U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

93-386 PDF 2004

EXAMINING LONG-TERM 

SOLUTIONS TO REFORM AND 

STRENGTHEN THE DEFINED 

BENEFIT PENSION SYSTEM

HEARING

BEFORE THE

SUBCOMMITTEE ON EMPLOYER-EMPLOYEE 

RELATIONS

OF THE

COMMITTEE ON EDUCATION 

AND THE WORKFORCE 

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

April 29, 2004

Serial No. 108-55

Printed for the use of the Committee on Education and the Workforce

(

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

or 

Committee address: http://edworkforce.house.gov 

(II)

COMMITTEE ON EDUCATION AND THE WORKFORCE 

JOHN A. BOEHNER, Ohio, Chairman

Thomas E. Petri, Wisconsin, Vice Chairman 

Cass Ballenger, North Carolina 

Peter Hoekstra, Michigan 

Howard P. ‘‘Buck’’ McKeon, California 

Michael N. Castle, Delaware 

Sam Johnson, Texas 

James C. Greenwood, Pennsylvania 

Charlie Norwood, Georgia 

Fred Upton, Michigan 

Vernon J. Ehlers, Michigan 

Jim DeMint, South Carolina 

Johnny Isakson, Georgia 

Judy Biggert, Illinois 

Todd Russell Platts, Pennsylvania 

Patrick J. Tiberi, Ohio 

Ric Keller, Florida 

Tom Osborne, Nebraska 

Joe Wilson, South Carolina 

Tom Cole, Oklahoma 

Jon C. Porter, Nevada 

John Kline, Minnesota 

John R. Carter, Texas 

Marilyn N. Musgrave, Colorado 

Marsha Blackburn, Tennessee 

Phil Gingrey, Georgia 

Max Burns, Georgia 

George Miller, California 

Dale E. Kildee, Michigan 

Major R. Owens, New York 

Donald M. Payne, New Jersey 

Robert E. Andrews, New Jersey 

Lynn C. Woolsey, California 

Rube ́n Hinojosa, Texas 

Carolyn McCarthy, New York 

John F. Tierney, Massachusetts 

Ron Kind, Wisconsin 

Dennis J. Kucinich, Ohio 

David Wu, Oregon 

Rush D. Holt, New Jersey 

Susan A. Davis, California 

Betty McCollum, Minnesota 

Danny K. Davis, Illinois 

Ed Case, Hawaii 

Rau ́l M. Grijalva, Arizona 

Denise L. Majette, Georgia 

Chris Van Hollen, Maryland 

Tim Ryan, Ohio 

Timothy H. Bishop, New York

Paula Nowakowski, Staff Director 

John Lawrence, Minority Staff Director 

SUBCOMMITTEE ON EMPLOYER–EMPLOYEE RELATIONS 

SAM JOHNSON, Texas, Chairman

Jim DeMint, South Carolina, Vice Chairman 

John A. Boehner, Ohio 

Cass Ballenger, North Carolina 

Howard P. ‘‘Buck’’ McKeon, California 

Todd Russell Platts, Pennsylvania 

Patrick J. Tiberi, Ohio 

Joe Wilson, South Carolina 

Tom Cole, Oklahoma 

John Kline, Minnesota 

John R. Carter, Texas 

Marilyn N. Musgrave, Colorado 

Marsha Blackburn, Tennessee 

Robert E. Andrews, New Jersey 

Donald M. Payne, New Jersey 

Carolyn McCarthy, New York 

Dale E. Kildee, Michigan 

John F. Tierney, Massachusetts 

David Wu, Oregon 

Rush D. Holt, New Jersey 

Betty McCollum, Minnesota 

Ed Case, Hawaii 

Rau ́l M. Grijalva, Arizona 

George Miller, California, ex officio 

(III)

C O N T E N T S 

Page

Hearing held on April 29, 2004 .............................................................................. 1

Statement of Members: 

Andrews, Hon. Robert, Ranking Member, Subcommittee on EmployerEmployee Relations, Committee on Education and the Workforce .......... 3

Johnson, Hon. Sam, Chairman, Subcommittee on Employer-Employee Relations, Committee on Education and the Workforce ................................ 1

Prepared statement of ............................................................................... 3

Statement of Witnesses: 

Ghilarducci, Teresa, Ph.D, Faculty of Economics, University of Notre 

Dame, Notre Dame, IN ................................................................................. 81

Prepared statement of ............................................................................... 83

Heaslip, Greg, Vice President, Benefits, PepsiCo, Inc., Purchase, NY ........ 17

Prepared statement of ............................................................................... 18

Iwry, J. Mark, Esq., Non-Resident Senior Fellow, The Brookings Institution, Washington, DC ................................................................................... 21

Prepared statement of ............................................................................... 24

Kent, Kenneth A., Academy Vice President, Pension Issues, American 

Academy of Actuaries, Washington, DC ..................................................... 5

Prepared statement of ............................................................................... 7

Letter submitted for the record ................................................................ 45

Lynch, Timothy P., President and CEO, Motor Freight Carriers Association, Washington, DC ................................................................................... 66

Prepared statement of ............................................................................... 68

Miller, John S. (Rocky), Jr., Partner, Cox, Castle & Nicholson LLP, Los 

Angeles, CA ................................................................................................... 73

Prepared statement of ............................................................................... 74

(1)

EXAMINING LONG-TERM SOLUTIONS TO 

REFORM AND STRENGTHEN THE DEFINED 

BENEFIT PENSION SYSTEM 

Thursday, April 29, 2004

U.S. House of Representatives 

Subcommittee on Employer-Employee Relations 

Committee on Education and the Workforce 

Washington, DC 

The Subcommittee on Employer-Employee Relations met, pursuant to notice, at 10:32 a.m., in room 2175, Rayburn House Office 

Building, Hon. Sam Johnson [Chairman of the Subcommittee] presiding. 

Present: Representatives Johnson, Boehner, Wilson, Isakson, 

Kline, Carter, Andrews, Wu and Holt. 

Staff present: Stacey Dion, Professional Staff Member; Kevin 

Frank, Professional Staff Member; Ed Gilroy, Director of Workforce 

Policy; Molly Salmi, Deputy Director of Workforce Policy; Deborah 

Samantar, Committee Clerk/Intern Coordinator; Kevin Smith, 

Communications Counselor; Jo-Marie St. Martin, General Counsel; 

Jody Calemine, Minority Counsel Employer-Employee Relations; 

Margo Hennigan, Minority Legislative Assistant/Labor; Michele 

Varnhagen, Minority Labor Counsel/Coordinator. 

Chairman JOHNSON. A quorum being present the Subcommittee 

on Employer-Employee Relations of the Committee on Education 

and the Workforce will come to order. 

It’s 10:30 and everybody is gone except two of us. The two stalwarts of the Congress, Rob Andrews and myself, and we appreciate 

you all’s presence here this morning. 

STATEMENT OF HON. SAM JOHNSON, CHAIRMAN, SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE 

Chairman JOHNSON. We’re holding this hearing today to hear 

testimony on examining long-term solutions to reform and 

strengthen the defined benefit pension system. Under Committee 

rule 12B, opening statements are limited to the Chairman and 

ranking minority member of the Subcommittee. Therefore, if other 

members have statements, they will be included in the hearing 

record. 

With that, I ask unanimous consent for the hearing record to remain open for 14 days to allow members’ statements and other exVerDate 0ct 09 2002 12:51 Oct 18, 2004 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 H:\DOCS\93386 EDUWK PsN: NNIXON
2

traneous material referenced during the hearing to be submitted in 

the official hearing record. Hearing no objection, so ordered. 

Good morning to you all and welcome to the Employer-Employee 

Relations Subcommittee. Less than 3 weeks ago President Bush 

signed into law, as you know, the Pension Funding Equity Act, and 

that new law changed the interest rate we use as a bench mark 

for calculating how much money a pension plan can expect to earn 

on its assets. 

Getting from introduction to enactment on that new law, took 

better than 6 months, and it wasn’t a smooth or easy task, and 

that law expires in a year and a half or so. We just don’t have time 

to sit back and relax and admire our handiwork. The job we have 

ahead of us is far more complex than simply replacing an interest 

rate. 

Chairman Boehner and I said repeatedly we were working to introduce legislation that will significantly reform and strengthen the 

defined benefit pension system, and with the assistance of my 

ranking member, Rob Andrews, in this difficult job we’ll get it 

done. 

Over the last 20 years Congress has attempted several times to 

strengthen the defined benefit system, yet we’re seeing record deficits at the Pension Benefit Guarantee Corporation, and under funding problems continue to threaten the future of the system. 

Fundamental questions of long-term pension plan solvency are at 

the top of the list for reform. Expanding the number of pension 

plans and individuals in the plans will be important for insuring 

that Americans’ retirement will be financially secure. And among 

the thorniest of issues we will face is replacing the interest rate to 

be used for lump-sum calculations, because it’s still currently based 

on the 30-year treasury, which hadn’t been issued since 2001, as 

you’re aware. 

If the interest rate chosen is too low, lump-sum distributions will 

be unjustifiably large at the expense of all other plan participants. 

However, if the rate is too high, those taking lump sums would be 

getting less than the equivalent of their annuity payment. 

Other issues, such as deductibility of pension plan contributions, 

are integral to this effort but will fall within the jurisdiction of the 

House Ways and Means Committee, and since I’m on that Committee, as well, I’ll look forward to working with Chairman Thomas 

on those issues, and I’m sure that Rob can help me in that too. 

Mr. ANDREWS. Chairman Thomas or— 

Chairman JOHNSON. Well, can he? Last summer the Bush administration proposed some major changes to the way that assets 

and liabilities are measured, and some significant changes to notice 

requirements were included. We’ve already held a joint hearing on 

those proposals with the Ways and Means Committee. Today we’re 

holding the seventh hearing on this issue. 

Our invited witnesses today will give us their suggestions on how 

this system could be improved. With that, I now yield to the distinguished ranking minority member of the Subcommittee, Mr. Rob 

Andrews. 

[The prepared statement of Chairman Johnson follows:]

3

Statement of Hon. Sam Johnson, Chairman, Subcommittee on Employer–

Employee Relations, Committee on Education and the Workforce 

Good morning and welcome to the Employer–Employee Relations Subcommittee. 

Less than three weeks ago, President Bush signed into law the Pension Funding 

Equity Act. That new law changed the interest rate we use as a benchmark for calculating how much money a pension plan can expect to earn on its assets. Getting 

from introduction to enactment on that new law took better than six months and 

it was not a smooth or easy task. That new law expires in about a year and a half. 

We do not have time to sit back and admire our handiwork. The job we have 

ahead of us is far more complex than simply replacing an interest rate. 

Chairman Boehner and I have said repeatedly that we are working to introduce 

legislation that will significantly reform and strengthen the defined benefit pension 

system. I welcome the assistance of my Ranking Member Rob Andrews and the full 

Committee Ranking Member George Miller in this difficult job. 

Over the last 20 years, Congress has acted several times in attempts to strengthen defined benefit system and prevent pension underfunding, yet significant underfunding problems continue to persist that threaten the future of the defined benefit 

system. Workers should be able to count on their pension benefits when they retire, 

so the importance of this project cannot be understated. The defined benefit system 

needs long-term reform, and we have an obligation on behalf of workers and employers to move forward and act responsibly. 

Fundamental questions of long-term pension plan solvency are at the top of the 

list for reform. Expanding the number of pension plans and workers in these plans 

will be important for ensuring that Americans’ retirement will be financially secure. 

Among the thorniest of issues we will face, is replacing the interest rate used for 

lump sum calculations because it is currently based off of the 30–Year Treasury 

Bond which has not been issued since 2001. If the interest rate chosen is too low, 

lump sum distributions will be unjustifiably large at the expense of all other plan 

participants. However, if the rate is too high, those taking lump sums would be getting less than the equivalent of their annuity payment. 

Other issues, such as deductibility of pension plan contributions, are integral to 

this effort but will fall within the jurisdiction of the House Ways and Means Committee and I look forward to working with Chairman Thomas on those issues. 

Last summer, the Bush Administration proposed some major changes to the way 

that assets and liabilities are measured and funded as well as some significant 

changes to notice requirements. We held a joint hearing on those proposals with the 

Ways and Means Committee last July. 

Today we are holding the seventh hearing on the issue of defined benefit pension 

system reform. Our invited witnesses today will give us their suggestions as to how 

this system should be improved. 

STATEMENT OF HON. ROBERT ANDREWS, RANKING MEMBER, 

SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, 

COMMITTEE ON EDUCATION AND THE WORKFORCE 

Mr. ANDREWS. Thank you, Mr. Chairman, and thank you ladies 

and gentlemen. I’d like to thank the witnesses for their efforts in 

being with us today. Let me also say a special word for the pension 

community, much of which is gathered in this room this morning. 

We appreciate the diligence, substantive depth that the ladies and 

gentlemen who work on this issue bring to this process. I know 

both sides of the aisle have benefited from your advocacy and from 

the hard work that you do. 

I enjoy this area because it is one of the areas of the law and 

policy where partisan divisions are not self-evident and need not be 

self-limiting, and I hope that we can approach this morning’s hearing in that spirit. 

We face two significant paradoxes in the pension law of our country. The first is that the plans that are the strongest and most dependable in our pension world are the ones that are receiving the 

least number of new adherents and new enrollees and, in fact, are 

losing ground. Those are defined benefit plans. 

4

We did a lot of hearings in this Committee in the wake of the 

Enron and WorldCom scandals, and they were scandalous and 

painful episodes indeed. It’s important to remember that the pension scandals that have dominated the first couple of years of this 

decade came in defined contribution plans; self-directed defined 

contribution plans not in defined benefit plans. Defined benefit 

plans are solid as a rock, and that is something to celebrate and 

be very proud of. 

So I think that the first principle that we should apply in assessing the law that governs defined benefit plans is the Hippocratic 

Oath; we should first do no harm to a system that is very solid and 

very dependable for millions of retirees and their families. 

The paradox is that these plans are so dependable but they’re becoming so rare. Virtually no one is signing up to create a new one, 

and many employers are withdrawing from the ones that they are 

already in. And one of the issues that I want to explore in these 

hearings is why that is and what we can do about it. 

I don’t think we should ever mandate or coerce any union or any 

group of employers or any single employer to move toward defined 

benefit plans, but I think that we need to create an environment 

where that remains a viable choice. And I fear that that’s not the 

environment that we’re living in today. 

The second paradox is that at a time when Americans are living 

longer and going to be requiring more of their private assets to 

maintain their standards of living there are 69 million American 

workers who have no private pension coverage at all. In 1999, Congressman Owens and I requested that the General Accounting Office do an assessment of the number of American workers who 

have no private coverage at all, and that was the report that the 

GAO gave us. 

Now, that is both material to today’s discussion but also separate 

from today’s discussion. Obviously, legal parameters that would 

make it more attractive for employers and unions and employee 

groups to create pension plans will reduce the number of those 

without a pension. But I believe that those incentives alone are not 

sufficient to address the concerns of workers who are in low-margin 

industries, at low salaries, whose employers may well have the desire to fund a pension for those workers but don’t have the discretionary net income to do so. 

Although it’s within jurisdiction of my friends of the Ways and 

Means Committee, it’s important that we keep in mind the various 

proposals that have been made for refundable tax credits for lowincome workers, so that we can vigorously subsidize savings for 

workers who do not have a private pension. 

The paradox, again, is that the miracle of medical technology 

means that many Americans are going to be living to be 90 or 100 

years old. Now, the fastest growing demographic in the 2000 Census was the cohort of people between 80 and 90 years of age. That 

grew by 33 percent relative to the 1990 Census, which I think is 

great news for all of us. 

The problem is that we have a pension system that’s still rather 

predicated on the idea that you’re going to live for about 7 years 

after you retire. Happily, that’s no longer the case, but we’re heading toward a day when we’re going to have an awful lot of retirees 

5

living at or near the poverty line or beneath it. And one of the ways 

to confront that problem is to have a more robust and inclusive 

pension system. 

So I look forward to having these and other questions addressed, 

and I, again, thank both panels of witnesses for their time this 

morning. 

Chairman JOHNSON. Thank you. I appreciate your comments, 

and I tell you what. It is important to note that I think the insurance industry has already moved their final, you know, date at 

which they stop collecting and figuring things from about 96 or 100 

to 120. So, you know, it surprised me a little bit, because the doc 

told me I was only going to live to 104. Longer, huh, OK. 

Well, let’s get started. Our first panel for today’s hearing will 

focus on reforms to the single employer pension system, and they 

are Kenneth Kent, who is vice-president for pension issues of the 

American Academy of Actuaries. Greg Heaslip, who is vice-president for benefits at PepsiCo, Inc. Mark Iwry, who is non-resident 

single—or excuse me—senior fellow of the Brookings Institution. 

I’ll introduce the second panel after they’re seated, and before 

the witnesses begin the testimony, I’d like to remind members that 

we’ll ask questions after the entire panel has testified. In addition, 

the Committee rule two imposes a 5-minute limit on all questions. 

And there are lights down there, which will be green, yellow, and 

red, which will indicate to you five, one, and zero. So I’d appreciate 

your remarks remaining within the 5-minute limit, as well. 

I’ll recognize you at this time. Go ahead, Mr. Kent. 

STATEMENT OF KENNETH A. KENT, ACADEMY VICE-PRESIDENT, PENSION ISSUES, AMERICAN ACADEMY OF ACTUARIES, WASHINGTON, DC 

Mr. KENT. Thank you, Chairman Johnson, Ranking Member Andrews, and distinguished Committee members. Thanks for the opportunity to testify today on pension reform and thanks for that introduction. 

I’m here representing the American Academy of Actuaries. The 

Academy is a non-partisan, public policy organization for all actuaries in the United States. In my testimony today I’ll address three 

items—the need for reform; the Academy’s principles for reform; 

and opportunities for change in our system of benefit delivery. 

Do we need reform? The need is evident by the continuing decline in the number of defined benefit plans. Defined benefit programs are a fundamental vehicle for providing financial security for 

millions of Americans. Unlike other programs, they provide lifetime 

benefits to retirees, no matter how long they live and regardless of 

how well they do on their individual investments. 

However, recent market conditions of low interest rates and low 

market returns have caused more dramatic declines in the number 

of covered employees. There are many contributing factors, including regulatory and administrative burdens derived from years of 

amendments to ERISA, which have had a long-term detrimental 

impact. These programs need your support through major reform 

of the current laws. 

Our reform principles. Leading actuaries volunteered their time 

and intellectual capital to create a framework of principles for 

6

funding reform. We will be publishing a paper, presenting many of 

the ideas on how these principles can be addressed, some of which 

are included in the summary that is attached to my statements. 

Let me briefly describe the six principles. Solvency. This should 

be a fundamental objective of funding reform. The rules should 

move us to a point where assets cover liabilities. They should also 

address and reward responsible corporate behavior. 

Predictability. Contributions should be more predictable so they 

can be budgeted in advance. Excessive precision at the cost of rational predictable results can be expensive for employers and detrimental to employees. 

Transparency. Users of the information should be able to understand the current financial position of the pension plan. However, 

we should not confuse the need for financial disclosure with the 

measurements to identify long-term funding obligations. 

Flexibility. Sponsors should be encouraged to fund their plans 

better by allowing them to buildup margins in their plans without 

deduction and excise tax problems and providing excess surplus for 

other employee benefit purposes without reversion tax. 

Simplicity. The rules should be easier to understand and comply 

with. And, transition, sponsors need a smooth transition to the new 

rules so that they are not forced into freezing or terminating their 

pension plans. 

Reform is also an opportunity to bring our retirement system in 

line with the changing demographic and global business model. 

There are five areas that can help. Put hybrid plans back on the 

table. Their popularity stems from an ability to meet the needs of 

participants and employers alike, especially, within some industries. 

Provide phased retirement. Our workforce can use this gradual 

retirement process which makes these provisions a win, win for 

employers and employees. Mirror the opportunity available in defined contribution plans by allowing employee deductible contributions to defined benefits plans and allow employees access to purchase lifetime income through their employer plans. 

Provide portability. Multi-employer plans provide one-time-tested-effective model. IRAs go part way but the challenge is portability of annuity-type benefits to preserve the intended security. 

Defined benefit plans have a critically different function for retirement security over lump sums through investment and longevity 

risk pooling. 

Update the standard retirement age. In the 1930’s when life 

expectancies were much lower, age 65 was defined. Clearly, our society has changed, and this target should be changed to better 

align the expectations of the workforce today and in the future. 

I appreciate the opportunity to participate in this process on behalf of pension actuaries who have dedicated their careers to helping sponsors provide employees’ retirement security. To this end, 

we’re currently engaged in completing a white paper on ideas on 

reform, analyzing ways to redefine retirement age, establishing a 

national security as a bench mark. 

As we work to further define these principles, we will share them 

with you. Thank you for the opportunity on behalf of the American 

Academy of Actuaries. 

7

[The prepared statement of Mr. Kent follows:]

Statement of Kenneth A. Kent, Academy Vice President, Pension Issues, 

American Academy of Actuaries, Washington, DC


93386.001
8


93386.002
9


93386.003
10


93386.004
11


93386.005
12


93386.006
13


93386.007
14


93386.008
15


93386.009
16


93386.010
17

Chairman JOHNSON. Thank you, sir. We appreciate your testimony. Mr. Heaslip, you will be recognized. 

STATEMENT OF GREG HEASLIP, VICE-PRESIDENT, BENEFITS, 

PEPSICO, INC., PURCHASE, NY 

Mr. HEASLIP. Thank you. Mr. Chairman— 

Chairman JOHNSON. Thank you for coming all the way down 

from New York. That’s a tough road. 

Mr. HEASLIP. No problem at all. Thank you. I’m pleased to be included in the hearing this morning. My name is Greg Heaslip. I’m 

the vice-president of benefits for PepsiCo. 

Chairman JOHNSON. Turn on your mike. Will you push the button on it. 

Mr. HEASLIP. How’s that? 

Chairman JOHNSON. That’s perfect. 

Mr. HEASLIP. Good morning and thank you for inviting me this 

morning. My name is Greg Heaslip. I’m the vice-president of benefits for PepsiCo. I’m also on the board of the ERISA industry Committee. I’m here this morning representing PepsiCo. 

Mr. Chairman, before I begin my remarks this morning, I’d like 

to say a thank you to the Subcommittee for their leadership on replacing the 30-year treasury rate. That was something that’s extremely critical to plan sponsors, such as us, and I think your tenaciousness and persistency on that issue were critical in getting it 

over the goal line, so thank you very much for that. 

One of the reasons that the Pension Funding Equity Act is important to planned sponsors is that at least for the next 2 years we 

now have a reasonable basis on which to estimate our funding requirements. This certainty is very important from a planning and 

budgeting aspect for any plan sponsor. 

Secondly, as it uses a public readily available interest rate to determine liabilities, there’s a level of simplicity and transparency to 

the rate that appeals to us very much. And then, third, because the 

rate is based on a 4-year average instead of a spot rate there’s 

some stability and predictability in our funding requirements, 

which is also appealing to plan sponsors. 

Certainty, predictability, and stability are things that you’ll hear 

me reiterate during my testimony this morning. At PepsiCo and at 

other plan sponsors, defined benefit pension plans have grown to 

a size where they have a material impact on the company’s overall 

financial results. 

Our pension expense impacts our profits, our share price. Funding impacts our balance sheet and our credit rating. For any expense of a magnitude of a pension plan, companies have to know 

in advance for the next three to 5 years what costs and funding requirements will be with reasonable certainty. 

Recently, this has been almost impossible with defined benefit 

pension plans. It’s partly due to the market, but it’s also partly due 

to the complexity, frequent changes, and sometimes lack of guidance in these areas. It’s really not the cost of defined benefit pension plans that scares companies. We understand that and that’s 

what we signed up for while we implemented them. It’s the unpredictability, the volatility, and the uncertainty surrounding them 

that makes them very, very difficult and challenging to sponsor. 

18

I’d suggest that the way to strengthen our defined benefit system, our pension system in general, is to enact reforms that do 

three things. Provide greater certainty and predictability to 

planned sponsors, reduce the complexity inherent in today’s rules, 

and maintain flexibility for plan sponsors to make changes that are 

in the interests of their businesses and workers. 

Some specific recommendations I would suggest include, one, permanently replacing the 30-year treasury rate with a long-term corporate bond rate that is averaged over a three to 5-year period 

similar to what we have in place today. I would recommend using 

that rate for funding, lump-sum distributions, and PBGC premiums, eliminating some of the complex and contradictory rates 

that we use today. 

I’d encourage companies or I’d provide companies the flexibility 

to make higher tax-deductible contributions than current law provides and to eliminate the excise tax penalty so that when times 

are good and business conditions permit we can build a cushion of 

funding in our plans and provide for longer-term benefit security. 

I would maintain plan sponsor flexibility to change or modify 

their plans without mandates as to future benefits. We should 

never abandon the principle that what somebody has earned in a 

defined benefit plan is protected, but we shouldn’t—in a voluntary 

system we shouldn’t mandate what sponsors can do or can’t do in 

the future. 

Finally, in the area of disclosures, I would ask that you proceed 

cautiously. The pension literacy rate among our workers is not 

high. While we need to share important information, we also want 

to avoid creating undue anxiety or confusion among plan participants. 

Again, thank you for the opportunity this morning. We believe 

strongly in defined pension plans—defined benefit pension plans at 

PepsiCo and in the work you’re doing, and we look forward to a 

continued partnership in this important area. 

[The prepared statement of Mr. Heaslip follows:]

Statement of Greg Heaslip, Vice President, Benefits, PepsiCo, Inc., 

Purchase, NY 

Mr. Chairman, members of the Subcommittee, thank you for the opportunity to 

participate in today’s hearing. My name is Greg Heaslip and I am Vice President 

of Employee Benefits for PepsiCo, on whose behalf I am speaking today. 

PepsiCo is a food and beverage company headquartered in Purchase, NY with 

143,000 employees, including 60,000 employees in the U.S. PepsiCo’s annual revenues are about $27 billion; we are ranked number 62 on the Fortune 500 list of 

large corporations. 

PepsiCo sponsors several savings and retirement plans for its employees, including a defined benefit pension plan, defined contribution plan with employer matching contributions and broad-based stock option program. 

My focus this morning is the defined benefit pension plan, and some of the challenges and opportunities faced by PepsiCo and by defined benefit plan sponsors in 

general. 

As you know, defined benefit pension plans provide a unique and valuable set of 

advantages to both plan sponsors and their employees. For employers, the plans are 

an effective means of attracting and retaining a capable workforce. For employees, 

the advantages of defined benefit plans include: 

• Automatic participation - Employees do not have to enroll or contribute a part 

of their wages in order to receive benefits. 

• Benefit security. The plan sponsor bears the investment risk. Employees are 

protected from bad investment decisions and market fluctuations. Benefits are 

at least partially guaranteed by the PBGC, which is funded by plan sponsors. 

19

• Lifetime income. Plans provide regular monthly income to participants and 

their spouses for life. 

Given the well-documented lack of personal savings in this country, the growing 

cost of health care, the decline in employer-provided retiree medical benefits, stock 

market volatility, and longer life spans, defined benefit pension plans provide a 

unique and secure source of retirement income for more than 42 million American 

workers and family members. 

Nonetheless, recent cost increases for these plans have been challenging for all 

plan sponsors. PepsiCo’s experience is a case in point: • Over the past three years PepsiCo’s U.S. pension expense has risen from $26 

million to $135 million, an increase of 500%. • During the same period, PepsiCo has contributed $1.6 billion to its plans in 

order to maintain a reasonable funded status in the face of shrinking assets, 

due to a down equity market, and growing liabilities, driven by historically low 

interest rates. 

In addition to rapidly rising costs and funding requirements, plan sponsors have 

had to cope with several trends that create a difficult climate for defined benefit 

plans in general. Continuation of these trends will inevitably discourage the use of 

defined benefit plans: • Growing Uncertainty—The uncertainty around the replacement for the 30-year 

Treasury rate is an example of how unsettled the landscape is. Without knowing the basis for determining funding liabilities, plan sponsors could not accurately plan or budget. Analysts speculated what a company’s liabilities might 

be, adding an element of risk to stock valuations. Uncertainty drives plan sponsors toward more predictable, stable alternatives such as defined contribution 

plans. 

• Loss of Plan Sponsor Flexibility—Companies are increasingly concerned about 

their ability to change their plans, or adopt newer forms of defined benefits 

plans, in order to manage their costs or better meet the needs of a changing 

workforce. Some legislative proposals would impose unreasonable 

grandfathering requirements on plan sponsors who make plan changes, despite 

the voluntary nature of our pension system. Conversions to hybrid defined benefit pension plans have been attacked in the courts, media and legislature. 

Again, the result is the abandonment of defined benefit plans. 

• Growing Complexity—Pension funding rules have become so complex that even 

those of us who manage these plans have difficulty understanding them. In addition, pension accounting and funding follow different standards and are barely 

integrated. This nearly-overwhelming complexity drives plan sponsors to abandon defined benefit plans for more transparent approaches, such as those offered in the defined contribution arena. 

PepsiCo has been fortunate to weather this combination of volatility, uncertainty 

and complexity with its plans intact. We remain committed to defined benefit pension plans. However, that is not necessarily the case with all employers: 

• The number of defined benefit plans insured by the PBGC decreased 70% from 

114,500 in 1985 to 33,000 in 2002. 

• In the three most recent years reported—1999 to 2002 the number of plans decreased 20%. 

I believe there are a number of moderate reforms which, if enacted, could substantially improve the climate for defined benefit plans. The overriding objective of reform should be to strengthen and encourage growth of defined benefit pension plans. 

From a plan sponsor perspective this can be accomplished by reforms that provide 

greater certainty and predictability, maintain flexibility for plan sponsors and attack some of the complexity that exists today. 

Allow me to suggest some reforms which may accomplish these goals: 

Permanent Replacement of the Discount Rate for Liabilities 

Congress is to be commended for its bipartisan support and timely passage of the 

Pension Funding Equity Act earlier this month. 

The composite corporate bond rate contained in the Act provides needed clarity 

and certainty to plan sponsors. Going forward, I believe that the corporate bond rate 

as contained in Act is worth continuing on a permanent basis. 

• It leads to a more reasonable (though conservative) approximation of liabilities 

than the defunct 30-year Treasury rate. 

• It is readily available to the public. 

• It is largely immune from the consequences of public policy decisions and from 

manipulation. 

In addition, the use of a four year average, as currently provided for, is significantly less volatile than a ‘‘spot rate’’ would be, yet tracks the market. 

20

In order to reduce some of the complexity inherent in today’s defined benefit 

plans, this rate should also be used for other plan purposes such as calculation of 

lump sum distributions and determining variable PBGC premiums. I’ll say more on 

this in a moment. 

The relevance, accessibility and relative stability of this approach to pension funding make it appealing as a permanent reform. 

Use of a yield curve, on the other hand, appears to lack many of the benefits of 

the corporate bond rate and may create new issues. While there are still many questions on exactly how a yield curve would work, potential issues with this approach 

include: • The rate which would not be transparent, widely used or available to the public. • The rate would be more volatile—leading to more volatile funding requirements—unless some average or smoothing is introduced. This seems somewhat 

inconsistent with the concept of a yield curve and would make it even more 

complex. 

Plan sponsors would face increased uncertainty and funding volatility as a result. 

As indicated earlier, when faced with uncertainty or financial requirements they 

cannot adequately control, plan sponsors will tend to abandon defined benefit plans. 

Addressing Complexity 

One of the most daunting challenges facing defined benefit plan sponsors is the 

increasingly complex regulatory environment for these plans. The calculation of plan 

liabilities provides a perfect example. For funding purposes, plan sponsors are required to calculate liabilities four different ways, using three different interest rates. 

The liability figure actually used for funding can change from year to year based 

a number of factors. Pension expense is calculated using two interest rates, each of 

which is different from the rates used for funding. Lump sum distributions to participants are determined using yet another rate, the now-defunct 30 year Treasury 

rate. And variable rate PBGC premiums are based on a liability calculation that is 

different from all of the above. 

Multiple stakeholders with vested, but differing interests in pension plans have 

produced a patchwork of non-integrated requirements. Sheer complexity is driving 

many plan sponsors to simpler, more transparent types of retirement plans. The 

current situation begs for Congressional leadership to bring the various stakeholders together to create simplifying reforms. 

Higher Funding Limits 

Employers should have flexibility to make larger funding contributions when business and economic conditions permit. Raising funding limits and eliminating the excise tax penalty benefits participants, employers and the PBGC. When economic 

conditions inevitably worsen, the added cushion resulting from large contributions 

provides participants with increased security, employers with lower required contributions and the PBGC with less risk. 

Plan Sponsor Flexibility 

Legislative reforms should preserve the ability of plan sponsors to change or modify their pension plans, so long as they observe the longstanding requirement that 

benefits which participants have already earned will be protected. Legislation requiring plan sponsors to offer participants a choice of plans or to grandfather future 

benefit flies in the face of our voluntary system. Mandates lead to loss of flexibility 

and control for plan sponsors. The inevitable result will be more harmful than helpful to workers, as employers will avoid both traditional defined benefit plans and 

some of the newer alternatives that have been developed. 

Disclosure 

I would urge Congress to act cautiously when considering new disclosure requirements. 

I certainly support the goal of sharing meaningful information with participants, 

analysts and shareholders that enables them to make informed decisions about the 

company or take appropriate action. However, disclosures that create needless anxiety or confusion do more harm than good. 

Several of the Administration’s proposed disclosures fall into this category. For example, disclosing a plan’s termination liability is likely to alarm participants, even 

though the plan may be well funded and the plan is not being terminated. Similarly, 

public disclosure of plans that are ‘‘under-funded’’ by more than $50 million could 

be meaningless, or even misleading, in the context of large plans and insufficient 

relative to small plans. 

Both the spirit and practical outcome of proposals such as these would be to discourage the continuation of defined benefit plans. Ultimately, onerous and potenVerDate 0ct 09 2002 12:51 Oct 18, 2004 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6621 H:\DOCS\93386 EDUWK PsN: NNIXON
21

tially misleading new disclosures would be to disadvantage the very group they are 

designed to benefit—plan participants. 

Conclusion 

Mr. Chairman and members of the Subcommittee, thank you again for the opportunity to express my views on reforms that will strengthen the defined benefit pension system. With your leadership and with the involvement of key stakeholders, 

I am confident that we can improve the climate for this vitally important element 

of our retirement system. 

Chairman JOHNSON. Thank you, sir. I appreciate your outline as 

a matter of fact. You two are pretty close together. Mr. Iwry, you 

may begin your testimony now. 

STATEMENT OF J. MARK IWRY, ESQ., NON-RESIDENT SENIOR 

FELLOW, THE BROOKINGS INSTITUTION, WASHINGTON, DC 

Mr. IWRY. Thank you, Mr. Chairman. Chairman Boehner, Ranking Member Andrews, distinguished members. After spending 

much of the previous decade in the Treasury Department, overseeing the regulation of defined benefit and defined contribution 

plans and other employee benefits and after participating in the effort 10 years ago to reform the pension funding rules and shore up 

PBGC’s financial situation as it was then, I will tell you that probably the single most effective step that you could take to strengthen the defined benefit system at this point is to enact a reasonable 

solution to the cash balance pension controversy. 

The major portion of the defined benefit universe now takes the 

form of cash balance and other hybrid plans. Hundreds of sponsors 

have shifted from the traditional defined benefit plan as we know 

to this hybrid format, and the precise application of the governing 

statutes to these plans has been the subject of uncertainty, litigation, and now prolonged controversy. 

I would suggest that the courts are not the place to resolve this 

issue in a coherent, rational way that takes into account all the legitimate interests in the pension system. And that Congress should 

step up and provide a rational, general solution to cash-balanceplan issues as soon as possible. And a solution that I would suggest 

is actually feasible can be done in the near term. 

These types of plans have been unfairly demonized by some, and 

to some extent, idealized by others. There’s nothing inherently 

wrong, of course, with the plan that is funded by the company like 

a defined benefit plan while stating the basic benefit as an account 

balance like a DC plan and providing an investment return that 

generally does not depend on the risks of the equity market or on 

employees’ decisions as to how to invest. 

It’s the conversion, of course, from the defined benefit traditional 

format to the cash balance that’s been the issue, and, mainly in 

cases where the employer has not given sufficient transition relief 

to provide a soft landing to older and longer-service workers contrary to many cases where the employers have, in fact, provided 

ample transition relief. 

On the other side cash-balance plans have been characterized as 

the last, best, and only hope for the defined benefit system. And, 

in fact, I think there’s some truth to that, but there’s a sense in 

which they’re not fully a part of the defined benefit system insofar 

as they lack one of the key attributes that makes defined benefit 

22

plans particularly valuable, namely, the guaranteed lifetime benefit. 

They’re required, of course, to offer a joint survivor annuity and 

a life annuity, but as a practical matter, the presumptive form of 

payment in a cash balance is a lump sum. That’s how it’s presented 

to employees, and that’s what most people, in fact, take from most 

cash balance plans. But cash balance plans that give a fair transition to older workers are, indeed, valuable, in particular, if they’re 

funded by the company. So the coverage does not depend on the 

employee taking the initiative to decide to participate, and the investment risks and investment returns are pooled. 

As a centerpiece of your action to strengthen the defined benefit 

system, I would suggest that you could resolve the cash balance 

issue in a way that does four essential things. 

First, gives older workers substantial protection from the adverse 

effects of a conversion, including protection from wear away of the 

normal and early retirement benefit. 

Second, allow companies that maintain cash balance plans to do 

so without concern that they would be treated as age discriminatory. 

Third, give companies reasonable flexibility to change their 

plans, to make prospective amendments, including conversions to 

hybrid formats and to determine how to protect older workers, 

though not whether to protect older workers. And, finally, to resume the IRS determination letter process so these plans can get 

approved again and the system can move on. 

In my written statement I’ve outlined a specific framework for 

solution consistent with testimony that I submitted to this Committee last summer, and while I certainly don’t believe that I or 

anyone in particular has all the answers, I’ve suggested a number 

of very specific alternatives. And I would welcome discussion of 

those in this hearing or at the Committee’s convenience. 

On the funding side I agree with much of what my co-panelists 

have said. Let me just make a couple of specific points in addition. 

A central part of the work that needs to be done is to make the 

deficit reduction contribution; the accelerated funding that under 

funded plans are subject to to make that less volatile. 

As you know, this kicks in now too late, too suddenly, and can 

shut off too soon. The rules also allow inappropriate funding holidays to companies when they ought to be contributing, as the Bethlehem Steel case illustrated. Bethlehem Steel also illustrates the 

need for better disclosure. The plan looked like it was 84 percent 

funded the year before it went under and turned out to be under 

50 percent funded. 

I agree with my colleagues that the funding disclosures need to 

be sensitive to the need not to panic employees or inadvertently 

mislead people. I think there are ways to do that. Employers 

should be able to fund for lump-sum distributions, even when the 

value of the lump sum is actuarily greater than the value of the 

annuity. 

Chairman JOHNSON. Can you start to tie that down. 

Mr. IWRY. Yes, Mr. Chairman. This is my last point. 

Chairman JOHNSON. Thank you. 

23

Mr. IWRY. And I think that that needs to change. We should 

allow plans to fund for the lump sum, even when it’s more valuable 

than the annuity. Mr. Chairman, I’d be happy to answer any questions you or the members might have. 

[The prepared statement of Mr. Iwry follows:]

24

Statement of J. Mark Iwry, Esq., Non-Resident Senior Fellow, The 

Brookings Institution, Washington, DC


93386.011
25


93386.012
26


93386.013
27


93386.014
28


93386.015
29


93386.016
30


93386.017
31


93386.018
32


93386.019
33


93386.020
34


93386.021
35


93386.022
36


93386.023
37


93386.024
38


93386.025
39


93386.026
40


93386.027
41

Chairman JOHNSON. Thank you. I thought maybe The Brookings 

Institution taught you how to talk long. The Chair recognizes the 

Chairman of the Full Committee, Mr. Boehner, for questions. 

Chairman BOEHNER. Thank you, Mr. Johnson, and let me thank 

our panelists for their valuable insight and their testimony as we 

seek to find a rational answer for how to improve the pension system for American workers. 

As I was listening to the opening statement from the Chairman 

and Mr. Andrews and some of you, I began to remind myself that 

the pension system in the United States is a voluntary program on 

behalf—from employers on behalf of their employees. And when we 

seek to legislate, you know, fix the existing problems, that we just 

can’t lose sight of the fact that this is a voluntary system that we 

have in America that’s worked fairly well. Is it perfect? No. But it 

is a voluntary system. 

Secondly, as I listen to Mr. Kent outline the principles of reform; 

solvency, predictable, transparent, flexible, and simplicity I began 

to ask myself if we were talking about Social Security or the pension system. And if you look at the problems that we have in the 

defined benefit pension system in our country today, it’s really not 

a great deal different than the problems that we have in the Social 

Security system in America today, especially, in that people are living a great deal longer than when most of these plans were initiated and put together. 

And when you begin to look at the mortality tables, you can 

begin to understand why many of the defined benefit plans that we 

have are facing the kind of problems that they’re facing, especially, 

in older industries. 

And so I also want to take a moment to say thank you to many 

of you that are in the audience for your input, your help, and your 

advice as we were finally completing the pension bill that the 

President signed into law several weeks ago. I don’t know why 

something so simple turned out to be so difficult, but welcome to 

the U.S. Congress. 

There’s one other point that I want to make, and I think Mr. Andrews touched on it, and I want to touch on it, as well. What we 

seek to do here is to find a way to simplify the rules around defined 

benefit plans in meeting really two goals—two competing goals. 

One is to simplify the regulatory structure so that plans know what 

they have to do, when they have to do it, and can contribute when 

they’re most able to contribute. 

Now I think the entire DRC section, while it was put in in ’87 

and updated in ’94, was never really tested until we got to 2001, 

2002, 2003 and we found out that it was a meat axe that just 

doesn’t work. But we’ve got to find a way to make these simpler, 


93386.028
42

including—including the safe harbor of a cash-balance conversion, 

which once we get all the politics out of the way—which we never 

quite do around here—truly is a way to strengthen the defined benefit system. 

So we’ve got to do all that on one side while at same time insuring that the commitments that employers are making to their 

workers are kept. And that gets around to the solvency issue. And 

the reason I bring this up and make a point of it is that as we go 

through this process over the next year or so we’re going to be 

working with many people to find the right set of rules for defined 

benefit plans of all sorts. 

But I just want everyone to know on the other side of this equation we expect people to make contributions to their plans, and 

it’s—because I’ve had people suggest these changes, these changes, 

and someone suggested something to me this morning about a 

group of plans trying to find a way to give us good advice and all 

get on the same page. 

But I just want everybody to know that these are—this is the 

tightrope that we’re walking, because when we want people to 

make contributions and to keep their plans, we don’t want to over 

burden them and push them out of the process. But at the same 

point if you’re going to have this plan, you’re going to make commitments to your workers, you’ve got to be able—you’ve got to be 

willing to meet your commitments and to make those payments. 

And so, Mr. Kent, I’m very pleased with the points that the actuaries are making. We need your help in this process, and I think 

that the five or six goals that you outlined are the same types of 

goals that we have as we do this. 

Mr. Iwry, when it comes to cash balance, we’ve got to keep beating the drum. My colleagues on both sides of the aisle by and large 

understand that cash balance conversions in 99 percent of the 

cases were done correctly. There were only several cases where 

people were rather clumsy about how they pursued it in their conversion, but we have to have real rules that provide clear indications to people as to how they can do it where they don’t feel like 

they’re exposing themselves to endless litigation. There’s enough 

litigation out there already. 

So that—I’ve got another meeting to go to, but I just want to say 

thanks for being here and thank all of you for your help as we’ve 

been through this process and we will continue to go through this 

process. 

Chairman JOHNSON. Thank you Mr. Brookings—I mean, Mr. 

Boehner. You’re all right, John. I don’t care what they say. 

Chairman BOEHNER. As I’m fond of saying—and I have 11 brothers and sisters. My dad owned a bar—I can smell it a mile away. 

Chairman JOHNSON. Thank you for being here and thank you for 

your comments. Mr. Andrews, you’re recognized for 5 minutes. 

Mr. ANDREWS. I liked what you said, John. I don’t care what 

Sam says. I thought it was pretty good. I’d like to thank the witnesses for their testimony this morning. It was outstanding, and I 

hope that you will stay engaged with the Committee as we go forward in the process of trying to develop legislation. 

I wanted to ask Mr. Heaslip you favor making permanent the 30-

year bond rate that was done in the bill the President just signed, 

43

as opposed to the administration’s discussions of the yield curve. 

I’m sympathetic to your point of view. I think the last thing in the 

world we probably need now is another change to a variable instrument, at least, in this context. I wonder if you could tell us what 

you think is superior about the 30-year rate when compared to the 

yield curve. 

Mr. HEASLIP. A couple of thoughts on that. While I think there’s 

still a lot of questions about the yield curve, which need to be answered, so we’re working on partial information here, there’s probably two aspects to the interest-rate question that I think are important to consider. 

The first is what is the basis for the interest rate. The use of a 

long-term corporate bond rate has appealed because it’s publicly 

available, it’s very transparent, it’s simple to understand— 

Mr. ANDREWS. Pretty easy to understand. You look it up on the 

Internet and you know what it is, right? 

Mr. HEASLIP. Exactly. I’m not sure the same is true of a yield 

curve. It will vary from company to company. It will be difficult to 

explain to participants, and I don’t—it’s not something you can just 

look up on the Internet. So simplicity and transparency is one argument for the corporate bond rate. 

I think the second part of your question gets to over what period 

of time the rate will be based. The proposals that I’ve seen on the 

yield curve speak of it as a spot rate or a point-in-time rate, which, 

I think, by definition is likely to be more volatile than a corporate 

bond rate, which is averaged over a three to 5-year period. That 

volatility in the rate leads to volatility in funding requirements, 

and volatility in funding requirements, frankly, is one of the things 

we’re really struggling with. 

Mr. ANDREWS. I agree with you and I think that we don’t want 

to let precision in the rate be the enemy of the greater substantive 

point. That if one of the reasons why people are walking away from 

defined benefit plans is the volatility of their funding obligation, we 

might be very, very precise about very few LANs that are left in 

the universe. I wouldn’t want to see us elevate precision to the 

level of a religious principle. So I’m interested in hearing more 

thoughts about that. 

Mr. Iwry, I want to ask you about safe harbors for cash balance 

conversions that have already taken place. The administration has 

put rules on the table, which you regard as a constructive first 

step. What do you think we ought to do about an employer who has 

already done a cash balance conversion that’s consistent with those 

rules? In other words, the rules essentially say let’s give employees 

a choice between the lump-sum-aggregate choice and the continued 

defined benefit traditional choice. 

If a company has already done that, do you think that we should 

create a safe harbor for them so they can’t be sued for doing it? 

Mr. IWRY. Mr. Andrews, if the company is already given that 

kind of choice to participants between continuation of the old plan 

and the new cash balance format, I certainly think that they ought 

to be treated as having done a more than adequate transition for 

their older workers. But that kind of conversion should be protected from challenge. 

44

I think what we have to be sensitive about is how to deal with 

past cases in a way that’s fair to the sponsor, as well as the employees affected, if it doesn’t have unintended consequences. There 

are other conversions. People could pay a little less than that who 

might feel that they’re—might see themselves not needing that safe 

harbor. 

Mr. ANDREWS. I think we have to divide the world into three 

universes here; plans that have already made a conversion but 

done so in a way that impairs the fair, legitimate interests of pensioners; plans that have done a conversion already but have not 

impaired those fair interests, and I believe those plans should see 

a safe harbor; and then plans which are considering it in the future, so we can influence their behavior in a positive way. And 

we’re interested in your precise thoughts about how to do that. 

I did want to close with Mr. Kent. You said a lot of provocative 

and interesting things. Two of the most interesting things I 

thought were your views on raising the ceiling on contributions 

that can be made through pre-funding. How high do you think that 

ceiling should go? 

Mr. KENT. There are clearly within my profession a lot of different levels. We’ve heard as much as 130 to 165 percent of the 

current liability. It has to be rationalized to address the solvency 

issues, and part of it is going to depend on what liability or obligation we define as a bench mark for solvency. 

But if it were at 130 percent of the current liability, that’s one 

bench mark that could be justified. But it would not have taken 

plans through the kind of economic scenario that we just experienced over the past 3 years. There would still be plans that would 

fall into an insolvent position as a result of that. 

Mr. ANDREWS. I’m going to stop, but I would just ask each of 

three witnesses to consider this question. Should that threshold be 

set by regarding—well, what set of economic parameters should be 

used to set that threshold? If you want to take a worse-case-scenario idea for setting the threshold, you would make it very, very 

high. You assume the worse and let people put away money in good 

times, or should the scenario be more optimistic? 

And the second part of that question is other than revenue implications for the treasury, are there any other policy considerations 

we should think about in setting that threshold? Obviously, it will 

cost the treasury some money in the short run the higher you make 

the threshold. Although, arguably, I think it may avoid Federal 

outlays and PBGC if you make the threshold higher, so I’m not 

sure at the end of the day what it costs. 

But the question I would ask is supplement the record—because 

my time is up—is other than revenue implications, what other considerations should we take into account when setting the threshold 

for pre-funding pension obligations? Thank you, Mr. Chairman. 

[The provided material follows:]

45

Letter from Kenneth A. Kent, Academy Vice President, Pension Issues, 

American Academy of Actuaries, Washington, DC, Submitted for the Record


93386.029
46


93386.030
47


93386.031
48


93386.032
49


93386.033
50


93386.034
51


93386.035
52


93386.036
53


93386.037
54


93386.038
55


93386.039
56


93386.040
57


93386.041
58


93386.042
59


93386.043
60


93386.044
61

Chairman JOHNSON. Thank you. If you could respond in writing, 

we’d appreciate it, all three of you. Thank you very much. The 

Chair recognizes the gentleman from Minnesota, Mr. Kline, for 

questions. 

Mr. KLINE. Thank you, Mr. Chairman. Thank you gentlemen for 

being here with us today. I want to identify myself, of course, with 

the brilliant remarks of our Chairman of the Full Committee. Welcome to Congress. 

Mr. ANDREWS. You can tell who the freshmen are around here, 

can’t you? 

Mr. KLINE. We want to be sophomores, Mr. Andrews. That’s how 

that works. I’ve just got a couple of, I think, fairly straightforward 

questions. There’s been quite a bit of discussion today about hybrid 

plans, and, Mr. Kent, you were the first one to bring that up. 

Would you take just a minute and lay out for all of us here exactly 

what that is and what the difficulties might be associated with 

that. 

Mr. KENT. OK, sure. A hybrid plan—and I’ll use cash balance as 

an example—is one which provides a notional amount of defined 

funds that go into a person’s account, and that account is ultimately redefined as a benefit when they reach retirement. So that 

it still falls under the definition of a defined benefit, because within 

the plan structure you can determine what type of lifetime income 

the plan will provide an individual, based on that individual’s facts 

and circumstances; pay and service. 

The reason it’s called the hybrid is because through that person’s 

working lifetime they’re looking at an accumulation of an account 

balance, which will ultimately be converted. Typically, hybrid plans 

because they report an accumulation of account balance also offer 

those account balances to be paid out as lump sums when they 

reach retirement, which takes—which negates some of the impact 

of value that traditional defined benefit plans and life annuities 

offer. 

So that’s one form of a hybrid plan; something that looks like a 

defined contribution plan that is structured to deliver a lifetime income at a specific retirement age. Does that address your— 

Mr. KLINE. Thank you for the definition. And difficulties with 

companies and plans moving to that? 

Mr. KENT. Well, the difficulties stem from the way in which some 

companies have transitioned from a traditional defined benefit plan 

to a hybrid plan and the way in which they have structured those 

conversions. There is a concept called wear away where some people did not accrue benefits until the accumulation of their account 

plus the benefits they earned up to that point in time were more 

valuable than the benefits that they had prior to the conversion. 

And those are some of the provisions that are in contention in 

terms of the way in which plans have been converted and how 

they’re being communicated to participants. 

Mr. KLINE. OK, thank you very much. Earlier in the hearing 

today there was a fair amount of levity and conversation about people living to 104 and 94 and all those sorts of things, and it’s a 

very—of course, very real concern that we are living longer and, 

therefore, having to pay out benefits for a longer period of time. 

62

And, Mr. Kent, I was fascinated to hear you say that you’re 

working on a white paper or something that I was hoping you’d be 

willing to give us a little preview into. What are you thinking about 

raising the retirement age and how would you do that? How would 

you make that transition? 

Mr. KENT. And that’s not an easy transition to entertain, but 

what we’re doing is we’re asking actuaries and the academics to 

come up with some fundamental theories or concepts that we can 

apply that say how do you balance the number of years you would 

expect to be able to retire over the number of years you’re expected 

to work. Because, clearly, that ratio has gotten out of balance as 

people have been able to retire and have extended years—far more 

than the seven, if you will, back in 1930 that were expected. 

So there should be some ratio. This should also be done in coordination with a phased retirement, because you have two issues. You 

have people who are clearly at age 65 who are at the top of their 

game and capable of continuing to work, and you also have some 

people, particularly in labor industries, where age 65 is as far as 

they can go or even age 62, and they need some way to phase down 

from work. 

So coupling the concept of changing the benchmark of 65 with a 

phased—with the ability to phase into retirement would help our 

workforce move from what has been the historic bench mark for 

many years to something that would say people should expect to 

be able to work longer and balance the number of years in which 

they’re in retirement income versus active income. 

Mr. KLINE. It just seems like that would be extremely difficult 

to make that change. You’ve got expectations of employers and employees and families. Pretty tough load that you’re lifting there. 

Thank you very much, Mr. Chairman. I yield back. 

Chairman JOHNSON. Thank you, sir. The Chair recognizes the 

gentleman from Texas, Mr. Carter. 

Mr. CARTER. Mr. Kent— 

Chairman JOHNSON. Would you repeat that. 

Mr. CARTER. Thank you, Mr. Chairman. I don’t think I’ll ever 

live to be 104. Mr. Kent, you talked about the need for contribution 

predictability. Do you have any thoughts on how to decrease the 

volatility of these contributions, particularly, deficit reduction contributions? 

Mr. KENT. Well, you took a big step by bench marking the interest rates to be used, so that employers had an idea how to move 

forward and permanently securing a bench mark would help do 

that. 

The deficit reduction issues that employers are dealing with, one, 

it represents a significant exception, if you will, and the economic 

conditions that brought them on to the backs of employers in such 

a quick and severe way. There has to be a way to spread that, 

whether you put kind of a Governor on there that says the deficit 

reduction contributions kick in but it should be no more than ‘‘X’’ 

percent of what they would otherwise have to contribute in order 

to modify those results or rewrite that entire structure is one component. 

Another component may be to require that employers have a continuing obligation to contribute, even beyond what are currently 

63

considered full-funding limits. So that we raise the bar, and employers are in a position to say we still have a long-term obligation, 

and we’re not moving from a year when we have to contribute 

nothing to a year which we have to contribute 25 percent of payroll. 

So there are a number of ideas that we have that we’ll be coming 

out with in a paper that identify how to smooth that process out 

and make it more predictable for companies to budget for. 

Mr. IWRY. Mr. Carter, may I add something? 

Mr. CARTER. Yes, please. 

Mr. IWRY. I’d like to register one point of disagreement with my 

colleagues. I think that the short-term interest rate fix that’s just 

been enacted is desirable and necessary. I think that the long-term 

interest rate for purposes of pension funding should not be considered an issue that has now been presumptively closed and resolved. 

I do not think that Congress has given sufficient attention to the 

level of the interest rate. The argument has been made persuasively and I’ve joined in that that the 30-year treasury interest rate 

is obsolete and not workable. The argument has also been made—

and I’ve joined in that—that a rate based on something different 

like the corporate bond indices makes sense is ascertainable. Apart 

from the debate over yield curve conversions of that versus spot 

rates, but the level of the rate that’s based on corporate bonds, for 

example, has not been focused on adequately by Congress. 

Should it be corporate bonds minus a certain number of basis 

points? Should it be ‘‘X’’ percent of corporate bonds? Should it be 

100 percent of corporate bonds? That is an open question, and I 

think that it’s in part an empirical matter that Congress should address by using and sharing some of the modeling and data that the 

PBGC is doing. 

Chairman JOHNSON. Have you modeled that? 

Mr. IWRY. The PBGC, I think, has modeled that kind of analysis. 

Personally, I have not but I was part of that exercise, Mr. Chairman, 10 years ago when we tried to reform the funding rules. And 

it turned out that to make a really rational decision and know the 

impact on adequate funding for workers, as well as the impact on 

the plan sponsor, you had to run numbers. And I suggest that Congress could use some more wherewithals from the PBGC or elsewhere to share in the modeling and the number crunching that 

they do. 

Chairman JOHNSON. Thank you. Sorry to interrupt you, Mr. 

Carter. 

Mr. CARTER. I yield back my time, Mr. Chairman. 

Chairman JOHNSON. Thank you. The Chair recognizes the gentleman from South Carolina, Mr. Wilson. 

Mr. WILSON. Thank you, Mr. Chairman, and thank you all for 

being here this morning. And, Mr. Kent, you’ve stated that 401K 

plans currently have more tax advantages than the defined benefit 

plans. Would allowing pre-tax employee contributions assist plans 

with their current funding issues? 

Mr. KENT. We introduce it not to assist plans in their current 

funding issues, because we’re not suggesting that employees now 

be held to help employers fund what they have already held as an 

obligation based on their program. 

64

What we do suggest is that employers be allowed to design defined benefit plans that you would permit or require employees to 

contribute a portion of their own income to provide for long-term 

income net retirement. Very similar to the structure that you have 

in many public plans in this country where employees contribute 

to their plans, it enhances the level of benefit that they can retire 

on, and those contribution are before taxes. 

Mr. WILSON. And, additionally, you’ve been—and there’s been 

discussion about updating the standard retirement age. And so I’m 

going to give all three of you an opportunity to offend people like 

we do, and so—and that is to be specific as to how you suggest that 

the—what target retirement age do you see, and I’d like all three 

of you to share the blame or credit. And I can’t wait for you to enlighten us as to what the retirement age should be. 

Mr. KENT. The answer from my part for the Academy is that 

that’s a work in progress, and we hope to answer that question. We 

do think that you have to couple it with phased retirement, so that 

what you’re really doing is giving the individuals more flexibility 

but respecting their capability of retiring beyond some fixed age 

that currently is defined in the code. 

Mr. HEASLIP. We tend to look at this, not only on the basis of 

age, but years of service, and in many of the jobs at our company, 

people perform very physical work that’s difficult to do after say 25 

years of service. So one of our goals is to enable people who want 

to to retire after 25 or 30 years of service almost regardless of their 

age, because they simply can’t keep working. And so that’s sort of 

our soft spot or our sweet spot. 

Mr. IWRY. I share that concern that Mr. Heaslip has just articulated. I think the answer to the question what’s the ideal retirement age is none. That there need not be a legally mandated retirement age for most purposes. We’re really talking about a dozen 

different purposes here when we ask what should the retirement 

age be. But for the purpose of determining when people can leave 

and take their pension, I think that there’s a real interest in flexibility. 

If I may add regarding your earlier question, pre-tax contributions to defined benefit plans I would suggest that the Committee 

take into consideration as a caution here that companies may well 

be invited to frame that issue precisely the way you have, sir. That 

is to regard it as a way to shift the funding from the company to 

the employee. That’s not necessarily a reprehensible thing to do, 

but if Congress makes that easier for the company to do and a company is in a position where it would be convenient to do that in 

a particular year, you can very much start an erosion of defined 

benefit—of what we really care about in defined benefit plans by 

turning them into 401Ks. 

Mr. WILSON. And I appreciate that very much, and I represent—

back on the retirement age I appreciate the concept of flexibility. 

I represent Hilton Head Island in South Carolina. We have a lot 

of retirees, and I never cease to be amazed at how so many of them 

retired and then they go back into consulting and, truly, it should 

be based on flexibility. So I appreciate that very much. 

65

Mr. Heaslip, currently, there are restrictions on the amount of 

contributions that employers can deduct. Should Congress consider 

raising the level of tax-deductible contributions? 

Mr. HEASLIP. I do think that would be helpful. We’ve been fortunate in that our business is strong and we’ve been able to make 

voluntary contributions over the past several years. And I think 

the more you can do to encourage employers to make contributions 

when business and economic conditions are good the better off 

you’ll be when there’s the inevitable downturn. 

Mr. WILSON. And at what level would you suggest? 

Mr. HEASLIP. I don’t really know. I don’t have a specific suggestion in terms of the level. Higher than it is today. 

Mr. WILSON. Thank you very much, and I yield the balance of my 

time. 

Chairman JOHNSON. Mr. Wilson, I appreciate your remarks. Can 

I just ask Mr. Heaslip do you think restrictions ought to be placed 

on lump-sum distributions in a plan if it’s under funded? 

Mr. HEASLIP. I think that question goes to whom you’re trying 

to protect. Restrictions on lump-sum distributions would penalize 

plan participants or workers who have probably expected them, but 

they might benefit the PBGC. And so I tend to come down on the 

side of participants. And so I would say, no, you shouldn’t restrict 

lump-sum— 

Chairman JOHNSON. Yeah. But if a plan is under funded, they’re 

not going to pay the same lump sum probably. 

Mr. HEASLIP. I just feel that if companies have made a commitment to provide a lump-sum payment option they ought to follow 

through on that commitment. 

Chairman JOHNSON. Whatever it happens to be? 

Mr. HEASLIP. That’s right. 

Chairman JOHNSON. OK. And that’s their choice? The employee’s 

choice? 

Mr. HEASLIP. That’s right. 

Chairman JOHNSON. Mr. Kent, in your written testimony you 

state that many employers want to switch to cash balance plans to 

provide employees with a guaranteed portable defined benefit plan, 

and they don’t do it because of the current legal uncertainty. Would 

the administration’s current proposal guaranteeing a minimum 

benefit level by providing benefits that have not yet been earned 

encourage more employers to leave the system? 

Mr. KENT. It might. The challenge here is, as you heard in the 

other testimony, is the level of complexity that is added to the process of converting a plan and whether employers will go down that 

road of complexity and guarantees or identify that there may be a 

better way to do -- to approach their needs and structures in terms 

of terminating the plan and looking for the opportunity to afford 

a cash balance plan in the future. 

That I think has detrimental impact to employees, so that if any 

structure for conversion adds a fair amount of regulatory complexity that’s going to be balanced against the fact that—it will be 

balanced against whether to convert to a cash balance plan or just 

freeze the current plan and go to some other system that has less 

complexity. 

66

Chairman JOHNSON. Thank you so much for your testimony 

today. You guys have been an excellent panel. We appreciate your 

advice, and, hopefully, we can start the process. So if you would 

consider yourselves excused, would the next panel please take their 

seats. Thank you for being with us today. 

I will introduce the second panel as they are seated. Before the 

witnesses begin their testimony, I’d like to remind members that, 

again, we will be asking questions after the entire panel has testified. And we’ll impose a 5-minute limit on all questions. 

Our first witness is Timothy Lynch, president and CEO of the 

Motor Freight Carriers Association. The second witness is John 

‘‘Rocky’’ Miller, a partner with Cox, Castle & Nicholson. And the 

third Teresa Ghilarducci—there you go—associate professor of economics, University of Notre Dame. Thank you all for being with us, 

and I’d like to remind you that you’ve seen the lights work, so you 

understand the 5-minute limit, and I’d appreciate you all adhering 

to it, if you could. You may begin, Mr. Lynch. 

STATEMENT OF TIMOTHY LYNCH, PRESIDENT AND CEO, 

MOTOR FREIGHT CARRIERS ASSOCIATION, WASHINGTON, DC 

Mr. LYNCH. Is it on now? Thank you, Mr. Chairman. Good morning. My name is Tim Lynch, and I am the president and CEO of 

the Motor Freight Carriers Association, and I too want to add my 

comments to some of the earlier panelists about thanking both the 

Chairman, as well as the Committee members, for holding this 

hearing, as well as the work on the earlier legislation this year. 

I am here today as a representative of an association of trucking 

industry employers, who by virtue of their collective bargaining 

agreements, are major participants in a number of multi-employer 

plans. These employers are concerned about the current framework 

for multi-employer plans and strongly believe that if not properly 

addressed the problems will only get worse, thus jeopardizing the 

ability of contributing employers to finance the pension plans and 

ultimately putting at risk the pension benefits of their employees 

and retirees. 

Mr. Chairman, I have what I consider to be a fascinating statement on the history of trucking deregulation and MEPPA, but inasmuch as I may be the only one in the room who thinks it’s fascinating, I’ll ask that I’d be able to submit that for the record and 

we can move to page seven. 

Chairman JOHNSON. That’s fine. You may all submit your comments to the record. We’ll put them in. Without objection, so ordered. 

Mr. LYNCH. Thank you. In doing that, though, I would like to 

draw attention to the attachment to my statement, which shows a 

list of the top 50 LTL general freight truck companies that were 

in existence in 1979, and the bold-faced names are the ones who 

are still in existence. That is a very, very important key element 

of where we are in terms of our views about how to move forward. 

The single most significant problem confronting multi-employer 

plans in the trucking industry is the declining number of new participants. The multi-employer concept is a workable model if there 

are sufficient contributions being made today to sustain payment 

of current benefits, and as we have seen with recent history, heavy 

67

reliance on investment income can leave plans vulnerable to the 

vagaries of the market. 

However, the fact that there is a shrinking number of unionized 

trucking companies or that people are living longer are beyond the 

scope of what we are here to discuss today. There are simply some 

things we cannot change. But as indicated at the beginning of my 

statement, we believe there are changes that can be made and that 

reform of the MEPPA statute is both necessary and timely. 

We have three areas that we’d suggest reform. Withdrawal liability. It is no secret that the current framework for collecting withdrawal liability is broken. It doesn’t collect the unfunded liabilities 

it was designed to collect, leaving most multi-employer plans and 

ultimately all other contributing employers in the plan responsible 

for benefits of withdrawn employers. Withdrawal liability makes 

multi-employer plans very unattractive to new employers. 

The number of unfunded participants, those whose employer has 

withdrawn from the fund and is no longer making contributions 

has created such a significant burden at some plans that drastic 

action may be required. We are aware of one very large trucking 

industry plan in which half of the contributions—or half of the benefit payments that are made annually are made to beneficiaries 

who no longer have a contributing employer on their behalf. 

We would recommend that Congress direct the PBGC to undertake a comprehensive study of the unfunded participant issue and 

the financial burden it poses on multi-employer plans. Obviously, 

plans and the contributing employers cannot survive long term if 

only a handful of viable companies are responsible for the last 50 

years’ of trucking industry retirees. 

There also needs to be some exploration of alternatives to withdrawal liability that maintain the integrity of the plans but remove 

the disincentive for potential new contributing employers. Among 

other things, serious consideration should be given to developing a 

withdraw formula that will align benefits of employees of withdrawing employers to the amounts that are actually recovered. 

Greater multi-employer plans control and oversight. The basic 

structure of multi-employer plans makes plan design and certainly 

plan reduction decisions very difficult. Notwithstanding the fiduciary requirements on trustees taking unpopular actions to correct 

plan funding issues can have political consequences for union trustees and union officials. 

I believe we have to accept the reality that it will be very difficult for multi-employer plan boards to make necessary changes, 

particularly, for severely distressed plans. As multi-employer legislation is considered, serious consideration should be given to 

whether additional procedural or legal controls over the management of the plans could prevent serious funding issues. 

Something as simple as imposing funding policy guidelines that 

mandate clear targets for the plan’s unfunded liability. The Teamsters Western Pension Fund has long had a funding policy that established the funding levels and requires the trustees to adjust 

benefits. Plan modifications are virtually automatic. I see my red 

light is on so I will conclude. 

[The prepared statement of Mr. Lynch follows:]

68

Statement of Timothy P. Lynch, President and CEO, Motor Freight Carriers 

Association, Washington, DC 

Good morning. My name is Timothy Lynch and I am the President and CEO of 

the Motor Freight Carriers Association (MFCA). I want to begin by thanking Chairman Sam Johnson and the other members of the Subcommittee on Employer–Employee Relations for holding this hearing to discuss suggestions for securing the 

long-term viability of the multiemployer pension system. 

I am here today as a representative of an association of trucking industry employers who by virtue of their collective bargaining agreement are major participants 

in a number of multiemployer plans. Their companies are key stakeholders in these 

funds. The employers I represent are concerned about the current framework for 

multiemployer plans and strongly believe that if not properly addressed, the problems will only get worse, thus jeopardizing the ability of contributing employers to 

finance the pension plans and ultimately putting at risk the pension benefits of 

their employees and retirees. 

While we were supportive of the short-term relief provided to multiemployer plans 

under the recently-enacted Pension Funding Stability Act, we believed then, and 

continue to hold the view, that significant reform needs to occur if we are to secure 

the long-term viability of these plans. The financial difficulties facing the Central 

States pension fund are well known to this Committee, but Central States is not 

alone. Nor are the factors contributing to the problems of Central States unique. 

The challenges facing these pension funds cannot solely be attributed to the effects 

of a prolonged, down stock market. The problem, in our view, runs much deeper. 

MOTOR FREIGHT CARRIERS ASSOCIATION

MFCA is a national trade association representing the interests of unionized, general freight truck companies. MFCA member companies employ approximately 

60,000 Teamsters in three basic work functions: local pick-up and delivery drivers, 

over-the-road drivers and dockworkers. All MFCA member companies operate under 

the terms and conditions of the Teamsters union National Master Freight Agreement (NMFA), one of three national Teamster contracts in the transportation industry (the National Master United Parcel Service Agreement and the National Automotive Transport Agreement being the other two). 

Through its TMI Division, MFCA was the bargaining agent for its member companies in contract negotiations with the Teamsters union for the current National 

Master Freight Agreement (April 1, 2003—March 31, 2008). Under that agreement, 

MFCA member companies will make contributions on behalf of their Teamster-represented employees to approximately 45 different health & welfare and pension 

funds. At the conclusion of the agreement, MFCA companies will be contributing 

$12.39 per hour per employee for combined health and pension benefits, or a 33% 

increase in benefit contributions from the previous contract. This is in addition to 

an annual wage increase. 

DESCRIPTION OF PLANS

MFCA member companies, along with UPS, car-haul companies and food-related 

companies are typically the largest contributing employers into most Teamster/

trucking industry-sponsored pension plans. The 45 Teamster/trucking industry benefit plans vary widely in size, geographic scope and number of covered employees. 

The two largest plans—the Central States Pension Fund and the Western Conference of Teamsters Pension Fund—have reported assets of $18 and $24 billion respectively and cover over 1 million active and retired employees in multiple states. 

Conversely, several smaller plans in the eastern portion of the United States have 

assets below $200 million and cover less than 1,200 active and retired employees. 

As Taft–Hartley plans, these pension funds are jointly-trusteed (an equal number 

of labor and management trustees) and provide a defined benefit (although some 

plans offer a hybrid defined benefit/defined contribution program). MFCA member 

companies are represented as management trustees on most of the plans to which 

they make contributions. In an effort to help improve the management of the plans, 

MFCA member companies have made a concerted effort to nominate as management trustees individuals with backgrounds in finance, human resources, and employee benefits. However, because of the legal restrictions placed upon trustees in 

furtherance of their fiduciary responsibilities, there is very limited control by our 

companies over the actions and decisions of trustees. Additionally, there is no single 

appointing authority for management trustees but rather a mixture of associations 

and labor relations organizations. 

69

RELATIONSHIP BETWEEN COLLECTIVE BARGAINING AND THE PENSION PLANS

In its report to this Committee, the General Accounting Office (GAO) reported 

that multiemployer plans ‘‘contribution levels are usually negotiated through the 

collective bargaining agreement’’ and that ‘‘[b]enefit levels are generally also fixed 

by the contract or by the plan trustees.’’ In our case, that is only partially correct: 

the NMFA only establishes a contribution rate. It does not set a pension benefit 

level. It is worth reviewing for the Committee the relationship between collective 

bargaining and the multiemployer pension plans. 

Like most multiemployer plans, our plans are maintained and funded pursuant 

to collective bargaining agreements. During each round of bargaining, the industry 

and union bargain and agree on the per-hour contribution rate required to be paid 

by employers to the plans for pension and health benefits. Once the rate is established, however, the role of the collective bargaining process and of the collective 

bargaining parties with respect to the plans—in terms of the level of benefits, the 

administration of delivering those benefits, management of plan assets, etc.—is 

over. For employers, the only continuing role in the plans is to make the required 

contractual contributions. That is, unless the plan, over which the employers have 

no control, runs into financial crisis. I will talk more about that in a moment. 

Each multiemployer pension plan is a separate legal entity managed by an independent board of trustees. It is not a union fund controlled by the union. Nor is it 

an employer fund, over which the employer has control. Rather, by law, the plans 

are managed independently by their trustees under a complex set of statutory and 

regulatory requirements. Although the trustees are appointed - half by the union 

and half by the employer - each trustee has a legal obligation to act not in the interest of the union or employer that appointed them, but rather with a singular focus 

on the best interests of the plans participants. Trustees who do not act in the best 

interest of participants may be held personally liable for breach of their fiduciary 

duty. 

As noted earlier, employers’ role with respect to multiemployer pension plans is 

limited to making contributions unless the plan runs into financial difficulty. Under 

current law, employers are ultimately responsible for any funding deficiency that 

the multiemployer plan may encounter. Specifically, if a multiemployer plan hits a 

certain actuarially-calculated minimum funding level, employers in the fund are assessed a five percent excise tax and are required to pay for their pro-rata share of 

the funding shortfall or face a 100% excise tax on the deficiency. The requirement 

to make this payment of the shortfall effectively removes a key element of contract 

negotiations—employee benefits—from the collective bargaining process. 

This framework is modeled after the single employer plans. With single employer 

plans, a company sets up a pension plan and the company is responsible if the plan 

becomes underfunded. But, the big difference between single employer plans and 

multiemployer plans in this context is that a company controls its plan—determines 

benefit levels—where as employers in multiemployer plans do not have that kind 

of control. Like other multiemployer contributing employers, MFCA companies find 

themselves with ultimate responsibility for the plans into which they contribute 

with no control over the fund’s administration. 

HOW WE GOT TO WHERE WE ARE

The year 1980 witnessed a defining moment in the history of the trucking industry. Or more accurately, two defining moments. In that year Congress passed two 

major legislative initiatives—the Motor Carrier Act (MCA) and the Multiemployer 

Pension Plan Amendments Act (MEPPA)—that radically altered the profile of the 

industry and the landscape for industry-sponsored pension plans. The first brought 

about deregulation of the trucking industry and all the associated market dislocations. The second upset the essential balance between exiting and entering employers that is key to maintaining a viable multiemployer pension program. 

No one disputes the economic benefits to the American economy from deregulation 

of the trucking industry. Customers have more options, freight moves more efficiently and productively and total transportation/logistics costs have been reduced. 

But those benefits have not come without cost and part of those costs are associated 

with the departure of unionized truck companies as contributing employers to multiemployer pension plans. 

To put this in some perspective, I have included in my statement (Appendix A), 

a list of the top 50 general freight, LTL carriers who were operating in 1979, the 

year just prior to enactment of MCA and MEPPA. Of those 50, only 7 are still in 

operation and only 5 of the 7 are unionized. Virtually all of the 43 truck companies 

no longer in business had unionized operations, and consequently were contributing 

employers to industry-sponsored pension plans. There have been no subsequent new 

70

contributing employers of similar size to replace these departed companies. And beyond the top 50 there were literally hundreds, perhaps thousands, of smaller unionized truck operators who also have fallen by the wayside. 

The dynamic of our economic system is the right to grow and flourish as well as 

the risk of failure and bankruptcy. Unfortunately, in the world of MEPPA we are 

no longer sure who really qualifies as the winner. Trucking companies fiercely compete in the marketplace but perversely have to hope their competitors don’t go 

under. We have become not only our brother’s keeper, but also the keeper of his 

pension liabilities. Or as the GAO report to this Committee described the situation: 

‘‘Thus an employer’s pension liabilities become a function not only of the 

employer’s own performance but also the financial health of other employer 

plan sponsors. 

The simple fact is that since 1980 there has not been a single trucking company 

of any significant size to replace any of the departed companies on the Top 50 list. 

Part of that can be explained by the overall trends in collective bargaining. But 

there can be no question that the risk attendant to withdrawal liability has proven 

to be a powerful disincentive for new employers to come into trucking industry 

plans. 

Withdrawal liability clearly has been a barrier to new contributing employers 

coming into the funds but there’s also strong evidence that it has not resulted in 

any significant recovery of liabilities of withdrawing employers, one of the key assumptions of the original MEPPA debate. One of the largest trucking industry plans 

reports that bankrupt (withdrawing) employers ultimately pay less than 15% of 

their unfunded liability. And what happens when these liabilities are not fully recovered? They become the responsibility of the remaining contributing employers. 

Nothing highlights the inequity of this situation more than the recent bankruptcies of two contributing employers: Consolidated Freightways (CF) and Fleming 

Companies. Both companies were large, top 10 contributing employers to the Central States plan. They also sponsored their own company, single-employer plan. Last 

June, PBGC announced it was assuming responsibility for the CF plan with a potential liability of $276 million. On February 12, 2004 PBGC announced it was assuming the Fleming plan with a projected liability of $358 million. The combined 

liability for PBGC of the two companies’ single employer plans will be $634 million. 

Conversely, the Fleming and CF employees/retirees covered under multiemployer 

pension plans like Central States will now be the responsibility of the remaining 

contributing employers, less whatever these plans can recover in withdrawal liability payments. These beneficiaries will be entitled to a guaranteed full pension benefit. This will only add further cost to what is already one very stark financial fact 

of life for the Central States fund: half of its annual benefit payments now go to 

beneficiaries who no longer have a current contributing employer. 

The problem of taking on the increasing pension liabilities of individuals who no 

longer have an active employer making contributions into the fund is further exacerbated by the demographic trends and increasing costs of other employee benefits. 

Before the decade is out, it is very likely that several large trucking industry plans 

will have two retirees for every one active. Without any significant new contributing 

employers, it is difficult to see that trend slowing down or reversing. 

MEPPA delineates a very different role for PBGC with respect to single employer 

versus multiemployer plans. The GAO report identifies four: monitoring, providing 

technical assistance, facilitating activities such as plan mergers, and financing in 

the form of loans for insolvent plans. In contrast to PBGC’s more aggressive role 

with single employer plans, these are relatively passive activities. It was not until 

the recent Congressional debate over whether to provide limited relief to multiemployer plans that attention was focused on the need to have a better understanding 

of the true financial condition of these plans. And underlying that need was a concern whether the relief would provide assistance for a truly short-term issue or 

mask a more fundamental, long-term problem. 

Furthermore, the remedies available to multiemployer plans in the form of amortization relief or waivers are often viewed as ‘‘last resort’’ solutions. There are no 

intermediate steps that can assist a plan well before it reaches this point. 

WHERE DO WE GO FROM HERE

The single most significant problem confronting multiemployer plans in the trucking industry is the declining number of new participants. The multiemployer concept is a workable model if there are sufficient contributions being made today to 

sustain payment of current benefits. And as we have seen with recent history, heavy 

reliance on investment income can leave plans vulnerable to the vagaries of the 

market. 

71

However, the fact that there is a shrinking number of unionized trucking companies or that people are living longer are beyond the scope of what we are here to 

discuss today. There are simply some things we cannot change. 

But, as indicated at the beginning of my statement, we believe there are changes 

that can be made and that reform of the MEPPA statute is both necessary and timely. To assist the Committee in developing its reform proposal, we would respectfully 

suggest that several key issues be addressed. 

Withdrawal Liability 

It is no secret that the current framework for collecting withdrawal liability is 

broken. It doesn’t collect the unfunded liabilities it was designed to collect, leaving 

most multiemployer plans—and ultimately all other contributing employers in the 

plan—responsible for benefits of withdrawn employers. Additionally, as noted, withdrawal liability makes multiemployer plans very unattractive to new employers. 

The number of unfunded participants—those whose employer has withdrawn from 

the fund and is no longer making contributions—has created such a significant burden at some plans that drastic action may be required. 

We would recommend that Congress direct the PBGC to undertake a comprehensive study of the unfunded participant issue and the financial burden it poses on 

multiemployer plans. Obviously, plans and the contributing employers cannot survive long term if only a handful of viable truck companies are responsible for the 

last 50 years of trucking industry retirees. 

There also needs to be some exploration of alternatives to withdrawal liability 

that maintain the integrity of the plans but remove the disincentive for potential 

new contributing employers. Among other things, serious consideration should be 

given to developing a ‘‘withdrawal formula’’ that will align benefits of employees of 

withdrawing employers to the amounts actually recovered. 

Greater Multiemployer Plan Controls/Oversight 

The basic structure of multiemployer plans makes plan design—and certainly benefit reduction—decisions very difficult. Notwithstanding the fiduciary requirements 

on trustees, taking unpopular actions to correct plan funding issues can have political consequences for union trustees and union officials. Notwithstanding the essential benefit modifications required at Central States last year, it took the trustees 

more than a year to agree on cuts, and they occurred only after the judge overseeing 

the Fund imposed them. I believe we have to accept the reality that it will be very 

difficult for multiemployer plan boards to make necessary changes particularly for 

severely distressed plans. 

As multiemployer legislation is considered, serious consideration should be given 

to whether additional procedural or legal controls over the management of the plans 

could prevent serious funding issues. Something as simple as imposing funding policy guidelines that mandate clear targets for the plan’s unfunded liability. The 

Teamsters Western Pension Fund has long had a funding policy that established the 

funding levels and requires the trustees to adjust benefits based on the levels. Plan 

modifications are virtually automatic. 

Additionally, consideration should be given to requiring that the level of plan benefits be more closely tied to the level of plan contributions and available assets. This 

may require a hard look at anti-cutback provisions. If trustees want to increase benefits during good times, there should be less restriction on their ability to reduce 

benefits during bad times. 

We also believe that there needs to be additional oversight and procedures to handle funds if they do develop funding problems. Consideration should be given to enhancing the PBGC monitoring function. It is helpful to have a ‘‘Watch List’’ but it’s 

more important to have the ability to act on that ‘‘Watch List.’’ The current PBGC 

program could be expanded to differentiate between plans that are financially 

healthy, not-so-healthy, and troubled. For those plans in the latter two categories, 

appropriate remedial steps should be taken to address the particular problems. 

There is no reason why multiemployer plans should not receive more attention from 

the PBGC. 

Additionally, there should be a review of the procedures and conditions for granting amortization or waiver relief to determine if these provide appropriate solutions 

given the financial condition of the plan and that of the contributing employers. 

Finally, we believe that consideration needs to be given to the development of fiduciary guidelines for trustees to facilitate the merger of plans. If two pension plans 

can cover 85% of the country, there is no reason why we need twenty to cover the 

remaining 15%. Yet, notwithstanding the best efforts of plan trustees to consider 

plan mergers, there remain issues of fiduciary responsibility that hinder this effort. 

72

Correct the Imbalance of Employer Responsibility/Burden 

MFCA believes there needs to be a comprehensive review of the relative roles and 

responsibilities as between contributing employers and multiemployer plans. Employers cannot be expected to bear ultimate responsibility for the financial viability 

of plans, but at the same time be precluded from any ability to hold the plan and 

its trustees accountable. 

Finally, the excise tax on contributing employers must be eliminated. It is punitive and provides no benefit to the plan. It may provide some measure of accountability for single employer plans in which the employer controls both funding and 

decision-making, but not in the multiemployer world in which the employer has no 

control of the latter. 

In conclusion, I want to once again thank the Subcommittee for its willingness 

to review the issue of multiemployer plans and to consider our views and suggestions on this matter. I am happy to answer any questions you may have.

Chairman JOHNSON. Thank you, sir. I appreciate your testimony. 

You certainly may submit the rest of it for the record. 

Mr. LYNCH. Thank you very much. 

Chairman JOHNSON. I recognize the gentleman next to you. What 

do you want me to call you? Rocky? 

Mr. MILLER. Rocky is fine. 

Chairman JOHNSON. Thank you, sir. You’re recognized. 


93386.045
73

STATEMENT OF JOHN S. (ROCKY) MILLER, JR., PARTNER, COX, 

CASTLE & NICHOLSON, LLP, LOS ANGELES, CA 

Mr. MILLER. Thank you, Mr. Chairman, Ranking Member Andrews and Committee members. It is a privilege to appear in front 

of you today. I have submitted written remarks that I won’t repeat. 

I have essentially suggested three items for consideration by the 

Committee in considering multi-employer reform, and the first is to 

tinker with care. The multi-employer defined benefit pension plan 

system is a very different animal than the single-employer system, 

and it needs to be recognized as such and treated as such. 

The second suggestion is that the Deficit Reduction Act funding 

limitations for multi-employer plans be forever removed or at least 

removed permanently to see how it operates prospectively. We do 

not believe that there are the same potential for tax avoidance in 

a multi-employer system that there is in the single-employer system, because once a multi-employer employer contributes to that 

multi-employer plan, contributions—those contributions are gone 

from that employer. And while the small employers who contribute 

to multi-employer plans do so to provide a superior benefit than 

they could do individually, they do not want to provide an excessive 

benefit. 

So to have a funding limitation, is not necessary for multi-employer plans and, unfortunately, the existence of the deficit reduction act contribution limitation is, in fact, the reason that the 

multi-employer system is in front of you for reform today. Because 

it more than anything caused the under funding that we are seeing. 

All plans that I am aware of reached full funding at the late ’90’s 

and began having to improve benefits on a permanent basis or take 

other steps to stop funding in order to avoid becoming over funded. 

And, of course, we all knew as that was done that we were at the 

end of our historic bull market, and we were going to regress to a 

7 1/2 percent ongoing rate of return. 

So it was crazy to have to stop funding at that point, and most 

of the plans have had a predictable 25 percent downturn in their 

funding status, which would not have happened but for that limitation. 

And then the next point is that we need to find a way that is 

designed for multi-employer plans to encourage the plans to have 

a minimum funding level so that we can get the funding above a 

full funding point and insure that it will—that inbound turns it 

will not drop below full funding point or an appropriate funding 

point. 

However, that is a difficult concept to impose. For example, the 

suggestion of a 90 percent funding level and there would be no benefit improvements if you’re below that level, I don’t believe that is 

a workable rule, because in a collectively bargained system, which 

is a voluntary system, the employees, the union, and the employers 

all have to believe in the plan to work together to keep it appropriately functioning. 

And if you cease improving benefits in the collective bargaining 

process, it reduces the employee willingness to stick with the plan. 

Their demands will go elsewhere. They’ll go to other benefits and 

to wages, and that defeats the employer’s ability to over fund the 

74

plan. So the experience that we have is that you can get over funding—appropriate over funding of multi-employer plans if you negotiate for it, and part of that negotiation process has to be to incrementally allow benefit improvements. 

I have not seen a proposal yet that deals with how to address 

this problem. I think it is one that needs to be studied. One of the 

ways that it has practically been addressed in negotiations is to 

price benefit improvements over the life of the collective bargaining 

agreement, and in terms of the package that the employers are 

putting on the table of ‘‘X’’ dollar an hour, if the union wants a benefit improvement of a certain type, actuarily what is the cost of 

that over the life of the agreement. And you can come—that has 

worked pretty well in Southern California. So I see my time is up 

and I will cease. 

[The prepared statement of Mr. Miller follows:]

Statement of John S. (Rocky) Miller, Jr., Partner, Cox, Castle & Nicholson 

LLP, Los Angeles, CA 

Mr. Chairman and members of the Committee, it is a privilege to appear before 

you to discuss the Multiemployer Pension Plan system. I am speaking on my own 

behalf and as a member of Cox, Castle & Nicholson LLP. 

I. Background 

Cox, Castle & Nicholson is a full service law firm for the real estate and construction industry that has been continuously involved in multiemployer plans from their 

inception in the mid–1950’s. For over 50 years, it has been counsel to the Associated 

General Contractors of California. Throughout that time, it has been involved in assisting AGC, other multiemployer associations and individual employers in their negotiations of labor agreements with construction industry and other unions. In the 

1950s and 1960s, Cox, Castle & Nicholson helped create many of the multiemployer 

benefit plans negotiated in Southern California. It then served as management cocounsel to many of those plans. 

I have been involved in multiemployer benefit plan issues and in managementside labor relations my entire career. I began practicing law with Cox, Castle & 

Nicholson just as ERISA had become applicable to multiemployer benefit plans. I 

have represented multiemployer associations, individual employers, and the boards 

of trustees of multiemployer benefit plans of all types in all of the various legal matters they encounter. For almost 25 years, I have participated on behalf of employers 

in industry-wide multiemployer labor negotiations and in single employer labor negotiations, all of which have involved benefit plan issues. On behalf of multiemployer pension plans, I have been privileged to defend before the U.S. Supreme 

Court the constitutionality of the Multiemployer Pension Plan Amendments Act of 

1980 upholding the construction industry withdrawal liability rule. Conversely, on 

behalf of the owners of a shop employer, I was fortunate to obtain the only injunction issued by a District Court barring on constitutional grounds the retroactive application of the Multiemployer Pension Plan Amendments Act of 1980 withdrawal 

liability to a non-construction industry employer. I have also been honored to serve 

as a member of the ERISA Advisory Council of the U.S. Department of Labor, and 

I am an employer-side director of the National Coordinating Committee for Multiemployer Plans and a district director of the Associated General Contractors of California. 

II. Multiemployer Plans Are Worth Preserving 

Multiemployer benefit plans enable tens of thousands of mostly small employers 

to provide retirement, medical and other benefits to millions of their employees. The 

benefits provided are of a significantly better quality than these employers would 

ever have been able or willing to provide individually. 

The small employers that I have encountered over the years in construction industry multiemployer plans have a strong and uniform desire to provide quality retirement and medical benefits to their good employees, provided that the employers 

can still be competitive and profitable in the process. Employers who participate in 

multiemployer plans face competition day-in and day-out from employers who provide either no benefits or minuscule benefits to their employees. Employers who contribute to construction industry multiemployer plans must be more efficient, better 

75

organized and more sophisticated in order to survive and to stay competitive. A key 

part of that is having access to the best-trained and most productive employees. 

These small employers make a choice each time labor negotiations recur, typically 

every three to five years, whether to continue to ‘‘be union’’ and bound to collective 

bargaining rules and multiemployer benefit plan obligations or whether to opt out 

of a multiemployer bargaining group in order to abandon those burdens and compete unimpeded. In negotiations over the last ten to fifteen years in Southern California, comparatively few employers have chosen to leave. Those that wanted to, by 

and large, got out long ago. 

Instead, these employers remain and negotiate aggressively on a combined basis 

to maintain their competitiveness and profitability while finding some common 

ground with the unions representing their employees that protects and often improves incrementally the employees’ living standard contract after contract. This negotiation continues in a more collaborative sense as management trustees sit across 

from labor trustees and jointly-manage their multiemployer benefit plans. Benefit 

levels are adjusted by mutual agreement with the aid of sophisticated actuarial calculations and advice. In many settings, benefit improvements approved by labor and 

management trustees must also be agreed upon by the multiemployer associations 

and the union that sponsor the benefit plan in question. 

By this process, thousands of small construction employers in Southern California 

throughout the last forty years have provided the employees who worked for them 

and for their predecessors and competitors in the 30s, 40s and 50s, before multiemployer pension plans were even established, with high-quality retirement benefits 

paid for out of contributions made on hours worked by current employees. These 

small employers agreed with their unions to act in the same manner as Congress 

determined to act when adopting Social Security, finding that those who worked before the plans were created and who had paid nothing toward a pension benefit 

were still deserving of a benefit. These employers, the unions and their members, 

mutually agreed that money that might otherwise go toward a pension for the hour 

worked by a particular employee would instead go to the generation that preceded 

him or her. This Social Security-style transfer of income continues by mutual agreement but to a declining degree. To this day, retirees in many multiemployer plans 

who worked in the early years of those plans when hourly contributions were $0.05, 

$0.10 or $0.25 an hour, are receiving pension benefits for those years of service that 

significantly exceed the income that could have been generated off of those contributions. At the same time, the small employers acting through their multiemployer associations have worked with the unions and their employees to fully fund their pension plans in order to ensure that the hours currently worked by employees could 

be rewarded upon retirement by payment of the full pension benefit promised for 

that hour of service. 

Today, these employers and their unions are facing the sudden underfunding of 

their promised benefits as a consequence of the downturn in the markets and the 

decline in interest rates to historic lows. But, the multiemployer bargaining groups 

are already addressing this underfunding with their unions at the bargaining table 

as each multiemployer labor agreement comes up for renegotiation. Recent multiemployer labor agreement settlements have dedicated almost all compensation increases to re-funding pension plans and to maintaining healthcare plans. Yet, the 

average annual percentage cost increase reflected in such labor agreements has not 

increased materially beyond the settlements that were occurring before the 

downturns. Employees are willingly foregoing wage increases to protect benefit levels. This reflects the importance of these multiemployer plan benefits to the employees of these small employers and the simultaneous willingness of the unions and 

their members to keep their employers competitive with employers who do not provide such benefits. 

This conduct is, in effect, a voluntary increase by employees of their savings rate 

at the expense of their take-home pay. This is conduct Congress has tried to promote for twenty years or more with no success. Yet, over that same twenty-year period and continuing today, employers, their employees and unions involved in multiemployer negotiations have been practicing what Congress has preached. 

This is a benefit system that works. The participants in it, on the whole, have 

received greater benefits from it than other employees have received from individual 

employers. It should be facilitated and strengthened. 

III. Congress Giveth And Congress Taketh Away 

The success of multiemployer plans is attributable to Congress. The severity of 

today’s under-funding problem is also attributable to Congress. 

76

A. The Good 

Multiemployer plans exist and have been successful because of Congress. Through 

various legislation in the 1930s and earlier, Congress took steps to exempt employers and unions from antitrust and conspiracy laws to permit unions to organize and 

to permit employers to combine together and negotiate with unions. In the Taft–

Hartley Act in 1947, Congress authorized the creation of multiemployer benefit 

plans, provided that employers and unions managed them jointly. In 1959, in the 

Landrum Griffin Act, Congress redressed certain abuses that were occurring in such 

plans. In 1974 in ERISA, Congress imposed funding requirements and other constraints on multiemployer plans to ensure that promised benefits would be there 

when participants reached retirement. In 1980, in the MPPAA, Congress imposed 

upon employers in a multiemployer plan the financial obligation to make good on 

the pensions promised by that plan. This financial discipline was imposed by the 

concept of ‘‘withdrawal liability : an employer withdrawing from a multiemployer 

pension plan must pay to the plan that employer’s respective share of the unfunded 

vested pension liabilities of that pension plan. Further, Congress imposed financial 

liability on all contributing employers in a multiemployer plan to fund unfunded 

benefits should the plan terminate in an underfunded status. 

These various Congressional enactments have taken a multiemployer plan system 

created among private parties and managed, maintained and grown by the day-today decisions of small employers and their unions and have channeled those private 

actions to ensure that all multiemployer plans reached proper levels of funding and 

were managed in an appropriate manner along the way. Congress’ actions were a 

success. By the end of the 1990s, the overwhelming number of multiemployer pension plans were essentially fully funded. 

B. The Bad 

Unfortunately, Congress also subjected multiemployer plans to the Deficit Reduction Act. This well-meaning Congressional enactment imposed upon multiemployer 

pension plans a full-funding limitation. Actuarially, the maximum level to which a 

multiemployer plan could be funded was approximately 110% of liabilities. Most 

plans hit this ceiling at the end of the 1990s. At that time, all multiemployer plan 

trustees knew that the bull market in stocks had lasted a very long time. If actuarial use of a 7.5% or so expected long-term investment rate of return had any validity at all, rates of return in the markets had to revert to the mean and were likely 

to do so sooner rather than later. Nevertheless, to prevent employer contributions 

from becoming non-deductible under the Deficit Reduction Act, either pension benefits had to be raised or employee contributions had to be cut. 

Throughout the country, multiemployer plans improved benefits. They did not do 

so inappropriately. The benefit improvements were warranted for the participants 

that would receive them. And, in many cases, employer contributions were also reduced, usually to be diverted to wages or medical benefit plans, but not always. In 

competitive markets, contributions were not infrequently reduced without diversion 

to other employee costs. 

The problem of these actions was in the timing compelled by the Deficit Reduction 

Act. The benefit increases raised plan liabilities and decreased the cushion of overfunding available to withstand a reversion to the mean in investment returns. Absent the artificial funding ceiling of the Deficit Reduction Act, benefit improvements 

would have been agreed upon in smaller amounts spaced over a longer period of 

time. Employers, unions and both labor and management trustees would have continued to increase the ‘‘overfunded’’ levels of their plans in anticipation of a certain 

stock market downturn. 

Naturally, just as most of these Deficit Reduction Act benefit improvements and 

contribution reductions had gone into effect, investment returns did begin regressing to the mean. Many multiemployer plans fell from full funding status to funding 

levels between 70% and 75% within these years. Some fell lower. 

C. The Ugly 

Then, in the depths of an investment downturn that will one day cycle back up 

as surely as it was due to cycle down, some multiemployer plan trustees and the 

employers and unions that sponsor them discovered another crisis. Their plans are 

facing minimum contribution obligations under the funding standards of ERISA. 

The prospect exists that some of these plans will have to assess the employers that 

participate in these plans extra contributions. In theory, these can be imposed in 

the middle of the term of a collective bargaining agreement without the agreement 

of the employers. Thus, an employer group that perhaps risked a strike to persuade 

their employees that the employers could not afford a penny more in labor cost is 

77

suddenly at risk of being told that they may each owe a dollar an hour extra to 

‘‘heal’’ the multiemployer pension plan. 

Obviously, if any such impositions occur, the multiemployer plans that are involved may well be forever terminated by the employers as soon as possible. And 

other multiemployer plans will become less acceptable to small employers because 

of the perceived risk of contribution obligations being imposed over and above the 

wage and benefit costs agreed to in collective bargaining. For small employers who 

have been responsible in their participation in the management of multiemployer 

plans, such an outcome, based on an investment cycle downturn, is simply incomprehensible. It is one thing to tie one’s economic fortunes to the unknowns of union 

negotiations. It is quite another to tie one’s fortunes both to that unknown and to 

the unknowns of Congressional formulas that can produce surprise, immediate, 

extra cost impacts based on temporary conditions. 

D. The Aftermath 

Congress has identified the problem of the Deficit Reduction Act and provided in 

EGTRRA a temporary relaxation in the funding formula applicable to multiemployer plans. However, it is too little, too late. It will be years before any multiemployer plan is able to take advantage of the temporarily relaxed funding rules. In 

mature pension plans where a portion of plan income every year is spent on current 

pension benefit payments, a projected actuarial rate of return of 7.5% may only 

leave a return of 4% or less to rebuild plan funding levels. When an economic downturn has reduced funding levels by 25%, funding levels are rebuilt slowly. 

Thus, the much more immediate problem for some multiemployer plans is the 

minimum contribution obligation. Congress was asked to assist the multiemployer 

plan community in the temporary relief legislation. Early reports on the relief that 

was granted suggest that it was so narrowly drafted that it will assist almost no 

plans. Yet, numerous plans are reportedly in need of temporary help and are plans 

that can likely return to full funding and prosperity if the collective bargaining parties and the trustees of the plan are simply afforded some time in which to re-fund 

the plan in a prudent manner. 

IV. Multiemployer Plan Funding, Disclosure and Security—Suggestions for 

Reform 

A. Tinker with Care 

As the Deficit Reduction Act has demonstrated, the multiemployer plan system 

can be damaged and endangered by well-meaning Congressional action. The damage, once imposed, can take years to repair. 

Multiemployer plans are complex. They represent a cost and risk to small employers that can easily become unacceptable if their cost is not predictable or if adequate 

time does not exist to address cost increases and other problems incrementally and 

through a series of scheduled collective bargaining negotiations. 

The reasons employers contribute to multiemployer plans and the consequences 

of their contributions are different from some of the reasons employers have in contributing to single employer plans. Consequently, ‘‘improvements’’ to multiemployer 

plan regulation should be carefully studied in advance and supported by the multiemployer associations and unions that must live with the consequences of the regulation. 

Congressional respect and appreciation should be given to the employers who voluntarily assume the economic burdens of a multiemployer plan to guarantee benefits for their own employees and for the other participants in a plan. This respect 

should permit greater recognition that multiemployer plans are, indeed, different 

than other plans and should be treated as such. This respect should also produce 

a recognition that, when multiemployer plans encounter difficult times, the parties 

to those plans have a significant incentive among themselves to solve those problems in a mutually agreeable manner and to restore the health of the plans. 

The PBGC was mightily worried in the early days of ERISA that multiemployer 

plans in declining industries would impose dramatic funding obligations on the 

PBGC. Had Congress not modified ERISA appropriately, it is not inconceivable that 

the sky might have fallen. However, Congress acted carefully and incentivised employers and unions to solve the underfunding problems that existed early in the life 

of the nation’s multiemployer plans. Over the twenty years that followed the passage of ERISA, the employers contributing to multiemployer plans funded those 

plans fully in almost all respects. 

Respect should also prompt caution. Claims that multiemployer plans are unstable in competitive markets or in declining industries should not be accepted without 

the input of the entire community of employers contributing to multiemployer plans. 

Further, they should not be accepted without study of those plans that have continVerDate 0ct 09 2002 12:51 Oct 18, 2004 Jkt 000000 PO 00000 Frm 00081 Fmt 6633 Sfmt 6621 H:\DOCS\93386 EDUWK PsN: NNIXON
78

ued to exist in declining industries and the lessons they may provide. Multiemployer 

plans in the mining industry and plans of the ILGWU have suffered dramatic losses 

of contributing employers and of hours on which contributions are received. Yet, reports suggest that these funds have survived to pay promised benefits to the participants in them. 

In sum, much about the multiemployer plan system ‘‘ain’t broke’’ and shouldn’t 

be ‘‘fixed.’’

B. Remove the Deficit Reduction Act Funding Limitations from Multiemployer Plans 

on a Permanent Basis 

Employers contributing to multiemployer plans should be allowed to overfund 

those plans without limitation to ensure that promised benefits can be provided 

even if economic downturns, declining industry conditions or departure of other contributing employers impair the current and future prospects of the plan. This is protective of the PBGC. Yet, it is not likely to be detrimental to the Treasury. Employers contributing to multiemployer plans do not have an incentive to overfund those 

plans to any greater degree than is prudent for the health of the plans. 

Employers contributing to single-employer plans are different. They have a tax incentive to shelter income through the tax deductibility of contributions to the plan. 

Past behavior demonstrated these incentives as single employers used a variety of 

actions to overfund plans and then regain control of the excess assets. 

In multiemployer plans, once an employer makes a contribution to the pension 

plan, it is, for all intents and purposes, gone from that employer’s pocket. It will 

be used, one way or another, to the benefit of the employee participants in the plan. 

It will not revert to the employer. 

The only way a contributing employer can gain an advantage from an excess contribution to a multiemployer plan is, in theory, to obtain a reduced obligation to contribute at some point in the future. However, obtaining such a benefit requires the 

agreement of the union and its members and of all the other contributing employers. 

What actually happens with multiemployer plans is that excess contributions are 

usually converted to increased pension benefits somewhere along the way. If employers are granted reduced contributions by the union at a future date, it is likely 

to be in exchange for diversion of that contribution to wages or medical coverage. 

In rare cases, it could be to help reduce the employers’ costs and keep them competitive. 

Nonetheless, all of the foregoing outcomes are non-abusive, appropriate adjustments of economic conditions among private parties. None warrant imposition of 

funding limitations. 

Most fundamentally, while employers may want to provide a good retirement benefit to their employees; they never want to provide an excessive retirement benefit. 

Thus, the employer groups participating in multiemployer plans are very unlikely 

to over-contribute to those plans. 

Whether a multiemployer group concludes that a funding level of 120% or 150% 

of promised benefits or even higher is an appropriate target to insulate the plan 

from the risks of changing economic conditions, Congress should not be concerned. 

Indeed, at this point, such overfunding of multiemployer plans by multiemployer 

groups, given the current economic circumstances of plans, is unlikely to occur within this decade. 

Congress should applaud overfunding by multiemployer groups rather than being 

concerned about imposing a ceiling. The more well-funded a plan is, the less likely 

it will ever be a burden to the PBGC, or the taxpayer or the participating employers 

remaining within the plan even if the employment in the industry in which the plan 

exists disappears overnight. 

C. Mature Multiemployer Pension Plans Need to be Encouraged by an Appropriately–

Designed Set of Incentives to Become Overfunded and to Ensure that Funding 

Levels Thereafter will not Drop Below an Appropriate Minimum Funding Level 

Employers contributing to multiemployer plans would like to know, in theory, that 

their plans are overfunded and that these plans will not drop below a fully funded 

level no matter how severe economic conditions may become. The problem is how 

to achieve such a result. 

For example, to say simply that a plan must remain more than 90% funded is 

to impose a rule that cannot be met for years to come and that will cause dislocations in collective bargaining conduct and disincentives among employees to the continued retention of the multiemployer pension plan benefit. Full funding in a collective bargaining setting is achieved incrementally. As is illustrated in the appendix 

which follows these suggestions, unions and union members will trade small benefit 

79

improvements for a commitment to increased funding levels, but it becomes very difficult for them to agree that no benefit improvements will ever be adopted unless 

and until a funding level is exceeded. If they face such a restriction on their negotiating ability, they may well divert their demands to other benefits impairing the 

ability of the employer group to achieve and maintain full funding of a defined benefit pension plan. On the other hand, if a minimum funding limitation is developed 

that permits the negotiation process to trade off appropriate improvements here and 

there in exchange for a program of overfunding a pension plan and maintaining it 

above a minimum threshold, the multiemployer pension plan system is encouraged 

and protected rather than destabilized. 

No set of incentives for minimum funding has yet been surfaced that would appear to strike the right balance. It may prove to be an elusive concept. However, 

it is worth studying. One starting point would be to challenge the actuarial community to bring forth some concepts to address this issue. 

D. Revisit the Minimum Contribution Requirement for Multiemployer Plans to Address the Temporary Problems of Existing Plans and to Ensure that the Contribution Formula Is Appropriate for the Future 

Mandatory contributions imposed outside the collective bargaining cycle are destructive of multiemployer plans and the multiemployer plan system. Funding rules 

must be sufficiently stable and predictable that collective bargaining parties can 

deal with the rules in the regular collective bargaining cycle. 

For this immediate period of time, where the Deficit Reduction Act has contributed to the current underfunding of multiemployer plans, particular care should be 

given to whether or not those plans facing minimum funding standard deficiencies 

should be given greater leeway to recover from their economic circumstances. 

CONCLUSION. 

Many other issues can be raised and suggestions advanced for inclusion in a longterm reform package for multiemployer plan regulation. However, I will not suggest 

any further points here in these prepared remarks as they may serve to detract attention from the more important reforms and reform process suggested above. 

I have attached one further comment as an appendix to these remarks. It is a 

brief illustration of how four construction industry multiemployer plans in Southern 

California were created, developed and managed under the changing regulatory and 

economic environment. Each plan and the union and employers that sponsored it 

have behaved differently, yet each plan has prospered and suffered quite similarly 

under Congress’ enactments and under the economic and competitive conditions surrounding it. Together, the experiences of these plans demonstrate their importance 

to the sponsoring employers and their employees and the inherent stability and 

promise these plans retain for providing an appropriate mechanism for delivering 

pension benefits. 

I appreciate very much the opportunity to appear before you. I would be pleased 

to assist the Committee further in any way it desires. And I look forward to responding to any questions you may have. Thank you. 

APPENDIX 

COMMENT—THE CONSTRUCTION INDUSTRY MULTIEMPLOYER PENSION PLANS OF THE BASIC TRADES IN SOUTHERN CALIFORNIA 

PROVIDE A GOOD EXAMPLE OF HOW CONGRESSIONAL ACTION 

HAS BENEFITED AND BURDENED THE MULTIEMPLOYER PENSION PLAN SYSTEM AND OF THE STABILITY AND VALUE OF 

THESE PLANS TO SMALL EMPLOYERS AND THEIR EMPLOYEES 

The value of multiemployer plans and the impact of Congressional action upon 

them, both beneficially and detrimentally, is well-illustrated by the experience of the 

multiemployer pension plans in Southern California of the ‘‘Basic Trades’’, the Carpenters, Laborers, Operating Engineers and Cement Masons. In particular, the experience of these multiemployer plans demonstrates the responsible and varied conduct of the employers and unions that sponsor multiemployer plans and of the management and labor trustees that jointly manage such plans. 

These plans were all created in the early 1960’s. They were each created through 

master labor agreements between and among the four trade associations of general 

contractors and the councils and locals of the four unions in Southern California. 

The hourly contribution into the plans was minimal at first, a nickel or a dime an 

hour. Nevertheless, each of the plans began providing pension benefits almost immediately to those who had worked a sufficient number of years in the industry 

prior to the creation of the plan to qualify for coverage. Essentially, 15 years of servVerDate 0ct 09 2002 12:51 Oct 18, 2004 Jkt 000000 PO 00000 Frm 00083 Fmt 6633 Sfmt 6621 H:\DOCS\93386 EDUWK PsN: NNIXON
80

ice was required. When ERISA was implemented by the plans in 1976, each of the 

plans retained their 15 year benefit programs and added a 10 year ‘‘ERISA plan’’ 

that satisfied the minimum requirements of ERISA. 

After ERISA was adopted, the employer associations objected vehemently to 

ERISA’s definition of a ‘‘defined contribution’’ plan. The employer groups all had negotiated with each union express understandings that the employers’ only obligation 

to the pension plan was the hourly contribution. ERISA appeared to impose greater 

liability on the employers. This debate continued, in California and around the 

country, until the adoption of the MPPAA in 1980. The MPPAA clarified that employers contributing to multiemployer plans were, in fact, liable for their share of 

the unfunded vested liabilities of a pension plan. At the time the MPPAA went into 

effect, one of the four plans was only 25% funded. All had substantial unfunded liabilities exceeding $300 million for each of the three large plans. Employers who 

considered leaving these plans and incurring withdrawal liability were looking at 

acquiring $30–50,000 of liability for each full-time employee equivalent per year 

over a 5-year ‘‘look-back’’ period. 

Beginning in 1980, through collective bargaining, the employers and each of the 

unions agreed that pension benefits would not be raised again without substantial 

progress being made toward funding the plan. At a minimum, the employers and 

each union agreed that sufficient contributions would be directed to the pension 

plan to reduce the actuary’s estimated time necessary to fund the plan by one year 

for each year that passed. At the time withdrawal liability was imposed, the expected amortization periods mostly exceeded 20 years. 

During the 1980’s, the employers and each union gradually but substantially increased the rate of contribution to each pension plan. All agreed that pension benefits would not be increased except for the occasional adjustment here and there to 

address specific problems of particular groups. 

By the late 1980’s, two of the plans approached full funding. From that time on, 

one union agreed with the employers to freeze its defined benefit plan and to create 

a defined contribution plan into which all future contributions would flow. The other 

union and the employers continued to fund its defined benefit plan, improving benefits somewhat, but building a reserve beyond full funding. 

By the early 1990’s, the third multiemployer plan began to approach full funding. 

The employers and the union for this plan had been following a process of increasing benefits by one to two dollars per credit per year if the actuary concluded contemporaneously that sufficient actuarial ‘‘margin’’ existed to reduce the amortization 

period by the required amount and still fund the credit increase. As full funding was 

approached, the one and two dollar per credit increases were negotiated to occur 

more often and a practice was begun of issuing ‘‘13th checks’’ for existing retirees. 

Sometimes during the course of the year, this plan would issue three ‘‘13th checks’’. 

Each would equal one month’s pension benefit. 

The fourth plan did not fully fund until about the mid–1990s. This was because 

the employers and the union sponsoring this plan made a conscious decision to boost 

benefit levels significantly for all participants including all retirees in the early 

years of the pension plan. As a consequence, once withdrawal liability was created, 

benefits remained static for all plan participants for approximately fifteen years 

until full funding was achieved. 

After full funding was achieved by this plan, the employers negotiated to overfund 

this plan to the maximum extent permitted under the Deficient Reduction Act. The 

union agreed with this in concept, but insisted on benefit improvements for more 

recent retirees and participants to adjust their comparative under-receipt of benefits 

over the years that benefits had been frozen. This was accomplished in each of several successive labor negotiations by negotiating benefit improvements at the bargaining table. Actuarial projections were used estimating the amount of contributions needed to pay for each benefit improvement on either a fifteen-year amortization in some instances or, more typically, on a three-year amortization to permit 

full-funding of the benefit improvement over the life of the master labor agreement. 

The other plan that had continued to overfund achieved maximum overfunding 

in the mid–1990’s. Thereafter, the employers and this union agreed with the trustees to improve benefits dramatically for employees currently working for employers. 

Actuarially, these benefit improvements were calculated to insure that only enough 

were given to keep the plan within funding limits. This plan also provided some 

13th checks to existing retirees. 

The plan that had been frozen in favor of a defined contribution plan was reopened and resuscitated in the 1990’s. The employers, the union and the participants in the plan collectively decided that the defined contribution plan was not of 

as much value as the defined benefit plan. The result is that both plans are maintained on an ongoing basis. 

81

The plan that was increasing benefit credits by one or two dollars per year and 

paying 13th checks has continued on a similar course. The effect of this plan’s benefit payments has been to maintain the plan just under full funding limits. 

After the collapse of the stock market and the unprecedented decline in interest 

rates, all of these plans dropped from fully funded or close to fully funded status 

to funding levels around 75%. In each case, the employers, the union and the plan 

have reacted. 

The trustees of the most overfunded pension plan immediately reduced the value 

of benefit credit earned for future benefit accruals in recognition of the declining 

economic fortunes of the plan. The practice of this plan and of the employers and 

union involved has been to move quickly in adjusting benefit levels and then to 

retroactively increase benefit levels when financial circumstances permit. Thus, the 

expectation is that these reduced levels of future benefit accruals will one day be 

restored when funding is back to desired levels. 

The plan that made a practice of increasing benefit credits dollar by dollar and 

of giving numerous 13th checks has ceased those enhancements. Collective bargaining will occur later this year and further address the funding issues. 

The remaining two plans were subject to master labor agreements that have been 

recently renegotiated. In the negotiation of these agreements, the employers requested and the unions agreed to invest almost the entire amount of the wage and 

benefit increases negotiated into the defined benefit pension plans and into the medical multiemployer benefit plans. In negotiating these contribution increases, the 

collective bargaining parties looked at 5-year projections by the actuary of funding 

levels and the extent to which funding levels were likely to remain low or even deteriorate further unless substantial action was taken. Substantial action was taken. 

Projecting forward, all of the four unions agree with the employer associations 

that full funding is important to the safety of the plans and to keeping employers 

comfortable that they will not acquire unexpected pension liabilities beyond the 

amounts of their hourly pension contribution by participating in these multiemployer pension benefit plans. The boards of trustees of each of these multiemployer 

pension plans has long been populated by employer representatives and union representatives who get along well and work cooperatively to manage the plans. All of 

these boards of trustees coordinate with their respective employer associations and 

union leadership to be certain that the actions taken by the trustees are acceptable 

to the employer associations and to the union leadership as a whole. Three of these 

unions have been aggressive for more than a decade in negotiating competitive 

terms and conditions with the employer associations to recognize the competition 

these employers face from contractors that have no union obligations and that provide few or no fringe benefits to their employees. 

These circumstances have kept employers participating in these four plans with 

little fear of serious adverse consequences. 

Chairman JOHNSON. Thank you, sir. I appreciate your comments. 

Can I call you Dr. Teresa? 

Dr. GHILARDUCCI. Yes. 

Chairman JOHNSON. You’re recognized now. Thank you. Microphone, please. 

STATEMENT OF TERESA GHILARDUCCI, PH.D., FACULTY OF 

ECONOMICS, UNIVERSITY OF NOTRE DAME, NOTRE DAME, IN 

Dr. GHILARDUCCI. There’s some new research from health and 

labor economists that may help us all—folks in back of me and the 

colleagues that couldn’t be here today—that actually puts a new 

spin on this whole idea that we’re living longer. One of the reasons 

we’re living longer is because people are retiring. 

It looks as though that people being able to rest from their long 

career of work is actually letting them invest more in their health 

and actually improve their health. This is especially true for 

women, but it’s also true for men. No matter what kind of job they 

have, white or blue collar, this is really exciting new research, and 

it comes from the new data from the University of Michigan. 

82

And saying that, we must then realize how important it is to get 

pensions, because we try to solve the pension problem by raising 

retirement age, thinking that people living longer anyway raising 

the retirement age and taking away pensions may actually reduce 

that longevity we so herald. 

So with that, we are here again today as a group of people who 

have been really worried about expanding pension coverage. And, 

especially, expanding pension coverage among low-income workers. 

And multi-employer plans is really a high-performance model of 

how to do that. So you can—and you’ve seen previous testimony 

that showed that multi-employer plans actually exist for workers 

who are mobile, especially, work in small to medium-size establishments. 

But I’m here to talk about how multi-employer plans really help 

the employers. They solve a classic public good problem. That employers want trained, skilled workers, but don’t want to pay for it 

unless their competitors pay for it. So by coordinating with their 

competitors, they pitch in with an apprenticeship program, health 

program, and a pension program. They all have a piece. They all 

come together. And this actually helps industries produce skilled 

workers, stabilize industries, and it’s really good for the economy. 

I have documents on how high performance these plans are for 

the economy. I don’t want to talk about them right now. I’d like 

to submit those for the record. 

Chairman JOHNSON. Please do. 

Dr. GHILARDUCCI. Now, I’d like to actually talk about some of the 

reforms—the specific reforms that you have addressed here. We 

must know that one of the chief and brilliant aspects of multi-employer plans is that they are jointly trusteed by an employer group 

and an employee group. And this brilliance, this wisdom means 

that they are highly adaptable to their specific situation. 

It actually gives a break to Congress. You don’t have to legislate 

in every industry and every region. The trust agreement and the 

collective bargaining agreement and the relations between employer and employee lets that regulation happen. That’s why any 

rule that says it is 90 percent funded, there should be no benefit 

increases makes really no sense when you look at the whole economic logic of these things. So don’t do that. There’s no need to restrict benefits. 

As far as withdrawal liability, I wrote a book several years ago 

interviewing most employers and employees on multi-employer 

plans, and I was really struck with how they’ve used withdrawal 

liability. If there, indeed, is a crisis in some plans because too 

many employers left, guess what the drastic solution is? To get 

more employers into the plan. The employers and the unions will 

have a reason to do that if the withdrawal liability is too great or 

if they’re funding too many people who aren’t contributing. 

In Las Vegas auto shops are now organizing into a pension plan 

and to a health plan in a way they never did before under multiemployer plan agreement, because they’re good deals. If auto shops 

in Las Vegas can do it, then other multi-employer plans surely will 

find a way to expand. So tinkering with the withdrawal liability 

would really have these unintended consequences on these longterm agreements. 

83

1Multiemployer plans also help employees who stay in the same job but their owners are unstable. For two decades, nurses employed in a New Jersey hospital bargained to be included 

in the multiemployer pension plan operated by the International Union of Operating Engineers 

rather than their hospital’s single employer plan. Their pension benefits eroded over time because each time the hospital changed owners the pension plan was replaced. One nurse noted 

that she had been covered by six separate single employer DB plans, even though she remained 

working in the same job. She could not predict the benefits from any of them. ‘‘Delinking Benefits from a Single Employer: Alternative Multiemployer Models.’’ Benefits for the Workplace of 

the Future. Olivia S. Mitchell, David S. Blitzstein, Michael Gordon, Judith F. Mazo, Editors. 

Philadelphia: University of Pennsylvania Press. 2003. Pp. 260–284

The other point I want to make is—has been agreed upon—you 

were right—Mr. Andrews was right. This is really non-partisan. 

We should have pension rules that let people accumulate funds in 

good times, so that when there are bad times they can draw on it. 

So we should raise those deductibility limits or eliminate them 

completely for multi-employer plans. 

But I’m here as a professor, and I’d like to offer some blue-sky 

ideas, ideas that representatives through organizations might not 

be able to. One is an idea that actually has been played around 

here, and that is to allow employees to contribute to defined benefit 

plans. And multi-employer plans it’s probably a little bit easier to 

do that, because you have defined contributions coming in, but, actually, feedback on employees’ defined benefits. So multi-employer 

plans are actually structured to let employees contribute. That’s a 

great idea. 

We should also find ways to encourage the creation of defined 

benefit plans. When I was at the PBGC, we always explained the 

conversion from DC to DB is because the vendors sell 401K plans. 

There’s profits to be made there but not enough vendors sell DC 

plans. 

Last, we should investigate the consultant industry for how they 

got us into this what’s been called—and I think inaccurately—the 

Perfect Storm of low interest rates and high—well, low interest 

rates and low returns. The consultants told us—and I was a trustee on the Indiana Public Employee Relations Funds—told us that 

we would have high stock returns as far as the eye could see, and, 

therefore, we should load up our funds. 

Well, they weren’t being prudent. That industry needs some accountability and needs some investigation. The SEC is doing it 

now, and I think it’s—I think Congress and this Committee would 

be well served to show that this Perfect Storm wasn’t an act of God 

and unpredictable. It wasn’t a quirky incidence. It was built into 

the structure of pension fund consulting. 

[The prepared statement of Dr. Ghilarducci follows:]

Statement of Teresa Ghilarducci, Ph.D., Faculty of Economics, University 

of Notre Dame, Notre Dame, IN 

Mr. Chairman and members of the Committee, thank you for this opportunity to 

meet with you and discuss ways to improve America’s defined benefit pension system. 

We all know pension policy is stymied by our failure to extend pension coverage 

to workers who change jobs frequently, work for smallish employers, and whose employer changes because of mergers and acquisitions. 1 Yet some workers in this category have secure portable, defined benefit pensions; approximately twenty two percent of DB covered participants are in multiemployer plans which are risk-pooling, 

84

2 Approximately 60,000 employers contribute to the 1,661 multiemployer defined benefit plans 

and that upwards of 90% of such contributing employers are small to medium sized businesses, 

employing fewer than 100 employees and averaging fewer than 20. Statement Randy G. 

DeFrehn testimony to Subcommittee on Employer–Employee Relations, U. S. House of Representatives, ‘‘Reforming and Strengthening Defined Benefit Plans: Examining the Health of the 

Multiemployer Pension System. March 18, 2004 3 Currently the Pension Rights Center’s Conversation on Coverage (funded by the Ford Foundation), the GAO Retirement Advisory Panel, The DOL’s ERISA Advisory Panel of 2002 and 

my ongoing research project entitled ‘‘Pensions and Low Income Workers: What Works?’’ funded 

by the Retirement Research Foundation in Chicago Illinois are exploring how to use the best 

aspects of the multiemployer system to cover more workers. The inspiration is motivated by the 

perceived failure of individual based efforts incented by tax breaks to get the majority of workers without pensions to save for their retirement 4GAO, Testimony of Barbara Bovbjeg, Subcommittee on Employer–Employee Relations, U. S. 

House of Representatives. ‘‘Private Pensions: Multiemployer Pensions Face Key challenges to 

Their Long–Term Prospects.’’ March 18, 2004.p. 7. 

cost effective, and efficient ways to deliver a secure portable pension. 2 But they do 

much more because they solve a number of important labor market problems. 

Economic Logic of Multiemployer Plans 

Employers want trained workers but can’t often afford the pensions, health, and 

training programs that produce the necessary skills especially if their competitors 

don’t also pay for the same kinds of programs. No one employer is better off if they 

provide these programs alone, they are all better off if they cooperate and share in 

the cost. This classic public good or collective action problem is solved by multiemployer plans; all employers facing unstable product demand (and thus engage in frequent layoffs and re-hiring) benefit by having a ready supply of skilled workers and 

all employers pay their fair share. This (availability of skilled workers) adds to the 

productive capacity of an industry. 3 Such employers exist in the building and construction, retail food, trucking, health care and entertainment industries. This economic logic of multiemployer plans is under appreciated. Furthermore, these plans 

are part of a process by which secondary and third tier jobs are transformed into 

middle class jobs. 

This transformative capacity bears appreciation. Construction workers in every 

other developed democracy occupy the bottom of the labor food chain, whereas many 

of America’s construction workers are skilled middle class workers. Multiemployer 

apprenticeship, health, and pension plans are partly responsible. (The laborer without the multiemployer portable pensions has no incentive to stay connected to an 

occupation’s skill and would very well float from construction, to retail, etc. with 

economic fluctuations.) 

Employers benefit from the portability aspects in other ways. Take for example, 

UPS, a firm that provides good, but physically tough, work. A UPS worker who can’t 

take the strain is more willing to move easily to a companion employer because they 

don’t lose pension credits. This helps UPS maintain high performance standards. 

A chief and brilliant feature of multiemployer plans are that employers’ needs for 

predictable contributions and workers’ need for predictable benefits are both represented in the joint governance structure of the trust. The PBGC does not bailout 

multiemployer plans and the insured levels are a maximum $13,000 compared to 

the $44,000 maximum in the single employer plan. As the GAO notes this structure 

puts much more financial risk on the multiemployer programs so the employers and 

participants have much more incentives to find collaborative solutions to financial 

difficulties. 4 (Multiemployer plans are hybrids—contains the best of both worlds—

they act like defined contribution plans for employers and defined benefit plans for 

workers and retirees.) 

If So Multis are So Good Why Don’t More Employers Have Them? 

If multiemployer pensions are so good why don’t more employers have them and 

why do some want to get out. In industries characterized by large numbers of small 

to medium sized employers and/or a mobile workforce employers can’t seem to be 

able to cooperate enough to create and maintain these plans without a coordinating 

agent, that role is played by the union and the jointly trusteed plan. (The largest 

pension plan is the multiple employer plan—TIAA—CREF and it was initiated by 

a grant from the Carnegie Foundation.) Maintenance of long term agreements requires disciplined contributions, long term commitments, and a flexible structure 

that can weather business cycles. 

The general rules governing an employer’s withdrawal from a multiemployer plan 

require that an employer who ceases to participate in a fund that has unfunded 

vested benefits, be assessed its proportionate share of those unfunded vested beneVerDate 0ct 09 2002 12:51 Oct 18, 2004 Jkt 000000 PO 00000 Frm 00088 Fmt 6633 Sfmt 6621 H:\DOCS\93386 EDUWK PsN: NNIXON
85

5The Multiemployer Pension Plan Amendments Act of 1980 (MPPAA) added this requirement. 

6The impulse to escape the cooperative is a fundamental free rider problem (it is like listening 

to public radio but having someone else contribute); some employers that benefit from the labor 

supply stability may not want to pay for it 7More than 75% of all multiemployer defined benefit plans encountered funding limitations 

during the 1990s that would have resulted in the employers’ inability to take tax deductions 

for contributions if the trustees’ action had not increase benefits (DeFrehn, March 18, 2004). 

This was good because the participants and the funds got the advantages of the market returns, 

not the employers in contribution holidays. 

fits. 5 Letting employers opt out of withdrawal liabilities would have unintended consequences since the whole system is based on long term structure. 6

Tax deductibility of pension contributions surely incents pensions but they also 

invite tax avoidance. Congress imposed full funding limitations so that large employers couldn’t use the pensions to shelter profits from tax. That is not an issue 

with multiemployer plans. 7 Since multiemployer plans bear a lot of their own financial risk and thus aim to smooth benefits and employer contributions Congress 

should help the funds’ accumulate a contingency reserve in good times to offset the 

bad times when steep and prolonged declines in the investment markets and employment deplete funds. Multiemployer plans should be excluded from the maximum 

deductible limits. 

Blue Sky Ideas 

But the abundance of investment returns is not our problem now. The fad toward 

short term employment contracts and 401(k) type pensions—with outrageously high 

retail fees—shrink the number of employers wiling to be in single and multiemployer DB plans and the number of workers with pension coverage. 

Given the high performance aspects of multiemployer plans here are some blue 

sky ideas to consider: 

Encourage consortiums of employers to enter into trust agreements with a trade 

association or other groups of workers, in addition to encouraging the traditional 

route to multiemployer plans, through the collective bargaining agreement. 

Encourage more non-profit-like multiple - employer DC plans (like my university 

faculty TIAA–CREF plan). There must be some way cooperative efforts can reduce 

the high costs workers face to manage their DC accounts and convert lump sums 

into annuities. 

Investigate the consulting industries codes of conduct to find out why prudent experts aren’t; incentivize defined benefit plans to change their investment strategies 

not to be dependent on stock equity in order to reduce the risk of underfunding volatility. 

Thank you very much. I welcome any questions you may have. 

Chairman JOHNSON. Thank you, ma’am. I appreciate those comments. Mr. Lynch, the PBGC uses an automated screening process 

that measures plans against funding and financial standards that 

assist PBGC in determining which plans may be at risk of termination or insolvency. Would it be appropriate to use this screening 

process as a standard for determining when benefit increases or accruals should be automatically frozen? 

Mr. LYNCH. I certainly think the PBGC process should be upgraded and moved further up in the process. Whether or not it 

should be strictly limited to a clamp on benefit increases, I’m not 

sure that necessarily is the only answer to the problem. But, clearly, we have in—in our opinion today is you’ve got plans that go 

long, and the remedies that are available to them, either by perception or by reality, are really last-ditch remedies. When they go to 

the PBGC or when they go to the IRS for funding relief, waive relief, whatever it may be— 

Chairman JOHNSON. It’s too long? 

Mr. LYNCH. They’re pretty much getting near death’s doorstep. 

And what we think needs to have happen is something earlier in 

the process, particularly, for plans that are facing some pretty severe trend problems. 

86

Chairman JOHNSON. What do you recommend is the best way for 

employers to hold the plans accountable, because, you know, they 

don’t have a lot of control after the plan is initiated? 

Mr. LYNCH. And that’s one of the key elements of this. I mean, 

we negotiate a contract. We do not negotiate the benefit level. In 

our case we negotiated a contract that was effective April 1 of ’03 

with what we felt were fairly significant increases in our contribution. It wasn’t but 6 months later that we got a letter from one of 

the larger funds, indicating that there was a significant funding 

problem there. 

At that stage there’s not really a whole heck of a lot that’s available to us. I’m not a lawyer, but my first reaction was who do I 

sue, and when I was told I have no standing to sue anybody, that 

came as a little bit of a surprise. I’m not suggesting that we be 

given unfettered rights to sue. We certainly don’t want these plans 

tied up in endless litigation, but I do think there has to be some 

movement in that direction. If the employer is ultimately going to 

be held accountable financially, they’ve got to have a little bit more 

control over what goes on in the interim. 

Chairman JOHNSON. Thank you, sir. I’m not a lawyer either. I’ll 

now recognize a lawyer, Mr. Andrews, for questions. 

Mr. ANDREWS. Thank you very much, Mr. Chairman. I’d like to 

thank the witnesses for their testimony this morning. Mr. Miller, 

I read your recommendation—heard your recommendation about 

lifting funding contribution limitations on contributions by multiemployer and multi-employer plans. Do you think that there are 

adequate provisions in the law to be sure that once those contributions are made they will only inure to the benefit of the pensioners? Is there any loophole, any leak, any possibility that once 

the over-funding contribution is made that it could go somewhere 

else, other than the pensioners? 

Mr. MILLER. I believe the anti-reversion policies are clear on the 

matter of qualification for tax purposes. The—when terminated, 

they all—they go to benefits, and, certainly, to the extent—you 

know, I haven’t looked at that in a long time, but to the extent 

that’s a problem, that would be easy to address to make sure that 

that couldn’t happen. 

Mr. ANDREWS. I assume the answer is right. My own understanding of this law is that it’s pretty air tight, and I do think that 

there is—I haven’t heard a good argument against pre-funding. I 

just haven’t heard a good argument against letting employers put 

in whatever they think works, other than a revenue—a treasury 

argument. 

Mr. Kent—Mr. Lynch—excuse me—you would like to see more 

remedial measures by PBGC when people show up on some sort of 

watch list or early warning situation. What do you think those remedial measures ought to be? Mr. Johnson—Chairman Johnson, I 

think, asked you the question about whether we should—what the 

trigger should be to have PBGC take a look. Let’s assume we’ve hit 

the trigger, and they’re looking and they see someone who’s going 

to be in trouble. What kinds of tools do you think we should give 

PBGC to use? 

Mr. LYNCH. You made reference in your opening comment about 

do no harm. I’ll add another one to that, and I sort of fit the mediVerDate 0ct 09 2002 12:51 Oct 18, 2004 Jkt 000000 PO 00000 Frm 00090 Fmt 6633 Sfmt 6602 H:\DOCS\93386 EDUWK PsN: NNIXON
87

cine for what ails the patient. If it is a case where a plan comes 

in there with a disproportionately large number of beneficiaries, 

who, as I indicated, no longer have a contributing employer, I think 

that suggests a certain remedy. And, frankly, not a particularly 

pleasant one with respect to what you may have to do in terms of 

future benefits. 

Mr. ANDREWS. What is the remedy? 

Mr. LYNCH. I’m sorry. 

Mr. ANDREWS. What would that remedy look like? 

Mr. LYNCH. It could take the form of some type of ratio that will, 

in fact, have to reduce the benefit based on the amount that’s recovered from the now defunct employer. That is one area that we 

can look at. 

When a plan goes to the IRS with a very severe funding problem, 

they are permitted at that stage to freeze benefits or accruals back 

2 years. That’s certainly not a happy circumstance for anyone, but 

applying that remedy that late in the game, may not be the best 

point to do that. 

Mr. ANDREWS. There are no easy choices. I certainly understand 

that. Dr. Ghilarducci, in the blue-sky category, what do you think 

is the single most powerful idea for getting private pensions for 

people who don’t have them today? 

Dr. GHILARDUCCI. Probably, adding—for low-income workers 

probably adding something on top of Social Security, so there’s 

USA Credit, this mandatory defined contribution supplement to Social Security actually. In this realm and without your national 

mandate for a Social Security supplement, I think the voluntary 

employee idea with maybe some tax credits for low-income workers 

would do it. 

Mr. ANDREWS. The tax credit would operate as a match? 

Dr. GHILARDUCCI. Yes. 

Mr. ANDREWS. So if an employee makes a voluntary contribution, 

there would be a refundable tax credit as a match? 

Dr. GHILARDUCCI. Right. Or people could have their EITC go 

into—that would be actually very easy to do to go right into their 

retirement savings. I think the cash balance plans are the future 

of the defined benefit plan. 

Mr. ANDREWS. So the idea is that a person could choose to designate a portion of her or his EITC to pension contributions? 

Dr. GHILARDUCCI. Right. 

Mr. ANDREWS. Very interesting. We just have to expand the 

EITC, right? We tried to do that yesterday on the House floor. 

Thank you very much. 

Chairman JOHNSON. That is a good idea. Thank you for it. Mr. 

Kline, do you care to comment? 

Mr. KLINE. I do, Mr. Chairman. Thank you very much and thank 

the panelists for being here today. I very much appreciated the testimony of all three of you. 

I’m hearing an awful lot from the truckers in Minnesota, so I’m 

going to sort of focus my discussion on Mr. Lynch here. I perfectly 

welcome anybody else to jump in, but I’m hearing from truckers in 

Minnesota in some cases that they are, frankly, in big trouble. That 

this is really having an impact. Keeping the multi-employer plan 

88

fund is really having an impact on their bottom line and in some 

cases in their ability to stay in business. 

And, Mr. Lynch, I’m looking at your sort of striking list of the 

top 50 LTL carriers in 1979 and the six that are remaining today. 

Clearly, there are some major issues facing the multi-employer defined benefit plans in the trucking industry. 

And there was a discussion earlier in testimony about withdrawal liability, and I believe you state, Mr. Lynch, in your testimony that the withdrawal liability has been a barrier to new contributing employers from coming into the plans. Should plan trustees have the flexibility to adjust the benefit levels for the employees of an employer who withdraws from the plan? 

Mr. LYNCH. I believe they should. I believe that if—for a plan 

that faces a disproportionate number of beneficiaries who are in 

that category—the option there is either a larger role for the 

PBGC—financial role—or it is continued to put the burden on the 

existing contributing employers, and that is a dwindling number to 

the point where they are now going to be paying for, not only their 

own retirees, but this ever burgeoning group of other company retirees to which they had no connection with. 

And the underlying premise of a multi-employer plan is that the 

list of 50, if they go out, there will be somebody coming in. Unfortunately, in our industry there has been nobody of the similar size 

coming in to replace the ones who have gone out. 

Mr. KLINE. Thank you. You state in your testimony that consideration should be given to requiring that the level of plan benefits 

be more closely tied to the level of plan contributions and available 

assets. Could you just take a minute and expand on that. 

Mr. LYNCH. Again, that goes to the very difficult and tough issue 

of benefits. But it does, in fact, come down to simple math. If 

you’ve only got a hundred dollars coming in and you’ve got two 

hundred going out, it isn’t going to take you very long before something has to give. 

Now, you can certainly go back and say put another hundred dollars in, but the track record and the burden of increased contributions for the existing employer base is likely to result in further 

erosion of the employer base within the plan. They just simply will 

not be able to compete. 

Mr. KLINE. Well, it’s clear to me in discussions with folks back 

in Minnesota that we’ve got a rising problem and, in fact, a fairly 

large problem. We’ve had hearings before in this Committee about 

the trucking industry’s problems in multi-employer plans, and we 

all would like to see the companies stay in business and stay members of the plans and continue to make their contributions and 

make sure that we’re protecting the benefits that all these employees are expected to get. 

And the problem is that we don’t have enough employers in the 

plans. And so do you have any suggestions as to how to attract 

more employers to the multi-employer system? 

Mr. LYNCH. I gave a presentation to an industry group where I 

suggested that perhaps there could be certain tax incentives to encourage employers coming into the plans. Unfortunately, nobody in 

the room thought that was a particularly strong enough incentive 

to encourage them to enter in. 

89

It is the single hardest problem. It is one that I think is going 

to have to take some real creative thought, both from the folks out 

here, as well as the agencies and the Congress. But, unfortunately, 

I don’t have an answer for demographic and organizing trends. 

Mr. KLINE. I’d like to extend the question to anybody else on the 

panel. If you’ve got an idea, whether it’s blue sky or real-world tomorrow, on how we could get more employers to step up to this. 

And, again, I’m thinking sort of specifically about the trucking industry, because I know that there’s a pressing problem there. Anybody else would like to chime in? 

Dr. GHILARDUCCI. Well, the traditional way is if the union would 

organize and that’s sort of the stick way to do it. At the PBGC we 

had the same question, and that’s the question we brought up. And 

the idea is that some consulting firms would have to see this as 

a good business. You know, they would have to sell it to employers. 

I think economists I think academics could help too. Because if 

these employers were in multi-employer plans—pension plans—

they would have access to the health plans and to be—training. 

And these employers could actually become part of the unit of high 

performance rather than just sort of scraping by. Wages would increase in that industry. 

So I think there has to be a sell job. I think it does make—there 

is some logic to it, but I don’t have a quick fix. 

Mr. KLINE. Yeah, thank you. It does sound like there needs to 

be a sell job. There needs to be a buy job but with employers in 

trouble I think it would be pretty hard—it seems to me it’s increasingly hard to get them to buy into this. So you have to find a real 

salesman if you’re going to get them to do that. Thank you, Mr. 

Chairman, I yield back. 

Chairman JOHNSON. Thank you. I appreciate the testimony of all 

three of you, and it sounds like to me, Rocky, when you were talking the doctor was shaking her head yes on a lot of what you said. 

So I don’t think we’re too far away from finding a solution to this 

problem from a Congressional viewpoint anyway. And we’ll start 

working on it, and, hopefully, come up with an answer that we can 

all be proud of. And I thank you so much for your attendance and 

for the members who are here. If there’s no further business, the 

Committee stands adjourned. 

[Whereupon, at 12:05 p.m., the Subcommittee was adjourned.]

Æ