[Senate Hearing 111-1078]
[From the U.S. Government Publishing Office]
S. Hrg. 111-1078
PENSIONS IN PERIL: HELPING WORKERS
PRESERVE RETIREMENT SECURITY THROUGH
A RECESSION
=======================================================================
HEARING
OF THE
COMMITTEE ON HEALTH, EDUCATION,
LABOR, AND PENSIONS
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
ON
EXAMINING HELPING WORKERS PRESERVE RETIREMENT THROUGH A RECESSION,
FOCUSING ON THE PENSION BENEFIT GUARANTY CORPORATION'S PROCESS FOR
DETERMINING THE AMOUNT OF BENEFITS TO BE PAID, AND PBGC'S RECOUPMENT
PROCESS WHEN THE ESTIMATED BENEFIT PROVIDED IS TOO HIGH AND A RETIREE
RECEIVES AN OVERPAYMENT THAT MUST BE REPAID
__________
OCTOBER 29, 2009
__________
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Pensions
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
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COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS
TOM HARKIN, Iowa, Chairman
CHRISTOPHER J. DODD, Connecticut MICHAEL B. ENZI, Wyoming
BARBARA A. MIKULSKI, Maryland JUDD GREGG, New Hampshire
JEFF BINGAMAN, New Mexico LAMAR ALEXANDER, Tennessee
PATTY MURRAY, Washington RICHARD BURR, North Carolina
JACK REED, Rhode Island JOHNNY ISAKSON, Georgia
BERNARD SANDERS (I), Vermont JOHN McCAIN, Arizona
SHERROD BROWN, Ohio ORRIN G. HATCH, Utah
ROBERT P. CASEY, JR., Pennsylvania LISA MURKOWSKI, Alaska
KAY R. HAGAN, North Carolina TOM COBURN, M.D., Oklahoma
JEFF MERKLEY, Oregon PAT ROBERTS, Kansas
AL FRANKEN, Minnesota
MICHAEL F. BENNET, Colorado
J. Michael Myers, Staff Director and Chief Counsel
Frank Macchiarola, Republican Staff Director and Chief Counsel
(ii)
?
C O N T E N T S
__________
STATEMENTS
THURSDAY, OCTOBER 29, 2009
Page
Harkin, Hon. Tom, Chairman, Committee on Health, Education,
Labor, and Pensions, opening statement......................... 1
Enzi, Hon. Michael B., a U.S. Senator from the State of Wyoming,
opening statement.............................................. 3
Brown, Hon. Sherrod, a U.S. Senator from the State of Ohio....... 4
Prepared statement........................................... 5
Ryan, Hon. Tim, a U.S. Representative from the State of Ohio..... 7
Casey, Hon. Robert P., Jr., a U.S. Senator from the State of
Pennsylvania................................................... 8
Gump, Bruce, Chairman, Delphi Salaried Retirees Association,
Warren, OH..................................................... 9
Bovbjerg, Barbara D., Director Education, Workforce, and Income
Security Issues, Government Accountability Office, Washington,
DC............................................................. 12
Prepared statement........................................... 14
Jury, David R., Associate General Counsel, United Steelworkers of
America, Pittsburgh, PA........................................ 23
Prepared statement........................................... 25
Jones, Richard, Chief Actuary, Retirement Consulting, Hewitt
Associates, Lincolnshires, IL.................................. 28
Prepared statement........................................... 29
Mikulski, Hon. Barbara A., a U.S. Senator from the State of
Maryland....................................................... 42
Prepared statement........................................... 42
Brown, Hon. Sherrod, a U.S. Senator from the State of Ohio....... 46
Burr, Hon. Richard, a U.S. Senator from the State of North
Carolina....................................................... 48
Prepared statement........................................... 48
Franken, Hon. Al, a U.S. Senator from the State of Minnesota..... 51
Hagan, Hon. Kay, a U.S. Senator from the State of North Carolina. 53
Reed, Hon. Jack, a U.S. Senator from the State of Rhode Island... 53
Peterson, Ronald R., President, the John Hopkins Hospital and
Health System, Baltimore, MD................................... 67
Prepared statement........................................... 69
Gebhardtsbauer, Ron, Faculty-in-Charge, Acturial Science Program,
Pennsylvania State University, University Park, PA............. 71
Prepared statement........................................... 74
DeFrehn, Randy G., Executive Director, National Coordinating
Committee for Multiemployer Plans, Washington, DC.............. 79
Prepared statement........................................... 81
Friedman, Karen D., Executive Vice President and Policy Director,
Pension Rights Center, Washington, DC.......................... 97
Prepared statement........................................... 99
ADDITIONAL MATERIAL
Statements, articles, publications, letters, etc.:
National Education Association (NEA)......................... 111
YRC Worldwide, Inc........................................... 112
Letter from Senator Coburn to Barbara D. Bovbjerg............ 115
(iii)
PENSIONS IN PERIL: HELPING WORKERS
PRESERVE RETIREMENT SECURITY THROUGH A RECESSION
----------
THURSDAY, OCTOBER 29, 2009
U.S. Senate,
Committee on Health, Education, Labor, and Pensions,
Washington, DC.
The committee met pursuant to notice at 10:05 a.m., in room
SD-430, Dirksen Senate Office Building, Hon. Tom Harkin,
chairman of the committee, presiding.
Present: Senators Harkin, Mikulski, Reed, Brown, Casey,
Hagan, Franken, Enzi, Burr, Isakson, and Murkowski.
Also present: Congressman Ryan.
Opening Statement of Senator Harkin
The Chairman. The Committee on Health, Education, Labor,
and Pensions will come to order. I want to welcome everyone to
this very timely and important hearing on retirement security.
In these troubled economic times, working families face
unprecedented challenges. Millions of Americans have lost their
jobs. And those who have jobs are often working harder and
longer but still cannot meet the rising costs of basic everyday
needs like health care, education, and housing, let alone save
enough to provide for security in their old age.
The harsh reality is that the retirement security of
millions of American workers and retirees is in jeopardy. It is
not a new problem. It is the culmination of a trend that has
played out over the past couple of decades. Today, about one-
half of all U.S. workers have no pension or savings plan at
all. Let me repeat that. Today, about one-half of all U.S.
workers have absolutely no pension, no savings plan whatsoever.
Most others, in that other 50 percent, have only a 401(k)
account where workers shoulder all the risk and see much of
their hard-earned savings siphoned off by hefty fees. Not
surprisingly, many people have saved very little in these
accounts. And, of course, most have seen their nest eggs
decimated by the big decline in the stock market.
All of these problems make traditional pensions more
critical than ever. There are still 40 million Americans who
rely on a secure defined benefit pension to provide a
guaranteed income in their retirement years. Unfortunately,
these secure pensions are under attack too. More and more
companies are telling workers they cannot afford to pay for
pensions, despite the fact that the executives are getting
salaries and benefits that would make King Midas blush. In
other cases, companies use the bankruptcy process to shed
pensions. The company lives on but workers lose the hard-earned
retirement income they were counting on.
Congress has taken some important steps to help shore up
Americans' retirement security. In 2006, we passed the
bipartisan Pension Protection Act to require employers to do a
better job of funding their pension plans and to make it more
difficult for companies to default on what they owe.
I hope and expect that we can continue to address pension
issues in a bipartisan manner, as we did under the leadership
of both Senator Enzi and Senator Kennedy, along with Senator
Mikulski and Senator Burr and our colleagues on the Finance
Committee. As we investigate the challenges that workers and
employers face when pension plans get into financial trouble, I
look forward to moving forward in this same spirit to develop
both short- and long-term solutions.
Our first panel of witnesses today will focus on the many
losses that workers and retirees face when pensions fail.
Although we have a pension insurance system, the Pension
Benefit Guaranty Corporation, it provides only a partial safety
net.
In particular, we will hear about the plight of workers and
retirees at Delphi Corporation, the auto parts manufacturer.
The case of Delphi is unique since General Motors, quite
frankly, did the right thing by many tens of thousands of
workers under union contracts and topped up their pensions.
But there are still some other union workers--electrical
workers, operating engineers, and machinists--who labored right
alongside their brothers and sisters where they are not being
made whole on their pensions. And in addition--we will hear
more about this from Mr. Gump, an engineer who spent 33 years
working at Delphi--there are some 15,000 salaried workers who
are losing their pension benefits.
These stories demonstrate why we must do everything we can
to ease the toll that pension failures take on working
families.
Our second panel will discuss precisely that question, how
we can help. We all agree that requiring more employer
responsibility for the financial health of pensions has been an
important step. Unfortunately, the tougher requirements of our
new laws are kicking in just at the time when many employers
are facing the pressures of a bad stock market and a weak
economy.
I understand this predicament and I am willing to look at
solutions. But we must remember that it is precisely in such
tough economic times that the role of the Federal Government in
safeguarding Americans' retirement is more important than ever,
and we must strike a careful balance.
No question today's hearing could not be more important for
tens of millions of American workers and retirees. We face big
challenges in shoring up the retirement security of the
American people. I look forward to the hearing today and to our
witnesses, and I look forward to working with our colleagues on
a bipartisan basis to find some solutions.
With that, I will yield to my Ranking Member, Senator Enzi.
Opening Statement of Senator Enzi
Senator Enzi. Thank you, Mr. Chairman.
Just over a year ago, you and I held our first retirement
savings hearing together and we looked into how to provide a
greater transparency and understanding of the 401(k) disclosure
statements to workers and retirees. So today, I am very glad
that we are expanding our review of our Nation's retirement
saving system by looking into the traditional defined benefit
plan.
With the significant turndown in the stock market last
year, individuals and families with 401(k)'s and IRA's
immediately felt the impact. However, with respect to the
longer-term investing traditional benefit plans, the effect of
the market turndown was not as readily apparent.
Thankfully, we were able to provide some relief to workers,
retirees, and their families who have 401(k)'s, IRA's, and
defined benefit plans as we passed the Worker, Retiree and
Employer Recovery Act last December. While this was a very
temporary measure to help get over the initial shock of the
economy, we all agreed that we would come back and address this
problem again later this year.
When the Senate overwhelmingly passed the Pension
Protection Act in 2006, we all voted to shore up our defined
benefit system to ensure that retirees' pensions were there
when they retired. In fact, the stronger funding rules that we
implemented led to more companies funding their pension plans.
At the beginning of 2008, many plans were well on their way to
being 100 percent funded.
However, all of that has changed. If we could have foreseen
in 2006 the steep stock market decline coming around the bend,
then there is little doubt that we would have incorporated
greater flexibility in the funding rules.
I would like to thank all the panelists today for traveling
across the country to be with us today. We have a very good
cross section of workers, retirees, and employers, and I hope
they will give us great insight into what we can do.
However, I must single out the issue to be discussed on our
first panel, the issue of what happens to pension plans when
companies enter into bankruptcy. I am very disturbed by the
materials provided by Mr. Gump on behalf of the Delphi Salaried
Retiree Association. This type of deal negotiated behind closed
doors out of the public view is exactly the type of deal-making
that we have long criticized the PBGC for undertaking in years
past. However, this time, the behind-the-closed-door deal was
undertaken by the Administration's Auto Czar, the Auto Task
Force, and the Secretary of the Treasury.
Everyone needs to know and understand what promises were
made, who was negotiating this deal, and how this
Administration also pre-packaged the GM bankruptcy arrangement.
Taxpayers deserve to know how the Delphi situation is tied to
the larger Federal bailout of GM and how it impacts all of our
future. The deals that go on behind closed doors should be
viewed with sunshine and made transparent to the workers of
Delphi and the American people. If transparency is to be one of
the hallmarks of this Administration, as it was advertised,
then allowing sunshine on these dealings should not be
objectionable.
Mr. Chairman, this afternoon I will be sending a letter to
the Secretary of the Treasury and the Auto Czar insisting that
all documentation relating to this inside-the-Beltway agreement
be made public immediately. Mr. Gump's testimony indicates that
this deal was not in the best interest of the workers or the
taxpayers.
Mr. Chairman, thank you again for holding this hearing on
our Nation's traditional retirement plans.
The Chairman. Thank you very much, Senator Enzi.
Departing a little bit from the normal procedure where just
the Chairman and the Ranking Member make opening statements,
because of the particular interest that this has to the State
of Ohio and our Senator from the State of Ohio, I am going to
recognize Senator Brown for a statement. Then I will turn to
Representative Ryan for purposes of introduction before we
start our panel. Senator Brown?
Statement of Senator Brown
Senator Brown. Thank you very much, Mr. Chairman. Senator
Enzi, thank you for your role in raising these critical pension
issues before the committee today.
I would like to welcome particularly Bruce Gump from
Warren, OH and Congressman Tim Ryan from Niles representing the
Mahoning Valley. Both live in the Youngstown area. Each has
fought tirelessly for Delphi workers. I thank you both.
Just earlier today I met with probably a dozen Delphi
retirees. Every one of them had been with that company for 30
years. For every one of them, their situation is not what was
promised to them during their work lives. That is why we are
here today.
The chairman laid out what has happened to our pension
system, not just what has happened with Delphi workers and what
can happen to workers, but he laid out so well what has
happened to our whole pension system and how so many people
have fallen through the cracks particularly in the social
contract that we are all part of, you know, whether it is
Medicare or whether it is a private pension that you have been
promised through your whole career and it lies in tatters. That
is why this hearing is so important and what we have to do.
I will be brief, but I want to share a few examples from
what has happened in Ohio with the committee.
Richard was working for Republic Technologies. He was told
he would get a monthly pension benefit of $2,400. When PBGC
assumed trusteeship of the plan, he was told his benefit would
be $1,088. Later after PBGC calculated his final benefit, he
was told he had been overpaid and he owed back to PBGC $53,000.
His actual benefit would be $325 minus a recoupment deduction
of 10 percent, yielding literally $292.67.
Dorothea worked as a Packard GM Delphi hourly employee, as
many did here, for 34 years in Trumbull County. In her letter
to our office asking for assistance, she wrote: ``To sum up my
feelings, I was afraid to die. Now I am afraid to live. No
pension. No health care. No Social Security. No job. Please
help.''
John, a 55-year-old Delphi salaried retiree wrote:
``Thirty-one years of effort to secure a pension are
being ruined. In the bankruptcy court, creditors who
have only several years of revenue at risk are being
given higher priority. I have been looking for a job
for 10 months without any success. If my pension goes
to PBGC, my family may be living below the poverty
level.''
In the case of Delphi hourly employees under certain
collective bargaining agreements, GM agreed to make up the
difference between the PBGC benefit and what the retiree had
earned.
The Delphi salaried employees and a few hourly employees, I
believe about 100--those represented by the Union of Operating
Engineers, the IBEW, Brotherhood of Electrical Workers, and
machinist unions--had no such agreement. They, like the
salaried workers, are facing drastic reductions to their
benefits.
Other Delphi retirees are facing the loss of their health
benefits, which is why Congressman Ryan and I introduced
legislation in our respective houses to fund a voluntary
employees' beneficiary association, a VEBA, to help them with
the cost of health care. They too are looking for fair
treatment.
Mr. Chairman, again to emphasize what Senator Enzi said and
what you said, these are people that worked hard all their
lives. As I said, I met with many of them again this morning
for probably the fourth or fifth time. My office has been
working with them. Tim Ryan has so faithfully worked with them
and advocated for them. They are simply not being treated
fairly. The social contract is frayed. We need to deal with
that.
I thank the chairman.
[The prepared statement of Senator Brown follows:]
Prepared Statement of Senator Brown
Good Morning.
I would like to thank Chairman Harkin, Ranking Member Enzi,
and all of the members of the committee for holding this
hearing.
I appreciate the opportunity to join my colleagues in the
Senate and the representatives of the Delphi retirees to speak
out on behalf of the tens of thousands of Ohioans who are
paying the price of the Delphi bankruptcy in lost health care
and reduced pensions.
For many workers and retirees in Ohio and across the
Nation, there is a crisis of confidence in our social contract.
Pension benefits earned over a lifetime of service are
dramatically reduced in the wake of bankruptcy.
When PBGC assumes trusteeship of a pension plan, it can
only pay benefits up to what is guaranteed in law. Final
benefits can sometimes take months or years to calculate, with
the retiree responsible for any overpayment.
Early retirement, supplemental benefits, and health
benefits are not guaranteed. Retirees are in no position to
make up for these losses when their pension is assigned to the
PBGC. They feel betrayed by the system that was supposed to
protect them.
The Federal Government stepped in to bail out the auto
industry. TARP financing has enabled General Motors to quickly
move through bankruptcy. TARP financing enabled GM to address
its pension obligations. TARP saved thousands of jobs in a key
sector of our economy. However, some workers, many of whom
spent most of their careers as GM employees, were left out.
Tom Rose, a Delphi retiree who started his career with
General Motors in 1969, summarized the sentiment of many Delphi
retirees when he told the Dayton Daily News: ``Our defined
pension depended on a trust that was broken.''
In the case of Delphi hourly employees under certain
collective bargaining agreements, GM agreed to make up the
difference between the PBGC benefit and what the retiree had
earned. The Delphi salaried employees and some of the hourly
employees such as those represented by the International Union
of Operating Engineers, the International Brotherhood of
Electrical Workers (IBEW), and the Machinists unions had no
such agreement and are facing drastic reductions in their
pension benefits. They are looking for fair treatment.
Other Delphi retirees are facing the loss of their health
benefits, which is why Congressman Ryan and I introduced
legislation with Representatives Fudge, Kucinich, Turner, and
other members of the Ohio delegation to fund a Voluntary
Employees' Beneficiary Association to help them with the cost
of health care. They, too, are looking for fair treatment.
At our Senate HELP Committee hearing last month, we heard
testimony about how Delphi pushed many workers into early
retirement with the assurance that their pension benefits would
be safe. That was not true. Now these retirees face the
greatest losses in income.
John, a 55-year old Delphi Salaried retiree wrote my
office,
``Thirty-one years of effort to secure a pension are
being ruined. In the bankruptcy court, creditors who
only have several years of revenue at risk are being
given higher priority. I have been looking for a job
for 10 months without any success. If my pension goes
to the PBGC, my family will probably be living below
the poverty level.''
The loss of pension and health care benefits will add to
the economic devastation of an area already reeling from job
losses. A Youngstown State University study estimated an annual
fiscal impact of nearly $58 million, resulting in over 1,700
employment losses.
Protecting the pensions supports economic recovery.
Protecting retirement security was one of the purposes of
the bailout of our financial system.
We cannot bail out an industry while leaving thousands of
retirees who have loyally served it out in the cold.
We should be able to resolve this.
Thank you for inviting me to testify.
The Chairman. Thank you very much, Senator Brown.
I will turn first to Representative Ryan for an
introduction. Then I will yield to Senator Casey for purposes
of an introduction. And then we will move ahead.
Representative Ryan, a fourth term Congressman from the
17th District of Ohio. Welcome, Tim, and please proceed for
your introduction.
STATEMENT OF HON. TIM RYAN, U.S. CONGRESSMAN FROM
THE STATE OF OHIO
Mr. Ryan. Thank you, Mr. Chairman, and congratulations on
your new assignment. Ranking Member Enzi, members of the
committee, thank you for the privilege to appear before this
committee and to introduce my constituent and friend, Bruce
Gump.
I would also like to give a special thank you to Senator
Brown. As you can see, he has been working very hard on behalf
of these Delphi retirees for a long, long time, not only Delphi
retirees, but as he stated, other pensioners across the State
of Ohio and the country.
After a brief period of success following their 1999
spinoff from General Motors, Delphi Corporation was soon in
trouble. Languishing in bankruptcy for 4 years, Delphi canceled
pensions and health care benefits for retirees as GM's
bankruptcy sharply reduced both their revenues, curtailed
continuing payments, and jeopardized existing agreements.
Thanks to the Obama administration, many GM workers and
retirees will receive their full pensions and assistance with
their health care. Many Delphi retirees will also receive
assistance for their pensions.
However, many other Delphi retirees will see major cuts to
their pensions and almost all Delphi retirees will see
substantial cuts to their much-needed health care benefits.
These cuts will directly affect over 70,000 retirees across the
Nation and over 5,000 in my congressional district alone. Not
only will this have a devastating effect on these workers and
their families, but the secondary economic effects in
communities in Ohio will be enormous.
Mr. Bruce Gump of Warren, OH is one of the many Delphi
retirees in my district who lost both his health care benefits
and will see a reduction in his pension. Bruce retired after 32
years as an engineer in the automotive industry: almost 23 of
those years for GM prior to the spinoff and 10 years at Delphi.
At age 58, the PBGC will reduce his pension by a substantial
amount.
And his situation, unfortunately, is not unique. Delphi
forced many of its employees into early retirements. So the
pension reductions from the PBGC will be more severe than they
should be for people who have worked more than 30 years.
It is a problem when anyone in this country loses their
pension, no matter how, and today we have a chance to better
understand the situation and, more importantly, address the
problem.
So, again, I would like to say thank you. This is a
critical issue for those of us in northeast Ohio. We are having
tremendous, devastating job losses in Ohio, and to have this
compounding economic problem to pull all of this money out of
our communities truly is devastating. So, again, thank you.
Thank you, Senator Brown, for your leadership, and I appreciate
the opportunity for Bruce to be here.
The Chairman. Thank you very much, Congressman Ryan. I know
you have duties on the House side. So you can excuse yourself
whenever you feel that you have to get back to your House
duties.
Now I will recognize Senator Casey for purposes of
introduction for Mr. Jury.
Statement of Senator Casey
Senator Casey. Mr. Chairman, thank you very much, and I
appreciate your convening of this hearing.
There are a lot of ways to describe the challenge that the
country faces, but maybe one of the headlines on this says it
all, that we have pension funds in America underfunded by over
$400 billion. That alone speaks volumes about why we are here
today.
Mr. Chairman, I want to thank you for having this hearing.
I am going to be very brief. I want to introduce David Jury
who is the Associate General Counsel of the United Steelworkers
of America. It will not be a long introduction, but we want to
thank him for being here, as well as the other members of the
panel.
You know I am a big fan of the steel workers. They have
been so helpful to so many Pennsylvanians. They share our
history and our heritage in our State of hard work and
sacrifice. But they are also a union--I think David could speak
to this directly--focused on the future. We are grateful for
what they do in terms of developing a high-skilled workforce
and increasingly a diverse workforce, not just those who are
involved in making steel, but other parts of our economy as
well.
And on our second panel, I know that Randy DeFrehn of the
National Coordinating Committee for Multiemployer Plans is a
Johnstown, PA native. Of course, I will ask him to move back
there some day. We will talk about that later.
And Ron Gebhardtsbauer, who represents the Actuarial
Science Program from Penn State. I will not get into Penn State
football today, but they are doing pretty well. And I wanted to
make sure that I mentioned them.
Other than that, that is the only Pennsylvania
representatives that I know of here today.
[Laughter.]
If someone else wants to come up, I will introduce you as
well. Thank you, Mr. Chairman.
[Laughter.]
The Chairman. I did not realize we had so many
Pennsylvanians here today.
Let me just then introduce also the remainder of the panel.
Barbara Bovbjerg is the Director for Education, Workforce, and
Income Security Issues at the U.S. Government Accountability
Office, GAO. In that capacity, she oversees evaluative studies
on aging and retirement income policy issues, including Social
Security and private pension programs, operations and
management at the Social Security Administration, the Pension
Benefit Guaranty Corporation, and the Employee Benefits
Security Administration at the Department of Labor. Ms.
Bovbjerg holds a master's degree from Cornell University and a
B.A. from Oberlin College.
Also, Richard Jones, a principal and Chief Actuary in
Hewitt's Retirement and Financial Management Practice based in
Lincolnshire, IL, a fellow of the Society of Actuaries, an
enrolled actuary, and a member of the American Academy of
Actuaries. In his capacity as Chief Actuary, he is responsible
for U.S. actuarial practices, standards, and processes. As I
said, 22 years he has been with Hewitt, has consulted on a
broad range of retirement plan financial strategy and design
issues for their clients. He has made presentations to both the
Senate Finance Committee and the House Ways and Means
Committee. We are glad to have you here before the HELP
Committee.
We welcome our first panel. All of your statements will be
made a part of the record in their entirety. Your clock has a
5-minute timer. We ask if you could kind of sum it up in 5
minutes. I do not bang the gavel at 5. If you go over for 1 or
2, that is fine, but try to keep it around that so we can
engage in a conversation with you.
We will start with you, Mr. Gump. Again, welcome and please
proceed.
STATEMENT OF BRUCE GUMP, CHAIRMAN, DELPHI SALARIED RETIREES
ASSOCIATION, WARREN, OH
Mr. Gump. Thank you, Senator. If you do not mind, before I
start, I wanted to introduce the folks that came with me.
Marianne Hudick is the Vice Chair of the Warren Legislative
Group. Tony Flary, Alan Ryan, Cath Licasco, and Donna Vogel.
Larry Hartman is a member of my committee. He is not able to be
here today. Also with us are Dan Black and Paul Dubose, Elaine
Hofias, and Al Ryan. They all traveled here at their own
expense in order to participate in these proceedings. We very
much appreciate the opportunity.
I will start with my testimony.
Good morning, Chairman Harkin, Ranking Member Enzi, and
members of the committee. My name is Bruce Gump, and I
appreciate the opportunity to participate and give testimony on
behalf of the Delphi Salaried Retirees Association.
I would also like to thank my Senator, Sherrod Brown, for
the interest and concerns and efforts he has put forward on our
behalf.
The inequity in the treatment of our pensions affects more
than 20,000 salaried automotive workers. There are about 15,000
that are currently retired and another 5,000 still working for
the company. Active and retired people were secretaries and
technicians, engineers, sales people, accountants, customer
contract professionals, production supervisors, and mid-level
managers who were just out there trying to earn a living, send
their kids to college, and contribute to their communities.
These are highly educated people, many of whom worked for
General Motors for up to 4 decades before they were spun off to
Delphi. This issue also severely impacts their families and
their communities.
The expedited bankruptcies of General Motors and Chrysler
and the related bankruptcy of Delphi have resulted in
unprecedented Federal Government intervention by the executive
branch. Ironically, this intervention has resulted in a severe
economic impact on the salaried retirees of the former Delphi
Corporation while minimizing the losses for other worker groups
in the industry. We will see the pensions that we have earned
reduced by up to 70 percent by the PBGC. This will result in
many being at or even below the edge of poverty. No other group
in the auto industry faces this threat.
We heard this morning that some of the other smaller
unions--I had thought they had been topped off also, but
apparently that is not the case. I would be happy to include
them in this testimony. Fairness in all of this is what we are
for.
Honest, hard-working, play-by-the-rules American citizens
are paying a terrible price as a result of this unfair and
possibly illegal treatment of the Delphi salaried retirees.
Here is what happened.
After nearly 4 years in bankruptcy, the disposition of
Delphi's defined benefit pension plans was the only major
unresolved issue remaining at the time of the General Motors
bankruptcy. The PBGC had filed a lien on Delphi's valuable
foreign assets intending to protect the value of Delphi's
pension plans, but because of this lien, Delphi was unable to
sell its U.S.-based manufacturing assets to General Motors and
the remainder of the enterprise, which is mostly offshore now,
to the debtor-in-possession lenders.
Under pressure from the Treasury Department and the Auto
Task Force, the PBGC reached an unprecedented agreement with
both General Motors and Delphi to surrender their liens valued
at up to $3.4 billion for a mere $70 million from General
Motors and a $3 billion unsecured bankruptcy claim from Delphi
that the PBGC had to realize at the time would ultimately pay
nothing. They took this action knowing that they would have to
assume billions of dollars in unfunded pension liabilities and
drastically reduce the pensions of Delphi retirees.
We believe that this surrender of liens violated ERISA.
These illegal actions then cost the Delphi retirees, both
hourly and salaried, billions of dollars in lost pension
annuities.
This happened because the Administration chose to follow
what Dr. Edward Montgomery of the Department of Labor called a
``commercial model.'' Since the Delphi retirees had no
commercial value to General Motors or Delphi, we also received
no protection or benefit from the Auto Task Force. Because we
had no commercial value and so no protection or support from
the Administration, we lost our pensions to the PBGC.
At the time of the Delphi separation in 1999, labor unions
representing Delphi's hourly workers had received agreements
with General Motors to protect their pensions in the event
Delphi entered bankruptcy. I have been told this type of
obligation is normally modified or even canceled in bankruptcy,
but again, Treasury and Auto Task Force intervention in the
expedited GM bankruptcy produced an unprecedented offer from GM
to top up the pensions of Delphi's hourly workers represented
by the UAW.
Although identical agreements existed with other unions
representing smaller numbers of retirees, a similar offer was
not extended to them until the Federal Government, which was
now the majority owner of General Motors, again became involved
in the discussions several weeks later.
While we are pleased that General Motors has agreed to top
up Delphi's discarded pension obligations for all hourly
retirees, with the exceptions I just noted, we believe that the
principle of equal protection under the law dictates that the
salaried retirees receive comparable treatment from the now
federally owned enterprise.
Before concluding, I would like to draw your attention to
several points that quantify the impact of these events.
The average Delphi salaried retiree will lose over $300,000
in pension payments over his or her lifetime due to the PBGC
surrender of the liens on Delphi's overseas assets. In other
words, a large number of Delphi salaried retirees are now at or
near the poverty level due to the actions of the PBGC, the
Treasury, and the Auto Task Force.
No other group of employees, again with the exceptions I
just noted, or retirees in any of the federally supervised
automotive bankruptcies has sacrificed to the extent of the
Delphi salaried retirees. So the concept of shared sacrifice
was not applied equally. All other worker groups will receive
100 percent of the pensions they were promised. I want to
repeat that. All the other worker groups in the automotive
industry, with the exceptions of the smaller unions you
mentioned and us, will receive 100 percent of their guaranteed
pensions that they earned and worked for decades except us.
A study by Dr. Frank Akpadock at Ohio's Youngstown State
University found that the economic impact to the already
fragile local Mahoning Valley economy will exceed $161 million
per year. This is an economy that employs about 100,000 people
and because the $161 million a year is coming out of it, it
will result in the loss of about 5,000 jobs out of that
economy. That will drive the unemployment rate in that area to
about or even over 20 percent all because a commercial model
indicated that there was no need to treat the citizens in
various worker groups fairly or equally.
Extrapolating that YSU study predicts the loss of 85,000
jobs on a national level in places like Dayton, OH; Kokomo, IN;
Lockport, NY; El Paso, TX; Clinton, MI; and other places where
Delphi has a significant presence.
It is unfortunate, indeed, that the economic state of a
major American industry was so bad that the Administration had
to choose to become involved. However, we do not believe that
the Federal Government has the right to throw off the mantle of
Government and put on the cloak of business in order to justify
their treatment of any citizen based on his perceived
commercial value. Citizens do have the right to expect fair
treatment and access to due process from their Government.
What we are asking for is fair and equitable treatment. We
believe the U.S. Treasury set the standard of fairness in the
GM and Delphi bankruptcies when they provided funds for full
pensions and reduced health care insurance to the unionized
workers. The fact is, Senators, the U.S. Treasury and the Auto
Task Force have discriminated against us.
Chairman Harkin, Ranking Member Enzi, and members of the
committee, we hope you share the outrage of the unfair,
inequitable treatment and possibly illegal treatment that the
Delphi salaried retirees are receiving with respect to our
pensions. We ask that you as a committee and individually call
on President Obama, Treasury Secretary Geithner, Ron Bloom of
the Auto Task Force General Motors, and Delphi to reconsider
that decision to exclude the Delphi salaried retirees from the
pension treatment that was provided in the GM bankruptcy and
remedy this injustice.
Thank you for your attention, and I would be pleased to
answer any questions.
The Chairman. Thank you very much, Mr. Gump.
And now we will turn to Ms. Bovbjerg. Ms. Bovbjerg, again,
keep in mind all your statements will be made a part of the
record in their entirety. If you could sum it up, I would
appreciate it.
STATEMENT OF BARBARA D. BOVBJERG, DIRECTOR, EDUCATION,
WORKFORCE, AND INCOME SECURITY ISSUES, GOVERNMENT
ACCOUNTABILITY OFFICE, WASHINGTON, DC
Ms. Bovbjerg. Thank you very much, Mr. Chairman. Good
morning, Senators. I am very pleased to be here. Thank you so
much for inviting me to speak about a slightly different topic,
which is PBGC's final benefit determination processes.
Since PBGC's inception in 1974, they have trusteed almost
4,000 defined benefit plans covering more than a million
workers and retirees. Participants in such plans rely on PBGC
to determine what benefits they are owed under statutory
guarantees. Since 2008, though, the economic downturn has
brought a new influx of plan terminations, including Delphi,
and with them increased anxiety about what the PBGC guarantees
mean for worker benefits.
My testimony today describes how PBGC determines benefits
and how it recoups overpayments. My statement is based on a
recent report to this committee.
First, I will address the benefit determination.
The determination process requires many steps to complete,
and it involves gathering extensive data on plans, as well as
on each individual's work history and identifying who is
eligible for benefits under the plan. This can be particularly
complicated if the plan or the company has a history of
mergers, an elaborate structure, or missing data.
Most participants of terminated plans are entitled to
receive the full amount of benefits they earned under the
plans, but some will have their benefits reduced to comply with
legal limits. For example, PBGC generally does not guarantee
more than a certain amount, about $54,000 this year, to any
retiree in a trusteed plan. Higher earners in underfunded plans
may find their benefits exceed that cap and must be reduced
unless there are plan assets that would make up the difference.
Also, because PBGC's guarantees are based on retirement at
age 65, early retirees may face actuarial reductions.
PBGC has conducted studies about the impact of these limits
in large plans and the first from 1999 showed the limits
affected only about 5 percent of participants, but the more
recent study from 2008 found the number was that almost 16
percent were affected.
But until these calculations are made and benefit
termination is complete, participants receive estimated
benefits. Although participants generally give PBGC high marks
for its initial information sessions when a plan is newly
terminated, PBGC generally does not communicate with
participants during the benefit determination period, a time
that can extend for years, throughout which retirees are still
receiving their estimated benefits. Though PBGC completes most
participant benefit determinations in less than 3 years, some
participants have waited almost 9 years for final
determinations.
The long delays and resultant uncertainty regarding final
benefit amounts make it difficult for workers to plan for
retirement and, for those already retired, to feel very secure.
Indeed, some are unpleasantly surprised when they are notified
that their final benefits will be lower than what they have
been already receiving for many years.
PBGC has taken steps to shorten the benefit determination
process, and although their initiatives previously have focused
on ways to speed processing of the straightforward cases
instead of the more complex ones that are prone to delay, PBGC
is responding to recommendations we made in our report last
summer and is looking at ways to improve its processes for
addressing the most complex plans.
Let me now turn to the very difficult issue of
overpayments.
The vast majority of participants in terminated plans are
not affected by overpayments or by PBGC's process to reclaim
them. It is only about 2 percent of participants that are
subject to the recoupment process. But still, for these
participants, it can be quite a shock when PBGC notifies them
that their final benefit will be less, in some cases
substantially less, than the estimated benefits they have been
receiving and that, in addition, their new benefit amount will
be reduced by up to 10 percent until the overpayment is
recouped.
Overpayment sizes varied widely. There were some that were
less than $1, others more than $150,000. Most are under $3,000.
But even small inaccuracies in the estimated benefits add up if
they are continued for many years, over the course of 9 years.
Then the final benefit determination will be lower--it can make
a very high over payment.
PBGC does warn participants at the beginning of the process
that their benefits may be reduced due to legal limits, but
these general warnings are not well understood, nor are they
clearly remembered months or years later when reductions
actually occur and most beneficiaries are taken by complete
surprise. Hence, we have recommended that PBGC improve the
frequency and clarity of its communications with participants
in trusteed plans.
In conclusion, big, complex plans are the ones that cause
PBGC the greatest difficulties in benefit determination and
some very large ones are either in PBGC trusteeship now or
could be in the future. The Delphi plans recently taken by PBGC
have almost 70,000 participants and are about $7 billion
underfunded. Participants in these plans and others that will
surely follow will be better served by PBGC if the agency gives
greater attention not only to more efficient benefit
determination but to better and more frequent communication
with participants.
Losing your job and the ability to accrue future benefits
is bad enough. Let us not make a process that should be
reassuring and helpful to workers unnecessarily confusing,
surprising, or lengthy.
That concludes my statement, Mr. Chairman.
[The prepared statement of Ms. Bovbjerg follows:]
Prepared Statement of Barbara D. Bovbjerg
Why GAO Did This Study
Under the single-employer insurance program, the Pension Benefit
Guaranty Corporation (PBGC) may become the trustee of underfunded plans
that are terminated and assume responsibility for paying benefits to
participants as they become due, up to certain legal limits. From its
inception in 1974 through the end of fiscal year 2008, PBGC has
terminated and trusteed a total of 3,860 single-employer plans covering
some 1.2 million workers and retirees. Since 2008, the economic
downturn has brought a new influx of pension plan terminations to PBGC,
and more are expected to follow.
The committee asked GAO to discuss our recent work on PBGC.
Specifically, this testimony describes: (1) PBGC's process for
determining the amount of benefits to be paid; and (2) PBGC's
recoupment process when the estimated benefit provided is too high and
a retiree receives an overpayment that must be repaid.
To address these objectives, GAO relied primarily on a recent
report titled Pension Benefit Guaranty Corporation: More Strategic
Approach Needed for Processing Complex Plans Prone to Delays and
Overpayments (GAO-09-716, Aug. 2009). In that report, GAO made numerous
recommendations. PBGC generally agreed and is taking steps to address
the concerns raised. No new recommendations are being made in this
testimony.
______
Pension Benefit Guaranty Corporation
Workers and Retirees Experience Delays and Uncertainty when Underfunded
Plans Are Terminated
WHAT GAO FOUND
Most participants must wait about 3 years for PBGC to complete the
benefit determination process and provide their finalized benefit
amounts, but the vast majority are not affected by overpayments or the
recoupment process (see figure). Nevertheless, long delays and
uncertainty over final benefit amounts make it difficult for workers to
plan for retirement, and for retirees who may have come to depend on a
certain level of monthly income.
During the benefit determination process, key points of contact
with workers and retirees include:
Initial notification: PBGC's first communication with
participants is generally a letter informing them that their pension
plan has been terminated and that PBGC has become the plan trustee.
Estimated benefits: For retirees, PBGC continues payments
after plan termination, but adjusts the amounts to reflect limits set
by law. These payments are based on estimates, so overpayments can
occur.
Finalized benefit amounts: Once the benefit determination
process is complete, PBGC notifies each participant of the final
benefit amount through a ``benefit determination letter.''
A small percentage of participants have incurred overpayments to be
repaid through the recoupment process. But for those affected, the news
can still come as a shock, especially when several years have elapsed
since their benefits were reduced to comply with legal limits. Their
frustration may be compounded if they cannot understand the
explanations provided by PBGC. As the influx of large, complex plan
terminations continues, improvements in PBGC's processes are urgently
needed.
______
Mr. Chairman and members of the committee, I am pleased to be here
today to present information about what happens when underfunded
pension plans are terminated and trusteed by the Pension Benefit
Guaranty Corporation (PBGC). Under PBGC's single-employer insurance
program,\1\ if a company's defined benefit pension plan has inadequate
assets to pay all promised benefits, plan sponsors meeting certain
criteria may voluntarily terminate the plan through a ``distress''
termination, or PBGC may decide to terminate the plan involuntarily to
protect the plan's assets. If the plan's assets are insufficient to pay
benefits currently due, then PBGC must terminate the plan. In all these
situations, PBGC generally becomes the trustee of the plan and assumes
responsibility for paying benefits to the participants, up to certain
legal limits.\2\ From its inception in 1974 through the end of fiscal
year 2008, PBGC terminated and trusteed a total of 3,860 single-
employer plans covering some 1.2 million workers and retirees. Since
2008, the economic downturn has brought a new influx of pension plan
terminations to PBGC, and more are expected to follow.
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\1\ PBGC administers two separate insurance programs for private-
sector defined benefit plans: a single-employer program and a
multiemployer program. The single-employer program covers about 34
million participants in about 28,000 defined benefit plans. 29 U.S.C.
1322 and 1322a. The multiemployer program covers about 10 million
participants in about 1,500 collectively bargained defined benefit
plans that are maintained by two or more unrelated employers.
\2\ The termination of a fully funded plan is called a standard
termination. Plan sponsors typically purchase a group annuity contract
from an insurance company to pay benefits to the participants, and PBGC
does not become the trustee. 29 U.S.C. 1341(b).
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Today I will provide a description, from the workers' and retirees'
perspective, of what happens when a plan is terminated and trusteed by
PBGC. Specifically, I will describe (1) PBGC's process for determining
the amount of benefits to be paid, and (2) PBGC's recoupment process
when the estimated benefit provided is too high and a retiree receives
an overpayment that must be repaid. This testimony is based primarily
on a report we issued on August 17, 2009, titled Pension Benefit
Guaranty Corporation: More Strategic Approach Needed for Processing
Complex Plans Prone to Delays and Overpayments.\3\ In developing that
report, we reviewed PBGC policies and procedures, analyzed automated
data, and interviewed PBGC officials knowledgeable about various stages
of the benefit determination process. We focused our study on
participants of plans terminated and trusteed during fiscal years 2000
through 2008, and spoke with personnel from employee associations and
advocacy groups involved in some of these plan terminations. We
conducted this work between October 2008 and August 2009, in accordance
with generally accepted government auditing standards.\4\
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\3\ GAO-09-716 (Washington, DC: August 2009).
\4\ Those standards require that we plan and perform the audit to
obtain sufficient, appropriate evidence to provide a reasonable basis
for our findings and conclusions based on our audit objectives. We
believe the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives. For further
details on our methodology, see GAO, Pension Benefit Guaranty
Corporation: More Strategic Approach Needed for Processing Complex
Plans Prone to Delays and Overpayments GAO-09-716 (Washington, DC:
August 2009), p. 7 and appendixes I and II.
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BACKGROUND
PBGC was created as a government corporation by the Employee
Retirement Income Security Act of 1974 (ERISA) \5\ to help protect the
retirement income of U.S. workers with private-sector defined benefit
plans by guaranteeing their benefits up to certain legal limits. PBGC
receives no funds from general tax revenues. Operations are financed by
insurance premiums set by Congress and paid by sponsors of defined
benefit plans, recoveries from the companies formerly responsible for
the plans, and investment income of assets from pension plans that PBGC
trustees. Under current law, other than statutory authority to borrow
up to $100 million from the Treasury Department,\6\ no substantial
source of funds is available to PBGC if it runs out of money. In the
event that PBGC were to exhaust all of its holdings, benefit payments
would have to be drastically cut unless Congress were to take action to
provide support.\7\
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\5\ Pub. L. No. 93-406, tit. IV, 88 Stat. 829, 1003-1035 (codified
as amended at 29 U.S.C. 1301-1461).
\6\ 29 U.S.C. 1305(c).
\7\ 29 U.S.C. 1302(g)(2).
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In 2003, GAO designated PBGC's single-employer program as high-
risk, and PBGC has remained high-risk with each subsequent update,
including our most recent update in 2009. This means that the program
still needs urgent congressional attention and agency action. We
specifically noted PBGC's prior-year net deficit, as well as the risk
of the termination among large, underfunded pension plans, as reasons
for the program's high-risk designation. Over the last 6 years or so,
the assets and liabilities that PBGC accumulated from trusteeing plans
have increased rapidly. This is largely due to the termination,
typically through bankruptcies, of a number of very large, underfunded
plan sponsors. Last May, PBGC reported that unaudited financial results
through the second quarter of fiscal year 2009 showed its deficit
tripling since the end of fiscal year 2008, from about $11 billion to
about $33.5 billion. Since then, the influx of large plan terminations
has continued. For example, in August 2009, PBGC assumed responsibility
for six Delphi pension plans, covering about 70,000 workers and
retirees, and underfunded by a total of about $7 billion. PBGC
estimated that it would be liable for about $6.7 billion of this
underfunding.
PBGC'S BENEFIT DETERMINATION PROCESS GENERALLY TAKES ABOUT 3 YEARS
TO COMPLETE
Our review of plans terminated and trusteed between fiscal years
2000 and 2008 found that PBGC completed most participants' benefit
determinations in less than 3 years, but required more time--up to 9
years--to process determinations for complex plans, plans with missing
data, and plans with large numbers of participants. As some pension
advocacy groups and union representatives have noted, long delays and
uncertainty over final benefit amounts make it difficult for workers to
plan for retirement, and especially for retirees who have come to
depend on a certain level of monthly income. At the same time, the
benefit determination process requires many steps to be complete. It
requires gathering extensive data on plans and each individual's work
and personnel history, and identifying who is eligible for benefits
under the plan. This can be particularly complicated if the company or
plan has a history of mergers, an elaborate structure, or missing data.
It requires calculating each participant's benefit amount based on
provisions that vary from plan to plan, applying the legal limits on
guaranteed benefit amounts in each case, and valuing plan assets and
liabilities to determine if some or all of the nonguaranteed benefit
amount can still be paid. Also, the larger the plan, the heavier the
workload for PBGC. While the average number of participants per plan is
slightly fewer than 1,000, we found that some plans have many more--
nearly 93,000 in the case of Bethlehem Steel. PBGC's benefit
determination process is illustrated in Figure 1. The key points of
contact with workers and retirees that occur during this process are
described in detail below.
INITIAL NOTIFICATION
PBGC's first communication with participants is generally a letter
informing them that their pension plan has been terminated and that
PBGC has become the plan trustee.\8\ Shortly thereafter, this letter is
generally followed by a more detailed letter with a packet of
materials, including a DVD with an introduction to PBGC and answers to
frequently asked questions about how the benefit determination process
works. PBGC officials refer to this as a ``welcome'' package.
Additionally, for large plans likely to have many participants affected
by the legal limits on guaranteed benefits, PBGC will hold on-site
information sessions shortly after plan termination. PBGC also operates
a customer service center with a toll-free number that participants can
call if they have questions, provides a Web site for workers and
retirees with detailed information about plans and benefits, and sends
participants a newsletter with information about PBGC once or twice per
year.\9\
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\8\ Prior to termination, plan sponsors are required to notify
participants if the plan is significantly underfunded and warn them
that if the plan is terminated, their benefits must be cut back based
on the guarantee limits as of the plan termination date. 29 U.S.C.
1021(f).
\9\ PBGC produces an annual newsletter for retirees and a biannual
newsletter for future retirees.
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Nearly all pension advocacy groups and union representatives with
whom we spoke \10\ praised PBGC's efforts to hold information sessions
with the larger plans. One union representative commended PBGC staff
for going out into the field to talk with participants and answer
questions even though participants are likely to be angry. Other union
representatives commented that they have been impressed by PBGC's staff
for staying at these sessions until they have answered every
participant's questions. While these sessions are generally viewed as
helpful, some pension rights advocates noted that the information
presented is difficult for participants to understand and apply to
their own situations. Comments about PBGC's customer service center and
Web site were also mixed.
---------------------------------------------------------------------------
\10\ For a list of the organizations contacted, see GAO-09-716,
appendix II.
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Estimated Benefits
If the participant is already retired, or retires before the
benefit determination process is complete, PBGC makes payments to the
retiree based on an estimate of what the final benefit amount will be.
According to PBGC, most participants of terminated plans are entitled
to receive the full amount of benefits they earned under their plans.
In such cases, the calculation of an estimated benefit is
straightforward. However, some participants may have their benefits
reduced to comply with certain limits, specified under ERISA and
related regulations. These limits include the phase-in limit, the
``accrued-at-normal'' limit, and the maximum limit (see Fig. 2). In
these cases, the calculation of an estimated benefit is more
complicated. PBGC does not systematically track the number of
participants affected by the limits on guaranteed benefits or how much
these limits affect benefit amounts; however, PBGC has conducted two
studies on the impact of these limits in a sample of large plans. The
first study, issued in 1999, found 5.5 percent of participants were
affected by the limits; and the second study, issued in 2008, found
that 15.9 percent were affected.\11\
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\11\ PBGC, PBGC's Guarantee Limits--an Update (Washington, DC:
September 2008). This document summarizes the results from both the
1999 and 2008 studies.
Following the termination of their plans, those who are already
retired may continue to receive their same plan benefit amount as an
estimated benefit for several months--or even years--before the
estimate is adjusted to reflect the legal limits on guaranteed
benefits. When plans are terminated at the sponsor's request as
distress terminations, the sponsors are required to impose these limits
themselves so that participants' benefits are reduced as of the date of
termination. However, when plans are terminated involuntarily, there
can sometimes be lengthy delays before PBGC reduces estimated benefits
to reflect these limits. Not only must PBGC estimate the possible
impact of applying the guarantee limits to the participant's benefit,
PBGC must also estimate whether there might be sufficient plan assets
or recoveries of company assets to pay all or part of the nonguaranteed
portion of the participant's benefit.\12\ According to PBGC officials,
when it is unclear how much a plan's assets or recoveries will be able
to contribute toward the nonguaranteed portion of a retiree's benefit,
it can be difficult to calculate an accurate benefit amount until the
benefit determination process is complete. We found cases where
estimated benefits were adjusted within 9 months of termination, while
in other cases, more than 6 years elapsed before estimated benefits
were adjusted.
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\12\ The process for determining how the plan's assets are
distributed among the plan's participants is specified in ERISA. 29
U.S.C. 1322(c) and 1344. For a description of the allocation
process, see our recent report, GAO-09-716, appendix III.
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Finalized Benefit Amounts
Once the benefit determination process is complete, PBGC notifies
each participant of the final benefit amount with a ``benefit
determination letter.'' From the time of its initial contact with plan
participants until the benefit determination process is complete, PBGC
generally does not communicate with participants. In some cases, this
period can stretch into years.\13\ Some of the pension advocacy groups
and union representatives we spoke with said that these long periods
without communication are problematic for participants for several
reasons. For example, retirees whose benefits are subject to the
guarantee limits but who continue to receive their higher plan-level
benefits for long periods of time may come to depend on these higher
amounts and believe that this payment level is permanent. They are
surprised when--years later--their benefits are suddenly reduced. Even
for participants who are not yet receiving benefits, the lack of
communication about the likely amount of their final benefits makes it
difficult to plan for retirement.
---------------------------------------------------------------------------
\13\ However, if a participant applies to start benefit payments
during this time, communications would be exchanged between PBGC and
the participant about the participant's current status, eligibility,
and benefit amount, based on the requested retirement date.
---------------------------------------------------------------------------
In addition, PBGC's benefit determination letters generally provide
only limited explanations for why the amount may be different from the
amount provided under their plan. In complex plans, when benefit
calculations are complicated, the letters often do not adequately
explain why benefits are being reduced. Although benefit statements are
generally attached, the logic and math involved can be difficult even
for pension experts. Some pension advocates and union representatives
we spoke with said that they found the explanations in these letters to
be too vague and generic, and that the letters did not provide enough
information specific to the individual's circumstances to be helpful.
At the same time, they were generally sympathetic to the difficulty of
communicating such complicated information. As one advocate
acknowledged, for the letters to be accurate, they have to be
complicated; this may just be ``the nature of the beast.''
PBGC officials have taken steps to shorten the benefit
determination process, although their initiatives have focused on ways
to expedite processing of straightforward cases instead of the more
difficult cases prone to delays. PBGC has also developed more than 500
letter formats--in both English and Spanish--to address the myriad of
situations that may arise in the benefit determination process.
Nevertheless, PBGC officials acknowledged that their standard letter
formats may not always meet the needs of participants, especially those
with complex plans and complicated benefit calculations. PBGC recently
undertook a project to review and update their letters to try to better
meet participant needs.
PBGC'S RECOUPMENT PROCESS AFFECTS ONLY A SMALL PERCENTAGE OF TERMINATED
PLAN PARTICIPANTS
The vast majority of participants in terminated plans are not
affected by overpayments or PBGC's recoupment process. Overpayments
generally occur when a retiree receives estimated benefits while PBGC
is in the process of making benefit determinations and the final
benefit amount is less than the estimated benefit amount. However, we
found that of the 1,057,272 participants in plans terminated and
trusteed during fiscal years 2000 through 2008, more than half were not
yet retired and, therefore, did not receive estimated benefits before
the benefit determination process was complete. Moreover, for most who
were retired, the estimated benefit amount received did not change when
finalized. As shown in Figure 3, of the 6.5 percent with benefits that
did change when finalized, about half received a benefit amount that
was greater, and half received a benefit amount that was less (about 3
percent of total participants in these plans, overall). In cases with a
final benefit greater than the estimated amount, retirees are likely
due a backpayment for having been underpaid, which PBGC repays in a
lump sum, with interest. In cases with a final benefit that is less,
the retirees are likely to have received an overpayment, which they
then must repay to PBGC, with no added interest.
Overpayments can occur for two basic reasons: (1) there is a period
of time when the retiree's estimated benefit has not yet been reduced
to reflect applicable limits; and (2) the retiree's estimated benefit
is adjusted to reflect applicable limits, but the estimate is still
greater than the benefit amount that is ultimately determined to be
correct. In general, the longer the delay before a retiree's estimated
benefit is adjusted to reflect the correct amount, the larger the
overpayment, and the greater the amount that will need to be recouped
from future monthly benefit payments.
When an overpayment occurs, retirees typically repay the amount
owed by having their monthly benefits reduced by some fraction until
the debt is repaid. According to PBGC data, 22,623 participants in
plans terminated and trusteed during fiscal years 2000 through 2008
(2.1 percent of the total) were subject to such recoupment.\14\ The
total overpayment amounts varied widely--from less than $1 to more than
$150,000--but our analysis of PBGC data suggests that most owed less
than $3,000.\15\ Since in most cases PBGC recoups overpayments by
reducing a participant's final benefit by no more than 10 percent each
month,\16\ recoupment is amortized over many years and the impact on
the participant's benefit is limited. Per individual, we found that the
median benefit reduction due to recoupment was about $16 a month, or
about 3 percent of the monthly payment amount, on average. The effect
of receiving an overpayment of estimated benefits on one retiree's
monthly payment is illustrated in Figure 4. The total amount of this
retiree's overpayment was $5,600. His monthly payment was ultimately
reduced by nearly one-half, but this was primarily due to the
application of the guarantee limits. The amount of the benefit
reduction for recoupment of the overpayment is $38 per month, to be
paid until 6/1/2020.
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\14\ Retirees who receive a final benefit that is less than their
estimated benefit do not always end up with an overpayment that is
recouped through monthly benefit reductions. For example, estimated
benefit amounts may fluctuate over time, so that an overpayment may be
offset by an underpayment resulting in no amount due. Alternatively, in
some cases, it may be determined that the retiree is not eligible to
receive an ongoing benefit payment, so there is no payment to be
reduced for recoupment. PBGC refers to these as recovery cases rather
than recoupment cases.
\15\ Data reliability issues prevented us from conducting a more
definitive analysis of total overpayment amounts. For a more detailed
discussion of these data limitations, see our recent report, GAO-09-
716, appendix I. We were, however, able to verify that the person with
the largest amount to be recouped was an LTV plan participant who owed
a total of $152,194, and was to have $181 deducted each month from his
payment of $1,812 until 2/1/2078 (at which point he would be over 138
years of age). In general, we found that large overpayments tended to
occur in cases where there were lengthy delays before estimated
benefits were adjusted to reflect the guarantee benefit limits, but
that in some cases, they occurred due to disputes regarding claims from
ex-spouses (referred to as ``qualified domestic relations orders'').
\16\ PBGC regulations generally limit benefit reductions to the
greater of (a) 10 percent of the participant's monthly benefit, or (b)
the amount in excess of the participant's ``maximum guaranteeable
benefit.'' 29 CFR 4022.82(a)(2) (2009).
Participants are warned at the beginning of the process that their
benefits may be reduced due to the legal limits on guaranteed benefits,
and retirees are notified of possible overpayments when they begin to
receive estimated payments. However, these warnings may not have the
same meaning for participants when talked about in generalities as when
they later receive notices concerning their specific benefit amounts.
It can still come as a shock when--perhaps years later--they receive a
final benefit determination letter with this news. Their frustration
may be compounded if they fail to understand the explanations provided
in the benefit determination letters. Some pension advocates and union
representatives we spoke with said that this is often the case in
complex cases involving large benefit reductions. They noted that they
did not think most participants would be able to understand the
accompanying benefit statements without additional information and
assistance. In the participant files we reviewed, the benefit
statements that accompanied the letters ranged in length from 2 to 8
pages. In some cases, there were as many as 20 to 30 different line
items that required making comparisons between the items to understand
the logic of the calculations.\17\
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\17\ For an example of a benefit determination letter and benefit
statement, see GAO-09-716, appendix VII.
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Participants may appeal the results of the benefit determination
process within 45 days of receiving a final benefit determination.\18\
Appeals are accepted if they raise a question about how the plan was
interpreted, how the law was interpreted, or the practices of the
plan's sponsor, but not if they are based only on hardship. Although
some appellants have successfully used the appeals process to increase
their benefits, less than 20 percent of appeals docketed since fiscal
year 2003 have resulted in appellants receiving higher benefit amounts.
We found that a lack of understanding on the part of participants about
how their benefits are calculated may engender unnecessary appeals, and
that PBGC is not readily providing key information that would be
helpful to participants in deciding whether or not to pursue an appeal.
---------------------------------------------------------------------------
\18\ 29 CFR 4003.1(b)(7) and 4003.52 (2009).
---------------------------------------------------------------------------
Participants may request hardship waivers for overpayments, but
only in cases that do not involve an ongoing payment. PBGC policy
stipulates that in cases with an ongoing payment, recoupment of an
overpayment may not be waived unless the monthly reduction would be
less than $5.\19\ By comparison, Federal agencies such as the Social
Security Administration and the Office of Personnel Management
generally pursue repayment at a faster rate with larger reductions to
benefits when recouping overpayments, but their policies also give
greater prominence to waivers.
---------------------------------------------------------------------------
\19\ In addition, in the last month that benefits are to be reduced
to repay an overpayment, PBGC policy allows the final monthly reduction
amount to be waived if the remaining balance due is less than the
normal monthly reduction amount. 29 CFR 4022.82(a)(5) (2009).
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CONCLUSIONS AND RECOMMENDATIONS
To address the concerns of workers and retirees in terminated plans
who stand to lose as much as one-half or more of their long-anticipated
retirement income, and who will likely have to make painful financial
adjustments, PBGC needs a more strategic approach for processing
complex plans prone to delays and overpayments. The failure to
communicate more often and clearly with participants awaiting a final
determination can be disconcerting--especially when participants
receive the news that their final determination is ``surprisingly''
less than they anticipated, or when retirees learn that the estimated
interim benefit they had been receiving was too high and that they owe
money. More frequent and clearer communication with plan participants,
including more timely adjustments to estimated benefits, more
information about how their benefits are calculated, and where to find
help if they wish to appeal, would better manage expectations, help
people plan for their future, avoid unnecessary appeals, and earn good
will during a trying time for all.
In our recently issued report, we recommended that PBGC develop a
better strategy for processing complex plans in order to reduce delays,
minimize overpayments, improve communication with participants, and
make the appeals process more accessible. After reviewing the draft
report, PBGC generally agreed with our recommendations, noting the
steps it would take to address GAO's concerns. For example, PBGC said
that it had started to track and monitor tasks associated with
processing large, complex plans, and would continue to look for other
ways to improve its processes. A complete discussion of our
recommendations, PBGC's comments, and our evaluation are provided in
our recently issued report. As PBGC's financial challenges continue to
mount and dramatic increases to PBGC's workload appear imminent,
improvements to PBGC's processes are urgently needed.
Mr. Chairman, this completes my prepared statement. I would be
happy to respond to any questions you or other members of the committee
may have.
The Chairman. Well, thank you very much, Ms. Bovbjerg. That
is very timely.
Now we turn to Mr. Jury. Welcome, Mr. Jury, and please
proceed.
STATEMENT OF DAVID R. JURY, ASSOCIATE GENERAL COUNSEL, UNITED
STEELWORKERS OF AMERICA, PITTSBURGH, PA
Mr. Jury. Good morning. I am David Jury, Associate General
Counsel for the United Steelworkers. On behalf of International
President Leo Gerard and our 1.2 million active and retired
members, I thank the committee for the ability to appear this
morning to address the acute need for relief in order to
preserve the defined benefit pension system for all American
workers and retirees.
Defined benefit pension plans are the cornerstone of
retirement security for millions of Americans. The Pension
Benefit Guaranty Corporation serves a critical function in the
social safety net by insuring the pensions of 44 million
Americans. These pension guarantees sit at the intersection of
numerous forces affecting American workers: deregulation,
globalization, trade policy, and the decline of the
manufacturing sector.
United Steelworkers is familiar with this intersection of
forces through its representation of workers throughout
American manufacturing, but particularly in the domestic steel
industry. Between 1998 and 2003, the domestic steel industry
experienced a crisis brought on by a tide of imports, which
flooded the market and drove steel prices down to 20-year lows.
The result was 44 bankruptcies, 18 liquidations, and the loss
of 55,000 jobs.
During this period, the pension plans of 16 steel companies
were terminated, involving over 250,000 participants and $7
billion in unfunded guaranteed pension liabilities.
The termination of a pension plan is extraordinarily
disruptive for any worker regardless of status. While the
pension benefits of most retirees are not reduced following a
plan termination, there are limitations as to both the amount
and form of benefit that PBGC will guarantee. Among other
things, as Ms. Bovbjerg noted, the PBGC does not guarantee
monthly benefits above an established maximum level. Further,
PBGC does not guarantee early retirement supplements that
provide a retiree with additional income until he or she
becomes eligible for Social Security, and as a result of the
Pension Protection Act of 2006, PBGC does not guarantee
benefits earned either after an employer files bankruptcy or
after the pension plan's funding target falls below 60 percent.
According to a 2008 PBGC study of terminated steel industry
pension plans and applying these limitations, PBGC determined
that 21 percent of participants in the steel industry plans
suffered reduced benefits with an average cutback of 26
percent.
These plan terminations and benefit cutbacks are even more
painful because these same workers or retirees often at the
same time experience a loss of jobs or a termination or a
reduction in retiree health insurance benefits or both. After
working years in difficult and often dirty and dangerous jobs,
these workers rightfully feel both shocked and angry at this
convergence of events.
The source of the current problems in the defined benefit
pension system is not the PBGC, but instead the existing
legislative framework. Rather than encouraging employers to
maintain defined benefit pension plans and elevating the
interests of workers and retirees, aspects of the current law
undermine these policy goals.
In 2006, Congress responded to the mounting number of
pension plan terminations and a growing PBGC deficit by passing
the Pension Protection Act. While the stated goal of the act
was to strengthen the retirement system and improve plan
funding, the PPA has, in our experience, produced quite the
opposite result. We have observed an increase in the number of
employers seeking at the bargaining table to freeze or
terminate their defined benefit pension plans, often citing
directly the accelerated funding obligations imposed by law.
The PPA has made pension funding more onerous, inflexible,
and volatile by effectively requiring pension plans to be fully
funded at all times, a requirement premised in our view
erroneously upon the assumption that all benefits are payable
immediately. During an economic downturn, the combination of
these new funding rules has ratcheted up funding obligations at
the very moment when plan sponsors can least afford it in light
of conditions in both the general economy and in the credit
markets. Without prompt action, these funding obligations may
generate additional bankruptcies and pension terminations which
will only further burden the PBGC and erode retirement security
for American workers.
Congress can do several things to address the more harmful
aspects of the current law, and in the interest of time, I
refer you to our written testimony with respect to several
funding-related and other changes that Congress should
consider.
If I may--and this is beyond our written testimony--I would
like to address just briefly the circumstances at Delphi and in
particular the provenance of the agreement of GM to ``top up''
the pension benefits of steel worker retirees in Dayton, OH,
IUE retirees elsewhere.
These agreements were negotiated in 1999 at the time of the
spin-off.
In 2007, in the Delphi bankruptcy case, at a point in time
when Delphi saw light at the end of the tunnel and saw a
possible emergence from bankruptcy, the steel workers union and
the IUE and the United Auto Workers negotiated agreements with
Delphi and General Motors in which GM agreed to stand behind
the 1999 benefit commitments. These agreements were approved by
the bankruptcy court in Delaware and, among other things,
provided for a plan-to-plan transfer of assets from the Delphi
pension plan to the General Motors pension plan.
In the context of the current General Motors bankruptcy,
General Motors stood behind these commitments 10 years in
provenance, and I will be happy to address this and other
matters at the time of questions.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Jury follows:]
Prepared Statement of David R. Jury
I am David Jury, and I am an Associate General Counsel of the
United Steelworkers International Union (USW).
The USW represents 1.2 million active and retired members found in
nearly every manufacturing industry, not only steel, but paper,
forestry, rubber, energy, mining, automotive parts, and chemicals, as
well as healthcare, service and public employment. On behalf of the USW
and International President Leo Gerard, I thank the committee for the
invitation to appear today to address the impact of pension plan
terminations on workers and retirees and the urgent need for pension
funding and other related relief, a need that has become even more
acute during this recession.
Defined benefit pension plans are the cornerstone of retirement
security for millions of Americans. The Pension Benefit Guaranty
Corporation (PBGC) serves a critical function in the Nation's economy
and social safety net by insuring the pensions of 44 million current or
former workers covered under private sector defined benefit plans. PBGC
operates to protect the economic security of American workers and sits
at the intersection of numerous forces affecting American workers--
deregulation, globalization, trade policy, and the decline of the
manufacturing sector.
Among the USW's traditional core jurisdictions is the steel
industry. Between 1998 and 2003, the steel industry experienced a
crisis brought on by a rising tide of imports which flooded the market
and drove steel prices down to 20-year lows. The result was $11 billion
in net losses, 44 bankruptcies, 18 liquidations and the loss of 55,000
jobs.
During this period, the PBGC initiated terminations of the defined
benefit pension plans of 16 steel companies, involving over 250,000
participants and over $7.0 billion in unfunded guaranteed pension
benefits.
A distress or involuntary termination of a defined benefit pension
plan is extraordinarily disruptive for workers and retirees. While the
pension benefits of most retirees are unaffected, pensioners who
retired during the last 5 years prior to the termination or who were
forced out of their jobs by plant shutdowns or disabilities often
suffer substantial reductions in their pension benefits. Indeed,
according to a study by the PBGC of trusteed plans published in
September 2008, over 25,000 or 21 percent of participants in terminated
steel industry plans had their benefits reduced, with an average
cutback of 26 percent.
When a sponsoring employer is unable to fund the promised benefits
and an underfunded plan is terminated or abandoned, the PBGC takes over
the plan and pays benefits, subject to certain limits under the law.
Pursuant to existing law, the PBGC does not guarantee:
non-vested pension benefits;
basic monthly pension benefits in excess of the monthly
maximum guarantee level in effect at the time of plan termination;
early retirement supplements or ``bridge'' benefits that
are typically designed to provide a retiree with additional income
until he or she becomes eligible for Social Security;
severance or lump sum death benefits;
disability benefits when disability occurs after plan
termination; and
as a result of the Pension Protection Act of 2006,
benefits earned after the employer's date of bankruptcy filing or
benefits earned after a Plan's funding target falls below 60 percent.
Further, plan participants who have not qualified for a service or
event-based benefit as of the termination date (such as a 30-year or
shutdown pension) are forever unable to qualify, even if he or she
continues to work for the employer beyond the date of plan termination.
This is a harsh outcome for an employee who, in the example of a 30-
year benefit, falls just short of the mark at the time of plan
termination and is told that he or she can never qualify for the 30-
year pension that he or she expected.
Plan terminations and PBGC benefit cutbacks are even more painful
because they often affect employees who are, at the same time, losing
their jobs and/or retiree health care benefits. After working years in
difficult, and often dirty and dangerous jobs, affected workers rightly
feel shocked and angry by this convergence of events.
Unfortunately, it has been the USW's experience that workers often
do not learn the full extent of PBGC benefit cuts until years after the
plan is terminated and the PBGC assumes responsibility. When the PBGC
takes over a plan, it continues making benefit payments based upon an
initial calculation of the guarantee level. If the estimated benefit
exceeds the PBGC guarantee, the pension is reduced. However, the PBGC
continues paying this ``estimated benefit'' level until it completes
the final benefit determination.
According to the PBGC's own data, the average amount of time
required by the PBGC to complete final benefit determinations was 3.3
years in fiscal year 2008. In complicated cases, it is often much
longer. While the PBGC has responded commendably to the increase in its
workload caused by the large steel and airline terminations, the delay
in completing final benefit determinations is deeply unsettling for the
retirees involved.
One such example is the Republic Technologies International pension
plan. RTI employed USW members in Ohio, New York, Pennsylvania,
Illinois, and Indiana. The pension plan was relatively complex as it
featured a number of supplemental benefits and offset provisions. RTI
filed for bankruptcy in 2001 as a result of the financial crisis that
swept the American steel industry. On June 14, 2002, PBGC terminated
the RTI Plan. The USW therefore joined in an action in Federal court
against PBGC regarding the payment of shutdown benefits. The litigation
concluded in 2004, with the Court of Appeals for the Sixth Circuit
finding in PBGC's favor with respect to the shutdown benefit issue.
PBGC did not issue final benefit determinations until May 2008.
Consequently, for nearly 6 years, the RTI plan participants received
benefits from PBGC based upon estimated benefit determinations. It was
only after PBGC issued final benefit determination in May 2008 that
many participants learned that they had received benefit payments in
excess of the benefits guaranteed by PBGC, and that (1) their monthly
benefits would be reduced on a prospective basis to comply with the
plan's terms and the PBGC's limits, and (2) they owed large sums of
money to PBGC as a result of the overpayments they had received. Some
retirees owed PBGC a few thousand dollars, while many others owed
$60,000 or more. Similar stories are prevalent in the other steel
industry cases, though the period between the date of plan termination
and the issuance of final benefit determinations was not as great.
In order to prevent undue hardship, PBGC does not require
participants to pay back the overpayments all at once, nor does it
charge interest on the debts; instead, PBGC deducts 10 percent from the
participant's monthly benefit until the full amount is recouped. While
the PBGC's repayment policy is not unreasonable, for many retirees the
benefit cutback and overpayment notice of tens of thousands of dollars
causes great financial and emotional distress.
Stories such as these beg the question: what can be done to address
the problem? The source of the problem is not PBGC, but rather is the
legislative framework that governs single employer defined benefit
pension plans. Rather than promoting the maintenance of defined benefit
pension plans and elevating the interests of workers and retirees,
aspects of the current law undermine the vital role played by defined
benefit pensions in the U.S. retirement system.
In 2006, Congress responded to pension plan terminations in the
airline and steel industries and the growing PBGC deficit by passing
the Pension Protection Act (PPA). While the stated goal of the PPA's
supporters was to strengthen the retirement system and fortify plan
funding, it has, in the USW's experience, produced quite the opposite
result.
The limited time available does not allow me to describe the USW's
concerns regarding pension funding and the need for reform. We would
welcome the opportunity to express our views more fully at a later
date.
Nevertheless, there is also growing evidence that the PPA has
encouraged employers to freeze benefit accruals under existing single
employer defined benefit plans and has further accelerated the shift to
defined contribution pension plans. During the current economic crisis,
our Union has observed an increase in the number of employers (whether
inside or outside of bankruptcy) seeking to freeze or terminate their
defined benefit pension plans, often specifically citing the
accelerated funding obligations of PPA.
PPA has made pension funding more onerous, inflexible and volatile
by effectively requiring pension plans to be fully funded at all times,
a requirement that is based upon the erroneous assumption that all
funds can be withdrawn at any time. The consequences of these new
funding rules on employers during an economic downturn were predictable
as plummeting investment returns ratcheted up an employer's funding
obligation. But, in the shadow of the worst economic crisis since the
Great Depression, the PPA threatens to require employers to contribute
massive amounts to their defined benefit plans when they can afford it
the least and when credit and product markets have not yet recovered.
Without action, these funding obligations may cause additional
bankruptcies and distress terminations, which only will further burden
the PBGC and erode the retirement security of American workers.
It must be noted that The Worker, Retiree and Employer Recovery Act
of 2008 and IRS technical changes have provided some breathing room.
However, the relief was only temporary and additional relief for 2010
and 2011 is urgently needed.
For these reasons, in the interest of preserving the defined
benefit pension system and fulfilling employee and retiree
expectations, the USW urges Congress to provide immediate funding
relief to single employer defined benefit plans, including:
1. extending the 7-year period to amortize unfunded liabilities,
which will allow plans to pay off their funding shortfalls at a slower,
more reasonable rate;
2. allowing additional asset ``smoothing,'' which will reduce
shortfall payments for plans that experienced dramatic losses in the
stock market. Such a move recognizes that pension obligations are long-
term obligations best measured over time rather than as a single
snapshot;
3. delaying the PPA benefit limitations and ``at-risk'' accelerated
funding requirements for the duration of the relief period. The
limitation on benefit improvements disproportionately penalize Union-
represented hourly employees covered by flat dollar benefit formulas,
which require periodic adjustment to keep pace with earnings and
inflation, whereas most salaried employees enjoy earnings-based
formulas which increase automatically and are specifically excluded
from these restrictions;
4. repealing the PPA-mandated freeze on benefit accruals for plans
that are less than 60 percent funded. As stated before, these
provisions penalize workers who are responsible for neither their
employer's pension funding decisions nor the macro-
economic conditions that have increased pension underfunding; and
5. repealing PPA section 404, which calculates PBGC guarantees
based upon the date the plan sponsor filed for bankruptcy rather than
the date the plan is actually terminated. Again, this is another
example of current law penalizing workers for circumstances entirely
beyond their control.
Further, in the interest of fostering the important public policy
encouraging companies to maintain existing single employer defined
benefit pension plans, this relief should be provided only to plans
which have not frozen benefit accruals. Employers should not be
rewarded for actions which undermine worker and retirement security.
The need for pension funding relief is urgent because the effects
of the current economic crisis continue to place increasing pension
funding demands on industrial employers. These demands, ultimately,
impair the retirement security of workers and retirees throughout the
United States. On behalf of the USW, we encourage Congress to act
quickly and provide necessary and appropriate relief for the defined
benefit pension system.
Thank you again for the opportunity to appear before you today.
The Chairman. Thank you, Mr. Jury.
And now, Mr. Jones, please proceed.
STATEMENT OF RICHARD JONES, CHIEF ACTUARY, RETIREMENT
CONSULTING, HEWITT ASSOCIATES, LINCOLNSHIRE, IL
Mr. Jones. Chairman Harkin, Ranking Member Enzi, and
members of the committee, my name is Richard Jones, and I serve
as Chief Retirement Actuary at Hewitt Associates. Among other
things, Hewitt has expertise and leadership in the design,
financial management, and administration of pension plans for
mid- to large-sized employers.
We are grateful for the opportunity to get together with
you today to discuss how to best ensure American workers can
preserve retirement security through harsh economic times.
My testimony today really focuses on three things. First,
how the current pension funding requirements in this economic
environment are hurting American workers, as well as their
retirement security. Second, we would like to offer suggestions
for short-term solutions to the issues that are currently being
faced in pension funding. And third, we would like to offer a
few introductory thoughts on concepts for the future to make
sure that tomorrow's retirement plans can preserve retirement
security for Americans.
The issue at hand, as we have been discussing, is the
impact of the current economic crisis on pension funding. This
has greatly increased the pension funding obligations far in
excess of what plan sponsors were anticipating just a couple
short years ago. We see it producing less spending on job
creation. We see it producing less spending on capital
investments, and we see it furthering the risk of bankruptcy
for many organizations. We also see retirement benefit
cutbacks, as well as broader benefit cutbacks and pay cuts, and
all of these impacts are hurting retirement security for
American workers today.
To its credit, the Federal Government has already offered
some short-term relief that was referenced earlier to address
the current pension funding crisis and that was well received
and greatly appreciated by plan sponsors, but more is needed
and more is needed now to address the situations.
In terms of a short-term solution, we believe that further
temporary relief is necessary to ease the burden of the
accelerated pension funding requirements brought about by the
Pension Protection Act. When the Pension Protection Act was
passed, it was based on sound objectives, which is to
strengthen pension security and protect participants, but
Senator Enzi, you acknowledged that nobody could foresee
necessarily the steep downturn in the economy that was right
around the corner and the impact that that could have on
pension funding. In my 22 years as a practicing pension
actuary, I have never seen a more challenging pension financing
environment for plan sponsors.
So recognizing the unique nature of pension financing in
this particular environment, on a short-term basis, we would
like to suggest two things, and really they are pretty simple.
No. 1 is expanding the asset-smoothing corridor that is allowed
for pension funding calculations from the 90 to 110 percent
mark to something wider and, secondarily, allowing the
amortization of 2008 pension asset losses over a period of time
significantly longer than the 7 years currently called for by
the Pension Protection Act.
We believe the need for this is evidenced by the many
organizations that are struggling to meet their pension funding
obligations but yet want to and need to continue to provide
secure pensions for their workers.
This is particularly evident in bankruptcy situations, and
in my experience, bankruptcy contributes to participants losing
twice.
They lose the first time when the PBGC limits are imposed,
as our other panelists have described in great detail.
They lose secondarily because the replacement plans that
are put in place when organizations exit bankruptcy, or if
somebody finds another job, those are typically less generous
than the plans that they had pre-bankruptcy, and they tend to
not be of a defined benefit nature. They tend to be of a
defined contribution nature. And that is the second way that
retirement security is hurt during the bankruptcy process.
Hewitt has also been spending a lot of time thinking about
better long-term designs for pension benefits so that we can
learn from the lessons of this recession, as well as previous
downturns in the economy. We believe those designs need to be
flexible. They need to provide better risk management
characteristics and reduce volatility for both employees and
plan sponsors, and most importantly, they need to be secure for
participants.
More information on our concepts for the future are
included in my written testimony that was previously submitted.
Thank you very much for the chance to join you today, and I
look forward to fielding any questions you may have.
[The prepared statement of Mr. Jones follows:]
Prepared Statement of Richard Jones
Summary
THE PROBLEM
The last 15 years have brought monumental changes to the pension
landscape. Retirement plan designs and mix have shifted in response to
economic and regulatory changes and employee needs. In this economic
turmoil, many companies are feeling financially forced to take actions
today that will create a retirement income gap that will be very
difficult for many American workers to fill unless policymakers take
steps to assist with pension funding needs aggravated by the current
recession. In the United States, approximately 25 percent of the
Fortune 500 plans are frozen and some studies show that this could
increase to 60-70 percent by 2012. While the Federal Government has
taken significant steps to lessen the near-term cash contribution
requirements associated with the current recessionary environment, many
companies still need greater short-term relief in response to the
recession. Meeting the current pension funding requirements is forcing
many employers to curtail their investment in new jobs, cut back on
capital expenditures and implement further retirement plan cutbacks,
which in turn is slowing the economic recovery. The time to fix this
problem is now.
The need for this government relief is evidenced by the many
companies struggling to meet their obligations. It is particularly
significant in cases that we are here to discuss today--bankruptcy. The
essential retirement income problem with company reorganizations or
Chapter 11 bankruptcies is that once the defined benefit plan is frozen
and terminated, a participant's future retirement benefits are
significantly reduced. We need funding relief as a solution to help
maintain ongoing defined benefits, provide a level of protection for
mid-career workers, preserve jobs and avoid slowing down the economic
recovery.
SHORT-TERM FIXES
We recommend action to provide temporary relief to ease the burden
of the accelerated funding requirements of the Pension Protection Act
of 2006 (PPA). The original intent of PPA--to ensure sound funding for
defined benefit plans--is sound, but when it was enacted, no one
foresaw the deep recession ahead. Recognizing the unique nature of
those events in financial history, we recommend changes to provide
great flexibility for defined benefit pension plan funding:
We suggest either temporarily or permanently widening the
asset ``smoothing'' corridor for pension funding calculations from 90
percent to 110 percent of market value, to 80 percent to 120 percent of
market value, and
Allowing amortization of 2008 asset losses over a period
of time significantly longer than the 7 years currently required by
PPA.
LONG-TERM SOLUTION
We must learn from the lessons of this recession and create a new,
modern, 21st Century pension program that guards against these
problems. Hewitt has called for the reinvention of pension plans to
create risk sharing mechanisms with third parties. Hewitt's conceptual
models for the future include:
Participant accounts managed on a plan-wide basis to
ensure prudent investment approaches;
Life cycle-based account earnings that put in place
appropriate risk/return characteristics;
Flexibility in employer, employee, and third party
funding;
Flexibility in sponsorship; and
Annuity options during retirement years.
______
Chairman Harkin, Ranking Member Enzi, and members of the committee,
I am extremely grateful for the opportunity to appear before you today
to provide testimony to the committee as it examines how best to ensure
that American workers can preserve their retirement security in harsh
economic times. Pension funding is one of the most critical challenges
currently facing employers, and the eventual solutions will have a
significant impact on the continued prosperity of millions of American
workers.
My name is Richard Jones and I serve as the Chief Actuary for
Hewitt's Retirement Consulting Practice. Hewitt Associates is a global
human resources outsourcing and consulting company providing services
to major employers in more than 30 countries. We employ 23,000
associates worldwide. Headquartered in Lincolnshire, IL, we serve more
than 2,000 U.S. employers from offices in 18 States, including many of
the States represented by the members of this distinguished committee.
As a global leader in integrated retirement solutions, Hewitt
Associates has extensive experience supporting clients in pension plan
design, finance, and administration for mid- to large-sized employers.
We advise more than 2,500 clients on more than 3,500 pension plans and
administer defined benefit plans for more than 385 clients. In total,
our clients represent more than 10 million plan participants.
To avoid some of the perils that the committee is addressing today,
my testimony will focus on the public policy need for greater
flexibility in defined benefit financing and management. Our experience
and data show that defined benefit plans, coupled with defined
contribution plans, have generally been effective at producing reliable
retirement security for covered Americans. However, many defined
benefit plans are now in jeopardy due to a struggling economy and to
regulatory changes that limit the flexibility of how and when companies
fund their plans. The imminent need is for temporary relief to help
employers solve the funding problems exacerbated by the recession.
Longer term, we believe that future pension plans will have to be
designed differently so as to incorporate third-party risk sharing,
which would give participants more security while allowing employers
and workers to assume a manageable amount of risk.
The need for this risk-sharing model is evidenced by the recent
examples of employees losing significant portions of their pension
savings after their employer had to file for bankruptcy. Future models
must guard against this possibility on the front end, because we cannot
afford limitless bankruptcy protection. The future of retirement income
in corporate America requires employers to offer both defined benefit
and defined contribution plans. To do this, we need to reinvent defined
benefit plans so that they are more flexible and allow both companies
and employees to better manage and diversify risks.
I. PERILS IN THE CURRENT ENVIRONMENT
The last 15 years have brought monumental changes to the pension
landscape. Retirement plan designs and mix have shifted in response to
economic and regulatory changes and to employee needs. As the risks to
employers have grown, companies have increasingly chosen to close or
freeze their plans. Unless additional support is provided to assist
with pension funding needs aggravated by the current recession, this
trend is expected to continue. In the United States, approximately 25
percent of the Fortune 500 plans are frozen, and some studies show that
this could increase to 60 percent or 70 percent by 2012.\1\ We believe
the ``survival'' actions being taken by companies today--pension plan
freezes and cutbacks, and similar actions in 401(k) and other defined
contribution plans--are contributing to a retirement savings gap that
is already very difficult for many American workers to replace. But
policymakers and employers can take steps now to improve the outlook
for retirement plans as we await a full-blown economic recovery.
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\1\ McKinsey & Company, ``The Coming Shakeout in the Defined
Benefit Marke,'' (2007).
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Retirement Plan Design
As pension issues have become more complex, employers have
increasingly shifted from defined benefit pension plans to defined
contribution plans. This move partly reflects workforce needs and
preferences, as well as the huge financial exposure created by defined
benefit plans. But our experience also tells us that another key driver
has been increasing regulatory requirements and the recognition of the
financial exposure created by defined benefit pension plans. Recent
regulatory changes, including more stringent FASB/SEC requirements, as
well as adoption of the Pension Protection Act of 2006 (PPA), have
advanced the ``mark-to-market'' requirements of retirement plan
financing and unfortunately have intensified the shift away from
defined benefit pensions.
Exhibit 1 illustrates the movement away from defined benefit
pensions among large U.S. employers in the last 20 years.\2\ Whereas
defined benefit plans were the predominant form of retirement plans in
1990, the tables have now turned, with defined contribution plans
becoming the prevailing plan. This trend will continue unless steps are
taken to dampen the volatility or otherwise soften the blow of defined
benefit financing.
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\2\ Hewitt Associates, SpecSummaryTM database (2009).
With more Americans now relying on defined contribution plans for
all or part of their retirement income, these plans must now deliver
more. Automatic enrollment and automatic escalation practices and
policies in 401(k) plans are helping increase both participation and
the rate of savings. Unfortunately, approximately 7 percent of Fortune
500 organizations suspended their 401(k) matches for 2009 in response
to the dire economic conditions. We believe around half of these
organizations will reinstate the matching contributions in 2010, but
this practice is troubling because it can reduce the cyclical benefits
to employees of dollar cost averaging in investments.
Financial Requirements
The funded status of the Nation's pension funds has varied
dramatically over the past 20 years. Significant swings in interest
rates, coupled with two challenging equity environments in the last
decade, have created this volatility. Exhibit 2 illustrates the average
pension accounting funded status among the S&P 500--as measured by the
FAS 87 projected benefit obligation calculations used to drive income
statement and balance sheet calculations.\3\ This data documents the
fact that defined benefit pension plans have historically been
reasonably well funded. However, as shown below, the two equity market
crises of this decade have battered pension plan funded status.
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\3\ Hewitt Associates, ``Study Findings: Benefit Plan Disclosure
Under FASB Statements No. 87 and 106,'' (2009).
Congress, the IRS, and the Treasury Department have taken steps to
lessen the near-term cash contribution requirements associated with the
current recessionary environment, ranging from passage of the Worker,
Retiree, and Employer Recovery Act of 2008 (WRERA) to more recent
guidance from the IRS and Treasury regarding flexibility when selecting
discount rates and asset smoothing techniques. These steps have been
widely embraced and have been beneficial to the funding by defined
benefit plan sponsors, though additional funding relief is badly needed
on a temporary basis.
Despite the significance of some of these measures, many companies
need greater short-term relief in response to the recession. Meeting
the current pension funding requirements is forcing many employers to
curtail their investment in new jobs, cut back on capital expenditures
(also typically tied to jobs), and implement further retirement plan
cutbacks. In the most extreme cases, the near-term requirements are
adding to financial distress and could contribute to potential
bankruptcy.
Another financial option and strategy for pensions, partly enabled
by methodology employed in the PPA, includes ``liability-driven
investing'' (often referred to as ``LDI''). Many pension plan sponsors
were anticipating adoption of LDI investment techniques to preserve
pension-funded status and protect funded status levels. However, the
swift onset of the market downturns in 2008 and 2009 required many
organizations to put those plans on ``hold,'' pending recovery in the
financial markets. Full adoption of LDI techniques following the market
downturns would be the equivalent of ``selling low and buying high.''
Many pension plan sponsors are planning to adopt dynamic investment
approaches to help secure funded status gains as the market improves. A
continued orderly transition back to financial health for America's
pension plans will enable this.
Regulatory Requirements
Many companies, though fully supportive of sound financing of
defined benefit pension plans, are becoming increasingly concerned with
the staggering number of requirements for defined benefit pension plan
sponsors following the passage of the PPA. The original intent of the
act--to ensure funding for defined benefit plans--is sound. But when
the legislation was enacted, no one foresaw the deep recession ahead.
Unfortunately, significant flexibility in how plans are managed has
been lost, and the stringent requirements are commanding the attention
of chief financial officers, treasurers, and other business leaders. In
particular, the loss of flexibility in funding/credit balances and
associated funded status reporting requirements have become
challenging.
Although management oversight of pension issues is important and
appropriate, understanding and complying with PPA requirements has
become so onerous that it is taking the attention of business leaders
when they need to place full focus on managing their core businesses
during this critical economic period. Now is the time to create more
flexibility within the system, without undermining the PPA and the
long-term strength of defined benefit plan funding, to allow as many
employers as possible to continue offering retirement plans through the
recession and to create a bridge to next-generation retirement plans.
II. IMPACT OF THE CURRENT ENVIRONMENT ON PARTICIPANTS
The current retirement income plan environment as it translates to
participant benefit levels is well documented in Hewitt's 2008 study
titled ``Total Retirement Income at Large Companies: The Real Deal.''
This study looks at anticipated retirement income needs and sources for
nearly 2 million current employees at 72 large U.S. employers. The
sources of income include projected defined benefit pension, defined
contribution, and social security benefits. The results of our analysis
suggest that many American workers--particularly those who are not
contributing to an employer-sponsored plan--are not well positioned to
reproduce pre-retirement living standards during their retirement
years. And these conclusions were reached even before factoring in the
effect of the economic crises of 2008 and 2009.
Exhibit 3 summarizes the high-level results of our analysis. The
study found that employees contributing to 401(k) and other employer-
sponsored plans are projected to produce, on average, a respectable
95.9 percent income replacement at retirement age 65, while those not
currently contributing will produce only 53.9 percent.
Pension Plan Availability
Retirement income challenges are further exacerbated when defined
benefit pension benefits are not available. The average projected age
65 income replacement for those employees eligible for defined benefit
pension benefits is 105.9 percent (assuming they are contributing to
401(k) and other employer-sponsored programs). However, that figure
drops by 28 percentage points, to 77.6 percent, for employees who are
only eligible for defined contribution plan benefits. Exhibit 4 depicts
this drop along with the associated retirement needs.
2008 and 2009 Economic Crisis
The findings summarized above are calculated based on participants'
account balances before the significant economic downturn experienced
in 2008 and early 2009. A Hewitt study this year estimated the impact
of recent market experience on anticipated retirement income
replacement. Those calculations suggest that retirees will experience a
further reduction in retirement income replacement expectations of
approximately 4 percent. An economic recovery and better employee
savings behaviors could reverse some of this downward pressure for
properly invested participants. However, the potential reductions
resulting from both movements away from defined benefit pensions and
the current economic crisis are significant, and it is unlikely that,
in the short term, most employees will be able to fully recover what
they've lost.
III. IMPACT OF PENSIONS ON FINANCIALLY DISTRESSED AND BANKRUPT
ORGANIZATIONS--AND ON THEIR EMPLOYEES
When companies are in dire financial straits, the defined benefit
plan is a common area to look to for cost cutting. Frequently, the
defined benefit plan is frozen--never to return--and lower-valued
benefits are typically provided in its place. In a company
reorganization or Chapter 11 bankruptcy, benefits are protected by the
PBGC, but only to a point.
While some workers and retirees see little or no cutback in
benefits upon plan freeze and bankruptcy, others, depending on the
plan, can see significant reductions. And, while benefits for many
existing retirees may not decrease, retirees close to retirement age
may suffer the greatest loss. These mid- to late-career workers need to
adjust their retirement savings to make up for the lost retirement
benefits in a very short period of time. This group of workers is
vulnerable not only with respect to their diminished retirement
benefits, but also in their ability to locate a higher-paying job
which, of course, hurts their ability to save for retirement. In
addition, these workers have less ability to take long-term risks with
any savings or 401(k) plans, which limits their upside potential. A
solution is needed to help maintain ongoing defined benefits to provide
a level of protection needed for this group.
This section discusses how financial distress and bankruptcy can
affect benefit value through plan design changes, organization change
and restructurings, and distress termination and PBGC takeover of the
plan.
Plan Design Changes
Despite reports that the recession has ``ended,'' we continue to
meet with employers on a daily basis who understandably ask for
additional ways to cut costs in these tough economic times. In many
cases, those efforts are necessary to create resources to fund the
current pension obligations. Assets have been reduced by the recent
financial turmoil, and the PPA regulations mean that funding
obligations are now due much sooner. In some cases, these discussions
lead to planning for the eventual termination of the pension plan to
avoid further volatility. And even plan sponsors who wish to maintain
an ongoing defined benefit plan, despite financial challenges, are
required by the PPA to freeze participant accruals when a plan's
funding deteriorates.
Organizations continuing to sponsor defined benefit pension plans
provide retirement income benefit value equal to 7 percent to 10
percent of pay per year, while those providing defined contribution
benefits provide maximum benefit value equal to 6.8 percent of pay on
average.\4\ Exhibit 5 illustrates the various components of this
benefit value.
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\4\ Hewitt Associates, SpecSummaryTM database (2009).
This shift from higher benefit value, including defined benefit
pension plans, to lower-value defined contribution plans, is
accompanied by the shift in the relative safety of the programs to
participants. Under defined contribution plans, participants are
responsible for managing both investment and longevity risks, although
employers recognize that most participants need increased education and
advice to give them the knowledge and experience to do this
effectively.
Organizational Change and Restructurings
We also see evidence of organizations moving away from defined
benefit plan sponsorship in company reorganizations. In financially
troubled situations where an asset sale occurs, the sale rarely
includes the pension plan. This has been the case for dozens of pension
plans in 2008 and 2009 and illustrates why it is vital that future
defined benefit plans diversify risk. Risk sharing with third parties
would have helped ensure corporate willingness to continue pension plan
sponsorship.
``Distress'' Pension Termination and Pension Benefit Guaranty
Corporation (PBGC) Takeover
Participant losses are not limited to employer actions before
bankruptcy. Upon bankruptcy and PBGC takeover, participants stand to
lose benefit value. Any benefits an employee earned in excess of the
PBGC maximum guarantee are generally lost. The current PBGC maximum
guarantee is $4,500 per month in 2009--generally affecting longer-
service and higher-paid workers. Also, in many cases, pension plans
provide subsidies for employees retiring early. Upon a PBGC takeover,
employees not already meeting the requirements for a subsidy can never
grow into it in the future. Based on PBGC rules, this includes any
participants who actually recently met the eligibility for a subsidy.
These participants may have anticipated this subsidy when making other
retirement plans and can suffer a significant reduction in expected
retirement pay. They may have, in fact, already retired and begun to
receive benefits, having just met the eligibility. And, while perhaps
less significant, any employees who have not met minimum vesting
standards, such as 5 years of service, will lose their entire benefit.
Hewitt's conceptual models for the future would address this
shortfall. They include fully funded accounts, which leverage
professional asset management as well as pooling for risks during
retirement years--greatly mitigating the potential for loss.
IV. REINVENTING RETIREMENT SECURITY IN AMERICA
Providing adequate retirement income for working Americans presents
major challenges for us as a nation. As the baby boomers age, our
failures to prepare adequately for retirement will become increasingly
apparent. Many Americans already find that their retirement savings are
not sufficient to reproduce preretirement living standards. This
situation has worsened with the current recession and resulting
employer and employee actions regarding pensions and other retirement
plans.
We don't believe that Congress should expect employers will return
to defined benefit pension plans in their current form, although there
may be continued interest in alternative plan designs if Congress can
provide additional flexibility and supportive underlying policies.
Otherwise, the risks and exposure to corporate balance sheets is just
too large for many employers to begin ``jumping back in the ring'' in
any meaningful way.
At the same time, defined contribution and 401(k) plans cannot be
the sole long-term vehicle for individual and employer-provided
retirement savings. In other testimony, Hewitt has suggested steps that
might be taken to strengthen defined contribution plans in the
future.\5\
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\5\ Alison Borland. Hearing before the ERISA Advisory Council to
the Department of Labor. ``Approaches for Retirement Security in the
U.S.'' (Date: September 17, 2009)
Alison Borland. U.S. Congress. Hearing of the House Subcommittee on
Health, Employment, Labor and Pensions. ``401(k) Fair Disclosure for
Retirement Security Act of 2009.'' (Date: April 22, 2009)
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We believe the future of retirement income should include both
defined benefit and defined contribution plans. This necessitates the
reinvention of defined benefit plans structured to better manage risks.
Effective third-party and participant risk-sharing mechanisms need to
be better developed. Employees and retirees need to understand their
risks, and they also need to understand when it is appropriate to
involve others in the management of those risks. Investment and
longevity risks are too challenging for retirees with little or no
marginal resources to manage. Said differently, retirees with only
enough savings to ``get by'' shouldn't be taking on the full risks of
managing their savings over their life expectancies or being overly
cautious for fear of running out of assets.
Hewitt has compiled a number of potential models that incorporate
increased flexibility and risk sharing in pension plans that could
better serve employers and retirees in the future. These models will
create increased security on the front end, which would better
inoculate employees from the risks associated with bankruptcies and
reorganizations.
Our conceptual models incorporate:
Participant accounts managed on a plan-wide basis to
ensure prudent investment approaches and professional asset management
and techniques;
``Life cycle''-based account earnings--so the appropriate
risk/return characteristics are in place during all phases of
employment and retirement;
Flexibility in employer and employee funding--allowing
different organizations and industries to participate at the
appropriate level, fostering global competitiveness;
Flexibility in plan sponsorship--allowing different levels
of risk taking at the employer level, or alternatively shifting
sponsorship to third-party organizations; and
Annuity requirements and options--to ensure adequate long-
term investment and longevity protection for workers, retirees, and
their families.
V. HOW CONGRESS CAN HELP
Throughout this testimony, we have noted situations where
participants are in peril because of the loss of retirement income
benefits due to both the recession and the changes in employer-
sponsored retirement plans. In the short term, we encourage Congress to
take actions that preserve, as much as possible, the funding and other
flexibility necessary for employers to provide ongoing and meaningful
pension benefits in the current environment. This will lead to
continued and ongoing benefits for as many participants as possible,
and will help ensure that we exit the recession without digging an even
deeper hole for the current and future generations' retirement income
prospects.
Specifically, we recommend urgent action to provide temporary
relief at least to ease the burden of the accelerated funding
requirements of the PPA. In enacting the PPA, no one foresaw the
occurrence of this recession, which has been described by many
commentators as the worst since the Great Depression. For that reason,
the following changes are needed with respect to defined benefit
pension plan funding:
Widening--either temporarily or permanently--the asset
``smoothing'' corridor for pension funding calculations from 90 percent
to 110 percent of market value, to 80 percent to 120 percent of market
value (80 percent to 120 percent was allowed under pre-PPA rules); and
Allowing amortization of 2008 asset losses over a period
of time significantly longer than 7 years, recognizing the unique
nature of those events in financial history.
These provisions have been recommended and proposed by Hewitt and
other groups in the past 12 months and are necessary to create
sufficient smoothing in pension funding requirements in light of
current economic times.
We need to exit the current recession with a workforce prepared for
retirement and the resources necessary to continue fueling the economy.
As a nation, we cannot afford to plan for unlimited protections in
bankruptcy. Structures must be put in place that will allow companies
to thrive in the post-recession environment, rather than ``hunkering
down'' to prevent losses in bankruptcy and other situations.
This plan sponsor flexibility is also necessary to bridge to the
next generation of retirement plan design and management in the United
States. Congress needs to work with all stakeholders to develop this
next generation of tax-favored retirement income structures to support
effective third-party and participant risk-sharing mechanisms.
The Chairman. Thank you very much, Mr. Jones, and thank you
all for your excellent testimony.
We will begin our first round of questioning for 5 minutes
each, and I will start. Again, I will start with you, Mr.
Jones.
You suggest that we should expand the asset-smoothing from
90 to 110, and you did not say it verbally, but in your written
testimony, you say 80 to 120 percent of market value. Can you
just give me a little bit of the background? Why was 90 to 110
picked in the first place?
Mr. Jones. You know, I am not familiar with that. I know
that that was written into the Pension Protection Act, which as
I understand, the intent of that was to get more toward a mark-
to-market mentality of pension financing so there is more of a
real-time measure of how well the plan is funded at any
particular point in time. And narrowing that band--80 to 120
was allowed under pre-
Pension Protection Act law. You could smooth your assets within
that 80 to 120 band. The Pension Protection Act narrowed that
to 90 to 110, and I believe that was all of the intent of
getting closer to the mark-to-market.
The Chairman. Inform us. What would be the dangers, the
downside of expanding that to 80 to 120?
Mr. Jones. The danger is if you have got 80 cents on the
dollar of the assets, you are measuring costs based on the
dollar, but you have really got 80 cents in the trust. So to
the extent that you are under-contributing in the lean years,
on the flip side of that, during the strong years, you may have
$1.20 in the bank, but you are measuring the costs and
producing further contribution requirements into the trust,
assuming that there is only $1 in it.
It is intended to balance itself out over time, and if you
look at pension-funded ratios historically, they have tended to
be fairly strong because the smoothing mechanisms have allowed
that strength to continue during good times and bad with the
smoothing techniques.
The Chairman. Thank you for that.
Now, last you say in your written statement that the asset
amortization should be significantly longer than 7 years. You
do not say how long. Do you believe in the 2 plus 7 concept
that has been floated out there, or are you in favor of just a
straight line, giving it more than 7 years?
Mr. Jones. The 2 plus 7 certainly is a step in the right
direction where it would be interest only for 2 years and then
amortization for 7 years. Fifteen years has also been floated
in proposals, and I think that is also a rational approach to
handling those 2008 losses.
The Chairman. Ms. Bovbjerg, I want to ask you again about
the 3 years you said it takes to calculate final benefits and
the problems that engenders. You said sometimes it takes even
longer than 3 years, up to 9 years. Is there any way that the
process for calculating their final pensions could be
streamlined or sped up some way so that retirees would not have
to make these big paybacks? They are just a little bit
uncertain. They may have gone ahead and set up their retirement
accounts and bought another place to live or whatever, and then
all of a sudden, they find they cannot afford whatever they
have set up.
Ms. Bovbjerg. Absolutely. And once you are already
retired--it, of course, depends on your age, but you may not be
in a position where you could go out and adjust to a much lower
benefit by getting another job. If you have seen the press
lately, it can be very hard for an older worker to find a new
job.
We think that there are ways to make this process a little
more streamlined, more friendly to participants. PBGC does a
good job initially going out and talking to participants in
companies where they are on the verge of bankruptcy. PBGC is
about to take the plan. We talked to a number of workers who
gave them very high marks for the things they do initially.
But they need to do more to focus particularly on the
participants in very complex plans where it is likely that some
of the guaranteed benefits will be lower than what people were
expecting so that they can get those estimated benefits to be
more accurate, they can get final benefit determinations to
people more quickly. And they need to talk to people while they
are doing this so that people understand what is going on.
But the benefits are set in law. There is not too much you
can do to change that unless you wanted to change the
guarantees in the law.
The Chairman. I have 12 seconds to ask Mr. Jury a question.
Do you believe funding relief should come with strings that
require companies to keep their plans for some period of time
or maybe limit executive compensation?
Mr. Jury. Yes, Senator, particularly as it relates to
funding relief that is tied to employers maintaining their
plans. We do not believe that employers should receive a
benefit for having frozen plans and thus receive the funding
benefit relief.
We have not advocated at this point tying it to executive
compensation, but as you know, we at the Steelworkers and
within the labor movement have watched executive compensation
closely on many levels and many issues.
The Chairman. Thank you.
I would just state that I had supported the Pension
Protection Act in its final version as it went through. I
happen to be one who believes strongly in the defined benefit
pension program, and you state that basically has contributed
to making the shift from defined benefit to defined
contribution.
I recently read a book within the last year called The
Great Risk Shift and how more and more risk is being shifted to
individuals. And individuals just, obviously, cannot cope with
that kind of risk during their lifetime. We need to spread it
more broadly.
I am dismayed to find now that after 3 years, that the bill
we passed actually has propelled us more toward the defined
contribution plan rather than defined benefit plan. Yes, there
is my book. And I am hopeful that we can find a way to start
returning back to more defined benefit plans. But that is just
my view. I am not asking a question on that.
Senator Enzi.
Senator Enzi. Thank you, Mr. Chairman.
I will begin with Ms. Bovbjerg with GAO. This situation of
Delphi's pension plan poses some unique questions for the
future of our Nation's defined benefit system. Is this not the
first time that pension plans have been taken over by the PBGC
where third parties will top up the workers and retirees'
pensions, as if the pension plan had never gone to the PBGC?
In the instance before us, it is possible that if GM
decides to step in again, it will most certainly be using
Federal Government bailout dollars for the top-up. What kind of
precedent is this setting for future pension plans that are
taken over by the PBGC, and what does it say about the use of
taxpayer dollars for the top-up?
Ms. Bovbjerg. I hope you will be relieved to hear that we
have work underway on auto industry pensions, the PBGC, and the
auto bailout TARP because we were very interested in this
question of the role of the Federal Government as both majority
shareholder in GM and insurer of the defined benefit pensions.
I was very interested in the New York Times article
recently that said that the Delphi top-up was being paid by GM
plan assets, which I had not heard before.
This raises really good questions that we hope we will have
an answer for you on in the winter.
I did want to say that LTV Steel may have topped up
benefits back in the 1990s when their plans went out, but they
did have to take their plans back after they topped up the
benefits. There were two pension plan bankruptcies with that
company.
Senator Enzi. OK, thank you.
The drafters of ERISA back in the 1970s were careful not to
have the PBGC give too generous of benefits in plans taken over
by the PBGC, and the rationale was that too generous of
benefits given, the companies would make promises way beyond
the means and then they would dump their plans on the PBGC. And
since that time and especially in light of the huge deficit at
PBGC, Congress has not changed that philosophy.
By having companies make these top-ups to pension plans, is
it not trying to circumvent what the 1970s' Congress was trying
to prevent happening in the first place?
Ms. Bovbjerg. Well, I think you raise this fundamental
point. Why is someone not paying for these benefits? If an
employer is promising benefits to their workers, they should be
funding those benefits.
Now, I appreciate the difficulty of trying to achieve the
balance of how and when those benefits are funded, particularly
in an economic downturn, that balance is important. You do not
want to have a situation where an employer, in order to make
their pension contribution, has to go into bankruptcy or has to
lay off employees. No one wants that.
On the other hand, employers who do not fund their benefits
and their plans go to PBGC, you have the kind of situation that
we talked about with the steel workers, and we have talked
about with Delphi, where people are not able to get their full
benefit, and it is because the benefits are not funded.
Senator Enzi. And our attempt is to make sure that the
companies are not gaming the system at the same time.
Mr. Gump, I want to thank you for your very compelling
testimony today. I, too, asked the Department of the Treasury
for information concerning the Delphi pension arrangement.
However, other than a promise to get back to my staff, I have
not received any information to date.
Do you believe that if the negotiations between the
Administration--GM and Delphi--had been more transparent, then
the Delphi salaried retirees would have had a chance to comment
on that situation?
Mr. Gump. We would have at least had a chance to comment on
the situation, and that is a part of the problem here, that
PBGC followed a summary termination process and totally
excluded all of the other beneficiaries. That process, as I
understand it--and I am no ERISA lawyer or anything--is a
process that was only supposed to be used in small pension
plans, and yet, this is one of the largest that it has ever had
to take over and that process was followed. In fact, it was
done--I believe it was on a Sunday--and none of us knew about
it. Essentially it was done in secret. So yes, if it had been
required to have been more open, we would have had a better
opportunity, I think, to participate.
Senator Enzi. We will see if we can make that happen.
Mr. Jones, at the end of last year, the Federal Government
actuaries told us that companies can wait to make pension
funding benefit decisions as late as the third quarter of the
calendar year. At the end of 2008, when we passed the Worker,
Retiree and Employer Recovery Act, the Federal Government
actuaries advocated that we could have waited until September
of this year to act.
However, many companies we have talked with state that
yearly spending decisions, including pension funding payments,
need to be decided at the end of the year. I am afraid that if
we listened to the Federal Government actuaries' guidance this
year, we might be told to wait until September of next year.
Could you give us insight into how companies' spending
decisions are made? Should we wait until September of next year
to act?
Mr. Jones. No, I do not think you should wait until
September of next year to act. That is the deadline for when
cash contributions need to be contributed, and organizations
are complex and they obviously need to make decisions much
sooner. No, I would not wait.
Senator Enzi. Thank you.
My time has expired. I do have questions that I hope you
will allow me to submit in writing and get an answer to because
it is critical to this debate. Thank you. Thank you, Mr.
Chairman.
The Chairman. Thank you, Senator Enzi.
Senator Mikulski.
Statement of Senator Mikulski
Senator Mikulski. Thank you very much, Mr. Chairman. I ask
unanimous consent that my opening statement be included in the
record.
The Chairman. Certainly.
[The prepared statement of Senator Mikulski follows:]
Prepared Statement of Senator Mikulski
I thank Senator Harkin for holding this hearing today.
While we're on the verge of an historic victory to improve
health benefits, we also need to stand sentry for worker's
retirement benefits. The financial crisis may have started on
Wall Street, but this recession certainly has hurt everyone,
especially workers and retirees who assumed that if they worked
hard and played by the rules, they could retire with dignity
and security.
It has also hurt companies and employers--that have been
pillars of their community--that take pride in how they treated
their employees. Today they are struggling to keep benefits in
place and keep the lights on. The moral of the story is
everyone is facing a challenge. Employers are challenged to
fulfill their pension responsibilities and retirees and workers
are challenged to find a way to retire securely.
Congress has poured money into Wall Street so it is not
surprising that it's only on Wall Street that we see recovery
taking place. But we should be focusing resources where they
are needed: on workers who are the backbone of our economy, on
the good guy employers trying to do the right thing, and on
taxpayers who are responsible if something goes wrong. That's
what I hope we can talk about today.
I have a few simple principles for pension issues. The
first is that promises made must be promises kept. But we all
know that isn't always easy. So we in Congress must work to
help ``good guy'' businesses who still offer pensions to their
employees. We know that these companies are competing in a
global economy where offering a pension is voluntary, so we
need to work with these companies.
We also need to do no harm. My top priority is jobs, jobs,
jobs. We need to do everything we can to create and save them.
I won't support pension legislation unless it does that. We
need any relief to be targeted, timely and temporary.
Comprehensive reform passed in 2005 hasn't even taken full
effect. The principles of that reform were sound and we
shouldn't undermine them.
As our response focuses on the temporary shock to our
economy, we need to make sure we don't create permanent
consequences. We also need to be bipartisan. This committee
doesn't work on pensions to score political points. We do so
because we all have citizens in our States who need us to fight
for the retirement benefits they have earned. We have been
bipartisan before and I hope that is how we proceed now. And
most importantly, we need to act on behalf of workers and
retirees, making sure what we do helps them and doesn't help
fund golden parachutes or stock buy-backs and dividends.
We're focusing not only on what we can do to keep pensions
alive, but also on what to do about those that have already
ended. Senator Brown has his constituents here because their
pensions are being slashed as PBGC takes them over. I know all
too well about this problem. I worked with his predecessor
Senator DeWine to try to address it.
Like Ohio, my State used to have lots of manufacturing jobs
too. They had good pay and good benefits--like a real pension
plan. And like the Delphi employees here today, Bethlehem Steel
employees in my State had their pensions taken over by PBGC.
When Bethlehem Steel went into bankruptcy, it broke our
hearts. They were our neighbors. They worked all of their lives
for their pensions in hot, dirty and often dangerous
circumstances. Their hard-earned pensions went to PBGC. But
when people started to get their benefits, PBGC made a math
mistake. Workers who were forced to take pensions below what
they had earned were then told that PBGC had made an
overpayment and that they had to pay it back.
Well, I went to bat because I didn't want my constituents
to pay for a mistake PBGC made. But we couldn't change what had
already happened. Workers had to pay back part of the pensions
they had earned. It was a very serious hardship.
Dealing with PBGC at the time was really one royal pain.
And if I, as a Senator, was running into bureaucratic rigidity,
then I can only imagine how hard it was for these retirees. I
know we can't un-ring that bell, but I've continued to ring the
alarm that we need a better PBGC. That's something I've worked
on for a long time--a process that is predictable and timely
and respectful; a process that is an investment attitude that
is humble and prudent.
But no matter how much we improve the PBGC, Congress needs
to try and prevent what happened at Bethlehem Steel and is
happening at Delphi from happening in the first place. Everyone
is talking about economic recovery, but we're here today
because any recovery that is taking place is only happening in
the financial pages--not the real world.
I am outraged with these TARP twerps paying themselves
billion dollar bonuses at the same time that retirees are
having to pay back the pensions they earned to PBGC. And at the
same time that upstanding employers can't get the credit they
need and have to scale back benefits or lay-off workers because
Wall Street masters of the universe took us into a black hole.
I will make sure that any legislation helps the people that
deserve help. Not those who we've already helped and don't
appreciate it.
I do have flashing yellow lights about relaxing pensions
funding rules. It's led to trouble before. PBGC has deficits
because companies don't pay enough to their pensions when they
are healthy and can't pay enough when the PBGC has to assume
the plan. For more than a year, companies have said they need
taxpayers to sacrifice so they can stay afloat.
I have questions about funding relief. How do we know if
there is a need? If there is a need, how do we know how much
relief to grant? If there is a need, can we meet it without
bailing out bad decisions? Can we make sure that only the
companies that need the help take it? Can we reward those good
guy employers that acted responsibly? Can we make sure that we
help workers and retirees, nor corporate executives and Wall
Street TARP twerps?
I won't tolerate another boardroom bailout or let a bill go
forward to give taxpayer help to companies that don't need any
more of it. But, while I have flashing lights, I also know that
many good guy employers are struggling. They want to meet their
obligations without risking their businesses or laying off
employees who they consider part of their family.
Like all of us--I wish we didn't have to be here today.
Pensions are supposed to be a source of stability. But today,
workers and retirees are losing sleep over losing their
pensions. And employers are losing sleep over having to choose
whether to continue their pension plan or continue their
business.
Our economy is just barely off of rock bottom. We need to
make sure pension obligations do no harm and good guy
businesses can start to recover. But we also need to make sure
that short-term relief doesn't turn into long-term pension
deficits. I am on the side of employees counting on promised
pensions, good guy businesses trying to meet their obligations
and taxpayers who shouldn't have to bail out the PBGC.
I look forward to hearing the witnesses' ideas about how to
help and about how we can work together to strengthen the link
between hard work and a solid retirement and how to help our
businesses get to recovery.
Senator Mikulski. Mr. Chairman and also members, I want to
acknowledge the fact that you will have a gifted witness in the
second panel, Mr. Ron Peterson, running an iconic organization
in the State of Maryland called Johns Hopkins.
But, Mr. Chairman--and my question will go to Mr. Jury from
Bethlehem Steel.
We also had an iconic institution in Maryland. It was
called Bethlehem Steel. It used to employ 18,000 people. Many
people started out at something called the Point, worked their
way up, fed their family, had good wages because they were
represented by the Steelworkers. And they kept America going
from the beginning of the Industrial Revolution through the
great wars where we furnished armaments. Bethlehem Steel is now
owned by a Russian oligarch.
And so, as a result, today the largest employer now in the
State of Maryland in the private sector, but nonprofit, is
Johns Hopkins.
Many of the men who worked at Bethlehem Steel and women had
jobs they hated, that were dirty and dangerous, so that their
children could have jobs that they love. And now many of them
are working at Hopkins or the University of Maryland in
accounting to medicine.
But along the way, something terrible happened to our steel
industry due to foreign imports and dumping, and neither
Democrat nor Republican administrations stood up for them.
Bethlehem Steel went into bankruptcy, and they were thrown into
Pension Guarantee. But all along the way, Senator Sarbanes and
I were assured that the pension plan was solid. All along the
way, we were assured of that.
What we found was that there is a pattern here. Everything
is sweet. Everything is fine. Let us all have gushy-poo kumbaya
meetings with the workers so we are all in it together. But
what happens when they go under, what the workers find is they
are not all in it together. There is the ``them'' and there is
the ``us.'' There is the them that continues to get and there
is the us that gets the shaft.
My workers are still hurting. They saw their pensions
reduced when they went to Pension Guarantee, but they were
grateful that there is a Pension Guarantee. Then as they got
their benefits, they found that--and you speak, Mr. Jury, of
it. Pension Guarantee told them they made a math mistake. Many
of my retirees who were already living on the modest benefits
provided by Pension Guarantee then found they had to give the
money back because of a Government math mistake.
Well, I think we have more mistakes to correct than the
math. I worked with Senator Mike DeWine who was my ranking
member or I was his on this Subcommittee on Aging and Pensions.
We worked together on a bipartisan basis. He had his workers in
Ohio. I had my workers in Maryland. We found there was very
little we could do.
And my question then to you, Mr. Jury--you saw this and you
get the phone calls. You get the calls from those men and women
who worked those shifts day and night and so on. Three
questions.
No. 1, do you believe that through whatever law we have, as
we look at this current situation facing us, that there needs
to be kind of truth in pensions? And did we correct it in the
Pension Reform Act of a couple of years ago? Truth in pensions
about how they really are funded?
No. 2, Should there be an early warning system to both the
management and to the workers about this?
And No. 3, what grievance procedures should they have when
Government makes the math mistake and people have to give the
money back?
What reforms would you recommend so that it would never--I
cannot correct it for them, but they know I am here today. I
want them to know I never forgot what happened to them. Those
men and women were our neighbors. My father had a little
grocery store. When they were having difficult times, he went
on credit. My father is gone. Bethlehem Steel is practically
gone. The way of life is gone. But let us see if we cannot at
least reform it for the next go-round.
Mr. Jury. Well, thank you, Senator. You are correct. For
the steel workers and others at Bethlehem Steel in Sparrows
Point and Bethlehem, PA and northwest Indiana and Lackawanna,
NY and elsewhere, we unfortunately cannot turn around and fix
every one of their problems, but there are many other workers
who are or may very well soon be in the same circumstances.
Certainly the idea of greater information and greater
transparency for retirees is critical. I think there were
elements of that in the Pension Protection Act in 2006, and if
there is always an opportunity to think of whether more
information could be provided in a more clear fashion on a more
timely basis, of course, that is an important end.
We at the Steelworkers Union assisted retiree groups I
believe from Bethlehem, but also from Republic Technologies and
other steel and other companies through the PBGC's appeal
process. Indeed, at the moment we have litigation going on in
district court here in Washington for some steel worker
retirees from Thunderbird Mining on the Iron Range in
Minnesota. These are internal administrative review processes
which end with litigation in a district court where the courts
defer greatly to the administrative agency's internal
determinations.
Senator Mikulski. What reforms would you recommend?
Mr. Jury. Again, any reform that provides better
information more quickly, particularly about the funded status
of the pension plan, the risk the plan may be in, and also the
cost to the employer, which is itself a risk to the plan. We
have spoken in our written testimony and share the view that
spreading out these costs so these additional added onerous
costs do not imperil the pension system by creating this upward
escalator. That in itself is something that will serve, we
think, to preserve pension plans and protect our members and
all employees working under these plans and protect the
interests of retirees.
Senator Mikulski. Thank you.
Thank you, Mr. Chairman.
The Chairman. Thank you very much, Senator Mikulski.
Senator Reed.
Senator Reed. Mr. Chairman, I would yield to my colleagues.
The Chairman. Senator Brown.
Statement of Senator Brown
Senator Brown. Thank you. Thank you, Senator Reed, for
that.
Thank you for the testimony from all four of you very much.
Mr. Gump, talk to me, if you would. Tell us more about the
impact on Delphi's salaried retirees that took early
retirement. What was the impact on their benefits for those
that did? If you could give me some numbers of employees and
amount of impact.
Mr. Gump. There is a number of things that happened in
here. The Delphi retirees oftentimes were coerced into early
retirement with promises of severance pay and a supplement to
the retirement plan that would be essentially a bridge to
Social Security. Those are the things that were very much in
danger. In fact, there was a point during the bankruptcy
process when the company indicated that they would like to get
out from under the severance pay. It was not allowed, but
nonetheless, it was an attempt.
The point I am trying to make is it was not just
encouragement to leave. You know, things are going OK. You have
done all right. You know, things can be good. You can get out
now. It was a coercement. Hey, if you leave now, we will give
you this. And then after they are gone and things are moved to
the PBGC, the PBGC does not recognize those kinds of
supplements generally. So the rug is just pulled out from under
a person.
In some people's cases in the mid- to late 1950s, those
supplements could have amounted to something on the order of
$1,500 a month.
In the case of Delphi, we have been told by the PBGC that
the initial estimate, which this all started August 1st, could
be anywhere between January and March. It is hard. I mean, it
is 70,000 people they have to get through. There is a lot to
do. But if it goes to March, that would be 8 months. So 8
months times $1,500--when the first initial estimate comes
along, you could already be $10,000 or $12,000 in debt to the
PBGC.
The bottom line to it is that people do not know how to run
their lives. They do not know what they are going to get. It is
a very convoluted process that is hard to understand for an
outsider. It takes a long time to get to any kind of answer. In
the meantime, should we sell our house? Should we buy a house?
Should we try to move? Can we keep our kids in college? Can we
make commitments for the future? Can we buy a car? And that is
a whole other issue.
A lot of this anger is aimed back at General Motors and the
company that caused or initiated all this to happen. Here is
the Federal Government who is the majority owner of General
Motors and maybe 100,000 people, all told, are angry at them.
They are throwing 100,000 customers away. And these were
typically employees that were loyal customers. Plus, they have
spouses and children and family and friends and the whole
community can be angry. It seemed counterproductive for all
these kinds of things to happen.
But on a community-wide basis, it absolutely can be
devastating. In our local economy in the Mahoning Valley, in
Warren, Youngstown, and Niles area, taking $161 million per
year every year out of that economy, which is already very
badly damaged by the loss of the steel industry in that
community--the population of Youngstown, as I understand it,
has reduced from 160,000 to 60,000. There are 100,000 people
who have had to move away from that community, and the blight
that follows that kind of loss is just phenomenal and very
difficult.
I think the picture in the New York Times standing near the
parking lot there with all the weeds growing up is almost
poetic. This is what is happening across America.
And I would point out that in our particular cases, because
the Federal Government got involved and handled all this, that
we were really poster children for every salaried employee in
the United States because if the U.S. Government is going to
step into a situation which is agreed to be unusual and should
not really have to happen very often, but if it does and it
treats the salaried people like yesterday's trash, then every
salaried worker in America has just been treated that way. This
is what they have to expect from their Federal Government. I do
not think that is what is intended, but that is the message
that comes across in the way this was handled.
Yes, there are devastating issues. There are some people
here with me today that their pensions will be reduced to the
point that they truly can just barely afford health care. One
woman with me today, 2 weeks after she was told that benefits
were lost, was diagnosed with a potential breast tumor. She had
to pay the entire cost of determining whether or not
essentially she was going to live or die. And her husband has a
degenerative back disorder. He is in constant pain. He works at
it. He does OK with it, but the medications that he requires
are what he needs to live. And being self-employed, her
insurance is what was supplying her family.
It is a terrible situation and we are not alone. There are
a lot of people. Like I said, there are 20,000 people in Delphi
alone that this is affecting, and the message to the rest of
the salaried workers in America is just absolutely devastating
and really should not happen, especially based on some concept
of commercial value. Imagine applying that whole concept of
whether or not you can receive benefits based on your
commercial value to health care that the Federal Government is
deeply involved in.
Again, I do not think that is the message that is intended,
but that is certainly the message that comes across, is that if
we are willing to do it in this case, are we willing to do it
elsewhere? They followed that process here. Would it be right
somewhere else under some other conditions? I think we settled
that question in this country a long time ago, and I really do
not think we should be having to talk about it right now. But
we are and that is where we are.
``Devastation'' is probably the best word. Dr. Akpadock's
introduction to his study, when he gave it in a news
conference--he said that the right word to classify this is
``catastrophe'' for the community.
Thank you.
Senator Brown. Thank you. I thank you for the personal
stories that you have shared with us today. I have heard for
months from workers who have been given this news and about
their heartbreaking family situations. I also appreciate the
explanation you gave on the Youngstown State study, detailing
what this does not just to the several hundred workers and
their immediate or extended families, but what it means to a
whole community that has lost a lot of jobs. I just commend
that to the committee.
In my part of the country, there are more than a few cities
like Youngstown that have literally half the population that
they had in 1950. Youngstown, Cleveland, Detroit, cities like
that. Detroit was 2 million. Now it is a million. Cleveland was
a million. Now it is 400,000. Youngstown was 160,000-170,000,
and now it is roughly 70,000. The Delphi communities are going
to depend on the estimates the PBGC is making now. And what
this does to individual families--and Mr. Gump talked about it
and what it is doing to whole communities. And that is tens of
millions of dollars that will go back into the community or
will not depending on what we are able to do.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Brown.
I turn now to Senator Burr. I apologize for skipping. I
thought you had gone by me going out there. But Senator Burr is
our ranking member on the Retirement and Aging Subcommittee,
which Senator Mikulski chairs.
Senator Burr.
Statement of Senator Burr
Senator Burr. Thank you, Mr. Chairman. I would also ask
unanimous consent that my opening statement be a part of the
record.
[The prepared statement of Senator Burr follows:]
Prepared Statement of Senator Burr
Thank you, Mr. Chairman, for taking this look at America's
voluntary employer-provided retirement system.
It is well past-due for Congress to address the funding
crisis. For months the pension community--employers and
employees--has looked to Congress for leadership. A number of
us have had bipartisan conversations and have agreed on the
need for action.
Senator Isakson and I have suggested we provide a temporary
fix that maintains the overall obligations of companies to fund
their pensions but gives additional flexibility and time to
weather the recent financial market turmoil that has devastated
asset values. A number of Democratic colleagues have told us
they are interested in the idea but that they are deferring to
the Majority leadership of this committee to take action and
for the health care debate to conclude.
I am encouraged we are having this hearing because I think
we need to ramp this process up. We can't wait.
Addressing the pension funding crisis is a true economic
stimulus issue for both our Nation's employers and their
employees. Jobs and pensions rely on the financial health of
companies. Some plans are ongoing and building up new benefits
for participants. Some troubled companies are simply trying to
survive and maintain past promises earned by employees and
retirees. All need help. There is no nationwide stimulus
program more shovel-ready than pension stabilization.
Addressing pensions would help the economy now.
The Administration's record on these issues is basically
blank. Their most significant measure to date is the subject of
our first panel. That panel will highlight the disparity
between how different groups of employees were treated under
the Delphi/GM and Treasury/Auto Czar deal.
Mr. Chairman, this hearing shows your recognition that this
institution is capable of multi-tasking, and I thank you for
that.
Thank you, Mr. Chairman. I look forward to hearing from our
witnesses.
Senator Burr. I want to thank our witnesses for being here
today.
Mr. Chairman, let me express at the beginning I am
disturbed that somebody from PBGC is not here. I understand we
have reached out to them. I think it is unbelievable that we
could have this hearing and not have them here.
Mr. Jones, I am going to state something and just reconfirm
for me that I understand it. Many pension funds--pre the
economic crisis--were fully funded in America. Post the
economic crisis most, if not all, pension funds were
underfunded because of the reduction of the valuation of their
assets that were held in the pension. And the challenge before
Congress in a bipartisan way is how we change the pension rules
to allow companies to catch up in a reasonable period while
allowing enough time for assets to reinflate where that is
possible based upon the capital markets.
Is that a pretty accurate description?
Mr. Jones. That is very fair, yes.
Senator Burr. Well, I want to just sort of plead with my
colleagues that we work together to find a solution to this as
quickly as we can. The longer we stay in an anemic growth
period in this country, this pressure builds and it builds and
it builds where companies by law are having to make decisions
as to how much investment goes into pension obligations in many
cases to catch up and how much does not go into job creation
and this will be a never-ending cycle of increased unemployment
if in fact we do not address what is a security need for the
workers and sustainability for the companies.
Ms. Bovbjerg.
Ms. Bovbjerg. Bovbjerg, like iceberg.
Senator Burr. Bovbjerg, OK.
You made a statement. I just want to explore it a little
bit. In a phrase, you used this, ``unless the plan had
assets.'' Now, were the PBGC liens associated with Delphi
assets of the pension fund?
Ms. Bovbjerg. We were talking about this before the
hearing. I really cannot say anything about the PBGC liens. I
really do not know anything about them.
I can say that if there are sufficient assets in a plan
that PBGC trustees, they can pay above the guaranteed level if
the assets are there. They have a very complex asset allocation
situation that we explained endlessly in our report.
Senator Burr. Mr. Jones, are you familiar with the Delphi
situation?
Mr. Jones. I do not have close proximity to it, no.
Senator Burr. Mr. Gump, I will go to you because I know you
do.
[Laughter.]
Do you consider that the liens that PBGC had, assets of the
pension plan?
Mr. Gump. Absolutely. PBGC itself told us that those liens
were valued anywhere--as low as $1.8 billion and as high as
$3.4 billion. And they gave them up for the sake of $70 million
in cash from GM and a $3 billion unsecured claim----
Senator Burr. In your estimation, did PBGC voluntarily give
up those liens?
Mr. Gump. My understanding is that the expedited nature of
the GM bankruptcy led to some discussion and, I suppose you
could say, pressure from the Administration in order for the
General Motors bankruptcy to proceed rapidly.
Senator Burr. From what you know now, did General Motors'
bankruptcy basically make those assets worthless?
Mr. Gump. Essentially that is what happened from our
standpoint. The Administration said that they were not
actionable, but they accepted a $3 billion unsecured claim in
bankruptcy court which were absolutely not actionable.
Senator Burr. So from an actuarial standpoint, Mr. Jones,
can you envision a scenario where the PBGC would voluntarily
give up $3 billion worth of assets of a fund, transferring
those under an agreement into a company that they knew would go
bankrupt and the assets would be worthless?
Mr. Jones. I cannot speak for the PBGC----
Senator Burr. But you know what the PBGC's mission is and
that is to protect the----
Mr. Jones. Pension security.
Senator Burr [continuing]. Pension assets.
Mr. Jones. Correct.
Senator Burr. Does this even become nearly rational for
anybody, that the company that is in charge of protecting the
value of the pension fund voluntarily gave up the lien on the
assets with full knowledge that General Motors was going to go
into bankruptcy and therefore those assets would become
worthless? Have I got that right, Mr. Gump?
Mr. Gump. Yes, sir.
Senator Burr. Who requested that PBGC release those liens?
Mr. Gump. Well, of course, we were not part of the
conversation, so I cannot truly answer the question. We do know
that there was very heavy involvement of the Auto Task Force.
One would assume that it would be the Administration.
Senator Burr. Mr. Chairman, I know we are here today and my
time is up. I do look forward to working with my colleagues on
a solution to the pension funding challenges that most
companies have today, and I hope we will do that quickly.
I also hope that this committee or Senator Mikulski in the
subcommittee will take the opportunity to invite back the PBGC,
possibly the Auto Czar, anybody else who we think might be able
to shed some light on why the Federal Government would have put
their stamp of endorsement on the elimination of assets
designated for the pensions of Delphi employees.
I thank the chair.
The Chairman. I would say to my friend that I had asked
that question, and the basic response I got back was that it
was very hard for the PBGC to enforce or to act upon these
liens on foreign assets. There were liens on foreign assets,
but they felt that they could not really prove up on them or
enforce them at that time. Whether that is true or not, I do
not know. I am just telling you that is the response I got
back.
Senator Burr. I think the chairman has raised an important
point. I think the committee deserves a clarification as to the
thought process that PBGC went through and, more importantly, I
think the employees of Delphi are owed an explanation as to why
this decision was made.
Thank you, Mr. Chairman.
The Chairman. I agree with the Senator.
I will come back to you, Senator Reed.
Senator Franken.
Statement of Senator Franken
Senator Franken. Thank you, Mr. Chairman.
Thank you, Mr. Gump, for the story that you shared. I have
heard a lot of similar stories up on the Iron Range in
Minnesota from steel workers.
I want to thank Ms. Bovbjerg for your testimony. I was
struck by the problems that the GAO identified in the report
and how closely they mirror those of the groups of steel
workers and retirees that I have talked to on the Iron Range in
Minnesota. Their pensions were taken over by the PBGC in 2002
and 2003, and the problems that followed led them to form a
group like Mr. Gump belongs to. These steel workers have told
me that the PBGC failed to communicate with them for years at a
time, and the information they did receive did not fully
explain the situation they were facing.
Additionally, many of these workers were employed at
different mining operations, which made it more complicated for
everybody in computing their benefits, and it really left them
wondering what their benefits would be. And then many of them
were subject to recoupment. They had to pay back overpayments.
I am very troubled to see that the problems that we had in
2002 seem to be persisting 7 years later, at the time of your
audit.
First, I would like to ask you, in your audit, did you
encounter any of these Minnesota steel workers?
Ms. Bovbjerg. We did talk to a number of steel workers. I
think we might have talked with some from National Steel.
Mainly we got our information from PBGC and from the
experiences of prior terminations. We did go back to 2002, 2003
when we looked at these things.
I think that we were concerned like you that there are
going to be so many more big, complex terminations coming into
PBGC in the future--and at that time that we were doing this
work, Delphi was in the wings--that we felt that it was really
urgent that PBGC do the things that they can to make this
process easier for people. They cannot change the law as to
what the benefit guarantees are, but certainly they can change
the way that they work with people, the frequency with which
they talk to people, the complexity with which they provide
information. You know, there is always that trying to achieve a
balance between the technical accuracy and actually
communicating with people who are not actuaries.
Senator Franken. Precisely. There were years between when
they would hear from them being alerted that they were going to
be in PBGC and then what the outcome was.
Now whose job is it to change those laws? Oh, right, that
would be us.
[Laughter.]
Ms. Bovbjerg. I am glad I did not have to tell you.
Senator Franken. Yes.
I want to ask Mr. Jury about this because you work with the
steel workers. I got the endorsement of the steel workers up in
Hibbing very early, and I went down to their locker room area
and the president of the local introduced me to the guys saying
this is Al Franken. We are endorsing him. And do you have
questions? And a guy stood up and said, ``Yes, what are you
going to do to protect our pensions?'' And I really did not
know what to say to him. I am glad I am here because I really
want to know what I can say to him.
The fact of the matter is that they are guys that worked
for 38 years in the mines expecting that they would get a
pension of $2,400 a month, and it went to the PBGC and they
ended up getting like $600-$700. And they are 58 years old and
they had kids in college. And they were not on Medicare yet and
they had health problems after working for 38 years at a
taconite mine.
They would say, ``The mine went bankrupt. The entity that
owned the mine would go bankrupt. I lose my pension. The next
day they would be open again under some new ownership and I
would be working again except I would start from zero.''
What can we do as a body to prevent that kind of thing from
happening? How can I give this guy an answer? What is the
answer I can give him?
Mr. Jury. Thank you, Senator. That is a fair point. And
those same frustrations that were expressed to you were
expressed to me as well. I am a union-side labor lawyer that
spends too much time in bankruptcy court and I was around the
National Steel bankruptcy and the Eveleth Mining or Thunderbird
Mining bankruptcy cases where there were pension plan
terminations.
We have addressed today questions about how to prevent the
next generation, whether they are on the Iron Range or
elsewhere, about protecting and elevating the interests of the
workers and retirees by smoothing out some of these onerous
funding requirements, also eliminating what we think are some
gratuitous provisions that cut off benefit guarantees when a
company files in bankruptcy, which is an event the worker has
absolutely no control over.
In addition, I note that in the last Congress there was
bankruptcy reform legislation introduced, and if introduced
again, there is much about that bankruptcy reform legislation
that would further the protections of workers and retirees in
bankruptcy. It is a comprehensive approach.
In addition, it brings to mind the need for speedier
processing of these cases, and while I will not comment upon
the merits of this Thunderbird Mining case that is pending
here, I simply note that the pension plan there terminated in,
I think, July 2003. We are still litigating some of the
determinations PBGC made, and certainly as others have said,
the sooner a retiree knows what his or her future bears,
undoubtedly that is the better course.
Senator Franken. Thank you.
Mr. Chairman.
The Chairman. Thank you very much.
Senator Hagan.
Statement of Senator Hagan
Senator Hagan. Mr. Chairman, I really appreciate you
holding this hearing, and I have no questions for this panel at
this point in time. But thank you all for being here.
The Chairman. Thank you.
Senator Reed.
Statement of Senator Reed
Senator Reed. Thank you very much, Mr. Chairman.
I thank the panel. If I was taller, I could see you, Mr.
Gump.
[Laughter.]
I think we both have a similar characteristic.
First of all, what you have described is an extraordinarily
not only poignant, but in fact disheartening situation where
people who have struggled all their lives are now trying to get
by. The human element you bring here is as instructive as any
of the technical issues we will discuss. Thank you very much
for that.
It has been brought up here that we are in a situation
where because of the financial crisis, pension assets have
decreased and therefore there is underfunding. We have to allow
a gradual buildup.
I seem to recall when the market was very high-priced, that
it was not uncommon for companies to be taken over and the
pension plans reduced because it was overvalued. I wonder, Ms.
Bovbjerg, your view in terms of what we have to do in the good
times to provide for these bad times.
Ms. Bovbjerg. Well, I am sorry that Senator Mikulski is not
still here because Bethlehem Steel was really a major reason
why the Pension Protection Act was enacted. Bethlehem Steel had
been well funded until just really a very few years before its
bankruptcy, and then it was 40 percent funded or something. By
the time that PBGC took it, it was the largest single
termination PBGC had ever done at that time.
So the question is how can you encourage employers to fund
the promises that they make to employees while at the same time
being flexible enough that you do not drive them out of the
system entirely. I think that is why you see the Pension
Protection Act coming in to try to shore up funding for
employees and for PBGC and then, in downturn, concern about
whether it was flexible enough for employers to really do what
they need to do with their plans, but at the same time not go
bankrupt in the process of just trying to fund their plan.
We have talked in terms of assistance in bailout about the
need for things being targeted and temporary, and we continue
to say that about pension funding relief, that to the extent
that it can be targeted to those who need it and not those who
do not, which is difficult because we do not have a lot of
information, targeting would be preferable to widespread relief
to employers who do not need it and making it temporary so that
in a time when it is very difficult for employers--and I think
everyone agrees on that right now--that they are able to
address the funding shortfalls but maybe in a longer period of
time, maybe not at the expense of retaining jobs or even
creating new ones.
Senator Reed. It seems to me again--and these might be
isolated incidents--that there were occasions where companies
who had taken over, the pension plan was on the books
overfunded, and that money was not used for reinvestment in
jobs or anything else. It was essentially dividend out to the
new owners.
Ms. Bovbjerg. Well, at one time they could do that. They
are not supposed to do that now.
Senator Reed. Are you confident that we have done
everything we can to ensure that situation?
Ms. Bovbjerg. The thing that did concern me in the Pension
Protection Act is we really did not do anything about credit
balances, and that is what caused a lot of the underfunding in
Bethlehem Steel. That is why GM has not had to make any
contributions recently. They were overfunded. So they can use
those credits later instead of making contributions. So what
that means is that your funding level can drop very
precipitously if there are other bad things going on in the
economy when you are enjoying your credit balances.
We have a lot of concern about that. That is exactly the
time that PBGC might be called on to step in and take a plan,
and from what you have seen from the Delphi experience, when
you continue to run a plan and you are not making
contributions, your asset-liability ratio plummets.
Senator Reed. I just want to quickly turn the topic because
we have focused on commercial enterprises, but there is a
growing--this is not a surprise to anybody--concern among
municipal governments and State governments about their pension
liabilities. They are operating outside of PBGC. And is there
any mechanism in place now to reinsure them, to help them?
Because this might be the next crisis.
Ms. Bovbjerg. Well, the public plans are regulated by their
States.
Senator Reed. Right.
Ms. Bovbjerg. It is really quite different.
Senator Reed. That is why we might have another crisis.
Ms. Bovbjerg. But they are in a different situation because
in the private sector, you may have a Bethlehem Steel that goes
out of business and goes into bankruptcy and leaves an
underfunded plan. The State of Wisconsin does not go out of
business and leave underfunded plans. They are an ongoing
concern. It is a different situation when you think about
underfunding of public plans. But you are right to be
concerned.
Senator Reed. One final point. The chairman has been very
kind.
One of the concerns would be--you are exactly right. They
will not go out of business, but their only remedy then would
be to essentially do what has been done to Mr. Gump and his
colleagues which was to ratchet down payments or increase
significantly contributions just to reach a balance. Am I
missing something in terms of what else they can do?
Ms. Bovbjerg. It is likely to be to raise taxes because for
most States, they cannot reduce benefits for people who are
already on board. It has to only be for new employees. It is
very hard for them. You raise a good point.
Senator Reed. Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Reed.
I want to thank this panel for your input.
I would ask if each of you could submit for the record your
suggestions, any suggestions you might have, for I think what
Mr. Jones has said in his testimony is a pension plan for the
21st century. If you were to design a pension plan to answer
the problems that have come up here, what would it look like?
Maybe what we have had in the past is not working well, and
maybe we need to think about how we design a new pension plan
for the years ahead. I am open for any suggestions that you
might have, if you would submit those for the record.
Ms. Bovbjerg. Mr. Chairman, if I could jump in. We did do a
report last summer on alternative approaches to retirement
income security, and I would be happy to make that available to
this committee.
The Chairman. OK. I did not know that. Make sure we get it.
I can get another copy of it. Do not worry about that. I can
track that down.
Ms. Bovbjerg. Thank you.
The Chairman. I am going to dismiss this, but did you have
one last thing, Mr. Gump, that you wanted to say?
Mr. Gump. If you do not mind, yes. I think to answer your
question initially, I think one of the first things that needs
to happen is employees need to be elevated in priority. Right
now they are treated as essentially unsecured creditors.
Employees are not speculators in a company. They are the people
that are doing what they are told to do by the executives, and
they are the ones that are having to take it on the chin while
the executives are protecting themselves.
I would point up that in March the Delphi 10(k) form that
was filed just before they exited bankruptcy in July under the
paragraph entitled ``Change of Control''--if the executives
lost control of the company, they set aside for themselves just
over $100 million for the top five executives, while when we
have tried to form a VEBA, we were only able to squeeze about
$8.75 million out of them to form a VEBA for 20,000 people
which essentially ends up being nothing for support. Employees
need to be raised in the level of priority for bankruptcy.
If I may, Mr. Chairman, I brought with me what we call a
Hallmark card. The point of this document is that what is
happening to us is happening across the entire community. We
have had major business leaders, community leaders, political
leaders of our community sign. There is all together--and there
is an 8\1/2\ by 11 that goes in here--about 200 signatures that
have signed. And these are not just necessarily individuals.
These are the mayors and the trustees. I have a proclamation
here from the county commissioners that I just got done Tuesday
night. All we are asking for is fair treatment in this, nothing
more, but nothing less. I would like to submit that also. Thank
you.
The Chairman. Well, we will figure out some way of getting
that in the record.
[Laughter.]
[The information referred to follows:]
Save the Valley: Again
We the undersigned participants in the Alliance for Senior Action
Round Table Discussion do hereby affix our signatures in support of the
following:
That the determination by the Automotive Task Force to
make decisions regarding Delphi retirees' earned legacy benefits based
on a theoretical commercial model is unfair, unjust and erroneous
thinking.
That the negative economic effect, as substantiated by the
Youngstown State University Economic Impact Statement, will be
devastating and long lasting to the recovery of the Mahoning Valley.
That the estimated potential loss of $161 million in
spendable income and the elimination of up to 5,000 additional non-auto
industry jobs is unjustifiable in a regional economy already suffering
from double digit unemployment.
That there is a real moral and ethical obligation for the
Federal Administration to intervene further into the domestic auto
industry recovery to ensure that all retirees receive fair and
equitable earned legacy rights comparable to benchmarks already
established by General Motors and Delphi.
That President Obama instruct the U.S. Treasury and the
Automotive Task Force to initiate immediate and binding communications
with Senator Brown and Congressman Ryan to resolve the issue of full
funding of Delphi's pre-bankruptcy legacy obligations.
That the President advises the Pension Benefit Guaranty
Corporation to maintain pensions for Delphi and its domestic subsidiary
retirees at pre-trusteeship levels until the top-up funds are in place.
That the Commerce Department be instructed by the
President to exhaust every possible effort to attract large scale
employment projects to the vacant Delphi facilities in the Mahoning
Valley while those facilities are still sound and usable.
The Chairman. Thank you all very much. Again, I welcome
your suggestions on how we develop a new plan. Thank you very
much to this panel. Thank you for being here.
We will call up our second panel: Ronald Peterson, Ron
Gebhardtsbauer, Randy DeFrehn, and Karen Friedman.
[Pause.]
Thank you very much. Now we will turn to our second panel.
First we have Mr. Ronald Peterson, President of The Johns
Hopkins Hospital and Health System in Baltimore. He serves also
as the chairman of the Health System and the chairman of Johns
Hopkins Community Physicians that provides ambulatory care at
17 centers and a trustee of the Johns Hopkins Home Care Group
and is also vice chairman of the Maryland Governor's Workforce
Investment Board and was appointed by the Governor to
Maryland's Economic Development Commission.
Second, we have Mr. Ron Gebhardtsbauer. He heads up the
Actuarial Science Program at the Smeal College of Business at
Pennsylvania State University. Prior to that, he was the Senior
Benefits Advisor for the U.S. Senate's Committee on Finance,
the Senior Pension Fellow and Spokesperson for the Actuarial
Profession at the American Academy of Actuaries here in
Washington.
And then we have Mr. DeFrehn. Randy DeFrehn is the
Executive Director of the National Coordinating Committee for
Multiemployer Plans, a nonpartisan membership organization of
multiple employer pension plans and their sponsoring employee
and employer organizations.
Then last we have Ms. Karen Friedman, Executive Vice
President and Policy Director of the Pension Rights Center, the
country's only consumer organization dedicated solely to
protecting and promoting the retirement security of American
workers, retirees, and their families.
We welcome you here. Again, as I said to the other panel,
your statements will be made a part of the record in their
entirety. I appreciate it. We will start with Mr. Peterson. If
you could sum up your testimony in around 5 minutes, we would
appreciate it. Thank you very much, Mr. Peterson.
STATEMENT OF RONALD R. PETERSON, PRESIDENT, THE JOHNS HOPKINS
HOSPITAL AND HEALTH SYSTEM, BALTIMORE, MD
Mr. Peterson. Thank you very much. Good morning. I am Ron
Peterson. I serve as President of the Johns Hopkins Health
System. I am also the Executive Vice President of Johns Hopkins
Medicine, which is the formal alliance between our university
school of medicine and our health system. Collectively, Johns
Hopkins institutions constitute the largest private sector
employer in the State of Maryland. We have 49,000 employees.
Chairman Harkin and Ranking Member Enzi, certainly thank
you for the opportunity to testify before this committee this
morning. You are to be commended for holding this important
hearing to help workers preserve their retirement security as
we recover from this deep recession.
Retirement security is critically important to Johns
Hopkins and its employees. We are a 100-plus-year-old
institution with many long-term employees who rely on us for
their retirement security.
This issue is also important, we believe, to every company,
every employee, and every community across the United States
because it is more than a pension issue. We, in fact, view this
as an economic recovery issue and a jobs issue. You will hear
that with a few regulatory changes and no Government money, you
can save thousands of jobs.
First, let me assure you that Johns Hopkins will meet its
obligations to our defined benefit participants. All of us have
been hit by the extraordinary market losses of 2008, but we are
not here this morning asking for a bailout nor for taxpayer
assistance to right our pension plans. Rather, we are here to
ask today for temporary relief from Congress that can be
accomplished through pension funding rule changes allowing us
to manage our recent plan losses through this unprecedented
market downturn. With a few changes, we can continue to grow
our institutions and create jobs while meeting our pension
obligations. Remember that health care is one of the few
sectors where jobs have continued to grow.
The Pension Protection Act of 2006 accelerated pension
funding requirements for defined benefit pension plan sponsors.
These new requirements went into effect in 2008, the year the
financial crisis began. We fundamentally support the goals of
the PPA to increase the funding levels of defined benefit
pension plans over time, but the rules were enacted in a more
robust economy. By the time the rules went into effect, the
plans had taken losses in the market and interest rates
dropped, creating a perfect storm which caused dramatic,
unplanned increases in our pension funding obligations.
Now, the Worker, Retiree and Employer Recovery Act enacted
last year by Congress did provide temporary relief to some but
not all companies. We appreciate as well the additional relief
through regulatory guidance provided by the Treasury Department
that has helped many companies for 2009. But these changes are
really not enough.
Companies across the country are facing staggering funding
obligations for 2010 and beyond which will divert funds from
other purposes, including jobs. This issue is time-sensitive.
Under the PPA, the vast majority of plan sponsors' funding
obligations will be locked in on January 1, 2010, regardless of
what happens in the economy for the remainder of the year.
Johns Hopkins University and Johns Hopkins Health System
sponsor five active defined benefit pension plans that provide
benefits for 32,000 current and former employees. Johns Hopkins
is intent on maintaining these plans and adding participants in
the future.
We take a long-term approach to pension funding. All of our
plans were very well-funded, 95 percent or better, before the
recession, based on Johns Hopkins' prudent investment policy
and its commitment to secure benefits. In fact, Johns Hopkins
paid no variable rate premiums to the Pension Benefit Guaranty
Corporation last year.
We view the recent recessionary environment as a unique
event. The reality is that we are now behind in our capital and
cash flow forecasts as they relate to meeting the funding
requirements of the PPA.
Johns Hopkins is currently expanding and improving its
facilities to provide for enhanced care to the patients we
serve from Maryland and throughout the world. As a product of
that expansion, we are creating more jobs in the local market.
Like other not-for-profit institutions, we are facing tough
choices which could force us to scale back on much-needed
programs which benefit humankind in order to redirect those
funds into the pension trusts. In the absence of pension
reform, we could be faced with the undesirable choice to reduce
benefits or eliminate jobs.
Now, during fiscal year 2009, our plans have suffered
severe asset losses, 24 percent of the portfolio, or $223
million, due to the performance of the stock market. Thus, our
funded status has deteriorated to as low as 70 percent for one
of our plans. Coupled with the low level of interest rates,
these asset losses will require significant increases in cash
funding over the next 8 years. We have computed this to be
approximately $291 million, a jump of 60 percent in the amount
we had forecasted as recently as the summer of 2008.
We must undertake steps now to reserve cash for this very
large liability. Because this obligation is required by law, we
will be forced to divert resources from patient care services
and from job retention and creation. Every $10 million in
incremental pension funding equates to salaries for
approximately 125 nurses.
Johns Hopkins encourages Congress to take additional steps
to strengthen defined benefit pension plans, given the impact
of the recession. Specifically, lengthen the amortization
period for paying down pension deficits from 7 years to 15
years for the 2008 losses. For plans below an 80 percent funded
level, remove restrictions on accelerated payments except for
lump sum payments. Return to a policy that permits the asset-
smoothing corridor to be 20 percent of fair market value of
assets, and return to a 48-month asset-smoothing period to
allow for more prudent forecasts.
We encourage Congress to apply pension relief equally to
all plan sponsors.
Now, as a reference point, we do support the majority of
the concepts expressed by Representative Pomeroy in his
discussion draft that I have recently had the opportunity to
review.
By way of concluding, let me offer the following. Due to
the recent unusual market conditions, Johns Hopkins and other
defined benefit plan sponsors will be faced with extraordinary
incremental funding requirements. As the economy is beginning
to recover, job growth will be impeded as employers such as
Johns Hopkins will have to limit new program development and
divert these resources to our pension trusts. Ironically, this
will further exacerbate access to health care at a time our
country needs meaningful health care reform. Passage of these
four modifications to the pension funding rules will support
job growth and provide employers with the resources they need
to innovate and compete in a global marketplace. Again, this
can be done without a penny from Congress.
I wish to thank you very much for the opportunity.
[The prepared statement of Mr. Peterson follows:]
Prepared Statement of Ronald R. Peterson
Good Morning. I am Ronald R. Peterson, President of the Johns
Hopkins Health System and Executive Vice President of Johns Hopkins
Medicine. Johns Hopkins Medicine is the formal alliance between The
Johns Hopkins University School of Medicine and Johns Hopkins Health
System. I am here today on behalf of the Johns Hopkins Health System,
Johns Hopkins University and Johns Hopkins Medicine. Collectively,
Johns Hopkins institutions constitute the largest private sector
employer in Maryland, with 49,000 employees.
Chairman Harkin and Ranking Member Enzi, thank you for the
opportunity to testify before this committee. You are to be commended
for holding this important hearing to help workers preserve their
retirement security in this time of recession. Retirement security is
critically important to Johns Hopkins and its employees. We are a 100+
year-old institution with many long-term employees who rely on us for
their retirement security. This issue is also important to every
company, every employee, and every community across the United States,
because it is more than a pension issue. We view this as an economic
recovery issue and a jobs issue. You will hear that with a few
regulatory changes and no government money, you can save thousands of
jobs.
First, let me assure you, that Johns Hopkins will meet its
obligations to our defined benefit participants. All of us have been
hit by the extraordinary market losses of 2008, but we are not here
asking for a bailout, nor for tax payer assistance to right our pension
plans. Rather, we are here to ask today for temporary relief from
Congress that can be accomplished through pension funding rule changes
allowing us to manage our recent plan losses through this unprecedented
market downturn. With a few changes, we can continue to grow our
institutions and create jobs while meeting our pension obligations.
Remember that health care is one of the few sectors where jobs have
continued to grow.
The Pension Protection Act (``PPA'') of 2006 accelerated pension
funding requirements for defined benefit pension plan sponsors. These
new requirements went into effect in 2008, the year the financial
crisis began. We fundamentally support the goals of the PPA to increase
the funding levels of defined benefit pension plans over time. But, the
rules were enacted in a more robust economy. By the time the rules went
into effect, the plans had taken losses in the market and interest
rates dropped, creating a perfect storm to cause dramatic, unplanned
increases in our pension funding obligations.
The Worker, Retiree and Employer Recovery Act enacted last year by
Congress provided temporary relief to some, but not all, companies. We
appreciate, as well, the additional relief through regulatory guidance
provided by the Treasury Department that has helped many companies for
2009. But these changes are not enough.
The stock market has not fully recovered and interest rates remain
low. As a result, companies across the country are facing staggering
funding obligations for 2010 and beyond, which will divert funds from
other purposes, including jobs. This issue is time sensitive. Under the
PPA, the vast majority of plan sponsors' funding obligations will be
locked in on January 1, 2010, regardless of what happens in the economy
for the remainder of the year.
HOPKINS' BACKGROUND ON PENSIONS
The Johns Hopkins University and Johns Hopkins Health System
sponsor five active Defined Benefit pension plans that provide benefits
for nearly 32,000 current and former employees. Johns Hopkins' intent
is to maintain these plans and add participants in the future.
We take a long-term approach to pension funding. All of our plans
were well funded (95 percent or better) before the recession, based on
Johns Hopkins' prudent investment policy and its commitment to secure
benefits. In fact, Johns Hopkins paid no variable rate premiums to the
Pension Benefit Guarantee Corporation last year.
IMPACT OF 2008-2009 RECESSION ON PLAN FUNDING
We view the current recessionary environment as a unique event. The
reality is that we are now behind in our capital and cash flow
forecasts as they relate to meeting the funding requirements of the
Pension Protection Act.
Johns Hopkins is currently expanding and improving its facilities
to provide for enhanced care to the patients we serve from Maryland and
throughout the world. As a product of that expansion, we are creating
more jobs in the local market. Like other not-for-profit institutions,
we are facing tough choices which could force us to scale back on much-
needed programs which benefit humankind in order to redirect those
funds into the pension trusts. In the absence of pension reform, we
could be faced with the undesirable choice to reduce benefits, or
eliminate jobs.
During fiscal year 2009, our plans have suffered severe asset
losses, 24 percent of the portfolio (or $223 million) due the
performance of the stock market. Thus our funded status has
deteriorated to as low as 70 percent for one of our plans. Coupled with
the low level of interest rates, these asset losses will require
significant increases in cash funding over the next 8 years--$291
million--a jump of 60 percent in the amount we had forecasted during
the Summer of 2008.
We must undertake steps now to reserve cash for this very large
liability. We and the many other for-profit and non-profits companies
in a similar position will have to make decisions in the next few
months in order to be ready to satisfy the dramatically increased
funding obligation we expect to owe. Because this obligation is
required by law, we will be forced to divert resources from patient
care services and from job retention and creation. Every $10 million in
incremental pension funding equates to salaries for 125 nurses.
This obligation also affects the community in which Johns Hopkins
resides. With tremendous pressure on cash requirements for operations,
job-generating construction projects that have not begun will be put on
hold and much-needed patient care equipment replenishment programs will
be curtailed as well.
PENSION REFORM POSITION
Johns Hopkins encourages Congress to take additional steps to
strengthen defined benefit pension plans given the impact of the
recession, specifically:
Lengthen the amortization period for paying down pension
deficits from 7 years to 15 years for the 2008 losses. This would
reduce the $291 million funding requirement by $46 million over the
next 8 years;
For plans below an 80 percent funded level, remove
restrictions on accelerated payments except the lump sum payments;
Return to a policy that permits the asset smoothing
corridor to be 20 percent of the fair market value of assets; and
Return to a 48-month asset smoothing period to allow for
more prudent forecasts.
We encourage Congress to apply pension relief equally to all plan
sponsors. As a reference point, we would support the concepts expressed
by Representative Pomeroy in his discussion draft on this issue.
CONCLUSION
The Johns Hopkins University opened in 1876. After more than 130
years, Johns Hopkins remains a world leader in both teaching and
research. Preeminent professors mentor top students in the arts and
music, the humanities, the social and natural sciences, engineering,
international studies, education, business and the health professions.
The Johns Hopkins Hospital opened its doors in 1889 and soon thereafter
established a symbiotic relationship with The Johns Hopkins University
School of Medicine which opened in 1893. For more than a century, Johns
Hopkins Medicine has been recognized as a world leader in patient care,
medical research and teaching.
Today, Johns Hopkins Medicine is known for its excellent faculty,
nurses and staff specializing in every aspect of medical care. Johns
Hopkins Medicine includes four acute-care hospitals and programs for
local, national and international patient activities. In the past
decade, our environment has changed drastically, particularly in the
financing of patient care. We responded by moving into the community,
establishing ambulatory care centers, affiliating with other hospitals
in order to provide a broader spectrum of patient care and moving
toward the development of an integrated patient care delivery system.
At the same time, we have added to the economy and jobs throughout
Maryland.
Due to the recent unusual market conditions, Johns Hopkins and
other defined benefit plan sponsors will be faced with significantly
larger funding requirements. As the economy is beginning to recover,
job growth will be impeded as employers such as Johns Hopkins will have
to limit new program development and divert these resources to our
pension trust. Ironically, this will further exacerbate access to
health care at a time our country needs meaningful health care reform.
Passage of these four modifications to the pension funding rules will
support job growth and provide employers with the resources they need
to innovate and compete in a global market. Again, this can be done
without a penny from Congress.
Thank you very much for the opportunity to testify today. I look
forward to answering your questions.
The Chairman. Thank you very much, Mr. Peterson.
Now we will turn to Mr. Gebhardtsbauer. Please proceed.
STATEMENT OF RON GEBHARDTSBAUER, MAAA, EA, FSA, FCA, MSPA,
FACULTY-IN-CHARGE, ACTUARIAL SCIENCE PROGRAM, PENNSYLVANIA
STATE UNIVERSITY, UNIVERSITY PARK, PA
Mr. Gebhardtsbauer. Chairman Harkin, Ranking Member Enzi,
and distinguished members of the committee, thank you for
inviting me to testify here today on this very important issue.
A robust defined benefit system is vital for the retirement
security of our Nation's retirees, for the management of our
industries, and for our national economy.
I want to first note the significant advantages of DB plans
over 401(k)'s. We already knew that one-third of employees were
not contributing to their 401(k)'s and another third were not
contributing enough. Now, as you mentioned at the beginning of
this hearing, even the one-third that contributed enough are
finding they are in financial distress too because of the
market problems. Workers who planned to retire soon now
suddenly realize they cannot retire. With workers not retiring
now, the employers have to lay off more employees.
The biggest problem will show up actually in 10 years when
millions of retirees that have 401(k)'s now and they are
retiring in the future are reaching their 80s and they have run
out of money. At that point they will be too old to go back to
work. What will they do? With all these problems, 401(k)'s
should not be the only way we provide for retirement, but that
could easily happen.
With this as a backdrop, it is clear that our national
policy was more forward-looking when it encouraged DB plans.
The current laws are way more onerous for DB plans than they
are for 401(k)'s. No wonder companies are dropping their DB
plans.
The most important DB item to fix is the spike in the
minimum pension contributions due to the recent market crash.
With temporary relief, employers can meet their contribution
requirements that would otherwise double or even quadruple,
according to a Watson Wyatt analysis. Relief will also help
employers return to building and hiring American workers much
sooner, which helps America's No. 1 problem today, the jobless
recovery.
And as mentioned earlier, this relief is not a subsidy. It
does not cost the Government one penny. In fact, there is a CBO
memo that says it will increase Government revenues by about
$10 billion over the next 10 years. And it will also increase
the PBGC premiums. And it will reduce the number of weak
companies that will dump their pension plans on the PBGC.
So given these facts, I think relief is a no-brainer, but
we do need to make sure it is not too generous. An idea in the
Pomeroy bill keeps the relief from being too generous by
requiring contributions increase by a certain percent each
year.
Now, some would deny this relief to employers that froze
their DB accruals, and as an actuary I much prefer DB plans,
ones that are not frozen. But such a rule would cause an
injustice. Employers that recently replaced their DB plans with
a generous DC plan, even though that is not my favorite way to
go--I would still be concerned for them because in order to get
this relief, then they would have to back and reinstate their
DB accruals which would be doubly expensive unless they go back
then and freeze this new DC plan that they just created.
This would also treat companies in the same industry
differently. Companies that replaced their DB plan with a DC
plan would not get relief, thus putting them at a competitive
disadvantage to others in their industry.
Also, it would create a catch 22. If a market crash causes
a plan to be worse than 60 percent funded, the laws we just
passed in 2006 would require a freeze in the benefits. But then
this new rule that we are talking about would penalize the
employer for the freeze that we just imposed on them. We should
not have both a freeze and a maintenance rule operating at the
same time.
A maintenance rule could be important, and there is one in
the Pomeroy bill that makes sense to me. It requires a minimum
accrual in either the DB or DC plan, and if the company says we
cannot afford it anywhere--you know, if we cannot afford it for
the rank and file, then Congress can say, ``Well, then you are
not allowed to provide it to the top executives either. If you
cannot afford it for one, you cannot afford it for the other.''
Almost in closing, one concern of relief is that employers
will expect help in every crash in the future, which is
actually understandable because right now the rules do not work
in a market crash. Congress would have to come back and fix it
every time. If Congress fixes these rules permanently, though,
then the employers will not expect relief.
And there is an easy fix. I mention three in my paper,
three ways of doing it, but one easy fix is just change the
asset corridor back to 80 percent to 120 percent. Within 20
percent of market values.
The theory behind that is actually very good. I surveyed
Penn State's top finance and economics professors, and I found
that not one of them--not one of them--increased the
contributions to their retirement plan over the past year. In
fact, I did not either. I asked them why did they smooth so
heavily, and they looked at me with surprise and they said, is
that what you mean by smoothing? What they do is they just
assume that their assets are going to come back fairly soon,
and that is what actuarial smoothing is.
Earlier Senator Enzi brought up the question, why was there
this push to go to 90 to 110 percent smoothing, and I think it
was for the wrong reason. It was because in the accounting
world it really makes sense for the financial statements to
know--you know, mark-to-market because if you want to buy a
company, you know, half a company, a whole company, or if you
just want to buy 1,000 shares, you want to know what is that
company worth today. You do want a mark-to-market there. But
when it comes to budgeting for your contributions to a pension
plan, that is different.
For example, in a situation we have had just recently or
back in 1987 when the market crashed 20 percent and then came
right back up, the rule right now would say you cannot reflect
the fact--in fact, now that assets are like 50 percent back up
from where they were before--they are not all the way back, but
they are very far back. But the rule right now would say, ``No,
your assets can only be 10 percent different than what they
were back on December 31.'' Not only do you not have smoothing.
You cannot plan ahead. You do not have predictability because
back in September people did not know we were going to have a
crash, and so they were planning on building this building,
hiring these workers, and then all of a sudden the crash
happens. In September they find out, oh-oh, something is
happening. We may have to contribute double or triple or
quadruple as much. That is a real concern. That is what is
caused by the corridor.
Now, I am not trying to, at the moment, say anything about
the 7-year amortization. If we still have 7-year amortization,
you still get back up to full funding after 7 years. The
smoothing does not change that.
Finally, I also note that I have heard that PBGC is
acceptable to some smoothing and the particular idea that they
are OK on smoothing. This 20 percent corridor is actually
tighter than the one that PBGC is willing to go along with.
Finally, being the former actuary at the PBGC, I want to
protect it. I would also modify the bankruptcy rules so that
employers do not use them to dump their pension plans on the
PBGC. They should be held responsible for their promises, and I
will be happy to discuss that later. Thank you.
[The prepared statement of Mr. Gebhardtsbauer follows:]
Prepared Statement of Ron Gebhardtsbauer, MAAA, EA, FSA, FCA, MSPA
Chairman Harkin, Ranking Member Enzi, and distinguished members of
the Senate HELP Committee, thank you for inviting me to testify on this
very important issue.
A robust defined benefit (DB) system is important for the
retirement security of our Nation's retirees, for the management of our
industries, and for our national economy.
While it is valuable for employers to provide both DB and DC plans,
I want to note the important advantages of DB plans over 401(k)s. A
major advantage was demonstrated by the recent crash in the stock
market. We already knew that one-third of employees were not
contributing anything to their 401(k) and another one-third were not
contributing enough. Now we see that even the one-third who contributed
enough, are in financial distress, even if they responsibly invested in
a target retirement date fund. Many that just retired are finding that
they need to go back to work, even though now is not an easy time to
find a job. Those workers planning on retiring soon, now suddenly
realize they can't. They will need to continue working for they don't
know how long, even though many of them are getting laid off. This is a
problem for employers too. With a DB plan, employers could count on
their workers retiring on a more regular basis. But now, with no one
retiring, they will have to lay off employees, which is not easy to do.
We still haven't seen the biggest problem with the 401(k). In about
10 years or so, millions of retirees in their 80s will be running out
of money, because they lived longer than they expected or there is
another stock crash, and they didn't buy a lifetime income with their
401(k) funds. But, they will be too old to go back to work, so what
will they do? With all these problems, we don't want 401(k)s to be the
only way we provide for retirement, but that could easily happen. DB
plans address these problems for workers and employers. With DB plans,
these retirees would more likely have had lifetime incomes, and they
would not have to return to the labor pool.
Retirees returning to the labor market also hurt the Nation because
this increases unemployment rates. Finally, DB plans help the Nation
with patient capital that is more efficiently invested in the markets
than individual retirement money, and DB plans can hold investments
that individuals cannot.
With this as a backdrop, it becomes clear that our national policy
was more forward looking in the past when most large employers provided
DB plans; now our rules encourage employers to choose 401(k)s, even
when an employer would prefer a DB plan for their particular situation.
Yes, we allow employers the choice of a DB and/or DC plan, but it is a
false choice because current laws are much more onerous on DB plans,
and much easier for 401(k)s.
The most onerous item to fix today is the spike in minimum pension
contributions due to the market crash. With measured and temporary
relief, employers can meet their contribution requirements that would
otherwise double, triple, or even quadruple according to a recent
Watson Wyatt analysis.\1\ Without relief, their analysis shows that
contributions would be much larger than they have ever been. And, with
relief, we not only help employers meet their contribution
requirements, we also help them return to building and hiring American
workers much sooner. Thus, we have the opportunity to help not only
retirement security in America, but also the Nation's No. 1 problem
today: the jobless recovery.
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\1\ Analysis by Watson Wyatt Research and Innovation Center.
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And this relief is not a subsidy. It will not cost the government
one penny. In fact, according to a CBO memo,\2\ it will increase
government revenues by about $10 billion over the next decade, and it
will not hurt the PBGC.\3\ In fact, it will increase premiums to the
PBGC. Now, some may worry that PBGC will have to take over some worse-
funded plans in the near future, but that won't happen in the
aggregate. Their weak sponsors will not triple their contributions
anyway. On the contrary, CBO noted (and I agree) that providing relief
could decrease the number of weak companies that will dump their
pension plans on the PBGC. And relief will help keep healthy employers
in the DB system, so that they will continue to pay their premiums to
the PBGC.
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\2\ CBO's 7/31/09 Cost Estimate on H.R. 2989.
\3\ Per page 4 of CBO's 7/31/09 Cost Estimate on H.R. 2989.
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Given that relief is needed and doesn't hurt the PBGC, it is a no
brainer, but we need to make sure it is not too generous. Three House
bills (H.R. 2989, the Pomeroy bill, and the Boehner bill) are all in
the same ballpark on relief according to the Watson Wyatt analysis. The
Boehner bill may be unintentionally too generous in the first year. The
Pomeroy bill provides a way around that problem by requiring an
increase in the contribution by at least a certain percentage over the
next few years. I encourage you to adopt something similar to those
bills, with a possible minor change that reflects recent IRS relief.
Recent IRS Relief: Recent IRS guidance provided relief for many DB
sponsors in 2009, so their problems have been moved to 2010 and 2011.
Thus, it might make sense for your relief to be in those years. For the
pension plans that were not helped by the IRS guidance, you could give
them the relief for this year and either 2010 or 2011.
Maintenance of DB plan: Some employee groups have suggested denying
relief to employers that froze their DB accruals. Much as I prefer DB
plans with accruals, I have to note that a rule like that would cause
an injustice. For example, employers that froze their DB plans may have
already replaced it with a generous DC plan. They would have to
reinstate their DB accruals which would be doubly expensive, unless
they froze their new DC plan. That would create a lot of disturbance
just to get temporary relief. A rule requiring DB accruals would also
treat companies in the same industry differently. Companies that
replaced their DB plan with a DC plan would not get relief, thus
putting them at a competitive disadvantage to others in their industry.
In fact, I don't understand the imposition of a maintenance rule in
difficult times. The penalty doesn't fit the problem. It would make our
pension laws schizophrenic. I'll explain. If a market crash causes a
plan to be worse than 60 percent funded, a PPA provision requires the
freezing of accruals. But then this new rule would penalize the
employer for the freeze we just imposed on them. That's inconsistent,
and doesn't make sense. We shouldn't have both the law freezing
benefits and the maintenance rule operating at the same time. Dutch
pension laws, which people have been enamored of late, are much more
sensible in this area. After a market crash in the Netherlands, a
recent pension accrual (or cost-of-living adjustment) can be reduced.
And then when the market comes back, the accrual is restored. No wonder
a greater percentage of Dutch workers are covered by DB plans. Their
pension laws make more sense.
If a maintenance rule is really important, something like the one
in the Pomeroy bill makes more sense. It requires a minimum accrual in
either the DB or DC plan. Some employers may even be too weak to
provide either DB or DC accruals. Since those companies would be the
ones in need of the most help, prohibiting relief to them (or giving
them only partial relief) is going in the wrong direction. In this
case, the Pomeroy bill requires those employers to freeze their NQDC
(Non-Qualified Deferred Compensation) plan for executives. That makes
more sense. If a company can't afford benefits for their rank and file,
then they can't afford them for their executives either.
Permanent Fix to Funding Rules: After Congress solves this
temporary problem, they should revisit long-term pension funding
policy, so that they don't have to return to this issue again and
again. A fix could be a fairly simple change to the existing rules. If
Congress fixes the funding rules on a permanent basis, employers will
get the certainty they need, so that they can plan ahead and make
decisions (for example, how much of the plan assets should be allocated
to stocks). The recent past showed that the current funding rules break
down after a crash. We knew that when they were created, which is why
the American Academy of Actuaries pushed for an anti-volatility
mechanism in PPA. The new rules will also have problems in a market
bubble, because minimum contributions will go to zero under the PPA
rules. And when the inevitable crash comes, contributions will spike to
200 percent or 300 percent of what they were in the past, which is way
more than employers can handle. When health costs go up by just 15
percent or 25 percent employers, workers, and retirees scream. A 100
percent or 200 percent increase can be cataclysmic. At these times,
pension contributions need more smoothing than the current rules allow.
A concern caused by giving relief today is that employers will hope
for relief on the next crash, and not make the changes they need to
make in their policies. Thus, if Congress fixes the funding rules in a
permanent way so that they provide an appropriate amount of smoothing
that works even after a crash, then employers won't expect relief next
time. Here are several different ways to do it, with different levels
of complexity.
One method suggested by the actuarial consulting firm Mercer
(sometimes called the Anti-Volatility Mechanism or AVM) caps the
contribution increase (or decrease) at 25 percent of the cost of the
plan's current year accruals. (Congress could set the percent in the
law after consultation with the PBGC.) Here is how it would work. If
the contribution of a pension plan that was 100 percent funded was $100
million and the market crashed, so that next year's minimum
contribution doubled, the AVM would kick in and cap it at $125 million.
Each year, the minimum contribution would go up another 25 percent
until it reaches the actual amount of the contribution. Applying this
rule to past experience shows that the cap may not be needed for more
than 1 to 3 years generally, due to the market reverting to mean Price/
Earnings ratios (after fears subside) and the cumulative nature of the
cap. An Academy paper \4\ suggested the plan's funding levels would not
be much worse off due to the cap.
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\4\ Pension Funding Reform for Single Employer Plans (dated 2/28/
05).
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Because this cap smoothes out the volatile contribution, some
employers might forgo the use of smoothing their asset and liability
numbers.
This idea also works in the other direction. If a market bubble
occurs, the minimum contribution would not decrease by more than 25
percent. This keeps the contribution from going to zero too quickly.
The pension plan can become overfunded, but there will still be a
contribution. That is a positive attribute if you are the PBGC, because
having a surplus in the pension plan can help in the future if there is
a stock crash. However, it destroys wealth if a company is forced to
contribute to an overfunded plan, because surpluses are locked into the
plan. Thus, employers will be strongly against being forced to put more
money into an overfunded pension plan, unless the IRC section 420 rules
on asset transfers are relaxed (which I will discuss later).
There are a couple other concerns to address with the AVM idea. It
is a big change from current rules, so it needs to be tested before put
into law. Some concerns follow:
The AVM calculation could be complex. For example, contributions
delayed would have to create a new loss, and the interplay with credit
balances could be confusing. Also, a company shouldn't be able to
increase benefits, and then avoid the increase in their contribution
due to the AVM cap. Thus, the increase in contribution due to a benefit
increase should not be capped (ditto if an employer shuts down a plant
which increases benefits).
Mature plans: The AVM cap is modified if the cost of accruals is
zero, because otherwise the contribution increase would be 25 percent
of zero, which is zero. The AVM cap has another minimum increase equal
to 2 percent of a plan's value of accrued liabilities (if larger than
the above cap). This 2 percent number could also be set by Congress in
consultation with the PBGC, but it would be very difficult to agree
upon. Mature employers with large retiree populations compared to their
current workforces will find this minimum will blow them out of the
water, while PBGC will most likely want it stronger than these
companies will want.
AVM cap doesn't vary with interest rates: Unlike the 7-year
amortization rule, the AVM cap has problems because it doesn't vary
with interest rates. The 7-year amortization payment to a pension plan
works like a loan. When interest rates are high, the loan payment is
high relative to the loan amount. When interest payments are low, the
loan payment is low. For the same reason, a pension plan sponsor has to
pay a much larger 7-year amortization payment to get back to 100
percent funding when interest rates are high, and a lower payment when
interest rates are lower. However, the 2 percent cap will still just be
2 percent. For example, if interest rates are high, the funding ratio
won't improve by 2 percent as intended, and if assets don't do as well
for awhile, the funding ratio could actually deteriorate over the
period, not get closer to 100 percent. On the other hand, if interest
rates are low and if stocks do well, the funding ratio would snap back
much quicker than expected (possibly overfund, if assets revert to
prior levels), so the cap would have been higher than necessary.
Method II: Another idea suggested by the actuarial consulting firm
Towers Perrin (TP) would use market values of assets and liabilities to
determine a pension plan's funding ratio for the current and prior two
valuations. It would then average them, with heaviest weighting on the
current funding ratio. This average funding ratio could then determine
the underfunding to be paid off over 7 years, as under the current PPA
rules.
TP's suggestion uses market values at each valuation date, so it
would work for sponsors using LDI (liability determined investment)
techniques to immunize their pension plans from market and interest
risks (by, for example, holding bonds). It would also work for plans
that held stocks due to the averaging of the funding ratios. It would
be more responsive to market crashes than the AVM method: the greater
the crash, the larger the next year's contribution, but the increases
would be tempered by the averaging of the funding ratios. The averaging
of the funding ratios would also help with predictability, since a
certain portion of the contribution would already be fixed before the
valuation date, as in current rules.
This idea would have some complexity, in that prior funding ratios
should probably be revised to reflect subsequent contributions, benefit
accruals, and benefit improvements, but otherwise it could operate
under the PPA rules as they are now.
Problems with the corridor: Unfortunately, there is one aspect of
the PPA funding rules which if retained would undo all the good that
the TP idea provides. It is the tight corridor restriction that assets
must be within 10 percent of the market value of assets. The TP
proposal didn't keep the corridor. I will use an example to explain
why. If a pension plan's market value of assets equaled plan
liabilities at $100 million, and then a stock crash brought the assets
down temporarily to $70 million right around the valuation date, and
then came back to $100 million over the next year, the use of average
funding ratios would smooth the contribution and make it predictable,
but the 90 percent/110 percent corridor would override it, so that the
contribution would double, which would be way more than needed. It
would overfund the plan. The following year, the overfunding would
eliminate the minimum contribution requirement. It doesn't make any
sense to double contributions 1 year and then eliminate them the next
year. Employers are not going to want to maintain a DB pension plan, if
that happens. It makes much more sense to keep contributions relatively
stable.
Thus, even if assets come back fairly quickly, the PPA funding
calculation is stuck using the assets within the 90 percent/110 percent
corridor on the valuation date. In fact, this is the primary reason
PPA's funding rule didn't work this past year after the crash. This
brings us to the simplest fix of them all.
Method III: Reduce contribution volatility by simply changing the
permissible asset corridor back to 80 percent/120 percent of the market
value (and allow partial use of market values). Changing back to the 80
percent/120 percent asset corridor doesn't require much change to the
law. It would let PPA's 2-year smoothing rules work the way they were
intended.
In fact, PPA's 10 percent corridor causes problems even for plans
that partially immunize against interest rate risk. That's because it
restricts the value of assets, but not the value of liabilities. For
example, if interest rates increased say 200 basis points in 1 year,
the liabilities and bond values would decrease by about the same amount
(more than 10 percent). Since the employer only partially immunized,
they would probably still be using asset smoothing for the stock
values, but that would cause a problem with the bond values. They would
be pulled down by the 10 percent corridor restriction. One way to fix
that problem would be to allow employers to use market values of assets
and liabilities for the portion of liabilities that are immunized, and
use smoothed values for the portion not immunized.
There is good theory behind smoothing contributions. In recent U.S.
history, assets have come back after a crash. And if they don't come
back, then the 2-year smoothing will quickly revert to the new level of
assets. When I took an informal poll of some leading Finance and
Economics professors at my University, I asked if they had increased
their contributions to their retirement funds over the past year, and
not one of them had, even though they all held stocks whose value had
crashed. When I asked them why they had used such severe smoothing,
they looked at me with surprise, and some said ``is that what you mean
by smoothing?'' When we discussed why they had not increased their
contributions, they said they were assuming that their assets would
come back way before they retire. This is not a perfect analogy, but it
helped them understand why employers argue for some smoothing of
contributions. (By the way, some people may be thinking that I am
arguing for smoothing pension assets and liabilities in financial
statements. I am not. The need for market values makes sense there,
since companies are constantly being bought and sold, and in that case
you need to know the accurate values that day.)
The theory of smoothing contributions goes in both directions. It
is not used to just decrease contributions. It also increases
contributions. For example, smoothing assets during a bubble makes the
appropriate assumption (as in 1999) that the equity market can be
overvalued, so that smoothing would require a contribution. Using
market values would eliminate a contribution requirement.
Dr. Richard Thaler of the University of Chicago, one of the top
behavioral economists in the country, wrote an Opinion Piece in the
August 4, 2009 Financial Times entitled ``In Support of Actuarial
Smoothing.'' He wrote that market prices are not always right, and
suggested that government create automatic stabilizing activities. Such
an idea in the pension world would be to smooth pension contributions
through market bubbles and crashes. That would dampen the business
cycles of boom and bust caused by current rules that don't smooth
contributions adequately during market crashes. In addition, I note
that using the 80 percent/120 percent corridor has a lot less smoothing
in it than the AVM method after a large stock crash, so I don't
understand why supporters of the AVM rule think that the 80 percent/120
percent corridor rule is bad. Maybe there is an inconsistency in their
thinking.
Trapped Pension Surplus: In addition to reducing contribution
volatility, there are a few other items needed for pension funding to
work. As noted earlier, requiring plans holding stocks to have surplus
assets in their plans makes sense in case there is a future crash in
stock values, but it will only succeed if employers can access plan
surplus that will never be needed. Employers will not want to be forced
to contribute surplus funds to plans, knowing that they can never get
it back if it is not needed to pay promised benefits. Currently, if an
employer were to transfer surplus assets out of a plan to help them pay
for say the employee health plan costs, it is assessed a Federal income
tax of 35 percent plus a reversion excise tax of 50 percent and a State
income tax of maybe 5 percent, so that the government gets 90 percent
of any reversion. But the government gets no income from this, since no
employer will do it at such high tax rates. The 50 percent excise tax
was instituted in the 1980s when investors would buy a company, and pay
for the purchase by raiding the company's pension surplus. Fortunately,
thanks to mark-to-market accounting and rules putting the pension plan
on the company books, the purchaser would have to pay for that surplus
in order to buy the company, so it wouldn't happen anymore. The law
already allows transfers of pension surplus to retiree health plans
under IRC section 420, but that has no value to companies that don't
have a retiree health plan. If Congress wants to encourage well-funded
plans, it should expand IRC section 420 to also allow transfers to say
the health plan of employees in the pension plan, without bringing
pension raids back. They could provide restrictions, such as:
(1) Only allow small amounts of pension surplus to come out in any
1 year,
(2) Use the IRC 420 rules that requires the plan to have a 20
percent margin in the plan after the asset transfer,
(3) Require continuation of the pension plan for 5 years, and/or
(4) Require the approval of any union.
Even unions have testified in favor of a provision to transfer
pension assets to the employee health plans (since it was successfully
used with the UMW plan in the 1990s, and it could help employers retain
their health plans).
Other abuses that need to be fixed: I used to be the chief actuary
of the PBGC, so I want to make sure we don't harm it, but strengthen
it. As noted above, temporary relief shouldn't hurt the PBGC as long as
we don't encourage employers to think that we will continue to provide
relief at every crash. The way to do that, is to fix the rules
permanently so that they handle crashes better, as discussed above, and
discourage abuses, such as the ones below.
Bethlehem Steel was a weak company with a huge pension fund
invested heavily in stocks. When the stock market did well, good
returns eliminated the need for contributions to the pension plan, but
Bethlehem Steel was gambling. When the stock market crashed, they were
not able to afford the pension plan, and in fact, the crash gave them
the ability to put their pension promises to the PBGC. Heads they won,
tails the PBGC loses. We need to avoid that abuse. One way would be to
prohibit large weak companies from having such large amounts in stocks.
If a prohibition is too strong, an alternative would be to let the PBGC
charge these weak companies with unusually large allocations to stocks
(e.g., greater than 50 percent or 60 percent or their active liability
if less), a risk related premium. The premium could reflect their
probability of going bankrupt (by comparing their borrowing rate to a
Treasury rate). The calculating could also incorporate what the plan
assets might be after a crash (using recent volatility in the assets
held by the plan). The premium might be enough to keep the sponsor from
``overinvesting'' in stocks. Thus, it doesn't punish weak companies for
being weak. It only punishes them if they overinvest in stocks.
Companies like United Airlines went into reorganization, enabling
them to put their pension promises to the PBGC. An opinion piece in the
Wall Street Journal co-authored by the CEO of a major airline, the
former head of the PBGC, and the head of the major airline union
suggested that companies going through reorganization should have to
keep the responsibility for their pension promises, instead of dumping
them on the PBGC. Their solution required the three parties involved to
work out an Alternative Funding Arrangement where the contributions
were temporarily decreased in exchange for frozen guarantees and
possible benefit reductions that would be less harsh than if the PBGC
took over the plan. The Senate had a provision that would have
implemented such an idea in section 402 of their version of PPA, and
the American Academy of Actuaries wrote about this in a paper entitled
Keeping Employers Responsible for Their Promises. The Administration
was concerned that it would give the Treasury Department and PBGC too
much influence over an individual company and allow them to aid one
company in an industry over its competitors, but the aid pales in
comparison to the benefits of the PBGC completely taking over the
pension plan from the reorganizing company. If consistency is a
problem, Congress could set parameters around the relief provided.
PBGC Premiums: Finally, I would be remiss if I didn't note that
PBGC has a deficit and needs additional income to completely fulfill
its mission. It may be difficult to get enough funds from the remaining
companies in the DB system, since so many companies have terminated
their pension plans. PBGC's current underfunding is primarily due to
taking over underfunded pension plans in the airline and steel
industries, which means that the customers of those industries
underpaid for their services. This suggests that one source of funding
for PBGC could be the current customers of those industries. For
example, a fee of $1 per person could be charged for each commercial
flight (domestic or international) that takes off or lands at a U.S.
airport. In addition, there could be a $1 fee for every ton of raw
steel sold in or imported into the United States. Without these
changes, PBGC will have to rely on premium income from covered pension
plans, whose numbers are shrinking, and possibly withdrawing employers.
In conclusion, measured temporary relief can help both retirement
security and the Nation's unemployment problem. And it can be done in a
way that doesn't hurt the PBGC, and works for employers, if it is done
without unfair restrictions on which firms get it. In addition, so that
employers can plan ahead, Congress should fix the funding rules on a
permanent basis so that they don't have such volatile results after a
market crash. Otherwise, employers will expect relief after the next
crash. In addition, the pension asset transfer rules should be expanded
so that employers are more likely to add surplus assets to their
pension plans. A few abuses described above also need to be closed. I
appreciate the opportunity to discuss this topic and look forward to
your questions.
The Chairman. Mr. Gebhardtsbauer, thank you very much. Very
enlightening.
Mr. DeFrehn, welcome and please proceed with your
testimony.
STATEMENT OF RANDY G. DeFREHN, EXECUTIVE DIRECTOR, NATIONAL
COORDINATING COMMITTEE FOR MULTIEMPLOYER PLANS, WASHINGTON, DC
Mr. DeFrehn. Thank you, Chairman Harkin. Chairman Harkin,
Ranking Member Enzi, members of the committee, thank you for
the opportunity to appear here today and to offer our
perspective on this important issue.
In the interest of time, I will limit my remarks to the
effects of the financial crisis on the status of multiemployer
plans which operate under a different statutory and regulatory
framework than single-employer plans do.
Second, the unintended consequences of rigidly imposing the
PPA funding rules on the small businesses that contribute to
these plans.
And third, our suggestions for appropriate relief measures
to be enacted preferably before the end of the year.
Multiemployer plans are prevalent in a wide variety of
industries across the economy, including construction,
trucking, retail, and a host of other industries characterized
by a mobile workforce. Tens of thousands of small employers
contribute to them, the vast majority of which employ fewer
than 20 employees and are only able to provide benefits that
rival much larger firms by taking advantage of the
administrative economies of scale offered by these plans.
According to the latest PBGC Databook, there are 1,510
multiemployer DB plans in the United States. They cover 10.1
million participants, or about one in every four Americans who
has a defined benefit plan.
Multiemployer plans have been conservatively invested, well
managed, and historically have presented little risk to the
PBGC because employers share responsibility for these industry
plans and collectively pick up the responsibility for other
employers who leave the fund without paying their share of the
unfunded liabilities rather than shifting them to the PBGC.
Since 2000, multiemployer plans were victims of the same
two market collapses that have decimated the other segments of
the financial services industry. The first one resulted in the
enactment of the multiemployer provisions of the Pension
Protection Act that incorporated many of the recommendations of
our coalition's joint proposal for funding reform. Although the
PPA provided a viable framework for reform under normal market
conditions, including new, more aggressive funding targets, its
implementation coincided with the second once-in-a-lifetime
market collapse in less than 10 years.
Following enactment of the PPA, plan sponsors acted
aggressively to deal with the new, more demanding funding
benchmarks. Our recent survey of 385 plans showed that the
bargaining parties had already implemented contribution
increases averaging 21 percent in the 24-month period from
January 2007 through January 2009, not including the additional
costs related to the 2008 investment losses that averaged a
loss of 21 percent.
In terms of the funded status of the plans, it is quite
simple. In 2007, over three-fourths of all plans were funded
above 80 percent. By early 2009, over three-fourths of the
plans reporting were funded below 80 percent.
The funding requirements of the PPA that were intended to
improve benefit security of these plans now demanded the
parties adopt funding improvement or rehabilitation plans to
comply with these new funding targets. Absent legislative
relief, many plans will be forced to reduce benefits or
increase contributions further than necessary. That will make
contributing employers less competitive, reduce employment and
corresponding hours of contributions, and increase the
likelihood of plan failure. Furthermore, once adopted, these
contribution increases and any benefit reductions may not be
reversed until the plan emerges from endangered or critical
status perhaps years from now.
The coalition has proposed a variety of provisions to
provide the greatest relief to the broadest number of plans.
The proposals include two categories of change.
The first addresses plans that are expected to remain
solvent but which need more time to address the asset depletion
without inflicting irreparable harm to contributing employers.
This category of change includes, among others, proposals to
extend the amortization of losses incurred during 2008 and 2009
over 30 years or, alternatively, to allow plans to fresh-start
their funding standard account and amortize those charges over
30 years.
It is also proposed that plans be allowed to use 10-year
smoothing of only those losses for 2008 and 2009, as several of
the other speakers have mentioned, a change in the corridor,
which for multiemployer plans is currently 20 percent, as it
has been in the law for many years, but due to the magnitude of
the losses, we believe it is appropriate to change that
corridor to 30 percent for a short period of time.
The second category of change addresses plans that are not
expected to remain solvent absent further relief. Among the
proposals to help those plans and their participants are
increased flexibility for the PBGC to facilitate mergers of
weaker plans into stronger ones and to expand the existing law
that permits certain plans that are projected to become
insolvent to partition liabilities attributable to employers
who no longer contribute to the plan and which fail to pay
their withdrawal liability. Admittedly, this proposal carries
some costs, not anticipated to be paid for from the premium
structure, but by saving the remaining portion of the plan, it
has the potential of significantly reducing the longer-term
liability exposure for the PBGC, if the plans subject to this
relief were to fail.
A third aspect of this part of the proposal is to increase
the level of guaranteed benefits now limited to a maximum of
$12,870 a year for a participant with 30 years of service. We
would like to see that increased to about $20,000 with the
corresponding increase in premiums to cover that. By contrast,
you heard Ms. Bovbjerg explain that the current single-employer
guaranteed maximum is $54,000, about four times as much.
These proposed measures, as well as most of the other
recommended changes put forth by our coalition, are included in
the bill introduced Tuesday in the House by Congressman Pomeroy
and Tiberi known as the Preserved Benefits and Jobs Act of 2009
which Congressman Pomeroy proudly announces the acronym of
PB&J, since it is time to get back to basics.
We urge the committee to take timely action to enact
similar legislation to protect our plans, our employers, and
our participants before the end of 2009. Failure to act will
put the financial viability of thousands of small businesses
and the jobs of tens of thousands of employees at risk.
Thank you and I welcome your questions.
[The prepared statement of Mr. DeFrehn follows:]
Prepared Statement of Randy G. DeFrehn
Summary
Multiemployer defined benefit pension plans have provided secure
retirement benefits to tens of millions of American workers for over 60
years. They have been a successful model through which small businesses
can provide benefits comparable to those of much larger firms through
the pooling of risk and economies of scale. The 1,510 multiemployer
defined benefit plans currently provide pension benefits coverage for
10.1 million participants (approximately one in every four workers
currently covered by defined benefit plans today).
The success of this model lies in the shared commitment of labor
and management, reinforced by decades of successive laws and
regulations dating back to the 1947 Labor-Management Relations Act
which requires joint management of trust funds for the sole and
exclusive benefit of plan participants. Nevertheless, conflicting
Federal tax policies have compounded the problems created by the two
``once-in-a-lifetime'' market contractions that have occurred this
decade.
The multiemployer community addressed the last economic decline
through the formation of a broad-based coalition of stakeholders (the
Multiemployer Pension Plans Coalition) which embodied this joint
commitment by developing a coordinated proposal for funding reform
which formed the basis for the multiemployer provisions of the Pension
Protection Act of 2006. These reforms were designed to encourage plan
sponsors to improve the funding of multiemployer plans by setting new
benchmarks for the funding of plans that begin to experience funding
problems as the result of the bursting of the ``Tech bubble'' and
ensuing crisis of confidence, and provided new tools for plans to
achieve them. Since the end of the earlier crisis, plans had begun to
recover their earlier funded status when the PPA became effective. Even
before then, plan sponsors took pre-emptive action to address the
funding problems by increasing contributions and, to the extent
possible before its effective date, modifying future accruals.
Unfortunately, this coincided with the second ``once-in-a-lifetime''
market contraction in this decade.
With input from Senate and House Committee staff, the NCCMP
conducted a funding status survey for multiemployer plans to collect
and analyze information regarding the impact of that market crisis on
multiemployer plan funding and the need for further legislative relief.
The results of that survey are reported in the testimony, along with
irrefutable evidence that the fundamental reason for the deterioration
of the funded status of multiemployer plans was the global financial
meltdown.
Having identified the cause of the funding decline, the
Multiemployer Pension Plans Coalition once again coalesced to develop a
set of proposed funding reforms to address this latest funding
challenge. This testimony also includes a review of several of the
principal proposals for reform that attempt to balance the need to
improve funding without jeopardizing the competitive status of
contributing employers.
______
INTRODUCTION
Mr. Chairman and members of the committee, it is an honor to speak
with you today on this important topic. My name is Randy DeFrehn. I am
the Executive Director of the National Coordinating Committee for
Multiemployer Plans (the ``NCCMP'').\1\ The NCCMP is a non-partisan,
non-profit advocacy corporation created under section 501(c)(4) of the
Internal Revenue Code in 1974, and is the only such organization
created for the exclusive purpose of representing the interests of
multiemployer plans, their participants and sponsoring organizations. I
am testifying today on behalf of the NCCMP and the Multiemployer
Pension Plans Coalition (``Coalition''),\2\ a broad group comprised of
employers, employer associations, labor unions, multiemployer pension
funds, and trade and advocacy groups from across the country,
representing the full spectrum of the multiemployer community.
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\1\ The NCCMP is the premier advocacy organization for
multiemployer plans, representing their interests and explaining their
issues to policymakers in Washington since enactment of ERISA in 1974.
It has more than 200 affiliates which directly sponsor over 700
pension, health and welfare and training trust funds, as well as
employers and labor unions whose workers and members participate in
multiemployer plans.
\2\ The Multiemployer Pension Plans Coalition, which is coordinated
by the NCCMP, came together in response to the first ``once in a
lifetime'' bear market early in this decade, to harness the efforts of
all multiemployer-plan stakeholders toward the common goal of achieving
benefit security for the active and retired American workers who rely
on multiemployer defined benefit pension plans for their retirement
income. Collectively, these stakeholders worked tirelessly to devise,
evaluate and refine proposals from all corners of the multiemployer
community for funding reform. Their efforts culminated in a proposal
for fundamental reform of the funding rules contained in ERISA; rules
that had never been ``stress-tested'' under the kind of negative
investment markets which prevailed from 2000 through 2002; and rules
that were largely adopted in the multiemployer provisions Pension
Protection Act of 2006 (``PPA''). This group recognized that benefit
security rests on rules that demand responsible funding, discipline in
promising benefits and an underlying notion that even the best benefit
plan is irrelevant if the businesses that support it are unable to
remain competitive because of excessive, unanticipated or unpredictable
costs. The Coalition was reconstituted following the second ``once in a
lifetime'' market event in 2008 when it became clear that the
provisions of the PPA were not sufficiently flexible to address the
magnitude of the global catastrophic market contractions that affected
every part of the financial services infrastructure of the United
States.
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My remarks will be directed to the longstanding shared commitment
to retirement security for American workers evidenced by multiemployer
plans and the impact of the recent financial crisis on their long-term
viability.
EXECUTIVE SUMMARY
Multiemployer plans have provided retirement security to tens of
millions of American workers for more than 60 years. They currently
account for nearly one of every four participants in all defined
benefit plans. This system has survived and thrived as a result of a
joint commitment by labor and management (reinforced by the statutory
and regulatory structure) to responsibly balance the needs of all of
the stakeholders. Through the collective bargaining process the parties
have negotiated competitive wages and excellent pension and health
benefits while enabling employers to remain competitive. Multiemployer
plans enable employees in mobile industries to receive reliable
benefits through a system that pools assets, administration and
liabilities.
Multiemployer plans have been conservatively managed and well-
funded as evidenced by the fact that in the 29-year history of PBGC's
multiemployer guaranty fund only 57 funds covering 122,000 participants
have received any financial assistance from the agency totaling just
$417 million.\3\ Despite suffering losses between 15 percent and 25
percent in the early part of this decade, over 75 percent of plans were
more than 80 percent funded as recently as 2007. Nevertheless, the
investment losses suffered in the current global financial collapse
have threatened the financial viability of multiemployer defined
benefit plans as they have virtually all other financial institutions.
Coming in the first year of the new, more aggressive funding rules
required under the PPA, the recent losses have pushed compliance with
those rules out of reach for many plans without crippling additional
contribution increases, deep benefit cuts, or both; making contributing
employers less competitive, jeopardizing jobs and further reducing
hours on which contributions to the plans are based.
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\3\ To place these numbers in context, the PBGC's single employer
guaranty fund currently insures approximately 27,900 plans covering
33.8 million participants. To date the agency has assumed
responsibility for 3,860 plans covering 1.2 million participants at a
cumulative cost of $39.4 billion since its inception in 1974.
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As a result, the multiemployer community has coalesced behind a
comprehensive set of proposals that are designed to mitigate the
immediate effects of the current financial crisis. These proposals are
generally enumerated in the ``Preserve Benefits and Jobs Act of 2009''
introduced October 27 in the House by Congressmen Pomeroy and Tiberi.
The timely enactment of these measures will preserve the retirement
security of hundreds of thousands of multiemployer plan participants
and prevent further economic deterioration in the industries in which
such plans are the prevailing model.
BACKGROUND
Multiemployer defined benefit pension plans have provided
retirement income security to tens of millions of retired American
workers for more than 60 years. A product of the collective bargaining
process, they provide a model through which small employers, especially
those in industries characterized by mobile workforces, can provide
reliable benefits on a scale comparable with much larger firms, by
taking advantage of economies of scale and centralized administration
provided by the multiemployer plan model. According to the latest PBGC
Databook, there are currently 1,510 multiemployer defined benefit plans
covering some 10.1 million participants (approximately 23 percent of
all participants in defined benefit plans). They are prevalent in
virtually every area of the economy where employment patterns require
frequent movement within an industry, including: construction;
trucking; retail; communications; hospitality; aerospace; health care;
longshore; maritime; entertainment; food production, sales and
distribution; mining; manufacturing; textiles; and building services.
The overwhelming majority (over 90 percent) of contributing
employers to multiemployer plans in many industries are small
businesses, employing fewer than 20 employees, with more than half
employing fewer than 10. Any specific multiemployer plan may have only
a few contributing employers, or as many as several thousand, depending
on the industry and the scope of the plan (local, regional or
national).
Statutory and Regulatory Environment
Multiemployer plans have had separate and distinct statutory and
regulatory structures dating back to the 1940s, with the passage of the
Labor Management Relations Act of 1947 (more commonly referred to as
the Taft-Hartley Act). Among its sweeping labor law provisions, that
law prohibited employer contributions directly to unions or union funds
(as had become the practice). Instead it requires that any
contributions to support employee benefits must be made to a trust
established and maintained for the ``sole and exclusive benefit'' of
the participants, rather than furthering the interests of either labor
or management. Furthermore, while the misnomer of ``union funds'' is
still often incorrectly applied, the act requires equal representation
by employers and labor and in the management of these collectively
bargained employee benefit plans--a model and a requirement which
continues today.
The differences between single employer and multiemployer plans and
the obligations of the plan trustees were further codified with the
passage of two laws in the 1970s and 1980s. The first, the Employee
Retirement Income Security Act of 1974 (ERISA), expanded on the common
law fiduciary responsibilities of plan trustees, introduced the concept
of non-forfeitable (vested) benefits and required the pre-funding of
benefits. The second was the Multiemployer Pension Plan Amendments Act
of 1980 (MPPAA) which created the multiemployer guaranty fund of the
Pension Benefit Guaranty Corporation \4\ and imposed the concept of
``withdrawal liability'' that required sponsoring employers who depart
from plans pay their proportionate share of any unfunded vested benefit
obligations. These assessments were deemed necessary to prevent such
obligations from being unfairly shifted either to the taxpayer or to
the remaining employers thereby providing a double competitive
advantage to the departing employers (first, by no longer having any
obligation to make contributions to the plan, and second, by sticking
those same remaining employers with the liabilities for service earned
with the departing employers). Although both laws were the subject of
significant legal challenges, by and large they and the multitude of
ensuing regulations have been subsequently upheld and reinforced by
numerous court decisions.
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\4\ It is important to note that, unlike the single employer
guaranty program which acts as the insurer of first resort when a
sponsoring employer fails, the multiemployer program functions as the
insurer of last resort which never assumes liability for providing
financial assistance to troubled plans until all of the contributing
employers have ceased making contributions or paying withdrawal
liability and the collective pool of assets is depleted to the point of
insolvency (e.g. when the plan no longer has sufficient assets to pay
its benefit obligations).
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This notion of shared responsibility has proven to be an effective
means of delivering quality pension and health care benefits to
workers. All such benefits are funded by contributions that are
required to be made to independent trust funds pursuant to collective
bargaining (or other written) agreements between more than one employer
and at least one union. Benefit levels have traditionally been quite
modest. At the initiation of ERISA's pre-funding requirements, employer
contributions were the only source of revenue for payment of benefits,
the costs of administration and for the accumulation of assets to pre-
fund benefits owed to future retirees as they become due. Over time,
however, investment earnings from the monies set aside for such future
benefits provided an additional source of revenue. These earnings
became an increasingly important source of income to the funds, quickly
equaling and then surpassing contribution income as the primary source
of income. Today, most mature funds derive as much as 70 percent or 80
percent of the fund's income from their investments.
These pools of worker capital have a history of conservative,
professional management. Most boards of trustees utilize ``Qualified
Professional Asset Managers'' to manage their investments as permitted
under the law, and retain outside investment consulting firms to
monitor the performance of the managers selected. This approach,
coupled with the exceedingly favorable economic conditions generally
during the 1980s and 1990s, proved particularly successful in helping
to fully fund the plans' obligations. Unfortunately, rather than
providing a comfortable cushion against adverse markets, conflicting
tax policies helped set the stage for the two consecutive funding
crises plans have experienced since 2000. Specifically, two converging
developments combined to contribute to this phenomenon: the increasing
leveraging of plans; and the tax code limitations on accumulation of
reserves through contributions to plans that were ``fully funded.''
What is Meant by ``Leveraging'' of the Plans?
Unlike other economic references in which leveraging relates to the
practice of using assets as collateral, the term ``leveraging'' in this
context applies to the growing reliance on investment returns rather
than contributions to fund future benefits. Based on historical rates
of return when ERISA was enacted in 1974, most actuaries set assumed
rates of return on such investments between 4.5 percent and 5.0
percent. Actual returns that consistently exceeded assumed rates during
the 1980s and 1990s, and a strong economy that produced high hours of
contributions which built larger and larger fund balances, eliminated
the threat of unfunded vested benefits (and the corresponding
withdrawal liability) for all but a few plans. More importantly, the
market performance led actuaries to gradually increase their assumed
rates of return to their present levels that range between 7.0 percent
and 8.0 percent.\5\ Consistent with the plan fiduciaries' ``sole and
exclusive'' statutory obligation to manage multiemployer funds in the
best interests of plan participants, each time the rates of return were
increased, plan trustees were advised that the plan had the ability to
prudently increase benefits for both active workers (through higher
rates of accrual) and retirees, to improve the monthly benefits for
pensioners who had retired when benefit levels were necessarily modest.
Therefore, based on the recommendations of the fund professional
advisors, trustees gradually improved benefits. Even with such
increases, a recent survey by the NCCMP found that the majority of
multiemployer plans pay average monthly benefits that range between
$500 and $1,500, providing modest income replacement by anyone's
standards for workers who have been paid good middle-class wages
throughout their careers.
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\5\ According to a recent funding survey of nearly 400 of the 1,510
multiemployer defined benefit pension plans conducted by the NCCMP, 95
percent of plans assumed rate of return fell within that range with
more than half at 7.5 percent
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Theoretically, taking a long-term view of pension funding, this
approach was reasonable; however, such a long-term approach recognized
that the years in which the actual rate of return exceeded the assumed
rate would provide for the accumulation of assets to offset those other
years in which actual investment performance would lag the assumption.
In practice, this theoretical model was constrained by a Federal tax
policy that had been intended to prevent employers from sheltering
income in retirement plans by discouraging plan sponsors from
accumulating assets in excess of the plan's full funding limits.
How did the Tax Code Contribute to the Problem?
Acting as the other side of the same coin that required minimum
contributions to plans to ensure that adequate funds be accumulated to
pay benefits as they come due, the tax code prevented plan sponsors
from building reserves during the good years to offset losses suffered
during years of poor market performance. Employers who made
contributions above the ``maximum deductible'' limit, even those who
were required to do so by the terms of their collective bargaining
agreements, ran the risk of incurring penalties including the loss of a
current deduction for those contributions and the assessment of an
excise tax on such contributions. As plans approached this limit (as
some 70 percent or more of all plans did during the late 1980s and
1990s), trustees were advised that rather than accumulate additional
``rainy day'' reserves, they would need to make additional benefit
improvements to increase the cost of the plan sufficiently to protect
the deductibility of their legally required contributions under their
collective bargaining agreements.
The Day[s] of Reckoning
Questions of the sustainability of these benefit improvements were
raised by plan trustees even before the first stock market declines
early this decade began to be felt. Although some modest relief was
granted in EGTRRA, when the tech bubble burst and the markets suffered
a crisis of confidence fueled by the collapse of companies like ENRON
and WorldCom, the plans were unable to absorb market losses of 15
percent to 25 percent. Instead of being concerned with the maximum
deductible limits, for the first time since the passage of ERISA and
MEPPA, plans faced projections of near-term funding deficiencies as
they were told of the likelihood of failing to meet their minimum
funding requirements. Under ERISA's funding rules, the consequences of
such failures included a requirement for employers to pay their
proportionate share of the shortfall and pay an excise tax on top of
those additional contributions. The reliance on investment income by
mature plans meant that such additional contributions could total
several times the amounts contributed under their bargained rates, and
for industries like construction which typically have narrow profit
margins, significant numbers of contributing employers faced the very
real possibility of bankruptcy. Were this to occur, the remaining
employers would then have the shortfall amounts that were not paid by
the bankrupt companies redistributed among those that remained, causing
additional bankruptcies and, with a contracting contribution base,
eventual plan failure.
For unions and participants, the prospect of plan failure would
mean that future generations would have no reliable source of
retirement income. Even more troublesome was the prospect of the loss
of significant benefits for current pensioners and beneficiaries whose
benefits would be reduced, at best, to the maximum PBGC levels (a
maximum annual benefit of $12,870 for participants who retired with 30
years of service, with corresponding reductions for those with less
service). The convergence of interests by the stakeholders resulted in
a coordinated effort by labor and management (through the Multiemployer
Pension Plans Coalition) to devise a proposal for funding reform that
would prevent the destruction of the plans. This set of proposals
formed the nucleus of the multiemployer provisions of the PPA.
This set of proposals contained tough medicine for all of the
stakeholders. Once again, recognizing the problem was one in which all
stakeholders were affected, the parties agreed to a package which
included a notion of ``shared pain'' rather than having either group
shoulder the full costs. For plans facing long-term funding
difficulties (referred to as ``Endangered status'' or so-called
``yellow zone'' plans), the law required the bargaining parties to
negotiate over the terms of a ``Funding Improvement Plan'' to reverse
eroding funding levels. For plans with more serious funding problems
(``Critical status'' or so-called ``red zone'' plans), a
``Rehabilitation Plan'' is required to reverse the declining funding
trend. For the first time since the early 1980s, plans could reduce
certain classes of subsidized early retirement or subsidized surviving
spouse benefits in addition to reducing future accruals, as well as
imposing employer surcharges and, in limited circumstances, requiring
contribution increases. Furthermore, the PPA raised the maximum
deductible limit for multiemployer plans to 140 percent of the previous
limits. If the plans had sufficient time with ``normal'' market
performance, even a market contraction of the magnitude experienced
from 2000 to 2002 could have been absorbed.
Following the enactment of the PPA, but before it became effective
in 2008, plan fiduciaries began to take corrective action by increasing
contributions and adjusting benefits to avoid falling into one of the
``zones.'' Once the act became effective in January 2008 (for calendar
year plans), plans began to adopt funding improvement and
rehabilitation plans based on recent experience and then current rates
of return. The parties adopted what were frequently quite aggressive
additional contributions that strained the wage package and the
contributing employers' ability to compete. They were willing to do so
because they now knew the rules going forward and wanted to address any
potential funding difficulty as early as possible.
However, as the year progressed, the sudden and precipitous drop in
investment markets that decimated financial institutions of all types
around the world also wreaked havoc on multiemployer plans. Plans that
had formulated their Funding Improvement or Rehabilitation Plans were
now facing even deeper reductions in accumulated assets than had been
experienced from 2000 to 2002. Unfortunately, those groups which had
taken some of the most aggressive preventive measures were now faced
with filling an even deeper hole to meet their PPA funding targets, but
having previously exhausted their ability to increase contributions and
remain competitive, plan trustees and the bargaining parties are faced
with even more difficult choices. Above all, the magnitude of the
recent losses pointed out some of the shortcomings of the PPA to
respond to such drastic market fluctuations.
THE MAGNITUDE OF THE PROBLEM
In order to determine the extent of the losses and the effects of
the market contraction on the funded position of multiemployer plans
and assess the relative effectiveness of possible recommended
corrective measures, the NCCMP conducted a detailed survey of
multiemployer plans funded position over the period from 2007 through
May 31, 2009. With input from committee staff in both the Senate and
the House in formulating the questionnaire, the NCCMP sought to
determine the funded position prior to the PPA's effective date; the
number of covered participants; assets and liabilities (both on a
market value and actuarial basis); changes in funding levels subsequent
to the market contraction; contribution rates per hour and as a
percentage of compensation; asset allocation to determine the level of
risk inherent in the composition of the plans' investment portfolio and
actions taken to address funding difficulties. The following section
will present summary findings from that study.
Breadth of Survey Sample
Responses were received from 385 of the universe of 1,510
multiemployer defined benefit plans as reported in the PBGC's September
2008 Databook published in September 2009. Although the timing of the
plan year and the availability of certain data elements resulted in
fewer responses to a number of specific questions, comparative results
were compiled using data from plans that provided answers to each of
there relevant questions. As shown in Figure 1, responses were received
from plans covering 5.8 million of the 10.1 million participants in all
multiemployer plans.
The distribution of responding plans by number of participants
reflects a slightly greater number of larger plans than reported by the
PBGC.
Figure 3 shows the distribution of respondent plans distributed by
numbers of participants by industry association.
Plans that responded to the survey reported total assets in 2008 at
over a quarter trillion dollars ($237,569 million). Figure 4 shows the
distribution of assets for those respondents that reported an industry
affiliation.
The assumed rate of return is a key determinant in assessing
whether benefits are sustainable in the long run. Figure 5 shows that
the rates of return for multiemployer plans fall within a relatively
tight range between 7 percent and 8 percent with the majority of plans
at 7.5 percent.
Asset allocation is perhaps the single most important determining
factor in the success of a plan's investment program. Multiemployer
plans have been guided by Department of Labor rules that plans be
invested in diversified portfolios. Although one school of thought
encourages a lower risk profile with greater exposure to alternative
investments, most multiemployer plans have a traditional asset mix.
Looking at the performance from 2007 through 2009, for plans reporting
their asset allocation, equities comprised about 50 percent of the
average portfolio, with fixed income at about 30 percent, real estate 8
percent and ``other'', hedge funds, cash and private equity all
comprising less than 5 percent on average each. The reduction in equity
exposure from 2007 to early 2009 is primarily due to the reduction in
value of the underlying asset rather than a deliberate decision to
reduce equity exposure.
Figure 6 shows the actual median rates of return for all plans
reporting performance for the periods from 2007 and 2008. In 2007 the
median rate of return slightly exceeded the assumed rate at 7.97
percent, whereas the performance for 2008 was consistent with that of
the broad markets at a negative 21 percent.
These investment losses directly translated into a decline in the
plans' funded percentage. As shown in Figure 8, the reduction in funded
percentage was consistent across all industries generally ranging from
negative 10 percent to negative 40 percent, with the median loss at
negative 18.1 percent for plans that reported their funded percentage
in both years.
The net effect of the decline in funded percentage is shown in
Figure 9 (below) which shows a clear shift in the funding status of
plans from 2007 through 2009 with more than 75 percent of funds
reporting market value of assets greater than 80 percent of actuarial
liabilities in 2007, dropping to more than 75 percent of funds
reporting market value of assets at less than 80 percent funded by
2009. Although the number of plans reporting results at the beginning
of 2009 was lower because of the timing of the survey and the start of
the plan year, the pattern is as clear as the precipitating event.
The reduction in funded status is reflected in the change in
reported ``zone'' status disregarding any election to freeze under the
WRERA. As shown in Figure 10, the number of plans reporting green zone
status in 2008 (the first year this concept became effective) was 77
percent, with 14 percent in yellow and 9 percent in red. By 2009, those
numbers had reversed. Green zone plans had fallen to 20 percent, while
those in the yellow zone increased to 38 percent and red zone plans to
42 percent.
Average benefit payments for all reported multiemployer plan
participants in pay status are shown in Figure 11. The concentration of
monthly benefit payments between $500 and $1,500 reflects the large
number of pensions and survivors benefits based on pensions which
became effective when benefit levels were necessarily low.
New benefit awards are shown in Figure 12. The point where the
current PBGC benefit guarantee level is maximized is $1,320. Of the 275
plans which reported this data, 46.9 percent of all awards exceeded
that amount, meaning that participants in failed plans would suffer
even greater reductions than the formula provides to provide a
disincentive for plan sponsors to abandon their plans.
Figures 13 through 15 demonstrate that plan sponsors have been
proactive in addressing funding concerns. Figure 13 shows the reported
median contribution rates for 2007, 2008 and 2009. Median rates
increased by approximately 5 percent from $3.84 to $4.04 from 2007 to
2008, and by an additional 68.5 percent to $6.81 in 2009. The total
increase in median contributions from 2007 to 2009 exceeded 77 percent.
Figure 14 shows the average (mean) contribution increase for the
same periods. Hourly contributions rose by 20 (12.7 percent) between
2007 and 2008 from $3.84 to $4.04 and an additional 38 (10 percent) to
$4.18 per hour from 2008 to 2009. The total increase from 2007 to 2009
was 81 per hour or 21 percent.
Finally, Figure 15 shows the percentage of total compensation for
plans that reported this information for the years 2007, 2008 and 2009.
While the majority of plans report rates between 10 percent and 20
percent for all 3 years, the slope of the increase for plans reporting
in 2009 appears to be increasing. It should be noted that the 2009
numbers are not likely to reflect changes in funding improvement or
rehabilitation plans pursuant to the 2008 losses.
IMPLICATIONS AND PROPOSALS FOR LEGISLATIVE RELIEF
The data clearly show that the reason the funded position of
multiemployer plans has deteriorated in the last 3 years is the
financial crisis which has negatively impacted all financial
institutions--not overly generous plan designs, mismanagement or risky
investments as has been alleged by the uninformed. Given the collective
assets of these plans, it is also undeniable that these plans are an
integral part of the Nation's financial infrastructure, not only
because of their value in delivering reliable monthly benefits to plan
participants, but as a source of capital for private equity and as an
economic generator for the local economies where pensioners and
beneficiaries reside. It is also clear that plan fiduciaries and
settlers have taken prudent action to address projected funding
difficulties without waiting for the government to mandate such
actions.
Nevertheless, this system is not without limits. Unrelenting
statutory pressure to increase contributions above the very substantial
increases already implemented will place greater numbers of
contributing employers at a competitive disadvantage, further
threatening the long-term viability of plans that are dependent on such
contributions to meet their short- and long-term funding targets.
PROPOSED RELIEF MEASURES
The Multiemployer Pension Plan Coalition has evaluated and
recommended numerous legislative relief measures to provide statutory
flexibility to address the recent market volatility. Unfortunately,
there appears to be no ``one-size-fits-all'' solution. As a result, the
proposal identifies several reform options that are designed to provide
the greatest relief to the largest number of plans. With two
exceptions, these proposals have been incorporated into the House
``Preserve Benefits and Jobs Act of 2009'' bill introduced on October
27 by Congressmen Pomeroy and Tiberi.
The specifics of the proposals are attached to this submission and
will not be repeated here. However, it is important to underscore that
these proposals can be considered as following two tracks: one that
extends the timeframes to meet the plans' long-term obligations for
those plans that, with such assistance, will remain solvent; the second
addresses relief for plans that are unlikely to survive without direct
intervention.
For plans in the first category, the Coalition proposal suggests
that granting 30 years to either: (1) consolidate and ``fresh-start''
the plans' existing amortization bases (Funding Standard Account) over
that period; or (2) isolating and amortizing only the losses suffered
by plans in 2008 and 2009 over 30 years. The proposal includes related
provisions that would allow plans to use 10 year smoothing of the
portion of the plan's losses that would be recognized in the 2008 and
2009 years and would expand the relevant market to actuarial value of
assets corridor from 20 to 30 percent.
For plans in the second category, the proposal advocates for the
expansion of the PBGC's ability to facilitate mergers or ``alliances''
of weaker plans into stronger plans that could be a ``win-win''
proposition for participants (by not having the weaker plan fail with
corresponding benefit reduction if the plan were to require PBGC
funding assistance); contributing employers (by increasing the number
of contributing employers and lessening the probability of plan
failure); and the PBGC, whose timely intervention could reduce the
agency and taxpayers' liability exposure.
The second element of relief for vulnerable plans in certain
industries is the expansion of the current ERISA provisions governing
partition of plans projected to become insolvent. Such partitioning
could allow the plan to survive by segregating liabilities associated
with participants' service with employers that have ceased plan
participation and left without paying their full withdrawal liability.
Such segregation would be analogous to the amputation of a limb to save
the life of the patient, and would also reduce the likely liability
exposure of the PBGC. More importantly, prompt action on this issue
could protect thousands of jobs in industries that will be adversely
affected by the adoption of Funding Improvement or Rehabilitation plans
in the absence of such relief.
Finally, while each element of the coalition proposal is important
and the inclusion of specific mention of one rather than another is no
indication of priority, it is important to note that the proposal also
includes an increase in the PBGC guaranteed benefit levels by expanding
the current formula which guarantees 100 percent of the first $11 of
accrual, plus 75 percent of the next $33 of accrual times the number of
years of service, the Coalition proposal would add a third layer--50
percent of the next $40 of accrual. This proposal reflects the
increases in benefit levels required by the tax laws cited above and,
unlike the proposal for partition, would be funded by an increase in
the PBGC premiums.
I welcome the opportunity to submit these comments for your
consideration and look forward to reviewing certain aspects of them
with you at Thursday's hearing.
______
Attachment
Multiemployer Coalition Legislative Proposal for Multiemployer Defined
Benefit Pension Plan Funding Relief
A. GENERAL RELIEF FOR CHALLENGED BUT SOLVENT PLANS
1. Allow multiemployer plans that meet stated solvency standards
(to assure that the plan is expected to have enough cash-flow during
the extended period) to elect a one-time fresh-start of the Funding
Standard Account, with the sum of all of the current outstanding
balances amortized over a single 30-year period, effective starting
with the plan year beginning after either September 30, 2009 or
September 30, 2010.
2. As an alternative that the trustees may select instead of option
one, provide an option to isolate the investment losses suffered during
the period of 2-plan years beginning on and after September 1, 2008 and
ending by September 30, 2010 and amortize them over 30 years.
3. At the option of the trustees, extend the Rehabilitation or
Funding Improvement Periods by 5 years, offset (if applicable) by the
3-year extension elected by some plans pursuant to WRERA. The election
to use this extension could be made at any time that the Rehabilitation
or Funding Improvement Plan is being developed or updated, provided
that it could only be elected once with respect to each period that
such plan is in the Yellow Zone and once with respect to each period
that it is in the Red Zone.
4. Extend the automatic amortization extension period from 5 to 10
years with an additional 5 years available with IRS approval, and set
time limits for IRS review of automatic amortization extension
submissions, so that, if the actuary has properly certified that the
standards are met, the extensions can be adopted on a timely basis.
a. Provide that the 2008-2009 investment losses will not cause
multiemployer plans that received amortization extensions from IRS
before enactment of PPA to lose the benefit of those extensions,
despite IRS's requirement, when granting the extensions, that the
plans' funded levels improve each year by at least 1 percent.
5. To temper the immediate and dramatic impact of the recent plunge
in investments, widen the acceptable corridor for purposes of actuarial
smoothing to 30 percent to mitigate the initial impact on increased
employer contributions and/or benefit modifications attributable to the
precipitous drop in asset values for 2008 and 2009; and extend the
acceptable smoothing period to 10 years to phase in the losses of 2008
and 2009 only.
B. FOR TROUBLED PLANS THAT NEED SPECIAL HELP
6. Help multiemployer pension plans support one another by:
a. Recognizing a new type of plan called an ``alliance,'' through
which multiemployer pension plans can be combined for purposes of
investment, administration, fiduciary accountability, prospective
service credit for benefits and eligibility and retroactive vesting
credit, but maintain separate accounting for purposes of the funding
requirements (including the special funding requirements for endangered
and critical-status plans) and withdrawal liability associated with
benefits earned prior to the effective date of the alliance;
b. Specifically authorizing the PBGC to encourage and facilitate
fund mergers and alliances, including by providing financial assistance
from the multiemployer guaranty fund if the agency determines that that
assistance is reasonably expected to reduce the PBGC's likely long-term
loss with respect to the funds involved; and
c. Modifying the fiduciary rules and standards to remove
unnecessary impediments to multiemployer pension fund mergers,
including alliances, by:
(1) Providing that the trustees approving such a merger or
alliance are deemed to meet the ``exclusive benefit'' standards
of sections 403 and 404 of ERISA if they determine that the
merger is not reasonably likely to be adverse to the long-term
interests of the participants in the pre-merger plan for which
they are responsible, and
(2) Specifically adding multiemployer plan mergers that are
alliances to the types of mergers that, under existing law, are
deemed not to be prohibited transactions under sections 406(a)
and 406(b)(2) of ERISA, if the PBGC finds that the transaction
meets the standards in section 4231 of ERISA; and
(3) Confirming that the fiduciaries of the combined plan are
accountable to all of the participants of the merged plans in
the alliance.
7. Reinvigorate the multiemployer plan partition option under ERISA
4233, to meet special industry needs. Specifically, amend the
partition rules in ERISA 4233 as follows:
a. The provisions in ERISA Section 4233 would be revised to include
a new subsection entitled ``Qualified Partition upon Election By
Certain Plans.''
b. The new subsection would include the following provisions:
(1) Multiemployer pension plans that meet the requirements of
ERISA Section 4233(b)(1)-(4) (as modified as described in (b.
2) below), as well as the other criteria described in (b. 2)
below, could elect to transfer to the PBGC responsibility for
the vested benefits attributable to service of participants
with non-contributing employers that either have become
bankrupt or otherwise have gone out of business without paying
their proportionate share of the plan's full withdrawal
liability. If an election is made, the PBGC would be required
to assume the responsibility with respect to those benefits by
the first day of the first month that begins at least 90 days
after the date of the plan's election.
(2) To be eligible for a Qualified Partition, a Plan would
have to meet the following criteria:
(a) The plan has been certified to be in Critical (``Red
Zone'') Status at the time of the Automatic Partition request;
(b) The plan has suffered a substantial reduction in the
amount of aggregate contributions under the plan that is
attributable to employers that either have previously become
bankrupt or otherwise gone out of business without paying their
proportionate share of the plan's full withdrawal liability;
(c) The trustees certify, based on actuarial projections,
that the plan is likely to become insolvent and a significant
increase in contributions would be necessary to prevent
insolvency;
(d) As of the end of each of the immediately preceding 2-
plan years, the plan had a ratio of inactive participants
(retirees, beneficiaries and terminated vested participants) to
active participants of at least 2 to 1;
(e) In each of the immediately preceding 2-plan years, had
a ratio of benefit payments to legally-required contributions
of at least 2 to 1; and
(f) The trustees certify that, based on actuarial
projections, partition would significantly reduce the
likelihood of insolvency.
(3) For each plan year after a Qualified Partition, the plan
sponsor will determine whether aggregate employer contributions
have declined 10 percent or more as a result of employers'
becoming bankrupt or otherwise going out of business without
paying their proportionate share of the plan's full withdrawal
liability and, if so, shall transfer responsibility to PBGC for
non-forfeitable benefits attributable to service with those
employers.
(4) In the case of a Qualified Partition, the PBGC's
partition order described in ERISA Section 4233(d) will provide
for the transfer of vested benefits attributable to service of
participants with respect to non-contributing employers that
either have become bankrupt or otherwise have gone out of
business without paying their proportionate share of the plan's
full withdrawal liability, and the transfer of plan assets
attributable to withdrawal liability payments collected from
such non-contributing employers and any earnings thereon but
reduced by the amount of benefit payments actually made to such
participants.
(5) The PBGC would guarantee the non-forfeitable benefits
transferred pursuant to a Qualified Partition.
(6) Any net unfunded costs or liabilities incurred by the
PBGC in connection with Qualified Partitions will be
disregarded in determining the financial condition of the
guaranty funds under ERISA 4005 and premiums payable under
ERISA 4006.
8. Encourage continued participation by employers facing additional
pension contribution stress by:
a. Authorizing a ``pension support tax credit'' equal to the
eligible increase in the amount of employer contributions paid to a
multiemployer plan that is seriously endangered or in critical status,
pursuant to a collective bargaining agreement adopting a schedule of
contributions acceptable to the Trustees and consistent with the plan's
Rehabilitation or Funding Improvement Plan, provided that the plan is
not terminated or frozen for future accruals during any of the plan
years for which the increased contributions are paid.
b. An increase in contributions is eligible under this provision to
the extent it is attributable to an increase in the rate of
contributions (including an increase due to a change in the basis on
which contributions are made) required under the Trustee-approved
schedule.
c. The tax credit will be available for up to 3 consecutive years,
beginning with the year in which the increased contributions are first
paid.
C. FOR ALL PLANS
9. Increase the generally applicable PBGC multiemployer guarantees
prospectively, by adding a third level of guaranteed accrual rate, to a
maximum of 100 percent of the accrual rate up to $11, plus 75 percent
of the next $33, plus 50 percent of the next $40. This would produce a
maximum guarantee of roughly $20,000 a year for a participant with 30
years of service for a pension (compared with less than $13,000 under
current law).
10. Back PBGC obligations with respect to Qualified Partitions with
the full faith and credit of the United States to more appropriately
reflect the magnitude of benefits guaranteed and to enable the agency
to carry out its objectives to protect all defined benefit plans as set
forth in ERISA 4002(a), with due consideration to avoiding crippling
increases in the applicable premium structure.
11. Authorize employers to issue ``PPA Compliance Bonds'' that
would be guaranteed by the U.S. Treasury, subject to certain risk
management conditions, the proceeds of which would be contributed to
the plan.
12. Make technical corrections to sections 202 and 212 of the PPA,
which added the special funding rules to ERISA and the Internal Revenue
Code for multiemployer plans in endangered or critical status. For
example:
a. eliminate the possibility that IRC 432(c)(4)(C)(ii) could
subject plans that shift from endangered to critical status to
overlapping, inconsistent standards during the Rehabilitation Plan
Adoption Period,
b. streamline the rules for seriously endangered plans by providing
that the benchmarks in IRC 432(c)(3)(B) and (4)(B) apply to all such
plans, and
c. confirm that, if an endangered plan meets the applicable
statutory benchmarks before the end of its Funding Improvement Period
but the actuary certifies that it still fails the tests in 432(b)(1),
the original Funding Improvement Period and Funding Improvement Plan
remain in effect until the plan is no longer certified to be in
endangered status.
The Chairman. Thank you very much, Mr. DeFrehn.
And now we will turn to Karen Friedman from the Pension
Rights Center. Welcome.
STATEMENT OF KAREN D. FRIEDMAN, EXECUTIVE VICE PRESIDENT AND
POLICY DIRECTOR, PENSION RIGHTS CENTER, WASHINGTON, DC
Ms. Friedman. Chairman Harkin, Ranking Member Enzi, and
members of the committee, thank you for the opportunity to
testify today.
In today's devastated economic environment, we have seen
how important defined benefit pension plans are to the security
of American workers and their families. While millions of
Americans have seen their 401(k) account balances plummet in
value, workers and retirees in ongoing traditional pension
plans are the ones who are most likely to be sleeping soundly,
knowing that they will have a guaranteed lifetime stream of
benefits to supplement Social Security.
Helping companies to continue their ongoing defined benefit
pension plans is an important part of the economic recovery
process because doing so will provide retirees with guaranteed
monthly incomes so they can continue to contribute to the
economy, and in addition, pension plans generate long-term
investment capital that can help promote job creation.
For these reasons, the Pension Rights Center supports
providing emergency funding relief to companies that have done
the right thing and have continued to maintain their defined
benefit plans, and we believe that this emergency funding
should be given as long as that relief is conditioned on
certain critical protections for employees.
I will also explain today why we oppose providing blanket
funding relief for companies that have frozen their plans. Due
to time limitations, I will refer you to my written statement
for a discussion of other issues, and with your permission, I
would like to have these included in the record.
First and foremost, we believe that emergency funding
relief should be targeted to active defined benefit plans. We
support full funding relief only for companies that sponsor
pension plans where employees continue to accrue benefits.
Companies that have stood by their defined benefit programs,
while others have abandoned or frozen them, deserve the support
of Congress.
The type of relief we favor for ongoing single-employer
plans is an extended amortization period for losses
attributable to the recession. It is important to note that it
is the employees who would share the downside risk with the
PBGC if employers ultimately default on their obligations. And
obviously, we have seen that today with the Delphi retirees
loud and clear. Because of this, we believe that if companies
get funding relief, they must make a commitment that employees
will continue to accrue benefits under the plan at least until
the end of the period in which relief is granted. This will
ensure that companies will not get relief and then just freeze
the plan.
Also, we believe that as part of funding relief for ongoing
plans, companies should be prohibited from both making
contributions into deferred compensation arrangements and then
from paying out benefits to executives from these plans during
the relief period. We ask why should companies get funding for
pension plan contributions if they are then using the company's
operating assets to pay out huge benefits just for executives.
Our second major point that I want to emphasize today is
that companies with frozen plans, those that have stopped
accruals for workers, should not receive the same automatic
funding relief. Why? It is because the best argument for
granting funding relief to employers is that pension plans
provide benefits that working men and women can rely on.
Companies that have frozen their plans by stopping workers from
accruing benefits have severed this commitment to their
workers.
It is important to keep in mind that funding relief is not
free. It is essentially an unsecured loan provided by a pension
plan and its participants to the company. If a company cannot
continue to fund the plan and it is later terminated, employees
can lose benefits they earned if these are not fully guaranteed
by the Pension Benefit Guaranty Corporation. Again, we saw
this. The Delphi retirees are a tragic and extreme version, but
we have seen this all over the country. Since it is the
participants who bear a great part of the risks, we do not
believe that emergency relief should be made available to plans
in which employees are no longer accruing benefits.
Now, some have argued that extending relief to frozen plans
could free up money that could be used to create and preserve
jobs, but we really have not seen evidence of this. And this
money could be used for any purpose, including moving jobs
overseas, automation, or even executive compensation.
Here is what we are saying. Instead of granting automatic
funding relief for frozen plans, we suggest making use of
provisions that are already in current law. These provisions
allow employers to request a funding waiver from the IRS if
they could show temporary, substantial business hardship. We
would support providing the IRS with resources to streamline
the process to review waiver requests in the case of companies
with frozen plans that need relief, and one option might be for
Congress to establish a special temporary funding review board
and require that waivers be ruled on in an expedited manner,
perhaps within 60 or 90 days of the request.
In conclusion, Congress should definitely help ensure the
survival of existing defined benefit plans and stand by those
companies that continue their pension plans. But, Senator
Harkin, as you mentioned before, just providing funding relief
is not going to address the Nation's growing pension problems.
Also in direct response to your question, we encourage the
committee to hold hearings not just on ways to stabilize and
expand the pension system for current workers, which we are all
committed to do--and we have to look at all the ways that we
can address the problems of today and other problems of the
system--but we also need to examine the need for a new
universal, secure, and adequate pension system that supplements
Social Security for future workers.
And I just want to say quickly that the Pension Rights
Center, along with many other organizations, including the AFL-
CIO and the Service Employees International Union, just started
a new initiative called Retirement USA which released 12
principles for a universal, secure, and adequate pension system
for future generations. We are all committed to working to keep
the current system and preserve defined benefit plans for
today's workers and do everything we can to protect 401(k)
plans, but to work toward a universal, secure, and adequate
pension system for the future.
I welcome any interest that you have and I will be happy to
answer any questions that you have today.
[The prepared statement of Ms. Friedman follows:]
Prepared Statement of Karen D. Friedman
Mr. Chairman, members of the committee, thank you for the
opportunity to testify today. I am Karen Friedman, the Executive Vice
President and Policy Director of the Pension Rights Center, a 33-year-
old consumer rights organization dedicated to protecting and promoting
the retirement security of workers, retirees and their families.
In today's devastated economic environment, we have seen how
important defined benefit plans are to the security of American workers
and their families. While millions of Americans have seen their 401(k)
savings accounts plummet in value, workers and retirees covered by
defined benefit pension plans are the ones who are most likely to be
sleeping soundly, secure in the knowledge that they will have a
guaranteed lifetime stream of benefits to supplement Social Security.
Helping companies to continue their ongoing defined benefit plans
is also an important part of the economic recovery process, because:
(a) doing so will provide retirees with a guaranteed source of monthly
income to enable them to continue to be productive citizens and to
contribute to the economy; and (b) defined benefit plans generate long-
term investment capital that can help expand the economy and ensure the
preservation and creation of jobs.
For these reasons, the Pension Rights Center supports providing
emergency funding relief to companies that have done the ``right
thing,'' and have continued to maintain ongoing defined benefit plans--
as long as the relief is conditioned on certain critical protections
for employees, which I will discuss today. As I will explain later, we
oppose providing blanket funding relief for companies that have frozen
their plans. I will also talk about why we believe, as part of this
debate, certain Pension Protection Act (PPA) provisions that adversely
affect participants should be repealed. I also will discuss briefly
issues related to multiemployer plans, and why Congress should act to
stop the use of qualified defined benefit plans to unfairly provide
special benefits to selected top executives through so-called Qualified
Supplemental Executive Retirement Plans, or Q-SERPs for short.
I. FUNDING RELIEF SHOULD BE TARGETED TO ACTIVE DEFINED BENEFIT PLANS
First, and most important, we support full funding relief only for
companies that sponsor active defined benefit plans under which
employees continue to accrue benefits. Companies that stood by their
defined benefit programs while others abandoned or froze them deserve
support from Congress.
The type of relief we favor for ongoing single-employer plans is to
permit an extended amortization period for losses attributable to the
recession. It is important to note that it is employees who would share
the downside risk with the PBGC if employers ultimately renege on their
obligations. Because of this, we believe that if companies get funding
relief for their defined benefit plans, they must make a commitment
that employees will continue to earn new benefits under the plan at
least until the end of the period in which relief is granted. This will
ensure that companies will not get relief and then freeze the plan
which would be unfair to employees and contrary to the purpose of
receiving relief in the first place.
Also, we believe that as part of funding relief, companies should
be prohibited from both making contributions into deferred compensation
arrangements, such as rabbi trusts, and from paying out benefits to
executives from these plans during the relief period. The reason for
this recommendation is that contributions to and payments from these
nonqualified plans for executives are company assets that could help
fund the company's qualified plan for workers. Why should companies get
funding relief for plan contributions if they are still funding and
paying out benefits from deferred compensation plans for executives?
II. COMPANIES WITH FROZEN PLANS SHOULD RECEIVE NO ADDITIONAL FUNDING
RELIEF
As I said before, we believe that the best argument for granting
funding relief to employers is because doing so serves a constructive
societal purpose in preserving pension plans, which provide secure and
adequate retirement income to working men and women. Companies that
have frozen their plans--by stopping workers from accruing benefits--
have severed this commitment to their workers.
It is important to keep in mind that funding relief is not free: It
is essentially an unsecured loan provided by participants to the
company. Employees give up wage increases in exchange for company
contributions to defined benefit plans on their behalf. If a company
cannot continue to fund the plan and it is later terminated, employees
can lose benefits they earned if these are not fully guaranteed by the
Pension Benefit Guaranty Corporation. Since it is the participants who
potentially bear a great share of the financial burden of funding
relief, we do not believe that emergency relief should be made
available to plans in which employees are no longer earning new
benefits.
Some have argued that extending relief to frozen plans will help
save jobs because money not contributed to the pension plan could be
used to create and preserve jobs. But this argument is unsupported by
firm evidence. The fact is that this money could be used for any
purpose, including moving jobs overseas, automation or even executive
compensation.
It should also be noted that there are provisions in current law
that allow employers to request a funding waiver from the Internal
Revenue Service if they can show temporary substantial business
hardship and that failure to grant a waiver would be adverse to the
interests of plan participants.
We would support providing the I.R.S. with resources to streamline
the process to review waiver requests in cases of companies with frozen
plans that need relief. One option might be for Congress to establish a
special temporary funding review board and require that waivers be
ruled on in an expedited manner (perhaps within 60 or 90 days of the
request).\1\ A company with a frozen plan that wants further funding
relief could qualify for that relief by unfreezing the plan and
accepting the conditions we described above.
---------------------------------------------------------------------------
\1\ In the case of companies that are continuing their plans for
current employees but have frozen them for new hires, a tiered approach
to funding relief might be appropriate. For example, these plans might
be allowed to amortize only a portion of the recessionary losses, or be
permitted to amortize them over a shorter period of time. A similar
approach could be used for plans that no longer credit current
employees with future service, but allow their benefits to reflect
future increases in compensation.
---------------------------------------------------------------------------
III. REPEAL CERTAIN PENSION PROTECTION ACT PROVISIONS
Repeal the PPA provision mandating the automatic freeze of
benefit accruals in single-employer plans that are less than 60 percent
funded. Congress should not penalize plan participants because
employers have not funded the plan. Alternatively, the PPA provision
could be converted into a temporary suspension of benefit accruals
rather than a freeze, with the suspended accruals automatically
restored once a plan has attained a specified funding level.
Repeal the PPA provision that allows the PBGC to set the
date of a distress termination as the date the plan sponsor filed
bankruptcy rather than the date the plan is officially terminated by
the bankruptcy court. When the PBGC uses the earlier date, the agency
effectively cuts workers benefits by not counting additional accruals
that were earned before the plan was actually terminated.
IV. PROTECTIONS FOR EMPLOYEES IN MULTIEMPLOYER PLANS
Raise the maximum PBGC guarantee for multiemployer plan
benefits to at least $20,000 for a full-career worker.
Multiemployer plans in the future may find their way out
of the current crisis and become over-funded by a significant amount.
If so, we hope that Congress will explore ways to reinstate subsidized
early retirement benefits (and subsidized survivors benefits) that may
have been eliminated under the ``Red Zone'' (critical status)
provisions of the PPA.
V. ELIMINATE Q-SERPS
Two years ago, the Wall Street Journal revealed a practice in which
companies use pension plans that were set up for rank-and-file workers
to provide increased benefits for a small number of high-paid
executives. The enhanced benefit formulas for a privileged few were
known as Qualified Supplemental Executive Retirement Plans, (Q-SERPs.)
These provisions were an inequitable use of plan assets and may have
contributed, at least at the margins, to the current funding problems
of some plans. Congress should eliminate Q-SERPs.
CONCLUSION
The economic meltdown of the last year has shown the tremendous
value of defined benefit plans to employees and retirees. Congressional
response to the economic crisis should be to help ensure the survival
of existing defined benefit plans and stand by those companies that
stood by their defined benefit plans in an era when too many companies
abandoned their plans.
Also, we hope that this committee continues to hold retirement
income hearings both to examine ways of encouraging new defined benefit
plans as well as to look at broader issues for the future. We would
encourage you to look at both how to shore up the current system for
current workers and also to examine whether we need a new retirement
income system--on top of Social Security--for future generations. The
Pension Rights Center recently joined with the AFL-CIO, the Economic
Policy Institute, the National Committee to Preserve Social Security
and Medicare and the Service Employees International Union to convene
Retirement USA, a new initiative working for a visionary retirement
system--one that is universal, secure and adequate. Retirement USA has
established 12 Principles for a New Retirement System. These can be
viewed at www.retirement-USA.org and I would be pleased to answer any
questions you may have about this initiative.
The Chairman. Thank you very much, Ms. Friedman. Thank you
all very much for your testimony.
When I was reading over your testimonies last night, I have
different things that I circled. I asterisked this last
sentence of yours which said that ``Retirement USA has
established 12 Principles for a New Retirement System.'' I
would like to get those. I guess I can get them online here.
You gave us the----
Ms. Friedman. Yes, and I will be happy to send them to you.
The Chairman. Again, Ms. Friedman, any funding relief that
we provide I think should be targeted to those companies that
need it most. It should not be just a corporate giveaway. I
have said that many times.
Yesterday we received new data from the PBGC on the 50
large financial institutions that received the most TARP funds.
PBGC says that 38 of those 50 TARP recipients had defined
benefit pension plans. Well, I notice also that--I probably
should have said this to the former panel--TARP funds to
General Motors, $50.7 billion. Four-hundred million dollars has
been returned. They still have $46 billion or something like
that. GMAC, the holding company, got $13.4 billion. It just
seems to me the companies that got TARP funds could use some of
that money to make payments to their pension plans.
Do you think the financial companies that received billions
of dollars in TARP relief should get pension funding relief?
Ms. Friedman. Well, I guess this is what we would say. We
know that there are many financial institutions that have
received TARP money and they do, as you pointed out, have
defined benefit plans. I think that we would recommend the same
thing for the financial institutions that are getting TARP
money that we are recommending for frozen plans, and that is,
Congress should consider setting up a panel to review these
requests from financial institutions that have gotten TARP
money on a case-by-case basis. I do not think there should be
blanket relief, and I think----
The Chairman. Why do we not just require them to use the
TARP money to fund their pension plans?
Ms. Friedman. Well, that could be something that you could
consider. It would depend on the individual situations, but
certainly at the bare minimum, I think that these cases should
be reviewed on a case-by-case basis.
The Chairman. It does seem odd that we would give them the
taxpayers' money or our future generation's money, by the way,
for the TARP money and then we go back to the taxpayers and say
you got to fund them again on their pension benefits. It just
seems to me they could use some of that TARP money for that.
Ms. Friedman. Well, in this case what you are basically
doing is if they ask for funding relief, they are basically
saying we do not want to use this money to put into the pension
plans. I think you would have good reason to ask them why not
and what the money is going to be used for.
Certainly, Senator Harkin, which I am sure you agree with,
given all the legislation that you have introduced in the past,
if they do get relief, they really should stop contributions
and payments out of their executive deferred compensation
packages. And I think that is an absolute.
The Chairman. Any other views on using TARP money for
pension funding relief? Anybody else got any views on that? Mr.
Gebhardtsbauer, you have been with PBGC in the past. What say
you?
Mr. Gebhardtsbauer. I can appreciate your point. I think I
would still--and earmark some of that possibly just like we
earmark certain money to people who do not have enough to buy
food. We tell them you have to buy food with the food stamps, I
guess.
But I guess I would still--I guess a little bit like Karen
was saying. I do not know enough about the details of the
company, and so I would want to look at this on a case-by-case
basis to understand what I am doing.
I would also say that I think by smoothing the
contributions out, we are not saying you do not ever have to
contribute. We are just saying you do not have to contribute as
much this year. You will just have to contribute more down the
road. They still have to get back up to 100 percent. It is
just, does it all have to be right now or can we smooth it out.
The hope, of course, is that the stock market is going to
come back in a short period of time, a year or 2 or whatever,
and so what will end up happening, like it happened in 1987 and
other times when you have a crash, the stock market goes
further down than the fundamentals would call for. There are a
lot of fears. They are just afraid of buying in the stock
market. The stock market will always go down further than it
really makes sense and then it will come back.
Dr. Richard Thaler at the University of Chicago talks about
that, that maybe the market is not being appropriately priced.
Therefore, we should not be looking at what is today's value
because we are going to lock that number in for a whole year.
We should smooth it out a little bit. So he actually wrote an
article in the Financial Times talking about how we really--in
fact, he even used the word ``actuarial smoothing.'' He said a
case for actuarial smoothing. He is probably one of the most
famous behavioral economists around.
I tip my hat to the idea of using TARP funds, but I would
still go for some of the smoothing that we talked about like
expanding the corridor.
The Chairman. I understand that completely. I do. I think
that is something that this committee is really going to have
to take a look at. How many years were you looking at?
Mr. Gebhardtsbauer. I have actually been thinking more
about the smoothing, that it should be 20 percent within market
like it was in the old days. Now it is only 10 percent.
The Chairman. The 80 to 120?
Mr. Gebhardtsbauer. Yes, 80 to 120. The 10 percent--you
know, you get smoothing through the 7-year amortization rule,
and then the corridor totally eliminates it. It totally
eliminates all the good stuff from the 7-year amortization.
The Chairman. I asked that question earlier. How was that
90 to 110 ever--what was that based on?
Mr. Gebhardtsbauer. I think what it is, back around 2000-
2001, everybody was focusing on mark-to-market for the
accounting statements, and FASB actually moved to mark-to-
market. And it makes sense. If you are buying a company, you
want to know what is the company worth today, or even if you
are buying 1,000 shares of a stock, you want to know what is it
worth today. You want mark-to-market on the accounting books.
But when it comes to putting your money in, as I mentioned to
the finance professors at Penn State and the economics
professors--they all knew that the market crashed, but they did
not contribute any more this year than they did the year before
because they assume the market is going to come back. They were
heavily smoothing. They did not change their contribution at
all and neither did I. I guess we all sort of assume the market
is going to come back. It is very difficult to be forced to use
that number back on January 1 when we already know the market
is much better now than it was even back on that date.
The Chairman. Senator Enzi.
Senator Enzi. Thank you, Mr. Chairman.
Mr. Gebhardtsbauer, I am glad you are back in Washington,
DC, even just for a short while.
Mr. Gebhardtsbauer. Thank you.
Senator Enzi. I greatly appreciated your insight as we
worked on the original Pension Protection Act in 2006.
In your testimony, you discuss the Dutch pension system and
how it was able to weather downturns in the stock markets, as
well as the ability to keep more individuals in defined benefit
plans. Can you provide us with a little more insight into that
Dutch system?
Mr. Gebhardtsbauer. Yes. Well, they have multiemployer
plans where it covers whole industries. You will have the whole
industry covered. There is one advantage.
They also have a smoothing technique on the benefits. For
example, if there is a big crash--and this helps the accounting
books too because they have mark-to-market accounting in Europe
too. What it does is it says if you have this huge crash, if
you just gave a nice benefit in the past year, you can actually
reduce that temporarily, and then as soon as the market comes
back, you put it back in the plan. So people are not really
hurt because if they keep working, if they are in their 30s,
40s, and 50s, the market will come back and so it will be back
as a benefit in the plan.
Because of those laws helping employers keep their pension,
it allows that smoothing. It not only smoothes the
contributions. It is actually smoothing the accounting
statement book numbers because the liability gets smoothed too.
Senator Enzi. We have been talking about this narrower
corridor. In the previous panel, we talked a lot about trying
to prevent companies from gaming the system. But you are
recommending that we go back to the older corridor provisions.
If we go to those, can we keep the companies from gaming the
system with their pensions, whether they are fully funded or
they may not be?
Mr. Gebhardtsbauer. Right. I do not think this causes
gaming. There would be some economists and actuaries that would
say that because you are smoothing, you can hold more stocks in
the pension plan now. I talk about that in my written
testimony, that you do not want to encourage companies to have
too much stock. You get all kinds of penalties when you go
below 100 percent, 80 percent, 60 percent. You have to stop
paying lump sums. You have to freeze accruals. There are all
these penalties. You have to start contributing every quarter
of the year.
We might want to toughen those penalties a little bit. For
example, like Bethlehem Steel that was brought up a little bit
earlier. They had a huge percentage of their pension plan
assets in stocks, and it was only now a small company and a
huge number of retirees. The liabilities in the pension plan
were huge compared to the size of the current workforce. As
long as the stock market was doing alright, they could afford
their pension plan. In fact, the excess returns in the stock
market helped them. They did not have to contribute to the
pension plan and they still looked over 100 percent funded. But
then they were gambling because as soon as the stock market
went down, boom, they were blown out of the water and they had
to terminate, give it to the PBGC.
Since the PBGC existed, they knew we did not have to worry
about that. Actually they did because some employees then do
not get as good a benefit from the PBGC because the guarantees
are only up to a certain maximum.
But maybe we need some rules to make sure that you do not
have--that is the abuse, I think, you were talking about,
taking too much of a gamble with your pension plan, taking a
gamble that if things go badly, you can put the liabilities to
the PBGC.
The suggestion in my written testimony is--I do not know if
you want to prohibit, like you cannot have more than 60 or 70
percent stocks. I do not know if we would prohibit the choice,
but we would make it very difficult to do something like that.
For example, if you have over 60 percent or over 50 percent of
the assets in your plan in stocks, then we are going to charge
you a risk premium. This risk premium says you are putting a
risk on us, you know, the PBGC. Especially you would make it
mostly for a company that is pretty weak, a company whose
ratings are not high. That is where the abuse is going to
occur. We know we are weak. We can take a gamble, and if things
do not work, we dump it on the PBGC because we are already weak
enough to dump on the PBGC. So that might be an idea.
Senator Enzi. Thank you. I have some more specific
questions for you, as I do for all of the members of the panel.
I will submit those in writing.
I was going to do an additional question for the panel. You
can think about this because you will get it in writing. What
do we do about companies that are funded below 60 percent and
have no chance of coming back? We will need an answer to that
one too, but my time is about to expire here and other people
want to ask questions. I do want to rely on your expertise and
get some answers because this is really important to a lot of
people. Thank you.
The Chairman. Thank you, Senator Enzi.
Senator Hagan.
Senator Hagan. Thank you, Mr. Chairman.
Obviously, this recession has exacerbated this problem. I
am from North Carolina and had chaired the Budget Committee for
a number of years. I can remember that we were 110 percent
funded, overfunded in our pension plan. Just recently I think
it is down to 99 percent. I am very confident with what we are
doing in North Carolina, but obviously so many companies have
been impacted.
Mr. Peterson, your comment that $10 million in incremental
pension funding is the equivalent to 125 nurses is really
evident of the fact that we need jobs in our economy right now.
We are desperate to be sure we can provide jobs for people who
are unemployed and underemployed. I think it is obvious that we
are going to have to do something to amortize these problems
and help companies.
I want to be sure we give enough flexibility to make the
changes that companies need to be solvent, but without giving
them so much free rein that we find ourselves in the pre-
Pension Protection Act situations with unjustifiably
underfunded plans. I would love to hear some comments on that.
Either Mr. Peterson or Mr. Gebhardtsbauer.
Mr. Peterson. One way to perhaps start a response is that I
think we are thinking in terms of temporary relief. For
example, the reference to the extension of the amortization
period from 7 to 15 would be with respect to the losses
incurred in 2008. It would not be in perpetuity. I think maybe
that is one way of thinking about a way of providing relief
that does not open Pandora's box.
Mr. Gebhardtsbauer. Yes. In my testimony, I talk about how
the Pomeroy relief makes sense on a temporary basis, and it
seems to help everybody. Even the PBGC does not get hurt
because they get more premium income too. Hopefully, fewer
companies will end up terminating because for companies on the
edge with a triple or quadruple contribution they have to make
this year, that might be enough to push them into the PBGC. I
think this temporary basis--everybody is OK.
My concern about temporary relief is that then they expect
getting relief every time we have another crash because the
rules do not work right now in a crash. That is why we need to
make a fix so that the rules do work in the future for a
temporary crash. And one of the ideas I suggested was this
corridor relief. Other people have other ideas.
Senator Hagan. I had one other question and that is
concerning the defined contribution plans, and moving toward
those. Many companies are moving away from the defined benefit
plans. Do you think that what we are seeing right now would
increase the possibility that so many companies will move
toward, or future companies will definitely choose, the defined
contribution plans away from the defined benefit. Any thoughts
on that?
Mr. Gebhardtsbauer. Sure. I think if Congress does give
temporary relief, employers will see that Congress understands
our concerns. Congress understands that PPA is not working
perfectly right now in the midst of this unprecedented crash. I
think they would also want some sort of permanent relief that
it fixes something like the corridor. Again, I keep on going
back to those two things.
There is a whole bunch of other things, though, that I
would say are--there are a lot of differences in the rules for
DB plans versus 401(k)'s. I would try and level the playing
field more.
At one time, it was very clear, from looking at the laws,
that defined benefit plans paid you an income for the rest of
your life no matter how long you live, even if the stock market
crashed. It looked like the preferred thing. You know, it is
kind of like Social Security. There is real sureness that you
are going to get that benefit for the rest of your life no
matter what happens in the market. The DB has a really good
thing not only for retirees, but it is also good for employers.
Employers were happy to have DB plans in the past because it
helps them with managing the work flow, managing the industry,
and it is good for the country.
At one time, we used to encourage them more, but now, for
example, with a 401(k), you do not have to include one-third of
your employees or you do not have to really give much to it. It
could be just a small amount and only for the ones that put
money in first. If the employee puts money into a 401(k) plan,
it is tax deductible, whereas if the employee puts money into
the DB plan, it is not tax deductible. There are just lots of
reasons why the laws right now favor 401(k)'s.
Ms. Friedman. Yes, and I would just echo what Ron is
saying. I mean, I think that we need to further examine beyond
just today's hearing ways of encouraging companies to preserve
and set up new defined benefit plans because one thing this
economic recession collapse has done is focus attention on the
deficiencies of 401(k) plans and the importance of having
guaranteed income. It is very important that we figure out ways
to encourage companies to keep these plans, to set up new types
of these plans, and to look for ways of protecting future
generations.
Mr. Peterson. Another perspective, if I may share just
briefly, is that my observation had been that in an enterprise
such as Hopkins where we hire a lot of young people, young
people used to come to us with very little interest or concern
about the nature of the retirement plan that was offered. They
were mostly concerned about how much am I going to get paid,
maybe some other things about fringe benefits, but very little
concern about the pension.
Increasingly what we are finding is when they come in the
door for an interview, they are very much interested, and we
are finding that by offering a defined benefit approach, that
is really a leg up in the competitive marketplace. We think
that with employees having now experienced such a devastating
period over the last 24 months, there is renewed interest. We
think it is actually not only a responsible thing as an
employer to continue to offer. We do think it could be a
competitive advantage.
Senator Hagan. Thank you.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Hagan.
Senator Franken.
Senator Franken. Thank you, Mr. Chairman.
What we have here is that these companies, corporations,
are in a down period. The value of the money they have in their
pension plans has gone down, and we are in a recession. And we
are asking them essentially to put in more money to make up for
what they lost in the down market. Right?
In the middle of a recession, we are asking them to put
more money aside for the pensions, and that is money that
cannot be used to create jobs or invest in things. You want to
give them some flexibility and some relief. That all makes
sense to me.
Ms. Friedman, I think you spoke to this. I just want to
make sure that this money does not go to paying executives more
money.
Ms. Friedman. We are with you on that.
Senator Franken. Yes. We saw from Mr. Gump the example of
the Delphi employees, former employees, who cannot afford
health care. He started to tear up. And yet, it seems like the
top five executives at Delphi put aside $100 million for
themselves. That really seems just wrong. Right? How can we
prevent that kind of thing from happening?
Ms. Friedman. Well, certainly what we are recommending is
two conditions for providing funding relief to companies that
have ongoing plans. One is that if they get the relief, they
have to make sure that they maintain the plan, they do not
freeze it for the period of relief.
And the second is that since companies are saying that they
need this relief because the money that would have gone into
the pension plan instead could be used to preserve and create
new jobs, we are basically calling them on that by saying, OK,
then none of the money, during the period of time that you get
funding relief, should be used to either fund executive
compensation, the deferred executive compensation plans, or be
paid out to executives during that period, subject to
contractual concerns. That is one way of doing it, tying it to
the funding relief that you give to companies during this
period because it is a balancing act.
Obviously, the Pension Rights Center is very sympathetic to
businesses during this time, just as we are to employees and
retirees. Everybody has gotten whacked by this economy. We do
not think there should just be blanket relief to everybody.
First and foremost, we think that the relief should go to the
companies that have done the right thing and they are keeping
their plans going for workers and retirees because that is why
you are giving relief because you believe in the sanctity of
pension plans. But certainly we feel very strongly that there
should be conditions, and the limits on executive compensation
should be at least a part of that.
Senator Franken. Mr. DeFrehn, you were talking about
multiemployer plans, right? That is what I got.
Mr. DeFrehn. Yes.
Senator Franken. I was interested in your testimony.
Mr. DeFrehn. And I think your groups, sir, are a part of
our group too.
Senator Franken. Yes.
Now, as I understand it, the PBGC guarantees--for single-
employer plans, their guarantee is $54,000?
Mr. DeFrehn. That is correct.
Senator Franken. And for multiemployer plans, only $12,000.
Mr. DeFrehn. That is correct too.
Senator Franken. Why is that and why should I be OK with
that?
Mr. DeFrehn. When the guarantee programs were first put
into place, actually there was some question as to whether or
not a guarantee program was even necessary for multiemployer
plans because the structure is quite different. If a
corporation goes out of business, there is nowhere to go but to
the Government to cover those pension obligations. If an
employer who contributes to a multiemployer plan goes out of
business, the remaining employers pick up those liabilities.
Senator Franken. But sometimes an entire industry is hit.
Right?
Mr. DeFrehn. When an entire industry is hit, that is the
appropriate time for the Government to step in, and that is
what the PBGC is there for. And it has happened in several
situations, but if you look across the history of the two
trusts, you heard Ms. Bovbjerg say that about 3,860 companies
have had to turn to the PBGC for financial assistance. They
have taken over that many plans. And the cost to the agency
over that period of time is $39.4 billion collectively back to
1974.
Multiemployer plans, though, have looked out for their own
and been----
Senator Franken. Have any of them turned to the PBGC?
Mr. DeFrehn. Fifty-seven plans have received financial--as
opposed to 3,860. And the total dollars spent on those 57 plans
was $417 million instead of $39 billion. You can see the system
is good as far as having lower risk.
However, over time the level of benefits for those plans
that do fail--and there are plans that have gone that way and
there are others on the PBGC watch list that they are expecting
to see fail over time. We have had some really difficult
periods with the investments, but we also have mature plans,
many of which have an ongoing cash flow deficiency because the
number of contributing employers has shrunk. The trucking
industry, for example, where very few of the long haul freight
union companies continue to exist.
As those plans and those industries contract, there need to
be some additional tools available to the PBGC to make sure
that neither the employers that have continued to do the right
thing over the years, stepped in and acted in the stead of the
PBGC, are driven out of business because of that--and also we
need to better protect the participants who do receive
benefits. Therefore, we are recommending that the guarantee
levels be increased.
Now, there was a question as far as the structure and the
formula for determining what the benefits are from the PBGC.
There was a question of moral hazard. There was a concern when
these guarantee programs were put up that the Government not be
dumped on because it is easy for employers and plan sponsors to
walk away.
The formula for multiemployer plans is 100 percent of the
first $11 of accrual is guaranteed and 75 percent of the next
$33 is guaranteed. That is a very modest benefit if you figure
that the guarantee is based on 30 years' worth of service and
that is what you need to get that full $12,870. If you left
with 20 years of service, you are going to get about $800 a
month.
We are suggesting that in light of some of the benefit
improvements that were necessary--just if I can take one more
moment here. We had conflicting tax policies. We had a policy
where we wanted plans to be fully funded, and yet when they got
fully funded, we said you could not put money away for a rainy
day. Until this was adjusted in the PPA, plans that got to 100
percent funding were subject--if the employer continued to make
their collectively bargained required contributions, they no
longer got the deduction for making those contributions and
were subject to an excise tax. You could not put money aside
for a rainy day. And in that situation, which about 70 percent
of our plans ran into in the 1990s, the trustee's only
alternative was to increase the cost of the plan by raising
benefits.
We now have a situation where we made a bad situation
worse. We have dug the hole a little bit deeper. As a result,
we now have benefits that are well above the PBGC guarantee.
We are suggesting that along the line of the formulas that
are already in place, that for the next $40 of accrual, we
would guarantee 50 percent of that. That would get the
guarantee level to about $20,000, which is still not a lot by
anybody's standards, but we believe it is appropriate. Again,
that should be addressed in the premium structure.
Senator Franken. Thank you. I guess no one foresaw that
there could be a rainy day.
Mr. DeFrehn. Probably not.
Senator Franken. Thank you, Mr. Chairman.
The Chairman. Thank you very much, Senator Franken.
I thank our panel.
Again, I would ask you the same thing I asked the last
panel. Some of you already have this. But any suggestions, an
outline you would have for a new kind of pension system that we
might want to look at, a hybrid or a combination. You stated
that we have more tax benefits basically for the 401(k)'s than
we do for the DBs. Maybe that needs to be skewed around a
little bit. Maybe we ought to be thinking about how we have
workers provide payments into a DB plan and get some kind of
tax relief for that rather than just the 401(k)'s that they are
doing now.
It seems to me that we have a short-term and long-term
problem. We have this short-term problem right now because of
the downturn in the economy. I think we have a much longer-term
problem in terms of how we say to American workers, whether
they are organized labor union workers or salaried workers, as
we heard here from Mr. Gump, that there is a retirement program
to which they can enter and they can reasonably judge what
their benefits are going to be at the end within some
parameters. At least maybe there is a minimum or something.
For example, on Social Security, every so often I get
something from Social Security, or I did before when I was
younger, telling me how much I had accrued and what my benefits
were going to be. I realize you cannot do that with a program
that is not backed by the full faith and credit of the U.S.
Government, but there ought to be at least some reasonable
balance that says that if you get into this plan and you put in
this much and your employer puts in this much, at age 65 or 62
or 68 or whatever, you are going to be somewhere in this range.
And then we need the laws to back it up.
Of course, companies do go belly up. Conditions change. New
industries emerge. I still feel very strongly that the Pension
Benefit Guaranty Corporation has a very vital, vital role in
backing up these plans.
I look forward to your input on that. Any suggestions or
advice--get to our committee. I would appreciate it very much.
Thank you all very much. It was very interesting.
The record will be left open for 10 days for Senators and
others.
Thank you very much. The committee is adjourned.
[Additional material follows.]
ADDITIONAL MATERIAL
Prepared Statement of the National Education Association (NEA)
The National Education Association (NEA) respectfully submits these
comments to the Committee on Health, Education, Labor, and Pensions for
the record in conjunction with the October 29, 2009 hearing on
``Pensions in Peril: Helping Workers Preserve Retirement Security
Through a Recession.''
NEA strongly supports H.R. 3936, the ``Preserve Benefits and Jobs
Act of 2009'' introduced by Representatives Pomeroy (D-ND) and Tiberi
(R-OH) that provides the funding relief desperately needed by sponsors
of defined benefit pension plans in the private sector. H.R. 3936 is
appropriately calibrated to help plan sponsors recover from the
cataclysmic market losses that occurred during the 5-month period
stretching from the summer of 2008 through the winter of 2009, when the
assets of defined benefit pension plans suffered an average market
value loss of 40 percent. Without the short-term, targeted funding
relief provided by H.R. 3936, many employers will not be able to
continue in business, let alone maintain their pension plans.
Accordingly, NEA commends Representatives Pomeroy and Tiberi for
sponsoring this bill and urges the Senate to look at and move forward
similar legislation.
NEA is a leading advocate for financially stable, employment-based,
defined benefit pension plans in both the public and private sectors of
the economy. Although nearly all of NEA's members are employed by
public school employers not subject to the funding rules governing
private sector defined benefit pension plans (and therefore would not
be affected by the funding relief provided by H.R. 3936), NEA
understands that passage of the legislation is vitally important to the
survival of employment-based defined benefit pension plans in all
sectors of the economy. Without funding relief, the relatively
inflexible funding rules imposed on sponsors of private sector defined
benefit plans would make sustaining those plans, given the stresses of
the once-in-every-other-generation market upheaval of the end of last
year and the beginning of this one, nearly impossible for many
employers. For those employers, the cost of sustaining their defined
benefit pension plans under the funding rules without relief will force
them to retrench their operations severely, causing losses in economic
activity and jobs in their core businesses. And, as private sector
defined benefit pension plans become rarer, the defined benefit pension
plans maintained for our members will inevitably become harder for
public sector employers to sustain.
NEA's knowledge about the severe challenges that private sector
employers are facing in maintaining their defined benefit pension plans
has been gained first hand through the experience of its own affiliated
associations throughout the country, nearly all of whom maintain
defined benefit pension plans--on both a single employer and
multiemployer basis--for their own employees. For the most part, NEA's
affiliates are financially stable, mature organizations with
predictable cash flow. These organizations take pride in providing
retirement security for their staff employees by maintaining well-
funded defined benefit pension plans. Yet, the application of the new
stringent funding rules of the Pension Protection Act (``PPA'')--which
generally increase the unpredictability of funding requirements year-
to-year--to plans that have suffered, over a 5-month period, a drastic
and unpredictable market drop in the value of their funding, has
suddenly made sustaining those plans a nearly unbearable burden.
And it is not just the plans that are jeopardized by this funding
crisis: many of NEA's affiliated associations are being forced to
postpone, curtail, or eliminate regular services, staffing, and capital
improvements, often on top of increases in member dues. This is
because, absent relief, in 2009 the average NEA affiliate will be faced
with the immediate obligation to make funding contributions equal to 37
percent of its payroll, just to maintain its defined benefit pension
plan. This huge funding obligation is not the result of past
irresponsible funding behavior; on the contrary, these organizations
have been uniformly fiscally responsible sponsors of their defined
benefit plans, and many have been making markedly increased
contributions to their plans over the last few years. Not one of these
associations has taken contribution holidays or paid only the minimum
contribution required by existing funding rules. Financially sound,
long-term membership organizations such as these--like many other
businesses in the private sector--should be financially able to
maintain defined benefit pension plans. But, unless these employers are
given some temporary flexibility in how to recoup the severe investment
losses of the last 2 years suffered by their plans, many of these plans
will not be sustained, and the organizations will be substantially
damaged financially as well.
H.R. 3936 will have a major beneficial impact by providing sponsors
the opportunity to fund the investment losses that their defined
benefit plans incurred at the end of 2008 and the beginning of 2009
over a longer period of time. This one temporary change in the funding
rules will permit many defined benefit pension plans to remain viable;
and it will free up needed investment capital for the sponsors' core
businesses and allow these employers to begin hiring again. The draft
House proposal provides this temporary relief in the form of two
alternative funding rules, either of which sponsors may elect
voluntarily to comply: (1) an option to defer for 2 years the
amortization of the shortfalls occurring in 2009 and 2010; or (2) an
option to amortize the shortfalls occurring for the first time in 2009
and 2010 separately over a 15-year period. NEA is most pleased by the
inclusion of the latter alternative in the bill, because it will
provide greater relief for sponsors' contribution obligations in the
earlier years. NEA is similarly pleased with the bill's temporary
funding relief for multiemployer plans, which employers would be
permitted to elect voluntarily during 2009 or 2010 either: (1) to
restart the amortization of unfunded liabilities over a 30-year period;
or (2) to establish a separate amortization base for investment losses
recognized from the fall of 2008 through the fall of 2010 and to fund
this liability over a 30-year period.
The bill's ``maintenance of effort'' requirements, which are linked
to its temporary funding relief provisions for single employer plans,
are appropriately calibrated to incentivize sponsors to continue to
provide benefits to plan participants during the same period in which
they are receiving relief. As no plan sponsor is required to accept the
temporary funding relief, and the bill provides different methods of
complying with the maintenance of effort requirements, the temporary
limitation on the sponsors' flexibility to curtail plan benefits or to
enhance executive nonqualified plan benefits is both justified and
fair.
The genius of the bill is that it provides temporary funding relief
without undoing the principles of the PPA, which were designed to
ensure that defined benefit pension plans were better funded. Under the
bill, no employer would be allowed to make contributions for 2009 and
2010 that are less than those made for prior years. And no liabilities
will be hidden; that is, the accounting statements made on behalf of
the plan will fully reflect the value of the liabilities and the longer
time period during which sponsors will fund them.
Further, the changes that the bill does make to the PPA will help
sponsors maintain better funded defined benefit pension plans. All of
the temporary and permanent changes to the PPA are well-designed to
make plan funding more predictable and affordable, making it much more
likely that sponsors will be able to maintain their defined benefit
pension plans in the long run. By doing so, the bill improves the
financial outlook of the plan sponsors and the Pension Benefit Guaranty
Corporation.
For all of these reasons, NEA fully supports H.R. 3969, the
``Preserve Benefits and Jobs Act of 2009'' and intends to advocate
vigorously for the bill's enactment in both the House and Senate. We
urge the members of the Senate Health, Education, Labor, and Pensions
Committee to move forward similar legislation.
Thank you for the opportunity to submit these comments.
Prepared Statement of YRC Worldwide, Inc.
YRC Worldwide, Inc. (YRCW) is one of the Nation's largest trucking
companies. We employ approximately 45,000 men and women in the United
States, the majority of whom are members of the International
Brotherhood of Teamsters. We provide good middle class jobs with strong
wages, health care, and a pension. YRCW has approximately 700,000
customers, including the Department of Defense and FEMA. In 2008, YRCW
generated $22.1 billion in total output, employment for 141,158
workers, and $2.8 billion in total tax revenues for Federal, State, and
local governments. The Company transported goods valued at
approximately $202 billion or 1.4 percent of GDP. In addition, YRCW
contributed approximately $540 million to 36 multiemployer pension
plans to provide pension benefits to more than 1.2 million active and
retired Teamster members.
As the title of today's hearing suggests, many workers face an
uncertain retirement future because of the impact the recession has had
on their pension plans. Many companies that sponsor defined benefit
plans are struggling to adjust to a steep decline in business activity
while having to make up for significant investment losses incurred by
those plans. For companies that are part of the trucking and grocery
industries, the problems are even more acute. Thus, we thank the
Chairman for holding this hearing, as pensions are indeed in peril, and
workers need Congress to help preserve their retirement security.
Prior to the start of the recession, the Company had delivered
record earnings and operating margins. Since the freight recession
began in the second half of 2006, however, the Company has gone from
producing strong earnings to significant losses. In this exceptionally
difficult business environment, YRCW now faces three inter-related
problems in meeting its pension obligations: The Company funds the
benefits of, and effectively acts as insurer or guarantor for, hundreds
of thousands of workers who never have worked for YRCW (``non-sponsored
retirees''); the multiemployer plans to which we have been contributing
have suffered significant investment losses; and we face a worsening
demographic challenge as fewer workers support the pension obligations
of more and more retirees. Given our significant pension obligations,
the downturn in business volume in the current economic environment has
had especially adverse consequences for the Company. In short, our
contribution burden has now grown to an unsustainable level as our
business continues to suffer from the global economic meltdown.
Working with the Teamsters, we are doing what we can through self-
help measures to address the challenges we face. Since the beginning of
the year, for example, our union and non-union employees have agreed to
a 15 percent reduction in wages. Management has done so as well. In
addition, YRCW has taken other steps to improve the company's cash flow
and liquidity, including selling off excess property, consolidating
back-office functions, and reducing overhead. In addition, we have
temporarily terminated our participation in our largest plans for 18
months in order to preserve our cash flow. At the same time, the
multiemployer plans to which the Company has contributed also have
taken self-help measures to address the solvency challenges they face.
But unless Congress provides legislative relief this year, many of
the pension plans to which YRCW has been contributing will eventually
become insolvent. When that occurs, the Pension Benefit Guaranty
Corporation (PBGC) will be responsible for the pension obligations of
the hundreds of thousands of participants in the plans.
How did we get here? In 1980, Congress enacted two bills that,
albeit seemingly unrelated, have together over time created
unsustainable pension plan obligations for YRCW and other successful
freight carriers. The Motor Carrier Act deregulated the trucking
industry, while the Multiemployer Pension Plan Amendments Act (MPPAA)
imposed an exit penalty on companies upon their withdrawal from
multiemployer pension plans, including companies in the trucking
industry. As a result of MPPAA, a company that withdraws from a
multiemployer plan must pay its fair share of liability to fund the
plan's unfunded vested benefits.
Although seemingly similar, ``termination'' liability and
``withdrawal'' liability are fundamentally different legal concepts,
and have had fundamentally different impacts in the real world. Prior
to the enactment of MPPAA, if a multiemployer plan had a declining base
of contributing employers, the remaining employers were required to
absorb a greater share of the funding costs of benefits for non-
sponsored participants, i.e., plan participants previously employed by
former contributing employers. Similarly, if a multiemployer plan
terminated because of a substantial decline in its contribution base,
only the companies remaining in the plan at the time of termination
were required to pay termination liability to the PBGC. This often
resulted in a race to the exits by companies wishing to avoid
termination liability upon the plan's termination.
By substituting ``withdrawal liability'' for ``termination
liability'' in MPPAA, Congress sought to provide some measure of
protection for companies remaining in multiemployer plans. The
rationale for the change was that, if a company had to pay a fee upon
withdrawal, remaining employers would be less exposed and less inclined
to race to exit the plan. But the legislation had a perverse effect
instead: by imposing an exit penalty upon withdrawing companies, MPPAA
acted as a deterrent to new companies entering into multiemployer
agreements. The impact was particularly dramatic in a contracting
industry such as the freight carrier industry.
As a result of the interplay of the two statutes, of the thousands
of carriers in business in 1979, only a few are left to principally
fund multiemployer pension plans today. This has created a crippling
financial obligation that could lead to massive job losses and health
care and pension benefits losses for hundreds of thousands of active
and retired workers. To put the impact of the legislation in
perspective, we have appended to our statement a list of the top 50 LTL
carriers that were in business in 1979 and the handful left in business
today, two of which are now part of YRCW and two of which have dropped
out of the top 50.
In short, as an unintended consequence of the 1980 legislation,
YRCW now supports hundreds of thousands of workers who never worked for
YRCW. In fact, we have contributed more than $3 billion towards their
benefits. Employer bankruptcies and recent investment losses are
crippling the multiemployer plans to which YRCW has been contributing.
As a result, YRCW's contribution burden has become unsustainable and
many pension funds are headed for insolvency.
Many plans have been forced to implement both benefit reductions
and contribution increases as a result of the collapse in equities and
the requirements of the Pension Protection Act. Many plans are
``mature'' plans in which retirees receiving benefits heavily outnumber
participating active employees and where contributions already fall
well short of paying benefits, requiring significant investment
earnings each year to maintain their funding level. By themselves,
these circumstances likely will require every multiemployer plan to
make some kind of draconian adjustment for 2009 and beyond. Plans that
are fully funded or nearly fully funded will likely be required to
reduce the level of benefits they provide. Plans that are operating
under an amortization extension, funding improvement plan or
rehabilitation plan likely will be required to further reduce benefits
or increase contributions or both for 2009 and beyond.
The failure of a major employer, such as YRCW, will exacerbate
these problems. When a contributing employer fails, the plan loses the
contributions attributable to the employer both for the current year
and for the purposes of its actuarial calculations. Only a small
percentage of withdrawal liability--the amount the defunct contributors
owe for prior year benefits--is ever recovered in bankruptcy. The plan
suffers an immediate reduction in actives and often a substantial and
immediate increase in retirees, increasing its annual benefit payments
and making it more dependent on investment income. Required adjustments
become correspondingly greater. Contributions will need to be higher.
Cuts will need to be deeper.
In a multiemployer plan, when one employer fails, the benefit
obligations are shifted to the surviving employers, who must bear the
burden not only for current participants but also for the new non-
sponsored retirees. For members of the Teamsters, the remaining
employers include not just industrial employers but also participating
local unions and affiliated health and welfare and pension plans. At a
minimum, these remaining employers will bear the added burden of the
vested benefits of the failed employer's employees. Depending on
required adjustments, their employees may suffer reduced future
accruals, and the employers will likely be required to pay even higher
contributions. If the failure creates an immediate funding deficiency,
the remaining employers, even if they have an existing collective
bargaining agreement, will likely be required to pay an excise tax on
top of the increased contributions.
Higher contributions and reduced benefits may prompt other
employers to leave the plan, further reducing the number of active
members and the contribution base, increasing the number of retirees
and terminated vested members, and making the plan even more dependent
on future investment returns and more unstable. In some situations,
higher contributions will likely force remaining employers into
bankruptcy, resulting in even more lost jobs. In the worst case, the
failure of the primary plan will have a domino effect, leading to the
failure of other plans in which these employers contribute and even
more job losses.
Having made roughly $3 billion in contributions to fund the pension
benefits of retirees not affiliated with YRCW, the Company can no
longer afford to continue to serve in its role as an involuntary
surrogate for the PBGC. Self-help measures will not be enough. For the
sake of our Teamster employees and retirees, we need help from the
Congress this year to address the challenges facing the company and the
multiemployer plans to which we have long provided support.
PROPOSED LEGISLATIVE SOLUTION
We very much appreciate the efforts of Members to address the
challenges faced by multiemployer plans and companies such as YRCW. In
drafting legislation this year, we urge the Health, Education, Labor,
and Pensions Committee to:
Update the ``partitioning rules'' of current law so that
the PBGC would assume the pension obligations for non-sponsored
retirees while the plans continue to support the participants of
current employers; and
Provide a ``fresh start'' for multiemployer pension plans
suffering from recent investment losses.
Thank you for your consideration.
______
Attachment
top 50 ltl carriers in 1979*
1. Roadway Express (now part of YRCW)
---------------------------------------------------------------------------
* Bold = Companies Still Operating on 10/01/2009
---------------------------------------------------------------------------
2. Consolidated Freightways
3. Yellow Freight System (now part of YRCW)
4. Ryder Truck Lines
5. McLean Trucking
6. PIE
7. Spector Freight System
8. Smith's Transfer
9. Transcon Lines
10. East Texas Motor Freight
11. Interstate Motor Freight
12. Overnite Transportation (now UPS Freight)
13. Arkansas Best Freight (now ABF Freight System)
14. American Freight System
15. Carolina Freight Carriers
16. Hall's Motor Transit
17. Mason & Dixon Lines
18. Lee Way Motor Freight
19. TIME-DC Inc.
20. Wilson Freight Co.
21. Preston Trucking Co.
22. IML Freight
23. Associated Truck Lines
24. Central Freight Lines (now no. 84)
25. Jones Motor-Alleghany
26. Gateway Transportation
27. Bowman Transportation
28. Delta Lines
29. Garrett Freightlines
30. Branch Motor Express
31. Red Ball Motor Freight
32. Pilot Freight Carriers
33. Illinois-California Exp.
34. Pacific Motor Trucking
35. Central Transport (no longer in the top 100)
36. Brown Transport
37. St. Johnsbury Trucking
38. Commercial Lovelace
39. Gordons Transports
40. CW Transport
41. Johnson Motor Lines
42. System 99
43. Thurston Motor Lines
44. Watkins Motor Lines (now part of FedEx Freight)
45. Santa Fe Trail Transportation
46. Jones Truck Lines
47. Merchants Fast Motor Lines
48. Murphy Motor Freight
49. Maislin Transport
50. Motor Freight Express
______
U.S. Senate,
October 29, 2009.
Barbara Bovbjerg, Director,
Education, Workforce and Income Security,
Government Accountability Office,
441 G. Street, NW.,
Washington, DC 20548.
Dear Barbara: Thank you for your recent testimony before the Senate
Committee on Health, Education, Labor, and Pensions, titled, ``Pensions
in Peril: Helping Workers Preserve Retirement Security Through a
Recession.'' I regret that another commitment with the Judiciary
Committee prevented my attendance, but have reviewed your testimony and
would like to ask a few questions of you.
You do an excellent job explaining how the PBGC is making both
underpayments and overpayments when determining a final benefit for
pension participants assigned to it. At the October 29th hearing,
another witness, David Jury, provided a concrete example of an
overpayment.
Jury cites the case of Republic Technologies International (RTI), a
firm that filed bankruptcy in 2001. On June 14, 2002, PBGC terminated
the RTI pension plan, but a final determination benefit was not issued
until May 2008. Consequently, for nearly 6 years RTI employees received
benefits from PBGC based on estimated benefit determinations, only to
find out in May 2008 that they had received benefits in excess of the
benefits guaranteed by PBGC. Some retirees owed PBGC a few thousand
dollars, others $60,000 or more.
In light of testimony, it is curious that the GAO's April 2009
Improper Payments report shows absolutely no improper payments for PBGC
in either fiscal year 2008 or 2007. While I understand that a mechanism
is in place to allow PBGC to correct both under- and overpayments of
this nature, these are clearly instances of improper payments. Can you
please explain why GAO does not include these tallies in its annual
improper payments report? Do you think that there should be a better
accounting of the improper payments made by PBGC?
Also related to the PBGC, you testified before the Senate Committee
on Aging in May 2009 and commented on the status of outstanding audit
recommendations given to PBGC. You stated that GAO had identified 130
outstanding recommendations for corrective action that have not yet
been implemented, some of which were quite old. Has any progress been
made on the part of PBGC over the last 5 months in implementing any of
these outstanding recommendations.
Thank you for your time and expertise. Please feel free to follow-
up with my office if you have questions.
Sincerely,
Tom A. Coburn, M.D.,
U.S. Senate.
[Whereupon, at 12:48 p.m., the hearing was adjourned.]