulation, and we are currently at the center of a 
perfect storm, if you will, with plans struggling under down 
market, low interest rates and an aging workforce. The Employee 
Retirement Income Security Act (ERISA) (P.L. 93-406) and the 
Internal Revenue Code required companies to evaluate the costs 
of projected benefit payments and then set aside cash to fund 
those payments. The interest rate used to determine how much 
interest their cash might earn is the subject of this hearing 
because that rate was the 30-year Treasury bond. Almost 2 years 
ago, the U.S. Department of the Treasury stopped issuing the 
30-year Treasury bond, and the temporary fix we legislated will 
expire in less than 6 months.
    I believe everyone on the dais today understands the 
urgency for workers, companies, and taxpayers of finding a 
suitable long-term replacement for the 30-year Treasury bill 
rate for pension funding purposes. It is in everyone's best 
interest if pension promises are funded at accurate levels. 
Overfunded plans leave companies making unnecessary 
contributions that take away funds from capital improvements or 
hiring new employees. Underfunded plans leave workers and 
retirees at the risk of losing benefits that could leave 
taxpayers at risk through the Pension Benefit Guaranty Corp. 
(PBGC). Last week, the Administration proposed changes that 
would move the measurement of liabilities away from the 30-year 
Treasury bill to a corporate bond blend rate.
    The proposal also increases pension funding disclosures to 
employees and limits the ability of financially troubled 
companies to increase benefits. In our first panel, we will 
hear the Administration's efforts to bring a proposal to the 
table and look forward to hearing definitive details of the 
proposal. We want to work toward a permanent solution.
    Our second panel today will consist of witnesses with 
expertise in the pension industry who will give us their 
responses to the Administration's proposal and their 
perspective on the health of defined benefit plans. The panel 
consists of representatives of the business community, 
actuaries, and academics. I am hopeful that all witnesses today 
will be able to enlighten both Subcommittees on the important 
task of preserving our defined benefit system and continuing to 
encourage employers to provide retirement security for American 
workers.
    I think that at this point, I would like to recognize my 
Co-Chairman of this hearing, and the Chairman of the 
Subcommittee on Select Revenue Measures, Chairman McCrery, for 
purposes of making an opening statement. Chairman McCrery, you 
are recognized.
    [The opening statement of Chairman Johnson follows:]

Opening Statement of the Honorable Sam Johnson, Chairman, Subcommittee 
 on Employer-Employee Relations of the Committee on Education and the 
  Workforce, and a Representative in Congress from the State of Texas

    Good afternoon and welcome to an historic hearing on a very 
important issue before these two Subcommittees--the Employer-Employee 
Relations Subcommittee of Education and the Workforce and the Select 
Revenues Subcommittee of Ways and Means.
    I also want to welcome my Co-Chairman Jim McCrery and our ranking 
members Rob Andrews and Mike McNulty.
    As a member of both full Committees, I particularly appreciate the 
efforts of Chairman Boehner and Chairman Thomas to work together on 
issues of joint jurisdiction and especially on the critical issue of 
pension security for American workers.
    Today we are eager to hear members of the Administration explain 
their recent proposal regarding defined benefit pension funding rules.
    This hearing is the second in a series of hearings that my 
Subcommittee has held on the issue of defined benefit plans.
    As we learned in our previous hearing, the number of defined 
benefit plans has been declining for years, in part due to over-
regulation.
    We are currently at the center of a ``Perfect Storm,'' with plans 
struggling under a down market, low interest rates, and an aging 
workforce.
    ERISA and the Internal Revenue Code require companies to evaluate 
the cost of projected benefit payments and then set aside cash to fund 
those payments.
    The interest rate used to determine how much interest their cash 
might earn is the subject of this hearing because that rate was the 30-
Year Treasury Bond.
    Almost two years ago, the Treasury Department stopped issuing the 
30-Year Treasury Bond and the temporary fix we legislated will expire 
in less than six months.
    I believe everyone on the dais today understands the urgency for 
workers, companies and taxpayers of finding a suitable, long-term 
replacement for the 30-Year T-bill rate for pension funding purposes.
    It is in everyone's best interest if pension promises are funded at 
accurate levels.
    Over-funded plans leave companies making unnecessary contributions 
that take away funds from capital improvements or hiring new employees, 
and under-funded plans leave workers and retirees at risk of losing 
benefits and that could leave taxpayers at risk through the Pension 
Benefit Guaranty Corporation.
    Last week, the Administration proposed changes that would move the 
measurement of liabilities away from the 30-year T-bills to a corporate 
bond blend rate.
    The proposal also increases pension funding disclosures to 
employees and limits the ability of financially-troubled companies to 
increase benefits.
    We appreciate the Administration's efforts to bring a proposal to 
the table and look forward to hearing definitive details of the 
proposal.
    We want to work toward a permanent solution.
    Our second panel today consists of witnesses with expertise in the 
pension industry who will give us their responses to the 
Administration's proposal and their perspective on the health of 
defined benefit plans.
    The panel consists of representatives of the business community, 
actuaries, and academics.
    I am hopeful that all the witnesses today will be able to enlighten 
both subcommittees on the important task of preserving our defined 
benefit system and continuing to encourage employers to provide 
retirement security to American workers.

                                


    Chairman MCCRERY. Thank you, Mr. Chairman. I appreciate the 
opportunity to join with your Subcommittee on Employer-Employee 
Relations to explore this very important subject. In the 
interest of time, I would ask unanimous consent that my opening 
statement be included in the record of the hearing. It has been 
submitted to the Subcommittee.
    I would like to yield 1 minute of my time for opening 
statements to Mr. Portman, a Member of the Committee on Ways 
and Means who has introduced bipartisan legislation covering 
more than the subject of today's hearing, but it includes that 
and other issues pertaining to pensions. So, I yield to Mr. 
Portman.
    [The opening statement of Chairman McCrery follows:]

Opening Statement of the Honorable Jim McCrery, Chairman, Subcommittee 
 on Select Revenue Measures, and a Representative in Congress from the 
                           State of Louisiana

    Thank you, Mr. Chairman. It is a pleasure to join you in co-
chairing this joint hearing of our two Subcommittees.
    Mr. Chairman, it is well-known that within the Committee on Ways 
and Means, you bring to the table perspectives shaped by your 
participation and leadership on the Education and the Workforce 
Committee. It is an honor to be able to develop some of that 
perspective first-hand.
    This hearing is the Subcommittee on Select Revenue Measures' second 
foray into the difficult subject of finding a suitable replacement for 
the now-defunct rate used to calculate the future liabilities of 
defined benefit plans.
    Every witness at our first hearing agreed that the current 
mechanism, based on a multiple of the four-year weighted average of the 
rate on 30-year Treasury bonds, is inaccurate, understating the 
expected growth of plan assets.
    That hearing revealed the unanimity of opinion, both on the 
Subcommittee and among the witnesses, on the need for a permanent 
replacement for the 30-year rate. I applaud the Treasury Department for 
heeding that call and coming forward with a proposal.
    This hearing will give us a better understanding of the theory 
behind and the operation of the Administration's yield-curve proposal, 
which takes into account the term structure of a pension plan's 
liabilities.
    Based upon my review, I believe a yield curve would be a more 
accurate method of calculating these liabilities than the current 
system, which applies the same interest rate, regardless of when the 
plan anticipates paying benefits. I look forward to hearing more about 
this from Secretary Fisher.
    At the same time, the Administration's proposal recognizes that 
fixing the 30-year rate is but one part of the equation. Our goal can't 
just be to fix that problem and move on. It must be to strike a balance 
which ensures funding is adequate to protect the fisc but does not 
result in funding requirements which unnecessarily burden the defined 
benefit system.
    Accordingly, a comprehensive review of the defined benefit system 
will also require us to review:

    ** Mortality tables;
    ** Expected retirement ages;
    ** The extent to which companies should be able to increase 
contributions in good years;
    ** The effect on plan funding of applying different discount rates 
to lump sums versus lifetime pay-outs;
    ** Whether there should be limitations on new benefits or benefit 
accruals when plans are severely underfunded;
    ** The benefits and risks of increased transparency, such as the 
extent to which there should be public disclosure of severely under-
funded plans;
    ** The extent to which discount rates should be ``smoothed'' and 
how to balance the certainty and reduced volatility smoothing provides 
with the effect it has on reducing the accuracy of those rates.
    ** The length and type of transition which may be necessary to move 
from current rules to new ones.

    While it would be my hope that we enact as soon as possible a 
permanent replacement for the 30-year rate, any solution which does not 
address these issues may be premature. I look forward to examining with 
the witnesses the tension between these competing demands.
    Should we find it impossible to develop a comprehensive solution to 
these multi-faceted issues facing defined benefit plan sponsors, 
beneficiaries, and the public, the problems inherent in the current 
formula are sufficiently serious to merit an immediate, albeit short-
term solution.
    I would also like to briefly address the growing interest in carve-
outs which would provide special treatment to one industry or another. 
These proposals are coming from sympathetic industries, in some cases 
businesses still reeling from the effects of September 11 and the 
continuing sluggishness of our economy.
    When reviewing these proposals, we should carefully consider both 
the industries' present need for relief as well as the possible long-
term implications of such carve-outs. Although we will not hear such 
testimony today, it is clearly a matter of substantial importance.
    The defined benefit system has been, and will hopefully continue to 
be, an integral part of retirement security for millions of Americans. 
To do so, however, it must be properly funded to ensure that plans have 
the resources tomorrow to pay for promises made today.
    Congress must not create incentives which unintentionally 
discourage companies and unions from investing plan assets prudently or 
which allow them to make overly generous promises about future benefits 
which cannot realistically be met. Rules which facilitate such plan 
design flaws exacerbate the moral hazard present when a taxpayer-
financed backstop exists for terminated plans.
    Let me be clear. I support a vibrant defined benefit system, one 
which is responsibly financed. As we proceed with this hearing and with 
future legislation, I hope we will keep in mind the importance of 
providing rules for these plans which take into account the interests 
of not only employers and employees but also the future taxpayers who 
will be asked to shoulder the consequences of funding shortfalls.
    Thank you, and I yield back the balance of my time.

                                


    Mr. PORTMAN. I thank Chairman McCrery, and I want to 
commend both of you, Chairman McCrery and Chairman Johnson, for 
holding this hearing, the second one we have had on this topic 
with the joint Subcommittees. Clearly a permanent solution to 
the discount rate is needed. It is needed urgently. The 30-year 
Treasury rate is now obsolete and our temporary fix we put in 
place 2 years ago expires, as Chairman Johnson has said, very 
well.
    As you know, the Committee on Ways and Means is working 
with this Committee has put together more comprehensive 
legislation, the Portman-Cardin legislation, which we had 
planned to mark up earlier this year. Frankly we had been 
waiting anticipating a proposal from the Administration. I 
certainly look forward to discussing the details of the 
Administration's plan here today so we can move forward with 
this more comprehensive needed legislation.
    At the last joint Subcommittee hearing, I joined others in 
the panel, including both Chairs, including in urging the 
Administration to give us a specific proposal as an alternative 
to the 30-year Treasury rate. Again, we look forward to hearing 
more about that today. I think this is a very important issue 
for our economy right now. I think it is one of the factors 
contributing to a weakened economy. By having this artificial, 
low 30-year Treasury rate, many companies are contributing more 
to their pension plans that is needed to fund benefits, which 
does divert precious resources from investments designed to 
grow payrolls and jobs and businesses and contribute to an 
overall economic growth. This is very important. Another reason 
I think it is important is that day by day, we are seeing 
companies freezing their pension plans and workers losing their 
benefits. With that said, Mr. Chairman, I want to thank you 
both for holding this hearing, and I look forward to the 
testimony.
    Chairman MCCRERY. Thank you Mr. Portman. One of our 
colleagues on the Committee on Ways and Means who has 
introduced bipartisan legislation on one facet of this problem, 
Dave Camp from Michigan. I would like to recognize Mr. Camp for 
a brief statement.
    Mr. CAMP. Thank you, Mr. Chairman. Again, I also want to 
thank Chairman Johnson and Chairman McCrery for the opportunity 
to express support for their efforts to update the 30-year 
Treasury bond, but I would like to bring attention to a year 
bill I recently introduced, H.R. 2719, which would provide 
temporary relief for certain defined benefit plans that have 
been maintained by commercial airlines without any cost to 
taxpayers, and all of this while maintaining their normal 
pension payments.
    The Treasury Department proposal that is being examined 
today does not provide airlines with needed relief, and I know 
there are a number of pilots who made an effort to be at this 
hearing today, and I thank them for that. The enormous deficit 
reduction contributions (DRCs) that the airlines are facing is 
an immediate crisis for the airline industry. Replacing the 30-
year Treasury bond would be one step in addressing this crisis, 
but we need to do more. This legislation would provide relief 
without making taxpayers pay the bill. Our plan would make 
airlines continue their normal pension payments and would only 
allow for the deferral of their surcharge contribution payments 
temporarily. These payments are government mandated surcharge 
that was put on during the Clinton Administration on the 
airlines requiring the airlines to make enormous payments in an 
unreasonable time period.
    The legislation introduced by myself and Mr. Pomeroy would 
temporarily defer the additional funding contributions required 
by the DRC for a 5-year period. Airline plans would then pay 
interest on the unfunded liability for 5 years and amortize the 
unfunded liability over the next 15 years. The bill protects 
the PBGC from additional liability in the event an airline's 
pension's plan is terminated during the 10-year deferral 
period. In no way would this relieve the airlines from any of 
their pension liabilities. They will continue to make their 
normal contributions. I thank the Chairman for giving me an 
opportunity to discuss this legislation. I realize it is not 
directly on point with the hearing that you are having today, 
but it is a part of trying to make sure that our defined 
benefit plans are not only strong today, but in the future as 
well. Thank you very much.
    [The joint opening statement of Mr. Camp and Mr. Pomeroy 
follows:]

  Opening Statement of the Honorable Dave Camp and the Honorable Earl 
Pomeroy, Representatives in Congress from the State of Michigan and the 
                         State of North Dakota

    I would like to thank Chairmen McCrery and Johnson, and Ranking 
Members McNulty and Andrews for the opportunity to express my support 
for their efforts to update the 30-year Treasury bond, and also to urge 
your consideration of our bill H.R. 2719, which would provide temporary 
pension funding relief for certain defined benefit plans maintained by 
commercial passenger airlines. Unfortunately, the Treasury Department's 
proposal does not provide airlines with needed relief because the 
Administration proposal does not address deficit reduction 
contributions.
    Airlines and their unions, representing over 600,000 workers, have 
come to us together and asked that we temporarily relieve them of the 
enormous burden of making additional deficit reduction contributions to 
their pension plans. Enactment of this proposal is essential to 
maintaining a healthy and viable airline industry and to protecting the 
pensions of thousands of airline workers.
    The airline industry is facing an economic and pension funding 
crisis. The pension crisis is not the result of carriers failing to 
adequately fund their pension plans. In the past three years, the 
funded condition of airline pension plans has deteriorated 
substantially, largely because of unprecedented stock market declines 
and historically low interest rates. This has triggered a dramatic and 
unanticipated increase in required contributions to these plans.
    This dramatic increase in required pension contributions is 
occurring at a time when the airline industry can least afford it. We 
are all aware that the airline industry is currently suffering through 
its worst economic crisis ever as a result of the global recession, the 
events of September 11th and the Iraq war. Airline balance sheets are 
severely stretched and airlines are struggling to meet additional 
pension obligations and reduce debt. Airlines can't sell bonds to fund 
their pension plans like General Motors did--they just don't have the 
ability. Therefore, we may see other airlines seek protection through 
bankruptcy or be forced to terminate their pension plans.
    We do not want to see a repeat of what happened at US Airways 
earlier this year. This year US Airways was forced to terminate its 
pilots' defined benefit plan as part of the carrier's effort to emerge 
from bankruptcy. The legislation contains a provision that allows the 
US Airways pilots' pension plan to be restored.
    H.R. 2719 will allow cash-strapped airlines to use their limited 
resources to weather the current economic crisis, thereby preserving a 
viable domestic airline industry in the US. And it will allow the 
airlines to weather the crisis without having to terminate their 
defined benefit plans. Termination of airline defined benefit plans 
would not only be tragic for thousands of employees, but it would also 
be a devastating blow to the PBGC.
    Much of the current pension funding crisis is the result of changes 
to the funding rules adopted in 1987 and 1994. In 1987, Congress 
adopted the ``deficit reduction contribution'' (``DRC'')--a special 
funding surcharge assessed when a pension plan's funding status drops 
below 90 percent (or 80 percent in some cases). In 1994, the DRC was 
tightened in several ways, including by requiring that plan liabilities 
be measured based on even more pessimistic interest rate assumptions 
and further shortening amortization periods. In the face of the recent 
downturn, the DRC has proved onerous and inflexible, particularly with 
respect to cyclical industries like the airline industry.
    The Treasury Department proposal does not provide airlines with 
needed relief because the Administration proposal does not address 
deficit reduction contributions. These enormous deficit funding 
contributions are the immediate crisis facing the air carriers. 
Replacing the 30-year bond yield will not address the crisis they face 
today.
    Additionally, the Treasury Department proposal would ``freeze'' 
benefit accruals in underfunded plans sponsored by companies that are 
not investment-grade rated. This proposal, if applied to airline plans, 
could undermine workers' benefit expectations and trigger massive labor 
disputes because most collective bargaining agreements in this industry 
promise workers a right to continue to earn pension benefits during the 
collectively bargained agreements term.
    H.R. 2719 would temporarily defer the additional funding 
contributions required by the DRC for a period of 5 years. Airline 
plans would then pay interest on the unfunded liability for 5 years and 
then amortize the unfunded liability over the next 15 years. The bill 
protects the PBGC from additional liability in the event of an airline 
pension plan's termination during the 10-year deferral period.
    Solving the airline pension funding crisis requires temporary 
relief from these inflated DRC payments, which act much like a 
government-mandated surcharge. The airline industry is going through a 
severe, but short-term, problem caused by an extraordinary coincidence 
of adverse events. It is a cyclical industry, not a declining one. The 
airline industry will recover and will continue to pay its pension 
obligations. The bill presents a solution that gives relief to the 
airlines and their defined benefit plans, while at the same time 
protecting pension benefits and the PBGC.
    The proposal has the support of airline management and employees. A 
copy of the AFL-CIO Transportation Trades Department letter of support 
is attached for the record. Again, I thank the Chairmen and Ranking 
Members for allowing me this opportunity.

                                


    Chairman MCCRERY. I thank the gentleman for highlighting 
this issue this Subcommittee will certainly have to consider as 
we move forward on this issue. With that, Mr. Chairman, I yield 
back.
    Chairman JOHNSON. Thank you and your statement will be 
entered in the record. Chairman McCrery, I thank you again, and 
I recognize Ranking Member of the Subcommittee on Employer-
Employee Relations, Mr. Rob Andrews, for his opening statement.
    Mr. ANDREWS. Thank you, Mr. Chairman, and I would like to 
thank you and your Co-Chairman for sponsoring this hearing. 
There are many issues in the pension area where there are 
significant disagreements. There are 69 million Americans 
working today with no pension. There have been some serious 
abuses under the defined contribution system that have been 
brought to light in recent years, and there will be some 
significant disagreement. I think this is one area though where 
there is significant agreement, and we need to move quickly to 
enact some important legislation. There are employers all over 
our country who are not investing in new plant, not investing 
in new equipment, not hiring new workers, perhaps even letting 
go of workers because of enormous contributions they have to 
make to pension plans.
    Now if the purpose of those contributions is to secure the 
stability of those plans, then that is what we want to see. If 
those enormous contributions are triggered by a set of 
anomalous economic circumstances and, by the need to comply 
with an outdated and obsolete financial standard, that is not 
what we want to see. It is important that we solve the problem. 
The solution that we are looking for--and I would emphasize 
what Mr. Portman and Chairman Johnson said, it needs urgency of 
the Congress--is one that combines a couple of elements that we 
will be looking for both in the Administration proposal and I 
think we have already seen in Mr. Portman and Mr. Cardin's 
proposal, which I would embrace.
    The first standard is that the new rule promote the 
stability of pension funds over the long-term. We should enact 
nothing that in any way erodes, or takes away from the strength 
of pensions. I think the legislation introduced by Mr. Portman 
and Mr. Cardin meets that standard. Second, any standard must 
be fair to individuals. The effect on lump sum distributions 
must be such that there is no punitive or unfair impact upon 
individuals receiving a lump sum distribution. Third, the plan 
must provide for significant and immediate relief for 
employers. Must be something where employers immediately 
realize the benefit of restructured pension contributions. We 
spent a lot of time this year talking about economic stimulus. 
It is ironic at the same time the Congress is debating economic 
stimulus, an economic depressant has been rippling through the 
economy in the form of these enormous pension contributions. We 
need to reverse that depressant and complement the stimulus 
that has already been enacted so our economy can grow.
    Finally, it is important that the solution for this problem 
reflect long-term stability in the law. One of the concerns 
that I will tell the Administration I have right at the outset 
is the possibility of an erratic future in this area. I think 
it is very, very important that people who maintain defined 
benefit plans, we would like to see a lot more of them. Know 
with certainty the financial environment in which they are 
going to be operating and we can quarrel about the technical 
assets and liabilities of the yield curve approach, but there 
is one concern that for me is a threshold concern, and that is 
whether the instability that is built into that approach 
disqualifies this as a solution.
    So, I thank our colleagues for having this hearing. I would 
urge two things. One is that we stick to the narrow issue 
before us, which is technical correction of this interest rate 
discounting problem and not wander off into other more 
controversial areas, number one; and number two, that we act 
expeditiously so that companies throughout our country can 
benefit from this and therefore workers can benefit from it as 
well. I thank the Chairman for the time.
    Chairman JOHNSON. Thank you Mr. Andrews. I now would 
recognize Ms. Stephanie Tubbs Jones for whatever opening 
statement you wish to make.
    Ms. TUBBS JONES. Thank you Mr. Chairman. I am glad to have 
the opportunity to participate in this joint Subcommittee 
hearing, and I will share my time with my colleague over here 
who has been very active in the area. We are all in agreement 
on the focus of this hearing. The Administration's proposal for 
a permanent replacement of the 30-year Treasury rate is a very 
important issue for every Member of Congress and millions of 
American workers. Ultimate resolution of this issue will have a 
major effect on millions of American workers not just for a day 
or week, but for the duration of their retirement years.
    Defined benefit plans, the intended target of this 
proposal, play a very important role in our private pension 
system and in the lives of approximately 44 million workers, 
retirees and beneficiaries. These individuals are promised a 
determinable benefit under the pension plan for the duration of 
their years. The amount of the benefit as well as the long-term 
financial security for these workers depends, in large part, on 
the interest rate used to calculate both the funding of the 
promised benefit and the total benefit payable as a lump sum 
distribution at retirement.
    On April 30th, the Subcommittee on Select Revenue Measures 
held a hearing to consider available options for a permanent 
replacement of the 30-year Treasury rate. At this hearing, the 
Administration, through the Treasury Department, recommended 
that the current temporary provision enacted in 2002 for 2 
years be extended for another 2 years. The general response was 
well, we want a little more long-term and we are pleased that 
the Administration has made some proposals. There is little 
disagreement that the current interest rate used in calculating 
the level of funding needed for promised benefits under the 
plan is no longer an appropriate measure. I look forward to 
having the opportunity this afternoon to talk with Mr. Fisher 
and the other panel on many of these issues. I will ask that 
the rest of my statement through unanimous consent be submitted 
for the record. I yield all the rest of my time to my colleague 
Mr. Pomeroy.
    [The opening statement of Ms. Tubbs Jones follows:]

      Opening Statement of the Honorable Stephanie Tubbs Jones, a 
           Representative in Congress from the State of Ohio

    Today I am pleased to join my colleagues, Chairman Jim McCrery of 
the Select Revenue Measures Subcommittee, Chairman Sam Johnson, and 
Ranking Member, Robert Andrews, of the Subcommittee on Employer-
Employee Relations, Committee on Education and the Workforce, for this 
joint hearing.
    We are all in agreement that the focus of this hearing, the 
Administration's proposal for a permanent replacement of the 30-year 
Treasury rate, is a very important issue for every Member of Congress 
and millions of American workers. The ultimate resolution of this issue 
will have a major effect on millions of American workers, not just for 
a day or a week, but for the duration of their retirement years.
    Defined benefit plans, the intended target of the proposal before 
us, play a very important role in our private pension system, and in 
the lives of approximately 44 million workers, retirees, and 
beneficiaries. These individuals are promised a determinable benefit 
under the pension plan for the duration of their retirement years. The 
amount of the benefit, as well as the long-term financial security for 
these workers, depend in large part on the interest rate used to 
calculate both the funding of the promised benefit and the total 
benefit payable as a lump sum distribution at retirement.
    On April 30, 2003, the Select Revenue Measures Subcommittee held a 
hearing to consider available options for a permanent replacement of 
the 30-year Treasury rate. At this hearing, the Administration, through 
the Department of the Treasury, recommended that the current temporary 
provision, enacted in 2002 for two years, be extended for another two 
years.
    The general response from most of our Members to this 
recommendation was frustration. Many of us are keenly aware of the 
important role this issue plays in the long-term financial planning of 
corporate plan sponsors and the retirement security for millions of 
Americans.
    There is little disagreement that the current interest rate used in 
calculating the level of funding needed for promised benefits under the 
plan is no longer an appropriate measure. In addition, we have heard 
from many plan sponsors and representatives of employee groups who have 
expressed strong opposition to a temporary extension of the existing 
formula.
    The level of uncertainty that such an approach could cause for plan 
sponsors could lead to the ultimate demise of our defined benefit plan 
system. This is an undesirable outcome for the 44 million workers and 
their families who are currently served by our defined benefit system.
    It is clear that we have a difficult task ahead of us as we seek to 
develop a proposal that would balance the competing interests of plan 
sponsors and financial security for millions of American workers, 
beneficiaries and retirees who have earned a pension under these plans.
    I would like to thank the Administration for responding to the 
concerns of our Members and presenting us with a proposal for 
discussion today. I look forward to working with my colleagues and the 
Administration as we seek to develop a balanced and reasonable solution 
to this important issue.

                                


    Mr. POMEROY. I thank the gentlelady very much for yielding 
and appreciate the Chair's indulgence. I am going to be called 
to another meeting that I have to attend. I want to put on the 
record that I believe we have to approach the issue of 
reserving for pension funds consistent with the broad 
bipartisan goal of making certain we have defined benefits as 
an active presence in the employer benefit marketplace that we 
define our response to the existing funding formula problem in 
a way that will not place additional and significant pressure 
on the freezing or termination of defined benefit plans.
    Indeed, we ought to have as a goal increasing defined 
benefit plans not bringing them to an end. To that end, I 
believe that new reserving strategies that are unknown, that 
are not defined, that are highly complex that raise a distinct 
prospect of substantial near term funding liabilities to the 
employers all place pressure against continuing defined benefit 
pension plans and will significantly impact corporate 
strategies in this regard.
    I am a former insurance commissioner, and I care a lot 
about solvency. So, I don't think anybody ought to confuse what 
we are talking about as we look for strategies that work. We 
want solvent pension plans, no question about it. We don't want 
to take such a conservative approach with coming up with a 
funding formula that we inadvertently place significant 
pressure on the employer community to freeze or terminate their 
defined benefit plan. In the end that doesn't do anybody good, 
most particularly the workers that need their pensions. In that 
regard, I look forward to this hearing. It is an extremely 
important one, Mr. Chairman. I will have some questions to 
submit in writing in the event that I don't have an opportunity 
to ask them in this hearing.
    Chairman JOHNSON. Without objection, so ordered. Thank both 
of you for your comments. I want to welcome our witnesses, both 
Chairman McCrery and I welcome you to our hearing. The 
Honorable Peter Fisher is our first witness, and the Honorable 
Ann Combs is our second. We are glad to have both of these 
esteemed people from the Administration. Peter Fisher was 
confirmed by the U.S. Senate as Under Secretary for Domestic 
Finance on August 3, 2001. Prior to joining the Treasury 
Department, Mr. Fisher was Executive Vice President of the 
Federal Reserve Bank of New York and manager of the system Open 
Market Account for the Open Market Committee overseeing all 
domestic open market and foreign exchange operations and the 
provision of account services to foreign central banks. Mr. 
Fisher earned his Juris Doctor (JD) degree from Harvard and his 
Bachelor of Arts (BA) from Harvard college.
    Ann Combs is the Assistant Secretary of Labor for 
Employment Benefits Security and was confirmed on May 9, 2001. 
Before her appointment, Ms. Combs was Vice President and Chief 
Counsel, Retirement and Pension Issues for the American Counsel 
of Life Insurers. She also was a principal at the William M. 
Mercer firm and served on the Advisory Council on Social 
Security. During the Reagan and prior Bush Administration she 
spent 6 years as Deputy Assistant Secretary for the Employee 
Benefits Security Administration. A graduate of the University 
of Notre Dame, Ms. Combs holds a JD from George Washington.
    I remind Members that we will be asking questions after 
both witnesses have testified and ask Members to be mindful of 
the 5 minute rule. I believe that both of you are familiar with 
that 5 minute rule as well. Mr. Fisher, you may proceed.

STATEMENT OF THE HONORABLE PETER R. FISHER, UNDER SECRETARY FOR 
       DOMESTIC FINANCE, U.S. DEPARTMENT OF THE TREASURY

    Mr. FISHER. Thank you, Chairman Johnson, Chairman McCrery, 
Ranking Member Andrews, and other Members of the Committee. Ann 
Combs and I are pleased to be here to present the 
Administration's proposals for accurately measuring the 
liabilities of defined benefit pensions. I ask that my written 
testimony be made part of the record. Let me briefly summarize 
my testimony. Our shared goal is to improve the retirement 
security for workers and retirees by strengthening the 
financial help of the voluntary defined benefit system. To do 
this, we must ultimately undertake comprehensive reform.
    Americans are rightly demanding increased accuracy and 
transparency in corporate accounting. The Administration 
believes that America's pension beneficiaries are every bit as 
entitled to timely and accurate accounting and disclosure as 
are America's shareholders. The Administration's proposals 
released on July 8th represent a first step in this direction. 
The current rules that specify minimum funding requirements 
have not served us well. Sponsors today face burdensome and 
volatile funding contributions, and many plans are not 
adequately funded.
    Current rules provide one set of funding requirements under 
one set of measures, but if a plan slips below certain funding 
levels on those measures, the regime switches to a different 
measure and more stringent funding rules. This leads to 
volatility and uncertainty in funding requirements. The 
Administration would like to work with Congress over the next 
few months to develop proposals to reform funding rules to 
reduce this volatility in funding contributions while also 
moving to better funded plans over time. If we can reach 
agreement on more accurate measures and fix the funding rules, 
we would then like to consider adjustments to the tax 
deductibility of pension contributions to encourage sponsors to 
make contributions in good times as well as bad.
    From the Administration's point of view, the predicate for 
doing any of this is accurate measurement of current pension 
liabilities.
    Chairman McCrery, in testimony before your Subcommittee in 
April, I identified three issues that need to be addressed to 
create a permanent replacement for the 30-year Treasury. Our 
proposal addresses each of those. First, pension discount rates 
should be designed to ensure that liabilities reflect the 
timing of future benefit payments. Using a single long-term 
corporate interest rate to discount all pension liabilities 
will mask the underfunding of many pension plans and put other 
plans at risk. The Administration proposes that benefit 
payments made in future years be discounted to today's dollars 
using discount rates taken from a corporate yield curve. 
Liabilities would be computing using interest rates for 
specific years to discount benefit payments due to be made in 
each year. The Administration proposes a 5-year transition, 
beginning with use of long-term corporate rates in years 1 and 
2 for all plans.
    Everyone understands that if you go to a bank to purchase a 
certificate of deposit (CD), you will receive a different 
interest rate for a different maturity CD. A 1-year rate for a 
1-year CD, a 5-year rate for a 5-year CD, and a 10-year rate 
for a 10-year CD. If in measuring the present value of the 
bank's liabilities for those different CDs, the bank used only 
a 10-year rate, it would significantly understate its 
liabilities for the short-term CDs. The same math holds true 
for pension liabilities.
    Second, to produce an accurate measure of liabilities, 
pension discount rates should be based on current financial 
conditions. The current rules for smoothing discount rates by 
using a 4-year average leads to less accuracy and to greater 
volatility in funding. The Administration proposes a 5-year 
transition from 4 years smoothing to 90 days smoothing. This 
will eliminate the impact of day-to-day market volatility while 
providing an appropriately current measure of interest rates.
    Third, in order to fairly treat workers of all ages, we 
should use the same yield curve to value age appropriate lump 
sum payments in a consistent and neutral manner. The 
Administration proposes that after a 5-year phase in, the same 
yield curve used to manage pension liabilities should be used 
to measure lump sum payments. Everyone recognizes that the 
Administration's proposal provides the most accurate measure of 
liabilities. Criticism of our proposal are off the mark. 
Pension rules appear to be the only part of our financial 
system that do not use the standard techniques in calculating 
present values.
    Moreover, discounting all liabilities using a single long-
term corporate rate will lead to systematic underfunding of 
pensions in plans with predominantly older workers. We think 
that older workers have the same right to well-funded pensions 
that younger workers have and that they should not be 
disadvantaged by the use of an inaccurate discount rate 
methodology. As I stated at the outset, the Administration's 
permanent discount rate replacement proposal is designed to 
strengthen Americans' retirement security by producing accurate 
measure of pension liability. I look forward to answering your 
questions and to working with both of your Committees to 
achieve this goal.
    [The prepared statement of Mr. Fisher follows:]

    Statement of the Honorable Peter R. Fisher, Under Secretary for 
           Domestic Finance, U.S. Department of the Treasury

    Chairman McCrery, Chairman Johnson, Ranking Member McNulty, Ranking 
Member Andrews, and Committee members, Labor Assistant Secretary Ann 
Combs and I are pleased to present to you the Administration's 
proposals for strengthening the long-term health of the defined benefit 
pension system and making pension benefits more secure for America's 
working men and women.
    To begin, we must be clear on our objective: we all want to improve 
the retirement security for the nation's workers and retirees by 
strengthening the financial health of the voluntary defined benefit 
system that they rely upon. Current estimates suggest that pension 
plans in aggregate are underfunded by more than $300 billion. To 
achieve our objective, pension funding must improve. That will not 
happen until the existing pension funding rules are fixed. Over the 
next few months, the Administration would like to work with Congress to 
analyze the existing funding rules and develop additional proposals to 
improve and strengthen them.
    Making Americans' pensions more secure is a big job that will 
require comprehensive reform of the pension system. The Administration 
proposal that we released on July 8 is the necessary first step in the 
reform process but it is only the first step. Before I outline that 
proposal in detail, I would like to summarize briefly the case for 
comprehensive reform and list some of the topics that we believe reform 
should address.
Reform Issues
    Americans have a broadly shared interest in adequate funding of 
employer-provided defined benefit pensions. Without adequate funding, 
the retirement income of America's workers will be insecure. This by 
itself is a powerful reason to pursue improvements in our pension 
system.
    At the same time, we must remember that the defined benefit pension 
system is a voluntary system. Firms offer defined benefit pensions to 
their workers as an employee benefit, as a form of compensation. Our 
pension rules should thus be structured in ways that encourage, rather 
than discourage, employer participation.
    Key aspects of the current system frustrate participating employers 
while also failing to produce adequate funding. We thus have multiple 
incentives to improve our pension system, and to thus better ensure 
both the availability and the viability of worker pensions. We owe it 
to the nation's workers, retirees, and companies to roll up our sleeves 
and to create a system that more clearly and effectively funds pension 
benefits. Major areas that require our prompt attention include:

    1. Funding Rules

    Our complicated system of funding rules has been constructed, in 
part, to dampen the volatility of firms' funding contributions. Yet 
current rules fail to do so. After years of making few or no 
contributions at all, many firms are facing precipitous increases in 
their annual funding requirements. This outcome is frustrating to 
business and it has failed to provide adequate funding for workers and 
retirees.Improvements to funding rules should mitigate volatility, 
foster more consistent contributions, and increase flexibility for 
firms to fund up their plans in good times. Specific issues in the 
funding rules that need to be examined include:

    La. Volatility Caused by the Minimum Funding Backstop. The current 
minimum funding backstop, known as the deficit reduction contribution, 
causes minimum contributions of underfunded plans to be excessively 
volatile from year to year.
    Lb. Funding Target. The existing funding target is based on current 
liability, a measure with no clear or consistent meaning. We will seek 
to develop a better target.
    Lc. Contribution Deductibility. Together, minimum funding rules and 
limits on maximum deductible contributions require sponsors to manage 
their funds within a narrow range. Raising the limits on deductible 
contributions would allow sponsors to build larger surpluses to provide 
a better cushion for bad times.
    Ld. Asset Measurement. Under existing rules, assets can be measured 
as multi-year averages rather than current values. Pension funding 
levels can only be set appropriately if both assets and liabilities 
measures are current and accurate. Failure to accurately measure assets 
and liabilities contributes to funding volatility.
    Le. Credit Balances. If a sponsor makes a contribution in any given 
year that exceeds the minimum required contribution, the excess plus 
interest can be credited against future required contributions. These 
credit balances--mere accounting entries--do not fall in value even if 
the assets that back them lose value. Credit balances allow seriously 
underfunded plans to avoid making contributions, often for years, and 
contribute to funding volatility.
    Lf. Benefit Amortization. The amortization period for new benefits 
can be up to 30 years long. This may be excessive. We will also look at 
other statutorily defined amortization periods.

    2. Actuarial Assumptions

    We also intend to examine how the application of actuarial 
assumptions in the current funding rules may contribute to funding 
volatility and to inaccurate measurement of pension liabilities. For 
example, companies do not want to be surprised to find they have 
inadequately funded their plans because the mortality tables used in 
the funding rules are outdated or because those rules fail to account 
for lump sum payments. We will examine:

    La. Mortality Tables. In order to ensure that liabilities are 
measured accurately mortality estimates need to be made from the most 
up to date and accurate tables available. The Treasury will be 
examining the tables currently in use over the next few months and 
determine, after inviting public comment, whether they should be 
replaced.
    Lb. Retirement Assumptions. Retirement assumptions made by plan 
actuaries need to reflect the actual retirement behavior of those 
covered by the plan.
    Lc. Lump Sums. Liability computations for minimum funding purposes 
need to include reasonable estimates of expected future lump sum 
withdrawals that are determined by methodologies that are broadly 
consistent with other estimates of plan obligations.

    3. Other Issues

    Three other issues also deserve review:

    La. Extent of Benefit Coverage. It may be advisable to limit or 
eliminate guarantees of certain benefits that typically are not funded, 
such as shutdown benefits.
    Lb. Multi-employer Plan Problems. Multi-employer plans operate 
under a different set of rules than single-employer plans. Despite 
these regulatory differences, the same principles of accuracy and 
transparency should apply to multi-employer plans, and we will be 
reviewing the best ways to accomplish this.
    Lc. PBGC Premiums. PBGC's premium structure should be re-examined 
to see whether it can better reflect the risk posed by various plans to 
the pension system as a whole.

    Although comprehensive reform needs prompt attention, as I 
testified before your Subcommittee in April, Chairman McCrery, the 
necessary first step is to develop a more precise measurement of 
pension liabilities. Fixing the pension funding rules won't help unless 
we give our immediate attention to ensuring that we are accurately 
measuring the pension liabilities on which those rules rely.
    As I described in detail at the April hearing, our immediate task 
is replacing the 30-year Treasury rate used in measuring pension 
liabilities for minimum funding purposes.
    I think that we all agree that any permanent change in pension 
discounting rules should not contribute to future pension plan 
underfunding. In making the recommendations that I am about to 
describe, the Administration is seeking to measure accurately pension 
liabilities, in order to provide the necessary foundation for reform of 
the funding rules, which then will help ensure that pension promises 
made are pension promises kept.
    We face two near-term concerns that must be addressed in getting to 
a permanent replacement of the current discount rate.
    First, firms that sponsor defined benefit plans already are 
budgeting their pension contributions for the next several years. Near-
term changes to the current rules that would increase pension 
contributions above current expectations could disrupt these firms' 
existing short-term plans.
    Second, many underfunded plans are already facing sharp increases 
in their required pension funding contributions. Thus, while we must 
ultimately ensure that liabilities are measured accurately and that 
firms appropriately fund the pension promises they have made, an abrupt 
change from the current system could do more short-term harm than good 
by triggering plan freezes or terminations.
The Importance of the Discount Rate in Pension Funding
    To determine minimum required funding contributions, a plan sponsor 
must compute the present value of the plan participants' accrued future 
benefit payments, which is known as the plan's current liability. The 
present value of a benefit payment due during a particular future year 
is calculated by applying a discount factor to the dollar amount of 
that payment. This discount factor converts the dollar value of the 
future payment to today's dollars. Current liability is simply the sum 
of all these discounted future payments.
    Pension liabilities must be accurately measured to ensure that 
pension plans are adequately funded to protect workers' and retirees' 
benefits and to ensure that minimum funding rules do not impose 
unnecessary financial burdens on plan sponsors. Liability estimates 
that are too low will lead to plan underfunding, potentially 
undermining benefit security. Pension plan liability estimates that are 
too high lead to higher than necessary minimum contributions, reducing 
the likelihood that sponsors will continue to operate defined benefit 
plans.
    Computing pension liabilities is basically a two step process. In 
the first step, the plan actuary estimates the payments that will be 
made to retirees each year in the future. The pension plan's actuary 
makes these estimates based on the plan's terms, and estimates of how 
long current employees will work before retirement and receive benefits 
in retirement. Estimating the future stream of payments involves 
considerable judgment on the part of the actuary.
    Step two, converting the value of future payments to today's 
dollars, is, by comparison, simple and rather mechanical. To convert 
payments in a future year to present dollars, the estimated payments 
are simply adjusted by the appropriate discount rate. Although some 
discounting schemes use the same discount rate to compute the present 
value of payments for all future years, it is no more difficult to 
compute the present value using different discount rates for each 
future year.
    Choosing the right rate is the key to accurate pension discounting. 
The wrong rate leads to inaccurate estimates of liabilities that can be 
either too high or too low.
    Therefore, the primary goal of the Administration's proposal to 
replace the 30-year Treasury rate can be summed up in one word: 
accuracy. Without first accurately measuring a plan's pension 
liabilities, the minimum funding rules cannot ensure that the firm is 
setting aside sufficient funds to make good on its pension promises to 
its workers. Accurate liability measures also provide a firm's 
investors with valuable information about the pension contributions 
that will be made from the firm's earnings. Accurate liability measures 
allow workers and retirees to monitor the health of their pension 
plans. Finally, accurate liability measures allow the PBGC as pension 
insurer to better monitor the health of the overall pension system.
Pension Discounting under Current Law
    Since 1987, federal law has required that pension liabilities that 
determine minimum pension contributions be computed using the interest 
rate on the 30-year Treasury bond. Liabilities computed using this 
discount rate have become less accurate over time, as financial 
conditions have changed. In the late 1980s, inflation was at higher 
levels than today. As the inflation rate has declined, the term 
structure of interest rates has changed. Congress recognized this and 
in 2002 passed legislation that temporarily changed the discount rate 
to provide funding relief to plan sponsors. This temporary fix expires 
at the end of this year.
    In my April testimony, I put forward an Administration proposal 
that would have extended this fix for two additional years while the 
Treasury Department developed a permanent replacement discount rate. 
However, dissatisfaction with the continued use of the 30-year rate, 
even on an interim basis, was expressed by many members of Congress and 
pension sponsors. Your Committees asked the Administration to go back 
and return with a permanent proposal that we could support and, after 
two months of intense work, we are now pleased to present it today.
LThe Administration's Proposal for Accurately Measuring Pension 
        Liabilities
    In my April testimony, I explained why the Administration believes 
that corporate bond rates, not Treasury rates, should be the basis for 
the pension discount methodology. I also identified three key issues 
that needed to be addressed in selecting a permanent replacement for 
the 30-year Treasury rate: the time structure of a pension plan's 
future benefit payments; the appropriateness of smoothing the discount 
rate; and the appropriate relationship between the discount rate and 
the computation of lump sum payments.
    The proposal I will now set forth deals with each of these issues.

L1. Pension discount rates should be based on market determined 
        interest rates for similar obligations.

    The terms of pension contracts are not market determined because 
pensions are not bought and sold in an open market and pension sponsors 
do not compete with one another for participants. However, group 
annuity contracts, which are very similar to employer sponsored 
pensions, are sold in a competitive market by insurance companies. 
Group annuity contracts obligate the seller to provide a stream of 
annual cash payments, in exchange for a competitively priced premium, 
to individuals covered by the policy. We take the view, as Congress has 
in the past, that pension discount rates should reflect the risk 
embodied in assets held by insurance companies to make group annuity 
payments. These assets consist largely of bonds issued by firms with 
high credit ratings. Furthermore, the insurance companies issuing the 
group annuity contracts also have high credit ratings.
    Therefore, the Administration proposes that the new pension 
discount rate be based upon an index of interest rates on high-grade 
corporate bonds.

L2. Pension discount rates should be designed to ensure that 
        liabilities reflect the timing of future benefit payments.

    Each pension plan has a unique schedule of future benefit 
payments--or cash flow profile--that depends on the characteristics of 
the workforce covered by the plan. These characteristics include the 
percent of participants that are retired, the age of current workers 
covered by the plan, the percent receiving lump sums and whether the 
covered workforce has been growing or shrinking over time. Plans with 
more retirees and older workers, more lump sum payments, and shrinking 
workforces will make a higher percentage of their pension payments in 
the near future, while plans with younger workers, fewer retirees, 
fewer lump sums, and growing workforces will make a higher percentage 
of payments in later years.
    One approach to liability computation applies the same discount 
rate to all future payments regardless of when they occur. This 
approach produces inaccurate liability estimates because it ignores a 
basic reality of financial markets: that the rate of interest earned on 
an investment or paid on a loan varies with the length of time of the 
investment or the loan. If a consumer goes to a bank to buy a 
Certificate of Deposit, he will expect to receive a higher rate on a 
five-year CD than on a one-year CD. Likewise, that same consumer who 
borrows money to buy a house expects to pay a higher interest rate for 
a 30-year than a 15-year mortgage.
    Pension discount rates must recognize this simple financial 
reality. Pension payments due next year should be discounted at a 
different, and typically lower, rate than payments due 20 years from 
now. Why is this important? Pension plans covering mostly retired 
workers that use a 20-year interest rate to discount all their benefit 
payments will understate their true liabilities. This will lead to plan 
underfunding that could undermine retiree pension security, especially 
for workers who are nearing retirement age. Proper matching of interest 
rates to payment schedules cannot be accomplished using any single 
discount rate.
    Computing liabilities by matching interest rates on zero-coupon 
bonds that mature on the same date that benefit payments are due is not 
complicated. Once expected pension cash flows are calculated by the 
actuary it is no more difficult to discount benefit payments on a 
spreadsheet with an array of different interest rates than it is if 
only one discount rate is used.
    It is also important to understand that the discount rate used does 
not change the actual obligation--the liability is what it is. Choosing 
the proper discount rate gives us an accurate measure in today's 
dollars of future benefit payments; it does not change those payments. 
But if we don't measure that value properly today, plans may not have 
sufficient funds set aside in the future to make good on those pension 
promises.
    The Administration proposes that benefit payments made in future 
years be discounted to today's dollars using discount rates taken from 
a corporate bond yield curve (a table or graph that illustrates the 
interest rates on bonds that mature at different dates in the future). 
Liabilities would be computed by using interest rates on bonds that 
mature on a specific date in the future to discount benefit payments 
due to be made that same year.
    Furthermore, implementation of the yield curve would be phased in 
over five years. The phase-in would start with the use of a single 
long-term corporate bond rate as recommended in HR 1776 (proposed by 
Congressmen Portman and Cardin) for the first two years. In the third 
year a phase-in to the appropriate yield curve discount rate would 
begin. The yield curve would be fully applicable by the fifth 
year.1
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    \1\ In years 1 and 2 pension liabilities for minimum funding 
purposes would be computed using a discount rate that falls within a 
corridor of between 90 and 105 percent of a 4 year weighted average of 
the interest rate on a long-term highly-rated corporate bond. In years 
3 and 4, pension liabilities would be an average of that calculated 
using a long-term corporate rate and that using a yield curve. In year 
3, the corporate rate would receive a \2/3\ weight and the yield curve 
a \1/3\ weight. In year 4 the weights would be switched and in year 
five liabilities would be computed using the yield curve.
---------------------------------------------------------------------------
    This phase-in period would provide some short term funding relief 
for sponsors, but achieve the desired level of accuracy at the end of 
five years.

    3. Pension discount rates should be based on current financial 
conditions.

    Pension liability computations should reflect the current market 
value of future benefit payments--this is a key component of accuracy. 
Plan sponsors and investors are interested in the current value of 
liabilities in order to determine the demands pension liabilities will 
place on the company's future earnings. Workers and retirees are 
interested in the current value of liabilities so that they can 
determine whether their plans are adequately funded.
    Some argue that discount rates should be averaged (smoothed) over 
long periods of time. Under current law they are smoothed over four 
years. Such smoothing is intended to reduce the volatility of liability 
measures and helps make contribution requirements more predictable. 
Unfortunately current smoothing rules reduce the accuracy of liability 
measures while failing to achieve stability in annual contributions. 
Smoothing can mask changes in pension plan solvency of which workers 
and retirees should be aware. As I mentioned earlier, we would like to 
work with Congress to identify permanent reforms of the funding rules 
that would reduce volatility in annual contributions, without the 
corollary effect of reducing measurement accuracy.
    The Administration proposes to decrease smoothing gradually during 
the 5-year phase-in. In years one and two, four year smoothing is 
maintained. Smoothing is reduced in years three and four and finally, 
in year five, set a 90-day moving average to eliminate the impact of 
day-to-day market volatility. This will provide an appropriately 
current measure of interest rates.

    4. Pension discount rates should apply to annuities and lump sum 
payments in a consistent and neutral manner.

    Retirees and departing workers in some plans can opt to receive a 
single payment for their pension benefits rather than regular payments 
over their lifetimes. The value of these so-called lump sum payments is 
the present value of the worker's expected retirement annuity. Using 
different discount rates for annuities and lump sums creates an 
economic incentive for choosing one form of payment over the other.
    The Administration proposes that the yield curve used to measure 
pension liabilities also be used to compute lump sum payments so as to 
reflect accurately the life expectancy of retirees in the amounts that 
they will receive. In order to minimize the disruption of plans of 
workers who will receive benefits in the immediate future, lump sums 
would be computed using the 30-year Treasury rate as under current law 
in years one and two. In the third year a phase-in to the appropriate 
yield curve discount rate would begin. By the fifth year lump sums will 
be computed using the yield curve.
    Workers receiving lump sums, especially those in their 50's, 60's 
and older, would be better off under the Administration proposal than 
under an alternative that would compute lump sums using a single long 
term corporate interest rate. Workers electing lump sums at relatively 
younger ages would have a higher proportion of their future payments 
discounted at long-term interest rates than workers retiring at 
relatively older ages. This is appropriate given the different time 
frames over which they had been expecting to receive their benefits. 
While moving from the 30-year Treasury rate to any corporate bond based 
rate will result in lower lump sum payments for younger workers who 
leave their jobs, under the yield curve approach older workers closer 
to retirement age will be little affected by the change.
    However, some workers who will soon be leaving their jobs have been 
anticipating taking their pension benefits in the form of a lump sum 
with the expectation that those benefits would be computed using the 
30-year Treasury rate. Computing lump sums using the yield curve rather 
than the 30-year Treasury rate may result in lower lump sum payments 
for those who leave at a young age. The Administration proposal is for 
the benefits of younger and older workers alike to be consistently and 
accurately valued, whether a lump sum or a traditional annuity benefit.
Concluding Observations
    In closing I would like to make a few general observations about 
the Administration's proposed permanent discount rate for pension 
liabilities.
    Because discounting pension payments using a yield curve is already 
considered a best practice in financial accounting, large sponsors are 
almost certainly making these computations now or know how to make 
them.2 Sponsors certainly know what their expected future 
pension cash flows are.
---------------------------------------------------------------------------
    \2\ See Financial Accounting Standard 87.
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    The mechanics of discounting future pension cash flows are in fact 
quite simple. This is true whether one uses a single rate to discount 
all payments or uses different rates to discount payments made in each 
year. Such calculations, which can be done with a simple spreadsheet, 
should not pose serious problems even for small plans let alone plans 
sponsored by large, financially sophisticated firms.
    Yield curves used to discount pension benefit payments have been 
available for a number of years. One example of such a pension yield 
curve is the one developed by Salomon Brothers in 1994 for the 
Securities and Exchange Commission. Monthly Salomon Brothers yield 
curves dating back to January 2002 can be found on the Society of 
Actuaries web site at http://www.actuarial library.org.3 We 
envision that the Treasury Department would adopt a similar 
methodology. Using this widely accepted approach, we would develop and 
publish a yield curve reflecting interest rates for high-quality zero-
coupon call adjusted corporate bonds of varying maturities.
---------------------------------------------------------------------------
    \3\ This address opens a window to the Society's site search 
engine. To see discount curve examples simply type Salomon Brothers 
Pension Discount Curve into the query window.
---------------------------------------------------------------------------
    The adjustments that we would anticipate making--through a 
rulemaking process subject to public comment--would only be to reflect 
accurately the time structure of the yield curve. The procedure we 
envision would involve two types of adjustments: (1) standardizing the 
corporate rates as zero coupon, call adjusted rates; and (2) 
extrapolating the shape of the corporate yield curve using the shape of 
the Treasury yield curve because of the thinness of the market for 
corporate bonds of some durations, especially long-term bonds. The 
yield curve rates would not be adjusted to reflect expenses, mortality 
or any other actuarial or administrative concerns. The high-grade 
corporate rates used to construct the curve will only be adjusted so 
that they accurately reflect the time structure of benefit payments.
    As I mentioned, the Treasury would undertake this process using a 
formal notice and comment rulemaking process to ensure market 
transparency and to incorporate input from all interested parties in 
final development of the yield curve. Although the groundwork is well 
established, we certainly plan to work with all stakeholders to 
finalize the methodological details of the ultimate yield curve.
    While we believe that important near-term considerations warrant 
beginning the transition by allowing plans to use a long-term corporate 
bond index for the first two years, staying there would result in 
greater underfunding over time than we face today. Such an outcome 
would be counterproductive and harmful, and would certainly move the 
defined benefit system in the wrong direction. Most importantly, it 
would put workers' pensions at greater risk.
    Some have alleged that there would be adverse macroeconomic 
consequences to using a yield curve. Such critics allege that the 
economy would suffer because the resulting increased pension 
contributions would deplete funds from the economy. That argument is, 
we submit, incorrect. A firm's pension contributions are invested by 
the plan for the future benefit of the plan's participants. Those 
contributions go right back into the economy as savings. They are not 
withdrawn from the economy. Pension funds are a significant source of 
capital investment in our economy--investment that creates jobs and 
growth. And again, an accurate measurement of liabilities is necessary 
to ensure appropriate funding of pension promises to America's workers.
    The macroeconomic effect we should be worried about is that which 
would result if plan sponsors failed to fund the pension promises that 
America's workers are depending upon for their retirement security. 
This is why the Administration is urging that pension liabilities be 
accurately measured and why we intend to return before your Committees 
with further recommendations to fix the pension funding rules. Only if 
our pension liabilities are accurately measured will we be able to have 
an informed dialogue about such comprehensive reforms.
    Some have alleged that this proposal would place sponsors of plans 
with older workforces at a disadvantage by requiring them to put more 
money into their plans than they would under alternative proposals. The 
fact of the matter is that more money is needed in those plans to 
ensure that older workers receive the benefits they have earned through 
decades of hard work. These obligations of employers to our older 
workers exist whether our measurement system accurately recognizes them 
or not. We think that older workers have the same right to well funded 
pensions that younger workers have and that they should not be 
systematically disadvantaged by the funding rules.
    Finally, we should also not overlook other positive consequences of 
more accurate pension liability measures. We live in an era when 
Americans are rightly demanding increased accuracy and transparency in 
corporate accounting. Surely this is the standard we should pursue for 
the pension systems on which Americans' workers depend. Uncertainty 
about the size of pension liabilities has negative effects on sponsor 
stock prices. Increased accuracy of pension liability measurement will 
greatly reduce that uncertainty when such measures become available to 
the public under the enhanced disclosure measures that will be 
discussed by Assistant Secretary Combs. We see all of these 
recommendations as working together to clarify our pension funding 
challenges, better informing the public, employers and policy makers 
about what must be done to ensure adequate worker retirement security.
    As I stated at the outset, the Administration's permanent discount 
rate replacement proposal is designed to strengthen American's 
retirement security by producing accurate measures of pension 
liabilities. And accurate measurement is the essential first step in 
ensuring that pension promises made are pension promises kept.

                                


    Chairman JOHNSON. Thank you, sir. Ms. Combs, you may begin 
your testimony.

 STATEMENT OF THE HONORABLE ANN L. COMBS, ASSISTANT SECRETARY 
    FOR EMPLOYEE BENEFITS SECURITY, U.S. DEPARTMENT OF LABOR

    Ms. COMBS. Thank you, Mr. Chairman, Chairman McCrery, 
Ranking Member Andrews, and other Members of the Committee. I 
appreciate the opportunity to be here today before both 
Committees to discuss the Administration's proposals to 
strengthen the defined benefit system. We share both 
Committee's goals that defined benefit plans are an important 
source of retirement. We want to make this system stronger. The 
Administration's immediate plan represents the first crucial 
step toward more comprehensive reform.
    As Under Secretary Fisher has described, the first 
component of our proposal to provide for more accurate 
measurement of pension liabilities, I will now describe the 
remaining two components to improve transparency of pension 
plan funding and to protect workers and retirees and pension 
plans that pose the most severe risk of terminating without 
sufficient assets to pay benefits. The ERISA currently includes 
a number of reporting and disclosure provisions, yet their 
exists a void when it comes to the disclosure sure of pension 
funding information.
    The current disclosure rules have major shortcomings in 
both the timeliness and the quality of the information made 
public. Current disclosures do not satisfy workers, retirees or 
the financial markets need to know the funding status of 
pension plans. The Administration believes that workers should 
have the facts about their pension fund plans funded status. 
Transparency will both empower workers to plan for the future 
and encourage employers to responsibly fund their plans. We 
recommend three specific reforms at this time and look forward 
to working with both Committees to develop additional 
improvement in the future.
    First the Administration proposes that all companies 
disclose the value of their defined benefit pension plan assets 
and liabilities on both the current liability and the 
termination liability basis in their summary annual reports. 
This straightforward reform proposal would provide all workers 
in defined benefit plans with this vital information. It would 
encourage responsible funding and strengthen the defined 
benefit pension plan system.
    Second, we propose making available to workers certain 
financial data that companies already provide to the PBGC if 
their pension plans have more than $50 million in underfunding. 
This information, which is known as 4010 data, includes the 
most recent financial information about a pension plan's 
funding status. Under current law, PBGC cannot share this 
information with workers retirees or the financial markets.
    Finally, we would require companies to annually disclose 
their liabilities as measured by the proposed yield curve as 
that rate is phased in. Such disclosure will give workers and 
the financial markets a more accurate expectation of a plan's 
funding obligations and status under the new liability measure. 
Let me turn now to the Administration's proposals to safeguard 
against further deterioration in pension underfunding. Existing 
ERISA rules do not prevent planned sponsors from making pension 
promises that they cannot afford, nor require them to fund 
adequately the promises they make.
    The ultimate result is shattered worker expectations, 
strains on the PBGC insurance system, and pressure on the 
remaining more responsible PBGC premium payers. The 
Administration believes we must stop the most sought 
financially challenged companies with severely underfunded 
plans for making new pension promises that they cannot afford. 
Our proposal would only affect the most extreme examples of 
vulnerable plan sponsors, but it would help workers plan for 
their retirements based on realistic benefit promises and 
minimize PBCG's exposure. Our safeguards would only affect 
companies with below investment grade credit ratings whose 
plans are less than 50 percent funded on a termination basis. 
These plans would be frozen and could not increase benefits or 
pay lump sums in excess of $5,000 unless the plan sponsor 
contributes cash or provides security to fully fund the 
accruals, the benefit improvements or the lump sums.
    These same safeguards would extend to pension plans that 
are less than 50 percent funded and whose sponsors are in 
bankruptcy. For those plans that are in bankruptcy, PBCG 
guarantee limits would also be frozen. This proposal, as I 
said, is targeted at only those plans that are most likely to 
terminate without sufficient assets. Based on preliminary PBGC 
data, only 57 plans are sponsored by firms with below 
investment grade credit ratings and are funded at or below the 
50-percent threshold level. These plans have total liabilities 
of $34 billion in assets of just $14 billion leaving $20 
billion in exposure.
    The President's plan we described today addresses only the 
most pressing issues we urge Congress to address in the very 
short-term. There are a host of extremely important issues 
where we must work together if we are to restore workers and 
retirees' confidence in their retirement plans and bring a 
measure of stability to the defined benefit pension system.
    The Bush Administration's goal was to get plans on a path 
toward better funding, to reduce volatility in contributions 
and to encourage companies to fund their pension plans at 
levels sufficient to weather tough economic times. By 
strengthening the rules to restore certainty in funding and to 
prevent abuses, we will make more attractive for plan sponsors 
to retain their defined benefit plans. This concludes my 
remarks, and I would ask that my full remarks be included in 
the record and I would be happy to take questions.
    [The prepared statement of Ms. Combs follows:]
Statement of the Honorable Ann L. Combs, Assistant Secretary for 
        Employee Benefits Security, U.S. Department of Labor
Introductory Remarks
    Good afternoon Chairman Johnson, Ranking Member Andrews, Chairman 
McCrery, Ranking Member McNulty, and Members of both Subcommittees. 
Thank you for inviting me to discuss the Administration's proposal to 
improve the accuracy and transparency of pension information, as well 
as the funding of defined benefit pension plans. I am proud to 
represent the Department of Labor and the Employee Benefits Security 
Administration (EBSA), who work to protect American workers, retirees 
and their families and to support the growth and stability of our 
private pension and health benefits system.
    As you know, EBSA interprets and enforces Title I of the Employee 
Retirement Income Security Act (ERISA), which addresses the conduct of 
fiduciaries who are responsible for operating pension and health 
benefit plans. EBSA is charged with administering and enforcing this 
statute together with the Treasury Department, which is generally 
responsible for the tax provisions in ERISA, and the Pension Benefit 
Guaranty Corporation (PBGC), which provides insurance to protect the 
retirement benefits of participants in defined benefit plans when the 
corporate plan sponsor fails and the plan is inadequately funded.
    ERISA governs approximately 730,000 private pension plans and six 
million private health and welfare plans. These plans cover 
approximately 150 million workers and their dependents and hold assets 
of more than $4 trillion. There are approximately 33,000 defined 
benefit plans guaranteed by the PBGC covering 44 million workers and 
retirees.
    As my colleague from the Department of Treasury stated, the 
financial health of the voluntary defined benefit plan system is under 
significant pressure. Over the past two years, a significant number of 
large companies with highly underfunded defined benefit plans have 
failed, resulting in PBGC taking over their pension plan assets and 
liabilities. In FY 2002, the PBGC took a tremendous hit to its single-
employer insurance program, going from a surplus of $7.7 billion to a 
deficit of $3.6 billion--a loss of $11.3 billion in just one year. The 
loss is more than five times larger than any previous one-year loss in 
the agency's 28-year history. Moreover, based on PBGC's midyear 
unofficial unaudited financial report, the deficit has grown to 
approximately $5.4 billion.
    Why is the emergence of this deficit of such concern to Congress 
and the Administration? The PBGC's alarming deficit reflects a 
fundamental imbalance in the system that has occurred not only because 
of historically low interest rates and a loss in asset values, but also 
because of structural weaknesses that allow certain plans to continue 
to over-promise benefits as they descend into insolvency. Defined 
benefit pension plans play an important role in retirement security and 
should remain a viable option for those companies and workers who 
desire them. Unless we correct the problems leading to underfunding, 
healthy plan sponsors who subsidize unhealthy companies through their 
premium payments will continue to drop out of the defined benefit 
system leaving only the sick plans behind--a classic insurance death 
spiral. The result will be fewer workers with defined benefit plans and 
a greater level of risk for those workers who remain covered.
    When underfunded plans terminate without sufficient assets to pay 
promised benefits, many workers' and retirees' expectations are 
shattered, and, after a lifetime of work, they must change their 
retirement plans to reflect harsh realities. The Administration 
developed its reform package with these workers and retirees in mind. 
We can prevent similar situations in the future, while keeping a viable 
defined benefit system, if we act to improve and stabilize plan 
funding. If corporate plan sponsors and their counterparts in organized 
labor pursue reforms that leave pensions underfunded, then workers will 
remain vulnerable to losing some of the pension benefits they were 
promised.
    PBGC and the Departments of Labor, Treasury, and Commerce have 
developed a reform package in an effort to improve pension security for 
workers and retirees by strengthening the financial health of the 
defined benefit system. Under Secretary Fisher has already discussed 
the Administration's proposed discount rate for measuring pension plan 
liabilities, and I will now discuss the final two components of the 
Administration's proposal regarding improved transparency of pension 
plan information and increased safeguards against pension underfunding.
Transparency of Pension Plan Information
    It's been said that sunlight is the best antiseptic. One of the 
hallmarks of the Bush Administration has been an aggressive agenda to 
strengthen our economy by improving transparency and moving corporate 
and union financial disclosures out of the shadows.
    America's system of free enterprise, with all of its risks and 
rewards, is a great strength of our country and a model for the world. 
The fundamentals of a free market require clear rules and confidence in 
the accuracy of information if we are to achieve President Bush's goal 
for ``America to become an ownership society, a society where a 
lifetime of work becomes a retirement of independence.'' Ownership 
involves risks, but that risk must be based on shared, accurate and 
timely information.
    As major investors, defined benefit pension plans sponsored by 
American companies play a critical role in our national economy and in 
the lives of American workers, retirees and their families. The 
financial health of these plans must be transparent and fully disclosed 
to their ``owners''--the workers and their families who rely on 
promised benefits for a secure and dignified retirement.
    As columnist George Will said, a properly functioning free market 
system ``requires transparency, meaning a sufficient stream of 
information--a torrent, really--of reliable information about the 
condition and conduct of corporations.'' The same holds true for their 
pension plans.
    While ERISA includes a number of reporting and disclosure 
provisions that provide workers with information about their employee 
benefits, there exists a void in the law when it comes to the 
disclosure of pension funding information to workers. For example, 
although workers have a right to expect that their pension plans are 
well funded and that their retirement benefits are secure, they are 
typically unaware that the law sets only minimum funding obligations. 
Workers often do not learn the true extent of their plan's underfunded 
status until it terminates, frustrating workers' expectations of 
receiving promised benefits--and a secure retirement.

    Current Law

    The most basic disclosure requirement of a pension's funding status 
to workers under current law is the summary annual report (SAR). ERISA 
1 and DOL regulations require pension plans to furnish a SAR 
to all workers and retirees. The Form 5500, used by private sector 
pension and other employee benefit plans to annually report information 
to the Department of Labor, the Internal Revenue Service and the PBGC 
regarding the financial condition, investments and operations of their 
plans, is due seven months after the end of the plan year with a 
potential extension of an additional two and a half months. Following 
the filing deadline of the Form 5500, pension plan sponsors must then 
distribute the SAR within two months.
---------------------------------------------------------------------------
    \1\ ERISA Section 104(b)(3).
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    Corporate pension plan sponsors must use a SAR to disclose certain 
basic financial information from the Form 5500 including the pension 
plan's net asset value, expenses, income, contributions, and gains or 
losses. A pension plan's net asset value is calculated based on the 
market value of assets minus the plan's expenses incurred during the 
plan year. The SAR must also include the current value of a defined 
benefit plan's assets as a percentage of its current liability if the 
percentage is less than 70 percent.
    The ``current liability'' is a plan's liability as of today, it is 
intended to reflect a pension plan's liability assuming the employer's 
plan will continue indefinitely. It does not reflect a plan's 
``termination liability''--the cost to a company of terminating its 
pension plan by paying lump-sums and purchasing annuities in the 
private market that reflect the benefits workers have earned. This is 
an important distinction to workers concerned about the pension plan 
terminating.
    A second disclosure in current law is Section 4011 of ERISA that 
requires underfunded single-employer pension plans to send notices of 
their underfunding to workers and retirees. This notice must describe 
the plan's funding status and the limits of PBGC's guarantee. 
Generally, plans that are less than 90% funded on a current liability 
basis are required to distribute Section 4011 notices, although there 
are several significant exceptions.
    In 2002, preliminary data indicates that less than ten percent of 
plans gave notices as required by Section 4011 out of a universe of 
approximately 33,000 defined benefit pension plans. The notice must be 
furnished no later than two months after the filing deadline for the 
Form 5500 for the previous plan year, and may accompany the SAR if it's 
in a separate document.
    ERISA requires some pension plans to provide a third type of 
disclosure under Section 4010, but these disclosures are not provided 
nor available to workers or the public. Section 4010 requires corporate 
pension plan sponsors with more than $50 million in aggregate plan 
underfunding to file annual financial and actuarial information with 
the PBGC. Filings are required no later than 105 days after the close 
of the filer's fiscal year, although PBGC may grant waivers and 
extensions.
    Pension plan sponsors who file Section 4010 data with the PBGC must 
provide identification, financial, and actuarial information. Plan 
sponsors must provide financial information including the company's 
audited financial statement. Sponsors also are required to provide 
actuarial information that includes the market value of their pension 
plan's assets, the value of the benefit liabilities on a termination 
basis, and a summary of the plan provisions for eligibility and 
benefits.
    In 2002, approximately 270 plan sponsors reported plan information 
with the PBGC under Section 4010. So far in 2003, approximately 350 
plan sponsors have filed Section 4010 data. Prior to 2002, the largest 
number of Section 4010 filings received by the PBGC in any calendar 
year was less than 100. Obviously many more pension plans are 
triggering the $50 million level of underfunding that requires their 
sponsors to file Section 4010 data.

    Shortcomings of Current Law

    The current disclosure rules have major shortcomings in both the 
timeliness and quality of the information made available. Current 
disclosures do not satisfy workers', shareholders' or the financial 
markets' desire to understand the funding status of pension plans and 
the consequences of underfunding. The true measure of plan assets and 
liabilities is not transparent to workers, retirees, investors, or 
creditors.
    Pension plan sponsors calculate numerous measures of their pension 
plan liabilities, including current liability and actuarial liability, 
plus several methods of calculating each of them. Among all of these 
potentially confusing measures, only the termination liability comes 
close to expressing the pension plan's true ability to pay promised 
benefits if it terminates, and the potential exposure to PBGC.
    Less than ten percent of pension plans sent workers and retirees 
notices of severe underfunding in 2002 as required by Section 4011. 
Although many plans are facing unprecedented levels of underfunding, 
the complicated rules and exceptions 2 in current law 
relieve most plans of the obligation to send Section 4011 notices.
---------------------------------------------------------------------------
    \2\ For example, many plans do not send out Section 4011 notices 
because the requirement does not apply to a plan if (1) the funded 
current liability percentage for the plan year is at least 80 percent, 
and (2) such percentage for each of the two immediately preceding plan 
years (or each of the second and third years preceding plan years) is 
at least 90 percent. Notices are further not required under Section 
4011 where plans do not pay a PBGC variable rate premium in a given 
plan year.
---------------------------------------------------------------------------
    Even when plans are required to send Section 4011 notices, workers 
do not receive sufficient information regarding the consequences of 
plan termination. The information required does not reflect the plan's 
underfunding on a termination basis: exactly the kind of information 
workers would most need if their pension plan is severely underfunded.
The Bush Administration's Proposal
    In formulating our transparency proposal, the Administration 
recognized that workers and retirees deserve a better understanding of 
the financial condition of their pension plans, that required 
disclosures should realistically reflect funding of the pension plan on 
both a current and termination liability basis, and that better 
transparency will encourage companies to appropriately fund their 
plans.

    Disclose Plan Assets and Liabilities on a Termination Basis

    The Administration proposes that all companies disclose the value 
of their defined benefit pension plan assets and liabilities on both a 
current liability and termination liability basis in their SAR. This 
straightforward reform proposal is sweeping and effective in that it 
would require all plans to report this information. Informed 
participants will better understand their plan's funding status and 
plan accordingly. They can also serve as effective advocates 
encouraging their employers to better fund their plans.

    Disclose Funding Status of Severely Underfunded Plans

    The Administration proposes that certain financial data already 
collected by the PBGC under Section 4010 from companies sponsoring 
pension plans with more than $50 million of underfunding should be made 
public. We propose that the available information be limited to the 
underfunded plan's market value of assets, termination liability and 
termination funding ratios. Much of the information disclosed in the 
Section 4010 data, such as sensitive corporate financial information, 
should not be made public.
    As described earlier, Section 4010 liability data is more timely 
and of better quality than what is publicly available under current 
law. Year-end Section 4010 figures generally are required to be filed 
no later than 105 days after the close of the plan sponsor's fiscal 
year. This information on the pension plans with the largest unfunded 
liabilities, currently restricted to the PBGC, is critical to workers, 
the financial markets and the public at large. Disclosing this 
information will both improve market efficiency and help encourage 
employers to appropriately fund their plans.

    Disclose Liabilities Based on Duration-Matched Yield Curve

    The Administration also proposes that companies annually disclose 
their liabilities as measured by the proposed yield curve described by 
Under Secretary Fisher before the rate is fully phased in for funding 
purposes. Such disclosure will give workers and the financial markets 
more accurate expectations of a plan's funding obligations and status 
under the new liability measure.
Safeguards Against Deterioration in Pension Underfunding
    Before ERISA's enactment in 1974, thousands of workers lost their 
pensions because their companies failed to adequately fund the benefits 
they promised. In enacting ERISA, Congress set out to ensure that 
companies would safely set aside enough money in advance to secure 
workers' pensions. Unfortunately, current law does not achieve that 
goal.
    ERISA's funding rules aim to provide both security for workers and 
flexibility for plan sponsors. However, existing rules do not prevent 
corporate sponsors from making pension promises that they cannot 
afford, nor require them to fund adequately the promises they make.

    Current Law

    Current law establishes funding rules for pension plans, including 
rules that prohibit underfunded plans from increasing benefits. Under 
provisions in both the Internal Revenue Code and ERISA that apply to 
large plans,3 if a pension plan's funding ratio falls below 
60 percent of current liability, a company generally may not provide a 
benefit increase greater than $10 million unless the increase is 
immediately funded or security is provided to fully fund the 
improvement. A company sponsoring a plan with a funding ratio above 60 
percent on a current liability basis may have a much lower funding 
ratio on a termination liability basis, exposing its workers to the 
risk of receiving reduced pension benefits from the PBGC if the plan 
terminates.
---------------------------------------------------------------------------
    \3\ Code section 401(a)(29) and ERISA section 307.

---------------------------------------------------------------------------
    Shortcomings in Current Law

    Recent history demonstrates that some companies under financial 
duress make pension promises that in all probability will never be 
funded. These promises further strain the funding status of a plan and 
jeopardize the retirement security of unsuspecting workers when the 
plan ultimately terminates and is taken over by the PBGC. Furthermore, 
unfunded benefit increases undermine the financial integrity of the 
pension benefit guaranty system. Other defined benefit plan sponsors 
who fund their plans far more responsibly ultimately pay whatever 
unfunded benefits are guaranteed by PBGC through their premiums.
    The current system includes a ``moral hazard.'' A company facing 
financial ruin has the perverse incentive to underfund its defined 
benefit pension plan while continuing to promise additional pension 
benefits. The company, its employees, and any union officials 
representing them know that at least some of the additional benefits 
will be paid, if not by their own plan then by other plan sponsors in 
the form of PBGC guarantees. Financially strong companies, in contrast, 
have little incentive to make unrealistic benefit promises because they 
know that they must eventually fund them.
The Bush Administration's Proposal
    The Administration believes we must ensure that companies, 
especially those in difficult financial straits, make benefit promises 
they can afford and fund the pension promises they make. As we develop 
more comprehensive funding reforms, we must stop the most financially 
challenged companies with severely underfunded plans from making 
pension promises that they cannot afford. Our proposal would only 
affect the most extreme examples of vulnerable plan sponsors, would 
help workers plan their retirements based on realistic benefit 
promises, and would minimize PBGC losses.
    The proposal that we provide to you now would require companies 
with below investment grade credit ratings whose plans are less than 50 
percent funded on a termination basis to immediately fully fund or 
secure any new benefit improvements, benefit accruals or lump sum 
distributions. Benefit improvements would be prohibited unless the firm 
contributes cash or provides security to fully fund the improvement. 
The plan would be frozen, i.e., accruals (increases resulting from 
additional service, age or salary growth) would be prohibited unless 
the firm contributes cash or provides security to fully fund the 
additional liability.
    To prevent erosion of such plans' funding, lump sum payouts of more 
than $5,000 would be prohibited unless fully funded or secured. 
Allowing workers to take lump sum distributions from severely 
underfunded plans, especially those sponsored by financially strapped 
companies, allows the first workers who request the distributions to 
drain the plan, often leaving the majority of workers to receive 
reduced payments from the PBGC when the plan terminates.
    The Administration also proposes to extend the above safeguards to 
plans of corporate plan sponsors that file for bankruptcy with plans 
funded at less than 50 percent of termination liability. Furthermore, 
we recommend that PBGC's guaranty limits be frozen as of the date of 
the bankruptcy filing. This freeze would avoid another perverse 
incentive.
    Based on PBGC's preliminary 2003 data covering 90 percent of filing 
companies with plans that are underfunded by $50 million or more (the 
Section 4010 filers described above), only 57 plans sponsored by firms 
with below investment grade credit ratings are funded at or below 50 
percent on a termination basis. Their liabilities total $34 billion but 
their assets total just $14 billion, leaving $20 billion of liabilities 
unfunded.
    Another 32 plans sponsored by unrated firms (which may be above or 
below investment grade) are funded at or below 50 percent. These plans 
report liabilities of $10 billion and assets of $4 billion. Still 
another 68 plans are sponsored by firms in bankruptcy. These plans 
report liabilities of $28 billion and assets of $14 billion.
    In Under Secretary Fisher's testimony, he listed several of the 
areas under review for a package of more comprehensive reforms of the 
pension system. The issue of unfunded benefit increases by underfunded 
plans is prominent among those issues with which we have significant 
concerns. Our immediate proposal to restrict benefit increases by the 
most vulnerable plans and financially troubled companies does not 
represent everything that must be addressed in this area, but is merely 
a first step to ``stop the bleeding'' in cases that obviously undermine 
the financial integrity of the pension system.
Other Issues
    The President's plan we've described today addresses only the most 
pressing issues Congress must address in the very short term. As Under 
Secretary Fisher noted, there are a host of other, extremely important, 
issues where we must work together to address if we are to restore 
workers' and retirees' confidence in their retirement plans and 
introduce a long-overdue measure of stability to the defined benefit 
pension system.
    Defined benefit plans are intended to provide a secure source of 
retirement income that lasts a lifetime. Recent volatility in the stock 
market has reminded workers of the value of such plans where corporate 
plan sponsors bear investment risk. As our aging workforce begins to 
prepare for retirement and think about how to manage its savings 
wisely, there is a renewed interest in guaranteed annuity payouts that 
last a lifetime.
    If we do nothing but paper over the problems facing defined benefit 
plans and the companies and unions that sponsor them, we will ill-serve 
America's workers threatened by unfunded benefits and potentially 
broken promises.
    The Bush Administration is continuing to work on further proposals 
to strengthen the defined benefit system. Our goal is to get plans on a 
path toward better funding, to reduce harmful volatility in 
contributions, to encourage companies to set funds aside during good 
times so that when we enter another tough economic patch, sufficient 
assets have been set aside to weather the storm. We must keep in mind 
that this is a voluntary system. By strengthening the rules to restore 
certainty in funding and prevent abuses, we will make it more 
attractive for plan sponsors to retain their defined benefit plans.
    We are reviewing revised funding targets to protect workers from 
the threat of losing promised benefits because their plan terminates 
without sufficient assets to meet liabilities. We are reviewing revised 
funding rules that would better reflect the risk that a plan will 
terminate without sufficient assets. We are also reviewing the 
actuarial assumptions that underlie required funding contributions, 
including appropriate mortality tables, realistic retirement ages, and 
the frequency of lump sum payouts. And we intend to address some of the 
glaring gaps in the law, for example those that allow severely 
underfunded plans to continue to enjoy funding holidays because they 
are carrying credit balances based on outdated asset values.
    We need to keep improving the system's transparency, achieving 
better and more-timely disclosures to workers, retirees, and the 
financial markets. We also should re-examine the PBGC's premium 
structure to see whether it can better reflect the risk posed by 
various plans to the pension system as a whole.
    As we have reviewed both the method of discounting and the need for 
comprehensive reforms, we have simultaneously recognized the need for 
some transition relief to employers in our early stages of economic 
recovery, while improving funding standards over the long term. But we 
cannot allow the acknowledged need to reduce some near-term pressures 
to delay comprehensive reforms for too long lest we put more workers' 
retirement security at risk.
    Finally, we need to look at the challenges facing the multiemployer 
pension system as well--which has the same needs for transparency, 
accuracy of measurement, and adequate funding standards.
    The reform package we unveiled last week was intended to respond to 
an immediate need to replace the expiring discount rate used to value 
plan liabilities. The limited nature of the package we are presenting 
at this time should in no way be construed as a signal that these are 
the only issues that should be addressed. The Administration is not 
only ready but eager to work with Congress to develop a broad package 
of reforms that will strengthen the defined benefit system and protect 
the workers and retirees who rely on them for their retirement 
security.
    Thank you and I will answer any questions the committees may have.

                                


    Chairman JOHNSON. Without objection so ordered, and your 
remarks will be entered. Mr. Fisher, the Administration's 
proposal calls for an elimination of smoothing techniques. Can 
you explain why using unsmoothed interest rates instead of 
using a 4-year weighted average of interest rate would be 
preferable and why would this increase plan volatility?
    Mr. FISHER. We all agree on the need to reduce the 
volatility and uncertainty that corporate sponsors face in 
funding levels that change from year to year. We believe that 
volatility is actually a consequence of the interaction of the 
smoothing rule with the current funding rules. The current 
funding rules oscillate between one set of measures, as I said, 
and another set of measures when plans fall below specified 
target levels. The smoothing rules which provide for a 4-year 
smoothing of interest rates actually induce corporate sponsors 
to wait and see whether interest rates will change.
    Instead of adjusting to changes in the measurement of their 
liability as interest rates move, the 4-year smoothing masks 
the underfunding that is developing in their plans, which lets 
them in the hope that interest rates will come back they then 
wait and wait and wait and then get caught in the bind of our 
current funding rules. So, we actually believe that a 90-day 
smoothing will provide sponsors with the right incentives to 
stay on top of their funding requirements year by year and 
quarter by quarter without waiting to see whether they can grow 
their way out of an underfunding problem that begins to 
develop.
    Chairman JOHNSON. What you are saying is a more accurate 
assessment?
    Mr. FISHER. That is right. It will give us a much more 
accurate assessment.
    Chairman JOHNSON. Ms. Combs, do you think participants in a 
multi employer pension plan should be able to learn about 
funding status of their plans in a manner similar to the way 
participants in single employer plans do under your proposal?
    Ms. COMBS. We do, Mr. Chairman. I think it is important for 
all workers, regardless--it is important for all workers, 
regardless of the form in which they receive benefits, to have 
accurate information and to have transparency. We would be 
happy to work with you to develop appropriate disclosures for 
multi employer pension plans. They are structured somewhat 
differently and we would be happy to work with you to get 
appropriate disclosure.
    Chairman JOHNSON. Shouldn't we require that type of policy 
for them as well as the other?
    Ms. COMBS. As I said, I think transparency is always 
important and we would be happy to work with you on that, yes.
    Chairman JOHNSON. You don't think it ought to be part of 
this program?
    Ms. COMBS. I think if targeted disclosure on the funding 
status could be added to this program, because it is very 
analogous to what we are proposing for single employers. Larger 
issues facing the multi-employer plan, I think, deserve 
separate attention.
    Chairman JOHNSON. Thank you. Mr. Fisher, would a yield 
curve be used to determine a company's variable rate premium 
payment and what effects would that have on the PBGC?
    Mr. FISHER. Applying the curve to the variable rate payment 
was not part of our July 8th proposal. As my written testimony 
summarized, we think all of the premium rules should be part of 
the comprehensive form which we are prepared to work with both 
these Committees on immediately. We just did not see it as part 
of the immediate, immediate task of adjusting the rate. We 
think review of the premium rules should be part of 
comprehensive reform, but it was not part of our proposal on 
July 8th.
    Chairman JOHNSON. Do you intend to revise your program at 
all?
    Mr. FISHER. We had--we have not yet determined to revise 
our proposal. We look forward to this hearing to hearing from 
the Committee on your views.
    Chairman JOHNSON. Thank you, sir. I will reserve the rest 
of my time and Chairman McCrery, you are recognized for 
whatever comments you wish to make and/or questions you might 
have.
    Chairman MCCRERY. Thank you Mr. Chairman. Along those 
lines, Mr. Fisher, there are some who have suggested that until 
we know the full package of reforms from the Treasury 
Department, that we shouldn't move forward with a permanent 
replacement of the 30-year Treasury rate. Setting that aside 
for a moment, feel free to comment on that, I hope we can all 
agree that the worst thing we can do is not to act at all, in 
other words, to allow this current increase in the rate to 
expire this year with no replacement either on a temporary or a 
permanent basis; would you agree with that?
    Mr. FISHER. Yes, we certainly agree on the urgency of 
acting. I assume from my testimony, you are aware we believe 
that the predicate for comprehensive reform is accurate 
measurement. Accurate measurement can't wait until a later day. 
We have to begin with accurate measurement in order to be able 
to do comprehensive reform.
    Chairman MCCRERY. While I agree with you, it is just 
possible that Congress can't agree on what the most accurate 
measurement is right now forever and ever. If that is the case, 
I would hope that the Administration would urge us to, at the 
very least enact a temporary solution to the current interest 
rate problem or discount rate problem.
    Mr. FISHER. That would not be hard for the Administration, 
given that a temporary solution was our original proposal 2 
months ago before your Committee.
    Chairman MCCRERY. Before I go further, I want to commend 
the Administration for coming forward with a permanent 
solution. I do hope that the Congress can agree and move 
forward with a permanent solution. That is my first choice, but 
I wanted to make sure we established here that the worst thing 
we can do is to do nothing, either on a temporary or a 
permanent basis.
    As you pointed out in your last appearance before my 
Subcommittee, the Administration included three specific 
proposals, and now you are saying that you are exploring 
additional reforms. Could you give us an idea of the types, or 
at least the subject areas of the reforms you are considering 
now?
    Mr. FISHER. Certainly, sir. My written testimony spells out 
in some length the laundry list, and let me highlight the ones 
that I think are of particular interest. The schizophrenic 
nature of our funding rules, as I have said in my oral remarks, 
have not served us well. We have the rather soft assumptions of 
the actuaries providing generous inputs to the funding rules, 
which, if companies fall below specified levels they move to a 
completely different measurement system coming up with much 
harsher funding requirements. We would like to find something 
of a middle course.
    Now, finding a new set of funding rules we think is 
possible, and we have been working on this for many months. It 
requires a lot of work and simulations of the impact on the 
company plans to find a way to provide for a much smoother path 
that would get companies improving their funding and not the 
precipitous jump that is a consequence of the DRC. We think 
that is probably front and center.
    Let me be clear, as I said in my written testimony, the 
Treasury Department will begin next month the review of the 
mortality tables. We will invite public comment on that. We 
think that is another part of improving accuracy. We would like 
if we can get to greater accuracy, get to a fundamental 
rethinking of the funding rules that will avoid the sharp 
changes in funding levels, but move companies to better levels 
over time. Then as I said, we would like to look at the 
deductibility of contributions to encourage companies in good 
times as well as bad. In addition, the topics covered by 
Assistant Secretary Combs on benefit limitation and disclosure 
and PBGC's framework for premiums, we think all of that should 
be addressed as part of comprehensive reform.
    Chairman MCCRERY. Those are certainly matters of some 
import and some concern to corporations in this country that 
have pensions, but I gather that despite the import of those 
issues, you do not think it is premature to move forward with a 
permanent replacement with a 30-year Treasury note as a 
discount rate absent those--completing those kinds of studies 
and reforms?
    Mr. FISHER. That is correct, because we think any reform 
would include the use of the most accurate measure we could 
think of.
    Chairman MCCRERY. Mr. Chairman, my time has expired. I have 
some more questions, either for a second round or to submit in 
writing at a later time. Thank you.
    Chairman JOHNSON. Thank you, Chairman McCrery. Mr. Andrews, 
you are recognized.
    Mr. ANDREWS. I would like to thank both witnesses for their 
testimony. As usual, it was very thorough and comprehensive. We 
appreciate it.
    Mr. Fisher, I want to ask you, under what circumstances 
might the yield curve flatten sooner than you think it is going 
to flatten in this document that is in front of us here? Looks 
to me like it starts to smooth--starts to flatten out rather at 
about year 14. Are there circumstances where it would flatten 
out sooner than that?
    [The chart follows:]


    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    

                                ------                                

    Mr. FISHER. The chart you are looking at, it was prepared 
by the Treasury Department staff some days ago. It reflects a 
snapshot of current interest rates as of, I believe, May. That 
is not a forecast of rates in the future. You point to an 
important issue which is the risk that a yield curve inverts 
and then would have short rates higher than long rates.
    Mr. ANDREWS. Under what circumstance might that happen?
    Mr. FISHER. That would happen if the Federal Reserve was 
tightening interest rates as typically when short-term rates 
would move up to be as high or perhaps higher than long term 
rates.
    If I could, over the last 20 years, the Treasury yield 
curve has inverted a total of only 14 months out of 20 years. 
The corporate yield curve, which we are recommending as the 
basis for the yield curve for measuring liabilities, was 
inverted for only 1 month out of the last 20 years, and at 
that, only a very fraction of a few basis points. So, if you 
use a corporate curve, it is much less likely to invert, and 
therefore the important issue you are driving at, which has 
affected pensions while Treasury rates were being used.
    Mr. ANDREWS. If I could do a little more driving, so there 
is the possibility that there will be an inversion of the yield 
curve. To a layperson, and I am one, that sounds to me like I 
could meet a situation where the contribution I would have to 
make to my defined benefit plan would go up rather appreciably 
if I were an employer; is that correct?
    Mr. FISHER. If the yield curve inverted and stayed inverted 
for a long period of time that could happen.
    Mr. ANDREWS. My understanding is that the Administration's 
proposal is that after 5 years, there really would be no more 
smoothing. There would be a 90-day period, right? So, I don't 
get the benefit of the prior 3 years of averaging that in, 
right?
    Mr. FISHER. That is correct.
    Mr. ANDREWS. We can argue about the improbability. I don't 
claim to know how probable or improbable it is, but I sure do 
know that it is possible. It seems to me you got two things 
going here that would be inherently unstable. The first is that 
you are baking into the cake and writing into the law the 
possibility of an inversion in the yield curve. The second is 
that you are taking out of the law the measures that might 
mitigate the cost of that inversion by shrinking the smoothing 
period from 4 years to 90 days. Doesn't that strike you as kind 
of a double problem that might render a lot of employers 
reluctant to continue funding defined benefit plans?
    Mr. FISHER. No, I don't sir, because as I explained over 
the last 20 years there was only 1 month of an inversion of the 
corporate yield curve, in which case, 90-day smoothing would 
have removed that.
    Mr. ANDREWS. Does the yield curve move independently of the 
bond rate curve?
    Mr. FISHER. There are occasions where corporate spreads 
change in relation to Treasury curves so the two curves can 
move independently.
    Mr. ANDREWS. Generally speaking, is the yield curve more or 
less volatile than the bond rate curve?
    Mr. FISHER. They are volatile in different ways at 
different times. I would actually suggest the Treasury curve is 
perhaps more volatile.
    Mr. ANDREWS. I didn't ask about the Treasury curve. I asked 
about the yield curve versus the corporate bond curve. Which is 
more volatile?
    Mr. FISHER. The yield curve of Treasury, I believe, would 
be more volatile than a corporate curve.
    Mr. ANDREWS. Could you supplement the record with some data 
on that? I don't ask the question rhetorically. I ask it 
wanting to know. My concern here is someone who is an amateur 
at this subject is the introduction of some new uncertainties, 
new volatility in an environment where we are working hard to 
try and retain and expand defined benefit plans.
    If I were an employer and I knew there were any significant 
probability I would have to make a major increase into what I 
put in the defined benefit plan, it would make me less likely 
to have one. The purpose of this, I think, is to deal with the 
immediate problem of this drain on corporate resources to fund 
present plans, but also to deal with the more intermediate and 
long-term problem with encouraging people to create and 
maintain these plans. I appreciate your thoughts on this. 
Thanks, Mr. Chairman.
    Chairman JOHNSON. Thank you, Mr. Andrews. Ms. Tubbs Jones, 
do you care to question?
    Ms. TUBBS JONES. I do, but I would like to yield to my 
colleague, Mr. Pomeroy.
    Mr. POMEROY. Just to follow up a bit on the inversion. It 
strikes me that it is somewhat of a unique period of time where 
we have historically low interest rates and extremely high 
budget deficits creating, I think, significant prospects. We 
are going to have a higher short-term than long-term rate as 
the system adjusts going forward. I also think--I will tell 
you, Secretary Fisher, I find it flat out surprising that you 
don't think that the regimen you have advanced will strike the 
employer community as significantly higher, in fact onerous 
reserving requirements such that they might be discouraged away 
from maintaining support for their defined benefit plans. Have 
you had discussions with the employment community leading you 
to your conclusion?
    Mr. FISHER. Yes, we have had extensive discussions.
    Mr. POMEROY. The discussions I have had they told me that 
this is a significant departure from the kind of stable funding 
requirement reflective of their near and long-term liabilities 
and would lead them to change their view of the defined benefit 
plan and whether they could continue it or not. You are telling 
us that you don't think that this is going to be a problem?
    Mr. FISHER. I am sure you will hear from them that they 
think it is a problem. I want to be clear, we believe that 
pensions should be funded to their actual liabilities. We don't 
think the defined benefit system can survive if we only do it 
by putting our head in the sand about the actual measure of 
liability.
    Mr. POMEROY. The actual measure of liability will change 
significantly based upon the long-term--we are talking about 
long-term liabilities and therefore changes in the interest 
rates, earnings on the pension funds will significantly change 
their funding status at any given time. Are you suggesting that 
as changes occur due to, for example, investment return falloff 
that we are experiencing in recent times, all that needs to be 
made up in the near term by advanced funding by employers.
    Mr. FISHER. No. We are not suggesting that. We think, 
though, in reducing the volatility of contributions that 
employers face, we need to focus on the mechanism that produces 
it. Those are the funding rules combined with the 4-year 
smoothing which we think discourages companies from taking 
action to fund their plans when circumstances begin to change.
    Mr. POMEROY. I believe to the contrary. That moving to a 
90-day smoothing, you add an additional element. In addition to 
the yield curve volatility, you add yet another point of 
volatility that is going to have me as a chief executive 
officer saying, I simply don't know what my outside liability 
exposure is here year to year. I cannot satisfy shareholder 
demand for quarterly returns when I don't know what I am going 
to have to be taking off of the bottom line for pension 
funding. We are going to have to move away from defined benefit 
plans. There is just simply too much volatility and 
uncertainty. I believe that is precisely what you are moving 
forward.
    I would say in addition--I am taking Ms. Tubbs Jones' 
time--I am very surprised that in light of the strong feedback 
we gave you to come back with a plan, the plan you come with, 
you come 1 week in advance of this hearing shortly before we 
intend to take legislative action on this matter with something 
as--as new and significantly different as this yield curve 
proposal.
    This is an idea with some conceptual legitimacy, but an 
awful lot of very practical questions about implementation, 
timing, what it means in terms of expense--compliance, expense 
and complexity. I simply think we are hard-pressed to come to 
grips with all of this in 2 years, expecting employers to take 
a 2-year fix on corporate bond index, moving to a totally 
unknown environment thereafter has hardly displaced the 
confusion and the concern about whether that relative to 
pension funding presently has, in fact, made it a good deal 
worse.
    Secretary Combs, I would say the third feature you got 
relative to restricting all additional new liabilities of 
pension plans that fall in that category, those covering 57 
plans, about $34 billion in potential liabilities, would that 
mean essentially you would statutorily impose a freeze, and 
there could be no new accrual of pension benefits, including to 
the worker continuing their tenure at those places of 
employment?
    Ms. COMBS. That is correct. We would freeze those plans. No 
new accruals, no benefit improvements.
    Mr. POMEROY. This is absolutely wild to me. We are trying 
to stop the freezing of pension plans and you are going to 
statutorily impose them across the board.
    Ms. COMBS. The company--if they are willing to put the cash 
into pay for those additional accruals, if they are willing to 
provide security, if they can put the cash on the barrel head 
to pay for the benefit improvement, to pay for the lump sums, 
that is fine, but they are not going to extend their credit and 
keep digging the hole deeper. These are severely underfunded 
plans where people are really at risk of having their plan 
terminated without sufficient assets and facing much cutbacks 
in terms of their already accrued benefits under the PBGC or 
their expectations of early retirement subsidies that they may 
age into.
    So, we are just saying stop the bleeding if you are in this 
bad shape unless you have the cash or you can come up with the 
security to fund it. Then if you can get out of that situation 
and get better funded, or if your credit rating recovers, then 
your accruals will kick back in.
    Mr. POMEROY. The information I have from the marketplace is 
that your worker protections are going to protect the workers' 
right of their pensions.
    Chairman JOHNSON. The gentleman's time has expired, Mr. 
McKeon, do you wish to question?
    Mr. MCKEON. I would like to thank you both for being here 
and jumping into this non-controversial subject that we have 
before us. Mr. Fisher, can you please explain how using a yield 
curve will affect large companies with many defined benefit 
plans? Will this dramatically increase the cost to employers?
    Mr. FISHER. Sir, I believe that large plan sponsors, 
sophisticated companies, will find that it takes a matter of 
minutes, perhaps hours, but not days to adjust to the yield 
curve approach. Large plan sponsors have sophisticated 
financial operations. They have actuaries who will understand 
this material better than either you or I will. Today, every 
major pension plan has a schedule of the payments they expect 
to make in future years. The actuaries develop that for them. 
That is the complicated piece of the puzzle. The current 
regime, the current statute says they are to take 120 percent 
of the 30-year Treasury rate to discount each of those annual 
streams of payments. So, they plug in one rate for each of 
those annual outflows.
    What we are suggesting is that after we would publish a 
yield curve such as today we publish the 30-year Treasury rate 
for them to use, they would simply plug in the year appropriate 
rate for their--to fill in and calculate their liability. Now 
for plans with older workforces, this is a vital reform that we 
need to make sure that the plans are adequately funded to be 
there for the workers' retirement benefits. If we don't take 
account of the time structure of the benefits, then large 
companies with older workforces won't be funding to the prudent 
level.
    Mr. MCKEON. Thank you very much. Secretary Combs, many 
people have said that requiring plan sponsors to reflect 
liabilities on their yearly financial statements is 
inconsistent with the long-term nature of pension obligations. 
Is there a possibility that this could unnecessarily create 
panic among stockholders participants as well as volatility in 
the company's stock price?
    Ms. COMBS. Our proposal is to have all plans report on an 
annual basis to their workers and public at large two numbers: 
What is their liability on an ongoing basis and what would be 
their liability if they terminated the plan and had to go out 
and purchase annuities in the market tomorrow. I don't think 
that should cause panic. I think that would give people a more 
realistic picture of what are the possibilities. If their 
company sponsoring the plan is in weak financial condition, 
that should factor into their planning for their own 
retirement, and perhaps into the kind of benefit increases that 
they may be involved in negotiating if it is a bargained plan.
    I think that sunshine and information is a good thing. I 
don't think it will panic people. I think companies can explain 
this in a very rational way, and I think markets are figuring 
this out. It is getting filtered in through the financial 
markets, and I think workers deserve the same information that 
analysts on Wall Street are already calculating and figuring 
out. So, I don't think it should panic people. I think it can 
be done in a way where it is providing more information, and 
you will have better informed workers and retirees who will be 
able to make realistic planning for there own retirement.
    Mr. MCKEON. Thank you very much. I yield back, Mr. 
Chairman.
    Chairman JOHNSON. Thank you. Mr. Ryan, do you care to 
question? Mr. Brady, do you care to question? Mr. Foley, do you 
care to question? We already asked him. Ms. Blackburn, do you 
care to question? How about Mr. Portman? I bet he will. Mr. 
Portman you are recognized for 5 minutes.
    Mr. PORTMAN. I thought you would never get here, Mr. 
Chairman. Thank you. I thank my colleagues. First of all, I am 
glad you are here, Mr. Fisher and Ms. Combs, and I think it is 
a very important discussion we are having. I am struck by some 
of the discussion here about volatility.
    Let me just start by saying, this is a very fragile 
economy. This is a very difficult area in which to legislate. 
We are talking about billions of dollars which will have a 
major impact on our economy, major impact on jobs clearly, 
major impact on workers and their retirement quality of life; 
and I think we need to tread very carefully. One of the issues 
that comes up time and time again and has over the last 7 or 8 
years, as we have legislated more aggressively on pensions--Mr. 
Andrews talked about it, Mr. Pomeroy talked about it--is the 
issue of predictability and certainty and its impact on 
people's decisions as to whether to have defined benefit plans 
and, indeed, whether to have pensions at all.
    I just don't get it. How you can say that having a 90-day 
averaging will lead to less volatility, as compared with, say, 
a 1-year averaging even under your yield curve or certainly 
under a 4-year averaging scenario. I would hope that as we get 
into this process further, we would look more carefully at that 
issue on volatility and certainty and predictability, because I 
do think that that is a legitimate concern we have heard raised 
again and again.
    If I could, though, just ask you a few questions about the 
plan and then ask you about some long-term reform, you keep 
coming back to accurate measure, and, of course, many of us 
believe that the long-term high-quality corporate bond index is 
an accurate measure. In fact, as you know, over time it has 
been a very conservative measure, whether you look back 75 
years or 50 years or 25 years; and that is why we are not shy 
about promoting that as an alternative to the 30-year Treasury, 
which at one time was a good measurement and now is not as good 
a measurement--relatively low. Therefore, companies are having 
to put in more than they should, and it is causing a problem.
    If you are so concerned about accuracy, what about the 
actuarial assumptions you are making? One thing we don't get 
into in your plan, for instance, is the mortality tables. I 
heard from your oral testimony--I have not seen your written 
testimony yet--that you would hope to address this issue in the 
near future. If we are going to get at accuracy, we can't just 
look at funding, obviously. We need to look at not just age, 
but also blue collar, white collar, other mortality issues.
    The American Academy has come forward with some proposals. 
What is your proposal on that, and wouldn't that be something 
to address along with, as Chairman McCrery suggested, some of 
these contribution discount rate issues?
    Mr. FISHER. On the mortality table issues, we plan next--in 
the month of August to invite public comment on all aspects of 
the mortality tables. We just don't want to take one piece at a 
time, the blue collar issue or someone else's issue, so we will 
invite public comment on every aspect of updating the mortality 
tables to try to get to the issue of accuracy. We couldn't 
agree more.
    Mr. PORTMAN. So----
    Mr. FISHER. We don't have a proposal now. We want to hear 
from everyone who has an interest as stakeholder in this 
process, or an expert, to give us their best advice on what we 
should do.
    Mr. PORTMAN. Well, so do we, and I am encouraged by that. 
My question, I guess, is, don't you see a link between what we 
are talking about in terms of what the discount rate ought to 
be and mortality tables if you are talking about coming up with 
the most accurate measure?
    Mr. FISHER. The two issues both go to accuracy. What we 
have before us----
    Mr. PORTMAN. You could have a younger workforce and that 
force could be all white collar workers. You could have an 
older workforce of blue collar and vice versa. Under the 
Administration's proposal do you have an interest rate to 
determine the variable premium obligation, the PBGC's for 
variable premium obligation? Do you have an interest rate 
proposal for those?
    Mr. FISHER. No. As I mentioned, that was not part of our 
July 8th proposal.
    Mr. PORTMAN. Okay. So, that is not--is that something you 
plan to come up with in the short term, longer term, mid-term?
    Mr. FISHER. That would be part of the comprehensive reform 
we would look at. I would like to be clear about the mortality 
tables. That is something that we can fix by regulatory change, 
does not require congressional action, where the interest rate 
does.
    Mr. PORTMAN. You could, and you could have over the last 
few years, since the 2001 report. With regard to the cash 
balance plans, what is your proposal for a cash balance, which 
obviously is something which is growing; more and more 
employers are turning to cash balance? Does the yield curve 
also apply to cash balance plans, and how does that work with 
the cash balance plans?
    Mr. FISHER. The yield curve would apply to the liability 
measurement for cash balance plans as it would for any defined 
benefit plan. Now, the issues of moment with respect to cash 
balance plans are not in the measure of the liability, but in 
the conversion and in the other estimations. The Treasury 
Department is working--we have two different efforts under way 
to clarify prior rules the Treasury Department has issued to 
try to address those issues on conversions. Our announcement of 
the yield curve doesn't relate to those issues.
    Mr. PORTMAN. When would you expect to have that? Is that a 
several-week, several-month----
    Mr. FISHER. Well, we are hoping to have that promptly.
    Mr. PORTMAN. You have listed a number of other issues in 
your testimony and then some I have taken from your oral 
testimony today. We talked about the premium obligations, we 
talked about the DRCs. Do you expect to come up with a smoother 
path on DRCs? Is that something--I know it is not in your 
proposal now. I think that is an important aspect of the 
volatility we talked about.
    Mr. FISHER. Absolutely.
    Mr. PORTMAN. We talked about mortality; retirement 
assumptions, of course, would be part of that as well. What are 
your retirement assumption plans? Do you expect to come back 
with something on that, short term, as well?
    Mr. FISHER. Yes. We want to work on comprehensive reform. 
We look for your input and suggestions.
    Mr. PORTMAN. The notion of not allowing companies to put 
more aside during better times, which is--in 2001 we began a 
process of helping somewhat on that front. I would like to be--
personally I think that is very important. We need to be more 
aggressive on that front--certainly wish we had been back in 
the late nineties, going into 2000.
    You said earlier you wouldn't do that until you did other 
things with regard to funding. Why is that? Why wouldn't we go 
ahead and allow companies to set aside more now during good 
times?
    Mr. FISHER. We would like to get to an accurate measure of 
pension funding.
    Mr. PORTMAN. All of us would.
    Mr. FISHER. Yes. Then on the basis of that, we may look 
again at what we think the appropriate percentage funding level 
is to target.
    Mr. PORTMAN. My only point is----
    Chairman JOHNSON. The gentleman's time has expired.
    Mr. PORTMAN. I am sorry, Mr. Chairman. That is the final 
question I have, and I look forward to submitting more in 
writing. I thank Mr. Fisher and Ms. Combs for being here. I 
thank the Chairman.
    Chairman JOHNSON. Thank you. Ms. Tubbs Jones, do you care 
to question?
    Ms. TUBBS JONES. I do. I would like to pick up where he 
left off. We only get 5 minutes, so please make your answers as 
short as you possibly can. I want to pick up where Mr. Portman 
left, about you are concerned about accurate funding. If a 
company is in a position to fund its pension plan right now, 
why doesn't it make sense to allow them to do that, even if it 
is above the necessary funding level?
    Mr. FISHER. Well, they are allowed to do it. We are talking 
about the question of tax deductibility. We would like to get 
an accurate measure--and we all agree on what appropriate 
funding is--and then let companies contribute to those more 
accurate measures in good times as well as bad and get the 
deductibility.
    Ms. TUBBS JONES. Surely we would all like to get to 
accurate measuring, but all those workers that are seated out 
there who are worried about whether they are going to ever get 
any money, want to get it while the company has some money. 
They don't want to be in a position, when the company doesn't 
have any money, to say, okay, I can't get any. Especially under 
the proposal that is in Ms. Combs' testimony, it says that as 
we go through this transparency piece that if the company is 
incapable of providing the funding dollars to--can't speak to 
those dollars, that then the person can't get but $5,000. They 
may have paid in $10,000, $15,000, or $20,000, and they are 
sitting out there unable to get money.
    So, it doesn't make a lot of sense to me, either, that even 
though we want to talk about accuracy, companies might not be 
able to put money into a funding pool to be able to support 
their employees. That wasn't a question, but I will ask you one 
now.
    I recognize the merits of using a composite of corporate 
bonds to determine pension funding liability. I generally 
understand how the bond indexes are comprised. My concern comes 
from--as a result of my service on the Committee on Financial 
Services when we did all these hearings about Enron, Global 
Crossing and all those great companies that went kaput.
    Are any of the companies, or the index that you are 
proposing to use for corporate bonds to gauge pension plans, 
how are you going to guarantee against that type of situation 
for all these workers out here?
    Mr. FISHER. Well, we would use as many indexes as we can 
find of corporate bonds to create as diversified an index of a 
yield curve as we can, to avoid the kind of disturbance that 
would come off from one of the bankruptcy events. So, we share 
that concern.
    There are indexes in the market today that attempt to do 
this. We would construct our own through notice and comment, 
and we would be very concerned and a great deal of effort would 
go into making sure that the index was not disturbed by the 
event of a single corporation.
    Ms. TUBBS JONES. Let me turn to another area, Ms. Combs. I 
believe it is your testimony, if I can get to it correctly 
before I lose time--when we talk about transparency, what was 
the notion about why pension plans were not transparent when 
they first came into creation?
    Ms. COMBS. Well, there is disclosure involved with pension 
plans, but in terms of the disclosure about funding status----
    Ms. TUBBS JONES. That is the question.
    Ms. COMBS. Right. I think the rules were--I think people--
it goes back to the earlier question Mr. McKeon had. I think 
people do view their plans as an ongoing entity, and they 
don't--they were concerned that if they reported it on a 
termination basis, as well, that would alarm people. As I said 
before, I don't think that will alarm people. I think people 
need more information, not less. I think if you look----
    Ms. TUBBS JONES. Okay. If you already said it, then we are 
out of time on that subject matter. Let's go on. Let me ask 
another question.
    Ms. COMBS. Okay.
    Ms. TUBBS JONES. I have a colleague--I come from Cleveland, 
Ohio, where since 2001 we have lost 57,000 jobs in the city of 
Cleveland alone, many of them manufacturing jobs, many of them 
companies who are in this dilemma about having sufficient 
dollars to pay to their retirees.
    Have you contemplated--while we are talking about accuracy 
and other issues--providing some safeguard or some support for 
employees who do do lump sum payments, and they are under 59 
years of age, the possibility of giving them a tax credit or 
getting away from charging them a tax penalty on taking now 
their pension fund, when they are in a hardship situation?
    Ms. COMBS. That is--not as part of this proposal. I think--
--
    Ms. TUBBS JONES. I know it is not part of the proposal, but 
as we are talking about helping out the companies, I am talking 
about helping out the workers. Is there something that we can 
do on that issue?
    Ms. COMBS. Well, I think Mr. Portman and Mr. Cardin have 
worked hard at improving pension portability and having people 
roll their pension plans over. In terms of----
    Ms. TUBBS JONES. I am not asking you what Mr. Portman and 
Mr. Cardin are doing. I am asking you, has the Administration 
contemplated anything you can do to assist workers in this 
area? You can answer, Mr. Fisher, if you choose.
    Mr. FISHER. Our focus is on trying to improve funding rates 
over time. We think that is the best thing we can do for 
workers' retirement security.
    Ms. TUBBS JONES. Would you then consider thinking about 
what you could do for workers, even though that might be your 
focus? Last question, could I have a list of the names of all 
the companies that you list, the 57 that are in trouble, the 32 
that are in trouble, the names of those companies, please?
    Ms. COMBS. We will work to get you as much information as 
we can. One of the problems is, it is based on information. We 
can't disclose companies' specific information under the law. 
It is one of the things we would like to change, but we will 
get you as much information as we can.
    Ms. TUBBS JONES. Thank you, Mr. Chairman.
    Chairman JOHNSON. Thank you. The lady's time has expired. 
Mr. Holt, do you care to question?
    Mr. HOLT. I will save my questions for the next panel. 
Thank you.
    Chairman JOHNSON. Okay. Mr. Cardin, do you care to 
question?
    Mr. CARDIN. Thank you, Mr. Chairman. I will try to be very 
brief.
    Chairman JOHNSON. Let me just advise everybody we are going 
to have a series of three votes, and so we will be gone at 
least 40 minutes. Are you capable of remaining should we have 
more questions, or do you all need to attend to business?
    Mr. FISHER. We are at your service.
    Chairman JOHNSON. Thank you, sir. Continue.
    Mr. CARDIN. Mr. Chairman, I will try to be very brief. 
First, Secretary Fisher, I think we are making progress since 
the last time you appeared before our Committee. I particularly 
liked your recommendation for the first 2 years on the 
replacement rate.
    Mr. FISHER. I was hoping someone would notice.
    Mr. CARDIN. Right. It is this chart that we are concerned 
about. This is the chart on the decline of defined benefit 
plans over the last 15 years. In 1985, we had a 112,000 defined 
benefit plans in this country. We are now down to about 30,000 
defined benefit plans. There are less and less every year.
    We are very concerned about what we do here in Congress on 
whether--on funding or other provisions concerning the defined 
benefit plans, on what impact it is going to have on companies' 
freezing their plans or getting out of this business 
altogether, to the extent that they are permitted under ERISA, 
or not starting defined benefit plans.
    I appreciate your comments about having the most accurate 
measurements. We agree with you on that; we are looking for 
accurate measurements. I must tell you the hemorrhaging of 
these plans concerns all of us, because these are guaranteed 
benefit plans where--hedge against stock market declines. This 
is income security for retirees; they are very important.
    I guess my question to you is sort of--follows on Mr. 
Portman's question. There are a lot of factors that go into the 
funding. We mentioned mortality earlier. I am pleased that you 
are now noting that we should be looking at the mortality 
schedules. We agree with you, by the way. If a company is using 
a mortality schedule that is causing them to underfund a plan, 
it should be adjusted; we want accurate factors.
    What we have a concern about is that if you are going to 
make a radical change--and going to a yield curve is considered 
a radical change--that is something that should be really 
thought out very carefully in conjunction with a lot of the 
other suggestions that you are looking at, that you are not 
prepared to act on today. So, I would just encourage you to be 
sensitive to the impact that going to a yield curve at this 
particular moment could have on decisionmakers on defined 
benefit plans. Going to a reliable conservative corporate bond 
rate does help with predictability, does help with funding 
requirements, and does accomplish a lot of the other objectives 
that we are trying to in this field.
    I have one quick question and that is the lump sum side. I 
am not exactly sure how your proposal works on lump sum 
distributions as far as the income rate assumptions that you 
are making. Could you just briefly touch on that?
    [The chart follows:]

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                                ------                                

    Mr. FISHER. Certainly. At the end of our transition--and I 
will come back and describe the transition--we would have the 
same corporate yield curve that we would be publishing; it 
would be the set of interest rates that would be used to 
calculate an age-appropriate lump sum for individual retirees. 
So, comparing a lump sum for an--imagine, to simplify the 
example, an 80-year-old--80 is the life expectancy of both 
workers. A 50-year-old, the 30-year Treasury rate would be the 
appropriate rate; but a 70-year-old, a 10-year rate would be 
the appropriate rate. Now that would be at the end of a 5-year 
transition. In years, we would have a transition from the 
current statute, which is the spot 30-year Treasury rate and 
move gradually from where we are now to where we would be in 5 
years.
    Mr. CARDIN. So, that would have some significant impact on 
the lump sum distributions under current policy?
    Mr. FISHER. It would change it from current policy.
    Mr. CARDIN. Let me yield the balance of my time to Mr. 
Holt.
    Mr. HOLT. I thought Mr. Cardin was going to ask more 
explicitly about this chart and the slide in the number of 
defined benefit plans. Is it your intention to provide more 
transparent and accurate calculation methods? Or is it your 
intention to stop this slide away from the defined benefit 
plans? Or is it--do you think your proposals will have no 
effect one way or the other on whether people opt for the 
defined benefit plan or not?
    Ms. COMBS. I guess we will tag team this. Our intention is 
to have accurate funding of pension plans so that benefit 
promises are kept and that people make appropriate benefit 
promises that they can keep and workers don't have their 
benefits reduced unnecessarily or unexpectedly. We think that 
getting to a system of--as Under Secretary Fisher mentioned, 
the first step--measurement is only the first step.
    Then we want to get--how do we get funding rules that make 
sense? How do we get people on that path? There we should talk 
very seriously about volatility, about smoothing, about how we 
can gradually get people to a point where they are better 
funded. We believe that when plans are better funded and more 
reliable promises are made, then we will have an environment 
where we will stop losing defined benefit plans and perhaps 
gain some. The people who are doing a good job will have an 
incentive to stay in the system. Our biggest fear is that good 
people will leave.
    Mr. HOLT. Secretary Fisher, very quickly then.
    Mr. FISHER. We are concerned about healthy companies 
leaving the defined benefit universe, and we think if we leave 
the underfunding problem unaddressed and that we mask it with 
an inaccurate measure of reliabilities, companies that are in 
good shape will, through negotiations with their workers, get 
out of the defined benefit system.
    So, the plans that you see falling off on your chart are 
not all unhealthy ones. Some of them are healthy ones because 
they wish to get away from the system to avoid being there to 
hold the bag if too many underfunded plans come back to roost.
    Chairman JOHNSON. The time of the gentleman has expired. I 
would like to tell you all that our Members have agreed to put 
their questions in writing with the exception of one, and Mr. 
Levin has one question.
    Mr. LEVIN. I just have a quick question.
    Chairman JOHNSON. Hang on a second. Without objection, I 
would ask that you would be willing to answer those questions 
in writing as well.
    Mr. FISHER. Absolutely.
    Chairman JOHNSON. Mr. Levin, you are recognized.
    Mr. LEVIN. Just a quickie. I am sorry I missed your 
testimony. Let me ask you, is it relevant when we consider 
these issues to contemplate the impact of our answer on the 
future of a company and the economy in general? Did you take 
that into account? So, do we need to craft pension plans that 
take into account the obligation to workers clearly, and also 
the economic future of particular conditions; is that relevant?
    Mr. FISHER. Yes, we think that is a part of the calculus as 
we look at this.
    Mr. LEVIN. You took that into account, the impact on 
particular companies in particular industries, in making your 
proposal?
    Mr. FISHER. We did not look on an industry-specific basis, 
but clearly promoting the defined benefit universe, making this 
system work for all plans as part of what----
    Mr. LEVIN. How about the economic health of particular 
industries? Did you take that into account?
    Ms. COMBS. I think that is one of the reasons the first 2 
years we adopt the Portman-Cardin corporate bond rate, which we 
think will give significant short-term funding relief to allow 
companies time to begin to plan to make these payments and to 
allow us to develop the rules.
    Mr. LEVIN. You think that is sufficient?
    Ms. COMBS. That is what we--yes.
    Mr. LEVIN. Okay.
    Chairman JOHNSON. Thank you, Mr. Levin. I thank all the 
Members and thank the people from the Administration. You guys 
did a super job. Thank you for being here with us, and you are 
released. We will start with the second panel when we return. 
The hearing stands in recess.
    [Recess.]
    [Additional written questions submitted by Mr. McCrery to 
Mr. Fisher and his responses follow:]

    Question: If we cannot adopt the Administration's yield curve 
proposal, what would be your recommendation for a permanent solution 
for replacement of the 30-year Treasury rate?

    Answer: As I stated in my testimony, making Americans' pensions 
more secure is a big job that will require comprehensive reform of the 
pension system. The Administration proposal that we released on July 8 
is the necessary first step in the reform process. Pension liabilities 
must be accurately measured to ensure that pension plans are adequately 
funded to protect workers' and retirees' benefits and to ensure that 
minimum funding rules do not impose unnecessary financial burdens on 
plan sponsors. The Administration cannot accept a replacement discount 
rate that does not include the characteristics of the yield curve that 
account for the time structure of pension plans' benefit payments.

    Question: In the hearing held before the Select Revenue Measures 
Subcommittee in April, witnesses indicated that Congress in 1987 
intended the discount rate to be a proxy for the group annuity rate. Do 
you agree that this was Congress' intent? Two of the witnesses in April 
agreed that the group annuity rate is still a good target. Should it 
still be our goal to find a discount rate which approximates group 
annuity rates? If so, is there an objective measurement of the group 
annuity rate which is not subject to manipulation?
    If insurance companies invest primarily in corporate bonds, it 
would seem the group annuity rate would be equal to a corporate bond 
index rate minus some amount for expenses and profits. I have read in a 
paper by the American Academy of Actuaries, for example, that a proper 
discount rate to reflect the group annuity rate might be a corporate 
bond rate minus 70 basis points. If, in the long run, our goal is an 
accurate discount rate, would this discrepancy between the corporate 
bond rate and this ``group annuity rate'' suggest that the blended 
corporate bond rate in the Portman/Cardin bill, as a long-term 
solution, is too high and therefore might lead to systematic under-
funding?

    Answer: The terms of pension contracts are not market determined 
because pensions are not bought and sold in an open market and pension 
sponsors do not compete with one another for participants. However, 
group annuity contracts, which are very similar to employer sponsored 
pensions, are sold in a competitive market by insurance companies. 
Group annuity contracts obligate the seller to provide a stream of 
annual cash payments, in exchange for a competitively priced premium, 
to individuals covered by the policy. We take the view, as Congress has 
in the past, that pension discount rates should reflect the risk 
embodied in assets held by insurance companies to make group annuity 
payments. These assets consist largely of bonds issued by firms with 
high credit ratings. Furthermore, the insurance companies issuing the 
group annuity contracts also have high credit ratings.
    Pension liabilities are the present value of future expected 
pension benefit payments. The adjustments that you describe have been 
proposed to cover certain non-liability costs of buying annuities, 
including insurance company profits, and adjustments to compensate for 
incorrect mortality measures. We do not think that pension discount 
rates should be adjusted to reflect group annuity expenses or any other 
actuarial or administrative concerns. The high-grade corporate rates 
used to construct the curve will only be adjusted so that they 
accurately reflect the time structure of benefit payments.

    Question: Will there be an opportunity for public comment on the 
specifics of the yield curve proposal?

    Answer: Yes, there will be ample opportunity for public comment on 
the composition of the yield curve. Treasury would publish a request 
for comments on how the yield curve would be determined. After 
receiving and reviewing public comment, the Treasury would draft a 
proposed regulation which would set out the specifics on how the yield 
curve would be determined. That proposed regulation would be subject to 
public comments and a public hearing would be scheduled. After those 
comments were received and reviewed, the Treasury would publish final 
regulations on how the yield curve would be determined.

    Question: In the first 2 years of the Administration's plan, a 
blended corporate rate is utilized as the discount rate. When the yield 
curve is fully phased in, will the discount rate still be based on the 
blended corporate bond rates (with different maturities) used in the 
first 2 years?

    Answer: No. As discussed in my testimony, implementation of the 
yield curve would be phased in over 5 years. The phase-in would start 
with the use of a single long-term corporate bond rate as recommended 
in HR 1776 (proposed by Congressmen Portman and Cardin) for the first 2 
years. In the third year a phase-in to the appropriate yield curve 
discount rate would begin. The yield curve would be fully applicable by 
the fifth year. When the yield-curve is fully phased in, the discount 
rate will not in any way be based on the blended corporate bond rates 
(with different maturities).
    More specifically, we envision that in years 1 and 2 pension 
liabilities for minimum funding purposes would be computed using a 
discount rate that falls within a corridor of between 90 and 105 
percent of a 4 year weighted average of the interest rate on a long-
term highly rated corporate bond. In years 3 and 4, minimum funding 
liabilities would be an average of liabilities calculated using a long-
term corporate rate and liabilities calculated using a yield curve. In 
year 3, the corporate rate would receive a \2/3\ weight and the yield 
curve a \1/3\ weight. In year 4 the weights would be switched and in 
year five liabilities would be computed using the yield curve alone.

    Question: I have heard you say in public that the ``same grade'' of 
debt would be used to determine the yield curve discount rate. What 
exactly do you mean?

    Answer: The Administration proposes that the new pension discount 
rate be based upon an index of interest rates on high-grade corporate 
bonds. H.R. 1776, the Pension Preservation and Savings Expansion Act of 
2003 sponsored by Representatives Portman and Cardin, states that the 
discount rate used for pension funding purposes should be ``consistent 
with the rate of return with respect to amounts conservatively invested 
in long-term corporate bonds''. We interpret the phrase 
``conservatively invested'' to mean investment in high-grade corporate 
bonds that have a low default risk.

    Question: In testimony from the second panel, we heard that the 
yield curve concept has not been sufficiently developed, that it is 
untested. Can you please respond to those concerns?

    Answer: I wholeheartedly reject the opinion that ``the yield-curve 
concept has not been sufficiently developed, that it is untested.''
    Because discounting pension payments using a yield curve is already 
considered a best practice in financial accounting, large sponsors are 
almost certainly making these computations now or know how to make 
them.1 Sponsors certainly know what their expected future 
pension cash flows are. Yield curves for use in discounting pension 
benefit payments have been available for a number of years. One example 
of such a pension yield curve is the one developed by Salomon Brothers 
in 1994 for the Securities and Exchange Commission. Monthly Salomon 
Brothers yield curves dating back to January 2002 can be found on the 
Society of Actuaries Web site at http://
www.actuariallibrary.org/.2
---------------------------------------------------------------------------
    \1\ See Financial Accounting Standard 87.
    \2\ This address opens a window to the Society's site search 
engine. To see discount curve examples simply type Salomon Brothers 
Pension Discount Curve into the query window.
---------------------------------------------------------------------------
    Further, I should note that discounting using a yield curve is a 
standard practice in financial calculations. For example in the finance 
text Financial Markets, Instruments & Institutions (Second Edition), 
authors Anthony Santomero and David Babbel note that
    ``One way to value an annuity is to take the promised payment at 
each point in time, discount it by its respective spot rate of 
interest, and then sum all of the discounted cash flows.'' 3
---------------------------------------------------------------------------
    \3\ Santomero, Anthony and David Babbel Financial Markets, 
Instruments & Institutions (Second Edition), McGraw-Hill Irwin, 2001, 
page 104.
---------------------------------------------------------------------------
    Use of a yield-curve to discount obligations is in no way new, 
undeveloped or untested. Rather, use of yield-curve discount rates 
recognizes a simple financial reality. Pension payments due next year 
should be discounted at a different, and typically lower, rate than 
payments due 20 years from now. Why is this important? Pension plans 
covering mostly retired workers that use a 20-year interest rate to 
discount all their benefit payments will understate their true 
liabilities. This will lead to plan underfunding that could undermine 
retiree pension security, especially for workers who are nearing 
retirement age. Proper matching of interest rates to payment schedules 
cannot be accomplished using any single discount rate.

    Question: Will businesses be able to plan and predict pension 
obligations if a yield curve concept were instituted?

    Answer: Pension obligations (liabilities) are the present value of 
expected future benefit payments. The value of these obligations is 
inversely related to the interest rate or rates used to discount future 
benefit payments, that is the obligations will be higher if interest 
rates are low and lower value if interest rates are high. Interest 
rates change over time in ways that financiers and economists cannot 
predict with any degree of accuracy, therefore, the value of future 
pension obligations cannot be predicted accurately. This is true 
whether benefit payments are discounted by a single long-term interest 
rate, as Congressmen Portman and Cardin propose, or whether they are 
discounted using a yield curve, as the Administration proposes.

    Question: On the second panel, Mr. Steiner from Watson Wyatt 
Worldwide testified that rates of different duration bonds (shorter 
term bonds) can move independently of one another and change the shape 
of the yield curve, resulting in unpredictable funding requirements. 
How would you account for such fluctuations?

    Answer: The yield curve's shape, which reflects investors 
expectations about the future, does change over time. This occurs 
because investors expectations change over time. The shape of the yield 
curve, like the individual interest rates that make up the yield curve 
change in response to countless short-term and long-term economic and 
financial market conditions.
    The Administration's proposal directly accounts for such changes by 
using a yield curve rather than a single interest rate to compute 
pension liabilities. This approach produces accurate liability 
estimates because it takes into account a basic reality of financial 
markets: that the rate of interest earned on an investment or paid on a 
loan varies with the length of time of the investment or the loan.
    It is important to understand that the discount rate used does not 
change the actual obligation--the liability is what it is. Choosing the 
proper discount rate gives us an accurate measure in today's dollars of 
future benefit payments; it does not change those payments. But if we 
don't measure that value properly today, plans may not have sufficient 
funds set aside in the future to make good on those pension promises.

    Question: Will the yield curve discount rate apply to all defined 
pension plans regardless of size? Will smaller plans have the resources 
to calculate pension liabilities using the yield curve discount rate, 
or should Congress consider an exemption for smaller pension plans?

    Answer: We do not feel that small plans should be exempt from 
computing liabilities in a way that reflects the time structure of 
their benefit payments. We believe that accounting for this time 
structure is essential to ensuring that all plans, large and small, are 
adequately funded. We hope that as we go through the rule making 
process small plan sponsors will find that it is simple for them to 
adopt the yield curve approach in computing their liabilities.
    Treasury is of course ready, if the Member's wish, to devise an 
even simpler method for small plans to compute liabilities that still 
reflects the time structure of each plan's benefit payments. Such 
simplification of course results in reduced accuracy of the liability 
measure that is computed. While such a tradeoff of reduced accuracy for 
computational simplicity may be acceptable for small plans with small 
liabilities, it would unacceptable for large plans that are sponsored 
by large, financially sophisticated firms.

    Question: Some have suggested that a yield curve would force more 
mature industrial companies to cut back or drop their pension plans. 
Some have even suggested that companies will spin off subsidiaries with 
older workforces to limit pension funding exposure. How do you respond 
to these concerns?

    Answer: We do not believe that this would be a problem. Current law 
restricts the extent to which a company can establish a separate 
subsidiary to hold its pension liabilities.
    First, section 4069 of ERISA authorizes the PBGC--the Federal 
agency that guarantees pension liabilities in the event of plan 
termination--to go after the entities that were in the company's 
controlled group of corporations at the time of the transaction for up 
to 5 years after that transaction if ``a principal purpose'' of the 
transaction was to ``evade liability'' under the plan termination 
provisions of ERISA. This is an important safeguard for plan 
participants in the spun-off subsidiary.
    Second, a formation of a separate subsidy would require splitting 
the pension plan into a separate plan with similar benefits for the 
subsidiary. Plan sponsors can do this split currently. However, for a 
plan split, each such plan would have an appropriate portion of the 
assets and liabilities, and each plan would be subject to the minimum 
funding rules, including the accelerated deficit reduction funding 
requirements. The result, under the Administration's yield curve 
approach of valuing liabilities, would be that the plan with younger 
employees would use rates of interest that are generally higher on the 
yield curve to discount most of their future benefit payments--
resulting in potentially slower funding--but the other plan would have 
to use rates of interest that are lower on the yield curve--resulting 
in faster funding, indeed the funding for the plan with the older 
workers would have disproportionately faster funding so that the 
combined result would often result in funding on a combined basis that 
is faster than if the plan had not been split. Therefore, the total 
contributions between the two plans would be the same or higher than 
prior to the spinoff.
    Third, the formation of a separate subsidiary will often be 
unavailable because of employment agreement restrictions, such as 
requiring the consent of the union where the spun off plan covers union 
members. In Varity vs. Howe, the Supreme Court made it clear that the 
employer could not disguise the risks of a separate subsidy pension 
plan from employees. So companies where consent is required will have 
to honestly tell employees and the employee's representatives the 
reason behind the spinoff.

    Question: We heard from the second panel that a yield curve would 
require the use of bonds of durations with very thin markets. Mr. 
Porter pointed out that single events can have a large impact on the 
rates if the bond index is not broad enough. How would Treasury address 
this potential problem?

    Answer: As I mentioned in my testimony, the Treasury would 
undertake this process using a formal notice and comment rulemaking 
process to ensure market transparency and to incorporate input from all 
interested parties in final development of the yield curve. Although 
the groundwork is well established, we certainly plan to work with all 
stakeholders to finalize the methodological details of the ultimate 
yield curve. There will be ample opportunity for all stakeholders to 
bring potential problems to our attention.
    I do not believe the issue you raise is a problem. As I mentioned 
in my testimony and in response to question 6, yield curves used to 
discount pension benefit payments have been available for a number of 
years and are mandated for and used in financial accounting. The 
methodology that Treasury is likely to adopt is widely accepted and 
extrapolates the shape of the corporate yield curve using the shape of 
the Treasury yield curve because of the thinness of the market for 
corporate bonds of some durations, especially long-term bonds. Thus 
thin markets for bonds of some durations is not an issue.

    Question: Dr. Weller testified that eliminating smoothing would be 
counter-cyclical. That's because interest rates tend to drop during a 
recession. Eliminating smoothing (i.e., not allowing the use of higher 
interest rates from earlier years) will increase the amount of cash 
companies have to put in their plans during economic bad times (and 
reduce the amount that goes in during good times). Please comment on 
this criticism.

    Answer: Smoothing reduces the accuracy of liability measures and 
the smoothing in current rules has failed to achieve stability in 
annual contributions. Smoothing delays recognition that a plan's 
funding situation has changed. In recent years smoothing the discount 
rate delayed recognition that plan liabilities had risen as a 
consequence of falling interest rates. Because the smoothing delayed 
this recognition plans did not respond in a more timely manner. 
Furthermore, the effects of those lower rates will remain a critical 
factor in plan funding requirements several years after rates begin to 
rise again.
    Pension liability computations should reflect the current market 
value of future benefit payments--this is a key component of accuracy. 
Plan sponsors and investors are interested in the current value of 
liabilities in order to determine the demands pension liabilities will 
place on the company's future earnings. Workers and retirees are 
interested in the current value of liabilities so that they can 
determine whether their plans are adequately funded.
    In summary, smoothing mechanisms will contribute to, not eliminate 
funding volatility.

                                


    [Additional written questions submitted by Mr. Tiberi to 
Ms. Combs and her responses follow:]

    Question: Given the fact that there are over 9 million workers who 
participate in multi-employer plans not addressed by the 
Administration's proposal, does the Administration intend to address 
these same issues in multi-employer plans at some date in the near 
future?

    Answer: In connection with single employer plans, the 
Administration has proposed requiring more accurate measurement of 
liabilities, more transparency of funded status, and full funding of 
new benefit promises made by at-risk plans. The Administration has also 
signaled its intent to pursue fuller reforms to single employer plan 
funding rules.
    We agree that participants in multiemployer plans, like those in 
single employer plans, deserve assurance that their plans are soundly 
funded. We therefore are open to considering similar reforms to 
multiemployer plan requirements. In considering such reforms, however, 
it is advisable to take into account important differences between 
single- and multiemployer plans.
    While there are significant risks facing the multiemployer program, 
these risks may be less than those facing the single-employer program. 
For example, several employers rather than just one support each 
multiemployer plan, and employers leaving multiemployer plans are 
generally liable for their share of any underfunding. Multiemployer 
plans are covered under a separate PBGC insurance program that includes 
loans to insolvent plans, lower premiums and a lower guaranty limit 
than that of the single-employer plan program.

    Question: The Administration's proposal includes prohibiting a 
company from raising benefit levels if a company falls below a certain 
termination liability funding threshold. Given the need to protect 
pensions of workers in all defined benefit plans, does the 
Administration support a minimum funding amount for benefit increases 
for multi-employer pension plans?

    Answer: The Administration is willing to consider reforms of this 
sort. It is especially important that at-risk plans not make additional 
benefit promises without adequately funding them. The Administration 
has proposed new restrictions for single employer plans where the plan 
sponsor is bankrupt or has a credit rating below investment grade and 
the plan is seriously underfunded. The Administration looks forward to 
working with Congress to determine the circumstances when multiemployer 
plans are at similar risk and what restrictions might be appropriate 
when such risk exists.

    Question: Single employer plans have a minimum 90% asset to benefit 
ratio requirement while multi-employer plans have no such requirement. 
Should there also be a required minimum 90% asset to benefit ratio 
requirement for multi-employer plans? If not, please explain your 
rationale and an alternative method for ensuring that a multi-employer 
plan participant is protected against inadequate funding.

    Answer: Multiemployer plans are not subject to the deficit 
reduction contribution requirements (DRC) that apply to significantly 
underfunded single-employer plans. In general, a plan is subject to the 
DRC requirement in a plan year when the value of its assets is less 
than 90 percent of its current liability.
    However, Congress in 1980 enacted the Multiemployer Pension Plan 
Amendments Act (MPPAA) that subject multiemployer plans to mandatory 
requirements for financially weak plans in ``reorganization'' that do 
not exist for single employer plans. A multiemployer plan is considered 
in ``reorganization'' where the plan's retiree amortization benefits 
over a 10-year period exceed the plan's net charge to its standard 
funding account.

    Question: The focus over the last few years has been on single 
employer plans, and SEPs of companies that are publicly-held and 
therefore have a rigorous SEC quarterly disclosure schedule. In 
contrast, multi-employer plans have no such SEC disclosure requirement 
and are run by a private board of trustees. As the Administration 
pursues the necessary goal of greater disclosure for SEPs, does it 
support greater disclosure for MEPs as well? If so, please elaborate on 
the various disclosure options which may appear viable to your experts.

    Answer: Public companies with single employer plans currently file 
with the SEC both 10-Ks (annual reports) and 10-Qs (quarterly reports). 
The 10-K report sets forth current pension data required by the 
Financial Accounting Standards Board (FASB), but the 10-Q report does 
not update that data each quarter.
    Given that the need for retirement security is the same, the 
Administration favors transparency for both single-employer and 
multiemployer plans. The Administration will carefully consider whether 
the same kinds of disclosure requirements it has proposed for single 
employer plans should also apply to multiemployer plans, taking into 
accounts the differences between the two.

                                


    Chairman JOHNSON. The hearing will come back to order. The 
second panel has their seats, and they are all ready. I would 
ask at this time for my Co-Chairman, Chairman McCrery, to 
introduce the second panel. Go ahead, Chairman McCrery.
    Chairman MCCRERY. Thank you, Chairman Johnson. We have a 
distinguished panel to deliver remarks and answer questions for 
us this afternoon. First, is Mr. Kenneth Porter. Mr. Porter is 
Director of Corporate Insurance and Global Benefits Financial 
Planning for the Dupont Company. He is responsible for global 
property and casualty insurance risk and for the worldwide 
financial planning and actuarial policy for employee and 
retiree benefits. He is currently the director of both the 
ERISA Industry Committee and the American Benefits Council, and 
is a member of the Wharton Executive Education Advisory Board.
    Mr. Porter previously served as Chair of the ERISA Industry 
Committee and the American Benefits Council. He is also a 
member of Financial Executives International, an enrolled 
actuary, a member of the American Academy of Actuaries and a 
Fellow of the Conference of Consulting Actuaries. He has 
previously testified before Committees and Subcommittees of the 
U.S. Congress, the U.S. Department of Labor, the Treasury 
Department, and the PBGC.
    Next we have Mr. Kenneth Steiner. Mr. Steiner is a 
consulting actuary with over 30 years of pension plan 
consulting experience. He has worked with single employer 
plans, multi-employer plans and plans sponsored by governmental 
agencies. His areas of expertise include plan design, plan 
funding, accounting under Financial Accounting Standards Board 
Statement No. 87, and communication with plan participants. Mr. 
Steiner was appointed resource actuary for Watson Wyatt 
Worldwide in October 2000 and now works in the firm's 
Washington, D.C., office where he provides technical and 
practical guidance to Watson Wyatt actuaries in the United 
States. Mr. Steiner is a Fellow of the Society of Actuaries, a 
Fellow of the Conference of Consulting Actuaries, a member of 
the American Academy of Actuaries and an Enrolled Actuary under 
ERISA. He holds a BA degree from the University of California 
at Davis.
    Next, a fellow Louisianian, Mr. Ashton Phelps, Jr. Mr. 
Phelps has been President and Publisher of the Times-Picayune 
of New Orleans, Louisiana, since December 1979. He has also 
served as Chairman of the Auditing Committee of the Associated 
Press, as a member of the boards of the Southern Newspaper 
Publishers Association and the Southern Newspaper Publishers 
Association Foundation, and as President of the Louisiana Press 
Association. Mr. Phelps received his BA degree from Yale 
University, and I, as a Louisiana State University Law School 
graduate, can say the only black mark on his record is, he has 
a JD from Tulane University Law School.
    Last on this afternoon's panel is Dr. Christian Weller. Dr. 
Weller is an economist for the Economic Policy Institute in 
Washington where he has worked as an international 
macroeconomist since 1999. Prior to joining the Economic Policy 
Institute, he worked at the Institute for European Integration 
Studies at the University of Bonn in Germany, the Department of 
Public Policy of the American Federation of Labor and Congress 
of Industrial Organization (AFL-CIO), and spent time working 
for banks in Germany, Belgium and Poland. Dr. Weller holds 
doctoral and master's degrees from the University of 
Massachusetts and a degree in Economics from the University of 
Konstanz in Germany. Mr. Chairman, that concludes the 
introduction of our witnesses this afternoon.
    Chairman JOHNSON. Thank you, Chairman McCrery; I appreciate 
those introductions. We appreciate you being here. Are you all 
aware of our light system from the previous panel? Mr. Porter, 
you may begin your testimony.

  STATEMENT OF KENNETH W. PORTER, DIRECTOR, GLOBAL BENEFITS, 
DUPONT COMPANY, WILMINGTON, DELAWARE, ON BEHALF OF THE AMERICAN 
  BENEFITS COUNCIL, THE BUSINESS ROUNDTABLE, THE COMMITTEE ON 
   INVESTMENT OF EMPLOYEE BENEFIT ASSETS, THE ERISA INDUSTRY 
COMMITTEE, THE FINANCIAL EXECUTIVES INTERNATIONAL, THE NATIONAL 
 ASSOCIATION OF MANUFACTURERS, AND THE U.S. CHAMBER OF COMMERCE

    Mr. PORTER. Chairman Johnson, Co-Chairman McCrery, Members 
of the Committee, it is an absolute pleasure to be here today 
and to testify in these important matters.
    I am appearing on behalf of the American Benefits Council, 
the Business Roundtable, the Committee on Investment of 
Employee Benefit Assets, the ERISA Industry Committee, 
Financial Executives International, the National Association of 
Manufacturers, and the U.S. Chamber of Commerce. It is an 
honor, distinctly, to be able to share with you the concerns of 
industry.
    We have broad agreement that there is an immediate need to 
fix something that is broken. The question is not whether to 
fix it, it is how and when. We have two obvious alternatives 
before us today. One is the rates inherent in the proposals 
from Representatives Portman and Cardin and the other presented 
by the Treasury Department just last week.
    I would like to start off by sharing just a little 
perspective because I think it is helpful. In the heat of the 
debate that we have had in recent weeks over these issues, I 
think we have lost sight in some discussions of a historical 
perspective.
    When ERISA was enacted and debated back in the 1970s, there 
was a cogent, well-defined, long-term retirement income policy 
articulated for this Nation. In the context of that, funding 
rules and other participation rules were established that had 
the effect of encouraging employers to sponsor and maintain 
long-term retirement income plans. Over the years, there have 
been a number of bulletin changes to ERISA. The net effect is 
that we now have in ERISA about a dozen different definitions 
of plan liability.
    We have heard testimony that talks in terms of being the 
liability, the correct measure, but yet Congress in its--its 
historical manifestations of ERISA have now given us 12 
definitions of liability. When a plan participant asks us what 
the liability of the plan is, we are really hard-pressed to 
give them a single answer, and we need to know what the purpose 
of their question is so we can give them an answer that befits 
the question.
    The Financial Accounting Standards Board, in adapting 
standards for employer accounting, didn't like any of those 
dozen definitions and gave us two more; the International 
Accounting Standards Board wants to give us yet another. So, we 
don't have a single or unified view of what the correct measure 
of employed pension liabilities are.
    There are lots of views. There is lots of dissension on 
what that is. It is not universal. What we are now being 
presented with is, what do we do with one of those measures 
that is currently defective?
    If you look at all of the dozen measures of liability in 
ERISA, those related to the 30-year Treasury bonds only reflect 
a couple of those liabilities. The liabilities associated with 
normal pension funding do not use the 30-year Treasury bonds. 
Liabilities associated with most disclosure do not use the 30-
year Treasury bond. Some of the PBGC measurements do not use 
the 30-year Treasury bonds. In fact, what you find if you look 
at all the liabilities in ERISA, the 30-year Treasury bond 
reflects two specific areas of liability; one is the variable 
rate premium and the other is the so-called DRC.
    Now, there has been some discussion, as if this liability 
was the liability for the pension plan and yet ERISA, that 
there is normal funding. There are full funding limits, and in 
some cases where there needs to be, there should be a DRC 
measured according to, currently, the 30-year Treasury bond 
yield interest rate.
    Three years or so ago, when the Treasury Department 
decided, for sound fiscal reasons, that it was appropriate to 
start buying back 30-year Treasury bonds; and then, more 
recently, to stop selling them in the first place, discount 
rates on long-term Treasuries started to decline rapidly. In 
fact, earlier this year, in late April, early May, when the 
Federal Reserve Chairman suggested--confirmed a rumor that 
there may be an additional buy-back of 30-year Treasury bonds 
to help stimulate the economy, 30-year Treasury bonds dropped 
70 basis points in 3 weeks.
    Every time the Federal Reserve adjusts interest rates to 
stimulate the economy, the minimum contribution applied by the 
deficit reduction goes up, and the very companies that we are 
hoping will help stimulate the economy with low interest rates 
are forced to divert more money into their pension 
contributions through lower interest rates. In fact, pension 
funding has become a counterweight to the growth of the economy 
during a difficult time. The reverse has been true, in a sense, 
in strong times, where pension funding is not permitted to be 
made during a strength and required to be made during weakness. 
This is a flawed attempt at a noble cause.
    We believe very strongly that no government bond, 
therefore, can be used for pension funding purposes because it 
holds pension funding subject to the legitimate needs of the 
U.S. monetary and fiscal policy. We need something that is 
independent of the fiscal policy to drive our pension funding. 
That is why we strongly support the interest rates inherent in 
the proposals of Representatives Portman and Cardin. These 
provide a very strong basis for funding. Interestingly enough, 
if you go back to 1987 when Congress--I am sorry.
    Chairman JOHNSON. Can you begin to close?
    Mr. PORTER. I will close.
    Chairman JOHNSON. Thank you.
    Mr. PORTER. As we go back to 1987 when Congress proposed 
this particular portion of the bill, what is in the Portman-
Cardin bill today is very consistent with the original intent 
of this portion of law.
    Before us, we believe, is the choice between something that 
is short-term and long-term. We believe that what is 
represented by the Portman-Cardin bill in interest rates is 
more like a technical correction for what we already have in 
law, whereas what the Treasury Department has proposed is a 
fundamental, sweeping change. We need to understand national 
policy before we make sweeping change.
    [The prepared statement of Mr. Porter follows:]
   Statement of Kenneth W. Porter, Director, Global Benefits, DuPont 
   Company, Wilmington, Delaware, on behalf of the American Benefits 
   Council, the Business Roundtable, the Committee on Investment of 
 Employee Benefit Assets, the ERISA Industry Committee, the Financial 
 Executives International, the National Association of Manufacturers, 
                    and the U.S. Chamber of Commerce
    Chairmen of the Subcommittees and Members, thank you for the 
opportunity to present the joint views of the American Benefits 
Council, the Business Roundtable, the Committee on Investment of 
Employee Benefit Assets, the ERISA Industry Committee, Financial 
Executives International, the National Association of Manufacturers, 
and the U.S. Chamber of Commerce--organizations that represent a broad 
cross-section of American business and pension plans. My name is 
Kenneth W. Porter, Director, Global Benefits, Dupont Co. I am serving 
as a spokesman today, however, for these organizations, each of which 
has a vital interest in encouraging the creation of a regulatory 
climate that fosters the voluntary creation and maintenance of defined 
benefit pension plans for employees, and which come before you today 
with a common voice.
    In our view, the need to replace the obsolete 30-year Treasury bond 
interest rate used for pension calculations is the most pressing issue 
facing employers that sponsor and individuals who rely on defined 
benefit pension plans today. Immediate action is required to correct 
the problem.
    We commend the Bush Administration for stepping forward with a set 
of principles that recognize the need for permanent replacement of the 
obsolete 30-year Treasury bond rate. In particular, we are pleased that 
the Administration included in their recommendations the replacement of 
the 30-year Treasury bond rate with a conservative, high-quality 
corporate bond rate. The use of a composite corporate bond interest 
rate to replace the 30-year Treasury rate has been widely discussed for 
almost a year, enjoys strong, bipartisan backing, and has support 
across the ideological spectrum. Use of a composite, high-quality 
corporate bond rate will appropriately measure pension liability, will 
improve predictability of plan obligations, and is consistent with the 
pension rules previously adopted by Congress.
    We do not, however, believe that the addition of a ``yield curve'' 
concept referred to in the Administration's recommendations has been 
sufficiently developed or examined, nor do we believe that it will 
provide the certainty and clarity in defined benefit plan funding 
obligations that is urgently needed to ensure the continued viability 
of our defined benefit pension system. Consideration of the 
fundamentally new and untested yield curve regime should only occur in 
the context of a very careful review of all the pension rules and with 
a better understanding of the macroeconomic consequences of such a 
change.
    Under current law, employers that sponsor defined benefit pension 
plans are required to use the 30-year Treasury bond rate for a variety 
of pension calculation purposes, including plan funding requirements, 
calculation of lump sum distributions, and liability for variable 
premium payments to the Pension Benefit Guaranty Corporation (the 
``PBGC''). The various provisions of federal law requiring use of the 
30-year Treasury bond rate for pension calculations were enacted in 
1987 and 1994 when there was a robust market in 30-year Treasury bonds 
and the yields on those bonds were an acceptable proxy for corporate 
bonds and other long-term debt instruments. While a variety of rates 
were discussed, it was believed at the time the 30-year Treasury rate 
was first selected in 1987 that use of the rate would result in 
companies setting aside appropriate assets to meet their long-term 
funding obligations. That assumption is no longer valid.
    Beginning in 1998, the U.S. Treasury Department began a program of 
retiring federal debt by buying back 30-year Treasury bonds. In October 
2001, the Treasury Department discontinued issuance of 30-year Treasury 
bonds altogether. With commencement of the buyback program, yields on 
30-year Treasury bonds began to drop and to diverge from the rest of 
the long-term bond market--a divergence that increased precipitously 
after the October 2001 discontinuation. As a result of the shrinking 
supply of these bonds (particularly when coupled with continuing demand 
for the relative safety of U.S. government debt), the secondary market 
interest rate on existing 30-year Treasury bonds has reached historic 
lows and no longer correlates with the rates on other long-term bonds. 
The Treasury Department itself has concluded, ``[The] Treasury 
Department does not believe that using the 30-year Treasury bond rate 
produces an accurate measurement of pension liabilities.'' 1
---------------------------------------------------------------------------
    \1\ Testimony of Peter Fisher, Undersecretary for Domestic Finance, 
U.S. Department of Treasury, before the House Ways and Means 
Subcommittee on Select Revenue Measures (April 30, 2003).
---------------------------------------------------------------------------
    The result of these low rates is to artificially but substantially 
inflate pension liabilities and consequently increase required pension 
contributions and PBGC premiums. The inflated pension contributions 
mandated by use of the obsolete 30-year rate exceed what is necessary 
to fund promised benefits and produce a series of disastrous results 
for employees, employers, and our economy as a whole.
    More and more of the companies that confront these inflated and 
unpredictable contributions (which can often be several times greater 
than prior year contributions, due to the non-proportional nature of 
the pension funding rules) have concluded that they have no choice but 
to stop the financial bleeding by freezing or terminating their plans. 
Both terminations and freezes have truly unfortunate consequences for 
workers--current employees typically earn no additional pension 
accruals and new hires have no pension program whatsoever. Government 
data reveals that defined benefit plan terminations have continued to 
accelerate in recent years, with a 19% drop in the number of plans 
insured by the PBGC from 1999 to 2002 (from 39,882 to 32,321, down from 
a high of 114,396 in 1985). Just as troublesome, the statistics above 
do not reflect plans that have been frozen. While the government does 
not track plan freezes, reports make clear that these freezes are on 
the upswing in recent months. A major consulting firm reports that 21% 
of surveyed defined benefit plans intend to scale back benefits for 
current employees through a freeze or other mechanism and 27% intend to 
offer less generous benefits for new hires.
    Today's inflated funding requirements also harm the economy as cash 
unnecessarily poured into pension plans diverts precious resources from 
investments that create jobs and contribute to economic growth. Facing 
pension contributions many times greater than they had anticipated, 
employers are having to defer steps such as hiring new workers, 
investing in job training, building new plants, and pursuing new 
research and development. Yet these are precisely the steps that would 
help lower our nation's unemployment rate, spur individual and 
corporate spending, and return the country to robust economic growth. 
Some employers may be forced to lay off employees in order to 
accumulate the required cash contributions. Moreover, financial 
analysts and financial markets are now penalizing companies with 
defined benefit pension plans because of the unpredictable future 
pension liabilities that result from uncertainty as to what will 
replace the 30-year Treasury bond rate. The resulting pressure on 
credit ratings and drag on stock prices, which harms not only the 
company but also its shareholders, is a further impediment to strong 
economic growth.
    Because of these problems and the fact that the use of an obsolete 
interest rate for pension calculations makes no sense from a policy 
perspective, Congress acted in the March 2002 economic stimulus bill to 
provide temporary relief that expires in 2003. Since 2002, the 30-year 
Treasury bond rate has only become progressively more obsolete, and the 
associated problems described above have become more grave. In short, 
the 30-year Treasury bond rate is a broken rate that must be replaced. 
To continue to base pension calculations on an obsolete interest rate 
undermines the very foundation of our pension laws and defined benefit 
plan system.
    We strongly endorse replacing the broken 30-year Treasury rate for 
pension calculations with a rate based on a composite blend of the 
yields on high-quality corporate bonds. H.R. 1776, a comprehensive 
pension reform bill authored by Representatives Rob Portman (R-OH) and 
Ben Cardin (D-MD), includes a provision (section 705) that does exactly 
that.
    A corporate bond composite rate steers a conservative course that 
fairly and appropriately measures pension liability. High-quality 
corporate bond rates are known and understood in the marketplace, and 
are not subject to manipulation. Such rates would also provide the kind 
of predictability that is necessary for company planning of pension 
costs. Moreover, use of a corporate bond blend would achieve 
transparency given today's daily publication of corporate bond rates 
and instant access to market information through electronic means.
    Use of such a conservative corporate bond blend would ensure that 
plans are funded responsibly. Moreover, the strict funding requirements 
that Congress adopted in 1987 and 1994 would continue to apply. 
Substitution of a corporate bond blend would merely mean that companies 
are not forced to make the extra, artificially inflated contributions 
required by the obsolete 30-year Treasury rate. This is why 
stakeholders from across the ideological spectrum--from business to 
organized labor--agree that the 30-year Treasury rate should be 
replaced by a conservative, high-quality corporate bond blend.
    The Treasury Department has also suggested that after two years of 
utilization of a corporate bond rate, a so-called ``yield curve'' 
concept should be adopted. While a fully developed yield curve proposal 
has not been issued and the specifics underlying the concept are 
unknown, it appears that it would involve a complicated regime under 
which the interest rates used for measuring pension liability would 
vary with the schedule and duration of payments due to each plan's 
participants.
    Although neither we nor the Congress yet have sufficient detail to 
fully analyze the Treasury Department's yield curve approach, it is 
clear that a yield curve regime would represent a very significant 
change in our pension system. It would lack the transparency and 
predictability of a conservative corporate bond blend, and also not be 
as well understood. At a minimum, it raises a large number of policy 
concerns and unanswered questions that have not been adequately studied 
or addressed. Based on our current understanding of the concept, we are 
concerned that the yield curve would:

     Exacerbate funding volatility by making liabilities 
dependent not only on fluctuations in interest rates, but also on 
changes in the shape of the yield curve (caused when rates on bonds of 
different durations move independent of one another) and on changes in 
the duration of plan liabilities (which can occur as a result of 
layoffs, acquisitions, etc.). The ``smoothing'' techniques that allow 
employers to use the average of the relevant interest rate over several 
years in valuing liabilities to reduce funding volatility also would 
not be allowed.
     Increase pension plan complexity (already a significant 
impediment to defined benefit plan sponsorship) by moving from a system 
based on a single interest rate to a much more complex system that 
relies on a multiplicity of instruments with widely differing durations 
and rates.2
---------------------------------------------------------------------------
    \2\ Although statements have been made that the yield curve 
adjustment would be simple and easy, the fact that the Treasury 
Department has failed to provide full details on the proposal, even 
after months of study, belies the simplicity of the proposal.
---------------------------------------------------------------------------
     Make it difficult for employers to plan and predict their 
pension funding obligations (another significant impediment to defined 
benefit plan sponsorship today).
     Result in less ability for a plan sponsor to fund pension 
plans while participants are younger because it would delay the ability 
to deduct contributions to periods when the workforce is more mature 
and declining. In addition, important flexibility would be lost by 
removing the corridor surrounding the interest rate (historically 90% 
to 105% of the averaged rate). The loss of such flexibility would make 
it harder for employers to fund their plans in times when corporate 
resources are more plentiful.
     Require use of bonds of durations with very thin markets 
(because few such bonds are being issued). As a result, single events 
(e.g., the bankruptcy of a single company unrelated to the plan 
sponsor) could affect the rate of a given bond index dramatically, 
thereby leading to distortions in pension calculations and even 
potential manipulation.
     Have uncertain macroeconomic effects on the economy as a 
whole and on particular companies, industries, and classes of workers.
     Involve a considerable delegation of policy authority by 
Congress to the Executive Branch since the entirety of the construction 
and application of the yield curve would apparently be left to the 
regulatory process.
     Not necessarily result in a more accurate measure of 
liabilities, since the theoretically more ``precise'' plan-by-plan 
yield curve interest rate would not be accompanied by other similar 
plan-specific assumptions.

    There also are many additional unanswered questions created by the 
Administration's yield curve concept. For example, it is unclear how 
such a concept would apply to issues such as the calculation of lump 
sums, the valuation of contingent forms of distribution, the payment of 
interest and conversion to annuities of employee contributions to 
defined benefit plans, and the payment of interest credits under hybrid 
pension plans. Many of these uncertainties raise serious policy issues. 
For example, if application of a yield curve resulted in higher lump 
sum payments for older workers compared to younger ones, that result 
must be examined closely to determine whether it would modify ERISA's 
vesting standards by increasing backloading of benefits. It is also 
unclear how, or even if, the yield curve concept would apply for 
purposes of calculating PBGC variable premium obligations, another very 
major and unaddressed policy question.
    It is unrealistic to believe that all of these outstanding issues 
and concerns raised by the yield curve concept could be addressed in 
the short time in which Congress must act on a replacement for the 30-
year Treasury rate. Such an untested change--from our current rules 
that allow for an interest ``corridor'' and an averaged interest rate 
to a yield curve concept applied on a ``spot'' basis--would require a 
complete reevaluation of our pension funding rules (as today's rules 
are premised on these corridor and averaging features). In addition, it 
is unclear from the limited information available how the very 
significant issues of transitioning from a system based on corridors 
and averaging to a less flexible system would be resolved. At a 
minimum, to the extent that this type of major overhaul of our pension 
funding rules is considered, it should be done in the context of a more 
fundamental review through deliberative Congressional study and the 
regular legislative process.
    We also want to briefly touch on other issues referenced in the 
Administration's pension reform principles--namely additional 
disclosure of pension information and a new idea that would mandate 
freezes in certain private-sector pension plans. First, it is important 
that any required disclosure be responsible and serve a clearly defined 
need. Disclosure that provides a misleading picture of pension plan 
finances or that is unnecessary or duplicative of other disclosures 
could be counter-productive. For example, the Administration's proposal 
to key disclosure off of a plan's termination liability could provide a 
misleading depiction of plan finances for ongoing plans that are 
reasonably well funded because these plans are not in any danger of 
terminating. This type of misleading disclosure could unnecessarily and 
falsely alarm plan participants, financial markets, and shareholders. 
Moreover, termination calculations of the type being proposed are among 
the most costly and administratively burdensome calculations a plan can 
be asked to perform. Similarly, the Administration's proposal to allow 
publication of certain information that today is provided on a strictly 
confidential basis to the PBGC whenever a plan is underfunded by more 
than $50 million would provide yet another impediment to companies' 
willingness to sponsor defined benefit plans, and ignores the size of 
the plan and its assets and liabilities. For many pension plans with 
billions of dollars in assets and obligations, such a relatively modest 
amount of underfunding is often quite normal and appropriate. It should 
not be cause to trigger publication of information on an ad hoc basis 
that could again sound unnecessary alarm bells.
    We also believe that the Administration's proposal that would 
freeze private sector pension plans and remove lump sum rights when a 
company reaches a certain level of underfunding and receives a junk 
bond credit rating requires careful review. While we appreciate (and 
share) the Administration's concerns about PBGC guarantees of benefit 
promises that are made by financially troubled companies, their 
proposal raises technical and policy issues that require further 
examination. For example, there is no definition of ``junk bond'' 
status provided, and there is a question of whether it is appropriate 
to mandate a cutback in participants' benefits based on a third-party's 
determination of credit rating. Moreover, it is not clear why employees 
should lose their rights to certain forms of benefit when their company 
experiences financial trouble.
    We thank you for the opportunity to present our views. All parties 
agree that the immediate problem is clear--the need to replace the 
obsolete 30-year Treasury bond rate. The solution is to permanently 
substitute an interest rate based on a composite of high-quality 
corporate bond indices.
    Once that problem is solved, we also look forward to working with 
your Committees and the Administration on a comprehensive discussion of 
the long-term funding challenges facing our pension system as well as 
proposals designed to provide additional protection to the PBGC. Let us 
emphasize that employers that responsibly fund their plans and pay 
PBGC's per-participant premiums share the same objective as the PBGC--
ensuring a sound defined benefit system over the long-term. However, a 
failure to immediately deal with the 30-year Treasury rate anomaly 
through substitution of corporate bond blend threatens not only the 
future viability of our defined benefit retirement system but the 
economic recovery as well.

                                


    Chairman JOHNSON. Thank you, sir. Mr. Steiner, you may 
begin.

   STATEMENT OF KEN STEINER, RESOURCE ACTUARY, WATSON WYATT 
                           WORLDWIDE

    Mr. STEINER. Thank you, Chairman Johnson, Chairman McCrery, 
and distinguished Committee Members; thank you for inviting me 
to testify today. My name is Ken Steiner, and I am the Resource 
Actuary for Watson Wyatt Worldwide. Watson Wyatt is a human 
resources and benefits consulting firm employing nearly 6,300 
associates worldwide. We are a major provider of actuarial 
consulting services to retirement plans in the United States.
    At Watson Wyatt we believe that defined benefit funding 
rules should be carefully drafted to balance the security needs 
of plan participants and the PBGC with the business needs of 
plan sponsors. Plan participants need to be able to count on 
receiving the benefits they have earned, the PBGC needs to 
control its risk, and plan sponsors need plans that are 
consistent with their business objectives, including having 
funding requirements that are flexible, predictable and stable. 
It is not a simple task to balance all these needs.
    One thing is clear: since defined benefit plan sponsorship 
is generally a voluntary action taken by an employer, it is 
quite likely that many plans would be terminated or frozen if 
these plans ceased to meet defined benefit plan sponsors' 
business needs.
    It is no secret, and this Committee has mentioned several 
times that defined benefit plan sponsorship has declined over 
many years; and this trend continues today. Given the rapid 
decline in the number of defined benefit plans, we are 
concerned that if not carefully crafted, actions by Congress to 
significantly change the funding and disclosure rules at this 
time will result in even more defined benefit plan terminations 
or plan freezes. If this occurs, America's workers will be the 
ultimate losers.
    The Administration has indicated that its proposal 
constitutes only the first phase of several phases of funding 
reforms to be proposed. We support the undertaking of a 
comprehensive study of funding requirements of our pension 
system. We also support certain aspects of the Administration's 
proposal, including the use of the corporate bond rate as a 
replacement for the now defunct 30-year Treasury rate and the 
use of a more reasonable basis to determine lump sum 
distributions. However, we believe other aspects of the 
proposal should be delayed so that they can be better 
coordinated with changes anticipated in future reform 
proposals.
    As mentioned by Chairman Johnson in the earlier panel's 
discussion, over the last few years the investment climate has 
been marked by the equivalent of a ``perfect storm,'' leaving 
many defined benefit plan sponsors with underfunded plans. 
However, a significant portion of the perceived underfunding 
results from the use of the obsolete 30-year Treasury bond to 
value liabilities. This low and discontinued rate makes plan 
liabilities appear larger than they really are, and 
consequently overstates plan contribution requirements.
    To give you a sense of the magnitude of the problem, we 
have examined the pension contribution of Fortune 1000 
companies that sponsor defined benefit plans, and for the last 
3 years, from 1999 to 2001, total contributions to the defined 
benefit plans from these companies were $41 billion. By 
comparison, in 2002 alone, these companies contributed a total 
of about $43 billion, more than had been contributed for the 
prior 3 years combined and about triple the total contributions 
made just the year before.
    No one knows what plan sponsors will actually contribute to 
their plans for 2003 and the next few years. However, 
contributions can be estimated based on prior experience and 
assumptions about the future. Based on certain assumptions, we 
estimate the total contributions by Fortune 1000 companies in 
2003 will be about $83 billion, almost double the total in 2002 
and six times the amount contributed in 2001.
    Under current law and continued use of the obsolete 30-year 
Treasury rate, we estimate contributions in the aggregate for 
the next 2 years, 2004 and 2005, will total about $160 billion, 
even assuming plan assets earn 8 percent per annum after 2002. 
These large contributions divert corporate assets needed to 
grow companies and provide jobs.
    Given these daunting numbers, Watson Wyatt is pleased that 
the use of a corporate bond yield rate has been proposed as a 
replacement for 30-year Treasuries in determining corporate 
liability interest rate, both as part of the Portman-Cardin 
bill, H.R. 1776, and for the first 2 years of the 
Administration's proposal. However, we have concerns about the 
Administration's proposal to move to a corporate bond yield 
curve over the next 5 years.
    Based on our understanding of the yield curve proposal, the 
changes will likely increase plan Administration fees, increase 
volatility from year to year, reduce employer contribution 
flexibility and make it more difficult for sponsors to budget 
contribution requirements from year to year. None of these 
results is likely to encourage plan sponsors to maintain their 
plans.
    By eliminating the 4-year averaging feature under current 
law, contribution requirements will become much more volatile 
despite the testimony to the contrary in the earlier panel. As 
an example, we have only to look at experience over the last 12 
months. For the period ending May 31st, corporate bond rates 
have declined about 170 basis points. For a typical plan, this 
would have an impact of increasing plan liability by about 22 
percent. By comparison, under existing law, the decrease in the 
4-year average interest rate over the past 12 months is 
expected to increase plan liability by only about 3 percent. 
Therefore, we believe it is important to maintain the averaging 
features of current law. Thank you.
    [The prepared statement of Mr. Steiner follows:]
   Statement of Ken Steiner, Resource Actuary, Watson Wyatt Worldwide
    Chairman Johnson, Chairman McCrery and distinguished committee 
members, thank you for inviting me to testify on ``Examining Pension 
Security and Defined Benefit Plans: The Bush Administration's Proposal 
to Replace the 30-Year Treasury Rate.'' My name is Ken Steiner, and I 
am the Resource Actuary for Watson Wyatt Worldwide. Watson Wyatt is a 
human resources and benefits consulting firm employing nearly 6,300 
associates worldwide. We are a major provider of actuarial and 
consulting services to retirement plans in the United States.
General Comments
    At Watson Wyatt we believe that defined benefit plan funding rules 
should be carefully drafted to balance the security needs of plan 
participants and the Pension Benefit Guaranty Corporation (PBGC) with 
the business needs of plan sponsors. Plan participants need to be able 
to count on receiving the benefits that they have earned. To be 
financially viable, the PBGC needs to control its risk and at the same 
time encourage companies to maintain their defined benefit plans. In 
addition to having plans that help them accomplish their business 
objectives, plan sponsors need to have contribution flexibility, 
predictability and stability. Ideally they would like to be able to 
fund more during good economic times and less during poor economic 
times. It is not a simple task to balance all these needs.
    One thing is clear; since defined benefit plan sponsorship is a 
voluntary action taken by an employer, it is quite likely that plans 
will be terminated if these plans cease to meet the sponsor's business 
needs. It is no secret that defined benefit plan sponsorship has 
declined over many years--from 114,000 federally insured plans in 1985 
to under 33,000 in 2002. And this trend continues today. Over the past 
three years, the PBGC has reported a decrease of over seven thousand 
five hundred plans, almost a 20% drop in defined benefit plan 
sponsorship during that period. In addition, a significant number of 
plan sponsors have recently frozen plan benefits. Given the rapid 
decline in the number of defined benefit plans, we are concerned that, 
if not carefully crafted, actions taken by Congress to significantly 
change the funding and disclosure rules at this time will result in 
even more defined benefit plan terminations. Obviously if this occurs, 
America's workers will be the big losers.
    Watson Wyatt recently reported that the number of employers with 
fully funded pension plans declined from 84% in 1998 to 37% in 2002. 
The decline would have been greater if Congress had not enacted a 
temporary interest rate correction provision. The drop in the number of 
fully funded plans has been reported in the media almost exclusively as 
a story about the precariousness of the pension benefits for 
participants in underfunded plans, but the use of artificially low 
interest rates to determine required employer contributions threatens 
the long-term viability of every pension plan in a voluntary system 
such as ours, regardless of funded status. The best way to ensure the 
financial security of working Americans is by preserving the defined 
benefit system, not imposing additional requirements that will drive 
more employers from sponsoring pension plans.
    Defined benefit plans provide unique advantages for employees and 
employers. Annuity distributions are more prevalent in defined benefit 
than defined contribution plans, providing participants with a 
predictable income stream for life, no matter how long they live, and 
reducing the risk of retirement assets leaking from the system for 
other purposes. Defined benefit plans provide more flexibility in 
managing an employer's workforce, such as through early retirement 
window benefits and early retirement subsidies.
    The Administration has indicated that its proposal constitutes only 
the first phase of funding reforms designed to protect workers' 
retirement security. We support a comprehensive study of current 
pension law with the objective of better meeting the needs of the three 
parties discussed above and encouraging expanded sponsorship of defined 
benefit plans. We would be happy to assist in such a study. However, we 
believe significant aspects of the current proposal should wait until a 
study has taken place. We support certain aspects of the 
Administration's proposal, including the use of a corporate bond rate 
as a replacement for the now defunct 30-year Treasury rate (with 
modificaiton as discussed below) and use of a more reasonable, market-
representative basis to determine minimum lump sums. However, we 
believe other aspects of the proposal should be delayed so that they 
can be coordinated with changes that may be needed.
    My written statement will focus on three important issues for this 
hearing, namely:

     The need for funding flexibility resulting from ``perfect 
storm'' conditions
     Our reaction to funding aspects of the Administration's 
proposal
     Our reaction to non-funding aspects of the 
Administration's proposal
Need for Funding Flexibility
    Over the last few years, the investment climate has been marked by 
the equivalent of a ``perfect storm,'' leaving many defined benefit 
plan sponsors with underfunded plans.' The interest rate used to 
determine a plan's liability has a significant impact on the employer's 
funding obligations, as does asset performance. As interest rates 
decline, plan liability and the need to make pension contributions also 
increase. In addition to the general decline in interest rates over the 
last several years, the discontinuance of the 30-year Treasury bond has 
depressed the rate used by employers to determine their funding 
obligations even further. As a result, contributions to these plans 
have increased significantly and are expected to increase further.
    Under current law, if plan assets fall below 90 percent of a 
measure of a plan's benefit liabilities to participants known as the 
plan's ``current liability,'' defined benefit plan sponsors may be 
subject to accelerated contribution requirements. This liability is 
calculated using a weighted four-year average of 30-year Treasury 
rates. The lower the interest rate used in the calculation, the higher 
the current liability and the required contributions. Even though the 
U.S. Department of the Treasury has stopped issuing the 30-year 
Treasury bonds, the IRS still estimates a yield for this now-
hypothetical bond. The rate for June 2003 is 4.37 percent. Most plan 
sponsors, who generally take a long-term view of plan funding, believe 
that the IRS should use an interest rate closer to sponsor's projected 
long-term investments returns, such as 8 percent, to determine plan 
liability for funding purposes.
    Congress provided some temporary relief to defined benefit plan 
sponsors in the Job Creation and Worker Assistance Act of 2002 (JCWAA). 
The JCWAA increased the maximum current liability interest rate from 
5.99 to 6.85 percent for 2002 calendar year plans, and from 5.82 to 
6.65 percent for 2003 calendar plan years. However, the temporary 
provisions of JCWAA are scheduled to expire at the end of the 2003 plan 
year. Upon expiration of JCWAA, we estimate that the maximum current 
liability interest rate will drop from 6.65% for the 2003 calendar year 
to 5.39 percent for 2004 calendar year plans and to 5.05 for 2005 
calendar year plans.
    Contributions to defined benefit plans sponsored by Fortune 1000 
companies totaled $11 billion in 1999. These companies contributed 
$16.1 billion in 2000 and $14 billion in 2001. So in the three-year 
period from 1999 to 2001, these plan sponsors contributed a total of 
$41 billion to their defined benefit plans. But the years of low 
contributions have ended. In 2002 alone, the Fortune 1000 defined 
benefit plan sponsors contributed $43.5 billion--more than the 
contributions for the previous three years combined and almost three 
times the contributions made just the year before.
    In 2002, total contributions represented about 180 percent of the 
estimated unfunded current liability for the Fortune 1000 companies 
with underfunded plans, determined using the maximum current liability 
interest rate (6.85 percent). Assuming that sponsors reduce their 
contributions for 2003 from 180 to 100 percent of the estimated 
unfunded current liability using the maximum current liability rate for 
2003, it is estimated that Fortune 1000 companies will contribute about 
$83 billion to their defined benefit plans--almost twice 2002 
contributions and around six times 2001 contributions.
    Assuming that plan assets earn 8 percent per annum for both 2003 
and 2004 and sponsors contribute 100 percent of their total unfunded 
current liability (counting plans whose assets exceed current liability 
as zero and using the highest permissible interest rate to determine 
current liability), we estimate that contributions would approximately 
total $160 billion for the next two years under current law.
    The use of a corporate bond yield rate has been proposed as a 
replacement for 30-year Treasuries in determining the current liability 
interest rate, most recently as part of the Portman/Cardin bill (HR 
1776). The Administration's proposal would use the same rate for 2004 
and 2005 plan years. Based on the methodology described above, if we 
assume that monthly 30-year Treasury rates in the four-year average 
would be replaced by monthly Salomon Brothers Pension Liability Index 
rates, and the future index value would remain unchanged from its April 
2003 value, we estimate that contributions for the two-year period 
would be approximately $45 billion--about $115 billion less than under 
current law.
    Not all plan sponsors base contribution decisions on the current 
liability interest rate. For example, some plan sponsors contribute 
sufficient amounts to avoid accounting charges or PBGC variable rate 
premiums. So the methodology used to estimate contributions almost 
certainly overstates the effect of using a blended corporate bond rate 
on contributions that will be made in practice. However, without 
correction of the anomalously and inappropriately low rate required 
under current law, contribution amounts will be significant and 
inappropriately burdensome.
    When the 30-year Treasury rate was adopted as the benchmark for 
plan funding, the top end of the range of rates employers could select 
from was a fair approximation for long term, high quality corporate 
bond rates. The Treasury Department's buyback and subsequent 
discontinuation of the 30-year bond has driven rates on these bonds to 
a level significantly below other conservative long-term bond rates. 
The result has been an artificial inflation in pension liabilities, 
with employers confronting overstated required pension contributions. 
These inappropriately higher required contributions divert corporate 
assets needed to grow companies, payrolls, and the economy.
    Temporarily or permanently correcting interest rates used for 
funding purposes to more appropriate levels could help plan sponsors 
keep their plans afloat in these stormy economic times, which would 
certainly benefit plan participants as well. Adopting interest rates 
based on long term, high quality corporate bond rates, as proposed in 
Portman Cardin (and the Administration proposal for the next two years) 
would go far in providing plan sponsors with the funding flexibility 
they sorely need. As discussed below, if a blended corporate bond rate 
is used to replace 30-year Treasuries, we recommend that the lower end 
of the current liability interest rate be reduced from 90% to 80% to 
allow sponsors to increased flexibility to make higher contributions to 
their plans.
Funding Changes in the Administration Proposal
    Under current law, a plan's current liability is determined based 
on a four-year weighted average of 30-year Treasury rates. The sponsor 
may select an interest rate between ``corridors'' of 90% to 105% of the 
resulting four-year average rate. Under JCWAA, the upper corridor was 
increased from 105% to 120% for 2002 and 2003 plan years only. The 
current liability interest rate is used to discount future benefit 
payments attributable to benefits earned to the date of the actuarial 
valuation to determine the present value of those payments. The 
resulting present value, which is compared with valuation assets, is 
called the plan's current liability. For many plans, the upper and 
lower corridors define minimum and maximum deductible contribution 
requirements. Thus, current law provides plan sponsors with 
contribution flexibility by allowing plan sponsors that wish to 
contribute more to their plans the ability to use a lower current 
liability interest rate. Further, the four-year average nature of the 
calculation helps to smooth the effect of significant changes in 
interest rates from year to year. Given the trend of rates and 
assumptions for trust fund growth, it is generally a relatively easy 
process under current law for employers to budget contribution 
requirements for the next year.
    The Administration proposal would substitute a corporate bond rate 
blend as set forth in the Portman/Cardin pension legislation (H.R. 
1776) for the 30-Year Treasury rates and maintain the four-year average 
and 90%-105% corridor for 2004 and 2005 plan years. It is anticipated 
that the use of a blended corporate bond rate will increase the upper 
end of the corridor by 100-150 basis points. Unfortunately, it would 
also increase the lower end of the corridor in a similar manner. 
Because the purpose of the proposal is to strengthen America's pension 
security, we believe that the lower end of the range should be reduced 
to 80% of the four-year average of the blended corporate bond rate. 
Current law already provides this flexibility by allowing the IRS to 
extend the lower end of the range, but we believe it should be 
incorporated in the legislation.
    After 2005, the Administration proposal would transition over a 
three-year period to the use of a corporate bond yield curve. Once 
fully phased-in, the four year weighted average feature of current law 
would be gone, with the yield curve rate being used on much more of a 
spot-rate basis. The corridors in existing law would also disappear.
    Under the yield curve proposal, instead of using a single interest 
rate to discount future expected benefit payments, a different discount 
rate will be used to discount each future year's expected payments. A 
particular year's discount rate (which will change every month) will be 
based on corporate bond yields for bonds with maturities in that year. 
The Administration proposal claims that this calculation will improve 
the accuracy of the pension liability discount rate and current 
liability calculation.
    While providing more perceived accuracy to the determination of a 
plan's current liability, the Administrative proposal will likely 
increase plan Administration fees, increase volatility from year to 
year, reduce employer contribution flexibility and make it more 
difficult for sponsors to budget contribution requirements from year to 
year. The calculation of current liability will be significantly 
complicated by the need to use 30-60 different discount rates than the 
single discount rate anticipated under current law.
    By eliminating the four-year average feature and interest rate 
corridors, contribution requirements will become much more volatile. 
For example, over the last 12 months ending May 31, corporate bond 
rates measured by the Salomon Brothers Pension Liability Index have 
declined by 170 basis points. For a typical plan, this would have the 
impact of increasing current liability by about 22 percent. By 
comparison, the four year weighted average of 30-year Treasury rates 
decreased from 5.68% to 5.39% over the same period. This decrease would 
be expected to increase current liability for a typical plan only by 
about 3%. Instead of reflecting only a portion of that decline under 
existing law, the yield curve would require reflection of the full 
decrease. Since interest rates can move significantly up and down over 
a fairly brief period, this can cause undesirable contribution 
fluctuations for sponsors that generally prefer stability. Further, 
since the corridors would be eliminated, it is not clear how flexible 
contribution requirements would be under the Administration proposal. 
Changes in the shape of the yield curve, which occurs when rates of 
different duration bonds move independently of one another, can also 
alter a plan's liabilities and required contributions even when long 
term bond rates or plan demographics do not change. Lastly, by basing 
contribution requirements on a yield curve determined close to the 
beginning of the plan sponsor's plan year, it will be more difficult 
for sponsors to know and budget for that year's contribution.
    The Administration also proposes that all companies calculate and 
disclose the value of pension plan liabilities on a plan termination 
basis. This calculation is yet another very complicated calculation for 
most plans, and is in addition to the value of plan current liabilities 
that are used for funding purposes and reported in the plan's annual 
return. Our comments on this particular aspect of the proposal are set 
forth below; however, it is important to note that current liability 
will generally not be equal to plan termination liability. It is not 
clear that disclosure of a plan's funded status on a plan termination 
basis will provide meaningful information to plan participants. If 
Congress determines that additional participant disclosure concerning 
plan funding is necessary, it should be limited to plans sponsored by 
employers in bankruptcy or with below investment grade credit ratings, 
limiting any additional disclosure to those participants likely to need 
it and reducing unnecessary complication and confusion for plans that 
are unlikely to terminate with insufficient assets.
Other Aspects of the Administration's Proposal
    Reforming interest rates used to determine lump sum distributions 
is also needed, as the discontinued 30-year Treasury bond rate is also 
used to determine the minimum value of lump sum distributions from 
defined benefit plans. Just as the current artificially low long term 
government bond rate inflates pension funding contributions, the rate 
inflates the lump sum value of participants' annuity benefits, 
providing a significant incentive for participants to elect lump sums 
over annuity distribution options. While participants certainly enjoy 
the increased value of their lump sums, and reasonable expectations of 
those participants near retirement should be protected, it is bad 
retirement policy to induce selection of lump sum distributions over 
annuity options. We support the Administration's proposal to determine 
minimum lump sums by phasing-in to a more reasonable basis over a five-
year period. A two-year ``grandfather'' period of current law 
provisions does not appear to us to be unreasonable.
    The Administration's proposal includes several items to increase 
disclosure to plan participants. According to the proposal, ``too often 
workers are unaware of the extent of their plans' underfunding until 
their plans terminate, frustrating workers' expectations of receiving 
promised benefits.'' Accordingly, the Administration proposal would 
require disclosure of plan assets and liabilities on a termination 
basis in annual reporting to participants. Sponsors would also be 
required to report the plans current liability determined on the yield 
curve basis and the PBGC would be authorized to disclose to the public 
certain financial data from companies with more than $50 million of 
unfunded vested liabilities.
    Calculation of a plan's termination liability can be extremely 
complicated. It involves the use of PBGC assumptions and, except for 
the fact that the same data is used, can take as much time and effort 
as the annual actuarial valuation to determine plan contribution 
requirements. While knowing that plan assets at the time of the last 
valuation equaled 70% of plan termination liability, for example, can 
be of some value to plan participants, this fact can also be easily 
misinterpreted. Upon an actual plan termination, amounts actually 
received by plan participants depend on a number of factors. It is 
highly unlikely that a plan with assets equal to 70% of plan 
termination liabilities would pay $.70 on the dollar to all 
participants. First of all, if the sponsor can afford it, the sponsor 
is obligated to make up the shortfall. Further, even if the plan 
sponsor cannot make up the shortfall, different participants are 
treated differently, depending on the priority assigned their benefits 
under PBGC rules. In this situation, some participants may receive 100% 
of their accrued benefits and some non-vested participants may receive 
0%. Some vested highly compensated individuals whose benefits fall into 
lower priority categories may receive less than 70% because their 
benefits are limited by maximum PBGC guarantees. Therefore, providing 
information regarding plan termination liabilities in the aggregate 
will frequently fall short of the intent expressed in the 
Administration's proposal to avoid ``frustrating workers' expectations 
of receiving promised benefits.''
    While this information may be of some value to participants in 
plans where plan termination with insufficient assets is a real 
possibility, it is likely to be confusing and irrelevant to 
participants in plans sponsored by employers able to pay all promised 
benefits if their plans were terminated.
    As noted in the Administration's proposal, 90 percent of companies 
whose pension plans have been trusteed by the PBGC had junk bond credit 
ratings for the entire ten year period before termination. If 
additional administrative burdens are imposed on defined benefit plans 
in the name of strengthening America's pension system, such changes 
should focus on the companies that represent the greatest risk to 
participants' retirement benefits and the bulk of the PBGC's potential 
risk, and not on the majority of the remaining companies for which no 
strengthening is required to protect the interests of participants. 
Rather than burden companies that are financially strong and fully able 
to make good on their pension promises with complex and costly 
additional disclosure requirements of dubious value, we recommend that 
any additional disclosure requirements apply only to those companies in 
bankruptcy or those with below investment grade credit ratings.
Conclusion
    I want to thank you for holding this hearing to discuss what our 
firm believes to be some of the most important retirement policy 
questions our nation faces. Defined benefit plans offer many unique 
advantages for employees and the employer sponsors of these programs 
sincerely believe in their value. Without prompt and reasonable action 
by Congress and the Administration, we fear these plans will continue 
to rapidly disappear from the American pension landscape.
    Thank you very much for the opportunity to appear today. I would be 
pleased to answer any questions you may have.

                                


    Chairman JOHNSON. Thank you, sir. Mr. Phelps, you may 
begin.

          STATEMENT OF ASHTON PHELPS, JR., PUBLISHER,

             TIMES-PICAYUNE, NEW ORLEANS, LOUISIANA

    Mr. PHELPS. Chairmen McCrery and Johnson and Members of the 
Subcommittee, I am Ashton Phelps, Jr., Publisher of the Times-
Picayune newspaper in New Orleans, Louisiana. I appreciate the 
opportunity to participate in this hearing.
    Our newspaper maintains a defined benefits pension plan to 
provide retirement security for our employees and their 
families. I am glad that the Subcommittee and others in 
Congress are considering legislation to encourage the use of 
these kinds of plans. In my testimony I will concentrate on one 
single issue, namely, the need for a permanent replacement for 
the 30-year Treasury bond rate. This issue is critically 
important and immediate action is urgently required.
    As you are well aware, employers have generally been 
required by law to use the 30-year Treasury bond rate to 
calculate their liabilities under their plans and for certain 
other purposes. In 2002, Congress wisely recognized that the 
plunging rate of the 30-year Treasury bond, which is no longer 
being issued, had resulted in inflated estimates of pension 
liabilities and, in turn, in substantial increases in funding 
requirements above the levels required to secure benefits. As a 
result, Congress enacted stopgap legislation to allow employers 
to use a more realistic discount rate for 2002 and 2003.
    As we meet here today, however, employers are facing the 
risk that the old rules will snap back in 2004, despite the 
almost universal agreement that you have heard here today that 
the 30-year Treasury bond rate is no longer the appropriate 
benchmark. To prevent such a result, Congress needs to act and 
needs to act now. If Congress fails to act promptly, employers 
will have no choice but to begin soon to manage their 
businesses and their cash flows on the assumption they will be 
faced with substantial increases in pension funding 
requirements next year.
    In the uncertain economic climate we have now, employers 
may have to take steps that would otherwise be unnecessary and 
undesirable. These steps could include limiting employee 
benefit improvements, reducing capital spending for new plant 
and equipment, or curtailing spending for research and 
development.
    Our main point here today is that these types of actions 
could begin to occur now, given the uncertainty as to whether 
Congress will act. If actions such as these do occur, there 
could be adverse effects that might not be fully reversible if 
Congress waits until near the end of this year to act.
    I think there is broad consensus that it would be better 
for Congress not simply to extend the stopgap legislation for 
an additional period of years, but instead to enact a permanent 
replacement. The pending Portman-Cardin legislation does this 
by providing for the use of the corporate bond index to 
determine the discount rate employers would use to calculate 
their pension liabilities and their required contributions, as 
well as for other pension-related purposes.
    The Portman-Cardin funding approach is supported by both 
the AFL-CIO and the business community, and we would certainly 
welcome its enactment. Having said that, we recognize the 
Administration has offered a new proposal that, after the first 
2 years, differs significantly from the Portman-Cardin 
approach. I have been told by experts that the proposal 
deserves further study and that there may be problems with the 
yield curve approach for some employers as it would be applied 
in later years.
    According to my advisors, the proposed yield curve approach 
would drop the current 4-year averaging of interest rates, 
which could present employers with even greater uncertainty 
about their cash flow and their budget decisions. In addition, 
a yield curve could substantially increase pension 
contributions for employers with relatively older workforces, 
threatening severe economic hardship for them and their 
employees.
    My purpose here today is not to debate the merits of the 
two different approaches to the funding issue, and I am 
certainly not qualified to do so. My purpose is to urge you to 
act promptly to resolve the uncertainty that businesses such as 
ours face. One approach that would accomplish the result would 
be to enact the Portman-Cardin funding mechanism now. That 
would eliminate the uncertainty. Congress would still have the 
opportunity to give the Administration proposal careful study 
and to enact any changes to Portman-Cardin funding rules for 
2006 and beyond.
    Let me close with the point with which I began. We need to 
remove the uncertainty in the immediate future. If that 
uncertainty continues into late October or into November, 
employers may, in the interim, have taken steps they would not 
otherwise have taken, and it may have adverse effects on 
employees and their companies as a whole.
    To borrow a phrase from the late football coach, George 
Allen, on the issue of replacing the 30-year Treasury note, 
``The future is now.'' I deeply appreciate the interest of the 
Subcommittees and am prepared to respond to any questions you 
might have. Thank you.
    [The prepared statement of Mr. Phelps follows:]
              Statement of Ashton Phelps, Jr., Publisher,
                 Times-Picayune, New Orleans, Louisiana
    Chairmen McCrery and Johnson and members of the Subcommittees, I 
appreciate the opportunity to participate in this hearing. I am Ashton 
Phelps, Jr., Publisher of The Times-Picayune newspaper in New Orleans, 
Louisiana. Our newspaper maintains a defined benefit pension plan to 
help provide retirement security for approximately 1,000 of our 
employees and their families. I am glad that these Subcommittees and 
others in Congress are considering legislation to encourage the use of 
these types of plans.
    In my testimony today, I want to focus on one single issue; namely, 
the need for permanent replacement for a 30-year Treasury bond rate. 
This issue is critically important to the economy and the private 
pension system and immediate action is urgently required.
    As you are well aware, employers generally have been required by 
law to use the 30-year Treasury bond rate to calculate their 
liabilities under their plans and for certain other purposes. The 
Treasury Department's aggressive ``buyback'' of the 30-year bond in the 
late 1990s and subsequent discontinuation of the bond in 2001, however, 
have driven rates on these bonds to far below that of other 
conservative long-term bond rates. These inordinately low rates have 
inflated our funding obligations far above levels required to secure 
benefits.
    This situation has a significant impact on how employers operate 
their businesses. Pension fund contributions beyond what is needed to 
fund future benefits may force employers to divert cash they would 
otherwise invest in new business opportunities and capital projects 
that create jobs. Unreasonably high contributions will also force some 
employers to limit benefit improvements. Finally, the uncertainty now 
hanging over the pension funding issue will soon force all of us to 
make next year's budget decisions under a worst-case funding scenario, 
to the detriment of our business, our employees, and the economy.
    Unless Congress moves quickly to put a more realistic pension 
discount rate in place for 2004, these very substantial cash resources 
will not be available to help us weather the current economic downturn 
and grow our business.
    We appreciate that Congress has already recognized this problem and 
allowed employers to use a more realistic discount rate for 2002 and 
2003. We also appreciate the leadership of Representatives Rob Portman 
(R-OH) and Ben Cardin (D-MD) in proposing a permanent solution (Section 
705 of H.R. 1776) to this problem and applaud the Administration for 
embracing the Portman-Cardin approach as a funding benchmark for the 
next two years.
    The pending Portman-Cardin funding proposal permanently replaces 
the 30-year Treasury bond rate with the rate of interest earned on 
conservative long-term corporate bonds, directing the Treasury 
Department to produce this rate based on one or more corporate bond 
indices. The new rate also applies for other pension calculation 
purposes, including funding, PBGC premiums and lump sum payments. This 
approach has broad support and is acceptable to both the business 
community and the AFL-CIO.
    It's critical that Congress include the funding reforms contained 
in H.R. 1776 in the first available bill that can reach the President's 
desk. If Congress fails to act promptly, employers will have no choice 
but to begin soon to manage their businesses under the worst-case 
scenario I noted earlier. In the uncertain economic climate we now 
have, employers may have to take steps that would otherwise be 
unnecessary and undesirable. These steps could include limiting future 
benefit improvements, reducing capital spending for new plant and 
equipment, or curtailing spending for research and development.
    In the midst of these economic challenges, defined benefit pension 
plans, voluntarily established by employers, continue annually to 
provide hundreds of billions of dollars of retirement income to 
retirees. The stock market conditions of recent years (and the 
corresponding decline in many individuals' 401(k) accounts, have 
reaffirmed the critical role a defined benefit plan plays in helping us 
to provide for the retirement security of our employees and their 
families.
    Yet the number of defined benefit plans continues to fall. 
According to its most recently published annual report, in 2002 the 
Pension Benefit Guaranty Corporation insured about 32,500 plans, down 
from a high of 114,400 plans in 1985. Moreover, the agency notes that 
the number of plans ``has fallen precipitously in recent years.'' This 
trend is disheartening on a policy and a human level because by 
offering a monthly benefit for life, many of these plans help ensure 
that retirees and their spouses will not outlive their retirement 
income.
    Congress should be doing everything it can to encourage the 
availability of such plans for workers, not creating additional 
disincentives for employers that voluntarily sponsor these plans. With 
quick enactment of the Portman-Cardin approach, Congress can help stem 
this tide.
    We recognize that the Administration's recently offered proposal 
differs significantly from the Portman-Cardin approach beginning in 
2006. I have been told by our experts that the proposal deserves 
further study and that there may be problems with the yield curve 
approach for some employers as it would be applied in these later 
years. Chief among these concerns is that a yield curve approach could 
introduce additional volatility and complexity to the funding rules.
    According to my advisors, the proposed yield curve approach would 
likely use an unknowable ``spot rate'' instead of a four-year average 
of interest rates, which could present employers with even greater 
uncertainty about their cash flow and budget decisions. In addition, a 
yield curve could substantially increase pension contributions for 
employers with relatively older workforces, threatening severe economic 
hardship for them and their employees.
    I understand that there may be additional problems with a yield 
curve approach and that the Administration's new disclosure 
requirements also raise significant issues. I'm not yet familiar with 
the intricacies of these issues, but I do know this: Imposing further 
uncertainty on employers' ability to set budgets and estimate future 
pension funding obligations will have a negative impact on a pension 
system that is already in trouble.
    My purpose today, however, is not to debate the technical merits of 
these two different approaches--I'm certainly not qualified to do so--
but to urge you to act promptly to resolve the uncertainty businesses 
such as ours face. Enacting the Portman-Cardin funding mechanism now 
would eliminate the current uncertainty and provide Congress enough 
time to give the Administration's proposal the careful study it 
deserves.
    Let me close with the point with which I began and that is that we 
need to remove the uncertainty in the immediate future. If that 
uncertainty continues until late October or into November, employers 
may in the interim have taken steps that they would not otherwise have 
taken and which may have adverse effects on pension plan participants 
or on their companies as a whole. I deeply appreciate the interest of 
these Subcommittees and am prepared to respond to any questions you may 
have.

                                


    Chairman JOHNSON. Thank you, sir. I appreciate your accent. 
I can understand every word. Dr. Weller, you may begin.

 STATEMENT OF CHRISTIAN E. WELLER, PH.D., ECONOMIST, ECONOMIC 
                        POLICY INSTITUTE

    Dr. WELLER. Thank you, Chairman Johnson, Chairman McCrery, 
and Ranking Member Andrews for inviting me here today to talk 
about the President's proposal to change funding rules for 
defined benefit plans. It is a pleasure to be here.
    I am an economist at the Economic Policy Institute in 
Washington, where I have focused for the last 4 years on 
retirement issues, including defined benefit plans. Part of my 
testimony is based on a paper I co-authored with Dean Baker, 
Co-Director of the Center for Economic and Policy Research, 
evaluating a number of pension reform proposals.
    Defined benefit plans are an important insurance benefit 
amid increasingly insecure retirement savings; hence, any 
proposal to change the pension funding rules should meet, in my 
view, two tests. It should at least maintain the security of 
pension benefits and it should promote and sustain sponsorship 
of defined benefit plans.
    I will first comment on the Administration's proposal, 
which fails on the second goal, and then discuss an alternative 
proposal that would accomplish both goals especially in the 
current situation.
    In the immediate future, employers need funding relief, as 
many others have noted. Shifting from the 30-year Treasury rate 
to the corporate bond rate would offer plan sponsors short-term 
funding relief. Liabilities would decline on average by 6 to 8 
percent.
    For the medium term, it is important to make interest rates 
less volatile to maintain sponsorship of defined benefit plans. 
Here, the Administration's proposal to use a yield curve 
creates the biggest problem. Under a yield curve, the length of 
each liability is matched to the interest rate for a corporate 
bond rate with a similar maturity. For example, for a benefit 
that the plan has to pay in 5 years, the discount rate could be 
the corporate bond rate for 5-year bonds and so on and so 
forth.
    The relationship between short-term and long-term interest 
rates changes quickly over time, especially for corporate bond 
rates, which makes interest rates and hence future pension 
funding hard to predict and creates uncertainty for employers. 
More uncertainty for employers will make them more likely to 
bend their pension plans in the future.
    Replacing the corporate bond rate with the yield curve 
creates another problem. Because short-term interest rates are 
lower than long-term rates, the liabilities that have to be 
paid sooner, such as benefits to older workers, would be more 
expensive. Plans with a disproportionate share of older workers 
would face more rapidly rising costs than other firms when the 
yield curve is introduced. Workers in mature industries, 
especially in manufacturing, may be disproportionately likely 
to lose some of their promised benefits.
    When the yield curve will be introduced, the current 
practice of smoothing or averaging interest rates over a 4-year 
period would also be eliminated. This averaging makes interest 
rates less volatile and, thus, pension funding more 
predictable. Eliminating the smoothing procedure would mean 
larger swings in contributions which could lead to larger 
contributions in a recession.
    Because interest rates and asset price are typically lower 
in a recession, when earnings are weak, current rules require 
more contributions during a recession than during other times. 
The Administration's proposal offers some short-term relief, 
but at the cost of additional future headaches for employers in 
increased retirement income insecurity for workers.
    There is a better way of changing funding rules, though. An 
alternative would be to smooth interest rates over a time 
horizon that matches the average duration of pension 
liabilities. Since pension plans have liabilities that come 
due, on average, after more than 10 years, you can expect to 
encounter a number of interest rates over the next two decades 
during which they will invest funds and pay out benefits. The 
interest rate assumption should match this flow of funds into 
and out of pension plans, for instance, by averaging interest 
rates over 20 years instead of just 4 years. The current 4-year 
average of the 30-year Treasury rate could, for instance, be 
replaced by a 20-year average of the 10-year Treasury rate.
    Such a proposal, if introduced today, would offer even more 
short-term relief than the Administration's proposal to 
substitute the corporate bond rate for the 30-year Treasury 
rate. More importantly, a longer term average would eliminate 
cyclical fluctuations in the interest rates and, therefore, 
stabilize funding during recessions.
    In our estimates, average contributions from 1952 to 2002 
would have been substantially lower than under the current 
rules while the actual funding ratio would have been higher 
reflecting a lower probability of fund failure. Consequently, a 
smoother interest rate would offer employers funding relief 
right now. It would stabilize employer contributions to pension 
plans in the future and it would reduce the probability of plan 
failure, because it would not burden pension plans as much as 
current rules do during a recession.
    Funding rules should be changed so that pension benefits 
can be secured both in the short-term and for the foreseeable 
future. To that end, pension rules should allow for less 
volatility, less uncertainty and more transparency. The 
Administration's proposal, however, moves exactly in the 
opposite direction.
    In the interest of securing pension benefits amid a rising 
tide of retirement income insecurity, we need to create less, 
not more volatility. Thank you very much for your attention.
    [The prepared statement of Dr. Weller follows:]
                Statement of Christian E. Weller, Ph.D.,
                  Economist, Economic Policy Institute
    Thank you, Chairman McCrery and Chairman Johnson, and members of 
the committees for inviting me to speak to you today about the 
Administration's proposal to change funding rules for pension plans. I 
am an economist at the Economic Policy Institute, where the focus of my 
research is on retirement issues. My testimony today is partially based 
on a paper that I have written with Dean Baker, co-director of the 
Center for Economic and Policy Research, for the Economic Policy 
Institute.
Pension Funding Needs to Provide Relief Now and Security in the Future
    From a public policy perspective, any proposal to change the 
pension funding rules should satisfy a two-pronged test: (1) it should 
at least maintain the security of pension benefits; and (2) promote and 
sustain sponsorship of defined benefit plans. With these two goals in 
mind, I will first comment on the Administration's proposal, which 
fails on the second goal, and then discuss an alternative proposal that 
would accomplish both goals.
    The discussion over the benchmark interest rate that is used to 
calculate pension liabilities for funding purposes is not just a 
technical issue. It has real consequences for the retirement security 
of millions of Americans, who are facing growing risks in preparing for 
retirement. Many workers still do not have retirement plans through 
their employers. For the past three decades, more than half of all 
private sector workers were not covered by a retirement plan. And those 
workers who have a retirement plan--particularly a defined contribution 
plan--face more and more risks with their savings. These risks were 
poignantly illustrated by the fraud and deception that took place at 
Enron. At the same time, millions of employees face added insecurities 
as defined benefits are being put in jeopardy due to the perfect storm 
of pension funding: Falling interest rates, tumbling asset prices, and 
a weak economy. Securing defined benefits is an important aspect of 
reducing the growing insecurities that workers are facing with their 
retirement savings.
    Defined benefit plans are an important source of retirement income 
for millions of Americans. Professor Ed Wolff calculated in a 2002 
report for the Economic Policy Institute that in 1998 46 percent of 
households near retirement could expect some income from defined 
benefit plans. That is, a large number of households still rely on this 
secure insurance benefit. Many defined benefit plans often not only pay 
retirement benefits, but also survivorship benefits and disability 
benefits. In a world of increasing uncertainty for workers who are 
preparing for retirement, such insurance benefits are invaluable 
assets. Consequently, the goal of any proposal to change the pension 
funding rules should be to secure promised benefits, while sustaining 
the system for the future. After all, these promised benefits are 
deferred compensation that employees already earned and that they count 
on in retirement.
Three Problems Facing Pension Funding
    To secure funding for pension plans, three problems need to be 
addressed. First, the current benchmark interest rate, the 30-year 
treasury bond yield, that is used to calculate pension liabilities, 
needs to be replaced since the Treasury no longer issues 30-year bonds.
    Second, the decline of the benchmark interest rate came at a time 
when pension plans saw their assets tumble amidst a stock market crash 
and when employers were already struggling due to a weak economy. Thus, 
pension plans are facing numerous short-term funding pressures. In the 
interest of maintaining the security of pension benefits, public policy 
should consider rule changes that will offer plan sponsors short-term 
funding relief.
    The third problem is that the current combination of declining 
interest rates, falling asset prices, and low earnings is recurring as 
it typically does in a recession. Consequently, current funding rules 
create a counter-cyclical funding problem and compound the problem by 
requiring more contributions during a recession than during other 
times. In order to promote and sustain sponsorship of defined benefit 
plans, rule changes should occur in a way that is consistent with more 
stable funding. This would make it less likely that employers would 
have to make cash contributions when the economy is weak and they are 
less able to afford them, and more likely that employers will 
contribute when the economy is strong and businesses are flush.
Evaluating the Administration's Proposal
    The rules proposed by the Bush Administration on July 9 may 
maintain the security of pension benefits in the short-term, but they 
exacerbate the long-term risks for pension funding and add new problems 
to the mix. Thus, they put retirement income security for America's 
working families further in jeopardy because they put the sustained 
sponsorship of defined benefit plans at risk. The Administration's 
proposal envisions the replacement of the 30-year treasury rate with 
the corporate bond rate for a period of two years, after which it will 
be permanently replaced by the use of a yield curve. Under a yield 
curve assumption, the length of each liability is matched to the 
interest rate for a corporate bond rate with a similar maturity. For 
example, for a liability that the pension plan has to pay in five 
years, the discount rate could be the corporate bond rate for 5-year 
bonds, whereas for a benefit that is payable in 20 years, it could be 
the rate for 20-year bonds. Lastly, it appears that the 
Administration's proposal will eliminate the current practice of 
smoothing interest rates over a 4-year period.
    The Administration's proposal addresses the first problem, of 
course, by replacing the 30-year treasury rate as the benchmark 
interest rate.
    Second, shifting from the 30-year treasury rate to the corporate 
bond rate would offer plan sponsors short-term funding relief if 
current smoothing rules were applied. The 4-year weighted average of 
the corporate bond rate is about 50 to 70 basis points higher than the 
currently allowable 120 percent of the 4-year weighted average of the 
30-year treasury bond rate. For a typical pension plan, this could mean 
a reduction in liabilities of about 6 to 8 percent. Hence, pension plan 
sponsors would receive the short-term relief that they are seeking.
    However, third, the short-term relief from the Administration's 
proposal is a trade off against greater risks in the future, which 
could jeopardize the sponsorship of some defined benefit plans. The 
proposed new rules create added uncertainties in several ways. For one, 
the new rules will presumably eliminate the smoothing of interest rates 
now allowable under the law. Given past experience this could increase 
volatility of the interest rate assumption by more than 20 percent. 
Since interest rates tend to fall in a recession, eliminating the 
smoothing provisions will result in sharper declines of the underlying 
interest rate and necessitate larger increases in the required 
contributions.
    Further, the Administration's proposed new rules would require 
companies to use a myriad of interest rates to value their liabilities 
instead of just one interest rate for all liabilities. Specifically, 
the Administration believes that the term of the asset that the 
interest rate is based on should match the maturity of the liability.
    Aside from technical questions about which bond rates to use, the 
proposal creates large uncertainties for plan sponsors since they may 
have to make assumptions about future movements of not one interest 
rate, but a wide range of them. The relationship between short-term and 
long-term interest rates changes quickly over time, and it does so more 
for corporate bond rates than for treasury rates. The ratio of the 
corporate bond rate to the commercial paper rate is about 50 percent 
more volatile than the ratio of the 10-year treasury bond yield to the 
6-month treasury bill yield.
    Further, economic theory says that short-term rates should be lower 
than long-term rates. However, during a number of periods there was an 
inverse yield curve, that is, short-term rates were higher than long-
term rates. This makes the yield curve even harder to predict.
    Adding more uncertainty to pension plan funding could lead 
employers, who are already concerned about the complexity of pension 
regulations, to reduce or abandon their pension promises. Workers would 
suffer as their future benefits are cut back or eliminated all 
together.
    Another uncertainty arises about the transition from the long-term 
corporate bond rate to the yield curve after two years. Short-term 
interest rates are typically, but not always, lower than long-term 
rates. Pension plans' costs will likely rise--as their assumed discount 
rates fall--during the transition from a single interest rate to a 
yield curve. In other words, the respite many employers will enjoy from 
the replacement of the 30-year treasury rate with the corporate bond 
rate may be short-lived. As recent events have shown, though, rising 
costs will provide an incentive for employers to reduce benefits or 
even terminate plans, undercutting the retirement security for many 
workers.
    Replacing the corporate bond rate with the so-called yield curve 
creates another problem that could spell greater danger for many 
workers, especially for those who work in mature industries, such as 
automobiles. Because the yield curve typically shows lower interest 
rates for shorter term maturities and higher interest rates for longer 
term maturities, its use in discounting pension liabilities would make 
liabilities that have to be paid sooner, such as benefits to older 
workers, more expensive. Hence, plans with a disproportionate share of 
older workers would face more rapidly rising costs than other firms 
when the yield curve is introduced. Consequently, workers in many 
mature industries, especially in manufacturing, who have already 
suffered from a prolonged recession in this sector, may be 
disproportionately likely to lose some of their promised benefits.
    To sum up, the Administration's proposal offers some short-term 
relief, but at the cost of additional future headaches for employers 
and increased retirement income insecurity for workers.
An Alternative, Smoother Approach to Pension Funding
    Does this mean that nothing can be done? Not at all. There is a 
better way of changing funding rules. As stated earlier, any proposal 
to change the pension funding rules should at least maintain the 
security of benefits and promote and sustain sponsorship of defined 
benefit plans.
    A major problem for both employees and employers has been that the 
current funding rules create a counter-cyclical funding burden, 
requiring increased contributions, hence a greater likelihood of 
problems, for plan sponsors during a recession.
    An alternative would be to change the rules--to make contributions 
less volatile and less likely to rise during a recession. In the paper 
I co-authored with Dean Baker, we discuss three rule changes that would 
help smooth contributions over time. One of these rule changes 
addresses the issue of the benchmark interest rate specifically. Our 
results show that using a smoother interest rate assumption than is 
currently the practice would reduce the volatility of contributions. It 
would reduce the required contributions during recessions and increase 
them during good times, and it would help to improve the overall 
funding status of pension plans. Put differently, our proposal not only 
meets the two-pronged test laid out earlier, but it surpasses it. The 
security of benefits would be improved and adverse incentives for plan 
sponsors would be reduced.
    Current law already allows for some interest rate smoothing in 
calculating pension liabilities. This provision recognizes that pension 
plans are a going concern that can expect to receive future 
contributions, while they are making regular benefit payments. It also 
recognizes that interest rates can fluctuate quite widely over the 
course of one or two years. Thus, to stabilize funding for pension 
plans in a way that will assure the future payment of benefits without 
unduly burdening employers at any given point in time, the law has 
permitted some interest rate smoothing.
    However, the smoothing of interest rates that is currently allowed 
still maintains a high degree of volatility. An alternative would be to 
smooth interest rates over a time horizon that matches the average 
duration of pension liabilities. The calculations would essentially 
assume that, during its expected life span, a pension plan will 
experience interest rates similar to those that prevailed for the past 
twenty years. To put it differently, since pension plans are going 
concerns with an average duration of liabilities of well above ten 
years, they can expect to encounter a number of interest rate scenarios 
over the next two decades, during which they will invest funds and pay 
out benefits. The interest rate assumptions should match this flow of 
funds into and out of pension plans.
    Figure 1 shows what different smoothing assumptions would look like 
compared to the current practice of the 4-year weighted average. The 
figure shows that averaging interest rates over 20 years would smooth 
them considerably compared to the current practice and compared to the 
current market rate. The same is true if the 20-year average of the 10-
year rate is taken (figure 2). For instance, the difference between the 
4-year weighted average of the 30-year treasury bond yield and the 20-
year average of either the 10-year or the 30-year treasury bond yield 
is about two percentage points. In other words, moving from the current 
benchmark interest rate to the 20-year average of the 10-year treasury 
bond yield, for instance, would increase the assumed interest rate by 
about 1 percentage point, and thus would offer even more short-term 
relief than the Administration's proposal to substitute the corporate 
bond rate for the 30-year treasury bond rate.
    The choice of the interest rate that will be used for this 
smoothing practice is determined by a number of factors. In principle 
it should be an interest rate for a fairly low risk security to reflect 
the nature of pension benefits. It should be an interest rate that can 
be easily defined, so as to minimize confusion and improve 
transparency. And it should be an interest rate where sufficient 
history is available to allow for the calculation of a long-term 
average. Clearly a number of interest rates will meet these criteria, 
but the 10-year treasury rate has the advantage that its long-term 
average is relatively lower than that of other interest rates, such as 
the corporate bond rate, thus reducing the chance for underfunding in 
the long-run.
    More important than the choice of interest rate is maintaining or 
even extending the smoothing of interest rates. A longer term average 
offers the advantage of eliminating cyclical fluctuations in the 
assumed interest rates, and therefore stabilizing funding during 
recessions. In our estimates, average contributions from 1952 to 2002 
would have been substantially lower than under the current rules, while 
the actuarial funding ratio would have been higher, reflecting a 
lowered probability of fund failure. That is because contributions 
would have been made during good economic times, allowing funds to 
build up reserves for the inevitable bad times.
    Consequently, assuming a smoother interest rate would address a 
number of concerns. It would offer employers funding relief from the 
pension funding difficulties they are currently experiencing. It would 
also stabilize employer contributions to pension plans, thereby helping 
to secure retirement income by reducing the risks to this important 
insurance benefit. In the same vein, it would reduce the probability of 
plan failure because it would not burden pension plans as much as 
current rules do during a recession. Hence, plan termination becomes 
less likely, reducing the expected burden on the Pension Benefit 
Guaranty Corporation.
Conclusion
    America's workers have increasingly been facing the risks of saving 
for retirement by themselves. An important part of the retirement plan 
landscape, defined benefit pension plans, offer them some assurance as 
they prepare for retirement. However, pension plan beneficiaries have 
experienced an inordinate amount of uncertainty as funding rules 
required large additional contributions in the middle of a weak economy 
and the largest stock market crash in U.S. history. Rather than 
offering employers the small lifeboat of ad hoc relief from this 
perfect storm, which may jeopardize pension plans in the long term, we 
need to build a better boat that enables employees, employers, and 
pension fund regulators to ride out the inevitable rough seas ahead. 
Funding rules should be changed so that pension benefits can be secured 
both in the short term and for the foreseeable future. To that end, 
pension rules should allow for less volatility, less uncertainty, and 
more transparency.
    The Administration's proposal, however, moves exactly in the 
opposite direction. It makes funding rules more complicated and it adds 
more volatility to pension funding both by eliminating the beneficial 
interest rate smoothing that is part of the funding rules right now and 
by replacing a single interest rate with a widely fluctuating range of 
interest rates. In the interest of securing pension benefits amid a 
rising tide of retirement income insecurity, we need to create less, 
not more, volatility.
    Thank you very much for your consideration.



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    Chairman JOHNSON. Thank you, sir. I appreciate your 
comments. Chairman McCrery, do you care to question? You are 
recognized for 5 minutes.
    Chairman MCCRERY. Thank you, Mr. Chairman. Mr. Phelps, 
thank you very much for coming to Washington today to testify. 
For the benefit of the Members of the two panels, or the two 
Subcommittees, you should know, Mr. Phelps called me about this 
issue some time ago; and so I wanted to use that as an example 
of anybody who calls me that, beware, they may get to testify 
before a Subcommittee.
    Actually, I appreciated the call, as I do from all of my 
constituents--not that he is a constituent, but he is from my 
State, because often they bring to Members' attention, problems 
that we may not know about. So, I appreciated the call.
    I also wanted to have on our panel today someone from the 
real world, so to speak, not that you actuaries are not from 
the real world, but a real businessperson who has been involved 
in his particular business for quite some time, as has his 
family. He is very familiar with the ins and outs of defined 
benefit programs. They have tried for many years to maintain a 
good program for their employees, so I wanted to have that 
perspective today. So, thank you very much, Mr. Phelps, for 
coming and providing that.
    Along that line, we know that your pension plan is facing--
or your company is facing problems with respect to your pension 
plan because of the very low interest rate associated with the 
30-year Treasury, and if that were allowed to go forward, you 
would have to make contributions far in excess of what any 
reasonable person would conclude would be necessary to properly 
fund your future liabilities.
    Are there any other factors that you can point to that have 
caused your pension to have problems, your pension program to 
have problems right now, such as returns on investments, or the 
general state of the economy? Are there other factors that are 
contributing to the problems with your pension?
    Mr. PHELPS. Thank you, Mr. Chairman. I appreciate the 
opportunity to be here. I think our plan would be subject to 
the same influences as those of other companies in this 
economy. I think we have a particularly strong commitment to 
our employees. The main point, I would like to be sure is 
understood today is that this is not a theoretical, long-term 
issue. This is one in which we need a permanent solution now, 
because those decisions of that possible exposure on 
overfunding, or funding that we think is not realistically 
needed, are dollars that could otherwise go into the economy 
and capital goods, employee benefits and other ways of running 
the business.
    When you, in our opinion, unnecessarily take those dollars 
out of the economy, you are making decisions now which can't be 
corrected and which are going to hurt long-term employees and 
the economy. That is something that we think should be very 
much taken into account.
    Chairman MCCRERY. So, if we fix the discount rate for 
contributions, that solves your problems?
    Mr. PHELPS. If you get what we feel is a realistic rate and 
one that seems to be agreed upon, or agreed upon by Democrats, 
Republicans, business, labor, and what I have heard today 
coming from the Members of the Subcommittees, it would be fine 
in terms of our operation.
    Chairman MCCRERY. Okay. Thank you. We haven't talked today 
much about group annuity rates, but back in the 1980s, I guess, 
when we pegged the 30-year Treasury as a discount rate, there 
was a lot of talk, evidently, in the record about how we wanted 
to try to find a ``peg rate'' that would most closely resemble 
group annuity rates. Are you familiar with that term and is it 
still--is it as accurate today as many thought it was back in 
1987?
    Mr. PORTER. I would argue that there are some problems with 
that term in that very few large corporations would consider a 
group annuity contract. They are self-funded self-trusteed 
plans. I don't think the market exists--I could be wrong--to a 
sufficient degree to contemplate what is a very, very large 
plan would look like in the context of a group annuity 
contract. That would be an interesting exercise.
    Group annuity contracts have a place, and they certainly 
exist, and--but among the larger employers that I tend to be in 
contact with, it is something we don't relate to.
    Chairman MCCRERY. Anybody else on the panel? Well, 
evidently when the 30-year Treasury was arrived at as the 
benchmark, there was a lot of discussion about how it resembled 
group annuity rates, and so maybe it doesn't apply anymore. 
Maybe it did in the 1980s and not now.
    Mr. STEINER. I would say, in general, I agree with Mr. 
Porter. However, I would say that the bond yield rate has very 
much a similarity with the group annuity rate, except that it 
does not include insurance company profits and things of that 
nature.
    Chairman MCCRERY. Yes. Well, those were stripped out. That 
is why the 30-year Treasury, I think, was arrived at as the 
benchmark. Mr. Chairman, my time has expired, but I would 
appreciate a second round.
    Chairman JOHNSON. Thank you, Chairman McCrery. Mr. 
Ballenger, do you care to comment? You are recognized for 5 
minutes.
    Mr. BALLENGER. Thank you, Mr. Chairman. I know this is 
water over the dam and all this kind of stuff, but--past 
history--I owned a small company, and trying to be generous to 
employees, I put in a defined benefit plan; and everything was 
going great until along comes ERISA. Once I heard the Federal 
Government had got into this thing, I knew we were dead.
    So, I got scared to death, and I got out from under that 
and went into an employee stock ownership plan. Of course, it 
doesn't take long to figure out that the Federal Government was 
having some likelihood of bothering us there, so I went into--
also, to a defined contribution plan with a 401(k). I think Mr. 
Andrews said it best. This is a--what do you call it--a 
voluntary benefit of employers.
    Now, if you are a new company just starting out, like I was 
in 1957, and you got to sit there and see all of this crazy 
stuff going around about pensions and the difficulties that--as 
you, Mr. Porter, said--the difficulties that are flowing there 
no matter how we go about this thing, I think the first thing I 
would do is guarantee that I would never have a defined 
contribution plan--I mean a defined benefit plan. Defined 
contribution at least takes care of itself.
    The one thing that I wanted to know, I was going to ask Ms. 
Combs, how many defined contribution plans disappeared after 
ERISA came along and were created into defined contribution 
plans? It was just--it would appear to me that the simplest way 
to solve this problem for any new corporation is, don't have a 
defined benefit plan, just defined contributions.
    You, Mr.--am I being silly, Mr. Porter?
    Mr. PORTER. I think you are exactly on point. I don't know 
the exact number of defined benefit plans when ERISA was 
formed, something in the 400,000 or 500,000 number seems to 
ring a bell with me from those days, if my memory serves me 
correctly.
    Back in the 1970s, when ERISA was enacted, companies looked 
at the balance of a defined benefit plan versus a defined 
contribution plan. The defined benefit plan provided better 
income security for employees, and over the long term, because 
it was a long-term funding arrangement, would do so at less 
cost to the employer. So, there was a value base for the 
employer to get into a defined benefit plan. Defined 
contribution plans, on the other hand, were less volatile and 
less administrative, but had no guarantees of income for 
retirees.
    Today, with a short-term focus increasingly on defined 
benefit plans, it becomes questionable about whether a defined 
benefit plan is, in fact, more cost effective than a defined 
contribution plan. So, the major benefit to having a defined 
benefit plan is still income security for employees. All other 
measures, as far as I can tell, argue in favor of defined 
contribution plan.
    Mr. BALLENGER. Well, I was just thinking a 401(k) seemed to 
be the most popular thing around today, and if you were 
beginning from scratch, I think almost anybody would say 
listen, let's have a defined contribution plan and skip this 
whole thing.
    I just wondered, Mr. Phelps, if you had it to start all 
over again, and you knew the government was going to get 
involved in whatever your private efforts were for your 
employees, would you have looked at it in a different way?
    Mr. PHELPS. That is an excellent question. I am sorry. 
Excellent question. I actually believe that a defined benefit 
plan is in the longer range--long-range interest of the 
American worker. I think some of the stock market volatility we 
have seen in recent years would give good support to that. 
Many--some workers will invest their funds very well and some 
will not and some will blow it all in the first couple of years 
of retirement and some will be prudent about it.
    So, I happen to believe that the society is better off and 
the workers are better off long term with the defined benefit 
plan. I am here today to ask that you all pass the legislation 
which makes realistic for those companies that feel as we do to 
fund such plans and they can fund them realistically and not 
overfunding them.
    Mr. BALLENGER. The only thing that scares me is when I 
started mine, it was 1957 and now everyone is getting pretty 
old that was with me to begin with. It has been getting, even 
on the defined contribution plan, it is getting pretty 
expensive. So, you don't have control over either plan as far 
as the future is concerned. Somewhere along the line, knowing 
that Uncle Sam--I am not trying to put down Portman-Cardin but 
it is probably a good answer since everybody seems to be in 
favor of it.
    Somewhere down the road it scares me to death to have Uncle 
Sam involved in something like this, and we might run into the 
same thing that we have run into right now. I yield back.
    Chairman JOHNSON. Thank you, Mr. Ballenger. Mr. Andrews.
    Mr. ANDREWS. I would like to thank the witnesses for 
outstanding testimony. Mr. Phelps, your ringing endorsement of 
defined benefit plans is welcome. Frankly, it is why many of us 
have misgivings about the Social Security private option 
proposals, which is a subject for another day. Let me ask the 
panelists this: does anyone disagree with the statement that 
the Administration's proposal introduces too much uncertainty 
into the calculus by introducing this yield curve. Anybody 
disagree with that statement? Does anybody disagree with the 
statement that they are concerned about the 90-day window on 
the Administration's proposal, I believe, for smoothing rather 
than the 4 years in present law? Does anybody disagree with 
that statement? Okay.
    If I could then turn the question around, Dr. Weller, we 
know what you think about smoothing, the 10- or 20-year window 
would make sense. I think that is a proposal that merits 
serious consideration. What do the other three witnesses think 
about that? Smoothing, if I understand it correctly, in 
layperson's terms, is how many years you get to average in to 
the rate that you have got to assume for growth of the 
principal that is in the trust fund for the pension? What do 
the other three witnesses think is an appropriate smoothing 
system?
    Mr. PORTER. I believe that every company probably has a 
different view. My company has celebrated its 200th anniversary 
last year, and next year we will have its defined benefit plan 
for 100 years. We have been funding it since the 1920s very 
successfully. We believe in taking the best we can in the 
interest of our employees and retirees. We have viewed our 
pension obligation as a long term obligation for 80 years, 100 
years, if you include the booking we did during--before we 
started funding it in the 1920s. It is a very long-term 
undertaking. A short-term view especially imposed in the moment 
where we have the 45-year low in interest rates really makes me 
shudder. Long-term averaging is where we are.
    Mr. ANDREWS. Do you think an average in excess of 4 years 
is worth considering?
    Mr. PORTER. As part of a DRC, I really applaud that 
proposal.
    Mr. STEINER. I would like to look at numbers. I'm an 
actuary. So, I think it is appropriate to study it as part of 
the proposed restructuring.
    Mr. ANDREWS. You find no intuitive objection to a term 
longer than 4 years? Actuaries are never intuitive, is that 
your answer?
    Mr. STEINER. Thank you. I would suggest that it may be 
feasible or desirable to have different smoothing rules for 
those companies that PBGC and the Administration is concerned 
with, those companies that are not in healthy financial shape. 
Those companies that are in financially sound shape, it may be 
reasonable to have 4 years or longer for smoothing, but those 
companies that are in bankruptcy or with below investment-grade 
credit ratings, it might make sense to use a different measure 
for those companies.
    Mr. ANDREWS. Mr. Phelps, I don't want to preempt your 
answer, but I wanted to echo something you said in your 
testimony about the urgency of getting this done. I have had 
constituents call me, businesses large and small and express 
real concern about this that if this problem isn't fixed, they 
are going to lay people off or they are going to forego some 
expansion that might put people to work. I share your view that 
the proposal put forward by Mr. Portman and Mr. Cardin is the 
right way to fix this. However, given where the Administration 
is, tell me what you think the shortest extension of the bond 
rate idea would give you some degree of certainty. In other 
words, if we had to make a compromise and say we will agree to 
x number of years and look at something beyond that, what is x 
in your mind?
    Mr. PHELPS. I don't have a specific figure. I would 
strongly support a permanent change in this regard. We are 
getting it from all of the Members of the Committee, and you 
are getting it from business and labor. The people who have 
looked at it says this is what makes sense, and this is the 
realistic funding rate for the future. So, I would hope we 
would get a permanent solution at this time on behalf of 
employees and companies.
    Mr. ANDREWS. I agree with you, and for the record, I would 
urge the Administration to join this very broad coalition that 
we have heard expressed today. Realistically, though, I would 
rather have an intermediate or less satisfying solution right 
now than I would have no solution at all, and kick back into 
the problem that we are facing if we don't get something 
passed.
    Mr. PORTER. May I respond?
    Chairman JOHNSON. Quickly.
    Mr. PORTER. We have been asked by rating agencies to do 
long-term forecasts of cash flows. When we try to give them a 
realistic view of what cash flow might be so they can determine 
our credit rating, their response is, well show us what it 
would be if Congress fails to act. Show us what it would be. 
Assets don't earn anything if Congress fails to act. We can't 
as businesses plan property expansion and jobs with a short-
term fix. If there is to be an interim, it needs to be long 
enough so that when the solution is finally achieved, there is 
still enough forecast years left so we can have some 
strategic----
    Mr. ANDREWS. I completely concur. A permanent solution is 
needed here, and I think we have it before this Committee. 
However, I think an interim solution that fits within the 
parameters is immensely preferable to inaction, which I think 
would cause real retardation in the economy.
    Chairman JOHNSON. Ms. Tubbs Jones, do you care to comment?
    Ms. TUBBS JONES. Thank you, Mr. Chairman, yes, I do. Good 
afternoon. Mr. Phelps, everybody is talking to you and I was 
given an assignment. Do you know someone by the name of Alex 
Macheski.
    Mr. PHELPS. I do indeed. He has a defined benefit plan as I 
do.
    Ms. TUBBS JONES. Tomorrow do an editorial in your paper to 
tell Mr. Macheski what a great Congresswoman he has in me, so 
he can publish it and repeat it in the greater Cleveland area. 
I would like to welcome you on behalf of my constituent paper, 
The Plain Dealer, to our hearing. I am going to skip over the 
actuarial and then if the Chairman allows me to come back to 
you, but welcome to all of you.
    Mr. Steiner, tell me, or perhaps answer the question that 
my colleague, Mr. Andrews, asked with regard to what would be 
the shortest term that we could do an interim fix such that 
defined benefit plans would not be harmed if there is such a 
thing?
    Mr. STEINER. I am not sure there is such a thing. It 
depends on whether the economy recovers. I certainly think 2 
years is kind of a minimum period, and hopefully the economy 
will recover and this will not be as significant an issue after 
the 2-year period, but who knows.
    Ms. TUBBS JONES. That is what we said in 2001. You talked 
about in your testimony that in 2002 alone, Fortune 1000 plans 
sponsored to contribute $43.5 billion. In 2003, they are going 
to contribute some $83 billion; are these unusually large 
funding requirements attributable to the interest rate 
assumption or are there other contributing factors?
    Mr. STEINER. It is hard to say what the basis is for plan 
sponsors to make contributions. The interest rate is a factor 
in their decision, but other factors also come into play--
whether to make contributions to not have to pay PBGC variable 
rate premiums, or in particular, some companies are making 
contributions because they can afford to or some companies are 
making contributions because they want to avoid accounting 
charges. So, the decision on whether to make a contribution is 
not solely a function of the interest rate that we are talking 
about. However, changing the interest rate as suggested in 
Portman-Cardin would provide companies with significant 
flexibility. The companies may not use that flexibility, but it 
would provide them with significant flexibility.
    Ms. TUBBS JONES. I ran out of time on your answer. Dr. 
Weller, give me a shorter answer--same question.
    Dr. WELLER. What was the question?
    Ms. TUBBS JONES. What impact does the aging population have 
on the funding requirements that companies are required to pay 
in?
    Dr. WELLER. Can you repeat the question? I completely froze 
there.
    Ms. TUBBS JONES. Am I scaring you? The question I asked, 
are there large amounts of dollars that have been put into 
programs over the last 2 years? In Mr. Steiner's testimony, 
there were huge amounts of the dollars that were put in. I 
asked were those funding requirements, do they come as a result 
of change in interest rates? Let me change it a little bit for 
you. In the Administration proposal, there was some discussion 
about limiting the ability of companies to make payments into 
funding when the times are good. What is your position on that, 
sir?
    Dr. WELLER. First of all, as Mr. Steiner said, it is hard 
to distinguish on an aggregate what the major contributions to 
the funding problems are. Clearly the declining interest rate 
is one of the major ones. Clearly the other one is we have seen 
large decreases in asset prices, the largest in the history of 
the United States. I think the first point I want to make about 
this----
    Ms. TUBBS JONES. It has to be a short point.
    Dr. WELLER. Combination of falling asset prices and falling 
interest rates always a curse in a recession or most 
recessions. It will reoccur in the next one too, and most 
likely in the next one too. The next one, yes, there is a 
problem that pension funds were not allowed to contribute or 
were discouraged from making contributions when times were 
good, and I think we need to take that really seriously under 
consideration, whether we allow plans to make contributions or 
eliminate the discouragement that is currently on the books.
    Ms. TUBBS JONES. Mr. Phelps, Mr. Porter, what other than 
this 30-year Treasury bond would cause you two, who have had 
long-term defined benefit plans, to change your position about 
providing defined benefit plans to your employees?
    Mr. PHELPS. For us, the issue is much more the allotment of 
dollars by forcing us as one with a defined benefit plan to 
overfund it, in our opinion, and as generally agreed, one then 
is prevented from improving other benefits, from allocating 
capital and ways to improve business and help the American 
economy. It does not make sense, and I would urge the Congress 
not to send the message to those who have or might consider 
defined benefit plans that they are going to have to overfund 
them when there is the agreement there that we have heard here 
today in terms of a standard which is an adequate funding 
standard. You simply are discouraging people from having or 
going into these plans if you will not adopt a permanent 
solution.
    Ms. TUBBS JONES. Can I get a quick answer from Mr. Porter, 
Mr. Chairman.
    Chairman JOHNSON. You are getting your money's worth.
    Mr. PORTER. I think all of the factors feed into it: 
assets, liabilities, demographics, the economy, and the fact 
that our Nation is becoming more a part of a global economy and 
less of a stand-alone national economy. We have to compete with 
worldwide competition, and to the extent that we penalize 
companies before doing the right thing, that has an economic 
impact.
    Ms. TUBBS JONES. Thank you, Mr. Chairman.
    Chairman JOHNSON. Mr. Kline, do you care to comment?
    Mr. KLINE. Yes, thank you, Mr. Chairman, and thank you, 
gentlemen for coming in today. I am not an actuary and perhaps 
not intuitive either, so I find this extremely complicated and 
fairly confusing. I wanted to cut to a couple of short 
questions, if I could, and I am not sure who even to ask them 
to, so I will start by asking all of you. Mr. Andrews opined 
that he thought it was better to have an interim solution 
rather than no action by Congress, and I think we assume that 
you agreed--could you tell me do you agree with that, an 
interim solution is better than no action?
    Mr. PORTER. I think no action a very serious issue.
    Mr. PHELPS. I would say it is a serious mistake not to get 
a permanent solution now given the agreement we have heard.
    Mr. KLINE. Right, but again, assuming that we could not get 
a long-term solution, you would prefer to have an interim 
solution to no solution? I had someone from Minnesota come into 
my office and express concern about the difference between 
multi employer defined benefit plans, and, perhaps, single 
employer. In this particular case, the employer was in the 
trucking business and part of many trucking companies that are 
contributing to, I think, a Teamsters defined benefit plan. The 
discussion here today about what to do about the 30-year 
Treasury, would that apply equally to the two situations, a 
single employer and multi? Do you have a comment on that?
    Mr. STEINER. The funding issues for multi employer plans 
are similar, and therefore, the interest rate would apply to 
them as well.
    Mr. KLINE. So, is there general agreement that the approach 
you would take for one would apply to the other?
    Mr. STEINER. Yes.
    Mr. KLINE. Thank you very much, Mr. Chairman, I yield back. 
Mr. Portman, I reckon you ought to have a word or two. Do you 
care to comment?
    Mr. PORTMAN. Of course, Mr. Chairman.
    Chairman JOHNSON. You are recognized.
    Mr. PORTMAN. Anybody who has intuition wouldn't be able to 
understand this pension system. Your question--I guess I have a 
couple of things, Mr. Chairman. One is, I like what Mr. Steiner 
said about setting the parameters here. I know there are 
reporters who were here earlier who had to leave, and I talked 
about this a lot in the public forum. It doesn't always get 
communicated somehow, but could we talk a little bit about 
liabilities? When we hear numbers as we did earlier today about 
billions of dollars, $300 billion and so on, what is that based 
on?
    Here is my point: the 30-year Treasury is used to calculate 
the pension liability that reporters like the Washington Post 
this morning and others write about in their editorial. What is 
the impact of the 30-year Treasury as compared to something 
like a long-term safe corporate bond or some other rate that 
would be a more realistic rate?
    Mr. STEINER. Using methodology that is an approximation, 
because it can only be an approximation, we determined that for 
2004 and 2005, the extent of possible overstatement of 
contribution requirements by using the 30-year Treasury as 
opposed to a blended corporate bond yield, as you have 
suggested, would be as much as $115 billion over a 2-year 
period.
    Mr. PORTMAN. Can you give us a sense of what percentage 
that is as compared to the reduction of value of assets and 
reduction of interest rates overall? How much does the 30-year 
Treasury contribute to that?
    Mr. STEINER. As indicated in the testimony, we indicated 
that for 2004 and 2005, if the law is not changed, 
contributions might be in the neighborhood of $160 billion by 
the Fortune 1000 companies for the 2-year period 2004 and 2005. 
By comparison, under Portman-Cardin, that amount would be $45 
billion. Now we are not suggesting that sponsors would actually 
reduce their contributions to that extent, but that is the 
relative magnitude of the overstatement of using 30-year 
Treasuries.
    Mr. PORTMAN. Overstatement of the liabilities. That is even 
larger than I thought as a percentage. Even if it is 30 percent 
or 40 percent, that is a significant difference. I think it is 
important as we lay out, what is the problem what are trying to 
get at, which obviously is an issue of PBGC having a potential 
to have a run on its assets and having the taxpayer picking up 
the tab at the end of the day. We need to keep in mind that 
part of this is an analysis of liabilities, which is based on 
an accurate measure. You can look at different ones, but if you 
look back at 25, 50 or 75 years as Mr. Phelps said earlier, it 
is a conservative measure.
    Mr. Porter talked about an interim period being long enough 
so that we have enough time left to plan. I talked earlier 
about earlier planning, certainty and predictability and the 
importance of that not just to this issue, but to keeping jobs 
in general, and what do you think the interim would have to be 
in order to leave enough time?
    Mr. PORTER. If I had to pick an interim, I would have a 
variable length, so that once final decisions are made, it will 
have some delayed impact. It may not be politically plausible, 
but that is the issue. When our chairman has to decide whether 
to build a plant, that is a long-term financial undertaking, 
and if he doesn't have certainty around the pension funding, he 
has to be more cautious on that decision.
    Mr. PORTMAN. So, you would like to see an interim period 
that is long enough, but then once there were an adjustment to 
something else, it would have to be a transition.
    Mr. PORTER. That is right.
    Mr. PORTMAN. The Treasury Department has promoted, as you 
know, a 2-year corporate rate, and then a transition over 
another 3 years to a yield curve analysis. We don't have all 
the details on that yet, and they are still fleshing that out, 
but it would probably be a 90-day averaging. Is that adequate 
or not adequate?
    Mr. PORTER. My preference would be if there was an interim 
period, that it be locked into the corporate bond rate. That if 
a decision is made in the context of what our Nation's long-
term retirement income policy should be that we should go to 
something like a yield curve, and it be enacted as a separate 
piece. I would oppose enacting something now that we don't have 
any details on.
    Mr. PORTMAN. Would you also say there are other factors 
that are related to the issue of what the discount rate ought 
to be, for instance, the actuarial assumptions and mortality 
rates we talked about earlier, or are those unrelated? Can you 
legislate on one without dealing with the other issues, the 
other funding issues or even accounting issues?
    Mr. PORTER. I think you need to focus on the whole package, 
what is it we are trying to accomplish with funding in the 
first place and protecting our participants. Also if you look 
at transparency, that is an issue that has been raised several 
times, current law says that assets are allocated on a 
termination basis to retirees first and then to eligible to 
retire and so on. It doesn't make a lot of sense to talk about 
transparency on the liability side without matching it to 
assets. I think you need to look at the whole funding and 
liability and asset picture before we make a decision on one 
piece of it.
    Mr. PORTMAN. My time is up. I have some additional 
questions for the record, if that is okay.
    Chairman JOHNSON. Sure. Would you all be willing to answer 
questions that are posed after this testimony? Thank you, I 
appreciate that. Mr. Andrews.
    Mr. ANDREWS. Thank you. Very briefly, Mr. Steiner, I wanted 
to echo something Mr. Portman just said. Would you state again 
your best estimate of the difference between the contributions 
that would be required next year if the law were not changed 
and what you think it would be under Mr. Portman and Mr. 
Cardin's proposal.
    Mr. STEINER. We haven't estimated that on a 1-year basis, 
but on a 2-year basis. We estimate that if the law is not 
changed, contributions to the plans would be in the 
neighborhood of $160 billion. We also indicated if sponsors 
base their contribution decision just solely on the higher 
interest rate anticipated under Portman-Cardin, the total 
contributions for the 2-year period would be in the 
neighborhood of $45 billion, but we are not suggesting that 
planned sponsors----
    Mr. ANDREWS. I understand.
    Mr. STEINER. This is a measure of the overstatement of the 
30-year Treasury rate.
    Mr. ANDREWS. It is a plausible point that if we were not to 
take this step, that we would see the effective withdrawal from 
the economy over a 2-year period of $100 billion of salaries 
and wages, new plant and equipment, and other far more 
stimulative spending. We spend months around here arguing about 
an economic stimulus package that wasn't much larger than that 
when you break it down on a year-by-year basis.
    As I said earlier, it would be truly ironic if after a 
mighty attempt to create some stimulus for the economy, that 
we, by default, permitted this depressant effect to take place 
in the economy. This is a very important point. I yield the 
balance of my time to my friend from Ohio.
    Ms. TUBBS JONES. Thank you, Mr. Chairman and Mr. Andrews. I 
want to go to the yield curve. As I understand it, as the 
proposal from the Administration, you would--when we change or 
should we change from 30-year Treasury bonds to corporate bond 
ratings, then companies would ultimately be forced to invest in 
instruments required to fit that short-term investment. My 
question is would they be precluded from investing in equity 
instruments such as stocks?
    If they are, what would be the effect on the stock market 
in the long-term? Finally, how would you reconcile this 
approach on the discussion about having people on Social 
Security investing their money in the stock market? Short 
question.
    Dr. WELLER. Well, let me say the first thing about interest 
rates because they came up here. I think what is important to 
keep in mind is what will affect pension plan contributions or 
pension plan funding is changes in interest rates, not levels. 
So, moving toward a yield curve would actually exacerbate the 
problem because you have not only one interest rate, but 
multiple interest rates changing and thereby obviously changing 
contributions in unpredictable ways. As it is my understanding, 
the yield curve would only affect the liability side. It would 
have no effect on the asset side. I am not sure--maybe some of 
the actuaries could contribute.
    Ms. TUBBS JONES. You are saying because it won't have an 
effect on the asset side, it means they could invest in stock 
markets?
    Dr. WELLER. They could invest in the stock market. I think 
overall actual investments, advisory boards, pension funds look 
at the overall portfolio and expect the rate of return that 
they are assuming in trying to beat that market or that 
assumption. Whether they think they can get that from a stock 
market at any given point in time or from the bond market, I 
think, depends on the overall situation.
    Ms. TUBBS JONES. I am done. I thank you very much. Mr. 
Porter, real quick.
    Mr. PORTER. I think there--while it can voluntarily invest 
in equities, there will be a natural pressure to match assets 
and liabilities so that the volatility on the corporate balance 
sheet is minimized, and I think it will pull hundreds of 
millions of dollars out of equities, and I don't know that the 
fixed income market can handle it right now.
    Chairman JOHNSON. You got your full value.
    Ms. TUBBS JONES. Know that I appreciate it.
    Mr. ANDREWS. I would ask unanimous consent that a letter to 
you, Chairman Johnson from the AARP, be entered into the record 
dealing with the question of lump sum distribution.
    [The information follows:]
                                                               AARP
                                               Washington, DC 20049
                                                      July 14, 2003
The Honorable Sam Johnson
Chairman
Subcommittee on Employer-Employee Relations
2181 Rayburn House Office Building
Washington, DC 20510

The Honorable Jim McCrery
Chairman
Subcommittee on Select Revenue Measures
1135 Longworth House Office Building
Washington, DC 20510

    Dear Mr. Chairman:

    We commend you for holding this timely joint hearing with the 
Subcommittee on Employer-Employee Relations on the Administration's 
proposal to improve the accuracy and transparency of pension 
information.
    The Administration has proposed an ambitious plan to improve the 
accuracy of the pension liability discount rate, increase the 
transparency of pension plan information and strengthen safeguards 
against pension underfunding.
    The Administration's proposals to increase the transparency of 
pension plan information and enhance safeguards against pension 
underfunding merit careful review by the Subcommittees.
    In particular, AARP urges that you reject the recommendation that 
the 30-year Treasury rate be replaced with rates drawn from a corporate 
bond yield curve, or other changes that would unfairly reduce benefits. 
This recommendation and other similar legislative proposals pending 
before the Committees would reduce by as much as one-third the lump sum 
payments that millions of Americans are eligible to take from their 
employer's pension funds when they retire, change jobs, or are laid 
off.
    We request that you include as part of the record of this hearing 
this letter and the attached report prepared by AARP's Public Policy 
Institute (PPI) entitled ``Increasing the Pension Discount Rate Would 
Cut Benefits.'' This report documents and illustrates the potential 
impact of replacing the 30-year Treasury rate with a composite 
corporate bond rate on lump sum payments. As illustrated on Table 1 of 
the report, the use of a composite corporate bond rate to calculate 
lump sum benefits would reduce the lump sum benefits for a 45-year old 
by 24.2 percent relative to current law, compared to a 16.5 percent cut 
for a 55-year old and 8.1 percent for a 65 year old.
    AARP would oppose any proposal to unfairly change plan funding 
rules that would reduce single-sum retirement benefits for millions of 
employees in defined benefit pension plans. As your committees and the 
Congress consider substitutes for the 30-year Treasury interest rate 
and related changes to these pension provisions, we urge you to protect 
and preserve participant's benefits, including single sums and 
annuities. While it is appropriate to review the use of the 30-year 
Treasury rate for funding purposes, the law should maintain a more 
conservative rate for determining the value of benefits paid in a 
single sum.
    We recognize the need to enact a replacement for the 30-year 
Treasury rate. The Treasury decision to discontinue the 30-year bond, 
in combination with other economic factors, has pushed rates on these 
bonds to a level below other conservative long-term bond rates. These 
trends, in combination with generally low interest rates (including the 
30-year rate) and a weak stock market are currently imposing added 
funding pressures on employers that sponsor defined benefit plans. It 
is appropriate for Congress to address these funding pressures.
    However, American workers too are feeling the pressure of falling 
rates and a weak market. These financial trends have also dramatically 
lowered both the savings and retirement account balances and the 
expected returns that working families have been counting on for a more 
secure retirement. A survey conducted by AARP last year among 50-70 
year-old investors showed that 77 percent of the group who lost money 
in stocks reported that their losses have altered their lifestyles, 
work plans, or expectations about retirement. About 27 percent of the 
respondents who reported stock losses have either postponed retirement, 
returned to work in retirement, started to look for work, or are 
considering taking one of these steps as a result of their losses.
    In addressing employer funding concerns, Congress should not 
compound the hardship faced by individuals by changing the law to 
reduce guaranteed benefit amounts. At a minimum, Congress should retain 
an interest rate for determining single-sum benefit amounts that is 
consistent with the historical level of the 30-year Treasury rate. This 
can be done by maintaining the traditional relationship or spread 
between the current statutory single-sum rate and any higher market 
rate that may be selected for funding purposes. (e.g., use the higher 
corporate bond rate minus 100 basis points, or use 85% of the higher 
corporate bond rate for purpose of the lump sum calculation).
    In addition, to the extent that legislation prescribes any new 
single-sum interest rate benchmark, even one that attempts to replicate 
the traditional spread for the 30-year Treasury rate (after adjusting 
for the effect of Treasury debt reduction, buy-backs and discontinuance 
of the 30-year Treasury bond), fundamental fairness to employees 
dictates that any change be phased in very gradually.
    If Congress concludes that it requires more time and analysis to 
give adequate consideration to the pros and cons of the 
Administration's yield curve funding rate proposal versus the Portman-
Cardin funding rate proposal, it may find it prudent to extend current 
law (as in effect for 2002-2003) for an additional 2 years, as the 
Administration has previously proposed.
    We appreciate the opportunity to share our views with your 
Subcommittee on this important and timely subject.

            Sincerely,
                                                  Michael W. Naylor
                                               Director of Advocacy

                                                         Attachment

                                


                      AARP Public Policy Institute

        Increasing the Pension Discount Rate Would Cut Benefits
    Many defined benefit pension plans give retiring or terminating 
employees the choice of receiving their benefits in the form of a 
single cash payment (a ``lump sum'' distribution) instead of a series 
of regular payments. Plans generally determine the amount of a lump sum 
distribution based on the present value of the future stream of 
payments that represents the pension the employee has earned. To 
calculate the present value, plans use a legally required discount rate 
designed to prevent lump sum values from being understated.
    The discount rate used can make a significant difference in the 
amount of the lump sum benefit, with a higher discount rate producing a 
lower benefit. The benefit cut is deeper for younger individuals 
because of the effect of discounting over additional years.
    To figure the amount of a lump sum payout, the law has required use 
of a discount rate that is at least as favorable to employees as the 
interest rate on 30-year Treasury bonds. (This lump sum discount rate 
has been different--generally lower--than the interest rate plan 
sponsors are allowed to use to determine how much they must contribute 
to fund their plans.) But Congress now is considering alternatives to 
the 30-year Treasury discount rate, because Treasury has stopped 
issuing 30-year bonds.
    Figure 1 presents calculations of lump sum benefits using the 
Treasury 30-year bond rate and a composite corporate bond rate. The 
composite corporate bond rate is an average of the high-quality long-
term bond indices of Lehman, Moody's, Merrill Lynch, and Salomon.
    The percentage differences in lump sums produced by using the 
Treasury 30-year bond rate and the composite corporate bond rate are 
presented in Table 1.
    The figures in the chart and the table assume that the lump sum 
paid at the age on the horizontal axis replaces a monthly annuity 
benefit of $1,000, payable starting at age 65. The lump sum benefit is 
the result of a present value calculation. All figures were provided by 
the American Academy of Actuaries.
    Workers of all ages would receive a lower lump sum benefit from 
calculations using a high-quality long-term corporate bond rate than 
they receive under current rules that employ the 30-year Treasury bond 
rate. Thus, a 65-year-old would receive a $142,700 benefit under 
current law, which uses the Treasury 30-year bond rate, but using a 
composite corporate long-term bond rate would reduce this benefit by 
8.1% to $131,200.
    The impact of using a corporate bond rate to calculate lump sum 
distributions would be greater for younger workers. Thus, using the 
composite corporate rate would reduce lump sum benefits for a 45-year-
old by 24.2% relative to current law, compared to a 16.5% cut for a 55-
year-old.
    A change from the 30-year Treasury bond discount rate would not 
affect the benefit of plan participants who choose to take their 
pension in the form of an annuity instead of a lump-sum payment.



    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]



------------------------------------------------------------------------
   Table 1.  Percent Reduction of Lump Sum Distribution if the 30-Year
  Treasury Bond Rate is Replaced with the Composite Corporate Bond Rate
-------------------------------------------------------------------------
  Age at Time of Lump Sum Distribution            Percent Change
------------------------------------------------------------------------
45                                        -24.2%
55                                        -16.5%
60                                        -12.4%
65                                        -8.1%
------------------------------------------------------------------------
Data source: American Academy of Actuaries.


                                


    Chairman JOHNSON. Without objection, so ordered. I would 
like to ask a question about blended rates. One, I think, Mr. 
Porter, you said that defined benefit plans or rules haven't 
kept up with the changes in economy in the last 5 years. Would 
a blended corporate rate to replace a 30-year Treasury enable 
plans to keep up with future changes, and what do you think of 
a blended rate, for how long?
    Mr. PORTER. Talking about the blended rate as in Portman-
Cardin?
    Chairman JOHNSON. I think the gentleman from Louisiana 
would have understood me.
    Mr. PORTER. I think that goes a long way to helping the 
situation. It would be helpful to understand where we want to 
go as a Nation. I articulate a long term retirement policy, but 
I think that really, really helps, and I think we need to have 
it as long as possible, preferably permanent. I don't believe 
we are going to have interest rates stay where they are 
forever. This is hopefully a short-term volatility. When 
interest rates return, that will be returning back to normal 
funding, and this will be what it was intended to be, a stop-
gap measure.
    Chairman JOHNSON. If we have to do a temporary measure, 
would you think maybe a blended rate for 5 years would work?
    Mr. PORTER. That would certainly help.
    Chairman JOHNSON. All of you agree with that?
    Mr. STEINER. Could I just make a comment that the last 3 
years of investment experience would stress a program with the 
current design using blended rates as well. We have just faced 
the perfect storm, as you indicated. We believe that the rules 
should be revisited and some kind of incentive should be given 
to employers to fund more during the good times and not as much 
as during the bad. We have just been through a situation where 
it is shown the rules, as they currently exist, do have some 
flaws, even with the replacement of a corporate bond rating.
    Chairman JOHNSON. Appreciate that. Do you have a comment?
    Dr. WELLER. The term ``perfect storm'' has been used--we 
used it in the title of our paper. I want to caution here that 
this is not a unique situation. We show in the paper that the 
combination of falling asset prices and falling interest rates 
and weak earnings recurs in most recessions, and I think that 
needs to be taken into consideration when we rewrite the rules 
that we get this right for the future.
    Chairman JOHNSON. Thank you, sir. Chairman McCrery, you 
care to question?
    Chairman MCCRERY. Yes. Thank you, Mr. Chairman. I don't 
want to be the skunk at the party here, but I think it is 
incumbent upon some of us, one of us, to point out that there 
is not unanimity, as my good friend from Louisiana has said 
several times. Yes, business, yes, organized labor agree, but 
they have their own different reasons for agreeing. I should 
point out that the Bush Administration, through the Treasury 
Department, the Department of Labor, and the PBGC, disagree 
with the rate as stated in the Portman-Cardin bill. So, it is 
not as simple as you are saying well, we all agree, so let us 
do it. Evidently, in a prior time in 1987, I go back to 1987 
when this issue was squarely in front of policymakers, a 
different decision was reached. The blended corporate bond rate 
in 1997 was not equal to the 30-year Treasury rate, was it?
    Mr. PORTER. It was very close.
    Chairman MCCRERY. Was it higher or lower?
    Mr. STEINER. I believe it was a little higher, but nowhere 
near the spread that currently exists today.
    Chairman MCCRERY. Should we look exactly for something that 
is exactly what the 30-year Treasury was in 1987? The 
Administration has said in their proposal, let us use the 
Portman-Cardin blended corporate bond rate. That is their 
proposal, but they say let us take into account the varying 
liabilities, pension plan to pension plan, according to that 
plan's makeup, its workforce, its retiree force. What is wrong 
with that? Leave aside the complexity and all that. In concept, 
what is wrong with that?
    Mr. PORTER. When the work was done in 1987, this was 
intended to be a backstop against normal funding. It wasn't 
intended to be the absolute of funding. What I am hearing in 
the form of a yield curve sounds like a replacement for normal 
funding. To the extent that it is a fundamental change in the 
way plans are funded, that debate needs to take place. To the 
extent that we could view it as the drop-in replacement for 30-
year Treasuries, which I don't, then your arguments would be 
well regarded. I just think it is not a drop-in. I think it is 
a fundamental change and we need to understand fully the 
complexity and consequences of that change before it is 
adopted.
    Chairman MCCRERY. I agree. We need to fully understand what 
we are doing, and we may have to have some more hearings.
    Mr. STEINER. The Administration's proposal focuses on a 
plan termination like liability. It is not a plan termination 
liability, but it is like one. We can talk about whether it is 
confusing to give participants both pieces of information, 
because that will indeed be confusing. The Administration's 
focus is really on protecting plan participants in those 
companies that are not financially strong.
    As a matter of fact in their proposal, they indicate 90 
percent of the companies whose pension plans had been trusted 
by the PBGC, had junk bond ratings for the entire 10-year 
period before termination. We agree that it is probably 
reasonable to focus on those companies when designing rules 
that look at plan termination liability and really require 
accurate measurement of those liabilities. We are not so 
convinced that it is absolutely necessary to saddle the rest, 
the 85 percent of the other good plan sponsors with the strict 
rules, and this focus on plan termination liability when they 
are perfectly able to provide benefits on plan termination.
    Chairman MCCRERY. I am not sure that the Administration is 
as inflexible as you paint them. In fact, I think you will 
find, and if you were to have further discussions with them, 
that they have thought about including in their final proposal 
which we don't have yet, but flexibility for funding that could 
solve some of the concerns that you have expressed. Quickly, 
talk about lump sum distribution. Should we apply the same 
rate, discount rate for pension funding as we do to lump sum 
distributions?
    Mr. PORTER. I think ultimately what is used for lump sums 
needs to be fair and equitable for the participants and the 
plans. Plan sponsors that put in lump sum options did so on the 
belief that they would be paying out an equitable lump sum 
present value of the benefit that the individuals would have 
received if they had taken the annuity. To the extent that the 
rates that are currently in use are paying out a 
disproportionate amount of assets versus what would be 
reasonable for a long-term annuity, then the pension plans are 
being drained and we are worrying about the PBGC and the 
adequacy of the PBGC. I think we have to be concerned that we 
do a balanced approach to lump sums, and whether that is the 
same or some percentage of the same that is close, that needs 
to be debated, but I think it is fair and equitable.
    Mr. STEINER. To the extent that 30-year Treasury bond uses 
a low interest rate, using the 30-year Treasury bond to 
determine lump sum distributions overstates the value of those 
distributions. It is a policy question as to whether we should 
be encouraging lump sum distributions and defined benefit 
plans. I agree with Mr. Porter that when these plan sponsors 
initially adopted lump sum distributions, interest rates were 
relatively close to their long-term expectations. So, they 
thought that granting a lump sum distribution was kind of a 
cost neutral situation. The law requires them to continue 
paying distributions and the interest rates have dropped a lot 
and so plans are being drained, and this is a concern to plan 
sponsors.
    Chairman MCCRERY. Thank you, Mr. Chairman.
    Chairman JOHNSON. Thank you, Chairman McCrery. As you can 
hear we have a series of four votes, and so I want to thank you 
all for participating today. I appreciate all of you being here 
and taking the time out. I think we have had an excellent 
discussion, both with you and the previous testimony. So, we 
appreciate your presence and your testimony. Thank you so much. 
The hearing will stand adjourned.
    [Whereupon, at 5:10 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]

                                


     Statement of the Allied Pilots Association, Fort Worth, Texas

    The Allied Pilots Association (APA), the union representing the 
16,000 pilots and retired pilots of American Airlines, strongly 
endorses the intent of Congress and the Administration to strengthen 
and improve pension security. However, we believe that the HR 1776 and 
Administration's proposal do not adequately address the needs of 
pension plan participants. To provide adequate protection and security, 
APA recommends the following actions:

     Extend the sunset provisions as enacted in section 405 of 
the Job Creation and Workers Assistance Act of 2002 through 2005 to 
allow time for a careful analysis to derive a universal alternative 
applicable to all defined benefit plans
     Disassociate the liability discount rate from the lump 
sum discount rate since pension plans invest for capital accumulation 
and retirees invest for capital preservation
     Develop a universal rate for all pension plans to use for 
liability that recognizes a pension plan's funding horizon
     Use 120% of the rate used by the Pension Benefit Guaranty 
Corporation (``PBGC'') for calculating lump sums (the rate was required 
prior to the change to the 30-Year Treasury under GATT)
     Require all companies to disclose the value of their 
pension plan assets and liabilities on a termination basis in their 
annual reporting using the market value of assets (not the actuarial 
value of assets)
     Require plan sponsors and their controlled groups to 
properly fund their pension obligations before making contributions to 
or providing benefits under nonqualified arrangements for corporate 
executives (e.g., non-qualified supplemental executive retirement 
plans, stock plans, incentive programs, bonus arrangements, etc.)
     Allow pension plan sponsors and their participants to 
jointly address pension funding issues without imposition of benefit 
limitations or reductions from the federal government.
     Eliminate the provisions of Article 3 of the 
Administration's proposal

    While there is no disagreement that the pension security of 
Americans participating in defined benefit pension plans has eroded 
significantly over the past few years, neither the proposal nor HR 1776 
appear to provide the level of security on which so many participants 
will depend upon in their approaching retirement years. The 
Administration's proposal fails in the following respects:

     Matching the interest discount rates to the term 
structure of plan liabilities will most likely increase pension costs 
for companies experiencing economic hardship
     It fails to recognize the distinction of risk for the 
retiree versus the plan sponsor when setting the discount rate for 
valuing lump sum distributions
     It fails to place limitations on sponsors of underfunded 
pension plans while restricting pension accruals of plan participants 
(e.g., there are no restrictions on contributions to non-qualified 
executive plans or other similar benefits)
     It encourages plan sponsors to file for bankruptcy 
protection by providing a significant reduction in the pension 
obligations eroding the pension security of their employees
     It fails to adequately recognize the obligations of plan 
sponsors to provide the negotiated benefits under their working 
agreements with labor

    The following responds to each of the points (shown in quotes) in 
the Administration's proposal in the order presented:

    1. Improving the Accuracy of the Pension Liability Discount Rate:

    ``Accuracy is essential because too high a rate leads to 
underfunding, putting retirees and taxpayers at risk. Too low a rate 
causes businesses to contribute more than is needed to meet future 
obligations, overburdening businesses at this early stage of the 
recovery.''
    APA agrees with Congress, the Administration and corporate America 
that there is a need to replace the use of the 30-Year Treasury as the 
interest discount rate for pension purposes since the sale of new 30-
Year Treasury securities has ceased. This lower than market rate 
significantly inflates the pension liabilities and the amount plan 
sponsors must contribute to adequately fund their pension obligations.
    The Administration's proposal addresses two specific areas of 
concern, pension funding and lump sum payments for participants. APA's 
comments and recommendations for each of these points follows.

    Use of Appropriate Yield Curve Discount Rate

    ``The Administration recommends that pension liabilities ultimately 
be discounted with rates drawn from a corporate bond yield curve that 
takes into account the term structure of a pension plan's liabilities. 
For the first two years, pension liabilities would be discounted using 
the blend of corporate bond rates proposed in HR 1776 (Congressmen 
Portman and Cardin). A phase-in to the appropriate yield curve discount 
rate would begin in the third year and would be fully applicable by the 
fifth year. Using the yield curve is essential to match the timing of 
future benefit payments with the resources necessary to make the 
payments''

     This method will most likely increase pension obligations 
for plan sponsors experiencing economic distress. While the details of 
the yield curve model are not clear, it appears the model attempts to 
match the term of the liabilities with an appropriate corporate bond 
yield. Thus, plans that have longer expected term liabilities would use 
a longer-term yield rate and plans with shorter expected term 
liabilities would use a shorter-term yield rate. Generally, plans with 
a younger workforce and fewer annuitants would have a longer-term 
liability expectation than plans with an older workforce and many 
annuitants.
          In times of economic distress, one of the first steps that a 
        company takes is to reduce its workforce. Companies generally 
        achieve these reductions through layoffs and/or retirement 
        incentives. Layoffs are generally based on longevity, primarily 
        affecting younger employees and older retirees accept 
        retirement. Both of these conditions reduce the expected 
        liability term and, under the proposal would require the use of 
        a lower discount rate based on a shorter-term yield curve. A 
        lower discount rate would potentially significantly increase 
        the plan's liability. As a result, such a company would face 
        potentially higher pension costs during a period when it could 
        least afford them.

    This method defeats the goal of simplicity. While the 
Administration's proposal hopes to make the process simple and easy, 
the proposal would not achieve this goal in the following situations:

     Companies with multiple defined benefit pension plans 
would have multiple discount rates for each plan. While each plan's 
discount rate would be based on that plan's expected liability term, 
the use of multiple rates would greatly complicate the Administration 
for that company. For example, American Airlines has five defined 
benefit pension plans; thus, under the Administration's proposal, 
American would have up to five different discount rates.
     The use of a plan specific discount rate would 
significantly differ from the current FAS 87 liabilities as reported on 
corporate balance sheets. FAS 87 was established by the accounting 
profession as a means to standardize pension expense among various 
companies. It established a uniform methodology to be applied across 
all corporations. Since each plan would have its own discount rate, the 
results of the funding valuation and its liability determination would 
vary significantly from the FAS 87 valuation. This is greatly 
complicated should the company have multiple pension plans.

    RECOMMENDATION: Extend the sunset provisions as enacted in section 
405 of the Job Creation and Workers Assistance Act of 2002 through 2005 
to allow time for a careful analysis to derive a universal alternative 
applicable to all defined benefit plans.

Phase in Use of Yield Curve for Lump Sums

    ``Currently, lump sums are valued using a lower rate than that used 
for pension funding, draining pension plans' assets whenever lump sums 
are paid. In order to protect the retirement security of both those who 
have not yet retired, and those who have chosen to take benefits as an 
annuity, the Administration proposes that ultimately, lump sums be 
discounted by the same rate used for other pension liabilities. In 
order to avoid disrupting the plans of workers who will receive 
benefits in the immediate future, lump sums would be computed using the 
30-year Treasury rate as under current law in years one and two. In the 
third year a phase-in to the appropriate yield curve discount rate 
would begin. By the fifth year lump sums will be discounted by the same 
rate used for other pension liabilities.''

     Linking the interest discount rate for a plan's liability 
determination to the rate used to determine lump sum distributions 
forces a retiree to take on greater investment risk than is prudent. A 
distinction should be made between the rate used to determine both a 
pension plan's funded status and the rate used to determine the lump 
sum payment to a retiree for the following reasons:

       Retirees Have Fewer Resources to Recover From Losses. 
Retiree's have little time to recover from an investment loss or down 
market. Their lump sums must provide the primary source of income for 
the remainder of both the retiree's and spouse's life. As a result, 
financial planners universally recommend portfolios designed to 
preserve capital at the expense of higher investment returns to avoid 
the potential for irrecoverable losses. This differs significantly from 
a pension plan's investment objective to accumulate wealth. Since such 
portfolios designed to preserve capital trend toward low-risk to no-
risk investments, the discount rate used to determine the lump sum 
should be a risk-free rate.
       Retiree's Financial Security May Be Jeopardized. To use 
the same interest discount rate for both the liability determination 
and for lump sum determinations, forces the retiree to take on more 
risk than may be prudent in order to obtain the same economic value of 
the benefit. For example, if the lump sum was determined using a rate 
of 8%, the retiree must obtain a return of 8% for each year throughout 
retirement to get the same economic benefit. This may require him or 
her to invest a larger portion of the lump sum in higher-risk equity 
investments than is prudent for his or her age. In addition, each 1% 
point increase in the interest rate reduces a retiree's lump sum by 
approximately 10%.
       Pension Plans Can Tolerate The Higher Risk Associated 
With Higher Investment Returns. Unlike retirees, pension plans can 
tolerate a riskier investment mix for the expected higher returns since 
the corporations that sponsor these plans can offset losses from 
corporate revenues. Many defined benefit plans use an investment mix of 
equities and fixed income (typically 60%/40%, respectively) to yield 
expected annual returns of 8%-10%. Thus, for the purpose of determining 
a plan's funded status a higher rate that reflects the expected higher 
returns is appropriate.

     The Administration's Proposal asserts that using a lower 
interest rate than used for pension funding drains pension plan assets. 
This proposal fails to focus on the cause of the underfunding. The 
Administration's proposal focuses on the discount rate used to 
determine lump sum distributions; instead, the focus should be on the 
plan's actuarial assumptions since it is the actuarial assumptions, not 
just the liability discount rate, which determines the funded level of 
a plan. Plan sponsors have great latitude in setting and adjusting the 
actuarial assumptions to compensate for all forms of benefit payment 
and plan experience. The plan sponsor and actuary are jointly 
responsible for setting actuarial assumptions that reasonably reflect 
plan experience and expectations. The plan sponsor is responsible for 
ensuring that that plan is appropriately funded to meet the benefit 
payments promised to retiring participants. Thus, the plan sponsor 
should ensure that reasonable actuarial assumptions are established 
that consider all aspects of plan design, demographics and experience.

    RECOMMENDATION: Use 120% of the rate used by the PBGC for 
calculating lump sums (``Historical Rate'', the rate required prior to 
the change to the 30-Year Treasury under GATT).

     The Historical Rate Compares Favorably to the 30-Year 
Treasury Rate. The Historical Rate is the rate that was required by law 
prior to the change to the 30-Year Treasury. From 1988 through 2002, 
the median for the 30-Year Treasury was 6.79% compared to 6.3% for the 
Historical Rate. The median rates for calendar year 2002 were 5.40% and 
5.25% for the 30-Yr Treasury and the Historical Rate, respectively.
     The PBGC rate is the rate used to determine the value of 
lump sums. The PBGC has established a discount rate used for 
determining the value of a participant's benefit. The Historical Rate 
is based on the PBGC rate. The following chart shows the monthly 
difference between the 30-Year Treasury and the Historical Rate from 
1988 through 2002.

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


2. Increasing the Transparency of Pension Plan Information.
Disclose Plan Assets and Liabilities on a Termination Basis
    ``The Administration proposes that all companies disclose the value 
of pension plan assets and liabilities on a termination basis in their 
annual reporting. Too often workers are unaware of the extent of their 
plans' underfunding until their plans terminate, frustrating workers' 
expectations of receiving promised benefits.''
    APA agrees with this proposal and further recommends that this 
information be provided to all plan participants in the annual summary 
annual report.
Disclose Funding Status of Severely Underfunded Plans.
    ``The Administration proposes that certain financial data already 
collected by the PBGC from companies sponsoring pension plans with more 
than $50 million of underfunding should be made public. Publicly 
available information would include the assets, liabilities and funding 
ratios of the underfunded plan, but not confidential employer financial 
information. This data is more timely and accurate that what is 
publicly available under current law.''
    APA agrees with the requirement that corporate financial 
information such as pension assets, liabilities and funding ratios of 
the underfunded plan be disclosed, but that other information such as 
contributions to, and payments from, non-qualified benefits and 
compensation programs also be disclosed to the public.
Disclose Liabilities Based on the Duration-matched Yield Curve of 
        Corporate Bonds
    ``The Administration proposes that companies annually disclose 
their liabilities as measured by the proposed yield curve before 
duration-matching is fully phased in for funding purposes. By providing 
this information before the new discount rate is effective, workers and 
the financial markets will have more accurate expectations of a plan's 
funding obligations and status.''
    This proposal is particularly puzzling. Most defined benefit plans 
invest 60%-70% in equities and 30%-40% in fixed income. Duration 
matching of only 30%-40% of the portfolio seems to entirely ignore the 
larger position and greater impact of the equities. This proposal begs 
further explanation and details.
3. Strengthening Pension Funding to Protect Workers and Retirees
Firms with Below Investment Grade Credit Rating
    ``When firms with junk bond credit ratings increase pension benefit 
promises, these costs stand a good chance of being passed on to the 
pension insurance system, frustrating the benefit expectations of 
workers and retires and penalizing employers who have adequately funded 
their plans. Under the Administration's proposal, if a plan sponsored 
by a firm with a below investment grade credit rating has a funding 
ratio below 50 percent of termination liability, benefit improvements 
would be prohibited, the plan would be frozen (no accruals resulting 
from additional service, age or salary growth), and lump sum payments 
would be prohibited unless the employer contributes cash or provides 
security to fully fund these added benefits. In an analysis of over 
half of PBGC claims, 90 percent of companies whose pension plans have 
been trusteed by the PBGC had junk bond credit ratings for the entire 
ten year period before termination.''
    The Administration's stated intent of this provision is to protect 
workers and retirees by strengthening pension funding. While APA 
supports this as a noble endeavor, the proposals suggested do not 
provide protection for workers or retirees and do not address a process 
to adequately strengthen pension funding.
    The Administration's proposal is to place severe limitations (e.g., 
freezing benefit accruals, prohibiting benefit improvements and 
eliminating lump sum payments) if a plan's funding ratio falls below 
50% of termination liability. APA has the following concerns regarding 
these proposals.

     This proposal fails to allow employers and employees to 
jointly address the problem. By enacting such a law, the federal 
government has deprived the employer and his employees from considering 
other alternatives to address the problem (such as, wage reductions, 
reduction in future pension accruals, etc.). In many cases, this will 
have the effect of unilateral elimination of negotiated pension 
benefits.
     Fails to recognize other causative factors. In many 
cases, pension underfunding is the result of a number of other inter-
related events such as Stephen Kandarian's ``perfect storm'' which 
caused most of America's defined benefit pension plans to become 
significantly underfunded when just a couple of years before they were 
adequately to over-funded. To impose such drastic actions for a 
temporary condition harms both workers and retirees.
     Change to the Termination Basis for Measuring Plan 
Funding Level is not Fair to Plan Participants or Sponsors.  In prior 
years, most Companies have maintained their defined benefit plans at 
adequate funding levels. The funding level has been measured using the 
Actuarial Accrued Liability method since this method assumes that the 
pension plan will be an on-going concern, which is a qualification 
requirement. To abruptly change the measurement from the conventional 
Actuarial Accrued Liability measurement used by many companies to 
measuring liabilities on a Termination basis will cause many, if not 
most plans, to fail to meet this standard and require immediate 
imposition of the benefit reductions. This is not fair to plan 
participants or plan sponsors.
     Fails to Recognize the Responsibility of the Plan Sponsor 
to Ensure the Financial Stability of the Plan.  The plan sponsor has 
the responsibility to ensure that the plan, through investment returns 
and contributions, has the assets available to pay the promised 
benefits as they become due. This proposal places severe restrictions 
on the benefits of plan participants, with no requirements or penalties 
on the plan sponsor. At a minimum, the plan sponsor should be 
prohibited from establishing or contributing to any non-qualified 
benefit program or providing any non-salary compensation (e.g., stock 
options, incentive compensation, bonuses, deferred compensation, etc.) 
established for executives until the pension plan funding level exceeds 
80% on a termination basis and all frozen, suspended or forfeited 
benefits are restored under the terms of the plan as they existed prior 
to the benefit reductions under the Administration's proposal.
     Fails to Describe What Happens to a Plan whose Funding 
Ratio Rises above the 50% Level. While the Administration's proposal 
describes the benefit reductions that apply to a plan that falls below 
the 50% level, there is no provision describing what happens when a 
plan's liabilities again exceed the 50% level.

    RECOMMENDATION: APA recommends that this portion of the 
Administration's proposal be eliminated for the reasons cited above.

Firms in Bankruptcy

    Same restrictions as above plus PBGC's guaranty limit would be 
fixed as of the date the plan sponsor files for bankruptcy
    The Administration's proposal would impose the benefit reductions 
recommended above in addition to reducing the maximum benefits to the 
level provided by the PBGC when a company files for bankruptcy. APA 
disagrees with this proposal for the following reasons:

     Many Companies who file for Bankruptcy Emerge with no 
Impact to their Defined Benefit Plans. In many cases, bankruptcy is 
caused by temporary adverse economic conditions. Companies many times 
emerge from bankruptcy. Not every bankruptcy leads to trusteeship of a 
defined benefit plan by the PBGC. Thus, to impose the PBGC termination 
provisions on the pension plans of any company that files for 
bankruptcy fails to recognize this possibility and is punitive to the 
plan participants. In addition, this would apply even to plans that 
were 100% funded on a termination basis. In this case, the plan would 
have assets significantly in excess of the liabilities calculated under 
the proposed reductions.
     The Requirement to Impose these Benefit Reductions Fails 
to Allow Employers and their Employees and Creditors to Consider All 
Alternatives to Address the Problems Causing the Bankruptcy. The 
reasons are the same as stated above. By enacting such a law, the 
federal government has deprived the employer and his employees and 
creditors from considering all alternatives to address the problem 
(such as, wage reductions, reduction in future pension accruals, etc.). 
In many cases this will have the effect of unilateral elimination of 
negotiated pension benefits.
     Motivates Employers to File for Bankruptcy. If enacted, 
this provision would provide employers with another reason to file for 
bankruptcy since through such a filing an employer could reduce or 
eliminate a pension cost that he was unsuccessful in negotiating 
through the collective bargaining process. This provision provides no 
incentive for an employer to increase the funding of the pension plan 
or address other issues that may be contributing to the bankruptcy.

    RECOMMENDATION: APA recommends that this portion of the 
Administration's proposal be eliminated for the reasons cited above.

    To summarize, while APA agrees with the intent of Congress and the 
Administration to strengthen and improve pension security of the 
millions of plan participants covered under defined benefit pension 
plans, APA believes that the Administration's proposal and HR 1776 do 
not adequately address the needs of pension plan participants. To 
provide adequate protection and security, APA recommends the following 
actions:

     Extend the sunset provisions as enacted in section 405 of 
the Job Creation and Workers Assistance Act of 2002 through 2005 to 
allow time for a careful analysis to derive a universal alternative 
applicable to all defined benefit plans
     Disassociate the liability discount rate from the lump 
sum discount rate since pension plans invest for capital accumulation 
and retirees invest for capital preservation
     Develop a universal rate for all pension plans to use for 
liability that recognizes a pension plan's funding horizon
     Use 120% of the rate used by the Pension Benefit Guaranty 
Corporation (``PBGC'') for calculating lump sums (the rate was required 
prior to the change to the 30-Year Treasury under GATT)
     Require all companies to disclose the value of their 
pension plan assets and liabilities on a termination basis in their 
annual reporting using the market value of assets (not the actuarial 
value of assets)
     Require plan sponsors and their controlled groups to 
properly fund their pension obligations before making contributions to 
or providing benefits under nonqualified arrangements for corporate 
executives (e.g., non-qualified supplemental executive retirement 
plans, stock plans, incentive programs, bonus arrangements, etc.)
     Allow pension plan sponsors and their participants to 
jointly address pension funding issues without imposition of benefit 
limitations or reductions from the federal government.
     Eliminate the provisions of Article 3 of the 
Administration's proposal

    The Allied Pilots Association has long valued the pension programs 
that it has negotiated for our members and stands ready to assist in 
any way possible to ensure the pension security for our members and the 
American public.

                                


           Statement of the American Federation of Labor and
                  Congress of Industrial Organizations
    The AFL-CIO, on behalf of its affiliated unions' 13 million 
members, appreciates the opportunity to express our views on proposals 
to replace the interest rate on 30-year Treasury bonds as the benchmark 
interest rate for various pension funding rules and related 
requirements under the tax code and ERISA.
    Employment-based pensions are an essential component of a strong 
national retirement system. Unions have long supported defined benefit 
plans as the soundest vehicles for building and safeguarding retirement 
income security, as they are federally insured and provide a guaranteed 
monthly lifetime benefit. As a result, seven-in-ten union workers in 
the private sector (compared to fewer than one out of every seven non-
union workers) participate in defined benefit plans. Millions of union 
members now count on negotiated pension benefits when they reach 
retirement.
    The Employee Retirement Income Security Act (ERISA) sets specific 
funding requirements for defined benefit plans aimed at ensuring that 
plans have sufficient assets to meet promised benefits over the long 
run. ERISA also provides that defined benefit pensions are to be 
insured through the Pension Benefit Guaranty Corporation (PBGC), and 
plans are to pay premiums to the PBGC to finance its insurance program.
    Several pension funding rules require the use of interest rates 
based on the interest rate on 30-year Treasury bonds. Congress chose 
the 30-year Treasury bond rate for funding purposes because it believed 
it was an accurate and appropriate proxy for group annuity purchase 
rates.1 Most significantly, the rate on 30-year Treasury 
bonds is used to measure single-employer pension benefit promises for 
purposes of the minimum funding rules and the determination of variable 
rate premiums owed to the PBGC. Therefore, that rate has an important 
impact on how much single-employer pension plan sponsors have to 
contribute to their funds and the level of premiums they are required 
to pay to the PBGC.
---------------------------------------------------------------------------
    \1\ General Accounting Office, Private Pensions: Process Needed to 
Monitor the Mandated Interest Rate for Pension Calculations, pp. 4-5 
(February 2003).
---------------------------------------------------------------------------
    The Treasury Department's decision to stop issuing 30-year Treasury 
bonds early last year, however, has undermined the funding objectives 
prescribed by Congress when it selected the interest rate on 30-year 
Treasury bonds as the underlying benchmark. The Treasury Department's 
decision to stop issuing 30-year Treasury bonds means that the interest 
rate derived from those bonds is artificially low and no longer an 
accurate proxy for group annuity purchase rates. In response, Congress 
enacted a temporary change in the rules to allow plans to use a higher 
interest rate, but one still based on the 30-year Treasury bond 
2, for purposes of the minimum funding requirements and the 
PBGC variable rate premium.
---------------------------------------------------------------------------
    \2\ For purposes of measuring current liabilities under IRC section 
412(l), Congress raised the ceiling on the interest rate corridor from 
105% to 120% of the four-year weighted average of the 30-year Treasury 
bond rate. For purposes of determining the PBGC variable rate premium, 
Congress raised the ceiling on the interest rate corridor from 85% to 
100% of the applicable annual interest rate on 30-year Treasury bonds.
---------------------------------------------------------------------------
    The AFL-CIO believes that Congress should prescribe a replacement 
for the rate of interest on 30-year Treasury bonds for those purposes. 
It is imperative that Congress selects a permanent rate now to promote 
the stability of defined benefit plans. The following guidelines should 
inform Congress's decision-making in determining the new rates:
    First, Congress's objective must be limited to selecting the right 
replacement rate. This means choosing a rate that will yield plan 
funding sufficient to protect workers' accrued benefits if a plan 
terminates. Any other objectives, such as addressing the short-term 
pension funding pressures resulting from significant stock market 
declines and historically low interest rates, should be addressed 
through other tools.3
---------------------------------------------------------------------------
    \3\ Congress should examine, separately, interactions between the 
current funding rules and the historically low interest rates and three 
consecutive years of stock market losses that pension funds are 
enduring.
---------------------------------------------------------------------------
    Second, the interest rate that replaces the 30-year Treasury bond 
rate should approximate group annuity purchase rates. Such a rate is 
consistent with Congress's original intent, and it reflects the cost of 
buying benefits in the private market if a plan were to terminate, 
therefore providing appropriate protections for workers and 
beneficiaries. The rate could be based on Treasury securities, an index 
or indices of high-quality long-term corporate bonds, or a composite of 
both in combination with an appropriate adjustment factor if necessary 
to approximate group annuity purchase rates. Legislation should 
preclude any requirement that interest rate basis be related to the 
duration of plan liabilities or be taken from a yield curve.
    We are troubled by the Bush Administration's proposal to replace 
the 30-year Treasury bond rate permanently with rates taken from the 
corporate bond yield curve. This would effect a radical change in the 
underlying pension funding rules and have troubling consequences for 
workers, retirees and the future of defined benefit plans. Current 
pension funding rules are predicated on the use of a single, smoothed 
interest rate to measure all liabilities. The Administration's proposal 
would require each plan to use many different discount rates with no 
meaningful smoothing.
    Mandating the use of a yield curve, as the Administration has 
proposed, threatens to destabilize the voluntary defined benefit 
pension system. The Administration's yield curve proposal introduces 
substantial volatility into pension funding requirements because it 
eliminates the four-year weighted average smoothing of current law, 
relies on thin bond markets to determine rates for specific maturities, 
introduces the risk of an inverted yield curve and requires discount 
rates to change with what could be sudden changes in workforce 
demographics. All of these factors, which can translate into 
unpredictable plan contribution requirements, likely will weigh heavily 
on companies' willingness to continue to sponsor defined benefit plans. 
The predictability of a company's contributions is particularly 
important when comparing defined benefit plans to 401(k)s and other 
defined contribution plans. In the latter type of plan, companies not 
only can establish much more predictable contributions but also easily 
eliminate their contributions during economic downturns, as a number of 
prominent companies have done recently.
    Additionally, although the yield curve has been advertised as a way 
to improve the measurement of plan liabilities, it would not result in 
a more accurate measurement of plan liabilities and particularly would 
penalize many mature companies and their workers. The Administration's 
stand-alone yield curve mandate ignores other critical factors that 
determine the size and duration of a plan's liabilities. Most 
significantly, this approach neglects to account for the impact of 
certain critical differences in the mortality rates of plan 
participants on the measure of liabilities. An extensive study of the 
mortality of individuals covered by pension plans clearly shows that 
there are significant differences in mortality rates between blue-
collar and white-collar workers. In fact, whether an individual is an 
hourly or salaried worker is a more important predictor of mortality at 
age 65 than gender. Failure to incorporate the use of collar-based 
mortality adjustments in the Administration proposal penalizes a great 
many plans because their participant populations are relatively mature 
and predominantly blue collar. As a result, the Administration's 
proposal would distort the measurement of their liabilities. This would 
have troubling consequences, in particular, for workers at 
manufacturing companies, many of which already are under enormous 
financial stress. It is worth noting that the manufacturing sector has 
lost more than two million jobs in recent years.
    We believe it is critically important that Congress act now to 
provide an appropriate replacement for the 30-year Treasury bond rate, 
which protects the security of workers' pensions while promoting and 
maintaining the stability and sponsorship of defined benefit plans.
    We greatly appreciate the opportunity to present our views on this 
important matter.

                                


              Statement of the American Society of Pension
                     Actuaries, Arlington, Virginia

    The American Society of Pension Actuaries (ASPA) appreciates this 
opportunity to submit its views in connection with this joint hearing 
that has been called to examine pension security and defined benefit 
plans, with a special focus on the Bush Administration's proposal to 
replace the 30-year Treasury rate as the benchmark for calculating 
required contributions to defined benefit plans and lump sum payouts 
from defined benefit plans.
    ASPA is a national organization of over 5,000 retirement plan 
professionals who provide consulting and administrative services for 
qualified retirement plans covering millions of American workers. The 
vast majority of these plans are maintained by small businesses. ASPA 
members are retirement plan professionals of all types, including 
consultants, administrators, actuaries, and attorneys. ASPA's 
membership is diverse, but united by a common dedication to the private 
pension system.
    We applaud the Subcommittees and the full Committees for their 
leadership in exploring these important issues. We also commend the 
Subcommittees and the full Committees for their demonstrated commitment 
to maintaining the framework of laws upon which is built a strong, 
employer-based system of providing retirement income benefits to our 
nation's workers.

The Yield Curve: Further Details, Further Study
Comprehensive Review Required

    On July 7, 2003, the Administration announced significant proposals 
to change some of the rules for funding single-employer defined benefit 
plans. The proposals as they are currently available are summarized 
below. However, it is important to note that at this stage, Treasury is 
still working on some important details. The centerpiece of the plan is 
a proposal to replace the 30-year Treasury bond rate as an interest 
rate benchmark for purposes of calculating the deficit reduction 
contribution and lump sum distributions with a corporate bond interest 
rate based on a yield curve (i.e., a duration-matched discount rate).
    ASPA congratulates the Administration for its willingness to 
address these important issues. Specifically, ASPA welcomes the 
Administration's acknowledgement of a corporate bond rate as 
conceptually an appropriate replacement for the 30-year Treasury bond 
rate.
    ASPA is currently studying the Administration's proposals. Until 
all of the details are revealed, it is difficult to reach ultimate 
conclusions. After further review, ASPA may very well conclude that a 
yield curve approach, appropriately refined, is a reasonable approach 
to replacing the 30-year Treasury bond rate. However, ASPA strongly 
believes that a significant change to the funding rules, such as the 
yield curve proposal, should only be considered in the context of a 
complete review and possible additional revisions respecting the 
overall funding rules.
    ASPA's initial conclusion is that while a yield curve approach may 
be more theoretically correct, as the Administration asserts, there are 
other aspects of the funding rules that likely could also be refined to 
be more theoretically correct. ASPA believes all these elements should 
be examined together, comprehensively.
    For example, mortality tables could certainly be updated. It may be 
appropriate to allow plans to use mortality tables that are better 
tailored to the specific demographics of the plan. For example, H.R. 
1776, the new pension reform bill introduced by Representatives Rob 
Portman (R-OH) and Ben Cardin (D-MD), would permit the use of ``blue 
collar/white collar'' mortality tables in certain circumstances. 
Further, duration matching concepts might be appropriate for purposes 
of asset valuation. Similarly, asset smoothing techniques and 
amortization periods for experience gains and losses probably should be 
reconsidered. Additionally, there is a need to discuss rules that would 
allow plan sponsors to better fund their plans in advance when they 
have the resources to do so. ASPA is in the process of examining these 
and other issues.
    A critically important aspect of any overall review of the funding 
rules must also include consideration of the potential impact on 
defined benefit plan coverage. Defined benefit plan coverage in this 
nation is threatened. Some three quarters--75 percent--of our nation's 
workforce is not covered by a defined benefit plan. Although some of 
these workers, if they are fortunate enough, are at least covered by a 
defined contribution plan, like a 401(k) plan, most of the nation's 
workforce does not enjoy the security of a guaranteed level of post-
retirement income.
    Recent stock market declines clearly highlight the difference 
between a defined benefit plan and a defined contribution plan, in 
which participants bear the risk of investment losses. According to a 
recent study by the Employee Benefit Research Institute, a three-year 
bear market immediately prior to retirement can significantly reduce 
income replacement rates generated by 401(k) plan accounts. This is not 
an issue for defined benefit plans, which provide a guaranteed monthly 
retirement benefit for employees. A defined benefit plan's guarantee of 
a specific level of post-retirement monthly income provides a strong 
retirement policy justification for encouraging defined benefit plan 
coverage. Consequently, any defined benefit plan funding reform and 
related proposals must carefully balance potentially expected burdens 
against perceived benefits. In fact, given the importance of promoting 
defined benefit plan coverage ASPA believes that any proposed increased 
burden on defined benefit plans must be justified by a compelling 
policy rationale.

        Interim Benchmark Should Replace 30-Treasury Rate Until
         Completion of a Comprehensive Review of Funding Rules

    In the July 7 proposal, the Administration indicates that it 
supports comprehensive funding reform and is currently reviewing the 
appropriateness of current mortality tables. It is also considering 
possible incentives for more consistent annual funding requirements. 
However, Treasury says it views these issues as follow-up issues, a 
second step to follow enactment of the yield curve proposal. By 
contrast, ASPA believes these issues should be considered together, so 
that the potential for their combined effect on defined benefit plan 
coverage can be examined. Consequently, ASPA believes the yield curve 
rules should not be instituted before consideration of other possible 
changes to the funding rules.
    Thus, it is ASPA's view that a 4-year weighted average corporate 
bond rate should be enacted as a substitute for the 30-year Treasury 
bond rate. This interim approach should endure for several years, until 
a formal study can be conducted to develop proposals for comprehensive 
funding reform. In fact, ASPA would suggest a joint Administration/
Congressional commission, with private sector input, to study all 
pension funding reform issues.
    ASPA believes the interim 4-year weighted average corporate bond 
rate measure should be based on the provision included in H.R. 1776, 
the Portman-Cardin pension reform legislation. The relevant provision 
in H.R. 1776 would replace the four-year weighted average 30-year 
Treasury bond rate with a four-year weighted average corporate bond 
rate. Treasury would determine the rate, using a blend of indices 
reflecting high-quality long-term corporate bonds. The Portman-Cardin 
provision would also apply a spot corporate bond rate to lump sum 
distributions. The spot corporate bond rate would begin in the third 
year after enactment, and would be fully phased in over the subsequent 
five years. ASPA suggests applying a similar provision to any short-
term measure in advance of comprehensive funding reform.
    Further, ASPA supports the Portman-Cardin provision to fix the 
interest rate at 5.5 percent for calculating the lump sum Internal 
Revenue Code Section 415 defined benefit limit. ASPA encourages 
Congress to enact this provision immediately. This provision is 
particularly important to ensure sounder funding of small business 
defined benefit plans. ASPA strongly urges that the fixed 5.5 percent 
rate for calculating the lump sum 415 defined benefit limit be included 
in any defined benefit plan funding legislation enacted by Congress 
this year.
    Congress has been considering a replacement for the 30-year 
Treasury bond rate for some time. Presently, for purposes of the 
deficit reduction contribution, plans can use up to 120 percent of the 
4-year weighted average of 30-year Treasuries. However, this rate is 
scheduled to revert to 105 percent after the 2003 plan year. Thus, it 
is critical that Congress act to address this issue this year.

Summary of Bush Administration Proposals 1

    \1\ The Administration's proposals as announced only apply to 
single employer plans and have no impact on multiemployer plans. The 
proposals were announced in the form of a white paper and there is some 
likelihood that, in addition to further technical details, items 
discussed in the proposal may change.
---------------------------------------------------------------------------
            Funding and Lump Sum Changes

    For purposes of calculating the deficit reduction contribution 
(DRC) under Section 412(l) the 4-year weighted average 30-year Treasury 
bond interest rate would be replaced with a ``yield curve discount 
rate'' which would be fully phased in after four years. Beginning with 
the 2004 plan year and ending with the 2005 plan year, a 4-year 
weighted average of a corporate bond rate would be used. Treasury would 
determine the rate by blending various high-quality corporate bond 
indices reflecting bonds of maturities of at least 20 years. Beginning 
with the 2006 plan year, two-thirds of current liability for purposes 
of the DRC would be determined using this corporate bond rate and one-
third would be determined using a yield curve. For purposes of the 2007 
plan year, these percentages would flip. For the 2008 and later plan 
years, the current liability would be determined entirely based on the 
yield curve. It is important to note that the yield curve would not 
reflect 4-year weighted averages, and would be, to some degree, a spot 
rate.
    Although the technical details of the proposal have not been 
released, it is our understanding that the yield curve would be applied 
to projected future cash flows, which would then be discounted using an 
interest rate based on the yield curve. In other words, each year's 
projected future cash flows would be discounted using a different 
interest rate. The actual mechanics of this have not yet been ironed 
out. The Administration is asking for broad regulatory authority to 
address the details. ASPA believes that it would be overly burdensome, 
if not impossible, to value every participant's benefit individually 
and thus some averaging techniques must be allowed.
    Calculation of lump sums would be done using the same rules as 
current law for the 2004 and 2005 plan years (i.e., the spot 30-year 
Treasury bond rate). For the 2006 and 2007 plan years, a phase-in 
between the 30-year Treasury bond rate and a yield curve approach 
similar to the one described above for purposes of calculating current 
liability would apply. For the 2008 and later plan years, lump sums 
would be calculated entirely under a yield curve approach. Thus, the 
interest rates for workers electing lump sum distributions closer to 
normal retirement age will be lower (and thus more valuable) than for 
younger workers.
    The Administration's proposal does not address the issue of the 
interest rate used for purposes of determining the defined benefit plan 
limit under Internal Revenue Code Section 415 for a lump sum 
distribution. ASPA urges both Congress and Treasury to establish a 
fixed rate--5.5 percent would be appropriate--for this purpose.

            Increased Disclosures

    Beginning with the 2004 plan year, all plans would have to disclose 
the value of plan assets and liabilities on a termination liability 
basis in their summary annual report. It is unclear under what basis 
termination liability would be measured for this purpose.
    ASPA has concerns about this termination liability disclosure 
proposal, particularly the burden it would place on plans that are 
otherwise well funded. It is further unclear what is accomplished by 
this proposal, given that such disclosure and notices are already 
required to be given to plan participants in the case of under funded 
plans under Title IV of ERISA. ASPA believes the very real burden that 
would be imposed on plan sponsors by such a disclosure rule would 
substantially outweigh any perceived benefit of such a rule in terms of 
additional information to participants.
    Beginning with the 2004 plan year, plans required to submit 
financial data to the PBGC under ERISA Section 4010 would have to make 
available to the public, upon request, a certain amount of such 
information respecting the plan. The specific information that would be 
required has not yet been specified.
    Beginning with the 2006 plan year, plans would have to disclose in 
the summary annual report their current liability (for purposes of the 
deficit reduction contribution) determined entirely based on the yield 
curve.

            LBenefit Restrictions for Severely Underfunded Plans with a 
            Threatened Plan Sponsor

    Where (1) a plan's funding ratio falls below 50 percent of 
termination liability (probably using a Title IV standard) and (2) 
where the plan sponsor has a junk bond or similar credit rating or the 
plan sponsor has declared bankruptcy, the plan would no longer be able 
to accrue additional benefits (no accruals from additional service, 
age, or salary growth plus any benefit improvements) and would no 
longer be able to pay lump sums unless the plan sponsor contributes 
cash or provides security to fully fund the added benefits or lump 
sums. This is a restrictive rule--perhaps overly restrictive--for those 
plans subject to it, although it is unclear how many plans would be 
affected. The restriction on lump sums can be seen as punitive from the 
standpoint of innocent participants who suddenly lose the ability to 
elect a lump sum distribution, particularly from a threatened plan. In 
addition, ASPA believes that there are tens of thousands of defined 
benefit plans maintained by plan sponsors who have not issued bonds and 
thus do not have a bond credit rating. ASPA encourages both the 
Administration and Congress to consider alternative credit standards 
for such plans. ASPA would be pleased to further discuss this issue and 
our accompanying concerns with the key policymakers in this process.

            Other Funding Reforms

    Finally, the Administration indicates that it is also reviewing 
other possible defined benefit plan funding reforms. The July 7 
proposal states that Administration personnel are considering ``the 
proper establishment of funding targets, appropriate assumptions for 
mortality and retirement age, and incentives for more consistent annual 
funding.'' ASPA concurs that these issues merit further study and 
recommendations for modification, and believes such study and 
recommendations should come before the establishment of a yield curve 
to replace the 30-year Treasury rate as the benchmark rate for defined 
benefit plan calculations. ASPA disagrees with the Administration's 
insistence that its yield curve proposals should be enacted 
immediately, before consideration of these other possible reforms. ASPA 
strongly urges Congress to undertake the necessary comprehensive review 
of all pension funding rules before enactment of significant reforms.

Summary and Conclusion

    ASPA believes the Administration's yield curve proposal for 
establishing a new and better benchmark interest rate for purposes of 
calculating the deficit reduction contribution and lump sum 
distributions holds some promise as the best way to solve the current 
pension funding crisis confronting defined benefit plan sponsors. 
However, ASPA strongly believes that pension funding issues are crucial 
to an employer's decision to establish a defined benefit plan--and that 
defined benefit plans are superior mechanisms for providing retirement 
income security to our nation's workers. Consequently, ASPA believes it 
is necessary to conduct a comprehensive review of all pension funding 
issues prior to the enactment of a permanent change to the benchmark 
interest rate.
    At the same time, however, ASPA knows it is imperative to establish 
a new benchmark interest rate to replace the 30-year Treasury bond 
rate. Because Treasury has stopped issuing 30-year bonds, the 30-year 
bond interest rate no longer works as a viable measure for calculating 
pension funding issues. Any failure to establish a stable replacement 
rate threatens employers' ability and willingness to continue their 
defined benefit plans.
    Accordingly, ASPA urges Congress to enact an interim replacement 
benchmark rate. ASPA supports the long-term corporate bond rate 
mechanism contained in H.R. 1776 as the appropriate interim rate. 
Further, ASPA supports the formation of a Congressional-Administration-
Private Sector commission to study and make recommendations on overall 
pension funding issues, prior to the enactment of a permanent 
replacement benchmark rate. ASPA believes there is potential for the 
Administration's yield curve proposal, but that further study--both 
with respect to still-undetermined and important details of how it 
would work, and with respect to its interaction with other pension 
funding rules--is necessary before the yield curve can be definitively 
judged.
    ASPA would be pleased to provide further input and/or to answer any 
questions

lawmakers may have as they grapple with this important and complex 
issue. ASPA also thanks the Committees for this opportunity to provide 
our views.

                                

    Statement of the Honorable John A. Boehner, a Representative in 
                    Congress from the State of Ohio
    I'd like to thank the witnesses for coming to testify on this very 
important subject. Strengthening the pension security of American 
workers is a top priority for this Congress, and today's hearing is the 
second in a series held by the Education & the Workforce Committee that 
examines the health of defined benefit pension plans, the type that 
promise to pay a specific monthly benefit to workers when they retire.
    Thirty-year Treasury interest rates and pension funding 
calculations are all obscure and arcane topics to working families, but 
our goal here couldn't be more simple: To strengthen the retirement 
security of American workers by protecting the retirement savings that 
workers expect from their defined benefit pension plans.
    The financial health of defined benefit plans is a critical issue 
for millions of workers, and the funding of these plans has become more 
challenging for many companies because of low interest rates, a 
sluggish economy, stock market losses, and an increasing number of 
retirees.
    As a result, the number of employers offering defined benefit 
pension plans has declined from 112,000 in 1985 to just more than 
30,000 last year. Some employers have even frozen or terminated their 
pension plans altogether.
    The lack of a suitable, long-term replacement to the 30-year 
Treasury interest rate could jeopardize employers' willingness to 
continue their commitment to defined benefit pension programs. Solving 
this problem not only means providing greater certainty and relief to 
beleaguered employers, but more importantly strengthening the 
retirement security of millions of working families who rely on the 
safe and secure benefits that defined benefit pension plans provide.
    While I am pleased that the Bush Administration has come forth with 
a proposal, we must consider its potential ramifications on employers, 
workers, and their families. That is the reason we are here today. We 
have an obligation to help ensure that the pension benefits promised to 
working families will be there when they retire.
    I'd like to thank the Ways & Means Committee, and specifically 
Chairmen Thomas and McCrery, for their work on this issue. I look 
forward to working with them and the rest of my colleagues as we move 
ahead.

                                

  International Union, United Automobile, Aerospace & Agricultural 
                                       Implement Workers of America
                                               Washington, DC 20036
                                                      July 10, 2003
Honorable John A. Boehner
Chairman, House Education and the Workforce Committee
2181 Rayburn House Office Bldg.
Washington, D.C. 20515

Honorable George Miller
Ranking Member, House Education and the Workforce Committee
2101 Rayburn House Office Bldg.
Washington, D.C. 20515

Honorable Bill Thomas
Chairman, Committee on Ways and Means
1102 Longworth House Office Bldg.
Washington, D.C. 20515

Honorable Charles Rangel
Ranking Member, Committee on Ways and Means
1106 Longworth House Office Bldg.
Washington, D.C. 20515

    Dear Chairman Thomas and Ranking Member Rangel:

    The Treasury Department recently released its long awaited proposal 
for replacing the 30-year treasury rate for purposes of calculating 
pension plan liabilities. Unfortunately, this proposal would have 
serious negative consequences for workers, retirees and employers, as 
well as the continuation of defined benefit pension plans. Accordingly, 
the UAW strongly urges you to reject this misguided proposal.
    The Treasury proposal would peg the new interest rate assumption 
for calculating pension liabilities for two years to a blend of 
corporate bond rates. However, following that brief transition period, 
the proposal would quickly phase in a yield curve under which the 
interest rate assumption would vary based on the age of the plan 
participants and the number of retirees. The UAW is very troubled by 
this yield curve proposal for a number of reasons.
    First, the yield curve proposal is enormously complex, and would 
greatly increase the administrative burdens on plan sponsors. Instead 
of having a clearly defined interest rate assumption that would be 
known in advance, plan sponsors would be forced to utilize an 
assumption that could vary from year to year, depending on the precise 
age and retirement status of the plan participants. The volatility and 
lack of certainty inherent in this approach would negatively impact 
plan sponsors, and would inevitably discourage them from continuing 
defined benefit plans.
    Second, the yield curve proposal would not lead to more 
``accuracy'' in pension funding. Indeed, it ignores other factors that 
have a major impact on the timing of pension obligations, such as the 
mortality of the plan participants. It is noteworthy, in this regard, 
that the Treasury Department proposal fails to incorporate the 
recommendation made by the American Academy of Actuaries that plan 
sponsors be allowed to adjust their mortality assumptions to reflect 
differences between blue and white collar plan participants.
    Third, and most importantly, the yield curve proposal would 
severely penalize older manufacturing companies that have larger 
numbers of older workers and retirees. As a result, it could force 
these companies to cut back pension benefits for their workers and 
retirees, or even to terminate their pension plans. It could also lead 
to sharp cut backs in retiree health care and other critically 
important benefits. And there is also a substantial danger it could 
result in more layoffs and plant closings. Thus, the yield curve 
proposal would be bad for workers and retirees in the manufacturing 
sector, as well as their employers.
    The manufacturing sector has been extremely hard hit by the recent 
economic downturn, having already lost more than 2 million jobs. The 
UAW submits it makes absolutely no sense to penalize companies in this 
sector, by imposing enormously burdensome pension requirements on them. 
This will not lead to better funding of their pension plans. Instead, 
it simply will hurt workers and retirees by forcing benefit cut backs, 
plan terminations, layoffs and plant closings.
    Instead of this misguided yield curve proposal, the UAW urges 
Congress to adopt a straightforward proposal that permanently replaces 
the 30 year treasury rate with a new interest rate assumption based on 
a high-quality corporate bond index or composite of indexes, with the 
highest permissible rate of interest being 100 percent of the four year 
weighted average of that rate. This approach has support in both the 
employer and labor communities, as well as bipartisan support in 
Congress. It is administratively simple, and will provide plan sponsors 
with the certainty and stability that is so important. In addition, it 
would approximate the rate for purchasing annuities, which we believe 
is the appropriate benchmark for protecting the security of pension 
benefits for workers and retirees and assuring that pension plans are 
adequately funded. Finally, it would treat all plan sponsors the same, 
and would not penalize older manufacturing companies.
    The UAW believes it is extremely important that Congress act 
promptly to provide an appropriate replacement for the 30 year treasury 
rate for purposes of calculating pension liabilities. We urge you to 
reject the Treasury Department's yield curve proposal, and instead to 
adopt the straightforward corporate bond proposal described above. 
Thank you for considering our views on this critically important issue.

            Sincerely,
                                                       Alan Reuther
                                               Legislative Director

                                

                                                     March of Dimes
                                               Washington, DC 20036
                                                      July 14, 2003
The Honorable Robert E. Andrews
Ranking Member, Subcommittee on Employer-Employee Relations
Committee on Education and the Workforce
United States House of Representatives
Washington, DC 20515

    Dear Representative Andrews:

    On behalf of 1,500 staff and over 3 million volunteers nationwide, 
I am writing to thank you for holding a joint hearing on pension 
security and defined benefit plans. The Foundation urges you to act 
quickly to provide relief to defined benefit plans and to protect the 
pensions of current and future plan participants.
    The March of Dimes is a nonprofit organization working to improve 
the health of mothers, infants and children by preventing birth defects 
and infant mortality through research, community services, education, 
and advocacy. The March of Dimes sponsors a defined benefit pension 
plan for its employees, which serves as an important tool for 
attracting and retaining high-caliber employees who are committed to 
the mission of the March of Dimes.
    Like many other employers, the March of Dimes is concerned about 
funding pressures that are straining the stability of the nation's 
defined benefit pension system. One of the primary sources of this 
funding pressure is tied to the required use of an obsolete interest 
rate--the 30-year Treasury bond rate--as the benchmark for a variety of 
pension calculations, including those involving pension liabilities, 
pension insurance premiums, and lump-sum distribution calculations. 
Fortunately, there are positive steps that Congress can take to address 
these funding pressures and enable employers, including the March of 
Dimes, to provide financially sound pension programs. First and 
foremost, there is an urgent need to enact a permanent and 
comprehensive replacement for the 30-year Treasury bond rate, which can 
be achieved by promptly enacting the provision included in the Pension 
Preservation and Savings Expansion Act (H.R. 1776), recently introduced 
by Representatives Portman and Cardin. Their proposal offers a balanced 
and carefully structured solution to a complicated and urgent pension 
funding problem.
    If retirement plans such as the March of Dimes defined benefit plan 
are to remain viable as a long-range planning tool providing retirement 
income security for current and future employees, Congress must take 
quick action to relieve the very real funding pressures now faced by 
these plans. Thank you for your ongoing efforts on behalf of the 
employees of the March of Dimes and other tax-exempt organizations. 
Please call on us if we can be helpful in moving this bill to enactment 
this year.

            Sincerely,
                                             Marina L. Weiss, Ph.D.
           Senior Vice President Public Policy & Government Affairs

                                


    United Airlines Master Executive Council of the Air Line Pilots
                                         Association, International
                                           Rosemont, Illinois 60018
                                                      July 15, 2003
U.S. House of Representatives
Committee on Ways and Means
Washington, DC 20515

    My name is Captain Paul Whiteford, Chairman of the United Airlines 
Master Executive Council of the Air Line Pilots Association, 
International. In this capacity, I represent more than 13,000 active, 
furloughed and retired pilots at United. I have been a pilot with 
United for 25 years and was proud to serve our country as a pilot in 
the US Air Force from 1973-1974 during the Vietnam conflict. I also am 
proud to represent the pilots at United, one of the hardest working and 
most professional groups of men and women in the airline industry 
today. United workers have suffered enormous hardships in the past few 
years, punctuated by the loss of two of our aircraft and our crew and 
passengers in the September 11th terrorist attacks. In addition to 
enduring the emotional turmoil of September 11th, our pilots have 
agreed to a base wage reduction of 30% and when you take into 
consideration that the majority of our pilots have been demoted to 
lesser paying jobs in the system, the fact is that many of us have seen 
our take home wages reduced by more than 40%. We have seen our benefits 
reduced, been forced to relocate, taken furloughs--all with the goal of 
sustaining the airline and delivering a safe and secure vital service 
to our fellow citizens.
    Speaking on behalf of these men and women, it is an honor to submit 
testimony to this joint hearing of the Select Revenue Measures 
Subcommittee of the Committee on Ways and Means and the Employer-
Employee Subcommittee of the Committee on Education and the Workforce. 
Exploring and finding a solution to the pension-funding crisis facing 
the airline industry today is a critical priority for our membership.
    I want to first commend the Bush Administration and the Department 
of Treasury on its current proposal to extend existing pension funding 
relief provisions, set to expire this year, for two more years. This 
provision lets under funded plans use the corporate bond rate as a 
replacement for the 30-year Treasury bonds for a variety of defined 
benefit pension calculations. It is our belief that this proposal will 
go a long way toward solving some of the more immediate pension funding 
issues in the airline industry, including the situation at my employer, 
United Airlines, which has been operating under the protection of the 
bankruptcy court since late 2002. We think addressing this issue is the 
right strategy and certainly the right first step. However, we also 
believe this proposal alone will not fix America's troubling pension 
problem.
    We believe pension reform must be expanded beyond this initial 
step. I want to offer my voice, the voice of 13,000 pilots at United, 
all of whom are joining the voices of our fellow 66,000 pilot members 
of the Air Line Pilots Association in asking Congress to go further and 
enact legislation that would provide air carriers with a temporary 
exemption from certain pension funding rules. Without this help, we are 
very concerned about the survival of the industry. This industry has 
been devastated by the events of September 11th, the global recession, 
the spike in oil prices, the Iraq war and the SARs virus . . . all 
issues beyond our control.
    I am pleased to say that on this issue, our union stands alongside 
United's management in our shared commitment to solve the pension 
funding issue. In my experience, labor and management do not always 
share points of view on pension reform or other negotiated matters. I 
would hope the Members present at today's joint hearing would 
appreciate the common platform and bond that my members share with the 
leadership at United and the other major carriers on this issue.
    Before we get to the specifics of the legislative solution we 
propose, let me take a moment to paint a quick backdrop on the airline 
industry and the history of pension funding.
    Each of the major airlines has sponsored defined benefit pension 
plans. These are for pilots, other unionized employees and management. 
At the end of 1999, airline industry defined pension plans held about 
$33 billion in assets to support about $32 billion in projected 
benefits obligations. The plans were, on average, approximately 102% 
funded. At the end of 2002, the major airlines had pension assets of 
about $26 billion to support projected benefits obligations of 
approximately $49 billion, creating a funding level equal to less than 
54%. This steep, short-term decline in funding levels is remarkable in 
its scope and is attributable to two central factors: three years of 
declining equity markets and the fact that market interest rates, used 
to discount pension liabilities, are at 40-year lows.
    During this period, the industry suffered from a serious and 
critical economic tailspin. Losses for the last two years are more than 
$20 billion and the industry is expected to lose another $8 to $13 
billion in 2003. United Airlines is in bankruptcy. US Airways recently 
emerged from bankruptcy. American Airlines is attempting to restructure 
outside of bankruptcy. Other carriers are facing significant economic 
pressure and may be forced into the bankruptcy arena.
    We fervently believe the major airlines need additional legislative 
relief at this critical time. Such relief would allow the industry to 
marshal its liquid assets to weather the current economic crisis, to 
remain out of bankruptcy (or in the case of United, emerge successfully 
from bankruptcy) and to retain a viable domestic airline industry. We 
expect that interest rates will return to historic norms and note that 
the equity markets are already showing signs of rebound, which should 
help restore more traditional rates of return. Because pension plans 
are long-term propositions, funding relief is appropriate to give time 
for these abnormal market factors to correct and for the airlines and 
their unions to explore other means of reducing under funded pension 
plans.
    Before I outline our proposal, I want to let the Members present 
know that we have been very focused on what we can do to reduce 
United's pension funding commitments. In fact, during what was a series 
of very difficult negotiations in the Spring of 2003, we agreed to 
several significant changes in our pension structure. The defined 
benefit plan requires a monthly retirement payment to a pilot, which is 
the product of three factors: the pilot's years of service, a 
multiplier and his final average earnings. All three components have 
been changed in a way which reduces the pilot's pension and, therefore, 
the Company's pension obligations. Years of service, which previously 
were unlimited, are now capped at 30. The multiplier has been reduced 
from 1.5 to 1.35. And the final average earnings over time will reduce 
as a direct function of the lowering of the wages. Moreover, the pilots 
have agreed to reduce the Company's annual contribution to a companion 
defined contribution plan. These concessions substantially reduced our 
pension benefits by 35%, which equates to approximately $1.5 billion in 
pension funding reductions through 2008 alone.
    The proposal we support is very straightforward. It is designed to 
provide airlines with a temporary five-year moratorium from deficit 
reduction contributions for any plan with a funding percentage of less 
than 80%. Airlines still would be required to contribute at least the 
minimum funding contribution compelled under current statute, but would 
be exempted from the more onerous funding requirements included in 
current law. In addition, we are proposing that airlines be permitted 
to amortize existing minimum funding requirements over a new 15-year 
period, as opposed to the current five-year period. The proposal also 
clearly states that once the funding percentage for any pension plan is 
at least 90% for any plan year during this moratorium, the moratorium 
ends and the airline will be required to return to previous funding and 
amortization requirements.
    The significance of this proposal is worth reviewing. By affording 
the airlines an opportunity to conserve cash during this extreme 
cyclical trough, Congress will be ensuring the survival of the 
airlines, the continued employment of hundreds of thousands of airline 
workers, and protect the previously earned benefits of those already 
retired. It would avoid the devastating act of terminating defined 
benefit plans, many of which are under funded due to macro-economic 
shifts beyond the control of the airline or the unions. It is the right 
thing to do at the right time.
    In closing, I again applaud the Bush Administration and these two 
Subcommittees' efforts to find a solution that will solve today's 
pension funding crisis. We hope you will give serious consideration to 
our proposal on its merits and its intent. Thank you for this 
opportunity to present our perspective.

    Sincerely,
                                             Captain Paul Whiteford
           Chairman of the United Airlines Master Executive Council
                         Air Line Pilots Association, International

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