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PROTECTING PENSIONS AND ENSURING THE

SOLVENCY OF PBGC

HEARING

BEFORE THE

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,

FINANCE, AND ACCOUNTABILITY

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

MARCH 2, 2005

Serial No. 109–17

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpo.gov/congress/house

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

TOM DAVIS, Virginia, Chairman

CHRISTOPHER SHAYS, Connecticut

DAN BURTON, Indiana

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

GIL GUTKNECHT, Minnesota

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

CANDICE S. MILLER, Michigan

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

GINNY BROWN-WAITE, Florida

JON C. PORTER, Nevada

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

CHARLES W. DENT, Pennsylvania

VIRGINIA FOXX, North Carolina

——— ———

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. DUTCH RUPPERSBERGER, Maryland

BRIAN HIGGINS, New York

ELEANOR HOLMES NORTON, District of

Columbia

———

BERNARD SANDERS, Vermont

(Independent)

MELISSA WOJCIAK, Staff Director

DAVID MARIN, Deputy Staff Director

ROB BORDEN, Parliamentarian

TERESA AUSTIN, Chief Clerk

PHIL BARNETT, Minority Chief of Staff/Chief Counsel

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, FINANCE, AND ACCOUNTABILITY

TODD RUSSELL PLATTS, Pennsylvania, Chairman

VIRGINIA FOXX, North Carolina

TOM DAVIS, Virginia

GIL GUTKNECHT, Minnesota

MARK E. SOUDER, Indiana

JOHN J. DUNCAN, JR., Tennessee

EDOLPHUS TOWNS, New York

MAJOR R. OWENS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

EX OFFICIO

HENRY A. WAXMAN, CALIFORNIA

MIKE HETTINGER, Staff Director

TABETHA MUELLER, Professional Staff Member

NATHANIEL BERRY, Clerk

ADAM BORDES, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on March 2, 2005 .............................................................................. 1

Statement of:

Elliott, Doug, president, Center on Federal Financial Institutions ............. 84

Walker, David M., Comptroller General, U.S. Government Accountability

Office; and Brad Belt, Executive Dirctor, Pension Benefit Guaranty

Corp. ............................................................................................................... 3

Belt, Brad ................................................................................................... 26

Walker, David M. ...................................................................................... 3

Letters, statements, etc., submitted for the record by:

Belt, Brad, Executive Dirctor, Pension Benefit Guaranty Corp., prepared

statement of ................................................................................................... 28

Elliott, Doug, president, Center on Federal Financial Institutions, prepared statement of ........................................................................................ 86

Platts, Hon. Todd Russell, a Representative in Congress from the State

of Pennsylvania, various prepared statements ........................................... 39

Walker, David M., Comptroller General, U.S. Government Accountability

Office, prepared statement of ....................................................................... 6

(1)

PROTECTING PENSIONS AND ENSURING THE

SOLVENCY OF PBGC

WEDNESDAY, MARCH 2, 2005

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, FINANCE, AND ACCOUNTABILITY, COMMITTEE ON GOVERNMENT REFORM, Washington, DC.

The subcommittee met, pursuant to notice, at 2 p.m., in room

2247, Rayburn House Office Building, Hon. Todd R. Platts, (chairman of the subcommittee) presiding.

Present: Representatives: Platts, Towns and Duncan.

Staff present: Mike Hettinger, staff director; Dan Daly, counsel;

Tabetha Mueller, professional staff member; Jessica Friedman, legislative assistant; Nathaniel Berry, clerk; Adam Bordes, minority

professional staff member; and Cecelia Morton, minority office

manager.

Mr. PLATTS. The Subcommittee on Government Management, Finance and Accountability will come to order.

We are awaiting the arrival our ranking member. Mr. Towns will

be here shortly as well as Mr. Belt, who is in the building or working his way into the building.

We are going to go ahead and get started because we expect the

first vote on the floor to be at 2:45 or 3 p.m. Our hope is to get

in at least an hour or more before any votes happen.

The solvency of the Pension Benefit Guaranty Corp. has become

an issue of great concern. Over the past decade, the financial picture at the PBGC has shifted dramatically from surpluses of nearly

$10 million in 2000 to a reported $24 billion deficit in 2004. Structural changes in the U.S. economy have put a disproportionate

strain on firms that traditionally offer employees defined benefit

plans, the type guaranteed by the PBGC.

As we look at the future for the affected sectors of the economy,

specifically the manufacturing and the airline industries, Congress

needs to take a hard look at pension reform. Without action, we

risk not only jeopardizing the financial security of 44 million American pensioners with the possibility of a costly taxpayer bailout to

fulfill the promises made to those workers. With an estimated $400 billion in unfunded pensions, the need

to act is urgent. It may not be a crisis today but if we do not act,

it will become one.

President Bush, in his fiscal year 2006 budget, has proposed a

variety of reforms aimed at meeting these challenges. My colleague

and chairman on the Committee on Education and the Workforce,

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Chairman John Boehner, has taken the lead in vetting these proposals. As Congress discusses these reforms, there is a need to understand the structure of the PBGC, how it is managed and how

it will implement new statutory tools.

Many in the financial community have expressed concern that

problems at the PBGC are not a function of the economic downturn

and that there are structural issues that need to be addressed if

any reforms are to work effectively. Specifically, there is a concern

that the statutory framework of the PBGC precludes it from responding to financial events that affect solvency and while the

PBGC is, in essence, an insurer, it lacks the mechanisms employed

by traditional insurance companies to mitigate risk. A clearer understanding of these and other structural management issues will

ensure that Congress considers reform proposals in the most effective manner possible.

As a member of the Education and Workforce Committee, I look

forward to working with Chairman Boehner and I hope to offer

unique insights gleaned from this hearing today.

We have a very distinguished panel here today, Comptroller General, David M. Walker, former Acting Executive Director of the

PBGC, who certainly brings a wealth of experience to our hearing.

We will be joined by Mr. Brad Belt, the current executive director

of the PBGC. Our second panel will consist of Mr. Doug Elliott,

president, Center on Federal Financial Institutions.

We appreciate each of our witnesses being here today and the

testimony they have provided to us in writing as well.

I will now yield to our ranking member, the gentleman from New

York, Mr. Towns.

Mr. TOWNS. Thank you very much, Mr. Chairman, for holding

this hearing today on the current state and future challenges of the

Pension Benefit Guaranty Corp.

I welcome our panel of witnesses and look forward to a candid

exchange of ideas on how we can better address the challenges of

both the PBGC and our Nation’s retirees.

In 1974, Congress identified the long-term need to establish a

Government-run program that would step in and manage and administer privately run, defined benefit pension plans for companies

experiencing overbearing financial hardships. The principle was

simple, by establishing a Federal program that would serve as a

backstop for companies who sponsored pension plans, the private

sector would continue to provide adequate retirement benefits for

employees who have demonstrated loyalty and continued service to

their firms. The financing mechanism for the program would be equitable and would ensure that both the Government and employers

had a stake in the preservation of strong, defined benefit retirement systems.

As more beneficiaries become eligible for benefits and fewer

workers participate in defined benefit plans, there is general consensus among analysts at PBGC that assets and cash-flow will provide insufficient improvements over the next two decades. Therefore, it is only appropriate for us to begin a serious debate about

the future goals and objectives of the PBGC while developing appropriate remedies that are fair and equitable among employers

and employees alike.

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As we hear from our distinguished panel today, I hope we can

be mindful of the broader themes that seem to be more pertinent

over the long term as short term policy adjustments will fail to

remedy the underlying deficiencies of the PBGC.

For example, I know there is a school of thought that believes

the core economic challenge facing the PBGC can be resolved

through premium adjustment alone. While I agree that premiums

are a part of the problem, it fails to address whether the Congress

believes the PBGC can remain an adequate safety net to the private marketplace in the future.

Specifically, we must carefully evaluate whether the PBGC is living up to its responsibilities as a pension fund regulator as plans

continue to endure financial distress and damaging losses on their

investments. Until these issues are resolved, the long term sustainability of the PBGC as a reliable safety net for the private sector

and its workers cannot be ensured.

Once again, Mr. Chairman, thank you for holding this hearing

and I am eager to hear from our witnesses.

Thank you.

Mr. PLATTS. Thank you, Mr. Towns.

We have been joined by Mr. Bradley Belt, current executive director, PBGC. Thanks for joining us here today.

Mr. BELT. My apologies, Mr. Chairman, for my tardiness. The

President is actually visiting the Hill today and we got held up by

his motorcade. I hope you will forgive me.

Mr. PLATTS. We always give him priority, that is for sure. We are

glad to have you, and you are actually here just in time.

We are going to begin with Mr. Belt and Mr. Walker and then

we will proceed to our second panelist and then go to Q and A for

all three of you after we have heard from everyone.

If I can ask the two of you to stand and take the oath before you

begin your testimony.

[Witnesses sworn.]

Mr. PLATTS. We will now begin with your oral testimony. I think

we are going to limit it and try and stay around 5 minutes as best

you can and we will get into Q and A.

STATEMENT OF DAVID M. WALKER, COMPTROLLER GENERAL,

U.S. GOVERNMENT ACCOUNTABILITY OFFICE; AND BRAD

BELT, EXECUTIVE DIRCTOR, PENSION BENEFIT GUARANTY

CORP.

STATEMENT OF DAVID M. WALKER

Mr. WALKER. It is good to be back before you this time to discuss

the challenges facing the Pension Benefit Guaranty Corp. and the

defined benefit pension system. I would like the entire statement

to be included in the record and I will move to summarize.

Mr. PLATTS. Without objection.

Mr. WALKER. The PBGC issue as a subset of a broader challenge.

One of the things you may be familiar with is that the GAO in the

last 2 weeks has issued a document called ‘‘Twenty First Century

Challenges, Reexamining the Base of the Federal Government.’’ I

think if you, Mr. Towns and your colleagues haven’t had an opporVerDate 11-MAY-2000 10:01 May 25, 2005 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 D:\DOCS\20880.TXT HGOVREF1 PsN: HGOVREF1
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tunity to look at this document, I would strongly recommend that

you do so.

Basically, among other things, it says we are on an imprudent

and unsustainable fiscal path and that tough choices are going to

have to be made with regard to discretionary spending, mandatory

spending, entitlement programs and tax policies. I also note that

a vast majority of the Federal Government is based upon policies,

programs, functions and activities that made sense when they were

put into place but in many cases have not been subject to fundamental review, reexamination, reprioritization and in some

cases, reengineering since they were put into place.

The PBGC was put into place in 1974. A lot has changed in the

world since 1974 and I think we have seen over the years, some

things have worked and some things haven’t work. So we need to

fundamentally step back and reassess what makes sense for today

and tomorrow.

In that regard, I include on pages 2 and 3 of my statement that

in light of past trends and future challenges, there are some very

fundamental questions I think have to be asked and answered

about the PBGC which I won’t take the time to repeat right now.

I think they illustrate the fact that the PBGC is a subset of our

broader reexamination challenge.

I think it is critically important that we recognize that while

PBGC does not face an immediate crisis, it does have a large and

growing financial problem and it would be prudent to address it

sooner rather than later. I would respectfully suggest you cannot

solve the problem merely through looking at additional revenues,

premium or otherwise. There need to be reforms in the insurance

program, changes in the funding standards, and enhanced transparency. In addition, you should consider providing PBGC with

some additional authorities that insurance-type entities would normally have in order to balance the interests of the various parties.

I think it is also important to keep in mind that this is not just

about the Pension Benefit Guaranty Corp. because the PBGC does

not insure all promised benefits. It is not only important to ensure

the long range, financial integrity and viability of the Pension Benefit Guaranty Corp., but also to try to enhance the retirement security of millions of Americans who are working and those who are

retired because frequently when plans terminate and are assumed

by the PBGC, participants do not receive all their promised benefits. Therefore, it is not just the PBGC we should be concerned

about.

We almost have somewhat of the three bears theory here. Let me

clarify what I mean by that. It is very important that actions be

taken that are systemic in nature with regard to the PBGC. It is

important they be effective enough in order to assure the long-term

viability of the PBGC and the retirement security of workers and

retirees.

On the other hand, care needs to be taken not to go too far because if you go too far, it can result in providing incentives for people to leave the defined benefit system and they are already leaving

it in large numbers at the present point in time. That is one of the

factors contributing to the PBGC’s challenge.

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There have been a number of reforms in the PBGC over the

years, including during the time that I was Acting Executive Director of the PBGC as well as Assistant Secretary of Labor for Pensions and Health, to try to reduce the put option, the moral hazard,

if you will, in trying to be able to offload obligations onto PBGC.

Time has proven they are not adequate. While if markets return

and interest rates rise, PBGC’s current financial condition would

be enhanced, I think it is pretty clear that reforms are necessary

in order to put it on a sound and sustainable path in the future.

In conclusion, while I have a tremendous amount of information

included in my testimony including a number of ideas for consideration by this subcommittee and the Congress at large, I think we

have to recognize that action is necessary and the sooner we act,

the better because the sooner you act, as long as we balance these

interests, the less traumatic the changes will have to be, and the

more time there can be for the transition.

In some ways, Mr. Chairman and Mr. Towns, I would respectfully suggest that the same thing goes for the Social Security system. It does not face immediate crisis, but it does have a large and

growing financial problem. It would clearly be prudent to act sooner rather than later. There are frankly more than a few analogies

between the challenges facing our Social Security system and the

PBGC. I think it would be prudent for Congress to act on both

sooner rather than later.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Walker follows:]

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Mr. PLATTS. Thank you, Mr. Walker.

Mr. Belt.

STATEMENT OF BRAD BELT

Mr. BELT. Thank you.

I want to commend you for holding this hearing on the issues

facing the Federal Pension Insurance Program and on the structural changes that would better enable the Corporation to better

achieve its mission, as you noted, Mr. Towns, for us to live up to

our statutory responsibilities.

I don’t want to be too repetitive because I actually find myself

very much in agreement with the Comptroller General in describing the issues facing the program.

I would note that today’s hearing is very timely. In 2004, the

Single-Employer Pension Insurance Program posted its largest

year-end shortfall ever, over $23 billion. That is a major reason

why GAO has once again placed the program on its list of high-risk

government programs in need of urgent attention. We would agree

with that.

This isn’t just about the PBGC, it is about the retirement security of millions of American workers. The fact is the termination of

underfunded pension plans can have harsh consequences for workers and retirees. When plans terminate, workers and retirees’ expectations of a secure future may be shattered because by law, not

all benefits promised under a plan are guaranteed.

Other companies that sponsor defined benefit plans also pay the

price through higher premiums when underfunded plans terminate. Not only will healthy companies end up subsidizing weak

companies with underfunded plans, they may also face the prospect

of having to compete against a rival firm that has shifted a significant portion of its paper costs onto the Government.

In the worse case, PBGC’s deficit could grow so large that the

premium increase necessary to close the gap would cause responsible premium payers to exit the system which would only exacerbate the problem. If this were to occur, Congress would face pressure to have U.S. taxpayers pay the benefits of workers whose pension plans have failed.

In addition to the $23 billion shortfall already reflected on our

balance sheet, the insurance program remains exposed to record

levels of underfunding ND defined benefit plans, more than $450

billion in total. Not all of this underfunding poses a risk to participants and premium payers, but the shortfall in plans sponsored by

financially weaker employers has never been higher as well, almost

$100 billion.

Despite the structural problems inherent in the current system,

the PBGC continues to do all it can to meet the challenges facing

the pension insurance program, from strong financial management

and robust internal controls to new system technologies and a

sharper focus on risk management, the Corporation is prepared to

meet its statutory responsibilities.

The PBGC’s financial reporting continues to present a clear picture of the fiscal health of the insurance programs. For fiscal year

2004, the PBGC’s financial statements received their 12th consecutive, unqualified opinion from the Corporation’s independent audiVerDate 11-MAY-2000 10:01 May 25, 2005 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 D:\DOCS\20880.TXT HGOVREF1 PsN: HGOVREF1
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tors, PriceWaterhouseCoopers. I certainly can’t take the credit for

that since I have only been executive director for the agency for the

past year.

Also, in recognition of the importance placed on sound financial

reporting by the Sarbanes-Oxley Act, the PBGC was one of the first

Federal Government entities to perform a comprehensive internal

control assessment even though it was not required to do so.

The PBGC has also initiated several changes to enable it to better manage the financial risks facing the pension insurance program. The first was adoption of a new investment policy that would

reduce the Corporation’s risks resulting from a mismatch between

assets and liabilities.

Another initiative will improve the PBGC’s ability to gather, analyze and act on pension plan funding information and to respond

to marketplace developments in a timely manner. As part of an

overall reorganization, the Corporation is establishing a new Office

of Risk Assessment to strengthen its capability to measure and

manage risk to the pension insurance program.

The PBGC is also taking aggressive steps to monitor the financial condition of pension plans and their sponsors to minimize

losses where possible for the insurance program. When necessary,

the PBGC is prepared to negotiate or litigate to protect the benefits

of plan participants and the interests of the insurance program.

Another top priority has been the establishment of on-line services that customers can access at their convenience through the

Internet. In the past year, the Corporation unveiled new self-service accounts for participants and trusted plans and for administrators of insured plans and the pension practitioners who assist

them. Participants and plan practitioners can conduct a range of

transactions electronically at any time of day, year around.

I would note the PBGC also underwent its first program assessment rating tool, referred as the PART by the Office of Management and Budget. While the PBGC was scored as effective in areas

under the Corporation’s control, OMB noted ‘‘a risk that prevents

it from following many insurance industry best practices regarding

premium structure, risk management, funding rules and benefit

determination,’’ much as the Comptroller General noted.

Mr. Chairman, even as the PBGC does everything it can to meet

its operational and financial challenges, it is not enough. The current legislative framework does not ensure sound pension funding

and a strong safety net. We believe it is critical to enact the administration’s reform proposal to strengthen the funding rules, enhance

the information workers get about their pension plan and fix the

PBGC premium system. Without these changes, the risk of loss for

workers, responsible companies and taxpayers will remain unacceptably high.

We look forward to working with you and Congress to make necessary reforms this year.

Thank you for inviting me to testify and I would be pleased to

answer any questions.

[The prepared statement of Mr. Belt follows:]

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Mr. PLATTS. Thank you, Mr. Belt.

We are going to have Mr. Elliott come up and offer his testimony.

In addition to the testimony we are receiving today, we have

agreed to enter into the record statements from the American Benefits Council, the American Society of Pension Professionals and

Actuaries and the U.S. Chamber of Commerce. We appreciate these

organizations providing their perspectives on this important issue.

Without objection, I move these three statements be entered into

the record of this hearing.

[The information referred to follows:]

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Mr. PLATTS. Mr. Elliott, we will now move to you. If I could first

ask you to stand and take the oath.

[Witness sworn.]

Mr. PLATTS. We appreciate your being with us and the wealth of

your real life, private sector experience in the field we are discussing today. We appreciate the written testimony as well.

Would you like to begin with your opening statement?

STATEMENT OF DOUG ELLIOTT, PRESIDENT, CENTER ON

FEDERAL FINANCIAL INSTITUTIONS

Mr. ELLIOTT. Thank you for inviting me.

I commend you for addressing this very important topic from the

point of view of government efficiency and effectiveness, a point of

view often neglected elsewhere.

I am president of the Center on Federal Financial Institutions.

We are a non-partisan, non-profit think tank that focuses on the

Federal Government’s immense lending and insurance activities.

We do not advocate positions. Instead, we try to inform you so you

can make your own decisions. All opinions expressed today, therefore, are my own and not those of COFFI.

COFFI has published the only detailed public model of PBGC’s

finances outside of PBGC itself. Our base case showed that PBGC

would need a $78 billion infusion in today’s dollars in order to

avoid running out of cash over the next 75 years assuming present

law and policy. This would make it the second largest financial

bailout in history after the savings and loan crisis.

Without reforms or rescue, our model shows the cash running

out in 2021. This is consistent with PBGC’s 30-year history which

shows a cumulative loss of $23 billion, demonstrating that its premiums are insufficient for the risks it has been required to take on.

What should Congress do? I recommend that Congress examine

six areas. First, Congress should stop making infrequent, ad hoc

decisions about PBGC. Instead, it should make some major strategic choices that are still unresolved 30 years after passage of

ERISA. Most importantly, should PBGC premiums fully cover its

costs? ERISA requires that premium levels be adequate to cover

full costs and explicitly does not give PBGC access to taxpayer

funding except for a nominal borrowing amount.

However, Congress sets premium levels and has consistently chosen to set them at levels that have proven to be inadequate. Congress could improve the situation by either affirming its intention

that premiums fully cover costs and creating a mechanism to ensure this happens or determining an upper limit to premiums with

the recognition that taxpayers would subsidize any shortfall.

My written testimony spells out a number of other important

issues involving premiums. My key point is they should be decided

based on sound, underlying principles, not as the result of ad hoc

compromise. Similar issues arise in the area of funding rules and

restrictions on benefit increases for severely underfunded plans.

Congress currently sets hard and fast rules that cannot be altered by PBGC to reflect changing conditions. These rules are also

immensely complicated since they result from political compromises

and not an agreement on overall principles.

85

Second, Congress should ensure the most effective coordination of

pension fund regulation. Pension funds and pension plans are overseen by the Department of Labor, the IRS, other parts of Treasury,

PBGC and the SEC. Perhaps this division of responsibility works

perfectly but it is worth seriously examining simplification.

Third, Congress could optimize PBGC’s ability to negotiate with

troubled companies. Under present law, the Federal Government

has little negotiating flexibility and that flexibility requires the coordination of multiple agencies.

Fourth, Congress should provide clear, overall investment guidelines for PBGC and eliminate micromanagement. The big question

is whether PBGC should try to minimize risk by holding mostly

bonds or should invest primarily in stocks like the pension funds

it insures.

On the other hand, while leaving PBGC great flexibility on the

big issue, Congress has made an artificial distinction between the

investment of funds obtained through premiums, which must be invested in bonds, and those obtained from failed plans where PBGC

has great freedom to choose its investments.

Fifth, Congress should encourage PBGC to focus careful attention on developing an optimal strategic plan for the big growth

spurt it is growing through. PBGC’s job will be more than five

times bigger by 2006 than it was in 2000. Perhaps PBGC’s management, who I respect, has everything well under control but I

have never seen a company that did not perform better with vigilant oversight.

I am sometimes asked about PBGC’s expense levels and I must

confess that I have no idea whether there is a great deal of fat or

management is performing brilliantly at expense control. The information to make this judgment is seriously lacking. This is particularly concerning since the Federal budget rules do not provide

strong incentives to watch expenses closely as the large majority of

expenses are allocated to the off-budget, quasi-trusts.

This brings me to the final item. Congress should align Federal

budget rules relating to PBGC with economic reality. According to

Federal budget rules, PBGC has contributed $12 billion to deficit

reduction over its life, even though generally accepted accounting

principles, which better reflect economic realities, shows a cumulative loss of $23.3 billion. Bad accounting creates bad incentives.

For example, Congress might have been more vigilant to balance

premium and risk levels if the budget had reflected PBGC’s true

economic losses.

Thank you for the opportunity to testify. I look forward to your

questions.

[The prepared statement of Mr. Elliott follows:]

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Mr. PLATTS. Thank you, Mr. Elliott.

We are now going to ask Mr. Walker and Mr. Belt to join you

at the table.

Mr. Walker, I think we will start with what is the financial future as we can best identify right now with PBGC. Mr. Elliott

talked in his written testimony in their model that perhaps in 2021

insolvency would occur. I was wondering if your office has done any

modeling of that nature in naming a year in which the insolvency

would happen if no changes would occur?

Mr. WALKER. I don’t recall us doing an independent analysis of

that or being asked to do that. I will tell you that different people

might have different opinions of what the date might be, but I

think the bottom line is it is only a matter of when, not a matter

of if.

I might note just to put things in context that in the case of HI,

the Medicare Program, the trust fund on that is supposed to run

dry in 2019 and in the case of Social Security, it is 2042. Therefore,

this is obviously closer to the former rather than the latter. Therefore I would say the sense of urgency for action in connection with

PBGC and defined benefit system reform is somewhat greater, although I think we ought to act on all three.

Mr. PLATTS. If we use 2018 with Social Security when we actually start using bonds, when we start generating less money than

we are paying, all these dates are going to fall pretty tight if we

don’t act. I think your opening statement that we need to look to

reform each one of these individually, but understand there is the

picture of how they are all interconnected.

The PBGC was put on GAO’s high risk list back in 1990 and

came off 5 years later. Can you give us some background on what

got them on the list then and what they did to get off the list?

Mr. WALKER. In fairness, it wasn’t the agency that has been put

back on the high risk list, it is the Single Employer Insurance Program which is the subject of this hearing rather than the entire

agency.

Basically, as our statement and probably some of the others

show, if you look at the history of the financial condition of the

PBGC, it has varied over the years and there were a number of reforms enacted into law spanning several periods of time. For a brief

period of time, PBGC actually had significant surpluses. I might

note that our country had significant surpluses due to a number of

very large terminations concentrated in a couple of industries, steel

and airlines, those surpluses and the accumulated surplus changed

very dramatically in a very short period of time to where at September 30, 2004, the PBGC has an accumulated deficit of over $23

billion.

We saw the turn and our view was it was going to get worse absent some type of action, not just by the executive branch and the

PBGC, but also by the Congress. That is why we put the PBGC

Single Insurance Program back on the high risk list. It is also why

we are here today.

Mr. PLATTS. You touch on the surpluses over several years in the

late 1990’s and I guess a question for maybe all three of you is your

analysis when we look at the trend and see some small deficits inVerDate 11-MAY-2000 10:01 May 25, 2005 Jkt 000000 PO 00000 Frm 00095 Fmt 6633 Sfmt 6633 D:\DOCS\20880.TXT HGOVREF1 PsN: HGOVREF1
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creasing through the early 1990’s and see significant surpluses for

about 5 years and then all off the charts in the last 3 years.

What is your assessment of what started driving those surpluses

or the appearance of surpluses and what came to be in 2001, 2002

where we are today. Does this tell us something about the systematic problems of the way we have structured PBGC?

Mr. BELT. If I might, I would direct your attention to an interesting study or report put out by Credit Suisse First Boston called

‘‘The Magic of Pension Accounting.’’ Part three. Their analysts have

done a very extensive study of the pension insurance program and

all the issues related to moral hazard. They note beginning in

1999, the period from 1999 to 2003, with respect to the S&P 500

which covers more than half of our overall liability, the total assets

over that 4-year period rose by $10 billion, less than a 1 percent

compound annual growth rate per year while liabilities during that

same period of time grew by $430 billion, more than a 10 percent

compound annual growth rate. That was a combination of factors,

not the least of which was falling asset values in the pension plans,

also falling interest rates which increased the value of the liabilities and also companies were not putting much cash in the pension plans during that period of time. They had taken advantage

of something called credit balances that exist in the system right

now to be able to take contribution holidays.

I believe this is in charts in my written testimony. What we have

seen in companies that we have taken over—like Bethlehem Steel,

USAirways and United Airlines as well, for several years prior to

termination, the companies were putting no money into the pension

plans, notwithstanding the fact that the gap was widening between

the value of the assets and liabilities. In some cases, the liabilities

continued to accrue normally as well and in some cases, they were

actually negotiating new benefit increases.

Mr. WALKER. Again, macro and micro, macro with regard to the

overall defined benefit pension system. As you know, for much of

the 1990’s, the markets went up pretty healthily. In the last several years, we have seen that interest rates have gone down. As a

result for a period of time in the 1990’s, the overall funding for defined benefit plans was very positive but as the markets corrected

and as interest rates declined it meant the asset values came down

and the amount of money it took to buy out the liabilities went up

significantly because interest rates went down. When interest rates

go down it costs more money to be able to buy out the liability.

You had the combined effect of reducing asset values, increasing

liabilities, that causes the bottom line to hemorrhage.

As Brad properly mentioned, there are flaws in the current minimum funding standards whereas you had situations where companies didn’t have to make contributions under the current law because they had these credits. At the same point in time, the bottom

line of their pension plan is hemorrhaging.

The last thing I would mention is PBGC has received a disproportionate amount of its losses from certain industries that are

subject to quite a bit of competition and in many cases, have gone

through extensive deregulation, in particular, the airline industry

and the steel industry. So I think some of the losses have been the

result of things going on with regard to certain industries.

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Mr. PLATTS. Mr. Elliott.

Mr. ELLIOTT. If I might add one thing because I think you have

raised a very important question. We need to understand whether

we are in an odd period or whether this is the accumulated result

of a lot of problems. One thing people often don’t realize who are

unfamiliar with the insurance industry, PBGC is a credit insurer.

Credit insurers tend to have the same characteristics as say hurricane insurance. Most years you need to make money because every

so often, you are going to lose a lot of money.

It is not actually that reassuring that there were a few years

when PBGC made some money, we needed to be making money

most years to be ready for the really bad ones that come in the

credit cycle.

Mr. PLATTS. That goes to the graph that tells us that the systematic or structural problems with the way we set up the system is

because we weren’t making money but for a few limited years more

driven by the market valuations, that we clearly have a structural

problem because we are not putting money away for these bad

years that are going to come.

Mr. ELLIOTT. Absolutely. The only extended good period for

PBGC financially was the fool’s paradise at the end of the bubble

when we all thought we were making money.

Mr. BELT. I think the more interesting chart if you look forward

is the dramatic increase in our reasonably possibles, that is, the

amount of underfunding in pension plans sponsored by companies

now higher credit risks, that is they are not investment-grade risk

companies. That is the real concern. We have seen a ramp up from

about $10 billion in underfunding by junk bond-rated companies 2

or 3 years ago to now almost $100 billion. There is still a lot of risk

resident in the system.

While I agree with David that the bulk of the losses thus far

have come from two industry sectors, airline and steel, the majority

of our exposure looking forward is actually in other industry sectors.

Mr. PLATTS. Kind of setting the stage as far as the type of problem we are facing, I wasn’t here in Congress when we had the savings and loan debacle. Is this issue something that without needed

reforms, we will have a similar challenge before the American taxpayer?

Mr. BELT. I actually have the dubious pleasure, I guess, of having been counsel to the Senate Banking Committee during that period of time. I was involved in drafting FIRREA and FDICIA in

dealing with establishing the Resolution Trust Corp.

As I noted previously, there are some very real differences between that situation and some unfortunate similarities. I think the

two principal similarities are that there is a tremendous lack of

transparency in the system. Back then, it was something called

regulatory accounting principles that were used to really hide the

problems resident in a lot of the risk at that point, and we have

the same lack of transparency problems under both the financial

accounting standards as well as ERISA today.

The other problem most relevant to the S&L situation is the tremendous degree of moral hazard that exists in the system. That is

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what we need to address, all the perverse incentives to actually

shift costs onto the Federal Government.

I do want to note there are a couple of important differences and

I think both Doug and David noted this. We are not facing a liquidity crisis at this point in time. There was a liquidity crisis in the

S&L situation where you were dealing with demand deposits.

The other difference is that this is more a function of a flaw in

the rules themselves. At that point in time, there was a lot of malfeasance on the part of Charlie Keatings and others that I don’t

think you see here. It may be you can question whether people had

prudently matched their pension plans, but it appears in most

cases, they fully complied with applicable requirements, which is

part of the problem.

Mr. PLATTS. The system allows that underfunding to occur as opposed to them circumventing the rules?

Mr. BELT. United Airlines filed an informational brief in a court.

We have been dealing with them in bankruptcy right now where

they potentially present a claim of $6 billion. They take some pride

in noting they complied with all ERISA’s rules and regulations.

Notwithstanding that fact, they are $8 billion underfunded.

Mr. WALKER. It was prior to my tenure but I know my predecessor, Chuck Bowsher, spent quite a bit of time testifying before

Congress before and after the meltdown of the savings and loan industry.

I think it is important we learn from the lessons of the past and

that we hopefully act before we have to act when the facts are clear

and compelling. In that regard, it is clear that this is not a temporary problem, there are systemic problems that need to be addressed.

I might also note, technically the PBGC is not backed by the full

faith and credit of the U.S. Government. The PBGC has the authority to borrow up to $100 million and that is it. From a practical

standpoint, yourself as an elected member, can imagine what type

of public pressure there would be placed on the Congress to act if

for some reason, the PBGC was not able to discharge its responsibilities.

Therefore, I think from a practical standpoint we shouldn’t take

a lot of comfort in the fact that technically the government doesn’t

have to step in but practically, there would be a lot of pressure to

do so. That is why it is important to engage in the systematic reforms.

Mr. PLATTS. I would agree with your assessment that maybe legally it is not backed by the full faith and credit but morally, it will

be and more important while we do move forward with these reforms.

The analogy with the savings and loan and the fact that it was

too late, whereas we have the chance to bring these issues forward.

Hopefully we do get our hands around this issue and move forward

in a positive way.

You mentioned, Mr. Belt, transparency and similarities and the

lack of transparency. My understanding is the Form 5500 is one of

your main sources of information and your analyzing, and that is

in essence almost 2 year old data. It kind of goes to the point of

lack of transparency if you are making decisions today in the very

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fast changing marketplace for industries out there, the ability to

rely on what you have before I assume that is one of the areas that

we have structural changes and your thoughts on that as well, Mr.

Elliott.

Mr. BELT. You make an excellent point, Mr. Chairman. Participants can’t make informed decisions about their own retirement security, shareholders can’t make informed investment decisions, and

regulators can’t make informed policy decisions when we are dealing with stale information that actually hides the true financial

status of pension plans, particularly in dynamic market environments of today.

It is in fact the case, the principal source of information for all

pension plans is the Form 5500 which is a required to be filed by

all 30,000 D-B plans, when we get that information in our hands,

it is usually over 2 years old. We do have an additional source of

information, more timely information, information filed under Section 4010 which is information required to be filed by companies

more than $50 million underfunded for pension plans. We do get

that on an annual basis, and we will have those reports coming in

April 15, a little over a month from now, and they will actually

speak to December 31, 2004. That is more timely information.

We actually have that. Unfortunately, in the law right now,

ERISA Section 4010 says we have to keep that information confidential. We know the more timely financial status information.

We believe that information should be available to the marketplace. It is not just an issue of lack of transparency in ERISA with

respect to sources of information, it is the fact the information provided bearns no relation to economic reality in many cases. You

have actuarial valuation of assets, you have smoothed interest rate,

a whole host of mechanisms that are really designed to obfuscate

current economic reality.

It is a problem not only in ERISA but also in accounting standards.

Mr. PLATTS. Are there specific proposals that BPGC has put forth

regarding changing those forms to not allow there to be an intentional blurring of the reality?

Mr. BELT. That is part and parcel of the administration’s reform

proposal.

Mr. WALKER. I want to note that GAO currently is doing work

on the Form 5500 filing requirement. We anticipate issuing a report this summer and expect there will probably be some recommendations coming as part of that report.

The other thing is my understanding is the administration is recommending the funding information be expedited, not the entire

Form 5500 but that the funding information be expedited and reported quicker.

I think one of the concepts that we need to keep in mind is when

we have a situation that represents a bona fide risk based upon a

reasonable person, to both the PBGC and the plan participants and

beneficiaries, information has to be provided quicker and there

needs to be an enhanced degree of transparency as compared to

what we have right now because history has shown that with a

risk-based, targeted degree of transparency, it does have a positive

behavioral effect. The market forces can then come together,

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whereby retirees, unions, and workers can say why aren’t you

funding my pension plan. I think it is prudent to try to help those

market forces come to bear to minimize the necessity for government intervention.

I do believe the PBGC is going to need more authority to intervene quicker than it has the ability to intervene right now in addition to what it can do right now because it doesn’t have a lot of

flexibility at the present time. It holds the nuclear option. It can

go in and terminate the plan and cause it to impose losses on the

PBGC and plan participants and beneficiaries. It doesn’t have

enough intermediate options which I think it needs to explore

more.

Mr. PLATTS. Mr. Belt, in the forms that are required, what is the

ability for you to go out to companies and ask them to provide additional information and how successful are you likely to be based on

the track record where you say you would like a little more information to get a clearer picture. They say we gave you what you required and that is all we are giving you.

Mr. BELT. We routinely request additional information in appropriate circumstances and we have civil subpoena authority to request information to conduct investigations. There certainly has

been some resistance to that in the past given the fact that companies take this notion that with respect to pensions, leave us alone,

you don’t really have much business meddling in our business. By

and large, I would agree with that. I don’t want to be doing that.

When they are taking actions, that pose material risk of loss to

the pension insurance program or they are otherwise abusing the

pension insurance program in a way that may harm the interest

of participants, premium payers or the taxpayers, then it is incumbent upon us to use the tools at our disposal to try to address those

situations.

As David noted, the tool set is fairly limited under current law.

We call it the atom bomb with a nuclear option. That is really a

last resort because termination of the plan has all the harsh consequences I talked about. In some cases, termination may be necessary to avoid future or further losses down the road but we

would rather get to a position where we can say, let us talk about

some of these intermediate sanctions or remedies and not have to

push that button.

Mr. PLATTS. As we look at structural changes, to me a fairly simple reform of the transparency that gets to the moral pressure that

is brought or the marketplace pressure to have internally companies do better by their pensioners is a fairly simple step that

doesn’t have the risk of negatively impacting the economic viability

of the company. At least it is a starting point as we get into these

structural changes.

Mr. Elliott.

Mr. ELLIOTT. I would just like to reinforce some of what has already been said which is I think there is a misconception that the

PBGC is an insurance company and a misconception it is a regulator. There is a little bit of truth to each, but the fact is, as an

insurance company, it can’t set premiums, it can’t decide who it is

going to take, it can’t tell companies they are acting in a way that

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makes them lose their insurance. It has almost none of the attributes of an insurance company.

Mr. PLATTS. Or as a regulator?

Mr. ELLIOTT. Yes, and as a regulator, it isn’t.

Mr. PLATTS. I would like to recognize the gentleman from Tennessee, Mr. Duncan, for a statement and then questions.

Mr. DUNCAN. Thank you, Mr. Chairman.

This is a very, very important topic and I am just so sorry that

I had some other meetings and appointments and couldn’t get here

until now, so I will probably ask about things already covered. I

want to apologize to the witnesses.

Mr. Walker seems to come here every time on mind boggling topics. A few weeks ago you were here and the Defense Department

had lost $9 billion in Iraq and then there was $35-$45 billion that

I think had been wrongly handled. I mentioned then that Charlie

Cook, the very respected analyst, said people can comprehend $600

hammers or $900 toilet seats but they couldn’t comprehend any figure over $1 billion. There is a lot of truth in that.

It just kind of scares me. We have a $8.5 trillion national debt.

Everyone’s eyes glaze over when you talk about that because that

is such an unbelievable figure you can’t comprehend that. Then we

have these $400-$500 billion deficits we continue to run. I sit here

and think, how in the world are we going to pay all these Civil

Service pensions, pay all the military pensions, pay all the Social

Security pensions, Medicare, Medicaid and then you get to the

PBGC.

I mentioned in my last newsletter, very few people even know

what the PBGC is but it says in this brief, there are 30,000 plans

and 34 million workers. I put in my last newsletter to 250,000

homes in my district, the New York Times had this story in January that said you have this $23.3 billion deficit. Is that going up,

coming down or where do we stand?

Mr. BELT. Three years ago, the single employer program had a

$7.7 billion surplus. We have had a $31 billion swing to bad in our

net position over the past 3 years and it certainly is our concern

that the hole will get much deeper unless we enact appropriate reforms now. The first rule of holes Secretary Chao talked about

when she unveiled the administration’s reform proposal was, ‘‘Stop

digging.’’

Mr. DUNCAN. Let me ask this and I apologize because I know you

have probably already covered this, but what do we have to do,

what reforms are you recommending?

Mr. BELT. We have a comprehensive set of reforms that are attached to the testimony or at least we reference them. They are in

three areas. One is strengthening the funding rules; make sure the

companies, in contrast to the current law, are appropriately funding their pension plans and if they are underfunded, we give them

a reasonable period of time to get up to fully funded. Second, address some of the moral hazard in the system particularly through

rationalized premium rules. Premiums have been insufficient thus

far.

Mr. DUNCAN. You have been $16–$19 a month and you want to

go to $30 a month?

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Mr. BELT. It is actually per year, sir, $19 per plan participant per year is what they pay so this would be an additional $11 per

plan participant per year for what may be $1 million worth of pension coverage for an annuitant. A lot of people complained, the plan

sponsors complained about paying higher premiums, and I understand none of us likes to pay higher premiums.

Mr. DUNCAN. That is per year. I didn’t realize that.

Mr. BELT. The premiums haven’t been raised since 1994, notwithstanding the fact that wages have gone up in the interim, the

maximum guarantee under law has gone up on a wage index in

that period of time as well. Losses have grown. A viable insurance

system has to have premium levels sufficient to cover expected

claims.

Historically, we have had about $1 billion annual premium revenue at PBGC. That has gone up a little more recently but just in

the last 3 years, I noted we had a $30 billion swing in our net position. Clearly that premium revenue is far insufficient to cover expected claims.

Mr. DUNCAN. Is the number of plans and the number of singleemployer workers covered going up or going down?

Mr. BELT. Actually, a little of both. The number of plans has fallen fairly dramatically over the past 20 years from a peak of about

112,000 20 years ago to just under 30,000 today but most of that

was smaller plans. The number of workers covered in the system

between both the single employer and multiemployer program has

actually grown a little bit. It is about 44 million workers and retirees who are covered by the PBGC.

However, what we see is more than half of those now are retirees. Fewer than half are active workers. So there is a clear trend

line away from the defined benefit plan as we have traditionally

known it. A lot of companies have looked at alternative structures

like cash balance plans that you are familiar with, but there has

definitely been a trend line down.

Mr. DUNCAN. Several years ago when I was waiting to change a

plane in Atlanta, I read a front page article in the Atlanta Constitution, that said at that time, several thousand plans a year

were getting out from under the PBGC because there was too

much, they thought, red tape and regulations and bureaucracy involved. Has that been eased some or are you still getting complaints like that?

Mr. BELT. Indeed and they are very valid complaints. ERISA’s

history is characterized by layering on, tinkering at the margins.

A little tweak here and there just makes the system more complex

and needlessly so. We are doing two things. The administration’s

reform proposal is all about substantially simplifying the current

complex morass of rules and regulations. Also, at the PBGC, we are

looking at our rules and regulations, strengthening where necessary, streamlining where we can. An example of that is for the

first time allowing electronic filing of the Form 4010 that I talked

about before which heretofore had not been in a standardized format, comes in paper forms that look like this, we hand load that

in excel spreadsheets, and everybody is handwriting these documents. We are setting up an electronic environment. We are allowing participants and other practitioners to engage with the PBGC

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on-line, which we hadn’t done before. So we are doing what we can.

There is no question that statutory changes are necessary.

Mr. DUNCAN. Mr. Walker, what do you say about all this? You

heard me say a few minutes ago that I don’t see how in the world

we are going to meet all these obligations with the Civil Service,

military and all that. Do you see problems, the same problems I

see? What do you think we need to do about this right now.

Mr. WALKER. First, there is a big picture and a small picture. On

the big picture, I would recommend our 21st Century Challenges

report. It was issued 2 weeks ago and has been sent to your office.

Basically it says that we are on an unsustainable path from the financial and fiscal standpoint for the whole government and we are

going to have to fundamentally restructure discretionary spending,

mandatory spending, entitlement programs and tax policies.

PBGC is a subset of that overall challenge. It is on a

unsustainable path. We need to step back and fundamentally reassess what its proper role and function is. It needs systemic reforms,

many along the lines of what Brad talked about. While I agree

with you, Mr. Duncan, that it is difficult and it might be easier to

deal with $600 toilet seats than it is $1 billion, I think we can keep

in mind that $1 billion is about $1.7 million $600 toiletseats, so it

is unacceptable under any circumstance.

Mr. DUNCAN. Let me tell you what I think. You are really in a

key position. I think this is such a serious problem that I think you

almost need to be the Paul Revere of this day. You need to get out

and rally, call peoples’ attention to this report and these problems

we are talking about and how unsustainable they are. I think right

now most people don’t realize how serious these problems are and

how we are not going to be able to pay these.

Everybody is counting on these military pensions and Civil Service pensions. I think people have to demand that the Federal Government become much more fiscally conservative if they want to

draw a check that is going to mean anything. What we will start

doing I guess is printing more money and that won’t work for very

long. You have a key position being the Comptroller General now

and so forth.

Mr. WALKER. I can assure you that I am dedicated to doing my

part and I think that is about the 10th time in the last 2 weeks

I heard somebody call me a Paul Revere. I take that as a positive.

I am going to do my part but it is going to take a lot more people

working together to get out the message.

Mr. DUNCAN. It is going to take all of us. That is why I said I

am pleased that Chairman Platts called this hearing today because

we need to do more of this. I know Todd is doing as much as he

can but I just shake my head about it. I know one of our fellow

Republicans was quoted the other day as saying something about

we didn’t need to worry about it because we wouldn’t be in office

a few years from now when all this is going to hit but we have

some big problems.

Mr. PLATTS. When we talk about 2020 or 2042 or 2052, I say my

son will be eligible to retire from Social Security in 2063 and my

daughter in 2066 which sounds like a long time off until you put

it in the perspective of those are my children, so whether it is Social Security or PBGC, you are right, these are issues that we eiVerDate 11-MAY-2000 10:01 May 25, 2005 Jkt 000000 PO 00000 Frm 00103 Fmt 6633 Sfmt 6633 D:\DOCS\20880.TXT HGOVREF1 PsN: HGOVREF1
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ther need to be serious in our approach to solving them or else future generations will suffer tremendously.

Mr. DUNCAN. I think it is going to hit us a lot sooner than 2042.

Mr. WALKER. I think you both make a good point. Two quick

comments. One, I think when you talk about numbers, billions, trillions, whatever, it is almost mindboggling so you are trying to convert it to terms that people can understand. I think there are two

things people have to keep in mind. Whether it is the PBGC or

whether the government as a whole, it is about values, fiscal responsibility, stewardship and prudence being three examples.

The other thing is it is about people. It is about our kids, our

grand kids and future generations. So it is about values and it is

about people. It is just prudent to act sooner rather than later because time is working against us. The longer we wait, the tougher

it is going to be, the more dramatic the changes will have to be,

and the less transition time there will be.

Mr. DUNCAN. Thank you.

Mr. PLATTS. Tom Brokaw describes our seniors today as the

greatest generation, saved the world in World War II and the importance of them being engaged in these debates, especially as it

relates to Social Security which is setting the stage. If we can do

this, then we can take on the real challenge, Medicare, which is

more staggering and seniors can play such a critical role and show

their great strength as they did in the 1940’s in defending the

world by saving the financial security long term for our Nation and

our citizens, to be engaged in a responsible and active way as opposed to here in Washington, it is just so politicized. It is Republicans versus Democrats, not good policy.

It looks like we are going to have a first vote in about 10–15 minutes. Mr. Walker, I know you need to leave by 3:30 p.m., so let us

get in a few more questions.

Mr. Belt, as far as when we look at structural changes, some entities, specifically FDIC, if that provides a model we should be looking at for the type of structural changes we should give you and

PBGC to address your challenges?

Mr. BELT. I certainly think that is a useful analog to look at, a

reasonably successful financial regulator and Federal insurer. Ultimately it depends upon the policy decisions made by Congress as

to the appropriate role of the Pension Benefit Guaranty Corp. Both

Dave and Doug alluded to this at the outset.

Right now, PBGC has to be several things. We are charged with

the statutory responsibility of looking out for plan participants in

a given situation, United Airlines, Bethlehem Steel, what have you.

We are also charged with the responsibility of looking out for the

interest of the 44 million plan participants that we insure. We are

also charged with making sure we have resources to pay the benefits of the 1 million people that we are now wards for. They have

come in and are in trusteed plans. We will be cutting checks for

them for the next 40 or 50 years.

We are also specifically charged with keeping premiums as low

as possible, protecting the interest of premium payers. As noted,

we are explicitly not backed by the full faith and credit of the U.S.

Government. We are supposed to be self financing. Those are often

very difficult to reconcile. In fact, they are usually butting heads.

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Every time I have to make a business or policy decision at

PBGC, I am inevitably goring somebody’s ox. If we have to make

the decision to terminate a pension plan because it is going to

present a long-term loss or risk to the insurance program as a

whole, that is going to hurt the interest of the participants in that

particular plan because they stop accruing benefits, and they may

have benefits cut back.

I also can’t just write checks willy-nilly and also protect the interest of premium payers and the taxpayer as well. We are this odd

hybrid as Doug noted of being both a traditional insurer in some

respects, and also a social insurer.

Mr. PLATTS. I think Mr. Elliott’s first point was Congress deciding which is it, social program, insurer, to clearly define you are

one or the other so you can move forward and know what is expected and given the tools within the defined mission that you have

whereas now we are wanting to be everything to everybody, especially when we talk about keeping premiums as low as possible, $9

per year for that $1 million in potential coverage, yet we know we

are not funding it long term satisfactorily. You are just competing

with yourself.

Mr. BELT. On the premium, to put it in perspective in another

case, United Airlines, as an example and they are just illustrative,

I don’t want to pick on United Airlines, but they pay about $2 million a year in premiums to the pension insurance program but they

may present a claim of over $6 billion to us. The increase in the

flat rate premium from $19 per capita per year to $30 a year, that

additional $11 increase would be about another $1 million they

would have to pay in. That would be $1 million additional versus

a claim of $6 billion and they are spending that much litigating in

Bankruptcy Court mostly against us each and every month.

Mr. PLATTS. The example gives a point for us to look at. What

are your best options as you are watching a company and based on

review of information that a company is in trouble and is going to

come in. We talked about you going in and involuntarily terminating it. What can you do within the responsibilities you currently

have?

Mr. BELT. That is an excellent question. I would break it down

to pre-bankruptcy and post-bankruptcy because once we are in the

bankruptcy environment, Chapter 11, our hands are really tied by

the Bankruptcy Code. Prior to that time, we monitor any number

of risks to the pension insurance program, and while the vast majority of companies act very responsibly, every once in a while you

come across transactions and maybe they are not intended this way

or maybe they are, that pose a risk of loss. You may be spinning

off an underfunded pension plan into a weak subsidiary or the

other way around. You actually leave behind an underfunded pension plan where there is no ability to make good on those obligations. There may be a transaction to break up a controlled group

and we have joint and several liability against members of a controlled group.

In those cases, we would ideally like to be able to go in and say,

wait a second, what is your plan of action and we need to have

some protection. You can’t abuse the pension insurance program

that way, just shift the risk to the pension insurance program.

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Mr. PLATTS. What is your ability to say you can’t do that? How

do you say you can’t do that?

Mr. BELT. We say we have concerns and can we talk about those

concerns and what we might do to address them. Ultimately our

only real, clearly articulated tool in the statute is to say if you don’t

do anything, we will terminate the pension plan. That means we

take the liability, the participants are hurt.

Mr. PLATTS. The company itself may say.

Mr. BELT. If they are in bankruptcy, they may actually say go

ahead and take it. Prior to that point in time, it does have some

adverse consequences for them because it matures the debt obligation, may cause problems for them in the credit markets and with

their other creditors, so they are not necessarily going to want to

go down that path. Nonetheless it is a high level game of

brinksmanship and you can imagine with a large manufacturing

company in a particular sector, going in to say I am going to push

that button, the kind of pressure we would get from this body and

across the Hill if it were employees in their districts and their

States.

Mr. PLATTS. Mr. Walker, you were involved in the first involuntary termination of a plan. Can you give an example of what decisions were made?

Mr. WALKER. I believe I made the decision to terminate the first

plan involuntarily. I don’t know how many have been done since

then but it had never been done before. That was in the mid to late

1980’s. It was clear to me that it was a circumstance in which it

wasn’t a matter of whether the plan was going to terminate, it was

only a matter of when the plan was going to terminate and what

the degree of underfunding would be. Basically, it also dealt with

the steel industry and the steel industry as I said previously has

gone through a lot of restructuring. It has a tremendous amount

of global competition and there are certain features in the steel industry plans whereby if a plant shuts down, then very lucrative,

early retirement benefits can end up popping up overnight. It was

pretty clear to me that one or more plants were likely to shut down

and if we waited to take action after that happened, then the fact

was the liabilities were going to increase significantly. We weren’t

going to get more recovery because the company was worth whatever it was worth. So I made the decision to go ahead and involuntarily terminate.

I negotiated with the labor union, I negotiated with management

and others to try to achieve an equitable result but again, that is

the nuclear option. You need to have intermediate sanctions that

are credible and viable. Let me give you an analogy.

The Internal Revenue Service has the authority to disqualify a

pension plan due to abuse. They have very rarely done so because

there are a lot of innocent parties that are harmed when you disqualify a pension plan. That is why it is important to have credible

and meaningful, intermediate sanctions.

I will say this, there is no question you are going to have to

make some changes in the insurance program, make some changes

in the funding rules and make some other changes in addition to

giving the PBGC some additional authority. I think you have to

deal with several structural changes. It is not a matter of whether

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they need additional revenues, yes, they do, but I think we have

to debate how much of it should be through fixed premiums versus

variable or risk related premiums. While obviously the weakest

companies aren’t going to be able to carry the full burden, you

want to minimize the amount of increases you impose on those who

ultimately may not ever represent a real risk or you may encourage

them to leave the system. That is one of those balancing of interests you always try to achieve. It is difficult.

Mr. PLATTS. Mr. Elliott.

Mr. ELLIOTT. If I could followup on comments about sanctions. I

would agree it would be helpful for the PBGC to have additional

sanctions less severe than the so called nuclear option but we

should also give them carrots. They should have the ability to do

things that plan sponsors would like and may need such as the

ability to spread out their payments over a longer period of time,

for example.

One reason I say that is that would also give them the ability

to bargain to some extent with how the pension plan is being run,

if there is too much equity risk in a particular plan, for example.

It is hard with a sanction to make them not do that but it is easier

to say there is this other thing you are asking us for, we would give

you permission to do it if you could show us you will do some

things to help us.

Mr. PLATTS. We have the incentives for them, kind of perverse

incentives to shift the burden to the PBGC, give them incentives

with a positive approach to not do that, and do right by their pensioners and ultimately the taxpayers or PBGC.

Mr. Duncan.

Mr. DUNCAN. First of all, I have a report from the GAO that says

the PBGC covers 34 million workers and in your testimony, Mr.

Belt, it says 44 million.

Mr. BELT. There are two different programs, the single employer

program which is 34 million and about another 10 million in the

multiemployer program.

Mr. DUNCAN. You also have a chart here that says there is $450

billion in underfunding estimated for 2004?

Mr. BELT. Correct.

Mr. DUNCAN. You also say, which we all realize, and I chaired

the Aviation Subcommittee for 6 years, the most immediate threat

is the airline industry. How much of that underfunding comes from

the airline industry and how much is other industries?

Mr. BELT. We have about a total of exposure to the airline industry of about $31 billion, actually somewhat less than that now because we have taken over the USAirways plans.

Mr. DUNCAN. By far, the great majority of that comes from other

industries?

Mr. BELT. That is right.

Mr. DUNCAN. When you find a plan that is underfunded, what

do you do? Do you send a letter, a notice or warning?

Mr. BELT. Current law allows them to be underfunded and allows them to continue to be underfunded. In many cases, they can

take actions to not put any money into the pension plan, and they

can take actions to increase benefits. Those are all proposed

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changes in the administration’s reform proposal to address those

flaws.

Mr. DUNCAN. Current law allows that. So you are saying so far

you don’t do anything, you don’t even say a letter saying we feel

your plan is underfunded or anything like that?

Mr. BELT. We have no authority to do that because they are able

to say they are complying fully with the minimum funding requirements established under ERISA and Title I and Title IV right now,

and the Internal Revenue Code.

Mr. DUNCAN. One of the reforms you are recommending is that

you be given some authority to do something about that?

Mr. BELT. The administration’s reform proposal that Dave and

Doug alluded to is focused first and foremost on strengthening the

funding rules so that we understand what the current financial

status of the pension plan is at given point in time and then we

make sure we take away a lot of these mechanisms like smoothing

and like credit balances that have been used by plan sponsors

under current law to allow the hole to get deeper and deeper and

deeper and say you have to fund up that deficit over a reasonable

period of time, 7 years.

We also put in place benefit limitations so that in fact as you get

further underfunded, more benefit limitations kick in so we don’t

want companies in the position of not honoring the promises they

have already made, and we want them to stop making new promises which are ultimately going to be hollow. There are many elements like that embedded in the administration’s reform proposal.

Mr. DUNCAN. A few minutes ago we talked about the $23.3 billion and how that has been generated in the last 3 years but you

have 3,500 failed plans that are under your mound?

Mr. BELT. That is correct.

Mr. DUNCAN. I assume that has speeded up in the last few

years?

Mr. BELT. Actually, no. The number of plans we take over that

are either voluntarily terminated or distressed terminations or

abandoned, those 3,500, the number per year has not significantly

increased. The amount of underfunding in the pension plans we

have taken over has dramatically increased. Using the catastrophic

or hurricane insurance analogy, we have been hit by the Hurricane

Andrew and several others in succession over the last 2 or 3 years. While in the past there were a lot of companies that had $100

million of underfunding, we now have had Bethlehem Steel with

$3.7 billion, $3 billion in USAir, potentially United Airlines of $6

billion and many others in the multiple hundreds of millions of dollars, that were over $1 billion worth of underfunding.

Mr. DUNCAN. Thank you. We had a hearing a few weeks ago

about the Defense Department and how we weren’t taking any action against these companies that have ripped off the Government,

but this is another important area that we ought to take some action on.

Mr. PLATTS. We are working with our witnesses and trying to

help raise that awareness because your statement earlier that

when you take all the issues together, each one is pretty challenging, when you take them all together, it is overwhelming. The sooner we get to working on the solutions, the better. I assure you as

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a subcommittee we want to continue to help raise awareness. As

a non-authorizing committee, part of our role from a subcommittee

standpoint is being a Paul Revere within the Congress to help raise

the awareness among our own colleagues.

Mr. DUNCAN. I appreciate the three of you coming here today to

talk about this. I think it is a very important problem we need to

do something about.

Mr. PLATTS. Mr. Belt, can you decline to take over a plan if it

will impact the solvency of PBGC? What are your rights to say no,

we aren’t going to do it for x, y and z?

Mr. BELT. As was noted, we can’t decline or deny insurance no

matter how high a risk the sponsor of the plan poses and even if

they fail to pay premiums or make contributions to their plans.

That is the social insurance aspect. Then there is a mechanism

under current law where companies can seek to transfer their pension obligations to the pension insurance program, to the Federal

Government insurance program if they meet certain statutory criteria established by Congress, the distress termination application.

That is not a decision for better or worse the PBGC makes. That

is in the hands of the Bankruptcy Court and a bankruptcy judge.

Unfortunately from my standpoint, the bankruptcy judge’s interests are not aligned with those of the other premium payers or the

participants, they are aligned with those of the debtor. Their sole

responsibility is to ensure that the company is able to successfully

emerge from bankruptcy and be very healthy in doing so, so they

have tended to buy into the argument that they can’t afford these

pension plans and would not be able to emerge without them.

We do present detailed financial analysis to the bankruptcy

courts but we have no control.

Mr. PLATTS. Do you have the right to appeal? No. So you can

make your case but you accept what the bankruptcy judge rules?

Mr. BELT. Correct.

Mr. PLATTS. You don’t have the ability to prevent a plan.

Mr. BELT. I stand corrected. We can appeal outside the bankruptcy court to the district court on that decision.

Mr. PLATTS. If a plan wants to in anticipation of turning over the

plan, if they plus up their benefits, you have to accept that?

Mr. BELT. No. There is kind of a fail-safe mechanism in current

law that guanantees of benefits granted within the previous 5

years are phased in over a period of time and that is to avoid exactly that situation. That also implicates issues like shutdown benefits which are not pre-funded. There are mechanisms to require

phase-in of guarantees of benefits granted over the prior 5-year period.

Mr. PLATTS. We talked about structural changes but we didn’t

touch on personnel. Do you have the manpower to meet the challenges you are facing especially if we give you more authority and

have structural changes achieved? Do you have the people you

need?

Mr. BELT. We have extraordinarily dedicated and capable staff at

the PBGC but it is also true we are facing an extraordinary operational and financial pressure that the organization has faced previous to this time. Those are going to continue and likely to exacerbate so it is incumbent upon us to make sure we have the best and

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brightest talent and that is particularly so in the area of risk management. The numbers we are talking about not are only the onbalance-sheet risks we face, we are managing $40 billion plus in

assets, about $70 billion in liabilities but also these contingent liabilities and trying to monitor the risks out there with limited resources requires that we have extraordinarily capable people who

understand the capital markets, who understand risk and can really bring these tools to the Government.

We are going out with a national search for a chief financial officer right now, trying to bring in the best and the brightest. I am

looking at people from within government but also outside in the

private sector, same with the General Counsel and new head of the

Office of Risk Assessment. As you know, we are somewhat constrained in attracting the best and brightest to government as we

all are.

Mr. PLATTS. I imagine in comparison to the SEC and some of the

new ability they have been given under Sarbanes-Oxley to go after

the key personnel. You don’t have that same level of flexibility?

Mr. BELT. We do not have the same kinds of flexibilities as the

FDIC and the other banking regulators, the SEC and others.

Mr. PLATTS. Mr. Elliott, the proposed reforms put forth thus far,

your opinion on how far they would go to restoring long term solvency to PBGC?

Mr. ELLIOTT. The administration has put forth a very bold proposal to my surprise because obviously any bold proposal distributes a lot of pain. I think if passed it probably would solve the

PBGC’s problem. The issue is it would also put severe stress on the

defined benefit system. There are a myriad of details I won’t go

into but that is the pro and the con.

Mr. PLATTS. And the risk of plans being terminated because of

the cost of continuing them?

Mr. ELLIOTT. Or frozen in any event. I think it will push a number of plans toward freezing.

Mr. BELT. We respectfully disagree with that conclusion because

as a policy matter, the last thing the administration and the President want to do is further impair the retirement security of millions of Americans and as a business matter, the last thing I want

to do is drive out my principal revenue base, have all the good actors and premium payers leave the system and leave the bad apples behind. We think we have struck an appropriate balance but

there is no question this issue has been raised as to whether we

have pushed too hard and people will look to exit the system.

I would note that under current law, we have had a trend line

downwards. No one is establishing new defined benefit plans except the United Methodist Church over the last several years. We

would like to arrest that. We think we need to clean up the rules

and our balance sheet before we can do that.

Mr. PLATTS. Based on the testimony I saw summaries from Senator Grassley’s hearing yesterday, the business community and the

labor community would share Mr. Elliott’s concern. They see it as

being too extreme and the economic impact. Is that a fair read?

Mr. BELT. The business community certainly complained about a

number of aspects of the proposal. They don’t want to pay higher

premiums. They have made that very clear. They want to maintain

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the mechanisms that I talked about before, the smoothing mechanisms that kind of hide the current state of economic reality, and

they want to maintain the ability to not pay in using credit balances notwithstanding the fact they may still be underfunded.

I understand their desire to retain those things. They want to

have the free put to the government, I understand their desire to

retain that but we don’t want that poses an unacceptable risk to

the taxpayer, that is not appropriate. Also with respect to labor

unions, I think a lot of unions actually support many aspects of the

administration’s proposal. But you heard the United Auto Workers

who have been on record saying they want taxpayer moneys, they

want this to be a taxpayer bale out. That has been true since

United Auto Workers pushed for the original creation of the pension insurance program prior to establishment of ERISA in the

1960’s.

Mr. PLATTS. An important perspective on what I read from yesterday and the history in that issue.

Mr. ELLIOTT. So nobody misunderstands, I am neither advocating

nor opposing the administration’s proposal. I merely mean to say

there are serious cons as well as pros.

Mr. PLATTS. But it is substantive and truly seeking to address

the challenges before you?

Mr. ELLIOTT. Absolutely. I highly commend them for that. It is

a plan that if followed through I think really would take care of

the PBGC deficit.

Mr. PLATTS. Mr. Walker, your thoughts on what has been put

forth thus far by the administration and your sentiments on how

successful it would be versus the risk associated with moving forward?

Mr. WALKER. First, there are a lot of details contained in my testimony that I would commend to you and the subcommittee. I am

willing to meet separately on this issue. I would say bottom line

is there is absolutely no question in my mind that Congress needs

to act and should act in this Congress, preferably in this session

of this Congress.

I also believe the administration is putting forth a comprehensive

proposal that deals with transparency, with funding, with certain

insurance reforms. The scope of the package I believe is good. I believe there are a few elements of the package that need further examination but I think it is definitely a positive step forward and

I believe that Congress needs to act on comprehensive legislation

hopefully in this session of this Congress.

Mr. PLATTS. Has there been much response to the greater transparency or do they still want to keep everything secret and confidential?

Mr. BELT. That is difficult to discern. If you read some of the testimony in the second panel from yesterday’s Finance Committee

hearing, there are indications of why support even stronger disclosure. If that is true, I am delighted and would embrace and let us

sign on the dotted line.

Mr. PLATTS. That would help and the marketplace pressure going

to work.

I apologize in having to run over for votes. Try to keep close to

the 3:30 p.m. commitment, Mr. Walker and safe travels. I appreVerDate 11-MAY-2000 10:01 May 25, 2005 Jkt 000000 PO 00000 Frm 00111 Fmt 6633 Sfmt 6633 D:\DOCS\20880.TXT HGOVREF1 PsN: HGOVREF1
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ciate your insights, helping to educate me as one who is probably

going to be called to vote on some significant proposals in the coming year. It really has helped me and hopefully helped to broaden

the exposure of what the risk is out there and if we don’t act. All

three of you, your knowledge base is tremendous and I am sure as

a body, we will continue to call on all three of you as we move forward.

We will keep the testimony open for 2 weeks and the record open

for additional information you want to submit.

I appreciate both staff for their work on this hearing.

The hearing stands adjourned.

[Whereupon, at 3:33 p.m., the subcommittee was adjourned.]

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