[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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                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.
---------------------------------------------------------------------------
    \1\ Pew Research Center, ``Baby Boomers Approach Age 65--Glumly,'' 
December 2010 http://pewresearch.org/pubs/1834/baby-boomers-old-age-
downbeat-pessimism.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \2\ These are PBGC calculations based on our own actuarial analysis 
of a 2011 Boston College study.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \3\ Bureau of Labor Statistics, DOL, ``Employee Benefits in the 
United States--March 2011'' (July 26, 2011).
---------------------------------------------------------------------------
     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.
---------------------------------------------------------------------------
    \4\ See AMR's news release on filing bankruptcy: http://
aa.mediaroom.com/index.php?s=43&item=3397.
---------------------------------------------------------------------------
    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]

                                ------                                

    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \3\ Until 1980 the PBGC only provided assistance to 10 plans.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \6\ See ``Road to Recovery . . .'', page 8.
---------------------------------------------------------------------------
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:]

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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.
                                 ______
                                 
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    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.]