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

       EXAMINING LONG-TERM SOLUTIONS TO REFORM AND STRENGTHEN THE DEFINED
                            BENEFIT PENSION SYSTEM

    =======================================================================

                                    HEARING

                                   before the

                  SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS

                                     of the

                             COMMITTEE ON EDUCATION
                               AND THE WORKFORCE
                         U.S. HOUSE OF REPRESENTATIVES

                          ONE HUNDRED EIGHTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 April 29, 2004

                                   __________

                               Serial No. 108-55

                                   __________

      Printed for the use of the Committee on Education and the Workforce

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                    COMMITTEE ON EDUCATION AND THE WORKFORCE

                        JOHN A. BOEHNER, Ohio, Chairman

    Thomas E. Petri, Wisconsin, Vice     George Miller, California
        Chairman                         Dale E. Kildee, Michigan
    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, Staff Director
                     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

                                     ------
                                C O N T E N T S

                                  ----------
                                                                       Page

    Hearing held on April 29, 2004...................................     1

    Statement of Members:
        Andrews, Hon. Robert, Ranking Member, Subcommittee on
          Employer-Employee Relations, Committee on Education and the
          Workforce..................................................     3
        Johnson, Hon. Sam, Chairman, Subcommittee on Employer-
          Employee Relations, Committee on Education and the
          Workforce..................................................     1
            Prepared statement of....................................     3

    Statement of Witnesses:
        Ghilarducci, Teresa, Ph.D, Faculty of Economics, University
          of Notre Dame, Notre Dame, IN..............................    81
            Prepared statement of....................................    83
        Heaslip, Greg, Vice President, Benefits, PepsiCo, Inc.,
          Purchase, NY...............................................    17
            Prepared statement of....................................    18
        Iwry, J. Mark, Esq., Non-Resident Senior Fellow, The
          Brookings Institution, Washington, DC......................    21
            Prepared statement of....................................    24
        Kent, Kenneth A., Academy Vice President, Pension Issues,
          American Academy of Actuaries, Washington, DC..............     5
            Prepared statement of....................................     7
            Letter submitted for the record..........................    45
        Lynch, Timothy P., President and CEO, Motor Freight Carriers
          Association, Washington, DC................................    66
            Prepared statement of....................................    68
        Miller, John S. (Rocky), Jr., Partner, Cox, Castle &
          Nicholson LLP, Los Angeles, CA.............................    73
            Prepared statement of....................................    74

      EXAMINING LONG-TERM SOLUTIONS TO REFORM AND STRENGTHEN THE DEFINED
                             BENEFIT PENSION SYSTEM

                                  ----------

                            Thursday, April 29, 2004

                         U.S. House of Representatives

                   Subcommittee on Employer-Employee Relations

                    Committee on Education and the Workforce

                                 Washington, DC

                                  ----------

        The Subcommittee on Employer-Employee Relations met,
    pursuant to notice, at 10:32 a.m., in room 2175, Rayburn House
    Office Building, Hon. Sam Johnson [Chairman of the
    Subcommittee] presiding.
        Present: Representatives Johnson, Boehner, Wilson, Isakson,
    Kline, Carter, Andrews, Wu and Holt.
        Staff present: Stacey Dion, Professional Staff Member;
    Kevin Frank, Professional Staff Member; Ed Gilroy, Director of
    Workforce Policy; Molly Salmi, Deputy Director of Workforce
    Policy; Deborah Samantar, Committee Clerk/Intern Coordinator;
    Kevin Smith, Communications Counselor; Jo-Marie St. Martin,
    General Counsel; Jody Calemine, Minority Counsel Employer-
    Employee Relations; Margo Hennigan, Minority Legislative
    Assistant/Labor; Michele Varnhagen, Minority Labor Counsel/
    Coordinator.
        Chairman Johnson. A quorum being present the Subcommittee
    on Employer-Employee Relations of the Committee on Education
    and the Workforce will come to order.
        It's 10:30 and everybody is gone except two of us. The two
    stalwarts of the Congress, Rob Andrews and myself, and we
    appreciate you all's presence here this morning.

       STATEMENT OF HON. SAM JOHNSON, CHAIRMAN, SUBCOMMITTEE ON
      EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON EDUCATION AND THE
                               WORKFORCE

        Chairman Johnson. We're holding this hearing today to hear
    testimony on examining long-term solutions to reform and
    strengthen the defined benefit pension system. Under Committee
    rule 12B, opening statements are limited to the Chairman and
    ranking minority member of the Subcommittee. Therefore, if
    other members have statements, they will be included in the
    hearing record.
        With that, I ask unanimous consent for the hearing record
    to remain open for 14 days to allow members' statements and
    other extraneous material referenced during the hearing to be
    submitted in the official hearing record. Hearing no objection,
    so ordered.
        Good morning to you all and welcome to the Employer-
    Employee Relations Subcommittee. Less than 3 weeks ago
    President Bush signed into law, as you know, the Pension
    Funding Equity Act, and that new law changed the interest rate
    we use as a bench mark for calculating how much money a pension
    plan can expect to earn on its assets.
        Getting from introduction to enactment on that new law,
    took better than 6 months, and it wasn't a smooth or easy task,
    and that law expires in a year and a half or so. We just don't
    have time to sit back and relax and admire our handiwork. The
    job we have ahead of us is far more complex than simply
    replacing an interest rate.
        Chairman Boehner and I said repeatedly we were working to
    introduce legislation that will significantly reform and
    strengthen the defined benefit pension system, and with the
    assistance of my ranking member, Rob Andrews, in this difficult
    job we'll get it done.
        Over the last 20 years Congress has attempted several times
    to strengthen the defined benefit system, yet we're seeing
    record deficits at the Pension Benefit Guarantee Corporation,
    and under funding problems continue to threaten the future of
    the system.
        Fundamental questions of long-term pension plan solvency
    are at the top of the list for reform. Expanding the number of
    pension plans and individuals in the plans will be important
    for insuring that Americans' retirement will be financially
    secure. And among the thorniest of issues we will face is
    replacing the interest rate to be used for lump-sum
    calculations, because it's still currently based on the 30-year
    treasury, which hadn't been issued since 2001, as you're aware.
        If the interest rate chosen is too low, lump-sum
    distributions will be unjustifiably large at the expense of all
    other plan participants. However, if the rate is too high,
    those taking lump sums would be getting less than the
    equivalent of their annuity payment.
        Other issues, such as deductibility of pension plan
    contributions, are integral to this effort but will fall within
    the jurisdiction of the House Ways and Means Committee, and
    since I'm on that Committee, as well, I'll look forward to
    working with Chairman Thomas on those issues, and I'm sure that
    Rob can help me in that too.
        Mr. Andrews. Chairman Thomas or--
        Chairman Johnson. Well, can he? Last summer the Bush
    administration proposed some major changes to the way that
    assets and liabilities are measured, and some significant
    changes to notice requirements were included. We've already
    held a joint hearing on those proposals with the Ways and Means
    Committee. Today we're holding the seventh hearing on this
    issue.
        Our invited witnesses today will give us their suggestions
    on how this system could be improved. With that, I now yield to
    the distinguished ranking minority member of the Subcommittee,
    Mr. Rob Andrews.
        [The prepared statement of Chairman Johnson follows:]

       Statement of Hon. Sam Johnson, Chairman, Subcommittee on Employer-
          Employee Relations, Committee on Education and the Workforce

        Good morning and welcome to the Employer-Employee Relations
    Subcommittee.
        Less than three weeks ago, President Bush signed into law the
    Pension Funding Equity Act. That new law changed the interest rate we
    use as a benchmark for calculating how much money a pension plan can
    expect to earn on its assets. Getting from introduction to enactment on
    that new law took better than six months and it was not a smooth or
    easy task. That new law expires in about a year and a half.
        We do not have time to sit back and admire our handiwork. The job
    we have ahead of us is far more complex than simply replacing an
    interest rate.
        Chairman Boehner and I have said repeatedly that we are working to
    introduce legislation that will significantly reform and strengthen the
    defined benefit pension system. I welcome the assistance of my Ranking
    Member Rob Andrews and the full Committee Ranking Member George Miller
    in this difficult job.
        Over the last 20 years, Congress has acted several times in
    attempts to strengthen defined benefit system and prevent pension
    underfunding, yet significant underfunding problems continue to persist
    that threaten the future of the defined benefit system. Workers should
    be able to count on their pension benefits when they retire, so the
    importance of this project cannot be understated. The defined benefit
    system needs long-term reform, and we have an obligation on behalf of
    workers and employers to move forward and act responsibly.
        Fundamental questions of long-term pension plan solvency are at the
    top of the list for reform. Expanding the number of pension plans and
    workers in these plans will be important for ensuring that Americans'
    retirement will be financially secure. Among the thorniest of issues we
    will face, is replacing the interest rate used for lump sum
    calculations because it is currently based off of the 30-Year Treasury
    Bond which has not been issued since 2001. If the interest rate chosen
    is too low, lump sum distributions will be unjustifiably large at the
    expense of all other plan participants. However, if the rate is too
    high, those taking lump sums would be getting less than the equivalent
    of their annuity payment.
        Other issues, such as deductibility of pension plan contributions,
    are integral to this effort but will fall within the jurisdiction of
    the House Ways and Means Committee and I look forward to working with
    Chairman Thomas on those issues.
        Last summer, the Bush Administration proposed some major changes to
    the way that assets and liabilities are measured and funded as well as
    some significant changes to notice requirements. We held a joint
    hearing on those proposals with the Ways and Means Committee last July.
        Today we are holding the seventh hearing on the issue of defined
    benefit pension system reform. Our invited witnesses today will give us
    their suggestions as to how this system should be improved.
                                     ______

    STATEMENT OF HON. ROBERT ANDREWS, RANKING MEMBER, SUBCOMMITTEE
    ON EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON EDUCATION AND THE
                               WORKFORCE

        Mr. Andrews. Thank you, Mr. Chairman, and thank you ladies
    and gentlemen. I'd like to thank the witnesses for their
    efforts in being with us today. Let me also say a special word
    for the pension community, much of which is gathered in this
    room this morning. We appreciate the diligence, substantive
    depth that the ladies and gentlemen who work on this issue
    bring to this process. I know both sides of the aisle have
    benefited from your advocacy and from the hard work that you
    do.
        I enjoy this area because it is one of the areas of the law
    and policy where partisan divisions are not self-evident and
    need not be self-limiting, and I hope that we can approach this
    morning's hearing in that spirit.
        We face two significant paradoxes in the pension law of our
    country. The first is that the plans that are the strongest and
    most dependable in our pension world are the ones that are
    receiving the least number of new adherents and new enrollees
    and, in fact, are losing ground. Those are defined benefit
    plans.
        We did a lot of hearings in this Committee in the wake of
    the Enron and WorldCom scandals, and they were scandalous and
    painful episodes indeed. It's important to remember that the
    pension scandals that have dominated the first couple of years
    of this decade came in defined contribution plans; self-
    directed defined contribution plans not in defined benefit
    plans. Defined benefit plans are solid as a rock, and that is
    something to celebrate and be very proud of.
        So I think that the first principle that we should apply in
    assessing the law that governs defined benefit plans is the
    Hippocratic Oath; we should first do no harm to a system that
    is very solid and very dependable for millions of retirees and
    their families.
        The paradox is that these plans are so dependable but
    they're becoming so rare. Virtually no one is signing up to
    create a new one, and many employers are withdrawing from the
    ones that they are already in. And one of the issues that I
    want to explore in these hearings is why that is and what we
    can do about it.
        I don't think we should ever mandate or coerce any union or
    any group of employers or any single employer to move toward
    defined benefit plans, but I think that we need to create an
    environment where that remains a viable choice. And I fear that
    that's not the environment that we're living in today.
        The second paradox is that at a time when Americans are
    living longer and going to be requiring more of their private
    assets to maintain their standards of living there are 69
    million American workers who have no private pension coverage
    at all. In 1999, Congressman Owens and I requested that the
    General Accounting Office do an assessment of the number of
    American workers who have no private coverage at all, and that
    was the report that the GAO gave us.
        Now, that is both material to today's discussion but also
    separate from today's discussion. Obviously, legal parameters
    that would make it more attractive for employers and unions and
    employee groups to create pension plans will reduce the number
    of those without a pension. But I believe that those incentives
    alone are not sufficient to address the concerns of workers who
    are in low-margin industries, at low salaries, whose employers
    may well have the desire to fund a pension for those workers
    but don't have the discretionary net income to do so.
        Although it's within jurisdiction of my friends of the Ways
    and Means Committee, it's important that we keep in mind the
    various proposals that have been made for refundable tax
    credits for low-income workers, so that we can vigorously
    subsidize savings for workers who do not have a private
    pension.
        The paradox, again, is that the miracle of medical
    technology means that many Americans are going to be living to
    be 90 or 100 years old. Now, the fastest growing demographic in
    the 2000 Census was the cohort of people between 80 and 90
    years of age. That grew by 33 percent relative to the 1990
    Census, which I think is great news for all of us.
        The problem is that we have a pension system that's still
    rather predicated on the idea that you're going to live for
    about 7 years after you retire. Happily, that's no longer the
    case, but we're heading toward a day when we're going to have
    an awful lot of retirees living at or near the poverty line or
    beneath it. And one of the ways to confront that problem is to
    have a more robust and inclusive pension system.
        So I look forward to having these and other questions
    addressed, and I, again, thank both panels of witnesses for
    their time this morning.
        Chairman Johnson. Thank you. I appreciate your comments,
    and I tell you what. It is important to note that I think the
    insurance industry has already moved their final, you know,
    date at which they stop collecting and figuring things from
    about 96 or 100 to 120. So, you know, it surprised me a little
    bit, because the doc told me I was only going to live to 104.
    Longer, huh, OK.
        Well, let's get started. Our first panel for today's
    hearing will focus on reforms to the single employer pension
    system, and they are Kenneth Kent, who is vice-president for
    pension issues of the American Academy of Actuaries. Greg
    Heaslip, who is vice-president for benefits at PepsiCo, Inc.
    Mark Iwry, who is non-resident single--or excuse me--senior
    fellow of the Brookings Institution.
        I'll introduce the second panel after they're seated, and
    before the witnesses begin the testimony, I'd like to remind
    members that we'll ask questions after the entire panel has
    testified. In addition, the Committee rule two imposes a 5-
    minute limit on all questions. And there are lights down there,
    which will be green, yellow, and red, which will indicate to
    you five, one, and zero. So I'd appreciate your remarks
    remaining within the 5-minute limit, as well.
        I'll recognize you at this time. Go ahead, Mr. Kent.

     STATEMENT OF KENNETH A. KENT, ACADEMY VICE-PRESIDENT, PENSION
         ISSUES, AMERICAN ACADEMY OF ACTUARIES, WASHINGTON, DC

        Mr. Kent. Thank you, Chairman Johnson, Ranking Member
    Andrews, and distinguished Committee members. Thanks for the
    opportunity to testify today on pension reform and thanks for
    that introduction.
        I'm here representing the American Academy of Actuaries.
    The Academy is a non-partisan, public policy organization for
    all actuaries in the United States. In my testimony today I'll
    address three items--the need for reform; the Academy's
    principles for reform; and opportunities for change in our
    system of benefit delivery.
        Do we need reform? The need is evident by the continuing
    decline in the number of defined benefit plans. Defined benefit
    programs are a fundamental vehicle for providing financial
    security for millions of Americans. Unlike other programs, they
    provide lifetime benefits to retirees, no matter how long they
    live and regardless of how well they do on their individual
    investments.
        However, recent market conditions of low interest rates and
    low market returns have caused more dramatic declines in the
    number of covered employees. There are many contributing
    factors, including regulatory and administrative burdens
    derived from years of amendments to ERISA, which have had a
    long-term detrimental impact. These programs need your support
    through major reform of the current laws.
        Our reform principles. Leading actuaries volunteered their
    time and intellectual capital to create a framework of
    principles for funding reform. We will be publishing a paper,
    presenting many of the ideas on how these principles can be
    addressed, some of which are included in the summary that is
    attached to my statements.
        Let me briefly describe the six principles. Solvency. This
    should be a fundamental objective of funding reform. The rules
    should move us to a point where assets cover liabilities. They
    should also address and reward responsible corporate behavior.
        Predictability. Contributions should be more predictable so
    they can be budgeted in advance. Excessive precision at the
    cost of rational predictable results can be expensive for
    employers and detrimental to employees.
        Transparency. Users of the information should be able to
    understand the current financial position of the pension plan.
    However, we should not confuse the need for financial
    disclosure with the measurements to identify long-term funding
    obligations.
        Flexibility. Sponsors should be encouraged to fund their
    plans better by allowing them to buildup margins in their plans
    without deduction and excise tax problems and providing excess
    surplus for other employee benefit purposes without reversion
    tax.
        Simplicity. The rules should be easier to understand and
    comply with. And, transition, sponsors need a smooth transition
    to the new rules so that they are not forced into freezing or
    terminating their pension plans.
        Reform is also an opportunity to bring our retirement
    system in line with the changing demographic and global
    business model. There are five areas that can help. Put hybrid
    plans back on the table. Their popularity stems from an ability
    to meet the needs of participants and employers alike,
    especially, within some industries.
        Provide phased retirement. Our workforce can use this
    gradual retirement process which makes these provisions a win,
    win for employers and employees. Mirror the opportunity
    available in defined contribution plans by allowing employee
    deductible contributions to defined benefits plans and allow
    employees access to purchase lifetime income through their
    employer plans.
        Provide portability. Multi-employer plans provide one-time-
    tested-effective model. IRAs go part way but the challenge is
    portability of annuity-type benefits to preserve the intended
    security. Defined benefit plans have a critically different
    function for retirement security over lump sums through
    investment and longevity risk pooling.
        Update the standard retirement age. In the 1930's when life
    expectancies were much lower, age 65 was defined. Clearly, our
    society has changed, and this target should be changed to
    better align the expectations of the workforce today and in the
    future.
        I appreciate the opportunity to participate in this process
    on behalf of pension actuaries who have dedicated their careers
    to helping sponsors provide employees' retirement security. To
    this end, we're currently engaged in completing a white paper
    on ideas on reform, analyzing ways to redefine retirement age,
    establishing a national security as a bench mark.
        As we work to further define these principles, we will
    share them with you. Thank you for the opportunity on behalf of
    the American Academy of Actuaries.
        [The prepared statement of Mr. Kent follows:]

     Statement of Kenneth A. Kent, Academy Vice President, Pension Issues,
                 American Academy of Actuaries, Washington, DC

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                                    ------

        Chairman Johnson. Thank you, sir. We appreciate your
    testimony. Mr. Heaslip, you will be recognized.

     STATEMENT OF GREG HEASLIP, VICE-PRESIDENT, BENEFITS, PEPSICO,
                           INC., PURCHASE, NY

        Mr. Heaslip. Thank you. Mr. Chairman--
        Chairman Johnson. Thank you for coming all the way down
    from New York. That's a tough road.
        Mr. Heaslip. No problem at all. Thank you. I'm pleased to
    be included in the hearing this morning. My name is Greg
    Heaslip. I'm the vice-president of benefits for PepsiCo.
        Chairman Johnson. Turn on your mike. Will you push the
    button on it.
        Mr. Heaslip. How's that?
        Chairman Johnson. That's perfect.
        Mr. Heaslip. Good morning and thank you for inviting me
    this morning. My name is Greg Heaslip. I'm the vice-president
    of benefits for PepsiCo. I'm also on the board of the ERISA
    industry Committee. I'm here this morning representing PepsiCo.
        Mr. Chairman, before I begin my remarks this morning, I'd
    like to say a thank you to the Subcommittee for their
    leadership on replacing the 30-year treasury rate. That was
    something that's extremely critical to plan sponsors, such as
    us, and I think your tenaciousness and persistency on that
    issue were critical in getting it over the goal line, so thank
    you very much for that.
        One of the reasons that the Pension Funding Equity Act is
    important to planned sponsors is that at least for the next 2
    years we now have a reasonable basis on which to estimate our
    funding requirements. This certainty is very important from a
    planning and budgeting aspect for any plan sponsor.
        Secondly, as it uses a public readily available interest
    rate to determine liabilities, there's a level of simplicity
    and transparency to the rate that appeals to us very much. And
    then, third, because the rate is based on a 4-year average
    instead of a spot rate there's some stability and
    predictability in our funding requirements, which is also
    appealing to plan sponsors.
        Certainty, predictability, and stability are things that
    you'll hear me reiterate during my testimony this morning. At
    PepsiCo and at other plan sponsors, defined benefit pension
    plans have grown to a size where they have a material impact on
    the company's overall financial results.
        Our pension expense impacts our profits, our share price.
    Funding impacts our balance sheet and our credit rating. For
    any expense of a magnitude of a pension plan, companies have to
    know in advance for the next three to 5 years what costs and
    funding requirements will be with reasonable certainty.
        Recently, this has been almost impossible with defined
    benefit pension plans. It's partly due to the market, but it's
    also partly due to the complexity, frequent changes, and
    sometimes lack of guidance in these areas. It's really not the
    cost of defined benefit pension plans that scares companies. We
    understand that and that's what we signed up for while we
    implemented them. It's the unpredictability, the volatility,
    and the uncertainty surrounding them that makes them very, very
    difficult and challenging to sponsor.
        I'd suggest that the way to strengthen our defined benefit
    system, our pension system in general, is to enact reforms that
    do three things. Provide greater certainty and predictability
    to planned sponsors, reduce the complexity inherent in today's
    rules, and maintain flexibility for plan sponsors to make
    changes that are in the interests of their businesses and
    workers.
        Some specific recommendations I would suggest include, one,
    permanently replacing the 30-year treasury rate with a long-
    term corporate bond rate that is averaged over a three to 5-
    year period similar to what we have in place today. I would
    recommend using that rate for funding, lump-sum distributions,
    and PBGC premiums, eliminating some of the complex and
    contradictory rates that we use today.
        I'd encourage companies or I'd provide companies the
    flexibility to make higher tax-deductible contributions than
    current law provides and to eliminate the excise tax penalty so
    that when times are good and business conditions permit we can
    build a cushion of funding in our plans and provide for longer-
    term benefit security.
        I would maintain plan sponsor flexibility to change or
    modify their plans without mandates as to future benefits. We
    should never abandon the principle that what somebody has
    earned in a defined benefit plan is protected, but we
    shouldn't--in a voluntary system we shouldn't mandate what
    sponsors can do or can't do in the future.
        Finally, in the area of disclosures, I would ask that you
    proceed cautiously. The pension literacy rate among our workers
    is not high. While we need to share important information, we
    also want to avoid creating undue anxiety or confusion among
    plan participants.
        Again, thank you for the opportunity this morning. We
    believe strongly in defined pension plans--defined benefit
    pension plans at PepsiCo and in the work you're doing, and we
    look forward to a continued partnership in this important area.
        [The prepared statement of Mr. Heaslip follows:]

      Statement of Greg Heaslip, Vice President, Benefits, PepsiCo, Inc.,
                                  Purchase, NY

        Mr. Chairman, members of the Subcommittee, thank you for the
    opportunity to participate in today's hearing. My name is Greg Heaslip
    and I am Vice President of Employee Benefits for PepsiCo, on whose
    behalf I am speaking today.
        PepsiCo is a food and beverage company headquartered in Purchase,
    NY with 143,000 employees, including 60,000 employees in the U.S.
    PepsiCo's annual revenues are about $27 billion; we are ranked number
    62 on the Fortune 500 list of large corporations.
        PepsiCo sponsors several savings and retirement plans for its
    employees, including a defined benefit pension plan, defined
    contribution plan with employer matching contributions and broad-based
    stock option program.
        My focus this morning is the defined benefit pension plan, and some
    of the challenges and opportunities faced by PepsiCo and by defined
    benefit plan sponsors in general.
        As you know, defined benefit pension plans provide a unique and
    valuable set of advantages to both plan sponsors and their employees.
    For employers, the plans are an effective means of attracting and
    retaining a capable workforce. For employees, the advantages of defined
    benefit plans include:
          Automatic participation - Employees do not have to enroll
    or contribute a part of their wages in order to receive benefits.
          Benefit security. The plan sponsor bears the investment
    risk. Employees are protected from bad investment decisions and market
    fluctuations. Benefits are at least partially guaranteed by the PBGC,
    which is funded by plan sponsors.
          Lifetime income. Plans provide regular monthly income to
    participants and their spouses for life.
        Given the well-documented lack of personal savings in this country,
    the growing cost of health care, the decline in employer-provided
    retiree medical benefits, stock market volatility, and longer life
    spans, defined benefit pension plans provide a unique and secure source
    of retirement income for more than 42 million American workers and
    family members.
        Nonetheless, recent cost increases for these plans have been
    challenging for all plan sponsors. PepsiCo's experience is a case in
    point:
          Over the past three years PepsiCo's U.S. pension expense
    has risen from $26 million to $135 million, an increase of 500%.
          During the same period, PepsiCo has contributed $1.6
    billion to its plans in order to maintain a reasonable funded status in
    the face of shrinking assets, due to a down equity market, and growing
    liabilities, driven by historically low interest rates.
        In addition to rapidly rising costs and funding requirements, plan
    sponsors have had to cope with several trends that create a difficult
    climate for defined benefit plans in general. Continuation of these
    trends will inevitably discourage the use of defined benefit plans:
          Growing Uncertainty--The uncertainty around the
    replacement for the 30-year Treasury rate is an example of how
    unsettled the landscape is. Without knowing the basis for determining
    funding liabilities, plan sponsors could not accurately plan or budget.
    Analysts speculated what a company's liabilities might be, adding an
    element of risk to stock valuations. Uncertainty drives plan sponsors
    toward more predictable, stable alternatives such as defined
    contribution plans.
          Loss of Plan Sponsor Flexibility--Companies are
    increasingly concerned about their ability to change their plans, or
    adopt newer forms of defined benefits plans, in order to manage their
    costs or better meet the needs of a changing workforce. Some
    legislative proposals would impose unreasonable grandfathering
    requirements on plan sponsors who make plan changes, despite the
    voluntary nature of our pension system. Conversions to hybrid defined
    benefit pension plans have been attacked in the courts, media and
    legislature. Again, the result is the abandonment of defined benefit
    plans.
          Growing Complexity--Pension funding rules have become so
    complex that even those of us who manage these plans have difficulty
    understanding them. In addition, pension accounting and funding follow
    different standards and are barely integrated. This nearly-overwhelming
    complexity drives plan sponsors to abandon defined benefit plans for
    more transparent approaches, such as those offered in the defined
    contribution arena.
        PepsiCo has been fortunate to weather this combination of
    volatility, uncertainty and complexity with its plans intact. We remain
    committed to defined benefit pension plans. However, that is not
    necessarily the case with all employers:
          The number of defined benefit plans insured by the PBGC
    decreased 70% from 114,500 in 1985 to 33,000 in 2002.
          In the three most recent years reported--1999 to 2002 the
    number of plans decreased 20%.
        I believe there are a number of moderate reforms which, if enacted,
    could substantially improve the climate for defined benefit plans. The
    overriding objective of reform should be to strengthen and encourage
    growth of defined benefit pension plans. From a plan sponsor
    perspective this can be accomplished by reforms that provide greater
    certainty and predictability, maintain flexibility for plan sponsors
    and attack some of the complexity that exists today.
        Allow me to suggest some reforms which may accomplish these goals:
    Permanent Replacement of the Discount Rate for Liabilities
        Congress is to be commended for its bipartisan support and timely
    passage of the Pension Funding Equity Act earlier this month.
        The composite corporate bond rate contained in the Act provides
    needed clarity and certainty to plan sponsors. Going forward, I believe
    that the corporate bond rate as contained in Act is worth continuing on
    a permanent basis.
          It leads to a more reasonable (though conservative)
    approximation of liabilities than the defunct 30-year Treasury rate.
          It is readily available to the public.
          It is largely immune from the consequences of public
    policy decisions and from manipulation.
        In addition, the use of a four year average, as currently provided
    for, is significantly less volatile than a ``spot rate'' would be, yet
    tracks the market.
        In order to reduce some of the complexity inherent in today's
    defined benefit plans, this rate should also be used for other plan
    purposes such as calculation of lump sum distributions and determining
    variable PBGC premiums. I'll say more on this in a moment.
        The relevance, accessibility and relative stability of this
    approach to pension funding make it appealing as a permanent reform.
        Use of a yield curve, on the other hand, appears to lack many of
    the benefits of the corporate bond rate and may create new issues.
    While there are still many questions on exactly how a yield curve would
    work, potential issues with this approach include:
          The rate which would not be transparent, widely used or
    available to the public.
          The rate would be more volatile--leading to more volatile
    funding requirements--unless some average or smoothing is introduced.
    This seems somewhat inconsistent with the concept of a yield curve and
    would make it even more complex.
        Plan sponsors would face increased uncertainty and funding
    volatility as a result. As indicated earlier, when faced with
    uncertainty or financial requirements they cannot adequately control,
    plan sponsors will tend to abandon defined benefit plans.
    Addressing Complexity
        One of the most daunting challenges facing defined benefit plan
    sponsors is the increasingly complex regulatory environment for these
    plans. The calculation of plan liabilities provides a perfect example.
    For funding purposes, plan sponsors are required to calculate
    liabilities four different ways, using three different interest rates.
    The liability figure actually used for funding can change from year to
    year based a number of factors. Pension expense is calculated using two
    interest rates, each of which is different from the rates used for
    funding. Lump sum distributions to participants are determined using
    yet another rate, the now-defunct 30 year Treasury rate. And variable
    rate PBGC premiums are based on a liability calculation that is
    different from all of the above.
        Multiple stakeholders with vested, but differing interests in
    pension plans have produced a patchwork of non-integrated requirements.
    Sheer complexity is driving many plan sponsors to simpler, more
    transparent types of retirement plans. The current situation begs for
    Congressional leadership to bring the various stakeholders together to
    create simplifying reforms.
    Higher Funding Limits
        Employers should have flexibility to make larger funding
    contributions when business and economic conditions permit. Raising
    funding limits and eliminating the excise tax penalty benefits
    participants, employers and the PBGC. When economic conditions
    inevitably worsen, the added cushion resulting from large contributions
    provides participants with increased security, employers with lower
    required contributions and the PBGC with less risk.
    Plan Sponsor Flexibility
        Legislative reforms should preserve the ability of plan sponsors to
    change or modify their pension plans, so long as they observe the
    longstanding requirement that benefits which participants have already
    earned will be protected. Legislation requiring plan sponsors to offer
    participants a choice of plans or to grandfather future benefit flies
    in the face of our voluntary system. Mandates lead to loss of
    flexibility and control for plan sponsors. The inevitable result will
    be more harmful than helpful to workers, as employers will avoid both
    traditional defined benefit plans and some of the newer alternatives
    that have been developed.
    Disclosure
        I would urge Congress to act cautiously when considering new
    disclosure requirements.
        I certainly support the goal of sharing meaningful information with
    participants, analysts and shareholders that enables them to make
    informed decisions about the company or take appropriate action.
    However, disclosures that create needless anxiety or confusion do more
    harm than good.
        Several of the Administration's proposed disclosures fall into this
    category. For example, disclosing a plan's termination liability is
    likely to alarm participants, even though the plan may be well funded
    and the plan is not being terminated. Similarly, public disclosure of
    plans that are ``under-funded'' by more than $50 million could be
    meaningless, or even misleading, in the context of large plans and
    insufficient relative to small plans.
        Both the spirit and practical outcome of proposals such as these
    would be to discourage the continuation of defined benefit plans.
    Ultimately, onerous and potentially misleading new disclosures would be
    to disadvantage the very group they are designed to benefit--plan
    participants.
    Conclusion
        Mr. Chairman and members of the Subcommittee, thank you again for
    the opportunity to express my views on reforms that will strengthen the
    defined benefit pension system. With your leadership and with the
    involvement of key stakeholders, I am confident that we can improve the
    climate for this vitally important element of our retirement system.
                                     ______

        Chairman Johnson. Thank you, sir. I appreciate your outline
    as a matter of fact. You two are pretty close together. Mr.
    Iwry, you may begin your testimony now.

     STATEMENT OF J. MARK IWRY, ESQ., NON-RESIDENT SENIOR FELLOW,
               THE BROOKINGS INSTITUTION, WASHINGTON, DC

        Mr. Iwry. Thank you, Mr. Chairman. Chairman Boehner,
    Ranking Member Andrews, distinguished members. After spending
    much of the previous decade in the Treasury Department,
    overseeing the regulation of defined benefit and defined
    contribution plans and other employee benefits and after
    participating in the effort 10 years ago to reform the pension
    funding rules and shore up PBGC's financial situation as it was
    then, I will tell you that probably the single most effective
    step that you could take to strengthen the defined benefit
    system at this point is to enact a reasonable solution to the
    cash balance pension controversy.
        The major portion of the defined benefit universe now takes
    the form of cash balance and other hybrid plans. Hundreds of
    sponsors have shifted from the traditional defined benefit plan
    as we know to this hybrid format, and the precise application
    of the governing statutes to these plans has been the subject
    of uncertainty, litigation, and now prolonged controversy.
        I would suggest that the courts are not the place to
    resolve this issue in a coherent, rational way that takes into
    account all the legitimate interests in the pension system. And
    that Congress should step up and provide a rational, general
    solution to cash-balance-plan issues as soon as possible. And a
    solution that I would suggest is actually feasible can be done
    in the near term.
        These types of plans have been unfairly demonized by some,
    and to some extent, idealized by others. There's nothing
    inherently wrong, of course, with the plan that is funded by
    the company like a defined benefit plan while stating the basic
    benefit as an account balance like a DC plan and providing an
    investment return that generally does not depend on the risks
    of the equity market or on employees' decisions as to how to
    invest.
        It's the conversion, of course, from the defined benefit
    traditional format to the cash balance that's been the issue,
    and, mainly in cases where the employer has not given
    sufficient transition relief to provide a soft landing to older
    and longer-service workers contrary to many cases where the
    employers have, in fact, provided ample transition relief.
        On the other side cash-balance plans have been
    characterized as the last, best, and only hope for the defined
    benefit system. And, in fact, I think there's some truth to
    that, but there's a sense in which they're not fully a part of
    the defined benefit system insofar as they lack one of the key
    attributes that makes defined benefit plans particularly
    valuable, namely, the guaranteed lifetime benefit.
        They're required, of course, to offer a joint survivor
    annuity and a life annuity, but as a practical matter, the
    presumptive form of payment in a cash balance is a lump sum.
    That's how it's presented to employees, and that's what most
    people, in fact, take from most cash balance plans. But cash
    balance plans that give a fair transition to older workers are,
    indeed, valuable, in particular, if they're funded by the
    company. So the coverage does not depend on the employee taking
    the initiative to decide to participate, and the investment
    risks and investment returns are pooled.
        As a centerpiece of your action to strengthen the defined
    benefit system, I would suggest that you could resolve the cash
    balance issue in a way that does four essential things.
        First, gives older workers substantial protection from the
    adverse effects of a conversion, including protection from wear
    away of the normal and early retirement benefit.
        Second, allow companies that maintain cash balance plans to
    do so without concern that they would be treated as age
    discriminatory.
        Third, give companies reasonable flexibility to change
    their plans, to make prospective amendments, including
    conversions to hybrid formats and to determine how to protect
    older workers, though not whether to protect older workers.
    And, finally, to resume the IRS determination letter process so
    these plans can get approved again and the system can move on.
        In my written statement I've outlined a specific framework
    for solution consistent with testimony that I submitted to this
    Committee last summer, and while I certainly don't believe that
    I or anyone in particular has all the answers, I've suggested a
    number of very specific alternatives. And I would welcome
    discussion of those in this hearing or at the Committee's
    convenience.
        On the funding side I agree with much of what my co-
    panelists have said. Let me just make a couple of specific
    points in addition. A central part of the work that needs to be
    done is to make the deficit reduction contribution; the
    accelerated funding that under funded plans are subject to to
    make that less volatile.
        As you know, this kicks in now too late, too suddenly, and
    can shut off too soon. The rules also allow inappropriate
    funding holidays to companies when they ought to be
    contributing, as the Bethlehem Steel case illustrated.
    Bethlehem Steel also illustrates the need for better
    disclosure. The plan looked like it was 84 percent funded the
    year before it went under and turned out to be under 50 percent
    funded.
        I agree with my colleagues that the funding disclosures
    need to be sensitive to the need not to panic employees or
    inadvertently mislead people. I think there are ways to do
    that. Employers should be able to fund for lump-sum
    distributions, even when the value of the lump sum is actuarily
    greater than the value of the annuity.
        Chairman Johnson. Can you start to tie that down.
        Mr. Iwry. Yes, Mr. Chairman. This is my last point.
        Chairman Johnson. Thank you.
        Mr. Iwry. And I think that that needs to change. We should
    allow plans to fund for the lump sum, even when it's more
    valuable than the annuity. Mr. Chairman, I'd be happy to answer
    any questions you or the members might have.
        [The prepared statement of Mr. Iwry follows:]

       Statement of J. Mark Iwry, Esq., Non-Resident Senior Fellow, The
                     Brookings Institution, Washington, DC

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                                    ------

        Chairman Johnson. Thank you. I thought maybe The Brookings
    Institution taught you how to talk long. The Chair recognizes
    the Chairman of the Full Committee, Mr. Boehner, for questions.
        Chairman Boehner. Thank you, Mr. Johnson, and let me thank
    our panelists for their valuable insight and their testimony as
    we seek to find a rational answer for how to improve the
    pension system for American workers.
        As I was listening to the opening statement from the
    Chairman and Mr. Andrews and some of you, I began to remind
    myself that the pension system in the United States is a
    voluntary program on behalf--from employers on behalf of their
    employees. And when we seek to legislate, you know, fix the
    existing problems, that we just can't lose sight of the fact
    that this is a voluntary system that we have in America that's
    worked fairly well. Is it perfect? No. But it is a voluntary
    system.
        Secondly, as I listen to Mr. Kent outline the principles of
    reform; solvency, predictable, transparent, flexible, and
    simplicity I began to ask myself if we were talking about
    Social Security or the pension system. And if you look at the
    problems that we have in the defined benefit pension system in
    our country today, it's really not a great deal different than
    the problems that we have in the Social Security system in
    America today, especially, in that people are living a great
    deal longer than when most of these plans were initiated and
    put together.
        And when you begin to look at the mortality tables, you can
    begin to understand why many of the defined benefit plans that
    we have are facing the kind of problems that they're facing,
    especially, in older industries.
        And so I also want to take a moment to say thank you to
    many of you that are in the audience for your input, your help,
    and your advice as we were finally completing the pension bill
    that the President signed into law several weeks ago. I don't
    know why something so simple turned out to be so difficult, but
    welcome to the U.S. Congress.
        There's one other point that I want to make, and I think
    Mr. Andrews touched on it, and I want to touch on it, as well.
    What we seek to do here is to find a way to simplify the rules
    around defined benefit plans in meeting really two goals--two
    competing goals. One is to simplify the regulatory structure so
    that plans know what they have to do, when they have to do it,
    and can contribute when they're most able to contribute.
        Now I think the entire DRC section, while it was put in in
    '87 and updated in '94, was never really tested until we got to
    2001, 2002, 2003 and we found out that it was a meat axe that
    just doesn't work. But we've got to find a way to make these
    simpler, including--including the safe harbor of a cash-balance
    conversion, which once we get all the politics out of the way--
    which we never quite do around here--truly is a way to
    strengthen the defined benefit system.
        So we've got to do all that on one side while at same time
    insuring that the commitments that employers are making to
    their workers are kept. And that gets around to the solvency
    issue. And the reason I bring this up and make a point of it is
    that as we go through this process over the next year or so
    we're going to be working with many people to find the right
    set of rules for defined benefit plans of all sorts.
        But I just want everyone to know on the other side of this
    equation we expect people to make contributions to their plans,
    and it's--because I've had people suggest these changes, these
    changes, and someone suggested something to me this morning
    about a group of plans trying to find a way to give us good
    advice and all get on the same page.
        But I just want everybody to know that these are--this is
    the tightrope that we're walking, because when we want people
    to make contributions and to keep their plans, we don't want to
    over burden them and push them out of the process. But at the
    same point if you're going to have this plan, you're going to
    make commitments to your workers, you've got to be able--you've
    got to be willing to meet your commitments and to make those
    payments.
        And so, Mr. Kent, I'm very pleased with the points that the
    actuaries are making. We need your help in this process, and I
    think that the five or six goals that you outlined are the same
    types of goals that we have as we do this.
        Mr. Iwry, when it comes to cash balance, we've got to keep
    beating the drum. My colleagues on both sides of the aisle by
    and large understand that cash balance conversions in 99
    percent of the cases were done correctly. There were only
    several cases where people were rather clumsy about how they
    pursued it in their conversion, but we have to have real rules
    that provide clear indications to people as to how they can do
    it where they don't feel like they're exposing themselves to
    endless litigation. There's enough litigation out there
    already.
        So that--I've got another meeting to go to, but I just want
    to say thanks for being here and thank all of you for your help
    as we've been through this process and we will continue to go
    through this process.
        Chairman Johnson. Thank you Mr. Brookings--I mean, Mr.
    Boehner. You're all right, John. I don't care what they say.
        Chairman Boehner. As I'm fond of saying--and I have 11
    brothers and sisters. My dad owned a bar--I can smell it a mile
    away.
        Chairman Johnson. Thank you for being here and thank you
    for your comments. Mr. Andrews, you're recognized for 5
    minutes.
        Mr. Andrews. I liked what you said, John. I don't care what
    Sam says. I thought it was pretty good. I'd like to thank the
    witnesses for their testimony this morning. It was outstanding,
    and I hope that you will stay engaged with the Committee as we
    go forward in the process of trying to develop legislation.
        I wanted to ask Mr. Heaslip you favor making permanent the
    30-year bond rate that was done in the bill the President just
    signed, as opposed to the administration's discussions of the
    yield curve. I'm sympathetic to your point of view. I think the
    last thing in the world we probably need now is another change
    to a variable instrument, at least, in this context. I wonder
    if you could tell us what you think is superior about the 30-
    year rate when compared to the yield curve.
        Mr. Heaslip. A couple of thoughts on that. While I think
    there's still a lot of questions about the yield curve, which
    need to be answered, so we're working on partial information
    here, there's probably two aspects to the interest-rate
    question that I think are important to consider.
        The first is what is the basis for the interest rate. The
    use of a long-term corporate bond rate has appealed because
    it's publicly available, it's very transparent, it's simple to
    understand--
        Mr. Andrews. Pretty easy to understand. You look it up on
    the Internet and you know what it is, right?
        Mr. Heaslip. Exactly. I'm not sure the same is true of a
    yield curve. It will vary from company to company. It will be
    difficult to explain to participants, and I don't--it's not
    something you can just look up on the Internet. So simplicity
    and transparency is one argument for the corporate bond rate.
        I think the second part of your question gets to over what
    period of time the rate will be based. The proposals that I've
    seen on the yield curve speak of it as a spot rate or a point-
    in-time rate, which, I think, by definition is likely to be
    more volatile than a corporate bond rate, which is averaged
    over a three to 5-year period. That volatility in the rate
    leads to volatility in funding requirements, and volatility in
    funding requirements, frankly, is one of the things we're
    really struggling with.
        Mr. Andrews. I agree with you and I think that we don't
    want to let precision in the rate be the enemy of the greater
    substantive point. That if one of the reasons why people are
    walking away from defined benefit plans is the volatility of
    their funding obligation, we might be very, very precise about
    very few LANs that are left in the universe. I wouldn't want to
    see us elevate precision to the level of a religious principle.
    So I'm interested in hearing more thoughts about that.
        Mr. Iwry, I want to ask you about safe harbors for cash
    balance conversions that have already taken place. The
    administration has put rules on the table, which you regard as
    a constructive first step. What do you think we ought to do
    about an employer who has already done a cash balance
    conversion that's consistent with those rules? In other words,
    the rules essentially say let's give employees a choice between
    the lump-sum-aggregate choice and the continued defined benefit
    traditional choice.
        If a company has already done that, do you think that we
    should create a safe harbor for them so they can't be sued for
    doing it?
        Mr. Iwry. Mr. Andrews, if the company is already given that
    kind of choice to participants between continuation of the old
    plan and the new cash balance format, I certainly think that
    they ought to be treated as having done a more than adequate
    transition for their older workers. But that kind of conversion
    should be protected from challenge.
        I think what we have to be sensitive about is how to deal
    with past cases in a way that's fair to the sponsor, as well as
    the employees affected, if it doesn't have unintended
    consequences. There are other conversions. People could pay a
    little less than that who might feel that they're--might see
    themselves not needing that safe harbor.
        Mr. Andrews. I think we have to divide the world into three
    universes here; plans that have already made a conversion but
    done so in a way that impairs the fair, legitimate interests of
    pensioners; plans that have done a conversion already but have
    not impaired those fair interests, and I believe those plans
    should see a safe harbor; and then plans which are considering
    it in the future, so we can influence their behavior in a
    positive way. And we're interested in your precise thoughts
    about how to do that.
        I did want to close with Mr. Kent. You said a lot of
    provocative and interesting things. Two of the most interesting
    things I thought were your views on raising the ceiling on
    contributions that can be made through pre-funding. How high do
    you think that ceiling should go?
        Mr. Kent. There are clearly within my profession a lot of
    different levels. We've heard as much as 130 to 165 percent of
    the current liability. It has to be rationalized to address the
    solvency issues, and part of it is going to depend on what
    liability or obligation we define as a bench mark for solvency.
        But if it were at 130 percent of the current liability,
    that's one bench mark that could be justified. But it would not
    have taken plans through the kind of economic scenario that we
    just experienced over the past 3 years. There would still be
    plans that would fall into an insolvent position as a result of
    that.
        Mr. Andrews. I'm going to stop, but I would just ask each
    of three witnesses to consider this question. Should that
    threshold be set by regarding--well, what set of economic
    parameters should be used to set that threshold? If you want to
    take a worse-case-scenario idea for setting the threshold, you
    would make it very, very high. You assume the worse and let
    people put away money in good times, or should the scenario be
    more optimistic?
        And the second part of that question is other than revenue
    implications for the treasury, are there any other policy
    considerations we should think about in setting that threshold?
    Obviously, it will cost the treasury some money in the short
    run the higher you make the threshold. Although, arguably, I
    think it may avoid Federal outlays and PBGC if you make the
    threshold higher, so I'm not sure at the end of the day what it
    costs.
        But the question I would ask is supplement the record--
    because my time is up--is other than revenue implications, what
    other considerations should we take into account when setting
    the threshold for pre-funding pension obligations? Thank you,
    Mr. Chairman.
        [The provided material follows:]

     Letter from Kenneth A. Kent, Academy Vice President, Pension Issues,
    American Academy of Actuaries, Washington, DC, Submitted for the Record

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        Chairman Johnson. Thank you. If you could respond in
    writing, we'd appreciate it, all three of you. Thank you very
    much. The Chair recognizes the gentleman from Minnesota, Mr.
    Kline, for questions.
        Mr. Kline. Thank you, Mr. Chairman. Thank you gentlemen for
    being here with us today. I want to identify myself, of course,
    with the brilliant remarks of our Chairman of the Full
    Committee. Welcome to Congress.
        Mr. Andrews. You can tell who the freshmen are around here,
    can't you?
        Mr. Kline. We want to be sophomores, Mr. Andrews. That's
    how that works. I've just got a couple of, I think, fairly
    straightforward questions. There's been quite a bit of
    discussion today about hybrid plans, and, Mr. Kent, you were
    the first one to bring that up. Would you take just a minute
    and lay out for all of us here exactly what that is and what
    the difficulties might be associated with that.
        Mr. Kent. OK, sure. A hybrid plan--and I'll use cash
    balance as an example--is one which provides a notional amount
    of defined funds that go into a person's account, and that
    account is ultimately redefined as a benefit when they reach
    retirement. So that it still falls under the definition of a
    defined benefit, because within the plan structure you can
    determine what type of lifetime income the plan will provide an
    individual, based on that individual's facts and circumstances;
    pay and service.
        The reason it's called the hybrid is because through that
    person's working lifetime they're looking at an accumulation of
    an account balance, which will ultimately be converted.
    Typically, hybrid plans because they report an accumulation of
    account balance also offer those account balances to be paid
    out as lump sums when they reach retirement, which takes--which
    negates some of the impact of value that traditional defined
    benefit plans and life annuities offer.
        So that's one form of a hybrid plan; something that looks
    like a defined contribution plan that is structured to deliver
    a lifetime income at a specific retirement age. Does that
    address your--
        Mr. Kline. Thank you for the definition. And difficulties
    with companies and plans moving to that?
        Mr. Kent. Well, the difficulties stem from the way in which
    some companies have transitioned from a traditional defined
    benefit plan to a hybrid plan and the way in which they have
    structured those conversions. There is a concept called wear
    away where some people did not accrue benefits until the
    accumulation of their account plus the benefits they earned up
    to that point in time were more valuable than the benefits that
    they had prior to the conversion. And those are some of the
    provisions that are in contention in terms of the way in which
    plans have been converted and how they're being communicated to
    participants.
        Mr. Kline. OK, thank you very much. Earlier in the hearing
    today there was a fair amount of levity and conversation about
    people living to 104 and 94 and all those sorts of things, and
    it's a very--of course, very real concern that we are living
    longer and, therefore, having to pay out benefits for a longer
    period of time.
        And, Mr. Kent, I was fascinated to hear you say that you're
    working on a white paper or something that I was hoping you'd
    be willing to give us a little preview into. What are you
    thinking about raising the retirement age and how would you do
    that? How would you make that transition?
        Mr. Kent. And that's not an easy transition to entertain,
    but what we're doing is we're asking actuaries and the
    academics to come up with some fundamental theories or concepts
    that we can apply that say how do you balance the number of
    years you would expect to be able to retire over the number of
    years you're expected to work. Because, clearly, that ratio has
    gotten out of balance as people have been able to retire and
    have extended years--far more than the seven, if you will, back
    in 1930 that were expected.
        So there should be some ratio. This should also be done in
    coordination with a phased retirement, because you have two
    issues. You have people who are clearly at age 65 who are at
    the top of their game and capable of continuing to work, and
    you also have some people, particularly in labor industries,
    where age 65 is as far as they can go or even age 62, and they
    need some way to phase down from work.
        So coupling the concept of changing the benchmark of 65
    with a phased--with the ability to phase into retirement would
    help our workforce move from what has been the historic bench
    mark for many years to something that would say people should
    expect to be able to work longer and balance the number of
    years in which they're in retirement income versus active
    income.
        Mr. Kline. It just seems like that would be extremely
    difficult to make that change. You've got expectations of
    employers and employees and families. Pretty tough load that
    you're lifting there. Thank you very much, Mr. Chairman. I
    yield back.
        Chairman Johnson. Thank you, sir. The Chair recognizes the
    gentleman from Texas, Mr. Carter.
        Mr. Carter. Mr. Kent--
        Chairman Johnson. Would you repeat that.
        Mr. Carter. Thank you, Mr. Chairman. I don't think I'll
    ever live to be 104. Mr. Kent, you talked about the need for
    contribution predictability. Do you have any thoughts on how to
    decrease the volatility of these contributions, particularly,
    deficit reduction contributions?
        Mr. Kent. Well, you took a big step by bench marking the
    interest rates to be used, so that employers had an idea how to
    move forward and permanently securing a bench mark would help
    do that.
        The deficit reduction issues that employers are dealing
    with, one, it represents a significant exception, if you will,
    and the economic conditions that brought them on to the backs
    of employers in such a quick and severe way. There has to be a
    way to spread that, whether you put kind of a Governor on there
    that says the deficit reduction contributions kick in but it
    should be no more than ``X'' percent of what they would
    otherwise have to contribute in order to modify those results
    or rewrite that entire structure is one component.
        Another component may be to require that employers have a
    continuing obligation to contribute, even beyond what are
    currently considered full-funding limits. So that we raise the
    bar, and employers are in a position to say we still have a
    long-term obligation, and we're not moving from a year when we
    have to contribute nothing to a year which we have to
    contribute 25 percent of payroll.
        So there are a number of ideas that we have that we'll be
    coming out with in a paper that identify how to smooth that
    process out and make it more predictable for companies to
    budget for.
        Mr. Iwry. Mr. Carter, may I add something?
        Mr. Carter. Yes, please.
        Mr. Iwry. I'd like to register one point of disagreement
    with my colleagues. I think that the short-term interest rate
    fix that's just been enacted is desirable and necessary. I
    think that the long-term interest rate for purposes of pension
    funding should not be considered an issue that has now been
    presumptively closed and resolved.
        I do not think that Congress has given sufficient attention
    to the level of the interest rate. The argument has been made
    persuasively and I've joined in that that the 30-year treasury
    interest rate is obsolete and not workable. The argument has
    also been made--and I've joined in that--that a rate based on
    something different like the corporate bond indices makes sense
    is ascertainable. Apart from the debate over yield curve
    conversions of that versus spot rates, but the level of the
    rate that's based on corporate bonds, for example, has not been
    focused on adequately by Congress.
        Should it be corporate bonds minus a certain number of
    basis points? Should it be ``X'' percent of corporate bonds?
    Should it be 100 percent of corporate bonds? That is an open
    question, and I think that it's in part an empirical matter
    that Congress should address by using and sharing some of the
    modeling and data that the PBGC is doing.
        Chairman Johnson. Have you modeled that?
        Mr. Iwry. The PBGC, I think, has modeled that kind of
    analysis. Personally, I have not but I was part of that
    exercise, Mr. Chairman, 10 years ago when we tried to reform
    the funding rules. And it turned out that to make a really
    rational decision and know the impact on adequate funding for
    workers, as well as the impact on the plan sponsor, you had to
    run numbers. And I suggest that Congress could use some more
    wherewithals from the PBGC or elsewhere to share in the
    modeling and the number crunching that they do.
        Chairman Johnson. Thank you. Sorry to interrupt you, Mr.
    Carter.
        Mr. Carter. I yield back my time, Mr. Chairman.
        Chairman Johnson. Thank you. The Chair recognizes the
    gentleman from South Carolina, Mr. Wilson.
        Mr. Wilson. Thank you, Mr. Chairman, and thank you all for
    being here this morning. And, Mr. Kent, you've stated that 401K
    plans currently have more tax advantages than the defined
    benefit plans. Would allowing pre-tax employee contributions
    assist plans with their current funding issues?
        Mr. Kent. We introduce it not to assist plans in their
    current funding issues, because we're not suggesting that
    employees now be held to help employers fund what they have
    already held as an obligation based on their program.
        What we do suggest is that employers be allowed to design
    defined benefit plans that you would permit or require
    employees to contribute a portion of their own income to
    provide for long-term income net retirement. Very similar to
    the structure that you have in many public plans in this
    country where employees contribute to their plans, it enhances
    the level of benefit that they can retire on, and those
    contribution are before taxes.
        Mr. Wilson. And, additionally, you've been--and there's
    been discussion about updating the standard retirement age. And
    so I'm going to give all three of you an opportunity to offend
    people like we do, and so--and that is to be specific as to how
    you suggest that the--what target retirement age do you see,
    and I'd like all three of you to share the blame or credit. And
    I can't wait for you to enlighten us as to what the retirement
    age should be.
        Mr. Kent. The answer from my part for the Academy is that
    that's a work in progress, and we hope to answer that question.
    We do think that you have to couple it with phased retirement,
    so that what you're really doing is giving the individuals more
    flexibility but respecting their capability of retiring beyond
    some fixed age that currently is defined in the code.
        Mr. Heaslip. We tend to look at this, not only on the basis
    of age, but years of service, and in many of the jobs at our
    company, people perform very physical work that's difficult to
    do after say 25 years of service. So one of our goals is to
    enable people who want to to retire after 25 or 30 years of
    service almost regardless of their age, because they simply
    can't keep working. And so that's sort of our soft spot or our
    sweet spot.
        Mr. Iwry. I share that concern that Mr. Heaslip has just
    articulated. I think the answer to the question what's the
    ideal retirement age is none. That there need not be a legally
    mandated retirement age for most purposes. We're really talking
    about a dozen different purposes here when we ask what should
    the retirement age be. But for the purpose of determining when
    people can leave and take their pension, I think that there's a
    real interest in flexibility.
        If I may add regarding your earlier question, pre-tax
    contributions to defined benefit plans I would suggest that the
    Committee take into consideration as a caution here that
    companies may well be invited to frame that issue precisely the
    way you have, sir. That is to regard it as a way to shift the
    funding from the company to the employee. That's not
    necessarily a reprehensible thing to do, but if Congress makes
    that easier for the company to do and a company is in a
    position where it would be convenient to do that in a
    particular year, you can very much start an erosion of defined
    benefit--of what we really care about in defined benefit plans
    by turning them into 401Ks.
        Mr. Wilson. And I appreciate that very much, and I
    represent--back on the retirement age I appreciate the concept
    of flexibility. I represent Hilton Head Island in South
    Carolina. We have a lot of retirees, and I never cease to be
    amazed at how so many of them retired and then they go back
    into consulting and, truly, it should be based on flexibility.
    So I appreciate that very much.
        Mr. Heaslip, currently, there are restrictions on the
    amount of contributions that employers can deduct. Should
    Congress consider raising the level of tax-deductible
    contributions?
        Mr. Heaslip. I do think that would be helpful. We've been
    fortunate in that our business is strong and we've been able to
    make voluntary contributions over the past several years. And I
    think the more you can do to encourage employers to make
    contributions when business and economic conditions are good
    the better off you'll be when there's the inevitable downturn.
        Mr. Wilson. And at what level would you suggest?
        Mr. Heaslip. I don't really know. I don't have a specific
    suggestion in terms of the level. Higher than it is today.
        Mr. Wilson. Thank you very much, and I yield the balance of
    my time.
        Chairman Johnson. Mr. Wilson, I appreciate your remarks.
    Can I just ask Mr. Heaslip do you think restrictions ought to
    be placed on lump-sum distributions in a plan if it's under
    funded?
        Mr. Heaslip. I think that question goes to whom you're
    trying to protect. Restrictions on lump-sum distributions would
    penalize plan participants or workers who have probably
    expected them, but they might benefit the PBGC. And so I tend
    to come down on the side of participants. And so I would say,
    no, you shouldn't restrict lump-sum--
        Chairman Johnson. Yeah. But if a plan is under funded,
    they're not going to pay the same lump sum probably.
        Mr. Heaslip. I just feel that if companies have made a
    commitment to provide a lump-sum payment option they ought to
    follow through on that commitment.
        Chairman Johnson. Whatever it happens to be?
        Mr. Heaslip. That's right.
        Chairman Johnson. OK. And that's their choice? The
    employee's choice?
        Mr. Heaslip. That's right.
        Chairman Johnson. Mr. Kent, in your written testimony you
    state that many employers want to switch to cash balance plans
    to provide employees with a guaranteed portable defined benefit
    plan, and they don't do it because of the current legal
    uncertainty. Would the administration's current proposal
    guaranteeing a minimum benefit level by providing benefits that
    have not yet been earned encourage more employers to leave the
    system?
        Mr. Kent. It might. The challenge here is, as you heard in
    the other testimony, is the level of complexity that is added
    to the process of converting a plan and whether employers will
    go down that road of complexity and guarantees or identify that
    there may be a better way to do -- to approach their needs and
    structures in terms of terminating the plan and looking for the
    opportunity to afford a cash balance plan in the future.
        That I think has detrimental impact to employees, so that
    if any structure for conversion adds a fair amount of
    regulatory complexity that's going to be balanced against the
    fact that--it will be balanced against whether to convert to a
    cash balance plan or just freeze the current plan and go to
    some other system that has less complexity.
        Chairman Johnson. Thank you so much for your testimony
    today. You guys have been an excellent panel. We appreciate
    your advice, and, hopefully, we can start the process. So if
    you would consider yourselves excused, would the next panel
    please take their seats. Thank you for being with us today.
        I will introduce the second panel as they are seated.
    Before the witnesses begin their testimony, I'd like to remind
    members that, again, we will be asking questions after the
    entire panel has testified. And we'll impose a 5-minute limit
    on all questions.
        Our first witness is Timothy Lynch, president and CEO of
    the Motor Freight Carriers Association. The second witness is
    John ``Rocky'' Miller, a partner with Cox, Castle & Nicholson.
    And the third Teresa Ghilarducci--there you go--associate
    professor of economics, University of Notre Dame. Thank you all
    for being with us, and I'd like to remind you that you've seen
    the lights work, so you understand the 5-minute limit, and I'd
    appreciate you all adhering to it, if you could. You may begin,
    Mr. Lynch.

     STATEMENT OF TIMOTHY LYNCH, PRESIDENT AND CEO, MOTOR FREIGHT
                  CARRIERS ASSOCIATION, WASHINGTON, DC

        Mr. Lynch. Is it on now? Thank you, Mr. Chairman. Good
    morning. My name is Tim Lynch, and I am the president and CEO
    of the Motor Freight Carriers Association, and I too want to
    add my comments to some of the earlier panelists about thanking
    both the Chairman, as well as the Committee members, for
    holding this hearing, as well as the work on the earlier
    legislation this year.
        I am here today as a representative of an association of
    trucking industry employers, who by virtue of their collective
    bargaining agreements, are major participants in a number of
    multi-employer plans. These employers are concerned about the
    current framework for multi-employer plans and strongly believe
    that if not properly addressed the problems will only get
    worse, thus jeopardizing the ability of contributing employers
    to finance the pension plans and ultimately putting at risk the
    pension benefits of their employees and retirees.
        Mr. Chairman, I have what I consider to be a fascinating
    statement on the history of trucking deregulation and MEPPA,
    but inasmuch as I may be the only one in the room who thinks
    it's fascinating, I'll ask that I'd be able to submit that for
    the record and we can move to page seven.
        Chairman Johnson. That's fine. You may all submit your
    comments to the record. We'll put them in. Without objection,
    so ordered.
        Mr. Lynch. Thank you. In doing that, though, I would like
    to draw attention to the attachment to my statement, which
    shows a list of the top 50 LTL general freight truck companies
    that were in existence in 1979, and the bold-faced names are
    the ones who are still in existence. That is a very, very
    important key element of where we are in terms of our views
    about how to move forward.
        The single most significant problem confronting multi-
    employer plans in the trucking industry is the declining number
    of new participants. The multi-employer concept is a workable
    model if there are sufficient contributions being made today to
    sustain payment of current benefits, and as we have seen with
    recent history, heavy reliance on investment income can leave
    plans vulnerable to the vagaries of the market.
        However, the fact that there is a shrinking number of
    unionized trucking companies or that people are living longer
    are beyond the scope of what we are here to discuss today.
    There are simply some things we cannot change. But as indicated
    at the beginning of my statement, we believe there are changes
    that can be made and that reform of the MEPPA statute is both
    necessary and timely.
        We have three areas that we'd suggest reform. Withdrawal
    liability. It is no secret that the current framework for
    collecting withdrawal liability is broken. It doesn't collect
    the unfunded liabilities it was designed to collect, leaving
    most multi-employer plans and ultimately all other contributing
    employers in the plan responsible for benefits of withdrawn
    employers. Withdrawal liability makes multi-employer plans very
    unattractive to new employers.
        The number of unfunded participants, those whose employer
    has withdrawn from the fund and is no longer making
    contributions has created such a significant burden at some
    plans that drastic action may be required. We are aware of one
    very large trucking industry plan in which half of the
    contributions--or half of the benefit payments that are made
    annually are made to beneficiaries who no longer have a
    contributing employer on their behalf.
        We would recommend that Congress direct the PBGC to
    undertake a comprehensive study of the unfunded participant
    issue and the financial burden it poses on multi-employer
    plans. Obviously, plans and the contributing employers cannot
    survive long term if only a handful of viable companies are
    responsible for the last 50 years' of trucking industry
    retirees.
        There also needs to be some exploration of alternatives to
    withdrawal liability that maintain the integrity of the plans
    but remove the disincentive for potential new contributing
    employers. Among other things, serious consideration should be
    given to developing a withdraw formula that will align benefits
    of employees of withdrawing employers to the amounts that are
    actually recovered.
        Greater multi-employer plans control and oversight. The
    basic structure of multi-employer plans makes plan design and
    certainly plan reduction decisions very difficult.
    Notwithstanding the fiduciary requirements on trustees taking
    unpopular actions to correct plan funding issues can have
    political consequences for union trustees and union officials.
        I believe we have to accept the reality that it will be
    very difficult for multi-employer plan boards to make necessary
    changes, particularly, for severely distressed plans. As multi-
    employer legislation is considered, serious consideration
    should be given to whether additional procedural or legal
    controls over the management of the plans could prevent serious
    funding issues.
        Something as simple as imposing funding policy guidelines
    that mandate clear targets for the plan's unfunded liability.
    The Teamsters Western Pension Fund has long had a funding
    policy that established the funding levels and requires the
    trustees to adjust benefits. Plan modifications are virtually
    automatic. I see my red light is on so I will conclude.
        [The prepared statement of Mr. Lynch follows:]

        Statement of Timothy P. Lynch, President and CEO, Motor Freight
                      Carriers Association, Washington, DC

        Good morning. My name is Timothy Lynch and I am the President and
    CEO of the Motor Freight Carriers Association (MFCA). I want to begin
    by thanking Chairman Sam Johnson and the other members of the
    Subcommittee on Employer-Employee Relations for holding this hearing to
    discuss suggestions for securing the long-term viability of the
    multiemployer pension system.
        I am here today as a representative of an association of trucking
    industry employers who by virtue of their collective bargaining
    agreement are major participants in a number of multiemployer plans.
    Their companies are key stakeholders in these funds. The employers I
    represent are concerned about the current framework for multiemployer
    plans and strongly believe that if not properly addressed, the problems
    will only get worse, thus jeopardizing the ability of contributing
    employers to finance the pension plans and ultimately putting at risk
    the pension benefits of their employees and retirees.
        While we were supportive of the short-term relief provided to
    multiemployer plans under the recently-enacted Pension Funding
    Stability Act, we believed then, and continue to hold the view, that
    significant reform needs to occur if we are to secure the long-term
    viability of these plans. The financial difficulties facing the Central
    States pension fund are well known to this Committee, but Central
    States is not alone. Nor are the factors contributing to the problems
    of Central States unique. The challenges facing these pension funds
    cannot solely be attributed to the effects of a prolonged, down stock
    market. The problem, in our view, runs much deeper.

                       Motor Freight Carriers Association

        MFCA is a national trade association representing the interests of
    unionized, general freight truck companies. MFCA member companies
    employ approximately 60,000 Teamsters in three basic work functions:
    local pick-up and delivery drivers, over-the-road drivers and
    dockworkers. All MFCA member companies operate under the terms and
    conditions of the Teamsters union National Master Freight Agreement
    (NMFA), one of three national Teamster contracts in the transportation
    industry (the National Master United Parcel Service Agreement and the
    National Automotive Transport Agreement being the other two).
        Through its TMI Division, MFCA was the bargaining agent for its
    member companies in contract negotiations with the Teamsters union for
    the current National Master Freight Agreement (April 1, 2003--March 31,
    2008). Under that agreement, MFCA member companies will make
    contributions on behalf of their Teamster-represented employees to
    approximately 45 different health & welfare and pension funds. At the
    conclusion of the agreement, MFCA companies will be contributing $12.39
    per hour per employee for combined health and pension benefits, or a
    33% increase in benefit contributions from the previous contract. This
    is in addition to an annual wage increase.

                              Description of Plans

        MFCA member companies, along with UPS, car-haul companies and food-
    related companies are typically the largest contributing employers into
    most Teamster/trucking industry-sponsored pension plans. The 45
    Teamster/trucking industry benefit plans vary widely in size,
    geographic scope and number of covered employees. The two largest
    plans--the Central States Pension Fund and the Western Conference of
    Teamsters Pension Fund--have reported assets of $18 and $24 billion
    respectively and cover over 1 million active and retired employees in
    multiple states. Conversely, several smaller plans in the eastern
    portion of the United States have assets below $200 million and cover
    less than 1,200 active and retired employees.
        As Taft-Hartley plans, these pension funds are jointly-trusteed (an
    equal number of labor and management trustees) and provide a defined
    benefit (although some plans offer a hybrid defined benefit/defined
    contribution program). MFCA member companies are represented as
    management trustees on most of the plans to which they make
    contributions. In an effort to help improve the management of the
    plans, MFCA member companies have made a concerted effort to nominate
    as management trustees individuals with backgrounds in finance, human
    resources, and employee benefits. However, because of the legal
    restrictions placed upon trustees in furtherance of their fiduciary
    responsibilities, there is very limited control by our companies over
    the actions and decisions of trustees. Additionally, there is no single
    appointing authority for management trustees but rather a mixture of
    associations and labor relations organizations.

        Relationship Between Collective Bargaining and the Pension Plans

        In its report to this Committee, the General Accounting Office
    (GAO) reported that multiemployer plans ``contribution levels are
    usually negotiated through the collective bargaining agreement'' and
    that ``[b]enefit levels are generally also fixed by the contract or by
    the plan trustees.'' In our case, that is only partially correct: the
    NMFA only establishes a contribution rate. It does not set a pension
    benefit level. It is worth reviewing for the Committee the relationship
    between collective bargaining and the multiemployer pension plans.
        Like most multiemployer plans, our plans are maintained and funded
    pursuant to collective bargaining agreements. During each round of
    bargaining, the industry and union bargain and agree on the per-hour
    contribution rate required to be paid by employers to the plans for
    pension and health benefits. Once the rate is established, however, the
    role of the collective bargaining process and of the collective
    bargaining parties with respect to the plans--in terms of the level of
    benefits, the administration of delivering those benefits, management
    of plan assets, etc.--is over. For employers, the only continuing role
    in the plans is to make the required contractual contributions. That
    is, unless the plan, over which the employers have no control, runs
    into financial crisis. I will talk more about that in a moment.
        Each multiemployer pension plan is a separate legal entity managed
    by an independent board of trustees. It is not a union fund controlled
    by the union. Nor is it an employer fund, over which the employer has
    control. Rather, by law, the plans are managed independently by their
    trustees under a complex set of statutory and regulatory requirements.
    Although the trustees are appointed - half by the union and half by the
    employer - each trustee has a legal obligation to act not in the
    interest of the union or employer that appointed them, but rather with
    a singular focus on the best interests of the plans participants.
    Trustees who do not act in the best interest of participants may be
    held personally liable for breach of their fiduciary duty.
        As noted earlier, employers' role with respect to multiemployer
    pension plans is limited to making contributions unless the plan runs
    into financial difficulty. Under current law, employers are ultimately
    responsible for any funding deficiency that the multiemployer plan may
    encounter. Specifically, if a multiemployer plan hits a certain
    actuarially-calculated minimum funding level, employers in the fund are
    assessed a five percent excise tax and are required to pay for their
    pro-rata share of the funding shortfall or face a 100% excise tax on
    the deficiency. The requirement to make this payment of the shortfall
    effectively removes a key element of contract negotiations--employee
    benefits--from the collective bargaining process.
        This framework is modeled after the single employer plans. With
    single employer plans, a company sets up a pension plan and the company
    is responsible if the plan becomes underfunded. But, the big difference
    between single employer plans and multiemployer plans in this context
    is that a company controls its plan--determines benefit levels--where
    as employers in multiemployer plans do not have that kind of control.
    Like other multiemployer contributing employers, MFCA companies find
    themselves with ultimate responsibility for the plans into which they
    contribute with no control over the fund's administration.

                           How We Got To Where We Are

        The year 1980 witnessed a defining moment in the history of the
    trucking industry. Or more accurately, two defining moments. In that
    year Congress passed two major legislative initiatives--the Motor
    Carrier Act (MCA) and the Multiemployer Pension Plan Amendments Act
    (MEPPA)--that radically altered the profile of the industry and the
    landscape for industry-sponsored pension plans. The first brought about
    deregulation of the trucking industry and all the associated market
    dislocations. The second upset the essential balance between exiting
    and entering employers that is key to maintaining a viable
    multiemployer pension program.
        No one disputes the economic benefits to the American economy from
    deregulation of the trucking industry. Customers have more options,
    freight moves more efficiently and productively and total
    transportation/logistics costs have been reduced. But those benefits
    have not come without cost and part of those costs are associated with
    the departure of unionized truck companies as contributing employers to
    multiemployer pension plans.
        To put this in some perspective, I have included in my statement
    (Appendix A), a list of the top 50 general freight, LTL carriers who
    were operating in 1979, the year just prior to enactment of MCA and
    MEPPA. Of those 50, only 7 are still in operation and only 5 of the 7
    are unionized. Virtually all of the 43 truck companies no longer in
    business had unionized operations, and consequently were contributing
    employers to industry-sponsored pension plans. There have been no
    subsequent new contributing employers of similar size to replace these
    departed companies. And beyond the top 50 there were literally
    hundreds, perhaps thousands, of smaller unionized truck operators who
    also have fallen by the wayside.
        The dynamic of our economic system is the right to grow and
    flourish as well as the risk of failure and bankruptcy. Unfortunately,
    in the world of MEPPA we are no longer sure who really qualifies as the
    winner. Trucking companies fiercely compete in the marketplace but
    perversely have to hope their competitors don't go under. We have
    become not only our brother's keeper, but also the keeper of his
    pension liabilities. Or as the GAO report to this Committee described
    the situation:
            ``Thus an employer's pension liabilities become a function not
            only of the employer's own performance but also the financial
            health of other employer plan sponsors.
        The simple fact is that since 1980 there has not been a single
    trucking company of any significant size to replace any of the departed
    companies on the Top 50 list. Part of that can be explained by the
    overall trends in collective bargaining. But there can be no question
    that the risk attendant to withdrawal liability has proven to be a
    powerful disincentive for new employers to come into trucking industry
    plans.
        Withdrawal liability clearly has been a barrier to new contributing
    employers coming into the funds but there's also strong evidence that
    it has not resulted in any significant recovery of liabilities of
    withdrawing employers, one of the key assumptions of the original MEPPA
    debate. One of the largest trucking industry plans reports that
    bankrupt (withdrawing) employers ultimately pay less than 15% of their
    unfunded liability. And what happens when these liabilities are not
    fully recovered? They become the responsibility of the remaining
    contributing employers.
        Nothing highlights the inequity of this situation more than the
    recent bankruptcies of two contributing employers: Consolidated
    Freightways (CF) and Fleming Companies. Both companies were large, top
    10 contributing employers to the Central States plan. They also
    sponsored their own company, single-employer plan. Last June, PBGC
    announced it was assuming responsibility for the CF plan with a
    potential liability of $276 million. On February 12, 2004 PBGC
    announced it was assuming the Fleming plan with a projected liability
    of $358 million. The combined liability for PBGC of the two companies'
    single employer plans will be $634 million.
        Conversely, the Fleming and CF employees/retirees covered under
    multiemployer pension plans like Central States will now be the
    responsibility of the remaining contributing employers, less whatever
    these plans can recover in withdrawal liability payments. These
    beneficiaries will be entitled to a guaranteed full pension benefit.
    This will only add further cost to what is already one very stark
    financial fact of life for the Central States fund: half of its annual
    benefit payments now go to beneficiaries who no longer have a current
    contributing employer.
        The problem of taking on the increasing pension liabilities of
    individuals who no longer have an active employer making contributions
    into the fund is further exacerbated by the demographic trends and
    increasing costs of other employee benefits. Before the decade is out,
    it is very likely that several large trucking industry plans will have
    two retirees for every one active. Without any significant new
    contributing employers, it is difficult to see that trend slowing down
    or reversing.
        MEPPA delineates a very different role for PBGC with respect to
    single employer versus multiemployer plans. The GAO report identifies
    four: monitoring, providing technical assistance, facilitating
    activities such as plan mergers, and financing in the form of loans for
    insolvent plans. In contrast to PBGC's more aggressive role with single
    employer plans, these are relatively passive activities. It was not
    until the recent Congressional debate over whether to provide limited
    relief to multiemployer plans that attention was focused on the need to
    have a better understanding of the true financial condition of these
    plans. And underlying that need was a concern whether the relief would
    provide assistance for a truly short-term issue or mask a more
    fundamental, long-term problem.
        Furthermore, the remedies available to multiemployer plans in the
    form of amortization relief or waivers are often viewed as ``last
    resort'' solutions. There are no intermediate steps that can assist a
    plan well before it reaches this point.

                            Where Do We Go From Here

        The single most significant problem confronting multiemployer plans
    in the trucking industry is the declining number of new participants.
    The multiemployer concept is a workable model if there are sufficient
    contributions being made today to sustain payment of current benefits.
    And as we have seen with recent history, heavy reliance on investment
    income can leave plans vulnerable to the vagaries of the market.
        However, the fact that there is a shrinking number of unionized
    trucking companies or that people are living longer are beyond the
    scope of what we are here to discuss today. There are simply some
    things we cannot change.
        But, as indicated at the beginning of my statement, we believe
    there are changes that can be made and that reform of the MEPPA statute
    is both necessary and timely. To assist the Committee in developing its
    reform proposal, we would respectfully suggest that several key issues
    be addressed.
    Withdrawal Liability
        It is no secret that the current framework for collecting
    withdrawal liability is broken. It doesn't collect the unfunded
    liabilities it was designed to collect, leaving most multiemployer
    plans--and ultimately all other contributing employers in the plan--
    responsible for benefits of withdrawn employers. Additionally, as
    noted, withdrawal liability makes multiemployer plans very unattractive
    to new employers.
        The number of unfunded participants--those whose employer has
    withdrawn from the fund and is no longer making contributions--has
    created such a significant burden at some plans that drastic action may
    be required.
        We would recommend that Congress direct the PBGC to undertake a
    comprehensive study of the unfunded participant issue and the financial
    burden it poses on multiemployer plans. Obviously, plans and the
    contributing employers cannot survive long term if only a handful of
    viable truck companies are responsible for the last 50 years of
    trucking industry retirees.
        There also needs to be some exploration of alternatives to
    withdrawal liability that maintain the integrity of the plans but
    remove the disincentive for potential new contributing employers. Among
    other things, serious consideration should be given to developing a
    ``withdrawal formula'' that will align benefits of employees of
    withdrawing employers to the amounts actually recovered.
    Greater Multiemployer Plan Controls/Oversight
        The basic structure of multiemployer plans makes plan design--and
    certainly benefit reduction--decisions very difficult. Notwithstanding
    the fiduciary requirements on trustees, taking unpopular actions to
    correct plan funding issues can have political consequences for union
    trustees and union officials. Notwithstanding the essential benefit
    modifications required at Central States last year, it took the
    trustees more than a year to agree on cuts, and they occurred only
    after the judge overseeing the Fund imposed them. I believe we have to
    accept the reality that it will be very difficult for multiemployer
    plan boards to make necessary changes particularly for severely
    distressed plans.
        As multiemployer legislation is considered, serious consideration
    should be given to whether additional procedural or legal controls over
    the management of the plans could prevent serious funding issues.
    Something as simple as imposing funding policy guidelines that mandate
    clear targets for the plan's unfunded liability. The Teamsters Western
    Pension Fund has long had a funding policy that established the funding
    levels and requires the trustees to adjust benefits based on the
    levels. Plan modifications are virtually automatic.
        Additionally, consideration should be given to requiring that the
    level of plan benefits be more closely tied to the level of plan
    contributions and available assets. This may require a hard look at
    anti-cutback provisions. If trustees want to increase benefits during
    good times, there should be less restriction on their ability to reduce
    benefits during bad times.
        We also believe that there needs to be additional oversight and
    procedures to handle funds if they do develop funding problems.
    Consideration should be given to enhancing the PBGC monitoring
    function. It is helpful to have a ``Watch List'' but it's more
    important to have the ability to act on that ``Watch List.'' The
    current PBGC program could be expanded to differentiate between plans
    that are financially healthy, not-so-healthy, and troubled. For those
    plans in the latter two categories, appropriate remedial steps should
    be taken to address the particular problems. There is no reason why
    multiemployer plans should not receive more attention from the PBGC.
        Additionally, there should be a review of the procedures and
    conditions for granting amortization or waiver relief to determine if
    these provide appropriate solutions given the financial condition of
    the plan and that of the contributing employers.
        Finally, we believe that consideration needs to be given to the
    development of fiduciary guidelines for trustees to facilitate the
    merger of plans. If two pension plans can cover 85% of the country,
    there is no reason why we need twenty to cover the remaining 15%. Yet,
    notwithstanding the best efforts of plan trustees to consider plan
    mergers, there remain issues of fiduciary responsibility that hinder
    this effort.
    Correct the Imbalance of Employer Responsibility/Burden
        MFCA believes there needs to be a comprehensive review of the
    relative roles and responsibilities as between contributing employers
    and multiemployer plans. Employers cannot be expected to bear ultimate
    responsibility for the financial viability of plans, but at the same
    time be precluded from any ability to hold the plan and its trustees
    accountable.
        Finally, the excise tax on contributing employers must be
    eliminated. It is punitive and provides no benefit to the plan. It may
    provide some measure of accountability for single employer plans in
    which the employer controls both funding and decision-making, but not
    in the multiemployer world in which the employer has no control of the
    latter.
        In conclusion, I want to once again thank the Subcommittee for its
    willingness to review the issue of multiemployer plans and to consider
    our views and suggestions on this matter. I am happy to answer any
    questions you may have.

    [GRAPHIC] [TIFF OMITTED] T3386.045

                                     ______

        Chairman Johnson. Thank you, sir. I appreciate your
    testimony. You certainly may submit the rest of it for the
    record.
        Mr. Lynch. Thank you very much.
        Chairman Johnson. I recognize the gentleman next to you.
    What do you want me to call you? Rocky?
        Mr. Miller. Rocky is fine.
        Chairman Johnson. Thank you, sir. You're recognized.

    STATEMENT OF JOHN S. (ROCKY) MILLER, JR., PARTNER, COX, CASTLE
                   & NICHOLSON, LLP, LOS ANGELES, CA

        Mr. Miller. Thank you, Mr. Chairman, Ranking Member Andrews
    and Committee members. It is a privilege to appear in front of
    you today. I have submitted written remarks that I won't
    repeat.
        I have essentially suggested three items for consideration
    by the Committee in considering multi-employer reform, and the
    first is to tinker with care. The multi-employer defined
    benefit pension plan system is a very different animal than the
    single-employer system, and it needs to be recognized as such
    and treated as such.
        The second suggestion is that the Deficit Reduction Act
    funding limitations for multi-employer plans be forever removed
    or at least removed permanently to see how it operates
    prospectively. We do not believe that there are the same
    potential for tax avoidance in a multi-employer system that
    there is in the single-employer system, because once a multi-
    employer employer contributes to that multi-employer plan,
    contributions--those contributions are gone from that employer.
    And while the small employers who contribute to multi-employer
    plans do so to provide a superior benefit than they could do
    individually, they do not want to provide an excessive benefit.
        So to have a funding limitation, is not necessary for
    multi-employer plans and, unfortunately, the existence of the
    deficit reduction act contribution limitation is, in fact, the
    reason that the multi-employer system is in front of you for
    reform today. Because it more than anything caused the under
    funding that we are seeing.
        All plans that I am aware of reached full funding at the
    late '90's and began having to improve benefits on a permanent
    basis or take other steps to stop funding in order to avoid
    becoming over funded. And, of course, we all knew as that was
    done that we were at the end of our historic bull market, and
    we were going to regress to a 7 1/2 percent ongoing rate of
    return.
        So it was crazy to have to stop funding at that point, and
    most of the plans have had a predictable 25 percent downturn in
    their funding status, which would not have happened but for
    that limitation.
        And then the next point is that we need to find a way that
    is designed for multi-employer plans to encourage the plans to
    have a minimum funding level so that we can get the funding
    above a full funding point and insure that it will--that
    inbound turns it will not drop below full funding point or an
    appropriate funding point.
        However, that is a difficult concept to impose. For
    example, the suggestion of a 90 percent funding level and there
    would be no benefit improvements if you're below that level, I
    don't believe that is a workable rule, because in a
    collectively bargained system, which is a voluntary system, the
    employees, the union, and the employers all have to believe in
    the plan to work together to keep it appropriately functioning.
        And if you cease improving benefits in the collective
    bargaining process, it reduces the employee willingness to
    stick with the plan. Their demands will go elsewhere. They'll
    go to other benefits and to wages, and that defeats the
    employer's ability to over fund the plan. So the experience
    that we have is that you can get over funding--appropriate over
    funding of multi-employer plans if you negotiate for it, and
    part of that negotiation process has to be to incrementally
    allow benefit improvements.
        I have not seen a proposal yet that deals with how to
    address this problem. I think it is one that needs to be
    studied. One of the ways that it has practically been addressed
    in negotiations is to price benefit improvements over the life
    of the collective bargaining agreement, and in terms of the
    package that the employers are putting on the table of ``X''
    dollar an hour, if the union wants a benefit improvement of a
    certain type, actuarily what is the cost of that over the life
    of the agreement. And you can come--that has worked pretty well
    in Southern California. So I see my time is up and I will
    cease.
        [The prepared statement of Mr. Miller follows:]

       Statement of John S. (Rocky) Miller, Jr., Partner, Cox, Castle &
                         Nicholson LLP, Los Angeles, CA

        Mr. Chairman and members of the Committee, it is a privilege to
    appear before you to discuss the Multiemployer Pension Plan system. I
    am speaking on my own behalf and as a member of Cox, Castle & Nicholson
    LLP.
                I. Background

        Cox, Castle & Nicholson is a full service law firm for the real
    estate and construction industry that has been continuously involved in
    multiemployer plans from their inception in the mid-1950's. For over 50
    years, it has been counsel to the Associated General Contractors of
    California. Throughout that time, it has been involved in assisting
    AGC, other multiemployer associations and individual employers in their
    negotiations of labor agreements with construction industry and other
    unions. In the 1950s and 1960s, Cox, Castle & Nicholson helped create
    many of the multiemployer benefit plans negotiated in Southern
    California. It then served as management co-counsel to many of those
    plans.
        I have been involved in multiemployer benefit plan issues and in
    management-side labor relations my entire career. I began practicing
    law with Cox, Castle & Nicholson just as ERISA had become applicable to
    multiemployer benefit plans. I have represented multiemployer
    associations, individual employers, and the boards of trustees of
    multiemployer benefit plans of all types in all of the various legal
    matters they encounter. For almost 25 years, I have participated on
    behalf of employers in industry-wide multiemployer labor negotiations
    and in single employer labor negotiations, all of which have involved
    benefit plan issues. On behalf of multiemployer pension plans, I have
    been privileged to defend before the U.S. Supreme Court the
    constitutionality of the Multiemployer Pension Plan Amendments Act of
    1980 upholding the construction industry withdrawal liability rule.
    Conversely, on behalf of the owners of a shop employer, I was fortunate
    to obtain the only injunction issued by a District Court barring on
    constitutional grounds the retroactive application of the Multiemployer
    Pension Plan Amendments Act of 1980 withdrawal liability to a non-
    construction industry employer. I have also been honored to serve as a
    member of the ERISA Advisory Council of the U.S. Department of Labor,
    and I am an employer-side director of the National Coordinating
    Committee for Multiemployer Plans and a district director of the
    Associated General Contractors of California.

                II. Multiemployer Plans Are Worth Preserving

        Multiemployer benefit plans enable tens of thousands of mostly
    small employers to provide retirement, medical and other benefits to
    millions of their employees. The benefits provided are of a
    significantly better quality than these employers would ever have been
    able or willing to provide individually.
        The small employers that I have encountered over the years in
    construction industry multiemployer plans have a strong and uniform
    desire to provide quality retirement and medical benefits to their good
    employees, provided that the employers can still be competitive and
    profitable in the process. Employers who participate in multiemployer
    plans face competition day-in and day-out from employers who provide
    either no benefits or minuscule benefits to their employees. Employers
    who contribute to construction industry multiemployer plans must be
    more efficient, better organized and more sophisticated in order to
    survive and to stay competitive. A key part of that is having access to
    the best-trained and most productive employees.
        These small employers make a choice each time labor negotiations
    recur, typically every three to five years, whether to continue to ``be
    union'' and bound to collective bargaining rules and multiemployer
    benefit plan obligations or whether to opt out of a multiemployer
    bargaining group in order to abandon those burdens and compete
    unimpeded. In negotiations over the last ten to fifteen years in
    Southern California, comparatively few employers have chosen to leave.
    Those that wanted to, by and large, got out long ago.
        Instead, these employers remain and negotiate aggressively on a
    combined basis to maintain their competitiveness and profitability
    while finding some common ground with the unions representing their
    employees that protects and often improves incrementally the employees'
    living standard contract after contract. This negotiation continues in
    a more collaborative sense as management trustees sit across from labor
    trustees and jointly-manage their multiemployer benefit plans. Benefit
    levels are adjusted by mutual agreement with the aid of sophisticated
    actuarial calculations and advice. In many settings, benefit
    improvements approved by labor and management trustees must also be
    agreed upon by the multiemployer associations and the union that
    sponsor the benefit plan in question.
        By this process, thousands of small construction employers in
    Southern California throughout the last forty years have provided the
    employees who worked for them and for their predecessors and
    competitors in the 30s, 40s and 50s, before multiemployer pension plans
    were even established, with high-quality retirement benefits paid for
    out of contributions made on hours worked by current employees. These
    small employers agreed with their unions to act in the same manner as
    Congress determined to act when adopting Social Security, finding that
    those who worked before the plans were created and who had paid nothing
    toward a pension benefit were still deserving of a benefit. These
    employers, the unions and their members, mutually agreed that money
    that might otherwise go toward a pension for the hour worked by a
    particular employee would instead go to the generation that preceded
    him or her. This Social Security-style transfer of income continues by
    mutual agreement but to a declining degree. To this day, retirees in
    many multiemployer plans who worked in the early years of those plans
    when hourly contributions were $0.05, $0.10 or $0.25 an hour, are
    receiving pension benefits for those years of service that
    significantly exceed the income that could have been generated off of
    those contributions. At the same time, the small employers acting
    through their multiemployer associations have worked with the unions
    and their employees to fully fund their pension plans in order to
    ensure that the hours currently worked by employees could be rewarded
    upon retirement by payment of the full pension benefit promised for
    that hour of service.
        Today, these employers and their unions are facing the sudden
    underfunding of their promised benefits as a consequence of the
    downturn in the markets and the decline in interest rates to historic
    lows. But, the multiemployer bargaining groups are already addressing
    this underfunding with their unions at the bargaining table as each
    multiemployer labor agreement comes up for renegotiation. Recent
    multiemployer labor agreement settlements have dedicated almost all
    compensation increases to re-funding pension plans and to maintaining
    healthcare plans. Yet, the average annual percentage cost increase
    reflected in such labor agreements has not increased materially beyond
    the settlements that were occurring before the downturns. Employees are
    willingly foregoing wage increases to protect benefit levels. This
    reflects the importance of these multiemployer plan benefits to the
    employees of these small employers and the simultaneous willingness of
    the unions and their members to keep their employers competitive with
    employers who do not provide such benefits.
        This conduct is, in effect, a voluntary increase by employees of
    their savings rate at the expense of their take-home pay. This is
    conduct Congress has tried to promote for twenty years or more with no
    success. Yet, over that same twenty-year period and continuing today,
    employers, their employees and unions involved in multiemployer
    negotiations have been practicing what Congress has preached.
        This is a benefit system that works. The participants in it, on the
    whole, have received greater benefits from it than other employees have
    received from individual employers. It should be facilitated and
    strengthened.

                III. Congress Giveth And Congress Taketh Away

        The success of multiemployer plans is attributable to Congress. The
    severity of today's under-funding problem is also attributable to
    Congress.
    A. The Good
        Multiemployer plans exist and have been successful because of
    Congress. Through various legislation in the 1930s and earlier,
    Congress took steps to exempt employers and unions from antitrust and
    conspiracy laws to permit unions to organize and to permit employers to
    combine together and negotiate with unions. In the Taft-Hartley Act in
    1947, Congress authorized the creation of multiemployer benefit plans,
    provided that employers and unions managed them jointly. In 1959, in
    the Landrum Griffin Act, Congress redressed certain abuses that were
    occurring in such plans. In 1974 in ERISA, Congress imposed funding
    requirements and other constraints on multiemployer plans to ensure
    that promised benefits would be there when participants reached
    retirement. In 1980, in the MPPAA, Congress imposed upon employers in a
    multiemployer plan the financial obligation to make good on the
    pensions promised by that plan. This financial discipline was imposed
    by the concept of ``withdrawal liability : an employer withdrawing from
    a multiemployer pension plan must pay to the plan that employer's
    respective share of the unfunded vested pension liabilities of that
    pension plan. Further, Congress imposed financial liability on all
    contributing employers in a multiemployer plan to fund unfunded
    benefits should the plan terminate in an underfunded status.
        These various Congressional enactments have taken a multiemployer
    plan system created among private parties and managed, maintained and
    grown by the day-to-day decisions of small employers and their unions
    and have channeled those private actions to ensure that all
    multiemployer plans reached proper levels of funding and were managed
    in an appropriate manner along the way. Congress' actions were a
    success. By the end of the 1990s, the overwhelming number of
    multiemployer pension plans were essentially fully funded.
    B. The Bad
        Unfortunately, Congress also subjected multiemployer plans to the
    Deficit Reduction Act. This well-meaning Congressional enactment
    imposed upon multiemployer pension plans a full-funding limitation.
    Actuarially, the maximum level to which a multiemployer plan could be
    funded was approximately 110% of liabilities. Most plans hit this
    ceiling at the end of the 1990s. At that time, all multiemployer plan
    trustees knew that the bull market in stocks had lasted a very long
    time. If actuarial use of a 7.5% or so expected long-term investment
    rate of return had any validity at all, rates of return in the markets
    had to revert to the mean and were likely to do so sooner rather than
    later. Nevertheless, to prevent employer contributions from becoming
    non-deductible under the Deficit Reduction Act, either pension benefits
    had to be raised or employee contributions had to be cut.
        Throughout the country, multiemployer plans improved benefits. They
    did not do so inappropriately. The benefit improvements were warranted
    for the participants that would receive them. And, in many cases,
    employer contributions were also reduced, usually to be diverted to
    wages or medical benefit plans, but not always. In competitive markets,
    contributions were not infrequently reduced without diversion to other
    employee costs.
        The problem of these actions was in the timing compelled by the
    Deficit Reduction Act. The benefit increases raised plan liabilities
    and decreased the cushion of overfunding available to withstand a
    reversion to the mean in investment returns. Absent the artificial
    funding ceiling of the Deficit Reduction Act, benefit improvements
    would have been agreed upon in smaller amounts spaced over a longer
    period of time. Employers, unions and both labor and management
    trustees would have continued to increase the ``overfunded'' levels of
    their plans in anticipation of a certain stock market downturn.
        Naturally, just as most of these Deficit Reduction Act benefit
    improvements and contribution reductions had gone into effect,
    investment returns did begin regressing to the mean. Many multiemployer
    plans fell from full funding status to funding levels between 70% and
    75% within these years. Some fell lower.
    C. The Ugly
        Then, in the depths of an investment downturn that will one day
    cycle back up as surely as it was due to cycle down, some multiemployer
    plan trustees and the employers and unions that sponsor them discovered
    another crisis. Their plans are facing minimum contribution obligations
    under the funding standards of ERISA. The prospect exists that some of
    these plans will have to assess the employers that participate in these
    plans extra contributions. In theory, these can be imposed in the
    middle of the term of a collective bargaining agreement without the
    agreement of the employers. Thus, an employer group that perhaps risked
    a strike to persuade their employees that the employers could not
    afford a penny more in labor cost is suddenly at risk of being told
    that they may each owe a dollar an hour extra to ``heal'' the
    multiemployer pension plan.
        Obviously, if any such impositions occur, the multiemployer plans
    that are involved may well be forever terminated by the employers as
    soon as possible. And other multiemployer plans will become less
    acceptable to small employers because of the perceived risk of
    contribution obligations being imposed over and above the wage and
    benefit costs agreed to in collective bargaining. For small employers
    who have been responsible in their participation in the management of
    multiemployer plans, such an outcome, based on an investment cycle
    downturn, is simply incomprehensible. It is one thing to tie one's
    economic fortunes to the unknowns of union negotiations. It is quite
    another to tie one's fortunes both to that unknown and to the unknowns
    of Congressional formulas that can produce surprise, immediate, extra
    cost impacts based on temporary conditions.
    D. The Aftermath
        Congress has identified the problem of the Deficit Reduction Act
    and provided in EGTRRA a temporary relaxation in the funding formula
    applicable to multiemployer plans. However, it is too little, too late.
    It will be years before any multiemployer plan is able to take
    advantage of the temporarily relaxed funding rules. In mature pension
    plans where a portion of plan income every year is spent on current
    pension benefit payments, a projected actuarial rate of return of 7.5%
    may only leave a return of 4% or less to rebuild plan funding levels.
    When an economic downturn has reduced funding levels by 25%, funding
    levels are rebuilt slowly.
        Thus, the much more immediate problem for some multiemployer plans
    is the minimum contribution obligation. Congress was asked to assist
    the multiemployer plan community in the temporary relief legislation.
    Early reports on the relief that was granted suggest that it was so
    narrowly drafted that it will assist almost no plans. Yet, numerous
    plans are reportedly in need of temporary help and are plans that can
    likely return to full funding and prosperity if the collective
    bargaining parties and the trustees of the plan are simply afforded
    some time in which to re-fund the plan in a prudent manner.

                IV. Multiemployer Plan Funding, Disclosure and Security--
                        Suggestions for Reform

    A. Tinker with Care
        As the Deficit Reduction Act has demonstrated, the multiemployer
    plan system can be damaged and endangered by well-meaning Congressional
    action. The damage, once imposed, can take years to repair.
        Multiemployer plans are complex. They represent a cost and risk to
    small employers that can easily become unacceptable if their cost is
    not predictable or if adequate time does not exist to address cost
    increases and other problems incrementally and through a series of
    scheduled collective bargaining negotiations.
        The reasons employers contribute to multiemployer plans and the
    consequences of their contributions are different from some of the
    reasons employers have in contributing to single employer plans.
    Consequently, ``improvements'' to multiemployer plan regulation should
    be carefully studied in advance and supported by the multiemployer
    associations and unions that must live with the consequences of the
    regulation.
        Congressional respect and appreciation should be given to the
    employers who voluntarily assume the economic burdens of a
    multiemployer plan to guarantee benefits for their own employees and
    for the other participants in a plan. This respect should permit
    greater recognition that multiemployer plans are, indeed, different
    than other plans and should be treated as such. This respect should
    also produce a recognition that, when multiemployer plans encounter
    difficult times, the parties to those plans have a significant
    incentive among themselves to solve those problems in a mutually
    agreeable manner and to restore the health of the plans.
        The PBGC was mightily worried in the early days of ERISA that
    multiemployer plans in declining industries would impose dramatic
    funding obligations on the PBGC. Had Congress not modified ERISA
    appropriately, it is not inconceivable that the sky might have fallen.
    However, Congress acted carefully and incentivised employers and unions
    to solve the underfunding problems that existed early in the life of
    the nation's multiemployer plans. Over the twenty years that followed
    the passage of ERISA, the employers contributing to multiemployer plans
    funded those plans fully in almost all respects.
        Respect should also prompt caution. Claims that multiemployer plans
    are unstable in competitive markets or in declining industries should
    not be accepted without the input of the entire community of employers
    contributing to multiemployer plans. Further, they should not be
    accepted without study of those plans that have continued to exist in
    declining industries and the lessons they may provide. Multiemployer
    plans in the mining industry and plans of the ILGWU have suffered
    dramatic losses of contributing employers and of hours on which
    contributions are received. Yet, reports suggest that these funds have
    survived to pay promised benefits to the participants in them.
        In sum, much about the multiemployer plan system ``ain't broke''
    and shouldn't be ``fixed.''
    B. Remove the Deficit Reduction Act Funding Limitations from
            Multiemployer Plans on a Permanent Basis
        Employers contributing to multiemployer plans should be allowed to
    overfund those plans without limitation to ensure that promised
    benefits can be provided even if economic downturns, declining industry
    conditions or departure of other contributing employers impair the
    current and future prospects of the plan. This is protective of the
    PBGC. Yet, it is not likely to be detrimental to the Treasury.
    Employers contributing to multiemployer plans do not have an incentive
    to overfund those plans to any greater degree than is prudent for the
    health of the plans.
        Employers contributing to single-employer plans are different. They
    have a tax incentive to shelter income through the tax deductibility of
    contributions to the plan. Past behavior demonstrated these incentives
    as single employers used a variety of actions to overfund plans and
    then regain control of the excess assets.
        In multiemployer plans, once an employer makes a contribution to
    the pension plan, it is, for all intents and purposes, gone from that
    employer's pocket. It will be used, one way or another, to the benefit
    of the employee participants in the plan. It will not revert to the
    employer.
        The only way a contributing employer can gain an advantage from an
    excess contribution to a multiemployer plan is, in theory, to obtain a
    reduced obligation to contribute at some point in the future. However,
    obtaining such a benefit requires the agreement of the union and its
    members and of all the other contributing employers.
        What actually happens with multiemployer plans is that excess
    contributions are usually converted to increased pension benefits
    somewhere along the way. If employers are granted reduced contributions
    by the union at a future date, it is likely to be in exchange for
    diversion of that contribution to wages or medical coverage. In rare
    cases, it could be to help reduce the employers' costs and keep them
    competitive.
        Nonetheless, all of the foregoing outcomes are non-abusive,
    appropriate adjustments of economic conditions among private parties.
    None warrant imposition of funding limitations.
        Most fundamentally, while employers may want to provide a good
    retirement benefit to their employees; they never want to provide an
    excessive retirement benefit. Thus, the employer groups participating
    in multiemployer plans are very unlikely to over-contribute to those
    plans.
        Whether a multiemployer group concludes that a funding level of
    120% or 150% of promised benefits or even higher is an appropriate
    target to insulate the plan from the risks of changing economic
    conditions, Congress should not be concerned. Indeed, at this point,
    such overfunding of multiemployer plans by multiemployer groups, given
    the current economic circumstances of plans, is unlikely to occur
    within this decade.
        Congress should applaud overfunding by multiemployer groups rather
    than being concerned about imposing a ceiling. The more well-funded a
    plan is, the less likely it will ever be a burden to the PBGC, or the
    taxpayer or the participating employers remaining within the plan even
    if the employment in the industry in which the plan exists disappears
    overnight.
    C. Mature Multiemployer Pension Plans Need to be Encouraged by an
            Appropriately-Designed Set of Incentives to Become Overfunded
            and to Ensure that Funding Levels Thereafter will not Drop
            Below an Appropriate Minimum Funding Level
        Employers contributing to multiemployer plans would like to know,
    in theory, that their plans are overfunded and that these plans will
    not drop below a fully funded level no matter how severe economic
    conditions may become. The problem is how to achieve such a result.
        For example, to say simply that a plan must remain more than 90%
    funded is to impose a rule that cannot be met for years to come and
    that will cause dislocations in collective bargaining conduct and
    disincentives among employees to the continued retention of the
    multiemployer pension plan benefit. Full funding in a collective
    bargaining setting is achieved incrementally. As is illustrated in the
    appendix which follows these suggestions, unions and union members will
    trade small benefit improvements for a commitment to increased funding
    levels, but it becomes very difficult for them to agree that no benefit
    improvements will ever be adopted unless and until a funding level is
    exceeded. If they face such a restriction on their negotiating ability,
    they may well divert their demands to other benefits impairing the
    ability of the employer group to achieve and maintain full funding of a
    defined benefit pension plan. On the other hand, if a minimum funding
    limitation is developed that permits the negotiation process to trade
    off appropriate improvements here and there in exchange for a program
    of overfunding a pension plan and maintaining it above a minimum
    threshold, the multiemployer pension plan system is encouraged and
    protected rather than destabilized.
        No set of incentives for minimum funding has yet been surfaced that
    would appear to strike the right balance. It may prove to be an elusive
    concept. However, it is worth studying. One starting point would be to
    challenge the actuarial community to bring forth some concepts to
    address this issue.
    D. Revisit the Minimum Contribution Requirement for Multiemployer Plans
            to Address the Temporary Problems of Existing Plans and to
            Ensure that the Contribution Formula Is Appropriate for the
            Future
        Mandatory contributions imposed outside the collective bargaining
    cycle are destructive of multiemployer plans and the multiemployer plan
    system. Funding rules must be sufficiently stable and predictable that
    collective bargaining parties can deal with the rules in the regular
    collective bargaining cycle.
        For this immediate period of time, where the Deficit Reduction Act
    has contributed to the current underfunding of multiemployer plans,
    particular care should be given to whether or not those plans facing
    minimum funding standard deficiencies should be given greater leeway to
    recover from their economic circumstances.

                CONCLUSION.

        Many other issues can be raised and suggestions advanced for
    inclusion in a long-term reform package for multiemployer plan
    regulation. However, I will not suggest any further points here in
    these prepared remarks as they may serve to detract attention from the
    more important reforms and reform process suggested above.
        I have attached one further comment as an appendix to these
    remarks. It is a brief illustration of how four construction industry
    multiemployer plans in Southern California were created, developed and
    managed under the changing regulatory and economic environment. Each
    plan and the union and employers that sponsored it have behaved
    differently, yet each plan has prospered and suffered quite similarly
    under Congress' enactments and under the economic and competitive
    conditions surrounding it. Together, the experiences of these plans
    demonstrate their importance to the sponsoring employers and their
    employees and the inherent stability and promise these plans retain for
    providing an appropriate mechanism for delivering pension benefits.
        I appreciate very much the opportunity to appear before you. I
    would be pleased to assist the Committee further in any way it desires.
    And I look forward to responding to any questions you may have. Thank
    you.

                                    APPENDIX

                COMMENT--THE CONSTRUCTION INDUSTRY MULTIEMPLOYER PENSION
                        PLANS OF THE BASIC TRADES IN SOUTHERN CALIFORNIA
                        PROVIDE A GOOD EXAMPLE OF HOW CONGRESSIONAL ACTION
                        HAS BENEFITED AND BURDENED THE MULTIEMPLOYER
                        PENSION PLAN SYSTEM AND OF THE STABILITY AND VALUE
                        OF THESE PLANS TO SMALL EMPLOYERS AND THEIR
                        EMPLOYEES
        The value of multiemployer plans and the impact of Congressional
    action upon them, both beneficially and detrimentally, is well-
    illustrated by the experience of the multiemployer pension plans in
    Southern California of the ``Basic Trades'', the Carpenters, Laborers,
    Operating Engineers and Cement Masons. In particular, the experience of
    these multiemployer plans demonstrates the responsible and varied
    conduct of the employers and unions that sponsor multiemployer plans
    and of the management and labor trustees that jointly manage such
    plans.
        These plans were all created in the early 1960's. They were each
    created through master labor agreements between and among the four
    trade associations of general contractors and the councils and locals
    of the four unions in Southern California. The hourly contribution into
    the plans was minimal at first, a nickel or a dime an hour.
    Nevertheless, each of the plans began providing pension benefits almost
    immediately to those who had worked a sufficient number of years in the
    industry prior to the creation of the plan to qualify for coverage.
    Essentially, 15 years of service was required. When ERISA was
    implemented by the plans in 1976, each of the plans retained their 15
    year benefit programs and added a 10 year ``ERISA plan'' that satisfied
    the minimum requirements of ERISA.
        After ERISA was adopted, the employer associations objected
    vehemently to ERISA's definition of a ``defined contribution'' plan.
    The employer groups all had negotiated with each union express
    understandings that the employers' only obligation to the pension plan
    was the hourly contribution. ERISA appeared to impose greater liability
    on the employers. This debate continued, in California and around the
    country, until the adoption of the MPPAA in 1980. The MPPAA clarified
    that employers contributing to multiemployer plans were, in fact,
    liable for their share of the unfunded vested liabilities of a pension
    plan. At the time the MPPAA went into effect, one of the four plans was
    only 25% funded. All had substantial unfunded liabilities exceeding
    $300 million for each of the three large plans. Employers who
    considered leaving these plans and incurring withdrawal liability were
    looking at acquiring $30-50,000 of liability for each full-time
    employee equivalent per year over a 5-year ``look-back'' period.
        Beginning in 1980, through collective bargaining, the employers and
    each of the unions agreed that pension benefits would not be raised
    again without substantial progress being made toward funding the plan.
    At a minimum, the employers and each union agreed that sufficient
    contributions would be directed to the pension plan to reduce the
    actuary's estimated time necessary to fund the plan by one year for
    each year that passed. At the time withdrawal liability was imposed,
    the expected amortization periods mostly exceeded 20 years.
        During the 1980's, the employers and each union gradually but
    substantially increased the rate of contribution to each pension plan.
    All agreed that pension benefits would not be increased except for the
    occasional adjustment here and there to address specific problems of
    particular groups.
        By the late 1980's, two of the plans approached full funding. From
    that time on, one union agreed with the employers to freeze its defined
    benefit plan and to create a defined contribution plan into which all
    future contributions would flow. The other union and the employers
    continued to fund its defined benefit plan, improving benefits
    somewhat, but building a reserve beyond full funding.
        By the early 1990's, the third multiemployer plan began to approach
    full funding. The employers and the union for this plan had been
    following a process of increasing benefits by one to two dollars per
    credit per year if the actuary concluded contemporaneously that
    sufficient actuarial ``margin'' existed to reduce the amortization
    period by the required amount and still fund the credit increase. As
    full funding was approached, the one and two dollar per credit
    increases were negotiated to occur more often and a practice was begun
    of issuing ``13th checks'' for existing retirees. Sometimes during the
    course of the year, this plan would issue three ``13th checks''. Each
    would equal one month's pension benefit.
        The fourth plan did not fully fund until about the mid-1990s. This
    was because the employers and the union sponsoring this plan made a
    conscious decision to boost benefit levels significantly for all
    participants including all retirees in the early years of the pension
    plan. As a consequence, once withdrawal liability was created, benefits
    remained static for all plan participants for approximately fifteen
    years until full funding was achieved.
        After full funding was achieved by this plan, the employers
    negotiated to overfund this plan to the maximum extent permitted under
    the Deficient Reduction Act. The union agreed with this in concept, but
    insisted on benefit improvements for more recent retirees and
    participants to adjust their comparative under-receipt of benefits over
    the years that benefits had been frozen. This was accomplished in each
    of several successive labor negotiations by negotiating benefit
    improvements at the bargaining table. Actuarial projections were used
    estimating the amount of contributions needed to pay for each benefit
    improvement on either a fifteen-year amortization in some instances or,
    more typically, on a three-year amortization to permit full-funding of
    the benefit improvement over the life of the master labor agreement.
        The other plan that had continued to overfund achieved maximum
    overfunding in the mid-1990's. Thereafter, the employers and this union
    agreed with the trustees to improve benefits dramatically for employees
    currently working for employers. Actuarially, these benefit
    improvements were calculated to insure that only enough were given to
    keep the plan within funding limits. This plan also provided some 13th
    checks to existing retirees.
        The plan that had been frozen in favor of a defined contribution
    plan was re-opened and resuscitated in the 1990's. The employers, the
    union and the participants in the plan collectively decided that the
    defined contribution plan was not of as much value as the defined
    benefit plan. The result is that both plans are maintained on an
    ongoing basis.
        The plan that was increasing benefit credits by one or two dollars
    per year and paying 13th checks has continued on a similar course. The
    effect of this plan's benefit payments has been to maintain the plan
    just under full funding limits.
        After the collapse of the stock market and the unprecedented
    decline in interest rates, all of these plans dropped from fully funded
    or close to fully funded status to funding levels around 75%. In each
    case, the employers, the union and the plan have reacted.
        The trustees of the most overfunded pension plan immediately
    reduced the value of benefit credit earned for future benefit accruals
    in recognition of the declining economic fortunes of the plan. The
    practice of this plan and of the employers and union involved has been
    to move quickly in adjusting benefit levels and then to retroactively
    increase benefit levels when financial circumstances permit. Thus, the
    expectation is that these reduced levels of future benefit accruals
    will one day be restored when funding is back to desired levels.
        The plan that made a practice of increasing benefit credits dollar
    by dollar and of giving numerous 13th checks has ceased those
    enhancements. Collective bargaining will occur later this year and
    further address the funding issues.
        The remaining two plans were subject to master labor agreements
    that have been recently renegotiated. In the negotiation of these
    agreements, the employers requested and the unions agreed to invest
    almost the entire amount of the wage and benefit increases negotiated
    into the defined benefit pension plans and into the medical
    multiemployer benefit plans. In negotiating these contribution
    increases, the collective bargaining parties looked at 5-year
    projections by the actuary of funding levels and the extent to which
    funding levels were likely to remain low or even deteriorate further
    unless substantial action was taken. Substantial action was taken.
        Projecting forward, all of the four unions agree with the employer
    associations that full funding is important to the safety of the plans
    and to keeping employers comfortable that they will not acquire
    unexpected pension liabilities beyond the amounts of their hourly
    pension contribution by participating in these multiemployer pension
    benefit plans. The boards of trustees of each of these multiemployer
    pension plans has long been populated by employer representatives and
    union representatives who get along well and work cooperatively to
    manage the plans. All of these boards of trustees coordinate with their
    respective employer associations and union leadership to be certain
    that the actions taken by the trustees are acceptable to the employer
    associations and to the union leadership as a whole. Three of these
    unions have been aggressive for more than a decade in negotiating
    competitive terms and conditions with the employer associations to
    recognize the competition these employers face from contractors that
    have no union obligations and that provide few or no fringe benefits to
    their employees.
        These circumstances have kept employers participating in these four
    plans with little fear of serious adverse consequences.
                                     ______

        Chairman Johnson. Thank you, sir. I appreciate your
    comments. Can I call you Dr. Teresa?
        Dr. Ghilarducci. Yes.
        Chairman Johnson. You're recognized now. Thank you.
    Microphone, please.

     STATEMENT OF TERESA GHILARDUCCI, PH.D., FACULTY OF ECONOMICS,
                UNIVERSITY OF NOTRE DAME, NOTRE DAME, IN

        Dr. Ghilarducci. There's some new research from health and
    labor economists that may help us all--folks in back of me and
    the colleagues that couldn't be here today--that actually puts
    a new spin on this whole idea that we're living longer. One of
    the reasons we're living longer is because people are retiring.
        It looks as though that people being able to rest from
    their long career of work is actually letting them invest more
    in their health and actually improve their health. This is
    especially true for women, but it's also true for men. No
    matter what kind of job they have, white or blue collar, this
    is really exciting new research, and it comes from the new data
    from the University of Michigan.
        And saying that, we must then realize how important it is
    to get pensions, because we try to solve the pension problem by
    raising retirement age, thinking that people living longer
    anyway raising the retirement age and taking away pensions may
    actually reduce that longevity we so herald.
        So with that, we are here again today as a group of people
    who have been really worried about expanding pension coverage.
    And, especially, expanding pension coverage among low-income
    workers. And multi-employer plans is really a high-performance
    model of how to do that. So you can--and you've seen previous
    testimony that showed that multi-employer plans actually exist
    for workers who are mobile, especially, work in small to
    medium-size establishments.
        But I'm here to talk about how multi-employer plans really
    help the employers. They solve a classic public good problem.
    That employers want trained, skilled workers, but don't want to
    pay for it unless their competitors pay for it. So by
    coordinating with their competitors, they pitch in with an
    apprenticeship program, health program, and a pension program.
    They all have a piece. They all come together. And this
    actually helps industries produce skilled workers, stabilize
    industries, and it's really good for the economy.
        I have documents on how high performance these plans are
    for the economy. I don't want to talk about them right now. I'd
    like to submit those for the record.
        Chairman Johnson. Please do.
        Dr. Ghilarducci. Now, I'd like to actually talk about some
    of the reforms--the specific reforms that you have addressed
    here. We must know that one of the chief and brilliant aspects
    of multi-employer plans is that they are jointly trusteed by an
    employer group and an employee group. And this brilliance, this
    wisdom means that they are highly adaptable to their specific
    situation.
        It actually gives a break to Congress. You don't have to
    legislate in every industry and every region. The trust
    agreement and the collective bargaining agreement and the
    relations between employer and employee lets that regulation
    happen. That's why any rule that says it is 90 percent funded,
    there should be no benefit increases makes really no sense when
    you look at the whole economic logic of these things. So don't
    do that. There's no need to restrict benefits.
        As far as withdrawal liability, I wrote a book several
    years ago interviewing most employers and employees on multi-
    employer plans, and I was really struck with how they've used
    withdrawal liability. If there, indeed, is a crisis in some
    plans because too many employers left, guess what the drastic
    solution is? To get more employers into the plan. The employers
    and the unions will have a reason to do that if the withdrawal
    liability is too great or if they're funding too many people
    who aren't contributing.
        In Las Vegas auto shops are now organizing into a pension
    plan and to a health plan in a way they never did before under
    multi-employer plan agreement, because they're good deals. If
    auto shops in Las Vegas can do it, then other multi-employer
    plans surely will find a way to expand. So tinkering with the
    withdrawal liability would really have these unintended
    consequences on these long-term agreements.
        The other point I want to make is--has been agreed upon--
    you were right--Mr. Andrews was right. This is really non-
    partisan. We should have pension rules that let people
    accumulate funds in good times, so that when there are bad
    times they can draw on it. So we should raise those
    deductibility limits or eliminate them completely for multi-
    employer plans.
        But I'm here as a professor, and I'd like to offer some
    blue-sky ideas, ideas that representatives through
    organizations might not be able to. One is an idea that
    actually has been played around here, and that is to allow
    employees to contribute to defined benefit plans. And multi-
    employer plans it's probably a little bit easier to do that,
    because you have defined contributions coming in, but,
    actually, feedback on employees' defined benefits. So multi-
    employer plans are actually structured to let employees
    contribute. That's a great idea.
        We should also find ways to encourage the creation of
    defined benefit plans. When I was at the PBGC, we always
    explained the conversion from DC to DB is because the vendors
    sell 401K plans. There's profits to be made there but not
    enough vendors sell DC plans.
        Last, we should investigate the consultant industry for how
    they got us into this what's been called--and I think
    inaccurately--the Perfect Storm of low interest rates and
    high--well, low interest rates and low returns. The consultants
    told us--and I was a trustee on the Indiana Public Employee
    Relations Funds--told us that we would have high stock returns
    as far as the eye could see, and, therefore, we should load up
    our funds.
        Well, they weren't being prudent. That industry needs some
    accountability and needs some investigation. The SEC is doing
    it now, and I think it's--I think Congress and this Committee
    would be well served to show that this Perfect Storm wasn't an
    act of God and unpredictable. It wasn't a quirky incidence. It
    was built into the structure of pension fund consulting.
        [The prepared statement of Dr. Ghilarducci follows:]

         Statement of Teresa Ghilarducci, Ph.D., Faculty of Economics,
                    University of Notre Dame, Notre Dame, IN

        Mr. Chairman and members of the Committee, thank you for this
    opportunity to meet with you and discuss ways to improve America's
    defined benefit pension system.
        We all know pension policy is stymied by our failure to extend
    pension coverage to workers who change jobs frequently, work for
    smallish employers, and whose employer changes because of mergers and
    acquisitions. 1 Yet some workers in this category have
    secure portable, defined benefit pensions; approximately twenty two
    percent of DB covered participants are in multiemployer plans which are
    risk-pooling, cost effective, and efficient ways to deliver a secure
    portable pension. 2 But they do much more because they solve
    a number of important labor market problems.
    ---------------------------------------------------------------------------
        \1\ Multiemployer plans also help employees who stay in the same
    job but their owners are unstable. For two decades, nurses employed in
    a New Jersey hospital bargained to be included in the multiemployer
    pension plan operated by the International Union of Operating Engineers
    rather than their hospital's single employer plan. Their pension
    benefits eroded over time because each time the hospital changed owners
    the pension plan was replaced. One nurse noted that she had been
    covered by six separate single employer DB plans, even though she
    remained working in the same job. She could not predict the benefits
    from any of them. ``Delinking Benefits from a Single Employer:
    Alternative Multiemployer Models.'' Benefits for the Workplace of the
    Future. Olivia S. Mitchell, David S. Blitzstein, Michael Gordon, Judith
    F. Mazo, Editors. Philadelphia: University of Pennsylvania Press. 2003.
    Pp. 260-284
        \2\ Approximately 60,000 employers contribute to the 1,661
    multiemployer defined benefit plans and that upwards of 90% of such
    contributing employers are small to medium sized businesses, employing
    fewer than 100 employees and averaging fewer than 20. Statement Randy
    G. DeFrehn testimony to Subcommittee on Employer-Employee Relations, U.
    S. House of Representatives, ``Reforming and Strengthening Defined
    Benefit Plans: Examining the Health of the Multiemployer Pension
    System. March 18, 2004
    ---------------------------------------------------------------------------
    Economic Logic of Multiemployer Plans
        Employers want trained workers but can't often afford the pensions,
    health, and training programs that produce the necessary skills
    especially if their competitors don't also pay for the same kinds of
    programs. No one employer is better off if they provide these programs
    alone, they are all better off if they cooperate and share in the cost.
    This classic public good or collective action problem is solved by
    multiemployer plans; all employers facing unstable product demand (and
    thus engage in frequent layoffs and re-hiring) benefit by having a
    ready supply of skilled workers and all employers pay their fair share.
    This (availability of skilled workers) adds to the productive capacity
    of an industry. 3 Such employers exist in the building and
    construction, retail food, trucking, health care and entertainment
    industries. This economic logic of multiemployer plans is under
    appreciated. Furthermore, these plans are part of a process by which
    secondary and third tier jobs are transformed into middle class jobs.
    ---------------------------------------------------------------------------
        \3\ Currently the Pension Rights Center's Conversation on Coverage
    (funded by the Ford Foundation), the GAO Retirement Advisory Panel, The
    DOL's ERISA Advisory Panel of 2002 and my ongoing research project
    entitled ``Pensions and Low Income Workers: What Works?'' funded by the
    Retirement Research Foundation in Chicago Illinois are exploring how to
    use the best aspects of the multiemployer system to cover more workers.
    The inspiration is motivated by the perceived failure of individual
    based efforts incented by tax breaks to get the majority of workers
    without pensions to save for their retirement
    ---------------------------------------------------------------------------
        This transformative capacity bears appreciation. Construction
    workers in every other developed democracy occupy the bottom of the
    labor food chain, whereas many of America's construction workers are
    skilled middle class workers. Multiemployer apprenticeship, health, and
    pension plans are partly responsible. (The laborer without the
    multiemployer portable pensions has no incentive to stay connected to
    an occupation's skill and would very well float from construction, to
    retail, etc. with economic fluctuations.)
        Employers benefit from the portability aspects in other ways. Take
    for example, UPS, a firm that provides good, but physically tough,
    work. A UPS worker who can't take the strain is more willing to move
    easily to a companion employer because they don't lose pension credits.
    This helps UPS maintain high performance standards.
        A chief and brilliant feature of multiemployer plans are that
    employers' needs for predictable contributions and workers' need for
    predictable benefits are both represented in the joint governance
    structure of the trust. The PBGC does not bailout multiemployer plans
    and the insured levels are a maximum $13,000 compared to the $44,000
    maximum in the single employer plan. As the GAO notes this structure
    puts much more financial risk on the multiemployer programs so the
    employers and participants have much more incentives to find
    collaborative solutions to financial difficulties. 4
    (Multiemployer plans are hybrids--contains the best of both worlds--
    they act like defined contribution plans for employers and defined
    benefit plans for workers and retirees.)
    ---------------------------------------------------------------------------
        \4\ GAO, Testimony of Barbara Bovbjeg, Subcommittee on Employer-
    Employee Relations, U. S. House of Representatives. ``Private Pensions:
    Multiemployer Pensions Face Key challenges to Their Long-Term
    Prospects.'' March 18, 2004.p. 7.
    ---------------------------------------------------------------------------
    If So Multis are So Good Why Don't More Employers Have Them?
        If multiemployer pensions are so good why don't more employers have
    them and why do some want to get out. In industries characterized by
    large numbers of small to medium sized employers and/or a mobile
    workforce employers can't seem to be able to cooperate enough to create
    and maintain these plans without a coordinating agent, that role is
    played by the union and the jointly trusteed plan. (The largest pension
    plan is the multiple employer plan--TIAA--CREF and it was initiated by
    a grant from the Carnegie Foundation.) Maintenance of long term
    agreements requires disciplined contributions, long term commitments,
    and a flexible structure that can weather business cycles.
        The general rules governing an employer's withdrawal from a
    multiemployer plan require that an employer who ceases to participate
    in a fund that has unfunded vested benefits, be assessed its
    proportionate share of those unfunded vested benefits. 5
    Letting employers opt out of withdrawal liabilities would have
    unintended consequences since the whole system is based on long term
    structure. 6
    ---------------------------------------------------------------------------
        \5\ The Multiemployer Pension Plan Amendments Act of 1980 (MPPAA)
    added this requirement.
        \6\ The impulse to escape the cooperative is a fundamental free
    rider problem (it is like listening to public radio but having someone
    else contribute); some employers that benefit from the labor supply
    stability may not want to pay for it
    ---------------------------------------------------------------------------
        Tax deductibility of pension contributions surely incents pensions
    but they also invite tax avoidance. Congress imposed full funding
    limitations so that large employers couldn't use the pensions to
    shelter profits from tax. That is not an issue with multiemployer
    plans. 7 Since multiemployer plans bear a lot of their own
    financial risk and thus aim to smooth benefits and employer
    contributions Congress should help the funds' accumulate a contingency
    reserve in good times to offset the bad times when steep and prolonged
    declines in the investment markets and employment deplete funds.
    Multiemployer plans should be excluded from the maximum deductible
    limits.
    ---------------------------------------------------------------------------
        \7\ More than 75% of all multiemployer defined benefit plans
    encountered funding limitations during the 1990s that would have
    resulted in the employers' inability to take tax deductions for
    contributions if the trustees' action had not increase benefits
    (DeFrehn, March 18, 2004). This was good because the participants and
    the funds got the advantages of the market returns, not the employers
    in contribution holidays.
    ---------------------------------------------------------------------------
    Blue Sky Ideas
        But the abundance of investment returns is not our problem now. The
    fad toward short term employment contracts and 401(k) type pensions--
    with outrageously high retail fees--shrink the number of employers
    wiling to be in single and multiemployer DB plans and the number of
    workers with pension coverage.
        Given the high performance aspects of multiemployer plans here are
    some blue sky ideas to consider:
        Encourage consortiums of employers to enter into trust agreements
    with a trade association or other groups of workers, in addition to
    encouraging the traditional route to multiemployer plans, through the
    collective bargaining agreement.
        Encourage more non-profit-like multiple - employer DC plans (like
    my university faculty TIAA-CREF plan). There must be some way
    cooperative efforts can reduce the high costs workers face to manage
    their DC accounts and convert lump sums into annuities.
        Investigate the consulting industries codes of conduct to find out
    why prudent experts aren't; incentivize defined benefit plans to change
    their investment strategies not to be dependent on stock equity in
    order to reduce the risk of underfunding volatility.
        Thank you very much. I welcome any questions you may have.
                                     ______

        Chairman Johnson. Thank you, ma'am. I appreciate those
    comments. Mr. Lynch, the PBGC uses an automated screening
    process that measures plans against funding and financial
    standards that assist PBGC in determining which plans may be at
    risk of termination or insolvency. Would it be appropriate to
    use this screening process as a standard for determining when
    benefit increases or accruals should be automatically frozen?
        Mr. Lynch. I certainly think the PBGC process should be
    upgraded and moved further up in the process. Whether or not it
    should be strictly limited to a clamp on benefit increases, I'm
    not sure that necessarily is the only answer to the problem.
    But, clearly, we have in--in our opinion today is you've got
    plans that go long, and the remedies that are available to
    them, either by perception or by reality, are really last-ditch
    remedies. When they go to the PBGC or when they go to the IRS
    for funding relief, waive relief, whatever it may be--
        Chairman Johnson. It's too long?
        Mr. Lynch. They're pretty much getting near death's
    doorstep. And what we think needs to have happen is something
    earlier in the process, particularly, for plans that are facing
    some pretty severe trend problems.
        Chairman Johnson. What do you recommend is the best way for
    employers to hold the plans accountable, because, you know,
    they don't have a lot of control after the plan is initiated?
        Mr. Lynch. And that's one of the key elements of this. I
    mean, we negotiate a contract. We do not negotiate the benefit
    level. In our case we negotiated a contract that was effective
    April 1 of '03 with what we felt were fairly significant
    increases in our contribution. It wasn't but 6 months later
    that we got a letter from one of the larger funds, indicating
    that there was a significant funding problem there.
        At that stage there's not really a whole heck of a lot
    that's available to us. I'm not a lawyer, but my first reaction
    was who do I sue, and when I was told I have no standing to sue
    anybody, that came as a little bit of a surprise. I'm not
    suggesting that we be given unfettered rights to sue. We
    certainly don't want these plans tied up in endless litigation,
    but I do think there has to be some movement in that direction.
    If the employer is ultimately going to be held accountable
    financially, they've got to have a little bit more control over
    what goes on in the interim.
        Chairman Johnson. Thank you, sir. I'm not a lawyer either.
    I'll now recognize a lawyer, Mr. Andrews, for questions.
        Mr. Andrews. Thank you very much, Mr. Chairman. I'd like to
    thank the witnesses for their testimony this morning. Mr.
    Miller, I read your recommendation--heard your recommendation
    about lifting funding contribution limitations on contributions
    by multi-employer and multi-employer plans. Do you think that
    there are adequate provisions in the law to be sure that once
    those contributions are made they will only inure to the
    benefit of the pensioners? Is there any loophole, any leak, any
    possibility that once the over-funding contribution is made
    that it could go somewhere else, other than the pensioners?
        Mr. Miller. I believe the anti-reversion policies are clear
    on the matter of qualification for tax purposes. The--when
    terminated, they all--they go to benefits, and, certainly, to
    the extent--you know, I haven't looked at that in a long time,
    but to the extent that's a problem, that would be easy to
    address to make sure that that couldn't happen.
        Mr. Andrews. I assume the answer is right. My own
    understanding of this law is that it's pretty air tight, and I
    do think that there is--I haven't heard a good argument against
    pre-funding. I just haven't heard a good argument against
    letting employers put in whatever they think works, other than
    a revenue--a treasury argument.
        Mr. Kent--Mr. Lynch--excuse me--you would like to see more
    remedial measures by PBGC when people show up on some sort of
    watch list or early warning situation. What do you think those
    remedial measures ought to be? Mr. Johnson--Chairman Johnson, I
    think, asked you the question about whether we should--what the
    trigger should be to have PBGC take a look. Let's assume we've
    hit the trigger, and they're looking and they see someone who's
    going to be in trouble. What kinds of tools do you think we
    should give PBGC to use?
        Mr. Lynch. You made reference in your opening comment about
    do no harm. I'll add another one to that, and I sort of fit the
    medicine for what ails the patient. If it is a case where a
    plan comes in there with a disproportionately large number of
    beneficiaries, who, as I indicated, no longer have a
    contributing employer, I think that suggests a certain remedy.
    And, frankly, not a particularly pleasant one with respect to
    what you may have to do in terms of future benefits.
        Mr. Andrews. What is the remedy?
        Mr. Lynch. I'm sorry.
        Mr. Andrews. What would that remedy look like?
        Mr. Lynch. It could take the form of some type of ratio
    that will, in fact, have to reduce the benefit based on the
    amount that's recovered from the now defunct employer. That is
    one area that we can look at.
        When a plan goes to the IRS with a very severe funding
    problem, they are permitted at that stage to freeze benefits or
    accruals back 2 years. That's certainly not a happy
    circumstance for anyone, but applying that remedy that late in
    the game, may not be the best point to do that.
        Mr. Andrews. There are no easy choices. I certainly
    understand that. Dr. Ghilarducci, in the blue-sky category,
    what do you think is the single most powerful idea for getting
    private pensions for people who don't have them today?
        Dr. Ghilarducci. Probably, adding--for low-income workers
    probably adding something on top of Social Security, so there's
    USA Credit, this mandatory defined contribution supplement to
    Social Security actually. In this realm and without your
    national mandate for a Social Security supplement, I think the
    voluntary employee idea with maybe some tax credits for low-
    income workers would do it.
        Mr. Andrews. The tax credit would operate as a match?
        Dr. Ghilarducci. Yes.
        Mr. Andrews. So if an employee makes a voluntary
    contribution, there would be a refundable tax credit as a
    match?
        Dr. Ghilarducci. Right. Or people could have their EITC go
    into--that would be actually very easy to do to go right into
    their retirement savings. I think the cash balance plans are
    the future of the defined benefit plan.
        Mr. Andrews. So the idea is that a person could choose to
    designate a portion of her or his EITC to pension
    contributions?
        Dr. Ghilarducci. Right.
        Mr. Andrews. Very interesting. We just have to expand the
    EITC, right? We tried to do that yesterday on the House floor.
    Thank you very much.
        Chairman Johnson. That is a good idea. Thank you for it.
    Mr. Kline, do you care to comment?
        Mr. Kline. I do, Mr. Chairman. Thank you very much and
    thank the panelists for being here today. I very much
    appreciated the testimony of all three of you.
        I'm hearing an awful lot from the truckers in Minnesota, so
    I'm going to sort of focus my discussion on Mr. Lynch here. I
    perfectly welcome anybody else to jump in, but I'm hearing from
    truckers in Minnesota in some cases that they are, frankly, in
    big trouble. That this is really having an impact. Keeping the
    multi-employer plan fund is really having an impact on their
    bottom line and in some cases in their ability to stay in
    business.
        And, Mr. Lynch, I'm looking at your sort of striking list
    of the top 50 LTL carriers in 1979 and the six that are
    remaining today. Clearly, there are some major issues facing
    the multi-employer defined benefit plans in the trucking
    industry.
        And there was a discussion earlier in testimony about
    withdrawal liability, and I believe you state, Mr. Lynch, in
    your testimony that the withdrawal liability has been a barrier
    to new contributing employers from coming into the plans.
    Should plan trustees have the flexibility to adjust the benefit
    levels for the employees of an employer who withdraws from the
    plan?
        Mr. Lynch. I believe they should. I believe that if--for a
    plan that faces a disproportionate number of beneficiaries who
    are in that category--the option there is either a larger role
    for the PBGC--financial role--or it is continued to put the
    burden on the existing contributing employers, and that is a
    dwindling number to the point where they are now going to be
    paying for, not only their own retirees, but this ever
    burgeoning group of other company retirees to which they had no
    connection with.
        And the underlying premise of a multi-employer plan is that
    the list of 50, if they go out, there will be somebody coming
    in. Unfortunately, in our industry there has been nobody of the
    similar size coming in to replace the ones who have gone out.
        Mr. Kline. Thank you. You state in your testimony that
    consideration should be given to requiring that the level of
    plan benefits be more closely tied to the level of plan
    contributions and available assets. Could you just take a
    minute and expand on that.
        Mr. Lynch. Again, that goes to the very difficult and tough
    issue of benefits. But it does, in fact, come down to simple
    math. If you've only got a hundred dollars coming in and you've
    got two hundred going out, it isn't going to take you very long
    before something has to give.
        Now, you can certainly go back and say put another hundred
    dollars in, but the track record and the burden of increased
    contributions for the existing employer base is likely to
    result in further erosion of the employer base within the plan.
    They just simply will not be able to compete.
        Mr. Kline. Well, it's clear to me in discussions with folks
    back in Minnesota that we've got a rising problem and, in fact,
    a fairly large problem. We've had hearings before in this
    Committee about the trucking industry's problems in multi-
    employer plans, and we all would like to see the companies stay
    in business and stay members of the plans and continue to make
    their contributions and make sure that we're protecting the
    benefits that all these employees are expected to get.
        And the problem is that we don't have enough employers in
    the plans. And so do you have any suggestions as to how to
    attract more employers to the multi-employer system?
        Mr. Lynch. I gave a presentation to an industry group where
    I suggested that perhaps there could be certain tax incentives
    to encourage employers coming into the plans. Unfortunately,
    nobody in the room thought that was a particularly strong
    enough incentive to encourage them to enter in.
        It is the single hardest problem. It is one that I think is
    going to have to take some real creative thought, both from the
    folks out here, as well as the agencies and the Congress. But,
    unfortunately, I don't have an answer for demographic and
    organizing trends.
        Mr. Kline. I'd like to extend the question to anybody else
    on the panel. If you've got an idea, whether it's blue sky or
    real-world tomorrow, on how we could get more employers to step
    up to this. And, again, I'm thinking sort of specifically about
    the trucking industry, because I know that there's a pressing
    problem there. Anybody else would like to chime in?
        Dr. Ghilarducci. Well, the traditional way is if the union
    would organize and that's sort of the stick way to do it. At
    the PBGC we had the same question, and that's the question we
    brought up. And the idea is that some consulting firms would
    have to see this as a good business. You know, they would have
    to sell it to employers.
        I think economists I think academics could help too.
    Because if these employers were in multi-employer plans--
    pension plans--they would have access to the health plans and
    to be--training. And these employers could actually become part
    of the unit of high performance rather than just sort of
    scraping by. Wages would increase in that industry.
        So I think there has to be a sell job. I think it does
    make--there is some logic to it, but I don't have a quick fix.
        Mr. Kline. Yeah, thank you. It does sound like there needs
    to be a sell job. There needs to be a buy job but with
    employers in trouble I think it would be pretty hard--it seems
    to me it's increasingly hard to get them to buy into this. So
    you have to find a real salesman if you're going to get them to
    do that. Thank you, Mr. Chairman, I yield back.
        Chairman Johnson. Thank you. I appreciate the testimony of
    all three of you, and it sounds like to me, Rocky, when you
    were talking the doctor was shaking her head yes on a lot of
    what you said.
        So I don't think we're too far away from finding a solution
    to this problem from a Congressional viewpoint anyway. And
    we'll start working on it, and, hopefully, come up with an
    answer that we can all be proud of. And I thank you so much for
    your attendance and for the members who are here. If there's no
    further business, the Committee stands adjourned.
        [Whereupon, at 12:05 p.m., the Subcommittee was adjourned.]