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H.R. 2830, THE PENSION PROTECTION ACT

HEARING

BEFORE THE

COMMITTEE ON EDUCATION 

AND THE WORKFORCE 

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

June 15, 2005

Serial No. 109–22

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 

Howard P. ‘‘Buck’’ McKeon, California 

Michael N. Castle, Delaware 

Sam Johnson, Texas 

Mark E. Souder, Indiana 

Charlie Norwood, Georgia 

Vernon J. Ehlers, Michigan 

Judy Biggert, Illinois 

Todd Russell Platts, Pennsylvania 

Patrick J. Tiberi, Ohio 

Ric Keller, Florida 

Tom Osborne, Nebraska 

Joe Wilson, South Carolina 

Jon C. Porter, Nevada 

John Kline, Minnesota 

Marilyn N. Musgrave, Colorado 

Bob Inglis, South Carolina 

Cathy McMorris, Washington 

Kenny Marchant, Texas 

Tom Price, Georgia 

Luis G. Fortun ̃ o, Puerto Rico 

Bobby Jindal, Louisiana 

Charles W. Boustany, Jr., Louisiana 

Virginia Foxx, North Carolina 

Thelma D. Drake, Virginia 

John R. ‘‘Randy’’ Kuhl, Jr., New York 

George Miller, California 

Dale E. Kildee, Michigan 

Major R. Owens, New York 

Donald M. Payne, New Jersey 

Robert E. Andrews, New Jersey 

Robert C. Scott, Virginia 

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 

Rau ́l M. Grijalva, Arizona 

Chris Van Hollen, Maryland 

Tim Ryan, Ohio 

Timothy H. Bishop, New York 

John Barrow, Georgia

Paula Nowakowski, Staff Director 

John Lawrence, Minority Staff Director

(III)

C O N T E N T S 

Page

Hearing held on June 15, 2005 ............................................................................... 1

Statement of Members: 

Boehner, Hon. John A., Chairman, Committee on Education and the 

Workforce ....................................................................................................... 1

Miller, Hon. George, Ranking Member, Committee on Education and 

the Workforce ................................................................................................ 4

Porter, Hon. Jon C., a Representative in Congress from the State of 

Nevada, prepared statement of .................................................................... 88

Statement of Witnesses: 

Franzoi, Ms. Lynn, Vice President for Human Resources, Fox Entertain 

Group ............................................................................................................. 11

Prepared statement of ............................................................................... 13

Ghilarducci, Dr. Teresa, Professor of Economics, University of Notre 

Dame .............................................................................................................. 26

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

Lynch, Mr. Timothy P., President and CEO, Motor Freight Carriers Association ............................................................................................................ 52

Prepared statement of ............................................................................... 53

Mazo, Ms. Judith F., Senior Vice President/Director of Research, the 

Segal Company .............................................................................................. 61

Prepared statement of ............................................................................... 62

Additional material request from Mr. Scott ............................................ 83

Pushaw, Mr. Bart, Actuary, Milliman, Inc. .................................................... 19

Prepared statement of ............................................................................... 22

Scoggin, Mr. Andrew J., Vice President for Labor Relations, Albertsons, 

Inc. ................................................................................................................. 57

Prepared statement of ............................................................................... 58

Additional Submissions: 

Aitken, Mr. Herve H., Alliance President, the Multiemployer Pension 

Plan Alliance (MPPA), prepared statement ................................................ 88

American Association of Retired Persons (AARP), prepared statement ...... 99

American Society of Pension Professionals & Actuaries (ASPPA), prepared statement ............................................................................................ 102

ERISA Industry Committee (ERIC), prepared statement ............................. 104

(1)

H.R. 2830, THE PENSION PROTECTION ACT 

Wednesday, June 15, 2005

U.S. House of Representatives 

Committee on Education and the Workforce 

Washington, DC 

The committee met, pursuant to call, at 10:30 a.m., in room 

2175, Rayburn House Office Building, Hon. John A. Boehner 

[chairman of the committee] presiding. 

Present: Representatives Boehner, Petri, McKeon, Castle, Johnson, Souder, Norwood, Ehlers, Tiberi, Osborne, Porter, Kline, 

Musgrave, Inglis, McMorris, Marchant, Price, Fortuno, Boustany, 

Foxx, Drake, Kuhl, Miller, Kildee, Owens, Andrews, Scott, Woolsey, 

McCarthy, Tierney, Kind, Kucinich, Wu, Holt, Davis of California, 

McCollum, Davis of Illinois, Grijalva, Van Hollen, Ryan, and 

Bishop. 

Staff Present: Stacey Dion, Professional Staff Member; Kevin 

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

Policy; Richard Hoar, Staff Assistant; Greg Maurer, Coalitions Director; Steve Perrotta, Professional Staff Member; Molly Salmi, 

Deputy Director of Workforce Policy; Deborah Samantar, Committee Clerk/Intern Coordinator; Kevin Smith, Senior Communications Advisor; Jo-Marie St. Martin, General Counsel; Jody 

Calemine, Minority Counsel, Employer-Employee Relations; 

Tylease Fitzgerald, Minority Staff Assistant; Margo Hennigan, Minority Legislative Assistant/Labor; Michele Varnhagen, Minority 

Labor Counsel/Coordinator; and Mark Zuckerman, Minority General Counsel. 

Chairman BOEHNER. A quorum being present, we are holding 

this hearing today to hear testimony on H.R. 2830, the Pension 

Protection Act of 2005. 

Under committee Rule 12(b), opening statements are limited to 

the chairman and ranking member. Therefore, if other members 

have statements, they can be included in the hearing record. And 

with that I ask for unanimous consent for the hearing record to remain open for 14 days to allow members’ statements and other extraneous material being referenced here in today’s hearing to be included in the official hearing record. Without objection, so ordered. 

I want to thank all of you for coming and thank all of our witnesses for their willingness to be here today. 

Last week, my colleagues and I introduced the Pension Protection Act, a legislation we have been working on for nearly a year, 

to reform our private pension system. As I said previously, our reVerDate 0ct 09 2002 10:16 Jul 26, 2006 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 H:\NNIXON\DOCS\FC\6-15-05\21841.TXT DICK
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form bill won’t just tinker around the edges of a defined benefit 

pension system. As promised, the bill we introduced, as outlined, 

is a comprehensive solution to address these problems. 

Because of today’s outdated pension rules, workers, retirees and 

taxpayers all stand to lose unless we act quickly on fundamental 

pension reform. The recent example of United Airlines demonstrates the need for reform, and we plan to act quickly over the 

next month. 

The balance we have attempted to strike is a difficult one. How 

do we preserve the defined benefit pension plan for workers and 

ensure these plans are adequately and consistently funded without 

making the rules so onerous it becomes more attractive for employers to simply stop offering these benefits altogether? 

Our efforts are focused not just on ensuring PBGC solvency, 

which alone will not solve the problem. Instead, we have a broader 

vision of strengthening the health of defined benefit pension plans 

and preserving these benefit pension plans for workers. 

Our bill adopts many of the features in the administration proposal. It includes tough new funding requirements to ensure that 

employers properly fund their plans, it provides workers with 

meaningful disclosure about the status of their pension plans, and 

it protects taxpayers from a possible multibillion dollar bailout of 

the Pension Benefit Guaranty Corporation. As you would expect, 

there are some differences, and in some cases we solve the same 

problems with a slightly different approach. 

While every stakeholder may not agree with each aspect of our 

bill, our approach has been focused on protecting the interests of 

workers, retirees and taxpayers; and I think our proposal accomplishes the goals that we set out without jeopardizing employers 

ability to offer these voluntary benefits. So it is important to note 

we are at the beginning of this process. And we plan to work with 

all interested parties, including the administration, employers, 

labor groups and our colleagues on the other side of the aisle as 

we move forward. 

I would like to highlight several key aspects of the Pension Protection Act. The bill provides a permanent interest rate based on 

a modified yield curve. It also requires employers to meet a 100 

percent funding target; and, requires additional contributions to 

address any funding shortfalls over 7 years, the measure also includes a key provision that restricts executive compensation arrangements for employers with underfunded pension plans. 

Some have expressed concern that employers may smooth their 

pension assets and liabilities over too long a period of time, and I 

agree. That is why our bill reduces the practice of smoothing. The 

complete elimination of smoothing, however, could render employers’ ability to protect and budget for pension contribution virtually 

impossible. Without some degree of predictability, the dramatic volatility we have seen will continue and employers will simply stop 

offering these benefits altogether. 

Some employers have used credit balances to mask plan underfunding. I think our bill solves this problem not just by prohibiting 

the use of such balances and plans that are underfunded but also 

by reforming the funding rules to ensure that employers properly 

fund their plan. 

3

The bill phases in increases in employer premiums paid to the 

Pension Benefit Guaranty Corporation; and while raising premiums alone will not solve the problem of PBGC’s insolvency, an 

increase is both prudent and necessary. 

The measure also makes all form 4010 information filed with the 

PBGC by underfunded plans available to the public. 

The bill also goes beyond the administration disclosure plan by 

requiring both single- and multi-employer pension plans to notify 

workers and retirees about the status of their plan within 90 days 

after the close of the plan year. 

The introduced bill does not include any industry specific relief. 

Our immediate focus has been overhauling a broken pension system and laws that have contributed to the problems in the airline 

industry and similar industries. But I would prefer to focus on comprehensive solutions in addressing this problem. 

This is an important issue for some of our colleagues on this committee, particularly Mr. Price, and a former member of our committee, Mr. Isakson, our colleague in the Senate and other members; and I have a lot of respect for what they are trying to accomplish and understand the impact of this issue to many of their constituents. I want to work with them on pension reform as we move 

forward. 

We have also included much-needed reforms to the multi-employer pension system in our proposal. Our bill includes new funding benchmarks, limits future benefit increases for severely underfunded plans, and provides new disclosure for workers and contributing employers. I am pleased that the coalition of employers and 

labor groups have made significant progress on this issue, and we 

are going to continue to work with both sides as we move forward. 

We all know there is a lack of personalized investment advice 

readily available to workers. Our bill allows employers to provide 

rank-and-file workers with access to high-quality investment advice 

as an employee benefit, while making certain a tough fiduciary and 

disclosure protection ensures the advice remains solely in the workers’ best interest. 

This proposal has passed the House three times in the past 4 

years with significant bipartisan support, and we think that it is 

a commonsense way to give workers access to quality investment 

advice. 

The Pension Protection Act, as introduced, does not include finalized cash balance protections. Last week, I also introduced a standalone bill, the Pension Preservation and Portability Act, as a starting point towards discussions on efforts to resolve the legal uncertainty surrounding cash balance plans. We are working to resolve 

details and expect to finalize this issue before we report the bill 

from the committee. 

It is interesting to hear the reaction to our proposal. Some of my 

Democrat friends are actually arguing that our bill is too tough on 

employers, an argument I am not sure I’ve ever heard from them. 

Some in the administration may argue we need to go a little bit 

further. On balance, I think that that means we have it just about 

right. This bill meets our objectives of putting together requirements in place to ensure worker protections are properly funded 

4

but does so in a real-world, practical way that will help preserve 

these plans for workers and protect the interests of taxpayers. 

I want to thank all of our witnesses for being here today. 

I would like to thank the members of the committee for their assistance in drafting this bill, especially Mr. Johnson and Mr. Kline, 

who have worked closely with us. We have had bipartisan conversations on many aspects of this bill, and I look forward to continuing to work closely with the members of our committee on both 

sides and with Mr. Thomas and the members of the Ways and 

Means Committee as we continue to move this bill through the legislative process. 

With that, I would like to yield to my friend, the ranking Democrat on our committee, Mr. Miller. 

Mr. MILLER. Almost 3 years ago, in July of 2002, I wrote a letter 

to the Bush administration warning that urgent action was needed 

to reform defined benefit plans. That year the underfunding of the 

private pension plans jumped 425 percent from the previous year 

to $111 billion. Subsequently, the GAO and the PBGC repeatedly 

warned that action by Congress was needed. From that time that 

I sent the letter in 2002 urging immediate action, private pension 

plan underfunding has jumped another 425 percent to $450 billion. 

I say all of this because—as a prime example of Congress and 

the President ignoring the urgent needs of the American people. 

Precious time has slipped away, with devastating, real consequences. What was then an urgent matter has exploded into a 

national retirement security crisis. 

Today, United Airlines is about to dump $6.6 billion of losses 

onto the Pension Benefit Guaranty Corporation. The stakes for the 

120,000 United Airlines employees and retirees is very high. They 

face deep and permanent cuts in their retirement benefits. United 

employees have always been repeatedly asked to give wage concessions to help United to improve its financial condition, and they 

have done so each and every time. 

In return for operating in good faith, United and the PBGC cut 

a side deal to terminate these employees’ plans. Right before the 

employees were cut out of the discussions, the PBGC itself concluded that United could afford to continue at least one of its four 

plans. 

I will put a letter into the record later by PBGC Executive Director Bradley Belt, dated April 6 this year, that states, that the 

PBGC continues to believe that the interests of the participants in 

the pension insurance program would best be served by the continuance of the AFA plan, the flight attendant plan. How can the 

PBGC conclude one week that it is in everyone’s interest to continue the pension plan and then move to ax it the next week? You 

don’t have to be a student of the business pages or the business 

journals to see that there is open speculation that all other airlines 

will look at United actions to see if they can cut their own costs 

by dumping their workers’ pension plans. 

I am also very concerned—and again the speculation goes to 

other industries—of whether or not those who face economic difficulties or which have drastically underfunded their pension plans 

will follow United’s examples and pass the debts on to the taxpayers and their own employees. 

5

I am disappointed that this committee has yet to hold a hearing 

on the United pension plan termination. All the hard-working 

United employees were denied access to this hearing room. Over 

2,000 pilots, flight attendants, and machinists from all over the 

country participated in the Democratic online hearing 2 weeks ago. 

They have been given no opportunity to tell their story to this committee, which will write the new pension legislation. 

Collectively, these employees and retirees face over $3 billion in 

irreplaceable retirement savings that were promised by United. 

Their letters are heartbreaking, and their voices deserve to be 

heard by this committee. 

Two of those individuals are in the audience today. Jamie 

Manley was a flight attendant for United, and Ellen Saracini, 

whose husband Victor was the pilot of the plane that was flown 

into the South Tower of the World Trade Center. In their letters, 

they outline the economic hardship that will devastate their families. 

Mr. Chairman, I requested that an abbreviated portion of that 

hearing, this online hearing, be entered into the record today as 

part of my testimony. 

Chairman BOEHNER. Reserving the right to object. I think all of 

us agree that the plight of the employees of United Airlines demonstrates the need for comprehensive pension reform. The thousands of workers and retirees of United and others companies who 

have lost a portion of their pension benefits deserve action now. I 

have reintroduced a comprehensive reform package to address this. 

But I also remind my colleagues that, beginning some 2 years 

ago, as we were preparing and passed the Pension Funding Equity 

Act that was signed into law some 15 months ago, that included 

specific airline industry relief, relief that United and others and 

their employees were in fact requesting. That relief was for last 

calendar year and this calendar year, when we expected to have a 

comprehensive reform bill ready to pass this year. 

I have to make clear that the so-called online hearing is not a 

hearing. The gentleman from California and I have had this discussion before. Our staffs have had discussions back and forth; and I 

need to make clear that, while people may have participated in an 

online chat conversation about this, I hope no one was misled into 

believing that this was an official hearing because, in fact, it was 

not. 

Now, I would ask my colleague from California to, under the 

rules of the House, not to refer to this publicity issue as a hearing. 

Now, I understand, we are in some difficult partisan fights around 

here, but—if the gentleman wants to take people’s comments, he 

is certainly entitled to do that, but I don’t want anyone to be misled into believing that this is official testimony for an official hearing, and I would like to ask my colleague if he would amend his 

unanimous consent request to submit this information in a digest 

form. He has in fact done that, and we will be happy to take this 

and put it in the record. But, please, let’s all play by the rules; and 

I don’t want anyone to think that in fact this was an official hearing when in fact it wasn’t. 

Mr. MILLER. Mr. Chairman. 

6

*Submitted and placed in permanent archive file, comments before the U.S. House of Representatives, Committee on Education and the Workforce (July 19, 2006). 

Chairman BOEHNER. Without objection, we will accept the comments.* 

Mr. MILLER. I thank you for accepting this as part of the record, 

part of my testimony. I think this testimony is important. I only 

wish it were part of the official record of this and this was an official hearing. Unfortunately, that opportunity was not given to us, 

I thank you for accepting that testimony——

Chairman BOEHNER. Will the gentleman from California yield? 

Mr. MILLER. Yes. 

Chairman BOEHNER. Good. Now all of you who have been around 

the committee over the last 4 years know that Mr. Miller and I in 

fact have a very good relationship here. As a matter of fact, I think 

I have a very good relationship with all the members on both sides 

of the aisle. I want to remind my colleague from California that 

there has never been a request for a hearing on a United Airlinesspecific situation. We have had hearings over the last several years 

on the problems in the airline industry in general, but there has 

never been a specific request to go through the United situation 

specifically. 

Mr. MILLER. Mr. Chairman, I would be remiss if I did not accept 

that invitation to dance. 

I request a hearing on the United Airlines. I think it is absolutely critical to understand what happened in the last weeks of 

the bankruptcy negotiations and the transfer of those negotiations 

to the PBGC and what took place there, it is critical to know 

whether or not alternatives that could have been explored, alternatives that are being asked for by Delta and others were a possibility. I don’t know the answer to that question. 

As we consider the markup of your legislation and other suggestions, I think it would be most important that we understand what 

transpired at that time. So I hope that we can have that hearing. 

Chairman BOEHNER. I will take your request under advisement. 

Mr. MILLER. Thank you, Mr. Chairman, but do it before the 

music stops. 

The point is this, that we need an independent review of United 

Airlines’ ability to continue its plans either as they currently were 

or in a modified form. And the reason why we need that is to see 

whether or not greater protection could have been provided for the 

employees that have spent 30 years, 20 years, 15 years of their 

lives trying to make sure that this airline continued to fly. 

The employees should be full participants in the discussions 

about the future of their retirement. The Congress and the American taxpayers, who could be called upon to pay out billions of dollars to cover pension plans that have been underfunded and sent 

to the PBGC for payment, deserve accurate information. 

Last week, Representative Jan Schakowsky and I introduced legislation, H.R. 2327, to impose a 6-month freeze on any company in 

bankruptcy trying to dump its pension obligations onto the PBGC 

until Congress has time to explore the alternatives to bankruptcy 

and to the dumping in PBGC. Employees should not wake up and 

find themselves divested of their life savings or retirement nest 

7

eggs. We need a set of rules in place before companies unload their 

liabilities. 

The alternatives to termination, such as the conversion to multiemployer plans, or cash balance plans, or the bonding of pension 

plans, or the bonding of premiums, should all be considered before 

we dump this onto the taxpayers. The PBGC should have the flexibility to help struggling plans turn around with financial help in 

some circumstances. The employees should be at the table for any 

consideration of pension plan termination. Our 6-month moratorium bill would give us time to legislate these improvements in 

pension law. 

Mr. Chairman, regrettably, the bill before us today has many of 

the flawed provisions that President Bush advocated earlier this 

year: heavy reliance on employee benefit cuts and billion dollar tax 

hikes for employers. These actions might seriously undermine the 

defined benefit plans of employees and employers and would fail to 

provide the protection that employees need for their hard-earned 

retirement nest egg. 

The bill also fails to stop the runaway pension terminations like 

United airlines. Therefore, more companies will dump their unwanted pension liabilities onto the Federal Government and onto 

pension sponsors without meeting any significant test that they 

have no other choice; and that will spread the misery and disappointment to employees, who are the real victims of these unfair 

terminations. 

This bill fails to hold corporate executives accountable for the 

mismanagement of the company’s pension plans, while allowing the 

same executives to enjoy lavish retirement benefits. Last week 

United Chairman, Glenn Tilton admitted that he will keep all of 

his $4.5 million golden parachute, while employees lose 30, 40, and 

70 percent of their retirement. I guess contract givebacks are only 

for employees, not for the executives. 

Here is how one retired pilot, John Clark of Charlottesville, who 

was a United pilot for 36 years and will have his pension reduced 

by 70, responded to Tilton: ‘‘What Tilton is saying is that United 

guaranteed to me, why is the promise made to him understandable 

and one made to me go by the wayside?’’ We must act now to stop 

this unfair treatment. 

This bill, finally, Mr. Chairman, also fails to help airline pilots 

who take a double hit when the plan is terminated because the pilots are forced to retire at age 60 when they get less than $46,000 

a year of the maximum allowed by PBGC. 

Mr. Chairman, in conclusion, let me say this. One of the most 

troubling aspects of our rush to mark up this bill is that we all now 

have become painfully aware, and the members of this committee 

and the records that have been submitted to them, that these companies are allowed to keep two sets of books for pension purposes. 

This bill proposes to make the secret set of books published, and 

I applaud you for doing that. But this information, referred to as 

the 4010 plan information, will give employees and investors upto-date, accurate information about their company’s pension plans. 

This is a good idea, and I have proposed legislation for the last 

year that we do this. 

8

This committee has in its possession the 4010 summary information with some 850 seriously underfunded plans for 2003 and 2004. 

We can and we should release this information today for the benefit of millions of employees represented by these companies. We 

should also do it for the benefit of those stock analysts, those who 

are investing their pension plans in these very same companies 

through their mutual fund plans, through their IRAs, through their 

401(k)s. They ought to know what the real situation is with these 

pension plans. 

As I have said to you in a letter asking for the release of this 

information, the discrepancy, in some cases, is hundreds of millions 

of dollars and, in some cases, billions of dollars. We need to know 

and we need to have this transparency so those who have interest 

in this industry will be able to analyze this, give us the benefit of 

their information, their read on this. 

Because, as you know, not speculation on our part but within the 

business journals every day the question is will or will not the remedies for pension problems hasten the dumping and the termination of pension plans by companies that are in difficult situations. The extent to which these plans are underfunded I believe 

is a key component to whether or not people will be able to answer 

that question as we write this legislation. 

So I would hope that you would join me and you join President 

Bush and you would make that information available prior markup 

of this legislation, and I applaud you for making it a part of your 

bill. I think it is critical to the transparency of the understanding 

and the negotiations around this legislation. 

Thank you very much for the opportunity, and I do realize that 

you were nice enough to give me a little bit more than 5 minutes. 

Chairman BOEHNER. Will the gentleman yield? 

Mr. Miller, you understand that we, you and I, came to an agreement on the request for the 4010 information from the Pension 

Benefit Guaranty Corporation. We came to an understanding in a 

bipartisan way that we would request them to turn over the information, and we agreed that we would keep that information for the 

purpose of our staffs and members to be used in the development 

of our pension proposals. 

While I understand the interest in disclosing this information, I 

think you know as well as I know that the current 4010 information is flawed. That is why in the bill we clarify and make significant changes to the 4010 information that is collected so that it is 

much more useful. 

The problem with this information under current law is that I 

think it is inherently misleading and not useful in determining 

whether the plans are underfunded and pose a risk to the PBGC. 

So the release of this information I don’t think is warranted. It violates the agreement that you and I came to. When I gave you my 

word that I would ask for this information in a bipartisan way, I 

gave you my word. I think we came to an agreement and would I 

would prefer that we stick to that agreement. 

Mr. MILLER. Mr. Chairman, if I may respond. 

Chairman BOEHNER. On your time. 

Mr. MILLER. Thank you. 

9

I have honored that agreement; and I appreciate you, after we 

introduced the resolution of inquiry, to responding to that resolution and arranging for the members of this committee to have this 

information. 

What I am saying is, now, after reviewing that information, we 

may have a difference of opinion on whether it is flawed or not 

flawed or to what extent it is or is not. But after reviewing that 

information, and seeing the magnitude of the discrepancies between those PBGC documents and the public documents, I think—

I don’t know how we can go forward without the public understanding that. But more importantly, the professionals in the field 

understanding that and the ramifications for this legislation. I believe that is why the administration has asked 2 years ago that 

this information be made available. 

I have introduced legislation to do it, so I am not going to violate 

our agreement. I am asking that you and I, as parties to that 

agreement, consider the modification of that prior to the markup 

of this legislation. Because it is hard for me to see how we can go 

forward without that information being on the table. 

You will characterize it one way. Analysts will characterize it another way. The companies will characterize it another way. But it 

is critical information that has been reported to the PBGC which 

is different from the reports in the 401(k) public statements of 

these very same corporations and again draws into question of 

whether or not—how we balance. You have a bill that requires and 

we are going to have a process that requires this balance, the assessments and premiums. Whether or not that pushes these companies over or not, I think you have to know the real extent of 

their liabilities. The companies will certainly be free to modify and 

tell us what their current problems are and if they believe that 

that information does not accurately reflect that. 

Thank you very much, Mr. Chairman. Mr. Chairman, again, I 

thank you for the extension. 

Chairman BOEHNER. Mr. Miller——

Mr. MILLER. Yes, I will yield to you. 

Chairman BOEHNER.—I understand clearly your request. But I 

have to say very clearly for you and for others that the release of 

this information—in my view, would be totally irresponsible on the 

part of myself and the members of this committee to disclose it in 

the form in which it is. As I said before, this data, as this form is 

currently drawn up and currently used, is inherently flawed; and 

for us to release that—all of that data to the public would be irresponsible, in my opinion, on the part of myself and all of us. 

Mr. MILLER. I would just say, after reviewing it, apparently the 

administration didn’t think it was inherently flawed; and I don’t 

know the PBGC has testified or suggested that it is inherently 

flawed. Maybe we will hear something new here in these hearings. 

I just think it goes to whether or not Congress has all the information. The decisions we are going to make on your legislation—and, 

again, I thank you for bringing it forward—are going to affect the 

livelihoods and the futures of millions of Americans that are a part 

of these plans. 

And, again, it is Wall Street that is making this speculation. It 

is not George Miller. It is in the business journals. It is in the anaVerDate 0ct 09 2002 10:16 Jul 26, 2006 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 H:\NNIXON\DOCS\FC\6-15-05\21841.TXT DICK
10

lysts’ statements. It is in the discussions of these companies. And 

we are now, in one form or another, going to provide for these assessments. I think we have to know the impact of those assessments for the sake of the future of these workers and their retirements. 

I think I have exhausted my time. 

Chairman BOEHNER. The gentleman’s time has expired. 

Mr. MILLER. Thank you. 

Chairman BOEHNER. Let me announce for all of you that room 

2257, one floor above us, is open for overflow. We have monitors 

and screens there. So if you would like to have a seat upstairs, you 

are more than welcome to go to the overflow room. 

We have two panels of witnesses today, the first of which will address single-employer defined benefit system reforms; and I want 

to begin by introducing our first panel. 

Our first witness will be Ms. Lynn Franzoi. Ms. Franzoi is the 

Senior Vice President of Benefits for Fox Entertainment Group, 

where she is responsible for the designed administration of financing of all benefit programs for over 12,000 domestic employees and 

800 foreign employees and for operation of the Child Development 

Center at Fox. 

Ms. Franzoi has served on the National Summits on Retirement 

Savings in 1998 and 2002. She also serves as a member of the U.S. 

Chamber of Commerce Health and Employee Benefits Committee 

and as chairperson for the U.S. Chamber of Commerce Qualified 

Plan Committee. She was appointed to a 3-year term as a member 

of the Advisory Council on Employee Welfare and Pension Benefit 

Plans to the Department of Labor’s Employee Benefits Security Administration in 2004. 

We will then hear from Mr. Bart Pushaw. Mr. Pushaw is consulting actuary in Milliman’s Dallas office. Since entering the field 

in 1995, he has worked primarily with Fortune 500 companies as 

a retirement advisor and account manager. Mr. Pushaw has lead 

and managed compensation and benefit post merger integration in 

multibillion dollar acquisitions and helped develop and execute new 

total retirement programs. 

He has also led asset allocation and investment policy development projects for pension and retiree medical plans as well as managed human resource due diligence efforts. Before joining Milliman, 

Mr. Pushaw was a partner at Ernst and Young 11 years and a 

partner at Mercer prior to that. Mr. Pushaw has written numerous 

articles and spoken before many professional actuarial groups. He 

is a member of the American Academy of Actuaries and an enrolled 

actuary under ERISA and an associate with the Society of Actuaries and fellow in the Conference of Actuaries. 

We will then hear from Dr. Theresa Ghilarducci. Dr. Ghilarducci 

is an Associate Professor of Economics at Notre Dame, Director of 

the Higgins Labor Research Center. She is a Fellow in the Kellogg 

Institute, the Kroc Institute for International Peace Studies and 

Nanovic Institute for European Studies and served as trustee of 

the Indiana Public Employees Retirement Fund and an Advisory 

Board Member of the of Pension Benefit Guaranty Corporation. 

Professor Ghilarducci’s scholarly work is on the financial human 

resource aspects of pension systems, including private and public 

11

plans and social security. Professionally she is a trustee and advisor to pension and trust funds worth over $30 billion at the Federal 

and State level, and has appeared before this committee on several 

occasions. 

I want to remind the members of our panel, somebody has explained the lights to you. Keep it to 5 minutes, will be great; a little longer isn’t the end of the world. 

Chairman BOEHNER. And with that, Ms. Franzoi can begin. 

STATEMENT OF LYNN FRANZOI, VICE PRESIDENT FOR HUMAN 

RESOURCES, FOX ENTERTAINMENT GROUP 

Ms. FRANZOI. Thank you. 

Good morning, Chairman Boehner, Ranking Member Miller and 

members of the committee. I would like to thank you for the opportunity to appear before you this morning to discuss an issue that 

I think is critical to American employees, workers and retirees. 

My name is Lynn Franzoi, and I am the Senior Vice President 

of Benefits for Fox Entertainment Group, Inc. I am testifying today 

on behalf of the United States Chamber of Commerce, which represents more than three million businesses and organizations of 

every size, industry sector and geographical region. Fox Entertainment Group is a member of the Chamber’s Employee Benefit Committee, and I serve as chairperson of the Qualified Plans Committee. The American Benefits Council Business Roundtable, Committee on Investment of Employee Benefit Assets, ERISA Industry 

Committee, National Association of Manufacturers and National 

Rural Electric Cooperative Association also join in the themes expressed in this testimony; and some of these groups will be submitting their own supplemental testimony. 

I have over 30 years of experience—close to 30 years, not over—

in the field of employee benefits; and, as was recently stated, I am 

currently serving on a 3-year term as a member of the Advisory 

Council. 

We appreciate the hard work that Chairman Boehner, Chairman 

Thomas, Chairman Johnson and other members of the Committee 

on Education and the Workforce have contributed to the issue of 

pension reform which has resulted in the introduction of H.R. 2830, 

the Pension Protection Act of 2005. We also appreciate the committee taking the lead on pension reform and believe that the legislation moves the debate forward in a constructive manner. However, we have significant concerns with important aspects of the 

legislation, and that could negatively impact the defined benefit 

system. 

My written testimony delineates in detail a number of items that 

we endorse in the bill as well as several areas of concern. I will use 

my time before you to highlight some of our more immediate concerns about the bill. 

First, I must stress that employers need time to weigh the effects 

of H.R. 2830. Pension issues are extremely complex. As such, employers will expend significant time and effort determining the impact of all of the changes proposed in H.R. 2830. 

The proposed legislation fundamentally changes the current 

funding regime. Analyzing these proposed rules will require employers to examine the changes from a comprehensive and systemic 

12

viewpoint. We ask the members of the committee to view this legislation as the beginning of a discussion on pension reform. All of the 

business organizations I represent here today look forward to continuing to work with the committee as our members weigh the 

practical impact of this legislation. 

Second, the business community continues to have serious concerns about the yield curve concept. The yield curve is often used 

for things that have a definite maturity rate, such as mortgages 

and loans for autos. However, pension liabilities do not have a definite maturity due date because there are many assumptions that 

are built into the maturity date such as expected retirement date, 

expected work life with the company and expected mortality. These 

assumptions may or may not actually turn out as expected. Thus, 

a yield curve does not present the certainty that it is advertised to 

have. 

While we appreciate the efforts made to simplify the yield curve 

through the introduction of segments, the proposal would still engender significant complexity. The segmented rates are more complex than the current composite corporate bond interest rate, and 

there has yet to be any justification for this additional complexity. 

In addition, we are concerned that the legislation confers substantial discretion to the Treasury Department in the construction of 

the proposed modified yield curve which would make it virtually 

impossible for employers to model internally as part of their corporate planning and would be also difficult for Congress to oversee. 

Third, we urge Congress to protect credit balances. While H.R. 

2830 generally keeps the credit balance concept, the bill works in 

a manner that could force some employers to write off their existing credit balances. Without the ability to use credit balances, employers have no incentives to contribute more than the minimum 

required contribution. Under H.R. 2830, credit balances would be 

subtracted from assets for a number of purposes, including benefit 

restriction purposes and the determination of at-risk liability. This 

could result in some companies that are adequately funded and 

being subject to benefit restrictions and at-risk liability targets. We 

recommend revising the bill to provide that credit balances are not 

subtracted from assets for any purpose other than determining the 

amortization amount for underfunding. 

Fourth, on the issue of hybrid plans, we commend Chairman 

Boehner for recognizing the importance of addressing the hybrid 

plan issue despite the ongoing controversy surrounding cash balance and other hybrid plans. Many employers find that these plans 

offer the best designs for their workers. 

One way to encourage continued participation in the defined benefit system is to allow employers the flexibility of design. If employers do not have design options that meet the needs of their workforce, they will leave the defined benefit system. To this end, H.R. 

2831, the Pension Preservation and Portability Act of 2005, moves 

the debate on hybrid plans forward; and therefore, we urge Congress to include it as part of the comprehensive pension reform. 

Fifth, Congress should give very careful consideration to increasing the PBGC premiums. Not only does the bill increase the flat 

premium rate from $19 to $30, which is a 63 percent increase, but 

it also indexes both the flat premium rate and the variable rate to 

13

wages. ERISA requires the PBGC to maintain premiums at the 

lowest levels possible. Including an annual automatic increase to 

the PBGC premium takes away from Congress’ ability to regulate 

PBGC premiums because the amount of the premiums will change 

without Congress reviewing the need for such change. 

We acknowledge that this is a difficult and complex public policy 

area because Congress must find the right balance between setting 

funding requirements which protect employees and the PBGC but 

are not so overly restrictive so as to drive employers away from 

this voluntary defined benefit pension system, much less from establishing new pension plans. 

The business community is committed to finding a solution that 

at the end of the day will strengthen the defined benefit system by 

encouraging plan sponsors to continue to maintain their plans. We 

look forward to working with you, Chairman Boehner, and with 

Chairman Thomas and your committee to find such a solution. 

Thank you, and I am happy to answer any questions that you 

may have. 

[The statement of Ms. Franzoi follows:]

Prepared Statement of Lynn Franzoi, Senior Vice President, Benefits, Fox 

Entertainment Group, Inc., on Behalf of the U.S. Chamber of Commerce 

Good afternoon, Chairman Boehner, Ranking Member Miller, and members of the 

Committee, I would like to thank you for the opportunity to appear before you this 

morning to discuss an issue that is critical to American employers, workers, and retirees. My name is Lynn Franzoi and I am the Senior Vice President, Benefits, for 

Fox Entertainment Group, Inc. Fox administers benefit programs for over 12,000 domestic employees, 800 foreign employees, 1,000 retirees and over 3,000 terminated 

vested participants. Fox maintains defined contribution plans, defined benefit plans, 

and contributes to several multiemployer plans. 

I am testifying today on behalf of the United States Chamber of Commerce, the 

world’s largest business federation, representing more than three million businesses 

and organizations of every size, sector, and region. Fox Entertainment Group is a 

member of the Chamber’s Employee Benefit Committee and I serve as Chairperson 

of the Qualified Plans Subcommittee. American Benefits Council, Business Roundtable, Committee on Investment of Employee Benefit Assets, ERISA Industry Committee, National Association of Manufacturers, and National Rural Electric Cooperative Association also join in the themes expressed in this testimony and some of 

these groups will be submitting their own supplemental testimony. 

While I am here today on behalf of several organizations, my testimony also reflects my years of experience in the benefits field. In addition to over 20 years in 

the field of employee benefits, I am currently serving a three-year term as a member 

of the Advisory Council of Employee Welfare and Pension Benefit Plans to the Department of Labor’s Employee Benefits Security Administration. I also served on the 

National Summit on Retirement Savings in 1998 and 2002. 

We appreciate the hard work that Chairman Boehner, Chairman Thomas, Chairman Johnson, and other members of the Committee on Education and the Workforce have contributed to the issue of pension reform which has resulted in the introduction of H.R. 2830, the Pension Protection Act of 2005 (the ‘‘Act’’). We appreciate the Committee taking the lead on pension reform and believe that the legislation moves the debate forward in a constructive manner, and in many ways shores 

up the viability of the defined benefit plan system. However, as outlined below, we 

also have significant concerns with important aspects of the legislation that may be 

counter-productive to this goal. 

Defined benefit plans allow employers to provide an important retirement benefit 

to workers. In a defined benefit plan, employers bear the investment risk. In the 

event that plan assets are insufficient to pay benefits, the employer and its affiliated 

companies must do so. Even when a company is liquidated in bankruptcy, plan benefits are guaranteed by the PBGC. Moreover, defined benefit plans must offer an 

annuity form of payment. Annuities provide a lifetime payment stream that ensures 

that retirees do not outlive their retirement benefit. Thus, defined benefit plans provide a fixed, guaranteed, and secure retirement benefit. 

14

1Pension Benefit Guarantee Corporation, Pension Insurance Data Book 2004, Spring 2005. 

Defined benefit plans are an integral part of the national economy. There are over 

30,000 single and multiemployer defined benefit plans that cover roughly 32 million 

workers.1 These plans paid out over $120 billion in retirement benefits last year. 

Currently, there are 11.6 million retirees receiving benefits from private employer 

defined benefit plans. Furthermore, defined benefit plans held $1.6 trillion in assets 

as of 2002, thereby increasing the national pool of long-term capital. 

Issues of Immediate Concern 

Employers Need Time to Weigh the Effects of H.R. 2830

Pension issues are extremely complex and, therefore, employers are still determining the impact of all of the changes proposed in H.R. 2830. The current timetable for consideration of the bill may not be sufficient for a complete analysis by 

employers so additional issues may continue to arise throughout this process. The 

proposed legislation fundamentally changes the current funding regime. Therefore, 

analyzing the proposed rules will require employers to examine the changes from 

a systemic viewpoint as the entirety of the changes could have a profound impact 

upon an employer’s plan. Moreover, as the funding situation of various companies 

differs from one to the other, the impact of the proposal will be different on each 

company. Thus, the business organizations represented today will also need time to 

best determine how to approach the proposed rules in the manner best for the defined benefit plan community. All of the business organizations listed look forward 

to continuing to work with the Committee as our members weigh the practical impact of this legislation. 

Employers Will Require Transition Relief 

As stated above, H.R. 2830 will implement broad changes to the current system. 

Therefore, in addition to time to weigh the provisions, employers will also need time 

to implement changes that are made into law. We are concerned that H.R. 2830 

does not provide adequate transition relief. The bill replaces all of the current funding rules with an entirely new set of rules. It is essential that Congress provide an 

adequate phase-in period for employers to implement these changes successfully. 

Among the provisions that will have a significant impact are the new rules requiring that projected lump sums be taken into account in determining liability. Under 

current law, projected lump sums are not (and cannot be) taken into account in determining current liability. This omission generally understates a plan’s true liability because current rules for determining the minimum value of lump sum payments are extremely generous to participants at the expense of the plan as a whole. 

The bill begins to coordinate the payment rules with the liability rules. However, 

there is a generous phase-in for lump sum payment purposes but not for liability 

purposes. This means that many plans will experience a sharp increase in liability 

without time to adjust to such an increase. 

Similarly, H.R. 2830 establishes a 100% funding target which is an increase from 

the current minimum funding requirement of 90%. For many plans, this is an effective 10% increase in liabilities that would occur immediately. Employers will need 

time to fund their plans to the increased level and without an appropriate transition 

period there could be massive disruptions to their capital spending and long-term 

business plans. 

The Yield Curve Concept is Not Appropriate for Pension Plans 

The yield curve will add unnecessary complexity to pension calculations. The yield 

curve is often used for things that have a definite maturity date, such as mortgages 

and auto loans. However, pension liabilities do not have a definite maturity date 

because there are many assumptions built into the maturity date such as expected 

retirement date, expected work life with the company, and expected mortality rate. 

These assumptions may or may not actually turn out as expected. Thus, the yield 

curve does not present the certainty that it is advertised to have. Rather, it is just 

another method of estimating pension liability and it is one that will be costly and 

burdensome for employers to adopt. 

While we appreciate the efforts made to simplify the yield curve through the introduction of segments, the proposal would still engender significant complexity and 

we remain 4 concerned about the impact of the change. The segmented rates required under H.R. 2830 are more complex than the current composite corporate 

bond interest rate and there has yet to be any justification for the additional comVerDate 0ct 09 2002 10:16 Jul 26, 2006 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6621 H:\NNIXON\DOCS\FC\6-15-05\21841.TXT DICK
15

2For example, one critic has reported that yield curves offer only a ‘‘Band Aid’’ approach that 

could conceivably make liability estimation models more reliable, but that yield curve data that 

is not carefully constructed will make estimates less, not more, reliable. (Don Mango, Structural 

Dependence and Stochastic Processes, American Re-Insurance 2001 Casualty Actuarial Society 

DFA Seminar, available at www.casact.org/coneduc/dfa/2001/handouts/mango1.ppt [hereinafter 

Mango]. For a similar criticism of the use of yield curves in certain liability models, see Peter 

Blum, Michel Dacorogna & Paul Embrechts, Putting the Power of Modern Applied Stochastics 

into DFA, 2001 Casualty Actuarial Society DFA Seminar, available at www.casact.org/coneduc/

dfa/2001/handouts/blum1.ppt.) This critic has also suggested that even the most well constructed 

yield curve data sets will only address a symptom of an otherwise internally inconsistent model. 

plexity. On the contrary, critical analysis of the yield curve concept indicates that 

it may be inappropriate for calculating pension liabilities.2

In addition, we are concerned about the construction of the proposed modified 

yield curve. H.R. 2830 directs the Treasury Department to develop the modified 

yield curve based on investment grade corporate bonds and confers substantial discretion onto the Treasury Department. This type of discretionary, non-market interest rate would be virtually impossible for employers to model internally as part of 

corporate planning and would also be particularly difficult for Congress to oversee. 

Moreover, the Treasury Department has complete discretion in determining how the 

different classes of bonds are to be weighted. As the bill has been drafted, Treasury 

could, for example, provide that only six-year bonds will be used to determine the 

interest rate on the five to 20-year segment. Alternatively, Treasury could provide 

that durations from five to 10 years will be weighted at twice the weighting of bonds 

from 10 to 20 years. These changes could have a significant impact on the effective 

interest rate. Because the interest rate has such a dramatic effect on pension funding, it would be important for Congress, and not Treasury, to determine how the 

interest rate for each segment is calculated. 

Current Credit Balances Must be Protected and Workable Rules Provided for 

the Future 

While H.R. 2830 generally keeps the credit balance concept, the bill works in a 

manner that could force some employers to write-off their existing credit balances. 

Without the ability to use credit balances, employers have no incentive to contribute 

more than the minimum required contribution. Moreover, employers should not be 

precluded from using the credit balances that they have already accumulated. Employers pre-funded their plans with the expectation that they would be able to credit 

the excess funding in future years in which they may face difficult economic times. 

Employers made these additional contributions relying upon rules that were in 

place at the time. Changing these rules on them now would be unfair and could 

cause employers to view the credit balance system as unreliable and, thereby, create 

a disincentive for advanced funding. 

Under H.R. 2830, credit balances would be subtracted from assets for a number 

of purposes, including benefit restriction purposes and the determination of at-risk 

liability. This requirement could have dire consequences for some plans. For example, consider a plan that has $100 in liabilities, $90 in assets, and $40 in credit balances. Such a plan would be considered 50% funded for purposes of imposing benefit 

restrictions and at-risk liability determinations. As a result, the plan would have 

to be frozen (no new benefits for any participant), lump sums could not be paid, and 

liabilities would have to be calculated using the at-risk determination rules that require accelerated and burdensome funding. This is entirely inappropriate given that 

the plan is in fact 90% funded. We recommend revising the bill to provide that credit balances are not subtracted from assets for any purpose other than determining 

the amortization amount for underfunding. 

Hybrid Plans are Vital to the Defined Benefit Plan System and Should be Included in Comprehensive Pension Reform 

We commend Chairman Boehner for recognizing the importance of addressing the 

hybrid plan issue. Despite the ongoing controversy surrounding cash balance and 

other hybrid plans, many employers find that these plans offer the best designs for 

their workers. For an increasingly mobile workforce, steady accruals under a cash 

balance plan provide greater benefits than under a traditional pension plan where 

accruals are back-loaded. Moreover, workers desire cash balance plans because of 

the similarities to 401(k) plans. One way to encourage continued participation in the 

defined benefit system is to allow employers the flexibility of design. If employers 

do not have design options that meet the needs of their workforce, they will leave 

the defined benefit system. 

Without statutory guidance, there will continue to be litigation that only serves 

to confuse the issue even further. Such lawsuits against plan sponsors put hybrid 

16

plans at risk and threaten the retirement security of workers who benefit under 

these plans. For reasons described more fully below, we believe that H.R. 2831, the 

Pension Preservation and Portability Act of 2005, moves the debate on hybrid plans 

forward and, therefore, urge Congress to include it as part of comprehensive pension 

reforms, such as in H.R. 2830. 

Additional Issues 

As stated above, employers will need time to thoroughly review the impact of H.R. 

2830. Nonetheless, in the remainder of this testimony, we would like to share with 

you some of our initial thoughts and reactions to certain provisions in the legislation. 

Pension Reform Must Contribute to the Viability of the Defined Benefit Plan 

System 

For the protection of workers and the defined benefit system, the funding rules 

should ensure that pension benefits are appropriately funded. As such, funding requirements should track investment practices and choices as much as possible and 

allow employers freedom in making funding choices. It is very important that funding rules not impose unrealistic requirements or burdens that would create an administrative and financial drain on plans or overburden employers that are already 

struggling to better fund their plans. 

It is extremely important that employers be encouraged to maintain their participation in the defined benefit plan system. There are elements of H.R. 2830 that 

achieve this goal. For example, the increase in the maximum deductible contribution 

to 150% of current liability and maintaining the concept of credit balances are both 

extremely important in encouraging additional contributions to pension plans during good economic times. In addition, we appreciate the recognition that the benchmark for the interest rate assumption should be based upon corporate bond rates 

and not the 30-year Treasury rate and that smoothing over multiple years is essential to reflecting actual investment trends and maintaining predictability. 

• The Increased Maximum Deduction Limit Will Encourage Greater Contributions 

H.R. 2830 increases the deductible limit to 150% of current liability for single-employer plans and 140% of current liability for multiemployer plans. Increasing the 

maximum deductible contribution limit is long overdue. Employers should be able 

to contribute more to their plans in good times and not be forced to increase contributions during bad economic times. Some employers with plans that are now experiencing funding deficiencies would have liked to have increased contributions 

when they had cash on hand. However, they were limited by the maximum deductibility rules. Not only would their additional contributions have been nondeductible, 

but they would have had to pay a significant excise tax on the contributions. This 

cap on contributions works against companies and plan participants by requiring 

contributions when companies are financially strapped and prohibiting contributions 

when companies are prosperous. Thus, companies cannot insulate themselves and 

their plan participants against cyclical changes in the economy. Therefore, we fully 

support the increases to the maximum deductible contributions for defined benefit 

plans. 

• The 30-year Treasury Bond Interest Rate is an Inappropriate Benchmark 

There has been considerable debate over the proper replacement for the 30-year 

Treasury bond interest rate assumption. We believe that the interest rate assumption should be a reliable indicator of long-term expected returns on long-term investments for permanent defined benefit plans and should not be subject to significant 

short-term fluctuation. The Chamber believes that a composite corporate bond rate 

is the appropriate replacement for the 30-year Treasury rate and addresses these 

concerns. We are pleased that H.R. 2830 recognizes that the interest rate should 

be based upon a corporate bond rate and not linked to a government debt instrument. 

• Smoothing of the Asset and Liability Calculations are Necessary to Provide Predictability 

Plan sponsors generally project their funding requirements over several years and 

would like to have certainty about their funding requirements over that period of 

time. Over a short time period, market rates remain fairly volatile and, thus, funding assumptions based on a short time period are unpredictable. We appreciate that 

H.R. 2830 will use a long-term weighted average. However, it will decrease the average period for asset 7 calculations from five years for assets and four years for liabilities to three years for both. Since it is a shorter time period than what is currently 

in place, there are concerns about its practical effect. As our members analyze this 

17

change, we will determine the impact of this decrease and whether it is a viable 

change. 

Permanent Funding Reform for Multiemployer Pension Plans is Critical 

Multiemployer plans must deal with many of the same funding issues as singleemployer plans, but also have other concerns that are specific to their structure. In 

addition to the current economic situation, multiemployer plans are contending with 

a long-term issue of declining participation by workers and employers. Thus, as the 

pool of retirees is increasing, the pool of contributing workers is decreasing. This 

is causing significant burdens upon employers who continue to participate in these 

plans. In addition, as bankrupt employers withdraw from multiemployer plans, the 

remaining U.S. employers are left to pay liabilities for people who never worked for 

them, which puts U.S. employers at a competitive disadvantage to foreign competition in the same industries which are not burdened by such assessments. Obviously, 

this is an unfair drain of resources on these employers and their workers. 

The Pension Funding Equity Act of 2004 granted temporary funding relief to certain multiemployer plans. Such a temporary provision that provided only limited relief does not offer a lasting solution. Particularly for multiemployer plans in crisis, 

there needs to be permanent and fundamental funding reform. 

There are several challenges facing participating employers in multiemployer 

plans. Some large multiemployer plans are facing unprecedented shortfalls that are 

likely to result in funding deficiencies that will require substantial catch-up contributions by remaining employers and create excise tax liability. In addition, some 

of these same plans are experiencing shifting demographics in which retired participants outnumber active participants and life expectancy assumptions are proving to 

be inaccurate. The funding deficiency problems could result in significant financial 

outlays by remaining employers and, in extreme cases, could push an employer into 

bankruptcy. 

To address these issues, H.R. 2830 will ensure that multiemployer plan sponsors 

and trustees have the flexibility to implement measures that will ensure the continuation of their plans by creating various ‘‘zones’’ that depend upon the funding 

status of the plan. Within each zone, there are requirements that must be met and 

tools that allow the trustees to improve the funding of these plans. One important 

tool that was not included in the legislation is allowing plans in critical status to 

reduce accrued benefits. We understand that this is a drastic measure but it is necessary to remedy the severe underfunding some of these plans are experiencing. 

Many in the business community and labor organizations support inclusion of this 

provision as a necessary tool to save these plans. Therefore, we encourage Congress 

to allow multiemployer plans that are in critical status the option to reduce accrued 

benefits. 

H.R. 2831 Would Resolve Key Issues in the Hybrid Plan Debate 

We would like to thank Chairman Boehner for introducing separate legislation 

that addresses the cash balance and hybrid plan situation. Cash balance and hybrid 

plans are the fastest growing type of defined benefit plan and, thus, critical to the 

viability of the system. Therefore, assuring the validity of these plans is extremely 

important. We urge Congress to include this legislation with the other pension reforms in H.R. 2830. 

The Chamber has argued that formulaic tests may not adequately determine age 

discrimination in hybrid plans and, therefore, a broader test should be used. Calculating benefits in terms of an age-65 annuity is not required under ERISA and is 

not an accurate method for determining age discrimination in cash balance and hybrid plans. Rather, age discrimination in such plans should be tested by looking at 

the pay and interest credits received on an annual basis or by looking at the change 

in an individual’s account balance from year to year. 

H.R. 2831 meets these criteria. By establishing a broad test for age discrimination, it will provide realistic criteria for hybrid plans that will protect all workers 

and allow employers to continue to offer benefits through these types of plans. Moreover, the retroactive effective date provides much needed clarification for existing 

hybrid plans. 

In addition, H.R. 2831 resolves the whipsaw effect issue. The whipsaw effect prevents plan sponsors from providing a more generous benefit because it may result 

in an unintended windfall for participants who decide to take their benefit in the 

form of a lump sum. Rather than penalizing plan sponsors for attempting to increase benefits, the law should support such efforts while also ensuring that participants receive the proper benefit. Allowing employers to use a market rate to determine the present value of the accrued benefit will ensure that all workers receive 

the benefit to which they are entitled. 

18

3 A plan has a liquidity shortfall when it does not have enough liquid assets to cover three 

times the amount of benefit disbursements made in the previous year. 

Transition Options for Hybrid Plans Must Remain Flexible—Mandates are 

Not a Viable Solution 

We are pleased that H.R. 2831 does not impose a mandate on benefit options. 

Plan sponsors have been converting traditional defined benefit plans to cash balance 

and hybrid plans for over 20 years. In that time, plan sponsors have used many different transition methods to successfully convert their plans. Limiting transition options will only hurt the workers participating in hybrid plans. Mandating specific 

safe harbors for conversion may encourage some employers to terminate their defined benefit plan rather than convert it to a hybrid plan. Also, for those plans that 

have already converted, mandating retroactive safe harbors would require certain 

employers to terminate their plans. Mandatory choice or any other mandatory benefit imposition is inconsistent with the voluntary nature of ERISA and should not 

be part of any legislative resolution for hybrid plans. 

H.R. 2830 Removes Obstacles to Providing Investment Advice 

H.R. 2830 modernizes ERISA by better enabling employers to provide workers 

with access to investment advice pertaining to their retirement plan. Defined contribution plans, which largely did not exist when ERISA was enacted in 1974, require greater employee participation than traditional defined benefit plans, in which 

the employer pays for the 9 entire benefit and takes on investment risk. With defined contribution plans, employees make investment decisions and take on that 

risk. Clearly, the need for education and advice on how to invest that money is an 

important complement to the defined contribution retirement model. 

H.R. 2830 clarifies existing law to allow employers to provide employees access 

to investment advice from regulated professionals. To reduce the potential for a conflict of interest should the retirement plan service provider also be the provider of 

investment advice, the legislation requires disclosure of fees as well as any potential 

conflicts. 

Careful Consideration Should be Given to Increases in the PBGC Premiums 

We believe that the existence of the PBGC as a viable insurance institution is of 

paramount importance to the defined benefit plan system. However, funding reform 

that drives healthy companies and plans out of the system is at odds to the goal 

of protecting the PBGC. Therefore, reforms such as increasing PBGC premiums 

should be reviewed carefully. We are concerned that the flat-rate premium increase 

from $19 to $30 under H.R. 2830 will drive some employers out of the system and 

the additional increases on top of that will be even more detrimental. 

• PBGC Premiums Should Not Be Automatically Indexed 

Under H.R. 2830, the amount of the flat-rate premium and the variable rate premium will be indexed to wages. ERISA section 4002 states that the PBGC must 

maintain premiums ‘‘at the lowest level consistent with carrying out its obligations 

under this title.’’ Therefore, increases in premiums should be made only as determined to be necessary by Congress. Including an annual automatic increase to the 

PBGC premiums takes away Congress’s ability to regulate PGBC premiums because 

the amount of the premiums will change without Congress reviewing the need for 

such change. We recommend that the premiums not be indexed and that Congress 

maintain its responsibility in regulating the premiums. 

Certain Benefit Restrictions are Unduly Burdensome 

• Shut Down Benefits Should Not be Prohibited 

H.R. 2830 prohibits single-employer plans from providing shut down benefits or 

benefits based upon unpredictable contingent events. This restriction severely interferes with an employer’s ability to provide benefits that are appropriate for its workforce and business situation. Eliminating the ability of employers to provide a certain type of benefit is unduly restrictive. There have been several alternatives put 

forth to deal with the issue of shut down and contingent event benefits and we urge 

Congress to consider these alternatives. 

• Lump Sums Should Not be Restricted at the Levels Provided for in H.R. 2830

H.R. 2830 will prohibit plans that are less than 80% funded from paying out benefits in a lump sum. Currently, plans are only similarly restricted if they have a liquidity shortfall.3 Clearly there is a significant difference between a plan having a 

liquidity problem and being less than 80% funded. If this limitation must be included in pension reform, we recommend that it be included at a much lower fundVerDate 0ct 09 2002 10:16 Jul 26, 2006 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6621 H:\NNIXON\DOCS\FC\6-15-05\21841.TXT DICK
19

ing level (i.e., 60%). Another alternative is to allow employers that are less than 

80% funded to eliminate the lump sum benefit as an option to improve its funded 

status. It is unduly restrictive to participants to require employers to eliminate this 

option at such a high level of funding. 

• Restrictions on Benefit Accruals and Deferred Compensation are Overly Intrusive 

The Act will require severely underfunded plans to cease benefit accruals and prohibit advanced funding of deferred compensation. These restrictions interfere with 

employment contracts and management-labor relations and, therefore, are inappropriate. The ceasing of benefit accruals effectively freezes the plan. Even if the employer is able to improve its funded status, the workers will have lost the benefits 

that would have accrued during that period. This provision obviously intrudes into 

the labor-management relationship in a detrimental way. Similarly, restricting the 

funding of deferred compensation impedes upon an employer’s contractual relationships with its workers. Deferred compensation arrangements are entered into for 

various reasons that may have nothing to do with retirement options. Thus, linking 

these items together again intrudes upon an employer’s ability to manage its workforce. Consequently, these restrictions should not be included in the Act. 

ERISA Section 4010 Information Should Not be Disclosed 

The value of disclosing ERISA Section 4010 filing information is not readily apparent. It is not a measure of business stability or plan viability—rather, it is an 

arbitrary measure of funding. Moreover, H.R. 2830 requires that funding information for all plans in the controlled group be made available to participants and beneficiaries and not just those that are underfunded. Including this information will be 

confusing to participants who are participating in only one plan and may not even 

be aware of other plans in the controlled group. In addition, the information should 

not have to be provided to all participants in plans that are not underfunded. A 

worker receiving information about a plan in which he does not participate may become confused about the status of his or her own plan. 

In addition, the Section 4010 filing requirement is currently flawed in that it uses 

a fixed dollar threshold of $50 million of underfunding. For large pension plans with 

billions of dollars in assets, $50 million of underfunding is a miniscule amount of 

relative underfunding. Furthermore, in the current low interest rate environment, 

most every medium to large employer plan has a good chance of being required to 

make this filing even if it is nearly fully funded. Publicizing this information would 

perpetuate and magnify these anomalies. 

Conclusion 

We acknowledge that this is a difficult, complex public policy area because the 

Congress must find the right balance between setting funding requirements which 

protect employees and the PBGC, but are not so overly strict—in search of ‘‘perfect’’ 

funding requirements—so as to drive employers away from continuing with defined 

benefit pension plans, much less establishing new ones. Further, overly strict requirements will divert resources away from other useful purposes such as higher 

wages and capital investments. 

The Pension Protection Act of 2005 advances the discussion of pension reform. It 

includes a number of beneficial provisions that will encourage employers to maintain and strengthen their plans. However, there are also provisions that are 

counter-productive to that goal. We are committed to finding a solution that, at the 

end of the day, will strengthen the defined benefit plan system by encouraging plan 

sponsors to continue to maintain their plans. We look forward to continuing to work 

with Chairman Boehner and Chairman Thomas and their Committees to find such 

a solution. 

Thank you and I am happy to answer any questions that you might have. 

Chairman BOEHNER. Mr. Pushaw. 

STATEMENT OF BART PUSHAW, ACTUARY, MILLIMAN, INC. 

Mr. PUSHAW. Thank you, Chairman Boehner, Mr. Miller, members of the committee. Good morning. I am honored to be before 

you today. Thank you for inviting me. 

I would like to begin by commending the committee members on 

this bill. The Pension Protection Act significantly updates ERISA, 

which has been incredibly successful for over 30 years. Those who 

20

were responsible for it should be proud of their achievement and 

not sorry to see these parts changed. 

Today, I am speaking as an experienced, practicing retirement 

actuary enrolled under ERISA. I have been and continue to be 

proud to be a part of one of our most important institutional pillars 

of financial security. 

The funded position of many pension plans is recovering. The old 

rules indeed have worked in allowing sponsoring companies a brief 

but sufficient time to begin to recover from a recession before being 

required to contribute funds to plans, though weaknesses remain. 

This bill, as I mentioned, updates ERISA and greatly simplifies 

relevant provisions and fixes some of these weaknesses. 

The yield curve is not a widely familiar concept, and it has only 

recently begun to enter into use by the pension industry. Thirty 

years after ERISA was enacted, pension plans now have a wide 

range of maturity, from new plans with hordes of new hires at 

young ages, to plans which have retired population liabilities on 

their balance sheets which dwarf that of the plan sponsor. These 

vastly differing plan profiles have, in the past, all been treated 

identically for valuation purposes, grossly and materially erring 

relative to market value. Erroneous, inaccurate valuations mean no 

money to pay benefits. 

Using yield curves is the right answer. The market, arguably, incorporates more information about expectations in the yield curve 

than any other single measure. Capable plan managers and actuaries will be able to extract this forward-looking information to enhance financial forecasts, better supporting prudent plan management, leading to higher levels of benefit security for participants 

and thus strengthening the financial security of millions. 

Providing accurate estimates of future plan costs to corporate financial managers is important, because it is those same managers 

who will abandon a defined benefit pension plan when that plan 

impedes them in managing the financial affairs of the sponsor, in 

spite of their many valuable features. This bill enables rather than 

impedes good management. Accuracy promotes strengthened benefit security. 

The modified yield curve approach in this bill is a good simplification to ease administrative implementation by small plans 

but rigorous enough to develop market-based valuations for the 

largest of plans, reflective of their plan’s liability profiles and, 

hence, emerging cash flow needs. 

These cash flow needs include paying benefit distributions as 

lump sum payments. This bill brings a huge improvement with regard to lump sums. A financial disconnect occurred when plans 

were mandated to pay lump sums under artificial conditions, having no bearing to the intent of the plan sponsor nor with the way 

the plan had been funded. This bill removes that disconnect and 

enables the plan to properly fund paying lump sums to those who 

choose them. 

Due to the formidable risks associated with lump sums, I do not 

advocate them for the general population. However, lump sums do 

have a valuable and important role in financial planning when part 

of a comprehensive, well-designed personal financial plan. It is in 

this latter regard that I believe a limited exemption allowing lump 

21

sums to the small number of participants at or near normal retirement age should be granted, not limiting them in accordance with 

plan funded status since the run-on-the-bank issue is now defused 

due to the proposed plan/lump sum interest rate and mortality rate 

harmony. 

These bona fide retirees, at the end of their working career, cannot without pain suffer such sudden changes to their financial condition. Nor should they be asked to do so. In tandem with this positive change in determining lump sums, it should be noted it would 

indeed be in PBGC’s own financial interests that lump sums be 

paid out rather than become an entry on their books with an even 

larger assigned value. 

The benefit limitations, the amendment ban and benefit accrual 

freeze are entirely appropriate and makes common sense a required dictum again. Significant benefit enhancements promised 

while sponsors face financial demise buy nothing. The end game of 

funding these back room deals with taxpayer dollars needs to end, 

and I commend the committee for proposing to take this action. 

Use of credit balances is corrective. First intent reflected prepayments against long horizon schedules. These accumulations lose 

relevance, resulting in use antithetical to benefit security. More 

flexibility in using and accumulating these balances, giving appropriate credit to contributing sponsors and adjusting them for plan 

asset performance all support the primacy of strengthening benefit 

security while maximizing value to the sponsor. 

Since the inception of the earliest pension plans at around the 

turn of the last century, Americans have lived ever longer lives, 

and this improvement in mortality is expected to continue. Reflecting this expectation with regular updates of the underlying mortality tables is crucial. 

Time calls for another update, and the most recent mortality 

table published by the Society of Actuaries is the proposed table in 

the bill. This table, under proper projection of mortality improvement, incorporates this increased longevity, which results in a 

more accurate estimate of expected plan payouts and liabilities. 

Again, tying together the table the plan uses to estimate and fund 

payouts to the actual payouts themselves is sound actuarial finance,ameliorates distortions and adds back credibility to defined 

benefit plan as a strong tool for use in retirement plan strategy. 

This bill brings a new ability and a new flexibility to defined benefit plans which will allow prudent, well-managed companies the 

ability to continue or return to relying on the defined benefit plan 

as core of their retirement benefit strategy, differentiating themselves competitively in a positive manner to a labor force eager to 

gain and retain financial security in an era of increased personal 

assumption of financial risk. 

I humbly thank you for your patience and the opportunity to 

present my opinions to the committee. 

Chairman BOEHNER. Thank you. 

[The statement of Mr. Pushaw follows:]

22

* The following comments express my own opinions and position, and do not reflect those of 

Milliman, the American Academy of Actuaries or any other organization. 

Prepared Statement of Bart Pushaw, Actuary, Milliman, Inc.*

The Pension Protection Act significantly updates ERISA, which has been incredibly successful for over 30 years—those who were responsible for it should be proud 

of their achievement and not sorry to see these parts changed. I have been and continue to be proud to be a part of one of our most important institutional pillars of 

financial security. 

The funded position of pension plans is recovering—the old rules have indeed 

worked in allowing, through techniques of smoothing, sponsoring companies a brief 

but sufficient time to recover from a recession before being required to contribute 

funds to plans. But weaknesses remain. 

This bill, as mentioned, updates ERISA and also, in my belief, greatly simplifies 

relevant provisions and fixes some of those weaknesses. The updates primarily include use of the corporate spot rate yield curve and the mortality table. The fixes 

relate to the determination of lump sums and benefit limitations. The simplification 

of the funding rules is significant. 

Inherent in the old rules was the business environment of the day. Contrasting 

against that, today’s corporate finance officer manages in a faster pace, faster 

changing world, as we all know. Competitive forces, of a global fashion, have shortened planning horizons and leaned down corporate balance sheets. This leaningdown means it can’t support plans fixated on the long horizons underlying current 

funding rules any longer. This bill finally re-focuses pension plan financial drivers 

to a ’Security-Now’ approach. 

The focus of measuring has also changed—Book Values are out, Market Values 

are required. This bill successfully accomplishes this change with pension liabilities. 

In the past, individual actuarial discretion had driven the liability value of a plan, 

with professional latitude wide enough to lead to valuations virtually always significantly different than what can be considered market valuations. 

The yield curve is not a widely familiar concept, and it has only recently begun 

to enter into use by the pension industry. Thirty years after ERISA was enacted, 

pension plans now come in a wide range of maturity—ranging from new plans with 

hordes of new hires at young ages, to plans which have retired population liabilities 

on their balance sheets which dwarf that of the plan sponsor. These vastly differing 

plan profiles have, in the past, all been treated identically for valuation purposes, 

grossly and materially erring relative to market value. Erroneous, inaccurate valuations mean either no money to pay benefits or no money for corporate development 

and investment. 

Using yield curves is the right answer. The market incorporates more information 

about expectations in the yield curve than probably any other single measure. Capable plan managers and actuaries will be able to extract this forward looking information to enhance financial forecasts, better supporting prudent plan management, 

leading to higher levels of benefit security for participants and thus strengthening 

the financial security of millions. 

Providing accurate estimates of future plan costs to corporate financial managers 

is important because it is those same managers who will abandon a defined benefit 

pension plan when the plan impedes them in managing the financial affairs of the 

sponsor, in spite of their value-added features. This Bill enables rather than impedes good management. Accuracy promotes strengthened benefit security. 

The modified yield curve approach in this Bill is a good simplification to ease administrative implementation by small plans but rigorous enough to develop marketbased valuations for the largest of plans, reflective of their plan’s liability profiles 

and hence emerging cash flow needs. 

These cash flow needs include paying benefit distributions as lump sums. This 

Bill brings a huge improvement with regard to lump sum payments. A financial disconnect occurred when plans were forced to pay lump sums under artificial conditions; having no bearing to the intent of the plan sponsor nor with the way the plan 

had been funded. This Bill removes that disconnect and enables the plan to properly 

fund and pay lump sums to those who choose them. 

Much concern of pension financial integrity has been laid on the door of the lump 

sum payout. While this is not the most prudent choice of benefit selection for many, 

it still has its place. Additionally, lump sums carry something of a bad reputation 

as ’they keep draining trusts but can’t be funded.’

The proper application of the yield curve to determine both a plan’s Current, or 

Target, Liability interest rate and the Lump Sum cash out rate remedies these ails. 

23

This occurs because the lump sum exactly equals the liability. Pension plans might 

have been better off if the PBGC interest rate was never mandated. 

When we say we want to use the yield curve to determine the liability of a plan, 

we mean the following. Project annuity benefit payments the plan expects to pay 

for a person until they die. This gives you a stream of payments expected in each 

year from now to well into the future. Do this for each person; some payments will 

begin right away while others don’t start until sometime in the future. Then, add 

them all up. This gives you the stream of expected payments for the entire plan, 

for each year, out 85 years or so. 

Next, find a spot rate yield curve representing the high quality corporate bond 

market. This is a series of interest rates, one for each year out into the future. 

Then, to develop the liability of the plan, discount each year’s benefit payment by 

applying the corresponding year’s rate. Add all these discounted benefit payments 

together and you end up with the plan liability. 

Here’s a simplified numerical example. 

In this example, the relative dollar amounts and payout periods are irrelevant to 

the results. The yield curve used here is the actual December 31, 2004 curve as published by Citigroup and posted on the Society of Actuaries’ website. 

Let’s say we have a plan with two participants: Mary and Bob. Mary will retire 

today and receive $100 annually for ten years. Bob is younger, will retire 10 years 

from now and receive the same $100 a year for ten years. We show the plan benefits 

along with the current yield curve as follows:

Year Rate (%) Mary’s benefit Bob’s benefit Total plan benefits Discounted benefits 

1 .................................... 3.09 $100 ............................ $100 $97

2 .................................... 3.40 100 ............................ 100 94

3 .................................... 3.64 100 ............................ 100 90

4 .................................... 3.90 100 ............................ 100 86

5 .................................... 4.12 100 ............................ 100 82

6 .................................... 4.33 100 ............................ 100 78

7 .................................... 4.52 100 ............................ 100 73

8 .................................... 4.65 100 ............................ 100 70

9 .................................... 4.80 100 ............................ 100 66

10 .................................. 4.94 100 ............................ 100 62

11 .................................. 5.09 ............................ $100 100 58

12 .................................. 5.26 ............................ 100 100 54

13 .................................. 5.44 ............................ 100 100 50

14 .................................. 5.58 ............................ 100 100 47

15 .................................. 5.69 ............................ 100 100 44

16 .................................. 5.76 ............................ 100 100 41

17 .................................. 5.83 ............................ 100 100 38

18 .................................. 5.89 ............................ 100 100 36

19 .................................. 5.94 ............................ 100 100 33

20 .................................. 5.98 ............................ 100 100 31

Total .......................... ........................... $1,000 $1,000 $2,000 $1,230

The plan expects to pay out $2,000 over the next 20 years and the liability today 

is $1,230. The plan is economically indifferent as to whether it pays out $1,230 

today or $2,000 over 20 years. We can compute an effective rate which is the single 

interest rate equivalent to the series of rates forming the yield curve. The effective 

discount rate for the plan is 5.15% in our example. That is, if you use 5.15% each 

year for the entire plan, the liability would be the same $1,230 as above. Let’s also 

say the plan has assets of $1,230. 

What happens to the plan when a lump sum is paid out to Mary using a lower 

interest rate to calculate her lump sum? Is Bob, the remaining participants or 

PBGC, left less well off after the Mary takes her lump sum? 

The answer is NO. Let’s see why not. 

First, let’s use a lower interest rate, say 4.30%, to determine Mary’s lump sum. 

We go through the same discounting process on her benefits as follows:

Year Rate (%) Annuity benefit Discounted benefit 

1 ...................................................................................................... 4.30 $100 $96

2 ...................................................................................................... 4.30 100 92

3 ...................................................................................................... 4.30 100 88

4 ...................................................................................................... 4.30 100 84

5 ...................................................................................................... 4.30 100 81

24

Year Rate (%) Annuity benefit Discounted benefit 

6 ...................................................................................................... 4.30 100 78

7 ...................................................................................................... 4.30 100 74

8 ...................................................................................................... 4.30 100 71

9 ...................................................................................................... 4.30 100 68

10 .................................................................................................... 4.30 100 66

Total ............................................................................................ ........................... $1,000 $798

This says Mary gets paid a lump sum of $798. Now, let’s take another look at 

the plan’s liabilities, person by person. 

To do this, let’s separately discount each participant’s benefits using our yield curve.

Year Mary’s discounted 

benefits 

Bob’s discounted 

benefits 

1 ....................................................................................................................................... $97 $0

2 ....................................................................................................................................... 94 0

3 ....................................................................................................................................... 90 0

4 ....................................................................................................................................... 86 0

5 ....................................................................................................................................... 82 0

6 ....................................................................................................................................... 78 0

7 ....................................................................................................................................... 73 0

8 ....................................................................................................................................... 70 0

9 ....................................................................................................................................... 66 0

10 ..................................................................................................................................... 62 0

11 ..................................................................................................................................... 0 58

12 ..................................................................................................................................... 0 54

13 ..................................................................................................................................... 0 50

14 ..................................................................................................................................... 0 47

15 ..................................................................................................................................... 0 44

16 ..................................................................................................................................... 0 41

17 ..................................................................................................................................... 0 38

18 ..................................................................................................................................... 0 36

19 ..................................................................................................................................... 0 33

20 ..................................................................................................................................... 0 31

Total ............................................................................................................................ $798 $432

Notice that the sum of Mary’s liability of $798 and Bob’s liability of $432 equals the plan’s liability of $1,230. You will also notice that the lump sum we paid to 

Mary using a lower interest rate is exactly equal to the liability the plan expected 

to pay her using a different rate, a rate for the plan as a whole. And after Mary 

is paid, the plan still has the $432 it holds for Bob. 

Now, what if Bob wants a lump sum, too, and he wants it now? We can pay Bob his lump sum in the same way we did for Mary, and Bob would get exactly $432. 

In the end, after everyone is paid their benefit, the plan equitably pays out exactly 

as was expected, $1,320. 

What was the effective lump sum interest rate used to determine Bob’s lump sum 

amount? It was 5.63%. 

What’s the trick? Where did the lump sum interest rates come from and is this 

result a coincident or an actuarial anomaly? 

There is no trick at all. The rate used to determine the lump sum for Mary was 

arrived at using the same yield curve for her benefits as was used for the plan as 

a whole. Because the spot rates corresponding to her benefit payouts are lower than 

the spot rates that occur in later years, Mary’s lump sum rate (ie, her effective rate) 

is also than the plan’s effective rate. 

Is this coincidence? No, it is the logical result of using an internally consistent 

methodology, applying the very same yield curve equally to both the plan and the 

individual. 

Result: When done correctly, the lump sum rate for a retiree is lower than the 

rate used for the entire plan. In this case, 85 basis points less. 

What would have happened if we had used the plan’s rate of 5.15% to calculate 

Mary’s lump sum? Mary would have been paid $767, or $31 less. This would have 

resulted in a windfall for the plan at Mary’s expense. 

25

Result: Using the same yield curve equally is correct while using the same interest rate is not; the lump sum is equal to the liability. 

For the general population I do not advocate lump sums, due to the formidable 

risks associated with them. However, lump sums do have a valuable and important 

role in financial planning when part of a comprehensive, well designed personal financial plan. It is in this latter regard that I believe a limited exemption allowing 

lump sums to the small number of participants at or near normal retirement age 

should be granted—not limiting them in accordance with plan funded status, since 

the ’run on the bank’ issue is now happily defused due to the proposed plan/lump 

sum interest rate and mortality harmony. 

Some of the examples of the importance lump sums are: 

1. Lump sums allow a retiring employee to collect their deferred compensation entirely, as compared to an annuity, where in the case of premature death, even one 

day after retirement, the entire benefit is forfeited. 

2. Pension plans are considered a deferral of current wages. These wages are entirely earned in the year they are earned. Requiring annuitization means unfairly 

subjecting previously earned wages to forfeiture. 

3. Lump sums allow a retiring employee to sever economic ties to the company, 

plan and industry and reduce their exposure to industry risk by collecting and selfdirecting their lump sum in a manner they deem most appropriate for them. 

4. An employee’s lifetime earnings are subjected to market forces specific to the 

industry and company she works in. Often, this employment risk is converted into 

imprudent investment risk by a company requiring undiversified ownership of company stock via its defined contribution retirement plans. Laws which have historically allowed employees to diversify away this company risk are currently being 

strengthened. This same risk diversification ought to be allowed in a defined benefit 

plan as well. 

5. Collecting a lump sum allows a retiring employee better management over their 

entire portfolio of assets. 

6. Financial advisors promote the view of total wealth management to optimize 

investment choices. Each individual investor owns different assets in different proportions and has different needs and goals. These needs and goals often require an 

asset allocation approach which allocates pension funds other than in a level annual 

annuity. Unlike a portfolio of §401(k) fund investments, pension plan investments 

only facilitate self-direction when paid out in a lump sum. 

7. Collecting a lump sum allows the retiring employee to choose the appropriate 

time and extent of annuitization that’s right for them. 

8. Academic studies (e.g., the Pension Research Council at the Wharton School of 

Business, University of Pennsylvania) have indicated that the optimal age for a retiree to annuitize some part of their personal wealth is at an age which is significantly after the plan’s normal retirement age. 

9. A lump sum option facilitates retiree estate planning. 

10. Some retirees prefer their earned benefit be available for use in either bequeaths to heirs, providing liquid assets upon their deaths or other worthwhile uses 

chosen by the individual. Without a lump sum option, the death of the retiree leads 

to the partial or complete forfeiture of unpaid benefits denying the retiree their 

choice in how to use compensation they earned during employment. 

11. A lump sum allows more varied use of portions of their total retirement nest 

egg at their own discretion. 

12. Anecdotally, we know many newly retired individuals look forward to celebrating the end of their working lifetimes and new retirement. Oftentimes, they 

want to pay off their mortgages, take a well-earned trip(s) or contribute to their 

grandchildren’s college funds. Most individuals covered in pension plans without 

lump sum access have the vast bulk of their retirement funds locked in annuities 

via the plan (and Social Security). At least part of this retirement wealth ought to 

be accessible to them via lump sums if they desire to celebrate their achievement 

in any of these or numerous other ways. 

These bonafide retirees, at the end of their working career, can not without pain 

suffer such sudden changes to their financial condition, nor should they be asked 

to do so. In tandem with this positive change in determining lump sums, it should 

be noted, it would indeed be in the PBGC’s own financial interest that lump sums 

be paid out rather than become an entry on their books at an even larger assigned 

value. 

When a pension plan is funded on a correct actuarial basis, a lump sum payment 

does not cause undue hardship or otherwise denigrate the plan’s funded status. On 

the other hand, under current rules, lump sums cost more than annuities and, 

sometimes, can not be funded. 

26

Lump sums can be made to be a cost neutral benefit, as they were prior to PBGCmandated interest rates, by the prudent selection of an interest rate. The yield 

curve approach to determining the plan interest rate combined with an equivalent 

application of that yield curve to retiring participants will result in a lump sum 

which is cost neutral with no ’leakage’ whatsoever. 

The benefit limitations, the amendment ban and benefit accrual freeze are entirely appropriate and makes common sense a required dictum again. Significant 

benefit-enhancements promised while sponsors face financial demise buy nothing. 

Vaporous agreements by leadership faithfully relied upon by the rank and file adds 

to shattered trusts. The end-game of funding these back room deals with taxpayer 

dollars needs to end. And I commend the Committee for proposing to take this action. 

Since the inception of the earliest pension plans at around the turn of the last 

century, Americans have lived ever longer lives and this improvement in mortality 

is expected to continue. Reflecting this expectation with regular updates of the underlying mortality tables is crucial. 

Time calls for another update and the most recent mortality table published by 

the Society of Actuaries is the proposed table in the Bill. This table, under proper 

projection of mortality improvement, incorporates this increased longevity which allows for a more accurate estimate of expected plan payouts and liabilities. Again, 

tying together the table the plan uses to estimate and fund payouts to the actual 

payouts themselves is sound actuarial finance, ameliorates distortions and adds 

back credibility to the defined benefit plan as a strong tool for use in retirement 

plan strategy. 

The transition elements of the Bill are substantial. The changes brought about by 

the provisions during the phase-in periods are not dramatic, but easy. Plan sponsors 

will in general greet the new law with enthusiasm, drawn by the certainty brought 

by finally having an interest rate methodology in place as well as the internal cohesiveness and financial soundness in its approach. 

This Bill brings a new ability and new flexibility to defined benefit plans which 

will allow prudent, well-managed companies the ability to continue or return to relying on the defined benefit plan as the core of their retirement benefit strategy, differentiating themselves competitively in a positive manner to a labor force eager to 

gain and retain financial security in an era of increased personal assumption of financial risk. 

I humbly thank you for the opportunity to present my opinions to the Committee. 

Chairman BOEHNER. Dr. Ghilarducci. 

STATEMENT OF THERESA GHILARDUCCI, PROFESSOR OF 

ECONOMICS, UNIVERSITY OF NOTRE DAME 

Ms. GHILARDUCCI. Hello. I am also honored by the invitation; and 

I hope that my research and my observations will help your deliberations. 

I evaluate all pension reform by answers to four questions. 

The first one is, did this bill encourage better funding? Believe 

it or not, most pension funds are well funded and behave properly. 

I painstakingly developed a data set of 670 firms of over 18 years 

and linked them with firm profitability data and other kinds of 

data. I found that the vast majority of firms contribute more when 

their funds earns high returns and they contribute less when their 

funds aren’t doing so well. And that is good news. It is what ERISA 

intended. 

The bad news is that the limit on the funding ratios didn’t matter very much. So that, though it is reasonable to raise the funded 

ration to 150 percent, I don’t have high hopes it will significantly 

improve the plan funding. Most plans were not limited by that 

lower ratio. But prohibiting the use of credit balances for underfunded plans that this bill proposes may discourage well-funded 

plans from accumulating them, making bad times worse for good 

DB sponsors. We need to encourage pro cyclical accumulations. 

27

Now freezing benefit accruals at plans that are 60 percent funded does make sense, but I have serious problems with the limits 

on benefits increasing for plans that are funded at 80 percent. 

One of the reasons that the PBGC stopped publishing the ‘‘iffy 

fifty’’ list which publicized underfunded plans that many plans 

weren’t iffy at all, even if they were below the 90 percent funding 

ratio. But some were iffy, so I do support making those 4010 forms 

public. It is absolutely crucial. 

Now classifying companies by their funding ratios and not their 

ability to pay could let profitable companies purposely underfund 

the plan so they would have an excuse to renege on benefits. That 

would supersede the intended ERISA, and it would supersede any 

notions of fairness because workers paid for their promised benefits 

through, indirectly or directly, by taking less compensation in 

wages or other places. Real pension protections stops, it does not 

encourage, this reneging. 

Now everyone knows, I guess on this panel as well, that prohibiting lump sums could improve plan funding. Findings from behavioral economics and common sense show that they don’t result in 

real pensions and they bleed pension funds dry. But this plan—actually, this bill actually encourages lump sum payouts because they 

make them cheaper. 

The second question I ask, is this bill fair to workers and retirees? 

Well, the lump sum provisions aren’t fair. The bill raises the 

valuation rates to reflect what only high-income investors can attain. It lowers the lump sum by 27 percent in retirees who invest 

in only safe money market funds. 

Further, the bill lessens protection and shifts most of the costs 

of funding failures to workers who had no role in the decisions that 

caused the failures. Shut-down benefits make plant closings humane. But it is very important for all of us to realize that workers 

pay for those shut-down benefits through lower wages, deferred 

wages. Even more unfair is that this bill denies shut-down benefits 

to workers but doesn’t touch manager severance pay and executive 

buyouts. Eliminating shut-down benefits often just makes the deal 

more profitable to another buyer. I saw that happen in my area 

with the steel companies. 

This bill isn’t fair because it also allows workers’ accrued benefits 

to be cut when the fund hits that arbitrary 80 percent of funding 

ratio, though manager and salary benefits are only cut when they 

reach a lower ratio. 

Now, the United Airlines’ decision was unfair. The PBGC bypassed the labor management negotiations, which could have saved 

benefits, and cut their own deals to terminate the plan. This bill 

does not encourage that from happening again. 

Third question, does this bill encourage firms to stay in the DB 

system? 

I fear not. Besides being unfair and not improving the funding, 

and it could chase companies from the DB system. The premium 

cost hikes are over and above what is needed. 

The advice portions tacked on the bill bias the bill towards 

401(k) plans and that is especially glaring because there is no provision in this bill for the cash balance provisions. 

28

DBs are important to the economy and will be as the labor force 

gets older. They reduce training costs, and they reduce turnover 

costs. Older women workers are much less likely to retire at 65 if 

they have a DB plan. We need those older workers. 

But this bill could raise the costs of uncertainty. The yield curve, 

as already been mentioned, causes increasing uncertainty. PBGC 

defaults and a surprise hike in premiums also cause uncertainty. 

They may overwhelm these benefits I just mentioned and employers would leave the system. 

Does the bill help distressed companies maintain their plans? 

It doesn’t do much to not prevent companies from trying to figure 

out ways to not terminate it. In fact, without provisions to slow 

down those terminations, it could lead to a race to the bottom. 

In sum, how could you all protect real pensions? 

We need meaningful rules to structure cash balance plans. 

We need to raise premiums in a nonpunitive fashion and think 

out a way for PBGC to have a reassurance plan. That is the fatal 

flaw in the PBGC. It was only meant to take care of situations 

where a company went bankrupt, not whole industries going 

through restructuring and failure. 

We should help troubled companies stay in the system. You did 

that with the airline bill. 

You should slow down terminations. 

And I say just prohibit lump sum payouts. They are not fair. 

Thank you. 

[The statement of Ms. Ghilarducci follows:]

Statement of Dr. Teresa Ghilarducci, Professor of Economics, University of 

Notre Dame 

I appreciate the invitation, Chairman Boehner and Ranking Member Miller, and 

members of the Committee, to testify on the pension reform bill. I hope my research 

and observations will help your deliberations. 

I evaluate pension reform by answers to four questions.1

1. Does this bill encourage better funding? 

My research observes the same 670 pension sponsors for 18 years (no agency or 

researcher has this data set) and, after controlling for most factors2 determining 

pension contributions per participant, I conclude the vast majority of companies responsibly fund their plans despite popular conceptions. Firms contribute more to 

their funds when the funds are doing well and the funding ratio did not inhibit 

funding. That’s good news. That is what ERISA intended. The bad news is that pension funding falls when health insurance costs rise and when firms introduce a 

401(k).3

In sum, existing funding rules work well for the vast majority of the funds. Raising the funded ratio to 150 percent (for qualified contributions) is reasonable; but 

don’t have high hopes it will significantly improve plan funding—most firms were 

not limited by the lower ratio. 

Prohibiting the use of credit balances for underfunded plans may have the unintended consequence of discouraging DB plans and making bad times worse for DB 

sponsors who sincerely want to preserve their plans. We need to encourage accumulations in good times. I doubt that the prohibition would have prevented United’s 

pension plan default. 

Freezing benefit accruals at 60% makes sense, but I have problems with the limits on benefits for 80% funded plans. One of the reasons the PBGC stopped publishing the ‘‘iffy fifty’’ is that the many plans weren’t iffy at all even if they had 

below 90% funding ratios.4

Classifying companies by their funding ratios and not their ability to pay could 

let profitable companies purposefully underfund the plan as an excuse to renege on 

benefits that workers paid for by deferring compensation. 

Prohibiting lump sums could improve plan funding. Findings from behavioral economics and common sense show they don’t result in real pensions and they bleed 

funds dry. Lump sums came about to please management and sponsors seeing their 

29

cost may still be chary of being the first to revoke them. Congress can help them 

by banning them. 

2. Is the bill fair to workers and retirees by protecting benefits? 

If lump sums are kept this bill is unfair. Under current law, worker lump sums 

are valued using 30 year treasury rates (now at 5%). The bill raises the rate to investment grade corporate bonds (6%) which individuals generally do not have access 

to and lowers the lump sum by 27%.5

The whole idea of ERISA and pension protection was to ensure that promises 

made and indirectly paid for by workers weren’t reneged on. But this bill steps away 

from protecting accrued benefits by shifting most of the cost of funding failures to 

workers. Shut down benefits make plant closings humane; but they are mostly 

eliminated in this bill- even though workers gave up wages for them. Even more 

unfair manager severance pay and buyouts aren’t. Eliminating shut down benefits 

often just makes a deal more profitable to another buyer. 

The bill further moves away from pension protection by allowing workers accrued 

benefits to be cut when the fund hits a 80% funding ratios, though manager and 

salary plans only have to be below 60%. 

The PBGC’s decision in the UAL case is an example of moving away from 

ERISA’s intent. The agency bypassed union/company negotiations6—which could 

have saved benefits—and cut their own deal and involuntarily terminated the plan 

cutting benefits. The decision shifted all the costs of the company’s problems on the 

oldest and most loyal workers caused by factors out of their control.7

A fair move would have been the PBGC and Congress segregating the airline pension liabilities and paying them off with a temporary airline ticket tax. The rationale is that low-cost, start-up carriers and the passengers are benefiting from the legacy left by older workers and firms so they should pay some of the legacy costs.8

3. Does the bill encourage firms to stay in the DB system? 

I fear not. First, the bill’s premium cost hikes are not only high relative to expected losses from healthy plans but worse; companies could expect even more hikes 

because the PBGC suffers from the serious flaw of having no real plan reinsurance 

other than stiffing the healthy sponsors and taxpayers of last resort. For example, 

a user-fee revenue stream could reinsure the PBGC for the airline industry problems. (Future DB sponsors need the confidence Congress could provide by reinsuring 

the PBGC for a catastrophe like an industry collapse the agency was never structured to deal with: Studebaker failed but the U.S. car industry was doing well.) 

Two, the advice portions tacked on the bill may have unintended consequences of 

raising hopes that advice and education improve 401(k)s. Believe me its depressing 

to educators that research shows workers who attend investment advice seminars 

are LESS likely to change their contributions or allocations than those who didn’t.9

Also by emphasizing investment advice in this bill implies workers’ ignorance alone 

causes 401(k)s’ limitations as a pension system.10

Third, the bill’s bias towards 401(k)s is especially glaring since the bill has no protection for firms wanting to provide the future of DB plans—cash balance plans. 

(I am mostly disappointed in the bill for not encouraging the PBGC for not living 

up to the law11 that mandates the PBGC seek ways to strengthen the defined benefit system.) 

DBs are important to the economy. Firms, especially as the workforce ages, will 

want DB plans; they engender worker loyalty and reduce turnover and training 

costs.12 Older women workers are much less likely to retire at 65 if they are in a 

DB plan.13 DB participation is up slightly in retail and professional services. 

The last question for a pension reform bill is: 

4. Does the bill help companies that are in bankruptcy and/or distressed? 

The bill will not prevent firms in bankruptcy from dumping liabilities easily. Terminations produce lemming-like behavior and a race to the bottom.14 The bill should 

also put procedures in place that slow down terminations and make them subject 

to negotiations between workers and firms. 

Pension reform should also help employers find ways to stay in the system and 

survive short-term difficulties. The bill does not recognize that companies often need 

to have underfunded plans for some time, e.g. in a recession. Also penalizing companies in bad times15 could make DB pension plans more vulnerable and less attractive. 

In sum, how Congress can help protect real pensions? 

1. We need meaningful and encouraging rules for structuring cash balance 

plans—I trust you are working hard on that. 

2. Raise premiums in a non-punitive fashion and provide assurances to high performance DB sponsors that the PBGC has a thought-out reinsurance plan, not panicked premium increases. 

30

3. Implement funding rules that freeze benefit accruals for funds with below 60% 

funding, but don’t make 80% a blanket trigger. Shutdown benefits are crucial to fair 

restructuring and owners should have to reveal these costs better—your disclosure 

requirements will help. 

4. Help troubled companies stay in the system, rather than putting more pressure 

on their funding when they are least able to pay. 

5. Slow down terminations to prevent race to the bottom in an industry. 

6. Prohibit lump sums from qualified plans. 

7. Worker representation would be an efficient and effective way to enforce the 

commendable disclosure requirements. 

ENDNOTES

1. Does the reform encourage better and stable funding; is the reform fair to workers, retirees, 

executives, shareholders, customers, and tax payers; does the bill encourage the formation of 

‘‘real’’ pensions; a modest stream of lifetime income; and do the proposals help firms adjust to 

business cycles and industrial trauma? 

2. Firm profitability, normal cost, age of plan, cost of capital, and other determinants of funding contributions, 401(k) share of total pension contributions. See http://www.nd.edu/?tghilard/ 

Choose recent papers: ‘‘Did ERISA Fail Us Because Firms’ Pension Funding Practices Are Perverse?’’

3. Firms did not engage in perverse behavior—reducing funding when times are good only to 

find a short fall and more funding requirements when times are bad. The airline industry sponsors are exceptional they decreased DB funding even when the rest of the economy was doing 

well.) 

4. Because the company sponsors were viable in the medium term and publishing their names 

unduly worried workers and investors. 

5. It is reasonable that this bill allows the rate to vary by age—so older folks would presume 

to have lower and safer returns. But raising the interest rate substantially lowers the lump 

sum:

What the lump sum would be If the interest rate is To pay this amount for 25 years 

$99,999.98 at 3% $5,742.79

$73,412.08 at 6% $5,742.79

$52,127.50 at 10% $5,742.79

Also insurance companies discriminate reduce annuities for women, because on average they 

live longer. Women lose 30%. (The justification for raising the rate is that the Treasury rate 

is ‘‘artificially’’ low. This is a very curious and confusing judgment. Rates are set by markets, 

which are seen to be less artificial. What is artificial about the current market rate—it is still 

the best judgment of what a risk free long-term rate is.) 

6. Held under Section 1113 of the Bankruptcy Code. 

7. What is happening in airlines happened in railroads in the early 1900s. The first private 

defined pension plans were established by railroads in 1865, they were the airlines of their day. 

In 1919, the maturing defined benefit railroad pension plans were threatening to default for two 

familiar reasons. Workers were beginning to retire in large numbers and small start-up companies, that paid low wages and provided no benefits, invaded the legacy railroad’s routes by 

slashing haul rates. The nation could have chosen to allow what the PBGC and Untied Airlines 

agreed to happen, let pensions default and have the workers pay for the industrial restructuring. But the American decision-makers viewed that solution as unfair and the government 

mandated a multiemployer pension plan, the Railroad Retirement fund that all railroads pay 

into. The rationale was that the low-cost, start-up companies were taking advantage of the infrastructure the mature, legacy railroads and their workers created and needed to pay for the 

legacy benefits they were enjoying. To this day railroad workers have a strong defined benefit 

plan portable anywhere in the industry regardless of the death and birth of individual railroad 

companies. 

8. The agency segregates liabilities occasionally with idiosyncratic bankruptcies like TWA. 

Congress and Sec. of Labor Elizabeth Dole created a similar tax for coal to pay of miner’s health 

liabilities. Another creative solution is to put all airline employees into an airline retirement 

fund like the railroad workers. Delta and the airlines will keep their DB plans, not forced to 

follow United and crash their plans. Once airlines are out of the PBGC and into a multiemployer plan for the industry, the rest of the defined benefit system will be in better shape. 

9. See Steve Venti’s excellent overview of 401(k) investment behavior. http://

www.dartmouth.edu/?bventi/Papers/venti—savings—12-04.pdf 

10. Instead of adding another layer of for-profit vendors why not a worker representative on 

the board of trustees adds for both DB and DC plans. Through their representative they would 

have a genuine link and awareness of ongoing pension funding issues. A worker representative 

would further transparency goals. This bill sensibly requires more complete and timely Form 

5500s. Pension plans must notify participants of the funded status of their plan within 90 days 

and plans must provide summary reports within 15 days of the Form 5500 filing deadline. The 

act will also implement the investment advice proposal that passed the House in the 107th and 

108th Congress, which allows employers to provide workers with a qualified investment adviser 

and include fiduciary, and disclosure safeguards. 

11. The Employee Retirement Income Security Act: (Title 29 Chapter 18, Subchapter 111 USC 

Sec. 1302) gives three duties to the Pension Benefit Guaranty Corporation. The first is ‘‘(1) to 

31

encourage the continuation and maintenance of voluntary private pension plans for the benefit 

of their participants. 

12. It would be wrong to take away the lesson from the United Airlines bankruptcy and pension default that the idea of pension insurance is deeply flawed or that defined benefit pension 

plans are extinct and of no further use to employers. Companies sponsor defined benefit plans 

for vital economic reasons—they help retain valuable employees, they provide long service workers with a certain pension source that combined with Social Security and some home equity and 

health insurance can carry a middle class worker into a middle class retirement. 

13. www.nd.edu/tghilard choose recent papers and click on ‘‘The Distribution of Retirement 

Leisure’’

14. Shareholders and managers faced with competitors who can shift costs to the PBGC are 

encouraged to mimic. 

15. Higher premiums, faster and higher funding requirements, and limited credit balance use. 

Chairman BOEHNER. Well, I am glad to see everybody is on the 

same page in full agreement. 

I just have a question. It is kind of interesting that the business 

community thinks we have gone too far, and the professor thinks 

we haven’t gone far enough. The administration thinks that we 

have weakened their provisions, yet my phones haven’t stop ringing from businesses who think that it is just too hard to do. 

Let me explain just explain to everyone that we have a very difficult job to do. We know that the defined benefit pension system 

is in a crisis. We know that we have to do something about it. And 

the administration’s approach was really focused in on saving the 

PBGC. But I think there is a lot more we need to do than just saving the PBGC. That clearly is one of our goals. But trying to keep 

employers in the defined benefit system is critically important to 

those workers who are entitled to those benefits. Requiring companies to actually meet the commitments they are making to those 

employers are—in fact, are important goals as well. So the vision 

we have with this proposal is much broader than the administration’s and I think touches all of the goals that we need if we are 

truly going to reform the defined benefit system. 

Now the modified yield curve understandably is of some concern 

because it requires plans to fund liabilities as they come due, an 

inconvenient requirement if you don’t want to pay for what you 

promised. Now I don’t think anyone can argue against what we 

have here with a straight face. In fact, some of the testimony we 

have seen says that the companies can’t tell when their liabilities 

are coming due. So if accuracy of the modified yield curve is a concern, can somebody explain to me why one rate—one rate as we 

used to have under the law—is more accurate than a modified yield 

curve? 

Ms. Franzoi, I will let you tackle that. 

Ms. FRANZOI. Okay. I think with the single rate, that it is based 

on the corporate bond rate, it is realistic to what is happening out 

there, what returns are earning. And when you look at this modified yield curve, which is extremely complex, it is a snapshot picture. What I see today in my plan, is not going to be what it looks 

like 3 months from now. It varies dramatically, depending on your 

company, depending on your turnover, depending on the age of 

your employees. 

Chairman BOEHNER. Well, the demographics of your plan participants could not change dramatically within 3 months, I wouldn’t 

think. 

Ms. FRANZOI. It could within 6 months if you are in a company 

that has high turnover, if you are a company that is in a lot of acVerDate 0ct 09 2002 10:16 Jul 26, 2006 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6602 H:\NNIXON\DOCS\FC\6-15-05\21841.TXT DICK
32

quisitions and divestitures, which really is happening a lot in our 

businesses out there. 

So when I look at plans that I have worked with over the years, 

I have seen dramatic changes over like a 3- or 4-year period of time 

and sometimes in a very short period of time. 

So this would dramatically impact many employers to go to 

this——

Chairman BOEHNER. But how would a single rate, let’s use what 

has been in law—the 30-year Treasury bond, how would that 

rate—how could it be more accurate to use a rate like that than 

what we have outlined in the bill where you have got three different rates based on the maturity or the demographics of your employees whether they are going to retire in 0 to 5 years, 5 to 20 

years or over 20 years? And by blending the interest rates applicable to those three areas you get a much more accurate picture of 

what your liabilities are. 

Now, Mr. Pushaw, you are the expert here, much more so than 

I. So I will let you respond. 

Mr. PUSHAW. Thank you, Mr. Chairman. 

The choice of interest rate to use to value those liabilities is fairly irrelevant when you try and match up with the demographics. 

What I mean by that, your people are going to do what your people 

are going to do. Your demographics—your people are going to retire 

when they retire; they are going to die when they die. The choice 

of the interest rate does not impact that. 

So it comes down to, when are those cash flows going to come 

due? And surprisingly perhaps, that corporate bond rate is probably right, is probably the perfect rate for 5 percent, 7 percent of 

the plans out there coincidentally. 

But there are other extremes of when those cash flow needs come 

due, for example, in the legacy industries where there are lots of 

retirees, and there are lots of deferred vested employees and there 

are lots of older workers that have huge benefit liabilities coming 

due. That is what will be captured by a modified yield curve approach. 

It cannot be captured by the use of a single rate. A single rate 

cannot fit all. The yield curve with the flexibility built into it with 

this approach is intended to be modified to better suit the wide 

range of plans we have in America today, sir. 

Chairman BOEHNER. Ms. Franzoi, you made reference to and 

raised concerns about the PBGC premium increase, and I wanted 

to ask you whether you prefer what we have in our bill, which 

phases this in over 3 years for employers who are funded at 80 percent or above in their plans and only gives 3 years to those who 

are below 80 percent—they have to get their premiums up to $30. 

Or would you prefer the administration’s approach, and that is to 

have it all go into effect next year? 

Ms. FRANZOI. Well, if you are asking me if I prefer the phasedin versus the immediate, I would support the phased-in over the 

immediate. 

Chairman BOEHNER. That is what I thought. 

Now, you also raised concern about the fact that we index these 

premiums to a wage indicator, and I think I have to respond that 

PBGC premiums have not increased since 1991. Why? Because 

33

Congress did not act. I think, looking back clearly, it was irresponsible for the Congress not to have put an index in place so that 

those premiums would, in fact, increase regularly. And given the 

condition of the PBGC, I don’t think we have any choice but not 

only to increase these premiums, but in fact to index them. 

But having said that, I want to make it clear to everyone that 

we do not believe—and it is clear that the premium increase alone 

will not solve the problems at the PBGC—that a lot of the policy 

issues that we have in this bill will, in fact, require employers to 

better fund their plans, thereby reducing the risk—the long-term 

risk to the PBGC. 

I have overused my time. Let me recognize my colleague from 

California, Mr. Miller. 

Mr. MILLER. Thank you, Mr. Chairman. 

Dr. Ghilarducci, you supported the idea that the 4010 information should be made available. I would just like to recount a couple 

of efforts in the past, what we have suffered from this. 

In 2002, the Bethlehem Steel Corporation reported that its plan 

was 85 percent funded on a current liability basis. But when it was 

terminated, of course, it was a $3 billion loss to the PBGC, or to 

the fund. 

LTV reported that its fund on a current basis was 80 percent 

funded, and when termination came along it, in fact, was less than 

52 percent. And USAirways reported that it was 94 percent funded 

on a current liability basis, and when termination came, it turned 

out it was only 35 percent funded. 

So the government had this information, but employees, pensioners, investors did not have this information. And there is a 

world of difference between—as it turned out there was a world of 

difference between the claim of current liabilities being 94 percent 

funded and at termination of, 35 percent funded. So I appreciate 

and I hope that this committee will continue to look at the question 

of whether or not the public, the employees, investors and others 

are entitled to this information. 

I want to go to another point that you raised in your e-testimony, 

when I was hearing what you were saying on that online discussion. And that is whether or not PBGC to some extent, even though 

its mandate is to protect defined benefit plans, appears to be putting in a one-size-fits-all. We now see Delta and Northwest and a 

couple of other airlines saying, We want to modify; we would like 

to have a chance to stretch out and hold on to these assets for our 

employees, our retirees. 

Can you elaborate on other proposals that have been made here? 

I know that you mentioned in your testimony that Secretary Dole 

created such a fund for, what was it, the mine workers, right? 

Ms. GHILARDUCCI. Yes, the PBGC does have a lot of leeway to 

negotiate with companies, work with them early. If the public knew 

about the termination liability and the probability of termination, 

that would aid the PBGC in working out a deal to maintain benefits. That would be—that would match what the PBGC is supposed 

to do under the law, which is to try to maintain the defined benefit 

system. 

We have had defined benefit plans since 1865 in the railroad 

companies. Those legacy railroads developed defined benefit plans, 

34

and in 1910 those workers were older and they were retiring and 

those DB plans, just like now, were very expensive. At the same 

time, new low-cost start-ups—these were railroads, not airlines, 

but it should sound familiar because it is exactly the same kinds 

of situation—were taking advantage of the establishment of railroad travel and commerce in the United States. 

They were using their lines, but did not have unions or any pensioners. They got the benefits of all of those legacy workers and 

railroads, but they paid none of the costs. The Congress and the 

employers and workers developed the railroad retirement plan 

funded by all people taking advantage and using the railroad system. They pay a tax on railroad. 

Move forward to Elizabeth Dole working out a coal tax to pay for 

miners’ retiree health. These are the kinds of things that PBGC 

could have done. It could have segregated out the airline industry 

liabilities and found another revenue stream to pay for it. The 

PBGC did that with the TWA bailout, and Carl Icahn had to fund 

that plan specially. So there are precedents for having creative solutions, and this PBGC did not try. 

Mr. MILLER. The concern in terms of much of the anecdotal evidence we receive and what has been reported in the public press 

is that somehow the opportunity to complete those negotiations 

was short-circuited in the United negotiations. 

Ms. GHILARDUCCI. Yes, I think the PBGC panicked. There were 

a lot of people saying, Terminate those plans, bypass the negotiations, do not let them work it out. And a lot of people were saying, 

Give us time. The PBGC could have given them time and those 

benefits could have been preserved to minimize the losses. 

Mr. MILLER. We have seen—since the advent of the PBGC, the 

private sector has created an enormous array of financial facilities 

to make care of really huge liabilities—in some cases, national liabilities; in some cases, corporate liabilities, event liabilities—and 

they have been able to work out these kinds of facilities. And I just 

wonder to what extent in this legislation we should make that 

available because, again, different companies will have different 

scenarios. 

Different events will cause short-term/long-term restructuring 

events, but the PBGC ought to have that available. They ought to 

be to go to the reinsurance industry and say, How do we work this 

out? We want to make this decision a different way or we have different interests. We see our long-term interests being different, and 

yet I am worried because of the liabilities of PBGC that currently 

exist, the fear of taking on additional ones. 

The taxpayer exposure gets you into sort of one-size-inside-thebox thinking. We will take these, grab a billion and a half from 

United and hope things work out, when you have an array of financial instruments and risk-sharing instruments that have been created that we couldn’t even contemplate 10 years ago. 

You are shaking your head. 

Mr. PUSHAW. The issue of PBGC is an interesting one. It seems 

distasteful to have PBGC only act as a repository to mistakes. It 

seems, among the comments that I have just heard, that their role 

seems better suited to employees in an advocacy role, not in an insurer role. And I certainly do support your comments, Mr. Miller, 

35

about there is a large private insurance market out there that 

probably has a lot more experience and a lot more success in hedging those kinds of liabilities than the PBGC has shown us in the 

past 10 years. So the privatization perhaps of the insurance aspect 

would be interesting. 

However, also some of the numbers that we hear from PBGC, I 

am quite reluctant to put much faith in them. It seems odd that 

they can put their own assignment of value on these liabilities, 

that happens to be different from anybody else’s—I daresay likely 

different from the private insurance market. 

Mr. MILLER. I know that we are running over, but one of the discrepancies is the termination liability and the current liability. 

Mr. PUSHAW. One of the many problems you have with actuaries 

is that we have so many different measures of the same single obligation. But you know what, the PBGC liability is by far the largest 

assignment of value that you will see anywhere else. 

One of the things I think this bill does is, it collapses some of 

these different measures into a single measure that in my opinion 

is more accurate, more of a market value liability. And that, I 

think, is the one—maybe even the at-risk liability with its little 

load in there is the one that PBGC ought to be using for their own 

books. 

And then this other aspect of including deficits on their books before the events have even occurred seems to rhyme a little bit too 

closely for my pleasure with some of the other accounting issues 

that we are seeing in the headlines for the past couple of years. 

Why book a loss before the event even takes place? 

So the measure of the liability and the accounting methodology 

does not seem to jibe with the rest of the accounting industry. 

Mr. MILLER. That and other issues will be answered in these 

hearings. 

Mr. JOHNSON [presiding]. Thank you, Mr. Miller. 

Do you each agree that pension plans should be adequately 

prefunded? I think you do. And two of you argued that shutdown 

benefits ought not to be eliminated, but these benefits are not 

prefunded, and I don’t know how you can stand on both sides of 

that issue. 

Shutdown benefits are just like severance payments and ought 

not to be paid from underfunded pension plans. Would you like to 

comment? Go ahead. 

Ms. GHILARDUCCI. Shutdown benefits are implicitly funded. It is 

a possibility that could occur in the industry. They have caused 

problems before and have caused plans to be very underfunded; but 

they have been paid in many other places, and it makes the plant 

closure which often happens on a surprise basis much more humane. 

So there have got to be other ways to not eliminate them outright, and also to recognize that if a plan is 90 percent funded, it 

does not mean it is in danger, 80 percent funded, it does not mean 

it is in danger. 

When ERISA was passed and defined benefits were constructed, 

the choice was not between no defined benefit plans and 100 percent fully funded defined benefit plans. It was no defined benefit 

36

plans and partially defined benefit plans. So we are going—in this 

system going to tolerate underfunding. 

But when the company is ongoing and there are no new DB 

plans being formed, that is when it becomes a problem. It is not 

just the funding issue that is the problem. 

Mr. JOHNSON. Anyone else care to comment? 

Okay. I am not sure I agree with what you say. Mr. Pushaw, 

while the administration’s proposal eliminates credit balances completely, the Pension Protection Act retains the use of credit balances, but they can’t be used to offset real contributions if a plan 

is less than 80 percent. 

What are some of the problems with the current use of credit balances and do you believe the bill adequately addresses some of 

those problems? 

Mr. PUSHAW. Thank you, sir. Yes, I do believe the bill addresses 

them properly. One of the issues with credit balances is that they 

stale and they lose relevance. A credit balance can be due to a contribution made in excess of a minimum requirement, and that contribution could have been made 30 years ago, it could have been 

made 20 years ago. And that credit balance will grow under current law with 8 percent, 9 percent, 7 percent growth year in, year 

out, decade after decade perhaps, and really have nothing to do 

with the operations of the plan. 

And then, I think, what we are seeing a little bit today is that 

when a corporation—although these credit balances do afford great 

flexibilities, when you are on that slippery slope of declining funded 

status, that is not the time to reach into your pocket for Monopoly 

money. It is a time to reach in for cash. 

Mr. JOHNSON. Thank you. 

Ms. Franzoi, you argued against freezing benefits when plans hit 

60 percent funding. If neither labor nor management can’t or won’t 

control costs in plans, don’t you think Congress has to act before 

the plans go to the PBGC? 

Ms. FRANZOI. I think that freezing benefits is really detrimental 

to the employees who have been working for those benefits. And I 

really do not see what purpose freezing those benefits serves. 

Mr. JOHNSON. Well, it keeps the company from going bankrupt 

on their pension plans, that is what. And you know and I know 

that a lot of plans are in trouble, and we have got to resolve that, 

and you can’t make the government pay for all of those plans. That 

is not our responsibility. PBGC was not formed to do that. It was 

a protection; you know that. 

Ms. FRANZOI. I know that. But I think that the estimate of what 

the underfunding out there—as Mr. Pushaw said earlier—is not a 

reasonable estimate of the underfunding. And from the plans I 

have seen and the plans I have worked with as a plan sponsor, our 

goal is to keep them well funded; and they have been well funded. 

Mr. JOHNSON. Thank you. Appreciate your comments. 

My time has about expired, so I recognize Mr. Kildee for whatever comments you have. 

Mr. KILDEE. Thank you, Mr. Chairman. 

You mentioned, Ms. Franzoi, 29 years you have been involved in 

this, and about the same time I have been involved. I came to Congress 29 years ago, so we share at least the length of time and exVerDate 0ct 09 2002 10:16 Jul 26, 2006 Jkt 000000 PO 00000 Frm 00040 Fmt 6633 Sfmt 6602 H:\NNIXON\DOCS\FC\6-15-05\21841.TXT DICK
37

perience. I am sure you have greater depth. As a matter of fact, 

when in the early days of ERISA, I have to say that there were 

only about three people in Washington who understood it at that 

time. That was John Erlenborn a member of this committee, a Republican member; Phyllis Borsi, who used to work for the committee; and my neighbor, Don Myers, who I would walk across the 

street and pick up some ideas from him. That number has growth, 

obviously, but I remember those days. 

Let me make this statement and ask this question: There is a 

fear out there in my district and around the country that since 

United Airlines dumped its $6.6 billion into the PBGC, there is a 

fear, really growing fear that this may broaden out. 

I have attended in the last 2 weeks labor meetings in Saginaw, 

Bay City, and Flint, Michigan, and while they are still worried 

about possible changes in Social Security, they are becoming deeply 

concerned now about the safety of their pension plans. They really 

face now—many of them face what they feel is a double whammy—

Social Security uncertainty and now the pension plans. 

Let me ask you this: What are the more timid parts of this bill, 

2830, or the more bold parts? 

Or maybe put it in another way: What are the greater deficiencies and the greater strengths? We will start with you, Ms. 

Ghilarducci. 

Ms. GHILARDUCCI. The biggest weakness in this bill is that it 

does not recognize that the way to strengthen the defined benefit 

system is to get new plans in with younger workers. It does not address everything that is needed to make DB plans more attractive. 

Inherently, they are. Employers will need them as the workforce 

ages, but there is nothing in the bill that expands the universe of 

DB plans. 

Some of the best aspects of the bill are the disclosure requirements. It is ridiculous that it takes so long to get information from 

the form 5500, and the 4010s do have important information in 

them. 

Mr. KILDEE. Mr. Pushaw? 

Mr. PUSHAW. Thank you, sir. 

I think one of the key improvements here with this bill is the 

change of focus in the rules—in the funding rules themselves. 

ERISA instituted a funding methodology that looked 30 years down 

the road, looked very long term. And we focused our eyes when we 

were developing these minimum funding requirements on the peak 

of that summit so far away. 

As long as we are following that path to the future, it did not 

really matter under the rules what happened today. 

And what this bill does is, it refocuses us from where ERISA did, 

which back in 1974, that was the sign of the times with the economics/capital markets/business environment back then—much 

more stable than it is at least today. 

This bill takes our focus from the long-term, short-term bedeviled, and refocuses us on the short term, what people have earned 

today. Security now; not, you know, we will be okay in 10 or 20 

years when our investments earn 8 or 9 or 10 or 11 percent. 

So the shift in focus from long term to short term, and funding 

at 100 percent rather than what the current DRC rules have—

38

where 80 percent is okay, 90 percent is better, but we do not care 

about anything better than that necessarily—I think it is an improvement; followed by the other aspect of what we would refer to 

as the market valuation of the liabilities using the modified yield 

curve approach as opposed to leaving it to the discretion of the individual actuary on the plan, what they think that liability might 

be valued at, which is typically again a long term, what our portfolio of assets might earn over the next 30 years. 

Mr. KILDEE. Ms. Franzoi? 

Ms. FRANZOI. Well, I think this bill is a first—a good first attempt. I think in many respects it does not do enough to encourage 

employers to continue to maintain their plans, and while I agree 

with disclosure, I have an inherent problem with the 4010. It is 

based on a $50 million deficit, which when that went into place in 

the early to mid-90s when they did away with the top 50 plans, 

that might have been a significant number; but I can certainly look 

at my pension plan and how great our assets have increased. 

And you could have a plan, a company that has multiple plans, 

a large controlled group, and each plan could have $5 or $10 million of underfunding, and they are required to file that 4010. So 

that could really create concern, unnecessary concern, in employees 

for a plan that is well-funded. 

But if you look at the overall controlled group, it is not that I 

have a problem with the disclosure, but it needs to be meaningful 

and it cannot create fear. And I think with the $50 million index, 

well, really, it is detrimental to plan participants. 

Mr. KILDEE. Thank you. 

Mr. JOHNSON. Do the other two of you agree with that statement 

she just made? You do? 

Ms. GHILARDUCCI. I just think that information that might be 

confusing has to be explained. And if it does not have an explanation, there is something wrong. So I think that is trivial. 

I just worry about this bill causing the DB system to end. 

Mr. PUSHAW. One of the aspects in the administration’s proposal 

tied some funding requirements to the credit rating of the sponsoring organization. 

Now, I agree that should be done away with here. I think it 

ought to be a focus, on the other hand, of PBGC; and maybe their 

variable rate premiums should be tied to the credit rating of the 

organization. 

Likewise, the second 4010 calculations might be tied to the credit 

rating of the organization, because that is when the rubber starts 

hitting the road. And on top of that, I agree with Ms. Franzoi that 

$50 million for an organization that has pension plans in the multibillions, the volatility just because of normal operation of a defined 

benefit plan can swing 50 million plus or minus—that can happen 

in months—that dollar amount might be looked at to change, but 

also the way that PBGC approaches their business likely should 

change. 

Mr. JOHNSON. I think we do agree on the full disclosure. That is 

one of the landmarks. 

Mr. Kline, you are recognized for 5 minutes. 

39

Mr. KLINE. Thank you, Mr. Chairman. I want to thank the witnesses for being here. It is nice to have some real experts in the 

room. 

We have been working on this pretty hard in the committee, and 

I think we have brought forward a pretty good bill, which will be 

changed somewhat as we go forward, but the complexity of this, I 

find interesting. Because when I talk to my colleagues, we share 

information about what we are working on, and I mention that we 

are spending a lot of time on the pension reform, there is a common thread. People look at me, their eyes glaze and they say, This 

is really complex. 

And it is complex. So we appreciate your being here today. 

I have got a whole bunch of questions. I want to get at a couple 

of them. We have seen right here today, as the chairman indicated 

earlier, that we really are not always on the same page in our understanding of what is going on here. For example, Professor 

Ghilarducci was very, very clear in saying that lump sum payments are bad and ought to be eliminated. But I noticed in your 

testimony, Mr. Pushaw, that you had some redeeming qualities for 

those lump sum payments. 

I think that the professor’s concerns were principally that it 

takes cash away from the longer-term benefits. Could you, Mr. 

Pushaw, again sort of reput into digest form the redeeming qualities of those lump sum payments? 

Mr. PUSHAW. Yes, sir. In addition to the comments that are in 

my written statement, financial planning, when you near retirement, it really does take on a much more important role and a sudden change to that financial picture by a freeze on lump sums 

seems detrimental to those, whose fault is not theirs, that that 

funding status slipped like that. There are probably a half-dozen or 

so redeeming qualities of lump sums, at least, which include things 

like estate planning, which include things like, you know, My parents did not live past 65, I am not going to live past 65; why in 

the world would I take a life annuity when I am only going to get 

a couple of payments out of it? Issues like that where lump sums 

make more sense. 

One of the issues that has been well publicized and has gotten 

a lot of attention in the past couple of years in this town are the 

negative aspects with lump sums. I believe some of that negativity 

is due, in fact, to the PBGC. It was their action back in the 1980s, 

mid-80s, that actually they stepped in and started telling pension 

plans, pension plan sponsors, that, No, we do not want you to pay 

a lump sum that is $100,000 for this retiree; we want you to pay 

$130,000 to this retiree because that is what we think the right 

value is. 

So it is that disconnect—and that is the disconnect I mentioned 

in my verbal statement, sir—that when you have an outside influence all of the sudden dictating what the value of the benefit 

should be, compared to what the plan sponsor, what the plan document, what the employees even expect, there are going to be some 

bad things that happen. 

So when you have an annuity option and a lump sum option, the 

annuity option might have an actuarial value of $100,000. But the 

lump sum that you are being forced to pay out at an elevated, subVerDate 0ct 09 2002 10:16 Jul 26, 2006 Jkt 000000 PO 00000 Frm 00043 Fmt 6633 Sfmt 6602 H:\NNIXON\DOCS\FC\6-15-05\21841.TXT DICK
40

sidized level of $130,000, that is how I think the picture is formed 

that lump sums are a drain on assets, because the plan is only 

holding 100, yet they are forced to pay out 130. That does not make 

any sense. 

So one of the aspects of the bill that I think is very favorable is 

actually linking back the valuation of what the plan expects to pay 

in that lump sum based on mortality tables and modified yield 

curve and using a very similar, if not the same, mortality table and 

modified yield curve approach to determine lump sums. That way, 

if the plan is only holding $100,000, the lump sum and the annuity 

will all be the same value. It will be $100,000. 

So you cannot forget that, yes, we might pay out a lot of money 

in lump sums, but also you are discharging your liability as well 

on an equal basis. If a plan happens to be $100 underfunded today 

and tomorrow I take a lump sum under these rules, the next day 

it will be $100,000; it is not going to exacerbate the situation. 

Mr. KLINE. Thank you. I see I am out of time, but the professor 

deserves the remaining 30 seconds. 

Ms. GHILARDUCCI. Let me be clear. Lump sums, in my view, 

don’t have any place in a defined benefit system. People accumulate lump summability in 401(k)s. The defined benefit plan is the 

only place where people, with Social Security, can get a modest income for the rest of their lives. 

This bill would actually reduce the lump sump because it raises 

the interest rate, and only people with a lot of income who are very 

sophisticated can get that interest rate. The rest us take that lower 

amount, put it in a money market and we are in a worse way than 

we would be if we took an annuity. 

Mr. KLINE. Thank you, Mr. Chairman. 

Mr. JOHNSON. Thank you, Mr. Kline. 

The gentleman from New Jersey, Mr. Andrews. 

Mr. ANDREWS. Thank you, Mr. Chairman. Good morning. I would 

like to thank the witnesses for their outstanding testimony. For 

some of you, it is a return engagement. We are glad that you are 

here. 

I have a strong bias on this matter and that is toward defined 

benefit plans. I know they are good for the participants. I think 

they are very good for employers, because they provide a strong incentive for employees to stay with an employer; and I know that 

they are good for the economy, because they provide a very important source of income for retirees above and beyond Social Security. 

Unfortunately, my bias flies in the face of the statistical trends. 

The number of plans is shrinking. The number of new plans being 

created is virtually nonexistent. And I look at this bill through the 

prism of what can we do to reverse that trend. 

My instinct is that there are two things that we need to provide 

at the very least. The first is a greater degree of certainty for employers’ decision making about what the ground rules will be for 

decisions that they must make in continuing or starting a defined 

benefit plan. 

And the second is the degree of flexibility that we give the employer to deal with changing market conditions and changing competitive demands on the employer. 

41

I wanted to ask Ms. Franzoi the question about the modified 

yield curve. I think you and I agree that despite yeoman efforts by 

the chairman to improve upon the administration’s proposal, the 

modified yield curve proposal still raises some concerns about its 

complexity and ambiguity. 

What should we do instead, in your opinion, to do the interest 

rate fix? What should we do instead of the modified yield curve, assuming that we wanted to do something beside the modified yield 

curve? 

Ms. FRANZOI. Thank you. 

I think the temporary fix we have right now, tying it to the corporate bond rate, is something that seems to be working; and I 

would support that—we would support that over this modified yield 

curve. 

The modified yield curve, it really is very, very complex. I am not 

sure how you even start explaining that, how you calculate it. And 

as one other member of the committee said, people’s eyes glaze 

over when you start talking about retirement plans. I think this is 

an area of so much complexity, we need to simplify plans. 

Mr. ANDREWS. My concern is not the eyes-glazing-over problem; 

it is the eyes-slamming-shut problem. If there is too much complexity, a decision-maker might say, Let’s not do this at all, because we do not know what obligations we may have. 

Professor Ghilarducci—this goes to flexibility—I was interested 

in your summary about how to encourage and protect what you call 

‘‘real pensions,’’ and the first point of your summary is, we need 

meaningful rules for structuring cash balance plans. 

I am one of those who believes that cash balance plans can sometimes be unfair. But they are not inherently unfair, and I believe 

that the law should specifically and expressly authorize cash balance plans. If we were to do so, give me your opinion on the meaningful and encouraging rules that you think we ought to adopt that 

would protect pensioners, but make these plans viable. 

Ms. GHILARDUCCI. Good cash balance plans do not have a wearaway. They protect the benefits of older workers. They are fairly 

well-known. There is a list of them. The GAO report has good ones. 

I want to emphasize that when I was at the PBGC, late 1990s, 

early 2000, we said around the table, the only hope for the defined 

benefit system are cash balance plans. The PBGC could have put 

out a model cash balance plan, could have promoted a cash balance 

plan among vendors; and this PBGC did not move on that. 

Mr. ANDREWS. The final point I would make: I would encourage 

members of the committee and the panel to think about ways that 

the cost of the PBGC revenue problem be spread more equitably to 

those who created it. 

My sense is that 80 percent of the PBGC’s problem is attributable to permanent, deleterious conditions in two, maybe three industries—airlines, steel, maybe automotive manufacturing—and I 

don’t think that those problems are the fault of the plans in those 

sectors. I don’t think they are the result of cyclical changes in those 

sectors. I think they are the result of 9/11 in the case of the airline 

industry to a great extent, and I think they are the result of trade 

dynamics with steel. 

42

If that is the case, then I would hope we could work together 

with the Ways and Means Committee and others to find a way that 

those that are written, well-managed, well-funded plans do not 

have to come to the rescue of those who are unlucky enough to be 

in an industry that I just described. 

I see my time is up, and I thank the witnesses. 

Chairman BOEHNER [presiding]. The Chair recognizes the gentleman from Texas, Mr. Marchant. 

Mr. MARCHANT. Thank you, Mr. Chairman. 

As far as your testimony about you do not think that it is fair, 

the premium structure that has been proposed in the bill is not 

fair, how would you make it fair? 

Ms. GHILARDUCCI. There is an excellent paper done by economists at Watson Wyatt. They pointed out that raising the premiums so quickly—even a 3-year phase-in is still quick from 19 to 

30—really penalizes healthy companies who probably will never 

have to make themselves available to that insurance. It increases 

their contribution to the system 340 percent of expected losses, 

whereas the troubled firms only have to pay like 100 percent, a little bit less than 100 percent. 

So it is just an odd structure, and it is an odd—huge increase. 

It looks as if it is punitive, punitive to these companies because 

Congress did not raise their index long ago. 

Mr. MARCHANT. And you also testified that you thought that we 

should maintain the defined benefit plans for companies. And if 

you were a CEO now, going into a brand-new company, could you 

imagine watching these hearings and reading what you are in the 

paper and going to your board and saying I think the thing we 

need to do is do a defined benefit plan? 

Ms. GHILARDUCCI. I would be really worried, and if this bill 

passes, I wouldn’t adopt a defined benefit plan. 

I would hope that you do not go there. That you actually in these 

hearings help CEOs be certain that the defined benefit plan won’t 

be costly or uncertain, because they know there are benefits to it. 

Most CEOs want older workers to stay on board. We are coming 

into an era where we are going to have labor shortages. You have 

to do more here to encourage cash balance plans and to not penalize plans for having a DB plan. We have to encourage them to have 

credit balances. Maybe they shouldn’t be stale. 

But we have to tell executives if they have a DB plan, they can 

fund in good times and draw on it when their plans are underfunded. This bill does not allow them to draw on those credit balances as much as it does now when times are bad; and that belies 

the purpose of those things. 

Mr. MARCHANT. Mr. Chairman, I am going to give the balance 

of my time to Mr. Price, when it is his time to come to speak, if 

it is all right with the Chair. 

Chairman BOEHNER. I am not sure how we do that. 

Mr. SCOTT. Unanimous consent that his time be given to Mr. 

Price. 

Chairman BOEHNER. All right. The gentleman asks unanimous 

consent for his additional time to be given to Mr. Price when it is 

his turn. Without objection, it will be made in order. 

Mr. PRICE. I thank the gentleman. 

43

Chairman BOEHNER. The Chair recognizes the gentleman from 

Virginia, Mr. Scott. 

Mr. SCOTT. Thank you, Mr. Chairman. 

Mr. Chairman, I want to get to, I guess, more basic questions 

about how these things are funded to begin with, because if we are 

allowing these pension funds to get into stocks, into equities, there 

are naturally some ups and downs. Equities go through cycles like 

1929; 1987 was the day they lost 25 percent of their market share. 

From 1993 to 2000, the Dow doubled twice; and 2001 to 2005, it 

has been pretty much where it started off. 

If you had gone into some kind of yield curve or some other prediction from 1993 to 2000, you could be almost 100 percent too 

high. And 2001 and 2005, at least a third, 40 percent or more, underfunded. That is just the nature of equities. 

The risk—the employee in these defined benefit plans is not supposed to be taking any risk in the market. That is the whole point 

of a defined benefit. And we do not want them to get a back-door 

defined contribution situation where they do take some risk by allowing the plans to get woefully underfunded. 

I guess my question is, since we are talking about annuities, 

what solvency requirements are imposed on insurance companies 

that have promised to pay annuities and how is that different from 

what we are requiring for the pension plans? 

Mr. PUSHAW. I am not an expert by far, sir, on the insurance 

laws that are governed by State regulation, State by State. However, the familiarity I do have with that is that the insurance industry offers a number of different investment vehicles that fall 

into the annuity category, and they range from a guaranteed annuity all the way to a variable annuity. 

A variable annuity——

Mr. SCOTT. It is like a defined contribution plan where the employee or the recipient takes a risk in the market, and a guaranteed annuity is a defined benefit plan where you are looking for a 

defined benefit. If the market does well, the insurance company 

does well. And if the market goes down, that is the insurance company’s problem. 

Mr. PUSHAW. And your comment is about how those assets are 

invested at the insurance company. The variable annuities, there 

are segregated accounts, separate accounts at the insurance company if the individual chooses and does play the market and does 

that to gain the upside in the equity market, and there is some 

downside protection guaranteed by the insurance company. 

The guaranteed annuity, your defined benefit example, sir, is one 

where the assets are invested—required to be invested in the general fund of the insurance company, and that means bond investments strictly. 

Mr. SCOTT. Well, why should the pension funds be any different 

in terms of what is required for solvency than what is required of 

insurance companies? 

Mr. PUSHAW. I believe it is a matter of risk preference by the 

sponsoring organization. They believe if the liabilities, for example, 

are very long-term liabilities, then there is an opportunity if they 

can withstand—with their balance sheet and their revenue stream 

and their business, if they can withstand the year-to-year volatility, 

44

they often will take those chances and invest heavily, as we have 

seen, in the equity marketplace. 

Mr. SCOTT. Yes, but the problem is they are taking chances, but 

they are also bringing the employee, because if they go bankrupt, 

the employee does not get the promised benefit. Whereas if you had 

required better funding, the employee wouldn’t be at risk; they 

would expect a guaranteed benefit. 

And if you let them kind of go the ups and downs—let me ask 

another question: How often should you reevaluate the value of the 

principal to tell whether or not there is enough there? 

Mr. PUSHAW. Sir, in part, and I will turn it over to the professor—in part, that is what this bill does accomplish, because 

right now under the ERISA rules the liability is determined reflecting that additional risk and the expectation of long-term, increased 

returns because of their allocation to equities. 

So I might be—I might have a liability, a long-term liability of $100. But if I restate that, likely I would be doing it with the modified yield curve, then that liability would be higher than it would—

actually, my belief is it would encourage employers to reduce their 

risk because the liability is being valued as an insurance under the 

solvency type of basis. 

Mr. SCOTT. And you can actually buy an insured vehicle—product at that rate; you can actually buy an insured product that an 

insurance company would guarantee, in addition, to the company, 

the payment. 

Mr. PUSHAW. Notwithstanding some State taxes and profit margins and risk margins that increase the cost to the plan sponsor, 

generally speaking. Actually, back in the 1960s and 1970s, that is, 

where the pension industry was, is that the plan was an annuity 

insurance contract; and each year, every benefit increase, then the 

insurance company would reach in and buy another little piece of 

a guaranteed annuity. 

Chairman BOEHNER. Professor? 

Ms. GHILARDUCCI. If you wanted a liability fully funded at all 

times, you would have very few pensions. If you invested your lump 

sum or bought your annuity at a bond rate, as you are suggesting, 

it would make it safe, but it would make it a very small benefit. 

We were right, as pension funds, to go away from that and look 

more long term and take more risks, because the company would 

go on—not forever, but the failures would be idiosyncratic. 

I have to emphasize to everybody who might hear these hearings 

and contemplate the security of their funds, the vast majority of 

pension funds are well funded, that ERISA works for a vast majority of them. We are here today because two industries, steel and 

airline, have catastrophic risk. And that is what I would like this 

bill to actually address, how PBGC could be reinsured. 

Chairman BOEHNER. The Chair recognizes the gentleman from 

Georgia, Mr. Price, for 7 minutes. 

Mr. PRICE. Thank you, Mr. Chairman. I appreciate that. A little 

creative yielding, I guess. 

I want to thank the chairman for this hearing and for your bill. 

I commend you for your action and I have heard a couple of folks 

say that we need to slow down. I am here to tell you that we need 

to move with all due speed. 

45

We are in, I think, a crisis situation as it relates to a couple of 

industries, and I would like to focus a little bit on the legacy airline 

carriers in the airline industry, because I think there is where the 

problem is most clear. 

I have introduced, as the chairman mentioned, a bill H.R. 2106, 

which is a mirror bill of Senator Isakson in the Senate, that focuses 

on the airline carriers and allows them to adopt new funding rules 

for their DB system and allows them to spread out over 25 years 

their unfunded accrued liability and to pay it down using stable, 

long-term assumptions and gives them, I think, much greater flexibility. 

It does not exempt them from their obligations, which would 

occur should they go to the PBGC, and obviously that puts great 

hardship potentially on the taxpayer. It does not provide for any 

form of subsidy from the Federal Government, and taxpayers, as 

I mentioned, are limited by limiting the liability of the PBGC 

through the bill itself. The airlines have lost $33 billion, $33 billion since 2000, and the 

PBGC, as has been mentioned by many folks, has assumed 9.6 billion in unfunded pension liabilities from the two legacy carriers 

that have gone under in the past 2 years. The pension funds of 

other carriers are underfunded to the tune of $31 billion. We are 

in a situation where we need to act with all new dispatch. 

Last week, before the Senate Committee on Finance, the president of Northwest Airlines, Douglas Steenland, made the following 

comment: Defined benefit plans are one of the last vestiges of the 

airline regulation era. Northwest has concluded that defined benefit plans simply do not work for an industry that is as competitive 

and vulnerable to forces ranging from terrorism to international oil 

prices, that are largely beyond its control, as is the airline industry. 

And I would ask you, Mr. Pushaw, if you would comment on the 

state of the airline industry and the viability of DB plans within 

that industry. 

Mr. PUSHAW. Thank you, sir. 

A comment was made earlier about the number of plan terminations that we have seen over the years. Since 1986, plan terminations have numbered a little over 100,000. Those are startling 

numbers. They grab your attention. They say, Oh, there is a dinosaur on the way out. 

But when you look behind the numbers and you look at what is 

going on, my belief is that the vast majority of those plan terminations, in any case, were plan terminations of plans in industries 

and companies that never had any business starting a defined benefit plan. 

Mr. PRICE. How about the airline industry? 

Mr. PUSHAW. The airline industry is due to its cyclical nature, if 

nothing else, and ever-increasing competitiveness as it has 

emerged from regulation. If I was the CEO of a start-up airline 

today, I probably would not on day one establish a defined benefit 

plan, even though I think cash balance plans, in particular, are 

very worthwhile. 

On the other hand, as in any start-up organization, if you follow 

a company on this graph, how it is a start-up and high growth and 

then maturity, any start-up company would not have one. It might 

46

well be that airlines now are in a stage of decline, but I think it 

is only a limited decline to what we have always thought about 

with airlines in the legacy sense. The airline industry is changing 

and it is due for more change. 

The Catch-22 you all find yourself in is, how quickly do we act 

to support the current level of obligation those airline corporations 

have to their retirees and current employees on promises they have 

been making for a long time and how far do we push them for solutions to the solvency issue, getting PBGC to be an advocate there? 

And how far can you push them or how far can you give them 

a little bit more rope to react to it themselves? 

I am afraid I don’t know the answer to that, sir. 

Mr. PRICE. Do you believe that industry-specific bills or measures 

to address the airline industry are appropriate at this time in view 

of the legacy airline carriers’ difficulties? 

Mr. PUSHAW. It seems to make a lot of sense that if there are 

one or two bad apples—and I do not mean to say ‘‘bad’’ in terms 

of malfeasance or anything like that—but if there are one or two 

bad apples in the barrel, and the best of the apples, as both of my 

panelists have mentioned, are really doing very, very well, then 

perhaps it does make sense to deal very surgically and in a very 

limited way with those industries that you have mentioned. 

Mr. PRICE. Thank you. 

Thank you, Mr. Chairman. 

Chairman BOEHNER. The Chair recognizes the gentlewoman from 

New York, Mrs. McCarthy. 

Mrs. MCCARTHY. Thank you, Mr. Chairman. 

A number of the questions that I was going to ask have actually 

been answered. But I think where I want to go is with a lot of the 

businesses we are finding that they like predictability; and you 

need predictability to be able to figure out how many employees 

you have, what time basically are they going to be retiring and are 

they going to have the funds at this particular time. And what I 

also understand is that one of the questions that was answered is 

that a majority of our companies actually have enough money in 

their funds. It has basically been the Tax Code that has hurt a 

number of the companies; when they were earning a lot of money, 

they were not allowed to put a lot of money back in. When times 

are bad, obviously they do not have the money to put it into it. 

So I guess what I am looking for, with the plan that we are looking at through this committee, is that the best plan to have the 

predictability down the road for basically our corporations? 

Ms. GHILARDUCCI. I will be short. I know that everybody wants 

to say something. 

I think that the way that you are treating the current shortfall 

and the PBGC by hiking premiums a huge amount actually would 

make a company think, oh, when another industry goes down and 

the PBGC wants money, they are going to come back to me. They 

will stiff the healthy companies. 

I want to say that the industry approach is the only thing that 

makes sense. We should segregate out the airline industry’s liabilities and pay for it. Pay it down with a $1 or $2 ticket tax, a temporary tax on JetBlue, Southwest, on all of the airline industry like 

we did with the miners. 

47

But I am answering your question. A move like that from Congress would signal to corporations that we have a defined benefit 

plan and an insurance plan that takes care of idiosyncratic bankruptcies. We are not going to make you take the losses of industry 

collapses. And that would be a very good signal of predictability 

that you could send to employers. 

Mrs. MCCARTHY. What do you think about, as far as what we are 

planning on doing here, actually forcing some companies not to 

make any decisions on—maybe not do anything on their pension 

plans or going into the 401(k) plans versus really a defined benefit? 

Ms. GHILARDUCCI. I am sorry, could you repeat that? You think 

this bill actually encourages 401(k) plans? 

Mrs. MCCARTHY. I am asking you. 

Ms. GHILARDUCCI. Yes, that is what my written testimony appealed to by really asking the credit balances to be foreshortened. 

To actually show that the premiums can go up a huge amount, to 

have a modified yield curve that may not be explicable and therefore is unpredictable, the only place an employer could be encouraged to go is a 401(k), and those are not real pension plans. They 

shift all the risk of accumulation onto the employees. 

So if that is what you want to do, do not call it pension protection; it is eliminating these kinds of plans. 

Mrs. MCCARTHY. I agree with you, especially with the 401. We 

are just hearing everything up here about, let’s go 401. It is great 

for us to save into the 401(k) plans or Thrift Savings or anything, 

but it is not definite. 

Thank you. I yield back the balance of my time. 

Chairman BOEHNER. The Chair recognizes the gentleman from 

New York, Mr. Kuhl. 

Mr. KUHL. Thank you, Mr. Chairman. And thank you for scheduling this event so that we could have the benefit of the testimony. 

And thank you, members of the panel, for your contributions today. 

I am curious, I have enjoyed the questions and the answers that 

you have been giving, and I was noticing in your opening statements that two of you, I think out of the three of you, indicated 

that if this bill were to pass, in fact it would be a disincentive for 

employers to continue with defined benefit plans. I am curious, because I haven’t heard anybody ask the question, what would you 

do—I understand the benefits of a defined benefit plan and why 

employers—you have talked about older workers and retaining 

them and that sort of thing. But I am curious as to what you would 

do, if it is such a good plan to encourage employers—recognizing 

in fact that there are significant liabilities out there that certainly 

we as a body have to recognize and want to protect the people who 

are enrolling in these plan—what would you do, or what would you 

suggest we include in this bill, to encourage employers to not only 

continue defined benefit plans, but actually think about using them 

as they are opening new businesses?

Ms. GHILARDUCCI. This bill should have cash balance language in 

it. If it is a comprehensive bill and if you do not want to give the 

impression that you are encouraging 401(k) over DB, you have to 

have the cash balance provision in there. I also think that in this 

bill you should segregate out the liabilities from the airline indusVerDate 0ct 09 2002 10:16 Jul 26, 2006 Jkt 000000 PO 00000 Frm 00051 Fmt 6633 Sfmt 6602 H:\NNIXON\DOCS\FC\6-15-05\21841.TXT DICK
48

try and find another revenue stream to pay for it. This bill should 

hike premiums, but on a much less startling basis. 

This bill should have encouragements for credit balances to be 

accrued. They are not there; the credit balances are discouraged. 

This bill should discourage lump sum payouts and not encourage 

them like this bill does. 

So the points you hit in this bill are the right ones to look at, 

but they are working in the opposite direction. 

Ms. FRANZOI. I also think that this bill, as we said earlier, is a 

good start in going forward on it. But it needs to be something that 

gets rid of complexity and simplifies it for employers and helps 

businesses to have predictability as they are going forward with 

the funding. 

Once again, you get into the yield curve which, as I said earlier, 

I think is like a snapshot picture. You cannot compare it to auto 

loans and home mortgages, which are fixed things. This is almost 

like a fictional picture of what the plan looks like, and if employers 

do not have predictability and they are going to see this up and 

down movement with their funding, it is going to distract them 

from wanting to continue a plan or to put a plan in if they do not 

have one. 

Mr. KUHL. Thank you. 

Mr. Pushaw, would you care to make a contribution? 

Mr. PUSHAW. I agree with the professor, for example, in at least 

addressing, whether it is in this bill or a separate stand-alone bill, 

the cash balance attributes. They really are, when you talk about 

simplification, cash balance plans, albeit in the past from time to 

time they have been introduced at companies in the wrong way, 

they have been misused. But as any tool, they can be used for good 

as well as bad, and they have been misused. And we have seen the 

headlines of those cases where they have been misused, but that 

does not mean the cash balance plans are bad. 

Getting the cash balance plans, giving them a solid foundation, 

is probably, I would think, my first priority. Dealing with those airlines and steel industries probably is the second priority. 

Mr. KUHL. I yield back the balance of my time, Mr. Chairman. 

Chairman BOEHNER. The Chair recognizes the gentleman from 

Massachusetts, Mr. Tierney. 

Mr. TIERNEY. Thank you, Mr. Chairman. 

I thank all the witnesses today for your testimony and your answers to this. 

Let me start with two questions I want to try to get to. One is 

the PBGC, at least with respect to the airline, steel—those industries that are a problem like that ought to have some reinsurance 

mechanism, and several of you have mentioned segregating out the 

airlines and dealing with that separately from this problem. 

Is this something we should do structurally as we do this bill, to 

not have us make each one be drawn out when it happens, but deal 

with it as it goes along? 

Ms. GHILARDUCCI. I actually do not think it should be done structurally. Collapses of industries do not happen all the time. But to 

do it on an ad hoc basis like we would, it would send a signal that 

this is the way that PBGC is going to handle it. 

49

Mr. PUSHAW. We have mentioned before, the old lists that PBGC 

used to collect and publish, the ‘‘Iffy 50,’’ the 50 most poorly funded 

plans in the Nation that was replaced with the section 4010 filings. 

My comments earlier, I think are appropriate in that I would rather see PBGC structurally turned into an advocate, so that these 

early warning system devices like the ‘‘Iffy 50’’ or the 4010 are then 

acted upon early; that they are given enough authority to go into 

these sponsoring organizations and say, What are you going to do 

now? 

We have heard in the industry quite a bit about PBGC saying 

that, if you have been, or every plan that has terminated and 

dumped liabilities on our doorstep have been in junk bond status 

at least 10 years. 

I think that is even inherent in some of the administration proposal language. If that is such a well known, documented fact, then 

getting PBGC to the doorstep of that organization to do something 

about it in year one or year two with a combination of the indicators of underfunding and junk status, that is the time to act. 

Chairman BOEHNER. We feel they don’t have that authority right 

now. 

Mr. TIERNEY. We don’t believe they have that authority right 

now. 

Mr. PUSHAW. I do not believe that they have that authority if 

they did not act on it sufficiently. 

Ms. GHILARDUCCI. PBGC has an award winning early warning 

system where they have all the data necessary and they act on it 

by basically jawboning. Especially if a company has an underfunded plan and looks like it is going to be taken over they kind 

of jawbone and get it over early. I am surprised they are not here 

asking for more authority to intervene earlier. I don’t know why 

they are not doing that. 

Mr. TIERNEY. Thank you. On a separate issue that we have 

talked a lot about, the cash balance plans, and I think Mr. Pushaw 

said it best, they have it bad now because of the way they were 

implemented in certain instances, and generally I see people shy 

away almost when you start saying that. Could one or more of you 

just explain for me in broad terms what a good cash balance startup would look like that people might feel comfortable with? 

Mr. PUSHAW. Sir, if I can digress a little bit from your point of 

your question, it is the issues that I think we have all seen with 

cash balance isn’t necessarily the end product. It is not necessarily 

that, you know, this particular cash balance plan credits like a 

401(k) does, maybe 6 percent of pay into my account each year, and 

some of these ongoing details. The issues seem to be typical of a 

change from a final pay, final pay based to defined benefit plan, 

and I make that distinction because it is in the last 10 years of 

your career on any of that kind of plan that your benefit value skyrockets. Any time we change those plans, whether we are changing 

benefit structure, whether we are modifying some earlier retirement provisions, or even going to cash balance, even without going 

to cash balance, any time you change those that group of people 

are the ones that get hurt. 

So there is almost always some grandfathering, some protections, 

some transition for those folks that are so far down the defined 

50

benefit path in their career that switching to a 401(k), a savings 

share plan, or, in essence, a cash balance plan, will be hurt severely. So it is in those transitions when things change that we 

need to be particularly careful to address limiting how those things 

change, who would change, who it affects, how you communicate 

that to the employees because, in fact, some of these transitions 

from traditional defined benefit plans to cash balance plans were 

not communicated to the employees. 

Mr. TIERNEY. Thank you, sir. 

Ms. GHILARDUCCI. But that only refers to change in their traditional plans to cash balance. I think you were asking about an initial cash balance plan. They would be liked by young workers and 

old workers. They would be preferable to a 401(k) because your employer would set aside money for you in an account and guarantee 

a return. That is why they are insured by the PBGC and they are 

defined. But you can’t get at it to buy a new house or anything else 

that you do. And one of the problems is that they are cashed out 

when people leave the firm, and that has got to be actually firmed 

up. 

But if cash balance plans were sold by vendors and they were, 

they had a better reputation, I think many employers would implement them and maybe perhaps just have a 401(k) as a supplement. 

Mr. TIERNEY. And you think they would be as strong as the current DB plans in terms of at the end of a person’s career? 

Ms. GHILARDUCCI. No, they wouldn’t be as strong. They wouldn’t 

have the skyrocketing acceleration, and you might not get the personal benefit from it as your employer. What you want is your 

older workers to stay on the job. The DB system is doing that very 

well, and we are going to need that as we go into the future as the 

workforce ages. So already I have conceded that cash balance plan 

is our hope, but maybe some other companies will think that traditional defined benefit plans where they were confronted by these 

older workers will implement them. Having a clear flight path for 

cash balance plan doesn’t mean that traditional plans won’t be attractive. 

Chairman BOEHNER. The gentleman’s time has expired. 

Mr. TIERNEY. Thank you. 

Chairman BOEHNER. Chair recognizes the gentlelady from Washington, Ms. McMorris. 

Ms. MCMORRIS. Thank you, Mr. Chairman, and I, too, want to 

thank each of you for being here today and sharing your perspectives. It has been very helpful. I had a question for Ms. Franzoi. 

For the past few years, we have all heard that the current funding 

rules are simply not working. And if you read the newspaper or 

watch the news, there is more than enough examples to choose 

from. In your testimony, you state that restrictions on benefit accruals for greatly underfunded plans are overly intrusive and that 

the current credit balance system should remain virtually intact. 

How can you essentially defend status quo rules which have contributed significantly to the current state of our pension system? 

Ms. FRANZOI. I don’t think that you could say that having the 

credit balances or allowing plans to increase their benefit have so 

substantially contributed to where we are at today. There are many 

other factors in there that have gone to this, and I think as the 

51

professor has testified and what I have seen in my experience, 

there are a lot of really healthy plans out there. And they developed those credit balances with one idea, and now to turn around 

and change it, really puts them at a disadvantage. I think businesses look at these plans as an attraction and a retention tool. 

It is important to business to offer that to their employees, and 

most of us have been, I think, responsible plan sponsors. And our 

goal is to keep those plans well funded. So this is sort of a quick 

reaction to something that is happening in the airline industry. But 

I don’t think that is indicative of what all of us have done or how 

we financed our plans or how we have set up our asset allocations 

to fund these plans and make them viable. 

Ms. MCMORRIS. Thank you. 

Chairman BOEHNER. Any other questions for witnesses? If not, 

we want to thank our first panel for their contributions to our efforts, and we want to invite the second panel to come forward. 

And just for everyone’s information we do expect to have a series 

of at least five votes occur around 1 o’clock today. So we will go as 

far as we can and then make some decisions about how we proceed. 

So again thank you. The committee will stand in recess for 5 minutes. 

[Recess]. 

Chairman BOEHNER. I want to welcome our second panel today 

who are here to discuss the multi employer reforms in our bill. The 

first witness will be Mr. Timothy Lynch. Mr. Lynch holds the position as President and CEO of Motor Freight Carriers Association. 

He joined MFCA in October of 1997. MFCA is a National Trade Association representing the business interests of unionized general 

freight motor carriers. It is also the bargaining agent for those 

truck companies who are signatories of the Teamsters national 

master freight agreement. Prior to joining MFCA, Mr. Lynch was 

Vice President, Legislative Affairs of the American Trucking Association, where he was responsible for directing ATA’s legislative 

program on Capitol Hill operations. From February of 1982 until 

December of 1992, Mr. Lynch was Vice President for Government 

Affairs at Roadway Services, Incorporated. 

We will then hear from Mr. Andy Scoggin, and Mr. Scoggin is 

Vice President of Labor Relations for Albertsons, Inc. and has been 

with Albertsons since 1993. Prior to that time, Mr. Scoggin was an 

attorney for a San Francisco Bay Area law firm, and he has served 

on the board of trustees on a number of Taft-Hartley trust funds 

over the last decade. He currently serves as a management trustee 

on the Western Conference Trust Pension Fund, one of the largest 

private sector Taft-Hartley pension trust funds in the United 

States. 

Mr. Scoggin is a member of the International Foundation of Employee Benefit Plans. He also serves on the Pension Legislation 

Task Force of the Food and Marketing Institute and is a member 

of the International Foundation of Employee Benefit Plans. 

And then lastly, we will hear from Judith Mazo. Ms. Mazo is the 

Senior Vice President and Director of Research for the Segal Company with responsibility for directing research and providing guidance on public policy, legislative and regulatory issues. And before 

joining the Segal Company, Ms. Mazo was engaged in a private law 

52

practice here in Washington specializing in ERISA and serving as 

a special counsel to the PBGC and as a consultant to the Pension 

Task Force on the Committee on Education and Labor of the U.S. 

House of Representatives. She was the senior attorney for the 

PBGC and executive assistant to its general counsel from 1975 to 

1979. 

So I want to thank the three of you for coming here today and, 

Mr. Lynch, you can begin. 

STATEMENT OF TIMOTHY LYNCH, PRESIDENT AND CEO, 

MOTOR FREIGHT CARRIERS ASSOCIATION 

Mr. LYNCH. Mr. Chairman and members of the committee, good 

morning, or good afternoon. I want to begin by first thanking 

Chairman Boehner for holding this hearing on H.R. 2830. I also 

want to thank all the members of the committee and their staff 

and certainly the members and staff of the Employer Employee Relation Subcommittee for all of their hard work in developing a legislative proposal that is the subject of today’s hearing. 

While I cannot speak to all of the provisions of H.R. 2830, I can 

say that with respect to title II, the Funding Rules For Multiemployer Defined Benefit Plans, the sponsors of H.R. 2830 have done 

something at times unique in Washington. You have addressed a 

problem before it becomes a crisis. You are doing that by providing 

the tools for labor, management and plan trustees to deal with a 

problem without resorting to additional government regulation. Additionally, you are dealing with a problem before it grows so large 

that the only recourse is to government intervention through the 

PBGC. In our view, that is no small accomplishment, and we 

pledge to work with you to ensure enactment in law. 

I am here today as a representative of the Trade Association of 

Trucking Industry Employers who, by virtue of their collective bargaining agreement, are major participants in a number of multiemployer pension plans. In addition, I was a participant in discussions 

that began last October with other industry and labor representatives that ultimately resulted in a coalition, the Multiemployer 

Pension Plan Coalition, that developed a legislative proposal addressing many of the problems facing multiemployer pension plans. 

Because H.R. 2830 contains many of the recommendations of the 

Coalition, I believe it represents or presents an excellent opportunity for legislative action. The Coalition proposal is the only proposal that has the full support of contributing employers, organized 

labor, and those responsible for the governance and administration 

of multiemployer plans; in other words, all of the parties most directly affected by the MEPA statute. 

I would like to focus my comments today on two provisions of 

H.R. 2830, funding rules for multiemployer plans and endangered 

status and those in critical status. Both of these provisions are 

similar to recommendations that the Coalition proposed but they 

contain significant differences that I would like to highlight. 

The Coalition proposal envisioned an early warning system for 

plans that were at risk but not necessarily heading for severe financial difficulties. Plans in this category would be required to develop a benefit security plan to improve the funding ratio. That approach can probably be described as a soft benchmark. H.R. 2830 

53

establishes a hard benchmark with very stringent and time definite 

standards as part of the funding improvement plan. Plans at the 

higher end of the endangered category, for example, those with a 

funding ratio of between 75 and 79 percent, undoubtedly will be 

able to meet the one-third improvement benchmark. 

Unfortunately plans at the lower end; for example, those with a 

funding ratio between 66 and 69 percent, will have a virtually impossible task. The level of benefit modifications coupled with additional employer contributions needed to meet that benchmark over 

the 10-year time frame will be very detrimental, in our view, to 

both contributing employers and plan participants. We would request that the committee give consideration to alternative approaches, maintaining the benchmarks, but not ones that create an 

insurmountable and unreasonable financial burden on contributing 

employers. 

With respect to the funding rules for multiemployer plans in critical status, this provision is similar to the approach suggested by 

the Coalition’s category for plans with severe funding problems or 

what has been referred to as the red zone. Under the Coalition proposal, the most difficult and controversial remedies, additional employer contributions in the form of a mandatory surcharge and benefit modifications, are reserved for those plans that face the severest funding problems. This is in part designed as a strong incentive 

to plan trustees to do all they can to solve the plan’s problem before entering the red zone category. 

I believe it is to the credit of those in the Coalition and the interests that they represent that they recognize the risk and concern 

attendant to both additional contributions and benefit modifications. Any significant increases in employer contributions run the 

very real risk of jeopardizing the very large pool of small employers 

typically involved in multiemployer plans. 

Conversely, any significant modifications in the benefit plan 

raise important issues of labor management relations, employee 

trust, and fundamental fairness to retirees. I say this somewhat 

gingerly, but I can assure the members of this committee that you 

will have no more spirited debate over this issue than we had in 

the Coalition. 

But we understand that you cannot solve the problems facing a 

severely underfunded plan without both components. I would urge 

the committee to include both concepts as requirements for plans 

in the critical status category. 

Mr. Chairman, I want to close by once again praising the efforts 

of this committee in addressing the problems facing multiemployer 

plans. We will do everything we can to ensure final passage of a 

balanced and fair approach, and we believe that H.R. 2830 starts 

us well on our way toward that goal. Thank you. 

Chairman BOEHNER. Thank you, Mr. Lynch. 

[The statement of Mr. Lynch follows:]

Prepared Statement of Timothy P. Lynch, President and CEO, Motor 

Freight Carriers Association 

Mr. Chairman and Members of the Committee on Education and the Workforce, 

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 

John Boehner for holding this hearing on H.R. 2830, the Pension Protection Act of 

54

2005. I also want to thank all of the members of the Committee, their staffs and 

certainly the staff of the Employer-Employee Relations Subcommittee for all of their 

hard work in developing the legislative proposal that is the subject of today’s hearing. 

While I cannot speak to all of the provisions of H.R. 2830, I can say that with 

respect to Title II—Funding Rules for Multiemployer Defined Benefit Plans—the 

sponsors of H.R. 2830 have done something at times unique in Washington. You 

have addressed a problem before it becomes a crisis. You are doing that by providing the tools for labor, management and plan trustees to deal with a problem 

without resorting to additional government regulation. Additionally, you are dealing 

with a problem before it grows so large that the only recourse is to government 

intervention through the Pension Benefit Guarantee Corporation. In our view, that 

is no small accomplishment and we pledge to work with you to ensure enactment 

into law. 

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 pension plans. In addition, I was a participant in discussions that began last October with other industry and labor representatives that 

ultimately resulted in a coalition—the Multiemployer Pension Plan Coalition—that 

developed a legislative proposal addressing many of the problems facing multiemployer pension plans. 

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’ National Master Freight Agreement, one 

of three national Teamster contracts in the transportation industry. 

MFCA member companies are key stakeholders in multiemployer pension funds. 

They are concerned about the current framework for multiemployer pension plans 

and strongly believe that if not properly addressed, the problems will increase and 

possibly jeopardize the ability of contributing employers to finance the pension 

plans. The end result could put at risk the pension benefits of their employees and 

retirees. 

Development of Coalition Proposal 

Last October, we began participating in a small working group of trucking company and union representatives to try to develop recommendations that would be 

acceptable to multiemployer plans, unions and contributing employers. The objective 

was to develop a legislative proposal that would alleviate the short-term consequences of funding deficits and promote long-term funding reform for multiemployer plans. As a representative of contributing employers, I entered those discussions with a clear mission to protect the economic interests of my membership. My 

union counterparts entered with a similar mission to protect the interests of their 

membership. 

Early on in those discussions, we agreed on several fundamental issues that ultimately formed the basis for our recommendations. 

• Because of the diversity of multiemployer plans, a one-size-fits-all approach 

would not be productive. Instead remedial programs would be targeted to those 

plans facing the greatest financial problems. 

• Multiemployer plans function as a quasi-PBGC, with contributing employers assuming plan liabilities and shielding the federal agency from that responsibility 

until plan bankruptcy. Unfortunately, plan trustees don’t have all the tools available to the PBGC to address funding problems. 

• Furthermore, most of the tools available to address funding problems become 

available too late in the process and are often viewed as ‘‘last-resort’’ remedies by 

federal agencies. 

• All parties to the plans deserve more timely and meaningful disclosure of information about the status of the plans. 

• The need to establish an early warning system for ‘‘at risk’’ plans and a separate category for ‘‘severely underfunded’’ plans. 

• The burden to fix the problem of severely underfunded plans should not be 

borne disproportionately by any one party to the plans. To do otherwise would, in 

fact, jeopardize the continued viability of the plan and its defined benefits. 

This process ultimately was expanded to include employer and union representatives from other industries. The result is a coalition proposal that has the support 

of a wide range of business and labor organization interests. 

55

Recommendations for Legislative Action 

From the perspective of the contributing employers, the key elements of the coalition proposal are as follows. 

Funding Rules 

Under the proposal, multiemployer plans will be required to have strong funding 

discipline by accelerating the amortization periods, implementing funding targets 

for severely underfunded plans and involving the bargaining parties in establishing 

funding that will improve plan performance over a fixed period of time. In addition, 

the proposal limits the ability for plan benefit enhancements unless the plan 

reaches certain funding levels. 

Funding Volatility 

By virtue of their collective bargaining agreements, contributing employers must 

make consistent payments regardless what gains are achieved in the financial markets. (This is in contrast to single employer plans that may avoid contribution payments in lieu of above-average market returns.) However, the volatility of these 

plans occurs in the form of funding deficiencies. The coalition proposal addresses 

this situation by allowing the plans to use existing extension and deferral methods 

to permit time for the bargaining process to address the underfunding over a rational period of time. 

Earlier Warning System 

The coalition proposal establishes a ‘‘yellow zone’’ or early warning system. The 

goal of the yellow zone concept is to make sure plans are cautious in the ability to 

have affordable benefit levels. Additionally, plans in the yellow zone must improve 

their funded status in a responsible manner, one that does not put extreme pressure 

on the benefits provided or eliminate the ability for employers to operate in a highly 

competitive marketplace. The coalition proposal strikes a reasonable balance 

through creation of a bright line standard for an improving funded status but not 

one that creates an insurmountable and unreasonable financial burden on contributing employers. While it is important that yellow zone plans develop a program 

for funding improvement, the burden to do so should be commensurate with the 

ability to recover over a rational period of time. 

Plans With Severe Funding Problems 

Under the coalition proposal, plans facing severe funding problems are in a ‘‘red 

zone’’ or essentially reorganization status. When a plan is in reorganization status, 

extraordinary measures will be necessary to address the funding difficulties. It is 

here that the concept of shared responsibility for balancing plan assets and liabilities fully comes into play. Reorganization contemplates a combination of contribution increases—above those required under the collective bargaining agreement—

and benefit reductions—though benefits at normal retirement age are fully protected—to achieve balance. 

Transparency and Disclosure 

The Pension Funding Stability Act of 2004 greatly improved the transparency of 

multiemployer plans. The coalition proposal expands those disclosures and places 

additional disclosure requirements for plans that are severely underfunded in the 

red zone. 

Withdrawal Liability 

The coalition proposal attempts to strengthen and clarify withdrawal liability 

rules to protect the remaining contributing employers from assuming a disproportionate and unfair burden from non-sponsored participants. 

Pension Protection Act of 2005—Title II Multiemployer Plans 

How then do we view Title II of H.R. 2830? We believe that H.R. 2830 addresses, 

in part, all of the issues that we suggested were in need of reform. Several provisions of the legislation represent a significant—and innovative—approach to solving 

the funding problems facing multiemployer pension plans. We believe that H.R. 

2830 meets the overall objective of alleviating the short-term consequences of funding deficits while promoting long-term funding reform for multiemployer pension 

plans. 

Early Warning System 

H.R. 2830 contains the suggested early warning system for plans viewed as ‘‘at 

risk’’ through the establishment of a category called, ‘‘endangered plans.’’ While we 

are in agreement with this approach toward financially ailing plans, we have one 

very important—and critical—issue that needs to be addressed in order to gain our 

full support. 

56

The coalition proposal contained what can be described as ‘‘soft’’ benchmarks for 

plans in the endangered category while H.R. 2830 establishes very stringent and 

time-definite standards. Our rationale for a softer schedule takes into consideration 

that plans in this category will vary in the ability to improve their funding status 

over a defined time line. While plans at the higher end of the category (e.g., 75-79%) 

undoubtedly will be able to meet the 33 1/3% improvement benchmark, plans at the 

lower end (e.g., 66-70%) will have a virtually impossible task. The level of benefit 

modifications coupled with additional employer contributions needed to meet this 

benchmark will be detrimental to both contributing employers and plan participants. 

We would request that the Committee give consideration to alternative approaches to the treatment of plans in the endangered category and we would be 

willing to provide suggestions to accomplish that goal. While we certainly agree that 

the patient needs help, we cannot support an approach that potentially harms—if 

not kills—the patient. 

Plans With Severe Funding Problems 

H.R. 2830 establishes a second category of plans—‘‘critical’’—that is designed to 

address plans with the severest funding problems. Under the coalition proposal, the 

most difficult and controversial remedies—additional employer contributions and 

benefit modifications—are reserved for those plans that face the most difficulties. 

The members of the coalition recognize—and don’t take lightly—the impact of additional employer contributions and benefit modifications. Any significant increases in 

employer contributions run the very real risk of jeopardizing the large pool of small 

employers typically involved in multiemployer plans. Conversely, any significant 

modifications in the benefit plan raise important issues of labor/management relations, employee trust and fundamental fairness with retirees. 

However, all members of the coalition recognize that we cannot solve the problems 

facing ‘‘critical’’ plans without those two tools. Consequently, I would urge in the 

strongest terms possible that the Committee give consideration to including language that puts meaningful remedies back into the ‘‘critical’’ category of plans. 

Funding Rules 

H.R. 2830 will require plans to have strong funding discipline by accelerating the 

amortization periods, implementing funding targets for severely under funded plans 

and involving the bargaining parties in establishing funding that will improve plan 

performance over a fixed period of time. In addition, H.R. 2830 will limit the ability 

for plan benefit enhancements unless the plan reaches certain funding levels. While 

the legislation proposes a 15 year amortization schedule for increases and decreases, 

we would ask that further consideration be given to a 10 year schedule. We believe 

a 10 year schedule will provide stronger funding discipline. 

Funding Volatility 

H.R. 2830 attempts to provide additional tools to plan trustees to address the 

problems of a short-term funding deficiency and funding volatility. The coalition proposal addressed this issue by allowing the plans to use existing extension and deferral methods to permit time for the bargaining process to address the under funding 

over a rational period of time. We would urge the Committee to consider a more 

expansive list of tools for plan trustees to utilize in addressing funding volatility. 

Additionally, one of the objectives of the coalition was to preclude funding deficiencies—and the attendant penalties—from occurring during the collective bargaining agreement cycle. In the case of the excise tax penalty, this provides no benefit to plan funding and represents a punitive assessment against contributing employers. We would hope that the Committee shares that view. 

Transparency and Disclosure 

H.R. 2830, coupled with the earlier requirements under the Pension Funding Stability Act, provide additional information to plan participants, contributing employers, and employee organizations that should improve the dissemination of important 

plan information. 

Withdrawal Liability 

H.R. 2830 strengthens and clarifies the withdrawal liability rules to protect contributing employers from assuming a disproportionate and unfair burden from nonsponsored participants. 

Mr. Chairman, thank you for giving me the opportunity to present the views of 

the Motor Freight Carriers Association. I look forward to working with the members 

and staff of this Committee on the Pension Protection Act of 2005. I would be happy 

to answer any questions you may have. 

57

Chairman BOEHNER. Mr. Scoggin. 

STATEMENT OF ANDY SCOGGIN, VICE PRESIDENT FOR LABOR 

RELATIONS, ALBERTSONS, INC. 

Mr. SCOGGIN. Thank you, Mr. Chairman, members of the committee. Thank you for allowing me to testify today. I am testifying 

on behalf of Food Marketing Institute and its pension legislation 

task force. FMI represents 26,000 retail food stores across the 

country, many of which participate in multiemployer plans. 

As you mentioned in your outline, Mr. Chairman, my experience 

is not as an actuary but as a trustee and a collective bargainer addressing these issues at the table. I am pleased to appear before 

the committee today to express our views on H.R. 2830, the Pension Protection Act. Multiemployer pension plans provide benefits 

to almost 10 million workers and retirees in the United States. 

However, the past 10 years have exposed areas in existing law 

governing multiemployer pension plans that are inconsistent with 

the goal of stable and long-term decision making. We believe that 

responsible multiemployer plans can continue to maintain strong 

and viable funds and the minority of multiemployer plans which 

are facing greater risks can resolve their issues if given the necessary tools and legislative guidance. 

Further, we believe that the best decisions will be made when 

both labor and management have a full say in the outcome and are 

provided with the necessary tools to accomplish that goal. I will 

focus on four problem areas of current law. First, current laws and 

rules that govern Taft-Hartley pension plans trap trustees in a narrow corridor between full funding and funding deficiencies. Much 

like the early computer game Pong, the trustees are batted back 

and forth between two arbitrary walls that don’t encourage longterm decision making. 

Second, there are no clear guidelines for multiemployer trustees 

to make longer term funding decisions. Multiemployer plans are 

not required to look out over a number of years to detect potential 

deficiencies in the future and to adopt plans with achievable benchmarks to avoid those deficiencies before they approach. 

Third, access to short-term funding relief after a market downturn is good policy. It allows plans time to regain their momentum 

without taking short-term extraordinary and in some cases damaging action to head off a looming deficiency. Provisions such as 

section 304 of ERISA allow for such relief. Unfortunately, this relief has been hard for trustees to obtain, and there are no clear 

guidelines for trustees or bargaining parties today to determine 

when such relief will be granted. 

Finally, despite important changes in recent legislation access to 

key information, what we call transparency, is still not sufficiently 

able to participants and to contributing employers. 

But the multiemployer pension provisions in H.R. 2830 incorporate four principles that we believe are essential to accomplishing fundamental reform. One, greater transparency and greater flexibility for all plans; two, an early warning system for what 

the proposed legislation terms endangered and critical plans; three, 

immediate steps to stabilize these plans and, perhaps most importantly, objective, quantifiable benchmarks that measure the plan’s 

58

funding improvement, and they provide reasonable targets for the 

trustees and the bargaining parties. 

H.R. 2830 recognizes the unique nature of multiemployer plans 

and we appreciate that. All parties, the contributing employers, the 

unions and the trustees, will be encouraged to act responsibly on 

behalf of employees by taking a longer term view and by correcting 

any funding problems on the horizon before they reach a crisis 

stage. H.R. 2830 provides these solutions in a manner that will 

maintain the collective bargaining rights of all parties. 

In summary, we in the retail food industry strongly support efforts to reform our Nation’s pension funding laws. We are asking 

Congress to give us the tools to manage these plans more effectively so that we can continue to provide solid benefits for our millions of employees and retirees well into the future without ever 

becoming a burden on the Federal Government. 

Again Chairman Boehner, members of the committee, I thank 

you for the opportunity to testify in this important topic and I 

would be happy to answer questions. 

[The statement of Mr. Scoggin follows:]

Prepared Statement of Andrew J. Scoggin, Vice President of Labor 

Relations, Albertsons, on Behalf of the Food Marketing Institute 

Chairman Boehner and Members of the Committee, thank you for allowing me 

to testify today. My name is Andrew Scoggin, Vice President of Labor Relations for 

Albertsons, Inc. Albertsons is the second largest food and drug retailer in the United 

States, operating more than 2,500 stores in 37 states and employing over 240,000 

associates nationwide. Albertsons operates under the banners of Albertsons, Acme, 

Shaw’s, Jewel-Osco, Sav-on Drugs, Osco Drug, and Star Markets, as well as Super 

Saver and Bristol Farms, which are operated independently. We serve more than 

28 million customers each week in our stores. 

During the past decade, I have also served on the Boards of Trustees of a number 

of Taft Hartley multiemployer Trust Funds and I currently serve as a management 

trustee on the Board of Trustees of the Western Conference of Teamsters pension 

fund, one of the largest private sector Taft-Hartley pension trust funds in the 

United States with a current fund balance of $28 billion. 

I am testifying today on behalf of the Food Marketing Institute (FMI), of which 

Albertsons is a member. FMI represents 26,000 retail food stores across the country 

and has worked with its members for a number of years to achieve comprehensive 

pension reform. 

Industry-wide, supermarkets employ approximately 3.5 million Americans, providing employees with good wages and excellent benefits. Employment in the industry is a proven path to success for the American worker. The industry provides a 

variety of retirement plans among the wide range of benefits it offers. The industry’s 

defined benefit pension plans include both single-employer plans (those sponsored 

by an individual company and common in the steel, automotive, and airline industries) and multi-employer plans, in which many companies join together to fund and 

operate the plans (common in the grocery and construction industries). 

I am pleased to appear before the Committee today to express our views on H.R. 

2830, The Pension Protection Act. 

Multiemployer Plan Regulation 

Multiemployer plans are governed, in part, by the Employee Retirement Income 

Security Act (ERISA), like their single-employer plan counterparts. Unlike singleemployer plans, however, multiemployer plans are also governed by the Taft-Hartley Act, which mandates that their Boards of Trustees have equal representation 

by Union and Management Trustees. They are also governed by the Multiemployer 

Pension Plan Amendments Act of 1980, which amended ERISA and provided special 

rules for multiemployer pension plans. 

Multiemployer Plan Impact 

Multiemployer pension plans are an important part of the nation’s private sector 

retirement system, providing pension benefits for approximately 9.7 million workers 

and retirees in the United States. In 1980, Congress recognized some of the funding 

59

and operational differences between single-employer pension plans and multiemployer pension plans. As a result, Congress amended ERISA and established separate and distinct rules for multiemployer plans under the Multiemployer Pension 

Plan Amendments Act of 1980. 

Shortfall of Current Law 

The past 10 years have exposed areas in which existing law governing multiemployer pension plans are not consistent with a goal of stable, long-term decision 

making. We believe that responsible Trustees can continue to maintain strong and 

viable plans, and the minority of plans which are facing greater difficulties can resolve their issues if given the necessary tools and legislative guidance. Further, we 

subscribe to the view that the best decisions will be made when both management 

and labor have a full say in the outcome and are provided with the necessary tools 

to accomplish that goal. 

I will focus on four primary areas of current law that do not contribute to responsible, long-term administration of multiemployer pension plans. 

First, the funding ceiling is too low. As the law is currently written, any employer 

contributions made to a plan once the plan is ‘‘fully funded’’ are no longer deductible. Thus, the law discourages trustees from allowing a plan, during good times, 

to reach full funding. Why not? Because if the trustees come too close to a projected 

‘‘full funding’’ status, given the imprecise nature of actuarial projections the trustees 

could find themselves advising the contributing employers that their contributions 

will no longer be deductible. In that environment, trustees are not encouraged to 

make long term, responsible decisions. This is, unfortunately, counterproductive. 

During periods of strong investment return, such as occurred in the 1990s, funds 

should be encouraged to build up a strong surplus to provide them with a cushion 

for the difficult times. Instead, trustees are forced to decide whether to increase retirement benefits, sometimes to unreasonably high levels, or to suspend contributions. Both of these approaches put funds in a much worse position when the market turns down, as it inevitably will. 

Second, there are no clear legislative guidelines provided for multiemployer plan 

trustees to make longer term funding decisions. Unless required by a collective bargaining agreement, in practice, funds often do not ‘‘look out’’ over a specified number 

of years to detect potential deficiencies and to adopt a plan to avoid those deficiencies. Trustees aren’t required to address potential deficiencies until they are 

confronted by them. Although some funds have implemented long term funding policies, it is still not a common practice in many multiemployer funds. 

Third, access to short term funding relief granted by legislation after a market 

downturn is good policy because it allows trust funds time to regain momentum 

without taking short-term, extraordinary, and in some cases, damaging action to 

head off a looming deficiency. There are provisions in existence today, such as Section 412(e) of the Internal Revenue Code, that allow for such relief. Unfortunately, 

relief under 412(e) has been hard to obtain, and there are no clear guidelines for 

trustees or bargaining parties to determine when such relief will be granted. This 

creates uncertainty in collective bargaining and in the minds of trustees who must 

make significant decisions that hinge on whether such relief will be granted. 

Finally, FMI member employers represent great diversity in terms of size and geography. In many instances, those employers are not represented on the Boards of 

Trustees of the funds to which they contribute. This puts them in a position of limited access to information about the health and funded status of the plans. Despite 

important changes in recent legislation, transparency to key information is still not 

sufficiently available to participants and contributing employers. 

Need for Change 

We applaud the sponsors of H.R. 2830 for recognizing that Congress must address 

multiemployer pensions as part of comprehensive pension reform legislation. Although H.R. 2830 doesn’t address every proposal in FMI’s proposed legislation, we 

believe that it provides a reasonable and rational framework for multiemployer pension plans to work through the problems now facing all pension plans (both single 

and multiemployer). The reforms in H.R. 2830 are not a government bail out. Instead, the proposed legislation will provide the tools which will allow multiemployer 

plans to solve our own pension problems without direct government intervention 

and without putting additional financial pressure on the Pension Benefit Guaranty 

Corporation. We believe, if Congress acts now, multiemployer plans can solve their 

own problems so that they do not become a burden on the federal government or 

the taxpayer. 

60

FMI Task Force 

FMI has been working for the past year to develop recommendations for comprehensive pension reform. In addition, our industry has worked with other employer groups as well as representatives of the trucking industry, the International 

Brotherhood of Teamsters, the Central States Teamsters Pension Fund, and other 

union representatives to address multiemployer pensions funding reform. 

HR 2830—The Pension Protection Act 

The multiemployer pension provisions in HR 2830 incorporate four fundamental 

principles which FMI and its member companies believe are essential to accomplishing fundamental reform: (i) greater transparency and greater flexibility for all 

plans; (ii) an early warning system for what the proposed legislation terms ‘‘endangered’’ and ‘‘critical’’ plans; (iii) immediate steps to stabilize these plans, and (iv) 

perhaps most importantly, objective, quantifiable benchmarks that measure the 

plan’s funding improvement and provide reasonable targets for the Trustees and the 

bargaining parties. We have focused our comments on those provisions related to 

plans in what is referred to in the legislation as the ‘‘endangered’’ category—generally speaking those plans whose funding ratios are between 65 and 80 percent. 

Funding Reforms for ‘‘Endangered’’ Plans 

The requirements of current law permit, and even encourage, plans to take a 

short-term, ‘‘snapshot’’ approach to determine funding requirements and benefit formulas at the expense of long-term projections. H.R. 2830 requires multiemployer 

plan actuaries and trustees to take a longer-term look at a plan’s funding status. 

As you can imagine, it can take a considerable amount of time to make changes to 

multibillion dollar pension funds and early intervention, and action, is the key to 

reform. Under this legislation, trustees will be required to look at the plan’s current 

funding level, as well as seven years into the future, to project a plan’s funding outlook. As a result, potential future funding problems are recognized early, when there 

is still time to correct them in a responsible manner. 

Under H.R. 2830, once an ‘‘endangered’’ plan is identified as such, the plan’s 

Board of Trustees will be required to prepare a Funding Improvement Plan that stabilizes the plan during the interim period. The Funding Improvement Plan further 

requires that the Trustees adopt a schedule that will satisfy the benchmarks and 

allow the collective bargaining parties to adopt contribution levels that are appropriate for the benefits provided by the plan. The schedule would allow for employer 

contribution increases, reductions in future employee benefit accruals, or a combination of both. 

We believe that creating this mechanism will accurately address the unique nature of multiemployer plans, in which collective bargaining agreements fix contribution rates for several years into the future and where, under current ERISA law, 

Trustees are prohibited from retroactively reducing the benefit levels for plan participants. As a result, all parties (contributing employers, unions, and Trustees) will 

have the ability to act responsibly on behalf of employees by providing an accurate 

measure of expected liabilities over a longer time-frame and by providing a schedule 

to correct any funding problems on the horizon before they reach a crisis stage. We 

believe that H.R. 2830 provides these solutions in a manner that will also maintain 

the collective bargaining rights of all the parties. 

Greater Flexibility and Transparency for Multiemployer Plans 

H.R. 2830 encourages employers to build strong surpluses in trust accounts and 

provides greater flexibility to manage short term periods of reduced investment returns by increasing the maximum allowable deductibility of contributions. These 

proposals are critical to allowing plans sponsors to make long term, responsible decisions and open up the funding corridor to allow trustees more room to avoid crises. 

FMI is also concerned about the lack of transparency in multiemployer plans. 

Without current and accurate financial information, contributing employers and 

plan participants cannot work with plan Trustees to address underfunding issues. 

The 2004 Pension Equity Act took a step in the right direction by requiring enhanced disclosure for multiemployer plans, but didn’t go far enough toward getting 

timely information to affected parties. H.R. 2830 improves on the reforms initiated 

by this committee in the last Congress. 

In summary, though H.R. 2830 does not address every issue contained in FMI’s 

proposals, we in the retail food industry strongly support efforts to reform our nation’s pension funding laws. Those of us who contribute to and participate in multiemployer pension plans are asking Congress to recognize the ways in which these 

plans differ from single-employer pension plans, and to enact changes to existing 

laws that will give us the tools to manage these plans more effectively, so that we 

61

can continue to provide great retirement benefits for our millions of employees and 

retirees well into the future without ever becoming a burden on the federal government. 

Again, Chairman Boehner and members of this Committee, I thank you for the 

opportunity to testify on this important topic. I’d be happy to answer any of your 

questions. 

Chairman BOEHNER. Thank you. Ms. Mazo. 

STATEMENT OF JUDITH F. MAZO, SENIOR VICE PRESIDENT 

AND DIRECTOR OF RESEARCH, THE SEGAL COMPANY 

Ms. MAZO. Mr. Chairman, members of the committee, I appreciate the opportunity to testify here today. I am here also like Mr. 

Lynch as representing part of the Coalition that has put together 

its consensus proposal. I am here for the National Coordinating 

Committee for Multiemployer Plans, and I say with pride and trepidation, I have been on their working committee for 25 years. 

And I hope, given the exchanges and what you are saying today, 

to welcome the supermarket industry into our coalition and in the 

near future because the three of us really share your goals, and 

share one another’s goals, and we differ to some extent on some of 

the details along the way. But we really are in agreement both in 

congratulating you. I thought Tim Lynch’s point was very well 

taken at recognizing a problem before it is an absolute crisis, but 

also congratulating you and your staff at doing the very hard work 

at understanding the distinct nature of multiemployer plans and, 

in fact, coming up with special rules for them rather than try to 

shoehorn our plans into a mold that may or may not work for single employer plans, but wouldn’t necessarily recognize the realities 

of our industry. 

With that said, as I said we agree, we think that there is work 

to do both with the staff and among ourselves, we agree with the 

idea of having clear steps, milestones along the way to prevent 

plans from deteriorating to a crisis situation. We are working with 

the Food Marketing Institute to try to come up with agreement on 

what the appropriate technical measurements would be that would 

be comfortable for all. As Mr. Lynch said, it is an extremely delicate balance to get everyone in the room agreed to exactly how far 

one is free to go and not to go. 

I just want to summarize our philosophy on the multiemployer 

plan funding reform rules, and that is basically, we think that it 

is important to tighten the rules for plans, for multiemployer plans 

in general, the funding rules, to avoid preventable problems, to 

make sure that plans do, trustees do, look out into the future, plan 

appropriately, and take future costs into account. Along those lines, 

we applaud what your bill does, which is to bring the government 

along in that regard and raise the deduction limit because we estimate that some close to 75 percent of multiemployer plans were 

forced to increase benefits beyond what their trustees necessarily 

believed was appropriate. 

During the 1990s, to protect the employers from punitive excise 

taxes and loss of tax deductions simply for living up to their bargaining agreement, the plans were doing well in those days. The 

employers were paying what they owed, and the automatic deduction limits that were going to cut off the employers who were living 

62

up to their promises forced trustees to increase benefits and to dig 

the hole that they are now trying to climb out of. 

So we strongly applaud that reform; we believe strongly in tightening the rules and clarifying the rules so plans won’t get into danger and, as both of my colleagues have emphasized, coming up with 

appropriate tools so that when a plan does run into problems that 

the parties can’t control because of the markets, because of demographics, et cetera, they can right the ship before it founders. I 

went on Google yesterday to find who said, I had this deep memory 

from history class in my mind, give us the tools and we will finish 

the job. 

And the first person was Winston Churchill in 1940. The most 

recent person was the President of Tanzania. I think we all sort 

of share that objective as well. So thank you. 

[The statement of Ms. Mazo follows:]

Prepared Statement of Judith F. Mazo, Senior Vice President and Director 

of Research, the Segal Company 

Mr. Chairman and Members of the Committee, I am pleased to be here today to 

discuss the provisions of H.R. 2830 that are aimed at reforming and strengthening 

the funding rules that govern multiemployer defined benefit pension plans. The 

Segal Company is an international employee benefits, compensation and human resources consulting firm that serves close to 30% of the nation’s multiemployer pension plans. Our clients provide a secure retirement income for more than half of the 

workers covered by multiemployer plans. 

I appear here on behalf of a broad coalition of plans, employers, employer associations and labor organizations that sponsor multiemployer plans. The Coalition has 

put forth a carefully negotiated, balanced proposal for multiemployer pension plan 

reform, which has evolved through the efforts of many of the system’s largest stakeholders. It is important to note that they represent the overwhelming majority of 

employers and virtually all of the unions in the construction, trucking, entertainment, service and food industries, as well as the membership of the National Coordinating Committee for Multiemployer Plans (NCCMP), which directly represents 

over 600 jointly-managed multiemployer pension, health, training and other trust 

funds and their sponsoring organizations across the economy. 

I am pleased to see that you will also be hearing today from Mr. Timothy Lynch, 

President of the Motor Freight Carriers Association, which is part of our Coalition. 

We are also hoping to welcome the supermarket industry, today represented by Mr. 

Scroggin, to the group, as our shared goals for multiemployer pension reform are 

much stronger than our current differences over the details of how to reach them. 

The NCCMP is a non-profit, non-partisan advocacy organization formed in 1974 

to protect the interests of plans and their participants following the passage of 

ERISA and the increasingly complex legislative and regulatory environment that 

has evolved since then. The Segal Company has been the technical advisor to the 

NCCMP since its formation; I have been a member of its Working Committee for 

25 years. 

Initially, I want to congratulate Chairman Boehner and his staff for the care that 

you have taken to address the special issues facing multiemployer plans as distinct 

from the single-employer issues and problems. We appreciate the considerable effort 

that you have made to understand the special characteristics of multiemployer 

plans, the industries that support them and the labor-relations contexts in which 

they function, and to shape legislation appropriate for the multiemployer community 

rather than attempting to shoehorn multiemployer plans into the very-different single-employer requirements. We look forward to working together to refine the multiemployer provisions to be sure they achieve your goal and ours—stronger plans that 

do an even better job of meeting the needs of their participants, their employers and 

the industries that foster and sustain them. 

Background 

There are nearly 1600 multiemployer defined benefit pension plans in the country 

today. They provide benefits to active and retired workers and their dependents and 

survivors in virtually every area of the economy. Because of their attractive portability features, multiemployer plans are most prevalent in industries, like construction, which are characterized by mobile workforces. According to the latest informaVerDate 0ct 09 2002 10:16 Jul 26, 2006 Jkt 000000 PO 00000 Frm 00066 Fmt 6633 Sfmt 6621 H:\NNIXON\DOCS\FC\6-15-05\21841.TXT DICK
63

tion from the Pension Benefit Guaranty Corporation, multiemployer plans cover approximately 9.7 million participants, or about one in every four Americans who still 

have the protection of a guaranteed income provided by a defined benefit plan. With 

few exceptions, these are mature plans that were created through the collective bargaining process 40, 50 or even 60 years ago and have provided secure retirement 

income to many times the current number of participants since their inception. Although some mistakenly refer to them as ‘‘union plans,’’ the law has required that 

these plans be jointly managed with equal representation by labor and management 

on their governing boards since the passage of the Labor Management Relations 

(Taft-Hartley) Act in 1947. 

This active participation by both management and labor representatives (many of 

whom are also participants in the plans) provides a clear distinction between single 

employer and multiemployer plans. Multiemployer plans are regulated not only 

under the tax and employee benefits laws and regulations and the watchful eyes of 

the Department of Labor, the Internal Revenue Service and the Pension Benefit 

Guaranty Corporation, with which all private-sector benefit plans must comply. In 

addition, they are subject to a second overlay of regulation, the federal labor-relations laws. Most important among these laws and regulations, the Taft-Hartley Act 

requires that the union and management fiduciaries who serve on these joint boards 

operate these plans for the ‘‘sole and exclusive benefit’’ of plan participants. This, 

of course, echoes and reinforces the capstone of ERISA, which imposes fiduciary obligations on plan fiduciaries that put at risk the personal assets of those who fail 

to meet their obligations. 

It is estimated that over 65,000 employers contribute to multiemployer pension 

plans. The vast majority of these are small employers. For example, in the construction industry, which makes up more than 50% of all multiemployer plans (but just 

over one-third of the participants), it is estimated that as many as 90% of all such 

employers employ fewer than 20 employees. By sponsoring these industry plans, employers are able to ensure that their employees have access to comprehensive health 

and pension benefits and, through the jointly managed training and apprenticeship 

plans, the employers have access to a readily available pool of highly skilled labor, 

none of which would be feasible for individual employers to provide. 

Funding for multiemployer plans comes from the negotiated wage package agreed 

to in collective bargaining. For example, if the parties agree to an increase in the 

wage package of $1.00 per hour over three years, the $1.00 may be allocated as 40 

cents to the health benefit plan, 20 cents to pensions, 5 cents to the training fund 

and the remaining 35 cents taken in increased wages. Although for tax purposes the 

contributions that employers make to employee benefit plans are considered to be 

employer contributions, the funding comes from monies that would otherwise be 

paid to the employees as wages, health coverage or the like. Through collective bargaining the employees explicitly agree to take less in pay in order to fund the pension, so many of them feel as though they are making the contributions. 

For the overwhelming majority of contributing employers, their regular involvement with the plans is limited to remitting their monthly payments to the trust 

funds as required pursuant to their collective bargaining agreements. For these 

small companies, the funds are the perfect substitute for making a large financial 

commitment to human resources functions, providing administrative services and 

meeting today’s complex compliance requirements while providing economies of 

scale that would otherwise make such benefit plans unaffordable for small business. 

In effect, the employers have outsourced their employee benefits operations to the 

multiemployer plans and their labor-management boards of trustees. 

Since the passage of the Multiemployer Pension Plans Amendments Act of 1980, 

participants of multiemployer plans have been covered by the benefit guarantee provisions of the PBGC. Unlike single employer plans, however, the PBGC is more like 

a reinsurer of last resort for multiemployer plans. Instead of having PBGC pick up 

the pieces when an employer goes out of business, all of the employers who contribute to these plans self-insure against the risk of failure by one another. Under 

the multiemployer rules, employers who no longer contribute, or cease to have an 

obligation to contribute to the plan, must pay their proportionate share of any unfunded vested benefits that exist at the time of their departure. This obligation, 

known as withdrawal liability, recognizes the shared obligations of employers in 

maintaining an industry-wide skilled labor pool in which employees may move 

among contributing employers dozens of times during their careers. 

This system of shared risk has protected both the participants and the PBGC, as 

evidenced by the fact that it has had to intervene in fewer than 35 multiemployer 

cases over the past 25 years. The reduced risk to the PBGC is also reflected in a 

much lower premium for multiemployer plans—$2.60 per participant per year, 

versus $19 per participant per year plus a variable premium for single employer 

64

plans. The PBGC guarantees a much lower benefit for multiemployer plans. The 

guarantee formula is expressed as an accrual rate, with the maximum at $35.75 per 

month per year of service. This works out to $12,870 per year for a participant with 

30 years of service, compared with a maximum guaranteed annual benefit for single 

employer plans of roughly $45,000, for someone who retires at age 65. As of the last 

fiscal year, PBGC’s multiemployer guaranty program showed a small deficit—about 

$236 million—which was in fact an improvement over the prior year. So the multiemployer program, which covers more than 20% of the people with PBGC-guaranteed pensions, has a projected deficit equal to about 1% of that projected for the single employer program. 

The multiemployer system of pooled risk and mutual employer financial guarantees has been both one of the greatest strengths and major weaknesses of the multiemployer system. In the early 1980s, the presence, or even the threat of withdrawal 

liability produced a chilling effect on the growth of multiemployer plans that has 

persisted in several industries despite the fact that most have had no unfunded benefits for most of that time. On the other hand, for many, the threat of unfunded 

liabilities provided an incentive to plan fiduciaries to adopt and follow conservative 

funding and investment policies that, in combination with a robust economy, led the 

plans to become fully funded. 

Nevertheless, rather than being able to build a buffer against future economic 

downturns, this success led plans to experience problems at the top of the funding 

spectrum. In the late 1980s and throughout the 1990s, plans began to hit the full 

funding limits of the tax code. Under these provisions, employers that contribute to 

plans in excess of these limits were precluded from receiving current deductions for 

their contributions to the plans. Compounding the situation, employers who continued to make their contributions also faced an excise tax for doing so, despite the 

fact that the collective bargaining agreements to which they were signatory obligated them to continue to make them. Although in rare instances the bargaining 

parties negotiated ‘‘contribution holidays,’’ timing considerations and the fact that 

in most cases the plan fiduciaries and bargaining parties were different people 

meant that plan trustees had no choice other than to increase plan costs by improving benefits to bring plan costs up to the level of plan income to protect the deductibility of employer contributions. Further, once adopted, the actions taken to improve the plan of benefits in order to protect the employers cannot be rescinded 

under the anti-cutback provisions of ERISA. We estimate that over 75% of multiemployer defined benefit pension plans were forced to make benefit improvements as 

a result of the maximum deductible limits, even when the trustees were skeptical 

about being able to cover the costs in the long term. Overall, multiemployer plans 

were very well funded as the plans approached the end of the millennium, with the 

average funded position for all multiemployer plans at 97% (see The Segal Company 

Survey of the Funded Position of Multiemployer Plans—2000). 

In the three years that followed, however, these same plans, like all investors, suffered significant losses as the markets plunged into a deep and prolonged contraction. For the first time since the ERISA funding rules were adopted in 1974—in 

fact, for the first time since before the beginning of World War II—the markets experienced three consecutive year of negative performance. Not only were plans unable to meet their long term assumed rates of return on their investments, like just 

about all investors the plans saw their principal decline. For many of these mature 

multiemployer plans that depend on investment income for as much as 80% of their 

total income, the loss of significant portions of the assets caused a rapid depletion 

of what for most had been significant credit balances in their funding standard accounts. The most recent Segal Company multiemployer funding report shows a significant decline from the 97% in 2000, although the average funded position is still 

relatively healthy at 83%. Nevertheless, these investment losses have left a number 

of plans at all levels of funding facing credit balances approaching zero, meaning 

these plans face a funding deficiency in the near future (see The Segal Company 

Survey of the Funded Position of Multiemployer Plans—2004, attached). According 

to the most recent estimates, as many as 15% of all plans are projected to have a 

funding deficiency by the year 2008 and an additional 13% face the same fate by 

2012 (assuming benefit levels and contribution rates remain unchanged). 

The implications of a funding deficiency for contributing employers, the plans and 

their participants are potentially devastating. Once a plan’s credit balance drops 

below zero, contributing employers may have to be charged additional amounts to 

make up the shortage so that the plan can meet its minimum funding requirements. 

This is above the amounts they have promised to pay in their collective bargaining 

agreements. In addition, they are required to pay an excise tax by the IRS equal 

to 5% of that assessment. It the full shortfall is not made up in a timely fashion, 

the excise tax may be increased to 100% of the shortage. 

65

For many of the contributing employers, especially those in industries like construction that operate through competitive bidding and traditionally have small 

profit margins, they have bid their work throughout the year based on their fixed 

labor costs (including the negotiated pension contributions). For them, receiving an 

assessment for what could be multiples of the total contributed for the year, could 

be enough to drive them into bankruptcy. In this instance, the concept of pooled risk 

among contributing employers means that the shortage amounts as well as the excise taxes owed by the bankrupt employers would be redistributed among the remaining employers, invariably pulling some at the next tier into a similar fate. As 

more and more employers fail, those companies that are more financially secure 

begin to worry about being the ‘‘last man standing.’’ The result is that they will also 

seek ways to abandon the plan before all of their assets are at risk. When all of 

the employers withdraw, the assets of the plan will be distributed in the form of 

benefit payments until the assets on hand are sufficiently depleted to qualify for assistance from the PBGC. At that point, participants’ benefits will be reduced to the 

maximum guaranteed levels, as noted above, which are likely to represent only a 

fraction of the amount to which they would otherwise be entitled. 

A Balanced, Negotiated Industry-Wide Response 

Trustees of most plans faced with the prospects of an impending funding deficiency have already taken action to address the problem to the extent possible. For 

the most part, that has involved reducing future accrual rates or ancillary benefits 

that have not yet been earned, as the current anti-cutback rules prohibit reducing 

benefits that have already accrued, including all associated features such as early 

retirement subsidies and the like. In many cases, this has involved substantial reductions (e.g. 40% by the Western Conference of Teamsters, 50% by the Sheet Metal 

Workers National Pension Plan and the Central States Teamsters Pension Plan, 

and 75% in the case of the Plumbers and Pipefitters National Pension Plan). But 

financial impact of adjusting only future benefits is limited, especially for mature 

plans that have relatively small numbers of active workers earning new benefits. 

These actions on their own may be insufficient to avoid a funding deficiency. Moreover, it can be counterproductive to take too much away from the active workers, 

because they are the ones who must agree to increase funding for the pension plan. 

Additionally, the modest recovery of the investment markets experienced in 2004 

is only marginally helpful. For example, a $1 billion fund in 2000 that suffered a 

20% decline in assets through 2003 would have to realize an annualized rated of 

return of 15% every year for the remainder of the decade to get to the financial position by 2010 it would have had it achieved a steady rate of 7.5% for the full ten 

year period. Other relief, including funding amortization extensions under IRC Section 412(e) or the use of the Shortfall Funding Method, have been effectively precluded as options by the IRS. Consequently, the only alternative available requires 

a legislative solution. 

When the Pension Funding Equity Act of 2004 failed to give multiemployer plans 

short-term relief to help them over the current crisis, various groups began to evaluate alternatives. The objective was to find ways to strengthen plan funding to avoid 

or minimize risks that the trustees and the parties can control, and to provide additional tools to the plan fiduciaries and bargaining parties for plans that face imminent funding crises so that they can bring their liabilities and resources into balance. A broad cross section of groups that deal with many varieties of multiemployer 

plans from many different perspectives entered into extensive negotiations to develop a set of specifications for reform that all could agree on. The resulting specifications for reform reflect a carefully conceived compromise between employer and 

labor groups, undoubtedly quite different from what either group would have designed independently, but reflective of a desire by all parties to preserve the plans 

as valuable sources of retirement income security on a cost-effective basis. The result was the current coalition proposal, a copy of which is attached as an addendum 

to this testimony. Here is a summary of that proposal: 

Summary of Coalition Proposal 

The proposed specifications for multiemployer reform include three major components, supplemented with several clarifying and remedial changes intended to make 

the system work more effectively for plans, their participants and their contributing 

employers. 

The first component is applicable to all multiemployer plans and has two major 

provisions geared to strengthening funding requirements for plan amendments that 

increase or decrease plan costs (specifically unfunded actuarial accrued liabilities) 

related to past service and to require that new benefits designed to be paid out over 

a short period, like 13th checks, be amortized over that payout period. 

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The other major provision would allow plans to build a ‘‘cushion’’ against future 

contractions in investments, and to save for the lean years when times are good, 

by increasing the maximum deductible limit to 140% of the current limits and repealing the combined limit on deductions for multiemployer defined benefit and defined contribution plans. 

The second component of the Coalition proposal applies to plans that have potential funding problems, defined as those with a funded ratio of less than 80%, using 

the market value of assets compared to the actuarial value (as used for minimum 

funding) of its actuarial accrued liability. Such plans would be required to develop 

and adopt a ‘‘benefit security plan’’ that would improve the plan’s funded status. 

Plans in this category would not be able to adopt amendments to improve benefits 

unless the additional contributions related to such amendment more than offset the 

additional costs to the plan. Amendments that violate that restriction would be void, 

the participants would be notified and the benefit increase would be cancelled. 

To provide additional tools to help multiemployer plans deal with looming funding 

problems, they would have ‘‘fast track’’ access to five-year amortization extensions 

and the Shortfall Funding Method if certain criteria were met. IRS authorization 

could be withheld only in certain circumstances and applications would need to be 

acted upon within 90 days or the approval would be automatic. Additional restrictions that currently apply to plans with amortization extensions would also apply, 

although it would be clarified that plans could increase benefits if the result would 

be to improve the plan’s funding because the increase generates contributions above 

and beyond the amounts needed to pay for the benefit increases. 

The third and most critical component involves plans that have severe funding 

problems or will be unable to pay promised benefits in the near future. The intent 

is to prevent a funding deficiency that could trigger a downward spiral of the plan 

and its contributing employers and ultimately thrust the funding of the benefits 

onto the PBGC. This would be accomplished by providing the bargaining parties and 

plan fiduciaries with additional tools beyond those currently available to bring the 

plan’s liabilities and resources back into balance. 

The Coalition proposal modifies the current multiemployer-plan reorganization 

rules to provide a useful mechanism for plan sponsors, much like a Chapter 11 

bankruptcy reorganization. ERISA currently has reorganization rules governing 

plans that are nearing insolvency, but those rules were adopted at a time when the 

major concern was a plan’s ability to meet its payment obligations to current pensioners. Today, even those plans with the most severe funding problems have sufficient assets to meet their obligations to current pensioners. The Coalition proposal 

suggests several new triggers to reorganization that reflect the problems of mature 

plans, recognizing that funding ratios below 65%, a plan’s short term solvency and 

a plan’s demographic characteristics (i.e. the relationship between the present value 

of benefits earned by inactive vested and retired participants to that of currently 

active participants) can play an important role in a plan’s ability to meet its obligations to all participants, current and future. 

Once a plan is in reorganization, notice would be given to all stakeholders and 

the government agencies with jurisdiction over the plans that the plan is in reorganization and describing the possible consequences. Once in reorganization, plans 

would be prohibited from paying out full or partial lump sums, social security level 

income options for people not already in pay status, or other 417(e) benefits (except 

for the $5,000 small annuity cashouts). Within thirty days, contributing employers 

would be required to begin paying a surcharge of 5% above their negotiated contribution rates. If the bargaining agreement covering such contributions expires 

more than one year from the date of reorganization, the surcharge would increase 

to 10% above the negotiated rate and remain there until next round of bargaining. 

Once in reorganization, the normal funding standard account continues to run, but 

no excise taxes or supplemental contributions will be imposed if the plan encounters 

a funding deficiency. 

Not later than seventy-five days before the end of the first year of reorganization, 

the plan fiduciaries must develop a rehabilitation plan to take the plan out of reorganization within ten years. The plan would set forth the combination of contribution increases, expense reductions (including possible mergers), benefit reductions 

and funding relief measures (including amortization extensions) that would need to 

be adopted by the plan or bargaining parties to achieve that objective. Annual updates to the plan of rehabilitation would need to be adopted and reported to the affected stakeholders. Although the proposal anticipates the loosening of the current 

anti-cutback rules with respect to ancillary benefits (such as subsidized early retirement benefits, subsidized joint and survivor benefits, and disability benefits not yet 

in pay status), a participant’s core retirement benefit at normal retirement age 

would not be reduced. Additionally, with one minor exception which follows current 

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law regarding benefit increases in effect less than 60 months, no benefit for pensioners already in pay status would be affected. Finally benefit accruals for active 

employees could not be reduced below a specified ‘‘floor’’ as a means of ensuring that 

the active employees whose contributions support all plan funding, remain committed to the plan. 

The proposal anticipates that these ancillary benefits become available as part of 

a menu of benefits that can modified to protect plans from collapsing under the 

weight of previously adopted plan improvements that are no longer sustainable, but 

that cannot be modified under the current anti-cutback restrictions. Without such 

relief participants would receive lower overall benefits on plan termination and the 

plan would be eliminated for future generations of workers. Within seventy-five 

days of the end of the first year a plan is in reorganization, the plan trustees must 

provide the bargaining parties with a schedule of benefit modifications and other 

measures required to bring the plan out of reorganization under the current contribution structure (excluding applicable surcharges). If benefit reductions alone are 

insufficient to bring the plan out of reorganization, the trustees shall include the 

amount of contribution increases necessary to bring the plan out of reorganization 

(notwithstanding the floor on benefit accruals noted above). The trustees shall also 

provide any other reasonable schedule requested by the bargaining parties they 

deem appropriate. 

The bargaining parties will then negotiate over the appropriate combination from 

among the options provided by the trustees. Under this proposal, benefits for inactive vested participants are subject to reduction to harmonize the impact on future 

benefits for this group as well as for active participants. 

The proposal includes suggestions for: bringing the current rules on insolvency in 

line with the proposed reorganization rules; strengthening withdrawal liability provisions; and providing construction industry funds with additional flexibility currently available to other industries to encourage additional employer participation. 

It also includes provisions that address recent court rulings. One suggested change 

would allow trustees to adjust the rules under which retirees can return to work 

and still receive their pension benefits and another would confirm that plans can 

rescind gratuitous benefit improvements for current retirees adopted after the date 

they retired and stopped generating employer contributions. 

The Challenge 

For more than half a century, multiemployer plans have provided benefits for tens 

of millions of employees who, using standard corporate rules of eligibility and vesting, would never have become eligible. They offer full portability as workers move 

from one employer to another, in a system that should be held out as a model for 

all defined benefit plans. More importantly, the system of collective bargaining and 

the checks and balances offered by joint employer—employee management has enabled the private sector to take care of its own without the need for government 

support. 

Yet the current funding rules, previously untested under the unprecedented unfavorable investment climate experienced in recent years, have the potential not only 

to undermine the retirement income security of millions of current and future workers and their dependents, but to force large numbers of small businesses out of business and eliminating participants’ jobs. 

Your Committee has an ideal opportunity to enact meaningful reform supported 

by both the employer and employee communities, who have coalesced behind a responsible proposal that will enhance plan funding and provide safeguards to plans, 

participants, sponsoring employers and the PBGC, without adding to the already 

burgeoning debt. We know that our proposal is unlikely to be the last word, of 

course, and we embrace the opportunity to work with the Committee and with others, including others in the private sector with a stake in multiemployer plans, to 

strengthen and polish the ultimate result. Along those lines, there are a few points 

regarding the way H.R. 2830 adapts the ideas that have been put forth that we believe deserve mention at this stage. 

Section 202 of the Bill contains new funding and other requirements for multiemployer plans that are in ‘‘endangered’’ status that go well beyond what the Coalition 

has recommended for plans facing potential funding problems (colloquially referred 

to as the ‘‘Yellow Zone’’). While we think there may be some merit in further tightening the reins on plans that may be heading for serious trouble, it is important 

that the standards not be so stringent that they could create insupportable costs for 

employers and thereby harm rather than help with plan funding. With that in mind, 

we are continuing to work with all concerned to come up with workable targets and 

correction mechanisms to help endangered plans to recover. 

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Section 202 also creates a new category—multiemployer plans in ‘‘critical’’ status—which is set up to address the special problems of plans that are near the 

brink of failure. As noted, the Coalition agrees that a program like this is needed 

(in our proposal, it takes the form of a redesigned approach to plan reorganization). 

However, the role of plan trustees at this point is vital to plan survival and, we believe, they need additional authority to restructure and revitalize seriously troubled 

plans substantially beyond what is proposed in H.R. 2830. Again, we anticipate 

working with you and your staff to come up with a suitable solution to these important policy questions, as well as to deal with the inevitable technical issues that 

arise in any legislative effort in this extraordinarily complex area. 

Conclusion 

The Coalition understands that whatever legislation is ultimately passed will include some provisions that are distasteful to the employers, the employees or both, 

because it will of necessity be a compromise. Our aim is to make sure that, in the 

end, the environment for multiemployer plans will be improved, so that they, their 

contributing employers and their participants are all well-served. The alternative is 

not the continuation of the status quo, but a much worse fate that includes: the loss 

not only of accrued ancillary benefits, but a substantial portion of a participant’s 

normal retirement benefit as plans are assumed by the PBGC; the demise of potentially large numbers of small businesses and the loss, not only of pension benefits, 

but the jobs from which such benefits stem; and an increase in taxpayer exposure 

at the PBGC, an agency that is already overburdened. 

In closing, I would like to thank you for taking the time to engage in this important discussion and for the opportunity to be with you here today. 

MULTIEMPLOYER PENSION PLAN COALITION: SPECIFICATIONS FOR MULTIEMPLOYER

PENSION FUNDING PROPOSAL

I. FOR ALL MULTIEMPLOYER PLANS

A. Faster funding 

• Ten-year amortization of the net increase or decrease in unfunded actuarial accrued (past service) liability (AAL) due to a plan amendment increasing or decreasing benefits. 

• If the increase or decrease in AAL results from an amendment adding a benefit 

(not payable as a life annuity) that is payable over less than 10 years, amortization 

over the benefit payout period. 

B. Deductibility 

• The deduction limits for negotiated employer contributions to multiemployer 

pension plans would be 140% of the otherwise applicable funding limits spelled out 

in IRC section 404(a)(1). 

• The combined limit on deductions for defined benefit and defined contributions 

would be repealed for multiemployer plans. 

II. MULTIEMPLOYER PLANS WITH POTENTIAL FUNDING PROBLEMS

A. Trustee-Designed Program for Funding Improvement 

• If, as of the first day of a plan year, a multiemployer plan’s funded ratio is less 

than 80%, the trustees shall design and adopt a benefit-security program that is 

reasonably expected to improve the plan’s funded status. The benefit-security program shall be adopted by the due date, plus extensions, and filed with the plan’s 

Form 5500 for that first plan year, and shall be updated and modified annually 

thereafter until the plan’s funded ratio reaches 80% or more. 

B. Restrictions on Amendments Increasing Past Service Benefits 

• If a multiemployer plan’s funded ratio would be below 80% after taking into account an amendment increasing the amount or value of the plan’s AAL (benefits related to past service), the amendment is prohibited unless——

1. the plan is not in reorganization and will not be put into reorganization as a 

result of the increase, and 

2. reasonably anticipated employer contributions for the plan year equal or exceed 

the sum of the plan’s normal cost plus the annual payment needed to amortize either——

(a) the increase in the plan’s unfunded AAL attributable to the benefit increase 

over a 10-year period and the remaining (pre-existing) unfunded AAL over a 20-

year period, or 

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(b) interest on the plan’s unfunded actuarial accrued liability (including liability 

attributable to the benefit increase) and the plan is not projected to have a 

funding deficiency by the end of the 10-year period. 

Technical Notes: Paragraph (a), above, is determined as if all the provisions of the 

plan amendment and the current contribution rate or, if applicable, the ultimate 

(last) contribution rates provided for under the then-current collective bargaining 

agreements take effect on the first day of such year. 

The actuarial determinations under (a) or (b) may be based on a reasonable estimate of the plan’s AAL and normal cost as determined in the actuarial valuation 

for the preceding plan year. For purposes of applying 2), any credit balances are not 

taken into account. 

Enforcement of benefit restrictions. A benefit increase that violates the above restrictions would be void, and the participants would have to be notified that the 

benefit increase is cancelled. 

C. IRC Section 412(e) Extensions of Amortization Period 

• Fast-track extensions for multiemployer plans. The Secretary shall grant a 5-

year extension of amortization periods to a multiemployer plan that demonstrates, 

with such supporting documentation as the Secretary may require, that the plan: 

1. is projected, using reasonable actuarial assumptions, to have a funding deficiency within 10 years, unless benefits are reduced, contributions are increased and/

or the amortization extension is granted; and 

2. has developed and is carrying out a formal remedial plan that, in combination 

with the amortization extension, would improve the plan’s long-term funded status, 

including the ratio of assets to accrued liabilities, and prevent the funding deficiency 

from materializing (‘‘Remedial Plan’’); and 

3. would require substantially greater benefit reductions or contribution increases 

in the absence of the extension to avoid the funding deficiency, and 

4. is projected to have enough assets to meet its anticipated cash-flow needs if the 

extension is granted. 

• The extension shall be granted unless, within 90 days, the IRS denies it on the 

ground that the submission is incomplete or that the actuary’s analysis or projections are erroneous or unreasonable. 

Technical Note. If a rejected submission is resubmitted within 30 days, the initial 

90-day IRS consideration period, plus an additional 45 days, applies. If a plan fails 

to take the steps described in its remedial plan (including modifications in the remedial plan that are agreed to by IRS), the fast-track amortization extension would 

expire as of the first day of the plan year following the failure and the remaining 

unfunded portion of each charge would be amortized over the remainder of the original amortization period, in accordance with the regular funding rules. 

All of the conditions of IRC section 412(e) (as modified below) apply to a fast-track 

extension. 

• Additional provisions regarding benefit restrictions for multiemployer plans receiving an amortization extension under IRC section 412(e). The existing section 

412(e) benefit restrictions would apply. To encourage increased net contributions to 

the plan, a benefit increase would be permissible if the enrolled actuary certifies 

(and submits the supporting demonstration) that the additional charges to the funding standard account attributable to the benefit increase would be lower than the 

projected increase in credits due to a contribution rate increase that takes effect no 

later than the effective date of the benefit increase. A contribution increase can only 

be counted against the cost of a benefit increase if the added contributions were not 

identified in the remedial plan as a source of the plan’s improved funding or, if so 

identified, if the related benefit increase was addressed in the plan as well. 

D. Shortfall Funding Method 

• A multiemployer plan may adopt the shortfall funding method, or go off the 

shortfall method, once every five years, without IRS permission, but only if it is not 

currently on a fast-track extension of amortization period under IRC section 412(e). 

Technical Note. In the legislative history to ERISA, Congress called on the IRS 

to create the shortfall funding method to protect employers from a funding deficiency between collective bargaining sessions (but not for more than 5 years). 

The proposed change would not affect the plan’s ability to adopt an IRS-approved 

funding method without consent, or to adopt or go off shortfall before the end of a 

5-year period with IRS consent. 

• Prohibition on Benefit Increases. Amendments increasing benefits would be restricted in a plan that elects an automatic change to the shortfall method in the 

same manner that they are restricted in a multiemployer plan that has an amortization extension under IRC section 412(e). 

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III. MULTIEMPLOYER PLANS WITH SEVERE FUNDING PROBLEMS—REORGANIZATION

A. In General 

• Plan reorganization is a process, like Chapter 11 of the Bankruptcy Code for 

a corporation, that provides a plan with additional tools to bring its benefit promises 

and resources into balance. 

• A plan enters reorganization if it is expected to have a funding deficiency or 

to be unable to pay promised benefits in the near term (B, below). 

• A plan in reorganization has latitude to reduce benefits (other than core benefits payable at normal retirement age) (E., F., below), and employers that contribute 

to such a plan must make additional contributions but are temporarily protected 

from unaffordable contribution increases resulting from funding deficiencies. (D, 

below). 

B. Reorganization Triggers 

A multiemployer plan is in reorganization as of the first day of a plan year (and 

remains in reorganization for at least 2 plan years) if the plan’s actuary certifies, 

by a date no later than 21⁄2 months before the end of the prior plan year, that any 

one of the following tests is reasonably projected to be met: 

1. Solvency/funded-ratio test: assets at market plus anticipated contributions 

equal less than 7 years’ projected benefit payments plus administrative expenses 

and, as of the first day of the plan year, the plan’s funded ratio is less than 65%, 

or 

2. Short-term solvency test: assets at market plus anticipated contributions equal 

less than 5 years’ projected benefit payments plus administrative expenses, or 

3. Funding deficiency/funded-ratio test: plan is projected to have a minimum funding deficiency for any of the following 3 plan years (without regard to any applicable 

amortization extension under IRC section 412(e)) and, as of the first day of the plan 

year, the plan’s funded ratio is less than 65%, or 

4. Short-term funding deficiency test: plan is projected to have a minimum funding deficiency for either of the following 2 plan years (without regard to any applicable amortization extension under IRC section 412(e)), or 

5. Contribution/funding deficiency test: As of the first day of the plan year——

• projected contributions for the year are less than the sum of the plan’s normal 

cost for the year plus interest on the unfunded liabilities (regular minimum funding 

assumptions for assets and liabilities), and 

• the present value of the benefits of retired and terminated-vested participants 

is greater than the present value of the benefits of active participants accrued by 

the date of the calculation, and 

• the plan is projected to have a funding deficiency for any of the 3 following plan 

years (without regard to any applicable amortization extension under IRC section 

412(e)). 

Technical Note: The actuarial determinations must be reasonable projections as 

of the first day of the plan year for which the plan will be in reorganization, with 

the value of the plan’s accrued liabilities based on the actuarial assumptions used 

for ongoing plan funding. The projections may be based on the valuation for the 

plan year immediately preceding the plan year for which the determination is being 

made, or, if that valuation has not been completed by the end of the 6th month of 

the plan year, a reasonable projection of the liabilities determined as of the valuation date for the plan year preceding that one. The projected value of assets shall 

be the market value of the assets as of the last day of the 6th month of the plan 

year preceding the year for which the determination is being made (based on the 

most reliable information available to the trustees as of the determination date), 

projected forward at the plan’s assumed earnings rate. 

C. Reorganization: General Requirements 

• Notice would have to be given, by the end of the first month that the plan is 

first in reorganization, to the participants, contributing employers, unions, employer 

bargaining representatives and the PBGC, IRS and DOL that the plan is in reorganization, with a description of the possible consequences. 

• Trustees must develop a rehabilitation plan as is discussed in greater detail in 

Subsection G that would take the plan out of reorganization within 10 plan years. 

The rehabilitation plan (including the schedules described in, G, below) would describe the combination of contribution increases, expense reductions (including possible mergers), funding relief measures and benefit reductions (including benefit reductions permitted because the plan is in reorganization) that would be adopted or 

proposed to the bargaining parties, to achieve this. The rehabilitation plan must be 

filed by 21⁄2 months before the end of the first plan year that the plan is in reorgaVerDate 0ct 09 2002 10:16 Jul 26, 2006 Jkt 000000 PO 00000 Frm 00074 Fmt 6633 Sfmt 6621 H:\NNIXON\DOCS\FC\6-15-05\21841.TXT DICK
71

nization. If within 60 days of the due date for the rehabilitation plan the Trustees 

have not agreed upon a plan, then any Trustee may require the plan to enter into 

an expedited dispute resolution procedure to determine the rehabilitation plan. • If, under all of the circumstances, emergence from reorganization within that 

time frame is not reasonably possible, the rehabilitation plan would describe the alternatives considered, explain why emergence from reorganization is not feasible, 

and lay out steps to be taken to postpone insolvency or otherwise resolve the matter. • A summary of the rehabilitation plan and each yearly update would have to be 

distributed to participants and employers with the annual multiemployer plan funding notice. The full document would be available to them upon request. 

D. Funding Requirements for Plans in Reorganization 

• Thirty days after the plan provides the contributing employer with notice of its 

reorganization status, there will be automatic employer contribution surcharges as 

follows: • The first year, the surcharge is 5% of the contribution rate required by the 

collective bargaining agreement. 

• The second year and thereafter while the plan is in reorganization, the surcharge is 10% of the contribution rate required by the collective bargaining 

agreement. 

• The surcharge will terminate upon the execution of a new collective bargaining agreement which adopts a schedule of benefits published by the trustees pursuant to the rehabilitation plan. • The plan shall have a statutory cause of action to collect surcharges. • Surcharge contributions may not be the basis for benefit accruals. • Normal funding standard account continues to run during reorganization except 

there will be no excise taxes or additional contributions if a funding deficiency occurs while a plan is in reorganization. 

E. Benefit Restrictions for Plans in Reorganization 

• Effective as of the first day of the plan year that the plan is in reorganization, 

the plan shall not pay the following to people retiring on or after that date: lump 

sums, partial lump sums, social security level-income payments or other 417(e) benefits, except for $5,000 small-benefit cashouts. • The IRC section 412(e) restrictions on benefit increases apply. 

F. Benefit Reductions for Plans in Reorganization 

• In General: Core benefits payable at normal retirement age will be protected 

as provided under current law. However, the anti-cutback rules will be revised to 

permit limited modifications of certain protected benefits, as follows: • The otherwise-prohibited benefit reductions that would be allowed while a plan 

is in reorganization would be limited to: 

1. ‘‘benefits, rights and features’’ (e.g., post-retirement death benefits, 60-month 

guarantees, disability benefits not yet in pay status, early retirement benefits and 

the like), 

2. retirement-type subsidies (including, e.g., unreduced QJSA), early retirement 

benefits and payment options other than the 50% joint-and-survivor benefit and single-life annuity, and 

3. as provided under current law, benefit increases that would not be eligible for 

PBGC’s guarantee on the first day of reorganization because they were adopted or, 

if later, took effect less than 60 months before that. 

• Except as provided above, the accrued benefit at normal retirement age could 

not be reduced under the plan reorganization rules. 

• Except for rescission of recent benefit increases, the reorganization rules would 

not authorize reduction in protected benefits of participants who were in pay status 

one year before the first day of the year the plan enters reorganization. . 

• Benefit reductions made under the special authority of plan reorganization 

would be reflected in the minimum funding standard account but not in withdrawal 

liability calculations; surcharges would not be reflected in the employers withdrawal 

liability allocations. 

G. Procedures for Benefit Modification 

• By 21⁄2 months before the end of the plan year in which a plan goes into reorganization, the Trustees must provide to the negotiating parties a sliding schedule of 

benefit modifications and contribution increases that would meet the rehabilitation 

plan. At a minimum, the Trustees must provide the parties with the following 

schedules: 

1. A schedule of the benefit cutbacks and other measures required to bring the 

plan out of reorganization if there are no further increases in contributions to the 

72

plan. If the plan cannot emerge from reorganization without contribution increases, 

then the Trustees shall provide a schedule showing the amount of contribution increase necessary to bring the plan out of reorganization assuming all benefits are 

cut back to the extent permitted by law, provided that future accrual rates are not 

reduced below an accrual rate equivalent to a) 1% of the contributions made with 

the respect to the participant’s work or, b) if the current accrual rate on the effective 

date is less than 1% then no less than the current accrual rate. 

• In the event the parties do not adopt a schedule approved by the trustees then 

the trustees shall impose this schedule as the default schedule except that the mandatory surcharges described at Subsection D above shall remain in effect. 

• If the employer refuses to comply with the default schedule then at the discretion of the Trustees that employer’s participation in the plan may be terminated in 

which case the employer will be deemed to have withdrawn or if applicable, partially withdrawn. 

2. Upon the request of the bargaining parties the trustees shall provide a schedule 

of the contribution increases and other measures required to bring the plan out of 

reorganization assuming there are no cutbacks in protected benefits, and 

3. The trustees may, in their discretion prepare and provide the bargaining parties with any additional schedules that they deem appropriate for the parties’ consideration. 

4. The schedules required in this Subsection shall in the discretion of the trustees 

be updated periodically to reflect the experience of the plan, but not less than once 

every three years. A schedule that has been adopted by the bargaining parties 

through the collective bargaining process shall remain in effect for the duration of 

the collective bargaining agreement. 

• For active participants, the Trustees’ decision to implement a benefit cutback 

would be driven by the contribution obligation negotiated by the parties, i.e., the 

impact on each group will depend on what they negotiate. The Trustees shall include an allowance for funding other participants’ benefits in the schedules provided 

to the bargaining parties, and shall reduce their benefits to the extent permitted 

hereunder and deemed appropriate based on the plan’s overall funding status and 

prospects in light of the results of the parties’ negotiations. 

IV. INSOLVENCY

A. As under current law, the plan administrator would have to perform a PBGCprescribed solvency valuation for the first year the plan is in reorganization and at 

least every 3 plan years thereafter. If, as a result of one of these valuations, the 

plan is expected to become insolvent by the end of the 5th following plan year, annual insolvency valuations must be performed. 

B. If the current market value of available plan assets (without regard to expected 

contributions and earnings) is equal to no more than 5 years of projected benefit 

payments, accrued benefits may be reduced to the level necessary to postpone insolvency by another 3 years, but in no event below the PBGC-guaranteed level. Any 

such reductions in accrued benefits must be matched by proportional reductions in 

the rate of future accruals. 

C. In the year a plan becomes insolvent, accrued benefits must be reduced to the 

level supportable by the plan’s available plan assets, but not below the PBGC-guaranteed level. 

D. These requirements would run parallel to the plan reorganization rules and 

whatever rehabilitation measures the Trustees take pursuant to those provisions. 

V. DEFINITIONS

A. For purposes of IRC Sections 412(e), 412(f), 412(o), the plan reorganization 

rules and the comparable ERISA sections plus section 204(h), ‘‘plan amendment’’, 

in the case of a multiemployer plan, means an amendment to the plan or related 

documents adopted by the Board of Trustees. 

B. For purposes of the new provisions of the Code and ERISA added by this legislation, unless otherwise specified, 

1. except with respect to the rules in I.A., ‘‘actuarial accrued liability’’ and ‘‘normal 

cost’’ are determined based on the unit credit actuarial funding method, 

2. the value of plan liabilities is determined using the actuarial assumptions described in IRC section 412(b) that have been or are expected to be used for the plan 

year for which the determination is being made, and 

3. A plan’s ‘‘funded ratio’’ is the ratio of the market value of its assets to the actuarial value of its actuarial accrued liability. 

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VI. WITHDRAWAL LIABILITY REFORMS

A. Strengthen and clarify withdrawal liability rules for all plans 

• Repeal ERISA section 4225, which reduces or subordinates withdrawal liability 

claims under various circumstances involving employer liquidations. 

• Repeal ERISA section 4219(c)(1)(B) which arbitrarily limits an employer’s withdrawal liability payments to twenty years of payments. 

• ERISA section 4205 should be amended to make clear that an employer who 

performs work formerly covered by a pension plan incurs partial withdrawal regardless of whether the employer uses employees of a third party to perform the work. 

B. Repeal the special trucking-industry rule. 

C. Rationalize withdrawal liability rules for construction plans, by extending to them 

the following rules applicable to other plans. 

• Ability of trustees to adopt a ‘‘5-year free look’’

• Ability to amend the withdrawal-liability allocation rules to re-start presumptive-rule pools when plan as a whole is fully funded, to eliminate old remnants of 

individual employer’s liability. 

VII. MISCELLANEOUS OTHER ISSUES

A. Heinz fix, modeled after Alaska Teamsters fix—trustees would be allowed to 

adopt stricter benefit-suspension rules applicable to people who retire after adoption 

of the stricter rule—retroactive to 1/1/1976. 

B. Sheet Metal fix: multiemployer plans can rescind benefit increases for retirees 

adopted after the date of retirement. 

VIII. EFFECTIVE DATES

Unless otherwise specified, the effective date would be the first day of the first 

plan year beginning after enactment. New sections I.A and II.B—tougher standards 

for benefit increases—would not apply to previously negotiated benefit increases 

which restore benefits lost due to benefit cuts adopted between 2000 and the date 

of enactment, if, in connection with (and at the time of) the benefit reductions, the 

plan document, trust agreement or related documents promised to restore lost benefits if contributions were increased. Section II.D.—adoption of shortfall funding 

method—would be effective as of the 2003 plan year (retroactive filing of Schedule 

B permitted). 

Chairman BOEHNER. Let me just say, I want to thank all three 

of you, and the various parts of the Coalition and people who aren’t 

necessarily in the Coalition, for your willingness to work with us. 

We strongly believe that if we are going to do comprehensive 

pension reform that it should include multiemployers as well as 

single employer plans, ought to include cash balance, ought to include investment advice and we ought to deal with this in a meaningful way. 

And I appreciate there has been an awful lot of conversations, a 

lot of negotiations, but I have got to say I am a bit disappointed 

that we have yet to come to some agreement. 

Now, Mr. Lynch, you referred to the benchmarks in the so-called 

yellow zone as insurmountable and unreasonable for those plans 

that would be moving from what we have been referring to from 

the red zone into the yellow zone. And some members of the Coalition have been critical of those benchmarks that Mr. Scoggin believes are necessary. But over the last several weeks, we have 

asked on numerous occasions for, all right, if these benchmarks 

aren’t the right benchmarks and this time frame isn’t the right 

time frame, what are the right benchmarks, what is the appropriate time frame, and yet nobody can share formation with us. 

And I have to say I am a bit surprised. I don’t want to be in the 

74

middle of your negotiations, but we are trying to be helpful in 

terms of trying to find the right mix. 

I happen to believe what Mr. Scoggin and the FMI types believe, 

that having clear benchmarks are the surest way to get plans up 

to 100 percent funding. And we provide more flexibility by allowing 

the plans to be overfunded without the imposition of an excise tax. 

And so do we have some reason why we are stuck in neutral here? 

Mr. LYNCH. I guess that one is for me, huh? 

We had a meeting last week. It included something on the order 

of 10 actuaries representing various funds. I was disappointed I 

wasn’t involved in that meeting. 

Chairman BOEHNER. I am sure you were. 

Mr. LYNCH. They were trying to work through from a real-life 

perspective. If these plans didn’t exist and just started up today, 

I suspect maybe those benchmarks wouldn’t be as difficult as we 

think they can be. But unfortunately, at some point when this becomes law, the plans that are going to fall in those categories, particularly, as I said, at the lower end of that category, may have a 

difficult time getting up and meeting the benchmark. 

Does that mean they shouldn’t meet some benchmarks? Of 

course not. It is just that the particular benchmarks and how they 

are calculated could result in very significant increases to the contributing employers and further benefit modifications to the plan 

beneficiaries. 

Chairman BOEHNER. I fully understand that. I think all of you 

realize that it is in the interest of, it has been in my interest and 

I think in the interest of the members on both sides that both the 

contributing employers and the representatives of labor come to an 

agreement on this issue. 

Now, we do have language in the bill currently. It is my intent 

to leave that language in the bill and continue to work with all of 

you to try to come up with the right formula. And I know that—

let me ask you, Mr. Scoggin, since you had supported the benchmarks that we have in the bill, you understand the problems of 

companies that are coming out of the red zone and they are going 

to have a difficult enough time getting out of the red zone into the 

yellow zone where then we impose these hard benchmarks. Do you 

have ideas about how we can move forward here? 

Mr. SCOGGIN. Thank you, Mr. Chairman. Oh, I do. I think FMI 

does, but to put it a little bit into perspective we have also done 

quite a bit of modeling based on a number of real-life situations 

with real-life funds that we have looked at to determine whether, 

because obviously we are committing ourselves to benchmarks in 

our industry as well, whether these are realistic and reasonable, 

and to date our modeling indicates that they are. And we would 

welcome, from the Coalition or from others, modeling that may be, 

you know, would show a different result so that we can understand 

that. 

But I do understand the issues that the Coalition has raised and 

I will admit that our group looked primarily at keeping healthy 

funds healthy because we think that is the most important way to 

take care of problems. There may be some transitions, 

transitioning language or transitioning abilities that we could provide to funds coming out of the red zone. We certainly, from the 

75

FMI standpoint, would be willing to listen to some of that. To date, 

you know, we haven’t heard any of that, but we think even with 

transitioning language it ought to be solid, it ought to be firm and 

it ought to provide hard guidelines, because we think that it is true 

that trust funds and the bargaining parties in those funds are 

going to have to make hard decisions, and some of those hard decisions are going to be required to align contribution streams with 

promised benefits. 

Chairman BOEHNER. Well, I don’t want anyone to overread my 

remarks. I do appreciate the tremendous progress that we have 

made between the employer groups and the labor groups and your 

willingness to work with members on both sides of the aisle. It is 

just that I want to make it clear that I want to keep encouraging 

you to continue your conversation. We are going to a subcommittee 

markup next week. We will be in full committee markup the week 

after that. I don’t want anyone to not be on notice that we are 

going to proceed, and we want to continue to work with you as we 

do that. 

Chair recognizes—well, let me announce that we now do not expect to have votes until 1:45 to 2 o’clock. So if we work hard we 

will save you the problem of being gone for an hour and then coming back. 

Chair recognizes the gentlemen from Michigan. 

Mr. KILDEE. Thank you, Mr. Chairman. I am very concerned 

about the multiemployer plans out there. I have talked to a number of my people back home. I think we are reluctant and perhaps 

unlikely to write separate plans for the grocer chains than we 

would for the other, so it would be great if the three of you could 

come to the table, continue your dialogue and discussion, come to 

the table with a plan that would protect those things you feel are 

very, very important. 

I would encourage you. I think what you have done so far is very 

encouraging. Mr. Boehner’s bill has some differences from the Coalition’s proposal. The inclusion of the zone benchmarks requiring 

plans to decrease the underfunding by one-third would be one area 

of difference. And the additional benefit restrictions in the yellow 

zone are tougher than the quotas in these proposals. Do you think 

that there is a possibility of you to resolve those differences and 

come with a single plan. 

Ms. Mazo. 

Ms. MAZO. I am very optimistic. Two of my actuarial colleagues 

were in these marathon conference calls that Tim Lynch described 

going on last week, and I think that it was helpful for the chairman to pound some heads, frankly, and make some people get in 

rooms that we might not have otherwise done. Some our concern 

is not just with the specific numbers in the benchmarks per se, but 

in some of the mechanisms and how they work, and I feel I would 

be a little bit remiss not to point out that the grocery industry is 

a tremendously important part of the multiemployer community. It 

represents more than 14 percent of the participants. But the construction industry, which represents something like 37, 38 percent 

of the participants in multiemployer plans and more than half of 

the plans, is structured—the plans in the industry itself are structured very differently. The people are very mobile. They really kind 

76

of work for the industry rather than any one given employer. The 

contractors that are contributing employers, on average, are less 

than 20 employees per company, and so some of the mechanisms 

and the plans also tend to be much, much smaller. 

The average, more than three-quarters of the multiemployer 

plans in this country are fewer than 5,000 people, something less 

than half are fewer than $100 million in assets. So some planning 

ideas, some forward-looking ideas, and some bargaining-related solutions that might fit in an industry that has major chains, largely 

major chains and a largely stable workforce might not work for 

other industries that are in the multiemployer world, and that is 

part of what we are trying to accommodate. We too would prefer 

not to have a bunch of bright mind—things as fundamental as 

basic funding rules, and we do think it is important, as I said, to 

have safeguards that prevent plans to the extent possible from falling into trouble. 

But we are trying to accommodate the different shapes and sizes 

and capabilities of the different plans. 

Mr. KILDEE. And there are different shapes and sizes. I pulled 

wire for IBEW for a while, and of course worked out of the hall, 

was assigned to an employer who needed electricians. So there are 

differences. But if you can kind of bring this together so everyone 

can find some satisfaction and come united to this table, it would 

be very, very helpful. 

Ms. MAZO. And hopefully we will be able to do that. 

Mr. KILDEE. Thank you very much, Mr. Chairman. 

Mr. KLINE [presiding]. I thank the gentleman. I am mindful of 

Chairman Boehner’s timetable. I would like to keep moving. I 

would like to take a couple of minutes. I have a whole list of questions. 

First, I want to say that I think it is very, very important that 

this committee took up multiemployer plans and I know that the 

three panelists agree with that and it seems to me that we have 

done a pretty good job so far. We are looking forward to continuing 

the work. One of my concerns has, all along, been in the multiemployer plans, how do the smaller employers gain visibility and gain 

more ability to participate in the decision making process? 

And it could go to any of you. I have written down here by my 

question Mr. Scoggin. Do you think that this bill, this Pension Protection Act, is going to enhance the ability of smaller employers to 

be involved? 

Mr. SCOGGIN. Let me begin by pointing directly to the transparency rules in this bill, which I think are well thought out. And 

I believe that they will provide those small employers who today 

maybe have more difficulty obtaining insight into the health, the 

funded status of a plan, where that plan is going, even though they 

are contributing to that plan. 

Mr. KLINE. Isn’t it true that there are many small employers who 

have no visibility? 

Mr. SCOGGIN. I would agree. 

Mr. KLINE. I am just sorry. Just so everybody understands, we 

have a situation where you have employers who are paying benefits 

into a plan and they have no idea about the status of that plan. 

77

Mr. SCOGGIN. Yes, sir, that is exactly where I wanted to go, is 

to point out that we have hundreds, if not thousands of employers 

out there who are very good, unionized, honest employers who 

make significant contributions to benefit funds and do not have an 

ability to obtain direct access to information. And in our industry 

and through the FMI, we believe that the transparency rules that 

have been built into this bill will provide great benefit to those employers and certainly will allow them to address issues also in their 

collective bargaining when they have more full access to information as they engage in that collective bargaining. 

Mr. KLINE. Either of you have any comments on that. 

Mr. LYNCH. I think part of the issue there, Congressman, is not 

only the lack of access to information, but I think some of the folks 

who have mentioned this also have concerns about the ability to 

have representation as trustees on these plans. When you look, we 

contribute to something like 90 different multiemployer plans 

around the country. They range in size from the biggest, the Western Fund, the Central States Fund in the mid $20 billion asset 

range, all the way down to plans that may involve only one local 

in the East with a couple, $100,000 or million dollars in assets. 

We believe pretty strongly that the contributing employers need 

to be better represented on the plans. It is somewhat interesting 

how some of the management trustees find their way on the plans, 

and that takes a process, frankly, of changing the plan documents, 

and we have undertaken an effort, at least my association has, to 

try and carefully look at that and try and ensure that there is a 

little better cross-representation of the contributing employer base. 

Mr. KLINE. Thank you. 

Ms. MAZO. I guess I have a couple of, just a few little points to 

say. The point that Mr. Lynch just raised, I just want to emphasize 

that is exclusively a management issue, the decision on how management trustees are selected. In fact, it is illegal for the union side 

to have any input on that. So that is something that the employers 

need to work out. 

The other point, and I do think that transparency will help small 

employers understand what they are doing, and the smaller local 

plans in fact do pretty much know what is going on because it is 

all kind of one community. It is the very large plans which in fact 

are some of the most efficient and the most effective ways to deliver benefits with the greatest capability of meeting all of the administrative needs that does end up kind of swamping the smaller 

local contributor. And the point of the plans is, in fact, that both 

the employees and the employers delegate their responsibilities to 

their representatives to handle things. 

In my testimony I mentioned that multiemployer plans for many 

of the employers are really an outsourcing. The multiemployer 

group, including the multiemployer bargaining agent which the 

Motor Freight Carriers Association serves as, handles the process 

for—in many places, for their members, the Associated General 

Contractors does that. They are kind of like a union of employers. 

And so the small employers are welcome to take part, but they 

may find that they regret what they wished for when they see the 

documentation, the overwhelming degree of work that goes into 

paying attention to this. They can’t have every one employer deterVerDate 0ct 09 2002 10:16 Jul 26, 2006 Jkt 000000 PO 00000 Frm 00081 Fmt 6633 Sfmt 6602 H:\NNIXON\DOCS\FC\6-15-05\21841.TXT DICK
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mine its own employee’s benefits and still be part of a big pool of 

benefits. That is why multiemployer plans work. 

Mr. KLINE. Thank you for your comments. I must say, however, 

I think it would be very useful for those employers, large or small, 

to know what is going on in a plan that they are participating in. 

Ms. MAZO. And we have no concern about transparency. That I 

agree with. 

Mr. KLINE. Thank you very much. My time has expired. The gentleman from New Jersey, Mr. Andrews. 

Mr. ANDREWS. Thank you, Mr. Chairman, I want the record to 

reflect my appreciation for the efforts of Mr. Boehner, and Mr. 

Johnson, and obviously Mr. Miller and the staffs on both sides to 

try to solve this multiemployer problem. It is a significant problem, 

and we need to fix it. 

I frankly believe we should have fixed it last year. That was a 

subject of rather intense debate around here, and I want to commend all those involved in these very Churchillian negotiations we 

went through and are continuing to go through. 

I would echo Mr. Boehner’s admonition that you keep at it, try 

to find a way to reach accommodation with his view and other 

views as well. One of the things that I would like to make sure we 

get on the record is the benefits of the agreement or something like 

the agreement that you have reached. There is a lot of difficult aspects of this agreement. 

No one here ever wants to say that he or she voted for a decision 

making system that could result in not being able to increase people’s benefits, no one wants to do that, and certainly no one here 

wants to be accused of in any way contributing to the reduction of 

people’s benefits, and that is politically a volatile discussion. 

The reality is, and it is a hard reality, for some beneficiaries and 

some plans, I think the choice is whether they have any benefits 

at all or whether their benefits are cut dramatically or whether 

they can be largely preserved, and that is a hard problem to be 

working on. You have my support and my appreciation. 

But I think we should also get on the record the benefits. If we 

have real and meaningful relief for multiemployer plans, we are 

told by Ms. Mazo’s testimony that right now about 15 percent are 

in some trouble, and I think it was 13 percent. The number may 

grow to 15 percent in 2008. What happens when we don’t do these 

hard things? Let’s paint the most troublesome scenario. If we don’t 

give multiemployer plans the relief that they need, what would 

happen to the people covered by these plans that are in difficult 

shape? And any of you can answer that question. 

Ms. MAZO. If we were to start to have funding deficiencies in 

multiemployer plans, we fear that could really be catastrophic. 

First of all, it could have a domino effect based on the loss of confidence that employers and employees would have in their plans. 

A funding deficiency would mean that the employers would be 

faced with contributions mandated on them well beyond what they 

had promised and collective bargaining and all the parties agreed 

to. 

Mr. ANDREWS. I know all the members of the committee know 

this, but I think it is important to let the record reflect, Ms. Mazo, 

what happens when one or two employers in a multiemployer plan 

79

have a hard time meeting their obligations? What happens to the 

other people that are left? 

Ms. MAZO. This in fact is part of what we are struggling with 

now. It is the mature plan. The plans are designed to be funded 

with each employer paying essentially a uniform share. There are 

variations. But roughly so, it doesn’t matter how old or young their 

workforce is. Everybody contributes to a common pool and that 

funds all of the benefits. If some employers stop funding, they go 

out of business or they get seriously delinquent, the costs still have 

to be met, and that rolls over on to the other employers. And if that 

then makes the burden too heavy on the other employers, some of 

them are likely to tumble down, thus increasing and increasing and 

increasing the burden until it becomes completely supportable for 

the employers that are left. 

Mr. ANDERSON. It sort of has a pancaking effect, doesn’t it? One 

leaves and that puts more stress on the group that is left, then 

someone else leaves and that puts more stress, and so on. I think 

it is very important that we get the word out that the work you 

have done is to preserve full and robust pensions for millions of 

people. 

And I firmly believe if we don’t give plans the tools to deal with 

these problems, that we are going to have a much more serious 

one. So I would reflect what Mr. Boehner said, that we should all 

work as hard as we can to make sure that everyone’s interests are 

accommodated. There will be no perfect compromise. I am sure that 

the compromise that was originally reached and not in the bill was 

very difficult for a lot of people to swallow. 

But you know, I, for one, am a member that is prepared to work 

with you and sustain the political blows that may come from such 

a compromise in order to help. I appreciate your efforts. 

Ms. MAZO. Thank you. 

Mr. KLINE. Thank you. I thank the gentleman. 

And the gentleman from Texas. 

Mr. MARCHANT. Thank you, Mr. Chairman. The question I have 

has to do with the companies that go to the bargaining table for 

new agreements, and because it is easier, or has been in the past, 

easier to offer increased benefits in many occasions than it is to actually offer cash, is there anything in the Pension Protection Act 

that you see that will disincentivize that kind of activity or protect 

it? 

Mr. LYNCH. If I can take a stab at that, Mr. Congressman, when 

we negotiate and I do the negotiations on behalf of these companies, we don’t negotiate the benefit level, we don’t negotiate an administration of the plan. We negotiate a contribution level and then 

essentially it is left to the trustees of the plan to decide how they 

are going to use those assets to cover the promised benefits. 

One of the things that frankly we worked on in this Coalition 

proposal was a balancing act between the responsibilities of trustees on these plans and the responsibilities of the bargaining parties. Both the union representatives and the management representatives felt very strongly that you have to maintain the sanctity of the bargaining process, and so consequently some of the difficult choices that Congressman Andrews was referring to, they 

80

will in fact still be issues at the bargaining table because we think 

that is where we belong. 

Mr. SCOGGIN. If I might, there are provisions within this bill 

which do cause the bargaining parties to think carefully about 

what sort of benefits they are committing themselves to, and I 

think one is a change in the amortization that is proposed in this 

bill for new benefits that are negotiated into a plan, because it will 

be shortened from a current 30-year period to a 15-year period, and 

I think that is responsible because it causes those benefits to be 

paid in a reasonable manner and shortens your mortgage, if you 

will, but it also causes all parties to think very carefully about 

what benefits are going to be promised and to ensure that contributions that are promised and the benefit that is promised will align. 

Ms. MAZO. The point that Mr. Lynch made deserves some underscoring, and that is that the bargaining parts typically negotiate 

contributions to a multiemployer plan, and then the trustees, trustees based on the anticipated flow of contributions plus other earnings, determine what the benefits are. 

So in the multiemployer world, it is not the case as it has been 

characterized sometimes in the single employer world, that it is 

cheaper for an employer to just promise benefits and pay for them 

30 years from now than it is to pay current wages, because the employers in the multiemployer world are agreeing to pay the cash 

into the plan come what may. They aren’t putting anything off and 

making kind of a promise and I will see if I can pay for it tomorrow. They are promising the money and then it is up to the trustees to arrange the plan so that the money is spent responsibly. And 

as Mr. Scoggin said, the bill tightens the rules so that in order to 

spend the money on benefits, you have to have essentially more 

money coming in faster to pay for them. So you can’t make those 

promises unless you are quite sure that you will be paying for them 

responsibly. And if you are in any kind of trouble, then you have 

much faster rules for—well, under the bill you can’t make additional benefit promises. 

So the bill would tighten it, but also it has not been the same 

kind of temptation, I think, in the multiemployer world than it has 

been in the single employer world. 

Mr. MARCHANT. We just recently, I think the country just recently began to understand a little bit more about how the pension 

guaranty fund works when it was announced at the United pension 

would be basically 40 percent, or $4,000, around $4,000 cap, for 

many of the lower back standers, et cetera, that covered their employees. 

Do you think that the participants in the multiemployer plans 

fully understand how the pension security fund interacts with their 

personal pensions and what their provisions are? Are there documents that they sign that say, we understand what kind of pension 

plan we have, we understand what kind of insurance we have on 

this pension plan, we understand the maximum amount of money 

we can draw per month if this plan goes under? 

Ms. MAZO. If I may, the short answer to your question is no. I 

doubt that any multiemployer plan participants even think about 

whether their PBGC aren’t immune. The PBGC guaranty for multiemployer plans is much, much lower than it is for single employer 

81

plans. It is roughly for somebody with 30 years of service, it is 

maybe close to $13,000 a year as compared with maybe $45,000 a 

year. But the guarantee also works very, very differently in the 

multiemployer world, for just the reason in fact that Mr. Andrews 

was identifying and that we are all here to try to resolve, and that 

is in the multiemployer plan all of the employers are sort of guarantors of one another, so that if one person’s employer goes out of 

business they don’t lose their pension plan. It doesn’t go to PBGC. 

The benefits stay there and the other employers and hopefully new 

employers coming into the plan continue to fund it. 

So multiemployer plans hardly ever have, in fact since 1980, 36 

or so of them have had any contact with the PBGC in terms of 

guaranteed benefits. They don’t go to the PBGC, they don’t get 

their benefits cut until the plan runs out of cash completely, and 

even for a severely underfunded plan that would be a very long 

time. So they don’t know what the level is for their guarantee, and 

for most of them it really is and has been and we hope will continue to be irrelevant. 

Mr. KLINE. The gentleman’s time has expired. The gentlemen 

from Virginia, Mr. Scott. 

Mr. SCOTT. Thank you. Thank you, Mr. Chairman. As Mr. Andrews from New Jersey has suggested, we are looking at this from 

a perspective of what can we do to maximize the chances that employees will actually get their promised pension, and so we want 

to see how this bill affects that. 

First, let me ask a question on management of these pension 

funds. I haven’t heard anything about fees paid for management. 

Is that an issue that we should be looking at? 

Mr. SCOGGIN. The law currently provides that, and I think we 

are talking about the trustees and the fees that are paid to the 

trustees? Is that the question? 

Mr. SCOTT. Management generally. I know you pay a fee for—

mutual funds get a fee, and some charge more than others. 

Mr. SCOGGIN. Okay, I misunderstood the question. So with respect to the managers who would handle the funds that the trust 

fund has, I think given fiduciary rules that are very, very heavy 

on trustees at the trust table,at least for all the funds I have been 

involved with, the trustees take those all very seriously. Those 

funds, or those charges, those administrative charges, are in line 

with or less than I think what I have seen in any other given areas 

there. Really, truly we fight them hard to make sure that they are 

as low and as reasonable as they can be. 

I turn to the panelists. 

Mr. LYNCH. We made a very concerted effort about 5 years ago 

to try and start encouraging the people who would be trustees on 

the management side to have a blend, have people with a finance 

background, investment background, benefits background. That 

wasn’t always the case. 

So I think the caliber of trustee that we are getting on the management side has improved dramatically over the last, say, 10 

years. And consequently decisions about investment advisors, actuarial advisors, et cetera, et cetera, has also gone up. We also tried 

to institute something of a best practices where one fund, if they 

82

think something hasn’t quite gone the way it should, we let the 

trustees know about that in other funds. 

Ms. MAZO. One of the points of the multiemployer plans is that 

a whole lot of small employers can, as I said, basically band together and have the fund as a larger entity handle the investment 

and the benefit management. And, accordingly, in every case the 

fees are much less, except you know there may be some oddball 

cases, but the fees are much less than the great majority of the employers would ever be able to get if they tried to have their pension 

plans on their own. 

Mr. SCOTT. I didn’t hear any numbers as to what percentage 

funds are paying for management of the accounts. One percent? 

Half a percent? Two percent? Three percent? Does anybody know? 

Ms. MAZO. I think it depends on the portfolio. Every manager——

Mr. SCOTT. Mutual funds, and you have the EFT funds go from 

anywhere from .1 percent to 2 or 3 percent. 

Ms. MAZO. The funds are usually large enough to get less than 

1 percent management fee. But this is something that we could 

check out and supplement the record with information if you like. 

[The information follows:]

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mazo2.eps
84


mazo3.eps
85

Mr. SCOTT. What are you recommending, and what does the bill 

recommend in terms of cutting benefits? And we talked about restrictions and tools, management tools and all that, and I think the 

employee is looking at benefit cuts. What kind of cuts are proposed 

for those in the yellow and red zone? 

Mr. LYNCH. The cuts in the yellow zone that we had proposed 

would really be essentially all of those tools that are currently 

available to trustees now, reducing the accrual rate, ancillary benefits in certain categories, so in that category the tools are essentially the ones that are currently available. 

Mr. SCOTT. Accrual means future benefits. What you have, what 

you thought you had earned and are entitled to, are different than 


mazo3a.eps
86

accruals in the future. Are you talking about reducing what had 

been promised in the past? 

Mr. LYNCH. It would be the accrual rates. For example, you 

would take the rate—funds have taken the rate from say 2 percent 

accrual rate down to 1 percent accrual rate, which is what they are 

permitted to do now. 

Mr. SCOTT. What does that have to do with somebody’s check? 

Mr. LYNCH. It probably as a practical matters means that on a 

sliding scale employees would have to work longer to earn essentially the same benefit. 

Mr. SCOTT. Now, if you have worked and you want to quit today 

and you have accrued certain benefits, are you talking about anything that could adversely affect what someone thought they had 

already earned? 

Mr. LYNCH. No. But if they were a 20-year employee and were 

planning to work 30 years, what they had earned at the 20-year 

stage would not be touched. What goes forward it would be or could 

be touched. 

Mr. SCOTT. Is that everybody’s understanding? That what you 

have earned and kind of have in the bank will not be adversely affected by any of these recommendations, but what you may be able 

to earn in the future may be affected? 

Mr. LYNCH. Under the Coalition proposal the two areas that 

were absolutely untouchable was benefits for in-pay status, somebody who is already retired, and then essentially cutting back on 

the accrued benefit. 

Mr. SCOTT. Okay. That is the Coalition plan. How is that different from what is in the bill? 

Mr. LYNCH. At the moment in the red zone there is not a provision for that, but nor is there a provision for the mandatory additional employer surcharge. 

Mr. SCOTT. Wait a minute. You mean what is not in the bill is 

a protection of what you thought you had earned? That is not in 

the bill? 

Ms. MAZO. If I may, the Coalition proposed that if you are in the 

red zone, the trustees sub could make recommendations that the 

bargaining parties could act upon to cut side benefits, ancillary 

benefits, early retirement subsidies even if they had been earned, 

but generally not except for very recent benefit increases to cut the 

core retirement benefit at normal retirement age. That proposal is 

coupled with mandatory contribution increases for a period of time 

by the employers in the Coalition proposal and protection for the 

employers from funding penalties while the plan works outs its 

problems. The benefit changes, the existing accrued benefit 

changes, and the protections for the employers against funding 

penalties and the additional surcharges, none of those really very 

difficult features are in the bill as it stands now. 

Mr. SCOTT. Mr. Chairman, my time has expired. I think it would 

be helpful as we go forward to get a little chart about how these 

various proposals actually affect someone’s check because that is 

really what—I mean, some of this discussion is a little esoteric. The 

people want to know. You have been promised benefits. Am I going 

get the benefit or not if this bill passes? That would be helpful to 

87

see what the various proposals are and how someone’s check is affected. 

I appreciate the extra time. 

Chairman BOEHNER. Well, I am not sure somebody could provide 

you with a specific. What has been discussed and what has been 

agreed to by the Coalition would be tools available to the trustees 

of a multi-employer pension plan that are in fact in the red zone 

as a way of trying to protect benefits for all of the members. And 

these provisions are not in the bill as we speak because in fact they 

are controversial, and we wanted to study this a little further. But 

I would note and congratulate both sides of this discussion because 

while no one would want to employ some of those tools, they may 

in fact be—I think the trustees probably ought to have those tools 

in a situation where they are trying to save the benefits for the 

vast majority of their members. 

Mr. SCOTT. Mr. Chairman, that is what we want to see because 

when you say tools, some people hear cuts. And if a little cut is 

necessary to avoid going to the pension fund, and as I understand 

it, a lot of people are getting more from their pensions than would 

be guaranteed in the pension fund, then a little cut would be better 

than losing half of it and getting just the guaranteed benefit. 

Chairman BOEHNER. The gentleman is exactly correct. 

Mr. SCOTT. But we want to know exactly what tools, restrictions 

and all those other verbs or nouns mean so that we know exactly 

what is on the table. 

Chairman BOEHNER. I understand. 

Mr. SCOTT. Thank you. 

Chairman BOEHNER. Just to point out, in fairness, that those 

schools that would be available to the trustees in terms of actually 

reducing or adjusting ancillary benefits is coupled with a significant increase, a surcharge and increase to be paid by employers. 

And so I think we see both sides willing to come to the table to 

design a way out of a very difficult situation. 

Mr. SCOTT. Mr. Chairman, you have used the term kind of ancillary benefits and we have talked about core benefits. I think we 

need to make sure everybody understands what that means, what 

those mean too. I understand the ancillary benefits are from time 

to time when the trust fund is doing well, some extra kind of bonuses are thrown in where people can get to retire early but that 

was not really promised. It is kind of things are going well and 

they kind of get that. But if we are starting to cut back, those 

unpromised benefits would be the ones cut, not the promised benefit, when someone is working and expected a core benefit pension, 

that is not in jeopardy. I think that is what I mean when we talk 

about tools and what we are talking about so people will understand what chance they have of actually getting their promised 

benefit. And I think under some of these proposals it is almost 

guaranteed, although you might not get some of the extra things 

that have been thrown in along the way. You are guaranteed under 

this proposal to get your core benefit and you have the full faith 

and credit of every business involved in the multi-employer plan. 

Unlike the single employer plan where if that business goes under 

you are in tough shape. In this situation, you have got the full faith 

and credit of quite a number of different businesses guaranteeing 

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the fund. So it is a little bit more solvent, if one of these tools is 

not going after your core benefit. That is what we need to kind of 

make sure that we have got. 

Chairman BOEHNER. I want to thank my colleague from Virginia. 

I thank our witnesses today for your excellent testimony and for 

helping us understand more clearly how these reforms will affect 

the multi-employer plans. We look forward to continuing to work 

with you. 

The hearing is adjourned. 

[Whereupon, at 1:45 p.m., the committee was adjourned.] 

[Additional statements submitted for the record:]

Prepared Statement of Hon. Jon C. Porter, a Representative in Congress 

From the State of Nevada 

Good Morning, Mr. Chairman. Thank you for calling this important hearing 

today. The issues that we explore in this hearing, and seek to resolve in the legislation under examination, today are of the greatest importance for all Americans, of 

all ages. I appreciate the opportunity to continue the work that we, on this Committee and in this Congress, need to complete in order to strengthen the retirement 

security of all Americans. I look forward to the testimony of both panels here today, 

and would like to thank our witnesses for appearing before us today to offer their 

expert testimony. 

The financial health of the defined benefit pension system is a critical issue for 

the millions of workers that participate in these plans. The funding of these plans 

has become more challenging for many employers because of the unanticipated economic factors which they face today. As a result, the number of employers offering 

defined benefit pension plans has declined and some have even frozen or terminated 

their traditional pension plans altogether. Congress must work to provide an adaptable environment for these plans where employers are able to reasonably fund the 

pension benefits of their employees and retirees. 

I believe that this legislation makes excellent strides in resolving this situation. 

As we all work together to achieve this goal, we must protect the American tax 

payer from shouldering the burden of these plans. I am glad to see that this bill 

makes strong improvements in securing the financial stability of these plans, as 

well as providing the Pension Benefit Guarantee Corporation with the sound financial footing that will protect the American tax payer. 

I am also pleased at the inclusion of Multi-Employer Pension Plan reform. This 

necessary step will benefit the thousands of employees and employers who are responsible for supporting so much of the growth we have in Southern Nevada. We 

rely upon these workers to complete the transportation, infrastructure, and construction projects which make our community one of the Nation’s most vibrant. 

One particularly important aspect of improving retirement security is providing 

the financial savvy and intelligence of all Americans. H.R. 2830 provides greater 

transparency for plan beneficiaries, as well as providing increased access to financial advisors. Only through allowing American workers to engage in the process that 

provides for their retirement can we expect the system to be fundamentally sound. 

Again, thank you Mr. Chairman, for introducing this necessary and important legislation, and for holding this hearing today. As we strive to improve retirement security for the American worker, we must strive to balance the needs of beneficiaries, 

employers, and taxpayers. I look forward to working with my colleagues on this 

committee and throughout Congress, as we seek to improve the retirement security 

of all Americans. 

Prepared Statement of Herve H. Aitken, Alliance President, the 

Multiemployer Pension Plan Alliance 

Executive Summary 

Chairman Boehner and members of the committee, the Multiemployer Pension 

Plan Alliance appreciates your efforts to enact comprehensive reforms to both single 

employer defined benefit plans and multiemployer pension plans. While most of the 

attention has been focused on single employer plans, particularly in the airline industry, there are a number of Teamster multiemployer plans, involving the trucking 

industry, that now confront a financial crisis, as well. 

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The MEPA Alliance was formed last year in response to financial crisis that arose 

in the Central States pension plan. All our members are long time contributing employers to that plan. It is an understatement to say they were shocked to learn that 

this plan had become so severely underfunded that it reached a deficiency in 2004 

that would trigger federal excise tax penalties and additional contributions that our 

small business members could not afford to pay. 

Unless significant reform is enacted, multiemployer plans will ultimately lose the 

fight. Rather than creating an environment that encourages employers to grow their 

businesses and participate in these plans, the law has created a death spiral with 

traps and penalties that will forever drive current and prospective employers away. 

In fact, in a March 5, 1982 Wall Street Journal article, George Lehr, the Executive 

Director of the Central States pension plan said in a reference to withdrawal liability: ‘‘In theory, it’s a wonderful law; in practice, it doesn’t work. In the long run, 

employer liability is the single most damaging thing pension funds will be facing.’’ 

[Exhibit 1] 

The Pension Protection Act of 2005 is a significant improvement over the current 

multiemployer pension laws. We appreciate that it will now require greater transparency and disclosure by the plans. The smaller businesses that have participated 

in the Central States pension plan were kept in the dark about its financial deterioration; neither the plan administrator nor the trustees informed us of the dire financial condition until they needed our assistance in seeking legislation that would 

allow them to postpone this deficiency. 

H.R. 2830 also addresses one of the primary concerns facing smaller business in 

these plans: the significant financial penalties that would result under current law 

when a plan, such as the Central States plan, reaches a funding deficiency. Simply 

put, the excise tax penalties and additional contributions associated with a funding 

deficiency would drive them out of business within a year or two. 

The Alliance members support the bill’s establishment of new reorganization rules 

for severely underfunded (red zone) plans and at-risk (yellow zone) plans. However, 

Congress is now delegating to the plan trustees unprecedented authority to impose 

additional pension contributions upon employers when the current collective bargaining agreements expire. While we recognize that more contributions will be needed in these underfunded plans, there must be some safeguards against plan-mandated contributions, of 100 percent or more, than can force smaller businesses into 

bankruptcy. We, therefore, are recommending a 15 percent cap on plan mandated 

additional contributions, which is a slight increase over the 10 percent surcharge 

that is permitted upon enactment of this bill into law. It bears emphasis that small 

employers lack trustees on these plans and those trustees have historically been unresponsive to our needs and concerns. 

Ideally, the withdrawal liability rules should be repealed, rather than tightened. 

Short of this, we support reenactment of the law prior to the Multiemployer Pension 

Plan Amendments Act of 1980 (MPPAA) that properly and fairly held that no more 

than 30 percent of an employer’s net worth can be taken when it withdraws from 

an underfunded plan. It is patently unfair that a family-owned company can be 

stripped of all of the assets it has built up over generations notwithstanding that 

the company has made all its required pension contributions. The Alliance ask that 

H.R. 2830 be amended to reestablish this 30 percent rule. 

This committee should remove from H.R. 2830 the changes making the withdrawal liability rules even more onerous. UPS and the Teamsters proposed these 

changes to the existing rules that would result in withdrawal liability when a company uses independent contractors or third party driver leasing companies to meet 

customer needs. The trucking industry rule should not be repealed and the current 

rule that reduces liability for a company in liquidation should be maintained. As 

will be discussed, the withdrawal liability rules established in 1980 have discouraged new employers from entering these plans and have sealed the fate of these 

plans by causing a declining participation base. 

The Alliance members also believe that the controlled group rules, under current 

law, need to be reformed. Withdrawal liability should be confined to the contributing 

employer and any related, fractionalized entities that were separated out from the 

contributing employer to avoid withdrawal liability. We also support repealing the 

‘‘pay now and dispute later’’ provisions of MPPAA. 

Importantly, H.R. 2830 does establish objective funding standards for all plans 

that would prohibit benefit increases when there is insufficient income and assets 

to fund those benefit promises. Benefit increases should not be allowed in plans that 

have a funding ratio below 90 percent. As early as 1996, the Multiemployer Plan 

Solvency Coalition reported that trustees of the Central States plan had imprudently increased benefits beyond the means to pay for them and that it would exacerbate the underfunding crisis. Benefit promises should be made only when they can 

90

be paid. Similarly, the Alliance applauds the committee for substantially increasing 

high end caps on funding of the plans and permit funding up to 140% of full funding 

without penalty. 

We appreciate the new requirements in H.R. 2830 that will now provide timely 

and accurate disclosure of the key financial information by the plans to all participating employers, their employees and the PBGC. There needs to be sunshine in 

the dark rooms of these plans that have withheld information from contributing employers and plan participants in the past. Too much is at stake to tolerate the nondisclosure of this financial and actuarial data to all but the union and the employer 

companies that have trustees on these plans. 

The Alliance also recommends that this committee, as part of this legislation, create a Congressional commission to objectively study and make recommendations on 

how to fairly apportion and pay for the huge underfunding that has arisen in these 

plans, and in particular the benefits being paid to retirees that no longer have an 

employer contributing to these plans. The Central States plan currently pays approximately $1 billion annually to 100,000 retirees that lack a contributing employer. Those benefits consume nearly 100 percent of the annual contributions received by the plan from all the remaining employers. Contributing employers can 

no longer shoulder this entire burden which is mounting each year. 

The Alliance members are committed to achieving these legislative reforms for 

multiemployer plans to promote plan solvency, preserve reasonable pension benefits 

and save our smaller companies through a fair realignment of pension responsibilities and liabilities. 

The Plight of Smaller Businesses 

As hard as it may be to believe, the federal pension law created by the Multiemployer Pension Plan Amendment Act of 1980 severely penalizes companies for growing union jobs. 

In fact, that law has also made it impossible to sell a private company. No prudent investor is willing to inherit the mounting liabilities that come with acquiring 

a unionized firm that participates in an underfunded plan, such as the Central 

States plan. 

Contrary to the principles of the American dream, growing a company now significantly increases liability and wipes out any stake that is built up in the business. 

Sadly, MPPAA even precludes an employer from applying its expertise to other business ventures. Under the so-called controlled group regulations, the assets of an affiliated company are also at risk to pay for withdrawal liability if the owners have 

controlling interest in the participating employer. 

Many of you on this committee may have been owners of small businesses or 

worked in a family owned business. Consider for a moment what you would do if 

your family business were faced with a decision to participate in a multiemployer 

pension plan like Central States? Would you do it knowing that one day you could 

wake up and your family’s life work was wiped out because of it? Of course not. Yet, 

that is the stark reality faced by all the Alliance members. Only Congress has the 

ability to rectify the problem. 

Smaller businesses lack both the capital and diversification to weather much 

longer the financial crisis in these multiemployer pension plans. They have absolutely no control over the negotiation or setting of benefits or contributions in these 

plans and, as mentioned earlier, it is difficult for them to even obtain timely and 

accurate financial information from them. The trustees are not accountable to them. 

They represent either the Teamsters union or one of the major national companies 

that pay their salary. Smaller companies also lack the leverage at the collective bargaining table of those national companies. In sum, they cannot reform or change 

these plans from within, or at the bargaining table. They need your assistance. 

The Deteriorating Financial Condition of the Major Teamster Pension Plans 

Much of the discussion in these comments focuses on the Central States pension 

plan. That is because all the Alliance members participate in that multiemployer 

pension plan and it is the second largest Teamster pension plan with over $17 billion in assets. However, financial information on several other significant Teamster 

plans, which are also severely underfunded or at risk, is attached to this testimony. 

[Exhibits 2–4]. Central States may be one of the worst plans, but it is not alone. 

The deteriorating financial condition of these plans is widespread because no new 

employers are willing to join and be exposed to withdrawal liability. Deregulation 

of the trucking industry and the passing of MPPAA in 1980 commenced the slow, 

but steady, decline of the unionized trucking industry. Many unionized employers 

have ceased operations and the Teamsters have lost over 100,000 jobs in the freight 

sector. This in turn has dwindled the contribution base of these plans. 

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For example, there are now more retirees drawing pensions from the Central 

States plan than active workers on whose behalf employers are making contributions. [Exhibit 5]. The plan is experiencing a two percent decline annually in the 

contribution base. With more and more workers reaching retirement age, the situation worsens each year. The average age of a union truck driver is approximate 55 

years old. 

Consequently, the Central States pension plan has an annual negative cash flow 

of over $1 billion. It must rely on the returns on its investments each year to cover 

this expanding shortfall in revenue. For a while the rapid increases in the stock 

market masked these problems. But the stock crash in 2001 caused these plans assets to plummet and they are unlikely to change in the near or long-term future. 

The Central States plan, which reached a funding deficiency in 2004, is experiencing 

another bad year in 2005. It is projecting another $1.2 billion operating loss. For 

the first quarter 2005, it lost $451 million and had a negative return on investments. 

Since the passage of the Multiemployer Pension Plan Amendments Act of 1980, 

there has been a steady decline in these multiemployer plans. There were approximately 2200 plans in 1980 and fewer than 1700 remained by 2003. Only five new 

plans have been created since 1992. The number of active participants in these 

plans has decreased by 1.4 million since 1980. Thus, Central States is not alone in 

this financial struggle; it is however on the front burner having already reached a 

funding deficiency. 

The seven largest Teamster plans were collectively underfunded by $16-23 billion 

in 2002, depending on the method of calculating the assets. In 2003, the Central 

States plan alone was underfunded by $11.1 billion. It has been estimated that 

underfunding in this plan has further increased in 2004 to $15 billion. Many of 

these other plans are as financially strapped as the Central States plan, based on 

the 2002 data. These Teamster plans account for one quarter of the $100 billion in 

total multiemployer pension plan underfunding. 

However well intentioned, the changes made to the pension laws in 1980 have exacerbated the financial problems of these plans rather than strengthened them. 

These plans cannot continue to exist without new employers and more active participants. MPPAA shut the door on future participation by imposing withdrawal liability on all employers for plan underfunding. The problems confronting these multiemployer plans are systemic and they will not solve themselves. 

It is both shortsighted and patently unfair to propose an alleged solution which 

could force smaller contributors out of business rather than a solution that encourages them to grow their businesses, increase union jobs and continue to make plan 

contributions. 

The Impact of Plan Underfunding On Smaller Businesses 

Underfunding in multiemployer plans creates serious financial problems for all 

employers in the plans, but especially for smaller firms that lack access to capital 

that is available to publicly-traded companies. 

First, there is a cash flow problem when a plan, like Central States, reaches a 

funding deficiency. The employers, by law, are obligated to pay for this deficiency 

to put the plan back within the minimum funding standards of ERISA. 

Compounding the funding deficiency payments are excise tax penalties that are imposed. 

Exhibits 6–8 illustrate how the combination of additional contributions and excise 

tax penalties would destroy the finances of a smaller company with 100 employees. 

A funding deficiency of approximately $400 million, an amount consistent with the 

Central States plan’s estimates for 2004, would increase this company’s pension contributions by 40 percent. It would incur an additional 5 percent excise tax penalty 

that goes not to the plan but the general treasury and therefore does not help plan 

solvency. This company may be able to survive the first year of the funding deficiency. However, in the second year, it will be forced out of business because the 

additional contributions then would increase to 135 percent of current contributions 

to the plan, and the excise tax penalty would be an additional 100 percent of the 

prior year’s deficiency. 

The second way in which plan underfunding harms employers is when a withdrawal from a plan occurs. While a cessation of operations is the most common way 

in which withdrawal liability results, it can also arise through a change in operations, a terminal shutdown, a decline in union workers, involuntarily by strike or 

decertification of a union by the employees, expulsion by the pension fund, or disclaimer of continued representation of the bargaining unit by the union. 

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The financial impact of withdrawal liability is now overwhelming. The amounts 

of liability, which are calculated on a pro-rata share of underfunding, now far exceed 

the ability of most companies to pay; it exceeds their entire net worth. 

For the MEPA Alliance members, the costs associated with withdrawal liability 

that would be owed the Central States plan can be as high as five times their net 

worth and ten times the profits in their most profitable year. 

While the MEPA Alliance has focused on the harsh financial reality of underfunding on employers, ultimately it will impact the employees’ pensions and the federal government through the PBGC. If these plans cannot regain solvency, they face 

termination. The employees are only guaranteed payments of approximately $1,000 

per month, which is far below the $3,000 a month maximum benefit under the Central States plan. Therefore, they could lose up to two-thirds of their benefits. The 

PBGC would be obligated to pay that amount, if plan assets were insufficient. 

Therefore, employers, employees and their Union representatives, and the federal 

government all have a vested interest in solving this problem promptly. 

The Needed Congressional Reforms 

1. Full and Timely Disclosure of Plan Financial Information: 

The time is long overdue for complete, timely and accurate disclosure of the key 

financial information by these plans. The financial condition of the Central States 

plan has been a guarded secret, with only the union and four major transportation 

companies privy to the most up-to-date information. 

Under current law the multiemployer pension plans provide annual reports almost nine months after the end of the current fiscal year. Therefore, the Central 

States plan will release its 2004 information in September of this year. There is 

simply no reason why this annual report information in the Form 5500 cannot be 

disclosed much sooner, such as within 3 months after the end of the fiscal year. The 

key financial information, including the annual actuarial reports, should be released 

to all participating employers and employees, by written communication or posting 

it on the plan’s website. The Alliance members also believe that these pension 

funds, like mutual funds, should be required to provide quarterly updates. These updates are now provided by the Central States plan to the court overseeing the fund, 

so this would not be a new or burdensome requirement. 

Consideration should also be given to mandating a change in the make-up of the 

Board of Trustees, which is now controlled by the union and largest transportation 

companies. A rotation of employer representation, to allow for participation by 

smaller employers, may be appropriate. 

2. Repeal of the Federal Excise Tax and Current Funding Deficiency Rules is 

Essential: 

Under current law, the combination of federal excise tax penalties and additional 

mandated payments under the minimum funding standards will drive smaller 

trucking companies out of business within one to two years. They simply lack the 

cash to pay an additional 135 percent of contributions. These rules should be replaced with new reorganization procedures that apply to any plan that is severely 

underfunded or at risk of becoming severely underfunded. A severely underfunded 

plan should be defined as one that has a funding ratio of assets to liabilities of 65 

percent, An at-risk plan should be defined as one with a funding ratio below 80 percent. It is simply imprudent to wait for a plan to become severely underfunded, or 

near terminal, before remedial, reorganization measures are imposed. 

While the Alliance members support the general framework of H.R. 2830, safeguards need to be built into that proposal to protect smaller employers. Under this 

bill, when a plan goes into reorganization, additional contributions can be imposed 

on employers up to 10 percent of the existing contribution rate of the employer. This 

10 percent cap remains until the next collective bargaining agreement is negotiated. 

At that time, the pension plan will become involved in the collective bargaining 

process by submitting schedules to the parties based on the funding needs of the 

plans. The pension plan could submit a schedule that requires a 40 to 100 percent, 

or more, increase in pension contributions that a smaller employer cannot afford to 

pay. An employer would be expelled from the plan, if it fail to pay the plan-mandated contributions. Withdrawal liability then would be imposed, forcing bankruptcy 

upon the company. This unprecedented delegation of power to the plan to impose 

additional contributions needs to be restrained for the good of all employers. The 

Alliance members believe that a cap on additional contributions should be set a 15 

percent above the rate under the prior collective bargaining agreement. 

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3. Re-establishment of Limitations on Employer Liability: 

Nothing could be more unfair or more anti-business than a law that provides that 

even though you have made all of the pension payments agreed to with your union, 

you still can lose all of your company’s assets if a plan becomes underfunded resulting from the actions of others outside your control. Essentially, the changes made 

to the federal multiemployer pension laws in 1980, made all contributing employers 

bear the burden for the pensions of workers who never performed any jobs for their 

company and for the pension obligations of their competitors who have gone out of 

business. That violates the most basic American principle, that a person and business should be allowed to prosper from the fruits of their labor. 

The Alliance members believe that Congress should restore the law in effect prior 

to 1980 that limited the liability of an employer in an underfunded plan to 30 percent of the employer’s net worth. Ideally, the concept of joint liability of all employers for plan underfunding should be repealed. It has only served to deter new employers from joining these plans and it has not improved the financial condition of 

the plans which was the main rationale behind the concept of withdrawal liability. 

Even unions recognize this plight. As stated as early as 1982: ‘‘The International 

Ladies Garment Workers Union hopes the PBGC will permit its multiemployer plan 

to exempt the small entrepreneur who simply wants to sell his business and retire. 

‘He’s tired, he wants to quit or he has a few bad seasons and feels another bad season would wipe him out,’ observes the union’s president, Sol Chaikin. ’My own feeling is that it would be cruel and unusual punishment for our union pension fund 

to demand his unfunded liabilities going back 20 years. That would leave him without a penny.’ ’’

The plans will tell this Committee that they generally only collect 10 percent of 

the amount owed when an employer withdraws because few assets are left when 

an employer ceases operations. The PBGC has testified that they collect a comparable 10 percent amount when a single employer goes into bankruptcy. 

Just as the Federal Government has found it intolerable that 90 percent of these 

costs in single employer plans are passed on to the PBGC, the employers in multiemployer plans find it intolerable that they are made to bear this huge expense. In 

fact, they can no longer shoulder this cost. No company should have all it assets 

on the line for an obligation it never made to workers who were never employed 

by them. The 30 percent net worth standard needs to be restored by Congress. 

4. Withdrawal Liability Rules Should Be Eliminated Not Made More Onerous: 

The current law is extremely onerous on contributing employers to multiemployer 

pension plans. First, they are made liable for plan underfunding that they had no 

part in the making. Then, they are required to pay the withdrawal liability assessed 

by a plan before they have the right to contest it in arbitration. Moreover, the plan’s 

determination and calculation of withdrawal liability is presumed correct until proven otherwise by the employer. It is patently unfair and contrary to normal rules of 

American jurisprudence to require employers to pay this alleged liability before the 

liability is even established. 

Likewise, the fund can sue all the affiliated companies and individuals that have 

majority ownership interest in the participating company and affiliated companies 

and seek to make them jointly liable for the withdrawal liability. All employers 

would be well served by repealing these ‘‘pay now and dispute later’’ rules and controlled group liability regulations. 

Further, it is wholly inappropriate to tighten the withdrawal liability rules. No 

company should be exposed to withdrawal liability when it uses owner operators, 

independent contractors or third party leasing companies to perform transportation 

services at its facilities. That is contrary to federal labor law and labor policy. It 

will only harm trucking companies and their customers. It will provide a basis for 

these plans to expel employers and drive them into bankruptcy. 

The trucking industry rule should also not be repealed. This rule is one of the 

few beneficial exceptions to withdrawal liability that Congress created in 1980. More 

trucking employers will only enter these plans if they have an assurance that they 

will not be on the hook for past underfunding. Congress must resist attempts to 

tighten the noose of these withdrawal liability rules. 

5. Pension Promises Should Be Made Only When They Can Be Paid: 

In 1992, the PBGC became aware that the alarming rise in pension plan underfunding was due in part to benefit increases that could not be sustained by the income to these plans. It is neither fair to the employers nor to the employees to increase benefit levels that cannot be sustained by the contributions to the plan and 

the return on the investments. Yet that is what has occurred. Consequently, these 

94

plans have had to make recent changes to future benefit accruals and in other areas 

permitted under current law. 

What is needed is an objective standard that governs future benefit increases. In 

the past, bills have been introduced in Congress that would allow a plan to increase 

benefits only when it is at least 90 percent funded. Such an approach makes sense 

and the Alliance members support it to ensure that future benefits can be paid. Otherwise, they are only false promises that increase the withdrawal liability of employers. 

6. The Need For A Congressional Study On Long Term Solutions To Plan 

Underfunding: 

While all the above reforms are vital to the short-term viability of these plans and 

their contributing employers, there remains a need for Congress to address the significant past underfunding in these plans. The Central States plan has $11-15 billion in accumulated underfunding. Our recommended reforms will prevent this plan 

from becoming worse, but it will not solve the ills created in the past. 

At best, we project that the plan, which is now about 65 percent funded, may become 75 percent funded with our suggested changes. The reason for this modest improvement is that cost of the benefits to the retirees, who have no contributing employer, is consuming all the contributions to the plan, a situation that is getting 

worse each year. It is unsustainable over the long term. We believe that an objective 

study is necessary to remedy the problem. A Congressional study commission is an 

appropriate method to develop meaningful and fair solutions for employers, retirees 

and the Government. We therefore ask that Congress fund such a study and require 

a report back, with recommendations, within one year. 

Conclusion 

The Alliance members recognize that defined benefit plans, both single employer 

and multiemployer plans, once were the pillars for creating a sound retirement income for workers in this country. The sad reality today, however, is that countless 

numbers of businessmen and women will not offer them to their workers because 

of the onerous rules and liabilities that attach to them under ERISA and MPPAA. 

The basic elements of opportunity and incentives are missing from the equation. 

Meaningful reforms of the law, as discussed above, can revitalize these plans. Without change, the plans will continue to decline in numbers, in financial strength and 

as retirement vehicles for workers. 

The Alliance sincerely appreciates the important changes in the law that this 

committee is making in H.R. 2830. We will do all we can to assist you in this difficult, but critical, decision-making process. This is the single most important legislative issue confronting unionized trucking companies. It is not an overstatement to 

say change is necessary for the very survival of the smaller, family-owned, union 

trucking company members of the Alliance.

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Prepared Statement of the American Association of Retired Persons 

(AARP)


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Prepared Statement of the American Society of Pension Professionals & 

Actuaries (ASPPA) 

The American Society of Pension Professionals & Actuaries (ASPPA) appreciates 

the opportunity to submit our comments to the House Committee on Education and 

the Workforce on H.R. 2830, The Pension Protection Act of 2005. 


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1 Under the PPA, most plans are required to use a valuation date as of the first day of the 

plan year for plan funding purposes as well as this notice. Small business defined benefit plans 

(i.e., plans with 500 or fewer participants) may use any day during the plan year for these purposes (see sections 102 and 112 of the PPA). 2 In other respects, the PPA recognizes the reduced risk posed by small business defined benefit plans. Sections 102 and 112 of the bill exempt plans with 100 or fewer participants from 

the quarterly contribution requirements applicable to underfunded plans (see sections 102 and 

112 of the PPA). 

ASPPA is a national organization of almost 5,500 retirement plan professionals 

who provide consulting and administrative services for qualified retirement plans 

covering millions of American workers. ASPPA members are retirement professionals of all disciplines, including consultants, administrators, actuaries, accountants, and attorneys. Our large and broad-based membership gives it unusual insight 

into current practical problems with ERISA and qualified retirement plans, with a 

particular focus on the issues faced by small to medium-sized employers. ASPPA’s 

membership is diverse, but united by a common dedication to the private retirement 

plan system. 

Small Business Defined Benefit Plans should be Exempt from Proposed New Disclosure 

Section 501 of the Pension Protection Act (PPA) of 2005 (H.R. 2830) would require 

that all defined benefit plans provide participants and the Pension Benefit Guaranty 

Corporation (PBGC) with an annual funding status notice within 90 days after the 

end of the plan year (e.g., by March 31 for a calendar year plan). This proposed new 

notice is based on a similar notice required for multiemployer plans, but which are 

not required under current law to be provided until 60 days after the due date for 

the plan annual report (e.g., by December 15 for a calendar year plan). Specifically, 

the notice would be required to provide: 

• A statement as to whether the plan’s funded current liability percentage for the 

plan year is at least 100 percent; 

• A reasonable estimate of the value of plan assets for the plan year1, the projected liabilities for the plan as of the end of the plan year taking into account any 

significant events, and the ratio of such assets to such projected liabilities; 

• A summary of the rules governing termination of single-employer plans; 

• An explanation of the benefits protected by the PBGC and any limitations on 

such benefits; 

• The ratio as of the end of the plan year of the number of vested participants 

no longer employed by the plan sponsor to the number of active participants; and 

• A statement on the funding policy of the plan and the asset allocation of investments under the plan on a percentage basis as of the end of the plan year. 

The apparent purpose of this proposed notice is to give participants and the PBGC 

rapid information about the funding status of the plan. It is unclear what will be 

the practical value of such information to participants, particularly in the non-union 

environment. 

While some accelerated information might be helpful to provide an early warning 

system to protect the PBGC, an exemption from the new proposed notice should be 

made for plans sponsored by small companies. In fact, the Administration which 

proposed a similar early-warning disclosure earlier this year did provide for a small 

business exception. 

Small businesses would incur substantial additional administrative costs if they 

were required to comply with the proposed notice. The notice will require a material 

amount of actuarial work, which will then, in many cases, have to be duplicated 

when the annual report (i.e., Form 5500) is prepared in the Summer or Fall (for 

a calendar-year plan). Also, the proposed new notice is required more than eight 

months earlier than the current law notice applicable to multiemployer plans. That 

is a particular hardship on small businesses with limited resources. Finally, the information required in the notice may simply not be available. For example, many 

small business plans invest in hard-to-value assets (e.g., real estate; limited partnership investments), and it may be several more months before valuations for such 

assets are completed. 

Small business defined benefit plans have historically not been a burden on the 

PBGC since the owners are generally not covered under the PBGC pension insurance program.2 A new, early notice requirement for small business defined benefit 

plans that do not pose a potential risk to the PBGC would unnecessarily increase 

administrative complexity and costs for practically no benefit. 

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Recommendation 

ASPPA recommends that only plans with more than 500 participants should be 

required to comply with the proposed new notice requirements. The definition of 

small business defined benefit plans for purposes of this exemption would be the 

same as the definition of small business plans used in sections 102 and 112 of the 

PPA for purposes of permitting a valuation date for funding as of any day during 

the plan year. 

Prepared Statement of the ERISA Industry Committee (ERIC) 

Mr. Chairman and Members of the Committee, thank you for the opportunity to 

present the views of The ERISA Industry Committee (ERIC) on H.R. 2830, The Pension Protection Act of 2005, and H.R. 2831, The Pension Preservation and Portability Act of 2005. 

ERIC is a nonprofit association committed to the advancement of the employee 

retirement, health, incentive, and compensation plans of America’s major employers. 

ERIC’s members’ plans are the benchmarks against which industry, third-party providers, consultants, and policy makers measure the design and effectiveness of these 

plans. ERIC has a strong interest in proposals affecting its members’ ability to provide employee benefits, incentive, and compensation plans, their cost and effectiveness, and the role of these plans in the American economy. 

Challenges Before the Committee 

News media and other public forums, including hearings before this Committee, 

have been filled for months with reports of problems concerning the funding of defined benefit pension plans as well as reports of court challenges to defined benefit 

hybrid plans. In the midst of this surfeit of information, Congress must separate 

real from perceived problems and fashion solutions that will, when enacted, actually 

enhance the retirement security of American workers. Too often today reports of 

problems in specific industries have led to suggestions that the entire system needs 

to be reformed to meet the most egregious circumstances. The debate has become 

imbalanced. The vast majority of plans are not a threat to the PBGC—but harsh 

and volatile rules are a threat to the vast majority of plans and the businesses that 

sponsor them. 

The introductory summary to The Pension Protection Act states: 

Employers making major financial decisions must be able to predict and budget 

for their pension contributions every year or they’ll simply freeze or terminate their 

plans and stop offering these voluntary benefits altogether. Workers also need to 

know that employers are making timely contributions to adequately fund their pension plans. 

In this statement, the Chairman and the other sponsors of H..R. 2830 have correctly identified the challenge before the Committee. Pension funding rules are perpetually challenged by the need to balance the goals of affordability and security. 

These dual goals must be premised upon a realistic view of long-term pension liabilities, which no single snapshot can provide. Funding rules must secure benefits for 

workers, but they must also enable a company to allocate cash in its business in 

a way that ensures the continued viability and growth of that business. 

Similarly, the introductory summary to The Pension Preservation & Portability 

Act states: 

Cash balance pension plans—a type of defined benefit plan that is employer-funded, insured by the PBGC, and portable from job to job—represent an important component of worker retirement security....The threat of legal liability [associated with 

these plans] is creating ongoing uncertainty and undermining the retirement security of American workers. 

Again, the Chairman and other sponsors of H.R. 2831 have correctly identified the 

challenge before the Committee. Without legal certainty, innovative and popular 

benefits particularly suited to a mobile and dynamic workforce, including women, 

will disappear—and soon. 

Employers and employees will continue to want defined benefit plans in the future. They are a very cost-effective way to provide real retirement income to workers. If you start with the same pot of money, larger benefits can be provided to individuals through a defined benefit program because longevity and investment risks 

are pooled and calculated over a longer period of time than any single individual’s 

lifespan. In addition, the benefits do not fluctuate with investment performance or 

the economy. Employees appreciate and benefit from the certainty provided by having defined benefit plans in their retirement portfolio. Before their legal status was 

called into question, many employers were turning to hybrid defined benefit plans 

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that are well-suited for the modern workforce, and some of these employers had 

never sponsored a defined benefit plan before. Under a rational and predictable regulatory scheme, recent declines in the numbers of defined benefit plans can be 

brought to a halt and perhaps reversed. 

We discuss both bills in further detail below, beginning with H.R.2831. 

H.R.2831, The Pension Preservation & Portability Act of 2005

ERIC urges in the strongest possible terms that the Committee include the substance of H.R.2831 in the longer pension bill (H.R.2830) when it considers these 

matters in the next few weeks. The Congress can construct the most perfect funding 

rules possible—but without certainty for hybrid plans those rules are likely to apply 

to a rapidly dwindling universe. 

Hybrid plans are important to workers’ retirement security: 

• Approximately 25% of defined benefit plans today are of hybrid designs. 

• They provide secure retirement benefits to over 7 million American workers, 

and they are even responsible for about 20% of premium-taxes paid to the Pension 

Benefit Guaranty Corporation (PBGC). 

But companies cannot rationally maintain these plans in the face of potential 

legal liabilities that increase by millions, or in some cases hundreds of millions, of 

dollars every year and that can result in large legal expenses even when a plan is 

exhonorated. The issue has been festering for years. Time is of the essence and the 

time for action is now. The cost of inaction is unacceptable. 

The promise of action, however, is that employers will be able to maintain their 

plans and to consider installing these plans for their employees in the future. It 

bears repeating that hybrid plans are secure retirement plans——

• They are paid for by the employer; 

• The investment risk is borne by the employer; 

• The benefit is determined by a formula, not by the ups and downs of the economy; 

• The benefit is guaranteed by the PBGC; 

• Annuity payout forms must be offered by the plans; 

• Benefits accrue ratably over time so that even shorter service workers receive 

a meaningful benefit; 

• Benefits are easily portable; and 

• Employees like, understand, and appreciate these plans. 

It is very likely that, with legal certainty, even employers who do not now offer 

a defined benefit pension plan will establish hybrid plans for their employees. If this 

is the result, this Committee could rightfully be proud. 

H.R.2831 recognizes, however, that legal certainty at too high a cost is counterproductive. If a premium is charged for certainty, employers will choose other routes 

to create a compensation package. In this regard, H.R. 2831 takes the only rational 

approach——

• It validates hybrid plan designs without regard to whether the plan already exists or is established in the future. 

• It provides a transparent test for age discrimination in conversions that does 

not mandate that a conversion follow a specific formula and does not require additional benefits to be provided just because the employer is changing the plan for the 

future. 

• It also resolves a technical issue (called ‘‘whipsaw’’) that has been used to penalize employers who provide generous interest credits under their plan. 

A few key points in the debate over hybrid plans should be highlighted: 

• The preponderance of courts have determined that hybrid designs are legal and 

that they do not discriminate on account of age. The reasoning in a district court 

decision that ruled otherwise has subsequently been rejected by another district 

court. 

• Employees have not lost earned benefits during conversions. Under current law 

all benefits are protected once they are earned and vested. 

• If the ‘‘whipsaw’’ is resolved as it should be, employees will benefit because plan 

sponsors will be encouraged to provide higher interest credits under their plans. 

Our Members have discovered several technical issues raised by the wording of 

H.R.2831. WE will identify those issues to the Committee and its staff shortly. In 

addition, there are several important technical issues that are not presently addressed by the bill; these issues are outlined in an attachment to this Statement, 

and we urge the Committee to address them in the bill. However, let there be no 

doubt; we are here principally to applaud the clarity of the vision in the bill regarding what must be done and to urge enactment of H.R.2831 as a part of H.R.2830. 

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H.R. 2830, The Pension Protection Act of 2005

ERIC Proposes Action: The ERISA Industry Committee has a proud history of advocacy of sound pension funding. The organization came into being in response to 

the government’s call for assistance in implementing the landmark 1974 Employee 

Retirement Income Security Act. It was instrumental in fashioning the backstop 

funding rules of 1987 and in revising those rules in 1994. We do come to the current 

debate both with a sense of history and an understanding of the need for responsible action. 

This year, ERIC put forward comprehensive Consensus Proposals for Pension 

Funding, PBGC Reform, and Hybrid Plans. (See the complete proposal on ERIC’s 

web site: www.eric.org.) Key provisions of ERIC’s proposals are summarized below. 

To improve funding, ERIC proposes——

• faster amortization for plan amendments that increase benefits; • a higher funded ratio threshold below which companies must commence accelerated contributions; • inclusion of lump sum benefits in the calculation of current liability and coordination of the discount rate used for funding with that used to calculate minimum 

lump sum distributions; • preservation, with modifications, of an employer’s ability to pre-fund required 

contributions; • increases in the contributions that employers can make on a deductible basis, 

and • increased incentives to fund up plans by allowing excess assets to be used to 

fund savings plan contributions on behalf of the pension plan’s participants. 

To improve disclosure, ERIC proposes——

• To provide participants with plan-specific information parallel to that provided 

on an aggregate basis to investors, thereby providing participants valuable information on their plans on a dramatically accelerated schedule compared to current law. 

To protect the PBGC against rapid deterioration of a plan, in addition to the funding proposals outlined above, ERIC also proposes—— • Prohibiting amendments to increase benefits in sharply underfunded plans; • Ensuring more rapid funding of shut down benefits and limit PBGC guarantees 

where opportunity to fund has been truncated by a bankruptcy, • At bankruptcy, restricting PBGC guarantees and limiting payouts of lump sum 

and shut down benefits; and • Provide greater incentives for employees to take benefits in the form of an annuity. 

ERIC also believes that there should be greater flexibility in developing solutions 

for specific industries that will increase the likelihood that companies will be able 

to restructure their enterprise and avoid termination of their pension plans while 

also ensuring that the funded status of a company’s plans does not worsen. 

Assessing the Problem: To determine the extent of the problem facing it, the Committee faces the difficult task of sifting through a confusing and sometimes misleading array of numbers describing the current and potential future state of pension funding and of the Pension Benefit Guaranty Corporation. The greatest danger 

is overstating the problem, for that could easily lead to enactment of harsh measures that themselves precipitate the problems they seek to avoid. 

For example: 

• In September 2004, the PBGC estimated that pension plans ensured by the agency were underfunded by $450 billion. The liabilities in this estimate are calculated as though every company involved were going to fail and be forced to terminate its plans. This simply is not going to happen. A recent analysis by Goldman 

Sachs states, ‘‘Quite frankly, if all of those sponsors were to fail, pension plan 

underfunding would be the least of the worries for the US economy and the capital 

markets.’’ • On June 7, the PBGC stated that underfunding in 1108 plans reporting to the PBGC increased from $279 billion at the end of 2003 to $354 billion at the end of 

2004. However, • The same report also states that the funded ratio of these plans had remained virtually steady—69.7% at the end of 2003 and 69% at the end of 2004. 

Thus their funded status actually appears to have remained virtually constant 

over this period. 

• From 2003 to 2004, the PBGC reduced the arbitrary interest rate it uses 

to calculate liabilities from 4.7% in 2003 to 3.8% in 2004, a 90 basis point drop 

that dramatically increased estimates of liabilities in plans reporting to it. 

• The same report also notes that assets in these plans increased substantially during 2004—from $914 billion to $1.141 trillion—apparently enough to 

offset the increase in liabilities due to the change to a much lower discount rate. 

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Use of a more reasonable discount rate would produce a different picture. Moreover, like the $450 billion estimate, this estimate is predicated on all 1108 plans 

being terminated, an unrealistic assessment. 

• The PBGC had a published deficit at the end of 2004 of $23 billion. If the agency used the yield curve interest rate proposed in the Administration’s funding proposal, its deficit reportedly would have been $19 billion, a significant decrease. 

• A June 7, 2005, Government Accountability Office report cited a drop in funding 

ratios in plans from 2000 to 2002, the latest date for which that agency had data. 

However, 2000-2002 includes the impact of the recent economic downturn, so the 

drop in the funded status of plans should not be a surprise. Initial evidence from 

2003 and 2004, when the economy began to turn back up, presents a different picture. 

• One recent analysis shows assets of defined benefit plans at approximately 

$2 trillion at the end of 1999, dropping to $1.5 trillion at the end of 2002, but 

climbing back up to $1.8 trillion at the end of 2004. That’s not back to full 

health yet, but the direction is encouraging. 

• While assets have increased in the last two years, some of their impact has 

been offset by a continued drop in long term interest rates, which Federal Reserve Chairman Alan Greenspan calls anomalous and unprecedented. 

Avoiding Pitfalls: The sponsors of H.R.2830 have stated that, while the Administration’s proposals are focused on the PBGC, their bill aims to provide a soundly 

financed system in which employers will maintain their plans rather than freeze or 

terminate them. We agree that this is the appropriate focus. Consider the following: 

• Private sector defined benefit pension plans pay approximately $110-120 billion 

in benefits to retirees every year. By comparison, in 2004 the PBGC paid approximately $3 billion. 

• Over 44 million Americans receive or will receive benefits from defined benefit 

plans. By comparison, the PBGC’s present and future benefit population at the end 

of 2004 was approximately 1 million. 

• The PBGC does not have a short-term crisis. At the end of 2004 it had resources sufficient to pay benefits for 20 to 25 years. In 2004 the PBGC received $1.5 

billion in premiums and earned $3.2 billion on it assets—from which it paid $3.7 

billion in benefits and administrative expenses. As new claims come in, the agency’s 

asset base will continue to grow and it will also receive additional premiums. 

H.R.2830, in supplanting a the Administration’s short-term PBGC-focused view 

with a longer term objective of ensuring sound funding along with a robust defined 

benefit system, has avoided several key pitfalls in the Administration’s approach. 

• Averaging and Smoothing: Averaging of the funding discount rate and smoothing of assets are two concepts that are misapprehended in the current debate. These 

mechanisms were placed in the law not to obscure the status of the plan but to accomplish critical policy objectives. Specifically, because of current law averaging and 

smoothing, (1) the plan sponsor is better able to predict—and plan for—future cash 

contributions; (2) unnecessary and harmful volatility in cash calls on the company 

are somewhat ameliorated; and (3) accelerated funding requirements are less likely 

to occur as the country moves into a recession. Instead, the sharp cash calls on a 

company precipitated by accelerated funding waits until a short time later, typically 

as the economy begins an upturn. A February 2005 independent study conducted 

for the Business Roundtable showed that, if the Administration’s spot rate and 

mark-to-market measures of assets had been the law, kicking in accelerated funding 

as the economy dropped into a recession in 2001 and 2002, the diversion of cash 

from business enterprises to pension funding requirements would have cost the 

economy 330,000 jobs in 2003 alone. In some cases, the lack of averaging and 

smoothing would have created a death spiral in companies, increasing, rather than 

reducing, liabilities faced by the PBGC. H.R.2830 wisely retains averaging and 

smoothing albeit for a shorter period of time than under current law. We caution, 

however, that further analysis of H.R.2830 is required to ascertain whether the 

funding scheme outlined in H.R.2830 will meet the critical funding policy requirements of predictability, stability, and economic compatibility. 

• Credit Ratings: The Administration proposes that companies that fall below investment grade be required to fund their plans as though they were about to terminate. This is based on the faulty logic that a company’s current investment grade 

determines the funded status of its plans as well as its ability to survive into the 

future. It does not. To the contrary, the increased call on the company’s cash can 

easily precipitate the death spiral the proposal seeks to avoid. Moreover, the proposal raises the disturbing prospect of the U.S. government, not the marketplace, 

ruling on the financial soundness of companies, an unprecedented intrusion into the 

free market. H.R.2830 wisely rejects this approach, retains a more appropriate focus 

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on the funded status of plans, and imposes additional requirements only on plans 

that are significantly underfunded. • Credit Balances: The Administration proposals abolish credit balances, not only 

removing a key incentive for employers to pre-fund future required contributions 

but also breaking faith with companies that have pre-funded their obligations in the 

past. H.R. 2830 wisely retains the concept of providing credits for pre-funding, including, based on our understanding from conversations with staff, taking into account all assets in the plan, including those contributed in advance of minimum requirements, in computing the funded status of the plan for funding purposes. The 

bill addresses problems that have arisen by ensuring that the value of the available 

credit matches the underlying available assets and by limiting the use of pre-funding credits if a plan becomes substantially underfunded. While the bill retains this 

necessary component of sound funding policy, we are very concerned that, as drafted, the bill would subtract credit balances from available assets in determining 

whether certain ‘‘non-funding’’ limits are met, such as those triggering benefit cutoffs and ‘‘at risk’’ status. This can force a waiver of a large part of a company’s existing credit balance, undermining prior pre-payments made in good faith and discouraging pre-funding in the future. It is vital that this result be corrected. • Deductible Contributions: Plan sponsors face various limitations on the contributions they can make to their plans on a tax-deductible basis. While the Administration provided some relief in this area, the approach in H.R.2830 is more complete and more useful to plan sponsors. The bill both allows deductions of contributions up to 150% of current liability and also of contributions, under certain circumstances, in excess of 25% of compensation. This latter provision is particularly 

important for so-called ‘‘legacy’’ plans where there can be far more retirees than 

workers and the 25% of compensation limit will severely limit the ability of the employer to fund the plan. ERIC also recommends that the 10% excise tax imposed 

on non-deductible contributions be abolished. 

Important Actions: H.R.2830 proposes additional reforms that Congress should 

enact. • Permanent Interest Rate: H.R.2830 establishes a permanent interest rate for 

calculating liabilities. Few circumstances have caused more confusion and created 

a greater impediment to employers maintaining defined benefit plans than the absence of a permanent discount rate since 2001. • Coordination of Lump Sum Calculations: The bill coordinates the discount rate 

used for funding with that used to calculate minimum lump sum distributions, with 

a phase-in to prevent disruption of individuals’ retirement planning. This is a critical step that will ensure that plans with lump sums are not stripped of assets when 

large numbers of employees leave at once. The bill, however, should be amended to 

provide for plans that, under current law, rely on rates other than the 30-year bond 

rate for the calculation of lump sums. 

• Phase-in of Premium Increases: The bill contains substantial increases in premium-taxes paid to the PBGC. To ameliorate the impact of this change, H.R.2830 

phases those increases in over time. (Note below, however, that ERIC strongly opposes indexing of premiums in the future.) 

Areas for Additional Analysis and Areas of Concern: H.R. 2830 proposes a substantially new framework for funding requirements. This scheme must be carefully 

examined by real companies with real plans in order to ensure that it results in 

more soundly financed plans in both the short and the long term while making it 

possible—even inviting—for employers to maintain their defined benefit plans and 

establish new ones. This examination cannot be completed in less than one week. 

Nevertheless, we offer the following by way of a preliminary analysis to guide the 

Committee’s further deliberations even as we continue our examination of the bill’s 

provisions. 

• Long-Term Funding Rules: Sponsoring a defined benefit pension plan is not a 

one-year, three-year, or even five-year commitment. It is a commitment that spans 

several decades. We are concerned that H.R.2830 repeals the long-term funding 

rules that form the bedrock of ERISA, under which plans experienced real growth 

and expansion, and which for decades have resulted in the vast majority of plans 

being well-funded and paying all promised benefits to participants. Maintaining the 

long-term perspective is vital in meeting the goal of encouraging employers to establish and maintain defined benefit plans and to providing a sound, predictable, and 

stable funding basis for companies sponsoring pension plans. We are concerned that 

repeal of these rules—and reliance solely on the short-term focus taken by 

H.R.2830—is likely to result in fewer plans and less well funded plans over time. 

• Volatility & Harshness: The present current liability funding rules have already 

introduced significant volatility into funding and can confront sponsors with funding 

requirements that are sudden and harsh, which makes defined benefit plans less 

109

attractive for businesses and, during the recent downturn precipitated the freezing 

of benefits in numerous plans. H.R.2830 appears to add significantly to the volatility 

and harshness of current law and to loop into this unfortunate circumstance plans 

that are actually very well funded. Additional volatility and harshness is caused by: 

(1) reducing the averaging and smoothing periods to three years; (2) reducing the 

corridor for valuing assets; (3) establishing a modified yield curve as the discount 

rate (where fluctuations in the rate and in the curve both affect sponsors liability 

calculations); (4) dividing the yield curve into three ‘‘buckets’’ each of which can fluctuate; (5) one-sided amortization (in which experience losses increases amounts to 

be amortized but the largest amortization amount is carried forward in spite of experience gains until the plan regains a 100% funded level; and (6) the 100% funding 

target itself. While the bill’s four-month ‘‘lookback’’ in setting the plan’s discount 

rate is helpful, we are very carefully examining whether its seven-year amortization 

period will work in the context of cyclical companies and we are very concerned that 

the bill’s provisions appear to come down hard on plans that are extremely well 

funded—i.e. close to 100% funded—and are of no threat to the PBGC. ERIC has proposed a 90% threshold for accelerated funding. In setting an appropriate target, it 

is appropriate to remember that a 10-15% swing in the funded ratio of a plan is 

a normal result of economic ups and downs. If the threshold is set too high, then 

plans will be significantly overfunded at the top of the economic cycle, but will be 

provided no leeway for ordinary and normal downswings. The unnecessary pressure 

on a company’s cash makes it less likely the company will maintain a defined benefit plan, defeating the purpose of the legislation. • Yield Curve: H.R.2830 contains a modified yield curve designed to ameliorate 

problems stemming from the yield curve set out in the Administration’s proposals. 

Unfortunately it does not achieve that goal and we remain convinced that adopting 

a yield curve for pension funding purposes is a mistake. If the Congress believes 

it is important to have different rates for mature and young plans, there are much 

simpler ways to accomplish that goal, and we would be pleased to discuss this further with the Committee. Some of our concerns include: (1) The modified yield curve 

does not simplify required calculations since each plan must still make estimates 

of future payouts for years into the future. (2) The underlying yield curve rate is 

only tangentially market-based and it is extremely opaque. A yield curve works well 

for financial instruments, such as mortgages or Treasury bonds, where the structure 

of the bonds is similar and the payout set. But the corporate bond market is very 

diverse—and future pension payouts are only guesses. They are not set. Moreover, 

at the durations that are most important for pension plans, the bond market often 

is thin or non-existent. So the Administration’s yield curve actually is a fabrication 

constructed by agency officials. At best there will be errors in judgment. At worst 

the discount rate that must be used for a $2 trillion program is subject to manipulation that will be impossible for Congress to uncover. These problems are actually 

exacerbated by the vagueness in H.R.2830 where the Treasury apparently would 

have leeway to set rates anywhere within the three segments. (3) Use of a Treasuryconstructed yield curve obliterates companies’ ability to predict future contributions. 

(4) Use of a yield curve, even a modified one, adds to the volatility of required contributions since both the interest rate and the slope of the curve will move. 

• Mortality Assumptions: While ERIC recognizes the RP2000 mortality table as 

published by the Society of Actuaries as a carefully constructed table that relies on 

data derived from existing pension plans, we are concerned that H.R.2830 requires 

use of discounts rates that are designed to reflect more precisely than current law 

the maturity of plan liabilities—but fails to allow similar precision regarding mortality assumptions. This will result in a mis-match of assumptions and severe inaccuracies in measuring liabilities for many plans. ERIC has proposed that plan-specific mortality assumptions be allowed, and the bill should be amended to make this 

possible. 

• Effective Date: The bill assumes that plans can prepare for a significantly new 

funding scheme by 2006. This is simply unrealistic. Imposing changes of this magnitude that quickly is likely to result in chaos, followed by significant numbers of 

plans being terminated or frozen. 

• Indexing of premiums: While ERIC recognizes that some increase in PBGC premiums is likely, we very strongly oppose indexing of the premiums in the future. 

This has the effect of increasing premiums on all plan sponsors regardless of whether the agency needs the money or not and in direct violation of the mandate contained in ERISA (sec. 4002) that premiums be kept at the lowest possible level. This 

is so that available money can go into the plan—not be diverted unnecessarily to 

a government agency. The result can only be that plans will become more unattractive to maintain over time. Moreover, under the bill, the variable rate premium 

would be indexed twice. Since it is expressed as percent (0.9%) of underfunding, the 

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variable rate is automatically indexed as the value of wages and benefits increase 

over time. The bill would impose a second wage index on top of the one already 

imbedded in the rate’s structure. If Congress deems a premium increase is necessary, we urge that it provide plan sponsors the certainty of knowing what that 

increase is by setting out the amounts required in the law. 

• Benefit Cut-offs: It is important to maintain benefits for participants in all 

cases where that is possible. H.R.2830, like the Administration proposal, focuses on 

the PBGC and not on the participants and, in so doing, eliminates or reduced benefits in ways that are counterproductive and completely unnecessary. ERIC has proposed a comprehensive set of measures that would protect both participants and the 

PBGC and we strongly urge that the bill be modified in line with those proposals. 

ERIC’s proposals are appended to this testimony. 

• Disclosure: The bill contains several new disclosure provisions. ERIC proposes 

an approach that is simpler, faster, and more relevant. We propose that the information prepared for a company’s 10-K be provided, on a plan-by-plan basis, to plan 

participants. This means that every year participants will be getting the same information as investors—and they will be getting it 60 days after the close of the year 

(90 days for smaller companies). 

Conclusion: ERIC is prepared to work with the Committee toward its goals—

sound funding of defined benefit pension plans and an environment where employers face legal certainty regarding their plans and where they will want to establish 

and maintain these valuable retirement security programs. 

Addendum #1

Additional Issues Regarding H.R.2831

The following provisions should be included in H.R. 2831: 

1. Amendments to Anti-backloading Rules. Legislation should amend the antibackloading rules, both prospectively and retroactively, to provide that if a plan provides participants with the benefit produced by two or more alternative formulas, 

the plan will comply with the anti-backloading rules if each of the formulas, tested 

separately, complies with those rules. 

A. This allows an employer that converts its traditional defined benefit plan 

to a hybrid formula to offer generous transition benefits to affected plan participants. 

2. Offset for Benefits Provided by Another Plan. The legislation should also clarify, both prospectively and retroactively, that if a plan provides for an offset for benefits provided by another plan, the plan will comply with the anti-backloading rules 

if the gross benefit formula (i.e., before application of the offset) complies with the 

anti-backloading rules. 

A. In the case of a floor-offset arrangement involving a defined benefit plan 

and a defined contribution plan, where the benefits under the defined benefit 

plan are offset by the actuarial equivalent of the benefits under the defined contribution plan, the defined benefit plan complies with the anti-backloading rules 

if its gross benefit formula (i.e., before application of the offset) complies with 

the anti-backloading rules. 

3. Nondiscrimination Rules. The legislative history should direct the Treasury not 

to revisit the nondiscrimination testing issue raised by the proposed Internal Revenue Code sec. 401(a)(4) regulations that the Treasury has withdrawn. 

A. Because hybrid plans are defined benefit plans, it should always be permissible to test them as defined benefit plans under sec. 401(a)(4) as well as 

to cross-test them as defined contribution plans. 

4. Determination Letters. The legislative history should direct the Treasury to 

begin issuing, by a date certain, determination letters to plans that have been converted from traditional designs to hybrid designs. 

Addendum #2

Proposed Restrictions on Benefit Improvements and Payouts 

1. Treat shut-down benefits as a plan amendment for funding and guarantee purposes as of the date they are triggered. Also apply to shut-down benefit payments 

the restrictions under present law and proposed below that apply to payment of 

lump sums. 

The Administration’s proposal would needlessly jeopardize benefits that are vital 

to workers, especially older workers, whose place of employment is being shut down. 

While it is true that under the current structure the PBGC’s liability can be increased for shut down benefits for which no funding has been allowed under current 

law, the solution is not to abolish the benefits in all instances—including in ongoing, 

well-funded, and even over-funded plans that can easily afford them. The solution 

111

is to adjust the funding and guaranty rules to protect the PBGC from sudden increases in its liability. 

Shut down and other contingent benefits typically cannot be funded until they are 

triggered by the contingent event. This makes sense because the triggering of such 

benefits is nearly impossible to predict on a reliable basis. On the other hand, under 

present law, shut-down benefits are guaranteed by the PBGC. For shut downs that 

occur just before an underfunded plan terminates the PBGC must assume a liability 

for which there has been no opportunity for funding to occur. 

Most shut down benefits are paid without imposing any liability whatsoever on 

the PBGC. They are paid from an ongoing plan that is not terminating or from a 

plan that is terminating but is well- or over-funded. Thus, if shut-down benefits are 

treated as a plan amendment for both funding and PBGC guarantee purposes, the 

PBGC’s exposure is contained while preserving the payment of shut down benefits 

in the vast majority of circumstances. Moreover, such treatment would be consistent 

with other types of benefits that accrue shortly before termination but were previously unknown (i.e., plan amendments). 

As an additional measure of protection, the same restrictions could be placed on 

payment of shut down benefits as are proposed below regarding payment of lump 

sum benefits. 

2. Freeze the benefit the PBGC will guarantee at the time of bankruptcy. 

Bankruptcy proceedings can stretch out over a long period of time. We agree with 

the Administration that the PBGC guarantee limit should be frozen for a plan at 

the time of the bankruptcy filing. 

3. Prohibit amendments that increase benefits if the plan is less than 70% funded 

and has been less than 100% funded for more than a year. 

Under current law, amendments that increase benefits are prohibited if they 

would reduce the plan’s funded status below 60% unless simultaneous action is 

taken to restore the plan at least to a 60% funded level. The Administration proposes to raise this bar to 80%. This is simply too high. As we noted earlier, only 

3.3% of the dollar amount of all claims received by the PBGC from 1975 through 

2003 came from plans that were funded at a 75% or higher level on a termination 

basis. Plans that are reasonably well funded simply are not a threat to the PBGC 

and should be allowed to operate without government interference. Moreover, we 

have proposed that the amortization period for plan amendments that increase benefits be reduced from 30 to 10 years, a very significant change that will ensure that 

funding for plan amendments is significantly accelerated. 

On the other hand, a plan that is 60% funded can present a significant exposure 

to the PBGC. Thus we propose that the 60% level be increased to 70%. 

4. If the plan sponsor is in bankruptcy, limit the percentage of any lump sum that 

can be paid to the plan’s funded status. 

The Administration has proposed to prohibit payment of lump sums under a variety of circumstances in an apparent effort to curb the depletion of assets in a plan 

that might be transferred to the PBGC. Unfortunately, the PBGC’s proposal is far 

too broad, sweeps into its net too many plans that will not be transferred to the 

PBGC, and thus will cause serious and completely unnecessary disruption for older 

workers who are nearing retirement and have little chance to rearrange their plans. 

Moreover, the PBGC’s abrupt approach is likely to trigger the very ‘‘run on the 

bank’’ it seeks to avoid as workers eligible to take a lump sum will do so prematurely rather than risk losing it later. 

A less disruptive approach that still protects the PBGC would be to apply restrictions only if the plan sponsor is in bankruptcy and, in these circumstances, to limit 

the percentage of a lump sum that can be paid to an individual to the plan’s funded 

status. In other words, if the employer is in bankruptcy and the plan is 80% funded, 

then eligible individuals could receive 80% of their benefit in the form of a lump 

sum. 

5. Retain present law prohibitions on benefit amendments in bankruptcy as well 

as present law prohibitions on lump sum and other accelerated forms of benefit payments in the case of a plan with a liquidity shortfall. 

Bankruptcies can take several years to work through, and key to the employer’s 

ability to turn the business around is its ability to retain knowledgeable and skilled 

employees. The Administration proposes to freeze the company’s pension plan at the 

start of a bankruptcy, even if the plan is 99% funded. This hammer-blow approach 

will, in fact, harm rather than protect the PBGC by making it far more likely the 

company will not be able to retain the key employees it needs to effect a recovery. 

Under present law, if the employer maintaining a plan is involved in bankruptcy 

proceedings, no plan amendment may be adopted that increases the liabilities of the 

plan—including by an increase in benefits or any change in the accrual of benefits 

or in the rate at which benefits vest under the plan. Plans that have assets equal 

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to less than three years of benefit payments may not make lump sum payments or 

other payments that deplete assets on an accelerated basis. These provisions of law 

should be retained.

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