[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.]

                                 
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