[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
ASSESSING THE CHALLENGES FACING MULTIEMPLOYER 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, JUNE 20, 2012
__________
Serial No. 112-63
__________
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 Robert E. Andrews, New Jersey
Todd Russell Platts, Pennsylvania Robert C. ``Bobby'' Scott,
Joe Wilson, South Carolina Virginia
Virginia Foxx, North Carolina Lynn C. Woolsey, California
Bob Goodlatte, Virginia Ruben Hinojosa, Texas
Duncan Hunter, California Carolyn McCarthy, New York
David P. Roe, Tennessee John F. Tierney, Massachusetts
Glenn Thompson, Pennsylvania Dennis J. Kucinich, Ohio
Tim Walberg, Michigan Rush D. Holt, New Jersey
Scott DesJarlais, Tennessee Susan A. Davis, California
Richard L. Hanna, New York Raul M. Grijalva, Arizona
Todd Rokita, Indiana Timothy H. Bishop, New York
Larry Bucshon, Indiana David Loebsack, Iowa
Trey Gowdy, South Carolina Mazie K. Hirono, Hawaii
Lou Barletta, Pennsylvania Jason Altmire, Pennsylvania
Kristi L. Noem, South Dakota Marcia L. Fudge, Ohio
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 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 June 20, 2012.................................... 1
Statement of Members:
Andrews, Hon. Robert E., ranking member, Subcommittee on
Health, Employment, Labor and Pensions..................... 3
Roe, Hon. David P., Chairman, Subcommittee on Health,
Employment, Labor and Pensions............................. 1
Prepared statement of.................................... 3
Statement of Witnesses:
Henderson, Scott, treasurer and vice president, the Kroger
Co......................................................... 32
Prepared statement of.................................... 33
McReynolds, Judy, president and chief executive officer,
Arkansas Best Corp......................................... 6
Prepared statement of.................................... 8
Ring, John F., partner, Morgan, Lewis & Bockius LLP.......... 19
Prepared statement of.................................... 22
Sander, Michael M., administrative manager, Western
Conference of Teamsters Pension Plan....................... 11
Prepared statement of.................................... 13
Shapiro, Josh, deputy director for research and education,
National Coordinating Committee for Multiemployer Plans.... 14
Prepared statement of.................................... 16
Additional Submissions:
Mr. Andrews, letter, dated June 20, 2012, from Construction
Employers for Responsible Pension Reform caucus............ 60
Chairman Roe:
Letter, dated July 3, 2012, from Construction Employers
for Responsible Pension Reform caucus.................. 58
Prepared statement of the U.S. Chamber of Commerce....... 59
ASSESSING THE CHALLENGES FACING MULTIEMPLOYER PENSION PLANS
----------
Wednesday, June 20, 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 10:01 a.m., in
room 2175, Rayburn House Office Building, Hon. David P. Roe
[chairman of the subcommittee] presiding.
Present: Representatives Roe, Wilson, Thompson, Rokita,
Bucshon, Noem, Roby, Andrews, Kildee, McCarthy, Tierney, and
Holt.
Staff present: Andrew Banducci, Professional Staff Member;
Katherine Bathgate, Deputy Press Secretary; Adam Bennot, Press
Assistant; Casey Buboltz, Coalitions and Member Services
Coordinator; Ed Gilroy, Director of Workforce Policy; Benjamin
Hoog, Legislative Assistant; Marvin Kaplan, Workforce Policy
Counsel; 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; John
D'Elia, Minority Staff Assistant; Jonay Foster, Minority
Fellow, Labor; Brian Levin, Minority New Media Press Assistant;
Megan O'Reilly, Minority General Counsel; and Michele
Varnhagen, Minority Chief Policy Advisor/Labor Policy Director.
Chairman Roe. Call the meeting to order. A quorum being
present, the Subcommittee on Health, Employment, Labor, and
Pensions will come to order.
Good morning, everyone. I would like to welcome our guests
and thank our distinguished panel of witnesses for being with
us today.
In a recent editorial entitled the ``Union Pension Bomb''
the Wall Street Journal described the big trouble facing
multiemployer pension plans. The editorial noted a study by the
analystsat Credit Suisse which found multiemployer pension
plans are collectively underfunded by approximately $369
billion and only a small fraction of these plans are considered
stable and healthy.
It is important to note this study is based on a rate of
return on investments not reflecting in--reflected in existing
law. Some have argued the study makes assumptions that better
reflect the current state of the multiemployer pension system
and, as with any debate, others have disagreed. Regardless of
the methodologies used, this is not the first time the
challenges facing the multiemployer pension system have drawn
the public's attention.
According to an analysis by the benefits consulting firm
Segal, more than 25 percent of plans are in ``critical status''
due to severe financial deficiencies. A report by the Pension
Benefit Guaranty Corporation revealed multiemployer pensions
are increasingly dependent upon the agency's financial
assistance. In fact, the PBGC projects that its future
obligations to these plans totals $4.5 billion, a 48 percent
increase from previous estimates.
The corporation also expects the number of insolvent plans
to more than double over the next 5 years. Finally, there are
warnings by plan managers and trustees who fear the pensions
they oversee will become insolvent in the years ahead.
While some plans have made responsible decisions to help
ensure their long-term success, an aging workforce, weak
economy, investment losses, and unsustainable promises are
placing a great deal of strain on the multiemployer pension
system. The resultant uncertainty is an ongoing source of angst
for many workers and employers.
Some workers have little confidence the benefits they were
promised will be there when they retire. And employers trying
to keep their businesses open are also trying to keep up with
their growing pension obligations.
Policymakers continue to struggle with this pension problem
as well. In 1980 changes to federal pension law were adopted,
including reforms that promote greater responsibility among
employers and union officials for the promises they make to
workers. More recently, the Pension Protection Act enhanced the
accountability of the multiemployer pension system,
establishing classifications to better identify a plan's
financial strengths and weaknesses and requiring more detailed
disclosure of the plan's financial status.
Despite these well-intended efforts and past attempts to
provide relief problems still exist. A number of provisions in
existing law are set to expire in 2014, which means Congress
will need to take action once again to help address the
shortfalls of the multiemployer pension system. While some
pension plans are financially sound and prepared to meet their
obligations, it is becoming increasingly clear the depth and
breadth of the challenges facing the system will demand
significant reform.
With a deadline of 2 years it may seem like time is on our
side. However, we cannot ignore the impact this issue has right
now on the health and strength of our nation's economy.
Thousand of job-creators participate in the multiemployer
pension system with more than 10 million Americans dependent on
these benefits to help provide for financial security they
deserve in retirement. We must use the months ahead to ensure
we get this right.
I look forward to today's discussion and expect it will
pave the way for future conversations on this very important
subject.
I will now recognize my distinguished colleague, Mr. 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, everyone. I would like to welcome our guests and
thank our distinguished panel of witnesses for being with us today.
In a recent editorial entitled the ``Union Pension Bomb,'' the Wall
Street Journal described the ``big trouble'' facing multiemployer
pension plans. The editorial noted a study by analysts at Credit
Suisse, which found multiemployer pensions are collectively underfunded
by approximately $369 billion, and only a small fraction of these plans
are considered stable and healthy.
It is important to note this study is based on a rate of return on
investments not reflected in existing law. Some have argued the study
makes assumptions that better reflect the current state of the
multiemployer pension system and, as with any debate, others have
disagreed. Regardless of the methodologies used, this is not the first
time the challenges facing the multiemployer pension system have drawn
the public's attention.
According to an analysis by the benefits consulting firm Segal,
more than 25 percent of plans are in ``critical status,'' due to severe
financial deficiencies. A report by the Pension Benefit Guaranty
Corporation reveals multiemployer pensions are increasingly dependent
upon the agency's financial assistance. In fact, PBGC projects that its
future obligations to these plans total $4.5 billion--a 48 percent
increase from previous estimates. The corporation also expects the
number of insolvent plans to more than double over the next five years.
Finally, there are the warnings by plan managers and trustees who fear
the pensions they oversee will become insolvent in the years ahead.
While some plans have made responsible decisions to help ensure
their long-term success, an aging workforce, weak economy, investment
losses, and unsustainable promises are placing a great deal of strain
on the multiemployer pension system. The resultant uncertainty is an
ongoing source of angst for many workers and employers. Some workers
have little confidence the benefit they were promised will be there
when they retire. And employers trying to keep their businesses open
are also trying to keep up with their growing pension obligations.
Policymakers continue to struggle with this pension problem as
well. In 1980, changes to federal pension law were adopted, including
reforms that promoted greater responsibility among employers and union
officials for the promises they make to workers. More recently, the
Pension Protection Act enhanced the accountability of the multiemployer
pension system, establishing classifications to better identify a
plan's financial strengths and weaknesses and requiring more detailed
disclosure of the plan's financial status.
Despite these well-intended efforts and past attempts to provide
relief, problems still persist. A number of provisions in existing law
are set to expire in 2014, which means Congress will need to take
action once again to help address the shortfalls of the multiemployer
pension system. While some pension plans are financially sound and
prepared to meet their obligations, it is becoming increasingly clear
the depth and breadth of the challenges facing the system will demand
significant reform.
With a deadline of two years, it may seem like time is on our side.
However, we cannot ignore the impact this issue has right now on the
health and strength of our nation's economy. Thousands of job-creators
participate in the multiemployer pension system and more than 10
million Americans depend on these benefits to help provide the
financial security they deserve in retirement. We must use the months
ahead to ensure we get this right.
I look forward to today's discussion, and expect it will pave the
way to future conversations on this very important subject. I will now
recognize my distinguished colleague Rob Andrews, the senior Democratic
member of the subcommittee, for his opening remarks.
______
Mr. Andrews. Thank you, Mr. Chairman. Good morning. I
appreciate you calling this hearing and I appreciate the
preparation of today's witnesses.
One measure in Washington of how solvable a problem is is
the attendance at the hearing, and the higher the attendance
the less solvable the problem----
[Laughter.]
And here is why: Many of our hearings--and it is true
whether we are in the majority or the other side is in the
majority--are rather contentious, where they are held to prove
a political point, and everybody comes because everybody wants
to get into the brawl. This is not a brawl this morning; this
is a serious attempt at understanding a serious problem so we
can work together to solve it, and I am sure that our
colleagues on both sides will be actively engaged in helping to
solve that problem.
Here is the way I see the problem: It is the problem of a
woman who runs a sheet metal contracting firm and has 21
employees, and she has been through really tough times the last
5 years as construction has slowed and in some cases ground to
a halt.
And she has got two problems here that the amount that she
has to contribute to the pension fund in which she is a part
keeps going up, which makes her less competitive to go get bids
to build buildings or means that she has to pay lower wages to
her present workers in order to do so--puts her in a real
catch-22 situation. That problem worsens for her as other
employers go out of business or leave the plan because every
time one of them does the burden on her gets higher and more
difficult to bear, and if she thinks about reducing her
liabilities by leaving the plan it may put her out of business
because the withdraw liability is so high.
So this is about that small business person that builds
hospitals, and builds schools, and builds stores around the
country who is in real trouble to begin with, and this problem
makes trouble worse.
Problem is also, you know, about a 68-year-old iron worker
who thinks that he is going to get a certain pension for as
long as he lives. And we are here to do everything we can to
make sure that that promise to him is kept, because he held up
his end of the bargain. He went to work; he did his job well;
he paid into the fund; he, you know, participated in collective
bargaining agreements where he gave something up to get that
pension.
And then the third person I think about this morning is the
taxpayer of the United States of America, that although the
demands of multiemployer funds on the Pension Benefit Guaranty
Corporation are qualitatively smaller than those of single
employer plans simply because there are so many other
guarantors. Unlike a single employer plan, where all that
stands between the employer and the taxpayer is the PBGC, the
multi plans there is another layer of protection for the
taxpayer and it is that small businesswoman I just talked about
running the sheet metal contracting firm.
So those are the three people that I am worried about this
morning. And I think this is a problem with a solution. These
plans, depending upon how you measure their projected returns,
are anywhere from 52 percent funded to something quite a bit
higher than that, but they still have some trouble and the
trouble really comes from two sources.
The first is the same economic downturn that everybody else
went through--you know, the equity investments weren't worth as
much as they were supposed to be and the money people thought
they had in their fund they didn't have. I think we have all
been through that as individuals and families as well as
businesses.
But the second problem that the multis have that is unique
to the multis is the problem the E.U. is having this morning,
which is, to make a decision you need a lot of people to vote
``yes.'' So you see, when Honeywell or General Motors has a
problem the board of directors makes a decision, and they fix
their plan one way or the other, and off they go. But when the
Western States Conference has a problem, or the Central
Pennsylvania Fund has a problem, or the Sheet Metal Contractors
Fund has a problem, they got a lot of people who have a voice
in that decision. They have a collectively bargained agreement
and they have a--their word ``multi'' means they have a
multitude of employers who get a vote.
So I am not suggesting that that governance model doesn't
work. I would suggest exactly the opposite. I think it works
quite well, and I think that the multiemployer funds are an
example of voluntary labor management cooperation that works
very well in this country.
But the fact of the matter is, when you have to have a lot
of people agree on something it is a lot harder than when you
only have to have a few. And so the multis are in a situation
where they have suffered the same kind of economic harm that
everybody else has in the 2008 meltdown, but making hard
decisions about restructuring benefits or restructuring
contributions are much harder to make when you are in that
format where a lot of people have to make a decision.
So I see our goal as considering ways that we can create or
enhance a set of rules that make it possible for the trustees
who run the multiemployer funds to make the decisions they need
to make to make the funds stronger. Notice I said ``for them to
make the decisions.'' I am not in favor of us supplanting their
judgment with ours; I am not in favor of the Department of
Labor or the PBGC or this committee micromanaging those funds.
What I am in favor is creating an environment with the
proper incentives and disincentives where the trustees of the
multiemployer funds will have a better environment in which to
make decisions that help the lady running the sheet metal
contracting firm, the retired iron worker, and the taxpayer of
the United States.
I am confident we can work together, Mr. Chairman, and get
that done. I look forward to hearing from the witnesses this
morning.
Chairman Roe. Thank the ranking member, and I suspect that
you are right. The temperature in this room will be a lot lower
than it is outside today, so--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.
I will now introduce the witnesses. And this is a very
distinguished panel.
I have read all of your testimony and it--as I said, it
laid out the problem very well, just not the solution. So I
appreciate you doing that.
Ms. Judy R. McReynolds is the president and CEO of Arkansas
Best Corporation in Fort Smith, Arkansas.
Welcome.
Mr. Michael Sander is the administrative manager of Western
Conference of the Teamsters Pension Trust in Seattle,
Washington.
Welcome.
Josh Shapiro is the deputy executive director for research
and education at the National Coordinating Committee for
Multiemployer Plans in Washington, D.C.
Welcome, Mr. Shapiro.
John F. Ring is a partner with Morgan, Lewis, and Bockius
LLP in Washington, D.C.
Welcome.
And Scott M. Henderson is the vice president and treasurer
of the Kroger Company in Cincinnati, Ohio.
And before I recognize you to provide your testimony let me
briefly explain our lighting system. You have 5 minutes to
present your testimony and when you begin the light in front of
you will turn green. With 1 minute left the light 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. I won't
cut you off in mid-sentence, but just wrap up your thoughts.
And after everyone has testified members will have 5
minutes to ask questions. And I now will begin.
I want to thank the witnesses and begin with Ms.
McReynolds.
STATEMENT OF JUDY R. MCREYNOLDS, PRESIDENT & CEO, ARKANSAS BEST
CORP.
Ms. McReynolds. Chairman Roe, Ranking Member, and
distinguished members of the subcommittee, thank you for the
opportunity to testify regarding the impact of multiemployer
pension plan obligations on the trucking industry.
I am the president and chief executive officer of Arkansas
Best Corporation. Our largest operating subsidiary, ABF Freight
System, is based in Fort Smith, Arkansas, and has been in
continuous operation since 1923. We are one of the largest
less-than-truckload carriers in North America and have more
than 10,000 employees throughout the United States, Canada,
Puerto Rico, and Mexico.
ABF has traditionally been profitable but was hit hard by
the economic downturn that began in 2007. The biggest challenge
to ABF's long-term viability is its multiemployer pension plan
obligations. Unless the Congress acts, the ever increasing
contribution obligations to these plans will cause more
trucking company bankruptcies and the PBGC will ultimately have
to take over the funding of many plans.
ABF contributes to 25 separate multiemployer pension plans
associated with the trucking industry. Many of the plans
serving our industry are either already close to insolvency or
clearly headed in that direction.
The plans are independent of both the employers and the
union. The plan trustees, half of whom are appointed by the
employers, are ERISA fiduciaries who are required to act solely
in the interest of the plan participants. If a multiemployer
plan becomes insolvent the PBGC is responsible for providing
the assets to pay these benefits.
Contributions to multiemployer pension plans by ABF and
other employers have skyrocketed in recent years for a number
of reasons, two in particular. First, these plans were
established prior to federal deregulation of the trucking
industry in 1980. Deregulation caused a fundamental shift in
the economics of the industry and thousands of trucking
companies who were participants in the--these pension plans
have gone out of business. Under the multiemployer system the
remaining companies in the plan are effectively responsible for
the continued funding of all benefits, even for individuals
they never employed.
Second, the Pension Protection Act of 2006 gives
multiemployer plan trustees little flexibility to address
changed circumstances. The act significantly increased required
contributions to underfunded plans in the endangered yellow
zone status and the critical red zone status, a situation
exacerbated by historically low interest rates and investment
losses due to the stock market crash in 2007 and 2008.
In 2011 ABF contributed $133 million to multiemployer
plans. Approximately 62 percent of our current contributions
are made to critical red zone plans, including Central States
Pension Fund, and another 12 percent to yellow zone status
plans.
More than half of ABF's contributions to Central States
Pension Fund alone are used to fund benefits of retirees of
bankrupt or defunct companies, so-called ``orphan retirees.''
Any other multiemployer plans that we contribute to also have
large numbers of orphan retirees.
Three-fourths of our employees are represented by the
International Brotherhood of Teamsters and we are a party to
the National Master Freight Agreement. That 5-year agreement
expires March 31, 2013. In order to comply with the
requirements of PPA applicable to red and yellow zone plans the
agreement imposes a 7 percent compound annual contribution
increase on ABF, which results in a more than 40 percent
increase during the 5-year term of the agreement from the
already high levels previously in effect.
AFB operates in a highly competitive industry that consists
predominantly of nonunion freight transportation carriers with
much lower pension benefit costs. ABF now contributes $10.17 an
hour for pension benefits, 257 percent higher than those for
average union employers in the United States. These
contributions represent 21 percent of our total compensation
costs, compared to less than 8 percent for the average union
employer.
It is much worse with respect to nonunion competitors. In
2011 our average pension plan contribution for an operational
employee was $17,392, compared to $1,131 per employee for our
key nonunion competitors. Thus, our retirement plan
contributions are 1,437 percent higher than our nonunion
competitors.
Because of its higher pension costs a smaller portion of
the market is available to ABF and our market share dropped
from 5.5 percent in 2004 to 4 percent in 2011, relative to our
competition.
ABF is working with a number of groups to formulate
multiemployer pension plan reforms that make sense for plans,
active and retired employees, and contributing employers.
Further raising of contribution rates will jeopardize the
ability of employers to survive and continue contributing to
the plans. Plans cannot survive without contributing employers,
but plan trustees have few tools to make changes that are
necessary for the long-term viability of the plans and their
contributing employers.
ABF strongly supports efforts to save the multiemployer
pension plans that its active and retired employees depend on
for their retirement income. By taking action now Congress can
help avert a crisis that otherwise is almost certain to occur.
And I would be pleased to answer any questions that the
members of the subcommittee have today. Thanks.
[The statement of Ms. McReynolds follows:]
Prepared Statement of Judy McReynolds, President and
Chief Executive Officer, Arkansas Best Corp.
Chairman Roe and Ranking Member and distinguished members of the
Subcommittee, thank you for the opportunity to testify regarding the
impact of multiemployer pension plan obligations on the trucking
industry.
My name is Judy McReynolds and I am the President and Chief
Executive Officer of Arkansas Best Corporation. I am here to discuss
the pension challenges faced by our largest operating subsidiary, ABF
Freight System, Inc. (ABF). ABF, which is based in Fort Smith,
Arkansas, has been in continuous operation since 1923 and is one of the
largest less than truckload (LTL) motor carriers in North America. ABF
has more than 10,000 employees and provides interstate and intrastate
direct service to more than 44,000 communities through 275 service
centers in all 50 states, Canada, Puerto Rico and Mexico.
ABF is a model corporate citizen. We are consistently recognized
for excellence in safety, security and loss prevention by the American
Trucking Association. We have been named a ``Best Company to Sell For''
by Selling Power magazine for ten consecutive years. We have been a
named ``Top 125 Training Organization'' by Training magazine for the
last three years. In addition, we currently have three America's Road
Team Captains, and have had at least one driver representative on this
team every year since the team was established in 1995.
ABF has traditionally been profitable but was hit hard by the
economic downturn that began in 2007. We are working our way back to
profitability and last year reported a small positive operating income
of $9.8 million on more than $1.9 billion of revenue. With an operating
loss in the first quarter of 2012, ABF is not out of the woods, but we
are making progress. Despite the importance of these cyclical economic
factors, the biggest challenge to ABF's long-term viability and its
competitiveness within the trucking industry is the current and future
liabilities it faces under many of the multiemployer pension plans to
which it contributes.
Multiemployer Pension Plans and the Trucking Industry
ABF contributes to 25 multiemployer pension plans associated with
the trucking industry. Many of these plans are in difficult financial
straits. Multiemployer pension plans cover employees of different
employers generally in the same industry and geographic area and are
managed by a joint board of trustees, half of whom are appointed by the
contributing employers and the other half by the labor union. The plans
are independent of both the employers and the union. Neither collective
bargaining party can exercise legal control over the plans. Rather, the
trustees are fiduciaries who are required to act solely in the interest
of the plan participants, and not in the interest of either the
employers or the union. The Pension Benefit Guaranty Corporation (PBGC)
insures benefits promised under these plans, up to a maximum guaranteed
level set by law. If a multiemployer plan becomes insolvent, the PBGC
is responsible for providing assets to pay these benefits. The plans
pay annual premiums to the PBGC for this insurance coverage.
Contributions to multiemployer pension plans by employers like ABF
have skyrocketed in recent years for a number of reasons. First, these
plans were established at a time when the trucking industry was heavily
regulated by the federal government, which imposed barriers to entry
and rate regulation. When the Congress deregulated the trucking
industry in 1980, this caused a fundamental shift in the economics of
the industry. Since then, the industry has become much more competitive
and, as a result, thousands of trucking companies have gone out of
business. Under the multiemployer system, due to changes implemented by
the Employee Retirement Income Security Act of 1974, as amended
(ERISA), the remaining companies in the plan are effectively
responsible for the continued funding of all benefits under the plan,
including benefits of participants formerly employed by bankrupt or
defunct companies. This is a fundamental difference from single
employer pension plans, where the employer is responsible only for the
benefits it promised to its own employees. While the number of
companies contributing to trucking industry multiemployer pension plans
has been greatly reduced, the number of retirees who receive pension
benefits has increased. Thus, an unsustainable demographic situation
has developed where an ever-declining number of employers are
responsible for funding the benefits of retirees with whom they have no
connection. For example, ABF understands that more than 50 cents of
every dollar that it contributes to the Central States, Southeast and
Southwest Areas Pension Fund (the ``Central States Pension Fund'') goes
to fund benefits of former employees of bankrupt or defunct trucking
companies, so-called ``orphan'' participants.\1\
---------------------------------------------------------------------------
\1\ On the other hand, multiemployer plans that are less dependent
on the trucking industry and have a more diverse base of contributing
employers, such as the Western Conference of Teamsters Pension Fund,
are in much stronger financial positions.
---------------------------------------------------------------------------
Second, ERISA imposes potentially catastrophic ``withdrawal
liability'' on companies that withdraw from underfunded plans. When an
employer withdraws from a multiemployer pension plan, it owes its
proportional share of the plan's unfunded vested benefits. Many
withdrawals have occurred in the bankruptcy context, and plans
typically collect only pennies on the dollar of the withdrawal
liabilities owed by these bankrupt or defunct companies. For example,
when Consolidated Freightways withdrew from the Central States Pension
Fund following its bankruptcy in 2002, the Fund collected a small
fraction of the nominal $318 million withdrawal liability. This
shortfall ultimately must be funded by ABF and the other remaining
employers. Withdrawal liability has also deterred new employers from
contributing to the plans and investors from providing additional
capital to multiemployer plan contributing employers.
Third, the Pension Protection Act of 2006 (PPA) significantly
increased required contributions to underfunded plans, particularly
those in endangered (``Yellow Zone'') and critical (``Red Zone'')
status. When the PPA was enacted, interest rates had not dropped to
their current historically-low levels, and the stock market decline
following Lehman Brothers' bankruptcy had not occurred. In combination,
those two events drove up the value of plans' liabilities, while
reducing the value of their assets. For example, UPS withdrew from the
Central States Pension Fund at the end of 2007 and paid the Fund $6.1
billion in withdrawal liability. The Fund's losses from the stock
market decline in 2008 exceeded this payment from UPS. Unfortunately,
the PPA gives multiemployer plan trustees little flexibility to address
changed circumstances.
ABF's Multiemployer Plan Contributions
Based on the most recent annual funding notices ABF has received
from the multiemployer pension plans to which it contributes,
approximately 62% of ABF's contributions are made to plans that are in
critical/Red Zone status (including the Central States Pension Fund).
Close to half of ABF's total contributions are made to the Central
States Pension Fund. Plans in endangered/Yellow Zone status represent
12% of ABF's contributions. The remainder of ABF's contributions are
made to ``Green Zone'' plans like the Western Conference of Teamsters
Pension Fund.
Approximately 75% of ABF's workforce is represented by the
International Brotherhood of Teamsters (IBT). ABF is a party to the
National Master Freight Agreement (NMFA) with the IBT, and the current
five-year agreement expires March 31, 2013. In order to comply with the
requirements of the PPA applicable to Red Zone and Yellow Zone plans,
the current version of the NMFA has imposed a 7% annual, compound
multiemployer pension plan contribution increase on ABF since it went
into effect in 2008. Over the course of the five-year term of the
current NMFA, that means a total compounded PPA-required contribution
increase of more than 40% relative to the rate in effect before the
NMFA became effective in 2008. ABF has contributed the following
amounts to multiemployer pension plans in recent years: $104 million in
2009; $120 million in 2010; and $133 million in 2011. Those
contributions alone represent almost 8% of ABF's total revenues from
those years.
ABF's Competitive Situation
ABF operates in a highly competitive industry that consists
predominantly of nonunion freight transportation motor carriers. ABF's
nonunion competitors have much lower employee benefit cost structures,
and some carriers also have lower wage rates for their freight-handling
and driving personnel. In addition, wage and benefit concessions
granted by the IBT to a key union competitor allow for a lower pension
cost structure than that of ABF. During the recessionary economic
conditions that began in 2007 and worsened in 2008, competitors with
lower labor cost structures reduced freight rates, resulting in
increased pricing competition in ABF's primary market segment.
Furthermore, ABF's labor costs are strongly impacted by its
contributions to multiemployer plans that are used to pay benefits to
``orphan'' retirees who were never employed by ABF. As noted above,
more than half of ABF's contributions to the Central States Pension
Fund are used to fund benefits of retirees of companies that are no
longer contributing employers. Many other multiemployer plans to which
ABF contributes also have large numbers of orphan retirees.
Contributions to multiemployer pension plans are the main cost item
compromising ABF's competitiveness. For example, according to an April
24, 2012 study prepared by Mercer/WRG's Information Research Center,
ABF's contributions for pension benefits of $10.17 per hour worked are
257% higher than those for average union employers. Pension
contributions represent almost 21% of ABF's total compensation costs,
compared to less than 8% for the average union employer. Not only are
the levels higher for ABF, they are increasing more rapidly, with a
growth rate of 8% per year since 2007 compared to 4.2% for the average
union employer and 2.9% for the average nonunion employer. If ABF's
current contribution levels were frozen at current levels, and
contribution rates for average union employers grew at their current
rate of approximately 4.2% annually, it would take more than 30 years
just for those contribution levels to match ABF's current level. The
comparable figure for the average nonunion employer is 88 years.
The comparison is even worse with respect to ABF's nonunion
competitors. For 2011, ABF's average pension plan contribution for its
operational employees was $17,392 per employee. The average retirement
plan contribution by ABF's key nonunion competitors was $1,131 per
employee for that year. Thus, ABF's 2011 per-employee pension costs
were 1437% higher than those competitors, who are not responsible for
funding legacy liabilities of retirees they never employed.
Relative to its nonunion competitors, ABF had market share of
around 5.5% in 2004. That has dropped to below 4%. Unless multiemployer
pension plan contribution obligations are brought under control, ABF
will continue to lose market share. ABF's significantly higher cost
structure that results from the multiemployer pensions plans has been
highlighted in numerous financial analysts' reports and is reflected in
the Company's stock price. For example:
``[W]e see an above-peer cost structure keeping ABF from generating
earnings based on what the market will offer. ABF has a higher cost
structure than union and non-union peers, which could keep the company
at a competitive disadvantage * * * an above-peer cost structure and
persistent challenges in the core less-than-truckload business present
meaningful long-term risks.'' Anthony Gallo, Senior Analyst, Wells
Fargo
``We believe better relative tonnage levels will not solve the
problem of [ABF's] reduced profitability. It appears that a structural
change in compensation and benefits to its Teamster workforce is
necessary to better align costs with volumes * * * without material
progress [on compensation issues] Arkansas Best has structurally higher
costs than its peers stunting potential growth.'' Chris Wetherbee,
Research Analyst, Citi
``The most prevalent risks, in our opinion, to the performance of
ABFS' shares are the cyclical nature of LTL freight and legacy cost
headwinds from its unionized workforce. Additional risks include the
presence of well-capitalized integrated carriers (FedEx and UPS) in the
LTL market and uncertainty surrounding multi-employer pension
liabilities.'' Todd Fowler, Vice President, KeyBanc Capital Markets
ABF's stock traded at $12.29 on June 15, 2012. The 52-week high as
of that date was $27.44, more than double the current price. Before the
2008 financial crisis, ABF's stock price exceeded $45 per share.
If pension obligations are ignored, ABF's cost structure is in line
with that of its key competitors. It is ABF's multiemployer pension
obligations that require it to charge prices that its competitors are
able to undercut. This creates a vicious cycle, where higher prices
result in reduced market share, revenues drop, and ABF's ability to
invest in its business are jeopardized.
A solution to the multiemployer pension plan crisis is critical for
ABF and other trucking companies.
Conclusion
ABF is working with a number of groups to formulate multiemployer
pension plan reforms that make sense for plans, active and retired
employees, and contributing employers. Many multiemployer plans are in
an untenable situation. Further raising of contribution rates will
jeopardize the ability of employers to survive and continue
contributing to the plans. The PPA restrains plans' abilities to accept
reduced contribution rates for employers in financial distress. Plans
cannot survive without contributing employers, but current legal rules
make it difficult for plans to make changes that are necessary for the
long-term viability of the plans and their contributing employers. Plan
trustees currently have few tools to address the structural problems
faced by the plans and the employers on which they depend. ABF strongly
supports efforts to save the multiemployer pension plans that its
active and retired employees depend on for their retirement income.
In addition, action is required because the PBGC lacks the
resources to fulfill the multiemployer plan obligations it expects to
incur under current law. In its 2011 annual report, the PBGC noted that
the financial deficit of its multiemployer program doubled in its most
recently-completed fiscal year. The PBGC further stated that ``the
greater challenge, however, comes from those plans that have not yet
failed: our estimate of our reasonably possible obligations
(obligations to participants), described in our financial statements,
increased to $23 billion.'' Without sufficient contributing employers,
plans will eventually become insolvent and the PBGC will have to assume
responsibility for the benefits under those plans. Currently, all of
the PBGC's multiemployer program revenues come from premiums charged to
multiemployer plans themselves. However, if the PBGC cannot fulfill its
benefit guarantee obligations, there will be great pressure on the
federal government to provide additional funding to the PBGC from
general revenues. By taking action now, Congress can help avert a
crisis that otherwise is almost certain to occur.
I would be pleased to answer any questions that the members of the
Subcommittee may have. Thank you.
______
Chairman Roe. Thank you.
Mr. Sander?
STATEMENT OF MICHAEL SANDER, ADMINISTRATIVE MANAGER, WESTERN
CONFERENCE OF TEAMSTERS PENSION TRUST
Mr. Sander. Chairman Roe, Ranking Member Andrews, and
members of the subcommittee, thank you for inviting me to
testify today about the Western Conference of Teamsters Pension
Plan. My name is Mike Sander. I am the administrative manager
of the plan.
The Western Conference Plan, the largest multiemployer plan
in the country, provides secure retirement benefits to over
500,000 active and inactive vested employees and retirees.
Since 1955 we have provided retirement benefits to over 300,000
additional retirees and their families.
Plan assets today exceed $30 billion. Annual employer
contributions total $1.3 billion. Last year we paid $2.2
billion in benefits to plan participants in all 50 states.
Almost 1,700 employers engaged in over 50 different
industries participate in our plan. We continue to add new
employers and employee groups. These large and small employers
are engaged in a variety of industries: grocery, food
distribution, package delivery, manufacturing, beverage
bottling, law enforcement, waste disposal, health care, and
many others.
Some are brand names: United Parcel Service, Safeway, Coca-
Cola, Waste Management. But others are small businesses, like
W.W. Clyde and Company, in Orem, Utah; McGree Contracting
Company in Butte, Montana; and Whitewater Building Materials in
Grand Junction, Colorado.
Over 74 percent of employers that participate in the
Western Conference Plan are small businesses with 50 or fewer
employees. In fact, nearly half have 20 or fewer employees.
The Western Conference Plan is designed to accommodate a
mobile workforce. A recent analysis of our active workers
reveals that over 25 percent of participants over the course of
their career have worked for two or more contributing employers
to the plan. Participants work in a host of occupations,
including truck drivers, nurses, clerks, warehouse workers,
food processors, police officers, highway maintenance workers,
construction workers, and others.
The plan distributes a specified, regular amount of funds
to retirees, determined by historical employer contribution
rates, ages, lengths of service, and other factors. Because
retirees are guaranteed a fixed level of retirement income the
plan provides certainty and stability to retirees even in
unpredictable economic times. The plan limits risks to both
participants and employers by pooling contributions from a
variety of companies and industries.
Our goal is full funding. The trustees have always used a
conservative investment strategy and benefit plan design. The
plan has been in the green zone, as that term is defined by the
Pension Protection Act, since the law was first passed in 2006.
At the start of 2008, just before the market crash, our plan's
funded percentage was a robust 97.1 percent.
The plan's management and labor trustees have a long
history of working together to strengthen the plan and promote
the well-being of plan participants. After the dot-com market
slide in 2002 the trustees agreed to cut future benefits in
half in order to get back to full funding.
Like all institutional investors, the Western Conference
Plan was harmed by the unprecedented collapse of the markets
worldwide in 2008. Our asset values dropped by 20 percent, over
$6.2 billion. Congress passed common sense legislation in 2010
to allow plans to spread these losses over a longer period of
time. The plans funded status for 2012 is now projected to be
90.3 percent.
The Western Conference Plan strongly supports transparency.
Financial information about the plan, including our audited
financial statements, our Form 5500s, actuarial reports, annual
funding notices, and other documents are all readily available
for all to see. We encourage employers, participants, and other
stakeholders to review our financial data on our Web site.
The trustees strive to maximize operational efficiencies.
Through investments in technology and a streamlined processing
system computers now automate much of daily processing.
Employers can report their monthly hours activity over the
Internet and send their contributions electronically to a
clearinghouse where available funds are swept immediately into
the plan's investment pools. The plan uses only seven cents of
every contribution dollar to fund all plan operations, leaving
93 cents of contributions and 100 percent of investment income
to support funding levels.
Thank you for your consideration of our views. The Western
Conference Plan is a long-term enterprise. We have been
successful for over 50 years and we intend to provide
substantial retirement security for the next 50 years and
beyond.
We look forward to working with you and I would be happy to
answer your questions.
[The statement of Mr. Sander follows:]
Prepared Statement of Michael M. Sander, Administrative Manager,
Western Conference of Teamsters Pension Plan
Chairman Roe, Ranking Member Andrews, and Members of the
Subcommittee, thank you for inviting me to testify today about the
Western Conference of Teamsters Pension Plan. My name is Mike Sander,
and I am the Administrative Manager of the Plan.
The Western Conference Plan, the largest multiemployer pension plan
in the country, provides secure retirement benefits to over 500,000
active and inactive vested employees and retirees. Over the life of the
Plan since 1955, we have provided retirement benefits to over 300,000
additional retirees and their families. The Plan covers the 13 western
states--Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana,
Nevada, New Mexico, Oregon, Utah, Washington and Wyoming. Plan assets
exceed $30 billion, and annual employer contributions total $1.3
billion. Last year, we paid $2.2 billion in benefits to plan
participants in all 50 states and the District of Columbia.
Almost 1,700 employers, engaged in over 50 different industries,
participate in the Plan. We continue to add new employers and employee
groups. These large and small employers are engaged in a variety of
industries: grocery and food distribution, package delivery,
manufacturing, clerical, beverage bottling, law enforcement,
entertainment, waste disposal, health care and others. Some of them
will be familiar to you: United Parcel Service, Safeway, Coca-Cola, and
Waste Management. Others are not household names because they are small
businesses, like W.W. Clyde & Company in Orem, Utah, McGree Contracting
Company in Butte, Montana, and Whitewater Building Materials in Grand
Junction, Colorado. Over 74 percent of employers that participate in
the Western Conference are small businesses with 50 or fewer employees.
The Western Conference Plan is designed to accommodate a mobile
workforce, providing pension portability to participants who may find
it necessary to seek employment in a different industry or elsewhere in
the 13 western states, or even beyond. A recent analysis of our active
workers reveals that over 25% of participants over the course of their
career have worked for two or more contributing employers. Participants
work in a host of occupations, including as truck drivers, nurses,
clerks, warehouse workers, food processors, police officers, highway
maintenance workers, and construction workers.
The Western Conference Plan distributes a specified, regular amount
of funds to retirees, determined by historical employer contribution
rates, age, length of service, and other factors. Because retirees are
guaranteed a certain level of retirement income, the Plan provides
certainty and stability to retirees, even in unpredictable economic
times. The Plan limits risk to both participants and employers by
pooling contributions from a variety of companies and industries.
Our Plan's goal is full funding. The trustees have always used a
conservative investment strategy and benefit plan design. The Plan has
been in the ``green zone,'' as defined by the Pension Protection Act,
since that law was passed in 2006. At the start of 2008, just before
the market crash, the Plan's funded percentage was a robust 97.1%.
The Plan's management and labor trustees have a long history of
working together to strengthen the plan and promote the well-being of
participants. The trustees take their responsibilities for funding very
seriously. After the dot-com market drop in 2002, for example, the
trustees agreed to cut benefit accruals by one-half to get back to full
funding. Over the many decades the Plan has operated, the management
and labor trustees have worked well together, resolving differences
through a rational decision-making process focused on how best to
achieve the key objective of providing retirement security to the
hundreds of thousands of employees who participate in the Plan.
Like all institutional investors, the Western Conference Plan was
harmed by the unprecedented collapse of the markets worldwide in 2008.
Our asset values dropped by 20%, over $6.2 billion. Congress passed
common sense legislation in 2010 to allow plans to spread those losses
over a longer period of time. These important changes came at no cost
to taxpayers or the government. Despite the 2008 crash, the Western
Conference Plan's funded status for 2012 is projected to be 90.3%.
The Western Conference Plan strongly supports transparency.
Financial information about the Plan, including our audited financial
statements, Form 5500s, actuarial reports, annual funding notices, and
other documents, is readily available for all to see. We encourage
employers, participants and others to review our financial data at
http://www.wctpension.org./downloads/downloads.html.
The trustees strive to maximize operational efficiencies. Through
investments in technology and a streamlined processing system,
computers now automate much of daily processing. Employers can report
their monthly hours activity over the internet and send their
contributions electronically to a clearing house where available funds
are swept daily into investment vehicles. The Plan uses only seven
cents of every contribution dollar to fund all Plan operations, leaving
93 cents of contributions and 100% of the investment income to support
funding levels.
Since 1995, the Plan has provided an annual personal benefit
statement to each active participant. The statement shows the
participant's total accrued benefits and the amount earned in the
previous year, an itemization of hours worked and employer
contributions for that year, and beneficiary information. This gives
participants an important retirement planning tool.
The Plan investments are made in accordance with an asset
allocation model designed to provide strong returns consistent with a
variety of economic environments. The Trust uses indexing strategies to
provide effective diversification within the portfolios, while keeping
net investment costs low. The Plan leverages its asset size into
advantageous pricing. Manager selection is done with an eye to proven
long-term results. Strong returns from proven asset managers at low net
cost supports the highest benefit levels prudently possible.
Thank you for your consideration of our views. The Western
Conference Plan is a long-term enterprise. We have been successful for
over 50 years, and we intend to provide substantial retirement security
for the next 50 years and beyond. We look forward to working with you,
and I would be happy to answer your questions.
______
Chairman Roe. Thank you, Mr. Sander.
Mr. Shapiro?
STATEMENT OF JOSH SHAPIRO, DEPUTY EXECUTIVE DIRECTOR FOR
RESEARCH AND EDUCATION, NATIONAL COORDINATING COMMITTEE FOR
MULTIEMPLOYER PLANS
Mr. Shapiro. Chairman Roe, Ranking Member Andrews, and
members of the subcommittee, it is an honor to speak with you
today on this important topic. My name is Josh Shapiro and I am
the deputy director of the National Coordinating Committee for
Multiemployer Plans.
Multiemployer pension plans provide vital retirement income
security to millions of working-class Americans. By serving
workers characterized by very small employers and mobile
workforces these plans cover individuals who simply would not
have access to quality retirement benefits without them.
As we discuss the challenges facing multiemployer plans a
few features of these plans are worth noting. The first is that
each multiemployer plan is governed by a board of trustees that
consists of equal representation from both management and
labor. The contributions that companies make to these plans go
into a trust fund that is managed by the board of trustees, and
this trust fund operates independently of either bargaining
party.
There are currently approximately 1,450 multiemployer plans
in the country covering approximately 10 million workers. The
NCCMP has estimated that the aggregate assets held by these
plans totals approximately $450 billion.
As you all know, the 2008 financial crisis and ensuing
recession have had devastating effects on many sectors of our
economy. Multiemployer plans are no exception. These plans are
active investors in the equity markets, and just as they
experienced tremendous asset growth during the boom years of
the 1990s they also experienced enormous declines in their
asset holdings in recent years. What you may not know is that
the tax code that was in existence in the 1990s did not allow
these plans to store those asset gains as insurance against
future losses.
A unique feature of multiemployer plans is the fact that
contributions to the plans are governed by collective
bargaining agreements. Once those contributions are negotiated
there is no simple way to stop or reduce them when the plan is
overfunded.
Additionally, in the late 1990s contributions to an
overfunded multiemployer plan were not tax deductible to
employers, and in many cases such contributions would trigger
excise tax penalties. This unfortunate situation meant that as
a practical matter many plans had no choice other than to raise
their benefit levels in order to eliminate the overfunding and
preserve the tax deductibility of contributions. This inability
to hold those investment gains as insurance against future
losses left multiemployer plans especially vulnerable to
declines in capital markets.
The 2008 stock market crash reduced the funded position of
multiemployer plans by an average of approximately 30 percent.
The average plan was 90 percent funded immediately prior to the
crash. After the crash the contributions necessary to fund
these plans in many instances more than tripled.
The response of the multiemployer community to this crisis
has been profound. Across all sectors employees have accepted
lower wages and lower benefits while employers have had to make
larger contributions during a historically difficult business
climate. NCCMP data indicates that over 80 percent of
multiemployer plans have taken one or more of these steps.
While these responses have been painful they have been
largely successful. Recent survey data indicates that well over
60 percent of multiemployer plans are now in the PPA--the
Pension Protection Act--green zone, indicating a healthy funded
position.
While the news headlines will always focus on the small
number of plans that are deeply troubled and may not be able to
recover from the crisis, the fact is that the majority of plans
will be able to fully recover and pay benefits to future
generations of participants.
However, this recovery has come at a steep price. Younger
participants have had their faith in the system shaken as their
contributions have risen and benefits have declined, while the
sponsoring companies are concerned that they are effectively
acting as insurers against the stock market.
The NCCMP has convened a Retirement Security Review
Commission consisting of both labor and management
representatives whose mission is to study the situation facing
the plans and to develop a comprehensive proposal for reform.
The guiding principles of this commission are that employer
financial risk must be mitigated while at the same time
participant retirement income security must be preserved.
During this time of great challenge it is tempting to
conclude that the multiemployer pension system is broken and
should be abandoned. It would be a great tragedy if this fate
were to befall a system that has been so beneficial to so many
millions of people for so many decades. The system does not
need to go away but it does need to evolve.
I am confident that the upcoming recommendations of the
NNCMP commission will provide a solid foundation for a
retirement system that will meet the needs of both the
companies that support the plans and the employers that
participate in them.
Thank you very much for your kind attention, and I
sincerely look forward to working with you and your staff
members in the coming months as you work to implement necessary
reforms.
[The statement of Mr. Shapiro follows:]
Prepared Statement of Josh Shapiro, Deputy Director for Research and
Education, National Coordinating Committee for Multiemployer Plans
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 Josh Shapiro. I am the Deputy Director of the National Coordinating
Committee for Multiemployer Plans (the ``NCCMP''). The NCCMP is a non-
partisan, non-profit advocacy corporation created in 1974 under Section
501(c)(4) of the Internal Revenue Code. It is the only organization
created for the exclusive purpose of representing the interests of
multiemployer plans, their participants and sponsoring organizations.
In addition to my role at the NCCMP, I am also a Fellow of the Society
of Actuaries, a Member of the American Academy of Actuaries, and an
Enrolled Actuary under ERISA. I serve on the American Academy of
Actuaries Pension Committee, and on its Multiemployer Subcommittee.
The sponsors of multiemployer pension plans are predominately small
businesses that operate in industries characterized by highly fluid
employment patterns. For over 60 years multiemployer plans have made it
possible for these companies to provide their employees with modest and
reliable retirement income. Both the small size of the sponsoring
employers and the mobility of their workforces make it impractical for
them to achieve this objective with single-employer pension plans. For
this reason, millions of middle class Americans have financial security
in retirement that is entirely attributable to the existence of
multiemployer pension plans. According to the 2011 PBGC Annual Report,
there are currently approximately 1,450 multiemployer plans in the
country covering over 10 million participants. While precise figures
are difficult to obtain, the NCCMP has estimated that the aggregate
assets held by these plans totals approximately $450 billion.
Multiemployer plans are the product of collective bargaining
between one or more unions and at least two unrelated employers. The
collective bargaining process establishes the rate at which employers
will contribute to the plan, frequently expressed as a dollar amount
per hour of work. The contributions go into a trust fund that is
independent of either bargaining party. By law, the trustees of this
fund consist of equal representation from both management and labor.
With input from their professional advisors, the trustees determine the
benefit provisions of the pension plan, oversee the investment of the
assets, and administer the collection of contributions and the payment
of benefits. As trustees, the representatives of both sides of the
bargaining table have fiduciary responsibility to manage the plan for
the sole and exclusive benefit of the plan participants.
While most often associated with the 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, or national basis, and cover populations that
range from as small as a few hundred participants to as large as
several hundred thousand participants.
The Experience of Multiemployer Plans in the 1990's
Since the establishment of ERISA's pre-funding requirements,
multiemployer plans have typically been very well funded. This was
especially true in the late 1990's when exceptionally strong stock
market returns resulted in many plans having assets that were
significantly larger than their liabilities. While on the surface this
is a highly desirable result, it is ironic that this period actually
set the stage for the challenges that the plans face today. To see why
this is the case, it is first necessary understand how actuaries
calculate the funding needs of multiemployer plans through the use of
long-term assumptions and methods.
Long-term actuarial funding rests on the idea that the financial
markets will experience periods of strong investment returns and
periods of poor investment returns. The actuary determines the funding
requirements using an assumed rate of return on plan assets that
represents his or her best estimate of the long-term average, with the
understanding that over short periods of time the assets may perform
significantly better or worse than this average. The core idea is the
notion that short-term fluctuations will tend to offset each other, and
the plan can achieve stable long-term funding through the use of level
and predictable contributions. In order for this funding approach to
function properly, it is necessary for plans to maintain surplus
positions during periods of unusually strong asset returns, as these
surpluses will serve to offset the losses that the plans incur during
periods of unusually poor returns.
During the late 1990's, very strong investment returns resulted in
the majority of multiemployer plans having assets that exceeded their
liabilities. While the long-term approach to funding dictates that
plans need to preserve this overfunding to offset future investment
losses, two unique features of multiemployer plans prevented them from
remaining in a surplus position. The first of these features is the
fact that contributions to multiemployer pension plans are specified in
collective bargaining agreements. There is no simple mechanism for
stopping or reducing these contributions when the plan is overfunded.
The second unique feature of multiemployer plans is the fact that
during the 1990's, contributions to an overfunded multiemployer pension
plan were not tax deductible to the employers. In many cases, not only
would contributions to these plans have been non-deductible, they would
also trigger excise tax penalties.
The combination of these two features placed the trustees of
multiemployer pension plans in a very difficult position. The employers
were obligated by the collective bargaining agreements to contribute to
the plans, but due to the overfunding of the plans, these contributions
would not be tax deductible, and might trigger excise tax penalties. As
a practical matter, the trustees had no choice but to raise the level
of benefits that the plans provided so that the plan assets would no
longer exceed the liabilities. Essentially, they were forced to spend
the funding surpluses instead of being able to preserve them as
insurance against a market downturn. The NCCMP has estimated that
upwards of 70% of all multiemployer plans found themselves in this
position leading up to the millennium. The Pension Protection Act of
2006 (PPA) addressed this shortcoming in the tax code, but
unfortunately this change was too late to help most plans.
It is worth noting that the situation facing single-employer
pension plans was very different. The most obvious difference was the
fact that the sponsors of these plans had the option to simply stop
contributing to the plans during periods of overfunding. Many plan
sponsors took advantage of this option, and it was not uncommon for
these companies to go ten or more years without making any
contributions to the plans at all. At the same time, there was no need
for these plans to raise their benefit levels to eliminate the
overfunding, so many of them remained significantly overfunded year
after year. Some observers have noted that single-employer plans have
historically had higher funding levels than multiemployer plans. This
observation is true, but most authors either miss, or choose to ignore,
the fact that the ability of single-employer plans to effectively
maintain a surplus position gave them an inherent funding advantage
over multiemployer pension plans.
Market Turmoil of the 2000's
Having been unable to maintain a surplus position during the late
1990's, multiemployer pension plans were extremely vulnerable to the
market turmoil that characterized the decade between 2000 and 2010.
Despite the downturn that occurred in the years 2000 to 2003, by the
beginning of 2008 multiemployer plans were very much back on track.
NCCMP survey data indicates that at the beginning of that year, the
average plan was approximately 90% funded. The Pension Protection Act
of 2006 (PPA) established criteria for determining when a multiemployer
plan should be considered in `endangered status' or `critical status'.
NCCMP survey data shows that at the beginning of 2008, only 9% of plans
were considered to be `critical', with an additional 15% classified as
`endangered'.
The 2008 financial market crash and ensuing recession had a
profound impact on the funding position of multiemployer plans. The S&P
500 Index lost 37% that year, and the average multiemployer plan
experienced a decline of approximately 30% in its funded level
(determined using the market value of assets). For many plans with
funding ratios of 90% or better prior to the crash, the level of
contributions needed to responsibly fund the liabilities more than
tripled. This situation placed enormous burdens on companies that were
already contending with a historically difficult economic climate in
the years following the 2008 crisis. The recession also presented a
separate challenge for he plans themselves, as they depend on
employment levels to generate contribution income. As an analogy, the
2008 crash gave the plans a hole from which they need to dig out, and
the subsequent recession substantially reduced the size of their
shovel.
It is critical to note that the funding challenges currently facing
multiemployer plans are not the result of reckless investing,
aggressive assumptions, or unreasonably large benefits. NCCMP survey
data clearly documents this conclusion. This data indicated that at the
beginning of 2008, the average multiemployer plan held approximately
57% of its assets in equities, 27% in bonds, 6% in real estate, and the
remaining 10% spread across cash, hedge funds, private equity, and
other investments. This asset mix is in line with the portfolios of
pension funds in other sectors, and is also consistent with the
strategy that investment professionals recommend to individuals who
need to manage their own retirement savings through defined
contribution plans.
Regarding actuarial assumptions, the vast majority of multiemployer
pension plans budget for average returns of 7.5% or less on their
investments. This figure represents a reasonable estimate of the asset
returns that are attainable to investors with very long-term time
horizons. NCCMP survey data indicates that the median benefit that a
multiemployer plan pays to a retiree is approximately $900 per month,
which is just under $11,000 per year. As most retirees have been
receiving their benefits for many years, a better measure of the
benefits that the plans are currently promising is to look at the
median amount paid to a recent retiree. This figure is approximately
$1,400 per month, or just under $17,000 per year. By any measure, these
are modest retirement benefits that, when combined with Social Security
and personal savings, are just enough to allow retired participants to
have a decent standard of living.
The Road to Recovery
When a multiemployer plan encounters adverse experience, the
trustees and bargaining parties have two main tools at their disposal
to improve the funded position of the plan. The first tool is to
allocate additional contributions to the plan. When this tool is used,
it has a direct effect on both the employees and the employers. For the
employees, it serves to reduce their overall compensation, since absent
the funding challenges of the pension plan, these dollars would have
been available for other purposes. In fact, in many severely troubled
plans employees have accepted reductions in their paycheck wages in
order to allocate more money to the pension plan. For the employers the
additional contributions make it more difficult for them to compete in
the market place, often against competitors that have not chosen to
provide comparable retirement benefits to their employees. NCCMP survey
data indicates that more than 70% of multiemployer plans have responded
to the 2008 funding crisis with increased contributions.
The second tool available for the purpose of improving the funded
position of a multiemployer pension plan is to reduce the rate of
future benefit accrual. This action has minimal immediate effect on the
plan as it does not affect benefits that participants have already
earned. What it does do is allow a larger portion of the ongoing
contribution income to pay for the funding shortfall, as a lesser
portion of these contributions is required to cover the cost of
participants' benefit growth. In contrast to the first tool that
impacts both the employees and the employers, reducing the rate of
benefit accrual only has a direct impact on the employees. NCCMP survey
data indicates that approximately 40% of multiemployer plans have
responded to their funding challenges by reducing the rate of benefit
accrual.
The actions that multiemployer boards of trustees and sponsoring
employers have taken in response to the financial crisis have been
difficult for all stakeholders. However, these actions have not only
been necessary, they have been effective. While NCCMP survey data
indicates that only 20% of plans were in the PPA `green zone'
immediately following the 2008 crash, current data indicates that this
figure now exceeds 60%. An occasional, and particularly ill informed,
criticism of multiemployer plans is that they have ignored their
problems. Regardless of how someone feels about multiemployer pension
plans, any thorough analysis of their recent history will demonstrate
the commitment that both the employees and employers have to the plans,
and the sacrifices they have made to support them.
Despite the efforts of the sponsors to take the measures necessary
for recovery, a small number of plans have suffered more damage than
they will be able to endure. Primarily these plans come from industries
in which economic shifts have greatly hindered their ability to raise
the necessary contribution income. In particular, there are two
specific very large plans that have suffered from the unintended
consequences of unrelated public policy decisions. In one of these
plans, 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 plan, 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. In
both instances, the plans had managed to remain well funded until the
unprecedented market collapse imposed irrevocable harm on the plans'
investments. While these two plans represent major challenges to the
multiemployer community, and they are the subject of frequent media
attention, their unique circumstances are not representative of the
vast majority of multiemployer plans.
NCCMP Retirement Security Review Commission
The multiemployer funding provisions of the Pension Protection Act
of 2006 (PPA) will sunset at the end of 2014. The challenges currently
facing multiemployer plans make it clear that in order to survive and
grow in the future, the system requires a greater degree of flexibility
than is currently available. 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 PPA 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.
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 of 2011 and meets monthly
to evaluate their collective experience with current laws and
regulations and develop ideas for reform and improvement.
The group has identified the following key objectives:
Ensure that any proposed changes to the law or regulations
will allow the plans to continue to provide regular and reliable
retirement income to participants.
Reduce the financial risks to employers so that these
risks do not encourage companies to leave the system or prevent new
companies from joining the system.
The Commission has established an ambitious time table for its
deliberations with a target of developing legislative recommendations
later this summer. We look forward to keeping your Committee staff
apprised of our progress, and to discussing our recommendations when
they are available. We are confident that labor, management, and
government will be able to work together to achieve the necessary
enhancements that will enable multiemployer plans to survive and
continue to provide affordable, reliable and secure retirement income
to future generations of Americans.
______
Chairman Roe. Thank you, Mr. Shapiro.
Mr. Ring?
STATEMENT OF JOHN F. RING, PARTNER,
MORGAN, LEWIS & BOCKIUS LLP
Mr. Ring. Chairman Roe, Ranking Member Andrews, and members
of the subcommittee, thank you for the opportunity to
participate in this hearing today. I am a partner with the law
firm of Morgan, Lewis, and Bockius, and as part of my practice
I am--I serve as management co-counsel to a number of
multiemployer pension plans, and our firm represents dozens of
multiemployer plans in traditionally unionized industries.
In addition, I have negotiated on behalf of employers
numerous collective bargaining agreements which set for the
terms of and companies--the terms of companies' participation
in and contributions to multiemployer plans. So I have had the
benefit of seeing multiemployer plan issues both from the
bargaining table and the trustees table.
For more than 50 years multiemployer plans have played an
important role in the overall retirement scheme of this
country. In many unionized industries they are the retirement
system for millions of Americans. And while many of these plans
may be in good shape, like Mr. Sanders, the--there are
significant numbers that are not and they are headed towards
insolvency.
Before discussing the plans themselves I would like to
briefly talk about the companies that contribute to these
plans. There is a tendency to focus exclusively on the plans
and their beneficiaries, but consideration also needs to be
paid to the companies that participate in and pay for these
multiemployer plans. Without them the plans would be history.
And if the financial burden to sustain these plans becomes too
great then we run the risk of even more employers who provide
good jobs with good benefits going out of business.
Unfortunately, the number of companies that contribute to
these plans has dwindled significantly in the past several
decades. This has resulted in an ever increasing and in some
cases unsustainable burden on those companies that remain.
In some industries, increasing employer contributions to
multiemployer plans is simply not a viable option. In order to
comply with requirements of current law some plans would
require--or set employer contribution rates at upwards of $20
per hour. That is $20 per hour of each hour worked by their
active employees. It is obviously unsustainable.
So why, then, are some of the multiemployer plans in
trouble now and how bad is it? I think boiled down to its
simplest explanation the problem has been caused by a
combination of four things: one, investment loss; two, rising
liabilities due to low interest rates; three, serious
demographic issues; and fourth, spiraling liabilities left by
withdrawing employers.
These four things have put some multiemployer plans on an
irreversible path towards insolvency, and for some plans the
collapse is closing in quickly and they are projected to run
out of money within 5 years.
Investment returns and interest rates over the last decade
have ravaged most defined benefit pension plans, and
multiemployer plans were no exception. I would point out that
many of these plans now facing insolvency were in very good
shape--some upwards of 100 percent funded--more than a decade
ago.
The economic downturn only exacerbated the significant
demographic issues facing multiemployer plans. As the size of
the country's unionized workforce in a number of industries has
shrunk and continues to do so the ratio of retirees to active
participants also continues to grow greater. And many of these
retirees worked for companies who are gone or have withdrawn
and are no longer contributing. And as such, the benefits of
these retirees must be paid for by the remaining employers.
What this has meant is higher employer contributions, which
further threaten the financial viability of these last
remaining contributing employers, many of which are already
struggling because of the economy and because of the
significant cost disadvantages they face vis-a-vis their
nonunion competition. It has become a vicious cycle.
Situations like the one playing out in the current Hostess
bankruptcy will only make matters worse. There, the bankruptcy
judge may allow that company to walk away from all of the
multiemployer pension plans in which it previously contributed,
and to do so with no withdraw liability. For a number of
smaller bakery funds this will mean certain insolvency and will
leave the remaining employers with substantial liability.
So it is not a pretty picture for some of these
multiemployer plans. And what is worse, for plans in critical
status that have reduced future benefits to the maximum extent
possible and have raised contributions to the maximum extent
possible, there are simply no tools left that trustees can use
to avoid the slide towards insolvency. And regrettably, there
is nothing in the current law that gives responsible government
agencies--the IRS, the PBGC, or the DOL--any ability to provide
meaningful assistance to these plans prior to them running out
of money.
So looking forward what is the answer? With the sunset of
the PPA provisions in 2014, failure to address the problem in a
timely legislative solution will mean that these insolvent
plans will end up at the PBGC sooner rather than later. That is
the current law. This means that the status quo will result in
the government taking on a portion of these liabilities when
these plans become insolvent.
Mr. Chairman, thank you for giving me the opportunity to
testify and I look forward to answering any questions you may
have.
[The statement of Mr. Ring follows:]
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Chairman Roe. Thank you, Mr. Ring.
Mr. Henderson?
STATEMENT OF SCOTT M. HENDERSON, VICE PRESIDENT & TREASURER,
THE KROGER CO.
Mr. Henderson. Chairman Roe, Ranking Member Andrews, and
members of the subcommittee, thank you for this opportunity to
testify today. My name is Scott Henderson. I am vice president
and treasurer of the Kroger Company. I have responsibility for
Kroger's pension investments and I serve as a trustee for one
of the 33 multiemployer pension plans in which Kroger
participates.
Kroger is one of the largest retailers in the world, with
total annual sales exceeding $90 billion. Kroger is also one of
the largest unionized employers in the United States. Two-
thirds of our 339,000 associates are represented by labor
unions.
Kroger appreciates the funding discipline Congress imposed
under the Pension Protection Act. We look forward to discussing
ways to build upon those rules and ways Congress could make
broader structural changes to the multiemployer system.
Mr. Chairman, there are three points I would like to make
today. My first point is to note that multiemployer plans are
funded only by those employers that participate in these plans.
That is why we often stress that this is an employer issue.
It is sometimes believed that multiemployer plans are union
pension plans and, hence, a union issue. While it is true that
participants work under collective bargaining agreements, those
who fund these plans are employers--businesses large and
small--that employ millions of working Americans. As Congress
considers legislation that would address multiemployer plans it
is important to remember that a key objective is to help
employers better manage their financial exposure to these
plans.
My second point relates to Kroger's obligations to fund
retirement benefits of workers and retirees who never worked
for Kroger. Kroger has promised to fund the retirement benefits
that our associates have earned and we have kept this promise.
But Kroger, along with other employers that contribute to
multiemployer plans, should not be forced to fund or guarantee
the pension benefits of workers and retirees who never worked
for us.
Under the current system, employers that remain in a
multiemployer plan are financially responsible for the unpaid
obligations of an employer that leaves the plan without funding
its pension promises. Even if an employer pays everything it
owes before leaving a plan the remaining employers are still
financially responsible for the pension benefits of the exiting
employer.
This shifting of liabilities to remaining contributing
employers is referred to as the ``last man standing rule.'' In
those plans where the employer base has considerable declined
the liabilities being absorbed by remaining employers are
placing an unfair burden on these employers. In Kroger's case
it is one of the main reasons why we could be required to
contribute an additional $2.3 billion to fund pension benefits
over the long term.
This leads to my final point. The current multiemployer
rules are ill-suited for today's economy. The rules limit
companies such as Kroger from taking steps that would
strengthen these plans.
Despite these limitations Kroger has been innovative and
forward thinking in our approach to multiemployer funding
issues. Case in point: In 2011 we addressed some of our
exposure by negotiating with our union counterparts to merge
four multiemployer plans into a single new plan. Kroger
contributed $650 million to accelerate funding of the merged
plan, which increased its funded percentage from 73 percent to
91 percent. These efforts have long-term benefits for both our
shareholders and our retirees.
While Kroger would like to be more proactive, the current
rules limit our ability to take similar action with respect to
other multiemployer plans. Admittedly, it is easy to identify
problems with the current system. Coming up with workable and
equitable ways to reform these rules, however, is difficult.
But here are four broad concepts that Congress could
consider: One, continue the funding discipline imposed in 2006
by requiring bargaining parties and trustees to establish
benefits based on available contribution levels and to
eliminate current underfunding over a reasonable period of
time. Two, give plans and bargaining parties more tools to
address the current underfunding situation. Three, encourage
the consolidation of multiemployer plans. And four, make plan
information more accessible and transparent to contributing
employers and participants.
In closing, employers compete for the talent we need by
providing competitive compensation packages that include a
reasonable retirement benefit for long service employees. We
can best keep that commitment by remaining a financially strong
and growing company.
Mr. Chairman, we look forward to working with this
subcommittee and hope that you will view Kroger as a resource
as Congress takes on these complicated issues. Thank you for
the opportunity to testify and I look forward to answering your
questions.
[The statement of Mr. Henderson follows:]
Prepared Statement of Scott Henderson, Treasurer and
Vice President, the Kroger Co.
Thank you Chairman Roe, Ranking Member Andrews, and members of the
Subcommittee for the opportunity to testify today. My name is Scott
Henderson. I am the Vice President and Treasurer for The Kroger Co.
(``Kroger''). I have responsibility for Kroger's pension investments,
and I serve as a Trustee for one of the 33 multiemployer pension plans
in which Kroger participates.
I. About the Kroger Co.
Kroger is one of the largest retailers in the world, operating
2,425 supermarkets, 789 convenience stores, 337 fine jewelry stores and
37 food processing facilities. We have operations in more than 35
states and sales of more than $90 billion. Kroger's net earnings margin
is just over 1%, reflecting the highly competitive nature of the retail
food industry.
Kroger ranks 23rd on the list of Fortune 100 companies and has been
recognized by Forbes as the most generous company in America. We
support numerous charities and more than 30,000 schools and grassroots
organizations in the communities it serves. Kroger contributes food and
funds equal to 160 million meals each year through more than 80 Feeding
America food bank partners.
Kroger employs 339,000 associates. Approximately two-thirds of our
associates are covered by roughly 300 collective bargaining agreements
(``CBAs''), making Kroger one of the largest unionized employers in the
United States. Kroger's primary union is the United Food and Commercial
Workers International Union (``UFCW''), which represents almost 96% of
our unionized workforce. Kroger's other unions include the Bakery,
Confectionary, Tobacco, Grain Millers International Union (``BCTGM''),
the International Brotherhood of Teamsters (``IBT''), the International
Union of Operating Engineers (``IUOE''), the International Association
of Machinists (``IAM''), the Service Employees International Union
(``SEIU''), the United Steel, Paper and Forestry, Rubber,
Manufacturing, Energy, Allied Industrial and Service Workers
International Union (``USW''), and the National Conference of Fireman &
Oilers (``NCFO'').
Kroger contributes to 33 multiemployer defined benefit pension
plans. In 10 of these plans, we account for 5% or more of the plan's
total contributions. On average, Kroger contributes approximately $250
million per year to these plans. However, as described in greater
detail below, Kroger could be required to contribute an additional $2.3
billion over the long-term (in addition to its contributions to cover
current accruals) to fund pension benefits previously accrued under
these plans.
II. What is a multiemployer defined benefit pension plan?
A. General Overview
A multiemployer defined benefit pension plan is a retirement plan
to which more than one employer contributes. These plans are jointly
managed by a board of trustees and funded pursuant to a CBA.
Multiemployer plans were designed to serve as retirement vehicles for
smaller employers and employers with mobile workforces, where
employment patterns prevented employees from accruing adequate
retirement benefits under traditional defined benefit pension plan
sponsored by a single company. In other words, multiemployer plans were
established so that workers' pensions could be portable as they moved
from job-to-job within the same industry.
Multiemployer plans are subject to the Labor Management Relations
Act of 1947, otherwise known as the Taft-Hartley Act. These plans are
also subject to the Employee Retirement Income Security Act of 1974
(``ERISA'') and the relevant provisions of the Internal Revenue Code of
1986. These plans are required to have equal employer and union
representation on the governing board of trustees. In general, the
bargaining parties (i.e., the employer and the union) negotiate the
terms under which employer sponsors contribute to the multiemployer
plan. The board of trustees determines the benefits to be provided by
the plan, based on the level of plan contributions and actuarial
assumptions. Although the trustees are selected by management and
labor, they are required by law to act solely in the interests of plan
participants.
B. Withdrawal Liability
Prior to the enactment of ERISA and the Multiemployer Pension Plan
Amendments Act (``MPPAA''), an employer's obligation to a multiemployer
plan was generally limited to the contribution obligation established
in its CBA. In other words, a contributing employer's exposure to these
plans was limited to the contribution it was required to make during
the term of the CBA. Once it made the agreed-upon contribution, the
employer had no further liability. Thus, if it terminated participation
in a multiemployer plan following the expiration of its CBA, it did not
have any further liability to the plan.
In 1980, Congress enacted MPPAA. MPPAA was designed to address
perceived problems with the multiemployer pension plan rules, including
the possibility that an employer could terminate participation in a
plan without having fully funded its share of plan benefits.
MPPAA, in turn, strengthened the manner in which pension benefits
were protected by requiring contributing employers that terminated
their participation in a plan to make payments to cover their share of
any unfunded benefits. This is known as ``withdrawal liability.''
C. ``Last-Man Standing'' Rule
When a withdrawing employer fails to pay its portion of the plan's
unfunded liabilities--as is commonly the case with employers that
become bankrupt or simply go out of business--responsibility for
funding these unfunded liabilities is shifted to the remaining
contributing employers. This is referred to as the ``last-man
standing'' rule.
Even in those cases where an employer exits a plan and fully pays
its withdrawal liability, the remaining employers are still responsible
for ensuring that there is adequate funding in the future to cover plan
liabilities attributable to the exiting employer. Thus, if the plan has
adverse investment experience, the remaining employers must ultimately
fund the benefits of the workers and retirees of the withdrawn
employer. For example, assume an employer leaves a plan and pays $100
million in withdrawal liability (representing 100% of the amount it
owes) but the plan suffers a 25% investment loss in the following year
(as many plans did in 2008). Unless the plan experiences future
``excess'' investment returns that make up the loss, the ``last-man
standing'' rule requires the remaining employers to make up the $25
million shortfall. In other words, the remaining employers bear the
investment (and mortality) risk for benefits attributable to the
workers and retirees of the employer that exited the plan
(notwithstanding the fact that the employer paid its withdrawal
liability).
D. Implications of Withdrawal Liability and the ``Last-Man
Standing'' Rule
It is important to emphasize that the ``last man standing'' rule
effectively saddles employers that remain in a multiemployer plan with
potential liability for pension obligations of workers and retirees
that never worked for the remaining employers, worked for a competitor
of the employers, or who worked in a completely different industry than
the employers. This shifting of risk to the remaining employers places
an unfair burden on these employers, and depending on their financial
condition, could threaten the continued viability of these companies.
Not surprisingly, the ``last-man standing'' rule has effectively
discouraged the entry of new employers into these plans. New employers
do not want to join a multiemployer plan that could expose them to
future withdrawal liability on benefits earned by employees of other
employers, including benefits earned long before the new employer
joined the plan.
E. Multiemployer Plans and the Pension Benefit Guaranty
Corporation
Unlike single-employer defined benefit plans, the remaining
employers in a multiemployer plan effectively guarantee plan benefits
and the Pension Benefit Guaranty Corporation (``PBGC'') plays a
secondary role. Thus, unlike troubled single-employer defined benefit
pension plans--where the PBGC receives the plan's assets, assumes the
pension liabilities, and pays out benefits in the case of a distressed
plan--in the case of a multiemployer plan, the PBGC loans money to the
plan to pay benefits when the plan becomes insolvent. If this occurs,
the pension payments must be reduced to the extent they exceed the PBGC
statutory maximum. Currently, the maximum PBGC multiemployer guarantee
is $12,870 per year for a retiree with 30 years of service at normal
retirement age.
III. Kroger's participation in multiemployer defined benefit plans
Like many retail food employers, Kroger began participating in
multiemployer plans in the 1960s--in an era during which its exposure
to these plans was limited to the contribution it was required to make
during the term of its CBAs. Thus, its decision to participate in these
plans was made well before the transformational changes made by ERISA
and MPPAA.
Employers in the retail food industry operate distribution centers
and food processing facilities and transport goods between these
facilities and store locations. As a result of its transit operations,
Kroger, like a number of food employers, became contributing employers
to trucking industry multiemployer plans during the 1960s--at a time
when trucking companies dominated participation in these plans. As a
result of the dramatic consolidation in the trucking industry since the
1980s, some of these plans have ceased to be trucking plans, and food
and beverage employers--like Kroger--now represent the majority of
contributing employers.
The effects of the market consolidation in the retail food and
trucking industry was keenly felt when the 2001 tech bubble burst. The
combined effect of the market consolidation and those losses were
exacerbated by the 2008 stock market crash. These market events,
together with the dramatic consolidation that has occurred in the
trucking and food industries and the structural problems inherent in
the multiemployer rules that have discouraged new entrants into the
plans, have led to the current funding concerns.
As described in our annual report, Kroger could be required to make
future contributions of an additional $2.3 billion (in addition to its
contributions to cover current accruals) to fund previously accrued
pension benefits under the multiemployer plans in which it
participates. Approximately 70% of this exposure is attributable to
five of these plans. Importantly, a large portion of the $2.3 billion
that Kroger could have to contribute is attributable to workers and
retirees who never worked for Kroger.
IV. Kroger as an industry leader
A. Kroger's Proactive Actions to Address Underfunding
Kroger has been innovative and forward-thinking in its approach to
multiemployer pension funding issues. For example, in response to
funding concerns, union and Kroger trustees have worked together to
address the funding of the 11 multiemployer plans with a Kroger trustee
through a combination of contribution increases and benefit
adjustments. In addition, Kroger is a long-time proponent of
multiemployer funding reform including increased transparency. Since
2005, Kroger has made disclosures in its Annual Report with respect to
its participation in multiemployer plans, including the theoretical
estimate of its aggregated exposure to the underfunding in such
multiemployer plans. Kroger supported the efforts of the Financial
Accounting Standards Board for greater financial statement disclosure
of multiemployer plan exposure.
In 2011, Kroger acted to address underfunding of four UFCW
multiemployer plans, in which it was effectively the ``last man
standing,'' by negotiating the merger of these four plans into one, new
plan. In this case, Kroger associates accounted for over 90% of the
active participants in these plans (which covered almost 30% of
Kroger's represented workforce). Together, the four plans had a current
market value funded ratio of about 73% and over $900 million of
unfunded liabilities, about $200 million of which was attributable to
workers and retirees who had never worked for Kroger (i.e., amounts
that were shifted to Kroger on account of the ``last-man standing''
rule).
As part of the merger, Kroger agreed to accelerate its share of
funding to the plan and fund the liabilities attributable to workers
and retirees of employers that previously exited the plans. Kroger also
made a long-term commitment (until 2021) to a defined benefit plan that
is designed to provide competitive retirement benefits for career
Kroger associates covered by the new consolidated plan. In January,
2012, Kroger contributed $650 million to facilitate the merger of the
four plans and to eliminate most of the current underfunding. As a
result of this contribution, the new consolidated plan's current market
value funded ratio rose from approximately 73% to 91%.
B. Structural Impediments Prevent Faster Funding of
Underfunded Plans
Notwithstanding these efforts, Kroger still faces significant
exposure from underfunded plans, as do hundreds of other employers. The
current funding structure of multiemployer plans discourages companies
like Kroger from addressing those plans in which Kroger is not the
dominant contributing employer. This is because the current funding
rules effectively prevent employers like Kroger from eliminating their
share of plan underfunding, unless the other contributing employers can
be persuaded to take similar action (or the plan attempts to address
the issue through special withdrawal liability rules and contribution
agreements).
For example, the actions Kroger took last year to address
underfunding in four of its multiemployer plans would be difficult to
replicate for plans in which Kroger is a significant, but not dominant,
employer. Special contributions--such as the $650 million contribution
Kroger made to the new consolidated plan--would improve the overall
funding of the plan but would effectively benefit all contributing
employers. However, unless other contributing employers can be
persuaded to make special contributions, there is little reason for
Kroger to unilaterally fund these plans. To illustrate, if Kroger is an
equal participant in a multiemployer plan with four other employers, 80
cents of every additional dollar Kroger contributes towards the current
underfunding would serve to reduce the overall plan liability of other
contributing employers, and would actually increase Kroger's share of
the plan's remaining unfunded benefits if Kroger were to withdraw.
In the case of the new consolidated plan, Kroger took action only
after concluding that because it was already the ``last man standing,''
the advantages of plan consolidation outweighed the cost of the
additional contribution dollars. While special withdrawal liability
rules and contribution agreements could be fashioned to encourage
others contributors to follow Kroger's example, these steps would have
to be voluntarily adopted by the plan trustees and cannot completely
address all of the impediments to accelerated funding under current
law. Unless other contributing employers can be persuaded to make a
similar contribution, the current system effectively discourages
employers from committing significant dollars to address underfunding
in these plans.
V. Suggested concepts Congress may consider
A. Continue Funding Discipline Inherent in PPA Rules
The Pension Protection Act of 2006 (``PPA'') was designed to impose
discipline on pension funds and bargaining parties to ensure that the
bargaining parties and plan trustees acted responsibly and established
reasonable benefit and contribution levels. The PPA also provided
needed transparency for multiemployer plans. Prior to PPA, even large
employers like Kroger had difficulty securing information about the
plans to which they were contributing. Although the PPA included rules
requiring funding discipline and additional transparency, it did not
change the basic structure of the multiemployer pension plan rules
(e.g., withdrawal liability or the ``last-man standing'' rule).
The PPA rules applicable to multiemployer pension plans are
scheduled to sunset at the end of 2014. Congress should act to continue
the funding discipline imposed by the PPA by requiring bargaining
parties and plan trustees to establish benefits based on available
contribution levels, and to eliminate current underfunding over a
reasonable period of time. However, the tools currently available to
plan trustees, employers and unions wishing to responsibly address plan
underfunding issues have proven to be insufficient. The parties will
need greater flexibility in order to develop and implement the
necessary measures to address the underfunding issue in a mutually
satisfactory manner.
B. Greater Flexibility
Multiemployer plans, labor unions and employers are working
together to develop policy recommendations that would address the
current underfunding of multiemployer plans. Because such a substantial
proportion of our workforce relies on these plans to secure their
retirement, and because Kroger has had to devote significant resources
to fund the benefits of other workers in these plans, Kroger is deeply
invested in finding a solution to these challenges. Kroger is committed
to being part of the problem-solving process.
What is clear is that multiemployer plans and bargaining parties
must be provided with greater flexibility to address the underfunding
situation. Given the unique circumstances of each plan, the parties
should be afforded as much flexibility as possible. For example, the
fortunes of some plans could be improved by encouraging consolidation
as a means of promoting greater efficiencies and reducing expenses.
Plan trustees, unions and employers should be encouraged to take
responsible steps to place underfunded plans on solid footing. The
parties need support and flexibility so they can determine the best
course of action to improve their funding situation. There is no easy
solution to this problem, and the way forward is unclear. But solutions
exist, and by working together, we can secure the retirement benefits
our employees are counting on.
VI. Conclusion
Kroger applauds this Subcommittee for its leadership in holding
this hearing and beginning the process of addressing the structural
problems facing the multiemployer system. We are grateful for the
opportunity to tell our story, and we look forward to working with you,
the multiemployer plans and labor on a solution that will ensure the
continued viability of the multiemployer system.
______
Chairman Roe. I thank the panel. As I said, you all laid
out the problem very well.
It is the solution that is going to be the problem, as you
said, Mr. Henderson, and I want to tell you, you have my full
attention, and that we will--that you have my promise to work
with you all as best we can to help find some solutions here.
So let me start by saying that I started out my career in a
defined benefit program, and we changed to defined contribution
program 25 years ago because we saw we couldn't fund it. And I
served on the pension committee in my practice, which has 100
providers and 450 employees. So I do have some experience
there.
I was also mayor of our local city, and what I noticed was
that we were--when I started in 2003 as a city commissioner we
were paying 12 percent of payroll in retirement, and when I
left in 2008 it was up to 19 percent to come to Congress. And
Ms. McReynolds has laid it out, and I want to start--we
realized we could not continue that. The tax--future obligation
to taxpayers was unsustainable.
So now our city--actually two cities in my district--have
changed to a defined contribution plan and capped those
liabilities. So that may be something you have to look forward.
I realize these are contractually done in a--in union
contracts, and you have to--obviously to sustain those.
Ms. McReynolds, I was fascinated by your comments and how
much--$10.17 an hour in pension costs and $17,000--that is an
astonishing amount of money, and quite frankly, it is to make
up a previous liability. If you put $17,000 per employee they
would--everybody in your business would retire multiple
wealthy.
So how do we--I am going to start with you and then, Mr.
Henderson, I want you to chime in, because you are out there
trying right now to run your businesses and not go broke. So I
am going to start with you. What suggestions do you have? And I
heard Mr. Henderson's four ways.
Ms. McReynolds. Well, I think, you know, you heard a
variety of comments, you know, across the witnesses that are
testifying here today, Mr. Chairman, and, you know, I
appreciate the perspective of others and other plans. You know,
our specific issues relate to the trucking industry, and, you
know, really what you had in 1980 when these rules came into
place--you know, the deregulation of the industry and then the
ERISA rules that caused us to have responsibility for employees
who never worked for us, you know, the industry was much
different.
Over time we have had the failure of a number of companies
that were former contributors to these plans, and the current
situation is that we are acting as the PBGC for the trucking
industry. Our primary solution, you know, needs to involve
eliminating an obligation for orphaned retirees who never
worked for our company.
Chairman Roe. What percent of your--you may have said it;
you had a lot--what percent of your contributions are for
orphaned employees?
Ms. McReynolds. We believe that it is between 40 and 50
percent. We know 50 percent of our contributions go to Central
States. We have had factual information come from them that
suggests that 50 percent of our payments are for orphaned
retirees. The other funds have not given us the direct facts,
but we believe across the board it is similar, so I would say
between 40 and 50 percent of what we pay----
Chairman Roe. Significant amount.
Ms. McReynolds [continuing]. A significant amount. It is
north of $60 million a year for people who never worked for our
company. So our best solution is going to involve a solution
for those retirees of defunct employers----
Chairman Roe. So here your business is. You are trying to
compete in this market----
Ms. McReynolds. Right.
Chairman Roe [continuing]. With a huge disadvantage
financially to try to go out and get a contract.
Ms. McReynolds. That is right.
Chairman Roe. Mr. Henderson, I would like you to comment.
Mr. Henderson. Well, to the last point, we also compete in
a highly competitive industry and many of the new entrants in
our industry are not--do not work under collective bargaining
agreements, which adds additional pressure to our business.
I guess the best way for me to answer that question is
probably from my experience as a trustee on these multiemployer
plans. First comment I would make is that I appreciated as a
trustee the provisions of the Pension Protection Act. When a
plan goes in the red zone status and that clock starts running
it puts the necessary pressure on trustees to collectively
cooperate and come up with solutions, which I think we have
done.
And in the case that we are talking about here it is clear
that the last man standing, or the implication of orphans, is a
major problem in these plans, and in fact, in our case the four
plans that we consolidated last--well, January 1st of this
year, they collectively had approximately $3.5 billion worth of
liability, and almost $1 billion of that liability came from
orphans in those plans.
Chairman Roe. My time is expired.
I am going to ask a question later, Mr. Sander, why you
believe that plan--your plan is financially solvent. You can't
answer it right now because my time is expired, but I am going
to come back.
Mr. Andrews?
Mr. Andrews. Thank you.
This is a refreshing panel because not only did you lay out
the problem but many of you started to talk about the solution.
I would like to follow up on that.
Do we have a consensus here this morning that court
decisions or law that would let companies walk away from their
liability in bankruptcy--that is, discharge those liabilities
in bankruptcies--is undesirable and should not be the law? Does
everybody agree with that?
Mr. Sander. Think so.
Mr. Andrews. You should not be able to discharge these
departure liabilities in bankruptcy. Does anybody disagree with
that?
Okay. That doesn't make the present problem any better but
at least it keeps it from getting a lot worse. It would be
catastrophically bad, in my opinion, if that happened.
Number two: Mr. Shapiro outlined that we had 20 percent of
the plans in the green zone I guess the beginning of 2009. That
has migrated to about over 60. So something is working.
Does everybody agree at least thematically that we should
take the incentives in the 2006 law that helped make that
happen and reconsider those and maybe strengthen them some?
Everybody agree with that, at least conceptually? Okay.
Here is the hard one: I think there are some plans for whom
those incentives don't work because they have a huge cash flow
problem, and I think really that is what Ms. McReynolds is
talking about. We could say that, you know, you have 2 years to
get from red to yellow and 2 years to get from yellow to green
and I think that might put your trucking company out of
business, and it would hurt Krogers big time.
So what we don't want to do is kill the goose that is
laying the golden egg. So I think there are some plans for
which there is a cash flow problem here that the present
contributors are just not going to be able to handle on their
own. Does everybody agree with that presumption?
Ms. McReynolds. Yes.
Mr. Andrews. Okay.
Would it help solve that cash flow problem if there were a
credit facility available that would help the fund--in effect,
literally put cash into the fund, borrow it, put it in, and
amortize that cash over the future in order to reduce present
contributions? Would that be a good thing?
Yes. I don't think your mike is----
Ms. McReynolds. Yes. I would like to speak to that.
The way that additional funding could help is if it does
result in reduced contribution levels for employers.
Mr. Andrews. Let's say that----
Ms. McReynolds. I mean, you have to have the----
Mr. Andrews. Let's say that we wrote a rule that said that
is the only way you could borrow the money, that the only way
that you could borrow it would be if the proceeds went
exclusively to buy down the contribution for present
employees--or employers, rather. Would that work?
Ms. McReynolds. Again, if it resulted in us no longer
having to bear the burden of employees that never worked for
us----
Mr. Andrews. What would a----
Ms. McReynolds [continuing]. That would be a good----
Mr. Andrews. You have estimated that as maybe 40 percent of
your contributions?
Ms. McReynolds. Yes.
Mr. Andrews. Let's say purely hypothetically we were able
to knock that 40 percent down to 10 by taking some of the
pressure off in cash flow. What would that do for your trucking
company?
Ms. McReynolds. That would be a substantial improvement
from where we are today.
Mr. Andrews. What would that do for Krogers?
Mr. Henderson. Well, in our case--the best example I
suppose I can give is the consolidation that we achieved in
late 2011. In the four plans that we consolidated those plans--
we were the overwhelming contributor. We were, in fact, the
last man standing.
Under the rules of PPA all those plans were in the red
zone, so we had enacted--the trustees had enacted certified
rehabilitation plans.
Mr. Andrews. Right.
Mr. Henderson. And if you added them all together Kroger
was, over the course of 7, 8, 9 years, largely responsible for
funding all of the unfunded liability. Realizing we had that
liability and realizing that as one of the last remaining
conventional retailers--grocery retailers in the United States,
given our strong balance sheet, we actually concluded that we
could go to the regular capital markets and borrow money at a
rate that was very favorable to us.
Mr. Andrews. So I think we have a sort of three-tier issue
here. We have got some plans like the ones that you are in, Mr.
Henderson, where the capital markets, of their own volition,
might put up some of that money. There would be a second tier
where they wouldn't but perhaps consideration of a--some
guarantee would draw them into that marketplace.
And there is a third level where they wouldn't at all
because they are in such trouble, and that suggests that we at
least consider some kind of publicly provided credit facility
that might get you out from under this. And I would just
outline this as an analytical way of looking at this.
I would also say this to you: I don't think anybody should
have--any plan should have access to either the guaranty
facility or the direct loan facility unless it makes the kind
of reforms that you are all talking about here, unless it maxes
out internally on what it can do. But I think it might be a way
to go after that group that is the--that is really hurting and
find a way to get them over the hump, and I would be interested
in exploring that idea with you.
Thank you.
Chairman Roe. I thank the gentleman for yielding.
Mr. Rokita?
Mr. Rokita. Thank you, Mr. Chairman. I would like to yield
as much time as you would like to consume to you, sir, so you
can follow up your questioning.
Chairman Roe. Mr. Sander, obviously your--the plan you
represent is relatively healthy, and obviously what would make
all these plans relatively healthier would be about a 10 or a
15 percent improvement in the stock market, and interest rates
changing would help a lot.
But what is the difference between yours--I think I
understand it, but for the record I want you to explain the
difference between what Ms. McReynolds is experiencing and
maybe Mr. Henderson, and what you have experienced.
Mr. Sander. Sure. First of all, I would like to thank Ms.
McReynolds for the footnote in her testimony which referenced
our plan and was very complimentary about the funding levels
that our trustees have maintained.
I really don't have the experience or the knowledge to
speak to other plans other than the Western Conference, but I
can give you an idea about, having been in this position since
1992, the steps that our trustees have taken. Maintaining
strong funding has always been the guiding principle of the
Western Conference Plan, and the trustees have always, if you
will, lived within their means when it came to using reasonable
actuarial assumptions and investments assumptions and then
structuring the plan of benefits so that if we received
reasonable investment returns they were not going to be
creating unfunded liability for employers.
I think the other thing that is so critical is our
trustees--labor and management, working together--have always
made hard decisions about the structure of the plan when it was
necessary. The dot-com bust, frankly, was a really difficult
time for plans. Not as difficult as 2008, but difficult. And
out trustees, actually at the union's suggestion--union
trustees' suggestion--met and cut the accrual rate for future
benefits, the earnings formula, proactively so that the plan
could return back to full funding as quickly as possible.
So that level of cooperation has always been a real
trademark of the Western Conference Plan.
We are fortunate to have a diversity of employer industries
so that if, for instance, construction falls on hard times for
a year or 2 we will find another industry--food--that is very
steady or is growing, and this has really provided a cushion
for us and it is a real strength for our plan, and other plans
lack it. And we have been very open with our employers; we are
very open with the local unions. We are very, very transparent.
We have always taken the position that we want to be the
plan of choice. You mentioned, Mr. Chairman, your own personal
experience. We have a lot of small employers in our plan. We
have gone out, met with these employers at their request, we
have said, ``Look, this defined benefit formula is the best
place for your employees to be. If you bargain this rate of
contribution, we stay well funded, then that is all we are
going to be asking of you. Pay it accurately, pay it timely,
and we will take care, on the trustee end, of producing a good
family of benefits for your employees.'' And that has really
worked successfully for us.
Chairman Roe. I think one of the things that has happened
is when the actuaries have assumed a 7 percent accrual rate,
and that is just not--certainly in the last 10 to 12 years it
hasn't been. The 1990s, yes, but the last 10 or 12 years--now,
Mr. Shapiro pointed out, I think, the perfect storm, when the--
the 1990s, when things were going along just great, when you go
over 100 percent funded then the employer was punished if they
put more in, and that created a perfect storm where you
couldn't get it--there are going to be peaks and valleys and we
haven't rejected the economic cycle. It will go up again; it
will go down again. So we have to be able to get through those
times, and I think that is something I am going to look
strongly at is to allow those deductibilities to go to be
overfunded for a little while. I mean, some plans went years
without putting any money in there.
I am going to yield back to Mr. Rokita. I didn't mean to
use all of his time.
Mr. Rokita. Thank you, Mr. Chairman.
Appreciate everyone's testimony.
Mr. Henderson, I particularly appreciate you being here. My
father-in-law was a Kroger union truck driver for 30-some
years, although I think I botched that number exactly. So
really appreciate--I learned a lot through him and I learned a
lot through all your testimony here today.
If I can get this question in really quick to Mr. Ring,
however: Your testimony painted a sober picture of the
situation facing PBGC. Program has a deficit of $2.8 billion
and you say it is reasonably possible that it will take an
additional $23 billion in obligations to multiemployer plan
participants.
Can you explain how and when PBGC provides financial
assistance to insolvent plans?
Mr. Ring. Yes. As a plan becomes insolvent it is actually a
pretty orderly transition. Notice is provided to the
participants, benefits are cut to what is known as the PBGC
minimum, and the plan then starts paying benefits at a lower
rate, so there is an automatic benefit reduction. And then the
plan trustees petition for essentially what the law refers to
as a loan from the PBGC, and the PBGC picks up payment for all
those pension benefits going forward.
Mr. Rokita. Thank you. Time is out.
Chairman Roe. I thank--Mr. Rokita.
Mr. Kildee?
Mr. Kildee. Thank you, Mr. Chairman.
Mr. Shapiro, can you discuss how more investment in
international markets would affect the long-term stability of
multiemployer pension plans. There has been discussion of
broadening out the investments. Have you done any looking at
that or how that may affect it? We are living in a global
economy. Does that pose too many dangers or might it have some
opportunities?
Mr. Shapiro. That question actually has come up a fair bit
in our Retirement Security Review Commission. One of the steps
that we took early on in that process was to invite several
investment experts from various firms to talk to us about what
they see happening in the equity markets in the coming decades
with the particular question that we put to them, which is,
many of our funds are assuming or looking forward to, in their
budgets, 7 or 7.5 percent return and we wanted them to tell us
if they felt that that was reasonable going forward. Certainly
historically it has been very reasonable over the long term,
but that is not the same question. Is it reasonable going
forward?
And all of them, you know, gave us the answer. They felt
that it was but they all caveated the answer with some
qualifications, as investment people tend to do, and what they
said was that in order to achieve that going forward you really
need to be looking, you know, more globally than you have been
historically, that there is a need to diversify assets outside
of traditional U.S. equity markets and to look for more
innovative strategies that involve foreign countries and also
innovative strategies domestically.
So it is certainly our belief that if our plans are going
to achieve those levels of return going forward that it would
help them to embrace a more global approach to investing. And
plans have already been doing that. If you look back over the
past 5 or 10 years, multiemployer plans have absolutely been
gradually increasing their investments internationally. I think
that is a good trend and one that I see continuing.
Mr. Kildee. You at the table down there, you have an
enormous responsibility. We have an enormous responsibility. I
have been on this subcommittee for 36 years and I am leaving
this subcommittee--leaving Congress--at the end of this year.
And how well or not well have we done?
What are some of the good things--what are some of----
Mr. Andrews. Has the gentleman's time expired? I worry
about that answer.
Mr. Kildee. They can answer my question, can't they?
Anything good that you say we--yes, Mr. Shapiro?
Mr. Shapiro. I think PPA was in large part a very good
thing. The Pension Protection Act--I wish I could remember who
said this, because I quote it all the time and I feel like I am
not giving proper credit, but in the multiemployer world the
Pension Protection Act, in many ways, legislated good practice.
It didn't really create new ideas that plans should have been
doing--we felt that plans always should have a long-term
focus--but under the rules prior to PPA there was effectively
an option for plans to kind of look very short-term at their
picture and not look ahead.
PPA put in place rules that said, ``You can't do that
anymore. You must look forward.'' And that, I think, is the
strongest thing about PPA, and I regard that as being a
tremendous improvement to our system.
Mr. Kildee. Well you give me some comfort, then, as I leave
Congress. We did do something well there. Thank you.
Mr. Sander. I could speak to that, too. Thirty-six years
brings you almost back to the passage of ERISA itself, and
Congress has taken a focus on retirement security and
recognized it as a very important objective. The PPA--I agree
with Mr. Shapiro--was a necessary and a good framework to carry
us forward into this century and the needs.
One of the real privileges I get in this job is to meet
with some of our plan participants who are--who have been in
this plan and receiving benefits sometimes for decades. We have
over a dozen that are 100 years old and older, and I--we have a
large group that are in the 90s and heading toward that 100
year old.
When you meet with these folks again the universal comments
that we get is they are grateful for the security of the plan,
they are grateful for the structure, they are grateful for the
fact that the plans are built in a way to provide real
retirement security. And all of this, of course, on the defined
benefit end comes from the work of ERISA and from the
subsequent legislation, and we certainly see it every day in
our work.
Mr. Ring. I don't want to be--if you don't mind--I don't
want to be a downer on that, but the one area where I think
Congress, and frankly, the industry has not addressed the
problem is really dealing with these particular industries
where the demographics have left the plans with a substantial
number of what has been referred to as orphans. And it is an
issue that really needs to be addressed. There are many funds
that are--have a diverse population, many employers, but there
are a number of funds that don't, and the current employers are
saddled with the burden of really, as Ms. McReynolds says,
being the PBGC for the rest of the industry.
Mr. Kildee. Thank you very much.
Thank you, Mr. Chairman.
Chairman Roe. I thank the gentleman for yielding and for
his 36 years of service.
Dr. Bucshon?
Mr. Bucshon. Thank you, Mr. Chairman.
Ms. McReynolds, your testimony noted several quotes from
the financial analysts who are concerned about ABF's exposure
to multiemployer plans. A recent Credit Suisse analysis painted
a stark picture for these plans.
Regardless of whether you agree with the report or not, is
it fair to say that financial analysts and eventually the
financial markets take these liabilities into account when
looking at your stock prices, determining stock prices?
Ms. McReynolds. Absolutely fair. It is the case that they
do. You know, there are times when it is a higher profile
issue, and obviously, you know, upon the heels of the Wall
Street Journal article and, you know, the time after that, you
know, there are, you know, many more questions about it, but
one thing that it does in terms of our company--I meet with
shareholders often--is it is a complexity. It is a nonsensical
result that we have that we have to pay for people who never
worked for us, and that it is a tremendous difficulty for
someone who is trying to understand the direction of the
company, you know, what impact that can have on the company
going forward.
And I believe our company has done a tremendous job over
the years in addressing that, but going forward, an increasing
burden there, or a continuing burden there, is going to, you
know, have an impact on our company that I think others in the
industry and the shippers don't want it to have because our
company is a high-quality carrier and wants to remain that.
Mr. Bucshon. Mr. Henderson, are most of the people in the--
your competitors--do they have defined contribution plans or
defined benefit plans? I mean, what are the new people getting
into this type--I am assuming there are always businesses
coming into and out of your industry. What is the trend?
Because it seems to me nationally the trend is defined
contribution plans. Is that true?
Mr. Henderson. Yes. That would be the trend among newer
entrants into our industry.
Mr. Bucshon. I yield back.
Chairman Roe. I thank the gentleman for yielding.
Mrs. McCarthy?
Mrs. McCarthy. Thank you.
And I appreciate everybody's testimony, and it is very
refreshing to have everybody at the table agreeing that we need
to look at something. I actually had voted for the--in 2006,
the passage of the Pension Protection Act. One of the things,
unfortunately, that we couldn't get into it was making it more
flexible that if you were having good years to be able to put
more money into it.
Most of us kind of look that way when we are saving for our
future, ``Hey, it is a good month. I can put another $50
away,'' or something like that. I hope that we are able to look
at that, because I do believe that we will come back and we
will see, possibly--interest rates going back to 7 to 8
percent, but that is going to be down the road, so it is
unrealistic for anybody to expect. I am hoping that I get 4 to
4.5, to be very honest with you, especially at my age.
One question I would like to ask, because I have a
curiosity--and I know you all--and I am not talking about what
everybody gets, but the average retiree that retires today,
what would their average pension be when they retire, if they
retire at 65?
Mr. Shapiro?
Mr. Shapiro. I brought with me my book just in case such a
question might come up. We have some survey data that I don't
have memorized but I can certainly reference for you.
The NCCMP started about 3 years ago a survey that we send
to all multiemployer plans asking them some very basic
questions about what is going on in their plan and we compile
the results annually in a report. The first year we did this
was in 2009. We got a spectacular response that year. We had
nearly 400 plans respond out of a universe of about 1,400
plans, which exceeded our wildest expectations.
And if you give me just a moment to find the right page I
will quote the number for you. From that report the median
benefit paid to a multiemployer plan participant from those 400
plans, which we believe is representative of the whole
universe, was approximately $900 per month.
Mrs. McCarthy. $900 a month.
Mr. Shapiro. $900. So the point there being that by and
large, you know, these plans are paying very modest benefits to
people; they are not exorbitant.
Another measure to look at is, you know, obviously a large
portion of the retiree population is older, retired many
decades ago, so we also asked the question, ``What is the
average benefit you are paying to someone who retired in the
past year,'' to get a better sense of current benefit levels.
And there the answer was approximately $1,400 per month. So
certainly more of a reasonable amount, but by no means
exorbitant.
And with that--Mike, do you have some numbers----
Mr. Sander. Yes. I speak specifically to the----
Mrs. McCarthy. Mr. Sander, I know you are going to answer
that question, but I also want to say that I am very impressed
on the Western Conference Plan. You seem very realistic.
What I am asking is, when you--let's go back to 2008. What
were you basically projecting as a possible interest rate? Were
you looking at the 7 or 8 percent or were you----
Mr. Sander. In 2008?
Mrs. McCarthy. Yes.
Mr. Sander. Seven percent has been our assumption for a
period of time.
Mrs. McCarthy. Okay. Go ahead and, you can finish the other
part of the question.
Mr. Sander. I was just going to mention that from our
plan's standpoint it--our average benefit for a normal retiree
at age 65--and it does range--ranges because of the
contribution rate, which can be, obviously, a factor in driving
it----
Mrs. McCarthy. Sure.
Mr. Sander [continuing]. Is closer to $1,200 to $1,300 a
month. We have some that are quite a bit higher due to higher
contribution rates and longer lengths of service.
We also have a food processing component, which has been a
history in our plan for--almost since its inception, where the
contribution rate is very low but individuals still receive a
regular monthly benefit, albeit lower, out of that industry,
which is very valuable to them.
Mrs. McCarthy. And the other question I would like to ask
is, obviously there are certain--depending on how you are
working--we work in Congress--I worked as a nurse for over 32
years before I came here; I probably wouldn't be working as a
nurse at this particular time in my life because of my age, but
being that you work with unions, because unions are in all your
plans, from what I understand, and if they are construction or
whatever--physical hard work--what is the average age of those
people actually going in to look for retirement?
Mr. Sander. To our plan specifically, again, the age is
about 61 years is the average retirement age--the people draw
their benefit.
Mrs. McCarthy. Because I am only thinking of my two kid
brothers who are about ready--one has retired and he is 6 years
younger than me, and the other one will probably retire by at
least 62, only because physically their legs are gone, their
hips are gone, their knees are gone. Both of them just had
their knees done in the last 2 weeks. So that is a
consideration, too, isn't it, as far as having a defined--as
far as having to make sure that they have some sort of
insurance before they can start collecting, going on Medicare,
going into--collecting Social Security, even?
Mr. Ring. In many of the transportation funds--or plans,
the retirement age--eligibility for retirement age is much
lower, and you have people retiring, you know, early 50s,
sometimes earlier. And that is largely because it is a very,
very physically demanding job, but that means somebody is going
to be receiving a pension for the next 40, 50 years.
Mrs. McCarthy. Police officers, too.
Mr. Ring. Correct.
Mrs. McCarthy. It is mandatory that they retire at a much
earlier age than most people do. But you are right, these are
things to be considered, but I definitely am interested in the
Western Conference Plan to look at as a model and the
flexibility that obviously we are going to need.
Thank you. I yield back my balance of my time.
Chairman Roe. I thank you for yielding.
And, Ms. Noem?
Mrs. Noem. Thank you, Mr. Chairman.
And my question would be for Mr. Sander. I know that you
are tasked with the responsibility of not only representing the
employees and the employer trustees, but also the labor and
union trustees, as well, when you make management decisions,
and I was wondering if you would briefly describe that for us,
how you strike that balance in making those decisions about the
plan, how you represent management and labor at the same time,
and also how you represent the plan's participants?
Mr. Sander. One of the privileges of working on this plan
for a long as I have is to watch this board of trustees in
operation. As I mentioned before the funding integrity of the
plan has always been job one, principle one for this board. And
as a result of that I think it has really engendered a pride in
what this plan has accomplished over the years and what it is
accomplishing.
So we have an employer chairman, who represents the
management side of the board; we have a union chairman that
represents the union side. They work together every day in
trying to strike balance in the various interests of moving the
plan forward.
And then we have a variety of committees. We have a very
intensive committee structure that has delegated authorities
from the board to investment committee, plan design committee.
These types of committees work together. They are equal
number of employer and union trustees on the committee. They
make recommendations up to the full board. And this has worked
very effectively for us.
As far as the participant end, I cannot remember a time
when some decision was in front of this board and the question
was raised, ``Remember, we act in the best interest of the
participants. Let's be sure we have got that covered first
before we go to the secondary considerations.'' So that really
has always been the touchstone for this plan.
Mrs. Noem. Okay. Well, thank you. Just as a quick follow
up, then, having access to plan financial information is
important, but also not only to multiemployer plan participants
but also to employers who are deciding whether to participate
in that plan. So what steps--what action steps does the Western
Conference Plan--have you taken to ensure that its financial
information is transparent, that it is open and accessible to
both the employees and the participants that are effected?
Mr. Sander. We have taken a number of steps. Transparency
is something we feel very strongly about. As I mentioned
before, we always feel the more you look at this plan--
employer, union, participant--the better you are going to like
it.
So our main source of disseminating information right now
is our Web site, which receives several thousand hits a month.
And we have posted on there the last 3 or 4 years of audited
financial statements, actuarial reports, Form 5500s, and
contact information if the interested party wants to inquire
further.
We also put our annual funding notices and any other
information which becomes available. It is on there the next
day, as soon as it is published by the appropriate party.
We also do a variety of meetings. When an employer is--
fact, I just offered Ms. McReynolds a meeting in Fort Smith,
Arkansas. We are ready to come out and lay out what this plan
is about--our objectives, our history, how our funding is
structured--meet with the employer community, as we do with the
union community and participants, to be sure they understand
what is going on with the plan and their confidence in the plan
can remain strong.
Mrs. Noem. Well, thank you. I appreciate that.
Mr. Chairman, I yield back.
Chairman Roe. I am going to take a prerogative of having
a--if anyone has anymore questions--a second round of
questions, this is such an important issue.
And you have taken your time to come so I want to be sure
that we get all--extract all the information we can.
I certainly understand this problem from a personal
standpoint. I had a father that was a factory worker who at 50
his job went offshore--went to Mexico. He actually ended up,
after 30 years, after World War II with this plan, with
essentially no pension plan. So I know what it is like as a
family to be left out in the cold like that, and when you make
a promise to people you ought to keep your promise.
But the other side of that, and also, Mr. Sander, one of
the things I found being on our pension committee at work, I
was very interested in it doing well because that is how I was
going to retire. So I had a vested interest in that plan doing
well, as I am sure you have a vested interest in your plan
doing well.
I think the problems that I can see--and I think--the
ranking member and I have been talking about some solutions up
here, is the commitment to a defined benefit. That is a safety
net, and certainly these payments are not overly generous. They
are to keep you out of poverty when you retire and you worked
somewhere for many years.
I know I felt an obligation to my employees to provide them
retirement. If you work for me for 30 years I want you to be
able to retire and have a comfortable retirement in your
future. I felt a moral responsibility to do that. So we do
agree with we want to make sure we keep those promises.
It looks like some of the problems is with the orphan
employees you have got more people now receiving benefits than
are paying in, as Ms. McReynolds clearly pointed out. I think
the rate of return assumptions ought to be actuarially looked
at, not so generous.
I think that you have got the remaining companies, like Ms.
McReynolds or maybe less so with Kroger, but they can't stay
competitive under this--there is no way you can when--we always
hear about health care costs exceeding--or forcing us not to be
competitive, well this is exceeding anybody's health care
costs, what you pointed out. So I think the downturn in the
economy--I do believe the economy will turn around and get
better. I think this will look better, hopefully, in 2 or 3
years. And right now no government agency really has a way to
do anything. Actually, the law actually hurt in the 1990s, it
actually caused part of this problem.
And I think another problem is the PBGC--I mean, we are
talking about $9 per participant per year with 10 million
people, I mean, that is two lattes at the airport at Starbucks,
so that is definitely got to be looked at.
Have I pretty much touched on all the problems? I am going
to open it up now for you all to give us the solution.
So if somebody--I don't see anybody jumping out of their
chair, but----
Mr. Shapiro. I will talk----
Chairman Roe. Go ahead, Mr. Shapiro.
Mr. Shapiro. You know, I definitely don't have the solution
at this point, so I can't truly answer your question as it was
asked, but I can certainly give some thoughts on the directions
that we have been thinking. You know, our commission really has
been asking the exact same questions that you just asked for
the past 8 or 9 months. We don't have the answers yet but we
are working very close to a final proposal.
But in terms of, you know, you mentioned earlier defined
benefit plans and defined contribution plans as being the two
ways to go, and in today's environment that is correct. And I
think it is pretty clear to us at this point that defined
benefit plans are posing a problem for employers, as we have
seen here and thousands more, where the risks that they are
taking in these plans is more than they can deal with.
From our perspective, defined contribution plans have a
different problem, which is that there really is no guarantee
of--or not even anything close to a guarantee of lifetime
income for participants. And my personal feeling is that the
recent move we have seen to combined contribution plans in the
past decades is setting us up for a real problem of an entire
generation of completely broke 75-year-olds, and that troubles
me.
But if you look at, you know, defined benefit plans on one
side and defined contribution on the other, there is an ocean
of space that exists between those two plans but you can
combine features of both in such a way that you, you know,
really mitigate and reduce the risk to the employers and at the
same time, you know, provide some real income security to
participants. You know, the whole focus of our commission has
been exploring that space and trying to find how we can find
ways to really capture the best features of both worlds and put
it into a model that, as of today, doesn't exist, but we hope
will exist when we are done. So that is my quick perspectives
on where we can go.
Chairman Roe. Thank you.
I yield to the ranking member.
Mr. Andrews. Thank you.
I do think we have had discussion about solutions this
morning, led by the chairman and certainly helped by the panel,
and I wanted to explore two of the success stories I think that
we heard.
Mr. Sander, after the crash of 2008 your fund went down to
what percentage funded?
Mr. Sander. Mr. Chairman, our PPA percentage was at 85
percent in 2009, which was the lowest point.
Mr. Andrews. Okay. And where are you now?
Mr. Sander. 90.3.
Mr. Andrews. And what changes have you made to get that
progress?
Mr. Sander. Well the trustees--actually, after the dot-com
bust the trustees took the action that I mentioned earlier and
they were able to improve funding to the point where they were
able to actually improve benefits on temporary basis in 2006
and 2007. Those temporary improvements were rolled back
beginning in 2009 to, again, to balance the books, if you will.
Trustees have also taken action with the investment
portfolio to take a look at some alternative forms of
investment. We are looking at timberlands and farmland, things
which may not return immediately but over the longer term are
exceptional opportunities for long-term growth. So----
Mr. Andrews. And these really--I know the decisions were
made in the context of the PPA, but you weren't really under
any gun or deadline. These were voluntary decisions that were
consistent with your fiduciary duty, right?
Mr. Sander. That is correct. The trustees, I think, felt
that they needed to take some steps in order to get back to
their historic funding level goals.
Mr. Andrews. Now, Mr. Henderson, you have mentioned
consolidation as one of the ways--and Kroger certainly put its
money where its ideas were by in effect prefunding some of the
benefits of that consolidation. You should be commended for
that.
What other reforms did Kroger participate in, in some of
those multiple multi-plans that you are in. What worked?
Mr. Henderson. The situation we found ourselves in was that
we had become the dominant contributing employer to these four
plans, and they ranged anywhere from a $50 million plan, the
administrative expenses of which were eating up about 25 cents
of every contribution dollar simply because it was a small
plan, all the way to a $2 billion plan. And when we looked at
the underlying investments in those plans we discovered that
there were roughly 100 individual asset allocations that were
managing--I hate to use the word, but only about $2.5 billion
worth of assets.
And so working with labor and coming up with the solution
to this issue we were able to consolidate the plans. The
benefits of that should be significantly lower administrative
expenses to run the plan, lower asset management fees--when you
make larger asset allocations you----
Mr. Andrews. Better net returns.
Mr. Henderson [continuing]. Do enjoy lower fees.
Mr. Andrews. Yes.
Mr. Henderson. And then I guess it goes without saying that
when you allocate significantly larger numbers to folks like
FIMCO you do get a higher level of attention to your account.
Mr. Andrews. FIMCO would certainly agree with that.
Mr. Henderson. They would agree with that. And so we
thought there were a number of advantages to the plan, and
also, with interest rate structures being what they are, we
were able to take advantage of capital markets----
Mr. Andrews. Now, what has happened to the funding levels
of some of those plans? Where did they start before these
reforms and where are they now?
Mr. Henderson. Before the consolidation all four of them
were in the red zone and had enacted certified rehabilitation
plans. After the contribution that we made the combined plan is
now 91 percent funded. And we were able to actually improve and
secure the benefits of those participants.
Mr. Andrews. See I think the stories we just heard give us
some guiding principles for what we ought to do here. This was
a combination of subtle and gentle incentives to make very hard
decisions about benefits and consolidation. I am sure those
were not easy things to do. Coupled with an infusion of cash--
in this case from Krogers--I am not sure we are going to be
fortunate enough to have a Kroger in every one of those
situations.
And where we are not I think we need to explore a rational
and fair situation where we can either entice private capital
to play that role in a balanced and fair way or perhaps, under
certain circumstances, provide for more direct loan functions
that would help others. Because what I am hearing from Ms.
McReynolds is that even if the fund she is involved in made all
of those reforms the fact that there just aren't enough men and
women left standing that are prosperous to solve the problem.
Is that a fair characterization?
Ms. McReynolds. That is absolutely fair.
Mr. Andrews. Yes. And----
Ms. McReynolds. Well, and, you know, one of the things that
hasn't been mentioned yet that I am very concerned about--I
guess it has been mentioned on the positive side by Mr.
Sander--is, you know, whenever I meet with our employees I have
to interact with them, not necessarily respond because I am not
totally responsible for, you know, the red zone funds, but they
are aware of the troubled funds.
$80 million a year is the number we contribute to red zone
funds. And I have to be able to look back and our employees,
you know, who are concerned about whether they are going to
have a retirement benefit and we are contributing such
tremendous dollars to funds that need to be improved, and I
think your point is right----
Mr. Andrews. I realize my time is up, but I think that
employers like yours are--like you are in a situation here
where you are not in any way culpable or responsible for this
problem but it is a huge business problem for you and your
employees, and I think we ought to find some more fair way to
address that.
Ms. McReynolds. Yes. Thank you.
Chairman Roe. Thank the gentleman for yielding.
Mr. Rokita?
Mr. Rokita. Thank you, Mr. Chairman.
Hello again, everyone.
Following up on a conversation between Mr. Andrews and Ms.
McReynolds, do the other witnesses have anything to add or take
away from that? Do you agree, disagree?
Mr. Shapiro?
Mr. Shapiro. I would like to add one thing, which is, you
know, when you look at the multiemployer plan universe, the
actual--the largest sector of multiemployer plans by a healthy
margin is actually the construction industry. That is where
most of the plans are.
And they have a somewhat different problem, by and large.
They don't really generally have an orphan problem, per se, but
they have a work level problem. You know, the construction
industry right now is down--in the union areas--numbers vary,
but easily in excess of 20 percent, and in some parts of the
country it is more like 50 percent. And much of the problems
facing those plans would be repaired simply by some economic
recovery and get some construction going on. I think the vast
majority of construction industry plans, even the ones that
have some troubles, if they can get their work levels even
halfway back to where they were, you know, 5 years ago those
troubles would go away pretty quickly.
So their perspective is a little different than what has
been discussed here on this panel.
Mr. Rokita. Thank you, Mr. Shapiro.
Anyone else?
Seeing none, I wanted to follow up with Mr. Ring again,
along the same lines we were discussing earlier. On page eight
of your testimony, at the last paragraph there you say, ``What
is important to understand is that in certain sectors of the
economy and industries the extent of the multiemployer pension
plan problem is much worse than has widely been reported.'' Can
you get any more specific on that, what you wrote or what has
been said here today? What exactly do you mean and how
extensive is this?
Mr. Ring. Yes. I would be happy to.
You know, we talked earlier about the fact that some
reports say red zone plans are 27 percent of the overall plans
and--multiemployer plans in the country. But of those 27
percent there are a number of those that are facing insolvency,
and----
Mr. Rokita. How many?
Mr. Ring. What is that?
Mr. Rokita. How many? Roughly how many?
Mr. Ring. I don't know if you have a number on----
Mr. Rokita. Mr. Shapiro?
Mr. Shapiro. I do. It is impossible to come up with a
precise figure, and we have tried. Right now we have been
estimating somewhere in the neighborhood of 5 percent of all
plans have a danger of insolvency.
Mr. Rokita. Thank you.
Mr. Shapiro. It is not a precise number at all, but that is
a ballpark figure of what we are looking at.
Mr. Rokita. Thank you, Mr. Shapiro.
Mr. Ring?
Mr. Ring. Well, and, you know, at our firm we have a number
of multiemployer plans and we meet regularly to talk about
issues facing the plans. I am familiar with about a dozen plans
with enough participants that it will not take the--take long
to deplete the PBGC's current funding. So, you now, while we
could say, well, there are a lot of plans that are doing fine
and it is just a small number of plans that are insolvent,
those small number can really wreak havoc relatively quickly.
Mr. Rokita. Thank you.
Same question to the other witnesses. Anything to add
there?
Hearing none, I yield back. Thank you, Mr. Chairman.
Chairman Roe. I thank the gentleman for yielding.
Mr. Kildee?
Mr. Kildee. Just briefly, between the Americans--United
States system and the Canadian system--we have many companies
that operate in both the countries, and their economies are
similar--are there elements of the Canadian system--I will
address this to Mr. Sander--that perhaps we could emulate,
embrace, or are there some elements that we should avoid?
Anything we could learn from looking at our neighbor to the
north?
Mr. Sander. I have really been focused so much more on the
Western Conference side, I think maybe Mr. Shapiro has some
ideas in that regard.
Mr. Kildee. I defer to Mr. Shapiro.
Mr. Shapiro. Another aspect of our commission that, again,
that has been going on for many months now is we actually had
people come and talk to us from other countries to ask the
questions of, how do your plans work? You know, what do you
think of them? What are the strengths and what are the
weaknesses?
And we had a fellow come and speak to us a few months ago
from Canada and he gave us a very excellent presentation on how
their plans work. There are some similarities and some
differences. You know, on the surface they look--their
multiemployer plans look much like ours. The benefit structures
I think are similar; the way they are managed is fairly
similar.
But one thing which is fairly different is in most of the
provinces--and they actually have different rules that vary by
province--but in most of the provinces there is no concept of
withdraw liability. So if an employer chooses to leave they
leave and the plan has to make due as best it can.
And in some ways--it is interesting because a lot of the
employers that we have that want to leave the system, you know,
they don't leave because of withdraw liability but they also
want to leave because of withdraw liability. Once you take it
away there is not as much reason to leave in the first place.
So it is sort of--it is hard to say what the true impact is
of that concept, but in Canada that concept is absent. What
that means is ultimately if the assets of the plan are
insufficient to pay benefits because of a crisis or because of
whatever reason their benefits, in contrast to ours, are not
guaranteed. So what would happen then is if the fund does not
have enough money to pay benefits the trustees ultimately,
after they have exhausted all of their other options of trying
to negotiate more money, of trying to fix things perspectively,
do have the authority to lower benefits. That is a power that
by and large our trustees do not have.
That concept has certainly gotten a lot of discussion with
our commission and I think at this point I can't really comment
on, you know, to what degree we feel like we would be
interested in that, but I can certainly say that we have
discussed it extensively.
Mr. Kildee. Thank you very much.
Thank you, Mr. Chairman.
Chairman Roe. Thank the gentleman for yielding.
Mrs. Roby?
Mrs. Roby. Thank you, Mr. Chairman.
Thank you all for being here today. We really appreciate
it. In the short time I have been here you have already given
me a lot of insight and I look forward to reviewing the first
round of questions that were asked today.
Mr. Ring, can you discuss some of the well-intentioned but
possibly constraining legal boundaries limiting plan trustees
as they consider changing the benefits under the law? And I
think the perfect example is the anti-cutback rules, but could
you expand on that?
Mr. Ring. Well, as was said, the PPA put in place some
very, very good requirements and tools for trustees of plans,
and in a number of the plans that are well-funded and have a
broad base of employers those type of tools are very useful and
have kept the plans in good shape.
The plans that are of real concern are the ones that are
facing insolvency. And in those places, in those plans those
tools and restrictions of the PPA actually tie the hands of the
trustees to a certain extent.
I serve as counsel to a number of trustees, boards, and
they are incredibly frustrated that they have nothing to do--
nothing that they can really do except watch the plan slide
towards insolvency. They have cut benefits to the absolute bare
minimum. They really can't cut any further. And they have
raised contributions to a place where they know they are going
to bankrupt their contributing employers.
We know of plans that have actually just capped the highest
contribution rates because they know and they have gone out and
got studies to show that if they raise the contribution rates
any higher they will put their golden gooses out of business.
So those are--there are no other tools, and that is the thing
I--and Congressman Andrews mentioned it earlier, they are--I
think trustees in particularly in those type of plans need to
have some tools to be able to address these type of funding
issues.
Mrs. Roby. In your experience, I mean, how can plan funding
concerns have affected business or legal decisions made by your
clients?
Mr. Ring. Well, the--so many contributing employers these
days are fixated on this pension problem. Collective bargaining
is absolutely focused on the pension problem. When unionized
employers look at their overall labor costs most of the time
the wages and other cost structures are probably in line with
their competitors; it is the pension cost that is just
completely off the mark.
And so, you know, in collective bargaining that is a--it is
a huge issue. It affects the contributing employers in their
ability to attract investors, to get any type of financing. And
so it really limits and constrains employers in these plans and
their ability to compete in the marketplace.
Mrs. Roby. Can we just go back for 1 second--the potential
tools--and you may have discussed this already, but going back
to my first question, can you give some examples of what some
of, you know, the best tools would be that we could provide to
deal with this limiting structure that is in place now?
Mr. Ring. Well, Mr. Shapiro mentioned it, it is something
that I think is going to have to be looked at, and that is,
there may be certain financial benchmarks where trustees are
going to have to be able to look at reducing accrued benefits
for retirees. It is a kind of the third rail of pension
discussions because no one wants to address that, but--and I
understand, you know, the sensitivities because these promises
were made to the pensioners.
On the other hand, their benefits are going to be cut to
PBGC minimums if nothing is done and it will be an even greater
cut. And in many ways these pensioners, while they continue to
receive their full pensions, the active employees are receiving
very little accruals on their pension; they are receiving even
less, you know--I have been involved in negotiations for
concessions where employees are making 15 percent--or they have
taken 15 percent wage concessions, currently.
So, you know, in terms of the shared sacrifice in this
economy maybe looking at some type of benefit modifications for
pensioners is going to be necessary.
Mrs. Roby. Thank you.
My time is expired.
Chairman Roe. Thank the gentlelady for yielding.
Mr. Thompson?
Mr. Thompson. Thank you, Chairman. Thanks for hosting this
subcommittee hearing. A very important issue. When I came to
Congress along with the chairman here in January 2009 some of
the first businesses that I visited this was an issue. These
were obviously economic tough times at that point, but some of
these were very solvent, strong companies doing well and the
only potential financial threat was trying to deal with these
pension programs.
And in fact, the potential program--the pension programs at
that point--and I think it--some of it was an unintended
consequence of the Pension Protection Act of 2006. It was the
pension program and those funding requirements that had almost
the potential to put them out of business, whereas they were
solvent, going well even in tough economic times.
And so I want to come back to the whole issue of
competitiveness. Ms. McReynolds, I know you touched on that.
You talked about, you know, the significant differences in
terms of pension costs. Looking at your testimony, you know,
talk about 257 percent higher for those average nonunion
employers and it was an astronomical number, your 2011 per
employee pension costs were 1,437 percent higher than those
competitors--one or two for nonunion competitors.
I wanted to look at the broader implications of that. What
is the broader implications in terms of competitiveness,
solvency on your business as a result of that issue?
Ms. McReynolds. If we had the orphan retiree problem
solved--in other words, we didn't have to bear the--the cost
for people that never worked for us, our company would be much
more competitive in the marketplace. By that I mean, you know,
there is a certain--we are in the less-than-truckload business.
There is a market for that, okay? There is a variety of types
of customers and they require a variety of service levels and
will pay certain prices. Some of those customers are more price
sensitive than others.
What happens to us as we have to deal with this cost is
that we more and more have a smaller slice of that market that
is available to us. It is like the very most premium, where we
give, you know, the highest level of service because we have
higher prices, we are worth it, you know, when you get right
down to it, and I wouldn't suggest that we are not, but if we
were more competitive we would have a broader part of the less-
than-truckload market available to us and that would allow us
to grow our company and add jobs to our company.
And, you know, let me say, you know, again, we are very
comfortable paying the retirement benefits for our own
employees. We are very concerned about them having benefits
when they retire. Our basic problem is having to pay for people
who never worked for us.
Mr. Thompson. Just as a follow up, you know, one way to
ensure plan solvency is to continually raise contributions. Can
you explain whether these problems can be solved simply by
requiring larger contributions?
Ms. McReynolds. We have experienced that. I think in my
testimony I also reference in our last collective agreement
that began in 2008, because of PPA and the requirements for red
zone and yellow zone plans we had a 7 percent increase in our
pension cost every year that actually resulted in 40 percent
higher pension costs, you know, from 2008 until 2013. That was
a period of time where no one was able to increase pension
costs because of what was going on with the economy, yet we had
to deal with that.
And so, you know, we are in a situation where because of
the requirements under PPA kind of the normal collective
bargaining process can't function the way that it needs to, and
I think Mr. Ring commented about this earlier. We need the
tools to be able to address our costs in a way that make sense
at the collective bargaining table rather than having to have
ever increasing contributions that just are a burden and make
us less competitive.
Mr. Thompson. Thank you very much.
Chairman, I yield back.
Chairman Roe. I thank the gentleman for yielding.
And I want to thank the panel today, the witnesses, for
taking your time to testify in front of the committee. It has
been an extremely informative committee--subcommittee hearing,
and I will yield now to the ranking member for closing remarks.
Mr. Andrews. Well, thank you, Mr. Chairman, for--and your
staff and our staff for working hard to put together an
excellent panel. I think the members have been educated by this
and we thank the panel for all their preparation.
Again, I think it is both welcome and refreshing that there
have been ideas put forward here about how to address this
problem, and I am not suggesting that these are universally
agreed to or that they are all right, but I am hearing some
things I think sound good. One is, with respect to plans that
are burdened because of a lot of orphaned retirees there ought
to be some credit facility available that helps that plan get
through the present situation so it can see the light at the
end of the tunnel, at least reduce those costs. Where the
private sector can provide that credit facility, great; where
it can't, I think we need to look at some other mechanism.
I also think that any such credit facility that is made
available should carry with it the obligation to enact some of
the reforms we have heard about this morning so the plan can
strengthen itself internally. I think it shouldn't be a blank
check; I think it should be a quid pro quo where if you do your
part, if there is truly shared sacrifice there is a benefit for
that shared sacrifice.
I certainly think there should be no discharge in
bankruptcy of a withdraw liability. I think this would be a
catastrophic result for this whole sector and I think working
with our friends on the Judiciary Committee we need to address
that if, in fact, there is an adverse court decision.
And then finally, for those who are in the enviable
position of being able to choose to overfund their plans, I
don't think there should be any retardation of that at all. I
think such overfunding should be completely deductible. My
personal view is that if the money--if the employer or the
trustees want to they ought to be able to transfer that money
into another ERISA trust, like for health care, if they want
to. I think that we ought to encourage people to put money away
to help their employees in an ERISA trust under just about any
circumstances.
And I think we have learned a lot today, and I am sure some
of those ideas would work, some wouldn't. We would welcome
additional ideas, certainly, from the community.
But as I said at the very outset, this is a problem that
has a solution. It doesn't require the parties to fight each
other, and we heard none of that this morning. It does require
us to listen and learn, and I think we learned a lot from you
this morning.
And, Chairman, I commend you for your leadership on this
and promise you that our side will work in good faith very hard
to try to get this problem fixed. Thank you.
Chairman Roe. I thank the gentleman for yielding.
And I want to thank the committee once again, and learned--
I learned a lot today and certainly am committed to try to
help--be of any assistance that we can be to help solve this
problem. And certainly I think Ms. McReynolds' statement is
that we don't mind paying for our employees is one of the most
reasonable things I have ever heard, but for people that have
never worked for our company we have a little bit of a problem
with that, and I certainly get that. I put myself as a
fiduciary in a single-employer system and think, ``What if I
were asked to pay for the pension benefits of my competitors
across town?'' That is exactly what you are asked--have been
asked to do with this through the way it is set up.
I agree with Mr. Andrews. I think there are solutions here,
and we are certainly committed to trying to find those, and I
think we need to get on with it, because 18 months is not--that
is how long it is between now and 2014.
So I thank you all, and we look forward to working with
you.
And being no further business, the subcommittee stands
adjourned.
[Additional submissions of Chairman Roe follow:]
July 3, 2012.
Hon. Phil Roe,
U.S. House of Representatives, Washington, DC 20515.
Dear Chairman Roe: As members of the Construction Employers for
Responsible Pension Reform, a coalition of trade associations
representing thousands of construction companies that contribute to
multiemployer defined benefit pension plans (``MEPPs''), wish to
express our concern with a statement made by Mr. Josh Shapiro, Deputy
Director for Research and Education, National Coordinating Committee
for Multiemployer Plans. Mr. Shapiro spoke during the June 20, 2012,
hearing on Assessing the Challenges Facing Multiemployer Pension Plans
before the Education and Workforce Subcommittee on Health, Employment,
Labor and Pensions. Mr. Shapiro properly acknowledged that recent
reductions in industry activity is a significant problem for
construction employers that contribute to MEPPs, but his response in
answer to a question that ``if the work levels get even halfway back,
their problems will go away'' vastly understates the multiple
challenges construction industry plans are facing nationwide.
Construction industry employers contributing to MEPPs are in a
particularly precarious position at this time. It is true the economic
recession has affected the construction industry to a far greater
degree than most industries, and the decline in demand for construction
services has led to an extraordinary decline in work hours for
construction workers. At the same time, however, severe investment
losses have devastated plan assets, and rigid Pension Protection Act
(PPA) funding rules and anti-cutback restrictions have put pressure on
contributing employers. Bankruptcy and abandonment by other
contributing employers brings even more pressure to those remaining
employers. Unfortunately, the collapse/insolvency of defined benefit
pension plans is a real and immediate problem. Even for plans not
currently in a precarious funding position, collapse/insolvency is a
highly predictable outcome.
It is clear that recovery of the construction economy alone will
not solve the MEPP crisis plaguing contributing employers. While plans
may be able to improve their funded status as the construction economy
improves, the level of improvement would likely be insufficient to
overcome the combined effects of the economic downturn, decline in
competitive market share, withdrawal of contributing employers, and an
aging workforce. The reasons include:
Current and future construction industry economic
contractions will lower contribution income, which is based on hours
worked; while, at the same time, contribution rates are going up and
competition for business is great.
Stock market instability for the foreseeable future. Under
the best of circumstances, plans would take 15 years or more to recover
from 25 percent-plus market losses incurred in 2008 and 2009.
Shrinking contribution base causing a progressively
unfavorable active-participants-to-retired-participants ratio--i.e.,
fewer and fewer construction employers are contributing to MEPPs, and
those remaining have a shrinking market share, causing a decline in
hour-based contributions for active participants (workers) while plans
are facing benefit pay-outs to ever-increasing numbers of baby-boomer
retirees.
Ironic position of successful employers ultimately at risk
because pension fund and withdrawal liability rules leave the last
surviving company with all the liability for pension fund solvency.
Instability of plans in other industries, such as the
trucking industry, affecting the viability of construction employers
that contribute, or previously contributed, to those plans.
The risk, even for employers contributing to plans not in immediate
danger, is unsustainable. It is an unstable system with very real and
foreseeable dire consequences. The industry cannot rely on market
growth alone as a solution for these plans' recovery. According to
Segal, in 2001 construction industry plans had an average funded ratio
of 98 percent; however in 2006, the year construction industry
employment and man hours peaked, plans were only funded at an 80
percent ratio.
As you know, we are committed to developing constructive solutions
to the problems facing multiemployer pension plans. We continue to work
diligently with a broad coalition of labor and management from affected
industries to jointly present ideas to Congress. Congress and the
agencies have a coming window of opportunity to make needed structural
changes to ERISA that will ensure the long-term viability of
multiemployer pension plans. We look forward to working closely with
you on that critical project.
Sincerely,
Associated General Contractors of America,
Association of the Wall and Ceiling Industry,
Eastern Contractors Association, Inc.,
International Council of Employer of Bricklayers and Allied
Craftworks,
Mechanical Contractors Association of America,
National Electrical Contractors Association,
Sheet Metal and Air Conditioning Contractors National
Association,
The Association of Union Constructors.
______
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 multiemployer pension plans--is of
significant concern to our membership.
As sponsors of multiemployer defined benefit plans, a number of
Chamber members have a substantial interest in the viability of the
multiemployer plan system. Funding for multiemployer plans comes
entirely from employers, who are at financial risk when a plan faces
funding problems. Therefore, funding and accounting issues create
substantial challenges not just in maintaining the plan but also for
the employers' business.
While all defined benefit plans have been negatively impacted by
the financial crisis, certain multiemployer plans have been
particularly hard hit as the current financial crisis exacerbates long-
term funding problems resulting from shifting demographic trends and
financial problems within certain industries. While current law
requires insolvent employers to pay their share of liability upon
withdrawal from the plan, most bankrupt employers are unable to
realistically meet that liability. Therefore, the remaining employers
become financially responsible for the retirement liabilities of the
``orphaned'' retirees. This system results in untenable contribution
levels for the remaining employers, which can force them into
insolvency as well.
Moreover, in a multiemployer plan, there is joint and several
financial liability between all employers in the plan. Therefore, when
one employer goes bankrupt, the remaining employers in the plan are
responsible for paying the accrued benefits of the workers of the
bankrupt employer. Because of this liability, there is the fear of an
employer being ``the last man standing'' or the last remaining employer
in the multiemployer plan.
Reform of the Multiemployer Plan System is Necessary. The Chamber
supports multiemployer funding reform. Without such reform, many
employers--including many small, family-owned businesses--are in danger
of bankruptcy.
In April, the Chamber released a white paper entitled ``Private
Retirement Benefits in the 21st Century: A Path Forward.'' The paper
makes recommendations for all retirement plans and includes a special
section for multiemployer plans to address the unique challenges faced
by them. In that paper, we offered the solutions detailed below.
Withdrawal liability is a great burden that may force employers to
stay in multiemployer plans even when it is not economically feasible.
The Chamber feels that a comprehensive solution must be sought to allow
for a more robust multiemployer plan system and to maintain equity
among contributing employers.
Another problem arises from the nature of multiemployer plan
funding. Benefit increases are not anticipated in funding but are often
granted at contract renewal. These increases often apply not only to
active workers, but also to retirees. This practice may put the plan
into an underfunded situation because the benefit increases cause a
``loss'' for the year. This loss is generally funded over a long
amortization period, such as 20 years. While this additional expense
may be projected by the plan to be affordable for active employers that
are contributing a negotiated contribution rate (usually dollars per
hour or a percentage of pay), a withdrawing employer may be immediately
liable for its share of the underfunding.
In order to prevent bankruptcy among remaining employers in
multiemployer plans and unanticipated bankruptcy on withdrawing
employers, comprehensive funding reform should focus on allowing plans
to be financially solvent on an ongoing basis. Examples of such
provisions include, but are not limited to, additional tools for
trustees to maintain solvency, partitioning plans and promoting mergers
and acquisitions between certain plans.
Even for plans that are not at financial risk, changes could ensure
that they remain financially viable. For instance, the assumptions used
to determine withdrawal liability should be consistent with those used
to determine contribution requirements. They should not be more
conservative, forcing the withdrawing employer to subsidize active
employers. In addition, benefit increases should be moderated. In the
past, benefits were increased if the plan became overfunded and, as
noted above, granted even when the benefit increase would make the plan
underfunded. This prevented plans from being able to fall back on extra
contributions in later years. As a result, any future underfunding
would require additional contributions by current employers. Reform
efforts should focus on moderating benefit increases so that they are
not made simply because the plan is overfunded. One way to do this
would be to require disclosure of the amount of liability associated
with benefit increases--not just contribution increases.
Finally, the procedural rules that allow employers to arbitrate
disputes over the amount of withdrawal liability require change, at
least with respect to small employers. For example, the time frame for
requesting arbitration is very short, and a small employer, who may not
have significant administrative resources, is likely to miss it.
The suggestions above are just examples of steps that policymakers
can take. The Chamber is committed to addressing multiemployer funding
issues and is willing to discuss any viable ideas that allow
participating employers to remain financially solvent.
Reform of the Multiemployer System is NOT a Union Bailout. As
mentioned above, contributions to multiemployer plans are funded
entirely by employers, not unions. Therefore, it is employers at
financial risk, not unions and reforms to multiemployer plans have no
financial impact on unions or their activities. Misleading
characterizations, such as this, hinders progress that is essential to
implement much-needed reform.
Without a real reform to the multiemployer system and resolutions
to the underlying problems, more employers will be forced into
bankruptcy and more workers will be left without a secure retirement.
We stand ready to work with Congress and all interested parties to
resolve these issues as soon as possible. Thank you for your
consideration of this statement.
______
[Additional submission of Mr. Andrews follows:]
June 20, 2012.
Hon. Phil Roe,
U.S. House of Representatives, Washington, DC 20515.
Dear Representative Roe: As employers in the construction industry,
the Construction Employers for Responsible Pension Reform, we would
like to express our fundamental components for multiemployer pension
plan reform that will create long-term viability for employers. The
group of 8 leading construction trade associations represents more than
34,000 construction employers, the vast majority of which are small
family-owned business.
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 54 percent are construction
industry plans.
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.
We believe that Congress should enact reforms that will:
Recognize the unique relationship between the employer and
workers in the construction industry
Promote a reasonable and sustainable retirement benefit
through shared risk
Provide flexible rules to allow trustees of plans facing
financial instability to adapt to changing economic and market
conditions as they occur
Mitigate the unintended consequences of the ``last man
standing'' rule enacted in the Multiemployer Pension Amendments Act
Guarantee transparency and reporting by plans to all
affected parties
These principles 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,
Associated General Contractors of America,
Association of the Wall and Ceiling Industry,
Finishing Contractors Association,
International Council of Employer of Bricklayers and Allied
Craftworks,
Mechanical Contractors Association of America,
National Electrical Contractors Association,
Sheet Metal and Air Conditioning Contractors National
Association,
The Association of Union Constructors.
______
[Whereupon, at 11:43 a.m., the subcommittee was adjourned.]