[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
EXAMINING THE CHALLENGES FACING THE
PENSION BENEFIT GUARANTY CORPORATION
AND DEFINED BENEFIT PENSION PLANS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON HEALTH,
EMPLOYMENT, LABOR AND PENSIONS
COMMITTEE ON EDUCATION
AND THE WORKFORCE
U.S. House of Representatives
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
__________
HEARING HELD IN WASHINGTON, DC, FEBRUARY 2, 2012
__________
Serial No. 112-50
__________
Printed for the use of the Committee on Education and the Workforce
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----------
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COMMITTEE ON EDUCATION AND THE WORKFORCE
JOHN KLINE, Minnesota, Chairman
Thomas E. Petri, Wisconsin George Miller, California,
Howard P. ``Buck'' McKeon, Senior Democratic Member
California Dale E. Kildee, Michigan
Judy Biggert, Illinois Donald M. Payne, New Jersey
Todd Russell Platts, Pennsylvania Robert E. Andrews, New Jersey
Joe Wilson, South Carolina Robert C. ``Bobby'' Scott,
Virginia Foxx, North Carolina Virginia
Bob Goodlatte, Virginia Lynn C. Woolsey, California
Duncan Hunter, California Ruben Hinojosa, Texas
David P. Roe, Tennessee Carolyn McCarthy, New York
Glenn Thompson, Pennsylvania John F. Tierney, Massachusetts
Tim Walberg, Michigan Dennis J. Kucinich, Ohio
Scott DesJarlais, Tennessee Rush D. Holt, New Jersey
Richard L. Hanna, New York Susan A. Davis, California
Todd Rokita, Indiana Raul M. Grijalva, Arizona
Larry Bucshon, Indiana Timothy H. Bishop, New York
Trey Gowdy, South Carolina David Loebsack, Iowa
Lou Barletta, Pennsylvania Mazie K. Hirono, Hawaii
Kristi L. Noem, South Dakota Jason Altmire, Pennsylvania
Martha Roby, Alabama
Joseph J. Heck, Nevada
Dennis A. Ross, Florida
Mike Kelly, Pennsylvania
Barrett Karr, Staff Director
Jody Calemine, Minority Staff Director
SUBCOMMITTEE ON HEALTH, EMPLOYMENT, LABOR AND PENSIONS
DAVID P. ROE, Tennessee, Chairman
Joe Wilson, South Carolina Robert E. Andrews, New Jersey
Glenn Thompson, Pennsylvania Ranking Minority Member
Tim Walberg, Michigan Dennis J. Kucinich, Ohio
Scott DesJarlais, Tennessee David Loebsack, Iowa
Richard L. Hanna, New York Dale E. Kildee, Michigan
Todd Rokita, Indiana Ruben Hinojosa, Texas
Larry Bucshon, Indiana Carolyn McCarthy, New York
Lou Barletta, Pennsylvania John F. Tierney, Massachusetts
Kristi L. Noem, South Dakota Rush D. Holt, New Jersey
Martha Roby, Alabama Robert C. ``Bobby'' Scott,
Joseph J. Heck, Nevada Virginia
Dennis A. Ross, Florida Jason Altmire, Pennsylvania
C O N T E N T S
----------
Page
Hearing held on February 2, 2012................................. 1
Statement of Members:
Andrews, Hon. Robert E., ranking minority member,
Subcommittee on Health, Employment, Labor and Pensions..... 4
Roe, Hon. David P., Chairman, Subcommittee on Health,
Employment, Labor and Pensions............................. 1
Prepared statement of.................................... 3
Statement of Witnesses:
DeFrehn, Randy G., executive director, National Coordinating
Committee for Multiemployer Plans (NCCMP).................. 42
Prepared statement of.................................... 44
Gotbaum, Joshua, Director, Pension Benefit Guaranty
Corporation................................................ 5
Prepared statement of.................................... 9
Haggerty, Gretchen, chief financial officer, U.S. Steel...... 36
Prepared statement of.................................... 39
McGowan, Dr. John R., Ph.D., CPA, CFE, college professor and
author..................................................... 48
Prepared statement of.................................... 49
Porter, Kenneth W., founder and owner, Benefits Leadership
International.............................................. 30
Prepared statement of.................................... 32
Additional Submissions:
Mr. Andrews:
Letter, dated January 31, 2012, to Director Gotbaum from
Mr. Miller............................................. 57
Letter, dated February 1, 2012, from Dana Thompson,
SMACNA................................................. 58
Letter, dated November 30, 2011, to Secretaries Solis,
Geithner and Bryson from Mr. Miller.................... 60
Letter, dated January 18, 2012, to Secretaries Solis,
Geithner and Bryson from Mr. Miller.................... 63
Letter, dated January 11, 2012, from Secretary Solis to
Mr. Miller............................................. 65
Questions submitted for the record on behalf of Hon. Herb
Kohl, a U.S. Senator from the State of Wisconsin....... 90
Mr. Gotbaum, response to questions submitted for the record.. 91
Dr. McGowan:
Letter, dated May 25, 2012............................... 81
Analysis: ``The Financial Health of Defined Benefit
Pension Plans''........................................ 82
Roby, Hon. Martha, a Representative in Congress from the
State of Alabama, questions submitted for the record....... 89
Chairman Roe:
Letter, dated February 1, 2012, from Jeffrey D. Shoaf, on
behalf of Associated General Contractors of America
(AGC).................................................. 71
Engler, Hon. John, president, Business Roundtable,
prepared statement of.................................. 72
The U.S. Chamber of Commerce, prepared statement of...... 74
The Financial Services Roundtable, prepared statement of. 77
Letter, dated February 2, 2012, to Director Gotbaum from
Hon. Michael R. Turner, a Representative in Congress
from the State of Ohio................................. 78
Mr. Turner, prepared statement of........................ 79
National Electrical Contractors Association (NECA),
prepared statement of.................................. 81
Questions submitted for the record....................... 89
EXAMINING THE CHALLENGES FACING THE
PENSION BENEFIT GUARANTY CORPORATION
AND DEFINED BENEFIT PENSION PLANS
----------
Thursday, February 2, 2012
U.S. House of Representatives
Subcommittee on Health, Employment, Labor and Pensions
Committee on Education and the Workforce
Washington, DC
----------
The subcommittee met, pursuant to call, at 10:35 a.m., in
room 2175, Rayburn House Office Building, Hon. David P. Roe
[chairman of the subcommittee] presiding.
Present: Representatives Roe, Wilson, Heck, Andrews,
Kucinich, Loebsack, Kildee, Hinojosa, Holt, Scott, and Altmire.
Also present: Representatives Kline and Miller.
Staff present: Andrew Banducci, Professional Staff Member;
Katherine Bathgate, Press Assistant/New Media Coordinator;
Casey Buboltz, Coalitions and Member Services Coordinator; Ed
Gilroy, Director of Workforce Policy; Benjamin Hoog,
Legislative Assistant; Barrett Karr, Staff Director; Ryan
Kearney, Legislative Assistant; Brian Newell, Deputy
Communications Director; Krisann Pearce, General Counsel; Molly
McLaughlin Salmi, Deputy Director of Workforce Policy; Todd
Spangler, Senior Health Policy Advisor; Linda Stevens, Chief
Clerk/Assistant to the General Counsel; Alissa Strawcutter,
Deputy Clerk; Kate Ahlgren, Minority Investigative Counsel;
Aaron Albright, Minority Communications Director for Labor;
Tylease Alli, Minority Clerk; Daniel Brown, Minority Policy
Associate; Jody Calemine, Minority Staff Director; Tiffany
Edwards, Minority Press Secretary for Education; Brian Levin,
Minority New Media Press Assistant; Megan O'Reilly, Minority
General Counsel; Julie Peller, Minority Deputy Staff Director;
and Michele Varnhagen, Minority Chief Policy Advisor/Labor
Policy Director
Chairman Roe. Call the meeting to order. Thank you all for
being here. I am sorry I am a little late, but you don't get up
and leave when the President is praying, I can tell you that.
We just attended the prayer breakfast.
A quorum being present, the Subcommittee on Health,
Employment, Labor, and Pensions will come to order. Good
morning, and welcome, to our witnesses.
Director Gotbaum, it is good to see you. This hearing is
our first opportunity to have you before the subcommittee in
the 112th Congress and we appreciate you taking time out of
your very busy schedule to be with us today.
We are confronted today with two difficult realities. The
first is the financial challenges facing the Pension Benefit
Guaranty Corporation.
For more than 35 years the PBGC has provided an important
safety net to millions of workers in the event a defined
benefit pension plan becomes insolvent or is terminated. The
sheer size of the corporation's responsibilities are quite
remarkable and they continue to grow.
In 2011 the PBGC paid benefits to more than 819,000
retirees at a cost of $5.3 billion. At the same time, the PBGC
assumed responsibility for 152 terminated plans, increasing its
obligations to more than 4,300 plans. While the number may pale
in comparison to other federal programs like Social Security
and Medicare, PBGC still provides a federal backstop for the
defined benefit plan for approximately 43 million Americans.
Unfortunately, the PBGC reports a deficit of $26 billion,
and we learned just this week that the burden on the PBGC will
continue to grow in the months ahead. The events surrounding
American Airlines' bankruptcy and its resultant decision to
terminate the pension plans of 130,000 workers are deeply
troubling. Hostess Brands and Eastman Kodak are also in the
process of bankruptcy and we await word on whether they too,
will fail to meet their pension obligations.
The decision to declare bankruptcy and terminate a pension
plan can involve more than a company's balance sheets and
actuarial projects. It can also involve broken promises and the
additional struggles workers will face to achieve financial
security during their retirement years. Employers have a
responsibility to do everything they can to meet their
commitments and help ensure the loss of a job is not
exacerbated by the loss of their retirement benefits.
This leads us to the second, more difficult reality we must
confront: the state of the economy. Far too many employers are
operating on thin margins where an unexpected burden can
destroy their businesses.
We all want to see the finances of the PBGC strengthened.
However, we must closely examine and fully understand the
uninsured consequences of our policy decisions.
Excessive increases in premiums and unpredictable costs of
defined benefit plans will have a direct impact on employers
and job creation. At the same time, if we do not act
appropriately we will undermine the financial standing of the
PBGC and its ability to serve retirees.
Congress must remain engaged, and that is why I am
concerned about surrendering some of our authority in this
area. The oversight and guidance of this committee should
continue to play an important role in this debate.
As we move forward, our task is a difficult one: Find a
solution that can strengthen the PBGC without harming job
creation or discouraging participation in our voluntary pension
system. There will be no easy answers. However, I am confident
that by working together we can find a responsible solution
that protects the interests of employers, workers, retirees,
and taxpayers.
Before I close, Director Gotbaum, let me add my voice to
those who have raised concern with mismanagement of certain
pension plans by the PBGC. The workers who receive benefits
through the corporation are already coping with the devastating
ordeal of an employer going out of business or choosing to
sever ties with their workers' pension plan. It is deeply
unfortunate when this difficulty is compounded by poor
management at PBGC.
Recent reports by the PBGC's inspector general that
retirees may not have received proper benefits are disturbing,
and I hope you can provide assurances to this committee and the
nation's workers that you are implementing a plan to fix these
mistakes and prevent them from ever happening again. We stand
ready to assist you in any way we can.
Again, welcome, Director, and thank you for joining us. We
look forward to your testimony.
I will now recognize my distinguished colleague, Rob
Andrews, the senior Democratic member of the subcommittee, for
his opening remarks.
[The statement of Chairman Roe follows:]
Prepared Statement of Hon. David P. Roe, Chairman,
Subcommittee on Health, Employment, Labor and Pensions
Good morning and welcome to our witnesses. Director Gotbaum, it is
good to see you. This hearing is our first opportunity to have you
before the subcommittee in the 112th Congress, and we appreciate you
taking time out of your busy schedule to be with us this morning.
We are confronted today with two difficult realities. The first is
the financial challenges facing the Pension Benefit Guaranty
Corporation. For more than 35 years, PBGC has provided an important
safety net to millions of workers in the event a defined benefit
pension plan becomes insolvent or terminated. The sheer size of the
corporation's responsibilities are quite remarkable, and they continue
to grow.
In 2011, PBGC paid benefits to more than 819,000 retirees at a cost
of $5.3 billion. At the same time, PBGC assumed responsibility for 152
terminated plans, increasing its obligations to more than 4,300 plans.
While the number may pale in comparison to other federal programs like
Social Security and Medicare, PBGC still provides a federal backstop
for the defined benefit pension plans of roughly 43 million
individuals.
Unfortunately, PBGC reports a deficit of $26 billion--and we
learned just this week that the burden on PBGC will continue to grow in
the months ahead. The events surrounding American Airlines' bankruptcy
and its resultant decision to terminate the pension plans of 130,000
workers are deeply troubling. Hostess Brands and Eastman Kodak are also
in the process of bankruptcy, and we await word on whether they too
will fail to meet their pension obligations.
The decision to declare bankruptcy and terminate a pension plan can
involve more than a company's balance sheets and actuarial projections.
It can also involve broken promises and the additional struggle workers
will face to achieve financial security during their retirement years.
Employers have a responsibility to do everything they can to meet their
commitments, and help ensure the loss of a job is not exacerbated by
the loss of retirement benefits.
This leads us to the second, more difficult reality we must
confront: the state of the economy. Far too many employers are
operating on thin margins where an unexpected burden can destroy their
businesses. We all want to see the finances at PBGC strengthened.
However, we must closely examine and fully understand the unintended
consequences of our policy decisions.
Excessive increases in premiums and unpredictable costs of defined
benefits plans will have a direct impact on employers and job creation.
At the same time, if we do not act appropriately we will undermine the
financial standing of PBGC and its ability to serve retirees. Congress
must remain engaged, and that is why I am concerned about surrendering
some of our authority in this area. The oversight and guidance of this
committee should continue to play an important role in this debate.
As we move forward, our task is a difficult one: Find a solution
that can strengthen PBGC without harming job creation or discouraging
participation in our voluntary pension system. There will be no easy
answers. However, I am confident that by working together, we can find
a responsible solution that protects the interests of employers,
workers, retirees, and taxpayers.
Before I close, Director Gotbaum, let me add my voice to those who
have raised concerns with mismanagement of certain pension plans by
PBGC. The workers who receive benefits through the corporation are
already coping with the devastating ordeal of an employer going out of
business or choosing to sever ties with their workers' pension plan. It
is deeply unfortunate when this difficulty is compounded by poor
management at PBGC. Recent reports by PBGC's Inspector General that
retirees may not have received proper benefits are disturbing, and I
hope you can provide assurances to this committee--and the nation's
workers--that you are implementing a plan to fix these mistakes and
prevent them from happening again. We stand ready to assist you in any
way we can.
Again, welcome Director Gotbaum and thank you for joining us. We
look forward to your testimony. I will now recognize my distinguished
colleague Rob Andrews, the senior Democratic member of the
subcommittee, for his opening remarks.
______
Mr. Andrews. Mr. Chairman, and I appreciate you calling
this hearing.
Mr. Gotbaum, welcome to the committee, as we welcome the
other witnesses as well.
There are tens of millions of Americans who have gone to
work every day and worked as hard as they can, and they have
held up their end of the bargain. The end of the bargain that
is coming to them is that they are guaranteed, in some cases, a
pension check for the rest of their lives.
That promise is nonnegotiable. A person who has gone out
every day and done what he or she is supposed to do and relies
on that pension check should never have to worry that their
personal version of the American dream will be imperiled
because the pension won't be there.
Now, I think the chairman is very right that the keeping of
that promise, in the case of Americans who are enrolled in
defined benefit plans, is somewhat in jeopardy. And he has
correctly stated that it is our responsibility to try to remove
that jeopardy and reignite and restore that promise that has
been made to workers and retirees throughout the country.
And I think to do that we have got to meet two principles
that would at first seem to be in opposition to each other, but
I think are, in fact, quite complementary to each other. The
first is that we have to meet the principle that says that we
don't want to in any way burden our pensioners; we want to be
sure that the solvency of the Pension Benefit Guaranty
Corporation is established and maintained. We want to be sure
that any--in instances where companies are no longer able and
plans are no longer able to meet their obligations the PBGC is
able to meet those obligations.
The second principle is one I think just about everybody on
this committee would agree with and most American taxpayers
would agree, which is no more bailouts--no more bailouts of
anybody. And in a sense, that is what this discussion is about.
How do we be sure that this promise that has been made to
American workers and retirees is honored in a way that would
never require taxpayers to step in and make sure that promise
is honored? Which is another way of saying, how can we be sure
that the PBGC is managed in such a way it is self-financing,
that the revenues are there to meet the PBGC's obligations into
the future?
This is a daunting problem because of the data the chairman
cited, which that the PBGC presently projects a $26 billion
when one compares its current assets versus its current
obligations. Chairman is also right, though, that the solution
to this problem is economic growth. And I think there is no
better evidence of that if you look at the deficit of the PBGC
in recent years.
In 2008, before the financial meltdown hit the American
economy, the PBGC's deficit was $10.7 billion. By 2009 that had
gone to $21 billion, so we essentially had a doubling of the
PBGC's deficit in 1 year as the economy was collapsing around
the people of the United States.
Now, there has still been growth in that deficit, but
between 2009 and 2011 it grew by about 25 percent. That is
unacceptable, but it doubled in 1 year when the economy was
cratering.
So I do think the chairman is correct that the first order
of business of the committee, of the Congress, of the country
should be to reignite economic growth. And as we consider
various remedies to cure the deficit of the PBGC we should look
at each one of them through the prism of its impact on economic
growth.
The second point that I would make is that it is essential,
though, that we come to a reasonable conclusion to this, that
it is reflexive and well understood for people to say, ``Well,
whatever you do, don't ever raise premiums on PBGC
participants.'' That is a very attractive option. But if there
is a way that more revenue can come into the PBGC that does not
retard economic growth, that promotes the fiscal soundness of
the PBGC, then it is our obligation and our responsibility to
take a look at that.
Purpose of this morning's hearing, and I agree with it, is
to begin to explore the particulars of honoring this promise to
American workers and American retirees.
Mr. Chairman, I am glad to be a part of it and we look
forward to the witnesses' testimony.
Chairman Roe. I thank you for your remarks.
And pursuant to Committee Rule 7(c), all members will be
permitted to submit written statements to be included in the
permanent hearing record. And without objection, the hearing
record will remain open for 14 days to allow such statements
and other extraneous material referenced during the hearing to
be submitted for the official hearing record.
Now it is my pleasure to introduce our first distinguished
panel. Joshua Gotbaum is the director of the Pension Benefit
Guaranty Corporation, and--where he is responsible for the
agency's management, personnel organization, budget, and
investments.
And before we start--before we recognize you, let's see--
you know, you understand the system. You have been here before.
But the light in front of you will turn green; when 1 minute is
left it will turn yellow; and when your time is expired the
light will turn red, at which point I will ask you to wrap up
your remarks at that point.
And with no further comments, Mr. Gotbaum?
STATEMENT OF HON. JOSHUA GOTBAUM, DIRECTOR,
PENSION BENEFIT GUARANTY CORPORATION (PBGC)
Mr. Gotbaum. We are on now. Sorry.
Mr. Chairman, Mr. Andrews, thank you very, very much for
holding this hearing and for inviting us to testify. I want to
start--because these issues are issues that go beyond PBGC.
These are issues, as you pointed out, of economic growth, of
economic security, retirement security, and we are grateful
that you have asked us to talk about that.
I want to start, to be blunt, by apologizing for the
lateness of the submission of my testimony. There are a lot of
cooks in the pension kitchen, and so it took us longer to get a
testimony to you all than you would have liked on--especially
on something that was as complicated as this, and so I hope the
committee will accept that, and given the shortness of time--
although I have asked to go a little beyond 5 minutes--I am
just going to hit the high points, and I have every confidence
that you will not let me get away with anything without some
important questions.
The reason that we think this hearing is so important is
because retirement security is not only a--already a serious
concern, it is getting to be more so. Last April the Gallup
organization took a poll. They polled lots of folks, but the
thing that hit me hardest was that the people who were far away
from retirement--people who were 30 to 49 years of age--more
than three-quarters of them were worried about their
retirements--more than were worried about their paychecks or
their health care. And it is not as if those--there isn't a
basis for those worries, because the trends are disturbing.
The good news is we are living longer. Fifty years ago the
average person, we think, retired at about age 62, lived to be
about 79--that is 17 years. Today the average person works a
little longer already, maybe 63, lives to be 84--21 years. So
in 50 years we have seen an increase in the average retirement,
round numbers of about 25 percent. That is the good news.
If you could do the first slide?
The bad news is that pensions haven't kept up. This
admittedly hard-to-read slide shows the number of people who
have an employer-based pension, whether defined benefit or
defined contribution, for the last 30 years.
And what you see in it is a couple of things. One is it is
important to recognize that half of people who are working
today don't have an employer pension plan at all, and a third
of them don't even have access to one.
Second is that most of the people who do--and that is the
yellow part of the slide--have only a 401(k)-type plan. These
were originally intended, as you all know, as supplements. They
have become the main pension for most folks. And, as we also
know, unfortunately, with the collapse in stock markets, they
lost a lot of their value.
People in DB plans--and those are the green folks--they
feel more secure, they are more secure. But the fact is, the
percentage of the workforce that has DB plans has been
declining. Nonetheless, there are still some 70 million people
in America who have them.
The fundamental point is that since people are living
longer, healthier lives retirement is going to have to cost
more, not less. This means people will have to save more and
retirement plans are going to have to cost more.
The other point is that there is no single solution to
this, and it is the--some say the right things to do is to
create new options; some people say the right thing to do is to
preserve plans. We think the right thing to do is to do both.
Now, why is the PBGC even raising these issues? Because our
mandate from the day we were founded is to encourage voluntary
private plans, not just DB plans.
PBGC has been a safety net for 37 years. I want to be clear
about what we do and what we don't do.
When companies can't afford their plans we pay benefits.
But first, we always try to see if the companies can afford to
keep their plans because by law there are limits on our
benefits. There are dollar limits on our pensions, we don't pay
for health care, and, to pick a case that is in the headlines
immediately, that is what we are doing at American Airlines. We
are trying to see if the company can be reorganized
successfully without having to terminate the pension plans on
130,000 people.
I want to say that this is a complicated task and by and
large the PBGC does a very good job of it. We survey customer
satisfaction in the same way that private businesses do, and I
will tell you that PBGC's customer satisfaction is among the
very best in the federal government and better than a lot of
businesses that I have been in, and I spent most of my career
in business.
But there are plenty of challenges, and I will mention some
of them, and then I am sure you will raise additionals. One is,
PBGC is now $100 billion financial institution but its finances
are unsound. We are not looking for tax dollars. We are funded
by premiums. We have never taken a dime of taxpayer money.
However, unlike other government insurance programs in this
nation, unlike pension insurance agencies in other nations, and
unlike every private insurance company I have worked with in
business, our premiums are not set by us, they are set by law.
They are set too low and they are set in a way that punishes
the majority of companies that sponsor plans.
I want to be clear: We have got enough assets to pay
benefits for the near future--we have got $81 billion in
assets. But our obligations are greater.
If I could have the slide? Okay.
When you compare our assets to our obligations, as you, Mr.
Chairman and Mr. Andrews, both mentioned, we have a lot of
assets but our obligations are greater and they are not
shrinking. Our current deficit is $26 billion. If the plans at
American are terminated we estimate that deficit would increase
to about $35 billion.
This is not an immediate situation, but unless changes are
made, ultimately the PBGC is either going to run out of money
or have to come back for taxpayer bailout. That is not
something we ever want to discuss.
Our view of this is, Congress has time and again recognized
this and bit the bullet and raised premiums. We think the time
has come to consider it again. We propose to do it in a way
that, A, we think encourages plans, and B, takes into account
the fact that we are in hard times right now, that defers it.
So that is one challenge.
Second challenge, which you also mentioned, Mr. Chairman,
is that as pension plans got more complex and complicated we
didn't keep up. And as a result, on the pension plans--and I
will name them; it is embarrassing, but I will name them--at
United Airlines and at National Steel, when we were trying to
track the assets to make sure that we did the benefits right
the agency did a bad job. Even worse than that, we didn't find
the mistake; our inspector general did.
When I got here a year and a half ago I said some things
are going to have to change and they are. We are going back and
we are going to do it right. If we have underpaid people we are
going to pay them what we owe them with interest and an apology
and we are making a bunch of changes to make sure it doesn't
happen again.
PBGC has a really complicated job and I am not going to try
to snow you. Nobody is perfect. But when we find a mistake we
are going to fix it.
Third challenge, multiemployer plans. You have witnesses
speaking on this so I am just going to raise a couple of basic
points because this is something that we pay a lot of attention
to and care about.
One is, multiemployer plans involve hundreds of thousands
of small businesses all across the country and tens of millions
of workers. Like most pensions, during the 1990s things went
fine and in the last decade, unfortunately, things have not.
The Congress 5 years ago gave multiemployer plans some
tools to deal with underfunding and plans are using those
tools. For probably most plans those tools and an economic
recovery will be sufficient to get them out of the woods but it
is pretty clear that there are some who are going to need more
capabilities.
And so when the Congress reconsiders PPA you are going to
have to reconsider those issues. As in the past, it has got to
involve both business and labor; it has got to be bipartisan.
And we are working on some reports and some analysis to help in
that regard.
The last thing I will mention before we do questions is
what I started with, which is the hardest challenge is to, how
do you enhance voluntary retirement plans? And I was just going
to mention three approaches that we do.
One is to facilitate more options. There are folks who say,
``I would like something that isn't just a traditional defined
benefit final average pay plan,'' and there are folks who would
say, ``I would like something that is different from the
traditional DC plan.'' We ought to make clear that there are
options and we ought to make those options available so that
employers can use them.
Second point--and I will wrap up--is we have to preserve
the plans that we have by reducing administrative and
regulatory burdens.
The fact is, companies get out of the traditional defined
benefit system for a lot of reasons but we shouldn't encourage
them out by regulating alone. And my last point is that we need
to continue to help people understand their choices.
Everyone recognizes these issues are complicated, that
there is no one solution, that the government can't impose one,
that it has got to be bipartisan, and that it has got to be
deliberate. And that, frankly, is why we are so grateful that
you are holding this hearing, and as you do this PBGC would
obviously like to help, so----
[The statement of Mr. Gotbaum follows:]
Prepared Statement of Joshua Gotbaum, Director,
Pension Benefit Guaranty Corporation
Thank you for holding this hearing and inviting me to speak about
the PBGC and defined benefit pensions. I'll be speaking to these
concerns against the backdrop of retirement security more broadly.
These retirement security issues are important to the nation, because
it is clear that the retirement world is changing and that more needs
to be done to strengthen our retirement system and help Americans
achieve a secure retirement.
Challenges to Retirement Security
It's no secret that people are concerned about retirement. Each day
some 10,000 baby boomers turn 65.\1\ Baby boomers are the largest
generation that's ever faced retirement. But the concern isn't limited
to baby boomers. According to a 2011 Gallup Poll, the number one
financial concern for Americans is not having enough money for
retirement. Gallup found that 77% of Americans age 30-49 are worried
about not having enough money for retirement.
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\1\ Pew Research Center, ``Baby Boomers Approach Age 65--Glumly,''
December 2010 http://pewresearch.org/pubs/1834/baby-boomers-old-age-
downbeat-pessimism.
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Thanks to better health, better technology, and better lifestyles,
today we're living longer, healthier lives.
That's great news, but it also means that retirement costs more.
Fifty years ago, by our estimates, the average person retired at age 62
and lived to be 79: about 17 years. Today, after retirement at about
63, the average person can expect to live about 21 years--some 30%
longer. And that's just average life-spans; about a quarter of us will
live into our 90s.\2\
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\2\ These are PBGC calculations based on our own actuarial analysis
of a 2011 Boston College study.
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Once we do the math, it's clear that retirement is going to cost
more, not less. Unfortunately, pensions haven't kept up.
About one-third of American workers have no access to
employer-provided retirement benefits; about one-half actually have
such benefits.\3\
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\3\ Bureau of Labor Statistics, DOL, ``Employee Benefits in the
United States--March 2011'' (July 26, 2011).
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Of those that do, the majority have only have a defined
contribution (DC) plan, usually a 401(k). Many of these plans lost
value during the recent economic downturn.
The tens of millions of Americans that have DB pension
plans are better off, but employers have been turning away from such
plans.
An important trend has been the replacement of traditional DB plans
with DC plans. DC plans provide portability benefits for those who
change jobs frequently and allow people to set and invest their own
savings. Unfortunately, DC plans also shift a number of investment and
other risks onto the shoulders of American workers. Furthermore, we
tend to forget about the chance that we'll live longer than average and
don't buy annuities, so the chances of people running out of money are
rising.
Today, most people don't think they have enough money to retire--
and they're right. The Administration is committed to do what we can to
strengthen retirement security, which is an important priority not only
for workers and retirees but also for our economy and our nation.
PBGC: Safety Net and Preserver of Pensions
PBGC was founded in 1974 to patch a hole in America's retirement
security system. We ensure that once a company makes a pension promise,
it does not vanish: it's protected up to legal limits.
Today, PBGC guarantees payment of basic pension benefits earned by
nearly 44 million participants in more than 27,000 private-sector DB
pension plans.
Working to Preserve Plans
But the best outcome, for workers, retirees, their families, and
our pension insurance programs, is for companies to be able to keep
their own pension plans.
When a company is in trouble, we try first to see whether it can
reorganize successfully and still keep its pensions. We work with
companies both before and during bankruptcy, so that they continue to
keep their own pension promises after the sponsor reorganizes, or after
a new owner assumes operations. Companies that continued their plans
following bankruptcy in FY 2011 include Chemtura Corp. with 15,000
participants and Visteon Corp. with 23,000 participants.
Of course, we don't always succeed, but PBGC would rather prevent
pension losses than pick up the pieces.
The Pension Safety Net
When a plan cannot keep its pension commitments, we make sure the
plan's participants get their benefits, up to the limits of federal
pension law, on time. When we take over a plan, we make sure that
pension checks don't stop, even while we're figuring out people's
benefits. In fact, our 2006 study estimated that 84 percent of people
receive their full pension benefits.
And, we do it without taxpayer money. Our benefits are funded by
premiums, by the assets of the plans we take over, investment earnings
on our assets, and by recoveries in bankruptcy.
Over the years we've become responsible for about 1.5 million
people in more than 4,300 failed plans. In FY 2011, 873,000 people
received benefits from PBGC. Every month, on average, we pay benefits
totaling $458 million. We are also responsible for future payments to
about 628,000 people who have not yet retired. During FY 2011, we
assumed responsibility for more than 57,000 additional workers and
retirees in 134 failed pension plans.
Continuing Reforms to PBGC
In the 37 years since ERISA became law, both the retirement
landscape and PBGC have changed dramatically. When it started, the
agency had fewer than 50 personnel. Some 25 years later at the end of
FY 1999, PBGC had just over 1,400 personnel (some 750 federal employees
and 680 contractors) and about a $7 billion surplus, with assets of $19
billion and liabilities of $12 billion. Today, the agency is operated
with about 2,300 personnel, including some 980 federal employees as of
the end of FY 2011. However, PBGC also now has a $26 billion deficit,
with assets of $81 billion and liabilities of $107 billion.
Congress has continually made changes, both in PBGC's organization
and programs, and in other parts of the law. For example, under the
original ERISA structure, PBGC was required to assume responsibility
for a plan even if the plan sponsor could afford to keep it. In 1986,
Congress added a financial distress test.
Furthermore, in the past Congress has recognized that PBGC premiums
are too low, and has raised them repeatedly. As this Committee knows,
we think it is again time to reconsider and reform premiums.
PBGC's Current Financial Position and Future Prospects
PBGC is funded entirely through insurance premiums paid by plan
sponsors, assets from failed plans, investment earnings on our assets,
and recoveries in bankruptcy. The agency does not take even a dime of
taxpayer funds.
Each year, we report our financial position, as well as estimates
of our future exposure. As one who has spent a lifetime in finance, I'm
pleased to report that PBGC's accounts have been approved and given a
clean opinion by independent accountants and its Inspector General for
two decades.
Over the past twenty years, accounting for large financial
institutions has become more realistic. Assets and liabilities are now
marked to current market. We can no longer pretend that assets are
worth their ``average over the past three years.'' Nor can we estimate
our liabilities based on the average of past decades or on a hope that
interest rates will rise.
Long before this was required of other financial institutions, PBGC
accounts were marked to market. The discount rates used to determine
the agency's liabilities are derived from market quotes for annuities--
the same type of annuities that PBGC's benefits provide.
On this basis, PBGC reports a very substantial deficit (i.e., our
liabilities exceeded our assets). This past year it increased to $26
billion, as of September 30, 2011.
There are some who suggest that PBGC should use other methods to
estimate its liabilities than the market test. We don't agree.
No matter how PBGC's deficit is calculated, the agency's
liabilities exceed its assets. Some have suggested that we use
corporate bond rates, like ongoing pension plans; if we had, our FY
2011 deficit would still have been some $21 billion. If we had used the
discount rate of private insurance companies, the deficit would be
approximately $28B.
It is important to emphasize that none of these deficit figures
includes any exposure for future claims that we think could easily run
into the tens of billions of dollars. But PBGC's liabilities are paid
out over decades, and we have sufficient funds to pay benefits for the
near future. Nonetheless, our obligations are clearly greater than our
resources.
Premium Reform Proposal
If PBGC's finances aren't reformed, the agency will eventually run
out of money to pay benefits. We cannot ignore our own future financial
condition any more than we would of the pension plans we insure.
That is why, a year ago, the Administration proposed that Congress
reform PBGC premiums. We think that doing so is necessary to the
financial soundness of PBGC and important to encourage the preservation
of responsible pension plans.
Since the agency was founded, its premiums have been set by
Congress. ERISA's original annual premium was one dollar per
participant for the single-employer program and 50 cents per
participant for the multiemployer program. Congress has repeatedly
raised premiums, and made other changes.
Unfortunately, neither the level nor the form of premiums has kept
up with changes in retirement plans. For some companies and plans, our
premiums are far lower than any private insurance company would charge.
American Airlines provided only the latest and most graphic example.
American sought and received funding relief from Congress. Instead of
funding their pensions, they set aside a cash pool of over $4
billion.\4\ Since their bankruptcy filing, they have made it clear that
they would like to terminate their pension plans. Doing so would
increase PBGC's deficit by some $9 billion. For this insurance,
American has paid a total over 37 years of about $260 million in
premiums.
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\4\ See AMR's news release on filing bankruptcy: http://
aa.mediaroom.com/index.php?s=43&item=3397.
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But what's just as disturbing is that financially sound companies
are asked to make up the difference. And if Congress were to increase
those premiums just to cover the actions of other companies, it would
make the situation worse. Think how hard it is to convince companies to
keep their plans while you're asking them to pay for the losses of
others.
We recognize that there are many issues involved in making PBGC
responsible for establishing premiums that are both fair and
financially sufficient. The Administration proposed a range of
safeguards to allay the legitimate concerns of businesses and plans
that rates might rise too quickly or unfairly. No increases at all
would be permitted until after a year of consultation with the affected
constituencies. No increases would be allowed without a vote of PBGC's
board. The increase on any individual company or plan would be strictly
limited and all increases would be phased in over a period of years as
the Board may determine. Furthermore, unlike the current variable rate
premium, the Board would be charged, to the extent feasible, with
setting premiums to minimize increases during times when the economy or
markets are weak.
It is not surprising that companies and plans would like to avoid
increases in their premiums; all of us would. However, the arguments
against doing so are weak. Some claim that allowing PBGC to set
premiums this way would be ``unprecedented''--even though most other
government insurance programs in our nation, every pension insurance
agency in other nations, and every private insurance company in the
world already does so.
Some claim that PBGC doesn't need the money yet. In one sense,
that's true: PBGC has sufficient current funds to meet its obligations
for the near future. But deferring action now will necessitate more
drastic actions in the future. Without the tools to set its financial
house in order and to encourage responsible companies to keep their
plans, PBGC's may face, for the first time, the need for taxpayer
funds. That's a situation no one wants to face.
PBGC Challenges
PBGC is now a $100 billion financial institution, one that like
other financial institutions operates in a changing and complicated
environment. There are plenty of challenges; I'll mention some of the
more important ones.
Companies that Take Advantage of the Current System
Termination of a pension is not something a company should do
lightly. We work hard to make sure that terminations are necessary and
that companies understand the consequences. However, there are some
aspects of the current system that make it easier for companies to
terminate plans.
One, already mentioned, is that PBGC's premiums are neither high
enough nor individually calibrated to discourage terminations. There
are other examples. Often when an investor buys a company in
bankruptcy, it structures the transaction as a purchase of assets and
refuses to assume the pension obligations. Unfortunately, there are
also instances where investors that are already owners of bankrupt
companies arrange to ``sell the company to themselves'' in order to
avoid their pension commitments.
In some cases, investment firms design transactions to avoid being
part of a controlled group, so that, should a plan be terminated, the
investment firm's assets cannot be reached. The only real tool that
PBGC has at that point is to go to court and threaten plan termination,
which is far from optimal.
Improving Service Quality
When people first come in contact with PBGC, their lives have
already been turned upside-down. They face the possibility of losing
some pension benefits, and may have already lost the benefits PBGC does
not guarantee, such as retiree health plans. All too often they have
also lost their jobs.
PBGC works hard to help them with compassion and professionalism.
And I'm pleased to say that, by and large, the agency does so
exceedingly well. For over a decade, PBGC has surveyed its customers
using the same measures of service as private industry, the American
Customer Satisfaction Index (ACSI). Our customer satisfaction scores
are among the highest of any government agency and higher than many
private companies.
In 2011, retirees receiving benefits from PBGC scored us at 90.
Participants who called us with questions rated us at 86. Our online
tools for participants and plan administrator were scored 83 and 79,
respectively. An ACSI score of 80 is considered excellent, whether for
government or private business.
But this doesn't mean there isn't plenty of room for improvement.
Under ERISA, rather than offering a uniform benefit, like the Social
Security Administration, we are required to calculate each person's
benefit under their own former plan, and then apply the intricate
limits and provisions of the pension law. Getting those personalized
calculations right is a core part of what we do.
Correcting Our Mistakes. The benefit determination process is
complex and, over time, as plans themselves got more complex, PBGC
didn't always keep up. The agency made mistakes. Even worse, PBGC
didn't catch them; our Inspector General did.
When I joined PBGC a year and a half ago, it was clear that changes
needed to be made. Over the years, PBGC had done a bad job on some
parts of some benefit determinations (making sure we knew the values of
the assets of the plans we took over). These affected benefits paid to
people who worked at United Airlines, at National Steel, and other
plans. As a result, some people have been overpaid, and others
underpaid.
We're now going back and correcting our mistakes. If we underpaid a
person, we'll pay what we owe them with interest--and an apology.
Equally important, we've made and are making changes so that
similar mistakes don't happen again. We changed the people who were
tracking plan assets, we put reviewers on each plan processing team,
and we're training people more and more carefully. I also began a top-
to-bottom review of the entire benefits operations, including
processes, organization, and personnel. We have begun making changes,
and will implement more in the coming year.
Being More Responsive to Companies and Plans
PBGC is acutely aware that this is a voluntary system and is taking
steps to be more responsive. After complaints from industry that
premium election procedures had confused them, PBGC has allowed some
companies to correct their submissions. PBGC also provided relief from
some premium penalties.
PBGC is also being more responsive to companies and plans in
enforcing ERISA section 4062(e)--a statutory provision that imposes
liability in certain situations when plan sponsors downsize. In light
of comments, the agency plans to issue a re-proposed regulation on
4062(e). We have also begun to consider changes in how resources are
directed within the 4062(e) enforcement program, in order to focus on
the real threats to the retirement security of people in traditional
pension plans.
Multiemployer Plans
More than 10 million of America's workers and retirees participate
in and rely on multiemployer plans. Small businesses depend especially
on these plans to provide retirement security to their employees. Some
plans are in relatively good health--and have been for decades, even in
the face of industry decline. But many are substantially underfunded;
and for some, the traditional remedies of increasing funding or
reducing future benefit accruals won't be enough.
We have been studying the challenges facing multiemployer plans and
listening to stakeholders about possible approaches to address them. It
is clear that as Congress considers multiemployer plans in the coming
months, PBGC's multiemployer program will also have to be reviewed and
revised. We are working with Congress to begin to address these major
challenges and will publish a Multiemployer Plan report soon to help
advance the process.
Improving Retirement Security
Going forward, the challenge is not only to preserve the many
valuable parts of our current retirement system, but also to rethink
and enable new forms of retirement security.
In December, PBGC held a forum on the future of retirement
security. We invited leading thinkers from the pension community to
discuss the present and future of retirement security, including the
place of defined benefit plans. We structured the forum as an
opportunity to begin a conversation and to listen. What we heard was
illuminating.
Some employers, who have seen overall benefit costs rise, are
looking for ways to limit costs and risks, and share them with
employees. Some who have shifted to DC plans are considering ways to
get some of the benefits common in DB plans. For example, they are
looking at auto-enrolling their workforce, so that workers participate
by default. Some employers with DB plans have told us they would
consider hybrid DB options with some features of DC plans as an
alternative to freezing their plans.
Retirement experts across the spectrum agreed that delivering
pooled risk was a key to providing retirement security, whether that
meant finding a way to build it into a DC plan or making DB plans more
attractive.
What Can Government Do?
There are many approaches that government can take to encourage
more secure retirements. Some of these options include finding ways to
strengthen existing plans, facilitating new options, helping
individuals understand their retirement choices, and reducing
administrative and regulatory burdens.
In the year and a half I've been at PBGC, I've learned a bit about
the rhythm of pension policymaking. Pensions are so complicated that
legislative consensus has taken years to develop. Legislative changes
have been bipartisan and usually involved both the labor and tax
committees of both houses.
We all recognize that the Congress has many priorities this year.
Nonetheless, it is significant that you are holding this hearing.
America's workers are already concerned about the adequacy of their
retirement programs and hearings like this help advance the discussion
we will need to respond to them.
Those deliberations must involve all constituencies in a spirit of
cooperation. They must be both far-sighted and practical. PBGC has
broad expertise both in retirement programs and in business's ability
and willingness to provide them, and looks forward to assisting.
Thanks very much for the opportunity to report on our agency and to
raise some of the concerns about retirement security that we share. I
would be happy to answer any questions.
______
Chairman Roe. Thank you for your testimony.
And I am going to start by injecting something a little
personal. My father lost his job when he was 50, and this is
prior to ERISA, and basically after almost 30 years post World
War II ended up with, at 50 years old with a high school
education and no retirement plan.
Now, I think we have a solemn promise to people when you
make those promises that we keep those promises, and I think
when a person is out working--many of these very hard jobs,
labor jobs--they plan on this retirement along with their
Social Security and whatever money they can save for their
years. And what most Americans fear now, and you see it all the
time when you talk about your seniors, is outliving your
retirement plan. So these are very important.
I think one of the things that--I was--served on our
pension committee in my business in practice for almost 30
years and we, for the reason of expense, gave up a defined
benefit plan in 1980. For a small business it was very hard to
project--we figured 30 years ago it was going to be very
difficult for us to fund this so we went to a defined
contribution plan at that point.
Having said that, though, there are many Americans--over 40
million--who have a defined benefit plan, they expect to get
paid what they are told. And also, I wanted to ask, in the
company you use to do your audits, it is a little bit
disconcerting when people are already fearful that they have
lost their pension plan. I can assure you there are a hundred
and something thousand American Airlines workers right now that
are worried to death: Am I going to get what I was promised?
And then we find out that, through the I.G., that maybe we
haven't, in eight of the ten that the largest termination
plans, and this same company was used that didn't do it
correctly, how do we know it is done correctly and how much is
it going to cost to correct the mistakes?
Mr. Gotbaum. Very important. Let me say that we--for all of
the reasons that we just said we think it is important to
preserve the plans that people have. At PBGC it is also
important that they not worry that they are getting the benefit
they are entitled to.
And the fact of the matter is you are absolutely right that
the mistakes that the agency made some number of years ago
undermines the security we want to offer to everybody. So let
me tell you again what we did.
One is, the company that was doing those so-called audits
wasn't an auditor. They weren't a CPA firm. They are not doing
audits for PBGC anymore; we have hired CPA firms to do the job.
That is one.
Two, for--we are starting on the ones where we know we made
a mistake, which is United and National Steel, and we are then
applying those lessons to the other plans, and--because we are
going to find our mistakes and we are going to correct them----
Chairman Roe. Well, the reason this is very important is
that trust is important because if I am a retiree out there and
I have paid in I am now questioning, learning this, am I
getting what I should be getting? And that is a very honest
question on their part--am I getting paid what I should be
getting paid?
Let me go to another line of questioning. I know we just
saw the American Airlines just yesterday, I guess it was, or
day before yesterday, about pension. Do you see any companies
that would be out there that would be using the bankruptcy, I
guess, ability to shed their pension liability? We are looking
at $8 billion here of liability that they won't have, I think,
is what I read, or more with--they have assets, obviously, but
do you see that?
Mr. Gotbaum. Mr. Chairman, this one is a difficult question
because, as you have said, we are trying to do several things
at once here. One is, we want to. When a company cannot afford
to pay its pension we will step in, absolutely. But there are
times--I ran an airline in bankruptcy so I have some experience
in this--there are times when companies in bankruptcy ask for
things they don't really need, and so part of what we have to
do is we have to say, ``What are the facts? What can you really
do? What choices do you really have? Do you have to, in order
to succeed as a business, kill your employees' pension plans?''
We think it is important to do both, to be ready to pick up
benefits if the plans need to be terminated, but first to see
whether they can't be saved. That is what we do every day, and
I will tell you, having been--as a--I was across the table from
PBGC when I ran Hawaiian Airlines. I will tell you, they are
pretty good at it.
Chairman Roe. So you will be looking, along with the
bankruptcy judge, will make those decisions. Is that correct?
Mr. Gotbaum. Yes, sir.
Chairman Roe. So that we won't be--there won't be a
situation where they can walk away from this liability
unscathed.
Mr. Gotbaum. No, sir. If either we believe that a company
can't afford its pension or the bankruptcy court believes then
we take on the pension.
Chairman Roe. Okay.
Mr. Andrews?
Mr. Andrews. Mr. Chairman, I am going to defer to Mr.
Miller as our first questioner this morning.
Mr. Miller. Thank you very much, Mr. Andrews.
And thank you, Mr. Chairman.
I would like to continue where the chairman was going, Mr.
Gotbaum. And thank you very much for your service. Thank you
very much for your candor on the issue of the United Airlines.
You inherited this mess; it is almost a decade old. But I
appreciate the tenacity with which you are going after it and I
hope that we will have good results for those employees that
have missed the benefits of the proper appraisal of those
assets.
I wrote you a letter earlier and I am very concerned that
we don't repeat some of the downside of the United Airline, and
American Airline obviously timed its filing and its pension
contribution here together, so instead of paying $100 billion
they decided--I mean, they--$100 million they decided they
would pay 6.5--they would pay 6 percent of what they owed under
the plan.
The question is, do you have the ability or will you pursue
the ability to go after that money in the bankruptcy court? I
appreciate the rationale of bankruptcy why they did this. We
all know why they did it; it was cleverly thought out. But are
you going to pursue that additional--$90 million--in that
payment?
Mr. Gotbaum. Yes, Mr. Miller, we are, but we are going to
do it in two different ways. One is, the powers of PBGC are not
infinite, but one thing that we can do is when a company
doesn't make a pension contribution that they are supposed to
is we can go outside the bankruptcy process and file liens
against those parts of the company that aren't in bankruptcy--
--
Mr. Miller. You will pursue that?
Mr. Gotbaum. Oh, we have already done so.
Mr. Miller. Thank you.
The other question is, PBGC gave up its right in the United
case to restore the pension should United become profitable
with some obligation for the pension. I assume we are not going
to give up that right. United is now profitable and the
taxpayers are still stuck and the workers are still stuck. I
assume that that will not be given up in this effort without
some negotiation or some benefit to the workers and to the
taxpayers?
Mr. Gotbaum. As I said, Mr. Miller, as you know, first
thing we are going to try to do is see if we can keep those
plans in place. If there is termination the answer is yes, we
are going to try to protect the interest of the retirees and of
the PBGC, and that means being smart about getting the best
recovery we can.
Mr. Miller. Well, the other lesson was that then on the
morning that the bankruptcy determination was made the workers
took their cuts, the taxpayers took the liability, and the
executives of United Airline all got bonuses for steering
United Airlines through bankruptcy. I assume there will be some
challenge if that money is available for bonuses it might be
available to lower the burden on the taxpayers of this country
and on the workers who will lose a significant portion of their
pensions should this happen and should they be entitled only to
those payments under PBGC.
Mr. Gotbaum. Yes. Yes, Mr. Miller. One of the things--I can
tell you from personal experience, because I have been on the
other side of the table from PBGC, is the folks at PBGC are
active creditors. They believe in getting the best that they--
we possibly can for our recovery to protect ourselves, and,
although nobody puts it quite that way, bankruptcy is about
equity and we go for justice.
Mr. Miller. I guess I am a little bit suspect about how
active they were in the United case, okay, and I think that
taxpayers got screwed and I think the workers got screwed,
okay? So I would just like to know that this PBGC, under your
leadership, is going to be more active about conserving the
taxpayer resources and conserving the workers' resources in
this plan.
Mr. Gotbaum. I hope----
Mr. Miller. I don't think United has been liable for
workers or taxpayers.
Mr. Gotbaum. Mr. Miller, I hope that the actions of the
PBGC over the last month have convinced you that the PBGC is
going to be----
Mr. Miller. I say that, as you read here, that this is
going to be the largest, largest pension default in the history
of the country. This is an airline that is into us for, I
believe, $1 billion for the change in interest rates that the
Senate changed in the minimum wage bill. Minimum wage workers
got 75 cents and American Airlines got $1 billion in the same
bill.
So that $1 billion, I assume that must--is that beyond
reach in the bankruptcy court? That is the--suggested that that
has been the value of that change in interest rates.
Mr. Gotbaum. Yes. What that is is that over time American
got funding relief that enabled them to avoid putting $1
billion into their pension plans----
Mr. Miller. Right.
Mr. Gotbaum [continuing]. $1 billion that would have
increased benefits if the plans are terminated----
Mr. Miller. And the fact is they are about to offload $1
billion onto the taxpayers after getting $1 billion in relief.
So they are into us for $2 billion.
And so they scheduled the payments and they got the Senate
to change the amendment so that they could change their
payments or their contributions to the pension plan and then
they schedule their bankruptcy so they could minimize the
payments. This is a hell of a deal. It is just not very good
for taxpayers; it is not very good for workers.
And, you know, we are really relying on you in this one.
This is a test for other reasons of others that are falling.
But if you can work it out, if you can get an early bailout and
you can reschedule your payments, and then you can reschedule
your payments in bankruptcy, there are 14 million homeowners
who would like to have the same shot at that deal.
So you have got a big load to carry. I have a lot of
confidence in you, but this is--these are tough adversaries.
Thank you very much.
Chairman Roe. I thank the ranking member.
Now, Dr. Heck?
Mr. Heck. Thank you, Mr. Chairman.
And thank you, Mr. Gotbaum, for being here this morning. I
appreciated your testimony.
The administration's premium proposal calls for the PBGC to
have the discretion to set variable rate premiums, including
the authority to adjust premiums to account for risk as a
private insurance company would. Of course, defined benefit
plan sponsors are captive customers of the PBGC as they are
required by law to pay the premiums and there is not a private
market alternative.
Can you explain why the power to essentially tax plan
sponsors should be centralized with a government agency that
may have an incentive to increase premiums to offset its own
operational shortcomings but not to provide a competitive price
to the consumers? This is just akin to the fox watching the hen
house.
Mr. Gotbaum. Yes, Mr. Heck. That is a very important
question because I spend a lot of time talking to my customers
because my view is that the businesses that pay premiums to
PBGC are PBGC's customers too.
And it is funny, but having been in business two-thirds of
my life, none of us likes to have premiums go up. Doesn't
matter whether it is a government insurance agency or a private
insurance agency, et cetera.
The reason why we think it is important to move to a more
business-like scheme is two-fold. One is that right now,
because we have to wait until there is legislation, the PBGC's
deficit gets large enough so that some folks are getting
nervous. But that is not the main reason, from my perspective.
The main reason is that when you have premiums set by law
you have to use a kind of one-size-fits-all approach. And let
me take a specific case.
You are going to hear from the panel--later on in the panel
from U.S. Steel, a company with which I a long time ago did
business. And U.S. Steel makes the point that they care about
their pension plans, they fund their pension plans, and they
are responsible citizens, and they are.
But right now the way premiums are determined, if we have
to take on the pensions of American Airlines and our deficit
goes up by $9 billion American isn't going to pay those
increases, U.S. Steel is going to. And so for that reason we
think it makes more sense not to punish U.S. Steel for being a
good citizen, for caring about pension plans and--but to say,
``You deserve lower rates than the guys who are higher risk.''
That is the reason we proposed it.
Now, I want to be real clear: There are lots of issues
about how do you make sure that PBGC doesn't go off the
reservation? How do you make sure that things don't go--what
the administration has done is proposed a starter proposal to
the Congress in the hopes that we can have a discussion about
how best to do this.
We think it is important to do it. We don't think that
anybody has a monopoly on wisdom on how, but I would like to
get to a system that I could explain as fair to solid customers
like U.S. Steel.
Mr. Heck. And I appreciate that, and as I would express,
the concern would be not that PBGC would necessarily go off the
reservation but that we start seeing changes in premiums
because of internal difficulties that PBGC is having and not
necessarily based upon the risk for a given policy, and that
would be the concern.
And I thank you, Mr. Chairman, and I yield back.
Chairman Roe. Thank the gentleman for yielding.
Mr. Andrews?
Mr. Andrews. Thank you, Mr. Chairman.
Mr. Gotbaum, thank you for your testimony. I wanted to
explore your ideas about closing this $26 billion deficit. And,
I mean, obviously what we all hope is that we would have
economic growth that would make the assets that you hold more
valuable.
I mean, a quick back-of-the-envelope guess is if the Dow
Jones were at 15,000 your assets are probably worth about $120
billion today and you wouldn't have a deficit. But I don't
think that we can legislate that or hope for that. I mean, I am
trying to pass a bill that says that we will win the lottery in
my family but it hasn't worked so far.
So we do have to look at two other issues, and one is
premium increases, and the other is the way that you calculate
your deficit--the assumptions you are making in calculating
your deficit.
Let me say, with respect to premium increases, that--and I
speak only for myself on this--that I share the concern of
those who would create simply discretionary authority for you
or anyone else to set these increases. I think Dr. Heck's
question is well founded.
And again, without prejudice, how would you react to a
thought that there would be two limitations on your premium
authority--the first is that any premium increases would have
to be completely dedicated to the assets of the PBGC, could not
be sent to any other purpose in the federal government. In
other words, we couldn't raise the premiums and then drain the
revenue for general purposes.
And then the second would be that there would be some
statutory ceiling with which you have to operate. You would
have authority to increase your premiums up to X, and X could
be tied to some general economic metric rather than simply what
the agency thinks.
How would you react to that?
Mr. Gotbaum. I would say, Mr. Andrews, that you are talking
about just the sorts of issues that we think must be talked
about in order for the Congress to have comfort doing this.
This is exactly the kind of discussion we hope to have.
I will tell you two things in response to your specifics.
One is, we agree that this has to be for PBGC. PBGC's funds are
not taxpayer funds. We are trying to make sure that we never
ask for them.
Mr. Andrews. Right.
Mr. Gotbaum. And so premiums are dedicated for that
purpose.
Secondly, last year we put a little flesh on the bones. We
proposed that PBGC get the authority--that the PBGC's board get
the authority to raise rates, but some important things: One
is, we proposed a dollar limit on the total amount of the
increase. That is one.
Secondly, we proposed that no matter how it was--got done,
that nobody's--no company's premium could go up by a certain
amount above where it was last year. And the reason we were
doing that, sir, was to deal with exactly the issues that you
talked about, which is we want to keep our customers. We want
to keep companies in the DB system. We don't want to scare them
away.
Mr. Andrews. Let me ask you about the valuation side of the
equation. The assets are presently valued at around $90
billion. Is that right?
Mr. Gotbaum. A little over $80 billion, sir.
Mr. Andrews. A little over $80 billion. Are most of them
held in bonds? Where are the assets?
Mr. Gotbaum. Yes, sir. The investment policy of the PBGC
has changed from time to time over the 37 years, but for most
of its existence it looks like this: It is roughly a third in
equities, a third in fixed income instruments, and about a
third in treasuries. And that has been--it has bounced around.
The GAO did a report----
Mr. Andrews. What assumption are you making about bond
rates----
Mr. Gotbaum. Okay, if I may, the way we evaluate our
obligations is--and this has been the case for a very long
time--is we mark them to market but we mark them to the annuity
market because our obligations look like annuities----
Mr. Andrews. But I am asking about the assets, not the
obligations. What are you assuming----
Mr. Gotbaum. The assets are marked to market at current
value, so in other words, whatever bonds trade at today.
The liabilities, though--the liabilities are the hard part.
That depends on what you think interest rates are. We--and our
accountants have supported this for 20 years--we mark our
liabilities to market by getting quotes for annuities, because
our benefits are annuities. That works out to be--last time I
looked it was a little under 5 percent as the implied discount
rate in the----
Mr. Andrews. Are these all based upon a certain economic
forecast? I mean, I think it is pretty broadly assumed that
because of the artificially low short-term interest rates that
we are now living with that at some point in the near future
interest rates are going to rise. Have you taken that into your
consideration in stating the size of your deficit?
Mr. Gotbaum. Yes, Mr. Andrews, we have, but I have--there
are a lot of folks, including some who are sitting behind me
with whom I have had lots of discussions, who would say, ``Why
don't you evaluate your liabilities based on the corporate bond
rate?'' The reason we don't is because we think we should mark
it to market and so we use a rate that is different. But if we
use the corporate bond rate our deficit would be instead of $26
billion, $21 billion.
Other people say, ``You are an insurance company. Maybe you
should use the discount rate that insurance companies use.'' In
that case our deficit would be $28 billion.
If I may make one more point, which is, I don't think the
issue is by any means just the deficit, because what isn't in
our deficit is the plans that are coming in the future. For
example, the $26 billion which we announced in November, as at
December--as at September 30th--doesn't include American
Airlines. If American Airlines comes in it is going to be----
Chairman Roe. You have got to finish up, Mr. Gotbaum.
Mr. Andrews. Thank you, Mr. Gotbaum.
Thank you, Mr. Chairman.
Chairman Roe. Thank you, Mr. Andrews.
Mr. Wilson?
Mr. Wilson. Thank you, Chairman Roe, for holding this
important hearing.
And, Mr. Gotbaum, thank you for being here today. As you
stated in your testimony, the PBGC has reported a $26 billion
deficit at the end of the fiscal year. And again, it is going
to look like Congressman Andrews and I are in lockstep on
issues relative to asking a question, and it relates to our
mutual interests in how you calculate the deficit.
My understanding is that the deficit is calculated using
interest rates that are even lower than today's artificially
low rates. Is that accurate?
Mr. Gotbaum. Our liabilities are calculated by going to
insurance companies and getting quotes for annuities that
mirror our obligations. This is what we have been doing.
When you compare those to the current bond rates that are
used by corporate pension plans they are lower by, last time I
looked, about 75--by about 75 basis points. But the point that
I think is, again, worth making is that even if we used the
corporate bond rate our deficit would be over $20 billion, and
that excludes if we end up holding pensions like American
Airlines. It excludes future claims.
Mr. Wilson. And people may be disagreeing on this because
Ken Porter will be testifying in the second panel, and he
believes that if normal pre-economic downturn interest rates
were used that the PBGC would have no deficit. In other words,
if we used interest rates in effect before the government began
its concerted effort to keep interest rates low the PBGC would
have no deficit.
In this context, why is PBGC asking for $16 billion in
additional premiums and why isn't the PBGC publicly disclosing
that the deficit is a product of the artificially low interest
rates?
Mr. Gotbaum. If I may, let me say a couple things. One is,
I have a lot of respect for Ken Porter and for the folks he
represents. PBGC is now a $100 billion financial institution,
and one of the facts over the last decade is it has become
clear that financial institutions need to be more accountable,
not less.
There are folks, like Ken, who would argue that we should
go back to some of the tools that pension plans used to use of
smoothing or average interest rate. Our view is that is not
consistent with honest accounting and we don't think we should
change our accounts, and our auditors agree.
Mr. Wilson. And I do have to tell you, when you mention
mark to market, I am a former real estate attorney, and I was
just startled by using mark to market that mortgages that I
felt like had value somehow came back with no value. But I just
raise that to you, that it is--we wish you the best and I am
just so happy that Chairman Roe is working on this issue.
So I would refer back to the chairman.
Chairman Roe. I thank the gentleman.
Mr. Loebsack. Thank you, Dr. Roe.
Mr. Gotbaum, I do appreciate you being here today. Last
week I was privileged to be able to take part in a field
hearing held by Chairman Harkin from the Senate Health
Committee, and much of that focused around helping to ensure
the survival of the middle class. And I guess I can't state
strongly enough that for the sake of the middle class of
America that we need to make the middle class a priority on
this committee, and I think we really do need to focus on
improving the retirement system for American workers. It is
really critical for the American middle class, particularly the
defined benefit programs, but as well, those defined
contribution programs.
So I am really happy we are having thing hearing today. And
I think it is good that we are learning more about these
issues.
I do applaud you for standing up for the American Airlines
workers. I appreciate that. I hope you continue to do so, as
Mr. Miller mentioned.
And also for thinking about the long-term solvency of the
PBGC. There is simply no way around it. We have to do that. We
have to figure out how we are going to really continue this
process and continue the great work that the PBGC does.
But I have concerns, like everyone here I think, about the
long-term solvency issue of the fund, and I am concerned about
ensuring adequate guarantees, of course, for hardworking
Americans who were relying on their retirement funds.
I want to just piggyback a little bit on what Mr. Andrews
brought up as far as, you know, how you are going to fund this
system in the future. Can you explain in particular how a risk-
based system might affect already cash-strapped companies that
are out there and pension plans and how that can be countered?
Because there is certainly a fear, I think, that increased cost
could drive some of these companies to a breaking point given
the economic crisis that we have now. So can you answer that
particular question?
Mr. Gotbaum. That, Mr. Loebsack, is a very important
question and we have given it a lot of thought. It is, by the
way, an issue that other government insurance programs and
other agencies, like the FDIC, which has risk-based premiums,
like the flood insurance, like the crop insurance program has
as well.
What we think needs to happen is that we should take the
facts of each company and plan into account but there ought to
be limits and there ought to be a waiver process, there ought
to be limits, and there ought to be enough consultation and
care in putting this together so that--I may be loose when I
say--going off the record--so that we don't accidentally create
a situation that is a problem. We are pretty comfortable that
within the range of premiums that we are talking about we are
not going to put anybody out of business. Premiums work out on
a per-hour basis to be about three and a half cents an hour, so
if you--you know, if you even triple them you would be talking
an increase of seven cents an hour, which is, for the average
industrial worker, a fairly small piece.
But even though the numbers, we think, in practice would be
small, we agree with you completely that there need to be
safeguards to make sure that we don't by accident create a
situation that would get somebody out of the DB system, because
that is not what we are trying to do.
Mr. Loebsack. Right. I think that is a fear that a lot of
companies have, and some labor unions, as well.
Mr. Gotbaum. It absolutely is. And that is why, by the way,
we think that if we can get you all to consider this there are
going to have to be safeguards. There are going to have to be
limits and procedural safeguards, et cetera, so that you have
some comfort that we do this in a way that actually enhances
the system.
Mr. Loebsack. What about some other ideas that might be out
there, other ways to do this other than the system that you are
thinking about? What else have you taken into account?
Mr. Gotbaum. We have heard only a limited number of
alternatives. For example, a lot of folks have said, ``Just
don't raise the premiums and wait until you really do run out
of money.'' We don't think that is--we think that undermines
security so we don't think that is a responsible thing to do.
Other folks have said, ``Why don't you just keep raising
premiums the way you have in the past?'' And the reason we
don't like that so much is because now half of our money comes
in what is called the variable rate premium, and that premium
base is based on how underfunded a plan is. And that means that
when the economy goes down, when markets go down, when stock
values go down pension plans become underfunded and their PBGC
premiums go through the roof just at the time they can't pay
it.
Mr. Loebsack. Right.
Mr. Gotbaum. So our view is, let's not do it that way.
Let's find a way so that premiums don't hit you hardest when
you are least able to pay.
Mr. Loebsack. All right. Thank you. I really do appreciate
it.
Thank you, Dr. Roe, for having this hearing.
Chairman Roe. I thank the gentleman for yielding.
Chairman Kline?
Chairman Kline. Thank you, Mr. Chairman.
And thank you, Director Gotbaum, for being here and being
so forthcoming in your answers. A lot of discussion today about
exactly how much this deficit is it $26 billion--$22 billion
sort of hike thing, but it is money. And now, just looking at
this little chart and realizing that from the first day I
arrived the PBGC--in Congress back in 2003--the PBGC has been
operating at a deficit. I am feeling some personal
responsibility here about that.
But on a more serious note, we are concerned, clearly,
about the health. We are interested in the request for premium
increases. We are going to examine that here in this committee.
I think the questions that Mr. Andrews, and Mr. Wilson, and Dr.
Heck, and other--Dr. Loebsack asked are right on point.
One of the things you mentioned as I was walking in late--
and again, I apologize; I think it has probably been explained
that there was a National Prayer Breakfast today, and
incredibly, the traffic in Washington was tough, and so we were
late getting back. But you mentioned very briefly as I was
walking in some concerns about multiemployer plans, and that
works a little bit differently in the PBGC than the single
employer plans.
And I am looking at a note here about the 2010 Annual
Exposure Report that said it is possible for the multiemployer
program to be insolvent in the next 10 to 20 years. Have you
got an update on that? Is it better or worse?
Mr. Gotbaum. Oh, it is clearly getting more troubling, Mr.
Chairman. The multiemployer universe is, as you know, very
important, covers lots of small business, covers lots of
people. It is also a part of the pension world about which we
know less because we don't get--in other words--for example,
the folks at U.S. Steel, they are a public company so we know
something about their economics, okay?
We don't know very much about all of the small businesses
and large businesses that participate in multiemployer plans,
so we are working in something which the very distinguished
actuaries sitting behind me from PBGC would be offended if I
called really educated guesses. But based on those models and
projections, it does look like there are clearly some
multiemployer plans that are going to get into trouble, and the
way we do our accounts, if you will, is we kind of look forward
10 years. So when you have got a plan that might go insolvent
11 years from now it probably isn't in our accounts; if it is
going insolvent in 9 years it probably is. That is where we are
about now.
So we think this is a problem which is growing. We also
think it is a problem that is important.
Fortunately, as you can tell from the fact that I am
talking 10 years, this is something which this committee can
consider in a reasoned and bipartisan fashion over the next
couple of years, and we hope that is what you will do. And
obviously we would like to help assist and provide advice on
that.
Chairman Kline. Well, I thank you for that answer, and that
is, of course, the answer that I expected. We do know that
there are some pretty large multiemployer plans that are indeed
in trouble, and we are watching those.
And I was thinking back to a few years ago when we did the
Pension Protection Act and we tried to grapple with the
multiemployer plans, and sure enough, it is more complicated.
It is not straightforward; there is not a single company. You
have companies coming and going, and they have to pay
withdrawal liability, and it--grappling with it I thought that
we made a decent effort at it--to get at it, but looking at it,
there is going to be some more work that is going to be
required not just because of the PBGC, but the structure needs
to be looked at.
Anyway, I want to thank you very much for your time here
today.
And, Mr. Chairman, I will yield back.
Chairman Roe. Thank the chairman.
Mr. Kildee?
Mr. Kildee. Thank you, Mr. Chairman.
Mr. Gotbaum, what percentage of what the--they had expected
from Delphi did the salaried Delphi employees receive from
PBGC?
Mr. Gotbaum. Mr. Kildee, this is a good question, but
unfortunately, because of some work I did before I joined the
federal government--I was working with some institutions that
became involved in Delphi--I am recused from discussions of
Delphi. So if I may, can I have my staff, who is not recused,
get back and answer those for the record--answer any of your
questions on that subject for the record? It is very important
that we answer them, but I am not allowed to do it personally.
Mr. Kildee. Can we do that at this time, or----
Mr. Gotbaum. I think it would be better if we did it
through the record process. I promise you we will answer those,
because my view is, part of our job of providing retirement
security has to be that we answer the questions of the folks
whose pensions we take care of.
Mr. Kildee. Let me just ask you this--maybe you can----
Mr. Gotbaum. Sure.
Mr. Kildee. Is this amount--what percentage they are
getting from what they had expected from the corporation,
getting from PBGC--is that determined by hard law or by some
type of formula that is----
Mr. Gotbaum. It is actually more complicated than that, Mr.
Kildee. The rules are, we start with the pension plan that was
terminated. So we figure out what benefit each person would get
under that pension plan when it was terminated.
We then have a separate--an additional set of rules--there
are limits on how much we can pay--that we also. And
unfortunately, this complicated process takes a long time. I
wish it were different. I wish we were like Social Security, in
which case we would just have a formula, but we don't.
So what I am sure we are doing now at Delphi is we are
following the process that we have to follow, which is first
figure out what their plan provides, then apply the limits that
we have, and then tell folks about it. And if they disagree--
and plenty of folks do--we have an appeals process and a review
process to do that.
But if you want to get more specific details I would be
more than happy to make sure that we talk with you and your
staff with folks who don't have to be recused.
Mr. Kildee. I would appreciate that and I will defer until
that time.
Mr. Gotbaum. Thank you very much.
Mr. Kildee. Thank you very much.
Chairman Roe. Mr. Hinojosa?
Mr. Hinojosa. Thank you, Mr. Chairman.
Mr. Gotbaum, thank you for joining us today. Before I
proceed with my questions I would like to underscore that
retirement security is vitally important to millions of
American workers, and as many of our colleagues here in our
committee have stated, our nation must maintain its
longstanding commitment to protect Social Security and Medicare
guarantees and ensure that workers receive their promised
pensions.
My question to you, Director, is I understand that American
Airlines is proposing to terminate their four pension plans.
How do American Airline pension obligations compare to those of
other airlines?
Mr. Gotbaum. That, Mr. Hinojosa, is one of the issues that
we are trying to find out, because from our perspective, as I
mentioned, we can't say nobody should be allowed to terminate
their pension if they really can't afford it, and part of the
issues in a competitive industry like the airline industry--and
I worked in that industry--is you have to look at what you do
versus other competitors. However, I will tell you that it is
not just pension costs that go into this. It is the cost of all
workers that go into this comparison so that, for example, I
can tell you that last year American's per employee pension
costs were less than those of Delta by about 60 percent, okay?
They were higher than those of United by a smaller percentage.
That is the kind of information which we need to get in
order to form a judgment about whether they need to terminate
their pension plans. That is one piece of it.
The other piece of it, so that I give you a full answer, is
what other options do they have? Can they think about other
ways of raising revenue? Can they think about other ways to cut
costs besides killing their employees' pension plans?
Mr. Hinojosa. So when you get that information that
compares the airlines what can we in Congress do to improve the
retirement security of defined contribution plans such as our
own 401(k)?
Mr. Gotbaum. I am really glad you asked that question
because from our perspective that is another important issue on
retirement security. We understand that employers, for a lot of
reasons, want to go into defined contribution. We also
understand that people are unhappy with it.
So what we are trying to do--my colleagues in the Treasury
are leading the charge--is trying to make--excuse me--to allow
changes in defined contribution plans that give workers more
security. So we are trying to find ways to give them options
that offer lifetime income streams.
We are trying to find ways to give them options so that
they don't have to remember to sign up for the plan in order to
be in the plan. Those are efforts that my colleague, Mike
McKeever, at Treasury has been leading for some time. We think
it is a really important question, and I have got to say, I am
really glad that you asked it, and----
Mr. Hinojosa. In looking at the chart that was given to us
that came from your office there are three types--the defined
benefit, the both defined benefit and defined contribution, and
the last one, the defined contribution only. Speak to us about
the fundamental importance of the defined benefit plan for
American workers.
Mr. Gotbaum. Throw me into the briar patch. Thank you.
As you all know, pensions are really complicated. People
don't have time to do the math, they don't have time and the
skill to pick investments, et cetera, and that is all the
reasons why the traditional defined benefit plan, in our view,
provides better retirement security, because defined benefit
plans don't require us to become actuaries. They don't require
us to become investment experts.
And they provide workers with a secured income for their
entire life. They don't require people to guess whether they
are going to live to be 85, 90, or 95. So for all those reasons
we think defined benefit pension plans are a better way to go.
However--and this is important, too--it is also clear that
because this is a voluntary system that there are a lot of
companies who have said, we will not or we cannot take the
effect of having a pension plan on our reported financials, or
the expense, or whatever, et cetera. That is more than we will
do.
And so from our perspective, that is why it is important
that we encourage, make available hybrid options that have some
of the benefits of defined benefit but share some of the risk
with employees.
Mr. Hinojosa. Thank you.
Mr. Gotbaum. From an employee's perspective----
Mr. Hinojosa. My time has run out.
Thank you, Mr. Chairman.
Chairman Roe. Thank you, Mr. Hinojosa.
Mr. Scott?
Mr. Scott. Thank you. Thank you, Mr. Chairman.
Mr. Gotbaum, just a series of kind of quick questions. The
state and local pension funds have been pointed out as a cause
of concern. They are not under your jurisdiction at all. Is
that right?
Mr. Gotbaum. No, Mr. Scott, they are not.
Mr. Scott. The defined contribution plans that my colleague
from Texas just talked about--this just shows the number of
people covered by the defined contribution, it doesn't show the
size of the fund?
Mr. Gotbaum. That is right. This is the number of people in
private industry.
Mr. Scott. But most of those are woefully inadequate for
any kind of meaningful retirement plan. Is that right?
Mr. Gotbaum. I would say it differently----
Mr. Scott. The median for the defined contribution is
totally inadequate for any meaningful retirement plan.
Mr. Gotbaum. I would like to agree with you completely, Mr.
Scott, but I think it is worth saying that I think the
situation has some additional complications, which is there--if
you look at the average defined contribution plan amount for
people who are close to retirement, that is a much bigger
number that we are talking about.
Mr. Scott. The median, not----
Mr. Gotbaum. Yes, yes. However, what happens is that if the
markets go down just before somebody retires they are stuck. So
if you had somebody who was counting on their 401(k) and was
going to retire in 2009, they ain't going to be retiring. So
that is why we think defined benefit is----
Mr. Scott. Well, that is an additional risk that the market
may go down right when you need it. In addition to that, the
median is somewhere in the $30,000 to $50,000 range. Is that--
--
Mr. Gotbaum. Yes. That is with regard to all ages----
Mr. Scott. Which means that that is not going to be much of
a retirement. Now, one of the things that I have noticed is the
amount of money we are trying to collect with this deficit, you
have about 40 million people covered at $25 each, that would be
$1 billion, which is not enough to cover the gap. We need to be
focusing on making sure that plans don't fail as--rather than
trying to raise enough money to cover them.
Now, are these plans--the funds set aside for these plans,
are they subject to bankruptcy? I mean, the company goes
bankrupt, these plans are set aside and can't be gobbled up by
creditors; they are separate for the pensioners. Is that----
Mr. Gotbaum. Yes, sir. That is right.
Mr. Scott. Now, is the PBGC a priority creditor in
bankruptcy or are you just in line with all the other unsecured
creditors?
Mr. Gotbaum. For the vast majority of our claims we are
another unsecured creditor. We are, to be fair, usually the
largest unsecured creditor, and I am proud to say my colleagues
at the PBGC are some of the most knowledgeable and smartest
creditors any place, but yes, we are general--for the vast
majority of our claims we are just an unsecured creditor.
Mr. Scott. Is it a crime to fail to contribute to a plan as
promised?
Mr. Gotbaum. It is not a crime, sir, no.
Mr. Scott. So if you have promised plans, if you just sit
around and don't contribute to your plan that is just a civil
offense, not a criminal offense?
Mr. Gotbaum. Yes. It means you get a discussion with us.
Mr. Scott. Now, you have a fund--assets about $80 billion?
Mr. Gotbaum. Yes, sir.
Mr. Scott. And you said you had one third, one third, and
one third. Who manages that? Do you manage it internally or do
you outsource the management?
Mr. Gotbaum. There is a team of people within PBGC who are
responsible for oversight but the actual day-to-day provisions
are done by private sector managers who we oversee. We
interview them, we hold competitions to pick managers, and then
we pick managers and then we hold them accountable.
So there is a team of folks within PBGC who provide the
oversight and--but the people who actually day by day----
Mr. Scott. Could you give us, for the record, a list of
those and how many are women-owned and minority firms?
Mr. Gotbaum. Of course.
Mr. Scott. Okay. We have talked about the growth rate that
you assume in your planning for ascertaining whether you are
solvent or not. I understand that the assumed growth rate is
lower than the financial accounting standards for the FASB
board number. Is that right?
Mr. Gotbaum. I actually wouldn't say it that way, sir.
There is an accounting standard which we follow for how do you
measure your obligations, technically liabilities. There are
two ways you can do it.
Most pension funds use the estimated return either on all
of their assets or on bonds. PBGC, because what we do is we
offer annuities, we do it by a market test. We get quotes from
insurance companies for annuities and we add up those quotes to
create a market price for our obligations. And we have been
doing that for a long time.
Mr. Scott. And that number is lower than the Financial
Accounting Standards Board's projected growth rate?
Mr. Gotbaum. It is lower than--slightly lower than the
corporate bond rate, but as I mentioned before, if we took the
corporate bond rate our deficit would be north of $20 billion,
and that is before American Airlines.
Chairman Roe. Okay. Thank you.
Dr. Holt?
Mr. Holt. Thank you, Mr. Chairman.
And thank you for your testimony. I would like to continue
along the lines of questioning of my colleague from Virginia to
get a sense of how serious the problem is for the defined
contribution compared to defined benefits.
I realize this is a defined benefit program and I realize
that your financial liabilities deal with defined benefit
programs. But you do have a responsibility for retirement
programs in general, and I am not quite sure how you would
quantify it.
But if your deficit of some ten--depending on how you count
it, some tens of billions--represents how insecure the
retirement is for those people in defined benefit that you
might have to pick up for their retirement, what would be a
comparable way of calculating--what would be a comparable
figure for how insecure--how unlikely it is that defined
contribution people would have a similar standard of living in
their retirement? Do you see what I am trying to get at----
Mr. Gotbaum. Yes, Mr. Holt. I do----
Mr. Holt [continuing]. To quantify the scale. Because we
are spending a lot of time here talking about, you know, this
serious problem defined benefit plan funding for 10 percent of
retirees, and I really want to make sure that we have clear on
the record how large the problem is for the defined
contribution.
Mr. Gotbaum. And, Mr. Holt, with--I am going to answer your
question as best I can, and with your permission I am going to
send you all some further information afterwards for the
record.
You are right that we don't ensure defined contribution
plans but we do care about retirement security, and actually,
the Congress has asked us to set up a missing participate list
on defined contribution plans so we are paying attention to
that part of the world, too. There is not the same quality of
information that we have on the defined contribution side and
the defined benefits side, so what I am going to mention now--
and I will send you some more later--is some studies that were
done by the Employee Benefits Research Institution, which is a
nonpartisan, very well respected group.
They have estimated the effects on retirement income for
both defined benefit plans and defined contribution plans, and
what they say, which is, from my perspective, important, is
that if you have a defined benefit plan the odds that you will
end up being poor when you retire are cut dramatically, whereas
if you have a defined contribution plan the odds that when you
retire you will not have adequate income--and they have
multiple tests for that--are actually disturbingly substantial.
I would like, with your permission, to amplify that by sending
you the----
Mr. Holt. I will look forward to that. I hope we can cover
that again, as we have somewhat in the past, in more detail at
future hearings.
With regard to the premium adjustments, or proposed premium
adjustments, I don't understand how the premium of the single
employer relative to the multiemployer plans is determined.
Forty years ago it was two-to-one roughly, I think. Now it is
four-to-one. Can you explain that simply?
And after the premium adjustment that you are looking for
it would still be four-to-one, or three-to-one, or something
like that, I think. If you can do that simply I would
appreciate it.
Mr. Gotbaum. It is a good question. Let me start by
pointing out the fact that the level of guarantee on the single
employer program is a more generous level than the level of
guarantee on the multiemployer program.
In the multiemployer program the most I can pay for someone
who works for 30 years is just under $13,000 a year--a little
over $1,000 a month, okay? For the single employer universe,
yes, it is about four times that.
Now, I would like to tell you that the premiums were
carefully calibrated based on both of those, but it wasn't that
scientific because, as I mentioned, the premiums have been done
as part of recurrent pension or budget legislation and that is
part of the reason why we would like to be responsible for
doing it within some limits, because we would like for there to
be a fair relationship between exposure.
Mr. Holt. Well, my time is about to expire. In your
proposed adjustment in the premiums are you trying to readjust
that or will the same imbalance remain? That should be a short
answer because my time----
Mr. Gotbaum. It is a fair question. We haven't said yet--
what we have asked for is the ability to makes some judgments,
propose them publicly, discuss them with the community, and
then put them out for comment. That would clearly be an issue
when we do that.
Chairman Roe. Thank you.
And thank you, Mr. Gotbaum. It has been, obviously, very
informative. We appreciate your time and being here and I will
now ask the other--you are excused and I will ask the other
panel to please step forward and we will introduce you. Thank
you.
Mr. Gotbaum. Thank you very much, Mr. Chairman.
Chairman Roe. I thank the second panel for being here. It
is now my pleasure to introduce our second distinguished panel
this morning.
First is Mr. Ken Porter. He is president of Benefits
Leadership International, LLC. His firm provides actuarial and
international benefits consulting services.
Thank you for being here.
And Gretchen Haggerty is the executive vice president and
chief financial officer of the U.S. Steel. She is testifying on
behalf of the ERISA Industry Committee.
Randy DeFrehn is the executive director of the National
Coordinating Committee on Multiemployer Plans.
And John McGowan is a professor of accounting at Saint
Louis University. And Dr. McGowan has been an active teacher in
the areas of taxation and international accounting for over 15
years.
I welcome the panel, and first I will explain--you have
heard the lighting and we won't go through that again.
We will open with Mr. Porter?
STATEMENT OF KENNETH W. PORTER, PRESIDENT,
BENEFITS LEADERSHIP INTERNATIONAL, LLC
Mr. Porter. Mr. Chairman Roe, Ranking Member Andrews, and
members of the subcommittee, thank you very much for this great
opportunity to be here today. I must emphasize that I am here
on my own behalf; I am not representing a company or any trade
association.
I will note that my prior experience included extensive
experience for a multinational corporation where I was the
global--I had global responsibility for insurance risks as well
as was the global chief actuary. I am an actuary by background.
I applaud the subcommittee for its extremely timely hearing
that it is holding today. The historically low interest rate
environment we are in is creating an artificial funding crisis
for employers across the country. The crisis is diverting
billions of dollars away from job retention and creation and
away from economic recovery. Low rates are likely to cause
pension plans to be vastly overfunded in a few years when the
rates increase.
In addition, today's artificially low rates are costing the
government billions of dollars by--because it must reimburse
government contractors who are compelled to fund their plans in
excess because of the lower interest rate environment.
Measurement of pension liability is an inexact science. It
requires a myriad of assumptions about economic future and
long-term economic behavior.
Current rules inadvertently mandate that the assumption
that today's difficult economy will remain unchanged for the
next century. None of us wants that to happen.
Certainly the Federal Reserve doesn't believe it will. They
clearly acknowledge their role in holding interest rates down
as a means to stimulate the economy. I have no objection to
that.
They fully expect, however, that rates will start going up
after they cease their control in 2014, or sometime shortly
thereafter. Nevertheless, it is required by law that pensions
be funded as if the economy will never improve.
Frankly, the Pension Protection Act was predicated on a
free market economy where interest rates would remain
relatively in a normal range. There was no serious
consideration about the prolonged effect that a prolonged
Federal Reserve activity would have on the implications for
pension funding or on the PBGC liability.
The problem is clear: It is inappropriate to require
pension funding to assume economic distress will continue
indefinitely. Similarly, the required presumption of perpetual
economic distress creates the illusion of a PBGC deficit. The
PBGC, however, is not as underfunded as it would appear.
For example, the PBGC's own reports say the bulk of their
reported deficit is directly attributable to interest rate
declines beginning in 2008 when the Federal Reserve began its
economic stimulus activity. The return to more normal rates
will therefore eradicate most of this deficit.
In addition, it is reasonable to expect the PBGC
investments will outperform the current historically low
interest rate environment. In fact, the PBGC's own investment
returns have averaged about 10 percent over the last 3 years.
While we can't guarantee that in perpetuity, these returns
could certainly resolve the remainder of the reported deficit.
In short, the PBGC's deficit is based on assumptions even
the Federal Reserve doesn't think will happen. It is what is
there.
Accordingly, Congress should not use reported deficit as a
basis for increasing the premiums. PBGC has asked for authority
to set its premiums like an insurance company. Unfortunately,
the insurance company analogy falls apart quickly.
If it were a true insurance company it never would have
insured many of the plans that it now has assumed. When a
company goes to buy insurance the company decides what and how
much insurance to buy, it enters into negotiations with the
insurers of its choice, company can eliminate its coverage all
together if it doesn't like the deal. Meanwhile, commercial
insurance companies are under strict supervision of insurance
commissioners and must be competitive in cost and
responsiveness to the needs of its customers.
These factors help assure a fair and competitive insurance
purchasing environment. None of this is present today with the
PBGC.
Plan sponsors are captive clients. There are no
negotiations, no discussions of business need, no choice of
coverage, and no choice of providers. Except for the oversight
of the U.S. Congress there is no form of protection that we are
aware of at this point that would be afforded to premium
payers.
Finally, I would like to discuss briefly an issue that is
of great concern to the pension community. It is related to the
ERISA Section 4062(e).
In the summer of 2010 the PBGC issued proposed regulations
dealing with liabilities attributable to the shutdown of a
facility. The proposed regulations are inconsistent with our
understanding of the statute, inconsistent with previously
published PBGC guidance, and with the PBGC's historical
enforcement. The statute was not intended to do that.
Finally, the PBGC has now correctly identified that the
proposed regulation as needed--is needing review under the
applicable executive order. Nonetheless, it is my understanding
that the enforcement arm of the PBGC continues to enforce this
rule as if it were formal and final guidance. This is having a
detrimental effect on ordinary business transactions that are
posing no risk to the PBGC and are essential as companies work
toward economic recovery.
I thank you for the opportunity to testify and I look
forward to your questions.
[The statement of Mr. Porter follows:]
Prepared Statement of Kenneth W. Porter, Founder and Owner,
Benefits Leadership International; Retiree, the DuPont Co.
Chairman Roe, Ranking Member Andrews, and Members of the
Subcommittee, I am grateful for the opportunity to appear before you on
the challenges facing PBGC and defined benefit pension plans. My name
is Ken Porter, and I worked for 35 years for The DuPont Company, from
which I retired as the Finance Director for Corporate Insurance and
Global Benefits Financial Planning. I also served as Global Risk
Manager and Corporate Chief Actuary with responsibilities that included
DuPont's defined benefit pension plans covering more than 160,000
participants in the United States and with about $18 billion in U.S.
defined benefit plan assets. I also had actuarial oversight
responsibility for defined benefit pension plans in every other country
where the company sponsored defined benefit plans.
I am currently founder and owner of Benefits Leadership
International, which provides consulting services. I formerly headed up
the American Benefits Council's international and actuarial groups, and
served as director of the Council's research and education affiliate,
the American Benefits Institute.
Today, I am testifying on my own behalf and am not representing any
specific employer or association.
I applaud this Subcommittee for holding this extremely timely
hearing. The hearing is timely because there is one clear issue that is
strangling the defined benefit system and causing job loss across the
country. That issue is the application of today's artificially low
interest rates to defined benefit pension plans.
Today's historically low interest rates are creating an artificial
funding crisis for employers across the country. This crisis will
divert billions of dollars away from job retention and creation and
away from economic recovery. Instead, those billions will cause pension
plans to be vastly overfunded in a few years when interest rates return
to normal. That is a sad waste of America's resources.
In addition, as I discuss below, today's artificially low interest
rates are costing the government billions of dollars because the same
pension funding rules also apply to government contractors and the
government must, in turn, reimburse the contractors for making these
required contributions. Briefly, this is a shocking waste of government
money. Moreover, correcting the problem will actually help both the
government and the government contractors by preventing both from being
required to waste resources.
Measurement of pension liability is not an exact science. Rather,
it requires a myriad of assumptions about future economic behavior.
Current rules effectively, but inadvertently, mandate the illogical
assumption that today's economy will never improve. None of us wants
that assumption to be true. Certainly, the Federal Reserve doesn't
believe it will since they clearly expect interest rates to go back up.
Nevertheless, it is the law for pensions to be funded as if the economy
will not improve.
Similarly, the assumption that today's artificially low interest
rates will continue forever creates the illusion that the PBGC is
underfunded. It is clearly not underfunded by any responsible
measurement of what might happen in the future, as I discussed in
detail in a recent article and as I will summarize that article here
today. In this context, any increase in PBGC premiums is not a premium
increase, but simply a further tax on those American businesses that
tried to do the right thing by providing retirement security for their
employees.
Frankly, pension funding rules were promulgated without serious
consideration that prolonged Federal Reserve activity aimed at
stimulating the overall economy would have deleterious implications for
pension funding and for the PBGC liability.
The problems described above are clear. The solution is
correspondingly clear: apply historically stable interest rates for
funding purposes and for determining PBGC's true longer-term economic
status.
Funding Crisis
Background. As mentioned above, in order to address the critical
challenges facing our economy, the government has made great efforts to
keep interest rates at historically low levels. Within the last couple
of weeks, the Federal Reserve signaled its intent to keep short-term
interest rates at or near zero percent at least through the end of
2014. These valid government efforts to stimulate the economy are
significantly negated by the extraordinary pension funding impacts on
those companies that sponsor large defined benefit pension plans.
For pension funding purposes, plan liabilities are calculated by
discounting projected future payments to a present value by using
legally required interest rates based on corporate bonds: the lower the
rate, the greater the liability. Thus, today's artificially low rates,
which are expected to last until at least the end of 2014, are
triggering artificially high pension liabilities. The obvious
implication of the statement from the Federal Reserve is that low
interest rates will ultimately go away and be replaced by higher rates.
When rates do go back up to more normal levels, the measured pension
liabilities will go back down.
For example, in the case of a typical pension plan, the effective
interest rate required by law has dropped by approximately 70 basis
points from 2011 to 2012, which increases liabilities by approximately
10%. Thus, a plan with $7 billion of liabilities a year ago would have
$7.7 billion of liabilities today. That translates into an additional
funding shortfall of $700 million. That in turn triggers a company
obligation to make an additional contribution of approximately $119
million per year for seven years. That $119 million is not needed to
pay benefits; that obligation is simply the result of artificially low
interest rates that have no relationship to the plan's ability to pay
long-term benefits. However, this reflects only one year of the Federal
Reserve action to artificially lower interest rates which began in
2008. Thus for this example, the true annual amount of unnecessary
contributions might be multiples of this amount since this year's
amortization schedule is layered on top of similar amortization
schedules from prior years.
On a national basis, a study by the Society of Actuaries indicates
that required pension funding contributions for 2012 and later years
will be far greater than the amount required for prior years,
unnecessarily diverting billions of dollars away from job retention and
creation and from business investments. As discussed further below,
reducing those pension contributions not only saves jobs, but increases
tax revenue and decreases government spending by many billions of
dollars.
Recommendation. With respect to interest rates, we need to learn
from the lessons of the last few years. Economic conditions can change
quickly, and interest rates are often maintained at very low levels
during difficult economic periods. Under the current funding rules,
that will mean that when we encounter a downturn in the economy,
interest rates may well fall, exacerbating the problems for pension
plan sponsors and undermining any economic recovery by unnecessarily
diverting assets away from business investments. Conversely, if
interest rates were to temporarily return to the double-digit levels of
the early 1980's, pension liabilities could be slashed by, perhaps, two
thirds. This does not make sense, especially since pension plan
obligations are long-term obligations.
We need to move to a sounder system for setting interest rates. Why
should obligations due over 50 years be calculated based on interest
rate movements that may be aberrational and/or attributable to
governmental economic policy? It would make far more sense to base
interest rates on a long-term average, such as 25 years, that is
consistent with the long-term nature of pension liabilities. This one
change would solve the short-term funding crisis and provide American
businesses with the predictability and stability they need to make
business plans and manage risk.
Budget effects. As noted, this change in the law would have very
positive budget effects in the billions of dollars. First, during this
period of low interest rates, basing funding interest rates on
historical averages will reduce funding. (Correspondingly, during
periods of high interest rates, this will increase funding.) Decreasing
funding has, over the years, had two positive budget effects. First, it
increases tax revenues by decreasing deductible contributions to a tax-
exempt trust. Second, decreasing funding creates negative outlays on
the spending side by increasing the variable rate premiums paid to the
PBGC.
The proposal would also decrease government spending in a very
significant manner. Generally, government contractors in the energy
area are reimbursed for their pension contributions. In the defense
area, new rules have just been adopted under which defense contractors
will, subject to a phase-in period, generally be reimbursed for their
full pension contributions. Thus, since the proposal reduces required
funding contributions during this period of low interest rates, federal
government spending would appear to be correspondingly reduced, likely
by billions of dollars.
Moreover, the government spending being reduced appears to be
spending that is completely unnecessary in economic terms. There is
widespread agreement that interest rates are being held artificially
low to stimulate the economy at least through the end of 2014. In this
context, if contributions are made to pension plans based on the
artificially low interest rates, and the plans become fully funded or
close to fully funded based on such rates, those same plans will be
vastly overfunded when interest rates return to normal levels. In fact,
it is distinctly possible that many of the plans will be overfunded
indefinitely, which means that the required contributions were
wasteful.
The solution to the government spending issue is not to reduce
government reimbursements. That would simply mean the government does
not believe those contributions will be necessary over the long term
even though the law requires the contractors to make them. If the
government believed otherwise, the contributions would need to be
reimbursable. The solution, therefore, is to correct the interest rates
being used so that no one has to make completely unnecessary payments.
Conclusion. To maintain the current funding rules would be to
ignore the painful lessons of the last few years. Interest rates are
susceptible to artificial fluctuations that can hide the true value of
pension liabilities. This can result in unnecessary expenditures by
businesses and the government, slowing economic growth and leading to
government waste. My recommendation would address this conflict by
preventing artificially low interest rates from slowing any economic
recovery or creating unnecessary spending. In addition, my
recommendation would give American businesses the predictability they
desperately need to make business plans.
PBGC premiums
The Pension Benefit Guaranty Corporation is charged with protecting
the pension benefits of workers and retirees in the event a company
sponsoring a defined benefit pension plan goes bankrupt. The PBGC is
partially financed through premiums paid by the sponsors of defined
benefit pension plans. Premiums paid to the PBGC would be increased
under two recent proposals. Under the first proposal, the
Administration's proposal calls for PBGC to have the power to raise its
own premiums, with the increase focused primarily or exclusively on
plans maintained by ``high-risk'' companies''. This proposal was
estimated to raise $16 billion over the 10-year budget window. Under
the second proposal, the House Budget Committee proposed raising
premiums by $2.7 billion.
These calls for increased premiums are premised on the belief that
doing so is necessary to address concerns about the PBGC's financial
stability. But the PBGC is actually extremely stable financially.
No deficit. Defenders of a premium increase point to the PBGC's $26
billion deficit. Using historically normal interest rates, the PBGC has
no deficit, according to a study I recently completed.
Almost 80% of the PBGC's self-reported deficit is directly
attributable to the Federal Reserve action beginning in 2008 to reduce
interest rates to historically low levels. While this national policy
is expected to help stimulate the economy, such action translates into
a calculation of temporarily higher pension liabilities. Therefore,
when interest rates rise in the future, that PBGC's artificially
created deficit will shrink, if not evaporate.
Much, if not all, of the remaining 20% of the deficit
results from PBGC using an interest rate that is materially lower than
the rates employer-sponsored plans are required to use by the Financial
Accounting Standards Board (FASB) and pursuant to the Pension
Protection Act of 2006. There is no logic for the government to use one
rate, and to require private employers to use another.
Finally, current rules implicitly presume that yields on
the investment of PBGC assets will perpetually match the current,
artificially low interest rates. Thus, there is no recognition that
these billions of dollars held by the PBGC are expected to outperform
current, near zero interest rates over the long term. While this cannot
be guaranteed, it is instructive to recognize that the PBGC annual
reports show actual investment returns of 13.2%, 12.1% and 5.1% for
fiscal years 2009, 2010 and 2011, respectively. Thus, it is fair to
expect investment performance to also mitigate some of PBGC's reported
deficit.
I have not been able to review the American Airlines plans and the
effect on the PBGC if those plans were terminated. But based on the
methodology used by PBGC to calculate its deficit, their estimates of
the shortfalls in those plans could well be overstated.
Tax, not a premium. If Congress were to raise PBGC premiums
following a careful analysis of the true market value of the protection
being provided by the PBGC, that could be rightly labeled a premium
increase. If, however, Congress were to raise premiums without such a
careful analysis, that would not constitute a premium increase; it
would be a tax on defined benefit plan sponsors. At this point, there
is no economic basis established for the Administration's proposed
increase. In that context, such a premium increase would simply be an
additional tax increase on those employers that tried to do a good
thing by maintaining a defined benefit plan.
According to PBGC itself, no bailout is foreseeable. Some argue
that a premium increase is necessary now to avoid a taxpayer bailout.
This is simply wrong. It is clear that the PBGC does not pose a risk to
taxpayers for the foreseeable future. PBGC's own annual report states:
``Since our obligations are paid out over decades, we have more than
sufficient funds to pay benefits for the foreseeable future.'' This
gives policymakers and the defined benefit plans most affected by a
premium increase the opportunity to thoughtfully consider ways to
strengthen the defined benefit pension system in a way that protects
plan benefits and taxpayers but does not impose unwarranted increases
in costs on plans and the participants they benefit.
Moreover, on November 10, 2011, PBGC announced projections of its
deficit in 2020. The agency concluded, based on 5,000 simulations, that
the chances of the single-employer insurance guaranty program running
out of money in 2020 were zero. Moreover, in a majority of the 5,000
simulations, PBGC's position improved over the next ten years. So even
using its extremely unfavorable assumptions, PBGC concedes that the
financial condition of its single-employer program will likely improve
over the next decade.
Administration's proposal would undermine economic recovery.
Congress should continue to reject calls to weaken its own authority to
set PBGC premiums. The Administration's budget proposal would give the
PBGC Board the authority to set and adjust the level of premiums that a
retirement plans sponsor would pay, taking into account an employer's
financial condition. This would require the government to evaluate the
financial condition of private companies, including tax-exempt
organizations, a very disturbing intrusion of the government into
private business.
Moreover, under the Administration's proposal, per-participant
premiums could quadruple for the companies in the worst financial
condition, which could cost these struggling companies tens of millions
of dollars annually. Accordingly, basing PBGC premiums on the plan
sponsor's financial condition could create a downward corporate spiral
for companies that are facing financial difficulties, increasing their
cash flow burden and potentially forcing unnecessary bankruptcies with
devastating consequences for workers and our economy.
The Administration's proposal would also cause many companies to
offer lump sums to former employees so as to potentially reduce their
PBGC premiums by tens of millions of dollars annually. This would have
serious policy implications and would dramatically shrink the PBGC's
premium base.
In short, we should not use defined benefit plan sponsors as a
revenue source in the attempt to tackle the budget, without a policy
basis. The PBGC's issues should be carefully studied before any new
taxes or premium increases are imposed.
Proponents of the proposal to allow the PBGC set its own premiums
have pointed to the ability of commercial insurance companies to set
their own premiums. This insurance company analogy collapses quickly on
analysis. Sponsors of defined benefit pension plans already purchase
commercial insurance for a variety of business purposes. In these
commercial insurance situations, it is the purchaser who decides: (a)
Whether to buy any insurance; (b) How much insurance to buy; (c) Which
insurance company or companies to do business with, usually based on
cost and quality considerations; and, (d) Whether to modify its
insurance ``wants'' based on extant market conditions. Pension plan
sponsors have no such rights with respect to benefits protected by the
PBGC.
Moreover, commercial insurance companies must: (a) Remain cost
competitive or face loss of business to competitor insurers; (b) Work
collaboratively with their customers to tailor insurance products to
meet those customers' needs; and, (c) meet rigid requirements imposed
by various state insurance laws, as regulated by the respective state-
level insurance commissioners. None of these consumer protections
exists in the governance of the PBGC.
In short, the ability of commercial insurance companies to set
their own premiums does not provide sufficient precedent to justify
granting similar authority to the PBGC. Since none of the above
characteristics of commercial insurance exist relative to the PBGC,
Congress must continue its significant oversight role. Only Congress is
in a position to consider all aspects and assure that premiums charged
by the PBGC remain at appropriate levels that are fair to all parties.
Sales and Movements of Business Units
I also want to mention briefly one PBGC regulatory issue that is
causing great concern within the pension community.
In the summer of 2010, the PBGC issued proposed regulations dealing
with liabilities to the PBGC that arise under ERISA in connection with
a shutdown of a facility. The proposed regulations were not consistent
with the statute, previously published PBGC guidance, or PBGC's
historical enforcement practices. Under the statute, liability is
triggered if ``an employer ceases operations at a facility in any
location''. The statute was clearly intended to apply to situations
where operations at a facility are shut down. Instead, under the
proposed regulations, liability can be triggered where no operations
are shut down, but rather operations are, for example, (1) transferred
to another stable employer, (2) moved to another location, or (3)
temporarily suspended for a few weeks to repair or improve a facility.
Moreover, the liability created by the proposed regulations can be
vastly out of proportion with the transactions that give rise to the
liability. For example, in many cases, a de minimis routine business
transaction affecting far less than 1% of an employer's employees can
trigger hundreds of millions of dollars of liability, even in
situations where a plan poses no meaningful risk to the PBGC.
The PBGC correctly identified the proposed section 4062(e)
regulations as needing review pursuant to Executive Order 13563 on
Improving Regulation and Regulatory Review. The PBGC stated:
In light of industry comments, PBGC will also reconsider its 2010
proposed rule that would provide guidance on the applicability and
enforcement of ERISA section 4062(e).
However, it is my understanding that PBGC personnel, in
communications with plan sponsors, continue to refer to the proposed
regulations as current law, and are enforcing them as such. It is
inconsistent with the President's Executive Order to announce a
reconsideration of troublesome proposed regulations, while at the same
time actively enforcing them as current law.
This situation needs to be addressed. The PBGC's enforcement
practices are having a severely detrimental effect on business' efforts
to enter into business transactions that pose no meaningful risk to the
PBGC and that are essential to a functioning business world where
transactions can facilitate our economic recovery.
Conclusion
In conclusion, the use of today's artificially low interest rates
is:
Creating pension funding obligations that undermine job
retention and economic recovery,
Resulting in billions of dollars of wasteful government
spending, and
Creating an illusion that the PBGC has a deficit,
triggering consideration of unneeded new taxes on defined benefit plan
sponsors.
These issues need to be fixed through the use of historically
stable interest rates.
Thank you for the opportunity to testify. I would be happy to
answer any questions you may have.
______
Chairman Roe. Thank you, Mr. Porter.
Ms. Haggerty?
STATEMENT OF GRETCHEN HAGGERTY,
CHIEF FINANCIAL OFFICER, U.S. STEEL
Ms. Haggerty. Thank you for the opportunity to testify on
behalf of--I am sorry--thank you for the opportunity to testify
on behalf of the ERISA Industry Committee and United States
Steel Corporation. We believe pensions play a critical role in
providing retirement income for millions of Americans and are
valuable tools that allow employers to attract and retain
highly qualified workers.
I am the chief financial officer of U.S. Steel and my
responsibilities include financing new investments, managing
our cash flow, and ensuring we honor all of our obligations. I
also serve as chairman of the U.S. Steel and Carnegie Pension
Fund. U.S. Steel has managed a large domestic plan for over 100
years.
We take a responsible, prudent approach to managing our
long-term pension obligations. For many years we have been
voluntarily contributing to our plan $140 million annually--
over $1.3 billion since 2003--in order to smooth out our future
annual funding requirements.
The financial crisis hit our company particularly hard in
2009 and we lost $1.4 billion that year. We idled five of our
eight steel-making locations; we cut our capital budget by $300
million, or 40 percent. But we still made a $140 million
voluntary pension contribution to our plan.
Our last publicly released funding results from 2010 showed
that our plan was over 100 percent funded; however, that would
drop to 85 percent if we used today's exceptionally low rates
and--resulting from the Federal Reserve policy.
The combination of such low rates and increased funding
requirements arising under the PPA, the Pension Protection Act,
are severely burdening companies, undermining the future of
defined benefit plans, and threatening economic recovery. The
PPA dictates the interest rate used to calculate pension
liabilities and minimum funding requirements. The lower
interest rates are, the higher liabilities and potential
funding requirements.
These interest rate rules were conceived and developed over
a period of years long before the financial crisis. Since then
the Fed has adopted a monetary policy to lower and maintain
interest rates that are extraordinarily low by any historical
standard. Last week they indicated that they intend to maintain
these low levels of rates for years to come.
This current interest rate environment is so much different
than the environment and the historical perspective at the time
the PPA was enacted that I believe if the interest rate rules
had been developed in today's environment they would be much
different and more flexible than they are today. These actions
by the Fed impose a significant near-term burden on sponsors of
defined benefit pension plans, something that the Fed has
acknowledged.
Minimum funding amounts will be higher in the near term
than necessary for a long-term obligation. This creates great
economic inefficiency and impacts other important capital
allocation decisions that can help the economy.
U.S. Steel is pursuing a large capital investment program
with spending in 2011 and 2012 approaching $1 billion a year.
We are currently building new facilities in Pennsylvania,
Indiana, and Ohio, and we are strongly considering new capital
projects in Minnesota, Michigan, Alabama, and elsewhere.
These planned investments will create thousands of
construction jobs and hundreds of permanent jobs but they could
take backstage to our pension funding demands under the current
rules and in this low interest rate environment. Within the
next few years the cash needed to fund our main plan could be
significantly higher--perhaps multiples of our $140 million
voluntary contribution that we have been making.
With increased levels of cash outflow required to fund our
main plan our capital expenditures will likely be impacted as
one of our most significant, controllable cash outlays. If
other companies also reduce such important and economically
beneficial investments the economy will continue to disappoint
and underperform.
Therefore, on behalf of United States Steel Corporation and
the ERISA Industry Committee I urge you to give serious
consideration to the industry proposal on funding
stabilization. This proposal would better align PPA funding
rules with economic reality without deteriorating long-term
solvency of pension funds or the PBGC.
Simply stated, the proposal would stabilize discount rates
and modestly lengthen amortization periods for the unfunded
shortfall within a framework that still requires all plans to
be 80 percent funded within 7 years but allows plans whose
funded status is within the 80 to 100 percent range to amortize
over a 15-year period. If enacted soon, this important reform
could be the most constructive legislation Congress could pass
to help ensure continued economic recovery, especially among
capital-intensive industries where we want to continue to
encourage productive investment in new plants and equipment.
Before concluding I would also say that the business
community remains strongly opposed to any proposals that would
dramatically increase PBGC insurance premiums or give broad
powers to the PBGC to vary the amount of premiums based on
their subjective view of a company's credit worthiness. The
best way to ensure a plan's future is to increase its funded
status by stable and predictable funding infusions, not by
charging higher insurance premiums.
The funding stabilization proposal offers the best path
forward for the PBGC's long-term viability, for plan sponsors
who want to maintain their plans as long as the costs remain
affordable, and for beneficiaries who are counting on those
benefits in their retirement years.
Thank you. That concludes my prepared remarks.
[The statement of Ms. Haggerty follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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Chairman Roe. Thank you.
Mr. DeFrehn?
STATEMENT OF RANDY DeFREHN, EXECUTIVE DIRECTOR, NATIONAL
COORDINATING COMMITTEE FOR MULTIEMPLOYER PLANS
Mr. DeFrehn. Chairman Roe, Ranking Member Andrews, and
members of the committee, I am pleased to appear here on behalf
of the National Coordinating Committee of Multiemployer Plans,
and advocacy organization for jointly managed health, pension,
and other welfare benefits. We commend the committee on
conducting this hearing to examine the PBGC and defined benefit
plans. For the tens of millions of Americans whose retirement
security is provided through the defined benefit system your
attention to preserving this system is critically important.
Our detailed remarks are part of the record. This morning I
would like to make a few brief points specific to the
multiemployer community and look forward to your questions.
For over 60 years multiemployer plans have provided a
mechanism for tens of thousands of predominantly small
employers in industries with very fluid employment patterns to
provide modest but regular and dependable retirement income to
their employees. According to the PBGC's 2011 Annual Report,
approximately 10.3 million people are covered by the
approximately 1,460 insured multiemployer defined benefit
plans.
While most often associated with the building and
construction and trucking industries, multiemployer plans
actually cut across the economy, and while sharing the common
objective of providing a social safety net for the American
workers whose defined benefit plans have failed, PBGC's two
insurance fundamental differences. Unlike the single employer
system, which acts as an insurer of first resort, the
multiemployer system presents much lower risk of claims, acting
instead as insurer of last resort, stepping in only when all of
these employers that contribute to a multiemployer plan are
unable to meet their collective funding obligations.
The differential risk characteristics of the two guaranty
funds have been reflected since their inception in a much lower
guarantee level and corresponding premium structures. That
discussion was held earlier in your exchange with Mr. Gotbaum.
My only comment to supplement that is that it should be noted
that from 1982 until 2002 that that fund maintained a surplus,
even with those low premium rates.
In relative terms, the number of plans that have received
assistance from the guaranty fund has remained very low when
compared with a single employer system. While the number of
multiemployer plans has declined by nearly 700 since 1980, only
about 50 plans have ever received assistance from that fund.
The remainder were merged into plans that were significantly
larger or stronger.
In its latest report the PBGC reported assistance was paid
to a total of 49 plans totaling $115 million in 2011. In other
words, when compared with the single-employer system the
multiemployer system represents one of every four insured
participants but only 1 percent of the total number of plan
failures, 2 percent of the total dollars paid out, and just 5
percent of the numbers of participants receiving benefits.
It should also be noted that the benefit numbers for
multiemployer plans includes all administrative costs since the
agency doesn't take over responsibility for administering any
of the multiemployer plans. All in all, by having the pool of
contributing employers reinsure each other for the risk of a
failing contributor the agency gets the best of all worlds from
multiemployer plans.
In my remaining time I would just like to make three
concluding points. First, as a rule, multiemployer plans have
been very well funded. They would have been better funded but
competing tax policies prevented sponsors from funding them
above 100 percent. Nevertheless, the new funding rules of the
PPA and additional tools for plans to deal with their
liabilities have imposed a level of discipline on plan sponsors
that has caused them to take responsible actions that have
allowed the majority of plans to begin to rebound from the
recession, but for the continuing drag on plan contributions
resulting from the depressed employment.
After initial zone certifications that showed green zone
plans represented nearly 80 percent of all plans before the
recession, dipping to a low of 20 percent in 2009, trends
remain positive, with a single company survey completed in
January of 2011 showed approximately 66 percent have returned
to the green zone.
Second, we recognize that there are a limited number--two,
actually--of major plans with severe funding difficulties
resulting from unintended consequences of other public policy
decisions made by Congress, specifically the deregulation of
the trucking industry and the Clean Air Act, which these two
plans will soon, as you have heard from Mr. Gotbaum, approach
the PBGC for assistance.
Proposals to limit the exposure of the PBGC and, to a
lesser degree, contributing employers and plan participants
have been proposed for consideration by Congress. We believe
that some variation of those earlier proposals are worthy of
consideration as you deliberate further on this issue.
Finally, we appreciate the interest shown by the committee
in better understanding the challenges created by the Pension
Protection Act in anticipation of the sunset of the
multiemployer funding rules at the end of 2014. As we have
evaluated those challenges we have concluded that it may be
time to address some additional structural issues of the
underlying laws which can help ensure that multiemployer plan
participants can continue to receive regular, reliable pension
benefits, but which also can reduce the risk to employers that
currently present an obstacle to new employers joining the
system.
To that end, we have convened more than 40 groups
representing employers and employee representatives from the
full range of industries that rely on the multiemployer model
for providing retirement benefits to carefully evaluate the
current system and all viable alternatives designed to address
those objectives. We look forward to bringing the ideas of this
Retirement Security Review Commission to you as a community in
the near future and to working with you so that these plans can
continue to provide the tens of thousands of small businesses
and their employees with a sound retirement vehicle for another
60 years.
Thank you very much for your attention.
[The statement of Mr. DeFrehn follows:]
Prepared Statement of Randy G. DeFrehn, Executive Director,
National Coordinating Committee for Multiemployer Plans (NCCMP)
Chairman Roe, Ranking Member Andrews and Members of the Committee,
it is an honor to speak with you today on this important topic. My name
is Randy DeFrehn. I am the Executive Director of the National
Coordinating Committee for Multiemployer Plans (the ``NCCMP'').\1\ The
NCCMP is a non-partisan, non-profit advocacy corporation created in
1974 under Section 501(c)(4) of the Internal Revenue Code, and is the
only such organization created for the exclusive purpose of
representing the interests of multiemployer plans, their participants
and sponsoring organizations.
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\1\ The NCCMP is the premier advocacy organization for
multiemployer plans, representing their interests and explaining their
issues to policy makers in Washington since enactment of ERISA in1974.
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For over 60 years, multiemployer plans have provided a mechanism
for employees of tens of thousands of predominantly small employers in
industries with very fluid employment patterns to receive modest but
regular and dependable retirement income.\2\ They are the product of
collective bargaining between one or more unions and at least two
unrelated employers that are obligated to contribute to a trust fund
that is independent of either bargaining party whose benefits are
distributed to participants and beneficiaries pursuant to a written
plan of benefits. While most often associated with the building and
construction and trucking industries, multiemployer plans are pervasive
throughout the economy including the agricultural; airline; automobile
sales, service and distribution; building, office and professional
services; chemical, paper and nuclear energy; entertainment; food
production, distribution and retail sales; health care; hospitality;
longshore; manufacturing; maritime; mining; retail, wholesale and
department store; steel; and textile and apparel production industries.
These plans provide coverage on a local, regional, multiple state, or
national basis and can cover groups of several hundred to several
hundred thousand participants. By law, these plans must be jointly and
equally managed by both employers and employee representatives.
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\2\ The median benefit paid to participants of plans surveyed was
$908--See DeFrehn, Randy G. and Shapiro, Joshua, ``The Road to
Recovery: The 2010 Update to the NCCMP Survey of the Funded Position of
Multiemployer Plans'', The National Coordinating Committee for
Multiemployer Plans, 2011.
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According to the PBGC's 2011 Annual Report, approximately 10.3
million people are covered by the approximately 1459 insured
multiemployer defined benefit pension plans. This represents a slight
decline from the prior year's report which showed 10.4 million
participants in approximately 1500 plans. This decline is primarily a
function of the impact of the recession on employment patterns, the
magnitude of the market contractions and the sluggish nature of the
recovery for many covered industries. It also reflects the fact that a
few plans have had to avail themselves of the multiemployer guaranty
fund of the PBGC.
I would like to direct my comments today to an examination of that
fund, the infrequent number of multiemployer plans that have had to
take advantage of its protections since its inception, its importance
to specific troubled industries, and the multiemployer community's
ongoing commitment to jointly address the evolutionary challenges that
threaten the continuation of this system as evidenced by the recent
creation of a ``Retirement Security Review Commission.''
The Multiemployer Guaranty Fund
Unlike the single employer guaranty fund which became effective
with the passage of the Employee Retirement Income Security Act (ERISA)
in 1974, the implementation of the multiemployer guaranty fund was
originally discretionary,\3\ becoming mandatory only with the enactment
of the Multiemployer Pension Plans Amendments Act (MPPAA) in 1980.
While sharing the common objective of providing retirement security for
American workers whose employer based defined benefit plans have
failed, these two funds have fundamental differences. First and
foremost, the single employer system acts as the insurer of first
resort, assuming responsibility to pay benefits when the corporate
sponsor is no longer able to meet its obligations; whereas the
multiemployer system presents a much lower risk of claims as the
insurer of last resort, stepping in only when the all of the employers
that contribute to a multiemployer plan are unable to meet their
collective funding obligations. This risk is directly mitigated by the
pooling of liabilities and by the existence of withdrawal liability
(also a creation of MPPAA) which imposes an ``exit fee'' on employers
that cease to participate or no longer have an obligation to
participate in a multiemployer plan with unfunded vested benefits. This
exit fee represents either the departing employer's proportionate share
of the overall plan underfunding, or, under certain methods,
liabilities that are directly attributed to that employer. It was
enacted to stem the departure of employers from plans who realized they
could transfer their liabilities to their competitors without penalty
in the period immediately following the passage of ERISA.
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\3\ Until 1980 the PBGC only provided assistance to 10 plans.
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The risk characteristics of the two guaranty funds was reflected
from inception in much lower guarantee levels and corresponding premium
structures for multiemployer plans. The adequacy of this structure for
the multiemployer fund was evidenced by the fact that it operated at a
surplus from 1982 until 2002, (corresponding with the end of the first
of the two ``once-in-alifetime'' market contractions in the past decade
and the doubling of guaranteed benefits to their current levels) and
the fact that only 23 plans had ever received funding assistance from
the PBGC through that time. The increase in 2001 marked the only time
benefits had been raised since the guaranty fund's inception, bringing
the maximum guaranty level to its current modest level. The current
PBGC multiemployer plan benefit is a function of a formula based on the
participant's accrual rate and years of service, providing 100% of the
first $11 of the accrual and 75% of the next $33. For a participant
with 30 years of service, the maximum guarantee is $1,072.50 per month
($12,870 per year), or approximately one-fourth of the current single
employer guaranteed amount.
It is also important to note that unlike in a single employer plan
failure, the PBGC does not assume the operation of a multiemployer
fund; rather, the fund continues to operate as it had in the past,
paying benefits and performing normal administrative functions until
the plan becomes insolvent. At that time the plan is required to reduce
benefits to the statutory guarantee levels and receives a ``loan'' from
the agency to continue to make required benefit payments to remaining
plan participants.
In relative terms, the number of plans that have received
assistance from the guaranty fund has remained low when compared with
the single employer system. While the number of multiemployer plans has
decreased from 2,244 in 1980 to the current level, the vast majority of
plans that are no longer free-standing were merged into plans that were
significantly larger or stronger (especially plans with 5,000 or more
participants), generally producing plans that are stronger, with an
expanded contribution base of employers and reduced administrative
overhead created through the greater economies of scale. Nevertheless,
with the onset of the ``Great Recession'' of 2008, many plans that had
entered the year well funded (see below) were faced with significant
funding challenges, with some passing beyond the point where they could
be expected to recover. In the latest (2011) annual report, the PBGC
deficit has increased from $1.4 to $2.8 billion with assistance being
paid to 49 plans totaling $115 million in FY 2011. Furthermore, they
forecast future liabilities for plans that are ``reasonably probable''
to need the assistance of the Guaranty Fund to reach $23 billion. While
one might assume this large increase would imply widespread plan
failures, the fact of the matter is that these liabilities are
essentially attributable to two large plans that exist in industries
that have been adversely affected by public policy decisions with
unintended consequences that were severely impacted by the market
failures. These plans and efforts to address their situation will be
discussed in greater depth below.
The Funded Position of Multiemployer Plans
As a rule, multiemployer funds have been very well funded, in part
in response to the parties' desire to eliminate unfunded vested
benefits that would result in assessment of withdrawal liability.
Comparisons with the funded status of single employer plans often
misinterpret that fact when observing that multiemployer plans had
typically been funded at levels that were significantly lower than
single employer plans. What is missed in drawing that conclusion is the
fact that contributions to single employer plans are set by the
employer and when they became overfunded (or even funded above the
minimum funding requirements) as was common during the late 1980s and
90s, the employer simply made no further contributions. Conversely,
multiemployer plans are funded as a result of contributions negotiated
in binding collective bargaining agreements. In most cases, the plan
fiduciaries that are responsible for determining benefit levels do not
have the authority to waive or adjust the required contributions.
Therefore, plans that reached their maximum deductible contribution
levels had no alternative than to raise the plans' benefit levels (and
corresponding liabilities) in order to protect the current
deductibility of the employers' contributions. It has been estimated
that upwards of 70% of all multiemployer plans were required to take
that action in the years leading up to the millennium.
This conflicting public policy objectives (ensuring adequate
funding of pension plans, but preventing the tax sheltering of income
above full funding) failed to recognize the underlying premise of long-
term funding assumptions: that in order for a long-term assumption to
work it is necessary to be able to set aside gains in years that exceed
that assumption in order to make up for years in which the markets
underperform. This shortcoming was addressed in the Pension Protection
Act of 2006 (PPA), but unfortunately, the action came too late for most
plans.
By the time the situation was corrected, many plans had taken on
liabilities that, due to the anti-cutback provisions of ERISA, could
not be rescinded and are now a part of the plans' costs. While the
market downturn that led to the passage of the Pension Protection Act
of 2006 (PPA) resulted in significantly increased contributions and
reduced future benefit accrual reductions in anticipation of its
implementation, most plans entered 2008 well funded with an average
market and actuarial value of assets of approximately 90%.\4\ When the
first required ``Zone Certifications'' were completed at the beginning
of 2008, 80% of all plans reported they were in the ``Green'' zone. One
year later, their fortunes had reversed, with only 20% reporting Green
Zone status, direct casualties of market declines.\5\
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\4\ Entering 2008, the average multiemployer plan was approximately
90% funded on both a market and actuarial value of assets basis. (See
DeFrehn, Randy G. and Shapiro, Joshua; ``Multiemployer Pension Plans:
Main Street's Invisible Victims of the Great Recession of 2008'';
National Coordinating Committee for Multiemployer Plans; April 2010;
Page 18.)
\5\ Ibid, page 20.
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In response to the uncertainty of the depth and duration of the
recession, Congress passed limited relief in the form of the Worker,
Retiree and Employer and Relief Act of 2008, followed by additional
reforms in the Preservation of Access to Medicare and Pension Relief
Act of 2010. These measures, coupled with direct action by plan
sponsors (70% of which had increased contributions, approximately 35%
had reduced future accruals, or adjustable benefits and over 40% that
did both) enabled many plans to begin the climb back to the Green Zone.
In 2010, approximately 48% \6\ had done so and by 2011, according to a
survey by the Segal Company, that number had increased to approximately
66%. While certainly encouraging, and a sign of improving strength
across the majority of plans, the sluggish recovery continues to
depress contribution income, offsetting much of the strength of the
investment returns of 2009 and 2010.
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\6\ See ``Road to Recovery . . .'', page 8.
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Severely Troubled Plans
While many plans were able to benefit from the relief, a few had
suffered a fatal blow due to fraud (Madoff and other similar
situations), or simply because the industry could no longer survive. As
noted above, two specific plans requiring relief have suffered from
unintended consequences of other public policy decisions: in one, the
deregulation of the trucking industry in 1980 resulted in the decline
and demise of virtually all of the major contributing commercial
carriers; in the other, the Clean Air Act caused the cessation of a
large portion of the bituminous coal mining industry that previously
contributed to the plan, resulting in an active employee population
that is a small fraction of the previous number and a retiree to active
ratio of 12:1. In both instances, the plans had managed to remain well
funded until the unprecedented market collapse imposed irrevocable harm
on the plans' investments.
In response to demonstrations of the need for additional, targeted
relief by the multiemployer community, companion proposals were
introduced in both the House (the ``Preserve Benefits and Jobs Act'')
and the Senate that would have provided much needed assistance to these
severely troubled plans while preserving a portion of the plan that
could remain viable for future participants, primarily by reducing the
exposure of contributing employers and to the PBGC by modifying the
existing rules governing partition; however, these particular
provisions were not included in the final relief measures.
Similarly, we had strongly advocated for extending the authority
previously exercised by and acknowledged by the PBGC, to facilitate
mergers of weaker plans into stronger ones in the same industry to
achieve the same objectives of the hundreds of mergers which took place
since 1980, but which have become more problematic under the current
fiduciary constraints imposed by the Pension Protection Act.
In looking to the future, we would encourage Congress to reconsider
each of these measures as a way to reduce the potential financial
exposure to all stakeholders and ensure that the safety net available
through the multiemployer guaranty fund is preserved.
Meeting Future Challenges
The Pension Protection Act of 2006 contains funding provisions for
multiemployer plans that are scheduled to sunset at the end of 2014. In
our collective experience with the existing rules it has become
apparent that they are not sufficiently adaptable to the level of
volatility plans have experienced in recent years and that they will
need to be modified going forward. We have welcomed the interest shown
by your Committee staff and that of the other Committees of
jurisdiction, as well as the regulatory agencies in learning how the
Act could be modified to better meet the needs of plan participants,
sponsors and the plans themselves.
In the course of reviewing proposals for modifications, we have
come to the conclusion that now is an appropriate time to consider
taking a more fundamental assessment of the rules governing the
multiemployer defined benefit system. We recognize that the body of law
and regulations that has evolved over the past 60 years has become
unwieldy and in many ways runs counter to the original intent of
providing affordable worker retirement security with predictable costs
and minimal administrative burdens for the contributing employers.
Retirement Security Review Commission
In order to ensure that the interests of all stakeholders are
reflected in this evaluation, the NCCMP has convened a ``Retirement
Security Review Commission'' comprised of representatives from over 40
labor and management groups from the industries which rely on
multiemployer plans to provide retirement security to their workers.
The group began its deliberations in August and meets monthly to
evaluate their collective experience with current laws and regulations.
The group has adopted a methodology that reaches out to a variety of
disciplines to systematically review current and potential plan design,
funding, economic, investing and regulatory environments to identify
what currently works and any statutory and regulatory impediments to
achieving its objectives.
The group has limited its objectives to two:
1. Ensuring that any recommendations to modify the existing laws or
regulations provide regular and reliable retirement income; and
2. Reducing the risks to employers that provide an incentive to
existing employers to withdraw from the system and present impediments
to new contributing employers from joining.
The Commission has established an ambitious time table for its
deliberations with a target of developing legislative recommendations
by this summer. We look forward to providing periodic briefings as the
project evolves and to extensive collaboration to achieve needed
modifications that will enable multiemployer plans to survive and
provide affordable, reliable and secure retirement income to future
generations of American workers and employers.
Conclusion
We appreciate this opportunity to share our comments with you on
the future of multiemployer defined benefit pension plans and on the
importance of preserving the existing safety net for participants of
plans that can no longer provide such security on their own and look
forward to your questions.
______
Chairman Roe. Thank you.
Dr. McGowan?
STATEMENT OF JOHN McGOWAN, PROFESSOR,
SAINT LOUIS UNIVERSITY
Mr. McGowan. Yes. Thank you.
Honorable Chairman Roe, Member Andrews, member of the
subcommittee, I am honored and appreciate the opportunity to be
here. My interest is also in multiemployer plans. I have done
some research, and I bring this into the classroom for the
students and it is an amazing opportunity for me to hear from
respected members of Congress about how you are dealing with
these important problems.
I looked at, in my study, Form 5500 data, and I see a
slightly different pattern in Missouri. There is a steady,
serious decline in the financial solvency of these
multiemployer pensions. Admittedly, it is an anecdotal sample,
but these are real pension plans that are going downhill.
A little more detail about the state of PBGC with respect
to multiemployer plans--Mr. DeFrehn talked about it, but a
little more specificity, if you will. At the time of my 2008
report with respect to multiemployer plans there was $1.2
billion of assets and $2.1 billion of accrued liabilities--$700
million deficit.
Okay, there seems like there has been a downward spiral for
MDBP plans since then. September 2010 the deficit was $1.4
billion with respect to these plans. It doubled to $2.8 billion
end of 2011, and it is projected in the recent PBGC report as
going to $4.8 billion. So it is going in the wrong direction.
They talked about low interest rates and the PPA 2006
funding requirements. Maybe the committee could think about
relaxing those.
And one other idea I would toss out there is the withdrawal
liability. Now, the idea was good at first, you know, when all
of these employers exiting the plan to try to, you know, throw
off the liability, but what is happening is new employers do
not want to join--they want to have nothing to do with these
plans because of the proposed withdrawal liability. They stay
away from it like the plague.
So maybe the thought is relaxing some of the withdrawal
liability requirements for new entrants into the plan and make
it less draconian and less obnoxious for new entrants to come
in may be a way to change that dynamic with respect to
withdrawal liabilities.
Maybe modifying the partitioning rules. Central States was
on ICU in May of 2010. Senator Harkin's proposal, maybe
changing some of the partition rules to deal with some of the
weaker plans.
And last, you know, there is a dynamic in the private
sector, in either the assurance or banking industry, when you
have major financial problems. In that case a guarantor is
appointed by the state; they come in; they take charge of the
assets, and then they do with--they consider the effects of all
the claimants and do the best job they can to distribute those
assets out to those claimants who have claims on those.
At some point you might want to do that, because right now
the unions themselves control all the pension assets and not
the employers, which is a difference from the single-employer
plan.
Beyond that, I wish the committee all the luck in solving
this very important dilemma. I appreciate you guys convening,
and the remarks--I have been very impressed with them and I
look forward to your results. Thank you.
[The statement of Mr. McGowan follows:]
Prepared Statement of Dr. John R. McGowan, Ph.D., CPA, CFE,
College Professor and Author
Honorable Chairman Roe, Ranking Member Andrews, and Members of the
Subcommittee, I am honored and appreciate the opportunity to appear
before you on the challenges facing PBGC and defined benefit pension
plans. My name is John McGowan. I have been a professor at Saint Louis
University for 25 years. My Ph.D. is in economics and I have a strong
interest in retirement planning from both a writing and consulting
perspective. My testimony today is offered on my own behalf, and not on
behalf of any other organization.
I honor the Subcommittee for holding this important timely hearing.
The hearing is timely. The financial footing of MDBP plans continues to
slip. My primary concern is the welfare of so many retirees depending
on MDBP plans. In the same way I think it is important that taxpayers
not pick up the bill because of poor planning by Congress.
Presented next is an update to a study I originally performed in
2008. That study was based on 2006 data. My current study includes data
through 2010. An overview of many MDBP pensions in Missouri paints a
declining picture.
Current retirement prospects for workers in US
The primary focus of this report is the current and future
prospects for defined benefit multiemployer pension (MDBP) plans in the
US. The motivation for this report is to educate, inform and empower
retirees involved generally in any type of retirement plan and
specifically in MDBPs. More than at any other time in US history,
people should be actively involved in the planning and preparation of
their retirement plans.
It should be noted that challenges for retirees in the US are not
limited to participants in multiemployer pensions. The US Census
reports that the average retirement account for persons in the US is
$50,000. Moreover, the median retirement fund is $2,000 and more than
43 percent of Americans have less than $10,000 saved for retirement.\2\
Nearly 1 in 4 Americans will rely on Social Security as their primary
source of retirement. One major cause of retirement woes is the 20
percent decline of the S&P from 2000 to 2010. This decade long slide in
the stock market has done little to brighten the retirement prospects
for working Americans.
On May 27, 2010, the GAO released a study entitled, ``Long Standing
Challenges Remain for Multiemployer Pension Plans.\3\ The report
discusses in detail how multiemployer defined benefit pension (MDBP)
plans face significant ongoing funding and demographic challenges.
These challenges will lead to more plan failures and will increase the
financial burden on the Pension Benefit Guarantee Corporation (PBGC).
Multiemployer pension plans have a number of structural problems
when compared with single employer pension plans. Such challenges
include a continuing decline in the number of multiemployer pension
plans and an aging participant base. A decline in collective bargaining
in the United States has also left fewer opportunities for plans to
attract new employers and workers. Consequently, the proportion of
active participants paying into the fund has also been falling.
The problems with MDBP plans are indicative of the overall
structural economic breakdown of defined benefit plans in the US. Many
companies have concluded that defined benefit pension plans are too
rich and to costly to maintain after the economic crisis of 2008.\4\
Watson Wyatt documents the overall movement away from DB plans as part
of their 2009 survey. They reported for the first time that Fortune 100
companies began offering new employees only one type of retirement
plan: a 401(k) or similar ``defined contribution'' plan. Moreover, due
to the financial strain on the PBGC uncertainty is growing with respect
to the viability of failed single and multiemployer pension plans.
In 1974 Congress attempted address the growing troubles brewing
with employer provided pensions. They passed The Employee Retirement
Income Security Act of 1974 (ERISA). Congress thought they could
regulate employee pensions and ensure their availability for retirees.
Ironically, a good case can be made that these same rules are playing a
major role in the decline and possibly ultimate collapse of these same
pension plans.
The first part of this report briefly discusses the unintended
effects of ERISA. The second section looks at the current financial
condition of the PBGC. Thirdly, a number of MDBP industry surveys are
presented for the years 2008 thru 2011 to help assess recent
performance of MDBP plans. In 2006 I examined Form 5500 data for a
sample plans based largely in Missouri to gather anecdotal empirical
evidence on the performance of MDB pensions. This study is updated and
expanded in the fourth section of this report with data for 2007, 2008
and 2009. The following section reviews recent Congressional proposals
to rescue certain MDP plans. This report concludes with a look at a
couple of investment strategies for retirees and companies to consider
in light of these challenging conditions.
Current financial state of PBGC
More than 10 million current workers and retirees rely on
multiemployer plans. For decades, multiemployer plans were in
reasonably good health, even in the face of industry decline.
Unfortunately, for many multiemployer plans, that is no longer the
case. Many are substantially underfunded; for some, the traditional
remedies of increased funding or reduced future benefit accruals will
not keep the plans afloat.
At the time of my earlier report (McGowan 2008), PBGC assets
supporting the multiemployer program had a value of $1.2 billion and
accrued liabilities of $2.1 billion in the multiemployer insurance as
of September 30, 2007. At that time the net deficit was $900 million.
These liabilities represent the present value of future financial
assistance for plans that PBGC has identified as ``probables'' for
purposes of PBGC's financial statements. A probable'' plan is one that
is currently receiving, or is projected to require, financial
assistance. Thus, a ``probable'' plan is usually a terminated or
insolvent multiemployer plan. Unfortunately, the downward spiral for
MDBPs has accelerated since that time. By September 2010, the PBGC
deficit related to MDBPs rose to $1.4 billion. By the end of September
2011, the MDBP related deficit at PBGC doubled to $2.8 billion.
Similarly, the total PBCG deficit rose from $23 billion at the end of
fiscal 2010 to $26 billion by the end of the 2011 fiscal year.
MDBP Surveys for 2008 thru 2011: Are They on the Road to Financial
Recovery?
A number of studies have been performed to assess the recent
performance of MDBP plans. These results for these studies are shown
chronologically in the next section.
Financial Crisis of 2008
The National Coordinating Committee for Multiemployer Plans (NCCMP)
is an advocacy organization of multiemployer pension funds. Each year
they perform a survey on the financial health of MDBP plans. This
annual survey includes a major percentage of multiemployer pension
plans. For the beginning of 2008 plan years the NCCPMP reported that
over 75% of plans included in the survey were in the `green zone',
indicating a strong financial position. During 2008 the financial
crisis caused the average reported funded status to decline to 77% from
90% at the beginning of the year. Moreover, by the end of the year only
20% of MDBP respondents indicated their plans were still in the green
zone. Similarly, 42% of plans in the survey identified themselves as
critical status or `red zone' plans.
The plummeting financial status of defined benefit pension plans in
2008 was articulated in my earlier study (McGowan, 2008). That study
analyzed certain 2006 MDBP data and projected 2008 based on the
plunging indexes of the stock market. At the time, a number of local
trade unions were vigorously assaulting the study as flawed and
inaccurate. However, a number of other studies described the same
financial difficulties for 2008 multiemployer pension plans. For
example, Watson Wyatt Worldwide observed that the top 100 multiemployer
pensions were just 79 percent funded.that the top 100 multiemployer
pensions were just 79 percent funded.that the top 100 multiemployer
pensions were just 79 percent funded.that the top 100 multiemployer
pensions were just 79 percent funded.that the top 100 multiemployer
pensions were just 79 percent funded.that the top 100 multiemployer
pensions were just 79 percent funded.that the top 100 multiemployer
pensions were just 79 percent funded.
One major cause of this shift in MDBP plans can be traced to the
investment results for 2008 where the median asset return was -22.1%.
Moreover, the NCCMP report stated that the true impact of the crisis
was even more dramatic than these figures indicated.\8\ The PPA funded
percentage measure relies on the actuarial value of pension plan assets
and typically recognizes investment gains and losses gradually over
time. On a market value of assets basis, the average funded percentage
was much worse. The average funded market value percentage declined
from 89% to 65%.
In addition to investment results, the financial impact on a plan
is also a function of employment levels. When a plan becomes
underfunded, it is important that there be a large population of active
members with strong employment levels to create a contribution base
capable of offsetting the shortfall. Unfortunately, an equally historic
level of unemployment followed the historic market collapse of 2008.
This unemployment level has also severely limited the ability of many
plans to recover.
Returns improve in 2009: high unemployment continues
There was a high response rate for the 2009 NCCMP survey. Total
plan participants numbered 6.3 million and represented 60 percent of
the multiemployer plan population. Plans included in the NCCMP survey
reported a median 2009 asset return of 16.6%. This figure however was
not nearly enough to offset the devastating returns of the prior year.
The International Foundation of Employee Benefit Plans (IFEBP) reported
similar results in 2009 their survey of MDBP plans. As of August,
nearly three-quarters of MDBP plans were less than 80 percent funded.
The 2009 IFEBP survey had a much smaller sample size (213 plans).\9\
Nevertheless, the results were proportionate and consistent with other
surveys for that time period. The number of plans in the endangered or
critical status had tripled from 2008.
During 2009, participants and sponsors of multiemployer pensions
responded by increasing contributions and reducing benefit accrual
levels. Similarly, many plans in the IFEBP survey indicated that they
were taking advantage of the temporary freeze option available to MDBP
plans in 2009.
Returns stable in 2010: unemployment shows little
improvement
Participants in the 2010 NCCMP survey declined to 3.6 million or
approximately 35 percent of multiemployer plans. For a second straight
year, respondents reported strong investment returns in 2010.
Consequently, these plans reported an increase in average fund status
to over 82% from 77%.
The 2010 strengthening for pensions was not confined to
multiemployer plans. Milliman is among the world's largest independent
actuarial and consulting firms in the world. Their annual study covers
100 U.S. public companies with the largest defined benefit pension plan
assets for which an annual report (Form 10-K) is released by March 3 of
the following year. Their study also reflected an overall improvement
in funding status due to increased fund contributions. However, the
improvement was somewhat curtailed by ongoing low interest rates.
More specifically, the record cash contributions for these plans
and investment gains (12.8% actual returns for 2010 fiscal year vs.
8.0% expected returns) were offset by the 7.7% increase in liabilities
generated by the decrease in discount rates (5.43% for 2010, down from
5.82% in 2009 and 6.36% in 2008) used to measure pension plan
liabilities. The lower discount rate coupled with record cash
contributions culminated in a small improvement in the funding ratio
for these plans in 2010. The average increased to 83.9% from 81.7%.
Reasons for improved plan status in 2010 and 2009
As noted in the NCCMP report, the number of plans in the green zone
(more than 80 percent funded under PPA 2006 rules) more than doubled
from 20 to 48% by the end of 2010. Similarly, the number of plans in
the red zone (critical status) declined from 42 to 32%. The report
traced this improvement to three factors. First, there were strong
investment returns. Second, the plans and sponsoring employers
implemented a combination of contribution increases and benefit cuts to
shore up their financial status. Thirdly, the funding relief provisions
of the Preservation of Access to Care for Medicare Beneficiaries and
Pension Relief Act of 2010 helped improve multiemployer funding status.
Pension expense continues to rise for 2010
Record levels of pension expense were recorded in 2010. A $30.0
billion charge was recorded for firms in the 2010 Milliman Pension
Funding Study. There were 11 companies with pension income (e.g.,
negative expense) in 2010, down from 16 in 2008. Pension expense is
projected to increase for 2011 as companies using asset smoothing are
still reflecting the impact of losses in 2008.
Accounting changes adopted by some companies
A number of companies elected to recognize substantially all of
their accumulated losses for 2010. This accounting change resulted in a
significant charge to the year-end balance sheets for Honeywell,
Verizon and AT&T. The elimination of this charge in 2010 will lead to a
reduction of future years' pension expense through the elimination of
the annual charge to earnings for those losses. Milliman estimates that
similar charge to earnings for the remaining 100 companies would have
resulted in a $342 billion charge to their cumulative balance sheets
and a reduction in their 2011 pension expense of about $19.9 billion.
Proposed change to International Accounting Standards
There is also a serious debate raging regarding whether
International Accounting Standards should be converged with or adopted
in place of U.S. GAAP. A proposed change to International Accounting
Standards would eliminate the pension expense credit for Expected
Return on Assets (8.0% for the Milliman 100 companies in 2010). Under
this change, companies would have a pension expense equal to the
discount rate on the excess of liabilities over assets (or a similar
credit if the plan were more than 100% funded). If that change had been
adopted for U.S. GAAP accounting in 2010, the pension expense for the
Milliman 100 companies (and the charge to corporate earnings) would
have increased by about $30.0 billion. Such changes would have a
commensurate effect on multiemployer pension plans. Therefore pension
expenses would be pushed higher.
Defined Benefit Plans in 2011
A review of defined benefit plan performance in 2011 in Canada
shows that things also took a turn for the worse. Towers Watson has
kept a tracking index to represent defined benefit pension plans across
the country for more than a decade. In 2011, the index declined from 86
at the start of the year to 72 by the end. The index was at 100 in
December 2000 and after a brief rise in 2001, has been on a steady
decline ever since.\10\
Expected plan contributions expected for 2012
CFO Magazine reports that big pension contributions are expected in
2012. According to a new report from Credit Suisse and accounting
analyst David Zion, Companies in the S&P 500 will likely have to
contribute $90 billion to fund pension plan gaps in 2012, up from $52
billion in 2011.
A sample of Missouri based MDBP plans: an expansion and update
My original 2008 study was also presented at a Senate Hearing on
May 27, 2010.\11\ The Senate Hearing was entitled: ``Building a Secure
Future for Multiemployer Pensions.'' The purpose of this hearing was to
address the structural problems of multiemployer pensions.\12\
The key findings of my 2008 report are:
The assumption of failing pensions by PBGC had led to an
overall deficit of $955 million
By September 2007, the PBGC insured about 1,500
multiemployer (sometimes called union plans) plans and promised
benefits to about to roughly 10 million participants
Multiemployer pensions problems were forcing fund managers
to cut benefits
The other avenue to improve multiemployer fund status was
to increase contributions
Central States required a withdrawal liability payment of
$6 billion from UPS
Both employers and employees were encouraged to carefully
consider the financial condition of multiemployer pension plans whether
they were current or prospective participants
Measuring the funding status of multiemployer plans
The Pension Protection Act of 2006 places the task of computing the
funded status of MDBP plans in the hands of the actuary. Various
actuarial assumptions and methods are used to determine cost,
liabilities, interest rates, and other funding factors. While these
assumptions must be reasonable, they tend to make the actuarial value
of the assets significantly higher than market value. For example, the
actuarial value of the assets recognizes investment gains and losses
gradually over time.
The PPA 2006 directs actuaries to place MDBP plans in one of three
separate zones: green for healthy (80% funded), yellow for endangered
(65% funded) and red for critical (under 65% funded). Plans are in the
green or healthy zone if they are more than 80 percent funded. Yellow
zone or endangered plans are funded at least 65 but less than 80
percent. Plans are also in the yellow zone if they have had a funding
deficiency in the past 7 years. When a plan hits both conditions they
are considered ``seriously endangered.'' According to Eli Greenblum, an
actuary and senior VP of the Segal Co., ``Yellow zone plans cannot cut
protected or adjustable benefits, there is no official shelter from
funding-deficiency penalties, and there are no employer surcharges.''
\13\ If a plan people covered by a traditional defined-benefit pension
plan should receive a funding notice every year, which gives workers an
idea of how well the plan is doing. However, people frequently do not
have access to the funding notice. In these cases,FreeERISA.com.\14\
people can get a rough idea of how well their plan is doing by looking
at Form 5500. Moreover, participants in private pension plans have the
legal right to request the most recent Form 5500 from their plan
administrator. Participants can also find a less recent copy of the
Form 5500 on a web site called
Certain multiemployer pension administrators take such strong
exception to the notion that people are able to get a rough idea of the
financial solvency of their multiemployer pensions by looking at data
on IRS form 5500. Then Pension Rights Center stands behind this notion
and presents it clearly on their website.\15\ The Pension Rights Center
encourages people to determine the funded status of their pension by
dividing the current value of plan assets by the ``RPA 94'' current
liability. The RPA 94 (Retirement Protection Act of 1994) current
liability is based on the present value of benefits accrued to date.
This liability is discounted using a statutory interest rate assumption
range that is tied to average long-term bond yields.\16\ Numerous
studies have used this funding ratio as provided on Form 5500 as a
proxy for the financial solvency of multiemployer or union pension
plans.used this funding ratio as provided on Form 5500 as a proxy for
the financial solvency of multiemployer or union pension plans.used
this funding ratio as provided on Form 5500 as a proxy for the
financial solvency of multiemployer or union pension plans.
Sample of MDBPs in Missouri
This study expands on the sample of Missouri based multiemployer
pensions next. As can be seen from a casual review of the actuarial
data presented here from Form 5500s is that these plans are not doing
well.
Serves Laborers' International Union of North America
Locals #42, #53, and #110.
Congressional Efforts to ``Rescue'' Certain Underfunded MDBP Pension
Plans
In May 2010, Senator Casey introduced S. 3157 under the title of
Create Jobs and Save Benefits Act of 2010. The bill mirrors legislative
proposals introduced in 2009 by Reps. Earl Pomeroy and Patrick Tiberi.
Among other things, the bill proposes to transfer all pension
liabilities of ``orphan'' retirees--those who had worked at the now-
defunct trucking firms whose pensions are being funded by the surviving
truckers to the PBGC. Senator Casey characterized the current dilemma
as follows, ``The current costs of multi-employer pension compliance
represent a huge, hidden tax on large and small business.'' This
characterization understates the problem. Michael H. Belzer, a
professor at Wayne State University is one of the nation's foremost
experts on tru8cking labor law. He was correct when he recently said,
``the multi-employer concept was ``dumb'' and an inconceivably great
failure'' of public policy.
6. What is a realistic option for workers going forward?
Congress should have the courage to address the real problems with
MDBPs. The solution is not to write a blank check to fund these
pensions. The private sector is reflecting modern economic reality when
it comes to pension plans. There will be a continued migration away
from DB plans and toward 401K plans, or perhaps some combination of DB
and 401(K) plans, and possibly forced contributions from both employers
and employees to retirement plans.
references
BNA, Pension Protection Act Center at http://subscript.bna.com/pic2/
ppa.nsf/id/BNAP-6ZKK7E?OpenDocument.
Defrehn, R.G. and J. Shapiro, ``The Road to Recovery, The 2010 Update
to the NCCMP Survey of the Funded Status of Multiemployer
Defined Benefit Plans,'' See http://www.nccmp.org/.
McGowan 2008, The Financial Health of Defined Benefit Pension Plans: An
Analysis of Certain Trade Unions Pension Plans, U.S. Senate
Committee on Health, Education Labor and Pensions.
endnotes
\1\ I would like to acknowledge the support of Associate Builders
and Contractors. The views reflected in this study are my own and do
not necessarily reflect those of Saint Louis University.
\2\ C. Sutton, CNN Money, March 2010.
\3\ Statement of Charles A. Jeszeck, Acting Director Education,
Workforce, and Income Security Issues as part of Testimony Before the
Committee on Health, Education, Labor and Pensions, U. S. Senate.
\4\ S. Block, ``Traditional Company Pensions are going away fast,''
USA Today, May 22, 2009.
\5\ Leveson, I, Economic Security a Guide for an Age of Insecurity,
iUniverse p. 18, April 29, 2011.
\6\ See, Moody's: Growing Multiemployer Pension Funding Shortfall
is an Increasing Credit Concern,'' Sept. 10, 2009.
\7\ See, Furtchgott-Roth D., and A. Brown, ``Comparing Union-
Sponsored and Private Pension Plans: How Safe are Workers
Retirements?'' Hudson Institute, September 2009.
\8\ Defrehn, R.G. and J. Shapiro, 2010 Update to MCCMP Survey of
Funded Status of Multiemployer Defined Benefit Plans, p. 1.
\9\ See Wojcik, J., ``73 percent of multiemployer pension plans
underfunded: Study,'' Business Insurance, Sept. 29, 2009. CBC News.CA,
``Defined benefit pension plans had bleak 2011,'' Jan. 4, 2012.
\11\ See summary at http://www.help.senate.gov/imo/media/doc/
McGowan.pdf
\12\ See http://www.help.senate.gov/imo/media/doc/McGowan.pdf.
\13\ See comments by Eli Greenblum at March 21, 2007 at BNA
sponsored pension conference. goes into the red zone or funding level
below 65 percent, the trustees must adopt a rehabilitation plan.
Pension trustees may reduce certain benefits under the rehabilitation
plan.
\14\ See:http://www.pensionrights.org/publications/fact-sheet/how-
well-funded-your-pension-plan.
\15\ http://www.pensionrights.org/publications/fact-sheet/how-well-
funded-your-pension-plan.
\16\ See: http://www.actuary.org/pdf/pension/moodys--march06.pdf
Letter from D.J. Segal, VP of Pension Practice Counsel to American
Academy of Actuaries March 1, 2006.
\17\ See: Allen, S.G., R.L. Clark, and A.A. McDermed, ``Post-
Retirement Increases in Pensions in the 1980s: Did Plan Finances
Matter?'' National Bureau of Economic Research Working Paper #4413; D.,
Furchtgott-Roth, ``Union vs. Private Pension Plans: How Secure Are
Union Members' Retirements?'' Hudson Institute, Summer 2008, September
2009; Addoum, J.M., J.H. van Binsbergen, and M.W. Brandt, ``Asset
Allocation and Managerial Assumptions in Corporate Pension Plans,''
Duke Working Paper 2010; McGowan, J.R., ``The Financial Health of
Multiemployer Pension Plans, PBGC and the Recent Government Bailout
Proposal: Create Jobs and Save Benefits Act of 2010,'' Report prepared
for Senate Committee on Health, Education, Labor and Pensions: Building
a Secure Future for Multiemployer Pension Plans, May 27, 2010, See:
http://help.senate.gov/hearings/hearing/?id=6a51d13d-5056-9502-5d61-
e47c92a6a05f.
______
Chairman Roe. Thank you, Dr. McGowan.
I am going to just start by--with Ms. Haggerty, if you
don't mind, and want to thank you for making the investment in
U.S. companies, for funding your pension plan. And I have got
to ask you, how do we get out of this catch-22?
Let me go back 30 years. This would have been no problem--I
remember the first home I bought was 15 percent interest--is
still living in the same house. I Mastercharged the house. That
is what the interest rates were in 1982.
And when you plug these formulas in--and I, you know,
refinanced it 50 times until they got down to a reasonable
interest rate, but that is easy when you plug 10 percent
return, or 15 percent. If you were to plug the same rules in
your pension plan would have been overfunded forever if you
looked at that and carried on, as Mr. Porter was saying.
So how do we get out of when the Fed has something to do
with monetary policy, holding it way down, which forces this
liability? How do we get out of that?
Ms. Haggerty. That really is the purpose of the industry
stabilization proposal, or the funding stabilization proposal,
because if you look at interest rates over a much longer period
of time than the act now allows you to do, like 25 years, and
if you take out the peak--so you would cut off the 15 percent,
which would probably unfairly reduce the level of your
liability--but you would also cut off the low interest rates
and look at something that over time is much more realistic, if
you do that and you do that for an extended period of time it
has the effect of smoothing out the contributions for long
periods of time, which makes it much easier for companies to
plan what their funding is going to be and to keep up with it
on a regular basis.
Chairman Roe. What length of time are you speaking of?
Ms. Haggerty. Well, our proposal is to--there are really
two aspects to the proposal. One is to stabilize the discount
rate by using these longer-term maybe 25-year rates and cutting
off the extremes, okay?
The other part of it that goes hand-in-hand with the
proposal is to take any shortfall amortizations that you might
have because of the volatility in the market or how you measure
your obligation and amortize that over 7 years if your plan is
less than 80 percent funded, which is, you know, what we are
doing today. But if you are in the 80 to 100 percent funded, so
you are a reasonably well funded plan and there are a lot of
reasons why companies want to be in that zone instead of below
80 percent, you know, with the benefit restrictions and what
have you, then you can amortize that shortfall over 15 years.
So by stretching it out you are smoothing out how you fund your
plan, and the--I can't tell you how much effect this low
interest rate is having on how people calculate what is going
to happen just over the next couple of years, so it is
important that we do something now.
Chairman Roe. Here is the other thing that I want to ask
you is that--before I came here, as I said, I was on my medical
practice's pension plan and worked on that, but secondly, I was
mayor of the city--Johnson City, Tennessee. And in looking at
that we looked at--from the time I went on there, the 6 years I
was on the city commission, we went from paying 12 percent of
an employee's salary to 19 percent in making up that
difference, and it became--it looked almost inconceivable that
we kept going up. And as the market went down the taxpayer
liability went up and up and up.
So what our city did was a promise made is a promise kept.
If you are working for the city right now that is the plan you
have; we are going to honor that plan. But going forward, you
are going to have a defined contribution plan if you are a new
hire to the city so you will have some idea--future taxpayers
down the road won't be on the hook for just what you are
talking about.
I agree. I think you have got to have a better way--a
longer way to look at this, because your--I mean, I think I
read in one of the testimonies this is a 50-year--many of these
pensions--I think it was yours--is going to be--pay out over 50
years, not over 2 years, and----
Ms. Haggerty. Absolutely.
Chairman Roe [continuing]. And what do you think? And I
haven't got much time left, but what do you think the future of
the defined benefit plan is?
Ms. Haggerty. Well, Mr. Chairman, I think that we have seen
the future playing out before us and the defined benefit plans
are being reduced, you know, in multiples every year. We, in
fact, closed our defined benefit plan to new entrants in 2003
as a result of some of the risks that we saw on the horizon,
and most of the participants in our current plan are current
retirees but we expect to be continuing to pay for that for
well over 50 years.
But I think you are seeing people being driven out of
defined benefit plans. I think that people were able to, as you
did in the city, to create defined contribution plans that are
quite valuable to their employees.
You can make them competitive for employees. In this day
and age they tend to move from company to company so it is much
easier for them to take their retirement with them. They don't
have that option with a defined benefit plan; they may never
get vested.
So I think we have to be flexible with some of these
structures but I think that we also need to encourage people
that still have defined benefit plans to fund them in a
reasonable way.
Chairman Roe. Thank you.
I yield now to Mr. Andrews?
Mr. Andrews. Thank you, Mr. Chairman. I would like to begin
by asking unanimous consent to enter into the record a letter
from the ranking member, Mr. Miller, to Mr. Gotbaum; and a
letter from Dana Thompson, of the Sheet Metal and Air
Conditioning Contractors, to yourself and myself; and also to
ask unanimous consent that some questions for the record be
submitted to the witnesses, as well.
[The information follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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February 1, 2012.
Hon. Phil Roe, Chair; Hon. Rob Andrews, Ranking Member,
Subcommittee on Health, Employment, Labor and Pensions, Committee on
Education and the Workforce, U.S. House of Representatives,
Washington, DC 20515.
Re: Examining the Challenges Facing PBGC and Defined Benefit Plans
Dear Chairman Roe and Ranking Member Andrews: I am writing on
behalf of the Sheet Metal and Air Conditioning Contractors' National
Association (SMACNA). SMACNA is supported by more than 4,500
construction firms supplying expertise in industrial, commercial,
residential, architectural and specialty sheet metal and air
conditioning construction throughout the United States. The majority of
these contractors run small, family-owned businesses. Pension funding
issues figure prominently in the day-to-day business decisions of
SMACNA contractors. In 2010, SMACNA contractors contributed more than
$315 million to the Sheet Metal Workers' National Pension Fund (NPF)
and many of the contractors also contribute to a local defined benefit
pension fund. Overall, construction industry plans comprise
approximately 54 percent of multiemployer defined benefit pension
plans.
SMACNA is pleased you are holding this hearing and believe it is a
good beginning to a long process. Few in Congress fully understand how
multiemployer pension plans work and the serious consequences of not
addressing the issues facing the plans when the Pension Protection Act
(PPA) sunsets in 2014. Labor and management have both recognized a need
to improve the health of plans and are working jointly with each other
and government to jointly develop solutions to ensure the plans and the
system are sustainable. The current rules, the economic environment and
the instability of the equity markets have all converged to put plans
at risk which threatens the viability of contributing employers. The
construction industry has been especially hard hit by the lingering
economic recession.
Taking a balanced view of the PPA, it is fair to say it helped
employers and plans but has proved inflexible in the face of changing
equity markets and depressed construction economic markets. The PPA has
made positive changes. It:
Requires timely and extensive reporting so that all
contractors are well-informed on the status of the fund and their fund
obligations--problematic before PPA enactment;
Allows funds needing corrective action to take 10 or 15
years to bring the fund to a better funded position. Before PPA,
contractors contributing to some funds were facing funding
deficiencies, which had to be made up in full by employers in under one
year. In addition, excise taxes of five and ten percent and higher
could be levied by the IRS on the employer, benefitting the U.S.
general treasury and not the fund;
Forces funding issues to be addressed;
Allows for reduction of some accrued benefits for plans in
the worst shape; and
Maintains the integrity of the bargaining process.
However, more reforms are needed. PPA proved inflexible for
construction employers who operate on a very thin profit margin and
must maintain positive cash-flow until the completion of a construction
project.
A second historic equity market plunge occurred and
investment returns for plans plummeted below the expected rate of
return and into massive losses.
The construction market hit a long-term market cycle
depression.
Congressional relief was hard to get and slow to come.
PPA did not take market cycle or another massive equity
loss into account. Fund conditions worsened. PPA funding targets could
not be met;
Employers continue to look at increased contributions, and
workers face reduced wages and benefit accrual reductions at a time
when it is a significant hardship fostering intergenerational conflict
among workers in the industry.
SMACNA employers know there are painful steps that must be taken
and that structural reforms are needed. Life expectancy has increased
and most Americans are unable to accumulate sufficient retirement
income to live securely. SMACNA member firms take pride in the living
wages and good benefits they provide their employees and they are
committed to providing long-term retirement security to their workers
as they simultaneously work to ensure the viability of their companies.
We are willing to work with our union partners and Congress to enact
reforms to create an environment where responsible construction
employers working to do the right thing can continue to provide a long-
term retirement that may look different than the current defined
benefit system but will still provide retirement security for their
workers.
Respectfully,
Dana Thompson, Assistant Director,
Legislative Affairs, SMACNA, Inc., Capitol Hill Office.
______
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Roe. Without objection, so ordered.
Mr. Andrews. Thank you.
This has been a very edifying two panels. Thank you for
your contributions to it.
And, Dr. McGowan, we could use all the luck you can give
us, so thanks for contributing in many ways.
Mr. Porter [continuing]. And Ms. Haggerty, you have
complementary but not identical ideas about how to reduce the
gap in PBGC's projections and not kill the goose that laid the
golden egg by not requiring employers to put more in than they
are.
What argument would you make to a skeptical taxpayer who
would say, ``Well, if you make more generous interest rate
assumptions from the point of view of the plan's sponsor and
things go wrong, as they have so often in the last couple years
in American financial sector service--things go wrong, and
therefore the plans aren't as healthy as we thought they were
going to be, and therefore the PBGC's obligation is more likely
to be invoked, and therefore some moral hazard to the taxpayer
is likely to be invoked''? What would you say to that skeptical
taxpayer about each of your proposals?
Mr. Porter. First, I think I would step back for a moment.
Mark to market----
Mr. Andrews. Skeptical taxpayers don't let you do that,
but----
Mr. Porter. I understand. I hear you--apologize.
Fundamental underpinning of mark to market accounting is a
belief, in many sectors, that free market interest rates form
the basis of proper accounting and proper measurement. Today's
interest rates are not free market.
If it is true that free market interest rates are the
proper way to measure liabilities what can we say about
interest rates that are artificially constrained? They are not
proper----
Mr. Andrews. Okay.
Mr. Porter [continuing]. Okay?
We don't know what the right number is; we don't know what
rates would have been had the market been allowed to operate
freely. But what we do know is what we have is constrained. And
it ripples through the corporate bond rates, and it ripples
through the interest rates the PBGC is using, through the
annuity purchase rates that it is quoted.
Everything is operating in a constrained mode, not in free
market mode for now, and will continue at least through 2014.
What we are proposing, however it is done, is to find some way
to back out the artificiality that is in the marketplace today
and have something that more reasonably reflects the long-term
market and where it would have been in a free market.
Mr. Andrews. Would you agree that it should reasonably
reflect the most responsible but pessimistic view of the free
market in the long run to be conservative? In other words, I
understand you are talking about substituting for the market
some metrics that would drive the interest rate because we are
looking over the long term. Don't you think it would be prudent
to take the most pessimistic credible forecast and use that?
Mr. Porter. I don't know that I would agree with the most
pessimistic because there are some people in this country who
can be extremely pessimistic beyond reason. I would think that
it needs to be----
Mr. Andrews. All of the United States Senate, on many
occasions. [Laughter.]
Mr. Porter. I am not pointing fingers.
I think a reasonable conservative view is appropriate. The
most conservative, I think--you are always going to find
somebody who would write--rather be more conservative than the
next person.
Mr. Andrews. Kind of ironic we are having this discussion
this morning because on the House floor in a matter of minutes
is going to be a piece of legislation that would compel the CBO
to do something called dynamic scoring on tax cuts, and it
would write into law the supply side religion. And there is
some evidence that supports that tax revenues do grow over time
when rates are lower, but it really isn't a compelling case,
and the House is about to do--to write into law or try to write
into law the most optimistic forecast about revenues, which I
don't think would serve us well.
Ms. Haggerty, what do you think about this question?
Ms. Haggerty. I guess I would just say that--I am sorry; I
did turn it on--but I would just say that the risk of going too
conservative is that you will have companies that are not
investing in important things that need to be--that we need for
this country. And I could just give you an example: In 2009,
when things were so difficult for our company, we pushed off
some significant capital investments in coke facilities that we
needed--about $750 million of capital we delayed.
Mr. Andrews. You don't mean the Coke Brothers. You mean----
Ms. Haggerty. I mean coke for steel-making. So, but, you
know, it is an important thing for us and it was actually a--it
is something that was very significantly--a very significant
cost reduction project for us.
And so we--you know, we made less money in the years since
then because we failed to make those investments. And the more
profitable we are the better able we are to make the long-term
contributions that we need to make.
So there is a balance that has to be struck here. We have
to hold up to our obligations but we still have to have a
company that is profitable enough to do it over the long term.
Mr. Andrews. I thank you.
I would say to the chairman that this is a matter, I think,
that calls for his surgical skills, because I think there is a
way--empirically speaking, there is a way to write into the law
or write into our policy at least forecasting practices that do
not constrain business investment but are sufficiently
conservative to protect taxpayers. I really do think that there
is a way to do that. I am not sure that the two proposals
before us do that, but I think that they are a good start.
And there is also a way, I think, then, to give, perhaps as
a trigger, that if things don't turn out to be so rosy that
there is some mechanism that lets the PBGC get more revenue in
order to meet its obligations. Perhaps that is a way we should
look at this.
I thank you and I yield back.
Chairman Roe. Mr. Scott?
Mr. Scott. Thank you. Thank you, Mr. Chairman.
Mr. Chairman, we have heard from many of the members the
preference for the defined benefit plan over the defined
contribution plan, but the corporate interests are much more
aligned with the defined contribution because you make the
contribution then you can forget about it. There is no more
risk and there is no more concern.
What can we do to encourage corporations to stay with the
defined benefit plans that take the risk of the market
fluctuation off of the employee? Are there any things--are
there any market, for example, for insurance products that you
could buy as you go along to create the--to pay the defined
benefit? Is there any market for those products?
Ms. Haggerty. I think that Director Gotbaum maybe was
trying to imply that there was, but I guess I would just say it
this way, sir: The defined benefit plan, it is a great benefit
for somebody that is going to stay at a company for a longer
period of time. A defined contribution plan benefit may
actually be better for someone who would prefer to change jobs
periodically because they can take it with them.
So I would say that a defined contribution can be an
excellent benefit but for someone that stays at one--in one
place, like myself--I have been at U.S. Steel for 35 years--a
defined benefit plan is an excellent thing to have.
As far as having a product, there is no magic bullet that
will take your obligation and turn it into, you know, what your
payment is going to be, you know, and everything is going to
come out right. I think people try to argue for de-risking
plans, and I think that works for some. But by de-risking plans
you are, in all likelihood, investing the funds in your plan at
a rate that is much more comparable to your discount rate. So
therefore, you are not really earning anything above that
discount rate over a long period of time.
And I would just argue, if you look at our history, over 60
years in our plan we have paid out probably close to $30
billion in benefits, yet we have--that is maybe five times the
amount of contributions that we have had to put in. So we have
had great success investing for the long term, and I think that
is better for defined benefit plans to have the flexibility.
Mr. Scott. Well, the problem is what goes up might come
down.
Mr. DeFrehn, you indicated a tax policy that discourages
overfunding in the good years. Could you describe what that
problem is?
Mr. DeFrehn. Yes. For many years we had a problem with the
full funding limitations of the code, which said that if you
continue to make contributions to a plan that was fully funded
the employer couldn't take a current deduction for those
contributions.
If you think about these plans as being a collection of
collective bargaining agreements--sometimes thousands of
collective bargaining agreements related to one plan--the idea
of trying to open those agreements at the point where the plan
became fully funded and cease contributions was impractical.
And also, the boards of trustees who are the fiduciaries for
those plans are often not the same people who negotiate the
plans--the arrangements.
So they had little choice but to increase the liabilities
through benefit improvements in order to raise the cost of the
plan high enough to keep the contributions deductible. It seems
like a bizarre way to go about doing it but it was the only
route that was available until we were able to successfully get
that resolved in the Pension Protection Act.
Mr. Scott. Can any of the panelists comment on whether or
not programs that are insolvent--whether or not they should pay
a higher premium--risk-based premium--and how that should work?
If you are woefully underfunded should your premium not be
higher than somebody that is 100 percent funded----
Mr. Porter. If you are talking about insolvent there is
nothing for them to----
Mr. Scott. Under 80 percent funded. Should there be a
premium addition?
Mr. Porter. I guess there is a question--right now the
rules say the--yes, you pay more if you are underfunded. Other
rules--proposals that the PBGC has put out--is that you don't
base it on underfunding as much as you base it on the ability
of the company to survive.
We have a situation right now because of the artifice of
the interest rates where they are where a lot of companies find
themselves below 80 percent but never have before and most
likely won't be once interest rates return to a normal range.
Do we charge people more simply because of the aberration of
the marketplace? That doesn't seem--feel right at all. So I am
not sure that an absolute on 80 percent is the right answer,
either.
Mr. Porter. Mr. McGowan?
Mr. McGowan. The other potential problem with that is it
hits the pension plans at their weakest moment. Their risks go
up when they are least able to pay and so it sort of
accelerates, possibly, that downward spiral. So you might want
to, you know, factor that into consideration when you are
considering the level of higher premiums associated with risk
because that could accelerate that downward decline.
Chairman Roe. Mr. Altmire?
Mr. Altmire. Thank you, Mr. Chairman.
And welcome especially to Ms. Haggerty. I, as you know, am
from the Pittsburgh area myself and am grateful that you took
the time to come have this discussion before the committee.
Same for all of the panelists.
And I did want to ask, you mentioned, Ms. Haggerty, in the
previous question, about $30 billion in benefits over the past
60 years. You are speaking specifically and only about pension
benefits, right? Retirement----
Ms. Haggerty. Correct. That is correct.
Mr. Altmire [continuing]. Not the other benefits?
Ms. Haggerty. Right.
Mr. Altmire. And you address this a little bit in your
testimony, but that made me think about that 60-year period,
which we all understand what that has meant for our region in
western Pennsylvania and for the steel industry in the country.
And I wonder if you could talk a little bit more about maybe
especially 30 and 40 years ago and the very difficult times
that the industry went through, and the decisions that were
made, and the impact that they are having today on current
employees and on retirees, what the lessons that were learned,
and maybe in retrospect, were there decisions that you wish, in
your current position, had been made differently at that time?
And what can we learn across all sectors from that experience?
Ms. Haggerty. Thank you, Congressman Altmire. Appreciate
the question.
If you look back in--the situation that the congressman is
referring to is in the late 1970s and 1980s in our region we
had to undergo a significant amount of restructuring in our
industry and we cut--we closed many facilities, and as a result
we have many retirees today. I have 78,000 retiree--I have
78,000 participants in my main pension plan and maybe 90
percent of those are retirees, many from the 1970s and 1980s
and the early 1990s when we had such difficulty.
I would say that the lessons that we learned are good
lessons for people and it really--I really have my predecessors
to thank for it. In the early 1950s we began managing our own
pension plan and we have managed it in house--we are kind of
unusual in that regard--we have managed it in house since that
time. And we have taken a very long-term view to investing the
funds that have been entrusted in that plan.
But one of the things that my predecessors did was that
they funded the plan in the 1950s and they invested it in ways
that were very wise and long-term oriented, and we were
therefore able to restructure our industry and our company in
the 1970s and 1980s and still honor all of the benefits to the
employees that we had made--all the promises that we had made.
So I think it really is a great success story for taking a
long-term view to funding and investing in a defined benefit
pension plan.
Mr. Altmire. Dr. McGowan, I wonder from an academic
perspective if you could comment on international
competitiveness and the decisions that we have to make
regarding the PBGC and the future of these types of retirement
plans and pensions and what impact that is going to have on
American manufacturing, which is of great discussion in this
Congress, and our industry--what other countries are doing and
what is the competitive nature of this policy we are talking
about.
Mr. McGowan. Right. I really appreciate that question. I
was wanting to make that very point 3 or 4 minutes ago and it
is like a student asking the perfect question so I really
appreciate that.
You know, and the point is that we do live in a global
economy where we have an international economic marketplace and
companies in the U.S., in a sense, have to compete with those
global companies. And around the world this dynamic of defined
benefit pension plans kind of being replaced, as Ms. Haggerty
said at U.S. Steel 2003, is going on and on relentlessly.
And so for our companies in this country to compete in the
global marketplace we have to come up with some other options.
Realistically, like Mr.--you know, the chairman of the PBGC
said, there are other options, like a combination of defined
benefit-defined contribution, or just defined contribution. You
know, I have a defined contribution plan with the university
and they have matched it over--throughout the years, and I am
going to be okay, with, you know, other investing and planning.
So, yes, that is a great question. That brings up a really
important point about how U.S. companies have to compete in a
global marketplace.
Mr. Altmire. Thank you to the entire panel.
And thank you, Mr. Chairman.
Chairman Roe. Thank you to the gentleman for yielding.
Again, I want to thank the witnesses. This has been a great
two panels. I would like to thank you all for taking your time
to come and testify on this very important issue.
My medical license is still current if we need any
antidepressants after this panel. We can take care of that.
I will yield now to the ranking member for closing
comments.
Mr. Andrews. Well, again, I want to thank both panels and
you, Mr. Chairman, and our colleagues. We frankly should have
more hearings like this in the Congress.
This was a serious and, I think, substantive discussion of
a real problem, and it is one I believe we can solve. I really
do think we can thread that needle of making sure there are
never any bailouts--taxpayer-funded bailouts of the PBGC--but
doing so in a way that strikes the proper balance between a
more rational accounting of what the situation really is and
then more rational flexibility to raise revenue if we need to.
I really do think this is a problem with a solution.
And I look forward to working with you on that solution in
a way, as we have, frankly--Speaker Boehner sat in that chair
in 2006, and I think that we produced a piece of legislation
together that has improved the situation, along with minor
assistance from the Senate, and I think we certainly could do
that as well here. So I thank you for this opportunity.
Chairman Roe. I thank the gentleman for yielding. And I
will finish by saying that this is almost a catch-22. I see
companies, I see employees wanting to work together because one
of the great uncertainties, as you see people go forward, is
outliving their money, is how do you figure out how to have
enough retirement savings--Social Security, your own
retirement, your pension plan, whatever it may be--to not
outlive your money? And I think I see both employees and
employers sitting here today trying to figure out how you do
that and how you make a promise and you keep the promise.
So I thank you for being here and this subcommittee will
continue to work on this. Obviously there needs to be some work
done and I think a combination or a blend is something that we
will come up with. And I thank you all for being here.
With no further comments, the meeting is adjourned.
[Additional submissions by Chairman Roe follow:]
February 1, 2012.
Hon. Phil Roe,
U.S. House of Representatives, Washington, DC 20515.
Re: Examining the Challenges Facing PBGC and Defined Benefit Pension
Plans
Dear Representative Roe: On behalf of the Associated General
Contractors of America (AGC), I want to thank you for holding a hearing
``Examining the Challenges Facing PBGC and Defined Benefit Pension
Plans.'' Multiemployer pension plans are common in the unionized sector
of the construction industry and provide employers the opportunity to
provide their employees with a defined benefit plan that gives them
``portability'' to earn continuous benefits as they go from job to job
within the same industry. Of the 10 million participants in
multiemployer defined benefit plans, nearly 45 percent are construction
industry workers and retirees.
The majority of multiemployer plans suffered significant losses as
a result of the financial crisis. Recently enacted relief legislation
and some improvements in investment returns have helped some plans, but
the current rules, long-term demographics, and market conditions
continue to put at risk the viability of the plans and their
contributing employers. This is particularly true for the construction
industry, which has been affected by the economic recession to a far
greater degree than most industries. In short, further legislative
reform is needed and, with the Pension Protection Act nearing sunset,
the process must begin now.
AGC believes that Congress should enact reforms that will:
Provide a reasonable and secure retirement benefit for
employees through shared risk;
Preserve the flexibility and protection of the
``construction industry exemption'' while mitigating the long-term
effects of the ``last man standing rule'';
Share the burden equitably through benefit reductions and
continued employer contributions;
Transfer appropriate amount of risk from employers to
employees by facilitating and incentivizing the option to transition
from a defined benefit plan to a defined contribution or hybrid plan;
Provide predictable contribution rates for employers and
more tools to allow employers to prepare for and weather economic
downturns;
Create formal mechanisms for rolling back participants'
accrued benefits when a defined benefit plan comes under severe
financial stress, as a way to moderate employers' financial exposure
and thus revive their interest in sponsoring defined benefit plans;
and,
Allow for the ``de-risking'' of multiemployer pension
plans by lowering the expected rate of return gradually over a number
of years to a level that is conservative and sustainable. The increased
actuarial liability associated with lowering the expected rate of
return should be amortized over a long period of time. Only after a
plan over achieves its expected rate of return, could it grant benefit
increases.
AGC appreciates your leadership in examining multiemployer plans
and looks forward to working with you on these important issues. The
reforms recommend by AGC should never be viewed as a ``union bailout;''
rather, they are needed to help the tens of thousands of small
employers that contribute to the plans and to protect the retirement
security of their hardworking employees.
Sincerely,
Jeffrey D. Shoaf,
Senior Executive Director, Government Affairs.
______
Prepared Statement of Hon. John Engler, President,
Business Roundtable
Chairman Roe, we commend you, Ranking Member Andrews, and the other
members of this Subcommittee for holding this hearing. Pension plans
and the companies that sponsor them are facing unprecedented challenges
in the current economic climate. A thorough examination of the
operations of the Pension Benefit Guaranty Corporation (PBGC) and the
current issues faced by defined benefit plans and their sponsors is
warranted and timely.
Business Roundtable (BRT) is an association of chief executive
officers of leading U.S. companies with over $6 trillion in annual
revenues and more than 14 million employees. BRT member companies
comprise nearly a third of the total value of the U.S. stock market and
invest more than $150 billion annually in research and development--
nearly half of all private U.S. R&D spending. Our companies pay $163
billion in dividends to shareholders and generate an estimated $420
billion in sales for small and medium-sized businesses annually. BRT
member companies provide retirement and health benefits to their
employees and their families, including pension plans benefiting
millions of workers and retirees.
We believe that the best way to protect retirement security is for
Congress to sustain a retirement system for private-sector employers
that is fair and stable. All pension plans should be systematically
funded to ensure that benefits are paid when due, but funding rules
should not impose volatile, unpredictable, and untimely contribution
requirements on employers. Nor should employers that voluntarily
maintain pension plans for the benefit of their employees be threatened
with the massive and unjustified premium increases that are then used
to fund unrelated federal spending.
As outlined below, consideration of carefully tailored action to
stabilize pension funding rules is warranted today based on the lessons
learned since the economic downturn of late 2008 and the unprecedented
interest rate situation we are facing today. On the other hand, the
historically anomalous interest rates should not be used as a pretext
to justify excessive and unwarranted PBGC premium increases or,
conversely, to undermine the important long-term reforms enacted in the
Pension Protection Act of 2006 (PPA). Fundamental changes in retirement
policy should be undertaken only after careful study of the
implications on retirement security and on the economy as a whole.
Interest rates and plan funding
Under the PPA, a single employer pension plan's\1\ funded level and
the annual funding requirements are determined based on corporate bond
interest rates. This conservative measure of liability remains the best
measure to ensure the adequacy of pension funds for future retirees.
However, short-term fluctuations in interest rates can temporarily
distort the measurement of pension liabilities--liabilities that span
decades. The PPA funding rules
---------------------------------------------------------------------------
\1\ Our testimony today focuses exclusively on the single employer
pension plans and the PBGC's single employer benefit guaranty program.
contain limited provisions that reduce (or smooth) the impact of common
interest rate variations on the plan sponsor's immediate pension
contribution requirements. But the PPA rules did not contemplate the
sustained and extraordinary steps the Federal government has undertaken
in recent years to drive and hold down interest rates in order to get
the economy moving again. Unfortunately, the collateral damage from
actions to hold down interest rates artificially is that those low
interest rates are triggering artificially high pension liabilities and
dramatically larger immediate funding obligations.
---------------------------------------------------------------------------
Without further action by Congress, resources that must be devoted
to meet the unexpected new funding mandates will have to be diverted
from increasing payrolls and will delay the business investments
necessary to create jobs and spur the recovery. This is much more than
a cash flow issue for employers that sponsor pension plans. It is about
jobs and about the economic recovery, and will directly affect every
American. Volatile and unpredictable pension funding requirements, like
those employers face today, make it impossible for employers to plan,
slowing the economy. Moreover, forcing larger pension contributions as
the nation battles to emerge from the current economic downturn will
divert resources from capital spending and exaggerate the economic
cycle. As Business Roundtable has stated in the past, ``procyclical''
pension funding requirements, like those we are facing today, result in
an economy that overheats more during upturns and has deeper recessions
during downturns.\2\
---------------------------------------------------------------------------
\2\ Research done at the request of the Business Roundtable in 2005
by Robert F. Wescott, PhD. confirms that the failure to appropriately
smooth interest rates fluctuations would exaggerate economic downturns.
Dr. Wescott is an economist who works on and pension savings issues who
served as Chief Economist at the Council of Economic Advisers and as
Special Assistant to the President for Economic Policy. The study was
reviewed by Professor Deborah J. Lucas, Household International
Professor of Finance, Department of Finance, J.L. Kellogg Graduate
School of Management, Northwestern University, and Professor Stephen
Zeldes, Benjamin Rosen Professor of Economics and Finance at Columbia
University's Graduate School of Business, and chair of the school's
Economics Subdivision.
---------------------------------------------------------------------------
We urge you to consider appropriate adjustments in the plan funding
rules that take into account the extraordinary interest rate
environment we are experiencing, but that do not undermine the long-
term objective of ensuring retirement plans are funded systematically
over the long-term. Stabilizing the pension funding rules in a way that
minimizes volatility would not only create jobs, but could also help
reduce the PBGC's deficit and strengthen our pension system.
PBGC Deficits and Premiums. The PBGC's own 2010 Annual Report
states that: ``[s]ince our obligations are paid out over decades, we
have more than sufficient funds to pay for benefits for the foreseeable
future.'' Nonetheless, the PBGC asserts that its reported long-term
deficit justifies $16 billion or more in new taxes on defined benefit
plans in the form of PBGC premium increases. We strongly disagree.
A large portion of the PBGC's reported deficit is the direct result
of the Federal government's actions to hold down interest rates.
Moreover, serious questions exist regarding the methodology that the
PBGC uses to calculate its deficits. As a start, no significant
increases in premiums should even be considered until the PBGC fully
discloses and justifies its methodology for calculating its deficit and
the Congress and the public have the opportunity to review that
methodology. Moreover, PBGC premium increases should not be adopted
without a thorough investigation of the deficiencies in the benefits
administration and payments identified in the last three fiscal reports
issued by the agency's inspector general.
It is important to keep in mind that PBGC premiums for the single
employer program were already increased substantially four times since
1986, mostly recently in 2006. Since 2006, the PBGC per participant
premium has been automatically increased for wage inflation, resulting
in additional premium increases in 2007, 2008, 2009, and 2010.
Moreover, because the PGBC's variable rate premium is based on a plan's
funded level, which as discussed above goes down when interest rates
decline, PBGC variable rate premium (VRPs) collections have increased
dramatically since 2008. As reflected in PBGC Annual Reports, overall,
PBGC's single employer program premium collections have been well in
excess of $2 billion per year over the last three fiscal years (FY2009-
FY2011), an increase of over 66% over the total premiums that were
collected in FY2008 and earlier. Almost all of this new premium revenue
has been raised through the VRP, with the VRPs paid to the PBGC by
single employer pension plan sponsors having increased by over 400%
between FY2008 and FY2010. In light of those trends, it is difficult to
see how even greater premium increases are warranted, especially in the
current economic climate.
In any event, further increases in PBGC premiums should only be
considered after all the potential implications on the economic
recovery and the defined benefit system are thoroughly considered. In
particular, massive increases in premiums like those proposed by the
PBGC could accelerate the exodus from the pension system, undermining
retirement security and leaving the PBGC without plans to support it.
We continue to believe that the best way to deal with any long-term
financial problems at the PBGC is to keep more employers in the system,
not to tax them out of the system.
Mr. Chairman and members of the Subcommittee, we thank you for the
opportunity to share our views. We look forward to working with the
Committee on the challenges facing our pension system as well as
proposals dealing with the PBGC.
______
Prepared Statement of the U.S. Chamber of Commerce
The U.S. Chamber of Commerce would like to thank Chairman Roe,
Ranking Member Andrews, and members of the Subcommittee for the
opportunity to provide a statement for the record. The topic of today's
hearing--challenges facing the Pension Benefit Guaranty Corporation
(PBGC) and defined benefit plans--is of significant concern to our
membership.
As sponsors of defined benefit plans and professionals in the
retirement plan arena, Chamber members have a vested interest in the
ongoing viability of the PBGC. The PBGC is the final backstop for
participants in the defined benefit plan system. The existence of the
PBGC is important to plan sponsors because it maintains the credibility
of the defined benefit system. Therefore, it is necessary to ensure
that the PBGC remains a credible institution.
Introduction
In the last several years, the defined benefit plan system has
faced several significant challenges--industry bankruptcies, an
overhaul of the funding rules, demographic changes, and a financial
crisis affecting every type of industry and investment. The Chamber
believes that this is an appropriate time to review the governance,
policies and practices of the PBGC to ensure that the PBGC and the
defined benefit plan system are able to withstand additional challenges
in the future.
The Chamber recommends that Congress specifically consider the
following four issues: the calculation of the PBGC's deficit; increases
to PBGC premiums; the governance of the PBGC; and regulatory burdens
imposed by the PBGC. Each of these issues is discussed in further
detail below.
Discussion
Overly-Conservative Assumptions Create a Misleading View of the
PBGC's Deficit. The business community has long questioned the accuracy
of the PBGC's deficit numbers. To start, a substantial portion of the
deficit is due to historically low interest rates that are also
plaguing defined benefit plans.\1\ The low interest rates are
exacerbated by conservative discount rate assumptions used by the PBGC
to calculate future liabilities and conservative assumptions on
investment gains to calculate future assets.\2\ While there is some
room for differences in these assumptions, the Chamber believes that
the PBGC assumptions are unnecessarily conservative and should be
reviewed by Congress, as well as other interested parties to determine
if they accurately reflect expected investment and interest rate
experiences.
Since the establishment of the PBGC in 1974, it has most often
operated at a deficit.\3\ This on going deficit has led to many
concerns about whether the PBGC can continue as a viable entity on its
own or if a federal bailout will be necessary in the future. However,
the deficit is not an indicator of an immediate crisis. Even the PBGC
acknowledges that there is not a crisis. In its 2011 annual report, the
PBGC states ``[s]ince our obligations are paid out over decades, we
have more than sufficient funds to pay benefits for the foreseeable
future.''\4\ Moreover, in its 2010 Exposure Report, the PBGC states
that ``[i]n the 5,000 scenarios simulated in SE-PIMS, there are none in
which PBGC assets are completely exhausted within the 10-year
projection horizon.'' \5\
If the PBGC is able to meet its financial obligations for the
foreseeable future, then there is not a crisis. Congress should review
the deficit calculations used by the PBGC to determine whether the
assumptions accurately reflect the future financial expectations of the
agency.
PBGC Premium Payments Must Be Predictable. Discussions about the
deficit then often lead to talk of the premiums. The debate over
premiums generally hinges on whether the PBGC is viewed as purely an
insurance agency, where premiums should be directly associated with
risk, or if it is viewed as a quasi-insurance agency, where premiums
are based on various considerations. In either case, both of these
issues directly impact plan sponsors and can impact the way employers
decide to structure their retirement plans.
The business community has consistently opposed measures that
increase PBGC premiums for the sole purpose of decreasing its deficit.
For example, during the debate over the Pension Protection Act of 2006,
the business community opposed proposals that would allow the PBGC to
raise premiums without Congressional authorization. The Chamber
continues to believe that it is important that Congress--as a neutral
third party--determine whether premium increases are appropriate in the
context of the defined benefit system as a whole and not just the PBGC
deficit. As such, the Chamber believes that is important to have the
conversation on premium increases in the context of the policy
discussions mentioned in this statement and not as an independent
issue.
In the last couple of years, the Administration has put forth
recommendations to restore the solvency of the PBGC. These
recommendations include giving the PBGC Board the authority to adjust
premiums over time and would allow the Board to take into account the
credit worthiness of a company.\6\ Changes of this type and magnitude
would undermine the private sector defined benefit pension system,
hinder the economic recovery and could create an ill-advised precedent
of government intrusion into normal business activities.
Raising the PBGC premiums, without making contextual reforms to the
agency or the defined benefit system, amounts to a tax on employers
that have voluntarily decided to maintain defined benefit plans.
Proposals, like those included in the President's budget, that purport
to raise $16 billion in additional PBGC premiums are flawed and, even
if they were feasible, would result in an increase in PBGC premiums of
almost 100 percent. Even less draconian PBGC premium increases, when
added to the multi-billion dollar increases enacted in 2006, would
divert critical resources from job creation and business investment.
Furthermore, a creditworthiness test, like the one proposed by the
Administration, would inevitably result in the PBGC becoming an entity
that makes formal pronouncements about the financial status of American
businesses. This role is inappropriate for a government agency. Leaving
aside the question of whether the PBGC can establish accurate
mechanisms for measuring and adjusting an employer's credit risk across
industries and across the country, even modest year-to-year changes in
those government credit ratings could have implications well beyond
PBGC premiums, potentially affecting stock prices or the company's
access to other credit sources. We understand the pressures to address
the budget deficits, but massive increases in PBGC premiums are not the
solution.
Formal Procedures are Needed for the Governance of the PBGC. The
PBGC's Board does not currently have any formal, written procedures in
place describing a governance strategy. The Board is not required to
meet any certain number of times annually, and has met infrequently
over the past three decades. According to a recent GAO report, the
Board has met 18 times since 1980.\7\ In 2003, the board agreed to meet
twice, although a review of meeting minutes indicates that there is
generally not significant time spent on operational and strategic
issues and the meetings usually only last about an hour.\8\ According
to the report, the Board relies on the Inspector General and PBGC's
internal management committees to ensure the corporation is operating
effectively.\9\
The PBGC's corporate governance structure has recently come under
scrutiny by the Inspector General for the PBGC and the GAO citing
several perceived flaws in its current system of governance. A recent
report issued by the GAO identifies these issues in detail and proposes
significant changes to the PBGC's current structure. The report details
several recommendations for improvement to the PBGC's governance
structure, including the following:
more frequent board meetings;
the establishment of formal guidelines clarifying
administrative authority, responsibility and oversight;
expanding the board of directors to include members with
expertise in key areas relevant to the PBGC's mission;
and establishing standing committees to deal effectively
with issues facing the corporation.\10\
We are very concerned about the lack of formal guidance pertaining
to the governance of the PBGC. In general, we support the
recommendations laid out in the 2007 GAO report.
Regulatory Requirements are Overly Burdensome. In general, greater
regulation often leads to greater administrative complexities and
burdens. Such regulatory burdens can often discourage plan sponsors
from establishing and maintaining retirement plans. The following are
examples of regulatory burdens imposed by the PBGC that are
overwhelming.
PBGC Rule on Cessation of Operations: In August of 2010, the PBGC
published a proposed rule under ERISA section 4062(e) which provides
for reporting the liabilities for certain substantial cessations of
operations from employers that maintain single-employer plans. If an
employer ceases operations at a facility in any location that causes
job losses affecting more than 20% of participants in the employer's
qualified retirement plan, the PBGC can require an employer to put a
certain amount in escrow or secure a bond to ensure against financial
failure of the plan. These amounts can be quite substantial.
The Chamber believes that the PBGC proposed rule goes beyond the
intent of the statute and would create greater financial instability
for plan sponsors. Furthermore, we are concerned that the proposed rule
does not take into account the entirety of all circumstances but,
rather, focuses on particular incidents in isolation. As such, the
proposed rule would have the effect of creating greater financial
instability for plan sponsors.
The PBGC recently announced that it is reconsidering the proposed
rule. However, we continue to hear from members that the proposed rule
continues to be enforced. This type of uncertainty is an unnecessary
burden on plan sponsors and discourages continued participation in the
defined benefit plan system.
Alternative Premium Funding Target Election: The PBGC's regulations
allow a plan to calculate its variable-rate premium (VRP) for plan
years beginning after 2007, using a method that is simpler and less
burdensome than the ``standard'' method currently prescribed by
statute. Use of this alternative premium funding target (APFT) was
particularly advantageous in 2009 because related pension funding
relief provided by the Internal Revenue Service served for many plans
to eliminate or significantly reduce VRP liability under the APFT
method. However, in both 2008 and 2009, the PBGC determined that
hundreds of plan administrators failed to correctly and timely elect
the AFPT in their comprehensive premium filing to the PBGC, with the
failures due primarily to clerical errors in filling out the form or
administrative delays in meeting the deadline.
In June of 2010, the PBGC responded to the concerns of plan
sponsors by issuing Technical Update 10-2 which provides relief to
certain plan sponsors who incorrectly filed. We appreciate the PBGC's
attention to this matter and its flexibility in responding to this
situation. However, we are concerned that the relief provided does not
capture all clerical errors or administrative errors that may have
occurred and, therefore, some plan sponsors remain unfairly subject to
what are substantial and entirely inappropriate penalties. As such, we
believe that the rules established under the current regulation and the
Technical Update should be considered a safe harbor. The regulation
should be revised to state that if the safe harbor is not met, the PBGC
will still allow use of the APFT if the filer can demonstrate, through
appropriate documentation to the satisfaction of the PBGC, that a
decision to use the APFT had been made on or before the VRP filing
deadline. Proof of such a decision could be established, for example,
by correspondence between the filer and the plan's enrolled actuary
making it clear that, on or before the VRP filing deadline, the filer
had opted for the APFT. It is important that this regulatory change be
made on a retroactive basis, so as to provide needed relief to filers
for all post-PPA plan years.
Conclusion
Given the PBGC's role and the greater emphasis being placed on
retirement security generally, this is the perfect time to re-examine
the role of the PBGC and to re-define its policy objectives. As
mentioned above, a recalculation of the PBGC's deficit, consistency in
PBGC premiums, reformation of the PBGC's governing structure, and a
lessening of regulatory burdens would go a long way in securing the
future viability of the PBGC and the defined benefit system. We look
forward to working with this Committee and Congress to enact
legislation that will further these goals. Thank you for your
consideration of this statement.
endnotes
\1\ In the single-employer program, approximately $1 billion of the
net loss was due to a reduction in interest rate factors. PBGC 2011
Annual Report, p. 21.
\2\ See, Proposed PBGC Premium Changes--A Reality Check by Kenneth
Porter, Bloomberg BNA, Pension and Benefits Daily, September 14, 2011.
\3\ The exception is from 1996-2001 when the PBGC's surplus ranged
from $8 million to $9 billion. PBGC Insurance Data Book 2004, p. 26.
\4\ Id, p. iv.
\5\ 2010 PBGC Annual Exposure Report, p. 9, http://www.pbgc.gov/
documents/2010-Exposure.pdf.
\6\ See, The Moment of Truth: Report of the National Commission on
Fiscal Responsibility and Reform which recommends that the PBGC's board
be given authority to raise the premium rate to restore solvency (p.
41), http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/
documents/TheMomentofTruth12--1--2010.pdf.
\7\ Gov't Accountability Office, Pension Benefit Guaranty
Corporation: Governance Structure Needs Improvements to Ensure policy
Direction and Oversight, 3. GAO-07-808 (2007).
\8\ Id. at 15.
\9\ Id. at 3.
\10\ Id. at 21-23.
______
Prepared Statement of the Financial Services Roundtable
The Financial Services Roundtable (``Roundtable'') respectfully
offers this statement for the record to the U.S. House Education &
Workforce Committee, Subcommittee on Health, Employment, Labor, and
Pensions on ``Examining the Challenges Facing PBGC and Defined Benefit
Pension Plans.''
The Financial Services Roundtable represents 100 of the largest
integrated financial services companies providing banking, insurance,
and investment products and services to the American consumer. Member
companies participate through the Chief Executive Officer and other
senior executives nominated by the CEO. Roundtable member companies
provide fuel for America's economic engine, accounting directly for
$92.7 trillion in managed assets, $1.2 trillion in revenue, and 2.3
million jobs.
The Roundtable Supports Retirement Security
The Financial Services Roundtable supports increased incentives and
opportunities for Americans to save and invest. It is our belief that
providing these opportunities for Americans is important because
savings increase domestic investment, encourage economic growth, and
result in higher wages, financial freedom, and a better standard of
living. We believe that most Americans should approach retirement with
a comprehensive strategy that incorporates a number of retirement
vehicles.
Strengthening the retirement security of all Americans is a
priority for the Roundtable. Employer-sponsored retirement plans are an
important element for many Americans. However, the Roundtable opposes
increasing the level of premiums paid by companies to the Pension
Benefit Guaranty Corporation (PBGC) as request by President Obama. We
believe that the Administration's proposal, if enacted, would undermine
the safety and soundness of the pension system.
First, an increase in PBGC premiums similar to the one proposed in
the President's 2012 budget (and is expected to included on the 2013
budget) amounts to a tax on employers who maintain defined benefit
plans. Furthermore, such a tax is unnecessary because the PBGC's own
annual report (2010) states that ``[s]ince our obligations are paid out
over decades, we have more than sufficient funds to pay benefits for
the foreseeable future.'' The PBGC is not in danger of being unable to
perform its duties, nor are they in a position where they would need
public funds for a bailout. The Roundtable urges the Subcommittee to
examine the PBGC's financial situation more carefully, including
examining the actual nature of PBGC's deficit.
Next, giving the PBGC the authority to arbitrarily increase its
premiums diminishes Congress's oversight of the PBGC. Such a grant of
authority would give the PBGC the ability to determine what its
customers pay because by law all pension plans must pay the PBGC's
premiums. In essence, the PBGC would be able to raise rates anytime it
wanted to for almost any reason, and defined benefit plan sponsors
would have no choice but to pay it.
Finally, there are almost 19 million people participating in about
48,000 private-sector defined benefit plans. The number of employers
sponsoring pension plans goes down every year. Raising the PBGC's
premiums without also instituting broader industry reforms will only
serve to undercut the industry and the PBGC's goal of maintaining a
robust fund to help cover the shortfalls in pension plans. If this
proposal is implemented it will only quicken the trend of employers
moving to defined contribution plans and away from sponsoring defined
benefit plans.
The Roundtable believes our nation's current workplace retirement
system has enhanced the retirement security of millions of American
workers by increasing their retirement savings and the quality of life
during their retirement years. The pension industry is aware of the
challenges the Committee must confront. However, we firmly believe that
increasing PBGC premiums will only serve to divert valuable pension
resources that could be better spent on extending the longevity of
pension plans.
In closing, the Roundtable thanks the Subcommittee for the
opportunity to comment.
______
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
[Additional submissions by Dr. McGowan follow:]
Saint Louis University,
3674 Lindell Blvd.,
St. Louis, MO 63108, May 25, 2012.
Hon. Phil Roe, Congressman,
Tennessee 1st District, 419 Cannon Office Building, Washington DC
20515.
Dear Chairman Roe: Please be advised I have completed the study on
multiemployer pensions and it is attached. The study was in process at
the time of my testimony in February. Thanks for processing this study.
Let me know if you have any questions.
Cordially yours,
John R. McGowan, Ph.D., CPA, CFE,
Professor of Accounting.
______
The Financial Health of Defined Benefit Pension Plans
An Analysis of Certain Trade Unions Pension Plans: 2012 Update\1\
By John R. McGowan, Professor of Accounting
Saint Louis University, 3674 Lindell Blvd., St. Louis, MO 63108
current retirement prospects for workers in us
The primary focus of this report is the current and future
prospects for defined benefit multiemployer pension (MEPP) plans in the
US. The objective of this report is to educate, inform and empower
retirees involved in any type of retirement plan and specifically in
MEPPs. More than at any other time in US history, people should be
actively involved in planning and preparation for retirement.
Challenges for retirees in the US are not limited to participants
in multiemployer pensions. The US Census reports that the average
retirement account for persons in the US is $50,000. Moreover, the
median retirement fund is $2,000 and more than 43 percent of Americans
have less than $10,000 saved for retirement.\2\ Nearly 1 in 4 Americans
will rely on Social Security as their primary source of retirement. One
major cause of retirement woes is the 20 percent decline of the S&P
from 2000 to 2010. This decade long slide in the stock market has done
little to brighten the retirement prospects for working Americans.
As outlined in the May 27, 2010 GAO study, ``Long Standing
Challenges Remain for Multiemployer Pension Plans,\3\ multiemployer
(union) pension plans have a tough road to hoe. The report discusses in
detail how MEPPs face significant ongoing funding and demographic
challenges. The study documents how these challenges will lead to more
plan failures and will increase the financial burden on the Pension
Benefit Guarantee Corporation (PBGC). When compared with single
employer plans, MEPPs have a number of more serious structural
problems. Such problems include a continuing decline in the number of
multiemployer pension plans and an aging participant base. A decline in
collective bargaining in the United States has also left fewer
opportunities for plans to attract new employers and workers.
Consequently, the proportion of active participants paying into the
fund has also been falling.
The problems with MEPP plans are indicative of the overall
structural economic breakdown of defined benefit plans in the US. Many
companies have concluded that defined benefit pension plans are too
rich and too costly to maintain after the economic crisis of 2008.\4\
Watson Wyatt documents the overall movement away from DB plans in their
2009 survey. In fact, they reported that for the first time Fortune 100
companies started offering new employees only one type of retirement
plan: a 401(k) or similar ``defined contribution'' plan. Due to the
financial strain on the PBGC uncertainty is growing with respect to
both single and multiemployer pension plans.
The first part of this report briefly discusses the current
financial condition of the PBGC. Second, a number of MEPP industry
surveys are presented for the years 2008 thru 2011 to help assess
recent performance of MEPP plans. These surveys send mixed signals.
Some surveys suggest that MEPPs are on the way back after the 2008
financial crisis. Other surveys report that MEPPs are still having a
tough time.
In 2008 (McGowan) I examined Form 5500 data for a sample plans
based largely in Missouri to gather anecdotal empirical evidence on the
performance of MEPP pensions. That study is updated here and expanded
in the third section of this report with data for 2007, 2008 and 2009.
A review of the data for these MEPPs in Missouri points to the
conclusion that these plans are continuing their decline. This report
also reviews recent Congressional proposals to rescue certain MEPP
plans. Evidence suggests that Congress has not lost its energy to
rescue certain troubled MEPP plans. The final section of this report
discusses investment options for both employers and retirees in light
of these challenging conditions.
current financial state of the pbgc
At the time of my earlier report in 2008, PBGC assets supporting
the multiemployer program had a value of $1.2 billion and accrued
liabilities were $2.1 billion. These liabilities represent the present
value of future financial assistance for plans that PBGC has identified
as ``probables'' for purposes of PBGC's financial statements. A
probable'' plan is one that is currently receiving, or is projected to
require, financial assistance. Thus, a ``probable'' plan is usually a
terminated or insolvent multiemployer plan. At that time the net
deficit was $900 million. Unfortunately, the downward spiral for MEPPs
has accelerated since that time. By September 2010, the PBGC deficit
related to MEPPs rose to $1.4 billion. Similarly, by the end of
September 2011, the MEPP related deficit at PBGC doubled to $2.8
billion.
According to their most recent annual report, PBGC's obligations
for future financial assistance to multiemployer plans have increased
to $4.48 billion. This represents a 48 percent increase in obligations
from the previous year. These sharply increasing PBGC liabilities do
not inspire confidence for the sustainability of the multiemployer
system over the next decade. Similarly, the total PBCG deficit rose
from $23 billion at the end of fiscal 2010 to $26 billion by the end of
the 2011 fiscal year.
mdbp surveys for 2008 thru 2011:
are they on the road to financial recovery?
A number of studies have been performed to assess the recent
performance of MDBP plans. These results for these studies are shown
the next.
financial crisis of 2008
The National Coordinating Committee for Multiemployer Plans (NCCMP)
is an advocacy organization of multiemployer pension funds. Each year
they perform a survey on the financial health of MEPP plans. The annual
survey often includes a major percentage of multiemployer pension
plans. For the plan years beginning in 2008, the NCCPMP survey reported
that over 75% plans were in the `green zone', indicating a strong
financial position. Next, during 2008, the financial crisis caused the
average reported funded status to decline to 77% from 90% at the
beginning of the year. Moreover, by the end of the year only 20% of
MEPP respondents indicated their plans were still in the green zone.
Similarly, 42% of plans in the survey reported their plans were in
critical status or the `red zone.'
The plummeting financial status of defined benefit pension plans in
2008 was articulated in my earlier study (McGowan, 2008). That study
analyzed certain 2006 MDBP data and projected 2008 fund status for a
number of plans based on plunging indexes in the stock market. At the
time, a number of local trade unions vigorously assaulted the study as
flawed and inaccurate. Coincidentally, a number of other studies
described the same financial difficulties for 2008 multiemployer
pension plans. For example, Watson Wyatt Worldwide observed that the
top 100 multiemployer pensions were just 79 percent funded.\5\ Moody's
Investors service also published a study in 2009 citing growing concern
about multiemployer pension funding shortfalls.\6\ The Hudson Institute
also examined multiemployer pension data contained in Form 5500s. In
their study,\7\ Furchtgott-Roth and Brown concluded that the risks of
multiemployer pension plans exceeded those of private pension plans.
One major cause of this shift in MEPP plans is the investment
results for 2008 where the median asset return was -22.1%. According to
the NCCMP report, the true impact of the crisis was even more dramatic
than these figures indicated.\8\ The PPA funded percentage measure
relies on the actuarial value of pension plan assets and typically
recognizes investment gains and losses gradually over time. On a market
value of assets basis, the average funded percentage was much worse.
The average funded market value percentage declined from 89% to 65%.
In addition to investment results, the financial impact on a plan
is also a function of employment levels. When a plan becomes
underfunded, it is important that there be a large population of active
members with strong employment levels to create a contribution base
capable of offsetting the shortfall. Unfortunately, an equally historic
level of unemployment followed the historic market collapse of 2008.
This unemployment level has also severely limited the ability of many
plans to recover.
returns improve in 2009: high unemployment continues
There was a high response rate for the 2009 NCCMP survey. Total
plan participants numbered 6.3 million and represented 60 percent of
the multiemployer plan population. Plans included in the NCCMP survey
reported a median 2009 asset return of 16.6%. This figure was not
nearly enough to offset the devastating returns from the prior year.
The International Foundation of Employee Benefit Plans (IFEBP) reported
similar results in their 2009 survey of MEPP plans. As of August,
nearly three-quarters of plans were less than 80 percent funded. The
2009 IFEBP survey had a much smaller sample size (213 plans).\9\
Nevertheless, the results were proportionate and consistent with other
surveys for that time period. The number of plans in the endangered or
critical status had tripled from 2008.
During 2009, participants and sponsors of multiemployer pensions
responded by increasing contributions and reducing benefit accrual
levels. Similarly, many plans in the IFEBP survey indicated that they
were taking advantage of the temporary freeze option available to MEPP
plans in 2009.
returns stable in 2010: unemployment shows little improvement
Participants in the 2010 NCCMP survey declined to 3.6 million or
approximately 35 percent of multiemployer plans. For a second straight
year, respondents reported strong investment returns in 2010.
Consequently, these plans reported an increase in average fund status
to over 82% from 77%. While these results seem promising, the small
sample size raises questions about the validity of this sample.
The 2010 strengthening for pension funds was not confined to
multiemployer plans. Milliman is among the world's largest independent
actuarial and consulting firms in the world. Their annual study covers
100 U.S. public companies with the largest defined benefit pension plan
assets for which an annual report (Form 10-K) is released. Their study
also reflected an overall improvement in funding status due to
increased fund contributions. However, the improvement was somewhat
curtailed by ongoing low interest rates.
More specifically, the record cash contributions for these plans
and investment gains (12.8% actual returns for 2010 fiscal year vs.
8.0% expected returns) were offset by the 7.7% increase in liabilities
generated by the decrease in discount rates (5.43% for 2010, down from
5.82% in 2009 and 6.36% in 2008) used to measure pension plan
liabilities. The lower discount rate coupled with record cash
contributions culminated in a small improvement in the funding ratio
for these plans in 2010. The average increased to 83.9% from 81.7%.
reasons for improved plan status in 2010 and 2009
As noted in the NCCMP report, the number of plans in the green zone
(more than 80 percent funded under PPA 2006 rules) more than doubled
from 20 to 48% by the end of 2010. Similarly, the number of plans in
the red zone (critical status) declined from 42 to 32%. The report
traced this improvement to three factors. First, there were strong
investment returns. Second, the plans and sponsoring employers
implemented a combination of contribution increases and benefit cuts to
shore up their financial status. Thirdly, the funding relief provisions
of the Preservation of Access to Care for Medicare Beneficiaries and
Pension Relief Act of 2010 helped improve multiemployer funding status.
pension expense continues to rise for 2010
Record levels of pension expense were recorded in 2010. A $30.0
billion charge was recorded for firms in the 2010 Milliman Pension
Funding Study. There were 11 companies with pension income (e.g.,
negative expense) in 2010, down from 16 in 2008. Pension expense is
projected to increase for 2011 as companies using asset smoothing are
still reflecting the impact of losses in 2008.
accounting changes adopted by some companies
A number of companies elected to recognize substantially all of
their accumulated losses for 2010. This accounting change resulted in a
significant charge to the year-end balance sheets for Honeywell,
Verizon and AT&T. The elimination of this charge in 2010 will lead to a
reduction of future years' pension expense through the elimination of
the annual charge to earnings for those losses. Milliman estimates that
similar charge to earnings for the remaining 100 companies would have
resulted in a $342 billion charge to their cumulative balance sheets
and a reduction in their 2011 pension expense of about $19.9 billion.
proposed change to international accounting standards
There is also a serious debate raging regarding whether
International Accounting Standards should be converged with or adopted
in place of U.S. GAAP. A proposed change to International Accounting
Standards would eliminate the pension expense credit for Expected
Return on Assets (8.0% for the Milliman 100 companies in 2010). Under
this change, companies would have a pension expense equal to the
discount rate on the excess of liabilities over assets (or a similar
credit if the plan were more than 100% funded). If that change had been
adopted for U.S. GAAP accounting in 2010, the pension expense for the
Milliman 100 companies (and the charge to corporate earnings) would
have increased by about $30.0 billion. Such changes would have a
commensurate effect on multiemployer pension plans. Therefore pension
expenses would be pushed higher.
defined benefit plans in canada for 2011
A review of defined benefit plan performance in 2011 in Canada
shows that things clearly took a turn for the worse. Towers Watson has
kept a tracking index to represent defined benefit pension plans across
the country for more than a decade. In 2011, the index declined from 86
at the start of the year to 72 by the end. The index was at 100 in
December 2000 and after a brief rise in 2001, has been on a steady
decline ever since.\10\ It is reasonable to conclude that pension plans
in the US had similar experience for 2011.
expected plan contributions expected for 2012
CFO Magazine reports that big pension contributions are expected in
2012. According to a new report from Credit Suisse and accounting
analyst David Zion, Companies in the S&P 500 will likely have to
contribute $90 billion to fund pension plan gaps in 2012, up from $52
billion in 2011.
a sample of missouri based mdbp plans: an expansion and update
My original 2008 study was presented at a Senate Hearing on May 27,
2010.\11\ The Senate Hearing was entitled: ``Building a Secure Future
for Multiemployer Pensions.'' The purpose of this hearing was to
address the structural problems of multiemployer pensions.\12\
The key findings of my 2008 report were:
The assumption of failing pensions by PBGC had led to an
overall deficit of $955 million
By September 2007, the PBGC insured about 1,500
multiemployer (sometimes called union plans) plans and promised
benefits to about to roughly 10 million participants
Multiemployer pensions problems were forcing fund managers
to cut benefits
The other avenue to improve multiemployer fund status was
to increase contributions
Central States required a withdrawal liability payment of
$6 billion from UPS
Both employers and employees were encouraged to carefully
consider the financial condition of multiemployer pension plans whether
they were current or prospective participants
measuring the funding status of multiemployer plans
The Pension Protection Act of 2006 places the task of computing the
funded status of MDBP plans in the hands of the actuary. Various
actuarial assumptions and methods are used to determine cost,
liabilities, interest rates, and other funding factors. While these
assumptions must be reasonable, they tend to make the actuarial value
of the assets significantly higher than market value. For example, the
actuarial value of the assets recognizes investment gains and losses
gradually over time.
The PPA 2006 directs actuaries to place MDBP plans in one of three
separate zones: green for healthy (80% funded), yellow for endangered
(65% funded) and red for critical (under 65% funded). Plans are in the
green or healthy zone if they are more than 80 percent funded. Yellow
zone or endangered plans are funded at least 65 but less than 80
percent. Plans are also in the yellow zone if they have had a funding
deficiency in the past 7 years. When a plan hits both conditions they
are considered ``seriously endangered.'' According to Eli Greenblum, an
actuary and senior VP of the Segal Co., ``Yellow zone plans cannot cut
protected or adjustable benefits, there is no official shelter from
funding-deficiency penalties, and there are no employer surcharges.''
\13\ If a plan goes into the red zone or funding level below 65
percent, the trustees must adopt a rehabilitation plan. Pension
trustees may reduce certain benefits under the rehabilitation plan.
People covered by a traditional defined-benefit pension plan should
receive a funding notice every year, which gives workers an idea of how
well the plan is doing. However, people frequently do not have access
to the funding notice. In these cases,\14\ people can get a rough idea
of how well their plan is doing by looking at Form 5500. Moreover,
participants in private pension plans have the legal right to request
the most recent Form 5500 from their plan administrator. Participants
can also download copies of the Form 5500 on a web site called
FreeERISA.com.
Certain multiemployer pension administrators take such strong
exception to the notion that people are able to get a rough idea of the
financial solvency of their multiemployer pensions by looking at data
on IRS form 5500. Then Pension Rights Center stands behind this notion
and presents it clearly on their website.\15\ The Pension Rights Center
encourages people to determine the funded status of their pension by
dividing the current value of plan assets by the ``RPA 94'' current
liability. The RPA 94 (Retirement Protection Act of 1994) current
liability is based on the present value of benefits accrued to date.
This liability is discounted using a statutory interest rate assumption
range that is tied to average long-term bond yields.\16\ Numerous
studies have used this funding ratio as provided on Form 5500 as a
proxy for the financial solvency of multiemployer or union pension
plans.\17\
sample of mepps in missouri
This study expands on the sample of Missouri based multiemployer
pensions next. As can be seen from a review of the actuarial data
presented here from Form 5500s is that these plans continue their
decline. It should also be noted that the Carpenters Trust Pension Fund
of SL showed a modest improvement for 2010. This performance is
reflective of the improved market conditions for 2010. Other pension
funds would be likely to show similar results. That being said, the
financial status of MEPPs are still far below the funding levels of
2006.
----------------------------------------------------------------------------------------------------------------
Total
Pension fund Year Current assets liabilities Percentage
----------------------------------------------------------------------------------------------------------------
Carpenters Pension Trust of SL............................. 2010 $1,462,055,006 $3,264,817,009 44.7%
Carpenters Pension Trust of SL............................. 2009 $1,176,145,761 $3,143,709,605 37.4%
Carpenters Pension Trust of SL............................. 2008 $1,611,931,135 $2,794,336,754 57.6%
Carpenters Pension Trust of SL............................. 2007 $1,589,538,148 $2,305,084,039 68.9%
Carpenters Pension Trust of SL............................. 2006 $1,435,159,165 $2,031,453,937 70.6%
Construction Laborers of SL................................ 2009 $361,501,014 $815,694,842 44.3%
Construction Laborers of SL................................ 2008 $458,876,011 $719,746,151 63.7%
Construction Laborers of SL................................ 2007 $437,851,451 $594,131,725 73.7%
Construction Laborers of SL................................ 2006 $391,340,770 $519,434,403 75.3%
IBEW Local No 124.......................................... 2009 $121,051,761 $254,496,469 47.6%
Plumbers and Pipefitters: Misc. Local Chapters............. $79,631,277 $118,332,486 67.3%
Sheet Metal Workers Local 36............................... 2008 $153,004,997 $262,235,832 58.3%
Sheet Metal Workers Local 36............................... 2007 $140,785,417 $212,424,703 66.2%
Sheet Metal Workers Local 36............................... 2006 $129,274,465 $201,574,482 64.1%
Roofers Local No 20........................................ 2009 $53,148,454 $93,805,474 53.8%
MO-KAN Teamsters........................................... 2010 $46,084,294 $120,499,797 38.2%
Kansas City Cement Masons.................................. 2009 $35,269,314 $93,852,982 37.5%
Painters District Council No 3............................. 2009 $68,471,488 $249,667,631 27.4%
Operating Engineers Local 101.............................. 2010 $497,389,413 $1,113,743,496 44.6%
Insulators Local 27........................................ 2010 $22,761,378 $66,298,542 34.0%
Iron Workers of St. Louis.................................. 2009 $347,808,001 $847,967,614 41.0%
Bricklayers Union Local No. 1.............................. 2008 $66,319,296 $95,449,574 69.4%
Carpenters District Council of Kansas City................. 2009 $527,566,339 $1,312,230,524 40.2%
----------------------------------------------------------------------------------------------------------------
*Serves Laborers' International Union of North America Locals #42, #53, and #110.
congressional efforts to ``rescue'' certain underfunded mdbp pension
plans
In May 2010, Senator Casey introduced S. 3157 under the title of
Create Jobs and Save Benefits Act of 2010. The bill mirrors legislative
proposals introduced in 2009 by Reps. Earl Pomeroy and Patrick Tiberi.
Among other things, the bill proposed that the pension liabilities of
all ``orphan'' retirees from the now-defunct trucking firms be
transferred to the PBGC. Employers of the surviving trucking firms
still in the multiemployer plan are now funding these pension
liabilities. This proposal for the PBGC to take on new funding
obligations generated a mixed reaction.
Those parties who stood to benefit from a PBGC takeover or rescue
of certain unfunded pension liabilities were supportive. For example,
YRC, trucking companies, teamsters, all loved the idea. On the other
side of the coin, Diana Furtchgott-Roth wrote in TCS daily in
opposition to this bill. She referred to this action as a ``bailout''
of union pensions that would dramatically increase the burden on U.S.
debt and American taxpayers. Supporters of funding for ``troubled''
multiemployer pensions argue that the term ``bailout'' is unfair and
dishonest. They maintain that as long as PBGC does not use any taxpayer
funds to fund failed pensions it is not a bailout. Furthermore, certain
supporters argue that the only way to salvage certain failing pensions
is to ``partition'' them off and transfer them to the PBGC. The problem
with this plan is that the PBGC is on its way to running out of money.
As discussed in the next section, Chairman Gotbaum of the PBGC
testified that the PBGC may run out of money as soon as 9 years from
now. Moreover, certain major pension defaults occurring in 2012 as
American and Kodak may accelerate that timetable.
pbgc finances and challenges to multiemployer pensions
On Feb. 2, 2012, the House Education and Workforce Subcommittee on
Health, Employment, Labor and Pensions held a hearing entitled,
``Examining the Challenges Facing PBGC and Defined Benefit Pension
Plans.'' The hearing explored the financial and management challenges
at the Pension Benefit Guaranty Corporation (PBGC), as well as policy
proposals intended to strengthen the financial standing of the PBGC.
PBGC Director Joshua Gotbaum spoke at the hearing and addressed the
$26 billion deficit the PBGC currently faces. He stated that the PBGC
is a $100 billion dollar financial institution but that it is also
unsound financially. The value of the assets is around $80 billion.
Gotbaum discussed several options that Congress could take to encourage
more secure retirements. Once new policy proposed by Gotbaum was an
increase in employer pension insurance premiums. Gotbaum also addressed
multiemployer pension plans and stated that some of the plans are
substantially underfunded and the traditional remedies won't be enough.
In other words, Gotbaum recognized that some pensions were too far
gone to recover. Once pensions deteriorate past a certain point, one of
two things must occur. Either benefits must be reduced or there must be
an infusion of capital from another source. Time will tell if Congress
will revive the proposed ``rescue'' solution for certain pension funds.
The first two witnesses at the hearing emphasized the same two
issues. Both Ken Porter, former chief actuary with DuPont and Gretchen
Haggarty, CFO of U.S. Steel testified that low interest rates were a
significant cause of current pension underfunding problems. Similarly,
they both testified that the proposed increase in pension premiums
would also be detrimental to economic growth. Thirdly, Randy DeFrehn of
the NCCMP stated that while most multiemployer pensions are on the road
to recovery, there are a sizeable group of pensions that still need to
be rescued. He referred back to the 2010 proposal to ``Preserve Jobs
and Save Benefits Act'' that rescues certain multiemployer pensions. He
also suggested that weaker funds be allowed to merge into stronger
ones. As the final witness, I highlighted the deteriorating nature of
numerous multiemployer pensions in Missouri and suggested Congress
reform certain provisions from the PPA of 2006. Specifically, the use
of the withdrawal liability penalty is a harsh and unfair way to impose
underfunded pension costs on new and existing employers.
structural problems with multiemployer pension plans
As noted in the GAO report\18\ from May 2010, the PBGC has paid
$500 million in financial assistance to 62 insolvent plans. Major
challenges exist for multiemployer plans. Such challenges include
continuing decreases in the number of these plans and an aging
participant base. Further, a decline in collective bargaining in the
United States has left few opportunities for plans to attract new
employers and workers. As a result, the proportion of active
participants paying into the fund to others who are no longer paying
into the fund has decreased, thereby increasing plan liabilities and
the likelihood that PBGC will have to provide financial assistance in
the future.
While there has been some improvement in MEPPs since 2010, many of
the market and regulatory conditions discussed in this report will make
it very difficult for substantial turnarounds in performance for union
pensions. The review of a sample of Missouri based union pension plans
illustrates this point.
What is a realistic option for workers going forward?
The private sector is reflecting modern economic reality when it
comes to pension plans. There will be a continued migration away from
DB plans and toward 401K plans, or perhaps some combination of DB and
401(K) plans. Certain commentators have discussed the possibility of
required retirement plan contributions from both employers and workers.
That seems unlikely given past emphasis on individual liberty in the
United States.
The first thing workers should do is to increase their knowledge
and understanding about their retirement. If they are part of a defined
benefit pension plan they should investigate the financial solvency of
that plan. Given the uncertain long-term stability of many defined
benefit pension plans, individuals should also explore other retirement
options that allow them more independence and control. Many employers
match employee contributions to defined contribution plans. Over time
these plans can grow into substantial sources of retirement income.
There are also opportunities for individuals over the age of 50 to make
``catch up'' contributions with their existing retirement plans. Due to
competitive pressures and demographic and economic changes, peoples'
retirement prospects are becoming more challenging all the time. The
best think people can do is to clearly study their retirement options
and plan ahead.
references
BNA, Pension Protection Act Center at http://subscript.bna.com/pic2/
ppa.nsf/id/BNAP-6ZKK7E?OpenDocument.
DeFrehn, R.G. and J. Shapiro, ``The Road to Recovery, The 2010 Update
to the NCCMP Survey of the Funded Status of Multiemployer
Defined Benefit Plans,'' See http://www.nccmp.org/.
McGowan 2008, The Financial Health of Defined Benefit Pension Plans: An
Analysis of Certain Trade Unions Pension Plans, U.S. Senate
Committee on Health, Education Labor and Pensions.
endnotes
\1\ I would like to acknowledge the support of Associate Builders
and Contractors. The views reflected in this study are my own and do
not necessarily reflect those of Saint Louis University.
\2\ C. Sutton, CNN Money, March 2010.
\3\ Statement of Charles A. Jeszeck, Acting Director Education,
Workforce, and Income Security Issues as part of Testimony Before the
Committee on Health, Education, Labor and Pensions, U. S. Senate.
\4\ S. Block, ``Traditional Company Pensions are going away fast,''
USA Today, May 22, 2009.
\5\ Leveson, I, Economic Security a Guide for an Age of Insecurity,
iUniverse p. 18, April 29, 2011.
\6\ See, Moody's: Growing Multiemployer Pension Funding Shortfall
is an Increasing Credit Concern,'' Sept. 10, 2009.
\7\ See, Furtchgott-Roth D., and A. Brown, ``Comparing Union-
Sponsored and Private Pension Plans: How Safe are Workers
Retirements?'' Hudson Institute, September 2009.
\8\ Defrehn, R.G. and J. Shapiro, 2010 Update to MCCMP Survey of
Funded Status of Multiemployer Defined Benefit Plans, p. 1.
\9\ See Wojcik, J., ``73 percent of multiemployer pension plans
underfunded: Study,'' Business Insurance, Sept. 29, 2009.
\10\ CBC News.CA, ``Defined benefit pension plans had bleak 2011,''
Jan. 4, 2012.
\11\ See summary at http://www.help.senate.gov/imo/media/doc/
McGowan.pdf
\12\ See http://www.help.senate.gov/imo/media/doc/McGowan.pdf.
\13\ See comments by Eli Greenblum at March 21, 2007 at BNA
sponsored pension conference.
\14\ See:http://www.pensionrights.org/publications/fact-sheet/how-
well-funded-your-pension-plan.
\15\ http://www.pensionrights.org/publications/fact-sheet/how-well-
funded-your-pension-plan.
\16\ See: http://www.actuary.org/pdf/pension/moodys--march06.pdf
Letter from D.J. Segal, VP of Pension Practice Counsel to American
Academy of Actuaries March 1, 2006.
\17\ See: Allen, S.G., R.L. Clark, and A.A. McDermed, ``Post-
Retirement Increases in Pensions in the 1980s: Did Plan Finances
Matter?'' National Bureau of Economic Research Working Paper #4413; D.,
Furchtgott-Roth, ``Union vs. Private Pension Plans: How Secure Are
Union Members' Retirements?'' Hudson Institute, Summer 2008, September
2009; Addoum, J.M., J.H. van Binsbergen, and M.W. Brandt, ``Asset
Allocation and Managerial Assumptions in Corporate Pension Plans,''
Duke Working Paper 2010; McGowan, J.R., ``The Financial Health of
Multiemployer Pension Plans, PBGC and the Recent Government Bailout
Proposal: Create Jobs and Save Benefits Act of 2010,'' Report prepared
for Senate Committee on Health, Education, Labor and Pensions: Building
a Secure Future for Multiemployer Pension Plans, May 27, 2010, See:
http://help.senate.gov/hearings/hearing/?id=6a51d13d-5056-9502-5d61-
e47c92a6a05f.
\18\ ``Long-standing Challenges Remain for Multiemployer Pension
Plans,'' GAO-10-708T, May 27, 2010.
______
[Questions submitted for the record and their responses
follow:]
U.S. Congress,
Washington, DC, March 29, 2012.
Hon. Joshua Gotbaum, Director,
Pension Benefit Guaranty Corporation (PBGC), 1200 K Street, NW,
Washington, DC 20005.
Dear Director Gotbaum: Thank you for testifying at the February 2,
2012, Subcommittee on Health, Employment, Labor, and Pensions hearing
entitled, ``Examining the Challenges Facing PBGC and Defined Benefit
Pension Plans.'' I appreciate your participation.
Enclosed are additional questions submitted by Committee members
following the hearing. Please provide written responses no later than
April 16, 2012, for inclusion in the official hearing record. Responses
should be sent to Benjamin Hoog of the Committee staff, who may be
contacted at (202) 225-4527.
Thank you again for your contribution to the work of the Committee.
Sincerely,
Phil Roe, Chairman,
Subcommittee on Health, Employment, Labor and Pensions.
questions submitted by chairman phil roe
1. As part of its ``Plan for Regulatory Review,'' the Pension
Benefit Guaranty Corporation (PBGC) is reconsidering its proposed
regulations regarding facility shutdown liability under Section 4062(e)
of the Employee Retirement Income Security Act (ERISA). If finalized,
the proposed regulation would impose significant burdens on plan
sponsors. However, reports suggest PBGC officials are still referencing
these proposed regulations as ``the law'' in their interactions with
plan sponsors. Is PBGC enforcing these proposed regulations? Does PBGC
intend to finalize new 4062(e) regulations; and if so, how will they
address the concerns of plan sponsors who noted their potential for
disproportionately huge liability?
2. As part of last year's appropriations process, PBGC was granted
discretion to use funds for ``extraordinary'' administrative expenses
relating to its multiemployer program, provided it notifies the
appropriations committees. How does PBGC define ``extraordinary'' in
this context? Do we have your assurance that this power will not be
used without notifying the congressional committees of jurisdiction,
and used only as a last resort? How and under what circumstances do you
intend to notify Congress regarding your use of this authority?
3. Section 4010 of ERISA requires certain pension plan sponsors to
submit information to PBGC relating to plan funding. PBGC is required
annually to submit a report on this information to the congressional
committees of jurisdiction. Why has this report not yet been issued,
and when will PBGC submit this report to Congress?
4. The PBGC's 2010 Annual Exposure Report stated that the possible
deterioration of two large plans could cause PBGC's multiemployer
program to run out of money. Has the status of those two plans
improved? Have any new plans been added to the list of plans at
substantial risk of insolvency that would materially affect PBGC?
5. As you know, so-called ``orphan'' liabilities of employers who
went out of business but whose employees are still plan participants
are a huge burden for companies that participate in multiemployer
plans. When PBGC models the potential risk of plans, does it take into
account that these rising liabilities--and consequently higher required
plan contributions--may drive companies from the plan or even out of
business? If so, please explain how the models reflect the consequences
of rising liabilities.
6. Under ERISA Section 4005(c), PBGC is permitted to borrow up to
$100 million from the U.S. Treasury. Under what circumstances would
PBGC consider using this authority? Will you seek congressional
approval prior to borrowing?
7. Section 221 of the Pension Protection Act of 2006 (PPA) required
a report to be issued studying the effect of PPA on multiemployer
pension plans. Congress was to receive this report by December 31,
2011. When will this report be submitted to Congress? What key findings
and recommendations do you expect it to include?
questions submitted by representative martha roby
1. As you know, the PBGC Inspector General has been extremely
critical of the ways that plan asset valuation audits were conducted,
particularly in the cases of United Airlines and National Steel. The IG
noted that the contractor used in both of those audits has been used in
eight of the 10 largest plan terminations in PBGC history. Are those
other audits under review, and if so, will more irregularities come to
light?
2. How much will it cost to contract with outside firms to redo the
work in the United Airlines and National Steel audits? Will that money
come from premium contributions and the assets of terminate plans?
3. Your Inspector General's ``Report on Internal Controls,''
indicated that the Inspector General found that PBGC ``did not exercise
due professional care in the conduct and oversight of contracted audits
of asset values;'' and questioned whether PBGC personnel reviewed
contractors' work. How can we know that PBGC is properly overseeing its
contractors, and how does PBGC hold those contractors accountable for
errors?
4. In a recent report on PBGC's internal controls, the Inspector
General noted that it had uncovered instances of incorrect benefits
calculations. This is troubling because benefits calculation is a core
function of PBGC, and retirees were not provided with the benefits they
were entitled to under ERISA and the terms of the plan. What specific,
concrete steps is the agency taking to enhance training for its
professionals who calculate benefits?
questions submitted by representative robert andrews
on behalf of senator herb kohl
1. In the GAO and PBGC Inspector General have written several
reports emphasizing the need to reform the agency's governance
structure. Do you think that any change in premium structure should
include provisions to bolster PBGC's governance and oversight?
2. The Pension Benefit Guaranty Corporation Governance Improvement
Act of 2009 (S. 1544 in the 111th Congress) would expand the board,
require multiple board meetings, and create more efficient
communication between the board, IG, advisory committee and
professional staff. Do you support this legislation?
3. The bill in the last Congress created a variety of requirements
for the four new board members, but a draft version currently
circulating just requires that two come from each party, one be a
financial expert, and one have specific understanding of retirement
plans.
4. Do you have a problem with this proposed board makeup, or do you
have suggestions on improving it?
______
[Director Gotbaum's response to questions submitted for the
record follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
[Whereupon, at 12:37 p.m., the subcommittee was adjourned.]