[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
CHALLENGES FACING MULTIEMPLOYER PENSION PLANS: EVALUATING PBGC'S
INSURANCE
PROGRAM AND FINANCIAL OUTLOOK
=======================================================================
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, DECEMBER 19, 2012
__________
Serial No. 112-70
__________
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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 December 19, 2012................................ 1
Statement of Members:
Andrews, Hon. Robert E., ranking member, Subcommittee on
Health, Employment, Labor and Pensions..................... 4
Roe, Hon. David P., Chairman, Subcommittee on Health,
Employment, Labor and Pensions............................. 1
Prepared statement of.................................... 3
Statement of Witnesses:
Gotbaum, Hon. Joshua, Director, Pension Benefit Guaranty
Corporation................................................ 6
Prepared statement of.................................... 8
Additional Submissions:
Mr. Gotbaum:
Addendum, ``Pension Benefit Guaranty Corporation Annual
Report 2012,'' Internet address to..................... 15
Response to questions submitted for the record........... 33
Questions submitted for the record from:
Kline, Hon. John, Chairman, Committee on Education and
the Workforce.......................................... 32
Chairman Roe............................................. 32
Scott, Hon. Robert C. ``Bobby,'' a Representative in
Congress from the State of Virginia.................... 33
Tierney, Hon. John F., a Representative in Congress from
the State of Massachusetts............................. 32
CHALLENGES FACING MULTIEMPLOYER
PENSION PLANS: EVALUATING
PBGC'S INSURANCE PROGRAM
AND FINANCIAL OUTLOOK
----------
Wednesday, December 19, 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 10:03 a.m., in
room 2175, Rayburn House Office Building, Hon. Phil Roe
[chairman of the subcommittee] presiding.
Present: Representatives Roe, Wilson, Thompson, Walberg,
DesJarlais, Hanna, Rokita, Bucshon, Barletta, Noem, Roby,
Andrews, Kucinich, Hinojosa, Tierney, Holt, and Scott.
Also Present: Representatives Kline and Miller of
California.
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; Barrett Karr, Staff Director; Brian Newell, Deputy
Communications Director; Molly McLaughlin Salmi, Deputy
Director of Workforce Policy; Todd Spangler, Senior Health
Policy Advisor; Alissa Strawcutter, Deputy Clerk; Aaron
Albright, Minority Communications Director for Labor; Tylease
Alli, Minority Clerk; John D'Elia, Minority Staff Assistant;
Daniel Foster, Minority Fellow, Labor; Brian Levin, Minority
New Media Press Assistant; Megan O'Reilly, Minority General
Counsel; Julie Peller, Minority Deputy Staff Director; and
Michele Varnhagen, Minority Chief Policy Advisor/Labor Policy
Director.
Chairman Roe. A quorum being present, the Subcommittee on
Health, Employment, Labor, and Pensions will come to order.
Good morning, Director Gotbaum. And it is good to see you
again. We appreciate your taking your time to be with us this
morning.
Before we begin, I would like to take a moment to extend my
condolences to the people of Newtown, Connecticut. Last week,
an unspeakable act of evil killed 20 innocent children and six
amazing adults, changing our country and the community around
Sandy Hook Elementary School forever. As a Nation, we continue
to stand by the people of Newtown and lift them up in our
prayers.
And I now yield to my friend Congressman Andrews for any
comments he may have.
Mr. Andrews. Good morning, Chairman. Thank you for
beginning our gathering with the appropriate memorial to those
who suffered such a loss in Connecticut and across the country.
This is the Committee on Education and Labor. And the idea
that such an act of pure unadulterated evil could take place in
a school in this country is not something we can easily
process. Suffice it to say that there is unanimous feeling, I
know, on this committee that our hearts and prayers go out to
all those afflicted by this unspeakable loss.
There is a higher purpose in life than politics. It is
loving our children. And extending that love to those who
suffered from this is something I certainly will join you in
with a heavy heart but with a strong conviction.
Chairman Roe. On behalf of the committee, I ask that we
honor memories of those who died by observing a moment of
silence while we please stand.
You may be seated. Thank you for that privilege.
And now let's turn to the issue before the subcommittee
this morning. Today's hearing is our second opportunity in
recent months to examine the multiemployer pension system. In
June, we discussed broadly the politics governing the system
and its structural challenges. Since that hearing, news reports
have reminded us of the problems plaguing many pension plans
and the need for reforms that will help promote a stronger
system. Hostess Brands, an iconic American company for more
than 80 years, decided in November to close its doors and lay
off 18,500 workers. Hostess participates in 42 multiemployer
pension plans, and its total withdrawal liability, the penalty
a company pays when exiting a plan, could exceed $2 billion.
Yet it is uncertain whether that money will be collected in
bankruptcy. Those employers who remain in the plans will have
to provide Hostess employees the retirement benefits they
earned.
Regrettably, the Hostess story is one that is becoming all
too common in the multiemployer pension system. An employer
withdraws from a pension plan leaving behind unfunded promises
that then fall to the remaining employers. At times, this can
drive even more employers out of the system, creating a domino
effect that undermines the strength of the individual plan and
the pension system as a whole.
These events have a profound effect on workers, and they
also impact the Pension Benefit Guaranty Corporation. The
Federal agency provides financial assistance to multiemployer
pension plans in distress, a responsibility that has grown
significantly in recent years. According to its annual report,
PBGC has obligations of $7 billion in future financial
assistance and a 57 percent increase since 2011. The agency
believes there is a 30 percent chance its multiemployer
insurance program will be insolvent in less than 20 years.
Meanwhile, its total deficit continues to grow and now stands
at $34.4 billion.
Maintaining the status quo is no longer possible.
Provisions in the law governing multiemployer pensions will
expire in 2 years, which means Congress has an important
opportunity to study the system, assess its strengths and
weaknesses, and pursue solutions that support workers without
discouraging participation in the voluntary pension system.
To do this successfully, we need the facts as quickly as
possible. Unfortunately, the administration has a history of
delaying the facts and slowing the work of this committee. For
example, it took nearly 9 months to get answers to questions
submitted by members of the committee, both Republican and
Democrat, after our hearing with Director Gotbaum in February.
Only now are we able to complete the hearing record.
I am also troubled by two missing reports that were due
last year. These reports should provide important details on
multiemployer pensions, including the sufficiency of current
premium levels and the impact of funding rules on small
employers. The law requires the PBGC to finish these reports by
the end of last year and yet we are still waiting. We are now
told to expect the reports by the end of this year.
Congress is ultimately responsible for legislating changes
that will improve the long-term health and stability of the
multiemployer pension system. We cannot do our work if the
administration fails to do its job in a timely manner. Blaming
changes to the law enacted 6 months after the reports were due
is not an acceptable excuse.
The success of the multiemployer pension system depends
upon many factors, such as a strong economy, practical
promises, and a diverse group of participating employers. It
also requires policymakers working together on reforms that
serve the interests of workers, employers, and retirees.
Director Gotbaum, you play a vital role in that effort. I hope
you will help us get the answers we need without unnecessary
delay. And thank you for your service. And we look forward to
working with you.
I now recognize my distinguished colleague, Rob Andrews,
the senior Democratic member of the subcommittee, for his
remarks.
[The statement of Chairman Roe follows:]
Prepared Statement of Hon. David P. Roe, Chairman,
Subcommittee on Health, Employment, Labor and Pensions
Good morning. Director Gotbaum, it is good to see you. We
appreciate you taking time to be with us this morning.
Before we begin, I would like to take a moment to extend my
condolences to the people of Newtown, Connecticut. Last week, an
unspeakable act of evil killed 20 innocent children and six incredible
adults, changing our country and the community around Sandy Hook
Elementary School forever. As a nation, we continue to stand by the
people of Newtown and lift them up in our prayers. I ask that we honor
the memories of those who died by a observing a moment of silence.
[Moment of silence.]
Thank you.
Now, let us turn to the issue before the subcommittee this morning.
Today's hearing is our second opportunity in recent months to
examine the multiemployer pension system. In June, we discussed broadly
the policies governing the system and its structural challenges. Since
that hearing, news reports have reminded us of the problems plaguing
many pension plans and the need for reforms that will help promote a
stronger system.
Hostess Brands, an iconic American company for more than 80 years,
decided in November to close its doors and lay off 18,500 workers.
Hostess participates in 42 multiemployer pension plans and its total
withdrawal liability--the penalty a company pays when exiting a plan--
could exceed $2 billion. Yet it is uncertain whether that money will be
collected in bankruptcy. Those employers who remain in the plans will
have to provide Hostess employees the retirement benefits they earned.
Regretably, the Hostess story is one that is becoming all too
common in the multiemployer pension system. An employer withdraws from
a pension plan, leaving behind unfunded promises that then fall to the
remaining employers. At times, this can drive even more employers out
of the system, creating a domino effect that undermines the strength of
the individual plan and the pension system as a whole.
These events have a profound effect on workers, and they also
impact the Pension Benefit Guaranty Corporation. The federal agency
provides financial assistance to multiemployer pension plans in
distress, a responsibility that has grown significantly in recent
years.
According to its annual report, PBGC has obligations of $7 billion
in future financial assistance--a 57 percent increase since 2011. The
agency believes there is a 30 percent chance its multiemployer
insurance program will be insolvent in less than 20 years. Meanwhile,
its total deficit continues to grow and now stands at $34.4 billion.
Maintaining the status quo is no longer possible. Provisions in the
law governing multiemployer pensions will expire in two years, which
means Congress has an important opportunity to study the system, assess
its strengths and weaknesses, and pursue solutions that support workers
without discouraging participation in the voluntary pension system.
To do this successfully, we need the facts as quickly as possible.
Unfortunately, the administration has a history of delaying the facts
and slowing the work of this committee. For example, it took nearly
nine months to get answers to questions submitted by members of the
committee--both Republican and Democrat--after our hearing with
Director Gotbaum in February. Only now are we able to complete the
hearing record.
I am also troubled by two missing reports that were due last year.
These reports should provide important details on multiemployer
pensions, including the sufficiency of current premium levels and the
impact of funding rules on small employers. The law requires PBGC to
finish these reports by the end of last year and yet we are still
waiting. We are now told to expect the reports by the end of this year.
Congress is ultimately responsible for legislative changes that
will improve the long-term health and stability of the multiemployer
pension system. We cannot do our work if the administration fails to do
its job in a timely manner. Blaming changes to the law enacted six
months after the reports were due is not an acceptable excuse.
The success of the multiemployer pension system depends upon many
factors, such as a strong economy, practical promises, and a diverse
group of participating employers. It also requires policymakers working
together on reforms that serve the interests of workers, employers, and
retirees.
Director Gotbaum, you play a vital role in that effort. I hope you
will help us get the answers we need without unnecessary delay. Thank
you for your service and we look forward to working with you.
______
Mr. Andrews. Thank you, Mr. Chairman. And good morning
again.
Mr. Gotbaum, thank you for being with us this morning and
for your service to our country. You are running a very
important agency, and I know you are very dedicated to that
task. It is good that you are here this morning to answer the
committee's questions.
Ten million Americans benefit from a system that has served
this country for many decades very well. And it is a system
where pensions and other benefits are provided, where small
business people, contractors, trucking companies, markets,
supermarkets, and others get together and pool their resources
and share costs in order to provide pensions and other employee
benefits. This is what is known, as the chairman said, as the
multiemployer system.
The multiemployer system in all cases involves a collective
bargaining agreement that sets the terms and conditions of the
benefits that will be given. The system has worked
extraordinarily well and it is the system that 10 million
Americans rely upon for their pension. It is essentially and
fundamentally sound, but there are some significant problems
that we must deal with in order to assure its soundness.
The graphs that are to my right tell the story of the last
few years in this situation. Prior to the financial downturn of
the first decade of the new century, by and large,
multiemployer pension plans were exceedingly healthy. We then
had the downturn of 2001, followed by the market crash of 2008
and 2009. And if you look at the chart that is to my right, we
are in a situation where only 32 percent of multiemployer plans
were in the healthiest category in 2009. That number has now
grown to 60 percent. So improvement in the economy and several
steps taken by this committee--at that time under the
leadership of our present Speaker John Boehner--helped us to
give plan trustees the tools to improve the situation.
Having said that, the disturbing element of that graph is
the red category at the bottom which indicates that roughly a
quarter of plans are in some significant financial distress.
This distress flows from a variety of causes. Typically, the
cause is that the employers--the trucking companies, the
supermarket owners, the construction contractors--are in very
difficult segments of our economy. You talk to any electrical
contractor, air conditioning contractor, trucking company, they
will tell you they have had very difficult times over the last
5 or 6 years. So that manifests itself in less money coming
into the business, fewer workers paying into the fund.
The second problem we can all see in our own 401(k)
accounts, or thrift accounts in the case of Federal employees,
that as market values have tumbled, so have our retirement
accounts. So the investments in many of these funds have not
kept pace with the needs of employees.
And then the third is a sort of demographic tidal wave that
I have to take some responsibility for. I was born in 1957, so
I am part of the baby boom generation. And as baby boomers
begin to retire and relatively fewer workers are in place to
pay into funds, you have more people drawing out and fewer
people paying in, which is a problem we see in Medicare and
Social Security, in single-employer plans, and certain of these
plans as well.
So the task that is before the committee is to think about
ways that properly balance the health of the small businesses
that make up these plans so they can continue to thrive and
prosper, fairness to present retirees, and a system that
protects taxpayers to the maximum extent so that the promises
made by the Pension Benefit Guaranty Corporation that Mr.
Gotbaum leads would never have to step in and reach into the
Federal Treasury in order to help these plans, should that
occur. Now I would hesitate to point out, there is no explicit
guarantee from Federal taxpayers for these plans. But the last
5 years have certainly showed us that moral hazard exists, and
taxpayers are very often called upon to make good for promises
they never explicitly made.
Our goal as a subcommittee, which the chairman has pursued
very diligently for the last year, is to make sure that the day
never occurs when we are in a situation where the 10 million
people who are in these pension plans would ever require any
consideration of a taxpayer step in to help make that problem
happen. So I am encouraged, Mr. Chairman, that this is the
second hearing that we have had to delve into this issue. And I
look forward to working with you in the new year to find
constructive solutions so that we can ensure the continued
vitality of the businesses that pay into these funds, the
continued security of the 10 million Americans who rely on
these funds. And I yield back.
Chairman Roe. I thank the gentleman for yielding.
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.
It is now my pleasure to introduce Joshua Gotbaum, who is
the director of the Pension Benefit Guaranty Corporation, where
he has served since 2010. As director, he is responsible for
the agency's management, personnel, organization, budget, and
investments. Mr. Gotbaum holds degrees from Stanford, Harvard
Law School, and from Harvard's Kennedy School of Government.
And I understand, Mr. Gotbaum, that you have some family
members here, and would appreciate you introducing your guests,
if you would.
Mr. Gotbaum. Thank you, Dr. Roe. I am accompanied this
morning, in addition to by the very competent staff of the
Pension Benefit Guaranty Corporation, by my mother-in-law,
Carol Lougheed, who I will say, to evidence the bipartisanship
with which I think pensions should be done, is a Republican.
Mr. Andrews. Mr. Chairman, if I might, it is not necessary
to swear in this witness because no one would fail to tell the
truth in front of----
Mr. Gotbaum. Their mother-in-law. Yes. And also my son
Adam.
Chairman Roe. Thank you for introducing your guests.
Before recognize you to provide your testimony, let me
briefly explain our lighting system. You have 5 minutes to
present your testimony. When you begin, the light in front of
you will turn green. When 1 minute is left, the light will turn
yellow. And when your time has expired, the light will turn
red, at which point I will ask you to wrap up your remarks as
best able. After you have testified, members will each have 5
minutes for questions. Now appreciate your testimony.
STATEMENT OF JOSHUA GOTBAUM, DIRECTOR,
PENSION BENEFIT GUARANTY CORPORATION
Mr. Gotbaum. Dr. Roe, Mr. Andrews, Mr. Chairman, members of
the subcommittee, thank you very much. Thank you very much for
holding your prior hearing. Thank you very much for holding
this hearing. With your permission, I will summarize the main
points.
I want to start with something which is basic, which is
that multiemployer plans are important. I come from the
business community. Employee benefit plans are complicated. And
one of the real benefits of multiemployer plans is they permit
several hundred thousand businesses--mostly small businesses--
in many different industries to provide retirement security
without needing a big H.R. department, just by writing a check.
That is a huge benefit.
In addition, as Mr. Andrews noted, for more than 10 million
people and their families, multiemployer plans give them a
pension that is portable, that they can take with them from job
to job, that doesn't require them to become an investment
expert or an actuary, and that gives them an income they can
depend on for the rest of their lives without worrying that
they or their spouse might outlive the money in their 401(k).
And as you can see from the map to your right and my left,
multiemployer plans cover businesses and people in every State
in the Union and, I daresay, virtually every congressional
district.
Like single-employer plans, the last decade was tough for
multiemployer plans. Their investments shrank, but their
commitments did not. So their contributions necessarily rose at
a time when the businesses had less work and less ability to
pay them. Six years ago, a bipartisan coalition in Congress,
with the support of the business and labor community, passed
the Pension Protection Act. That was an important piece of
legislation. It recognized that not all multiemployer plans
were alike, some plans are healthier than others, that
different plans have different needs, that they need
flexibility. Two years ago, a similar bipartisan coalition
passed the Pension Relief Act, recognizing, again, that
multiemployer plans, as well as single-employer plans, needed
greater funding flexibility.
So where are we today? After all the events of the past
decade, the financial health of these plans varies widely. As
you can see from the status graph, there is a wide range of
financial conditions. Two years ago, about a third of all the
participants were in plans that reported--a third of 10 million
people--were in plans that reported they were in green status.
Today about 60 percent do. Excuse me, that is not true. In the
information we got, you know, a few months ago, as at the
beginning of 2011, 60 percent do. So we think that is good
news. What that means is that a majority of the participants
are in plans that are recovering. They are recovering for a
whole variety of reasons: In part because of their markets, in
part because they were conservative, in part because they used
the authorities that the Congress gave them under the Pension
Protection Act, in part because of funding relief, and, let's
be honest, in part because of luck.
However, a minority of plans, maybe a couple of hundred,
lack the necessary economic base. As you can see there, that is
a smaller set of the population. It is not most plans. It is
the minority of plans. But it is a significant number of plans.
They lack the economic base. They have fewer active employees
and contributing employers. And those that they do have may be
unwilling or unable to cover the costs of retirees,
particularly the orphan retirees of other companies that no
longer contribute to the plan.
Without changes, some of these plans will not be able to
avoid insolvency. The reason I personally am encouraged, as in
the past, multiemployer plans, their trustees, their employers,
their unions, their professionals, and others are stepping
forward, looking for solutions that everyone can endorse. They
are changes to allow flexibility, changes to allow distressed
plans more robust tools. One effort worth noting is the
retirement commission sponsored by the National Coordinating
Committee on Multiemployer Plans. We have not seen the result
of their work. They have been very insistent that they keep
government out. But they say they will come forward, and we
look forward to hearing their results and commenting on and
analyzing it.
We think that is the right step, that what the Congress has
always done is, working consensually with the many businesses,
small businesses, and the unions that make up multiemployer
plans, to figure out what works. And so we think the right step
is to hear from the industry itself and then to respond and
work with it.
At the same time, PBGC's multiemployer insurance program
also needs a fresh look. This is a program which has not been
substantially modified in 30 years. PBGC does not have the same
tools for multiemployer plans that it has for single-employer
plans. PBGC pays lower benefits for multiemployer plans than it
does for single-employer plans. And PBGC gets much lower
premiums from multiemployer plans than it does from single-
employer plans. As a result, unless there are significant
changes, both for plans and in PBGC's programs and finances,
the agency will eventually end up without the tools and
resources to help the plans improve and without the resources
to continuing to pay benefits for those plans that do fail.
I am, as one who spends his life working on fixing
businesses, an optimist. The next 2 years provides an
opportunity, an opportunity for multiemployer plans, their
participants, their professionals, their businesses, and their
unions to work together with the Congress and the
administration to develop approaches that are flexible,
practical, and facilitate self-help. And that is why we are
enormously grateful for the committee's continuing interest. I
look forward to hearing your comments, to answering your
questions, to finally providing the reports that we have owed
you for a year, for which I regret, and to working with you to
preserve what is a really important form of retirement security
for tens of millions of Americans.
Chairman Roe. I thank you for your testimony.
[The statement of Mr. Gotbaum follows:]
Prepared Statement of Hon. Joshua Gotbaum, Director,
Pension Benefit Guaranty Corporation
Thank you for holding this hearing on multiemployer plans and on
PBGC's efforts to support them.\1\
---------------------------------------------------------------------------
\1\ As the Committee knows, PBGC and the Board agencies are working
to complete reports on both multiemployer plans and on PBGC's
multiemployer program. As we explained in a letter to the Committee on
this topic, we have not yet completed the reports in part to be able to
present more current information than would otherwise have been
available, in part to incorporate recent legislative changes, and for
other reasons. We expect to complete the reports very soon. We regret
the delay.
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Multiemployer plans are an important part of retirement security.
They affect hundreds of thousands of businesses and more than ten
million participants and their families. Unlike some other retirement
or savings plans, multiemployer defined benefit plans offer lifetime
retirement income.
Multiemployer plans offer employers, especially small businesses,
the opportunity to provide retirement benefits to their workers. They
are an affordable way for businesses to provide a defined benefit
pension without the administrative expenses and burdens of sponsoring a
separate company retirement plan.
There are about 1,340 ongoing multiemployer plans.\2\ They are not
all alike. They cover a variety of industries, including construction,
retail food, transportation, manufacturing, and services (e.g., hotel
and restaurant industry). They vary in size from small local plans
covering a few hundred participants to large regional or national plans
covering hundreds of thousands.
Together these plans held nearly $400 billion in assets at the end
of 2010, making them an important factor in the U.S. economy and
Americans' retirement security.\3\ Like single-employer plans,
multiemployer plans were strongly affected by recent declines in the
economy and the investment markets. Virtually all of these plans
suffered massive asset losses, causing underfunding to soar and
compelling increased contributions at a time of economic contraction.
---------------------------------------------------------------------------
\2\ There are also about 110 terminated plans. These continue to
pay benefits until assets are depleted, at which point PBGC funds
benefits and administrative costs.
\3\ Based on Form 5500 filings.
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After all the events of the past decade, the financial health of
these plans varies widely. The majority are recovering, in part by
relying on the tools and authorities provided to plans under the
Pension Protection Act of 2006 (PPA) and subsequent legislation, as the
economy and the financial markets improve. Some plans, however, lack
the necessary economic base and will not, absent changes, be able to
avoid eventual insolvency.
As a result, PBGC's multiemployer insurance program will need a
fresh look. Although the timing is uncertain, currently PBGC is at risk
of having neither sufficient tools to help multiemployer plans deal
with their problems nor the funds to continue to pay benefits beyond
the next decade under the multiemployer insurance program.
In the past, multiemployer plans, the Congress, administrations of
both parties, and others have worked together to preserve multiemployer
plans, so they continue providing retirement security to more than 10
million participants and their families. We understand that
multiemployer plan trustees, employers, unions, and others have been
discussing potential solutions and expect to make proposals to the
Congress and the Administration sometime next year. PBGC looks forward
to assisting in that process.
Why Multiemployer Plans Matter
Multiemployer defined benefit plans offer a broad range of
advantages:
They provide lifetime participant and spousal annuities.
They provide portability for employees who change
employers frequently within an industry, such as in the construction
trades.
They ease employers' administrative burdens: joint boards
of trustees administer these collectively bargained plans, retaining
professional investment advisors and benefit managers, and minimizing
employers' fiduciary obligations. The employer need only remit
contributions to the plan in agreed-upon amounts.
They reduce administrative and investment costs through
economies of scale.
Outside the multiemployer sector, many employers over the past
several decades have turned to defined contribution plans (such as
401(k) plans) to avoid the long-term liabilities, potential
contribution volatility, and compliance complexities of defined benefit
plans--and some have opted to offer no plan at all. This has also been
occurring in the multiemployer sector. Unfortunately, the result is
often that employees do not save enough for a secure retirement.
Furthermore, defined contribution plans often lack lifetime income
options, so many retirees are at risk of outliving their savings.
For all these reasons, at a time of inadequate retirement savings
and declining retirement security, it is important to explore ways to
preserve the multiemployer model.
The Last Decade was Tough for All Pension Plans
Until the 2000's, both single-employer and multiemployer defined
benefit plans were generally adequately funded (plan assets were
relatively high relative to liabilities). Strong investment returns
provided asset growth with an affordable level of contribution effort
by employers. Many plans also relied on excess investment returns to
support benefit increases. However, the turmoil in the financial
markets, both at the beginning and the end of the last decade, caused
both single-employer and multiemployer plans to suffer dramatic losses.
(Both kinds of plans had similar investment mixes.)
The effect on multiemployer plans of a $50 billion loss in asset
values following the 2001-2002 downturn and a $100 billion loss
following the 2008 downturn was devastating. Underfunding, which had
totaled less than $50 billion until 2000, increased eight-fold during
the next decade, using PBGC measurements.
Equally distressing to plans was the economic recession that
followed the 2008 crash, which hurt the industries in which these plans
operate. Contributions to multiemployer plans are generally based on
hours worked: as active employees were laid off and work hours were
reduced, plan contributions plummeted. At the same time, the
significant underfunding in these plans put pressure on employers to
increase contributions: Minimum required contributions, as calculated
by plan actuaries, rose precipitously and there were fears that hourly
contribution rates for some plans would have to triple or quadruple to
avoid a funding deficiency or, beginning in 2008, to conform to
benchmarks required by funding improvement plans or rehabilitation
plans under PPA.
Congressional Support for Multiemployer Plans
Congress has acted repeatedly to help reduce the strains on
multiemployer plans and provide contribution flexibility: in 2004,
certain plans were permitted to defer the charges related to one-time
investment losses; in 2008, plans could elect to delay implementation
of PPA requirements for one year; and in 2010, funding relief allowed
many plans to lessen the impact of 2008 investment losses on their
funded status and contribution requirements. Plans relied extensively
on this relief as they tried to regain their footing.
PPA Tools Have Helped
Most important, Congress in the Pension Protection Act of 2006
recognized that different plans would require different combinations of
authorities concerning benefits and contributions.
PPA required annual plan certifications based on standardized
funding and liquidity measures for determining the financial health of
plans. Plans in serious financial distress are identified as in
``critical'' (``red'') status, and plans experiencing some financial
difficulty are identified as in ``endangered'' (``yellow'') status or
``seriously endangered'' (``orange'') status.\4\ Plans not experiencing
financial difficulty are categorized as non-distressed (``green'')
status.
---------------------------------------------------------------------------
\4\ Critical status is triggered when a plan is less than 65%
funded (on the plan's actuarial basis) and projects a funding
deficiency within 5 years or projects insolvency within 7 years, or the
plan has similar funding or insolvency characteristics; endangered
status is triggered when a plan is less than 80% funded (on the plan's
actuarial basis) or projects a funding deficiency within 7 years
(including amortization extensions); seriously endangered status is
triggered when a plan exhibits both endangered status triggers.
---------------------------------------------------------------------------
After the turbulence of 2008, PPA steered many plans to a more
structured path towards improved funded status. Over the past few
years, hundreds of plans in endangered or critical status were required
to adopt funding improvement plans or rehabilitation plans to increase
contributions and reduce costs. Between 2008 and 2010, average annual
employer contributions to these plans increased from $4,300 per active
participant to $5,000.
In 2009 and 2010 combined, over 350 plans reported reducing future
benefit accruals as a way to limit costs and liabilities. In addition,
for participants who had not yet retired, PPA permitted plans in
critical status to reduce certain past benefits such as early
retirement subsidies that were adopted when plans appeared to have had
a surplus. In 2009 and 2010, more than 250 plans reported making such
past benefit reductions; those that provided information reported
erasing nearly $3 billion in past benefit liabilities.
The funding flexibility that multiemployer plans were given under
PPA was particularly valuable to cushion the effects of financial
market and economic disruptions. To accelerate plan funding, PPA
shortens the amortization periods for all types of unfunded liabilities
to 15 years. However, PPA also allows plans to extend their
amortization periods by up to 5 years, without government approval, if
they would otherwise face a funding deficiency in the future and they
are on a path to funding improvement. By 2010, 178 multiemployer plans
were operating under automatic amortization extensions, compared to
only six plans using extensions in 2005 when IRS approval was required.
In addition, PPA generally exempted plans from the excise tax assessed
against employers for funding deficiencies, thus freeing up employer
resources for the plan's rehabilitation program. For the 2010 plan
year, 90 plans reported funding deficiencies totaling $1.9 billion for
which an excise tax will not be owed.
PRA 2010 Funding Relief Also Helped
In 2009, nearly 70% of all plans (covering 70% of all participants)
were in moderate or serious financial distress under PPA standards--
endangered (yellow), seriously endangered (orange), or critical (red)
status. By 2011, these numbers had dropped significantly: yellow,
orange or red status plans represented only 40% of all plans and
currently cover about 50% of all participants. This improvement in
funded status is due in part to positive investment returns in 2009 and
2010 and the steps plans took to improve their status.
But it is also due to the funding relief in the Pension Relief Act
of 2010 (PRA 2010). This relief allowed certain plans to amortize net
investment losses incurred during the 2008 crisis over a 29-year
period--rather than the shorter 15-year period that would otherwise
apply--significantly reducing annual amortization charges and minimum
required contributions. It also allowed plans to increase the actuarial
value of their assets for funding purposes by recognizing 2008
investment losses over 10 years rather than the regular smoothing
period of five years.
Plans relied extensively on PRA 2010 relief--more than 700 plans
elected the relief. Form 5500 filings indicate that a decrease in
amortization charges and an increase in amortization credits boosted
these plans' aggregate credit balances by $2 billion over the amounts
reported in the 2009 plan year.
The special funding rules had an additional importance: increasing
the actuarial value of assets had the effect of inflating a plan's
funded percentage, and larger credit balances delayed the date of a
future funding deficiency, both of which positively impacted plans'
funded statuses under PPA. About 400 plans that elected the relief were
in non-distressed (green) status in 2010.
Notices from many of these plans explained that the relief provided
a buffer against future adverse experience and made it easier to avoid
endangered or critical status in future years.
Given the lack of timely information available on multiemployer
plans, it is not possible to fully quantify the effects of funding
relief on plans' PPA funded statuses. Nonetheless, it seems clear that
many plans enhanced their certified status as a result of the relief.
Many plans certified as in endangered (yellow) and seriously
endangered (orange) status for the 2010 plan year were re-certified to
non-distressed (green) status as a result of the application of PRA
2010 relief. About 170 critical (red) status plans (45% of red plans in
2010) used PRA 2010 relief, stating that the plan was expected to
either immediately move into endangered (yellow) or non-distressed
(green) status or to emerge from critical status sooner as a result of
the relief.
For some plans, the deferral of recognition of obligations
permitted by PRA 2010 may make funding of those obligations ultimately
more difficult. The ratio of active (employed) participants to inactive
participants in multiemployer plans as a whole has been steadily
declining: 60% of participants were active participants in 1990, but
only 40% of participants are active today. Plans reported about 1.3
million non-sponsored (``orphan'') participants (whose employers have
withdrawn) in 2010, whose underfunded benefits become the
responsibility of employers other than their own. A smaller pool of
participating employers and active employees reduces the funding
available to meet plan obligations.
Multiemployer Plans Now in Varied Financial Situations
For Most Plans Challenges Seem Manageable, but Future
Flexibility Can Help
Our research suggests that the majority of multiemployer plans,
though currently substantially underfunded, will be able to recover
over time as the economy improves, financial markets stabilize, and
small and large businesses ramp up hiring and hours worked. This
assumes that these plans will generally maintain a base of contributing
employers able to sustain their liabilities and benefit disbursements,
and will avoid investment losses that significantly erode their asset
base. A diverse industrial base, broad geographical coverage, and
careful management help position plans for the future.
Generally, plans are using the tools and authorities provided under
PPA to reduce costs, limit liabilities, and increase contributions
steadily over time. They are using their new flexibility under PPA to
respond to market fluctuations and to reduce excessive stress on
employers and participants.
Trustees and others associated with these plans have begun
suggesting additional flexibility to address pressing issues, such as
the need to attract new employers, to transition to new benefit
formulas that reduce costs and minimize risks, and to adjust their
liabilities to ensure sustainability.
Severely Distressed Plans Will Need More Help
While a majority of plans appear primed for gradual recovery, a
minority of plans will not be able to recover using the tools and
authorities under PPA. Many critical status plans (and some seriously
endangered status plans) are severely distressed and will need still
further provisions to remain viable.
At the beginning of the 2008 plan year, only 12% of all plans were
in critical (red) or seriously endangered status (orange). That number
spiked to 44% of all plans at the beginning of the 2009 plan year. In
2010, nearly one-third of all plans, covering more than four million
participants, continued to be in critical (red) or seriously endangered
(orange) status. While the percentage of critical (red) and seriously
endangered (orange) plans dropped slightly in 2011 to 26% (336 plans)
of all plans, that percentage is likely understated due to the effect
of PRA 2010 funding relief. A substratum of critical and seriously
endangered status plans is beyond the point of recovery without
significant changes in the rules that govern their operations.
These plans' underlying fundamentals reveal why they are so
distressed. They often operate in declining industries--such as
furniture manufacturing, textiles, or typesetting, or in intensely
competitive markets, from which large numbers of employers have gone
out of business. Their participant populations are mature, with a large
proportion of retirees and significant unfunded retiree liabilities. As
a result, contributions coming into these plans on behalf of current
workers are small compared to the outflow of benefit payments.
Investment returns during the 2000s were unable to make up the
difference, as those returns suffered due to the drop in the overall
asset base. In the worst-case scenarios, these plans' negative cash
flows each year further erode their asset base and the plans are faced
with eventual insolvency.
The severely distressed subset of plans includes several hundred
plans. Some of these plans have already terminated and are expecting to
receive financial assistance from PBGC. Others are ongoing plans that
operate under PPA funding improvement or rehabilitation plans. The
rehabilitation plans of critical status plans often signal that they
have exhausted all ``reasonable measures'' for contribution increases
and reductions in adjustable benefits and do not expect to emerge from
critical status; they are merely striving to delay insolvency.
In the case of some of these ongoing plans, further contribution
increases may be needed: our research shows that critical status plans
averaged lower contributions per active participant in 2010 than plans
in other funded statuses--about $4,000 per participant as compared with
about $5,500 per participant. On the other hand, we also know that some
employers contribute substantially more and participate in numerous
multiemployer plans--large employers in one critical status plan
contributed $18,000 per active participant in 2011.
Because benefits generally cannot be reduced after they are earned,
there is also a natural limit to how much underfunding can be made up
through reductions in benefits. Plans may reduce future benefit
accruals for active workers and, under PPA, critical status plans may
reduce certain previously earned benefits (known as ``adjustable
benefits'')--such as early retirement benefits, early retirement
subsidies, subsidized optional forms of benefit, and disability and
death benefits (other than normal spousal death benefits)--for active
workers and terminated vested participants (participants no longer
earning benefits under the plan but not yet retired). However, where a
majority--or close to a majority--in a plan are already retired
participants whose benefits cannot be reduced, some employers and
active workers will be reluctant to consent to contribution increases
if the bulk of the money goes to retirees, while active workers'
earnings and benefits deteriorate.
If the bargaining parties cease to view the employer's contribution
to a plan as valuable, they will negotiate for the employer's
withdrawal from the plan. Such actions can ultimately lead to a mass
withdrawal of all employers from the plan and the plan's ultimate
insolvency. A mass withdrawal termination can result in withdrawal
liability assessments that can be particularly onerous at today's high
plan underfunding levels.
Preserving severely distressed plans is important, not just to the
employers and participants in those particular plans, but also to the
health of other multiemployer plans. Many contributing employers,
chiefly large employers, participate in numerous multiemployer plans,
and the termination of one plan that produces withdrawal liability
assessments for these employers could undermine the ability or
willingness of those employers to contribute to other multiemployer
plans. This, in turn, could result in multiple employer withdrawals and
mass withdrawal terminations for other plans, damaging hundreds or
thousands of businesses and hurting tens of thousands of workers along
the way.
PBGC's Multiemployer Insurance Program
PBGC helps to secure the retirement benefits of more than ten
million workers and retirees in multiemployer plans by working with
plans to retain and attract participating employers and by paying
financial assistance to cover benefits earned by workers up to the
maximum allowed by law when plans are no longer able.
Multiemployer Financial Assistance
PBGC's multiemployer program is very different from its larger and
better-known single-employer insurance program. Unlike the single-
employer program, when multiemployer plans are in distress, PBGC
generally can take no action until the plans have entirely run out of
money and are insolvent. Also unlike the single-employer program, when
PBGC becomes responsible for a multiemployer plan, the agency does not
take over the plan. Instead, the plan administrator remains in place
while PBGC funds the administrative and benefit costs.
PBGC multiemployer benefit levels are also very different. The
maximum guarantee for a multiemployer participant with 30 years of
service is $12,870 per year; it is not indexed for inflation. In
contrast, the maximum guarantee set by law for single-employer
participants at age 65 is $55,840 for the 2012 calendar year; the
maximum guarantee is indexed for inflation for future plan
terminations.
PBGC's Other Multiemployer Activities
In addition to providing financial assistance to insolvent plans,
PBGC has oversight authority for certain activities of multiemployer
plans that are important to their financial well-being.
Plans must notify PBGC when they propose to merge. PBGC evaluates a
merger to determine whether the merged plan poses a risk of loss to
PBGC or plan participants. Generally, this involves a confirmation that
the plan's finances will not be weakened and the plan will have
sufficient assets to pay benefits for a period of time. In some
instances, mergers can reduce a plan's administration costs, improve
future investment returns, and help expand the plan's ratio of active
to inactive participants. PBGC can and does provide technical
assistance, on request, to plans evaluating a merger option.
In a few rare cases, PBGC has facilitated a merger of an insolvent
(or near-insolvent) plan by providing financial assistance to the
merged plan rather than to the insolvent plan. However, PBGC does not
have the legal authority to provide financial assistance to facilitate
a merger in the absence of insolvency, nor the financial resources to
step in in such circumstances.
Plans may also apply to PBGC for an order of partition, which
permits a plan to transfer benefits of non-sponsored participants,
whose sponsors no longer participate in the plan, to a partitioned
portion of the plan that receives financial assistance from PBGC. The
requirements necessary for a partition are strict, in part because
retirees and participants in the partitioned plan incur an immediate
reduction in their benefits to PBGC's guarantee levels. A partition
requires a finding by PBGC that the plan has had a substantial
reduction in contributions due to employer bankruptcies and is likely
to become insolvent. PBGC has partitioned two plans; the second
occurred in 2010 when PBGC partitioned a trucking plan. PBGC does not
have the finances needed to undertake expanded partitioning activities,
even though doing so would relieve employers of burdensome unfunded
liabilities.
PBGC's Multiemployer Program Financial Status is Strained
Another difference from PBGC's single-employer program is that
multiemployer premiums are much lower, too. Historically, the program
had very low premium rates: multiemployer plans paid an annual flat-
rate premium of $2.60 per participant per year until 2006, when
Congress increased the rate to $8 per participant, indexed for
inflation. Plans have paid $9 per participant per year since 2008, and
multiemployer premiums to the insurance program totaled $92 million for
FY 2012. Under the Moving Ahead for Progress in the 21st Century Act
(MAP-21), multiemployer premiums will increase to $12 per participant
in 2013 (indexed), generating about $120 million for the program. For
single-employer plans, the per-participant flat rate premium under MAP-
21 for plan years beginning in 2013 is $42 (indexed) and these plans
also pay a variable rate premium on their underfunding. For
multiemployer plans, even with the MAP-21 increases, absent further
changes, PBGC premiums will be insufficient to support the guarantee at
some point in the future.
Because PBGC does not trustee multiemployer plans, the
multiemployer insurance program's assets consist only of premium income
and investment income on the premiums. The multiemployer program has
few assets: as of September 30, 2012, the program had total assets of
$1.8 billion.
As of the end of FY 2012, the multiemployer insurance program has
$7.0 billion in booked liabilities. This represents the present value
of all future financial assistance payments owed to participants in 148
plans that are recorded as liabilities on our FY 2012 financial
statements; these are plans currently receiving financial assistance,
terminated plans not yet receiving financial assistance, and ongoing
plans that are expected to receive financial assistance. Thus, our
current deficit--the difference between the program's $7.0 billion in
liabilities and $1.8 billion in assets--is $5.2 billion. We expect both
our liabilities and our deficit to increase as more distressed plans
terminate or approach insolvency in future years.
PBGC pays financial assistance in the form of life annuities and
administrative expenses. In 2012, PBGC paid $95 million in financial
assistance to 49 insolvent plans that had run out of assets to pay
benefits when due. Another 61 plans are terminated plans to which PBGC
expects to begin paying financial assistance in the future. Based
solely on our current inventory of booked plans as of September 30,
2012, the amount of financial assistance PBGC will pay each year is
projected to rise rapidly--with payments exceeding $500 million in
2022. This does not take into account financial assistance payments to
any plans that would be first recognized as liabilities of the program
in FY 2013 or future years.
Over the next decade or so, even before any new obligations are
added, there is a substantial risk that, without significant change to
the multiemployer system, the multiemployer program will become
insolvent and not be able to pay financial assistance. If new claims
are recognized and additional payments required, insolvency could occur
within a shorter timeframe, particularly if a large plan became
insolvent. However, the risk of program insolvency, while serious, is
not immediate and its timing is uncertain. Timing is dependent on many
factors, including investment returns and the actions of trustees,
employers, and unions dealing with individual ongoing plans.
Next Steps
For several years, multiemployer plans, participating employers,
unions, actuaries, plan professionals and others have been discussing
various changes to the multiemployer system that would preserve plans
by providing them greater flexibility to address various challenges.
Several are now planning to present proposals to both the Congress and
the Administration in the coming months.
The financial condition of multiemployer plans varies widely. Some
plans will propose flexibility in benefit structures, or in
contributions or withdrawal obligations. Severely distressed plans, on
the other hand, will probably require broader changes.
Historically, when necessary to preserve plans, Congress has worked
in a bipartisan way with the executive agencies, plans, businesses,
unions, and others. It was such a collaboration that resulted in the
Pension Protection Act of 2006. Some of the provisions of that Act will
sunset in 2014, which creates both the need and the opportunity to
consider what changes are appropriate for the future. PBGC looks
forward to working with Congress and the multiemployer community as
this important dialogue evolves.
PBGC's multiemployer program should also be reviewed as part of
that discussion. The basic contours of the program have not been
modified in more than 30 years. Some of the tools and authorities the
statute provides that might be useful in certain circumstances are not
useable in practice because of the agency's lack of financial
resources. Both the program and PBGC's finances should be analyzed as
part of and in the context of the broader changes for multiemployer
plans generally.
PBGC takes the support and preservation of multiemployer pension
plans very seriously. Since I have been Director, I have doubled the
size of multiemployer staff, am planning to add further resources and
make further changes to strengthen PBGC's capabilities.
PBGC staff has expertise and analytic ability in the area of
multiemployer plans, as well as a dedication to multiemployer plans. We
look forward to providing assistance in the deliberations, and to
continuing to serve the millions that look to multiemployer plans for a
secure retirement.
APPENDIX: PBGC FY 2012 ANNUAL REPORT
[The report, ``Pension Benefit Guaranty Corporation Annual
Report 2012,'' may be accessed at the following Internet
address:]
http://www.pbgc.gov/documents/2012-annual-report.pdf
------
Chairman Roe. And I really appreciate you being here a week
before Christmas because I felt it was very important. And the
reason for that was because that PPA sunsets in 2014. And I
think both sides of the aisle understand that we have got a
little bit of a timeline with this sunset to get moving. And I
was afraid if we would put this off, we would be into February
or later getting this done.
I can certainly appreciate the multiemployer, the
improvement there. And my question is, after reading your
testimony, that improvement somewhat is an improvement in the
economy but is it also the changes in the law that was made in
2010? Because something happened in 2010 to allow you to
amortize those liabilities over a different period of time. So
how much of that is just due to amortizing instead of 15 years
to 29 years? And I mean how much of it is due to the change in
the law we passed in 2010?
Mr. Gotbaum. Dr. Roe, you are unquestionably right that
part of the improvement is due to the fact that the funding
relief allowed plans to stretch out their required
contributions and, as a result, the indicators of distress some
plans no longer meet. Part of the improvement is clearly that.
I think it is important to recognize that an important part of
the improvement is also that the economy is recovering and that
plans really are taking advantage of the authorities that this
Congress gave them in the Pension Protection Act.
Unfortunately, the quality of information that we have, the
information that the Federal Government gets is a little old.
And so the reason why you have 2011 is because that is the
latest information we have. And so we don't have enough
information for me to be able to tell you how much of this is
funding relief and how much of this an economic recovery.
Chairman Roe. Clearly it is part of both, I think. I was
just hoping that it wasn't an accounting gimmick that we did.
And understandably I certainly understand that in a downturn
why companies need some relief, because they don't have the
cash flow to make their pension obligations. And that is
something we have to look at.
I think the other question I wanted to ask was, in
multiemployer plans versus single-employer plans, there is a
difference in the premium. And I was reading the financial
status is strained in your testimony where it is $9 per
participant; and with a single-employer plan it is $42, I
think. It looks like that very soon, at least last year, we
paid out more in the multiemployer plans than we took in, in
premiums. You obviously can't continue to do that. And by 2020,
or 8 to 10 years from now, 10 years from now, you estimate we
will be paying out $500 million in plans.
And I guess the other thing that I have, the question, how
do you propose to change that since you have the premiums only
bringing in 20 percent of what we will be paying out? Although
it is indexed for inflation. How do you propose to do that?
What recommendations do you make for that?
Mr. Gotbaum. That is an important question. Certain things
we know and can say right now. One is that the situation, as it
currently exists, cannot work forever. If we have the premiums
as they currently are and we have the system as it currently
is, eventually we will run out of money and can't pay benefits.
However, and this is what we have been wrestling with, it is
clear to us that because our program has not been rethought in
30 years, that the changes that ought to be made, some of which
will clearly involve higher premiums, I have to say, I am a
finance person, and I don't believe in, you know, prevaricating
about numbers, some of this resolution is going to clearly have
to involve higher premiums, premiums that reflect the real cost
of this.
But, and this is the reason why we don't have a set of
recommendations yet that are independent of what you all are
going to do, part of the solution relates to what the plans
themselves are allowed to do and can do to form self-help. If
plans, using the tools that you have given them and the tools
that the Congress might give them, as you consider changes, can
continue that transformation to less and less red, then our
situation is different. And so what we hope to do is, as part
of your discussion over the next year or 2 as to how to change
the multiemployer system in general, to work with the Congress
to develop reforms in PBGC's program and finances.
Chairman Roe. I think one of the other questions, and of
course I would like to see what it would be if we had the
previous accounting rules, and one of the recommendations, I
guess, that we will see, is should we assume these accounting
rules we passed in 2010 will be the new norm.
The other question, and you don't have to answer it because
my time has expired, is are these assumptions--and I have a
list of questions I would like answered--assumed on a 7.5
percent return? In other words, do you follow me that that is a
pretty lofty assumption these days? I am going to not answer
that question now.
Mr. Andrews.
Mr. Andrews. Thank you, Mr. Chairman.
Thank you, Mr. Gotbaum. When do you think we would have
results about 2012? I realize that you don't have those in your
custody. They are reported by various plans. But when will we
know the results for 2012?
Mr. Gotbaum. We will know them towards the end of 2013.
Mr. Andrews. Okay.
Mr. Gotbaum. One of the issues, Mr. Andrews, is that the
information requirements that we have are kind of from the
typewriter and carbon paper days. And so we are in an era in
which----
Mr. Andrews. You may have to explain those references to
the young staff that are sitting behind us here.
Mr. Gotbaum. Oh, sorry, sorry, sorry. Yes. For Mr.
Banducci's benefit, carbon paper is something that--anyway.
Sorry. But we are in an era in which I can get and send
information around the planet in a second and----
Mr. Andrews. We ought to figure out a way to work on it.
Let me ask you a couple. You have very wisely acknowledged
and listened to a collaborative process that has begun among
small businesses, unions, experts in this field. And I think
that the chairman has done the same thing and it is a good
thing to do. Without prejudging what those groups are going to
recommend, let me ask a couple of conceptual questions that I
carry as assumptions into this effort.
The first is that, given the relatively low cost of
obtaining money, that stretching payments out over amortization
schemes has been pretty effective in the 2010 and 2006 laws in
helping plans get to the green zone. Is that right?
Mr. Gotbaum. It is very clear that funding relief is an
important part of enabling plans to deal with their situation.
Mr. Andrews. Is it also correct that if we were to put the
hammer down on plans in the red zone and say, well, pay up
right now to get current, it would in all likelihood seriously
impair or kill a lot of these plans because we assume a lot of
employers would just leave, and you got the problem of people
abandoning and then the departure fee going up even more, that
the way to kill the goose that is laying this golden egg is to
insist that it pay up quicker. Do you think that is fair to
say?
Mr. Gotbaum. It is very clear, Mr. Andrews, that we can, if
we demand that plans--let me step back one second, if I may. We
are in a world in which financial markets vary a lot more than
they used to. And so as a result, plans' financial statuses
vary a lot more than they used to. And if we simultaneously, in
a world in which plans' financial status is variable, if we
demand that they fund up more and more rapidly, we are going to
make it harder and harder for folks to do that.
Mr. Andrews. Which has the perverse effect of actually
increasing PBGC exposure. It actually makes the problem worse
from your deficit point of view, right?
Mr. Gotbaum. It clearly raises our risks.
Mr. Andrews. Now, is it also true that many of these plans
in the red zone would benefit from structural internal reform?
Putting that in blunt English, lower benefits for some
participants, higher contributions from some employers to
improve their cash position. Is it empirically true that that
is the case?
Mr. Gotbaum. We don't know the details of the individual
plans. What a number have come to us and said, we are in a box.
The box is that if we keep on paying the benefits we have, we
will pay those benefits for 5 years or 7 years, whatever, and
then we will run out of money and then you, the PBGC, will owe
them a smaller benefit. And they have said they would like an
ability to think about whether or not there are ways to resolve
that that are fairer to them.
Mr. Andrews. Well, I think what we also conceptually----
Mr. Gotbaum. But if I may, Mr. Andrews, I want to be clear.
Mr. Andrews. Sure.
Mr. Gotbaum. My view of this is, this is very sensitive.
This gets to the guts, if you will, of the law regarding
employee benefit plans.
Mr. Andrews. It is a very hard question. And what I think
we all have to start to contemplate conceptually is an
arrangement where plans get access to these facilities that
would help them extend their liability and deal with this in
exchange for making some difficult internal decisions, which
hopefully would have the result of a relatively smaller benefit
reduction now, avoiding a much larger benefit reduction down
the road if they are PBGC beneficiaries. I yield back.
Chairman Roe. I thank the gentleman for yielding.
I now yield to our chairman, Mr. Kline.
Mr. Kline. Thank you, Mr. Chairman, for your indulgence in
recognizing me.
Thank you, Director, for being here for what many people in
America think are the holidays. Some of us here in this
building maybe not so much the holidays. But thank you very
much and having your family here. I have a whole bunch of
questions which, frankly, I am not going to ask. I just want to
make it clear that, with or without the chart up there, we
recognize that there are some multiemployer plans that are in
real, real trouble and, therefore, hundreds of thousands of
employees and retirees that are in trouble. And we also
recognize that the PBGC has a relatively limited ability to
help them. The benefit payments are relatively low, as you have
testified, compared to single-employer plan.
And so I very much appreciate Chairman Roe and Mr. Andrews'
diligence in pursuing this. I am determined to keep after this
because where we have some plans that are spectacularly in
trouble--and Central States is not a secret name here, in that
one multiemployer plan alone, you have employers that are in
trouble because of these obligations and you have in that one
plan alone hundreds of thousands of employees and retirees that
are at jeopardy.
So I am hoping that as we wrap up this Congress and move
into the next Congress that we will be able to work with you
and with those outside groups whose input we are eagerly
awaiting to do something about this. I think that the work that
we did under Chairman Boehner and ranking member then Miller in
the Pension Protection Act was a pretty good step. But clearly,
even though the 32 to 60 percent looks pretty nice up there, we
know that there are some big, big problems in the multiemployer
plans, and I am eager to get at it.
I see Mr. Miller is here, and I know that he recognizes
there is a problem as well. And I hope we are going to be able
to come together and do something about this, because it is a
multifaceted problem with the PBGC's limited capability and
some plans that are in real, real trouble.
So again, thank you very much for being here today and for
your testimony and your willingness to work with us as we try
to solve this problem.
And Mr. Chairman, I yield back.
Chairman Roe. I thank the gentleman for yielding.
Mr. Scott.
Mr. Scott. Thank you, Mr. Chairman.
And thank you for being with us.
Just a couple of quick questions first. When you say number
of plans, would the number of people covered by the plans be
essentially the same charts?
Mr. Gotbaum. Yes, Mr. Scott. This may be because I am a
nerd. What we have done here is we have showed you the
percentage of participants. So this is the percent of 10-plus
million people whose plans are in those segments.
Mr. Scott. Okay. And how would those charts for single
plans differ? Single plans, were they in trouble in 2009 and a
little bit better now and still in the 60 percent range? These
aren't any worse than single plans, are they?
Mr. Gotbaum. Mr. Scott, rather than make a guess about the
exact comparison, since the standards are actually different
for single-employer plans and multiemployer plans, if I may,
with your permission, let me come back with a chart for the
record trying to do an apples-to-apples comparison.
Mr. Scott. Okay. Now, when a company withdraws from a
multicompany plan on a voluntary basis they are responsible for
their proportionate share of the liability. That is not much of
a problem for a solvent company, but when a company goes
bankrupt, what happens?
Mr. Gotbaum. Unfortunately, what happens in a lot of cases
is that the bankrupt company, along with its other obligations,
is allowed in the bankruptcy process to eliminate its
obligation to its pension plan.
Mr. Scott. So who picks it up?
Mr. Gotbaum. In the multiemployer world, those obligations
are picked up by the remaining employers.
Mr. Scott. So if a company gets into one of these things,
they are at risk of getting everybody else's liabilities dumped
on them?
Mr. Gotbaum. Yes. And that is one of the issues that the
employers, the hundreds of thousands of employers, small
businesses and large, have continually raised.
Mr. Scott. They would argue that the pension fund really
ought to pick up the bankrupt company's share of the
liabilities.
Mr. Gotbaum. Mr. Scott, I will say that over the years, it
has repeatedly been suggested to the Pension Benefit Guaranty
Corporation, you know, rather than having the remaining
employers take the responsibility, why doesn't the PBGC take
the responsibility? And the fact is, the PBGC does not have the
resources to take on that responsibility. And the multiemployer
plan, the multiemployer system designed 30 years ago, didn't
anticipate that. And so part of the reason why I say that you
need to rethink the PBGC's program in the context of how you
rethink multiemployers is because a lot of the suggestions that
we get and that I suspect you will get would lean towards
saying, well, why don't you let the PBGC pay for it?
Mr. Scott. So what you are suggesting is, if we want to do
that, we would have to adjust the premium that they are paying
because the coverage is different?
Mr. Gotbaum. I don't think this is something which changing
premiums alone is going to resolve. I spend a lot of time with
both single and multiemployer plans and the sponsors of them
and the businesses. And some of the rhetoric I get about your
premiums are too high is just rhetoric. But some of it is the
very legitimate concern of businesses all across the country
that are trying to stay competitive, trying to control their
costs, and saying, you have become too big a piece of my cost,
I can't keep doing it.
Mr. Scott. I want to get in a quick question before my time
runs out. And that is, if you could respond to the chairman's
comment about how you can chase a 7.5 percent return in today's
market without unreasonable risk.
Mr. Gotbaum. Mr. Scott, I don't have an answer for that.
One of the things that we have learned over the last decade is
that the assumptions that actuaries made--and by the way, it
wasn't just actuaries, it was lots of folks, and it wasn't just
multiemployer plans, it was single-employer plans, too--that
people who went through the 1990s tended to think that pension
funds could make 9 percent, 10 percent, or more. And it looked
like it was going to last forever. And then for the last 10
years, as you know, pension funds have not earned 9 percent, 10
percent on average.
And so we are now in a, frankly, in a difficult situation
because I don't think there is anyone who knows for sure what
you can count on. And so we don't have a particular
recommendation for what a pension plan should do. We don't
think we are smart enough to do that. But we do think that
everybody recognizes the fact that the last 10 years have been
tough and you are going to need to think about what you do for
the future in the context of that.
Chairman Roe. Thank the gentleman for yielding.
Now yield to Mr. Walberg.
Mr. Walberg. Thank you, Mr. Chairman.
And thank you, Mr. Gotbaum, for being here. Last month, as
we all know, Hostess decided to liquidate as a result of their
bankruptcy. It had participated in, as I understand it, 42
different multiemployer plans and, in fact, two of the
company's largest creditors are multiemployer plans. The
withdrawal from these plans may cost the company up to $2
billion, with around $900 million going to the Confectionery
Workers plan and more than $500 million going to the Central
States plan. We know that they are very large contributors to
these plans. And following up to an extent on what Mr. Scott
was questioning, how will their bankruptcy affect these plans?
And more specifically, does it threaten their solvency?
Mr. Gotbaum. As you have said, sir, Hostess participates in
more than 40--the numbers that I got from my staff say 41--but
more than 40 multiemployer plans. In some of those plans,
Hostess is a big dog. Hostess has been a big dog. In some of
those plans, Hostess has been a more modest participant. For
those plans where Hostess was the big dog, the fact that they
are not going to contribute anymore and will be able to
discharge their obligations in bankruptcy is going to put those
plans in severely distressed status and some of those plans
will probably run out of money. Other plans where they are
either stronger or Hostess is a smaller percentage participant
will continue on, but the employers in those plans will say, I
am picking up, I am paying part of the cost that Hostess
avoided.
Mr. Walberg. But the larger ones, insolvency is the outcome
ultimately?
Mr. Gotbaum. No. As it happens, sir, the plans for which
insolvency is a real risk as a result of Hostess are relatively
smaller plans. Depending on how you count and how conservative
you want to be, there are four, five, six plans. They are not
the larger plans. These are smaller plans. And they are plans
that, because their larger employer, one of their largest
employers is no longer participating, are going to be in severe
financial distress. The largest plans in which Hostess
participated, they are a relatively small percentage of the
total. And so what I consider the Hostess tragedy is not going
to affect them particularly substantially.
Mr. Walberg. In fiscal year 2008, the deficit in the
multiemployer program was $473 million. However, over the past
4 years we have seen that deficit expand to $5.2 billion in
fiscal year 2012. How have demographic trends created this
increase? And what involvement is demographic trends?
Mr. Gotbaum. The fact that people are living longer means
that pensions, all pensions are necessarily more expensive. It
is a fact of life. And as a result, the plans that are
sufficiently likely on the multiemployer side that we have
already put them on their books, what that means is that as
people live longer, we are going to end up paying a little more
for it.
In the broad scheme of things, I think demographics, partly
because it is slow and partly because it is long, is less of an
immediate concern to the integrity of the Pension Benefit
Guaranty Corporation than the immediate financial or the near-
term financial, within the next, decade circumstance of the
severely distressed plans. Now, partly my reaction is, should I
be distressed that people are living longer, healthier lives,
and that it costs a little bit more? I don't think so. I think
that is something we should celebrate. It is one of the great
things about the Nation. I think the more immediate concern
is----
Chairman Roe. I have some sensitivity to that, too. The
gentleman's time is yield.
Mr. Tierney.
Mr. Tierney. Thank you, Doctor.
Thank you, Mr. Gotbaum. I just want to follow up on
something Mr. Scott started--actually, the chairman started,
Mr. Scott followed on. When you say you can't determine what
the rate of return should be and what the risk is going to be
on that, what bothers me a little bit is, don't you think we
ought to be a little more conservative in approach on that as
opposed to just accepting 7.5 percent return given history and
given the facts that we have to deal with?
Mr. Gotbaum. I think it is pretty clear, sir, that people
whose expectations were set in the 1990s need to reset those
expectations based on the experience we have had in the last
decade. The reason why I was saying to be cautious about it is,
there is a risk of overreacting on the downside in the same way
that we may have overreacted on the upside.
Mr. Tierney. But we pay people a lot of attention, they are
supposed to be smart enough to make those sorts of adjustments
and those calculations. So I guess as far as the PBGC is
concerned, you will be making more modest projections in all
your calculations?
Mr. Gotbaum. We actually are not in the business of making
projections. And the way we do our books is, we use--excuse my
dropping back into the jargon of the accounting community--we
mark to market. So the way we do our liabilities is we actually
get quotes from insurance companies about what they would
charge in order to pay benefits on the stream that we do, and
that is how we do it. We are actually not in the business of
forecasting rates.
Mr. Tierney. But you are in the business of accepting some
of those quotes and rejecting others.
Mr. Gotbaum. I'm sorry?
Mr. Tierney. You are in the business of rejecting some of
those quotes and accepting others when you make your
determination.
Mr. Gotbaum. Yes.
Mr. Tierney. So I am assuming that you are going to accept
those that come on the more modest side than those that are
more enthusiastic, given the history that we have seen here.
Mr. Gotbaum. Yes, sir.
Mr. Tierney. The other question I have is about the Hostess
debacle on that. What enforcement provisions or what role does
PBGC play or can it play when a company like Hostess takes
money from union employees meant for contribution to their
pension plan and doesn't make that contribution as well as not
making their own company contributions to the plan?
Mr. Gotbaum. This is, sir, a very tough situation. I have
spent my life working in distressed businesses. I have been on
the management side. I have represented unions. I have been all
around distressed companies for a long time. And I have learned
a couple of things. One is that when companies are in distress,
they take a whole series of actions to conserve cash, if they
are legal, and in the case of bankruptcy, you can go to the
court and say, I am not going to make my contributions, and get
court approval for not making the contributions.
Mr. Tierney. Did Hostess do that? Or did they stop making
their contribution before they went to court?
Mr. Gotbaum. I can't say that I know the facts in Hostess
and I am happy to come back.
Mr. Tierney. Well, let's assume for a moment that they
stopped making those contributions before they got permission
from the bankruptcy court. What responsibility does PBGC have?
Or is it only the trustees of the plan that have the
responsibility to monitor that situation?
Mr. Gotbaum. I think you have got it exactly right, which
is the trustees of the 41 plans in which Hostess participates,
they are creditors. Now, as it happens, Hostess has a single-
employer plan, too. So we are creditors too. But on the
multiemployer side, we are not the creditors. We are a step
removed from it.
Mr. Tierney. Did they stop making their contributions to
the single-payer plan as well?
Mr. Gotbaum. I don't know. Let me find out.
Mr. Tierney. If they did, what responsibility would accrue
to you to do something about it?
Mr. Gotbaum. That depends on what their legal obligations
are in bankruptcy.
Mr. Tierney. What about before they get to bankruptcy, if
they stopped making the payments?
Mr. Gotbaum. If they fail to make contributions
beforehand----
Mr. Tierney. If they are under contractual obligation to
people in the union to pay what the union has designated as $4
and some change per hour of their pay in there plus not making
their employer contributions, what obligation is it of PBGC or
the trustees, for that matter, of the multiemployer plans to
step in and do some enforcement, to do something about that
before things go belly up?
Mr. Gotbaum. Let me step back. Okay. When under bankruptcy,
companies----
Mr. Tierney. They are not in bankruptcy yet.
Mr. Gotbaum. Pardon?
Mr. Tierney. I am going to back you up a bit if you don't
mind. Before they are in bankruptcy.
Mr. Gotbaum. Hostess has been in bankruptcy multiple times
in the last 5 years.
Mr. Tierney. Right. But there were times that they were not
in bankruptcy, allegedly, when they were not making their
contributions before they went back to the bankruptcy court. So
they just took it upon themselves to take the money from the
employees that was designated for the plan, not put that money
into the plan, plus not make their own contribution to the
plan. When that is happening, what obligation to PBGC, what
obligation to the trustees to do something about that in that
period of time?
Mr. Gotbaum. The trustees of a plan----
Mr. Tierney. And PBGC on the single-payer plan.
Mr. Gotbaum. Right. We can act before bankruptcy, and we
do. We can go to court and put liens on property in order to
ensure that contributions are made if they are not made.
Mr. Tierney. That was not done in this situation, in the
Hostess situation.
Mr. Gotbaum. Rather than speculate, why don't I get the
facts and circle back.
Mr. Tierney. I would appreciate that, if you would. Thank
you.
Chairman Roe. Thank you Mr. Tierney.
I now yield to Mr. Thompson.
Mr. Thompson. Thank you, Chairman.
Mr. Gotbaum, thanks for being here. Thanks for your
testimony and your leadership in this area.
I wanted to first of all, with the report that you issued
in addition to your testimony, the graph that is on the third
page that talks about future retiree worries, I found that very
interesting actually and just wanted to affirm. There has been,
since 1979, based on that graph, obviously significant growth
in sole direct contributions programs and a corresponding
decrease in defined benefits. And it was the kind of gray area
in between--although it is not gray, it is kind of green on the
graph--which is where companies that have both. It seems like
that has been pretty stable since 1979 proportionally, where a
company offers both direct benefits and direct contributions.
Is there anything--it is like the third page--there you go.
Mr. Gotbaum. You talking about this one?
Mr. Thompson. That is it. I was just curious, is there any
inside information, is there any proportional changes within
those where companies hold both plans, where there has been
kind of a movement towards heavier weighting of direct
contributions versus defined benefits? Is that a movement you
are seeing?
Mr. Gotbaum. We continue to see that many employers are
deciding that rather than keeping responsibility for the
traditional defined benefit plan, that they instead would
rather pass that responsibility off to their employees. They do
it in a whole variety of ways. One way that has happened
recently is that employers will say to their employees, I know
I owe you $1,000 a month in perpetuity, but would you rather
have a check for the full amount instead? So people go out of
the defined benefit system by lump sums. They do it in other
ways.
From my perspective, one of the real challenges, and it is
not just a challenge in the multiemployer system, one of the
real challenges as the Congress thinks about retirement
security is how to balance the obligations you put on employers
with the obligations that employers are willing to take.
Mr. Thompson. Right. I experienced that before coming here
4 years ago in my health care career. The first part of that,
almost 30 years, was in a defined benefits, and, quite frankly,
that was putting us on a path of insolvency as an institution.
And I don't remember even the details. But there was a
transition plan, as you described one option, into a defined
contribution plan.
In your testimony, you said that any critical status plans
and some seriously endangered status plans are severely
distressed and will need still further provisions to remain
viable. What are some options to forestall their insolvency
without exposing taxpayers to potential liability?
Mr. Gotbaum. To be honest, Mr. Thompson, their first
reaction is, well, why doesn't the PBGC take it over? And they
ignore the fact that we don't have the resources to do so. So
that is in my view a kind of back door way of trying to get to
the taxpayers.
They are talking among themselves, and what we expect is
that some combination of stretching out obligations, expanding
the authorities that the Congress already gave them in 2006 in
the Pension Protection Act, that with a broader pallet of tools
and authorities, that more of them will be able to do self-
help. We haven't seen the specific proposals, and this is one
where the devil actually is in the details. So we are looking
forward to receiving proposals, as I know this committee is.
And so at that point, then we can talk about what the puts and
takes are.
Mr. Thompson. Thank you, Chairman.
Chairman Roe. I thank the gentleman for yielding.
Dr. DesJarlais.
Mr. DesJarlais. Thank you, Chairman.
And thank you, Mr. Gotbaum, to you and your family and
staff, for attending here today. I would like to yield the
balance of my time back to our chairman so he can finish his
line of questioning.
Chairman Roe. Okay. I thank the gentleman for yielding. I
don't have too many. But, you know, and what Mr. Thompson was
saying and also Mr. Tierney, both, I would like to comment on
that.
Because of the uncertainty, I guess, in these plans, and I
have a real interest in this, my father was a union member who
lost his job in 1973 when I was in the Army overseas. His
company went out of the country to another country, so he lost
his job and he lost his pension plan. Fifty old, first World
War II, had a buyout, like you were talking about, of $10,000
which was nothing after 30 years there. So I understand the
plight of people who have been promised something and it
doesn't occur. I mean, you have made your plans based on your
thinking that you are going to have a secure retirement.
We have a real obligation to get this right because there
are 10 million people out there and their families, many of
them who are retired, that are very, I am sure, very uneasy
right now about, am I going to continue to get my benefits? So
I think both sides of the aisle understand this very well.
Probably not a lot of people in this Congress understand the
size of this problem.
And I know I didn't until I started sat in this chair 2
years ago and began to understand that. So I saw one of the
liability estimates was $27 billion. How in the world are we
going to fund that? The current obligations are $5 billion
under water, the PBGC is. So how do we get to $27 billion? How
do we fix that problem? We have talked about premiums. Mr.
Tierney and I both mentioned assumptions. I made the assumption
when I retired that 5 percent would be what I would withdraw.
That was a little more generous than I probably should have
picked. So your answer.
Mr. Gotbaum. The $27 billion number is an estimate of plans
that might, under current law, in current circumstances, might
fail over the course of the next decade or so. That is an
estimate. Part of the reason why, frankly, your committee's
deliberations, why this hearing matters and why the next
matters, et cetera, is that there is no one who thinks that it
is written in stone that all these red plans have to fail. We
don't think that.
And so what, in my view, matters is that the Congress do
what it did in 2006 and what you are talking about doing here,
which is roll up your sleeves, work with the businesses and the
unions and the plans, and figure out what kinds of steps they
can take to do this.
One of the things you did in the PPA is you gave plans the
ability to do self-help. And can't tell you exactly how many
have done it, but a lot of them have. It is very clear that
some plans are going to need more, and that is why they are
going to come and suggest it.
I am a long-run optimist about this. Now, partly it is
because, with the committee's permission, a year ago, a small
business based in Dallas, Texas--American Airlines--filed for
bankruptcy, and on the day they filed for bankruptcy, they
said, we are going to have to terminate our pension plans.
These were single-employer plans, but it was a business, it
was in bankruptcy; they said, we have got to terminate them.
And we sharpened our pencils, we rolled up our sleeves. The
very competent staff of the PBGC worked with American Airlines,
with its unions, and with the other ERISA agencies, and today,
a year later, those plans have not been terminated. So people
were able to find ways to solve their problems without plans
failing. That same willingness to roll up their sleeves, I
think, can take a lot of red-zone plans and keep them from
becoming PBGC obligations.
Chairman Roe. I think having been in the operating room
thousands of times, I always planned on a train wreck and hoped
I would go on a train ride, and what we need to do is plan--
this is a train wreck. We need to plan the train ride I think
is what we need to do here.
Mr. Hinojosa.
Mr. Hinojosa. Thank you, Mr. Chairman. I am sorry that I
had to leave for a few minutes.
Chairman Roe and Ranking Member Andrews, retirement
security is an issue of great importance to millions of
Americans, including me, so I thank you for having this hearing
on the challenges facing multiemployer pension plans.
Director Gotbaum, in your testimony you indicated that
multiemployer plans, like the single-employer plans, have been
affected by the recent declines in the economy and the
investment markets, as we saw starting in 2007 through 2010.
Could you elaborate and tell me about the problem of orphan
participants, which are the participants for whom there is no
longer an employer; are they a significant problem for many of
these multiemployer plans, and do you have any thoughts on
solutions?
Mr. Gotbaum. I can describe the problem. I can't tell you
that there is a standard solution, Mr. Hinojosa.
In a single-employer plan, you have one company that is
setting aside money to pay benefits for that company's
employees, and that plan is limited to their employees so that
if the stock market goes down, and, as a result, the plan's
assets are insufficient, the company knows they are going to
have to put more in, and they are going to know that it is for
their employees.
In the multiemployer world you have hundreds of thousands
of businesses, small businesses, that are contributing to a
common pool. Now, there are some very important benefits from
that. One of them is that as a result their employees have
benefits that stay constant when they move from job to job.
That is a huge benefit. Another benefit is, speaking as a
person who has also worked in small business, you can be a
member of a multiemployer plan without having a huge HR
department, so it works better for a lot of small businesses.
So there are benefits to the multiemployer model, but there
are costs. One of the costs of the multiemployer model is that
everybody is in it together, and so if a plan gets underfunded,
then the existing employers are the ones who make up the
difference. The issue is that since you have many employers--
and, as we know, some small businesses don't make it, and some
industries--a lot of small businesses don't make it--the result
is that in some multiemployer plans, the bill, if you will, is
being presented to companies who know that most of the
employees are not their employees, and so they say, we don't
like that, that doesn't seem fair to us.
Now, does that get taken--do they take into account at that
moment that they have for, in some cases, decades and decades
gotten the benefits of the multiemployer model? No, obviously
not. But that is the crux of the concern, that businesses feel
that it is unfair that they pay for the obligations of
employees that were not theirs, even though, let us be clear,
they have been sharing those obligations in some cases for
decades and decades.
This is not an easy issue by any means. I find it a lot
easier to describe what the problem is than I can to tell you
some fair and decent way to resolve it.
Mr. Hinojosa. Time is running out, and I wanted to--thank
you for that explanation--but I wanted to ask you about, you
know, getting in the shoes of the employee who does not have to
go through the human resources committee or department, but yet
whatever money is being set aside for them, a fee is paid for
those who are investing that money, and oftentimes that fee can
be very expensive, and the employee doesn't know just how
expensive it is.
Number two, there is administration costs, and the employee
again doesn't know how much is being subtracted out of every
dollar that is invested each year for his retirement.
How do you handle that, and how do you manage it so that it
is--such as Federal employees using a thrift savings plan have
a negotiated cost for the investing, for the investors, and it
is very, very low. It is a fraction of 1 percent per year. That
is good. But what about these groups?
Mr. Gotbaum. Let me answer as I can, and then with your
permission, Mr. Hinojosa, I would like to come back with a more
detailed response.
From our perspective one of the benefits of multiemployer
plans is that many, many employers can hire, pay for a
centralized professional management, a management that can
drive hard bargains with investment firms, a management that
can get the economies of scale that you get from having many
people processed without having hundreds of separate HR
departments. So we think there is an important benefit from
that.
What I can't tell you and don't know is what disclosure
there is to the various participants of the costs of those
plans. So with your permission, sir, let me come back and
report on that for the record.
Mr. Hinojosa. Thank you.
Chairman Roe. Thank the gentleman for yielding.
Mr. Rokita.
Mr. Rokita. I thank the chair for holding this hearing. I
found it very educational, and if you look on the map there,
you can see that Indiana is very much affected by this issue
and these multiemployer plans. And I hear about it quite
frequently as I travel the State and as folks from Indiana
visit out here.
Some of this has already been touched on, but at the risk
of reiteration, I would like you to drill into it a little bit
more just so we are very clear for the record, okay?
So, number one, I am reading about the Central States
Pension Fund with liabilities of $14 billion, and if I notice
from your testimony, or from I forgot where, maybe this book, I
saw that your assets are $1.8 billion. Okay. So that concerns
me. What happens when Central--if and when Central States,
something terrible happens there, insolvency, how many more
insolvencies can we sustain before you become insolvent?
Mr. Gotbaum. Part of the reason why I say that I think the
PBGC's own program has to be rethought is the issue that you
raised. It is clear that if, because we have got a couple of
billion dollars in assets, and our premiums are, round numbers,
$100 million a year, it is bumped up a little bit, it is going
to be 120-next year, et cetera, that if we start becoming
responsible for several billion dollars a year in pension
payments, that we are going to run out of money. However, and
this is the important part, those plans--and it is not just the
Central States plan. There are--in that red zone there, there
are probably 200 plans, plans all across the country, not just
on the border of Indiana, not just in Indiana, et cetera, and
what we are hearing from them is they don't want to run out of
money, they don't want to become the wards of the PBGC, they
don't want to bankrupt the PBGC. They would like to have the
ability to work out their own self-help measures.
Mr. Rokita. Yet the number of orphan retirees only
increases. The number of orphan retirees only increases. I
mean, there is an insolvency issue, then there is the orphan
retirees, and that is kind of where I want to go as well.
To make a loose analogy to Social Security, when Mr.
Roosevelt started, there were 100 workers for every retiree.
Now there is 3, going to 2 in 15 years, and it seems to me that
these legacy orphan retirees, you know, how many do we have in
the system? Do you even know? And is it becoming harder and
harder to support these retirees obviously with less companies
paying into the system?
Mr. Gotbaum. In general, as I don't think we put in the
testimony, but it is in our annual report, systemwide the
average is about 1\1/2\ people who are not active, retirees and
what we call deferred vested, per active worker in the system.
So 1\1/2\ to 1 is the ratio. There are plans where that ratio
is 10 to 1. Those plans obviously cannot just turn to the
active employees and say, okay, you are going to increase your
contributions by a factor of five and go in. There something is
going to have to give.
I don't think that anyone can be definitive and say, oh,
there is a particular measure that you can legislate that will
work for all of the different kinds of plans that are there.
And that is a point that I should have made, and I am grateful
for you for enabling me to make it. Part of the reason why we
think flexibility matters, why the flexibility you gave in 2006
mattered, and why whatever you do prospectively matters, is
that the circumstance of the folks who are green is very
different from the folks who are in the red, and we don't want
to force one into the shoes of the other.
Mr. Rokita. Okay. Thank you, Chairman. I yield. Thank you.
Chairman Roe. Thank the gentleman for yielding.
Mr. Hanna.
Mr. Hanna. Thank you for being here, sir.
The last 10 years haven't been very good, have they, in the
market? You can see that. But you can also see that in the
last--from 2009 to 2011, you went from 32 to 60 and from 34 to
24. We also know that for about 100 years the markets returned
an average of someplace between 9 and 11 percent, depending
on--and as was mentioned, the fees are critical to that.
What I am looking at is something that has a positive side
to it, too, and that is that the actuarial tables that were
built to guarantee these defined-benefit plans were built
around long-held assumptions that that have broken down in the
last 10 years.
Just in your mind or with your understanding of all this--
and this year looks like the market may be up 9 or 10 percent--
how many years out into the future would it take to take 90
percent of the people out of the red and put them back in the
green? What has historically--because there is nothing
fundamentally wrong with the assumptions they made based on the
knowledge they had. We are looking at the 10-year slot, and we
are saying, this is horrible, which, of course, it is, and
plans are going broke, but this may not last forever either.
Hopefully it won't with so many people unemployed, et cetera,
et cetera. Looking forward, what do you see?
Mr. Gotbaum. Let me talk in general now, and, if I may,
especially after we get you the reports we owe you all, I would
like to answer in more detail.
There are clearly some plans who, even if you think they
will get the long-term average equity return, because the
experience of the last 10 years has been so bad, they are in
trouble, and they will be in trouble, and just praying for the
stock market by itself won't help. It will help some, but it
probably won't be sufficient. There are some plans.
There are other plans for whom the recovery of the stock
market, if it gets back to the long-term average, will enable
them, along with other things, to recover. So we know there is
some in some and some in the other.
If I may, since this is in part the guts of the reports
that we are working to send you all, if I can, after we have
done those reports, come back and give you a little more
detailed statement of how many we think are in one versus the
other, I would appreciate the opportunity to do that.
Mr. Hanna. Defined-benefit plans are great. People are
being told that they have to invest for themselves from a much
younger age. As you said, it was 34 to 1 when Roosevelt
developed Social Security. Now it is different. But that is
still not a--that is always going to be the new model, isn't
it? And a lot of people, a lot of companies are getting away
from defined-benefit plans simply based on the assumptions of
the last 10 years, and things like Mr. Madoff, those kinds of
things. It is not a bad model, but it is also true that
defined-benefit plans are really what works best for families
in the long run.
Mr. Gotbaum. I could not say it any better. Thank you for
saying it.
Mr. Hanna. Thank you. I am all done here. Thank you.
Chairman Roe. I thank the gentleman for yielding. I would
like again to thank Director Gotbaum for taking your time to
testify before the committee today, and I recognize closing
remarks from our ranking member Mr. Andrews.
Mr. Andrews. Thank you, Mr. Chairman. I thank our
colleagues, and I thank Mr. Gotbaum and his family for
attending and doing such a good job here today.
This is a problem I think we have set out on the right path
to solve, which is to collect a range of views from a series of
people with expertise on this problem and learn from them. And,
Mr. Chairman, I am confident that if we continue down this
path, we will find a solution that achieves the goals of
helping small businesses that pay into these plans prosper and
grow, that assures the maximum degree of security for pension
payments for families who depend on them, and improves the
fiscal health of the PBGC so we further minimize the
possibility that the PBGC would ever have to call upon the
Federal Treasury to make good its obligations.
What I have learned so far in listening to today's
questions and answers and the prior hearing is that the credit
facilities that the 2006 and 2010 laws made available have
contributed substantially to the growth of the green zone from
32 percent to 60 percent. Certainly demographic trends and
economic growth have contributed, but the availability of those
facilities has had a positive impact.
And I have also--will approach the rest of the discussions
with a premise that we should further facilitate those credit
facilities to multiemployer plans in a variety of ways, but we
should attach conditions depending upon the status of the plan.
I think relatively healthy plans should have the opportunity to
take advantage of such a facility, but I think that unhealthy
plans, frankly, should have something more in the nature of an
obligation to take advantage of them, and when they do, I think
that those plans should have a concurrent obligation to make
internal structural changes, however unpopular or difficult,
that will improve their health and, with it, improve the fiscal
health of the PBGC.
This is not a problem that--for which the solution will be
painless, easy, or uncontroversial, but if we take the path
that is too often taken here in Washington and just hope that
it gets better, which is emphatically not what the chairman is
doing, then I think it for sure will get worse.
There are 10 million people depending upon us, there are
hundreds of thousands of employers depending upon us, and I do
think that we have taken two very good steps toward a sober,
well-considered, and mature approach to solving this problem.
I look forward to working with you, Mr. Chairman, and our
colleagues, and, Mr. Gotbaum, you and your colleagues, and in
listening to people around the country with a stake in this
problem to solve it, and I appreciate your opportunity to be
with us today.
Chairman Roe. I thank the gentleman for yielding and his
comments. From the chair, I am absolutely committed, and this
subcommittee is absolutely committed, to helping solve this
problem, and it is imperative that we do that. I think the eyes
of the country are on us. There are many pension plans not only
in the multiemployer plan, but I think there are many pension
plans in States and others that are in extremis now and
certainly would be looking at us for guidance about how we
manage through this morass that we are in right now.
So I think that they--you made the comment in your
testimony that the PBGC is at risk for having neither
sufficient tools to help multiemployer plans deal with their
problem, nor the funds to continue to pay benefits beyond the
next decade under the multiemployer insurance plan. That is a
pretty sobering statement, and I think we can together
certainly work on the tools you need to do your job, and we can
certainly do that.
I had several thoughts up here today, and just to bring
them up, no solutions, but we have the assumptions problem
about the assumptions that we make. Is it possible in these
plans to segregate?
I think the ``last man standing rule'' creates some issues
for the stronger plans. For instance, UPS decided to get out.
They wrote a check for $6 billion and got out so they would
limit their future liabilities, and with credit being as low as
it is, what is to keep a strong company out there that has a
pretty good financial balance sheet to look at the
multiemployer plans and look, as Mr. Rokita, I think,
mentioned, the Central States plan with a $14 billion potential
liability, and clearly the money is going to run out at some
time, to walk.
I think that is a real issue for multiemployer plans, which
would further weaken them. And as Mr. Hanna has clearly stated,
the certainty of these plans for families is essential,
certainly the ones getting the benefits. You are limited now
because people who currently are receiving benefits cannot be
cut, but then, as you stated in your testimony, you are going
to go back to current employees and companies and say, hey, you
need to pony up some more money that you may never get.
So I think that is an issue, and I think another issue is
where the PBGC lines up in bankruptcy. I think the Hostess
situation is clear, that you are not at the front of the line.
Those employees that have worked there for decades are not at
the front of the line. They may be getting a much--could be
potentially getting a much-reduced benefit. It doesn't mean
that they will.
So I think a lot of those things are just questions, not
particularly solutions, but things that we have to work on, and
we don't have a lot of time to do it. So this subcommittee is
going to be very active in coming up with legislation to help,
and I am interested in knowing how much of the green has been
improved by our accounting that we changed and the assumptions,
because I think the 7\1/2\ percent, even though I do understand
what Mr. Hanna said, the historic assumptions have not occurred
in the last 10, 12-plus years.
The city that I was mayor, I started this discussion in
2003. It took 10 years to get--almost 10 years to get there,
but one was that we looked at our future liability. As the
market went down when I first became mayor, we were--I think
about 10, 11 percent of how much someone's salary was going
into their pension plan for defined benefit. As the economy got
worse, it was up at 18 or 19 percent of their income, which was
really straining the city budget.
So we started a discussion that new hirees would not--you
kept your promise to current employees, but new hirees would
come in under a defined-contribution plan. I think a lot of
businesses are having to look at that simply because of this,
and I think what we end up doing here, if we do this right,
might encourage other businesses to stay with the defined-
benefit plan for employees. So I think we have a huge
obligation.
I will finish by saying we will miss Don Payne, who passed
during this past year, that served many years on this committee
and did so with great dignity; and Dale Kildee and Dennis
Kucinich, who won't be with us on the subcommittee. Mr. Kildee
is retiring, and Mr. Kucinich is going on into private life.
Judy Biggert will not be here. It has been a great pleasure to
serve with all of those Members, and they have done a great
job, and I wanted to pass my congratulations on to them, to
wish everyone a merry Christmas.
Mr. Andrews. And Jason Altmire.
Chairman Roe. And Jason Altmire--I forgot my friend Jason
from Pennsylvania--also served with great distinction. He was
on and then off, and then back on, but he did serve here. We
appreciate his service.
I wish everyone a merry Christmas.
Mr. Andrews. Ms. Hirono.
Chairman Roe. And we could go on and on. Ms. Hirono is a
Senator now.
Anyway, we may have to get a whole list to read.
But anyway, merry Christmas. We are adjourned.
[Questions submitted for the record follow:]
U.S. Congress,
Washington, DC, March 4, 2013.
Hon. Joshua Gotbaum, Director,
Pension Benefit Guaranty Corporation (PBGC), 1200 K Street, NW,
Washington, DC 20005.
Dear Director Gotbaum: Thank you for testifying at the December 19,
2012 Subcommittee on Health, Employment, Labor, and Pensions hearing
entitled, ``Challenges Facing Multiemployer Pension Plans: Evaluating
PBGC's Insurance Program and Financial Outlook.'' I appreciate your
participation.
Enclosed are additional questions submitted by committee members
following the hearing. Please provide written responses no later than
March 18, 2013, for inclusion in the official hearing record. Responses
should be sent to Benjamin Hoog of the committee staff, who can be
contacted at (202) 225-4527.
Thank you again for your contribution to the work of the committee.
Sincerely,
Phil Roe, Chairman,
Subcommittee on Health, Employment, Labor, and Pensions.
questions submitted by chairman roe
1. For plan funding purposes, multiemployer plans calculate their
expected assets using a hypothetical, yet actuarially ``reasonable''
rate of return. Please contrast this method with PBGC's valuation
methodology, and explain whether the plan funding rules appropriately
reflect plan assets and liabilities.
questions submitted by chairman kline
1. Press reports regarding a speech you gave at the 58th Annual
Employee Benefits Conference of the International Foundation of
Employee Benefit Plans indicate that you called for new regulations on
the standard of care for multiemployer plans. Can you elaborate, and
describe how these new regulations would affect PBGC's future
sustainability?
2. In 2012, PBGC's Inspector General criticized the quality of the
information fed into your Pension Insurance Modeling System. What steps
have you taken to rectify this problem, and what remains to be done?
questions submitted by congressman tierney
1. Did Hostess stop making contributions to its single and/or
multi-employer pension plans prior to filing for bankruptcy?
2. Please detail the enforcement action(s) the PBGC can take to
require a company to continue making contributions to its pension plans
if it has stopped doing so. Is such enforcement action the same for
both single and multi-employer plans? If not, please explain.
3. When Hostess stopped making contributions to its single and/or
multi-employer pension plans, did the PBGC utilize all of the
enforcement authority available to them under the law? If not, why not?
4. Does the PBGC believe it has sufficient enforcement authority to
effectively deter and/or appropriately remedy future cases where a
company stops making contributions to its pension plans? If not, please
elaborate and provide specific recommendations (including technical
assistance, if available) for amending the relevant statute(s).
questions submitted by congressman scott
1. If a company in a multiemployer plan files for bankruptcy, do
the other companies in the plan inherit the full responsibility for
paying the withdrawn company's obligations in the pension fund? If so,
is there any relief for a small company which represents only a minor
portion of a large plan and which may be financially unable to pay the
additional costs?
2. Do many multiemployer plans approach a ``tipping point,'' where
insolvent companies are leaving and the surviving companies are having
so much trouble paying the increasing obligations of the departing
companies that others become insolvent, resulting in a cascade of
insolvencies and ultimate total failure of the plan?
3. What premium adjustment or statutory change would be necessary
in order for PBGC to be obligated to pay the proportional liability of
any single employer in a multiemployer plan that leaves a plan due to
bankruptcy?
4. If a company in a multiemployer plan goes bankrupt, and then
reorganizes and becomes solvent again, are its past pension obligations
revived?
5. What happened to the pension obligations of the automobile
companies that received assistance through the federal bailout?
6. How much risk could be mitigated if companies in multiemployer
plans were required to invest a significant proportion of their
investment assets in insurance products, where the risk of the vagaries
of the stock market would be borne by the private insurance and not the
plan itself?
______
[Response to questions submitted follow:]
Mr. Gotbaum's Response to Questions Submitted for the Record
questions submitted by chairman roe
1. For plan funding purposes, multiemployer plans calculate their
expected assets using a hypothetical, yet actuarially ``reasonable''
rate of return. Please contrast this method with PBGC's valuation
methodology, and explain whether the plan funding rules appropriately
reflect plan assets and liabilities.
Current law supplies multiemployer plans with more actuarial
discretion in measuring assets and liabilities for funding purposes
than single-employer plans. The methods of measurement used by PBGC are
different from either multiemployer or single-employer plans.
Multiemployer Return Assumptions Most multiemployer plans with more
than $1 billion in liabilities used an assumed rate of return between
7.5% and 8.5% for the 2010 plan year.\1\ The average assumed rate of
return for all multiemployer plans was 7.5%. These assumptions have
been the subject of some criticism because returns in the past decade
have been much lower and consensus forecasts for the next decade are
also below 7.5%. However, the 7.5%-8.5% range is consistent with market
returns in previous decades and with historical returns over longer
periods of time.\2\
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\1\ Actuarial discretion for multiemployer funding purposes
generally continued under the Pension Protection Act of 2006 (PPA). In
single-employer plans, the actuary's assumed interest rate (and
mortality table) has been historically more closely regulated by
statute. PPA specified the interest rate that all single-employer plans
must use, based on average segment rates on the corporate bond yield
curve for the preceding 24 months; the Moving Ahead for Progress in the
21st Century Act (MAP-21) funding relief allowed the segment rates to
be adjusted if they are below or above certain percentages of the
average of the rates for the preceding 25 years.
\2\ Based on a 60%-40% allocation of equities to bonds, average
returns exceeded 8% for the 85-year period preceding 2012; topped 14%
for the 20-year period preceding 2000; but barely broke 1% for the
2000s decade.
---------------------------------------------------------------------------
Multiemployer Asset Valuations Multiemployer plans also have more
discretion in valuing assets for actuarial purposes than single-
employer plans. Actuarial valuations are generally not based on current
market values, but instead use a ``smoothed'' value of assets,
recognizing market value gains and losses over five years (10 years for
2008-9 losses under PRA 2010 funding relief).
Actuarial discretion in plans' methods and assumptions (e.g., the
interest rate used for measuring liabilities and the smoothing period
for measuring assets) has an effect on the funded percentage and has
reduced the effect of mandatory funding requirements. In addition, it
affects plans' certified status as endangered or critical. While plans
must also separately disclose to participants the market value of
assets, they need not disclose the market value of their liabilities.
PBGC Asset and Liability Valuation Both PBGC's assets and
liabilities are reported at current market levels and are not
``smoothed'' or subject to actuarial discretion. The interest rate used
to determine PBGC's liabilities is derived from a survey of market
quotes for comparable annuities. PBGC and its independent auditors
believe this approach fairly and accurately represents the financial
situation of PBGC.
questions submitted by chairman kline
1. Press reports regarding a speech you gave at the 58th Annual
Employee Benefits Conference of the International Foundation of
Employee Benefit Plans indicate that you called for new regulations on
the standard of care for multiemployer plans. Can you elaborate, and
describe how these new regulations would affect PBGC's future
sustainability?
What I said was that plans need less burdensome regulation and more
flexibility. Employers will only be willing to sponsor defined benefit
plans if there is more flexibility in plan design, cost-sharing, and
funding for these plans. For example, the single-employer and
multiemployer plan communities are discussing new hybrid plan designs
that minimize contribution volatility and underfunding risk. Innovative
changes in law and regulation will be needed to allow these new plan
designs to work and to encourage companies to continue to provide
retirement plans to their employees.
Clearly, preserving pension plans is necessary to the preservation
of PBGC, but it's not enough. As I testified before the subcommittee,
PBGC's financial situation is unsound and its resources and authorities
are inadequate to help distressed plans avoid insolvency and fund the
benefits of plans that fail.
2. In 2012, PBGC's Inspector General criticized the quality of the
information fed into your Pension Insurance Modeling System. What steps
have you taken to rectify this problem, and what remains to be done?
As detailed in the Inspector General's report, in preparing several
reports, the staff of our Policy, Research and Analysis Department
(PRAD) made careless errors (generally in copying numbers from one
place to another) and did not check their own work. They compounded
these errors by not keeping their work papers. Our IG found these
errors, and also noted that PRAD's procedures weren't adequately
documented. We immediately made the changes recommended by the IG and
are making additional process improvements as appropriate. All reports
are now separately reviewed by others and procedures are being more
carefully documented.
Although issues documented by the IG arose in reports that used our
pension insurance modeling systems (PIMS), the Inspector General was
careful to note that her staff was not expressing an opinion on the
quality of those models themselves. We believe that PBGC's pension
insurance modeling systems are the best tools available by far for
information and projections concerning the defined-benefit pension-plan
universe. Most analysts in the actuarial and economic communities agree
that PBGC's models remain the best tools available.
That does not mean that we cannot and will not review them to make
them even better. We do.\3\ We will continue to work to improve them as
we better understand trends in the economy and in pension practices and
as our information improves. The Moving Ahead for Progress in the 21st
Century Act (MAP-21) requires an additional independent annual peer
review of PBGC modeling systems.\4\ PBGC responded by contracting for a
review by the Social Security Administration and outside consultants.
We will incorporate the results of those reviews in future
improvements. Nonetheless, it would be wrong to conclude that the
financial unsoundness of PBGC or of some multiemployer plans is the
artifact of modeling error.
---------------------------------------------------------------------------
\3\ Over the years, PBGC's Single-Employer Pension Insurance
Modeling System (SE-PIMS) has been reviewed and discussed in published
reports. Several years ago, PBGC provided the model to the Society of
Actuaries, which reviewed it and has begun using it in their own
published reports.
The Multiemployer Pension Insurance Modeling System (ME-PIMS),
which is newer than SE-PIMS, was designed in 2007, before
implementation of the PPA changes for multiemployer plans. PBGC is
revisiting certain ME-PIMS assumptions to better reflect current
experience under PPA as a basis for ME-PIMS projections, but the ERISA
agencies obtain information about how plans are responding to PPA only
gradually. PBGC commissioned an external review of ME-PIMS by an
outside consulting firm with substantial multiemployer experience and
received recommendations for changes in September 2012. We are now in
the process of reviewing and incorporating the consultant's suggestions
for improvements.
\4\ MAP-21, sec. 40233(a), states: ``The Pension Benefit Guaranty
Corporation shall contract with a capable agency or organization that
is independent from the Corporation, such as the Social Security
Administration, to conduct an annual peer review of the Corporation's
Single-Employer Pension Insurance Modeling System and the Corporation's
Multiemployer Pension Insurance Modeling System. The board of directors
of the Corporation shall designate the agency or organization with
which any such contract is entered into. The first of such annual peer
reviews shall be initiated no later than 3 months after the date of
enactment of this Act.''
---------------------------------------------------------------------------
questions submitted by representative tierney
1. Did Hostess stop making contributions to its single and/or
multi-employer pension plans prior to filing for bankruptcy?
Hostess Brands made required contributions to its single-employer
plan until it filed for reorganization under Chapter 11 in January
2012. Hostess stopped making those required contributions once it
entered bankruptcy.
Hostess stopped making annual contributions to multiemployer plans
in August 2011, a few months before it filed for bankruptcy.
In November 2012, a bankruptcy judge approved Hostess' request to
shut down its operations and liquidate its business. Hostess'
withdrawal from 41 multiemployer plans in which it participates
triggered an obligation under ERISA for Hostess to pay its share of the
plans' underfunding. These obligations total nearly $2 billion. Only a
tiny fraction of that amount will be recovered and paid to the plans.
2. Please detail the enforcement action(s) the PBGC can take to
require a company to continue making contributions to its pension plans
if it has stopped doing so. Is such enforcement action the same for
both single and multi-employer plans? If not, please explain.
PBGC's enforcement authorities are very different for single-
employer plans and multiemployer plans.
For single-employer plans, PBGC has the authority to file liens
against the sponsor and its non-debtor controlled group members if
missed contributions exceed $1 million. However, once a company files a
Chapter 11 petition, the situation changes. Under bankruptcy law, PBGC
cannot file liens against companies for contributions missed during
bankruptcy.
For multiemployer plans, PBGC has no authority to require employers
to make contributions. That authority is held only by plan trustees.
Plan trustees lack PBGC's ability to file liens for non-payment of
required contributions. Trustees must first obtain a judgment in
federal court for the unpaid contributions, but by the time such a
judgment is obtained, the employer may have entered bankruptcy,
preventing the trustees from filing a lien.
The plan trustees are also responsible for collecting withdrawal
liability from employers that leave the plan. (PBGC has no enforcement
authority with respect to such collections.) Because a bankrupt
company's withdrawal liability is generally discharged in bankruptcy
and is generally an unsecured general claim that enjoys no priority,
plans usually collect only a tiny fraction of the obligation of
bankrupt withdrawn employers.
3. When Hostess stopped making contributions to its single and/or
multi-employer pension plans, did the PBGC utilize all of the
enforcement authority available to them under the law? If not, why not?
Once Hostess stopped making contributions to its multiemployer
plans and, after filing, its single-employer plan, PBGC had no
authority to change Hostess's actions.
Hostess' single-employer plan will terminate and be trusteed by
PBGC. PBGC can and will pursue claims for contributions missed during
bankruptcy and plan underfunding of $62 million in bankruptcy. However,
because PBGC's claims are generally treated as unsecured claims in
bankruptcy, the recoveries are generally only a small fraction of the
plan's obligations.
4. Does the PBGC believe it has sufficient enforcement authority to
effectively deter and/or appropriately remedy future cases where a
company stops making contributions to its pension plans? If not, please
elaborate and provide specific recommend actions (including technical
assistance, if available) for amending the relevant statute(s).
PBGC does not have authority to require company contributions to
pension plans. With such authority under the single-employer program,
the agency would be better able to protect pensions, particularly
during the bankruptcy process.
Furthermore, ongoing pension contributions, unlike other ongoing
employee costs, are generally not considered a priority expense in
bankruptcy.
questions submitted by representative scott
1. a. If a company in a multiemployer plan files for bankruptcy, do
the other companies in the plan inherit the full responsibility for
paying the withdrawn company's obligations in the pension fund?
Yes. When a contributing employer to a multiemployer plan files for
bankruptcy or otherwise fails to pay assessed withdrawal liability, the
remaining employers in the plan become responsible for the benefits
earned with that employer. If the plan is underfunded, the benefits
must be funded by the remaining employers.
Even if the plan is well-funded in the year of an employer's
bankruptcy or withdrawal, the plan could later incur a substantial loss
in assets (e.g., due to investment losses) resulting in the
underfunding of plan benefits. In these circumstances, plans attempt to
preserve the plan by increasing contributions from current employers
and/or reducing future benefit accruals for current employees.
Problems arise when there has been a significant drop in the number
of contributing employers in a plan, and the number of inactive
participants (many of whose employers have left the plan) greatly
exceeds the number of active participants. If such a plan becomes
significantly underfunded, steep increases in plan costs can put
enormous pressures on a small pool of employers and employees to
support the liabilities of a much larger group of inactive
participants.
b. If so, is there any relief for a small company which represents
only a minor portion of a large plan and which may be financially
unable to pay the additional costs?
Yes. Withdrawal liability is calculated based on a company's level
of contributions to a plan, so a small company with small contributions
will face a smaller liability if it chooses to withdraw. Also, in some
cases, plan trustees provide the bargaining parties with alternative
schedules of varying contribution rates and benefit reductions,
enabling small employers to negotiate less onerous contribution terms
with commensurately lower benefits for their employees.
Nonetheless, some plans and employers report that their
circumstances are such that these measures, by themselves, are
insufficient, that some companies will choose to withdraw or be forced
to declare bankruptcy, and that the risk to plans is that other
employers will follow and cause mass withdrawal from a plan.
2. Do many multiemployer plans approach a ``tipping point,'' where
insolvent companies are leaving and the surviving companies are having
so much trouble paying the increasing obligations of the departing
companies that others become insolvent, resulting in a cascade of
insolvencies and ultimate total failure of the plan?
We don't have enough current information to be sure, but we don't
think that most of the more than 1,300 ongoing plans are or will be at
such a point. Nonetheless, some plans clearly will be. These generally
are plans that are both seriously underfunded and for which the base of
active employers is too small for that underfunding to be remedied by
increased contributions and/or reduced future accruals. Such plans are
often found in industries that have undergone major transformation
involving multiple bankruptcies, such as textiles, furniture-making, or
printing, but there are severely distressed plans in other industries
as well.
3. What premium adjustment or statutory change would be necessary
in order for PBGC to be obligated to pay the proportional liability of
any single employer in a multiemployer plan that leaves a plan due to
bankruptcy?
In order for PBGC to be able to pay the obligations of employers
that become bankrupt, PBGC would need much greater financial resources.
At present, we cannot say with any confidence what increase in premiums
would be necessary. We are undertaking analyses to try and develop
estimates.
ERISA allows a plan to apply to PBGC for a plan ``partition,''
transferring to PBGC the liabilities attributable to service with
employers that withdrew from the plan as a result of bankruptcy. The
purpose is to keep the plan viable for the remaining employers by
relieving them of the significant unfunded liabilities left behind by
bankrupt employers. However, this tool has been rarely used, as
partition is limited only to those participants that are ``orphaned''
as a result of formal bankruptcy proceedings and not for other cases.
Furthermore PBGC currently lacks the financial resources to fund
partitions. We are currently working to quantify the number of plans
that would be helped by a partition-type solution and what the
associated costs might be.
4. If a company in a multiemployer plan goes bankrupt, and then
reorganizes and becomes solvent again, are its past pension obligations
revived?
Generally not. If pension commitments are extinguished in
bankruptcy, then bankruptcy law acts to prevent any restoration after
emergence from Chapter 11. Some companies in bankruptcy will negotiate
with the union to remain as a contributing employer to the plan after
reorganization. In those cases, pension obligations remain in place.
5. What happened to the pension obligations of the automobile
companies that received assistance through the federal bailout?
General Motors (GM), Chrysler, and Ally Financial (formerly GMAC
and still partially owned by GM in 2008) received assistance through
the Automotive Industry Financing Program (AIFP) under the U.S.
``Troubled Assets Relief Program'' (TARP).
GM currently sponsors pension plans for its hourly and salaried
employees. However, in 2012 GM announced that it was eliminating its
obligations to salaried employees and retirees in several ways: (a)
certain retirees in the salaried plan were offered a one-time lump-sum
payment instead of receiving their pensions, (b) the pension
obligations of those retirees who chose not to take the lump-sum
payment were transferred by GM to the Prudential Insurance Company, and
(c) active participants and those retiring after December 1, 2011, were
moved to a new salaried pension plan with a lump-sum payment option
available at retirement (note that GM froze this new salaried plan in
late 2012). GM terminated the old salaried plan as well as a cash
balance plan where the employees were offered the choice between
receiving an annuity and a lump sum.
Chrysler currently sponsors pension plans for its hourly and
salaried employees. In 2009, PBGC obtained an agreement from Daimler
AG, then a Chrysler plan sponsor, to contribute $600 million to the
Chrysler pension plans. In 2012, Chrysler terminated a small cash
balance plan that was fully funded. In June 2013, Chrysler announced
that it would freeze its U.S. defined benefit plans for salaried
employees effective December 31, 2013. (Note that these plans were
closed to new hires effective December 31, 2003. Salaried employees
hired on or after January 1, 2004, were eligible for a 401(k) plan.)
The freeze affects about 8,000 employees, who will now receive
contributions from Chrysler in the 401(k) plan.
In 2012, Ally Financial offered terminated vested participants in
its pension plan a lump-sum payment in lieu of an annuity.
6. How much risk could be mitigated if companies in multiemployer
plans were required to invest a significant proportion of their
investment assets in insurance products, where the risk of the vagaries
of the stock market would be borne by the private insurance and not the
plan itself?
Federal law has never required pension plans to invest in any
particular form of investment. For those plans that are significantly
underfunded, investment in the vast majority of insurance or fixed
income products does not mitigate or exacerbate insolvency risk.
Investment policy and the mitigation and diversification of risk are
significant issues for multiemployer plans.
______
[Whereupon, at 11:28 a.m., the subcommittee was adjourned.]