[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
PRIVATE EMPLOYER DEFINED
BENEFIT PENSION PLANS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON SELECT REVENUE MEASURES
OF THE
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 17, 2014
__________
Serial 113-SRM04
__________
Printed for the use of the Committee on Ways and Means
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COMMITTEE ON WAYS AND MEANS
DAVE CAMP, Michigan, Chairman
SAM JOHNSON, Texas SANDER M. LEVIN, Michigan
KEVIN BRADY, Texas CHARLES B. RANGEL, New York
PAUL RYAN, Wisconsin JIM MCDERMOTT, Washington
DEVIN NUNES, California JOHN LEWIS, Georgia
PATRICK J. TIBERI, Ohio RICHARD E. NEAL, Massachusetts
DAVID G. REICHERT, Washington XAVIER BECERRA, California
CHARLES W. BOUSTANY, JR., Louisiana LLOYD DOGGETT, Texas
PETER J. ROSKAM, Illinois MIKE THOMPSON, California
JIM GERLACH, Pennsylvania JOHN B. LARSON, Connecticut
TOM PRICE, Georgia EARL BLUMENAUER, Oregon
VERN BUCHANAN, Florida RON KIND, Wisconsin
ADRIAN SMITH, Nebraska BILL PASCRELL, JR., New Jersey
AARON SCHOCK, Illinois JOSEPH CROWLEY, New York
LYNN JENKINS, Kansas ALLYSON SCHWARTZ, Pennsylvania
ERIK PAULSEN, Minnesota DANNY DAVIS, Illinois
KENNY MARCHANT, Texas LINDA SANCHEZ, California
DIANE BLACK, Tennessee
TOM REED, New York
TODD YOUNG, Indiana
MIKE KELLY, Pennsylvania
TIM GRIFFIN, Arkansas
JIM RENACCI, Ohio
Jennifer M. Safavian, Staff Director and General Counsel
Janice Mays, Minority Chief Cousel
______
SUBCOMMITTEE ON SELECT REVENUE MEASURES
PATRICK J. TIBERI, Ohio, Chairman
ERIK PAULSEN, Minnesota RICHARD E. NEAL, Massachusetts
KENNY MARCHANT, Texas JOHN B. LARSON, Connecticut
JIM GERLACH, Pennsylvania ALLYSON SCHWARTZ, Pennsylvania
AARON SCHOCK, Illinois LINDA SANCHEZ, California
TOM REED, New York
TODD YOUNG, Indiana
C O N T E N T S
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Page
Advisory of September 17, 2014 announcing the hearing............ 2
WITNESSES
Deborah Tully, Director of Compensation and Benefits Finance and
Accounting Analysis, Raytheon, Testimony....................... 6
R. Dale Hall, Managing Director of Research, Society of
Actuaries, Testimony........................................... 14
Scott Henderson, Vice President of Pension Investment and
Strategy, The Kroger Company, Testimony........................ 24
Jeremy Gold, FSA, MAAA, Jeremy Gold Pensions, Testimony.......... 34
Diane Oakley, Executive Director, National Institute on
Retirement Security, Testimony................................. 38
SUBMISSIONS FOR THE RECORD
AARP............................................................. 66
Church Alliance.................................................. 80
National Center for Policy Analysis.............................. 84
National Center for Policy Analysis.2............................ 88
National Education Association................................... 89
The ERISA Industry Committee..................................... 91
United Brotherhood of Carpenters and Joiners..................... 99
U.S. Chamber of Commerce......................................... 101
PRIVATE EMPLOYER DEFINED BENEFIT PENSION PLANS
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WEDNESDAY, SEPTEMBER 17, 2014
U.S. House of Representatives,
Committee on Ways and Means,
Subcommittee on Select Revenue Measures,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:19 a.m., in
Room 1100, Longworth House Office Building, the Honorable
Patrick Tiberi [Chairman of the Subcommittee] presiding.
[The advisory of the hearing follows:]
HEARING ADVISORY
Chairman Tiberi Announces Hearing on Private Employer Defined Benefit
Pension Plans
1100 Longworth House Office Building at 10:15 AM
Washington, September 10, 2014
Congressman Pat Tiberi (R-OH), Chairman of the Subcommittee on
Select Revenue Measures, today announced that the Subcommittee will
hold a hearing on defined benefit pension plans offered by private
sector employers, including both multiemployer plans and single
employer plans. The hearing will take place on Wednesday, September 17,
2014, in 1100 Longworth House Office Building, beginning at 10:15 A.M.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only. However,
any individual or organization not scheduled for an oral appearance may
submit a written statement for consideration by the Subcommittee and
for inclusion in the printed record of the hearing. A list of invited
witnesses will follow.
BACKGROUND:
Multiemployer (``ME'') pension plans collectively are less than 50-
percent funded, with underfunding exceeding $400 billion. The
Congressional Budget Office estimates that the Pension Benefit
Guarantee Corporation's (``PBGC'') ME insurance program, financed by
premiums from ME plans and not backed by taxpayers, will run out of
cash in 2021 and requires $9 billion over the next decade to pay
statutory benefits. PBGC's projected ME deficit for 2023 is $50
billion. With respect to ME plans that become insolvent: (1) retirees
will receive a maximum annuity of $12,870 from PBGC until PBGC runs out
of cash, and (2) employers will be subject to substantial withdrawal
liability that can exceed the value of the employer.
The current investment environment and low interest rates combined
with increasing life expectancies also present challenges to single
employer (SE) plans, although they generally are better funded than
multiemployer plans. (PBGC projects a deficit in its SE program of $8
billion for 2023.) Still, workers participating in, and employers
sponsoring, such plans face a variety of challenges. For instance,
employees whose employer is transitioning new employees into a defined
contribution plan (e.g., a 401(k) plan) face the prospect of their
employer being forced to freeze the defined benefit plan for all
employees to avoid violating the non-discrimination rules. H.R. 5381,
introduced July 31, 2014, by Chairman Tiberi, and H.R. 2117, introduced
May 22, 2013, by Ranking Member Richard Neal (D-MA), are designed to
protect longer-service participants in defined benefit plans that are
closed to new entrants by allowing cross-testing between defined
benefit and defined contribution plans. Other issues affecting single
employer plans include the impact of the in-service distribution rules
on employees' retirement schedules and the effect of mortality tables
on funding requirements.
In announcing this hearing, Chairman Tiberi said, ``I have heard
for years now from hundreds of businesses and nonprofits about the need
for pension reforms, especially for defined benefit plans. Increasing
pension costs have hampered both the job growth and capital investment
needed to grow the economy and have threatened retirement security for
American workers. The cost of doing nothing is too high a price to pay.
This hearing will give us the opportunity to examine challenges facing,
and opportunities to strengthen, the defined benefit pension system.''
FOCUS OF THE HEARING:
The hearing will focus on some of the challenges facing employers,
employees, and retirees who rely on defined benefit pension plans to
help provide retirement security. It will examine the funding rules
governing multiemployer plans, as well as selected issues that affect
single employer plans.
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October 1, 2014. Finally, please note that due to the change in House
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2610.
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Note: All Committee advisories and news releases are available on
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Chairman TIBERI. Thank you for joining us today. This
hearing will come to order. Good morning, thank you for joining
us for our subcommittee hearing on Private Employer Defined
Benefit Pension Plans. Today we examine the challenges facing
employers, employees, and retirees who rely on both single and
multi-employer defined benefit pension plans to help provide
retirement security. These challenges pose serious threats to
American workers and employers.
I know what it means personally for a family to lose the
pension they were relying on. When I was in high school my
father lost his job. He lost his pension. We lost our health
care. It was a volatile time, and I want families to avoid that
type of situation.
First I have heard from a number of companies with concerns
that treasury rules relating to non-discrimination testing for
single-employer defined benefit plans may cause plans to
freeze, and participants to lose their benefits. In response to
this issue, Ranking Member Richard Neal and I have introduced
legislation to offer non-discrimination testing to close
pension plans. It would prevent companies from having to freeze
their plans, and would prevent thousands of participants from
losing their benefits.
There are a number of other issues currently affecting
private defined benefit pensions, and it is my hope that this
hearing will give us an opportunity to gain a different
perspective or perspectives on these issues.
The funding challenges facing multi-plans are threatening
both retirement security for American workers and the solvency
of employers, whose ability to invest and create jobs is being
hampered by these pension obligations. I have said it for
years: The cost of doing nothing is too high of a price to pay.
I applaud Chairman Kline and the Education Workforce
Committee on their work on the issue, as well. I look forward
to gaining as much information as possible, as we determine an
appropriate path forward to deal with these very important
issues.
I thank our witnesses for being here, and now yield to
Ranking Member Neal.
Mr. NEAL. Thank you, Mr. Chairman. Thanks for calling this
timely hearing. A reminder to the audience that it is almost to
the day--six years--since America witnessed the financial
collapse and the near end of our economic system, as reminded
at the time by the Secretary of the Treasury and the Chairman
of the Federal Reserve Board. So I think that this issue
continues to be timely.
For those of us who were members of the House at that time,
to stand in the well of the House and to watch the stock market
in one hour dip by 700 points is compelling evidence of what I
think that this hearing is about today. So I do want to
acknowledge--and, by the way, that personal perspective that
you offered is telling, because one of the questions that is
seldom is ever raised by the media is how do we come to our
conclusions, and much of it is based on our own personal
experience, as it is with the witnesses today.
So, I want to thank you for the hearing. It is an issue
that deserves our much-needed attention. And it is my hope that
we will have an opportunity to use the hearing as a catalyst
for action.
It is also fitting that we are calling this hearing days
before we celebrate the 40th anniversary of the passage of
ERISA. Before ERISA there was little to no protection for
American workers enrolled in pension plans. In fact, there were
high-profile cases of Americans losing their retirement
benefits.
Congress responded to this crisis by passing ERISA. Today
ERISA serves as an example for us to follow, standing as a
testament to how working together in a bipartisan way ensures
Americans have access to financially secure retirement.
Unfortunately, it took Americans losing their retirement
benefits before Congress responded. Today we should not allow
the same thing to happen before we act.
We are at the precipice of an impending retirement crisis
in America that is seemingly twofold: Americans are not either
saving enough, or, at retirement time, we are seeing changes to
defined benefit plans. And, often times, those plans are
considered to be underfunded. It astounds me in this day and
age that half of the people that get up and go to work every
day in America are not in a retirement plan.
We know the statistics. The United States has a retirement
deficit of $6.6 trillion and PBGC estimates that, for the next
decade, private sector employer defined benefit pension plans
are going to carry a significant deficit. These staggering
statistics demonstrates that we, as Americans, need to do more
to prepare for our financial future. We must do all we can to
encourage more individuals to save, whether through financial
literacy programs, or through the Tax Code. Now is not the time
to cut the hard-earned benefits of millions of Americans.
It has been put forward by some that the best way to
address the private sector DB pension deficit is to cut
benefits. I could not disagree more. Pension benefits have been
earned through hard work, and these employees have relied on
these guarantees to fund their retirement. Before looking to
cut those earned benefits, we need to look at our current
funding rules, along with the insurance guarantee through the
PBGC to see if there are ways to reform the current system
before looking to cut benefits. Remember that if PBGC is not
strong, then the guarantees given to workers are eroded.
Many new entrants into the private sector workforce will
never know the security of a defined pension plan, which
provides the employee predictable and secure benefits for life.
Under DB plans, workers are promised a specific benefit at
retirement, a benefit they know in advance, and one that is not
subjected to the vagaries of the markets.
We can only look to previous decades for example of the
perils of investing solely in the stock market, whether the
401(k) tragedies of Enron, WorldCom, or the financial meltdown
in 2008 comes to mind.
I commend the chairman for calling this hearing. It is
extremely important for us to find a solution to the problems
vexing the private sector defined benefit plans, and to hear
solutions that will be put forward today, solutions that
maintain the integrity of the defined benefit, and ensures that
the promises made will be the promises kept.
And I thank the chairman. I am personally delighted that
you used your personal example of what happened to your dad. In
my case, one of the reasons I have been such a fervent
supporter of Social Security, when my parents died, that is how
we lived, survivor benefits. And again, it is the personal
experience that one has as they come to this institution, and
how they see the development of what ought to be happy years,
retirement years.
Thanks, Mr. Chairman.
Chairman TIBERI. Thank you, Mr. Neal, for your leadership.
Before I introduce today's witnesses, I ask unanimous
consent that all Members' written statements be included in the
record.
[No response.]
Chairman TIBERI. Without objection, so ordered.
Let me get to the witnesses. Deborah Tully, director of
compensation and benefits finance accounting analysis at
Raytheon in Massachusetts, thank you for being here.
R. Dale Hall, managing director of research at the Society
of Actuaries in Illinois. Thank you.
Scott Henderson, vice president of pension investment and
strategy for the Kroger Company in the great state of Ohio.
Thank you.
Jeremy Gold, Jeremy Gold Pensions in New York City. Thank
you.
Last, but not least, Diane Oakley, executive director of
the National Institute on Retirement Security here in
Washington, D.C.
I will remind all of you that you have 5 minutes to present
your oral testimony. Your full written testimony has been
submitted for the record.
Ms. Tully, we will begin with you.
STATEMENT OF DEBORAH TULLY, DIRECTOR OF COMPENSATION AND
BENEFITS FINANCE AND ACCOUNTING ANALYSIS, RAYTHEON
Ms. TULLY. Good morning, Chairman Tiberi, Ranking Member
Neal, and committee members. I am Deborah Tully, director of
compensation and benefits finance at Raytheon Company. I am a
fellow of the Society of Actuaries, and an enrolled actuary
responsible for reporting compliance and financial analysis for
Raytheon's retirement benefit programs. Thank you for the
opportunity to address the subcommittee on pension matters,
specifically the non-discrimination testing regulations as they
apply to closed plans.
Before I do so, let me give some background on Raytheon and
our retirement programs. Raytheon is a technology and
innovation leader, specializing in defense, security, and civil
markets throughout the world. Founded in 1922, Raytheon is
headquartered in Massachusetts, and has 61,000 employees. Our
2013 net sales were $24 billion.
Raytheon has maintained defined benefit plans, or DB plans,
since 1950, and defined contribution, or DC retirement plans,
since 1984. Closed to new employees hired after 2006,
Raytheon's DB plans covered approximately 172,000 people.
Raytheon's DC covers 92,000 people, and is made up of two
components: a 401(k) plan with a company match, and a
supplemental DC plan for employees hired after 2006.
Like many companies, we have been transitioning from a DB
retirement model to a DC model, most notably by closing our DB
plan to new employees, and offering them a DC plan, while
continuing to provide the DB plan to employees hired before
2007. This gradual change minimizes the impact to existing
employees, while providing the greatest opportunity for new
employees who are enrolled in the DC plan to maximize their
retirement benefit.
Under the Internal Revenue Code, DB plans must meet certain
non-discrimination testing standards to ensure that they do not
discriminate in favor of highly-compensated employees. IRS
rules generally define highly-compensated employees as those
earning more than $115,000 annually. To satisfy non-
discrimination requirements, a DB plan must pass three types of
tests, which often involve complex actuarial calculations to
ensure that a plan is not discriminatory.
For a plan that is closed to new participants, each of
these tests gets more difficult to pass over time, which
ultimately could jeopardize the tax-qualified status of the
plan, unless the employer makes changes. This occurs because
the group of employees earning benefits under a closed plan
will gradually have longer service, and will have earned
compensation increases over their careers. Over time, those
compensation increases will cause many employees to be treated
as highly compensated, and, as a result, the plan will risk
failure. Each year, more and more employers are facing this
issue, as the demographic profile of their closed DB plan
evolves.
Under current regulations, an employer has limited options
to ensure compliance if its closed plan is at risk of failure.
While some employers take interim steps to modify their plans,
such as removing some highly-compensated employees from the
plan, or changing certain features of the plan, these fixes are
only temporary solutions. Ultimately, many employers choose to
fully freeze their plans, since this is the only permanent
solution to the problem.
A full plan freeze means that employees will no longer earn
benefits in the DB plan. This negatively impacts mid- to late-
career employees, who are about to earn the most significant
portion of their retirement benefit, since the most valuable
accruals under a DB plan occur towards the end of an employee's
career.
Another option to avoid testing non-compliance is to reopen
the pension plan to employees who are not in the plan. While
every company has to evaluate their plan design, demographics,
and financial situation based on their specific circumstances,
this is an unlikely choice for most employers, given the trend
away from DB plans and toward DC plans, and the fact that many
competitors do not offer DB plans to new employees.
In response to the ongoing concern surrounding non-
discrimination testing, the Treasury Department issued non-
discrimination testing relief late last year for certain closed
DB plans. Valid through 2015, the relief allows employers to
combine their DB and their DC plans for non-discrimination
testing, referred to as cross-testing, as long as the plan
satisfied certain criteria before the end of 2013. This allows
employers to take the DC benefits offered to all employees into
consideration when evaluating the level of benefits being
provided.
This temporary relief is very much appreciated, and
reflects progress. However, it is not a complete solution.
Since it does not address all of the testing requirements, many
employers could still face testing failure.
In closing, employers who have chosen to maintain their DB
plans for some employees as they transition to a DC plan for
others, will face non-discrimination issues at one point or
another under the current regulations. While employers may have
near-term options to avoid failure, a long-term solution is
needed in order to allow employees to continue to earn benefits
under the DB plan.
We believe that H.R. 5381, introduced by Chairman Tiberi
and Ranking Member Neal, is a bipartisan solution that
addresses many of these non-discrimination testing concerns.
Under current regulations, we are penalizing employers who have
chosen to make a gradual transition from DB to DC retirement
programs, rather than taking a more abrupt approach. Without a
long-term solution, non-discrimination regulations will further
drive employers to exit the DB system at the expense of the
participants that the regulations were intended to protect.
Thank you for the opportunity to speak today, and I look
forward to answering any questions you may have.
[The prepared statement of Ms. Tully follows:]
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Chairman TIBERI. Thank you.
Mr. Hall, recognized for 5 minutes.
STATEMENT OF R. DALE HALL, MANAGING DIRECTOR OF RESEARCH,
SOCIETY OF ACTUARIES
Mr. HALL. Thank you, Mr. Chairman, Mr. Ranking Member.
Thank you for the opportunity to testify today. My name is Dale
Hall; I am managing director of research at the Society of
Actuaries. SOA is an educational, research, and professional
organization of more than 24,000 actuaries worldwide. We
conduct a wide range of research to provide technical resources
to advance the knowledge and capabilities of our profession,
and to inform public policy development. One thing the SOA does
not do is take positions on specific policy proposals; we are
not an advocacy organization.
As we begin this discussion, I think it would be helpful to
understand that our retirement plan mortality studies generally
include two parts. The first is a mortality table, which
contains data on the actual death rates of a given population,
including any relevant subgroups. And the second part is an
improvement scale, which is an experience-based estimate on
expected rates of improvement in longevity of a population over
time.
The SOA has long been the primary source for mortality and
mortality improvement studies on U.S. private-sector defined
benefit plans. SOA studies on retirement mortality date back to
the early 1950s.
The Secretary of the Treasury establishes the mortality
assumptions to be used to calculate certain liabilities for
pension plans. The SOA conducted a study in the 1990s of
uninsured pension plan mortality to ensure that the Treasury
Department would have current and thorough information
available for this process. The result of that study was the
release in 2000 of the SOA's RP 2000 Mortality Tables, and a
reaffirmation of our Mortality Improvement Scale AA.
As part of its periodic review of retirement plan mortality
assumptions, the SOA's retirement plans experience committee
initiated a new pension study in 2009. A request for data was
sent out to retirement plans, and plan experience was
ultimately collected from calendar years 2004 to 2008. And the
result of that study was the draft release of our RP 2014
mortality tables this past February. The draft table is based
on a large set of data that represents about 10.5 million life-
years of experience, and over 220,000 deaths.
That committee also focused on providing an updated model
for mortality improvement on retirement programs. That study
culminated with the draft release of the MP 2014 Mortality
Improvement Scale this past February. The MP 2014 report
provides a model for mortality improvement rates that would be
applied to the RP 2014 mortality table for use in future
calendar years.
Both RP 2014 and MP 2014 were exposed for a 120-day comment
period from February to May. The SOA is now working to review
and respond to those comments. We are working towards
publishing final tables and reports by a target completion date
of October 31, 2014.
The exposure draft for RP 2014 does estimate the financial
impact on transitioning from currently-used mortality tables
and improvement scales to the new RP 2014/MP 2014 basis. When
comparing the change from the 2000 mortality study to the 2014
mortality study, the SOA estimates the general change in a plan
liability calculation would be an increase of 4 to 8 percent,
depending upon the plan's demographics.
My written testimony has a detailed discussion of the
regulatory uses of mortality tables, I will just summarize them
briefly here.
The Pension Protection Act of 2006 amends the minimum
funding requirements for single-employer plans. It also
requires the Treasury Department to review mortality rates
every 10 years. In setting these funding requirements, the
Treasury Department has frequently referenced our RP 2000
Mortality Table and Improvement Scale AA. We anticipate the
Treasury Department will carefully review our upcoming RP 2014
and MP 2014 studies and utilize them as they see fit.
In conclusion, the effort to develop this new mortality
study has been a five-year undertaking that has involved many,
many highly qualified actuaries. Key decisions have been
validated by independent committees, and the work has been
peer-reviewed at multiple points in the process. The SOA
process for experienced studies is open and transparent, and we
seek input and objective analysis from a broad range of
experts.
We have approached this project with a great deal of rigor,
because of the very important uses of these mortality tables
and mortality improvement scales. We believe it is critically
important for professional actuaries to have access to reliable
and well-supported data so they, in turn, can provide
meaningful projections to the broad range of stakeholders
responsible for governing private pension plans.
I appreciate this opportunity to testify on behalf of the
Society of Actuaries, and I look forward to answering any
questions you may have.
[The prepared statement of Mr. Hall follows:]
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Chairman TIBERI. Thank you, Mr. Hall.
Mr. Henderson, you are recognized for 5 minutes.
STATEMENT OF SCOTT HENDERSON, VICE PRESIDENT OF PENSION
INVESTMENT AND STRATEGY, THE KROGER COMPANY
Mr. HENDERSON. Thank you, Chairman Tiberi, Ranking Member
Neal, and Members of the Subcommittee. Thank you for this
opportunity to testify on the state of the multi-employer
pension system. My name is Scott Henderson, I am vice president
of pension investments and strategy for The Kroger Company. I
am also an employer trustee on two of the largest multi-
employer pension plans in the food industry.
Kroger is one of the largest retailers in the world. We
operate in more than 2,600 stores and 34 states. We are also
one of the largest unionized employers in the United States. We
employ more than 375,000 associates, a majority of whom are
represented by labor unions. In the past six years we have
created 40,000 new jobs. We have hired more than 22,000
veterans, and we recently announced plans to hire 20,000
individuals for new, permanent positions. We also participate
in 36 multi-employer pension plans.
Combined, these plans manage over $70 billion in assets,
and have more than $100 billion in associated liabilities.
Needless to say, this issue is very important to us.
The uncertain fate of the multi-employer system is a huge
concern to our associates, our retirees, and our company. The
system is at great risk, and it threatens the retirement
security of millions of Americans.
I want to focus on five points: one, the multi-employer
system is broken, and desperately needs reform; two, many plans
are headed for insolvency; three, the PBGC's multi-employer
insurance fund is also headed for insolvency; four, labor and
management trustees, working together and with the PBGC, need
new tools to adjust accrued benefits in the most severely
funded plans; and, five, Congress must act now.
My first point is that the system needs reform. My written
statement describes the fundamental problems with the multi-
employer pension system. It was designed more than 65 years
ago. Few would have predicted that today's contributing
employers would become responsible for the risk of unfunded
liabilities left by previous employers. Existing employers are
leaving these plans to avoid this risk. New employers refuse to
join because the plans are in trouble. And the remaining
employers are unable to act because of the growing liabilities
they face. It creates a spiral that is nearly impossible to
reverse.
And that leads to my second point. Many plans are severely
underfunded now, and will become insolvent within a decade. The
PBGC estimates that nearly 1.5 million participants are at
serious risk because their plans are severely underfunded. In
Kroger's case, most of the plans we participate in are stable,
yet a few large plans--Central States in particular--will fail
without immediate reform. When these plans fail, many
participants will experience dramatic benefit reductions.
The failure of these plans will threaten the viability of
contributing employers and other plans, creating a domino
effect, which leads to my third point. As more plans fail, the
demands on the PBGC will compound. Congress created the multi-
employer insurance fund as a backstop to assist funds in need.
No one anticipated the profound impact of changes in
demographics, the contraction in the trucking industry, stock
market shocks, and other factors.
The unfortunate reality is that the insurance fund is
headed for insolvency. Several government agencies have reached
the same conclusion, including the PBGC itself, in its most
recent projections reports. The Congressional Budget Office
projects that the multi-employer fund will be exhausted by
2021. For contributing plans, it is like paying premiums to an
insurance company that we know is going out of business. And
when the PBGC becomes insolvent, the retirement benefit for
millions of Americans may disappear, as well.
This leads to my fourth point. To save these plans,
trustees need new tools. In extreme cases, we need the ability
to adjust accrued benefits. Last year the NCCMP issued a report
entitled, ``Solutions, Not Bailouts.'' Among these
recommendations was that labor and management trustees, working
together, be permitted to adjust benefits and plans that will
otherwise become insolvent. Importantly, this proposal will
succeed in preserving benefits without relying on taxpayer
dollars. Adopting this proposal will involve difficult
decisions, but the alternatives are far worse.
I completely agree with Tom Nyhan of Central States when he
testified last year--and I quote--``There is another
fundamental rule that is going to trump the anti-cutback rule,
and that is called arithmetic. It is not a question of if there
are going to be benefit cuts. There are going to be benefit
cuts. The question is when and how they are going to happen.''
And that is my final point. Congress must act now. We
cannot wait until 2021, or even 2016. Trustees need new tools
to delay and minimize benefit cuts as much as possible, and
save the retirement benefits of millions of Americans.
I am looking forward to working with this Subcommittee, and
I thank you for the opportunity to appear today.
[The prepared statement of Mr. Henderson follows:]
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Chairman TIBERI. Thank you, Mr. Henderson
Mr. Gold, you are recognized for 5 minutes.
STATEMENT OF JEREMY GOLD, FSA, MAAA, JEREMY GOLD PENSIONS
Mr. GOLD. Chairman Tiberi, Ranking Member Neal, and Members
of the Subcommittee, thank you for the opportunity to present
my views with respect to private employer defined benefit
pension plans. My views are my own, and do not represent any
other persons or organizations.
I am an independent consulting actuary and economist,
specializing in the financial aspects of pension plans. I will
address the measurement of liabilities and costs of multi-
employer pension plans. My central message is that liabilities
are understated by as much as 50 percent, and annual costs are
underestimated by as much as 100 percent. Good policies cannot
be based on bad numbers.
Actuaries performing valuations for multi-employer plans
have always been challenged by employers wanting lower costs
and employees wanting larger benefits. Circa 1980, with
Treasury bond yields in double digits, naturally conservative
actuaries were discounting benefit promises at interest rates
below seven percent. By 2000, with equity markets soaring, and
Treasury rates in the neighborhood of 6 percent, actuaries were
discounting at about 8 percent. Since 2000, although Treasury
rates have fallen to about 3 percent, indicating a widespread
decrease in interest rates, and a commensurate share increase
in liabilities, actuarial discount rates have, for the most
part, held steady.
The desires of employers and employees make it all but
impossible for consulting actuaries, with the best of
intentions, to lower discount rates accordingly. The result is
that liability values are severely understated, costs are
underestimated, and actuarial assumptions have been too
optimistic.
Once a deficit develops, once there is a hole in the
ground, there are only two ways to fix the problem: smaller
benefits for employees, larger costs for employers. The
proposals being discussed are very reasonably some combination
of these two approaches. I am agnostic as to how much benefits
should be cut versus how much additional cost should be borne
by employers.
My message is this: unless accurate estimates of future
costs are on the table and open for all to see, the combination
of benefit cuts and employer costs, increases, will not reduce
the deficit, will not fill the hole. On the contrary, the hole
will get bigger unless two necessary steps are taken: first,
get the right price for all future benefit accruals, and make
sure, at an absolute minimum, that these are paid; second,
accurately measure the deficit and decide when, how, and who
pays to fill the hole.
How can we get the right price--Actuaries trying to balance
the needs of employees and employers cannot be expected to push
valuations uphill when the interested parties want to go
downhill. I believe that the concept of an independent
consulting actuary putting a value on these benefits is
irreparably flawed. The parties setting the price must have
very significant skin in the game and capital at risk. The
party that sets the price must also guarantee the benefits and
hold sufficient capital to make good on its guarantee.
The need to have capital at risk guaranteeing benefit
promises implies something like insurance companies with
actuaries whose primary obligation is to the company that puts
up the capital, guarantees the benefits, and employs the
actuary. These institutions do not--the institutions I have in
mind do not have to be insurance companies as we know them, but
they must combine capital, benefit guarantees, and actuarial
expertise.
In summary, we should measure accrued liabilities and
future costs accurately. Accurate measurements will only be
made by parties with skin in the game, combining capital,
benefit guarantees, and actuarial expertise. To avoid making
matters worse than they already are, plans must, at an absolute
minimum, pay the full price for newly-earned benefits, or
reduce accruing benefits to match available funding, and we
must pay the interest on unfunded accrued liabilities.
Thank you.
[The prepared statement of Mr. Gold follows:]
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Chairman TIBERI. Thank you, Mr. Gold.
Ms. Oakley, you are recognized for 5 minutes.
STATEMENT OF DIANE OAKLEY, EXECUTIVE DIRECTOR, NATIONAL
INSTITUTE ON RETIREMENT SECURITY
Ms. OAKLEY. Thank you, Chairman Tiberi, Ranking Member
Neal, Members of the subcommittee, for the opportunity to
testify here today. I am Diane Oakley, the executive director
of the National Institute on Retirement Security. We are a non-
partisan research organization working in the retirement
security space.
Defined benefit plans enable Americans to be self-
sufficient. They provide businesses the workforce management
tool, and they support the U.S. economy. Employees value the
predictable income that lasts, giving them independence after a
lifetime of work. Employers value the cost-effective tool for
recruitment, retention, and managing their workforce.
Forty years ago, the Employee Retirement Income Security
Act became law, bringing financial certainty to private-sector
workers. Nobel economist Robert Merton recently summed up the
primary question of concern for retirement savers: Will I have
sufficient income in retirement to live comfortably--
Congress had the right focus in 1974, with ERISA:
retirement income security. The typical 1970s American was
identified as a 47-year-old housewife who lived with her
mechanic/machinist husband in the chairman's state of Ohio,
just outside of Dayton. His blue-collar job had a pension that,
combined with Social Security, would provide $12,000 of income,
a middle-class income in that time.
Typical American profile is quite different today. With
less access to pensions, they are extremely worried about their
retirement. Eighty-five percent of Americans are concerned
about their retirement prospects, and fifty-five percent are
very concerned. For Americans with DB pensions, it is easier to
address Merton's question on retirement security. If someone
works for 30 years, if they have a pension, perhaps they can
replace 45 percent of their pre-retirement income.
Pension income helps older households keep them out of
poverty. Retirees with pensions today rely less on public
assistance, which saved governments $8 billion in 2010 alone.
Yet, at the same time, 55 percent of older, middle-income
households relied on pension income to stay middle class.
Unfortunately, pension income is declining for retirees. In
1998, 52 percent of older Americans had a pension income. By
2000 that had fallen to just 43 percent. Households today in
the workforce near retirement represent the last generation of
American workers with widespread pension coverage. Sixty
percent of households between ages 55 and 64 have some type of
DB plan, while those younger than 45 have pension coverage at
half that level.
Today workers are more likely to rely on an individual or
retirement account, like a 401(k), which can fluctuate
dramatically with stock markets, and can be outlived. The shift
from DB also is a loss for local economies. Pension steady
income, regardless of stock market fluctuations, means that
they are considered economic stabilizers during economic
downturns.
In 2012, private-sector DB plans paid $167 billion to 13
million retirees from private-sector employers, giving them an
annual benefit of about $14,000, on average. Spending from
those benefits collectively supported 2.3 million jobs in
America, and generated $347 billion in economic output, and
provided $50 billion in federal, State, and local income taxes.
Fueled in part by changes in the nature of the private-
sector workforce, as well as accounting and government
regulations that created more volatility and less predictable
balance sheets, many private employers offering pensions have
chosen to freeze workers' DB plans. The Bureau of Labor
Statistics indicates that 10 percent of all private employers
offering new employees DB pensions today only covers about 18
percent of that workforce.
Reflecting this trend, 45 percent of workers with pensions
are concerned that their employers will reduce their pension,
and 37 percent are concerned that they will close their plan.
The switch to DB plans carries counter-cyclical risks for
employers, such as increased severance pay, higher benefit
costs, and results in lower mobility within organizations.
Studies have found that employers with DC plans are finding
older employees staying on in the workforce, and causing choke
points in their talent pipelines. But we have also seen a
recent trend with Kodak, for example, which announced that it
will improve its DB plan, while foregoing its employer match in
its 401(k).
With the disappearance of secure, predictable retirement
income, and declines in overall workplace coverage, the
American workers face a retirement savings burden that is
heavier and more troubling than ever before. Recently, the
Federal Reserve released a survey of American workers' well-
being, and what they found is, even though workers today have
more responsibility for their own retirement, most Americans
give no, little, or just some thought to planning for
retirement. For those who do plan, their plan is to keep on
working and Social Security. In----
Chairman TIBERI [continuing]. If you can----
Ms. OAKLEY [continuing]. 1991, a researcher commented----
Chairman TIBERI. Ms. Oakley, if you can wrap it up, your
time has expired.
Ms. OAKLEY. To reach the second hundred years of pensions,
I think we need to make sure we keep the pensions we have
today, find new ways to encourage pensions, and keep everyone's
DB plan Social Security.
[The prepared statement of Ms. Oakley follows:]
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-----
Chairman TIBERI. Thank you.
Ms. OAKLEY. Thank you.
Chairman TIBERI. Thank you all. Very good testimony.
Ms. Tully, begin with you. You mentioned that the Treasury
Department has released temporary relief through 2015, which, I
do agree, is a welcome progress. It is my understanding that
they have also sought comments on some additional possible
approaches that they may take. Can you comment on that--Would
that be helpful--Would that be something that would solve the
problem that you outlined in your testimony----
Ms. TULLY. Yes, thank you, Chairman. As you mentioned,
Treasury did provide relief late last year. And, as a part of
that relief, in their notice they actually did request comment
on several possible proposals for potential solutions. And
while those solutions may potentially help some employers, due
to their complexity, and the limited nature of those solutions,
we understand from industry organizations that a majority of
employers will likely not be able to utilize those potential
solutions, and even would have a challenge utilizing some
combination of those.
And that is why we actually support a long-term solution,
such as what is put forth in the Neal-Tiberi bill over what
some of these potential complicated Treasury solutions are.
Chairman TIBERI. So you mentioned the long-term solution.
Ms. TULLY. Yes.
Chairman TIBERI. And without it, in your testimony, you
mention that employers might be heading for the exits with
respect to those important plans that Ms. Oakley just talked
about.
Ms. TULLY. Yes.
Chairman TIBERI. Can you expand on that, from where you
sit, as someone who has to deal with reality and not what we
would hope would happen----
Ms. TULLY. Absolutely. So, as I mentioned in my testimony,
as companies start to come across these non-discrimination
testing issues, there are some potential near-term solutions
that they can use to solve the problems, such as removing some
highly-compensated employees from their plans, or tweaking
their plan design. But, again, those become very temporary
solutions.
So, from a practical standpoint, when an employer is
actually evaluating their choices, and realizing that they need
to operate this defined benefit plan, or their retirement
programs in general to provide, hopefully, consistent benefits
to their employees, they have to make choices for--based on
their business circumstances, based on their competitiveness.
And, often times, we are seeing companies are making a
choice simply to fix the non-discrimination testing issue
permanently, and move directly to a plan freeze, when, in
reality, these are exactly the companies that are--were
initially trying to make a more gradual transition to that type
of a program, and now they are faced with having to make it
permanently through a plan freeze.
Chairman TIBERI. Thank you. Mr. Henderson, you correctly
mentioned in your testimony--both your written and your oral
testimony--that CBO projects that The PBGC multi-employer
insurance fund will be exhausted by 2021.
My question is that even the plan that you and I support
that you mentioned--solutions, not bail-outs--even if that were
signed by the President--and that is an assumption at this
point, because stakeholders aren't quite all there yet--but
assuming that we ultimately get there, PBGC still estimates
that it would need an additional $1.4 billion per year to have
a 50 percent chance of avoiding insolvency.
You are an expert in this area, and not everybody is, on
the multi-side, in particular. Any thoughts on how we solve the
rest of the problem, once we have--we figure out the first
part----
Mr. HENDERSON. Thank you, Chairman, yes, I do. The NCCMP
proposal includes a number of recommendations. And in total,
what I think the--those recommendations are designed to do are
to keep today's liabilities inside the plans where they
currently exist, and give trustees, both employer and union
trustees, new tools with which to address the issues. And, in
my experience, every single plan that I am on, and the other
plans I have looked at, they are all different, and they all
require unique solutions to solve the problems that they have.
So, I can't argue with the contention of some that the, you
know, premiums may need to be adjusted by plans contributing to
PBGC. But there are a number of other tools that we need. And,
in fact, I think one of the main solutions is to keep
liabilities inside the plans as long as we can, give trustees
the ability to extend the solvency of those plans as long as
possible, and thereby avoid, as long as possible, any benefit
cuts.
Chairman TIBERI. Thank you. One final question before I
turn it over to Mr. Larson. Mr. Hall, I am not an actuary; I
don't think anybody up here is, other than maybe Mr. Young. Can
you explain to in English what you said, and what it means----
[Laughter.]
Chairman TIBERI. And here is what I am getting at, because
I think you made news. The bottom line, with respect to the new
report that you are going to issue at the end of December, what
does the new data show, in terms of life expectancy and
longevity versus what Ms. Tully is going to have to deal with,
or Mr. Henderson is going to have to deal with, with respect to
their employees.
Mr. HALL. Sure.
Chairman TIBERI. Living longer, I think, is what you said.
Mr. HALL. Yes, thank you, Chairman. We will try to do that.
The RP 2014 tables, especially compared to The RP 2000
tables, the comparison, just to give you a flavor of some of
the increasing life expectancies--I don't think it is brand new
news that people are living longer, but a life expectancy, for
example, for a male who reaches age 65, a retirement age, would
be around 82.1 under the old tables. Under the new tables, it
increases to 84-and-a-half, so about 2 to 2-and-a-half years of
extension. The same for females, where we move from 84.6 years
for those who reach age 65, extending out to about 86-and-a-
half for females. That is a table comparison without any
improvement, but those are the types of increases in longevity
that we are seeing, as we move from one table to the next.
Chairman TIBERI. So if you were working for a company and
you are in charge of pension plans, this is a big deal. Defined
benefit plans.
Mr. HALL. Yes, the--you know, we will leave it to the
employers to make those decisions, but longevity is certainly a
risk that employers face.
Chairman TIBERI. Thank you, Mr. Hall. Speaking of
longevity, I turn to Mr. Larson from Connecticut.
[Laughter.]
Chairman TIBERI. He has been here a long time.
Mr. LARSON. I thought he was going to say age before
beauty. But I thank my----
Chairman TIBERI. You are recognized for six minutes because
you have such a great----
Mr. LARSON. Well, I think The beauteous chairman for his
comments, and also I want to thank him and Ranking Member Neal
for both their legislation, and putting this panel together,
and this compelling testimony as well.
It is clear, when it comes to multi-employer pension plans,
that we are facing a dire and critical situation. I am also
reminded, though, of the great wizard of Westwood--I think the
actuary will know who that is--John Wooden, who said, ``You
must be quick, but don't hurry.''
And so, we hear an awful lot of alarm from a number of
constituents who would be impacted by a decision that needs to
be quick, but that shouldn't be hurried. And I think, as Mr.
Tiberi pointed out, not all of the stakeholders are completely
on board yet, but that is what the--this process should be
about, so that we can get to the point where we address this in
a timely fashion.
The fundamental principle that we must all keep in mind is
that these benefits that were earned by workers, and are
counting on for their retirement security, is center and front.
To me, this speaks to a broader conversation that we need to
have about retirement security for all Americans.
While I support defined benefit plans, as Ms. Oakley points
out, there has been precipitous decline in the number of
workers that have access to them. Even more concern is that,
while many Americans now have access now to defined
contribution plans, there are still millions that do not, or
have chosen not to participate.
Among those who do not choose to participate, they are not
saving enough, as 72 percent of Americans participating in
401(k) plans are not on track to reach their retirement income
goal by age 65. That is why I further agree with Ms. Oakley
that what we need to do is strengthen Social Security. And I am
going to ask you to address that, because I know you didn't
quite get to in your statement, what I read in your document,
``To improve access to low-cost, high-quality retirement plans
and improve the incentives for savings.''
So, Ms. Oakley, I would like to focus specifically on the
aspect of Social Security in terms of the overall retirement
security of Americans. Given all of the evidence that
retirement security of millions of Americans is increasingly in
jeopardy due to the decline of defined benefit plans and the
low rate of saving and defined contributions, wouldn't cuts to
Social Security that have been proposed through measures like
chained CPI be particularly devastating.
And, as a follow-up, what do you think we can do to help
strengthen Social Security benefits. And aren't there ways to
make modest changes to make certain that the program is solvent
long-term to bolster the obvious need that we hear before us
today. Ms. Oakley.
Ms. OAKLEY. Thank you, Mr. Larson, for that challenge.
First of all, I think you are absolutely right. Social
Security is the main source of retirement income. And as we
look at the recent data just released by the Federal Reserve on
the survey of consumer finances, and if you look at all working
households, not just those households that have saved, when we
look at people who are 10 years away from retirement, the
median savings, that typical American, that woman in--outside
of Dayton, that household today has just about $14,000 saved
for retirement. And that is somebody who is between 55 and 64.
If we look at all Americans between 65 and 25, it turns out
that we actually lost ground from even just 3 years ago. The
median savings is $2,500 in retirement accounts, be it an IRA,
a 401(3)(b), 401(k) plan.
So we know--and we also know, at the same time, that there
is scheduled cuts already to come in Social Security. So, you
are absolutely right, the people can't afford any more cuts.
And I think, as we look at what can be done, you know, Social
Security, as Mr. Gold said, you have got a choice of benefit
cuts or finding a way to prefund some of those benefits with
increases in the contributions.
In survey, many surveys that have been done, including ones
by my organization, there is strong public support for Social
Security, because I think Americans know it is going to be a
key part of their retirement, and they are willing to take a
little bit more of a cost, either by having the cap raised, or
by requiring greater contributions. And the sooner that is
done, the quicker it happens.
And, with regard to just broader savings, your state, for
example, in Connecticut recently adopted legislation asking the
state to look at is there a way that they can provide those
employees in Connecticut who currently don't have savings
something that is low cost, and will actually get them through
retirement.
So, I think there is a lot of new things going on that need
some help out there, too.
Mr. LARSON. Well, I thank you. I know our time is up. And
because of the longevity comment, I was given just----
Chairman TIBERI. I gave you an extra minute.
Mr. LARSON. Just 30 seconds. Just 30 seconds----
Chairman TIBERI. I will give you 30 seconds----
Mr. LARSON. By way of----
Chairman TIBERI. You are such a good sport.
Mr. LARSON. By way of anecdote, and--which I again commend
you and Mr. Neal for--these things are personal. And when you
talk to people in a wealthy state, like Connecticut, and you
find that women are subsisting on a total of $9,000 a year from
Social Security only, you begin to deeply appreciate what they
are up against, and why all these measures are interconnected,
necessary, and we have to be quick. But we can't hurry.
Chairman TIBERI. Thank you, Mr. Larson. That would be
something like, I would think, Philosopher Pascrell would say.
So----
Mr. LARSON. He is the poet Laureate of----
[Laughter.]
Chairman TIBERI. Thank you so much. A leader in retirement
issues, Mr. Paulsen from Minnesota.
Mr. PAULSEN. Thank you, Mr. Chairman. You know, the irony
is that I just learned my brother, who is an actuary, is
actually in Connecticut, as we speak, at an industry
roundtable, going through these same exact discussions, which
is kind of interesting.
But, Mr. Hall, I just want to dive into a question here a
little bit--greater detail, what you just touched on, this
longevity issue with mortality rates and the tables you deal
with, because, you know, the reality is that the longer
beneficiaries are expected to live, the larger the plan's
future obligations are.
So, if mortality is improving, you know, two-and-a-half
years, and some of those numbers you mentioned, the plan-
sponsored pension liabilities are going to be increasing
significantly. So do you expect plan sponsors, then, to
consider a variety of changes to avoid the substantial cash
contributions, irrespective of interest rates and rates of
return, that will be required with this improvement in
mortality?
And, if so, what are some of the changes that plan sponsors
would consider making to avoid that potentially significant
increase? Because that kind of gets to the crux of the matter.
Mr. HALL. Yes, the Society of Actuaries wouldn't have any
specific guidance for plan sponsors. I think that we would
encourage actuaries working with those plans to take the data
that we have done through our mortality studies, combine it
with specific plan information, and then work and encourage
plan sponsors to come up with decisions that are best for their
particular plan.
Mr. PAULSEN. And maybe, Ms. Tully, you can kind of--but,
you know, math, this is just numbers, this is arithmetic. I
mean what are some of the options that you might have to look
at, as an employer taking care of your employees, or Mr.
Henderson, just to follow up on that.
Ms. TULLY. Well, generally, I think that each company has
to evaluate their specific circumstances from a plan design,
demographic, and financial standpoint. And they do that on a
continual basis, as do we. I am aware of the mortality studies
that are out by the Society of Actuaries and, you know, there
is no doubt that people are indeed living longer, as they
indicated. But at this point we don't have any current plans to
change our plans at this time.
Mr. PAULSEN. Okay. Mr. Henderson.
Mr. HENDERSON. Thank you, yes. The question about
increasing contributions, obviously, Kroger is committed to
making the contributions that we need to make. In fact, we
contribute over $250 million a year to multi-employer plans. In
effect, that is 10 percent of our pre-tax earnings. So
contributions is not really the issue, it is the demographics
inside these plans that are causing the problems.
In fact, as much of the testimony here illustrates, for
every dollar we contribute to multi-employer plan, a great
percentage of that goes to fund orphan liabilities. So,
justifying making voluntary contributions to plans is just very
difficult for employers to do. And smaller employers,
particularly, simply can't do it.
Mr. PAULSEN. Good, all right. Thank you, Mr. Chairman. I
yield back.
Chairman TIBERI. Thank you, Mr. Paulsen. Mr. Marchant is
recognized for 5 minutes.
Mr. MARCHANT. Thanks for your testimony today. Following up
on what you stated--this is for Mr. Henderson--can you speak
more on the process of the National Coordinating Committee for
Multi-Employer Plans, and what process they went through in
defining their plan. And, in your opinion, did these
recommendations from The NCCMP adequate address the issue if
imminent insolvency?
Mr. HENDERSON. I wasn't a member of the committee, I wish I
had been.
The NCCMP was a broad collection of participants and
employer sponsors and unions and actuaries. And, Mr. Chairman,
I am not an actuary, either. I am surrounded by them today, I
have great respect for them. And, quite frankly, we won't solve
these problems without their help. But the coalition that
created the proposal is a broadly diversified group that
includes both union and employer sponsors. In fact, we have
written at least two letters jointly with the president of the
United Food and Commercial Workers Union in support of those
proposals.
So, I think what it illustrates is that all the
participants in these plans recognize how severe these problems
are, and are proposing solutions that will help us.
Mr. MARCHANT. Can you speak to the importance and effects
of the reform and inaction, and what kind of effect it would
have on Kroger's business model, especially on job creation and
company growth.
And then I would like for you to speak a little further on
the orphan issue that you mentioned.
Mr. HENDERSON. Well, I will take the orphan question first,
actually. It is--in many of the plans in which I am familiar,
the total liability of these plans, up to a third or even 40
percent of that total liability has been created by the exit of
previous employers. Some were--due to bankruptcy, were unable
to pay any of their withdrawal liability.
Some withdrew for other reasons, and either--because the
rules may or may not require them to pay all of the liability
that they owe, that leaves orphan liability--in fact, several
years ago we did something extremely unique. We--working with
The UFCW, we combined four multi-employer plans into one multi-
employer plan and achieved--there are a number of benefits
associated with plan consolidation, which is a number of the
proposals in the--to support plan consolidations and the
benefits that you can enjoy.
But when we consolidated the liabilities of those four
plans, the combined liability of those plans was $3.5 billion,
and approximately 1 billion of it came from orphan liabilities.
That is liabilities for people who didn't even work for Kroger,
much less work in the industry, itself. Now, again, we were
able to--for the benefits we achieved, and working with UFCW,
we were able to consolidate the plans and fully fund that plan
today. So I clearly would support the proposals in The NCCMP
proposal that support consolidating multi-employer plans.
Mr. MARCHANT. Thank you, Mr. Chairman.
Chairman TIBERI. Ms. Schwartz is recognized for 5 minutes.
Ms. SCHWARTZ. Thank you. I was nervous about the
introduction, so thank you for being quite straight-forward
about it, and no adjectives.
So, appreciate the panel and the hearing today. Certainly
is a serious issue before us. And I do think we need to put
this in both the context of how difficult it is right now,
given the potential insolvency, and--as well as the demographic
shifts, and some of the rules for the multi-employer plans to
work, and to be able to continue a defined benefit program for
their employees. Obviously, that is what we are talking about.
I think it was very helpful to have Ms. Oakley in front of
all of us to realize how important this is to real Americans
out there, who have planned very carefully, some of them, for
exactly what they expect to get from their own personal
savings, from employer benefits, how many of them define
benefits, and from Social Security. And any one of those three
getting messed up has huge implications for those families.
I met a woman in my district who said she had figured very
carefully about how to do this, but had not calculated that she
would have to pay for cable, because nothing existed when she
was planning it 20 years, to worry about that, or a cell phone
or even a computer. And those were real costs that she had not
counted on. So we haven't even discussed the fact that there
are real--the realities for people out there, as well as the
fact that we have just come through a very difficult recession.
And the undermining of 401(k) plans has created tremendous
uncertainty for Americans who have saved responsibly.
Now, we all have a responsibility to help young people
figure out how to save, and we have--there are suggestions,
obviously, legislatively, about how we can encourage that.
I don't think we want to change the demographic issues
that--pointing out we don't--we are not likely--nor do we want
to say that you should not live as long as you do, so we just
have to accept the realities of that.
So, I think what--my question for all of you--and I
particularly appreciate some of the reality check Mr. Henderson
has been providing. I have been to Kroger. If you shop at all
in the southeastern part of the United States it is hard to
miss, so I have been to your stores. And thank you for the
level of responsibility you have taken in providing these
defined benefit plans.
So, just a couple questions, if I may, and I will start
with Mr. Henderson, is you have referred to some actions we
might take. But, given there is legislative proposals on the
non-discrimination piece that Ms. Tully talked about, what else
could Congress be doing to encourage potential responsible
employers to take more responsibility in moving to prevent
insolvency and, particularly in multi-employer plans, how do
you make sure that the responsible employers are not left
holding all the responsibility, which is happening. It is one
question.
And, two, given that you seem to be committed to,
thankfully, a defined benefits plan, and all of the comments
have been that we are moving away from that, what else could we
be doing legislatively to encourage defined benefit plans,
given that there is almost an assumption that they are going to
go away, when, in fact, so many Americans are going to rely on
that.
So, those two questions, if I may.
Mr. HENDERSON. All right, thank you for the question. We
will soon have almost 400,000 employees in the company, and we
sponsor DB plans, both internal to the company--a single
employer plan--and the 36 multi-employer plans that we are in.
My company sponsors a defined contribution plan, a 401(k) plan
that has over $7 billion of employee and money matching
contributions invested in it.
I guess over--my experience tells me that, especially in DC
plans, communication is critical with the participants. You--in
a nutshell, you have to start early, you have to save, and you
have to be diligent about that over your lifetime. And then, as
your risk profile changes as you age, you need to be aware of
that, and make the appropriate changes.
So--but back to your first question about the other actions
that we can take. Again, back to the NCCMP proposal, and other
comments that have been made by folks at the PBGC themselves,
we need--we could certainly use help in promoting plan
consolidations. We could certainly use help in incentivizing
plans, both single employer and multi-employer, to overfund
those plans, if they can.
When conditions are good and returns are good, if we could
overfund those plans--in effect, save for a rainy day--the
system as it is today really does not incentivize you. In fact,
there is a disincentive to fund the plan to 100 percent. And I
think, if we change the rules and incentivize plans to overfund
their plans when they are good--and, again, I--you know, Mr.
Gold's testimony is the situation is bleak on multi-employer
plans, as I testified. And, if you listen to Mr. Gold, it is
actually even worse.
So, I do think anything we can do to promote changes in the
system, to consolidate plans, incentivize contributions to
plans, keep the liabilities inside the plans, because, frankly,
based on the expert's testimony, the PBGC will not be there to
support those benefits.
Ms. SCHWARTZ. It is a very fair warning, given that we have
had our own actions, and ones that many of us have questions
about, the whole issue of smoothing--these are not particularly
good ideas when we are looking at what happens in 10, 20 years.
When we can, we should be making those investments. So thank
you for your comments.
Chairman TIBERI. Thank you, Ms. Schwartz. Mr. Schock is
recognized for 5 minutes.
Mr. SCHOCK. Thank you, Mr. Chairman. Thank you, first, Mr.
Chairman, for holding this hearing. I think it is a very
important topic, and I know you and I have worked together on
some of your past legislative proposals, some more welcome and
controversial than others.
First I would like to ask Mr. Henderson. Obviously, we are
aware that there is a problem here. To put you up here on the
dais, I would suggest to you that for us to be able to do much
of what you are proposing and others requires not only the
political will of Members of Congress, but also the desire of
our constituents. And, as a frequent shopper of Kroger myself,
I will tell you that I have not had a bagger or a cashier or
someone in the bakery department talk to me about this issue.
So, my challenge to you would be what is your organization
doing to inform, educate, and motivate the thousands of
employees that you have that are voting constituents of our
districts to, first, make them aware that there is a problem
with their pension, and, second, to motivate them that if, in
fact, nothing is done, as suggested, in a decade, it goes belly
up, and their benefits are in question.
Because that is really, I think--you know, there is
different levers that we can tweak, you have done a great job
in outlining them. But help assure me that you are going to go
back here today, not only leaving us with a list of things to
do, but also a willingness and a desire to go back and help
fire up the troops and educate the very constituents that we
are all here today talking about trying to help.
Mr. HENDERSON. Thank you, Congressman, and I am, frankly,
glad to say that the majority of Kroger's--the plans in which
we participate, in fact, are what I would describe as certainly
better funded, if not well funded.
In fact, if you look at our annual report, the disclosures
which are now required by the accounting profession require us
to disclose certain pieces of information about the significant
plans in which we participate. In our annual report there are
approximately 12 large plans in which we participate. Seven of
those plans are described by the PPA as being ``red zone''
plans, and they have qualified rehabilitation plans in place.
And for all but two of those plans, the funded status of that
plan, the way we measure it today, is over 80 percent and
improving.
My point is that the provisions of the Pension Protection
Act--speaking, again, as an employer trustee who has had to
make these kinds of decisions--the provisions of the Pension
Protection Act are working and have improved the funded status
of multi-employer plans, certainly within the group that Kroger
participates in.
The example that I have to go back to, however, is Central
States. Based on all of the projections, the demographics just
simply overwhelm the finance in that condition.
Mr. SCHOCK. Do the Central States employees understand
their plan is underfunded----
Mr. HENDERSON. You know, I am not sure that they do,
because the communication--it gets confusing. It is a highly
complicated subject.
Quite frankly, you know, we are kicking around numbers
here, billions of this and billions of that, as if it is more
or less Monopoly money. I try to put a more human face on this.
There is someone my age who has been driving, you know, a truck
for Kroger for decades safely and on time. And he is probably
getting ready to retire, and he is looking at a retirement
benefit out of the Central States plan of maybe--well, the
average--and with respect to the actuaries on the panel----
Mr. SCHOCK. I am sorry, I am running out of time.
Mr. HENDERSON. Okay.
Mr. SCHOCK. The point is they need to know that it is
underfunded. They need to know there is a problem. And we don't
need to talk to them out in billions, we need to talk to them
about their several thousand dollars a month they are thinking
they are going to get isn't going to be there, because it makes
it easier for us to then help you----
Mr. HENDERSON. But the rules----
Mr. SCHOCK [continuing]. Accomplish what we are trying to
do.
Mr. HENDERSON. Yes, sir. With the rules in place today,
their benefit----
Mr. SCHOCK. The other question I want to ask you, Mr.
Henderson, and also Mr. Gold, perhaps, is these red zone plans
that have been identified as basically--their liability being
so great that if we actually made them pay in what they needed
to pay into the multi-employer pension plans, they would fold,
we say, ``Well, gee, for the sake of keeping you in, we won't
charge you.'' But, in fact, that only makes the problem worse.
So, I guess, as a member of the multi-employer pension
plan, Mr. Gold, who studies this, I am just curious, what are
we to do----
Mr. HENDERSON. You want to go first----
Mr. SCHOCK. Are we doing the right thing, allowing for red
zone plans to basically get a freebie for the time being, but
yet not fixing the unfunded liability that their employees have
created? Or is there some other path that we should be looking
at to help keep them in the multi-employer pension plan, but
also not exacerbate the unfunded liability----
Mr. GOLD. Well, I don't have any magic to offer. It is--the
one way to describe the way we are treating them today, it is
palliative care. And that may be as much as we can do for those
really, really troubled plans, which I think is the subject of
your question. Much of my focus is on the healthier plans, and
how to keep them healthy over an extended period--for
generations, perhaps--and that is why I focus on the
understatement.
I agree with Mr. Henderson that the--for these terribly
troubled plans, the demographics overweigh the financial
issues. And it is the financial issues for the healthier plans
which also trouble me.
Mr. HENDERSON. Okay. And, first, I am reminded that, based
on the funded status of the Central States plan, we--the plan
is required on an annual basis to send a funding notice, if you
will, to all participants of the plan about the condition of
the plan. And so all of the members of the Central States
plan--participants should have received a letter describing the
status of that plan to them.
Mr. SCHOCK. Great. Thank you both, I appreciate it.
Chairman TIBERI. Thank you. The gentleman from Indiana, Mr.
Young, is recognized.
Mr. YOUNG. Thank you, Mr. Chairman. I thank all our
panelists here today. I just would like to begin by first
acknowledging the concerted and affirmative efforts of Kroger--
and I know Raytheon, because I visited your facilities--to hire
veterans. I think that is very important during this period of
time.
I am really pleased that the chairman has convened this
hearing to discuss the integrity of private defined pension
benefit plans. There is no doubt, based on some of the grim
assessment that we have heard here today, that--and especially
as it pertains to retirement savings more generally--that we
need to act, and act boldly here in Congress.
I know there is one affirmative step that this Committee
can take that will help improve that situation for hundreds of
thousands of American workers. And this is a bit of a departure
from what we have been talking about, but it bears mentioning,
I think. I would hope we work together in coming months, and
perhaps beyond, to support and protect from adverse DOL
regulations ESOPs. This business formation results in employee-
owner saving for a secure retirement by owning a piece of where
they work.
Ms. Tully, back to the primary focus of this hearing--I
appreciate your testimony today--and specifically your focus on
non-discrimination rules, there is obviously a well-intentioned
rationale behind the existence of these rules, and so forth.
But our workforce has changed and will continue to change, and
we clearly need to step back and analyze those rules anew.
With that in mind, I applaud Chairman Tiberi and Ranking
Member Neal for their work together on this issue, and I hope
the full committee at some point can fully consider H.R. 5381.
We have to get this right, bottom line, for the benefit of both
the companies and the beneficiary.
Ms. Tully, during your testimony you spoke to some length
about the impact the non-discrimination rules have on
employers, and also that the IRS granted certain non-
discrimination relief through 2015. With that in mind, can you
discuss a bit about how Raytheon currently operates their
benefit plan in order to comply with the non-discrimination
rule structure, and how that would change after the IRS relief
expires----
Ms. TULLY. Sure, thank you. So our plans currently pass all
of the testing requirements under the non-discrimination rules,
and we do not actually need to utilize the testing relief at
this point that the Treasury has offered. And if we were to run
into testing issues, we would evaluate our situation then, and
determine what our next steps would be with respect to our
plan.
Mr. YOUNG. Mr. Henderson--you have thoughts on that
question----
Mr. HENDERSON. Well, at Kroger, on the single-level
employer plan we face the same issue with respect to the non-
discrimination testing, and we support what the young lady from
Raytheon is proposing, as well.
Mr. YOUNG. Thank you. Ms. Tully, in reference to other
proposals that might help mitigate or, ideally, eliminate this
current problem, what if we changed the definition of highly
compensated employees--or are there other solutions that might
work outside those proposed by my good colleagues Messrs.
Tiberi and Neal----
Ms. TULLY. Yes. So one potential short-term option could be
to change the definition, as you mentioned, of highly-
compensated employees, or make some other fixes, I would say,
around the edges of these rules. But any change such as that
would be a temporary solution, and wouldn't actually fix the
long-term problem.
And also, because of the nature of these complex actuarial
ratio tests that are used in the rules, there is actually a
chance that changing some of these provisions, such as the
definition of ``highly compensated employees'' could cause some
employees--employers to actually fail the test with such a
change.
In terms of other possible solutions, there could be other
possible solutions. I believe our perspective is that those
solutions need to be focused on the long-term fix for
employers, versus the short-term sort of Band-Aid solutions to
this issue. And you know, one possible additional long-term fix
may be to simply apply a general grandfathering rule that would
allow for employers who had passed all of these testing
provisions at the time that they were open, or at the point at
which they were closed, to continue to be considered passing in
the future. So that is just another possible solution.
Mr. YOUNG. Thank you for sharing your perspective. I yield
back. Thank you.
Chairman TIBERI. Thank you. Mr. Kelly, welcome to the
subcommittee. You are recognized for 5 minutes.
Mr. KELLY. Thank you, Chairman, and I appreciate it, and
thank you all for showing up.
My concern, because I come from the private sector, is the
private sector. And when you look at ERISA, their concerns are
only with private-sector pension plans. Is that correct? So if
there is the public sector--so if you were to say, well, the
Federal, the state and local governments, churches, none of
those are covered by this--and one of the problems--is that a
wrong statement, Mr. Gold----
Mr. GOLD. The central provisions of ERISA apply almost
exclusively to the private sector, as you say.
Mr. KELLY. Okay.
Mr. GOLD. There are some church plan rules and some other
things. That is why you saw the look on my face.
Mr. KELLY. No, that is okay, because I am really concerned
about this, because it seems to me it is kind of a two-sided
coin, or a one-sided coin.
Let me just ask you this, because I have a great deal of--
number of small employers in my district. I am going to read
this to you, because I think it is important to get this point
across. I have a company, Channellock, who--they make very
high-precision tools, tools that almost every tech in the world
uses. They have been in business since 1886. Mr. Diamond
questions me about this all the time. Let me ask you this.
Private sponsor of traditional pension plans must fund
their plans using an average, high-quality corporate bond rate,
as modified as MAP-21, and they must also pay PBGC premiums to
cover other employers who defaulted on their plans. These rules
have caused almost every private employer to discontinue
providing pension benefits.
In addition, the expense of these plans has increased
dramatically. Low interest rate environment and high PBGC
premiums, so job creation of our best employers has been
hampered in recent years now.
There is little incentive for an employer to overfund their
plans, due to significant excise tax on the return of excess
funds in the plan when a plan is terminated. And, in addition
to paying taxes on the reversion of excess funds, which is
reasonable, there is a 20 percent excise tax, at best, and it
could be as high as 50 percent.
For example, Channellock's pension plan. By government
standards, which generally uses a long-term rate expected on
trust fund assets of 7\1/2\ percent, is 100 percent funded.
However, by private industry standards, they are significantly
underfunded. Annual funding requirements are about $1 million
per year. PBGC premiums are currently around 200,000, and are
scheduled to increase to around $450,000 in the next two years.
Now, these are some solutions that they are offering.
Eliminate the excise tax and reversions of plan assets from
pension plans. Without concerns of high penalties from
overfunding, employers will be more likely to prefund their
plans, knowing that they can recover the excess in the future
without huge penalties, or change the funding requirements of
The PBGC premiums to be computed using a long--using a
reasonable long-term rate of return expected on a trust fund.
So, for example, it would be seven percent.
The reason I bring it up--Every one of these things that we
just talked about is a cost of doing business for them, and it
adds to their burden of doing what it is that they do. And it
just doesn't make sense to me that we put so much weight on the
private sector and yet, on the public sector, if they are
underfunded, the responsibility falls back on the taxpayers to
make them whole.
Yet, in the private sector, we put this burden on them, the
exact people we need to lift us out of this malaise that we are
in right now. We are making it harder for them to do business,
and we penalize them for salting away money in the good years
so they can cover the bad years. And it doesn't make sense to
me. And I have people ask me all the time, they say, ``Well, I
don't understand how some companies, who made huge profits last
year, are paying no taxes, and yet I am paying taxes every
year.'' And I said, ``It is very simple; it is part of our Tax
Code. You have carry-forward losses.''
Do you have an opinion on any of these things, The PBGC
specifically--Are those premiums excessive, and are those
putting such a burden on our private-sector people that they
are deciding to walk away from what they thought was an
excellent benefit for the people that work with them----
This is a company that was founded in 1886, they are strong
employers, they are strong members of the community, and yet
those are the people that we always put the heaviest burden on.
And I got to tell you, at some point, it is the old story,
``Don't worry about the mule, just load the wagon.'' I think
the mule is ready to unhitch himself and walk away from this
burden.
Yes, you can--please, you said something and I thought it
was great: Good policies cannot be based on bad numbers. And I
think, if you start with bad numbers, you are going to end up
with bad policy.
Mr. GOLD. Well, I may not give you that much satisfaction,
because----
Mr. KELLY. I am not looking for satisfaction, I am looking
for fairness.
Mr. GOLD. First, I am not a fan of those excise taxes. They
began with Senator Metzenbaum in the eighties, and they were
solving a problem we no longer have today.
But the cost of defined benefit pension plans, particularly
in a low-interest-rate environment, is higher, by far, than it
was in the 1980s or at any time when interest rates were
higher. That is just the laws of finance.
But I am always troubled by the thought that we are in some
way, by demanding contributions to pension plans, either
injuring the economy or injuring job prospects, and here is the
reason. That money does not go down a rat hole. The money
contributed goes right into the capital markets, where it then
becomes available for new investments. And the secret of the
capital markets is they try to deliver that money to those
companies with the best forward-looking prospects. And that
means that, while individual companies may be strapped for
pension costs, and perhaps considering lightening their
workforce, the economy, as a whole, is actually stimulated by
the collection of pension contributions, which are tax
deductible, which lowers taxes and, therefore, is also
stimulative.
So, I do not find--I understand for individual companies
that pension contributions can be burdensome, but in the
aggregate I don't find that to be true.
Mr. KELLY. Well, I agree, in the aggregate, I understand.
And a lot of the projects we see are being funded now by
pension funds. I talked to people who do those projects, and
they really go to the pensions to find that money to be
invested. But if you are Channellock, and you are facing this,
it drives the cost of your finished product--I think there is a
disconnection between the private sector and the public sector.
They believe--``they,'' believe the public sector--that it
doesn't matter what your costs are, just add it on to the
purchase price. I got to tell you, when people have a choice,
price point is very important.
So, if it costs you more to make a product and to put it on
the shelf, and you have to charge more for it, there is--
chances are you won't sell as many. If you don't sell as many,
you don't need to make as many. If you don't need to make as
many, you don't need to employ as many. I think we put a heck
of a burden on the private sector and walked away from it.
Because, in the public sector, the taxpayers will eventually
make up the difference between what is underfunded and not, and
it just doesn't work that way.
Mr. Hall, I appreciate your talk when you talk about
mortality. I mean the longer we live, the greater access we
have to these funds, and it does create a problem down the
road. I want to live as long as I can. But, by the same token,
I know that at some point we run out of the ability to fund all
those things.
So, thank you all for being here. But it is a great
concern, especially in the private sector. And it, to me, comes
down to sustainability. Can we sustain these programs--And
often times our hearts are willing, but our wallets are weak,
and I think we are running out of time on this.
Thank you, Mr. Chairman.
Chairman TIBERI. Great way to close. Thank you, Mr. Kelly.
Great hearing, great testimony, great questions.
This concludes today's hearing. Please be advised that
Members may submit written questions to the witnesses. Those
questions and the witnesses' answers will be made part of the
record. I would like to thank all of you for appearing today,
for your time. It has been super educational, and it also
demonstrates, again, the challenges that both single-employer
and multi-employer plans and pension plans face.
That is it for today. This hearing is adjourned.
[Whereupon, at 11:40 a.m., the subcommittee was adjourned.]
[Submissions for the Record follow:]
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AARP
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Church Alliance
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National Center for Policy Analysis
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National Center for Policy Analysis.2
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National Education Association
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The ERISA Industry Committee
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United Brotherhood of Carpenters and Joiners
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U.S. Chamber of Commerce
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