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S. HRG. 111–1078 

PENSIONS IN PERIL: HELPING WORKERS 

PRESERVE RETIREMENT SECURITY THROUGH 

A RECESSION 

HEARING 

OF THE

COMMITTEE ON HEALTH, EDUCATION, 

LABOR, AND PENSIONS 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

ON

EXAMINING HELPING WORKERS PRESERVE RETIREMENT THROUGH A 

RECESSION, FOCUSING ON THE PENSION BENEFIT GUARANTY CORPORATION’S PROCESS FOR DETERMINING THE AMOUNT OF BENEFITS 

TO BE PAID, AND PBGC’S RECOUPMENT PROCESS WHEN THE ESTIMATED BENEFIT PROVIDED IS TOO HIGH AND A RETIREE RECEIVES 

AN OVERPAYMENT THAT MUST BE REPAID 

OCTOBER 29, 2009 

Printed for the use of the Committee on Health, Education, Labor, and Pensions 

( 

Available via the World Wide Web: http://www.gpoaccess.gov/congress/senate 

COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS 

TOM HARKIN, Iowa, Chairman 

CHRISTOPHER J. DODD, Connecticut 

BARBARA A. MIKULSKI, Maryland 

JEFF BINGAMAN, New Mexico 

PATTY MURRAY, Washington 

JACK REED, Rhode Island 

BERNARD SANDERS (I), Vermont 

SHERROD BROWN, Ohio 

ROBERT P. CASEY, JR., Pennsylvania 

KAY R. HAGAN, North Carolina 

JEFF MERKLEY, Oregon 

AL FRANKEN, Minnesota 

MICHAEL F. BENNET, Colorado 

MICHAEL B. ENZI, Wyoming 

JUDD GREGG, New Hampshire 

LAMAR ALEXANDER, Tennessee 

RICHARD BURR, North Carolina 

JOHNNY ISAKSON, Georgia 

JOHN MCCAIN, Arizona 

ORRIN G. HATCH, Utah 

LISA MURKOWSKI, Alaska 

TOM COBURN, M.D., Oklahoma 

PAT ROBERTS, Kansas 

J. MICHAEL MYERS, Staff Director and Chief Counsel 

FRANK MACCHIAROLA, Republican Staff Director and Chief Counsel 

(II) 

C O N T E N T S 

STATEMENTS 

THURSDAY, OCTOBER 29, 2009 

Page 

Harkin, Hon. Tom, Chairman, Committee on Health, Education, Labor, and 

Pensions, opening statement ............................................................................... 1 

Enzi, Hon. Michael B., a U.S. Senator from the State of Wyoming, opening 

statement .............................................................................................................. 3 

Brown, Hon. Sherrod, a U.S. Senator from the State of Ohio ............................. 4 

Prepared statement .......................................................................................... 5 

Ryan, Hon. Tim, a U.S. Representative from the State of Ohio .......................... 7 

Casey, Hon. Robert P., Jr., a U.S. Senator from the State of Pennsylvania ...... 8 

Gump, Bruce, Chairman, Delphi Salaried Retirees Association, Warren, OH ... 9 

Bovbjerg, Barbara D., Director Education, Workforce, and Income Security 

Issues, Government Accountability Office, Washington, DC ............................ 12 

Prepared statement .......................................................................................... 14 

Jury, David R., Associate General Counsel, United Steelworkers of America, 

Pittsburgh, PA ...................................................................................................... 23 

Prepared statement .......................................................................................... 25 

Jones, Richard, Chief Actuary, Retirement Consulting, Hewitt Associates, 

Lincolnshires, IL .................................................................................................. 28 

Prepared statement .......................................................................................... 29 

Mikulski, Hon. Barbara A., a U.S. Senator from the State of Maryland ............ 42 

Prepared statement .......................................................................................... 42 

Brown, Hon. Sherrod, a U.S. Senator from the State of Ohio ............................. 46 

Burr, Hon. Richard, a U.S. Senator from the State of North Carolina ............... 48 

Prepared statement .......................................................................................... 48 

Franken, Hon. Al, a U.S. Senator from the State of Minnesota .......................... 51 

Hagan, Hon. Kay, a U.S. Senator from the State of North Carolina .................. 53 

Reed, Hon. Jack, a U.S. Senator from the State of Rhode Island ....................... 53 

Peterson, Ronald R., President, the John Hopkins Hospital and Health System, Baltimore, MD ............................................................................................. 67 

Prepared statement .......................................................................................... 69 

Gebhardtsbauer, Ron, Faculty-in-Charge, Acturial Science Program, Pennsylvania State University, University Park, PA .................................................... 71 

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

DeFrehn, Randy G., Executive Director, National Coordinating Committee 

for Multiemployer Plans, Washington, DC ........................................................ 79 

Prepared statement .......................................................................................... 81 

Friedman, Karen D., Executive Vice President and Policy Director, Pension 

Rights Center, Washington, DC .......................................................................... 97 

Prepared statement .......................................................................................... 99 

ADDITIONAL MATERIAL 

Statements, articles, publications, letters, etc.: 

National Education Association (NEA) ........................................................... 111 

YRC Worldwide, Inc. ........................................................................................ 112 

Letter from Senator Coburn to Barbara D. Bovbjerg .................................... 115 

(III) 

(1) 

PENSIONS IN PERIL: HELPING WORKERS 

PRESERVE RETIREMENT SECURITY 

THROUGH A RECESSION 

THURSDAY, OCTOBER 29, 2009 

U.S. SENATE, 

COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS, 

Washington, DC. 

The committee met pursuant to notice at 10:05 a.m., in room 

SD–430, Dirksen Senate Office Building, Hon. Tom Harkin, chairman of the committee, presiding. 

Present: Senators Harkin, Mikulski, Reed, Brown, Casey, Hagan, 

Franken, Enzi, Burr, Isakson, and Murkowski. 

Also present: Congressman Ryan. 

OPENING STATEMENT OF SENATOR HARKIN

The CHAIRMAN. The Committee on Health, Education, Labor, and 

Pensions will come to order. I want to welcome everyone to this 

very timely and important hearing on retirement security. In these 

troubled economic times, working families face unprecedented challenges. Millions of Americans have lost their jobs. And those who 

have jobs are often working harder and longer but still cannot meet 

the rising costs of basic everyday needs like health care, education, 

and housing, let alone save enough to provide for security in their 

old age. 

The harsh reality is that the retirement security of millions of 

American workers and retirees is in jeopardy. It is not a new problem. It is the culmination of a trend that has played out over the 

past couple of decades. Today, about one-half of all U.S. workers 

have no pension or savings plan at all. Let me repeat that. Today, 

about one-half of all U.S. workers have absolutely no pension, no 

savings plan whatsoever. Most others, in that other 50 percent, 

have only a 401(k) account where workers shoulder all the risk and 

see much of their hard-earned savings siphoned off by hefty fees. 

Not surprisingly, many people have saved very little in these accounts. And, of course, most have seen their nest eggs decimated 

by the big decline in the stock market. 

All of these problems make traditional pensions more critical 

than ever. There are still 40 million Americans who rely on a secure defined benefit pension to provide a guaranteed income in 

their retirement years. Unfortunately, these secure pensions are 

under attack too. More and more companies are telling workers 

they cannot afford to pay for pensions, despite the fact that the executives are getting salaries and benefits that would make King 

2 

Midas blush. In other cases, companies use the bankruptcy process 

to shed pensions. The company lives on but workers lose the hardearned retirement income they were counting on. 

Congress has taken some important steps to help shore up Americans’ retirement security. In 2006, we passed the bipartisan Pension Protection Act to require employers to do a better job of funding their pension plans and to make it more difficult for companies 

to default on what they owe. 

I hope and expect that we can continue to address pension issues 

in a bipartisan manner, as we did under the leadership of both 

Senator Enzi and Senator Kennedy, along with Senator Mikulski 

and Senator Burr and our colleagues on the Finance Committee. As 

we investigate the challenges that workers and employers face 

when pension plans get into financial trouble, I look forward to 

moving forward in this same spirit to develop both short- and longterm solutions. 

Our first panel of witnesses today will focus on the many losses 

that workers and retirees face when pensions fail. Although we 

have a pension insurance system, the Pension Benefit Guaranty 

Corporation, it provides only a partial safety net. 

In particular, we will hear about the plight of workers and retirees at Delphi Corporation, the auto parts manufacturer. The case 

of Delphi is unique since General Motors, quite frankly, did the 

right thing by many tens of thousands of workers under union contracts and topped up their pensions. 

But there are still some other union workers—electrical workers, 

operating engineers, and machinists—who labored right alongside 

their brothers and sisters where they are not being made whole on 

their pensions. And in addition—we will hear more about this from 

Mr. Gump, an engineer who spent 33 years working at Delphi— 

there are some 15,000 salaried workers who are losing their pension benefits. 

These stories demonstrate why we must do everything we can to 

ease the toll that pension failures take on working families. 

Our second panel will discuss precisely that question, how we 

can help. We all agree that requiring more employer responsibility 

for the financial health of pensions has been an important step. 

Unfortunately, the tougher requirements of our new laws are kicking in just at the time when many employers are facing the pressures of a bad stock market and a weak economy. 

I understand this predicament and I am willing to look at solutions. But we must remember that it is precisely in such tough economic times that the role of the Federal Government in safeguarding Americans’ retirement is more important than ever, and 

we must strike a careful balance. 

No question today’s hearing could not be more important for tens 

of millions of American workers and retirees. We face big challenges in shoring up the retirement security of the American people. I look forward to the hearing today and to our witnesses, and 

I look forward to working with our colleagues on a bipartisan basis 

to find some solutions. 

With that, I will yield to my Ranking Member, Senator Enzi. 

3 

OPENING STATEMENT OF SENATOR ENZI

Senator ENZI. Thank you, Mr. Chairman. 

Just over a year ago, you and I held our first retirement savings 

hearing together and we looked into how to provide a greater 

transparency and understanding of the 401(k) disclosure statements to workers and retirees. So today, I am very glad that we 

are expanding our review of our Nation’s retirement saving system 

by looking into the traditional defined benefit plan. 

With the significant turndown in the stock market last year, individuals and families with 401(k)’s and IRA’s immediately felt the 

impact. However, with respect to the longer-term investing traditional benefit plans, the effect of the market turndown was not as 

readily apparent. 

Thankfully, we were able to provide some relief to workers, retirees, and their families who have 401(k)’s, IRA’s, and defined benefit plans as we passed the Worker, Retiree and Employer Recovery 

Act last December. While this was a very temporary measure to 

help get over the initial shock of the economy, we all agreed that 

we would come back and address this problem again later this 

year. 

When the Senate overwhelmingly passed the Pension Protection 

Act in 2006, we all voted to shore up our defined benefit system 

to ensure that retirees’ pensions were there when they retired. In 

fact, the stronger funding rules that we implemented led to more 

companies funding their pension plans. At the beginning of 2008, 

many plans were well on their way to being 100 percent funded. 

However, all of that has changed. If we could have foreseen in 

2006 the steep stock market decline coming around the bend, then 

there is little doubt that we would have incorporated greater flexibility in the funding rules. 

I would like to thank all the panelists today for traveling across 

the country to be with us today. We have a very good cross section 

of workers, retirees, and employers, and I hope they will give us 

great insight into what we can do. 

However, I must single out the issue to be discussed on our first 

panel, the issue of what happens to pension plans when companies 

enter into bankruptcy. I am very disturbed by the materials provided by Mr. Gump on behalf of the Delphi Salaried Retiree Association. This type of deal negotiated behind closed doors out of the 

public view is exactly the type of deal-making that we have long 

criticized the PBGC for undertaking in years past. However, this 

time, the behind-the-closed-door deal was undertaken by the Administration’s Auto Czar, the Auto Task Force, and the Secretary 

of the Treasury. 

Everyone needs to know and understand what promises were 

made, who was negotiating this deal, and how this Administration 

also pre-packaged the GM bankruptcy arrangement. Taxpayers deserve to know how the Delphi situation is tied to the larger Federal 

bailout of GM and how it impacts all of our future. The deals that 

go on behind closed doors should be viewed with sunshine and 

made transparent to the workers of Delphi and the American people. If transparency is to be one of the hallmarks of this AdminisVerDate Nov 24 2008 09:28 Nov 04, 2011 Jkt 035165 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 S:\DOCS\53424.TXT DENISE
4 

tration, as it was advertised, then allowing sunshine on these dealings should not be objectionable. 

Mr. Chairman, this afternoon I will be sending a letter to the 

Secretary of the Treasury and the Auto Czar insisting that all documentation relating to this inside-the-Beltway agreement be made 

public immediately. Mr. Gump’s testimony indicates that this deal 

was not in the best interest of the workers or the taxpayers. 

Mr. Chairman, thank you again for holding this hearing on our 

Nation’s traditional retirement plans. 

The CHAIRMAN. Thank you very much, Senator Enzi. 

Departing a little bit from the normal procedure where just the 

Chairman and the Ranking Member make opening statements, because of the particular interest that this has to the State of Ohio 

and our Senator from the State of Ohio, I am going to recognize 

Senator Brown for a statement. Then I will turn to Representative 

Ryan for purposes of introduction before we start our panel. Senator Brown? 

STATEMENT OF SENATOR BROWN

Senator BROWN. Thank you very much, Mr. Chairman. Senator 

Enzi, thank you for your role in raising these critical pension 

issues before the committee today. 

I would like to welcome particularly Bruce Gump from Warren, 

OH and Congressman Tim Ryan from Niles representing the 

Mahoning Valley. Both live in the Youngstown area. Each has 

fought tirelessly for Delphi workers. I thank you both. 

Just earlier today I met with probably a dozen Delphi retirees. 

Every one of them had been with that company for 30 years. For 

every one of them, their situation is not what was promised to 

them during their work lives. That is why we are here today. 

The chairman laid out what has happened to our pension system, 

not just what has happened with Delphi workers and what can 

happen to workers, but he laid out so well what has happened to 

our whole pension system and how so many people have fallen 

through the cracks particularly in the social contract that we are 

all part of, you know, whether it is Medicare or whether it is a private pension that you have been promised through your whole career and it lies in tatters. That is why this hearing is so important 

and what we have to do. 

I will be brief, but I want to share a few examples from what has 

happened in Ohio with the committee. 

Richard was working for Republic Technologies. He was told he 

would get a monthly pension benefit of $2,400. When PBGC assumed trusteeship of the plan, he was told his benefit would be 

$1,088. Later after PBGC calculated his final benefit, he was told 

he had been overpaid and he owed back to PBGC $53,000. His actual benefit would be $325 minus a recoupment deduction of 10 

percent, yielding literally $292.67. 

Dorothea worked as a Packard GM Delphi hourly employee, as 

many did here, for 34 years in Trumbull County. In her letter to 

our office asking for assistance, she wrote: ‘‘To sum up my feelings, 

I was afraid to die. Now I am afraid to live. No pension. No health 

care. No Social Security. No job. Please help.’’ 

John, a 55-year-old Delphi salaried retiree wrote: 

5 

‘‘Thirty-one years of effort to secure a pension are being ruined. In the bankruptcy court, creditors who have only several 

years of revenue at risk are being given higher priority. I have 

been looking for a job for 10 months without any success. If my 

pension goes to PBGC, my family may be living below the poverty level.’’ 

In the case of Delphi hourly employees under certain collective 

bargaining agreements, GM agreed to make up the difference between the PBGC benefit and what the retiree had earned. 

The Delphi salaried employees and a few hourly employees, I believe about 100—those represented by the Union of Operating Engineers, the IBEW, Brotherhood of Electrical Workers, and machinist unions—had no such agreement. They, like the salaried workers, are facing drastic reductions to their benefits. 

Other Delphi retirees are facing the loss of their health benefits, 

which is why Congressman Ryan and I introduced legislation in 

our respective houses to fund a voluntary employees’ beneficiary 

association, a VEBA, to help them with the cost of health care. 

They too are looking for fair treatment. 

Mr. Chairman, again to emphasize what Senator Enzi said and 

what you said, these are people that worked hard all their lives. 

As I said, I met with many of them again this morning for probably 

the fourth or fifth time. My office has been working with them. Tim 

Ryan has so faithfully worked with them and advocated for them. 

They are simply not being treated fairly. The social contract is 

frayed. We need to deal with that. 

I thank the chairman. 

[The prepared statement of Senator Brown follows:] 

PREPARED STATEMENT OF SENATOR BROWN

Good Morning. 

I would like to thank Chairman Harkin, Ranking Member Enzi, 

and all of the members of the committee for holding this hearing. 

I appreciate the opportunity to join my colleagues in the Senate 

and the representatives of the Delphi retirees to speak out on behalf of the tens of thousands of Ohioans who are paying the price 

of the Delphi bankruptcy in lost health care and reduced pensions. 

For many workers and retirees in Ohio and across the Nation, 

there is a crisis of confidence in our social contract. Pension benefits earned over a lifetime of service are dramatically reduced in 

the wake of bankruptcy. 

When PBGC assumes trusteeship of a pension plan, it can only 

pay benefits up to what is guaranteed in law. Final benefits can 

sometimes take months or years to calculate, with the retiree responsible for any overpayment. 

Early retirement, supplemental benefits, and health benefits are 

not guaranteed. Retirees are in no position to make up for these 

losses when their pension is assigned to the PBGC. They feel betrayed by the system that was supposed to protect them. 

The Federal Government stepped in to bail out the auto industry. 

TARP financing has enabled General Motors to quickly move 

through bankruptcy. TARP financing enabled GM to address its 

pension obligations. TARP saved thousands of jobs in a key sector 

6 

of our economy. However, some workers, many of whom spent most 

of their careers as GM employees, were left out. 

Tom Rose, a Delphi retiree who started his career with General 

Motors in 1969, summarized the sentiment of many Delphi retirees 

when he told the Dayton Daily News: ‘‘Our defined pension depended on a trust that was broken.’’ 

In the case of Delphi hourly employees under certain collective 

bargaining agreements, GM agreed to make up the difference between the PBGC benefit and what the retiree had earned. The Delphi salaried employees and some of the hourly employees such as 

those represented by the International Union of Operating Engineers, the International Brotherhood of Electrical Workers (IBEW), 

and the Machinists unions had no such agreement and are facing 

drastic reductions in their pension benefits. They are looking for 

fair treatment. 

Other Delphi retirees are facing the loss of their health benefits, 

which is why Congressman Ryan and I introduced legislation with 

Representatives Fudge, Kucinich, Turner, and other members of 

the Ohio delegation to fund a Voluntary Employees’ Beneficiary Association to help them with the cost of health care. They, too, are 

looking for fair treatment. 

At our Senate HELP Committee hearing last month, we heard 

testimony about how Delphi pushed many workers into early retirement with the assurance that their pension benefits would be 

safe. That was not true. Now these retirees face the greatest losses 

in income. 

John, a 55-year old Delphi Salaried retiree wrote my office, 

‘‘Thirty-one years of effort to secure a pension are being ruined. In the bankruptcy court, creditors who only have several 

years of revenue at risk are being given higher priority. I have 

been looking for a job for 10 months without any success. If my 

pension goes to the PBGC, my family will probably be living 

below the poverty level.’’ 

The loss of pension and health care benefits will add to the economic devastation of an area already reeling from job losses. A 

Youngstown State University study estimated an annual fiscal impact of nearly $58 million, resulting in over 1,700 employment 

losses. 

Protecting the pensions supports economic recovery. 

Protecting retirement security was one of the purposes of the 

bailout of our financial system. 

We cannot bail out an industry while leaving thousands of retirees who have loyally served it out in the cold. 

We should be able to resolve this. 

Thank you for inviting me to testify. 

The CHAIRMAN. Thank you very much, Senator Brown. 

I will turn first to Representative Ryan for an introduction. Then 

I will yield to Senator Casey for purposes of an introduction. And 

then we will move ahead. 

Representative Ryan, a fourth term Congressman from the 17th 

District of Ohio. Welcome, Tim, and please proceed for your introduction. 

7 

STATEMENT OF HON. TIM RYAN, U.S. CONGRESSMAN FROM 

THE STATE OF OHIO 

Mr. RYAN. Thank you, Mr. Chairman, and congratulations on 

your new assignment. Ranking Member Enzi, members of the committee, thank you for the privilege to appear before this committee 

and to introduce my constituent and friend, Bruce Gump. 

I would also like to give a special thank you to Senator Brown. 

As you can see, he has been working very hard on behalf of these 

Delphi retirees for a long, long time, not only Delphi retirees, but 

as he stated, other pensioners across the State of Ohio and the 

country. 

After a brief period of success following their 1999 spinoff from 

General Motors, Delphi Corporation was soon in trouble. Languishing in bankruptcy for 4 years, Delphi canceled pensions and 

health care benefits for retirees as GM’s bankruptcy sharply reduced both their revenues, curtailed continuing payments, and 

jeopardized existing agreements. 

Thanks to the Obama administration, many GM workers and retirees will receive their full pensions and assistance with their 

health care. Many Delphi retirees will also receive assistance for 

their pensions. 

However, many other Delphi retirees will see major cuts to their 

pensions and almost all Delphi retirees will see substantial cuts to 

their much-needed health care benefits. These cuts will directly affect over 70,000 retirees across the Nation and over 5,000 in my 

congressional district alone. Not only will this have a devastating 

effect on these workers and their families, but the secondary economic effects in communities in Ohio will be enormous. 

Mr. Bruce Gump of Warren, OH is one of the many Delphi retirees in my district who lost both his health care benefits and will 

see a reduction in his pension. Bruce retired after 32 years as an 

engineer in the automotive industry: almost 23 of those years for 

GM prior to the spinoff and 10 years at Delphi. At age 58, the 

PBGC will reduce his pension by a substantial amount. 

And his situation, unfortunately, is not unique. Delphi forced 

many of its employees into early retirements. So the pension reductions from the PBGC will be more severe than they should be for 

people who have worked more than 30 years. 

It is a problem when anyone in this country loses their pension, 

no matter how, and today we have a chance to better understand 

the situation and, more importantly, address the problem. 

So, again, I would like to say thank you. This is a critical issue 

for those of us in northeast Ohio. We are having tremendous, devastating job losses in Ohio, and to have this compounding economic 

problem to pull all of this money out of our communities truly is 

devastating. So, again, thank you. Thank you, Senator Brown, for 

your leadership, and I appreciate the opportunity for Bruce to be 

here. 

The CHAIRMAN. Thank you very much, Congressman Ryan. I 

know you have duties on the House side. So you can excuse yourself whenever you feel that you have to get back to your House duties. 

Now I will recognize Senator Casey for purposes of introduction 

for Mr. Jury. 

8 

STATEMENT OF SENATOR CASEY

Senator CASEY. Mr. Chairman, thank you very much, and I appreciate your convening of this hearing. 

There are a lot of ways to describe the challenge that the country 

faces, but maybe one of the headlines on this says it all, that we 

have pension funds in America underfunded by over $400 billion. 

That alone speaks volumes about why we are here today. 

Mr. Chairman, I want to thank you for having this hearing. 

I am going to be very brief. I want to introduce David Jury who 

is the Associate General Counsel of the United Steelworkers of 

America. It will not be a long introduction, but we want to thank 

him for being here, as well as the other members of the panel. 

You know I am a big fan of the steel workers. They have been 

so helpful to so many Pennsylvanians. They share our history and 

our heritage in our State of hard work and sacrifice. But they are 

also a union—I think David could speak to this directly—focused 

on the future. We are grateful for what they do in terms of developing a high-skilled workforce and increasingly a diverse workforce, not just those who are involved in making steel, but other 

parts of our economy as well. 

And on our second panel, I know that Randy DeFrehn of the National Coordinating Committee for Multiemployer Plans is a Johnstown, PA native. Of course, I will ask him to move back there some 

day. We will talk about that later. 

And Ron Gebhardtsbauer, who represents the Actuarial Science 

Program from Penn State. I will not get into Penn State football 

today, but they are doing pretty well. And I wanted to make sure 

that I mentioned them. 

Other than that, that is the only Pennsylvania representatives 

that I know of here today. 

[Laughter.] 

If someone else wants to come up, I will introduce you as well. 

Thank you, Mr. Chairman. 

[Laughter.] 

The CHAIRMAN. I did not realize we had so many Pennsylvanians 

here today. 

Let me just then introduce also the remainder of the panel. Barbara Bovbjerg is the Director for Education, Workforce, and Income 

Security Issues at the U.S. Government Accountability Office, 

GAO. In that capacity, she oversees evaluative studies on aging 

and retirement income policy issues, including Social Security and 

private pension programs, operations and management at the Social Security Administration, the Pension Benefit Guaranty Corporation, and the Employee Benefits Security Administration at 

the Department of Labor. Ms. Bovbjerg holds a master’s degree 

from Cornell University and a B.A. from Oberlin College. 

Also, Richard Jones, a principal and Chief Actuary in Hewitt’s 

Retirement and Financial Management Practice based in Lincolnshire, IL, a fellow of the Society of Actuaries, an enrolled actuary, 

and a member of the American Academy of Actuaries. In his capacity as Chief Actuary, he is responsible for U.S. actuarial practices, 

standards, and processes. As I said, 22 years he has been with 

Hewitt, has consulted on a broad range of retirement plan financial 

9 

strategy and design issues for their clients. He has made presentations to both the Senate Finance Committee and the House Ways 

and Means Committee. We are glad to have you here before the 

HELP Committee. 

We welcome our first panel. All of your statements will be made 

a part of the record in their entirety. Your clock has a 5-minute 

timer. We ask if you could kind of sum it up in 5 minutes. I do 

not bang the gavel at 5. If you go over for 1 or 2, that is fine, but 

try to keep it around that so we can engage in a conversation with 

you. 

We will start with you, Mr. Gump. Again, welcome and please 

proceed. 

STATEMENT OF BRUCE GUMP, CHAIRMAN, DELPHI SALARIED 

RETIREES ASSOCIATION, WARREN, OH 

Mr. GUMP. Thank you, Senator. If you do not mind, before I 

start, I wanted to introduce the folks that came with me. Marianne 

Hudick is the Vice Chair of the Warren Legislative Group. Tony 

Flary, Alan Ryan, Cath Licasco, and Donna Vogel. Larry Hartman 

is a member of my committee. He is not able to be here today. Also 

with us are Dan Black and Paul Dubose, Elaine Hofias, and Al 

Ryan. They all traveled here at their own expense in order to participate in these proceedings. We very much appreciate the opportunity. 

I will start with my testimony. 

Good morning, Chairman Harkin, Ranking Member Enzi, and 

members of the committee. My name is Bruce Gump, and I appreciate the opportunity to participate and give testimony on behalf of 

the Delphi Salaried Retirees Association. 

I would also like to thank my Senator, Sherrod Brown, for the 

interest and concerns and efforts he has put forward on our behalf. 

The inequity in the treatment of our pensions affects more than 

20,000 salaried automotive workers. There are about 15,000 that 

are currently retired and another 5,000 still working for the company. Active and retired people were secretaries and technicians, 

engineers, sales people, accountants, customer contract professionals, production supervisors, and mid-level managers who were 

just out there trying to earn a living, send their kids to college, and 

contribute to their communities. These are highly educated people, 

many of whom worked for General Motors for up to 4 decades before they were spun off to Delphi. This issue also severely impacts 

their families and their communities. 

The expedited bankruptcies of General Motors and Chrysler and 

the related bankruptcy of Delphi have resulted in unprecedented 

Federal Government intervention by the executive branch. Ironically, this intervention has resulted in a severe economic impact 

on the salaried retirees of the former Delphi Corporation while 

minimizing the losses for other worker groups in the industry. We 

will see the pensions that we have earned reduced by up to 70 percent by the PBGC. This will result in many being at or even below 

the edge of poverty. No other group in the auto industry faces this 

threat. 

We heard this morning that some of the other smaller unions— 

I had thought they had been topped off also, but apparently that 

10 

is not the case. I would be happy to include them in this testimony. 

Fairness in all of this is what we are for. 

Honest, hard-working, play-by-the-rules American citizens are 

paying a terrible price as a result of this unfair and possibly illegal 

treatment of the Delphi salaried retirees. 

Here is what happened. 

After nearly 4 years in bankruptcy, the disposition of Delphi’s defined benefit pension plans was the only major unresolved issue remaining at the time of the General Motors bankruptcy. The PBGC 

had filed a lien on Delphi’s valuable foreign assets intending to protect the value of Delphi’s pension plans, but because of this lien, 

Delphi was unable to sell its U.S.-based manufacturing assets to 

General Motors and the remainder of the enterprise, which is mostly offshore now, to the debtor-in-possession lenders. 

Under pressure from the Treasury Department and the Auto 

Task Force, the PBGC reached an unprecedented agreement with 

both General Motors and Delphi to surrender their liens valued at 

up to $3.4 billion for a mere $70 million from General Motors and 

a $3 billion unsecured bankruptcy claim from Delphi that the 

PBGC had to realize at the time would ultimately pay nothing. 

They took this action knowing that they would have to assume billions of dollars in unfunded pension liabilities and drastically reduce the pensions of Delphi retirees. 

We believe that this surrender of liens violated ERISA. These illegal actions then cost the Delphi retirees, both hourly and salaried, billions of dollars in lost pension annuities. 

This happened because the Administration chose to follow what 

Dr. Edward Montgomery of the Department of Labor called a ‘‘commercial model.’’ Since the Delphi retirees had no commercial value 

to General Motors or Delphi, we also received no protection or benefit from the Auto Task Force. Because we had no commercial 

value and so no protection or support from the Administration, we 

lost our pensions to the PBGC. 

At the time of the Delphi separation in 1999, labor unions representing Delphi’s hourly workers had received agreements with 

General Motors to protect their pensions in the event Delphi entered bankruptcy. I have been told this type of obligation is normally modified or even canceled in bankruptcy, but again, Treasury 

and Auto Task Force intervention in the expedited GM bankruptcy 

produced an unprecedented offer from GM to top up the pensions 

of Delphi’s hourly workers represented by the UAW. 

Although identical agreements existed with other unions representing smaller numbers of retirees, a similar offer was not extended to them until the Federal Government, which was now the 

majority owner of General Motors, again became involved in the 

discussions several weeks later. 

While we are pleased that General Motors has agreed to top up 

Delphi’s discarded pension obligations for all hourly retirees, with 

the exceptions I just noted, we believe that the principle of equal 

protection under the law dictates that the salaried retirees receive 

comparable treatment from the now federally owned enterprise. 

Before concluding, I would like to draw your attention to several 

points that quantify the impact of these events. 

11 

The average Delphi salaried retiree will lose over $300,000 in 

pension payments over his or her lifetime due to the PBGC surrender of the liens on Delphi’s overseas assets. In other words, a 

large number of Delphi salaried retirees are now at or near the 

poverty level due to the actions of the PBGC, the Treasury, and the 

Auto Task Force. 

No other group of employees, again with the exceptions I just 

noted, or retirees in any of the federally supervised automotive 

bankruptcies has sacrificed to the extent of the Delphi salaried retirees. So the concept of shared sacrifice was not applied equally. 

All other worker groups will receive 100 percent of the pensions 

they were promised. I want to repeat that. All the other worker 

groups in the automotive industry, with the exceptions of the 

smaller unions you mentioned and us, will receive 100 percent of 

their guaranteed pensions that they earned and worked for decades 

except us. 

A study by Dr. Frank Akpadock at Ohio’s Youngstown State University found that the economic impact to the already fragile local 

Mahoning Valley economy will exceed $161 million per year. This 

is an economy that employs about 100,000 people and because the 

$161 million a year is coming out of it, it will result in the loss of 

about 5,000 jobs out of that economy. That will drive the unemployment rate in that area to about or even over 20 percent all because 

a commercial model indicated that there was no need to treat the 

citizens in various worker groups fairly or equally. 

Extrapolating that YSU study predicts the loss of 85,000 jobs on 

a national level in places like Dayton, OH; Kokomo, IN; Lockport, 

NY; El Paso, TX; Clinton, MI; and other places where Delphi has 

a significant presence. 

It is unfortunate, indeed, that the economic state of a major 

American industry was so bad that the Administration had to 

choose to become involved. However, we do not believe that the 

Federal Government has the right to throw off the mantle of Government and put on the cloak of business in order to justify their 

treatment of any citizen based on his perceived commercial value. 

Citizens do have the right to expect fair treatment and access to 

due process from their Government. 

What we are asking for is fair and equitable treatment. We believe the U.S. Treasury set the standard of fairness in the GM and 

Delphi bankruptcies when they provided funds for full pensions 

and reduced health care insurance to the unionized workers. The 

fact is, Senators, the U.S. Treasury and the Auto Task Force have 

discriminated against us. 

Chairman Harkin, Ranking Member Enzi, and members of the 

committee, we hope you share the outrage of the unfair, inequitable treatment and possibly illegal treatment that the Delphi salaried retirees are receiving with respect to our pensions. We ask 

that you as a committee and individually call on President Obama, 

Treasury Secretary Geithner, Ron Bloom of the Auto Task Force 

General Motors, and Delphi to reconsider that decision to exclude 

the Delphi salaried retirees from the pension treatment that was 

provided in the GM bankruptcy and remedy this injustice. 

Thank you for your attention, and I would be pleased to answer 

any questions. 

12 

The CHAIRMAN. Thank you very much, Mr. Gump. 

And now we will turn to Ms. Bovbjerg. Ms. Bovbjerg, again, keep 

in mind all your statements will be made a part of the record in 

their entirety. If you could sum it up, I would appreciate it. 

STATEMENT OF BARBARA D. BOVBJERG, DIRECTOR, EDUCATION, WORKFORCE, AND INCOME SECURITY ISSUES, GOVERNMENT ACCOUNTABILITY OFFICE, WASHINGTON, DC 

Ms. BOVBJERG. Thank you very much, Mr. Chairman. Good 

morning, Senators. I am very pleased to be here. Thank you so 

much for inviting me to speak about a slightly different topic, 

which is PBGC’s final benefit determination processes. 

Since PBGC’s inception in 1974, they have trusteed almost 4,000 

defined benefit plans covering more than a million workers and retirees. Participants in such plans rely on PBGC to determine what 

benefits they are owed under statutory guarantees. Since 2008, 

though, the economic downturn has brought a new influx of plan 

terminations, including Delphi, and with them increased anxiety 

about what the PBGC guarantees mean for worker benefits. 

My testimony today describes how PBGC determines benefits 

and how it recoups overpayments. My statement is based on a recent report to this committee. 

First, I will address the benefit determination. 

The determination process requires many steps to complete, and 

it involves gathering extensive data on plans, as well as on each 

individual’s work history and identifying who is eligible for benefits 

under the plan. This can be particularly complicated if the plan or 

the company has a history of mergers, an elaborate structure, or 

missing data. 

Most participants of terminated plans are entitled to receive the 

full amount of benefits they earned under the plans, but some will 

have their benefits reduced to comply with legal limits. For example, PBGC generally does not guarantee more than a certain 

amount, about $54,000 this year, to any retiree in a trusteed plan. 

Higher earners in underfunded plans may find their benefits exceed that cap and must be reduced unless there are plan assets 

that would make up the difference. 

Also, because PBGC’s guarantees are based on retirement at age 

65, early retirees may face actuarial reductions. 

PBGC has conducted studies about the impact of these limits in 

large plans and the first from 1999 showed the limits affected only 

about 5 percent of participants, but the more recent study from 

2008 found the number was that almost 16 percent were affected. 

But until these calculations are made and benefit termination is 

complete, participants receive estimated benefits. Although participants generally give PBGC high marks for its initial information 

sessions when a plan is newly terminated, PBGC generally does 

not communicate with participants during the benefit determination period, a time that can extend for years, throughout which retirees are still receiving their estimated benefits. Though PBGC 

completes most participant benefit determinations in less than 3 

years, some participants have waited almost 9 years for final determinations. 

13 

The long delays and resultant uncertainty regarding final benefit 

amounts make it difficult for workers to plan for retirement and, 

for those already retired, to feel very secure. Indeed, some are unpleasantly surprised when they are notified that their final benefits 

will be lower than what they have been already receiving for many 

years. 

PBGC has taken steps to shorten the benefit determination process, and although their initiatives previously have focused on ways 

to speed processing of the straightforward cases instead of the 

more complex ones that are prone to delay, PBGC is responding to 

recommendations we made in our report last summer and is looking at ways to improve its processes for addressing the most complex plans. 

Let me now turn to the very difficult issue of overpayments. 

The vast majority of participants in terminated plans are not affected by overpayments or by PBGC’s process to reclaim them. It 

is only about 2 percent of participants that are subject to the 

recoupment process. But still, for these participants, it can be quite 

a shock when PBGC notifies them that their final benefit will be 

less, in some cases substantially less, than the estimated benefits 

they have been receiving and that, in addition, their new benefit 

amount will be reduced by up to 10 percent until the overpayment 

is recouped. 

Overpayment sizes varied widely. There were some that were 

less than $1, others more than $150,000. Most are under $3,000. 

But even small inaccuracies in the estimated benefits add up if 

they are continued for many years, over the course of 9 years. Then 

the final benefit determination will be lower—it can make a very 

high over payment. 

PBGC does warn participants at the beginning of the process 

that their benefits may be reduced due to legal limits, but these 

general warnings are not well understood, nor are they clearly remembered months or years later when reductions actually occur 

and most beneficiaries are taken by complete surprise. Hence, we 

have recommended that PBGC improve the frequency and clarity 

of its communications with participants in trusteed plans. 

In conclusion, big, complex plans are the ones that cause PBGC 

the greatest difficulties in benefit determination and some very 

large ones are either in PBGC trusteeship now or could be in the 

future. The Delphi plans recently taken by PBGC have almost 

70,000 participants and are about $7 billion underfunded. Participants in these plans and others that will surely follow will be better served by PBGC if the agency gives greater attention not only 

to more efficient benefit determination but to better and more frequent communication with participants. 

Losing your job and the ability to accrue future benefits is bad 

enough. Let us not make a process that should be reassuring and 

helpful to workers unnecessarily confusing, surprising, or lengthy. 

That concludes my statement, Mr. Chairman. 

[The prepared statement of Ms. Bovbjerg follows:] 

14 

PREPARED STATEMENT OF BARBARA D. BOVBJERG

WHY GAO DID THIS STUDY

Under the single-employer insurance program, the Pension Benefit Guaranty Corporation (PBGC) may become the trustee of underfunded plans that are terminated 

and assume responsibility for paying benefits to participants as they become due, 

up to certain legal limits. From its inception in 1974 through the end of fiscal year 

2008, PBGC has terminated and trusteed a total of 3,860 single-employer plans covering some 1.2 million workers and retirees. Since 2008, the economic downturn has 

brought a new influx of pension plan terminations to PBGC, and more are expected 

to follow. 

The committee asked GAO to discuss our recent work on PBGC. Specifically, this 

testimony describes: (1) PBGC’s process for determining the amount of benefits to 

be paid; and (2) PBGC’s recoupment process when the estimated benefit provided 

is too high and a retiree receives an overpayment that must be repaid. 

To address these objectives, GAO relied primarily on a recent report titled Pension 

Benefit Guaranty Corporation: More Strategic Approach Needed for Processing Complex Plans Prone to Delays and Overpayments (GAO–09–716, Aug. 2009). In that report, GAO made numerous recommendations. PBGC generally agreed and is taking 

steps to address the concerns raised. No new recommendations are being made in 

this testimony. 

PENSION BENEFIT GUARANTY CORPORATION

WORKERS AND RETIREES EXPERIENCE DELAYS AND UNCERTAINTY WHEN

UNDERFUNDED PLANS ARE TERMINATED

WHAT GAO FOUND

Most participants must wait about 3 years for PBGC to complete the benefit determination process and provide their finalized benefit amounts, but the vast majority are not affected by overpayments or the recoupment process (see figure). Nevertheless, long delays and uncertainty over final benefit amounts make it difficult for 

workers to plan for retirement, and for retirees who may have come to depend on 

a certain level of monthly income. 

During the benefit determination process, key points of contact with workers and 

retirees include: 

• Initial notification: PBGC’s first communication with participants is generally 

a letter informing them that their pension plan has been terminated and that PBGC 

has become the plan trustee. 

• Estimated benefits: For retirees, PBGC continues payments after plan termination, but adjusts the amounts to reflect limits set by law. These payments are 

based on estimates, so overpayments can occur. 

• Finalized benefit amounts: Once the benefit determination process is complete, PBGC notifies each participant of the final benefit amount through a ‘‘benefit 

determination letter.’’ 

A small percentage of participants have incurred overpayments to be repaid 

through the recoupment process. But for those affected, the news can still come as 

a shock, especially when several years have elapsed since their benefits were reVerDate Nov 24 2008 09:28 Nov 04, 2011 Jkt 035165 PO 00000 Frm 00018 Fmt 6633 Sfmt 6621 S:\DOCS\53424.TXT DENISE

53424-32.eps
15 

1PBGC administers two separate insurance programs for private-sector defined benefit plans: 

a single-employer program and a multiemployer program. The single-employer program covers 

about 34 million participants in about 28,000 defined benefit plans. 29 U.S.C. §§ 1322 and 

1322a. The multiemployer program covers about 10 million participants in about 1,500 collectively bargained defined benefit plans that are maintained by two or more unrelated employers. 2The termination of a fully funded plan is called a standard termination. Plan sponsors typically purchase a group annuity contract from an insurance company to pay benefits to the participants, and PBGC does not become the trustee. 29 U.S.C. § 1341(b). 3GAO–09–716 (Washington, DC: August 2009). 

4Those standards require that we plan and perform the audit to obtain sufficient, appropriate 

evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. For further details on our methodology, see GAO, Pension 

Benefit Guaranty Corporation: More Strategic Approach Needed for Processing Complex Plans 

Prone to Delays and Overpayments GAO–09–716 (Washington, DC: August 2009), p. 7 and appendixes I and II. 5Pub. L. No. 93–406, tit. IV, 88 Stat. 829, 1003–1035 (codified as amended at 29 U.S.C. 

§§ 1301–1461). 

6 29 U.S.C. § 1305(c). 

duced to comply with legal limits. Their frustration may be compounded if they cannot understand the explanations provided by PBGC. As the influx of large, complex 

plan terminations continues, improvements in PBGC’s processes are urgently needed. 

Mr. Chairman and members of the committee, I am pleased to be here today to 

present information about what happens when underfunded pension plans are terminated and trusteed by the Pension Benefit Guaranty Corporation (PBGC). Under 

PBGC’s single-employer insurance program,1 if a company’s defined benefit pension 

plan has inadequate assets to pay all promised benefits, plan sponsors meeting certain criteria may voluntarily terminate the plan through a ‘‘distress’’ termination, 

or PBGC may decide to terminate the plan involuntarily to protect the plan’s assets. 

If the plan’s assets are insufficient to pay benefits currently due, then PBGC must 

terminate the plan. In all these situations, PBGC generally becomes the trustee of 

the plan and assumes responsibility for paying benefits to the participants, up to 

certain legal limits.2 From its inception in 1974 through the end of fiscal year 2008, 

PBGC terminated and trusteed a total of 3,860 single-employer plans covering some 

1.2 million workers and retirees. Since 2008, the economic downturn has brought 

a new influx of pension plan terminations to PBGC, and more are expected to follow. 

Today I will provide a description, from the workers’ and retirees’ perspective, of 

what happens when a plan is terminated and trusteed by PBGC. Specifically, I will 

describe (1) PBGC’s process for determining the amount of benefits to be paid, and 

(2) PBGC’s recoupment process when the estimated benefit provided is too high and 

a retiree receives an overpayment that must be repaid. This testimony is based primarily on a report we issued on August 17, 2009, titled Pension Benefit Guaranty 

Corporation: More Strategic Approach Needed for Processing Complex Plans Prone 

to Delays and Overpayments.3 In developing that report, we reviewed PBGC policies 

and procedures, analyzed automated data, and interviewed PBGC officials knowledgeable about various stages of the benefit determination process. We focused our 

study on participants of plans terminated and trusteed during fiscal years 2000 

through 2008, and spoke with personnel from employee associations and advocacy 

groups involved in some of these plan terminations. We conducted this work between October 2008 and August 2009, in accordance with generally accepted government auditing standards.4

BACKGROUND

PBGC was created as a government corporation by the Employee Retirement Income Security Act of 1974 (ERISA) 5 to help protect the retirement income of U.S. 

workers with private-sector defined benefit plans by guaranteeing their benefits up 

to certain legal limits. PBGC receives no funds from general tax revenues. Operations are financed by insurance premiums set by Congress and paid by sponsors 

of defined benefit plans, recoveries from the companies formerly responsible for the 

plans, and investment income of assets from pension plans that PBGC trustees. 

Under current law, other than statutory authority to borrow up to $100 million from 

the Treasury Department,6 no substantial source of funds is available to PBGC if 

it runs out of money. In the event that PBGC were to exhaust all of its holdings, 

16 

7 29 U.S.C. § 1302(g)(2). 

benefit payments would have to be drastically cut unless Congress were to take action to provide support.7

In 2003, GAO designated PBGC’s single-employer program as high-risk, and 

PBGC has remained high-risk with each subsequent update, including our most recent update in 2009. This means that the program still needs urgent congressional 

attention and agency action. We specifically noted PBGC’s prior-year net deficit, as 

well as the risk of the termination among large, underfunded pension plans, as reasons for the program’s high-risk designation. Over the last 6 years or so, the assets 

and liabilities that PBGC accumulated from trusteeing plans have increased rapidly. This is largely due to the termination, typically through bankruptcies, of a 

number of very large, underfunded plan sponsors. Last May, PBGC reported that 

unaudited financial results through the second quarter of fiscal year 2009 showed 

its deficit tripling since the end of fiscal year 2008, from about $11 billion to about 

$33.5 billion. Since then, the influx of large plan terminations has continued. For 

example, in August 2009, PBGC assumed responsibility for six Delphi pension 

plans, covering about 70,000 workers and retirees, and underfunded by a total of 

about $7 billion. PBGC estimated that it would be liable for about $6.7 billion of 

this underfunding. 

PBGC’S BENEFIT DETERMINATION PROCESS GENERALLY TAKES ABOUT 3 YEARS

TO COMPLETE

Our review of plans terminated and trusteed between fiscal years 2000 and 2008 

found that PBGC completed most participants’ benefit determinations in less than 

3 years, but required more time—up to 9 years—to process determinations for complex plans, plans with missing data, and plans with large numbers of participants. 

As some pension advocacy groups and union representatives have noted, long delays 

and uncertainty over final benefit amounts make it difficult for workers to plan for 

retirement, and especially for retirees who have come to depend on a certain level 

of monthly income. At the same time, the benefit determination process requires 

many steps to be complete. It requires gathering extensive data on plans and each 

individual’s work and personnel history, and identifying who is eligible for benefits 

under the plan. This can be particularly complicated if the company or plan has a 

history of mergers, an elaborate structure, or missing data. It requires calculating 

each participant’s benefit amount based on provisions that vary from plan to plan, 

applying the legal limits on guaranteed benefit amounts in each case, and valuing 

plan assets and liabilities to determine if some or all of the nonguaranteed benefit 

amount can still be paid. Also, the larger the plan, the heavier the workload for 

PBGC. While the average number of participants per plan is slightly fewer than 

1,000, we found that some plans have many more—nearly 93,000 in the case of 

Bethlehem Steel. PBGC’s benefit determination process is illustrated in Figure 1. 

The key points of contact with workers and retirees that occur during this process 

are described in detail below. 

17 


53424-33.eps
18 

8Prior to termination, plan sponsors are required to notify participants if the plan is significantly underfunded and warn them that if the plan is terminated, their benefits must be cut 

back based on the guarantee limits as of the plan termination date. 29 U.S.C. § 1021(f). 9PBGC produces an annual newsletter for retirees and a biannual newsletter for future retirees. 10For a list of the organizations contacted, see GAO–09–716, appendix II. 11PBGC, PBGC’s Guarantee Limits—an Update (Washington, DC: September 2008). This document summarizes the results from both the 1999 and 2008 studies. 

INITIAL NOTIFICATION

PBGC’s first communication with participants is generally a letter informing them 

that their pension plan has been terminated and that PBGC has become the plan 

trustee.8 Shortly thereafter, this letter is generally followed by a more detailed letter with a packet of materials, including a DVD with an introduction to PBGC and 

answers to frequently asked questions about how the benefit determination process 

works. PBGC officials refer to this as a ‘‘welcome’’ package. Additionally, for large 

plans likely to have many participants affected by the legal limits on guaranteed 

benefits, PBGC will hold on-site information sessions shortly after plan termination. 

PBGC also operates a customer service center with a toll-free number that participants can call if they have questions, provides a Web site for workers and retirees 

with detailed information about plans and benefits, and sends participants a newsletter with information about PBGC once or twice per year.9

Nearly all pension advocacy groups and union representatives with whom we 

spoke 10 praised PBGC’s efforts to hold information sessions with the larger plans. 

One union representative commended PBGC staff for going out into the field to talk 

with participants and answer questions even though participants are likely to be 

angry. Other union representatives commented that they have been impressed by 

PBGC’s staff for staying at these sessions until they have answered every participant’s questions. While these sessions are generally viewed as helpful, some pension 

rights advocates noted that the information presented is difficult for participants to 

understand and apply to their own situations. Comments about PBGC’s customer 

service center and Web site were also mixed. 

Estimated Benefits 

If the participant is already retired, or retires before the benefit determination 

process is complete, PBGC makes payments to the retiree based on an estimate of 

what the final benefit amount will be. According to PBGC, most participants of terminated plans are entitled to receive the full amount of benefits they earned under 

their plans. In such cases, the calculation of an estimated benefit is straightforward. 

However, some participants may have their benefits reduced to comply with certain 

limits, specified under ERISA and related regulations. These limits include the 

phase-in limit, the ‘‘accrued-at-normal’’ limit, and the maximum limit (see Fig. 2). 

In these cases, the calculation of an estimated benefit is more complicated. PBGC 

does not systematically track the number of participants affected by the limits on 

guaranteed benefits or how much these limits affect benefit amounts; however, 

PBGC has conducted two studies on the impact of these limits in a sample of large 

plans. The first study, issued in 1999, found 5.5 percent of participants were affected by the limits; and the second study, issued in 2008, found that 15.9 percent 

were affected.11

19 

12The process for determining how the plan’s assets are distributed among the plan’s participants is specified in ERISA. 29 U.S.C. §§ 1322(c) and 1344. For a description of the allocation 

process, see our recent report, GAO–09–716, appendix III. 13 However, if a participant applies to start benefit payments during this time, communications would be exchanged between PBGC and the participant about the participant’s current 

status, eligibility, and benefit amount, based on the requested retirement date. 

Following the termination of their plans, those who are already retired may continue to receive their same plan benefit amount as an estimated benefit for several 

months—or even years—before the estimate is adjusted to reflect the legal limits 

on guaranteed benefits. When plans are terminated at the sponsor’s request as distress terminations, the sponsors are required to impose these limits themselves so 

that participants’ benefits are reduced as of the date of termination. However, when 

plans are terminated involuntarily, there can sometimes be lengthy delays before 

PBGC reduces estimated benefits to reflect these limits. Not only must PBGC estimate the possible impact of applying the guarantee limits to the participant’s benefit, PBGC must also estimate whether there might be sufficient plan assets or recoveries of company assets to pay all or part of the nonguaranteed portion of the 

participant’s benefit.12 According to PBGC officials, when it is unclear how much a 

plan’s assets or recoveries will be able to contribute toward the nonguaranteed portion of a retiree’s benefit, it can be difficult to calculate an accurate benefit amount 

until the benefit determination process is complete. We found cases where estimated 

benefits were adjusted within 9 months of termination, while in other cases, more 

than 6 years elapsed before estimated benefits were adjusted. 

Finalized Benefit Amounts 

Once the benefit determination process is complete, PBGC notifies each participant of the final benefit amount with a ‘‘benefit determination letter.’’ From the 

time of its initial contact with plan participants until the benefit determination 

process is complete, PBGC generally does not communicate with participants. In 

some cases, this period can stretch into years.13 Some of the pension advocacy 

groups and union representatives we spoke with said that these long periods without communication are problematic for participants for several reasons. For example, retirees whose benefits are subject to the guarantee limits but who continue to 

receive their higher plan-level benefits for long periods of time may come to depend 

on these higher amounts and believe that this payment level is permanent. They 


53424-34.eps
20 

are surprised when—years later—their benefits are suddenly reduced. Even for participants who are not yet receiving benefits, the lack of communication about the 

likely amount of their final benefits makes it difficult to plan for retirement. 

In addition, PBGC’s benefit determination letters generally provide only limited 

explanations for why the amount may be different from the amount provided under 

their plan. In complex plans, when benefit calculations are complicated, the letters 

often do not adequately explain why benefits are being reduced. Although benefit 

statements are generally attached, the logic and math involved can be difficult even 

for pension experts. Some pension advocates and union representatives we spoke 

with said that they found the explanations in these letters to be too vague and generic, and that the letters did not provide enough information specific to the individual’s circumstances to be helpful. At the same time, they were generally sympathetic to the difficulty of communicating such complicated information. As one advocate acknowledged, for the letters to be accurate, they have to be complicated; this 

may just be ‘‘the nature of the beast.’’ 

PBGC officials have taken steps to shorten the benefit determination process, although their initiatives have focused on ways to expedite processing of straightforward cases instead of the more difficult cases prone to delays. PBGC has also developed more than 500 letter formats—in both English and Spanish—to address the 

myriad of situations that may arise in the benefit determination process. Nevertheless, PBGC officials acknowledged that their standard letter formats may not always 

meet the needs of participants, especially those with complex plans and complicated 

benefit calculations. PBGC recently undertook a project to review and update their 

letters to try to better meet participant needs. 

PBGC’S RECOUPMENT PROCESS AFFECTS ONLY A SMALL PERCENTAGE OF TERMINATED

PLAN PARTICIPANTS

The vast majority of participants in terminated plans are not affected by overpayments or PBGC’s recoupment process. Overpayments generally occur when a retiree 

receives estimated benefits while PBGC is in the process of making benefit determinations and the final benefit amount is less than the estimated benefit amount. 

However, we found that of the 1,057,272 participants in plans terminated and 

trusteed during fiscal years 2000 through 2008, more than half were not yet retired 

and, therefore, did not receive estimated benefits before the benefit determination 

process was complete. Moreover, for most who were retired, the estimated benefit 

amount received did not change when finalized. As shown in Figure 3, of the 6.5 

percent with benefits that did change when finalized, about half received a benefit 

amount that was greater, and half received a benefit amount that was less (about 

3 percent of total participants in these plans, overall). In cases with a final benefit 

greater than the estimated amount, retirees are likely due a backpayment for having been underpaid, which PBGC repays in a lump sum, with interest. In cases with 

a final benefit that is less, the retirees are likely to have received an overpayment, 

which they then must repay to PBGC, with no added interest. 

21 

14 Retirees who receive a final benefit that is less than their estimated benefit do not always 

end up with an overpayment that is recouped through monthly benefit reductions. For example, 

estimated benefit amounts may fluctuate over time, so that an overpayment may be offset by 

an underpayment resulting in no amount due. Alternatively, in some cases, it may be determined that the retiree is not eligible to receive an ongoing benefit payment, so there is no payment to be reduced for recoupment. PBGC refers to these as recovery cases rather than 

recoupment cases. 15Data reliability issues prevented us from conducting a more definitive analysis of total overpayment amounts. For a more detailed discussion of these data limitations, see our recent report, GAO–09–716, appendix I. We were, however, able to verify that the person with the largest 

amount to be recouped was an LTV plan participant who owed a total of $152,194, and was 

to have $181 deducted each month from his payment of $1,812 until 2/1/2078 (at which point 

he would be over 138 years of age). In general, we found that large overpayments tended to 

occur in cases where there were lengthy delays before estimated benefits were adjusted to reflect 

the guarantee benefit limits, but that in some cases, they occurred due to disputes regarding 

claims from ex-spouses (referred to as ‘‘qualified domestic relations orders’’). 16PBGC regulations generally limit benefit reductions to the greater of (a) 10 percent of the 

participant’s monthly benefit, or (b) the amount in excess of the participant’s ‘‘maximum 

guaranteeable benefit.’’ 29 CFR § 4022.82(a)(2) (2009). 

Overpayments can occur for two basic reasons: (1) there is a period of time when 

the retiree’s estimated benefit has not yet been reduced to reflect applicable limits; 

and (2) the retiree’s estimated benefit is adjusted to reflect applicable limits, but the 

estimate is still greater than the benefit amount that is ultimately determined to 

be correct. In general, the longer the delay before a retiree’s estimated benefit is 

adjusted to reflect the correct amount, the larger the overpayment, and the greater 

the amount that will need to be recouped from future monthly benefit payments. 

When an overpayment occurs, retirees typically repay the amount owed by having 

their monthly benefits reduced by some fraction until the debt is repaid. According 

to PBGC data, 22,623 participants in plans terminated and trusteed during fiscal 

years 2000 through 2008 (2.1 percent of the total) were subject to such 

recoupment.14 The total overpayment amounts varied widely—from less than $1 to 

more than $150,000—but our analysis of PBGC data suggests that most owed less 

than $3,000.15 Since in most cases PBGC recoups overpayments by reducing a participant’s final benefit by no more than 10 percent each month,16 recoupment is amortized over many years and the impact on the participant’s benefit is limited. Per 


53424-35.eps
22 

17For an example of a benefit determination letter and benefit statement, see GAO–09–716, 

appendix VII. 

individual, we found that the median benefit reduction due to recoupment was 

about $16 a month, or about 3 percent of the monthly payment amount, on average. 

The effect of receiving an overpayment of estimated benefits on one retiree’s monthly payment is illustrated in Figure 4. The total amount of this retiree’s overpayment 

was $5,600. His monthly payment was ultimately reduced by nearly one-half, but 

this was primarily due to the application of the guarantee limits. The amount of 

the benefit reduction for recoupment of the overpayment is $38 per month, to be 

paid until 6/1/2020. 

Participants are warned at the beginning of the process that their benefits may 

be reduced due to the legal limits on guaranteed benefits, and retirees are notified 

of possible overpayments when they begin to receive estimated payments. However, 

these warnings may not have the same meaning for participants when talked about 

in generalities as when they later receive notices concerning their specific benefit 

amounts. It can still come as a shock when—perhaps years later—they receive a 

final benefit determination letter with this news. Their frustration may be compounded if they fail to understand the explanations provided in the benefit determination letters. Some pension advocates and union representatives we spoke with 

said that this is often the case in complex cases involving large benefit reductions. 

They noted that they did not think most participants would be able to understand 

the accompanying benefit statements without additional information and assistance. 

In the participant files we reviewed, the benefit statements that accompanied the 

letters ranged in length from 2 to 8 pages. In some cases, there were as many as 

20 to 30 different line items that required making comparisons between the items 

to understand the logic of the calculations.17


53424-36.eps
23 

18 29 CFR §§ 4003.1(b)(7) and 4003.52 (2009). 19 In addition, in the last month that benefits are to be reduced to repay an overpayment, 

PBGC policy allows the final monthly reduction amount to be waived if the remaining balance 

due is less than the normal monthly reduction amount. 29 CFR § 4022.82(a)(5) (2009). 

Participants may appeal the results of the benefit determination process within 

45 days of receiving a final benefit determination.18 Appeals are accepted if they 

raise a question about how the plan was interpreted, how the law was interpreted, 

or the practices of the plan’s sponsor, but not if they are based only on hardship. 

Although some appellants have successfully used the appeals process to increase 

their benefits, less than 20 percent of appeals docketed since fiscal year 2003 have 

resulted in appellants receiving higher benefit amounts. We found that a lack of understanding on the part of participants about how their benefits are calculated may 

engender unnecessary appeals, and that PBGC is not readily providing key information that would be helpful to participants in deciding whether or not to pursue an 

appeal. 

Participants may request hardship waivers for overpayments, but only in cases 

that do not involve an ongoing payment. PBGC policy stipulates that in cases with 

an ongoing payment, recoupment of an overpayment may not be waived unless the 

monthly reduction would be less than $5.19 By comparison, Federal agencies such 

as the Social Security Administration and the Office of Personnel Management generally pursue repayment at a faster rate with larger reductions to benefits when recouping overpayments, but their policies also give greater prominence to waivers. 

CONCLUSIONS AND RECOMMENDATIONS

To address the concerns of workers and retirees in terminated plans who stand 

to lose as much as one-half or more of their long-anticipated retirement income, and 

who will likely have to make painful financial adjustments, PBGC needs a more 

strategic approach for processing complex plans prone to delays and overpayments. 

The failure to communicate more often and clearly with participants awaiting a 

final determination can be disconcerting—especially when participants receive the 

news that their final determination is ‘‘surprisingly’’ less than they anticipated, or 

when retirees learn that the estimated interim benefit they had been receiving was 

too high and that they owe money. More frequent and clearer communication with 

plan participants, including more timely adjustments to estimated benefits, more information about how their benefits are calculated, and where to find help if they 

wish to appeal, would better manage expectations, help people plan for their future, 

avoid unnecessary appeals, and earn good will during a trying time for all. 

In our recently issued report, we recommended that PBGC develop a better strategy for processing complex plans in order to reduce delays, minimize overpayments, 

improve communication with participants, and make the appeals process more accessible. After reviewing the draft report, PBGC generally agreed with our recommendations, noting the steps it would take to address GAO’s concerns. For example, PBGC said that it had started to track and monitor tasks associated with processing large, complex plans, and would continue to look for other ways to improve 

its processes. A complete discussion of our recommendations, PBGC’s comments, 

and our evaluation are provided in our recently issued report. As PBGC’s financial 

challenges continue to mount and dramatic increases to PBGC’s workload appear 

imminent, improvements to PBGC’s processes are urgently needed. 

Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other members of the committee may have. 

The CHAIRMAN. Well, thank you very much, Ms. Bovbjerg. That 

is very timely. 

Now we turn to Mr. Jury. Welcome, Mr. Jury, and please proceed. 

STATEMENT OF DAVID R. JURY, ASSOCIATE GENERAL COUNSEL, UNITED STEELWORKERS OF AMERICA, PITTSBURGH, 

PA 

Mr. JURY. Good morning. I am David Jury, Associate General 

Counsel for the United Steelworkers. On behalf of International 

President Leo Gerard and our 1.2 million active and retired members, I thank the committee for the ability to appear this morning 

24 

to address the acute need for relief in order to preserve the defined 

benefit pension system for all American workers and retirees. 

Defined benefit pension plans are the cornerstone of retirement 

security for millions of Americans. The Pension Benefit Guaranty 

Corporation serves a critical function in the social safety net by insuring the pensions of 44 million Americans. These pension guarantees sit at the intersection of numerous forces affecting American 

workers: deregulation, globalization, trade policy, and the decline of 

the manufacturing sector. 

United Steelworkers is familiar with this intersection of forces 

through its representation of workers throughout American manufacturing, but particularly in the domestic steel industry. Between 

1998 and 2003, the domestic steel industry experienced a crisis 

brought on by a tide of imports, which flooded the market and 

drove steel prices down to 20-year lows. The result was 44 bankruptcies, 18 liquidations, and the loss of 55,000 jobs. 

During this period, the pension plans of 16 steel companies were 

terminated, involving over 250,000 participants and $7 billion in 

unfunded guaranteed pension liabilities. 

The termination of a pension plan is extraordinarily disruptive 

for any worker regardless of status. While the pension benefits of 

most retirees are not reduced following a plan termination, there 

are limitations as to both the amount and form of benefit that 

PBGC will guarantee. Among other things, as Ms. Bovbjerg noted, 

the PBGC does not guarantee monthly benefits above an established maximum level. Further, PBGC does not guarantee early retirement supplements that provide a retiree with additional income 

until he or she becomes eligible for Social Security, and as a result 

of the Pension Protection Act of 2006, PBGC does not guarantee 

benefits earned either after an employer files bankruptcy or after 

the pension plan’s funding target falls below 60 percent. 

According to a 2008 PBGC study of terminated steel industry 

pension plans and applying these limitations, PBGC determined 

that 21 percent of participants in the steel industry plans suffered 

reduced benefits with an average cutback of 26 percent. 

These plan terminations and benefit cutbacks are even more 

painful because these same workers or retirees often at the same 

time experience a loss of jobs or a termination or a reduction in retiree health insurance benefits or both. After working years in difficult and often dirty and dangerous jobs, these workers rightfully 

feel both shocked and angry at this convergence of events. 

The source of the current problems in the defined benefit pension 

system is not the PBGC, but instead the existing legislative framework. Rather than encouraging employers to maintain defined benefit pension plans and elevating the interests of workers and retirees, aspects of the current law undermine these policy goals. 

In 2006, Congress responded to the mounting number of pension 

plan terminations and a growing PBGC deficit by passing the Pension Protection Act. While the stated goal of the act was to 

strengthen the retirement system and improve plan funding, the 

PPA has, in our experience, produced quite the opposite result. We 

have observed an increase in the number of employers seeking at 

the bargaining table to freeze or terminate their defined benefit 

25 

pension plans, often citing directly the accelerated funding obligations imposed by law. 

The PPA has made pension funding more onerous, inflexible, and 

volatile by effectively requiring pension plans to be fully funded at 

all times, a requirement premised in our view erroneously upon the 

assumption that all benefits are payable immediately. During an 

economic downturn, the combination of these new funding rules 

has ratcheted up funding obligations at the very moment when 

plan sponsors can least afford it in light of conditions in both the 

general economy and in the credit markets. Without prompt action, 

these funding obligations may generate additional bankruptcies 

and pension terminations which will only further burden the PBGC 

and erode retirement security for American workers. 

Congress can do several things to address the more harmful aspects of the current law, and in the interest of time, I refer you to 

our written testimony with respect to several funding-related and 

other changes that Congress should consider. 

If I may—and this is beyond our written testimony—I would like 

to address just briefly the circumstances at Delphi and in particular the provenance of the agreement of GM to ‘‘top up’’ the pension benefits of steel worker retirees in Dayton, OH, IUE retirees 

elsewhere. 

These agreements were negotiated in 1999 at the time of the 

spin-off. 

In 2007, in the Delphi bankruptcy case, at a point in time when 

Delphi saw light at the end of the tunnel and saw a possible emergence from bankruptcy, the steel workers union and the IUE and 

the United Auto Workers negotiated agreements with Delphi and 

General Motors in which GM agreed to stand behind the 1999 benefit commitments. These agreements were approved by the bankruptcy court in Delaware and, among other things, provided for a 

plan-to-plan transfer of assets from the Delphi pension plan to the 

General Motors pension plan. 

In the context of the current General Motors bankruptcy, General Motors stood behind these commitments 10 years in provenance, and I will be happy to address this and other matters at the 

time of questions. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Jury follows:] 

PREPARED STATEMENT OF DAVID R. JURY

I am David Jury, and I am an Associate General Counsel of the United Steelworkers International Union (USW). 

The USW represents 1.2 million active and retired members found in nearly every 

manufacturing industry, not only steel, but paper, forestry, rubber, energy, mining, 

automotive parts, and chemicals, as well as healthcare, service and public employment. On behalf of the USW and International President Leo Gerard, I thank the 

committee for the invitation to appear today to address the impact of pension plan 

terminations on workers and retirees and the urgent need for pension funding and 

other related relief, a need that has become even more acute during this recession. 

Defined benefit pension plans are the cornerstone of retirement security for millions of Americans. The Pension Benefit Guaranty Corporation (PBGC) serves a critical function in the Nation’s economy and social safety net by insuring the pensions 

of 44 million current or former workers covered under private sector defined benefit 

plans. PBGC operates to protect the economic security of American workers and sits 

at the intersection of numerous forces affecting American workers—deregulation, 

globalization, trade policy, and the decline of the manufacturing sector. 

26 

Among the USW’s traditional core jurisdictions is the steel industry. Between 

1998 and 2003, the steel industry experienced a crisis brought on by a rising tide 

of imports which flooded the market and drove steel prices down to 20-year lows. 

The result was $11 billion in net losses, 44 bankruptcies, 18 liquidations and the 

loss of 55,000 jobs. 

During this period, the PBGC initiated terminations of the defined benefit pension 

plans of 16 steel companies, involving over 250,000 participants and over $7.0 billion in unfunded guaranteed pension benefits. 

A distress or involuntary termination of a defined benefit pension plan is extraordinarily disruptive for workers and retirees. While the pension benefits of most retirees are unaffected, pensioners who retired during the last 5 years prior to the termination or who were forced out of their jobs by plant shutdowns or disabilities 

often suffer substantial reductions in their pension benefits. Indeed, according to a 

study by the PBGC of trusteed plans published in September 2008, over 25,000 or 

21 percent of participants in terminated steel industry plans had their benefits reduced, with an average cutback of 26 percent. 

When a sponsoring employer is unable to fund the promised benefits and an underfunded plan is terminated or abandoned, the PBGC takes over the plan and pays 

benefits, subject to certain limits under the law. 

Pursuant to existing law, the PBGC does not guarantee: 

• non-vested pension benefits; 

• basic monthly pension benefits in excess of the monthly maximum guarantee 

level in effect at the time of plan termination; 

• early retirement supplements or ‘‘bridge’’ benefits that are typically designed to 

provide a retiree with additional income until he or she becomes eligible for Social 

Security; 

• severance or lump sum death benefits; 

• disability benefits when disability occurs after plan termination; and 

• as a result of the Pension Protection Act of 2006, benefits earned after the employer’s date of bankruptcy filing or benefits earned after a Plan’s funding target 

falls below 60 percent. 

Further, plan participants who have not qualified for a service or event-based benefit as of the termination date (such as a 30-year or shutdown pension) are forever 

unable to qualify, even if he or she continues to work for the employer beyond the 

date of plan termination. This is a harsh outcome for an employee who, in the example of a 30-year benefit, falls just short of the mark at the time of plan termination 

and is told that he or she can never qualify for the 30-year pension that he or she 

expected. 

Plan terminations and PBGC benefit cutbacks are even more painful because they 

often affect employees who are, at the same time, losing their jobs and/or retiree 

health care benefits. After working years in difficult, and often dirty and dangerous 

jobs, affected workers rightly feel shocked and angry by this convergence of events. 

Unfortunately, it has been the USW’s experience that workers often do not learn 

the full extent of PBGC benefit cuts until years after the plan is terminated and 

the PBGC assumes responsibility. When the PBGC takes over a plan, it continues 

making benefit payments based upon an initial calculation of the guarantee level. 

If the estimated benefit exceeds the PBGC guarantee, the pension is reduced. However, the PBGC continues paying this ‘‘estimated benefit’’ level until it completes the 

final benefit determination. 

According to the PBGC’s own data, the average amount of time required by the 

PBGC to complete final benefit determinations was 3.3 years in fiscal year 2008. 

In complicated cases, it is often much longer. While the PBGC has responded commendably to the increase in its workload caused by the large steel and airline terminations, the delay in completing final benefit determinations is deeply unsettling for 

the retirees involved. 

One such example is the Republic Technologies International pension plan. RTI 

employed USW members in Ohio, New York, Pennsylvania, Illinois, and Indiana. 

The pension plan was relatively complex as it featured a number of supplemental 

benefits and offset provisions. RTI filed for bankruptcy in 2001 as a result of the 

financial crisis that swept the American steel industry. On June 14, 2002, PBGC 

terminated the RTI Plan. The USW therefore joined in an action in Federal court 

against PBGC regarding the payment of shutdown benefits. The litigation concluded 

in 2004, with the Court of Appeals for the Sixth Circuit finding in PBGC’s favor 

with respect to the shutdown benefit issue. 

PBGC did not issue final benefit determinations until May 2008. Consequently, 

for nearly 6 years, the RTI plan participants received benefits from PBGC based 

upon estimated benefit determinations. It was only after PBGC issued final benefit 

27 

determination in May 2008 that many participants learned that they had received 

benefit payments in excess of the benefits guaranteed by PBGC, and that (1) their 

monthly benefits would be reduced on a prospective basis to comply with the plan’s 

terms and the PBGC’s limits, and (2) they owed large sums of money to PBGC as 

a result of the overpayments they had received. Some retirees owed PBGC a few 

thousand dollars, while many others owed $60,000 or more. Similar stories are prevalent in the other steel industry cases, though the period between the date of plan 

termination and the issuance of final benefit determinations was not as great. 

In order to prevent undue hardship, PBGC does not require participants to pay 

back the overpayments all at once, nor does it charge interest on the debts; instead, 

PBGC deducts 10 percent from the participant’s monthly benefit until the full 

amount is recouped. While the PBGC’s repayment policy is not unreasonable, for 

many retirees the benefit cutback and overpayment notice of tens of thousands of 

dollars causes great financial and emotional distress. 

Stories such as these beg the question: what can be done to address the problem? 

The source of the problem is not PBGC, but rather is the legislative framework that 

governs single employer defined benefit pension plans. Rather than promoting the 

maintenance of defined benefit pension plans and elevating the interests of workers 

and retirees, aspects of the current law undermine the vital role played by defined 

benefit pensions in the U.S. retirement system. 

In 2006, Congress responded to pension plan terminations in the airline and steel 

industries and the growing PBGC deficit by passing the Pension Protection Act 

(PPA). While the stated goal of the PPA’s supporters was to strengthen the retirement system and fortify plan funding, it has, in the USW’s experience, produced 

quite the opposite result. 

The limited time available does not allow me to describe the USW’s concerns regarding pension funding and the need for reform. We would welcome the opportunity to express our views more fully at a later date. 

Nevertheless, there is also growing evidence that the PPA has encouraged employers to freeze benefit accruals under existing single employer defined benefit plans 

and has further accelerated the shift to defined contribution pension plans. During 

the current economic crisis, our Union has observed an increase in the number of 

employers (whether inside or outside of bankruptcy) seeking to freeze or terminate 

their defined benefit pension plans, often specifically citing the accelerated funding 

obligations of PPA. 

PPA has made pension funding more onerous, inflexible and volatile by effectively 

requiring pension plans to be fully funded at all times, a requirement that is based 

upon the erroneous assumption that all funds can be withdrawn at any time. The 

consequences of these new funding rules on employers during an economic downturn 

were predictable as plummeting investment returns ratcheted up an employer’s 

funding obligation. But, in the shadow of the worst economic crisis since the Great 

Depression, the PPA threatens to require employers to contribute massive amounts 

to their defined benefit plans when they can afford it the least and when credit and 

product markets have not yet recovered. Without action, these funding obligations 

may cause additional bankruptcies and distress terminations, which only will further burden the PBGC and erode the retirement security of American workers. 

It must be noted that The Worker, Retiree and Employer Recovery Act of 2008 

and IRS technical changes have provided some breathing room. However, the relief 

was only temporary and additional relief for 2010 and 2011 is urgently needed. 

For these reasons, in the interest of preserving the defined benefit pension system 

and fulfilling employee and retiree expectations, the USW urges Congress to provide 

immediate funding relief to single employer defined benefit plans, including: 

1. extending the 7-year period to amortize unfunded liabilities, which will allow 

plans to pay off their funding shortfalls at a slower, more reasonable rate; 

2. allowing additional asset ‘‘smoothing,’’ which will reduce shortfall payments for 

plans that experienced dramatic losses in the stock market. Such a move recognizes 

that pension obligations are long-term obligations best measured over time rather 

than as a single snapshot; 

3. delaying the PPA benefit limitations and ‘‘at-risk’’ accelerated funding requirements for the duration of the relief period. The limitation on benefit improvements 

disproportionately penalize Union-represented hourly employees covered by flat dollar benefit formulas, which require periodic adjustment to keep pace with earnings 

and inflation, whereas most salaried employees enjoy earnings-based formulas 

which increase automatically and are specifically excluded from these restrictions; 

4. repealing the PPA-mandated freeze on benefit accruals for plans that are less 

than 60 percent funded. As stated before, these provisions penalize workers who are 

responsible for neither their employer’s pension funding decisions nor the macroeconomic conditions that have increased pension underfunding; and 

28 

5. repealing PPA section 404, which calculates PBGC guarantees based upon the 

date the plan sponsor filed for bankruptcy rather than the date the plan is actually 

terminated. Again, this is another example of current law penalizing workers for circumstances entirely beyond their control. 

Further, in the interest of fostering the important public policy encouraging companies to maintain existing single employer defined benefit pension plans, this relief 

should be provided only to plans which have not frozen benefit accruals. Employers 

should not be rewarded for actions which undermine worker and retirement security. 

The need for pension funding relief is urgent because the effects of the current 

economic crisis continue to place increasing pension funding demands on industrial 

employers. These demands, ultimately, impair the retirement security of workers 

and retirees throughout the United States. On behalf of the USW, we encourage 

Congress to act quickly and provide necessary and appropriate relief for the defined 

benefit pension system. 

Thank you again for the opportunity to appear before you today. 

The CHAIRMAN. Thank you, Mr. Jury. 

And now, Mr. Jones, please proceed. 

STATEMENT OF RICHARD JONES, CHIEF ACTUARY, RETIREMENT CONSULTING, HEWITT ASSOCIATES, LINCOLNSHIRE, 

IL 

Mr. JONES. Chairman Harkin, Ranking Member Enzi, and members of the committee, my name is Richard Jones, and I serve as 

Chief Retirement Actuary at Hewitt Associates. Among other 

things, Hewitt has expertise and leadership in the design, financial 

management, and administration of pension plans for mid- to 

large-sized employers. 

We are grateful for the opportunity to get together with you 

today to discuss how to best ensure American workers can preserve 

retirement security through harsh economic times. 

My testimony today really focuses on three things. First, how the 

current pension funding requirements in this economic environment are hurting American workers, as well as their retirement security. Second, we would like to offer suggestions for short-term solutions to the issues that are currently being faced in pension funding. And third, we would like to offer a few introductory thoughts 

on concepts for the future to make sure that tomorrow’s retirement 

plans can preserve retirement security for Americans. 

The issue at hand, as we have been discussing, is the impact of 

the current economic crisis on pension funding. This has greatly increased the pension funding obligations far in excess of what plan 

sponsors were anticipating just a couple short years ago. We see it 

producing less spending on job creation. We see it producing less 

spending on capital investments, and we see it furthering the risk 

of bankruptcy for many organizations. We also see retirement benefit cutbacks, as well as broader benefit cutbacks and pay cuts, and 

all of these impacts are hurting retirement security for American 

workers today. 

To its credit, the Federal Government has already offered some 

short-term relief that was referenced earlier to address the current 

pension funding crisis and that was well received and greatly appreciated by plan sponsors, but more is needed and more is needed 

now to address the situations. 

In terms of a short-term solution, we believe that further temporary relief is necessary to ease the burden of the accelerated pension funding requirements brought about by the Pension Protection 

29 

Act. When the Pension Protection Act was passed, it was based on 

sound objectives, which is to strengthen pension security and protect participants, but Senator Enzi, you acknowledged that nobody 

could foresee necessarily the steep downturn in the economy that 

was right around the corner and the impact that that could have 

on pension funding. In my 22 years as a practicing pension actuary, I have never seen a more challenging pension financing environment for plan sponsors. 

So recognizing the unique nature of pension financing in this 

particular environment, on a short-term basis, we would like to 

suggest two things, and really they are pretty simple. No. 1 is expanding the asset-smoothing corridor that is allowed for pension 

funding calculations from the 90 to 110 percent mark to something 

wider and, secondarily, allowing the amortization of 2008 pension 

asset losses over a period of time significantly longer than the 7 

years currently called for by the Pension Protection Act. 

We believe the need for this is evidenced by the many organizations that are struggling to meet their pension funding obligations 

but yet want to and need to continue to provide secure pensions for 

their workers. 

This is particularly evident in bankruptcy situations, and in my 

experience, bankruptcy contributes to participants losing twice. 

They lose the first time when the PBGC limits are imposed, as 

our other panelists have described in great detail. 

They lose secondarily because the replacement plans that are put 

in place when organizations exit bankruptcy, or if somebody finds 

another job, those are typically less generous than the plans that 

they had pre-bankruptcy, and they tend to not be of a defined benefit nature. They tend to be of a defined contribution nature. And 

that is the second way that retirement security is hurt during the 

bankruptcy process. 

Hewitt has also been spending a lot of time thinking about better 

long-term designs for pension benefits so that we can learn from 

the lessons of this recession, as well as previous downturns in the 

economy. We believe those designs need to be flexible. They need 

to provide better risk management characteristics and reduce volatility for both employees and plan sponsors, and most importantly, 

they need to be secure for participants. 

More information on our concepts for the future are included in 

my written testimony that was previously submitted. 

Thank you very much for the chance to join you today, and I look 

forward to fielding any questions you may have. 

[The prepared statement of Mr. Jones follows:] 

PREPARED STATEMENT OF RICHARD JONES

SUMMARY

THE PROBLEM

The last 15 years have brought monumental changes to the pension landscape. 

Retirement plan designs and mix have shifted in response to economic and regulatory changes and employee needs. In this economic turmoil, many companies are 

feeling financially forced to take actions today that will create a retirement income 

gap that will be very difficult for many American workers to fill unless policymakers 

take steps to assist with pension funding needs aggravated by the current recession. 

In the United States, approximately 25 percent of the Fortune 500 plans are frozen 

and some studies show that this could increase to 60–70 percent by 2012. While the 

30 

Federal Government has taken significant steps to lessen the near-term cash contribution requirements associated with the current recessionary environment, many 

companies still need greater short-term relief in response to the recession. Meeting 

the current pension funding requirements is forcing many employers to curtail their 

investment in new jobs, cut back on capital expenditures and implement further retirement plan cutbacks, which in turn is slowing the economic recovery. The time 

to fix this problem is now. 

The need for this government relief is evidenced by the many companies struggling to meet their obligations. It is particularly significant in cases that we are 

here to discuss today—bankruptcy. The essential retirement income problem with 

company reorganizations or Chapter 11 bankruptcies is that once the defined benefit 

plan is frozen and terminated, a participant’s future retirement benefits are significantly reduced. We need funding relief as a solution to help maintain ongoing defined benefits, provide a level of protection for mid-career workers, preserve jobs and 

avoid slowing down the economic recovery. 

SHORT-TERM FIXES

We recommend action to provide temporary relief to ease the burden of the accelerated funding requirements of the Pension Protection Act of 2006 (PPA). The original intent of PPA—to ensure sound funding for defined benefit plans—is sound, but 

when it was enacted, no one foresaw the deep recession ahead. Recognizing the 

unique nature of those events in financial history, we recommend changes to provide great flexibility for defined benefit pension plan funding: 

• We suggest either temporarily or permanently widening the asset ‘‘smoothing’’ 

corridor for pension funding calculations from 90 percent to 110 percent of market 

value, to 80 percent to 120 percent of market value, and • Allowing amortization of 2008 asset losses over a period of time significantly 

longer than the 7 years currently required by PPA. 

LONG-TERM SOLUTION

We must learn from the lessons of this recession and create a new, modern, 21st 

Century pension program that guards against these problems. Hewitt has called for 

the reinvention of pension plans to create risk sharing mechanisms with third parties. Hewitt’s conceptual models for the future include: 

• Participant accounts managed on a plan-wide basis to ensure prudent investment approaches; • Life cycle-based account earnings that put in place appropriate risk/return characteristics; • Flexibility in employer, employee, and third party funding; • Flexibility in sponsorship; and • Annuity options during retirement years. 

Chairman Harkin, Ranking Member Enzi, and members of the committee, I am 

extremely grateful for the opportunity to appear before you today to provide testimony to the committee as it examines how best to ensure that American workers 

can preserve their retirement security in harsh economic times. Pension funding is 

one of the most critical challenges currently facing employers, and the eventual solutions will have a significant impact on the continued prosperity of millions of 

American workers. 

My name is Richard Jones and I serve as the Chief Actuary for Hewitt’s Retirement Consulting Practice. Hewitt Associates is a global human resources 

outsourcing and consulting company providing services to major employers in more 

than 30 countries. We employ 23,000 associates worldwide. Headquartered in Lincolnshire, IL, we serve more than 2,000 U.S. employers from offices in 18 States, 

including many of the States represented by the members of this distinguished committee. 

As a global leader in integrated retirement solutions, Hewitt Associates has extensive experience supporting clients in pension plan design, finance, and administration for mid- to large-sized employers. We advise more than 2,500 clients on more 

than 3,500 pension plans and administer defined benefit plans for more than 385 

clients. In total, our clients represent more than 10 million plan participants. 

To avoid some of the perils that the committee is addressing today, my testimony 

will focus on the public policy need for greater flexibility in defined benefit financing 

and management. Our experience and data show that defined benefit plans, coupled 

with defined contribution plans, have generally been effective at producing reliable 

retirement security for covered Americans. However, many defined benefit plans are 

31 

1McKinsey & Company, ‘‘The Coming Shakeout in the Defined Benefit Marke,’’ (2007). 

2 Hewitt Associates, SpecSummaryΤΜ database (2009). 

now in jeopardy due to a struggling economy and to regulatory changes that limit 

the flexibility of how and when companies fund their plans. The imminent need is 

for temporary relief to help employers solve the funding problems exacerbated by 

the recession. Longer term, we believe that future pension plans will have to be designed differently so as to incorporate third-party risk sharing, which would give 

participants more security while allowing employers and workers to assume a manageable amount of risk. 

The need for this risk-sharing model is evidenced by the recent examples of employees losing significant portions of their pension savings after their employer had 

to file for bankruptcy. Future models must guard against this possibility on the 

front end, because we cannot afford limitless bankruptcy protection. The future of 

retirement income in corporate America requires employers to offer both defined 

benefit and defined contribution plans. To do this, we need to reinvent defined benefit plans so that they are more flexible and allow both companies and employees 

to better manage and diversify risks. 

I. PERILS IN THE CURRENT ENVIRONMENT

The last 15 years have brought monumental changes to the pension landscape. 

Retirement plan designs and mix have shifted in response to economic and regulatory changes and to employee needs. As the risks to employers have grown, companies have increasingly chosen to close or freeze their plans. Unless additional support is provided to assist with pension funding needs aggravated by the current recession, this trend is expected to continue. In the United States, approximately 25 

percent of the Fortune 500 plans are frozen, and some studies show that this could 

increase to 60 percent or 70 percent by 2012.1 We believe the ‘‘survival’’ actions 

being taken by companies today—pension plan freezes and cutbacks, and similar actions in 401(k) and other defined contribution plans—are contributing to a retirement savings gap that is already very difficult for many American workers to replace. But policymakers and employers can take steps now to improve the outlook 

for retirement plans as we await a full-blown economic recovery. 

Retirement Plan Design 

As pension issues have become more complex, employers have increasingly shifted 

from defined benefit pension plans to defined contribution plans. This move partly 

reflects workforce needs and preferences, as well as the huge financial exposure created by defined benefit plans. But our experience also tells us that another key driver has been increasing regulatory requirements and the recognition of the financial 

exposure created by defined benefit pension plans. Recent regulatory changes, including more stringent FASB/SEC requirements, as well as adoption of the Pension 

Protection Act of 2006 (PPA), have advanced the ‘‘mark-to-market’’ requirements of 

retirement plan financing and unfortunately have intensified the shift away from 

defined benefit pensions. 

Exhibit 1 illustrates the movement away from defined benefit pensions among 

large U.S. employers in the last 20 years.2 Whereas defined benefit plans were the 

predominant form of retirement plans in 1990, the tables have now turned, with defined contribution plans becoming the prevailing plan. This trend will continue unless steps are taken to dampen the volatility or otherwise soften the blow of defined 

benefit financing. 

32 

3 Hewitt Associates, ‘‘Study Findings: Benefit Plan Disclosure Under FASB Statements No. 87 

and 106,’’ (2009). 

With more Americans now relying on defined contribution plans for all or part of 

their retirement income, these plans must now deliver more. Automatic enrollment 

and automatic escalation practices and policies in 401(k) plans are helping increase 

both participation and the rate of savings. Unfortunately, approximately 7 percent 

of Fortune 500 organizations suspended their 401(k) matches for 2009 in response 

to the dire economic conditions. We believe around half of these organizations will 

reinstate the matching contributions in 2010, but this practice is troubling because 

it can reduce the cyclical benefits to employees of dollar cost averaging in investments. 

Financial Requirements 

The funded status of the Nation’s pension funds has varied dramatically over the 

past 20 years. Significant swings in interest rates, coupled with two challenging equity environments in the last decade, have created this volatility. Exhibit 2 illustrates the average pension accounting funded status among the S&P 500—as measured by the FAS 87 projected benefit obligation calculations used to drive income 

statement and balance sheet calculations.3 This data documents the fact that defined benefit pension plans have historically been reasonably well funded. However, 

as shown below, the two equity market crises of this decade have battered pension 

plan funded status. 


53424-27.eps
33 

Congress, the IRS, and the Treasury Department have taken steps to lessen the 

near-term cash contribution requirements associated with the current recessionary 

environment, ranging from passage of the Worker, Retiree, and Employer Recovery 

Act of 2008 (WRERA) to more recent guidance from the IRS and Treasury regarding 

flexibility when selecting discount rates and asset smoothing techniques. These 

steps have been widely embraced and have been beneficial to the funding by defined 

benefit plan sponsors, though additional funding relief is badly needed on a temporary basis. 

Despite the significance of some of these measures, many companies need greater 

short-term relief in response to the recession. Meeting the current pension funding 

requirements is forcing many employers to curtail their investment in new jobs, cut 

back on capital expenditures (also typically tied to jobs), and implement further retirement plan cutbacks. In the most extreme cases, the near-term requirements are 

adding to financial distress and could contribute to potential bankruptcy. 

Another financial option and strategy for pensions, partly enabled by methodology 

employed in the PPA, includes ‘‘liability-driven investing’’ (often referred to as 

‘‘LDI’’). Many pension plan sponsors were anticipating adoption of LDI investment 

techniques to preserve pension-funded status and protect funded status levels. However, the swift onset of the market downturns in 2008 and 2009 required many organizations to put those plans on ‘‘hold,’’ pending recovery in the financial markets. 

Full adoption of LDI techniques following the market downturns would be the 

equivalent of ‘‘selling low and buying high.’’ Many pension plan sponsors are planning to adopt dynamic investment approaches to help secure funded status gains as 

the market improves. A continued orderly transition back to financial health for 

America’s pension plans will enable this. 

Regulatory Requirements 

Many companies, though fully supportive of sound financing of defined benefit 

pension plans, are becoming increasingly concerned with the staggering number of 

requirements for defined benefit pension plan sponsors following the passage of the 

PPA. The original intent of the act—to ensure funding for defined benefit plans— 

is sound. But when the legislation was enacted, no one foresaw the deep recession 

ahead. Unfortunately, significant flexibility in how plans are managed has been lost, 

and the stringent requirements are commanding the attention of chief financial officers, treasurers, and other business leaders. In particular, the loss of flexibility in 

funding/credit balances and associated funded status reporting requirements have 

become challenging. 

Although management oversight of pension issues is important and appropriate, 

understanding and complying with PPA requirements has become so onerous that 

it is taking the attention of business leaders when they need to place full focus on 

managing their core businesses during this critical economic period. Now is the time 


53424-28.eps
34 

to create more flexibility within the system, without undermining the PPA and the 

long-term strength of defined benefit plan funding, to allow as many employers as 

possible to continue offering retirement plans through the recession and to create 

a bridge to next-generation retirement plans. 

II. IMPACT OF THE CURRENT ENVIRONMENT ON PARTICIPANTS

The current retirement income plan environment as it translates to participant 

benefit levels is well documented in Hewitt’s 2008 study titled ‘‘Total Retirement Income at Large Companies: The Real Deal.’’ This study looks at anticipated retirement income needs and sources for nearly 2 million current employees at 72 large 

U.S. employers. The sources of income include projected defined benefit pension, defined contribution, and social security benefits. The results of our analysis suggest 

that many American workers—particularly those who are not contributing to an employer-sponsored plan—are not well positioned to reproduce pre-retirement living 

standards during their retirement years. And these conclusions were reached even 

before factoring in the effect of the economic crises of 2008 and 2009. 

Exhibit 3 summarizes the high-level results of our analysis. The study found that 

employees contributing to 401(k) and other employer-sponsored plans are projected 

to produce, on average, a respectable 95.9 percent income replacement at retirement 

age 65, while those not currently contributing will produce only 53.9 percent. 

Pension Plan Availability 

Retirement income challenges are further exacerbated when defined benefit pension benefits are not available. The average projected age 65 income replacement 

for those employees eligible for defined benefit pension benefits is 105.9 percent (assuming they are contributing to 401(k) and other employer-sponsored programs). 

However, that figure drops by 28 percentage points, to 77.6 percent, for employees 

who are only eligible for defined contribution plan benefits. Exhibit 4 depicts this 

drop along with the associated retirement needs. 


53424-29.eps 53424-30.eps
35 

4 Hewitt Associates, SpecSummaryΤΜ database (2009). 

2008 and 2009 Economic Crisis 

The findings summarized above are calculated based on participants’ account balances before the significant economic downturn experienced in 2008 and early 2009. 

A Hewitt study this year estimated the impact of recent market experience on anticipated retirement income replacement. Those calculations suggest that retirees 

will experience a further reduction in retirement income replacement expectations 

of approximately 4 percent. An economic recovery and better employee savings behaviors could reverse some of this downward pressure for properly invested participants. However, the potential reductions resulting from both movements away from 

defined benefit pensions and the current economic crisis are significant, and it is 

unlikely that, in the short term, most employees will be able to fully recover what 

they’ve lost. 

III. IMPACT OF PENSIONS ON FINANCIALLY DISTRESSED AND BANKRUPT

ORGANIZATIONS—AND ON THEIR EMPLOYEES

When companies are in dire financial straits, the defined benefit plan is a common area to look to for cost cutting. Frequently, the defined benefit plan is frozen— 

never to return—and lower-valued benefits are typically provided in its place. In a 

company reorganization or Chapter 11 bankruptcy, benefits are protected by the 

PBGC, but only to a point. 

While some workers and retirees see little or no cutback in benefits upon plan 

freeze and bankruptcy, others, depending on the plan, can see significant reductions. 

And, while benefits for many existing retirees may not decrease, retirees close to 

retirement age may suffer the greatest loss. These mid- to late-career workers need 

to adjust their retirement savings to make up for the lost retirement benefits in a 

very short period of time. This group of workers is vulnerable not only with respect 

to their diminished retirement benefits, but also in their ability to locate a higherpaying job which, of course, hurts their ability to save for retirement. In addition, 

these workers have less ability to take long-term risks with any savings or 401(k) 

plans, which limits their upside potential. A solution is needed to help maintain ongoing defined benefits to provide a level of protection needed for this group. 

This section discusses how financial distress and bankruptcy can affect benefit 

value through plan design changes, organization change and restructurings, and 

distress termination and PBGC takeover of the plan. 

Plan Design Changes 

Despite reports that the recession has ‘‘ended,’’ we continue to meet with employers on a daily basis who understandably ask for additional ways to cut costs in these 

tough economic times. In many cases, those efforts are necessary to create resources 

to fund the current pension obligations. Assets have been reduced by the recent financial turmoil, and the PPA regulations mean that funding obligations are now 

due much sooner. In some cases, these discussions lead to planning for the eventual 

termination of the pension plan to avoid further volatility. And even plan sponsors 

who wish to maintain an ongoing defined benefit plan, despite financial challenges, 

are required by the PPA to freeze participant accruals when a plan’s funding deteriorates. 

Organizations continuing to sponsor defined benefit pension plans provide retirement income benefit value equal to 7 percent to 10 percent of pay per year, while 

those providing defined contribution benefits provide maximum benefit value equal 

to 6.8 percent of pay on average.4 Exhibit 5 illustrates the various components of 

this benefit value. 

36 

This shift from higher benefit value, including defined benefit pension plans, to 

lower-value defined contribution plans, is accompanied by the shift in the relative 

safety of the programs to participants. Under defined contribution plans, participants are responsible for managing both investment and longevity risks, although 

employers recognize that most participants need increased education and advice to 

give them the knowledge and experience to do this effectively. 

Organizational Change and Restructurings 

We also see evidence of organizations moving away from defined benefit plan 

sponsorship in company reorganizations. In financially troubled situations where an 

asset sale occurs, the sale rarely includes the pension plan. This has been the case 

for dozens of pension plans in 2008 and 2009 and illustrates why it is vital that 

future defined benefit plans diversify risk. Risk sharing with third parties would 

have helped ensure corporate willingness to continue pension plan sponsorship. 

‘‘Distress’’ Pension Termination and Pension Benefit Guaranty Corporation (PBGC) 

Takeover 

Participant losses are not limited to employer actions before bankruptcy. Upon 

bankruptcy and PBGC takeover, participants stand to lose benefit value. Any benefits an employee earned in excess of the PBGC maximum guarantee are generally 

lost. The current PBGC maximum guarantee is $4,500 per month in 2009—generally affecting longer-service and higher-paid workers. Also, in many cases, pension 

plans provide subsidies for employees retiring early. Upon a PBGC takeover, employees not already meeting the requirements for a subsidy can never grow into it 

in the future. Based on PBGC rules, this includes any participants who actually recently met the eligibility for a subsidy. These participants may have anticipated this 

subsidy when making other retirement plans and can suffer a significant reduction 

in expected retirement pay. They may have, in fact, already retired and begun to 

receive benefits, having just met the eligibility. And, while perhaps less significant, 

any employees who have not met minimum vesting standards, such as 5 years of 

service, will lose their entire benefit. 

Hewitt’s conceptual models for the future would address this shortfall. They include fully funded accounts, which leverage professional asset management as well 

as pooling for risks during retirement years—greatly mitigating the potential for 

loss. 

IV. REINVENTING RETIREMENT SECURITY IN AMERICA

Providing adequate retirement income for working Americans presents major 

challenges for us as a nation. As the baby boomers age, our failures to prepare adequately for retirement will become increasingly apparent. Many Americans already 

find that their retirement savings are not sufficient to reproduce preretirement living standards. This situation has worsened with the current recession and resulting 

employer and employee actions regarding pensions and other retirement plans. 


53424-31.eps
37 

5 Alison Borland. Hearing before the ERISA Advisory Council to the Department of Labor. 

‘‘Approaches for Retirement Security in the U.S.’’ (Date: September 17, 2009) 

Alison Borland. U.S. Congress. Hearing of the House Subcommittee on Health, Employment, 

Labor and Pensions. ‘‘401(k) Fair Disclosure for Retirement Security Act of 2009.’’ (Date: April 

22, 2009) 

We don’t believe that Congress should expect employers will return to defined benefit pension plans in their current form, although there may be continued interest in 

alternative plan designs if Congress can provide additional flexibility and supportive 

underlying policies. Otherwise, the risks and exposure to corporate balance sheets 

is just too large for many employers to begin ‘‘jumping back in the ring’’ in any 

meaningful way. 

At the same time, defined contribution and 401(k) plans cannot be the sole longterm vehicle for individual and employer-provided retirement savings. In other testimony, Hewitt has suggested steps that might be taken to strengthen defined contribution plans in the future.5

We believe the future of retirement income should include both defined benefit 

and defined contribution plans. This necessitates the reinvention of defined benefit 

plans structured to better manage risks. Effective third-party and participant risksharing mechanisms need to be better developed. Employees and retirees need to 

understand their risks, and they also need to understand when it is appropriate to 

involve others in the management of those risks. Investment and longevity risks are 

too challenging for retirees with little or no marginal resources to manage. Said differently, retirees with only enough savings to ‘‘get by’’ shouldn’t be taking on the 

full risks of managing their savings over their life expectancies or being overly cautious for fear of running out of assets. 

Hewitt has compiled a number of potential models that incorporate increased 

flexibility and risk sharing in pension plans that could better serve employers and 

retirees in the future. These models will create increased security on the front end, 

which would better inoculate employees from the risks associated with bankruptcies 

and reorganizations. 

Our conceptual models incorporate: 

• Participant accounts managed on a plan-wide basis to ensure prudent investment approaches and professional asset management and techniques; 

• ‘‘Life cycle’’-based account earnings—so the appropriate risk/return characteristics are in place during all phases of employment and retirement; 

• Flexibility in employer and employee funding—allowing different organizations 

and industries to participate at the appropriate level, fostering global competitiveness; 

• Flexibility in plan sponsorship—allowing different levels of risk taking at the 

employer level, or alternatively shifting sponsorship to third-party organizations; 

and 

• Annuity requirements and options—to ensure adequate long-term investment 

and longevity protection for workers, retirees, and their families. 

V. HOW CONGRESS CAN HELP

Throughout this testimony, we have noted situations where participants are in 

peril because of the loss of retirement income benefits due to both the recession and 

the changes in employer-sponsored retirement plans. In the short term, we encourage Congress to take actions that preserve, as much as possible, the funding and 

other flexibility necessary for employers to provide ongoing and meaningful pension 

benefits in the current environment. This will lead to continued and ongoing benefits for as many participants as possible, and will help ensure that we exit the recession without digging an even deeper hole for the current and future generations’ retirement income prospects. 

Specifically, we recommend urgent action to provide temporary relief at least to 

ease the burden of the accelerated funding requirements of the PPA. In enacting 

the PPA, no one foresaw the occurrence of this recession, which has been described 

by many commentators as the worst since the Great Depression. For that reason, 

the following changes are needed with respect to defined benefit pension plan funding: 

• Widening—either temporarily or permanently—the asset ‘‘smoothing’’ corridor 

for pension funding calculations from 90 percent to 110 percent of market value, to 

80 percent to 120 percent of market value (80 percent to 120 percent was allowed 

under pre-PPA rules); and 

38 

• Allowing amortization of 2008 asset losses over a period of time significantly 

longer than 7 years, recognizing the unique nature of those events in financial history. 

These provisions have been recommended and proposed by Hewitt and other 

groups in the past 12 months and are necessary to create sufficient smoothing in 

pension funding requirements in light of current economic times. 

We need to exit the current recession with a workforce prepared for retirement 

and the resources necessary to continue fueling the economy. As a nation, we cannot 

afford to plan for unlimited protections in bankruptcy. Structures must be put in 

place that will allow companies to thrive in the post-recession environment, rather 

than ‘‘hunkering down’’ to prevent losses in bankruptcy and other situations. 

This plan sponsor flexibility is also necessary to bridge to the next generation of 

retirement plan design and management in the United States. Congress needs to 

work with all stakeholders to develop this next generation of tax-favored retirement 

income structures to support effective third-party and participant risk-sharing 

mechanisms. 

The CHAIRMAN. Thank you very much, Mr. Jones, and thank you 

all for your excellent testimony. 

We will begin our first round of questioning for 5 minutes each, 

and I will start. Again, I will start with you, Mr. Jones. 

You suggest that we should expand the asset-smoothing from 90 

to 110, and you did not say it verbally, but in your written testimony, you say 80 to 120 percent of market value. Can you just give 

me a little bit of the background? Why was 90 to 110 picked in the 

first place? 

Mr. JONES. You know, I am not familiar with that. I know that 

that was written into the Pension Protection Act, which as I understand, the intent of that was to get more toward a mark-to-market 

mentality of pension financing so there is more of a real-time measure of how well the plan is funded at any particular point in time. 

And narrowing that band—80 to 120 was allowed under prePension Protection Act law. You could smooth your assets within 

that 80 to 120 band. The Pension Protection Act narrowed that to 

90 to 110, and I believe that was all of the intent of getting closer 

to the mark-to-market. 

The CHAIRMAN. Inform us. What would be the dangers, the 

downside of expanding that to 80 to 120? 

Mr. JONES. The danger is if you have got 80 cents on the dollar 

of the assets, you are measuring costs based on the dollar, but you 

have really got 80 cents in the trust. So to the extent that you are 

under-contributing in the lean years, on the flip side of that, during 

the strong years, you may have $1.20 in the bank, but you are 

measuring the costs and producing further contribution requirements into the trust, assuming that there is only $1 in it. 

It is intended to balance itself out over time, and if you look at 

pension-funded ratios historically, they have tended to be fairly 

strong because the smoothing mechanisms have allowed that 

strength to continue during good times and bad with the smoothing 

techniques. 

The CHAIRMAN. Thank you for that. 

Now, last you say in your written statement that the asset amortization should be significantly longer than 7 years. You do not say 

how long. Do you believe in the 2 plus 7 concept that has been 

floated out there, or are you in favor of just a straight line, giving 

it more than 7 years? 

Mr. JONES. The 2 plus 7 certainly is a step in the right direction 

where it would be interest only for 2 years and then amortization 

39 

for 7 years. Fifteen years has also been floated in proposals, and 

I think that is also a rational approach to handling those 2008 

losses. 

The CHAIRMAN. Ms. Bovbjerg, I want to ask you again about the 

3 years you said it takes to calculate final benefits and the problems that engenders. You said sometimes it takes even longer than 

3 years, up to 9 years. Is there any way that the process for calculating their final pensions could be streamlined or sped up some 

way so that retirees would not have to make these big paybacks? 

They are just a little bit uncertain. They may have gone ahead and 

set up their retirement accounts and bought another place to live 

or whatever, and then all of a sudden, they find they cannot afford 

whatever they have set up. 

Ms. BOVBJERG. Absolutely. And once you are already retired—it, 

of course, depends on your age, but you may not be in a position 

where you could go out and adjust to a much lower benefit by getting another job. If you have seen the press lately, it can be very 

hard for an older worker to find a new job. 

We think that there are ways to make this process a little more 

streamlined, more friendly to participants. PBGC does a good job 

initially going out and talking to participants in companies where 

they are on the verge of bankruptcy. PBGC is about to take the 

plan. We talked to a number of workers who gave them very high 

marks for the things they do initially. 

But they need to do more to focus particularly on the participants in very complex plans where it is likely that some of the 

guaranteed benefits will be lower than what people were expecting 

so that they can get those estimated benefits to be more accurate, 

they can get final benefit determinations to people more quickly. 

And they need to talk to people while they are doing this so that 

people understand what is going on. 

But the benefits are set in law. There is not too much you can 

do to change that unless you wanted to change the guarantees in 

the law. 

The CHAIRMAN. I have 12 seconds to ask Mr. Jury a question. Do 

you believe funding relief should come with strings that require 

companies to keep their plans for some period of time or maybe 

limit executive compensation? 

Mr. JURY. Yes, Senator, particularly as it relates to funding relief 

that is tied to employers maintaining their plans. We do not believe 

that employers should receive a benefit for having frozen plans and 

thus receive the funding benefit relief. 

We have not advocated at this point tying it to executive compensation, but as you know, we at the Steelworkers and within the 

labor movement have watched executive compensation closely on 

many levels and many issues. 

The CHAIRMAN. Thank you. 

I would just state that I had supported the Pension Protection 

Act in its final version as it went through. I happen to be one who 

believes strongly in the defined benefit pension program, and you 

state that basically has contributed to making the shift from defined benefit to defined contribution. 

I recently read a book within the last year called The Great Risk 

Shift and how more and more risk is being shifted to individuals. 

40 

And individuals just, obviously, cannot cope with that kind of risk 

during their lifetime. We need to spread it more broadly. 

I am dismayed to find now that after 3 years, that the bill we 

passed actually has propelled us more toward the defined contribution plan rather than defined benefit plan. Yes, there is my book. 

And I am hopeful that we can find a way to start returning back 

to more defined benefit plans. But that is just my view. I am not 

asking a question on that. 

Senator Enzi. 

Senator ENZI. Thank you, Mr. Chairman. 

I will begin with Ms. Bovbjerg with GAO. This situation of Delphi’s pension plan poses some unique questions for the future of 

our Nation’s defined benefit system. Is this not the first time that 

pension plans have been taken over by the PBGC where third parties will top up the workers and retirees’ pensions, as if the pension 

plan had never gone to the PBGC? 

In the instance before us, it is possible that if GM decides to step 

in again, it will most certainly be using Federal Government bailout dollars for the top-up. What kind of precedent is this setting 

for future pension plans that are taken over by the PBGC, and 

what does it say about the use of taxpayer dollars for the top-up? 

Ms. BOVBJERG. I hope you will be relieved to hear that we have 

work underway on auto industry pensions, the PBGC, and the auto 

bailout TARP because we were very interested in this question of 

the role of the Federal Government as both majority shareholder 

in GM and insurer of the defined benefit pensions. 

I was very interested in the New York Times article recently that 

said that the Delphi top-up was being paid by GM plan assets, 

which I had not heard before. 

This raises really good questions that we hope we will have an 

answer for you on in the winter. 

I did want to say that LTV Steel may have topped up benefits 

back in the 1990s when their plans went out, but they did have to 

take their plans back after they topped up the benefits. There were 

two pension plan bankruptcies with that company. 

Senator ENZI. OK, thank you. 

The drafters of ERISA back in the 1970s were careful not to have 

the PBGC give too generous of benefits in plans taken over by the 

PBGC, and the rationale was that too generous of benefits given, 

the companies would make promises way beyond the means and 

then they would dump their plans on the PBGC. And since that 

time and especially in light of the huge deficit at PBGC, Congress 

has not changed that philosophy. 

By having companies make these top-ups to pension plans, is it 

not trying to circumvent what the 1970s’ Congress was trying to 

prevent happening in the first place? 

Ms. BOVBJERG. Well, I think you raise this fundamental point. 

Why is someone not paying for these benefits? If an employer is 

promising benefits to their workers, they should be funding those 

benefits. 

Now, I appreciate the difficulty of trying to achieve the balance 

of how and when those benefits are funded, particularly in an economic downturn, that balance is important. You do not want to 

have a situation where an employer, in order to make their pension 

41 

contribution, has to go into bankruptcy or has to lay off employees. 

No one wants that. 

On the other hand, employers who do not fund their benefits and 

their plans go to PBGC, you have the kind of situation that we 

talked about with the steel workers, and we have talked about with 

Delphi, where people are not able to get their full benefit, and it 

is because the benefits are not funded. 

Senator ENZI. And our attempt is to make sure that the companies are not gaming the system at the same time. 

Mr. Gump, I want to thank you for your very compelling testimony today. I, too, asked the Department of the Treasury for information concerning the Delphi pension arrangement. However, 

other than a promise to get back to my staff, I have not received 

any information to date. 

Do you believe that if the negotiations between the Administration—GM and Delphi—had been more transparent, then the Delphi 

salaried retirees would have had a chance to comment on that situation? 

Mr. GUMP. We would have at least had a chance to comment on 

the situation, and that is a part of the problem here, that PBGC 

followed a summary termination process and totally excluded all of 

the other beneficiaries. That process, as I understand it—and I am 

no ERISA lawyer or anything—is a process that was only supposed 

to be used in small pension plans, and yet, this is one of the largest 

that it has ever had to take over and that process was followed. In 

fact, it was done—I believe it was on a Sunday—and none of us 

knew about it. Essentially it was done in secret. So yes, if it had 

been required to have been more open, we would have had a better 

opportunity, I think, to participate. 

Senator ENZI. We will see if we can make that happen. 

Mr. Jones, at the end of last year, the Federal Government actuaries told us that companies can wait to make pension funding benefit decisions as late as the third quarter of the calendar year. At 

the end of 2008, when we passed the Worker, Retiree and Employer Recovery Act, the Federal Government actuaries advocated 

that we could have waited until September of this year to act. 

However, many companies we have talked with state that yearly 

spending decisions, including pension funding payments, need to be 

decided at the end of the year. I am afraid that if we listened to 

the Federal Government actuaries’ guidance this year, we might be 

told to wait until September of next year. 

Could you give us insight into how companies’ spending decisions 

are made? Should we wait until September of next year to act? 

Mr. JONES. No, I do not think you should wait until September 

of next year to act. That is the deadline for when cash contributions need to be contributed, and organizations are complex and 

they obviously need to make decisions much sooner. No, I would 

not wait. 

Senator ENZI. Thank you. 

My time has expired. I do have questions that I hope you will 

allow me to submit in writing and get an answer to because it is 

critical to this debate. Thank you. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator Enzi. 

Senator Mikulski. 

42 

STATEMENT OF SENATOR MIKULSKI

Senator MIKULSKI. Thank you very much, Mr. Chairman. I ask 

unanimous consent that my opening statement be included in the 

record. 

The CHAIRMAN. Certainly. 

[The prepared statement of Senator Mikulski follows:] 

PREPARED STATEMENT OF SENATOR MIKULSKI

I thank Senator Harkin for holding this hearing today. While 

we’re on the verge of an historic victory to improve health benefits, 

we also need to stand sentry for worker’s retirement benefits. The 

financial crisis may have started on Wall Street, but this recession 

certainly has hurt everyone, especially workers and retirees who 

assumed that if they worked hard and played by the rules, they 

could retire with dignity and security. 

It has also hurt companies and employers—that have been pillars of their community—that take pride in how they treated their 

employees. Today they are struggling to keep benefits in place and 

keep the lights on. The moral of the story is everyone is facing a 

challenge. Employers are challenged to fulfill their pension responsibilities and retirees and workers are challenged to find a way to 

retire securely. 

Congress has poured money into Wall Street so it is not surprising that it’s only on Wall Street that we see recovery taking 

place. But we should be focusing resources where they are needed: 

on workers who are the backbone of our economy, on the good guy 

employers trying to do the right thing, and on taxpayers who are 

responsible if something goes wrong. That’s what I hope we can 

talk about today. 

I have a few simple principles for pension issues. The first is that 

promises made must be promises kept. But we all know that isn’t 

always easy. So we in Congress must work to help ‘‘good guy’’ businesses who still offer pensions to their employees. We know that 

these companies are competing in a global economy where offering 

a pension is voluntary, so we need to work with these companies. 

We also need to do no harm. My top priority is jobs, jobs, jobs. 

We need to do everything we can to create and save them. I won’t 

support pension legislation unless it does that. We need any relief 

to be targeted, timely and temporary. Comprehensive reform 

passed in 2005 hasn’t even taken full effect. The principles of that 

reform were sound and we shouldn’t undermine them. 

As our response focuses on the temporary shock to our economy, 

we need to make sure we don’t create permanent consequences. We 

also need to be bipartisan. This committee doesn’t work on pensions to score political points. We do so because we all have citizens 

in our States who need us to fight for the retirement benefits they 

have earned. We have been bipartisan before and I hope that is 

how we proceed now. And most importantly, we need to act on behalf of workers and retirees, making sure what we do helps them 

and doesn’t help fund golden parachutes or stock buy-backs and 

dividends. 

We’re focusing not only on what we can do to keep pensions 

alive, but also on what to do about those that have already ended. 

43 

Senator Brown has his constituents here because their pensions 

are being slashed as PBGC takes them over. I know all too well 

about this problem. I worked with his predecessor Senator DeWine 

to try to address it. 

Like Ohio, my State used to have lots of manufacturing jobs too. 

They had good pay and good benefits—like a real pension plan. 

And like the Delphi employees here today, Bethlehem Steel employees in my State had their pensions taken over by PBGC. 

When Bethlehem Steel went into bankruptcy, it broke our 

hearts. They were our neighbors. They worked all of their lives for 

their pensions in hot, dirty and often dangerous circumstances. 

Their hard-earned pensions went to PBGC. But when people started to get their benefits, PBGC made a math mistake. Workers who 

were forced to take pensions below what they had earned were 

then told that PBGC had made an overpayment and that they had 

to pay it back. 

Well, I went to bat because I didn’t want my constituents to pay 

for a mistake PBGC made. But we couldn’t change what had already happened. Workers had to pay back part of the pensions they 

had earned. It was a very serious hardship. 

Dealing with PBGC at the time was really one royal pain. And 

if I, as a Senator, was running into bureaucratic rigidity, then I 

can only imagine how hard it was for these retirees. I know we 

can’t un-ring that bell, but I’ve continued to ring the alarm that we 

need a better PBGC. That’s something I’ve worked on for a long 

time—a process that is predictable and timely and respectful; a 

process that is an investment attitude that is humble and prudent. 

But no matter how much we improve the PBGC, Congress needs 

to try and prevent what happened at Bethlehem Steel and is happening at Delphi from happening in the first place. Everyone is 

talking about economic recovery, but we’re here today because any 

recovery that is taking place is only happening in the financial 

pages—not the real world. 

I am outraged with these TARP twerps paying themselves billion 

dollar bonuses at the same time that retirees are having to pay 

back the pensions they earned to PBGC. And at the same time that 

upstanding employers can’t get the credit they need and have to 

scale back benefits or lay-off workers because Wall Street masters 

of the universe took us into a black hole. I will make sure that any 

legislation helps the people that deserve help. Not those who we’ve 

already helped and don’t appreciate it. 

I do have flashing yellow lights about relaxing pensions funding 

rules. It’s led to trouble before. PBGC has deficits because companies don’t pay enough to their pensions when they are healthy and 

can’t pay enough when the PBGC has to assume the plan. For 

more than a year, companies have said they need taxpayers to sacrifice so they can stay afloat. 

I have questions about funding relief. How do we know if there 

is a need? If there is a need, how do we know how much relief to 

grant? If there is a need, can we meet it without bailing out bad 

decisions? Can we make sure that only the companies that need 

the help take it? Can we reward those good guy employers that 

acted responsibly? Can we make sure that we help workers and retirees, nor corporate executives and Wall Street TARP twerps? 

44 

I won’t tolerate another boardroom bailout or let a bill go forward 

to give taxpayer help to companies that don’t need any more of it. 

But, while I have flashing lights, I also know that many good guy 

employers are struggling. They want to meet their obligations without risking their businesses or laying off employees who they consider part of their family. 

Like all of us—I wish we didn’t have to be here today. Pensions 

are supposed to be a source of stability. But today, workers and retirees are losing sleep over losing their pensions. And employers 

are losing sleep over having to choose whether to continue their 

pension plan or continue their business. 

Our economy is just barely off of rock bottom. We need to make 

sure pension obligations do no harm and good guy businesses can 

start to recover. But we also need to make sure that short-term relief doesn’t turn into long-term pension deficits. I am on the side 

of employees counting on promised pensions, good guy businesses 

trying to meet their obligations and taxpayers who shouldn’t have 

to bail out the PBGC. 

I look forward to hearing the witnesses’ ideas about how to help 

and about how we can work together to strengthen the link between hard work and a solid retirement and how to help our businesses get to recovery. 

Senator MIKULSKI. Mr. Chairman and also members, I want to 

acknowledge the fact that you will have a gifted witness in the second panel, Mr. Ron Peterson, running an iconic organization in the 

State of Maryland called Johns Hopkins. 

But, Mr. Chairman—and my question will go to Mr. Jury from 

Bethlehem Steel. 

We also had an iconic institution in Maryland. It was called 

Bethlehem Steel. It used to employ 18,000 people. Many people 

started out at something called the Point, worked their way up, fed 

their family, had good wages because they were represented by the 

Steelworkers. And they kept America going from the beginning of 

the Industrial Revolution through the great wars where we furnished armaments. Bethlehem Steel is now owned by a Russian oligarch. 

And so, as a result, today the largest employer now in the State 

of Maryland in the private sector, but nonprofit, is Johns Hopkins. 

Many of the men who worked at Bethlehem Steel and women 

had jobs they hated, that were dirty and dangerous, so that their 

children could have jobs that they love. And now many of them are 

working at Hopkins or the University of Maryland in accounting to 

medicine. 

But along the way, something terrible happened to our steel industry due to foreign imports and dumping, and neither Democrat 

nor Republican administrations stood up for them. Bethlehem Steel 

went into bankruptcy, and they were thrown into Pension Guarantee. But all along the way, Senator Sarbanes and I were assured 

that the pension plan was solid. All along the way, we were assured of that. 

What we found was that there is a pattern here. Everything is 

sweet. Everything is fine. Let us all have gushy-poo kumbaya 

meetings with the workers so we are all in it together. But what 

happens when they go under, what the workers find is they are not 

45 

all in it together. There is the ‘‘them’’ and there is the ‘‘us.’’ There 

is the them that continues to get and there is the us that gets the 

shaft. 

My workers are still hurting. They saw their pensions reduced 

when they went to Pension Guarantee, but they were grateful that 

there is a Pension Guarantee. Then as they got their benefits, they 

found that—and you speak, Mr. Jury, of it. Pension Guarantee told 

them they made a math mistake. Many of my retirees who were 

already living on the modest benefits provided by Pension Guarantee then found they had to give the money back because of a 

Government math mistake. 

Well, I think we have more mistakes to correct than the math. 

I worked with Senator Mike DeWine who was my ranking member 

or I was his on this Subcommittee on Aging and Pensions. We 

worked together on a bipartisan basis. He had his workers in Ohio. 

I had my workers in Maryland. We found there was very little we 

could do. 

And my question then to you, Mr. Jury—you saw this and you 

get the phone calls. You get the calls from those men and women 

who worked those shifts day and night and so on. Three questions. 

No. 1, do you believe that through whatever law we have, as we 

look at this current situation facing us, that there needs to be kind 

of truth in pensions? And did we correct it in the Pension Reform 

Act of a couple of years ago? Truth in pensions about how they 

really are funded? 

No. 2, Should there be an early warning system to both the management and to the workers about this? 

And No. 3, what grievance procedures should they have when 

Government makes the math mistake and people have to give the 

money back? 

What reforms would you recommend so that it would never—I 

cannot correct it for them, but they know I am here today. I want 

them to know I never forgot what happened to them. Those men 

and women were our neighbors. My father had a little grocery 

store. When they were having difficult times, he went on credit. My 

father is gone. Bethlehem Steel is practically gone. The way of life 

is gone. But let us see if we cannot at least reform it for the next 

go-round. 

Mr. JURY. Well, thank you, Senator. You are correct. For the 

steel workers and others at Bethlehem Steel in Sparrows Point and 

Bethlehem, PA and northwest Indiana and Lackawanna, NY and 

elsewhere, we unfortunately cannot turn around and fix every one 

of their problems, but there are many other workers who are or 

may very well soon be in the same circumstances. 

Certainly the idea of greater information and greater transparency for retirees is critical. I think there were elements of that 

in the Pension Protection Act in 2006, and if there is always an opportunity to think of whether more information could be provided 

in a more clear fashion on a more timely basis, of course, that is 

an important end. 

We at the Steelworkers Union assisted retiree groups I believe 

from Bethlehem, but also from Republic Technologies and other 

steel and other companies through the PBGC’s appeal process. Indeed, at the moment we have litigation going on in district court 

46 

here in Washington for some steel worker retirees from Thunderbird Mining on the Iron Range in Minnesota. These are internal 

administrative review processes which end with litigation in a district court where the courts defer greatly to the administrative 

agency’s internal determinations. 

Senator MIKULSKI. What reforms would you recommend? 

Mr. JURY. Again, any reform that provides better information 

more quickly, particularly about the funded status of the pension 

plan, the risk the plan may be in, and also the cost to the employer, which is itself a risk to the plan. We have spoken in our 

written testimony and share the view that spreading out these 

costs so these additional added onerous costs do not imperil the 

pension system by creating this upward escalator. That in itself is 

something that will serve, we think, to preserve pension plans and 

protect our members and all employees working under these plans 

and protect the interests of retirees. 

Senator MIKULSKI. Thank you. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you very much, Senator Mikulski. 

Senator Reed. 

Senator REED. Mr. Chairman, I would yield to my colleagues. 

The CHAIRMAN. Senator Brown. 

STATEMENT OF SENATOR BROWN

Senator BROWN. Thank you. Thank you, Senator Reed, for that. 

Thank you for the testimony from all four of you very much. 

Mr. Gump, talk to me, if you would. Tell us more about the impact on Delphi’s salaried retirees that took early retirement. What 

was the impact on their benefits for those that did? If you could 

give me some numbers of employees and amount of impact. 

Mr. GUMP. There is a number of things that happened in here. 

The Delphi retirees oftentimes were coerced into early retirement 

with promises of severance pay and a supplement to the retirement 

plan that would be essentially a bridge to Social Security. Those 

are the things that were very much in danger. In fact, there was 

a point during the bankruptcy process when the company indicated 

that they would like to get out from under the severance pay. It 

was not allowed, but nonetheless, it was an attempt. 

The point I am trying to make is it was not just encouragement 

to leave. You know, things are going OK. You have done all right. 

You know, things can be good. You can get out now. It was a 

coercement. Hey, if you leave now, we will give you this. And then 

after they are gone and things are moved to the PBGC, the PBGC 

does not recognize those kinds of supplements generally. So the rug 

is just pulled out from under a person. 

In some people’s cases in the mid- to late 1950s, those supplements could have amounted to something on the order of $1,500 a 

month. 

In the case of Delphi, we have been told by the PBGC that the 

initial estimate, which this all started August 1st, could be anywhere between January and March. It is hard. I mean, it is 70,000 

people they have to get through. There is a lot to do. But if it goes 

to March, that would be 8 months. So 8 months times $1,500— 

47 

when the first initial estimate comes along, you could already be 

$10,000 or $12,000 in debt to the PBGC. 

The bottom line to it is that people do not know how to run their 

lives. They do not know what they are going to get. It is a very 

convoluted process that is hard to understand for an outsider. It 

takes a long time to get to any kind of answer. In the meantime, 

should we sell our house? Should we buy a house? Should we try 

to move? Can we keep our kids in college? Can we make commitments for the future? Can we buy a car? And that is a whole other 

issue. 

A lot of this anger is aimed back at General Motors and the company that caused or initiated all this to happen. Here is the Federal Government who is the majority owner of General Motors and 

maybe 100,000 people, all told, are angry at them. They are throwing 100,000 customers away. And these were typically employees 

that were loyal customers. Plus, they have spouses and children 

and family and friends and the whole community can be angry. It 

seemed counterproductive for all these kinds of things to happen. 

But on a community-wide basis, it absolutely can be devastating. 

In our local economy in the Mahoning Valley, in Warren, Youngstown, and Niles area, taking $161 million per year every year out 

of that economy, which is already very badly damaged by the loss 

of the steel industry in that community—the population of Youngstown, as I understand it, has reduced from 160,000 to 60,000. 

There are 100,000 people who have had to move away from that 

community, and the blight that follows that kind of loss is just phenomenal and very difficult. 

I think the picture in the New York Times standing near the 

parking lot there with all the weeds growing up is almost poetic. 

This is what is happening across America. 

And I would point out that in our particular cases, because the 

Federal Government got involved and handled all this, that we 

were really poster children for every salaried employee in the 

United States because if the U.S. Government is going to step into 

a situation which is agreed to be unusual and should not really 

have to happen very often, but if it does and it treats the salaried 

people like yesterday’s trash, then every salaried worker in America has just been treated that way. This is what they have to expect from their Federal Government. I do not think that is what 

is intended, but that is the message that comes across in the way 

this was handled. 

Yes, there are devastating issues. There are some people here 

with me today that their pensions will be reduced to the point that 

they truly can just barely afford health care. One woman with me 

today, 2 weeks after she was told that benefits were lost, was diagnosed with a potential breast tumor. She had to pay the entire cost 

of determining whether or not essentially she was going to live or 

die. And her husband has a degenerative back disorder. He is in 

constant pain. He works at it. He does OK with it, but the medications that he requires are what he needs to live. And being selfemployed, her insurance is what was supplying her family. 

It is a terrible situation and we are not alone. There are a lot 

of people. Like I said, there are 20,000 people in Delphi alone that 

this is affecting, and the message to the rest of the salaried workVerDate Nov 24 2008 09:28 Nov 04, 2011 Jkt 035165 PO 00000 Frm 00051 Fmt 6633 Sfmt 6601 S:\DOCS\53424.TXT DENISE
48 

ers in America is just absolutely devastating and really should not 

happen, especially based on some concept of commercial value. 

Imagine applying that whole concept of whether or not you can receive benefits based on your commercial value to health care that 

the Federal Government is deeply involved in. 

Again, I do not think that is the message that is intended, but 

that is certainly the message that comes across, is that if we are 

willing to do it in this case, are we willing to do it elsewhere? They 

followed that process here. Would it be right somewhere else under 

some other conditions? I think we settled that question in this 

country a long time ago, and I really do not think we should be 

having to talk about it right now. But we are and that is where 

we are. 

‘‘Devastation’’ is probably the best word. Dr. Akpadock’s introduction to his study, when he gave it in a news conference—he said 

that the right word to classify this is ‘‘catastrophe’’ for the community. 

Thank you. 

Senator BROWN. Thank you. I thank you for the personal stories 

that you have shared with us today. I have heard for months from 

workers who have been given this news and about their heartbreaking family situations. I also appreciate the explanation you 

gave on the Youngstown State study, detailing what this does not 

just to the several hundred workers and their immediate or extended families, but what it means to a whole community that has 

lost a lot of jobs. I just commend that to the committee. 

In my part of the country, there are more than a few cities like 

Youngstown that have literally half the population that they had 

in 1950. Youngstown, Cleveland, Detroit, cities like that. Detroit 

was 2 million. Now it is a million. Cleveland was a million. Now 

it is 400,000. Youngstown was 160,000–170,000, and now it is 

roughly 70,000. The Delphi communities are going to depend on 

the estimates the PBGC is making now. And what this does to individual families—and Mr. Gump talked about it and what it is 

doing to whole communities. And that is tens of millions of dollars 

that will go back into the community or will not depending on what 

we are able to do. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator Brown. 

I turn now to Senator Burr. I apologize for skipping. I thought 

you had gone by me going out there. But Senator Burr is our ranking member on the Retirement and Aging Subcommittee, which 

Senator Mikulski chairs. 

Senator Burr. 

STATEMENT OF SENATOR BURR

Senator BURR. Thank you, Mr. Chairman. I would also ask unanimous consent that my opening statement be a part of the record. 

[The prepared statement of Senator Burr follows:] 

PREPARED STATEMENT OF SENATOR BURR

Thank you, Mr. Chairman, for taking this look at America’s voluntary employer-provided retirement system. 

49 

It is well past-due for Congress to address the funding crisis. For 

months the pension community—employers and employees—has 

looked to Congress for leadership. A number of us have had bipartisan conversations and have agreed on the need for action. 

Senator Isakson and I have suggested we provide a temporary fix 

that maintains the overall obligations of companies to fund their 

pensions but gives additional flexibility and time to weather the recent financial market turmoil that has devastated asset values. A 

number of Democratic colleagues have told us they are interested 

in the idea but that they are deferring to the Majority leadership 

of this committee to take action and for the health care debate to 

conclude. 

I am encouraged we are having this hearing because I think we 

need to ramp this process up. We can’t wait. 

Addressing the pension funding crisis is a true economic stimulus issue for both our Nation’s employers and their employees. 

Jobs and pensions rely on the financial health of companies. Some 

plans are ongoing and building up new benefits for participants. 

Some troubled companies are simply trying to survive and maintain past promises earned by employees and retirees. All need help. 

There is no nationwide stimulus program more shovel-ready than 

pension stabilization. Addressing pensions would help the economy 

now. 

The Administration’s record on these issues is basically blank. 

Their most significant measure to date is the subject of our first 

panel. That panel will highlight the disparity between how different groups of employees were treated under the Delphi/GM and 

Treasury/Auto Czar deal. 

Mr. Chairman, this hearing shows your recognition that this institution is capable of multi-tasking, and I thank you for that. 

Thank you, Mr. Chairman. I look forward to hearing from our 

witnesses. 

Senator BURR. I want to thank our witnesses for being here 

today. 

Mr. Chairman, let me express at the beginning I am disturbed 

that somebody from PBGC is not here. I understand we have 

reached out to them. I think it is unbelievable that we could have 

this hearing and not have them here. 

Mr. Jones, I am going to state something and just reconfirm for 

me that I understand it. Many pension funds—pre the economic 

crisis—were fully funded in America. Post the economic crisis most, 

if not all, pension funds were underfunded because of the reduction 

of the valuation of their assets that were held in the pension. And 

the challenge before Congress in a bipartisan way is how we 

change the pension rules to allow companies to catch up in a reasonable period while allowing enough time for assets to reinflate 

where that is possible based upon the capital markets. 

Is that a pretty accurate description? 

Mr. JONES. That is very fair, yes. 

Senator BURR. Well, I want to just sort of plead with my colleagues that we work together to find a solution to this as quickly 

as we can. The longer we stay in an anemic growth period in this 

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50 

ment goes into pension obligations in many cases to catch up and 

how much does not go into job creation and this will be a neverending cycle of increased unemployment if in fact we do not address what is a security need for the workers and sustainability for 

the companies. 

Ms. Bovbjerg. 

Ms. BOVBJERG. Bovbjerg, like iceberg. 

Senator BURR. Bovbjerg, OK. 

You made a statement. I just want to explore it a little bit. In 

a phrase, you used this, ‘‘unless the plan had assets.’’ Now, were 

the PBGC liens associated with Delphi assets of the pension fund? 

Ms. BOVBJERG. We were talking about this before the hearing. I 

really cannot say anything about the PBGC liens. I really do not 

know anything about them. 

I can say that if there are sufficient assets in a plan that PBGC 

trustees, they can pay above the guaranteed level if the assets are 

there. They have a very complex asset allocation situation that we 

explained endlessly in our report. 

Senator BURR. Mr. Jones, are you familiar with the Delphi situation? 

Mr. JONES. I do not have close proximity to it, no. 

Senator BURR. Mr. Gump, I will go to you because I know you 

do. 

[Laughter.] 

Do you consider that the liens that PBGC had, assets of the pension plan? 

Mr. GUMP. Absolutely. PBGC itself told us that those liens were 

valued anywhere—as low as $1.8 billion and as high as $3.4 billion. 

And they gave them up for the sake of $70 million in cash from 

GM and a $3 billion unsecured claim—— 

Senator BURR. In your estimation, did PBGC voluntarily give up 

those liens? 

Mr. GUMP. My understanding is that the expedited nature of the 

GM bankruptcy led to some discussion and, I suppose you could 

say, pressure from the Administration in order for the General Motors bankruptcy to proceed rapidly. 

Senator BURR. From what you know now, did General Motors’ 

bankruptcy basically make those assets worthless? 

Mr. GUMP. Essentially that is what happened from our standpoint. The Administration said that they were not actionable, but 

they accepted a $3 billion unsecured claim in bankruptcy court 

which were absolutely not actionable. 

Senator BURR. So from an actuarial standpoint, Mr. Jones, can 

you envision a scenario where the PBGC would voluntarily give up 

$3 billion worth of assets of a fund, transferring those under an 

agreement into a company that they knew would go bankrupt and 

the assets would be worthless? 

Mr. JONES. I cannot speak for the PBGC—— 

Senator BURR. But you know what the PBGC’s mission is and 

that is to protect the—— 

Mr. JONES. Pension security. 

Senator BURR [continuing]. Pension assets. 

Mr. JONES. Correct. 

51 

Senator BURR. Does this even become nearly rational for anybody, that the company that is in charge of protecting the value of 

the pension fund voluntarily gave up the lien on the assets with 

full knowledge that General Motors was going to go into bankruptcy and therefore those assets would become worthless? Have I 

got that right, Mr. Gump? 

Mr. GUMP. Yes, sir. 

Senator BURR. Who requested that PBGC release those liens? 

Mr. GUMP. Well, of course, we were not part of the conversation, 

so I cannot truly answer the question. We do know that there was 

very heavy involvement of the Auto Task Force. One would assume 

that it would be the Administration. 

Senator BURR. Mr. Chairman, I know we are here today and my 

time is up. I do look forward to working with my colleagues on a 

solution to the pension funding challenges that most companies 

have today, and I hope we will do that quickly. 

I also hope that this committee or Senator Mikulski in the subcommittee will take the opportunity to invite back the PBGC, possibly the Auto Czar, anybody else who we think might be able to 

shed some light on why the Federal Government would have put 

their stamp of endorsement on the elimination of assets designated 

for the pensions of Delphi employees. 

I thank the chair. 

The CHAIRMAN. I would say to my friend that I had asked that 

question, and the basic response I got back was that it was very 

hard for the PBGC to enforce or to act upon these liens on foreign 

assets. There were liens on foreign assets, but they felt that they 

could not really prove up on them or enforce them at that time. 

Whether that is true or not, I do not know. I am just telling you 

that is the response I got back. 

Senator BURR. I think the chairman has raised an important 

point. I think the committee deserves a clarification as to the 

thought process that PBGC went through and, more importantly, 

I think the employees of Delphi are owed an explanation as to why 

this decision was made. 

Thank you, Mr. Chairman. 

The CHAIRMAN. I agree with the Senator. 

I will come back to you, Senator Reed. 

Senator Franken. 

STATEMENT OF SENATOR FRANKEN

Senator FRANKEN. Thank you, Mr. Chairman. 

Thank you, Mr. Gump, for the story that you shared. I have 

heard a lot of similar stories up on the Iron Range in Minnesota 

from steel workers. 

I want to thank Ms. Bovbjerg for your testimony. I was struck 

by the problems that the GAO identified in the report and how 

closely they mirror those of the groups of steel workers and retirees 

that I have talked to on the Iron Range in Minnesota. Their pensions were taken over by the PBGC in 2002 and 2003, and the 

problems that followed led them to form a group like Mr. Gump belongs to. These steel workers have told me that the PBGC failed 

to communicate with them for years at a time, and the information 

52 

they did receive did not fully explain the situation they were facing. 

Additionally, many of these workers were employed at different 

mining operations, which made it more complicated for everybody 

in computing their benefits, and it really left them wondering what 

their benefits would be. And then many of them were subject to 

recoupment. They had to pay back overpayments. 

I am very troubled to see that the problems that we had in 2002 

seem to be persisting 7 years later, at the time of your audit. 

First, I would like to ask you, in your audit, did you encounter 

any of these Minnesota steel workers? 

Ms. BOVBJERG. We did talk to a number of steel workers. I think 

we might have talked with some from National Steel. Mainly we 

got our information from PBGC and from the experiences of prior 

terminations. We did go back to 2002, 2003 when we looked at 

these things. 

I think that we were concerned like you that there are going to 

be so many more big, complex terminations coming into PBGC in 

the future—and at that time that we were doing this work, Delphi 

was in the wings—that we felt that it was really urgent that PBGC 

do the things that they can to make this process easier for people. 

They cannot change the law as to what the benefit guarantees are, 

but certainly they can change the way that they work with people, 

the frequency with which they talk to people, the complexity with 

which they provide information. You know, there is always that 

trying to achieve a balance between the technical accuracy and actually communicating with people who are not actuaries. 

Senator FRANKEN. Precisely. There were years between when 

they would hear from them being alerted that they were going to 

be in PBGC and then what the outcome was. 

Now whose job is it to change those laws? Oh, right, that would 

be us. 

[Laughter.] 

Ms. BOVBJERG. I am glad I did not have to tell you. 

Senator FRANKEN. Yes. 

I want to ask Mr. Jury about this because you work with the 

steel workers. I got the endorsement of the steel workers up in 

Hibbing very early, and I went down to their locker room area and 

the president of the local introduced me to the guys saying this is 

Al Franken. We are endorsing him. And do you have questions? 

And a guy stood up and said, ‘‘Yes, what are you going to do to protect our pensions?’’ And I really did not know what to say to him. 

I am glad I am here because I really want to know what I can say 

to him. 

The fact of the matter is that they are guys that worked for 38 

years in the mines expecting that they would get a pension of 

$2,400 a month, and it went to the PBGC and they ended up getting like $600–$700. And they are 58 years old and they had kids 

in college. And they were not on Medicare yet and they had health 

problems after working for 38 years at a taconite mine. 

They would say, ‘‘The mine went bankrupt. The entity that 

owned the mine would go bankrupt. I lose my pension. The next 

day they would be open again under some new ownership and I 

would be working again except I would start from zero.’’ 

53 

What can we do as a body to prevent that kind of thing from 

happening? How can I give this guy an answer? What is the answer I can give him? 

Mr. JURY. Thank you, Senator. That is a fair point. And those 

same frustrations that were expressed to you were expressed to me 

as well. I am a union-side labor lawyer that spends too much time 

in bankruptcy court and I was around the National Steel bankruptcy and the Eveleth Mining or Thunderbird Mining bankruptcy 

cases where there were pension plan terminations. 

We have addressed today questions about how to prevent the 

next generation, whether they are on the Iron Range or elsewhere, 

about protecting and elevating the interests of the workers and retirees by smoothing out some of these onerous funding requirements, also eliminating what we think are some gratuitous provisions that cut off benefit guarantees when a company files in bankruptcy, which is an event the worker has absolutely no control 

over. 

In addition, I note that in the last Congress there was bankruptcy reform legislation introduced, and if introduced again, there 

is much about that bankruptcy reform legislation that would further the protections of workers and retirees in bankruptcy. It is a 

comprehensive approach. 

In addition, it brings to mind the need for speedier processing of 

these cases, and while I will not comment upon the merits of this 

Thunderbird Mining case that is pending here, I simply note that 

the pension plan there terminated in, I think, July 2003. We are 

still litigating some of the determinations PBGC made, and certainly as others have said, the sooner a retiree knows what his or 

her future bears, undoubtedly that is the better course. 

Senator FRANKEN. Thank you. 

Mr. Chairman. 

The CHAIRMAN. Thank you very much. 

Senator Hagan. 

STATEMENT OF SENATOR HAGAN

Senator HAGAN. Mr. Chairman, I really appreciate you holding 

this hearing, and I have no questions for this panel at this point 

in time. But thank you all for being here. 

The CHAIRMAN. Thank you. 

Senator Reed. 

STATEMENT OF SENATOR REED

Senator REED. Thank you very much, Mr. Chairman. 

I thank the panel. If I was taller, I could see you, Mr. Gump. 

[Laughter.] 

I think we both have a similar characteristic. 

First of all, what you have described is an extraordinarily not 

only poignant, but in fact disheartening situation where people who 

have struggled all their lives are now trying to get by. The human 

element you bring here is as instructive as any of the technical 

issues we will discuss. Thank you very much for that. 

It has been brought up here that we are in a situation where because of the financial crisis, pension assets have decreased and 

54 

therefore there is underfunding. We have to allow a gradual buildup. 

I seem to recall when the market was very high-priced, that it 

was not uncommon for companies to be taken over and the pension 

plans reduced because it was overvalued. I wonder, Ms. Bovbjerg, 

your view in terms of what we have to do in the good times to provide for these bad times. 

Ms. BOVBJERG. Well, I am sorry that Senator Mikulski is not still 

here because Bethlehem Steel was really a major reason why the 

Pension Protection Act was enacted. Bethlehem Steel had been well 

funded until just really a very few years before its bankruptcy, and 

then it was 40 percent funded or something. By the time that 

PBGC took it, it was the largest single termination PBGC had ever 

done at that time. 

So the question is how can you encourage employers to fund the 

promises that they make to employees while at the same time 

being flexible enough that you do not drive them out of the system 

entirely. I think that is why you see the Pension Protection Act 

coming in to try to shore up funding for employees and for PBGC 

and then, in downturn, concern about whether it was flexible 

enough for employers to really do what they need to do with their 

plans, but at the same time not go bankrupt in the process of just 

trying to fund their plan. 

We have talked in terms of assistance in bailout about the need 

for things being targeted and temporary, and we continue to say 

that about pension funding relief, that to the extent that it can be 

targeted to those who need it and not those who do not, which is 

difficult because we do not have a lot of information, targeting 

would be preferable to widespread relief to employers who do not 

need it and making it temporary so that in a time when it is very 

difficult for employers—and I think everyone agrees on that right 

now—that they are able to address the funding shortfalls but 

maybe in a longer period of time, maybe not at the expense of retaining jobs or even creating new ones. 

Senator REED. It seems to me again—and these might be isolated 

incidents—that there were occasions where companies who had 

taken over, the pension plan was on the books overfunded, and 

that money was not used for reinvestment in jobs or anything else. 

It was essentially dividend out to the new owners. 

Ms. BOVBJERG. Well, at one time they could do that. They are not 

supposed to do that now. 

Senator REED. Are you confident that we have done everything 

we can to ensure that situation? 

Ms. BOVBJERG. The thing that did concern me in the Pension 

Protection Act is we really did not do anything about credit balances, and that is what caused a lot of the underfunding in Bethlehem Steel. That is why GM has not had to make any contributions recently. They were overfunded. So they can use those credits 

later instead of making contributions. So what that means is that 

your funding level can drop very precipitously if there are other 

bad things going on in the economy when you are enjoying your 

credit balances. 

We have a lot of concern about that. That is exactly the time that 

PBGC might be called on to step in and take a plan, and from what 

55 

you have seen from the Delphi experience, when you continue to 

run a plan and you are not making contributions, your asset-liability ratio plummets. 

Senator REED. I just want to quickly turn the topic because we 

have focused on commercial enterprises, but there is a growing— 

this is not a surprise to anybody—concern among municipal governments and State governments about their pension liabilities. 

They are operating outside of PBGC. And is there any mechanism 

in place now to reinsure them, to help them? Because this might 

be the next crisis. 

Ms. BOVBJERG. Well, the public plans are regulated by their 

States. 

Senator REED. Right. 

Ms. BOVBJERG. It is really quite different. 

Senator REED. That is why we might have another crisis. 

Ms. BOVBJERG. But they are in a different situation because in 

the private sector, you may have a Bethlehem Steel that goes out 

of business and goes into bankruptcy and leaves an underfunded 

plan. The State of Wisconsin does not go out of business and leave 

underfunded plans. They are an ongoing concern. It is a different 

situation when you think about underfunding of public plans. But 

you are right to be concerned. 

Senator REED. One final point. The chairman has been very kind. 

One of the concerns would be—you are exactly right. They will 

not go out of business, but their only remedy then would be to essentially do what has been done to Mr. Gump and his colleagues 

which was to ratchet down payments or increase significantly contributions just to reach a balance. Am I missing something in 

terms of what else they can do? 

Ms. BOVBJERG. It is likely to be to raise taxes because for most 

States, they cannot reduce benefits for people who are already on 

board. It has to only be for new employees. It is very hard for them. 

You raise a good point. 

Senator REED. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator Reed. 

I want to thank this panel for your input. 

I would ask if each of you could submit for the record your suggestions, any suggestions you might have, for I think what Mr. 

Jones has said in his testimony is a pension plan for the 21st century. If you were to design a pension plan to answer the problems 

that have come up here, what would it look like? Maybe what we 

have had in the past is not working well, and maybe we need to 

think about how we design a new pension plan for the years ahead. 

I am open for any suggestions that you might have, if you would 

submit those for the record. 

Ms. BOVBJERG. Mr. Chairman, if I could jump in. We did do a 

report last summer on alternative approaches to retirement income 

security, and I would be happy to make that available to this committee. 

The CHAIRMAN. OK. I did not know that. Make sure we get it. 

I can get another copy of it. Do not worry about that. I can track 

that down. 

Ms. BOVBJERG. Thank you. 

56 

The CHAIRMAN. I am going to dismiss this, but did you have one 

last thing, Mr. Gump, that you wanted to say? 

Mr. GUMP. If you do not mind, yes. I think to answer your question initially, I think one of the first things that needs to happen 

is employees need to be elevated in priority. Right now they are 

treated as essentially unsecured creditors. Employees are not speculators in a company. They are the people that are doing what they 

are told to do by the executives, and they are the ones that are 

having to take it on the chin while the executives are protecting 

themselves. 

I would point up that in March the Delphi 10(k) form that was 

filed just before they exited bankruptcy in July under the paragraph entitled ‘‘Change of Control’’—if the executives lost control of 

the company, they set aside for themselves just over $100 million 

for the top five executives, while when we have tried to form a 

VEBA, we were only able to squeeze about $8.75 million out of 

them to form a VEBA for 20,000 people which essentially ends up 

being nothing for support. Employees need to be raised in the level 

of priority for bankruptcy. 

If I may, Mr. Chairman, I brought with me what we call a Hallmark card. The point of this document is that what is happening 

to us is happening across the entire community. We have had 

major business leaders, community leaders, political leaders of our 

community sign. There is all together—and there is an 81⁄2 by 11 

that goes in here—about 200 signatures that have signed. And 

these are not just necessarily individuals. These are the mayors 

and the trustees. I have a proclamation here from the county commissioners that I just got done Tuesday night. All we are asking 

for is fair treatment in this, nothing more, but nothing less. I 

would like to submit that also. Thank you. 

The CHAIRMAN. Well, we will figure out some way of getting that 

in the record. 

[Laughter.] 

[The information referred to follows:] 

SAVE THE VALLEY: AGAIN

We the undersigned participants in the Alliance for Senior Action Round Table 

Discussion do hereby affix our signatures in support of the following: 

• That the determination by the Automotive Task Force to make decisions regarding Delphi retirees’ earned legacy benefits based on a theoretical commercial model 

is unfair, unjust and erroneous thinking. 

• That the negative economic effect, as substantiated by the Youngstown State 

University Economic Impact Statement, will be devastating and long lasting to the 

recovery of the Mahoning Valley. 

• That the estimated potential loss of $161 million in spendable income and the 

elimination of up to 5,000 additional non-auto industry jobs is unjustifiable in a regional economy already suffering from double digit unemployment. 

• That there is a real moral and ethical obligation for the Federal Administration 

to intervene further into the domestic auto industry recovery to ensure that all retirees receive fair and equitable earned legacy rights comparable to benchmarks already established by General Motors and Delphi. 

• That President Obama instruct the U.S. Treasury and the Automotive Task 

Force to initiate immediate and binding communications with Senator Brown and 

Congressman Ryan to resolve the issue of full funding of Delphi’s pre-bankruptcy 

legacy obligations. 

• That the President advises the Pension Benefit Guaranty Corporation to maintain pensions for Delphi and its domestic subsidiary retirees at pre-trusteeship levels until the top-up funds are in place. 

57 

• That the Commerce Department be instructed by the President to exhaust 

every possible effort to attract large scale employment projects to the vacant Delphi 

facilities in the Mahoning Valley while those facilities are still sound and usable. 


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The CHAIRMAN. Thank you all very much. Again, I welcome your 

suggestions on how we develop a new plan. Thank you very much 

to this panel. Thank you for being here. 

We will call up our second panel: Ronald Peterson, Ron 

Gebhardtsbauer, Randy DeFrehn, and Karen Friedman. 

[Pause.] 

Thank you very much. Now we will turn to our second panel. 

First we have Mr. Ronald Peterson, President of The Johns Hopkins Hospital and Health System in Baltimore. He serves also as 

the chairman of the Health System and the chairman of Johns 

Hopkins Community Physicians that provides ambulatory care at 

17 centers and a trustee of the Johns Hopkins Home Care Group 

and is also vice chairman of the Maryland Governor’s Workforce 

Investment Board and was appointed by the Governor to Maryland’s Economic Development Commission. 

Second, we have Mr. Ron Gebhardtsbauer. He heads up the Actuarial Science Program at the Smeal College of Business at Pennsylvania State University. Prior to that, he was the Senior Benefits 

Advisor for the U.S. Senate’s Committee on Finance, the Senior 

Pension Fellow and Spokesperson for the Actuarial Profession at 

the American Academy of Actuaries here in Washington. 

And then we have Mr. DeFrehn. Randy DeFrehn is the Executive 

Director of the National Coordinating Committee for Multiemployer 

Plans, a nonpartisan membership organization of multiple emVerDate Nov 24 2008 09:28 Nov 04, 2011 Jkt 035165 PO 00000 Frm 00070 Fmt 6633 Sfmt 6601 S:\DOCS\53424.TXT DENISE

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67 

ployer pension plans and their sponsoring employee and employer 

organizations. 

Then last we have Ms. Karen Friedman, Executive Vice President and Policy Director of the Pension Rights Center, the country’s only consumer organization dedicated solely to protecting and 

promoting the retirement security of American workers, retirees, 

and their families. 

We welcome you here. Again, as I said to the other panel, your 

statements will be made a part of the record in their entirety. I appreciate it. We will start with Mr. Peterson. If you could sum up 

your testimony in around 5 minutes, we would appreciate it. Thank 

you very much, Mr. Peterson. 

STATEMENT OF RONALD R. PETERSON, PRESIDENT, THE 

JOHNS HOPKINS HOSPITAL AND HEALTH SYSTEM, BALTIMORE, MD 

Mr. PETERSON. Thank you very much. Good morning. I am Ron 

Peterson. I serve as President of the Johns Hopkins Health System. I am also the Executive Vice President of Johns Hopkins Medicine, which is the formal alliance between our university school of 

medicine and our health system. Collectively, Johns Hopkins institutions constitute the largest private sector employer in the State 

of Maryland. We have 49,000 employees. 

Chairman Harkin and Ranking Member Enzi, certainly thank 

you for the opportunity to testify before this committee this morning. You are to be commended for holding this important hearing 

to help workers preserve their retirement security as we recover 

from this deep recession. 

Retirement security is critically important to Johns Hopkins and 

its employees. We are a 100-plus-year-old institution with many 

long-term employees who rely on us for their retirement security. 

This issue is also important, we believe, to every company, every 

employee, and every community across the United States because 

it is more than a pension issue. We, in fact, view this as an economic recovery issue and a jobs issue. You will hear that with a 

few regulatory changes and no Government money, you can save 

thousands of jobs. 

First, let me assure you that Johns Hopkins will meet its obligations to our defined benefit participants. All of us have been hit by 

the extraordinary market losses of 2008, but we are not here this 

morning asking for a bailout nor for taxpayer assistance to right 

our pension plans. Rather, we are here to ask today for temporary 

relief from Congress that can be accomplished through pension 

funding rule changes allowing us to manage our recent plan losses 

through this unprecedented market downturn. With a few changes, 

we can continue to grow our institutions and create jobs while 

meeting our pension obligations. Remember that health care is one 

of the few sectors where jobs have continued to grow. 

The Pension Protection Act of 2006 accelerated pension funding 

requirements for defined benefit pension plan sponsors. These new 

requirements went into effect in 2008, the year the financial crisis 

began. We fundamentally support the goals of the PPA to increase 

the funding levels of defined benefit pension plans over time, but 

the rules were enacted in a more robust economy. By the time the 

68 

rules went into effect, the plans had taken losses in the market 

and interest rates dropped, creating a perfect storm which caused 

dramatic, unplanned increases in our pension funding obligations. 

Now, the Worker, Retiree and Employer Recovery Act enacted 

last year by Congress did provide temporary relief to some but not 

all companies. We appreciate as well the additional relief through 

regulatory guidance provided by the Treasury Department that has 

helped many companies for 2009. But these changes are really not 

enough. 

Companies across the country are facing staggering funding obligations for 2010 and beyond which will divert funds from other 

purposes, including jobs. This issue is time-sensitive. Under the 

PPA, the vast majority of plan sponsors’ funding obligations will be 

locked in on January 1, 2010, regardless of what happens in the 

economy for the remainder of the year. 

Johns Hopkins University and Johns Hopkins Health System 

sponsor five active defined benefit pension plans that provide benefits for 32,000 current and former employees. Johns Hopkins is intent on maintaining these plans and adding participants in the future. 

We take a long-term approach to pension funding. All of our 

plans were very well-funded, 95 percent or better, before the recession, based on Johns Hopkins’ prudent investment policy and its 

commitment to secure benefits. In fact, Johns Hopkins paid no 

variable rate premiums to the Pension Benefit Guaranty Corporation last year. 

We view the recent recessionary environment as a unique event. 

The reality is that we are now behind in our capital and cash flow 

forecasts as they relate to meeting the funding requirements of the 

PPA. 

Johns Hopkins is currently expanding and improving its facilities 

to provide for enhanced care to the patients we serve from Maryland and throughout the world. As a product of that expansion, we 

are creating more jobs in the local market. Like other not-for-profit 

institutions, we are facing tough choices which could force us to 

scale back on much-needed programs which benefit humankind in 

order to redirect those funds into the pension trusts. In the absence 

of pension reform, we could be faced with the undesirable choice to 

reduce benefits or eliminate jobs. 

Now, during fiscal year 2009, our plans have suffered severe 

asset losses, 24 percent of the portfolio, or $223 million, due to the 

performance of the stock market. Thus, our funded status has deteriorated to as low as 70 percent for one of our plans. Coupled with 

the low level of interest rates, these asset losses will require significant increases in cash funding over the next 8 years. We have 

computed this to be approximately $291 million, a jump of 60 percent in the amount we had forecasted as recently as the summer 

of 2008. 

We must undertake steps now to reserve cash for this very large 

liability. Because this obligation is required by law, we will be 

forced to divert resources from patient care services and from job 

retention and creation. Every $10 million in incremental pension 

funding equates to salaries for approximately 125 nurses. 

69 

Johns Hopkins encourages Congress to take additional steps to 

strengthen defined benefit pension plans, given the impact of the 

recession. Specifically, lengthen the amortization period for paying 

down pension deficits from 7 years to 15 years for the 2008 losses. 

For plans below an 80 percent funded level, remove restrictions on 

accelerated payments except for lump sum payments. Return to a 

policy that permits the asset-smoothing corridor to be 20 percent 

of fair market value of assets, and return to a 48-month assetsmoothing period to allow for more prudent forecasts. 

We encourage Congress to apply pension relief equally to all plan 

sponsors. 

Now, as a reference point, we do support the majority of the concepts expressed by Representative Pomeroy in his discussion draft 

that I have recently had the opportunity to review. 

By way of concluding, let me offer the following. Due to the recent unusual market conditions, Johns Hopkins and other defined 

benefit plan sponsors will be faced with extraordinary incremental 

funding requirements. As the economy is beginning to recover, job 

growth will be impeded as employers such as Johns Hopkins will 

have to limit new program development and divert these resources 

to our pension trusts. Ironically, this will further exacerbate access 

to health care at a time our country needs meaningful health care 

reform. Passage of these four modifications to the pension funding 

rules will support job growth and provide employers with the resources they need to innovate and compete in a global marketplace. 

Again, this can be done without a penny from Congress. 

I wish to thank you very much for the opportunity. 

[The prepared statement of Mr. Peterson follows:] 

PREPARED STATEMENT OF RONALD R. PETERSON

Good Morning. I am Ronald R. Peterson, President of the Johns Hopkins Health 

System and Executive Vice President of Johns Hopkins Medicine. Johns Hopkins 

Medicine is the formal alliance between The Johns Hopkins University School of 

Medicine and Johns Hopkins Health System. I am here today on behalf of the Johns 

Hopkins Health System, Johns Hopkins University and Johns Hopkins Medicine. 

Collectively, Johns Hopkins institutions constitute the largest private sector employer in Maryland, with 49,000 employees. 

Chairman Harkin and Ranking Member Enzi, thank you for the opportunity to 

testify before this committee. You are to be commended for holding this important 

hearing to help workers preserve their retirement security in this time of recession. 

Retirement security is critically important to Johns Hopkins and its employees. We 

are a 100+ year-old institution with many long-term employees who rely on us for 

their retirement security. This issue is also important to every company, every employee, and every community across the United States, because it is more than a 

pension issue. We view this as an economic recovery issue and a jobs issue. You will 

hear that with a few regulatory changes and no government money, you can save 

thousands of jobs. 

First, let me assure you, that Johns Hopkins will meet its obligations to our defined benefit participants. All of us have been hit by the extraordinary market losses 

of 2008, but we are not here asking for a bailout, nor for tax payer assistance to 

right our pension plans. Rather, we are here to ask today for temporary relief from 

Congress that can be accomplished through pension funding rule changes allowing 

us to manage our recent plan losses through this unprecedented market downturn. 

With a few changes, we can continue to grow our institutions and create jobs while 

meeting our pension obligations. Remember that health care is one of the few sectors where jobs have continued to grow. 

The Pension Protection Act (‘‘PPA’’) of 2006 accelerated pension funding requirements for defined benefit pension plan sponsors. These new requirements went into 

effect in 2008, the year the financial crisis began. We fundamentally support the 

goals of the PPA to increase the funding levels of defined benefit pension plans over 

70 

time. But, the rules were enacted in a more robust economy. By the time the rules 

went into effect, the plans had taken losses in the market and interest rates 

dropped, creating a perfect storm to cause dramatic, unplanned increases in our 

pension funding obligations. 

The Worker, Retiree and Employer Recovery Act enacted last year by Congress 

provided temporary relief to some, but not all, companies. We appreciate, as well, 

the additional relief through regulatory guidance provided by the Treasury Department that has helped many companies for 2009. But these changes are not enough. 

The stock market has not fully recovered and interest rates remain low. As a result, companies across the country are facing staggering funding obligations for 

2010 and beyond, which will divert funds from other purposes, including jobs. This 

issue is time sensitive. Under the PPA, the vast majority of plan sponsors’ funding 

obligations will be locked in on January 1, 2010, regardless of what happens in the 

economy for the remainder of the year. 

HOPKINS’ BACKGROUND ON PENSIONS

The Johns Hopkins University and Johns Hopkins Health System sponsor five active Defined Benefit pension plans that provide benefits for nearly 32,000 current 

and former employees. Johns Hopkins’ intent is to maintain these plans and add 

participants in the future. 

We take a long-term approach to pension funding. All of our plans were well funded (95 percent or better) before the recession, based on Johns Hopkins’ prudent investment policy and its commitment to secure benefits. In fact, Johns Hopkins paid 

no variable rate premiums to the Pension Benefit Guarantee Corporation last year. 

IMPACT OF 2008–2009 RECESSION ON PLAN FUNDING

We view the current recessionary environment as a unique event. The reality is 

that we are now behind in our capital and cash flow forecasts as they relate to 

meeting the funding requirements of the Pension Protection Act. 

Johns Hopkins is currently expanding and improving its facilities to provide for 

enhanced care to the patients we serve from Maryland and throughout the world. 

As a product of that expansion, we are creating more jobs in the local market. Like 

other not-for-profit institutions, we are facing tough choices which could force us to 

scale back on much-needed programs which benefit humankind in order to redirect 

those funds into the pension trusts. In the absence of pension reform, we could be 

faced with the undesirable choice to reduce benefits, or eliminate jobs. 

During fiscal year 2009, our plans have suffered severe asset losses, 24 percent 

of the portfolio (or $223 million) due the performance of the stock market. Thus our 

funded status has deteriorated to as low as 70 percent for one of our plans. Coupled 

with the low level of interest rates, these asset losses will require significant increases in cash funding over the next 8 years—$291 million—a jump of 60 percent 

in the amount we had forecasted during the Summer of 2008. 

We must undertake steps now to reserve cash for this very large liability. We and 

the many other for-profit and non-profits companies in a similar position will have 

to make decisions in the next few months in order to be ready to satisfy the dramatically increased funding obligation we expect to owe. Because this obligation is 

required by law, we will be forced to divert resources from patient care services and 

from job retention and creation. Every $10 million in incremental pension funding 

equates to salaries for 125 nurses. 

This obligation also affects the community in which Johns Hopkins resides. With 

tremendous pressure on cash requirements for operations, job-generating construction projects that have not begun will be put on hold and much-needed patient care 

equipment replenishment programs will be curtailed as well. 

PENSION REFORM POSITION

Johns Hopkins encourages Congress to take additional steps to strengthen defined 

benefit pension plans given the impact of the recession, specifically: 

• Lengthen the amortization period for paying down pension deficits from 7 years 

to 15 years for the 2008 losses. This would reduce the $291 million funding requirement by $46 million over the next 8 years; 

• For plans below an 80 percent funded level, remove restrictions on accelerated 

payments except the lump sum payments; 

• Return to a policy that permits the asset smoothing corridor to be 20 percent 

of the fair market value of assets; and 

• Return to a 48-month asset smoothing period to allow for more prudent forecasts. 

71 

We encourage Congress to apply pension relief equally to all plan sponsors. As 

a reference point, we would support the concepts expressed by Representative Pomeroy in his discussion draft on this issue. 

CONCLUSION

The Johns Hopkins University opened in 1876. After more than 130 years, Johns 

Hopkins remains a world leader in both teaching and research. Preeminent professors mentor top students in the arts and music, the humanities, the social and natural sciences, engineering, international studies, education, business and the health 

professions. The Johns Hopkins Hospital opened its doors in 1889 and soon thereafter established a symbiotic relationship with The Johns Hopkins University School 

of Medicine which opened in 1893. For more than a century, Johns Hopkins Medicine has been recognized as a world leader in patient care, medical research and 

teaching. 

Today, Johns Hopkins Medicine is known for its excellent faculty, nurses and staff 

specializing in every aspect of medical care. Johns Hopkins Medicine includes four 

acute-care hospitals and programs for local, national and international patient activities. In the past decade, our environment has changed drastically, particularly 

in the financing of patient care. We responded by moving into the community, establishing ambulatory care centers, affiliating with other hospitals in order to provide 

a broader spectrum of patient care and moving toward the development of an integrated patient care delivery system. At the same time, we have added to the economy and jobs throughout Maryland. 

Due to the recent unusual market conditions, Johns Hopkins and other defined 

benefit plan sponsors will be faced with significantly larger funding requirements. 

As the economy is beginning to recover, job growth will be impeded as employers 

such as Johns Hopkins will have to limit new program development and divert 

these resources to our pension trust. Ironically, this will further exacerbate access 

to health care at a time our country needs meaningful health care reform. Passage 

of these four modifications to the pension funding rules will support job growth and 

provide employers with the resources they need to innovate and compete in a global 

market. Again, this can be done without a penny from Congress. 

Thank you very much for the opportunity to testify today. I look forward to answering your questions. 

The CHAIRMAN. Thank you very much, Mr. Peterson. 

Now we will turn to Mr. Gebhardtsbauer. Please proceed. 

STATEMENT OF RON GEBHARDTSBAUER, MAAA, EA, FSA, FCA, 

MSPA, FACULTY-IN-CHARGE, ACTUARIAL SCIENCE PROGRAM, PENNSYLVANIA STATE UNIVERSITY, UNIVERSITY 

PARK, PA 

Mr. GEBHARDTSBAUER. Chairman Harkin, Ranking Member 

Enzi, and distinguished members of the committee, thank you for 

inviting me to testify here today on this very important issue. 

A robust defined benefit system is vital for the retirement security of our Nation’s retirees, for the management of our industries, 

and for our national economy. 

I want to first note the significant advantages of DB plans over 

401(k)’s. We already knew that one-third of employees were not 

contributing to their 401(k)’s and another third were not contributing enough. Now, as you mentioned at the beginning of this hearing, even the one-third that contributed enough are finding they 

are in financial distress too because of the market problems. Workers who planned to retire soon now suddenly realize they cannot 

retire. With workers not retiring now, the employers have to lay off 

more employees. 

The biggest problem will show up actually in 10 years when millions of retirees that have 401(k)’s now and they are retiring in the 

future are reaching their 80s and they have run out of money. At 

that point they will be too old to go back to work. What will they 

72 

do? With all these problems, 401(k)’s should not be the only way 

we provide for retirement, but that could easily happen. 

With this as a backdrop, it is clear that our national policy was 

more forward-looking when it encouraged DB plans. The current 

laws are way more onerous for DB plans than they are for 401(k)’s. 

No wonder companies are dropping their DB plans. 

The most important DB item to fix is the spike in the minimum 

pension contributions due to the recent market crash. With temporary relief, employers can meet their contribution requirements 

that would otherwise double or even quadruple, according to a 

Watson Wyatt analysis. Relief will also help employers return to 

building and hiring American workers much sooner, which helps 

America’s No. 1 problem today, the jobless recovery. 

And as mentioned earlier, this relief is not a subsidy. It does not 

cost the Government one penny. In fact, there is a CBO memo that 

says it will increase Government revenues by about $10 billion over 

the next 10 years. And it will also increase the PBGC premiums. 

And it will reduce the number of weak companies that will dump 

their pension plans on the PBGC. 

So given these facts, I think relief is a no-brainer, but we do need 

to make sure it is not too generous. An idea in the Pomeroy bill 

keeps the relief from being too generous by requiring contributions 

increase by a certain percent each year. 

Now, some would deny this relief to employers that froze their 

DB accruals, and as an actuary I much prefer DB plans, ones that 

are not frozen. But such a rule would cause an injustice. Employers 

that recently replaced their DB plans with a generous DC plan, 

even though that is not my favorite way to go—I would still be concerned for them because in order to get this relief, then they would 

have to back and reinstate their DB accruals which would be doubly expensive unless they go back then and freeze this new DC 

plan that they just created. 

This would also treat companies in the same industry differently. 

Companies that replaced their DB plan with a DC plan would not 

get relief, thus putting them at a competitive disadvantage to others in their industry. 

Also, it would create a catch 22. If a market crash causes a plan 

to be worse than 60 percent funded, the laws we just passed in 

2006 would require a freeze in the benefits. But then this new rule 

that we are talking about would penalize the employer for the 

freeze that we just imposed on them. We should not have both a 

freeze and a maintenance rule operating at the same time. 

A maintenance rule could be important, and there is one in the 

Pomeroy bill that makes sense to me. It requires a minimum accrual in either the DB or DC plan, and if the company says we cannot afford it anywhere—you know, if we cannot afford it for the 

rank and file, then Congress can say, ‘‘Well, then you are not allowed to provide it to the top executives either. If you cannot afford 

it for one, you cannot afford it for the other.’’ 

Almost in closing, one concern of relief is that employers will expect help in every crash in the future, which is actually understandable because right now the rules do not work in a market 

crash. Congress would have to come back and fix it every time. If 

73 

Congress fixes these rules permanently, though, then the employers will not expect relief. 

And there is an easy fix. I mention three in my paper, three 

ways of doing it, but one easy fix is just change the asset corridor 

back to 80 percent to 120 percent. Within 20 percent of market values. 

The theory behind that is actually very good. I surveyed Penn 

State’s top finance and economics professors, and I found that not 

one of them—not one of them—increased the contributions to their 

retirement plan over the past year. In fact, I did not either. I asked 

them why did they smooth so heavily, and they looked at me with 

surprise and they said, is that what you mean by smoothing? What 

they do is they just assume that their assets are going to come 

back fairly soon, and that is what actuarial smoothing is. 

Earlier Senator Enzi brought up the question, why was there 

this push to go to 90 to 110 percent smoothing, and I think it was 

for the wrong reason. It was because in the accounting world it 

really makes sense for the financial statements to know—you 

know, mark-to-market because if you want to buy a company, you 

know, half a company, a whole company, or if you just want to buy 

1,000 shares, you want to know what is that company worth today. 

You do want a mark-to-market there. But when it comes to budgeting for your contributions to a pension plan, that is different. 

For example, in a situation we have had just recently or back in 

1987 when the market crashed 20 percent and then came right 

back up, the rule right now would say you cannot reflect the fact— 

in fact, now that assets are like 50 percent back up from where 

they were before—they are not all the way back, but they are very 

far back. But the rule right now would say, ‘‘No, your assets can 

only be 10 percent different than what they were back on December 31.’’ Not only do you not have smoothing. You cannot plan 

ahead. You do not have predictability because back in September 

people did not know we were going to have a crash, and so they 

were planning on building this building, hiring these workers, and 

then all of a sudden the crash happens. In September they find 

out, oh-oh, something is happening. We may have to contribute 

double or triple or quadruple as much. That is a real concern. That 

is what is caused by the corridor. 

Now, I am not trying to, at the moment, say anything about the 

7-year amortization. If we still have 7-year amortization, you still 

get back up to full funding after 7 years. The smoothing does not 

change that. 

Finally, I also note that I have heard that PBGC is acceptable 

to some smoothing and the particular idea that they are OK on 

smoothing. This 20 percent corridor is actually tighter than the one 

that PBGC is willing to go along with. 

Finally, being the former actuary at the PBGC, I want to protect 

it. I would also modify the bankruptcy rules so that employers do 

not use them to dump their pension plans on the PBGC. They 

should be held responsible for their promises, and I will be happy 

to discuss that later. Thank you. 

[The prepared statement of Mr. Gebhardtsbauer follows:] 

74 

1 Analysis by Watson Wyatt Research and Innovation Center. 2 CBO’s 7/31/09 Cost Estimate on H.R. 2989. 3Per page 4 of CBO’s 7/31/09 Cost Estimate on H.R. 2989. 

PREPARED STATEMENT OF RON GEBHARDTSBAUER, MAAA, EA, FSA, FCA, MSPA 

Chairman Harkin, Ranking Member Enzi, and distinguished members of the Senate HELP Committee, thank you for inviting me to testify on this very important 

issue. 

A robust defined benefit (DB) system is important for the retirement security of our Nation’s retirees, for the management of our industries, and for our national economy. 

While it is valuable for employers to provide both DB and DC plans, I 

want to note the important advantages of DB plans over 401(k)s. A major 

advantage was demonstrated by the recent crash in the stock market. We already 

knew that one-third of employees were not contributing anything to their 401(k) and 

another one-third were not contributing enough. Now we see that even the one-third 

who contributed enough, are in financial distress, even if they responsibly invested 

in a target retirement date fund. Many that just retired are finding that they need 

to go back to work, even though now is not an easy time to find a job. Those workers 

planning on retiring soon, now suddenly realize they can’t. They will need to continue working for they don’t know how long, even though many of them are getting 

laid off. This is a problem for employers too. With a DB plan, employers could count 

on their workers retiring on a more regular basis. But now, with no one retiring, 

they will have to lay off employees, which is not easy to do. 

We still haven’t seen the biggest problem with the 401(k). In about 10 years or 

so, millions of retirees in their 80s will be running out of money, because they lived 

longer than they expected or there is another stock crash, and they didn’t buy a lifetime income with their 401(k) funds. But, they will be too old to go back to work, 

so what will they do? With all these problems, we don’t want 401(k)s to be the only 

way we provide for retirement, but that could easily happen. DB plans address 

these problems for workers and employers. With DB plans, these retirees would 

more likely have had lifetime incomes, and they would not have to return to the 

labor pool. 

Retirees returning to the labor market also hurt the Nation because this increases 

unemployment rates. Finally, DB plans help the Nation with patient capital that 

is more efficiently invested in the markets than individual retirement money, and 

DB plans can hold investments that individuals cannot. 

With this as a backdrop, it becomes clear that our national policy was 

more forward looking in the past when most large employers provided DB 

plans; now our rules encourage employers to choose 401(k)s, even when an employer would prefer a DB plan for their particular situation. Yes, we allow employers the choice of a DB and/or DC plan, but it is a false choice because current laws 

are much more onerous on DB plans, and much easier for 401(k)s. 

The most onerous item to fix today is the spike in minimum pension contributions due to the market crash. With measured and temporary relief, employers can meet their contribution requirements that would otherwise double, triple, or even quadruple according to a recent Watson Wyatt analysis.1 Without relief, 

their analysis shows that contributions would be much larger than they have ever 

been. And, with relief, we not only help employers meet their contribution requirements, we also help them return to building and hiring American workers much 

sooner. Thus, we have the opportunity to help not only retirement security 

in America, but also the Nation’s No. 1 problem today: the jobless recovery. 

And this relief is not a subsidy. It will not cost the government one penny. 

In fact, according to a CBO memo,2 it will increase government revenues by about 

$10 billion over the next decade, and it will not hurt the PBGC.3 In fact, it will increase premiums to the PBGC. Now, some may worry that PBGC will have to take 

over some worse-funded plans in the near future, but that won’t happen in the aggregate. Their weak sponsors will not triple their contributions anyway. On the contrary, CBO noted (and I agree) that providing relief could decrease the number of 

weak companies that will dump their pension plans on the PBGC. And relief will 

help keep healthy employers in the DB system, so that they will continue to pay 

their premiums to the PBGC. 

Given that relief is needed and doesn’t hurt the PBGC, it is a no brainer, 

but we need to make sure it is not too generous. Three House bills (H.R. 2989, 

the Pomeroy bill, and the Boehner bill) are all in the same ballpark on relief according to the Watson Wyatt analysis. The Boehner bill may be unintentionally too generous in the first year. The Pomeroy bill provides a way around that problem by 

75 

requiring an increase in the contribution by at least a certain percentage over the 

next few years. I encourage you to adopt something similar to those bills, with a 

possible minor change that reflects recent IRS relief. 

Recent IRS Relief: Recent IRS guidance provided relief for many DB sponsors 

in 2009, so their problems have been moved to 2010 and 2011. Thus, it might make 

sense for your relief to be in those years. For the pension plans that were not helped 

by the IRS guidance, you could give them the relief for this year and either 2010 

or 2011. 

Maintenance of DB plan: Some employee groups have suggested denying relief 

to employers that froze their DB accruals. Much as I prefer DB plans with accruals, 

I have to note that a rule like that would cause an injustice. For example, employers 

that froze their DB plans may have already replaced it with a generous DC plan. 

They would have to reinstate their DB accruals which would be doubly expensive, 

unless they froze their new DC plan. That would create a lot of disturbance just 

to get temporary relief. A rule requiring DB accruals would also treat companies 

in the same industry differently. Companies that replaced their DB plan with a DC 

plan would not get relief, thus putting them at a competitive disadvantage to others 

in their industry. 

In fact, I don’t understand the imposition of a maintenance rule in difficult times. 

The penalty doesn’t fit the problem. It would make our pension laws schizophrenic. 

I’ll explain. If a market crash causes a plan to be worse than 60 percent funded, 

a PPA provision requires the freezing of accruals. But then this new rule would penalize the employer for the freeze we just imposed on them. That’s inconsistent, and 

doesn’t make sense. We shouldn’t have both the law freezing benefits and the maintenance rule operating at the same time. Dutch pension laws, which people have 

been enamored of late, are much more sensible in this area. After a market crash 

in the Netherlands, a recent pension accrual (or cost-of-living adjustment) can be 

reduced. And then when the market comes back, the accrual is restored. No wonder 

a greater percentage of Dutch workers are covered by DB plans. Their pension laws 

make more sense. 

If a maintenance rule is really important, something like the one in the Pomeroy 

bill makes more sense. It requires a minimum accrual in either the DB or DC plan. 

Some employers may even be too weak to provide either DB or DC accruals. Since 

those companies would be the ones in need of the most help, prohibiting relief to 

them (or giving them only partial relief) is going in the wrong direction. In this case, 

the Pomeroy bill requires those employers to freeze their NQDC (Non-Qualified Deferred Compensation) plan for executives. That makes more sense. If a company 

can’t afford benefits for their rank and file, then they can’t afford them for their 

executives either. 

Permanent Fix to Funding Rules: After Congress solves this temporary problem, they should revisit long-term pension funding policy, so that they don’t have 

to return to this issue again and again. A fix could be a fairly simple change to the 

existing rules. If Congress fixes the funding rules on a permanent basis, employers 

will get the certainty they need, so that they can plan ahead and make decisions 

(for example, how much of the plan assets should be allocated to stocks). The recent 

past showed that the current funding rules break down after a crash. We knew that 

when they were created, which is why the American Academy of Actuaries pushed 

for an anti-volatility mechanism in PPA. The new rules will also have problems in 

a market bubble, because minimum contributions will go to zero under the PPA 

rules. And when the inevitable crash comes, contributions will spike to 200 percent 

or 300 percent of what they were in the past, which is way more than employers 

can handle. When health costs go up by just 15 percent or 25 percent employers, 

workers, and retirees scream. A 100 percent or 200 percent increase can be cataclysmic. At these times, pension contributions need more smoothing than the current rules allow. 

A concern caused by giving relief today is that employers will hope for relief on 

the next crash, and not make the changes they need to make in their policies. Thus, 

if Congress fixes the funding rules in a permanent way so that they provide an appropriate amount of smoothing that works even after a crash, then employers won’t 

expect relief next time. Here are several different ways to do it, with different levels 

of complexity. 

One method suggested by the actuarial consulting firm Mercer (sometimes called the Anti-Volatility Mechanism or AVM) caps the contribution increase (or decrease) at 25 percent of the cost of the plan’s current year accruals. 

(Congress could set the percent in the law after consultation with the PBGC.) Here 

is how it would work. If the contribution of a pension plan that was 100 percent 

funded was $100 million and the market crashed, so that next year’s minimum contribution doubled, the AVM would kick in and cap it at $125 million. Each year, 

76 

4Pension Funding Reform for Single Employer Plans (dated 2/28/05). 

the minimum contribution would go up another 25 percent until it reaches the actual amount of the contribution. Applying this rule to past experience shows that 

the cap may not be needed for more than 1 to 3 years generally, due to the market 

reverting to mean Price/Earnings ratios (after fears subside) and the cumulative nature of the cap. An Academy paper 4 suggested the plan’s funding levels would not 

be much worse off due to the cap. 

Because this cap smoothes out the volatile contribution, some employers might 

forgo the use of smoothing their asset and liability numbers. 

This idea also works in the other direction. If a market bubble occurs, the minimum contribution would not decrease by more than 25 percent. This keeps the contribution from going to zero too quickly. The pension plan can become overfunded, 

but there will still be a contribution. That is a positive attribute if you are the 

PBGC, because having a surplus in the pension plan can help in the future if there 

is a stock crash. However, it destroys wealth if a company is forced to contribute 

to an overfunded plan, because surpluses are locked into the plan. Thus, employers 

will be strongly against being forced to put more money into an overfunded pension 

plan, unless the IRC section 420 rules on asset transfers are relaxed (which I will 

discuss later). 

There are a couple other concerns to address with the AVM idea. It is a big 

change from current rules, so it needs to be tested before put into law. Some concerns follow: 

The AVM calculation could be complex. For example, contributions delayed would 

have to create a new loss, and the interplay with credit balances could be confusing. 

Also, a company shouldn’t be able to increase benefits, and then avoid the increase 

in their contribution due to the AVM cap. Thus, the increase in contribution due 

to a benefit increase should not be capped (ditto if an employer shuts down a plant 

which increases benefits). 

Mature plans: The AVM cap is modified if the cost of accruals is zero, because 

otherwise the contribution increase would be 25 percent of zero, which is zero. The 

AVM cap has another minimum increase equal to 2 percent of a plan’s value of accrued liabilities (if larger than the above cap). This 2 percent number could also be 

set by Congress in consultation with the PBGC, but it would be very difficult to 

agree upon. Mature employers with large retiree populations compared to their current workforces will find this minimum will blow them out of the water, while 

PBGC will most likely want it stronger than these companies will want. 

AVM cap doesn’t vary with interest rates: Unlike the 7-year amortization rule, the 

AVM cap has problems because it doesn’t vary with interest rates. The 7-year amortization payment to a pension plan works like a loan. When interest rates are high, 

the loan payment is high relative to the loan amount. When interest payments are 

low, the loan payment is low. For the same reason, a pension plan sponsor has to 

pay a much larger 7-year amortization payment to get back to 100 percent funding 

when interest rates are high, and a lower payment when interest rates are lower. 

However, the 2 percent cap will still just be 2 percent. For example, if interest rates 

are high, the funding ratio won’t improve by 2 percent as intended, and if assets 

don’t do as well for awhile, the funding ratio could actually deteriorate over the period, not get closer to 100 percent. On the other hand, if interest rates are low and 

if stocks do well, the funding ratio would snap back much quicker than expected 

(possibly overfund, if assets revert to prior levels), so the cap would have been higher than necessary. 

Method II: Another idea suggested by the actuarial consulting firm Towers Perrin (TP) would use market values of assets and liabilities to determine a 

pension plan’s funding ratio for the current and prior two valuations. It would then 

average them, with heaviest weighting on the current funding ratio. This average 

funding ratio could then determine the underfunding to be paid off over 7 years, 

as under the current PPA rules. 

TP’s suggestion uses market values at each valuation date, so it would work for 

sponsors using LDI (liability determined investment) techniques to immunize their 

pension plans from market and interest risks (by, for example, holding bonds). It 

would also work for plans that held stocks due to the averaging of the funding ratios. It would be more responsive to market crashes than the AVM method: the 

greater the crash, the larger the next year’s contribution, but the increases would 

be tempered by the averaging of the funding ratios. The averaging of the funding 

ratios would also help with predictability, since a certain portion of the contribution 

would already be fixed before the valuation date, as in current rules. 

77 

This idea would have some complexity, in that prior funding ratios should probably be revised to reflect subsequent contributions, benefit accruals, and benefit improvements, but otherwise it could operate under the PPA rules as they are now. 

Problems with the corridor: Unfortunately, there is one aspect of the PPA 

funding rules which if retained would undo all the good that the TP idea provides. 

It is the tight corridor restriction that assets must be within 10 percent of the market value of assets. The TP proposal didn’t keep the corridor. I will use an example 

to explain why. If a pension plan’s market value of assets equaled plan liabilities 

at $100 million, and then a stock crash brought the assets down temporarily to $70 

million right around the valuation date, and then came back to $100 million over 

the next year, the use of average funding ratios would smooth the contribution and 

make it predictable, but the 90 percent/110 percent corridor would override it, so 

that the contribution would double, which would be way more than needed. It would 

overfund the plan. The following year, the overfunding would eliminate the minimum contribution requirement. It doesn’t make any sense to double contributions 

1 year and then eliminate them the next year. Employers are not going to want to 

maintain a DB pension plan, if that happens. It makes much more sense to keep 

contributions relatively stable. 

Thus, even if assets come back fairly quickly, the PPA funding calculation is stuck 

using the assets within the 90 percent/110 percent corridor on the valuation date. 

In fact, this is the primary reason PPA’s funding rule didn’t work this past year 

after the crash. This brings us to the simplest fix of them all. 

Method III: Reduce contribution volatility by simply changing the permissible asset corridor back to 80 percent/120 percent of the market value 

(and allow partial use of market values). Changing back to the 80 percent/120 

percent asset corridor doesn’t require much change to the law. It would let PPA’s 

2-year smoothing rules work the way they were intended. 

In fact, PPA’s 10 percent corridor causes problems even for plans that partially 

immunize against interest rate risk. That’s because it restricts the value of assets, 

but not the value of liabilities. For example, if interest rates increased say 200 basis 

points in 1 year, the liabilities and bond values would decrease by about the same 

amount (more than 10 percent). Since the employer only partially immunized, they 

would probably still be using asset smoothing for the stock values, but that would 

cause a problem with the bond values. They would be pulled down by the 10 percent 

corridor restriction. One way to fix that problem would be to allow employers to use 

market values of assets and liabilities for the portion of liabilities that are immunized, and use smoothed values for the portion not immunized. 

There is good theory behind smoothing contributions. In recent U.S. history, assets have come back after a crash. And if they don’t come back, then the 2-year 

smoothing will quickly revert to the new level of assets. When I took an informal 

poll of some leading Finance and Economics professors at my University, I asked 

if they had increased their contributions to their retirement funds over the past 

year, and not one of them had, even though they all held stocks whose value had 

crashed. When I asked them why they had used such severe smoothing, they looked 

at me with surprise, and some said ‘‘is that what you mean by smoothing?’’ When 

we discussed why they had not increased their contributions, they said they were 

assuming that their assets would come back way before they retire. This is not a 

perfect analogy, but it helped them understand why employers argue for some 

smoothing of contributions. (By the way, some people may be thinking that I am 

arguing for smoothing pension assets and liabilities in financial statements. I am 

not. The need for market values makes sense there, since companies are constantly 

being bought and sold, and in that case you need to know the accurate values that 

day.) 

The theory of smoothing contributions goes in both directions. It is not used to 

just decrease contributions. It also increases contributions. For example, smoothing 

assets during a bubble makes the appropriate assumption (as in 1999) that the equity market can be overvalued, so that smoothing would require a contribution. 

Using market values would eliminate a contribution requirement. 

Dr. Richard Thaler of the University of Chicago, one of the top behavioral economists in the country, wrote an Opinion Piece in the August 4, 2009 Financial Times 

entitled ‘‘In Support of Actuarial Smoothing.’’ He wrote that market prices are not 

always right, and suggested that government create automatic stabilizing activities. 

Such an idea in the pension world would be to smooth pension contributions 

through market bubbles and crashes. That would dampen the business cycles of 

boom and bust caused by current rules that don’t smooth contributions adequately 

during market crashes. In addition, I note that using the 80 percent/120 percent corridor has a lot less smoothing in it than the AVM method after a large stock crash, 

78 

so I don’t understand why supporters of the AVM rule think that the 80 percent/ 

120 percent corridor rule is bad. Maybe there is an inconsistency in their thinking. 

Trapped Pension Surplus: In addition to reducing contribution volatility, there 

are a few other items needed for pension funding to work. As noted earlier, requiring plans holding stocks to have surplus assets in their plans makes sense in case 

there is a future crash in stock values, but it will only succeed if employers can access plan surplus that will never be needed. Employers will not want to be forced 

to contribute surplus funds to plans, knowing that they can never get it back if it 

is not needed to pay promised benefits. Currently, if an employer were to transfer 

surplus assets out of a plan to help them pay for say the employee health plan costs, 

it is assessed a Federal income tax of 35 percent plus a reversion excise tax of 50 

percent and a State income tax of maybe 5 percent, so that the government gets 

90 percent of any reversion. But the government gets no income from this, since no 

employer will do it at such high tax rates. The 50 percent excise tax was instituted 

in the 1980s when investors would buy a company, and pay for the purchase by 

raiding the company’s pension surplus. Fortunately, thanks to mark-to-market accounting and rules putting the pension plan on the company books, the purchaser 

would have to pay for that surplus in order to buy the company, so it wouldn’t happen anymore. The law already allows transfers of pension surplus to retiree health 

plans under IRC section 420, but that has no value to companies that don’t have 

a retiree health plan. If Congress wants to encourage well-funded plans, it should 

expand IRC section 420 to also allow transfers to say the health plan of employees 

in the pension plan, without bringing pension raids back. They could provide restrictions, such as: 

(1) Only allow small amounts of pension surplus to come out in any 1 year, 

(2) Use the IRC 420 rules that requires the plan to have a 20 percent margin in 

the plan after the asset transfer, 

(3) Require continuation of the pension plan for 5 years, and/or 

(4) Require the approval of any union. 

Even unions have testified in favor of a provision to transfer pension assets to 

the employee health plans (since it was successfully used with the UMW plan in 

the 1990s, and it could help employers retain their health plans). 

Other abuses that need to be fixed: I used to be the chief actuary of the 

PBGC, so I want to make sure we don’t harm it, but strengthen it. As noted above, 

temporary relief shouldn’t hurt the PBGC as long as we don’t encourage employers 

to think that we will continue to provide relief at every crash. The way to do that, 

is to fix the rules permanently so that they handle crashes better, as discussed 

above, and discourage abuses, such as the ones below. 

Bethlehem Steel was a weak company with a huge pension fund invested 

heavily in stocks. When the stock market did well, good returns eliminated the 

need for contributions to the pension plan, but Bethlehem Steel was gambling. 

When the stock market crashed, they were not able to afford the pension plan, and 

in fact, the crash gave them the ability to put their pension promises to the PBGC. 

Heads they won, tails the PBGC loses. We need to avoid that abuse. One way would 

be to prohibit large weak companies from having such large amounts in stocks. If 

a prohibition is too strong, an alternative would be to let the PBGC charge these 

weak companies with unusually large allocations to stocks (e.g., greater than 50 percent or 60 percent or their active liability if less), a risk related premium. The premium could reflect their probability of going bankrupt (by comparing their borrowing rate to a Treasury rate). The calculating could also incorporate what the 

plan assets might be after a crash (using recent volatility in the assets held by the 

plan). The premium might be enough to keep the sponsor from ‘‘overinvesting’’ in 

stocks. Thus, it doesn’t punish weak companies for being weak. It only punishes 

them if they overinvest in stocks. 

Companies like United Airlines went into reorganization, enabling them 

to put their pension promises to the PBGC. An opinion piece in the Wall Street 

Journal co-authored by the CEO of a major airline, the former head of the PBGC, 

and the head of the major airline union suggested that companies going through reorganization should have to keep the responsibility for their pension promises, instead of dumping them on the PBGC. Their solution required the three parties involved to work out an Alternative Funding Arrangement where the contributions 

were temporarily decreased in exchange for frozen guarantees and possible benefit 

reductions that would be less harsh than if the PBGC took over the plan. The Senate had a provision that would have implemented such an idea in section 402 of 

their version of PPA, and the American Academy of Actuaries wrote about this in 

a paper entitled Keeping Employers Responsible for Their Promises. The Administration was concerned that it would give the Treasury Department and PBGC too 

79 

much influence over an individual company and allow them to aid one company in 

an industry over its competitors, but the aid pales in comparison to the benefits of 

the PBGC completely taking over the pension plan from the reorganizing company. 

If consistency is a problem, Congress could set parameters around the relief provided. 

PBGC Premiums: Finally, I would be remiss if I didn’t note that PBGC has a 

deficit and needs additional income to completely fulfill its mission. It may be difficult to get enough funds from the remaining companies in the DB system, since 

so many companies have terminated their pension plans. PBGC’s current underfunding is primarily due to taking over underfunded pension plans in the airline 

and steel industries, which means that the customers of those industries underpaid 

for their services. This suggests that one source of funding for PBGC could be the 

current customers of those industries. For example, a fee of $1 per person could be 

charged for each commercial flight (domestic or international) that takes off or lands 

at a U.S. airport. In addition, there could be a $1 fee for every ton of raw steel sold 

in or imported into the United States. Without these changes, PBGC will have to 

rely on premium income from covered pension plans, whose numbers are shrinking, 

and possibly withdrawing employers. 

In conclusion, measured temporary relief can help both retirement security and 

the Nation’s unemployment problem. And it can be done in a way that doesn’t hurt 

the PBGC, and works for employers, if it is done without unfair restrictions on 

which firms get it. In addition, so that employers can plan ahead, Congress should 

fix the funding rules on a permanent basis so that they don’t have such volatile results after a market crash. Otherwise, employers will expect relief after the next 

crash. In addition, the pension asset transfer rules should be expanded so that employers are more likely to add surplus assets to their pension plans. A few abuses 

described above also need to be closed. I appreciate the opportunity to discuss this 

topic and look forward to your questions. 

The CHAIRMAN. Mr. Gebhardtsbauer, thank you very much. Very 

enlightening. 

Mr. DeFrehn, welcome and please proceed with your testimony. 

STATEMENT OF RANDY G. DEFREHN, EXECUTIVE DIRECTOR, 

NATIONAL COORDINATING COMMITTEE FOR MULTIEMPLOYER PLANS, WASHINGTON, DC 

Mr. DEFREHN. Thank you, Chairman Harkin. Chairman Harkin, 

Ranking Member Enzi, members of the committee, thank you for 

the opportunity to appear here today and to offer our perspective 

on this important issue. 

In the interest of time, I will limit my remarks to the effects of 

the financial crisis on the status of multiemployer plans which operate under a different statutory and regulatory framework than 

single-employer plans do. 

Second, the unintended consequences of rigidly imposing the 

PPA funding rules on the small businesses that contribute to these 

plans. 

And third, our suggestions for appropriate relief measures to be 

enacted preferably before the end of the year. 

Multiemployer plans are prevalent in a wide variety of industries 

across the economy, including construction, trucking, retail, and a 

host of other industries characterized by a mobile workforce. Tens 

of thousands of small employers contribute to them, the vast majority of which employ fewer than 20 employees and are only able to 

provide benefits that rival much larger firms by taking advantage 

of the administrative economies of scale offered by these plans. 

According to the latest PBGC Databook, there are 1,510 multiemployer DB plans in the United States. They cover 10.1 million 

participants, or about one in every four Americans who has a defined benefit plan. 

80 

Multiemployer plans have been conservatively invested, well 

managed, and historically have presented little risk to the PBGC 

because employers share responsibility for these industry plans 

and collectively pick up the responsibility for other employers who 

leave the fund without paying their share of the unfunded liabilities rather than shifting them to the PBGC. 

Since 2000, multiemployer plans were victims of the same two 

market collapses that have decimated the other segments of the financial services industry. The first one resulted in the enactment 

of the multiemployer provisions of the Pension Protection Act that 

incorporated many of the recommendations of our coalition’s joint 

proposal for funding reform. Although the PPA provided a viable 

framework for reform under normal market conditions, including 

new, more aggressive funding targets, its implementation coincided 

with the second once-in-a-lifetime market collapse in less than 10 

years. 

Following enactment of the PPA, plan sponsors acted aggressively to deal with the new, more demanding funding benchmarks. 

Our recent survey of 385 plans showed that the bargaining parties 

had already implemented contribution increases averaging 21 percent in the 24-month period from January 2007 through January 

2009, not including the additional costs related to the 2008 investment losses that averaged a loss of 21 percent. 

In terms of the funded status of the plans, it is quite simple. In 

2007, over three-fourths of all plans were funded above 80 percent. 

By early 2009, over three-fourths of the plans reporting were funded below 80 percent. 

The funding requirements of the PPA that were intended to improve benefit security of these plans now demanded the parties 

adopt funding improvement or rehabilitation plans to comply with 

these new funding targets. Absent legislative relief, many plans 

will be forced to reduce benefits or increase contributions further 

than necessary. That will make contributing employers less competitive, reduce employment and corresponding hours of contributions, and increase the likelihood of plan failure. Furthermore, once 

adopted, these contribution increases and any benefit reductions 

may not be reversed until the plan emerges from endangered or 

critical status perhaps years from now. 

The coalition has proposed a variety of provisions to provide the 

greatest relief to the broadest number of plans. The proposals include two categories of change. 

The first addresses plans that are expected to remain solvent but 

which need more time to address the asset depletion without inflicting irreparable harm to contributing employers. This category 

of change includes, among others, proposals to extend the amortization of losses incurred during 2008 and 2009 over 30 years or, alternatively, to allow plans to fresh-start their funding standard account and amortize those charges over 30 years. 

It is also proposed that plans be allowed to use 10-year smoothing of only those losses for 2008 and 2009, as several of the other 

speakers have mentioned, a change in the corridor, which for multiemployer plans is currently 20 percent, as it has been in the law 

for many years, but due to the magnitude of the losses, we believe 

81 

it is appropriate to change that corridor to 30 percent for a short 

period of time. 

The second category of change addresses plans that are not expected to remain solvent absent further relief. Among the proposals 

to help those plans and their participants are increased flexibility 

for the PBGC to facilitate mergers of weaker plans into stronger 

ones and to expand the existing law that permits certain plans that 

are projected to become insolvent to partition liabilities attributable 

to employers who no longer contribute to the plan and which fail 

to pay their withdrawal liability. Admittedly, this proposal carries 

some costs, not anticipated to be paid for from the premium structure, but by saving the remaining portion of the plan, it has the 

potential of significantly reducing the longer-term liability exposure 

for the PBGC, if the plans subject to this relief were to fail. 

A third aspect of this part of the proposal is to increase the level of guaranteed benefits now limited to a maximum of $12,870 a year 

for a participant with 30 years of service. We would like to see that 

increased to about $20,000 with the corresponding increase in premiums to cover that. By contrast, you heard Ms. Bovbjerg explain 

that the current single-employer guaranteed maximum is $54,000, 

about four times as much. 

These proposed measures, as well as most of the other recommended changes put forth by our coalition, are included in the 

bill introduced Tuesday in the House by Congressman Pomeroy 

and Tiberi known as the Preserved Benefits and Jobs Act of 2009 

which Congressman Pomeroy proudly announces the acronym of 

PB&J, since it is time to get back to basics. 

We urge the committee to take timely action to enact similar legislation to protect our plans, our employers, and our participants 

before the end of 2009. Failure to act will put the financial viability 

of thousands of small businesses and the jobs of tens of thousands 

of employees at risk. 

Thank you and I welcome your questions. 

[The prepared statement of Mr. DeFrehn follows:] 

PREPARED STATEMENT OF RANDY G. DEFREHN

SUMMARY

Multiemployer defined benefit pension plans have provided secure retirement benefits to tens of millions of American workers for over 60 years. They have been a 

successful model through which small businesses can provide benefits comparable 

to those of much larger firms through the pooling of risk and economies of scale. 

The 1,510 multiemployer defined benefit plans currently provide pension benefits 

coverage for 10.1 million participants (approximately one in every four workers currently covered by defined benefit plans today). 

The success of this model lies in the shared commitment of labor and management, reinforced by decades of successive laws and regulations dating back to the 

1947 Labor-Management Relations Act which requires joint management of trust 

funds for the sole and exclusive benefit of plan participants. Nevertheless, conflicting Federal tax policies have compounded the problems created by the two 

‘‘once-in-a-lifetime’’ market contractions that have occurred this decade. 

The multiemployer community addressed the last economic decline through the 

formation of a broad-based coalition of stakeholders (the Multiemployer Pension 

Plans Coalition) which embodied this joint commitment by developing a coordinated 

proposal for funding reform which formed the basis for the multiemployer provisions 

of the Pension Protection Act of 2006. These reforms were designed to encourage 

plan sponsors to improve the funding of multiemployer plans by setting new benchmarks for the funding of plans that begin to experience funding problems as the result of the bursting of the ‘‘Tech bubble’’ and ensuing crisis of confidence, and proVerDate Nov 24 2008 09:28 Nov 04, 2011 Jkt 035165 PO 00000 Frm 00085 Fmt 6633 Sfmt 6621 S:\DOCS\53424.TXT DENISE
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1The NCCMP is the premier advocacy organization for multiemployer plans, representing 

their interests and explaining their issues to policymakers in Washington since enactment of 

ERISA in 1974. It has more than 200 affiliates which directly sponsor over 700 pension, health 

and welfare and training trust funds, as well as employers and labor unions whose workers and 

members participate in multiemployer plans. 2The Multiemployer Pension Plans Coalition, which is coordinated by the NCCMP, came together in response to the first ‘‘once in a lifetime’’ bear market early in this decade, to harness 

the efforts of all multiemployer-plan stakeholders toward the common goal of achieving benefit 

security for the active and retired American workers who rely on multiemployer defined benefit 

pension plans for their retirement income. Collectively, these stakeholders worked tirelessly to 

devise, evaluate and refine proposals from all corners of the multiemployer community for funding reform. Their efforts culminated in a proposal for fundamental reform of the funding rules 

contained in ERISA; rules that had never been ‘‘stress-tested’’ under the kind of negative investment markets which prevailed from 2000 through 2002; and rules that were largely adopted in 

the multiemployer provisions Pension Protection Act of 2006 (‘‘PPA’’). This group recognized that 

benefit security rests on rules that demand responsible funding, discipline in promising benefits 

and an underlying notion that even the best benefit plan is irrelevant if the businesses that 

support it are unable to remain competitive because of excessive, unanticipated or unpredictable 

costs. The Coalition was reconstituted following the second ‘‘once in a lifetime’’ market event 

in 2008 when it became clear that the provisions of the PPA were not sufficiently flexible to 

address the magnitude of the global catastrophic market contractions that affected every part 

of the financial services infrastructure of the United States. 

vided new tools for plans to achieve them. Since the end of the earlier crisis, plans 

had begun to recover their earlier funded status when the PPA became effective. 

Even before then, plan sponsors took pre-emptive action to address the funding 

problems by increasing contributions and, to the extent possible before its effective 

date, modifying future accruals. Unfortunately, this coincided with the second ‘‘oncein-a-lifetime’’ market contraction in this decade. 

With input from Senate and House Committee staff, the NCCMP conducted a 

funding status survey for multiemployer plans to collect and analyze information regarding the impact of that market crisis on multiemployer plan funding and the 

need for further legislative relief. The results of that survey are reported in the testimony, along with irrefutable evidence that the fundamental reason for the deterioration of the funded status of multiemployer plans was the global financial meltdown. 

Having identified the cause of the funding decline, the Multiemployer Pension 

Plans Coalition once again coalesced to develop a set of proposed funding reforms 

to address this latest funding challenge. This testimony also includes a review of 

several of the principal proposals for reform that attempt to balance the need to improve funding without jeopardizing the competitive status of contributing employers. 

INTRODUCTION

Mr. Chairman and members of the committee, it is an honor to speak with you 

today on this important topic. My name is Randy DeFrehn. I am the Executive Director of the National Coordinating Committee for Multiemployer Plans (the 

‘‘NCCMP’’).1 The NCCMP is a non-partisan, non-profit advocacy corporation created 

under section 501(c)(4) of the Internal Revenue Code in 1974, and is the only such 

organization created for the exclusive purpose of representing the interests of multiemployer plans, their participants and sponsoring organizations. I am testifying 

today on behalf of the NCCMP and the Multiemployer Pension Plans Coalition (‘‘Coalition’’),2 a broad group comprised of employers, employer associations, labor 

unions, multiemployer pension funds, and trade and advocacy groups from across 

the country, representing the full spectrum of the multiemployer community. 

My remarks will be directed to the longstanding shared commitment to retirement 

security for American workers evidenced by multiemployer plans and the impact of 

the recent financial crisis on their long-term viability. 

EXECUTIVE SUMMARY

Multiemployer plans have provided retirement security to tens of millions of 

American workers for more than 60 years. They currently account for nearly one 

of every four participants in all defined benefit plans. This system has survived and 

thrived as a result of a joint commitment by labor and management (reinforced by 

the statutory and regulatory structure) to responsibly balance the needs of all of the 

stakeholders. Through the collective bargaining process the parties have negotiated 

competitive wages and excellent pension and health benefits while enabling employers to remain competitive. Multiemployer plans enable employees in mobile indusVerDate Nov 24 2008 09:28 Nov 04, 2011 Jkt 035165 PO 00000 Frm 00086 Fmt 6633 Sfmt 6621 S:\DOCS\53424.TXT DENISE
83 

3To place these numbers in context, the PBGC’s single employer guaranty fund currently insures approximately 27,900 plans covering 33.8 million participants. To date the agency has assumed responsibility for 3,860 plans covering 1.2 million participants at a cumulative cost of 

$39.4 billion since its inception in 1974. 

tries to receive reliable benefits through a system that pools assets, administration 

and liabilities. 

Multiemployer plans have been conservatively managed and well-funded as evidenced by the fact that in the 29-year history of PBGC’s multiemployer guaranty 

fund only 57 funds covering 122,000 participants have received any financial assistance from the agency totaling just $417 million.3 Despite suffering losses between 

15 percent and 25 percent in the early part of this decade, over 75 percent of plans 

were more than 80 percent funded as recently as 2007. Nevertheless, the investment 

losses suffered in the current global financial collapse have threatened the financial 

viability of multiemployer defined benefit plans as they have virtually all other financial institutions. Coming in the first year of the new, more aggressive funding 

rules required under the PPA, the recent losses have pushed compliance with those 

rules out of reach for many plans without crippling additional contribution increases, deep benefit cuts, or both; making contributing employers less competitive, 

jeopardizing jobs and further reducing hours on which contributions to the plans are 

based. 

As a result, the multiemployer community has coalesced behind a comprehensive 

set of proposals that are designed to mitigate the immediate effects of the current 

financial crisis. These proposals are generally enumerated in the ‘‘Preserve Benefits 

and Jobs Act of 2009’’ introduced October 27 in the House by Congressmen Pomeroy 

and Tiberi. The timely enactment of these measures will preserve the retirement 

security of hundreds of thousands of multiemployer plan participants and prevent 

further economic deterioration in the industries in which such plans are the prevailing model. 

BACKGROUND

Multiemployer defined benefit pension plans have provided retirement income security to tens of millions of retired American workers for more than 60 years. A 

product of the collective bargaining process, they provide a model through which 

small employers, especially those in industries characterized by mobile workforces, 

can provide reliable benefits on a scale comparable with much larger firms, by taking advantage of economies of scale and centralized administration provided by the 

multiemployer plan model. According to the latest PBGC Databook, there are currently 1,510 multiemployer defined benefit plans covering some 10.1 million participants (approximately 23 percent of all participants in defined benefit plans). They 

are prevalent in virtually every area of the economy where employment patterns require frequent movement within an industry, including: construction; trucking; retail; communications; hospitality; aerospace; health care; longshore; maritime; entertainment; food production, sales and distribution; mining; manufacturing; textiles; 

and building services. 

The overwhelming majority (over 90 percent) of contributing employers to multiemployer plans in many industries are small businesses, employing fewer than 20 

employees, with more than half employing fewer than 10. Any specific multiemployer plan may have only a few contributing employers, or as many as several 

thousand, depending on the industry and the scope of the plan (local, regional or 

national). 

Statutory and Regulatory Environment 

Multiemployer plans have had separate and distinct statutory and regulatory 

structures dating back to the 1940s, with the passage of the Labor Management Relations Act of 1947 (more commonly referred to as the Taft-Hartley Act). Among its 

sweeping labor law provisions, that law prohibited employer contributions directly 

to unions or union funds (as had become the practice). Instead it requires that any 

contributions to support employee benefits must be made to a trust established and 

maintained for the ‘‘sole and exclusive benefit’’ of the participants, rather than furthering the interests of either labor or management. Furthermore, while the misnomer of ‘‘union funds’’ is still often incorrectly applied, the act requires equal representation by employers and labor and in the management of these collectively bargained employee benefit plans—a model and a requirement which continues today. 

The differences between single employer and multiemployer plans and the obligations of the plan trustees were further codified with the passage of two laws in the 

1970s and 1980s. The first, the Employee Retirement Income Security Act of 1974 

(ERISA), expanded on the common law fiduciary responsibilities of plan trustees, inVerDate Nov 24 2008 09:28 Nov 04, 2011 Jkt 035165 PO 00000 Frm 00087 Fmt 6633 Sfmt 6621 S:\DOCS\53424.TXT DENISE
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4 It is important to note that, unlike the single employer guaranty program which acts as the 

insurer of first resort when a sponsoring employer fails, the multiemployer program functions 

as the insurer of last resort which never assumes liability for providing financial assistance to 

troubled plans until all of the contributing employers have ceased making contributions or paying withdrawal liability and the collective pool of assets is depleted to the point of insolvency 

(e.g. when the plan no longer has sufficient assets to pay its benefit obligations). 5 According to a recent funding survey of nearly 400 of the 1,510 multiemployer defined benefit pension plans conducted by the NCCMP, 95 percent of plans assumed rate of return fell 

within that range with more than half at 7.5 percent 

troduced the concept of non-forfeitable (vested) benefits and required the pre-funding of benefits. The second was the Multiemployer Pension Plan Amendments Act 

of 1980 (MPPAA) which created the multiemployer guaranty fund of the Pension 

Benefit Guaranty Corporation 4 and imposed the concept of ‘‘withdrawal liability’’ 

that required sponsoring employers who depart from plans pay their proportionate 

share of any unfunded vested benefit obligations. These assessments were deemed 

necessary to prevent such obligations from being unfairly shifted either to the taxpayer or to the remaining employers thereby providing a double competitive advantage to the departing employers (first, by no longer having any obligation to make 

contributions to the plan, and second, by sticking those same remaining employers 

with the liabilities for service earned with the departing employers). Although both 

laws were the subject of significant legal challenges, by and large they and the multitude of ensuing regulations have been subsequently upheld and reinforced by numerous court decisions. 

This notion of shared responsibility has proven to be an effective means of delivering quality pension and health care benefits to workers. All such benefits are 

funded by contributions that are required to be made to independent trust funds 

pursuant to collective bargaining (or other written) agreements between more than 

one employer and at least one union. Benefit levels have traditionally been quite 

modest. At the initiation of ERISA’s pre-funding requirements, employer contributions were the only source of revenue for payment of benefits, the costs of administration and for the accumulation of assets to pre-fund benefits owed to future retirees as they become due. Over time, however, investment earnings from the monies 

set aside for such future benefits provided an additional source of revenue. These 

earnings became an increasingly important source of income to the funds, quickly 

equaling and then surpassing contribution income as the primary source of income. 

Today, most mature funds derive as much as 70 percent or 80 percent of the fund’s 

income from their investments. 

These pools of worker capital have a history of conservative, professional management. Most boards of trustees utilize ‘‘Qualified Professional Asset Managers’’ to 

manage their investments as permitted under the law, and retain outside investment consulting firms to monitor the performance of the managers selected. This 

approach, coupled with the exceedingly favorable economic conditions generally during the 1980s and 1990s, proved particularly successful in helping to fully fund the 

plans’ obligations. Unfortunately, rather than providing a comfortable cushion 

against adverse markets, conflicting tax policies helped set the stage for the two 

consecutive funding crises plans have experienced since 2000. Specifically, two converging developments combined to contribute to this phenomenon: the increasing 

leveraging of plans; and the tax code limitations on accumulation of reserves 

through contributions to plans that were ‘‘fully funded.’’ 

What is Meant by ‘‘Leveraging’’ of the Plans? 

Unlike other economic references in which leveraging relates to the practice of 

using assets as collateral, the term ‘‘leveraging’’ in this context applies to the growing reliance on investment returns rather than contributions to fund future benefits. 

Based on historical rates of return when ERISA was enacted in 1974, most actuaries set assumed rates of return on such investments between 4.5 percent and 5.0 

percent. Actual returns that consistently exceeded assumed rates during the 1980s 

and 1990s, and a strong economy that produced high hours of contributions which 

built larger and larger fund balances, eliminated the threat of unfunded vested benefits (and the corresponding withdrawal liability) for all but a few plans. More importantly, the market performance led actuaries to gradually increase their assumed 

rates of return to their present levels that range between 7.0 percent and 8.0 percent.5 Consistent with the plan fiduciaries’ ‘‘sole and exclusive’’ statutory obligation 

to manage multiemployer funds in the best interests of plan participants, each time 

the rates of return were increased, plan trustees were advised that the plan had 

the ability to prudently increase benefits for both active workers (through higher 

rates of accrual) and retirees, to improve the monthly benefits for pensioners who 

had retired when benefit levels were necessarily modest. Therefore, based on the 

85 

recommendations of the fund professional advisors, trustees gradually improved 

benefits. Even with such increases, a recent survey by the NCCMP found that the 

majority of multiemployer plans pay average monthly benefits that range between 

$500 and $1,500, providing modest income replacement by anyone’s standards for 

workers who have been paid good middle-class wages throughout their careers. 

Theoretically, taking a long-term view of pension funding, this approach was reasonable; however, such a long-term approach recognized that the years in which the 

actual rate of return exceeded the assumed rate would provide for the accumulation 

of assets to offset those other years in which actual investment performance would 

lag the assumption. In practice, this theoretical model was constrained by a Federal 

tax policy that had been intended to prevent employers from sheltering income in 

retirement plans by discouraging plan sponsors from accumulating assets in excess 

of the plan’s full funding limits. 

How did the Tax Code Contribute to the Problem? 

Acting as the other side of the same coin that required minimum contributions 

to plans to ensure that adequate funds be accumulated to pay benefits as they come 

due, the tax code prevented plan sponsors from building reserves during the good 

years to offset losses suffered during years of poor market performance. Employers 

who made contributions above the ‘‘maximum deductible’’ limit, even those who 

were required to do so by the terms of their collective bargaining agreements, ran 

the risk of incurring penalties including the loss of a current deduction for those 

contributions and the assessment of an excise tax on such contributions. As plans 

approached this limit (as some 70 percent or more of all plans did during the late 

1980s and 1990s), trustees were advised that rather than accumulate additional 

‘‘rainy day’’ reserves, they would need to make additional benefit improvements to 

increase the cost of the plan sufficiently to protect the deductibility of their legally 

required contributions under their collective bargaining agreements. 

The Day[s] of Reckoning 

Questions of the sustainability of these benefit improvements were raised by plan 

trustees even before the first stock market declines early this decade began to be 

felt. Although some modest relief was granted in EGTRRA, when the tech bubble 

burst and the markets suffered a crisis of confidence fueled by the collapse of companies like ENRON and WorldCom, the plans were unable to absorb market losses 

of 15 percent to 25 percent. Instead of being concerned with the maximum deductible limits, for the first time since the passage of ERISA and MEPPA, plans faced 

projections of near-term funding deficiencies as they were told of the likelihood of 

failing to meet their minimum funding requirements. Under ERISA’s funding rules, 

the consequences of such failures included a requirement for employers to pay their 

proportionate share of the shortfall and pay an excise tax on top of those additional 

contributions. The reliance on investment income by mature plans meant that such 

additional contributions could total several times the amounts contributed under 

their bargained rates, and for industries like construction which typically have narrow profit margins, significant numbers of contributing employers faced the very 

real possibility of bankruptcy. Were this to occur, the remaining employers would 

then have the shortfall amounts that were not paid by the bankrupt companies redistributed among those that remained, causing additional bankruptcies and, with 

a contracting contribution base, eventual plan failure. 

For unions and participants, the prospect of plan failure would mean that future 

generations would have no reliable source of retirement income. Even more troublesome was the prospect of the loss of significant benefits for current pensioners and 

beneficiaries whose benefits would be reduced, at best, to the maximum PBGC levels (a maximum annual benefit of $12,870 for participants who retired with 30 years 

of service, with corresponding reductions for those with less service). The convergence of interests by the stakeholders resulted in a coordinated effort by labor and 

management (through the Multiemployer Pension Plans Coalition) to devise a proposal for funding reform that would prevent the destruction of the plans. This set 

of proposals formed the nucleus of the multiemployer provisions of the PPA. 

This set of proposals contained tough medicine for all of the stakeholders. Once 

again, recognizing the problem was one in which all stakeholders were affected, the 

parties agreed to a package which included a notion of ‘‘shared pain’’ rather than 

having either group shoulder the full costs. For plans facing long-term funding difficulties (referred to as ‘‘Endangered status’’ or so-called ‘‘yellow zone’’ plans), the 

law required the bargaining parties to negotiate over the terms of a ‘‘Funding Improvement Plan’’ to reverse eroding funding levels. For plans with more serious 

funding problems (‘‘Critical status’’ or so-called ‘‘red zone’’ plans), a ‘‘Rehabilitation 

Plan’’ is required to reverse the declining funding trend. For the first time since the 

86 

early 1980s, plans could reduce certain classes of subsidized early retirement or subsidized surviving spouse benefits in addition to reducing future accruals, as well as 

imposing employer surcharges and, in limited circumstances, requiring contribution 

increases. Furthermore, the PPA raised the maximum deductible limit for multiemployer plans to 140 percent of the previous limits. If the plans had sufficient time 

with ‘‘normal’’ market performance, even a market contraction of the magnitude experienced from 2000 to 2002 could have been absorbed. 

Following the enactment of the PPA, but before it became effective in 2008, plan 

fiduciaries began to take corrective action by increasing contributions and adjusting 

benefits to avoid falling into one of the ‘‘zones.’’ Once the act became effective in 

January 2008 (for calendar year plans), plans began to adopt funding improvement 

and rehabilitation plans based on recent experience and then current rates of return. The parties adopted what were frequently quite aggressive additional contributions that strained the wage package and the contributing employers’ ability 

to compete. They were willing to do so because they now knew the rules going forward and wanted to address any potential funding difficulty as early as possible. 

However, as the year progressed, the sudden and precipitous drop in investment 

markets that decimated financial institutions of all types around the world also 

wreaked havoc on multiemployer plans. Plans that had formulated their Funding 

Improvement or Rehabilitation Plans were now facing even deeper reductions in accumulated assets than had been experienced from 2000 to 2002. Unfortunately, 

those groups which had taken some of the most aggressive preventive measures 

were now faced with filling an even deeper hole to meet their PPA funding targets, 

but having previously exhausted their ability to increase contributions and remain 

competitive, plan trustees and the bargaining parties are faced with even more difficult choices. Above all, the magnitude of the recent losses pointed out some of the 

shortcomings of the PPA to respond to such drastic market fluctuations. 

THE MAGNITUDE OF THE PROBLEM

In order to determine the extent of the losses and the effects of the market contraction on the funded position of multiemployer plans and assess the relative effectiveness of possible recommended corrective measures, the NCCMP conducted a detailed survey of multiemployer plans funded position over the period from 2007 

through May 31, 2009. With input from committee staff in both the Senate and the 

House in formulating the questionnaire, the NCCMP sought to determine the funded position prior to the PPA’s effective date; the number of covered participants; assets and liabilities (both on a market value and actuarial basis); changes in funding 

levels subsequent to the market contraction; contribution rates per hour and as a 

percentage of compensation; asset allocation to determine the level of risk inherent 

in the composition of the plans’ investment portfolio and actions taken to address 

funding difficulties. The following section will present summary findings from that 

study. 

Breadth of Survey Sample 

Responses were received from 385 of the universe of 1,510 multiemployer defined 

benefit plans as reported in the PBGC’s September 2008 Databook published in September 2009. Although the timing of the plan year and the availability of certain 

data elements resulted in fewer responses to a number of specific questions, comparative results were compiled using data from plans that provided answers to each 

of there relevant questions. As shown in Figure 1, responses were received from 

plans covering 5.8 million of the 10.1 million participants in all multiemployer 

plans. 

The distribution of responding plans by number of participants reflects a slightly 

greater number of larger plans than reported by the PBGC. 


53424-12.eps
87 

Figure 3 shows the distribution of respondent plans distributed by numbers of 

participants by industry association. 

Plans that responded to the survey reported total assets in 2008 at over a quarter 

trillion dollars ($237,569 million). Figure 4 shows the distribution of assets for those 

respondents that reported an industry affiliation. 

The assumed rate of return is a key determinant in assessing whether benefits 

are sustainable in the long run. Figure 5 shows that the rates of return for multiemployer plans fall within a relatively tight range between 7 percent and 8 percent 

with the majority of plans at 7.5 percent. 


53424-13.eps 53424-14.eps 53424-15.eps
88 

Asset allocation is perhaps the single most important determining factor in the 

success of a plan’s investment program. Multiemployer plans have been guided by 

Department of Labor rules that plans be invested in diversified portfolios. Although 

one school of thought encourages a lower risk profile with greater exposure to alternative investments, most multiemployer plans have a traditional asset mix. Looking 

at the performance from 2007 through 2009, for plans reporting their asset allocation, equities comprised about 50 percent of the average portfolio, with fixed income 

at about 30 percent, real estate 8 percent and ‘‘other’’, hedge funds, cash and private 

equity all comprising less than 5 percent on average each. The reduction in equity 

exposure from 2007 to early 2009 is primarily due to the reduction in value of the 

underlying asset rather than a deliberate decision to reduce equity exposure. 

Figure 6 shows the actual median rates of return for all plans reporting performance for the periods from 2007 and 2008. In 2007 the median rate of return slightly 

exceeded the assumed rate at 7.97 percent, whereas the performance for 2008 was 

consistent with that of the broad markets at a negative 21 percent. 


53424-16.eps 53424-17.eps
89 

These investment losses directly translated into a decline in the plans’ funded percentage. As shown in Figure 8, the reduction in funded percentage was consistent 

across all industries generally ranging from negative 10 percent to negative 40 percent, with the median loss at negative 18.1 percent for plans that reported their 

funded percentage in both years. 

The net effect of the decline in funded percentage is shown in Figure 9 (below) 

which shows a clear shift in the funding status of plans from 2007 through 2009 

with more than 75 percent of funds reporting market value of assets greater than 

80 percent of actuarial liabilities in 2007, dropping to more than 75 percent of funds 

reporting market value of assets at less than 80 percent funded by 2009. Although 

the number of plans reporting results at the beginning of 2009 was lower because 

of the timing of the survey and the start of the plan year, the pattern is as clear 

as the precipitating event. 


53424-18.eps 53424-19.eps
90 

The reduction in funded status is reflected in the change in reported ‘‘zone’’ status 

disregarding any election to freeze under the WRERA. As shown in Figure 10, the 

number of plans reporting green zone status in 2008 (the first year this concept became effective) was 77 percent, with 14 percent in yellow and 9 percent in red. By 

2009, those numbers had reversed. Green zone plans had fallen to 20 percent, while 

those in the yellow zone increased to 38 percent and red zone plans to 42 percent. 

Average benefit payments for all reported multiemployer plan participants in pay 

status are shown in Figure 11. The concentration of monthly benefit payments between $500 and $1,500 reflects the large number of pensions and survivors benefits 

based on pensions which became effective when benefit levels were necessarily low. 


53424-20.eps 53424-21.eps
91 

New benefit awards are shown in Figure 12. The point where the current PBGC 

benefit guarantee level is maximized is $1,320. Of the 275 plans which reported this 

data, 46.9 percent of all awards exceeded that amount, meaning that participants 

in failed plans would suffer even greater reductions than the formula provides to 

provide a disincentive for plan sponsors to abandon their plans. 

Figures 13 through 15 demonstrate that plan sponsors have been proactive in addressing funding concerns. Figure 13 shows the reported median contribution rates 

for 2007, 2008 and 2009. Median rates increased by approximately 5 percent from 

$3.84 to $4.04 from 2007 to 2008, and by an additional 68.5 percent to $6.81 in 

2009. The total increase in median contributions from 2007 to 2009 exceeded 77 percent. 


53424-22.eps 53424-23.eps
92 

Figure 14 shows the average (mean) contribution increase for the same periods. 

Hourly contributions rose by 20¢ (12.7 percent) between 2007 and 2008 from $3.84 

to $4.04 and an additional 38¢ (10 percent) to $4.18 per hour from 2008 to 2009. 

The total increase from 2007 to 2009 was 81¢ per hour or 21 percent. 

Finally, Figure 15 shows the percentage of total compensation for plans that reported this information for the years 2007, 2008 and 2009. While the majority of 

plans report rates between 10 percent and 20 percent for all 3 years, the slope of 

the increase for plans reporting in 2009 appears to be increasing. It should be noted 

that the 2009 numbers are not likely to reflect changes in funding improvement 

or rehabilitation plans pursuant to the 2008 losses. 


53424-24.eps 53424-25.eps
93 

IMPLICATIONS AND PROPOSALS FOR LEGISLATIVE RELIEF

The data clearly show that the reason the funded position of multiemployer plans 

has deteriorated in the last 3 years is the financial crisis which has negatively impacted all financial institutions—not overly generous plan designs, mismanagement 

or risky investments as has been alleged by the uninformed. Given the collective 

assets of these plans, it is also undeniable that these plans are an integral part of 

the Nation’s financial infrastructure, not only because of their value in delivering 

reliable monthly benefits to plan participants, but as a source of capital for private 

equity and as an economic generator for the local economies where pensioners and 

beneficiaries reside. It is also clear that plan fiduciaries and settlers have taken 

prudent action to address projected funding difficulties without waiting for the government to mandate such actions. 

Nevertheless, this system is not without limits. Unrelenting statutory pressure to 

increase contributions above the very substantial increases already implemented 

will place greater numbers of contributing employers at a competitive disadvantage, 

further threatening the long-term viability of plans that are dependent on such contributions to meet their short- and long-term funding targets. 

PROPOSED RELIEF MEASURES

The Multiemployer Pension Plan Coalition has evaluated and recommended numerous legislative relief measures to provide statutory flexibility to address the recent market volatility. Unfortunately, there appears to be no ‘‘one-size-fits-all’’ solution. As a result, the proposal identifies several reform options that are designed 

to provide the greatest relief to the largest number of plans. With two exceptions, 

these proposals have been incorporated into the House ‘‘Preserve Benefits and Jobs 

Act of 2009’’ bill introduced on October 27 by Congressmen Pomeroy and Tiberi. 

The specifics of the proposals are attached to this submission and will not be repeated here. However, it is important to underscore that these proposals can be considered as following two tracks: one that extends the timeframes to meet the plans’ 

long-term obligations for those plans that, with such assistance, will remain solvent; 

the second addresses relief for plans that are unlikely to survive without direct 

intervention. 

For plans in the first category, the Coalition proposal suggests that granting 30 

years to either: (1) consolidate and ‘‘fresh-start’’ the plans’ existing amortization 

bases (Funding Standard Account) over that period; or (2) isolating and amortizing 

only the losses suffered by plans in 2008 and 2009 over 30 years. The proposal includes related provisions that would allow plans to use 10 year smoothing of the 


53424-26.eps
94 

portion of the plan’s losses that would be recognized in the 2008 and 2009 years 

and would expand the relevant market to actuarial value of assets corridor from 20 

to 30 percent. 

For plans in the second category, the proposal advocates for the expansion of the 

PBGC’s ability to facilitate mergers or ‘‘alliances’’ of weaker plans into stronger 

plans that could be a ‘‘win-win’’ proposition for participants (by not having the 

weaker plan fail with corresponding benefit reduction if the plan were to require 

PBGC funding assistance); contributing employers (by increasing the number of contributing employers and lessening the probability of plan failure); and the PBGC, 

whose timely intervention could reduce the agency and taxpayers’ liability exposure. 

The second element of relief for vulnerable plans in certain industries is the expansion of the current ERISA provisions governing partition of plans projected to 

become insolvent. Such partitioning could allow the plan to survive by segregating 

liabilities associated with participants’ service with employers that have ceased plan 

participation and left without paying their full withdrawal liability. Such segregation would be analogous to the amputation of a limb to save the life of the patient, 

and would also reduce the likely liability exposure of the PBGC. More importantly, 

prompt action on this issue could protect thousands of jobs in industries that will 

be adversely affected by the adoption of Funding Improvement or Rehabilitation 

plans in the absence of such relief. 

Finally, while each element of the coalition proposal is important and the inclusion of specific mention of one rather than another is no indication of priority, it 

is important to note that the proposal also includes an increase in the PBGC guaranteed benefit levels by expanding the current formula which guarantees 100 percent of the first $11 of accrual, plus 75 percent of the next $33 of accrual times the 

number of years of service, the Coalition proposal would add a third layer—50 percent of the next $40 of accrual. This proposal reflects the increases in benefit levels 

required by the tax laws cited above and, unlike the proposal for partition, would 

be funded by an increase in the PBGC premiums. 

I welcome the opportunity to submit these comments for your consideration and 

look forward to reviewing certain aspects of them with you at Thursday’s hearing. 

ATTACHMENT

MULTIEMPLOYER COALITION LEGISLATIVE PROPOSAL FOR MULTIEMPLOYER DEFINED

BENEFIT PENSION PLAN FUNDING RELIEF

A. GENERAL RELIEF FOR CHALLENGED BUT SOLVENT PLANS

1. Allow multiemployer plans that meet stated solvency standards (to assure that 

the plan is expected to have enough cash-flow during the extended period) to elect 

a one-time fresh-start of the Funding Standard Account, with the sum of all of the 

current outstanding balances amortized over a single 30-year period, effective starting with the plan year beginning after either September 30, 2009 or September 30, 

2010. 

2. As an alternative that the trustees may select instead of option one, provide 

an option to isolate the investment losses suffered during the period of 2-plan years 

beginning on and after September 1, 2008 and ending by September 30, 2010 and 

amortize them over 30 years. 

3. At the option of the trustees, extend the Rehabilitation or Funding Improvement Periods by 5 years, offset (if applicable) by the 3-year extension elected by 

some plans pursuant to WRERA. The election to use this extension could be made 

at any time that the Rehabilitation or Funding Improvement Plan is being developed or updated, provided that it could only be elected once with respect to each 

period that such plan is in the Yellow Zone and once with respect to each period 

that it is in the Red Zone. 

4. Extend the automatic amortization extension period from 5 to 10 years with 

an additional 5 years available with IRS approval, and set time limits for IRS review of automatic amortization extension submissions, so that, if the actuary has 

properly certified that the standards are met, the extensions can be adopted on a 

timely basis. 

a. Provide that the 2008–2009 investment losses will not cause multiemployer 

plans that received amortization extensions from IRS before enactment of PPA to 

lose the benefit of those extensions, despite IRS’s requirement, when granting the 

extensions, that the plans’ funded levels improve each year by at least 1 percent. 

5. To temper the immediate and dramatic impact of the recent plunge in investments, widen the acceptable corridor for purposes of actuarial smoothing to 30 perVerDate Nov 24 2008 09:28 Nov 04, 2011 Jkt 035165 PO 00000 Frm 00098 Fmt 6633 Sfmt 6621 S:\DOCS\53424.TXT DENISE
95 

cent to mitigate the initial impact on increased employer contributions and/or benefit modifications attributable to the precipitous drop in asset values for 2008 and 

2009; and extend the acceptable smoothing period to 10 years to phase in the losses 

of 2008 and 2009 only. 

B. FOR TROUBLED PLANS THAT NEED SPECIAL HELP

6. Help multiemployer pension plans support one another by: 

a. Recognizing a new type of plan called an ‘‘alliance,’’ through which multiemployer pension plans can be combined for purposes of investment, administration, 

fiduciary accountability, prospective service credit for benefits and eligibility and 

retroactive vesting credit, but maintain separate accounting for purposes of the 

funding requirements (including the special funding requirements for endangered 

and critical-status plans) and withdrawal liability associated with benefits earned 

prior to the effective date of the alliance; 

b. Specifically authorizing the PBGC to encourage and facilitate fund mergers and 

alliances, including by providing financial assistance from the multiemployer guaranty fund if the agency determines that that assistance is reasonably expected to 

reduce the PBGC’s likely long-term loss with respect to the funds involved; and 

c. Modifying the fiduciary rules and standards to remove unnecessary impediments to multiemployer pension fund mergers, including alliances, by: 

(1) Providing that the trustees approving such a merger or alliance are 

deemed to meet the ‘‘exclusive benefit’’ standards of sections 403 and 404 of 

ERISA if they determine that the merger is not reasonably likely to be adverse 

to the long-term interests of the participants in the pre-merger plan for which 

they are responsible, and 

(2) Specifically adding multiemployer plan mergers that are alliances to the 

types of mergers that, under existing law, are deemed not to be prohibited 

transactions under sections 406(a) and 406(b)(2) of ERISA, if the PBGC finds 

that the transaction meets the standards in section 4231 of ERISA; and 

(3) Confirming that the fiduciaries of the combined plan are accountable to 

all of the participants of the merged plans in the alliance. 

7. Reinvigorate the multiemployer plan partition option under ERISA §4233, to 

meet special industry needs. Specifically, amend the partition rules in ERISA §4233 

as follows: 

a. The provisions in ERISA Section 4233 would be revised to include a new subsection entitled ‘‘Qualified Partition upon Election By Certain Plans.’’ 

b. The new subsection would include the following provisions: 

(1) Multiemployer pension plans that meet the requirements of ERISA Section 4233(b)(1)–(4) (as modified as described in (b. 2) below), as well as the other 

criteria described in (b. 2) below, could elect to transfer to the PBGC responsibility for the vested benefits attributable to service of participants with non-contributing employers that either have become bankrupt or otherwise have gone 

out of business without paying their proportionate share of the plan’s full withdrawal liability. If an election is made, the PBGC would be required to assume 

the responsibility with respect to those benefits by the first day of the first 

month that begins at least 90 days after the date of the plan’s election. 

(2) To be eligible for a Qualified Partition, a Plan would have to meet the following criteria: 

(a) The plan has been certified to be in Critical (‘‘Red Zone’’) Status at 

the time of the Automatic Partition request; 

(b) The plan has suffered a substantial reduction in the amount of aggregate contributions under the plan that is attributable to employers that either have previously become bankrupt or otherwise gone 

out of business without paying their proportionate share of the 

plan’s full withdrawal liability; 

(c) The trustees certify, based on actuarial projections, that the plan is 

likely to become insolvent and a significant increase in contributions 

would be necessary to prevent insolvency; 

(d) As of the end of each of the immediately preceding 2-plan years, the 

plan had a ratio of inactive participants (retirees, beneficiaries and 

terminated vested participants) to active participants of at least 2 

to 1; 

(e) In each of the immediately preceding 2-plan years, had a ratio of 

benefit payments to legally-required contributions of at least 2 to 1; 

and 

96 

(f) The trustees certify that, based on actuarial projections, partition 

would significantly reduce the likelihood of insolvency. 

(3) For each plan year after a Qualified Partition, the plan sponsor will determine whether aggregate employer contributions have declined 10 percent or 

more as a result of employers’ becoming bankrupt or otherwise going out of 

business without paying their proportionate share of the plan’s full withdrawal 

liability and, if so, shall transfer responsibility to PBGC for non-forfeitable benefits attributable to service with those employers. 

(4) In the case of a Qualified Partition, the PBGC’s partition order described 

in ERISA Section 4233(d) will provide for the transfer of vested benefits attributable to service of participants with respect to non-contributing employers that 

either have become bankrupt or otherwise have gone out of business without 

paying their proportionate share of the plan’s full withdrawal liability, and the 

transfer of plan assets attributable to withdrawal liability payments collected 

from such non-contributing employers and any earnings thereon but reduced by 

the amount of benefit payments actually made to such participants. 

(5) The PBGC would guarantee the non-forfeitable benefits transferred pursuant to a Qualified Partition. 

(6) Any net unfunded costs or liabilities incurred by the PBGC in connection 

with Qualified Partitions will be disregarded in determining the financial condition of the guaranty funds under ERISA §4005 and premiums payable under 

ERISA §4006. 

8. Encourage continued participation by employers facing additional pension contribution stress by: 

a. Authorizing a ‘‘pension support tax credit’’ equal to the eligible increase in the 

amount of employer contributions paid to a multiemployer plan that is seriously endangered or in critical status, pursuant to a collective bargaining agreement adopting a schedule of contributions acceptable to the Trustees and consistent with the 

plan’s Rehabilitation or Funding Improvement Plan, provided that the plan is not 

terminated or frozen for future accruals during any of the plan years for which the 

increased contributions are paid. 

b. An increase in contributions is eligible under this provision to the extent it is 

attributable to an increase in the rate of contributions (including an increase due 

to a change in the basis on which contributions are made) required under the Trustee-approved schedule. 

c. The tax credit will be available for up to 3 consecutive years, beginning with 

the year in which the increased contributions are first paid. 

C. FOR ALL PLANS

9. Increase the generally applicable PBGC multiemployer guarantees prospectively, by adding a third level of guaranteed accrual rate, to a maximum of 100 percent of the accrual rate up to $11, plus 75 percent of the next $33, plus 50 percent 

of the next $40. This would produce a maximum guarantee of roughly $20,000 a 

year for a participant with 30 years of service for a pension (compared with less 

than $13,000 under current law). 

10. Back PBGC obligations with respect to Qualified Partitions with the full faith 

and credit of the United States to more appropriately reflect the magnitude of benefits guaranteed and to enable the agency to carry out its objectives to protect all 

defined benefit plans as set forth in ERISA § 4002(a), with due consideration to 

avoiding crippling increases in the applicable premium structure. 

11. Authorize employers to issue ‘‘PPA Compliance Bonds’’ that would be guaranteed by the U.S. Treasury, subject to certain risk management conditions, the proceeds of which would be contributed to the plan. 

12. Make technical corrections to sections 202 and 212 of the PPA, which added 

the special funding rules to ERISA and the Internal Revenue Code for multiemployer plans in endangered or critical status. For example: 

a. eliminate the possibility that IRC §432(c)(4)(C)(ii) could subject plans that shift 

from endangered to critical status to overlapping, inconsistent standards during the 

Rehabilitation Plan Adoption Period, 

b. streamline the rules for seriously endangered plans by providing that the 

benchmarks in IRC §432(c)(3)(B) and (4)(B) apply to all such plans, and 

c. confirm that, if an endangered plan meets the applicable statutory benchmarks 

before the end of its Funding Improvement Period but the actuary certifies that it 

still fails the tests in §432(b)(1), the original Funding Improvement Period and 

Funding Improvement Plan remain in effect until the plan is no longer certified to 

be in endangered status. 

97 

The CHAIRMAN. Thank you very much, Mr. DeFrehn. 

And now we will turn to Karen Friedman from the Pension 

Rights Center. Welcome. 

STATEMENT OF KAREN D. FRIEDMAN, EXECUTIVE VICE 

PRESIDENT AND POLICY DIRECTOR, PENSION RIGHTS CENTER, WASHINGTON, DC 

Ms. FRIEDMAN. Chairman Harkin, Ranking Member Enzi, and 

members of the committee, thank you for the opportunity to testify 

today. 

In today’s devastated economic environment, we have seen how 

important defined benefit pension plans are to the security of 

American workers and their families. While millions of Americans 

have seen their 401(k) account balances plummet in value, workers 

and retirees in ongoing traditional pension plans are the ones who 

are most likely to be sleeping soundly, knowing that they will have 

a guaranteed lifetime stream of benefits to supplement Social Security. 

Helping companies to continue their ongoing defined benefit pension plans is an important part of the economic recovery process 

because doing so will provide retirees with guaranteed monthly incomes so they can continue to contribute to the economy, and in addition, pension plans generate long-term investment capital that 

can help promote job creation. 

For these reasons, the Pension Rights Center supports providing 

emergency funding relief to companies that have done the right 

thing and have continued to maintain their defined benefit plans, 

and we believe that this emergency funding should be given as long 

as that relief is conditioned on certain critical protections for employees. 

I will also explain today why we oppose providing blanket funding relief for companies that have frozen their plans. Due to time 

limitations, I will refer you to my written statement for a discussion of other issues, and with your permission, I would like to have 

these included in the record. 

First and foremost, we believe that emergency funding relief 

should be targeted to active defined benefit plans. We support full 

funding relief only for companies that sponsor pension plans where 

employees continue to accrue benefits. Companies that have stood 

by their defined benefit programs, while others have abandoned or 

frozen them, deserve the support of Congress. 

The type of relief we favor for ongoing single-employer plans is 

an extended amortization period for losses attributable to the recession. It is important to note that it is the employees who would 

share the downside risk with the PBGC if employers ultimately default on their obligations. And obviously, we have seen that today 

with the Delphi retirees loud and clear. Because of this, we believe 

that if companies get funding relief, they must make a commitment 

that employees will continue to accrue benefits under the plan at 

least until the end of the period in which relief is granted. This will 

ensure that companies will not get relief and then just freeze the 

plan. 

Also, we believe that as part of funding relief for ongoing plans, 

companies should be prohibited from both making contributions 

98 

into deferred compensation arrangements and then from paying 

out benefits to executives from these plans during the relief period. 

We ask why should companies get funding for pension plan contributions if they are then using the company’s operating assets to 

pay out huge benefits just for executives. 

Our second major point that I want to emphasize today is that 

companies with frozen plans, those that have stopped accruals for 

workers, should not receive the same automatic funding relief. 

Why? It is because the best argument for granting funding relief 

to employers is that pension plans provide benefits that working 

men and women can rely on. Companies that have frozen their 

plans by stopping workers from accruing benefits have severed this 

commitment to their workers. 

It is important to keep in mind that funding relief is not free. 

It is essentially an unsecured loan provided by a pension plan and 

its participants to the company. If a company cannot continue to 

fund the plan and it is later terminated, employees can lose benefits they earned if these are not fully guaranteed by the Pension 

Benefit Guaranty Corporation. Again, we saw this. The Delphi retirees are a tragic and extreme version, but we have seen this all 

over the country. Since it is the participants who bear a great part 

of the risks, we do not believe that emergency relief should be 

made available to plans in which employees are no longer accruing 

benefits. 

Now, some have argued that extending relief to frozen plans 

could free up money that could be used to create and preserve jobs, 

but we really have not seen evidence of this. And this money could 

be used for any purpose, including moving jobs overseas, automation, or even executive compensation. 

Here is what we are saying. Instead of granting automatic funding relief for frozen plans, we suggest making use of provisions that 

are already in current law. These provisions allow employers to request a funding waiver from the IRS if they could show temporary, 

substantial business hardship. We would support providing the IRS 

with resources to streamline the process to review waiver requests 

in the case of companies with frozen plans that need relief, and one 

option might be for Congress to establish a special temporary funding review board and require that waivers be ruled on in an expedited manner, perhaps within 60 or 90 days of the request. 

In conclusion, Congress should definitely help ensure the survival of existing defined benefit plans and stand by those companies that continue their pension plans. But, Senator Harkin, as you 

mentioned before, just providing funding relief is not going to address the Nation’s growing pension problems. Also in direct response to your question, we encourage the committee to hold hearings not just on ways to stabilize and expand the pension system 

for current workers, which we are all committed to do—and we 

have to look at all the ways that we can address the problems of 

today and other problems of the system—but we also need to examine the need for a new universal, secure, and adequate pension system that supplements Social Security for future workers. 

And I just want to say quickly that the Pension Rights Center, 

along with many other organizations, including the AFL–CIO and 

the Service Employees International Union, just started a new iniVerDate Nov 24 2008 09:28 Nov 04, 2011 Jkt 035165 PO 00000 Frm 00102 Fmt 6633 Sfmt 6601 S:\DOCS\53424.TXT DENISE
99 

tiative called Retirement USA which released 12 principles for a 

universal, secure, and adequate pension system for future generations. We are all committed to working to keep the current system 

and preserve defined benefit plans for today’s workers and do everything we can to protect 401(k) plans, but to work toward a universal, secure, and adequate pension system for the future. 

I welcome any interest that you have and I will be happy to answer any questions that you have today. 

[The prepared statement of Ms. Friedman follows:] 

PREPARED STATEMENT OF KAREN D. FRIEDMAN

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

today. I am Karen Friedman, the Executive Vice President and Policy Director of 

the Pension Rights Center, a 33-year-old consumer rights organization dedicated to 

protecting and promoting the retirement security of workers, retirees and their families. 

In today’s devastated economic environment, we have seen how important defined 

benefit plans are to the security of American workers and their families. While millions of Americans have seen their 401(k) savings accounts plummet in value, workers and retirees covered by defined benefit pension plans are the ones who are most 

likely to be sleeping soundly, secure in the knowledge that they will have a guaranteed lifetime stream of benefits to supplement Social Security. 

Helping companies to continue their ongoing defined benefit plans is also an important part of the economic recovery process, because: (a) doing so will provide retirees with a guaranteed source of monthly income to enable them to continue to 

be productive citizens and to contribute to the economy; and (b) defined benefit 

plans generate long-term investment capital that can help expand the economy and 

ensure the preservation and creation of jobs. 

For these reasons, the Pension Rights Center supports providing emergency funding relief to companies that have done the ‘‘right thing,’’ and have continued to 

maintain ongoing defined benefit plans—as long as the relief is conditioned on certain critical protections for employees, which I will discuss today. As I will explain 

later, we oppose providing blanket funding relief for companies that have frozen 

their plans. I will also talk about why we believe, as part of this debate, certain 

Pension Protection Act (PPA) provisions that adversely affect participants should be 

repealed. I also will discuss briefly issues related to multiemployer plans, and why 

Congress should act to stop the use of qualified defined benefit plans to unfairly provide special benefits to selected top executives through so-called Qualified Supplemental Executive Retirement Plans, or Q–SERPs for short. 

I. FUNDING RELIEF SHOULD BE TARGETED TO ACTIVE DEFINED BENEFIT PLANS

First, and most important, we support full funding relief only for companies that 

sponsor active defined benefit plans under which employees continue to accrue benefits. Companies that stood by their defined benefit programs while others abandoned 

or froze them deserve support from Congress. 

The type of relief we favor for ongoing single-employer plans is to permit an extended amortization period for losses attributable to the recession. It is important 

to note that it is employees who would share the downside risk with the PBGC if 

employers ultimately renege on their obligations. Because of this, we believe that 

if companies get funding relief for their defined benefit plans, they must make a 

commitment that employees will continue to earn new benefits under the plan at 

least until the end of the period in which relief is granted. This will ensure that 

companies will not get relief and then freeze the plan which would be unfair to employees and contrary to the purpose of receiving relief in the first place. 

Also, we believe that as part of funding relief, companies should be prohibited 

from both making contributions into deferred compensation arrangements, such as 

rabbi trusts, and from paying out benefits to executives from these plans during the 

relief period. The reason for this recommendation is that contributions to and payments from these nonqualified plans for executives are company assets that could 

help fund the company’s qualified plan for workers. Why should companies get funding relief for plan contributions if they are still funding and paying out benefits from 

deferred compensation plans for executives? 

100 

1 In the case of companies that are continuing their plans for current employees but have frozen them for new hires, a tiered approach to funding relief might be appropriate. For example, 

these plans might be allowed to amortize only a portion of the recessionary losses, or be permitted to amortize them over a shorter period of time. A similar approach could be used for 

plans that no longer credit current employees with future service, but allow their benefits to 

reflect future increases in compensation. 

II. COMPANIES WITH FROZEN PLANS SHOULD RECEIVE NO ADDITIONAL FUNDING RELIEF

As I said before, we believe that the best argument for granting funding relief to 

employers is because doing so serves a constructive societal purpose in preserving 

pension plans, which provide secure and adequate retirement income to working 

men and women. Companies that have frozen their plans—by stopping workers 

from accruing benefits—have severed this commitment to their workers. 

It is important to keep in mind that funding relief is not free: It is essentially 

an unsecured loan provided by participants to the company. Employees give up 

wage increases in exchange for company contributions to defined benefit plans on 

their behalf. If a company cannot continue to fund the plan and it is later terminated, employees can lose benefits they earned if these are not fully guaranteed by 

the Pension Benefit Guaranty Corporation. Since it is the participants who potentially bear a great share of the financial burden of funding relief, we do not believe 

that emergency relief should be made available to plans in which employees are no 

longer earning new benefits. 

Some have argued that extending relief to frozen plans will help save jobs because 

money not contributed to the pension plan could be used to create and preserve jobs. 

But this argument is unsupported by firm evidence. The fact is that this money 

could be used for any purpose, including moving jobs overseas, automation or even 

executive compensation. 

It should also be noted that there are provisions in current law that allow employers to request a funding waiver from the Internal Revenue Service if they can show 

temporary substantial business hardship and that failure to grant a waiver would 

be adverse to the interests of plan participants. 

We would support providing the I.R.S. with resources to streamline the process 

to review waiver requests in cases of companies with frozen plans that need relief. 

One option might be for Congress to establish a special temporary funding review 

board and require that waivers be ruled on in an expedited manner (perhaps within 

60 or 90 days of the request).1 A company with a frozen plan that wants further 

funding relief could qualify for that relief by unfreezing the plan and accepting the 

conditions we described above. 

III. REPEAL CERTAIN PENSION PROTECTION ACT PROVISIONS

• Repeal the PPA provision mandating the automatic freeze of benefit accruals 

in single-employer plans that are less than 60 percent funded. Congress should not 

penalize plan participants because employers have not funded the plan. Alternatively, the PPA provision could be converted into a temporary suspension of benefit accruals rather than a freeze, with the suspended accruals automatically restored once a plan has attained a specified funding level. 

• Repeal the PPA provision that allows the PBGC to set the date of a distress 

termination as the date the plan sponsor filed bankruptcy rather than the date the 

plan is officially terminated by the bankruptcy court. When the PBGC uses the earlier date, the agency effectively cuts workers benefits by not counting additional accruals that were earned before the plan was actually terminated. 

IV. PROTECTIONS FOR EMPLOYEES IN MULTIEMPLOYER PLANS

• Raise the maximum PBGC guarantee for multiemployer plan benefits to at 

least $20,000 for a full-career worker. 

• Multiemployer plans in the future may find their way out of the current crisis 

and become over-funded by a significant amount. If so, we hope that Congress will 

explore ways to reinstate subsidized early retirement benefits (and subsidized survivors benefits) that may have been eliminated under the ‘‘Red Zone’’ (critical status) provisions of the PPA. 

V. ELIMINATE Q–SERPS

Two years ago, the Wall Street Journal revealed a practice in which companies 

use pension plans that were set up for rank-and-file workers to provide increased 

benefits for a small number of high-paid executives. The enhanced benefit formulas 

for a privileged few were known as Qualified Supplemental Executive Retirement 

101 

Plans, (Q–SERPs.) These provisions were an inequitable use of plan assets and may 

have contributed, at least at the margins, to the current funding problems of some 

plans. Congress should eliminate Q–SERPs. 

CONCLUSION

The economic meltdown of the last year has shown the tremendous value of defined benefit plans to employees and retirees. Congressional response to the economic crisis should be to help ensure the survival of existing defined benefit plans 

and stand by those companies that stood by their defined benefit plans in an era 

when too many companies abandoned their plans. 

Also, we hope that this committee continues to hold retirement income hearings 

both to examine ways of encouraging new defined benefit plans as well as to look 

at broader issues for the future. We would encourage you to look at both how to 

shore up the current system for current workers and also to examine whether we 

need a new retirement income system—on top of Social Security—for future generations. The Pension Rights Center recently joined with the AFL–CIO, the Economic 

Policy Institute, the National Committee to Preserve Social Security and Medicare 

and the Service Employees International Union to convene Retirement USA, a new 

initiative working for a visionary retirement system—one that is universal, secure 

and adequate. Retirement USA has established 12 Principles for a New Retirement 

System. These can be viewed at www.retirement-USA.org and I would be pleased 

to answer any questions you may have about this initiative. 

The CHAIRMAN. Thank you very much, Ms. Friedman. Thank you 

all very much for your testimony. 

When I was reading over your testimonies last night, I have different things that I circled. I asterisked this last sentence of yours 

which said that ‘‘Retirement USA has established 12 Principles for 

a New Retirement System.’’ I would like to get those. I guess I can 

get them online here. You gave us the—— 

Ms. FRIEDMAN. Yes, and I will be happy to send them to you. 

The CHAIRMAN. Again, Ms. Friedman, any funding relief that we 

provide I think should be targeted to those companies that need it 

most. It should not be just a corporate giveaway. I have said that 

many times. 

Yesterday we received new data from the PBGC on the 50 large 

financial institutions that received the most TARP funds. PBGC 

says that 38 of those 50 TARP recipients had defined benefit pension plans. Well, I notice also that—I probably should have said 

this to the former panel—TARP funds to General Motors, $50.7 billion. Four-hundred million dollars has been returned. They still 

have $46 billion or something like that. GMAC, the holding company, got $13.4 billion. It just seems to me the companies that got 

TARP funds could use some of that money to make payments to 

their pension plans. 

Do you think the financial companies that received billions of 

dollars in TARP relief should get pension funding relief? 

Ms. FRIEDMAN. Well, I guess this is what we would say. We know 

that there are many financial institutions that have received TARP 

money and they do, as you pointed out, have defined benefit plans. 

I think that we would recommend the same thing for the financial 

institutions that are getting TARP money that we are recommending for frozen plans, and that is, Congress should consider 

setting up a panel to review these requests from financial institutions that have gotten TARP money on a case-by-case basis. I do 

not think there should be blanket relief, and I think—— 

The CHAIRMAN. Why do we not just require them to use the 

TARP money to fund their pension plans? 

102 

Ms. FRIEDMAN. Well, that could be something that you could consider. It would depend on the individual situations, but certainly 

at the bare minimum, I think that these cases should be reviewed 

on a case-by-case basis. 

The CHAIRMAN. It does seem odd that we would give them the 

taxpayers’ money or our future generation’s money, by the way, for 

the TARP money and then we go back to the taxpayers and say 

you got to fund them again on their pension benefits. It just seems 

to me they could use some of that TARP money for that. 

Ms. FRIEDMAN. Well, in this case what you are basically doing is 

if they ask for funding relief, they are basically saying we do not 

want to use this money to put into the pension plans. I think you 

would have good reason to ask them why not and what the money 

is going to be used for. 

Certainly, Senator Harkin, which I am sure you agree with, 

given all the legislation that you have introduced in the past, if 

they do get relief, they really should stop contributions and payments out of their executive deferred compensation packages. And 

I think that is an absolute. 

The CHAIRMAN. Any other views on using TARP money for pension funding relief? Anybody else got any views on that? Mr. 

Gebhardtsbauer, you have been with PBGC in the past. What say 

you? 

Mr. GEBHARDTSBAUER. I can appreciate your point. I think I 

would still—and earmark some of that possibly just like we earmark certain money to people who do not have enough to buy food. 

We tell them you have to buy food with the food stamps, I guess. 

But I guess I would still—I guess a little bit like Karen was saying. I do not know enough about the details of the company, and 

so I would want to look at this on a case-by-case basis to understand what I am doing. 

I would also say that I think by smoothing the contributions out, 

we are not saying you do not ever have to contribute. We are just 

saying you do not have to contribute as much this year. You will 

just have to contribute more down the road. They still have to get 

back up to 100 percent. It is just, does it all have to be right now 

or can we smooth it out. 

The hope, of course, is that the stock market is going to come 

back in a short period of time, a year or 2 or whatever, and so what 

will end up happening, like it happened in 1987 and other times 

when you have a crash, the stock market goes further down than 

the fundamentals would call for. There are a lot of fears. They are 

just afraid of buying in the stock market. The stock market will always go down further than it really makes sense and then it will 

come back. 

Dr. Richard Thaler at the University of Chicago talks about that, 

that maybe the market is not being appropriately priced. Therefore, 

we should not be looking at what is today’s value because we are 

going to lock that number in for a whole year. We should smooth 

it out a little bit. So he actually wrote an article in the Financial 

Times talking about how we really—in fact, he even used the word 

‘‘actuarial smoothing.’’ He said a case for actuarial smoothing. He 

is probably one of the most famous behavioral economists around. 

103 

I tip my hat to the idea of using TARP funds, but I would still 

go for some of the smoothing that we talked about like expanding 

the corridor. 

The CHAIRMAN. I understand that completely. I do. I think that 

is something that this committee is really going to have to take a 

look at. How many years were you looking at? 

Mr. GEBHARDTSBAUER. I have actually been thinking more about 

the smoothing, that it should be 20 percent within market like it 

was in the old days. Now it is only 10 percent. 

The CHAIRMAN. The 80 to 120? 

Mr. GEBHARDTSBAUER. Yes, 80 to 120. The 10 percent—you 

know, you get smoothing through the 7-year amortization rule, and 

then the corridor totally eliminates it. It totally eliminates all the 

good stuff from the 7-year amortization. 

The CHAIRMAN. I asked that question earlier. How was that 90 

to 110 ever—what was that based on? 

Mr. GEBHARDTSBAUER. I think what it is, back around 2000– 

2001, everybody was focusing on mark-to-market for the accounting 

statements, and FASB actually moved to mark-to-market. And it 

makes sense. If you are buying a company, you want to know what 

is the company worth today, or even if you are buying 1,000 shares 

of a stock, you want to know what is it worth today. You want 

mark-to-market on the accounting books. But when it comes to putting your money in, as I mentioned to the finance professors at 

Penn State and the economics professors—they all knew that the 

market crashed, but they did not contribute any more this year 

than they did the year before because they assume the market is 

going to come back. They were heavily smoothing. They did not 

change their contribution at all and neither did I. I guess we all 

sort of assume the market is going to come back. It is very difficult 

to be forced to use that number back on January 1 when we already know the market is much better now than it was even back 

on that date. 

The CHAIRMAN. Senator Enzi. 

Senator ENZI. Thank you, Mr. Chairman. 

Mr. Gebhardtsbauer, I am glad you are back in Washington, DC, 

even just for a short while. 

Mr. GEBHARDTSBAUER. Thank you. 

Senator ENZI. I greatly appreciated your insight as we worked on 

the original Pension Protection Act in 2006. 

In your testimony, you discuss the Dutch pension system and 

how it was able to weather downturns in the stock markets, as well 

as the ability to keep more individuals in defined benefit plans. 

Can you provide us with a little more insight into that Dutch system? 

Mr. GEBHARDTSBAUER. Yes. Well, they have multiemployer plans 

where it covers whole industries. You will have the whole industry 

covered. There is one advantage. 

They also have a smoothing technique on the benefits. For example, if there is a big crash—and this helps the accounting books too 

because they have mark-to-market accounting in Europe too. What 

it does is it says if you have this huge crash, if you just gave a nice 

benefit in the past year, you can actually reduce that temporarily, 

and then as soon as the market comes back, you put it back in the 

104 

plan. So people are not really hurt because if they keep working, 

if they are in their 30s, 40s, and 50s, the market will come back 

and so it will be back as a benefit in the plan. 

Because of those laws helping employers keep their pension, it 

allows that smoothing. It not only smoothes the contributions. It is 

actually smoothing the accounting statement book numbers because the liability gets smoothed too. 

Senator ENZI. We have been talking about this narrower corridor. In the previous panel, we talked a lot about trying to prevent 

companies from gaming the system. But you are recommending 

that we go back to the older corridor provisions. If we go to those, 

can we keep the companies from gaming the system with their pensions, whether they are fully funded or they may not be? 

Mr. GEBHARDTSBAUER. Right. I do not think this causes gaming. 

There would be some economists and actuaries that would say that 

because you are smoothing, you can hold more stocks in the pension plan now. I talk about that in my written testimony, that you 

do not want to encourage companies to have too much stock. You 

get all kinds of penalties when you go below 100 percent, 80 percent, 60 percent. You have to stop paying lump sums. You have to 

freeze accruals. There are all these penalties. You have to start 

contributing every quarter of the year. 

We might want to toughen those penalties a little bit. For example, like Bethlehem Steel that was brought up a little bit earlier. 

They had a huge percentage of their pension plan assets in stocks, 

and it was only now a small company and a huge number of retirees. The liabilities in the pension plan were huge compared to the 

size of the current workforce. As long as the stock market was 

doing alright, they could afford their pension plan. In fact, the excess returns in the stock market helped them. They did not have 

to contribute to the pension plan and they still looked over 100 percent funded. But then they were gambling because as soon as the 

stock market went down, boom, they were blown out of the water 

and they had to terminate, give it to the PBGC. 

Since the PBGC existed, they knew we did not have to worry 

about that. Actually they did because some employees then do not 

get as good a benefit from the PBGC because the guarantees are 

only up to a certain maximum. 

But maybe we need some rules to make sure that you do not 

have—that is the abuse, I think, you were talking about, taking too 

much of a gamble with your pension plan, taking a gamble that if 

things go badly, you can put the liabilities to the PBGC. 

The suggestion in my written testimony is—I do not know if you 

want to prohibit, like you cannot have more than 60 or 70 percent 

stocks. I do not know if we would prohibit the choice, but we would 

make it very difficult to do something like that. For example, if you 

have over 60 percent or over 50 percent of the assets in your plan 

in stocks, then we are going to charge you a risk premium. This 

risk premium says you are putting a risk on us, you know, the 

PBGC. Especially you would make it mostly for a company that is 

pretty weak, a company whose ratings are not high. That is where 

the abuse is going to occur. We know we are weak. We can take 

a gamble, and if things do not work, we dump it on the PBGC beVerDate Nov 24 2008 09:28 Nov 04, 2011 Jkt 035165 PO 00000 Frm 00108 Fmt 6633 Sfmt 6601 S:\DOCS\53424.TXT DENISE
105 

cause we are already weak enough to dump on the PBGC. So that 

might be an idea. 

Senator ENZI. Thank you. I have some more specific questions for 

you, as I do for all of the members of the panel. I will submit those 

in writing. 

I was going to do an additional question for the panel. You can 

think about this because you will get it in writing. What do we do 

about companies that are funded below 60 percent and have no 

chance of coming back? We will need an answer to that one too, 

but my time is about to expire here and other people want to ask 

questions. I do want to rely on your expertise and get some answers because this is really important to a lot of people. Thank 

you. 

The CHAIRMAN. Thank you, Senator Enzi. 

Senator Hagan. 

Senator HAGAN. Thank you, Mr. Chairman. 

Obviously, this recession has exacerbated this problem. I am 

from North Carolina and had chaired the Budget Committee for a 

number of years. I can remember that we were 110 percent funded, 

overfunded in our pension plan. Just recently I think it is down to 

99 percent. I am very confident with what we are doing in North 

Carolina, but obviously so many companies have been impacted. 

Mr. Peterson, your comment that $10 million in incremental pension funding is the equivalent to 125 nurses is really evident of the 

fact that we need jobs in our economy right now. We are desperate 

to be sure we can provide jobs for people who are unemployed and 

underemployed. I think it is obvious that we are going to have to 

do something to amortize these problems and help companies. 

I want to be sure we give enough flexibility to make the changes 

that companies need to be solvent, but without giving them so 

much free rein that we find ourselves in the pre-Pension Protection 

Act situations with unjustifiably underfunded plans. I would love 

to hear some comments on that. Either Mr. Peterson or Mr. 

Gebhardtsbauer. 

Mr. PETERSON. One way to perhaps start a response is that I 

think we are thinking in terms of temporary relief. For example, 

the reference to the extension of the amortization period from 7 to 

15 would be with respect to the losses incurred in 2008. It would 

not be in perpetuity. I think maybe that is one way of thinking 

about a way of providing relief that does not open Pandora’s box. 

Mr. GEBHARDTSBAUER. Yes. In my testimony, I talk about how 

the Pomeroy relief makes sense on a temporary basis, and it seems 

to help everybody. Even the PBGC does not get hurt because they 

get more premium income too. Hopefully, fewer companies will end 

up terminating because for companies on the edge with a triple or 

quadruple contribution they have to make this year, that might be 

enough to push them into the PBGC. I think this temporary 

basis—everybody is OK. 

My concern about temporary relief is that then they expect getting relief every time we have another crash because the rules do 

not work right now in a crash. That is why we need to make a fix 

so that the rules do work in the future for a temporary crash. And 

one of the ideas I suggested was this corridor relief. Other people 

have other ideas. 

106 

Senator HAGAN. I had one other question and that is concerning 

the defined contribution plans, and moving toward those. Many 

companies are moving away from the defined benefit plans. Do you 

think that what we are seeing right now would increase the possibility that so many companies will move toward, or future companies will definitely choose, the defined contribution plans away 

from the defined benefit. Any thoughts on that? 

Mr. GEBHARDTSBAUER. Sure. I think if Congress does give temporary relief, employers will see that Congress understands our 

concerns. Congress understands that PPA is not working perfectly 

right now in the midst of this unprecedented crash. I think they 

would also want some sort of permanent relief that it fixes something like the corridor. Again, I keep on going back to those two 

things. 

There is a whole bunch of other things, though, that I would say 

are—there are a lot of differences in the rules for DB plans versus 

401(k)’s. I would try and level the playing field more. 

At one time, it was very clear, from looking at the laws, that defined benefit plans paid you an income for the rest of your life no 

matter how long you live, even if the stock market crashed. It 

looked like the preferred thing. You know, it is kind of like Social 

Security. There is real sureness that you are going to get that benefit for the rest of your life no matter what happens in the market. 

The DB has a really good thing not only for retirees, but it is also 

good for employers. Employers were happy to have DB plans in the 

past because it helps them with managing the work flow, managing 

the industry, and it is good for the country. 

At one time, we used to encourage them more, but now, for example, with a 401(k), you do not have to include one-third of your 

employees or you do not have to really give much to it. It could be 

just a small amount and only for the ones that put money in first. 

If the employee puts money into a 401(k) plan, it is tax deductible, 

whereas if the employee puts money into the DB plan, it is not tax 

deductible. There are just lots of reasons why the laws right now 

favor 401(k)’s. 

Ms. FRIEDMAN. Yes, and I would just echo what Ron is saying. 

I mean, I think that we need to further examine beyond just today’s hearing ways of encouraging companies to preserve and set 

up new defined benefit plans because one thing this economic recession collapse has done is focus attention on the deficiencies of 

401(k) plans and the importance of having guaranteed income. It 

is very important that we figure out ways to encourage companies 

to keep these plans, to set up new types of these plans, and to look 

for ways of protecting future generations. 

Mr. PETERSON. Another perspective, if I may share just briefly, 

is that my observation had been that in an enterprise such as Hopkins where we hire a lot of young people, young people used to 

come to us with very little interest or concern about the nature of 

the retirement plan that was offered. They were mostly concerned 

about how much am I going to get paid, maybe some other things 

about fringe benefits, but very little concern about the pension. 

Increasingly what we are finding is when they come in the door 

for an interview, they are very much interested, and we are finding 

that by offering a defined benefit approach, that is really a leg up 

107 

in the competitive marketplace. We think that with employees having now experienced such a devastating period over the last 24 

months, there is renewed interest. We think it is actually not only 

a responsible thing as an employer to continue to offer. We do 

think it could be a competitive advantage. 

Senator HAGAN. Thank you. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator Hagan. 

Senator Franken. 

Senator FRANKEN. Thank you, Mr. Chairman. 

What we have here is that these companies, corporations, are in 

a down period. The value of the money they have in their pension 

plans has gone down, and we are in a recession. And we are asking 

them essentially to put in more money to make up for what they 

lost in the down market. Right? 

In the middle of a recession, we are asking them to put more 

money aside for the pensions, and that is money that cannot be 

used to create jobs or invest in things. You want to give them some 

flexibility and some relief. That all makes sense to me. 

Ms. Friedman, I think you spoke to this. I just want to make 

sure that this money does not go to paying executives more money. 

Ms. FRIEDMAN. We are with you on that. 

Senator FRANKEN. Yes. We saw from Mr. Gump the example of 

the Delphi employees, former employees, who cannot afford health 

care. He started to tear up. And yet, it seems like the top five executives at Delphi put aside $100 million for themselves. That really seems just wrong. Right? How can we prevent that kind of thing 

from happening? 

Ms. FRIEDMAN. Well, certainly what we are recommending is two 

conditions for providing funding relief to companies that have ongoing plans. One is that if they get the relief, they have to make sure 

that they maintain the plan, they do not freeze it for the period of 

relief. 

And the second is that since companies are saying that they need 

this relief because the money that would have gone into the pension plan instead could be used to preserve and create new jobs, 

we are basically calling them on that by saying, OK, then none of 

the money, during the period of time that you get funding relief, 

should be used to either fund executive compensation, the deferred 

executive compensation plans, or be paid out to executives during 

that period, subject to contractual concerns. That is one way of 

doing it, tying it to the funding relief that you give to companies 

during this period because it is a balancing act. 

Obviously, the Pension Rights Center is very sympathetic to 

businesses during this time, just as we are to employees and retirees. Everybody has gotten whacked by this economy. We do not 

think there should just be blanket relief to everybody. First and 

foremost, we think that the relief should go to the companies that 

have done the right thing and they are keeping their plans going 

for workers and retirees because that is why you are giving relief 

because you believe in the sanctity of pension plans. But certainly 

we feel very strongly that there should be conditions, and the limits on executive compensation should be at least a part of that. 

108 

Senator FRANKEN. Mr. DeFrehn, you were talking about multiemployer plans, right? That is what I got. 

Mr. DEFREHN. Yes. 

Senator FRANKEN. I was interested in your testimony. 

Mr. DEFREHN. And I think your groups, sir, are a part of our 

group too. 

Senator FRANKEN. Yes. 

Now, as I understand it, the PBGC guarantees—for single-em- ployer plans, their guarantee is $54,000? 

Mr. DEFREHN. That is correct. 

Senator FRANKEN. And for multiemployer plans, only $12,000. 

Mr. DEFREHN. That is correct too. 

Senator FRANKEN. Why is that and why should I be OK with 

that? 

Mr. DEFREHN. When the guarantee programs were first put into 

place, actually there was some question as to whether or not a 

guarantee program was even necessary for multiemployer plans because the structure is quite different. If a corporation goes out of 

business, there is nowhere to go but to the Government to cover 

those pension obligations. If an employer who contributes to a multiemployer plan goes out of business, the remaining employers pick 

up those liabilities. 

Senator FRANKEN. But sometimes an entire industry is hit. 

Right? 

Mr. DEFREHN. When an entire industry is hit, that is the appropriate time for the Government to step in, and that is what the 

PBGC is there for. And it has happened in several situations, but 

if you look across the history of the two trusts, you heard Ms. 

Bovbjerg say that about 3,860 companies have had to turn to the 

PBGC for financial assistance. They have taken over that many 

plans. And the cost to the agency over that period of time is $39.4 

billion collectively back to 1974. 

Multiemployer plans, though, have looked out for their own and 

been—— 

Senator FRANKEN. Have any of them turned to the PBGC? 

Mr. DEFREHN. Fifty-seven plans have received financial—as opposed to 3,860. And the total dollars spent on those 57 plans was 

$417 million instead of $39 billion. You can see the system is good 

as far as having lower risk. 

However, over time the level of benefits for those plans that do 

fail—and there are plans that have gone that way and there are 

others on the PBGC watch list that they are expecting to see fail 

over time. We have had some really difficult periods with the investments, but we also have mature plans, many of which have an 

ongoing cash flow deficiency because the number of contributing 

employers has shrunk. The trucking industry, for example, where 

very few of the long haul freight union companies continue to exist. 

As those plans and those industries contract, there need to be 

some additional tools available to the PBGC to make sure that neither the employers that have continued to do the right thing over 

the years, stepped in and acted in the stead of the PBGC, are driven out of business because of that—and also we need to better protect the participants who do receive benefits. Therefore, we are recommending that the guarantee levels be increased. 

109 

Now, there was a question as far as the structure and the formula for determining what the benefits are from the PBGC. There 

was a question of moral hazard. There was a concern when these 

guarantee programs were put up that the Government not be 

dumped on because it is easy for employers and plan sponsors to 

walk away. 

The formula for multiemployer plans is 100 percent of the first $11 of accrual is guaranteed and 75 percent of the next $33 is 

guaranteed. That is a very modest benefit if you figure that the 

guarantee is based on 30 years’ worth of service and that is what 

you need to get that full $12,870. If you left with 20 years of service, you are going to get about $800 a month. 

We are suggesting that in light of some of the benefit improvements that were necessary—just if I can take one more moment 

here. We had conflicting tax policies. We had a policy where we 

wanted plans to be fully funded, and yet when they got fully funded, we said you could not put money away for a rainy day. Until 

this was adjusted in the PPA, plans that got to 100 percent funding 

were subject—if the employer continued to make their collectively 

bargained required contributions, they no longer got the deduction 

for making those contributions and were subject to an excise tax. 

You could not put money aside for a rainy day. And in that situation, which about 70 percent of our plans ran into in the 1990s, the 

trustee’s only alternative was to increase the cost of the plan by 

raising benefits. 

We now have a situation where we made a bad situation worse. 

We have dug the hole a little bit deeper. As a result, we now have 

benefits that are well above the PBGC guarantee. 

We are suggesting that along the line of the formulas that are already in place, that for the next $40 of accrual, we would guarantee 50 percent of that. That would get the guarantee level to 

about $20,000, which is still not a lot by anybody’s standards, but 

we believe it is appropriate. Again, that should be addressed in the 

premium structure. 

Senator FRANKEN. Thank you. I guess no one foresaw that there 

could be a rainy day. 

Mr. DEFREHN. Probably not. 

Senator FRANKEN. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you very much, Senator Franken. 

I thank our panel. 

Again, I would ask you the same thing I asked the last panel. 

Some of you already have this. But any suggestions, an outline you 

would have for a new kind of pension system that we might want 

to look at, a hybrid or a combination. You stated that we have 

more tax benefits basically for the 401(k)’s than we do for the DBs. 

Maybe that needs to be skewed around a little bit. Maybe we ought 

to be thinking about how we have workers provide payments into 

a DB plan and get some kind of tax relief for that rather than just 

the 401(k)’s that they are doing now. 

It seems to me that we have a short-term and long-term problem. 

We have this short-term problem right now because of the downturn in the economy. I think we have a much longer-term problem 

in terms of how we say to American workers, whether they are organized labor union workers or salaried workers, as we heard here 

110 

from Mr. Gump, that there is a retirement program to which they 

can enter and they can reasonably judge what their benefits are 

going to be at the end within some parameters. At least maybe 

there is a minimum or something. 

For example, on Social Security, every so often I get something 

from Social Security, or I did before when I was younger, telling 

me how much I had accrued and what my benefits were going to 

be. I realize you cannot do that with a program that is not backed 

by the full faith and credit of the U.S. Government, but there ought 

to be at least some reasonable balance that says that if you get into 

this plan and you put in this much and your employer puts in this 

much, at age 65 or 62 or 68 or whatever, you are going to be somewhere in this range. And then we need the laws to back it up. 

Of course, companies do go belly up. Conditions change. New industries emerge. I still feel very strongly that the Pension Benefit 

Guaranty Corporation has a very vital, vital role in backing up 

these plans. 

I look forward to your input on that. Any suggestions or advice— 

get to our committee. I would appreciate it very much. 

Thank you all very much. It was very interesting. 

The record will be left open for 10 days for Senators and others. 

Thank you very much. The committee is adjourned. 

[Additional material follows.] 

111 

ADDITIONAL MATERIAL 

PREPARED STATEMENT OF THE NATIONAL EDUCATION ASSOCIATION (NEA) 

The National Education Association (NEA) respectfully submits these comments 

to the Committee on Health, Education, Labor, and Pensions for the record in conjunction with the October 29, 2009 hearing on ‘‘Pensions in Peril: Helping Workers 

Preserve Retirement Security Through a Recession.’’ 

NEA strongly supports H.R. 3936, the ‘‘Preserve Benefits and Jobs Act of 2009’’ 

introduced by Representatives Pomeroy (D–ND) and Tiberi (R–OH) that provides 

the funding relief desperately needed by sponsors of defined benefit pension plans 

in the private sector. H.R. 3936 is appropriately calibrated to help plan sponsors recover from the cataclysmic market losses that occurred during the 5-month period 

stretching from the summer of 2008 through the winter of 2009, when the assets 

of defined benefit pension plans suffered an average market value loss of 40 percent. 

Without the short-term, targeted funding relief provided by H.R. 3936, many employers will not be able to continue in business, let alone maintain their pension 

plans. Accordingly, NEA commends Representatives Pomeroy and Tiberi for sponsoring this bill and urges the Senate to look at and move forward similar legislation. 

NEA is a leading advocate for financially stable, employment-based, defined benefit pension plans in both the public and private sectors of the economy. Although 

nearly all of NEA’s members are employed by public school employers not subject 

to the funding rules governing private sector defined benefit pension plans (and 

therefore would not be affected by the funding relief provided by H.R. 3936), NEA 

understands that passage of the legislation is vitally important to the survival of 

employment-based defined benefit pension plans in all sectors of the economy. Without funding relief, the relatively inflexible funding rules imposed on sponsors of private sector defined benefit plans would make sustaining those plans, given the 

stresses of the once-in-every-other-generation market upheaval of the end of last 

year and the beginning of this one, nearly impossible for many employers. For those 

employers, the cost of sustaining their defined benefit pension plans under the funding rules without relief will force them to retrench their operations severely, causing 

losses in economic activity and jobs in their core businesses. And, as private sector 

defined benefit pension plans become rarer, the defined benefit pension plans maintained for our members will inevitably become harder for public sector employers 

to sustain. 

NEA’s knowledge about the severe challenges that private sector employers are 

facing in maintaining their defined benefit pension plans has been gained first hand 

through the experience of its own affiliated associations throughout the country, 

nearly all of whom maintain defined benefit pension plans—on both a single employer and multiemployer basis—for their own employees. For the most part, NEA’s 

affiliates are financially stable, mature organizations with predictable cash flow. 

These organizations take pride in providing retirement security for their staff employees by maintaining well-funded defined benefit pension plans. Yet, the application of the new stringent funding rules of the Pension Protection Act (‘‘PPA’’)— 

which generally increase the unpredictability of funding requirements year-toyear—to plans that have suffered, over a 5-month period, a drastic and unpredictable market drop in the value of their funding, has suddenly made sustaining those 

plans a nearly unbearable burden. 

And it is not just the plans that are jeopardized by this funding crisis: many of 

NEA’s affiliated associations are being forced to postpone, curtail, or eliminate regular services, staffing, and capital improvements, often on top of increases in member dues. This is because, absent relief, in 2009 the average NEA affiliate will be 

faced with the immediate obligation to make funding contributions equal to 37 percent of its payroll, just to maintain its defined benefit pension plan. This huge funding obligation is not the result of past irresponsible funding behavior; on the contrary, these organizations have been uniformly fiscally responsible sponsors of their 

defined benefit plans, and many have been making markedly increased contributions to their plans over the last few years. Not one of these associations has taken 

contribution holidays or paid only the minimum contribution required by existing 

funding rules. Financially sound, long-term membership organizations such as 

these—like many other businesses in the private sector—should be financially able 

to maintain defined benefit pension plans. But, unless these employers are given 

some temporary flexibility in how to recoup the severe investment losses of the last 

2 years suffered by their plans, many of these plans will not be sustained, and the 

organizations will be substantially damaged financially as well. 

H.R. 3936 will have a major beneficial impact by providing sponsors the opportunity to fund the investment losses that their defined benefit plans incurred at the 

112 

end of 2008 and the beginning of 2009 over a longer period of time. This one temporary change in the funding rules will permit many defined benefit pension plans 

to remain viable; and it will free up needed investment capital for the sponsors’ core 

businesses and allow these employers to begin hiring again. The draft House proposal provides this temporary relief in the form of two alternative funding rules, either of which sponsors may elect voluntarily to comply: (1) an option to defer for 

2 years the amortization of the shortfalls occurring in 2009 and 2010; or (2) an option to amortize the shortfalls occurring for the first time in 2009 and 2010 separately over a 15-year period. NEA is most pleased by the inclusion of the latter alternative in the bill, because it will provide greater relief for sponsors’ contribution 

obligations in the earlier years. NEA is similarly pleased with the bill’s temporary 

funding relief for multiemployer plans, which employers would be permitted to elect 

voluntarily during 2009 or 2010 either: (1) to restart the amortization of unfunded 

liabilities over a 30-year period; or (2) to establish a separate amortization base for 

investment losses recognized from the fall of 2008 through the fall of 2010 and to 

fund this liability over a 30-year period. 

The bill’s ‘‘maintenance of effort’’ requirements, which are linked to its temporary 

funding relief provisions for single employer plans, are appropriately calibrated to 

incentivize sponsors to continue to provide benefits to plan participants during the 

same period in which they are receiving relief. As no plan sponsor is required to 

accept the temporary funding relief, and the bill provides different methods of complying with the maintenance of effort requirements, the temporary limitation on the 

sponsors’ flexibility to curtail plan benefits or to enhance executive nonqualified 

plan benefits is both justified and fair. 

The genius of the bill is that it provides temporary funding relief without undoing 

the principles of the PPA, which were designed to ensure that defined benefit pension plans were better funded. Under the bill, no employer would be allowed to 

make contributions for 2009 and 2010 that are less than those made for prior years. 

And no liabilities will be hidden; that is, the accounting statements made on behalf 

of the plan will fully reflect the value of the liabilities and the longer time period 

during which sponsors will fund them. 

Further, the changes that the bill does make to the PPA will help sponsors maintain better funded defined benefit pension plans. All of the temporary and permanent changes to the PPA are well-designed to make plan funding more predictable 

and affordable, making it much more likely that sponsors will be able to maintain 

their defined benefit pension plans in the long run. By doing so, the bill improves 

the financial outlook of the plan sponsors and the Pension Benefit Guaranty Corporation. 

For all of these reasons, NEA fully supports H.R. 3969, the ‘‘Preserve Benefits and 

Jobs Act of 2009’’ and intends to advocate vigorously for the bill’s enactment in both 

the House and Senate. We urge the members of the Senate Health, Education, 

Labor, and Pensions Committee to move forward similar legislation. 

Thank you for the opportunity to submit these comments. 

PREPARED STATEMENT OF YRC WORLDWIDE, INC. 

YRC Worldwide, Inc. (YRCW) is one of the Nation’s largest trucking companies. 

We employ approximately 45,000 men and women in the United States, the majority of whom are members of the International Brotherhood of Teamsters. We provide good middle class jobs with strong wages, health care, and a pension. YRCW 

has approximately 700,000 customers, including the Department of Defense and 

FEMA. In 2008, YRCW generated $22.1 billion in total output, employment for 

141,158 workers, and $2.8 billion in total tax revenues for Federal, State, and local 

governments. The Company transported goods valued at approximately $202 billion 

or 1.4 percent of GDP. In addition, YRCW contributed approximately $540 million 

to 36 multiemployer pension plans to provide pension benefits to more than 1.2 million active and retired Teamster members. 

As the title of today’s hearing suggests, many workers face an uncertain retirement future because of the impact the recession has had on their pension plans. 

Many companies that sponsor defined benefit plans are struggling to adjust to a 

steep decline in business activity while having to make up for significant investment 

losses incurred by those plans. For companies that are part of the trucking and grocery industries, the problems are even more acute. Thus, we thank the Chairman 

for holding this hearing, as pensions are indeed in peril, and workers need Congress 

to help preserve their retirement security. 

Prior to the start of the recession, the Company had delivered record earnings and 

operating margins. Since the freight recession began in the second half of 2006, 

however, the Company has gone from producing strong earnings to significant 

113 

losses. In this exceptionally difficult business environment, YRCW now faces three 

inter-related problems in meeting its pension obligations: The Company funds the 

benefits of, and effectively acts as insurer or guarantor for, hundreds of thousands 

of workers who never have worked for YRCW (‘‘non-sponsored retirees’’); the multiemployer plans to which we have been contributing have suffered significant investment losses; and we face a worsening demographic challenge as fewer workers support the pension obligations of more and more retirees. Given our significant pension obligations, the downturn in business volume in the current economic environment has had especially adverse consequences for the Company. In short, our contribution burden has now grown to an unsustainable level as our business continues 

to suffer from the global economic meltdown. 

Working with the Teamsters, we are doing what we can through self-help measures to address the challenges we face. Since the beginning of the year, for example, 

our union and non-union employees have agreed to a 15 percent reduction in wages. 

Management has done so as well. In addition, YRCW has taken other steps to improve the company’s cash flow and liquidity, including selling off excess property, 

consolidating back-office functions, and reducing overhead. In addition, we have 

temporarily terminated our participation in our largest plans for 18 months in order 

to preserve our cash flow. At the same time, the multiemployer plans to which the 

Company has contributed also have taken self-help measures to address the solvency challenges they face. 

But unless Congress provides legislative relief this year, many of the pension 

plans to which YRCW has been contributing will eventually become insolvent. When 

that occurs, the Pension Benefit Guaranty Corporation (PBGC) will be responsible 

for the pension obligations of the hundreds of thousands of participants in the plans. 

How did we get here? In 1980, Congress enacted two bills that, albeit seemingly 

unrelated, have together over time created unsustainable pension plan obligations 

for YRCW and other successful freight carriers. The Motor Carrier Act deregulated 

the trucking industry, while the Multiemployer Pension Plan Amendments Act 

(MPPAA) imposed an exit penalty on companies upon their withdrawal from multiemployer pension plans, including companies in the trucking industry. As a result 

of MPPAA, a company that withdraws from a multiemployer plan must pay its fair 

share of liability to fund the plan’s unfunded vested benefits. 

Although seemingly similar, ‘‘termination’’ liability and ‘‘withdrawal’’ liability are 

fundamentally different legal concepts, and have had fundamentally different impacts in the real world. Prior to the enactment of MPPAA, if a multiemployer plan 

had a declining base of contributing employers, the remaining employers were required to absorb a greater share of the funding costs of benefits for non-sponsored 

participants, i.e., plan participants previously employed by former contributing employers. Similarly, if a multiemployer plan terminated because of a substantial decline in its contribution base, only the companies remaining in the plan at the time 

of termination were required to pay termination liability to the PBGC. This often 

resulted in a race to the exits by companies wishing to avoid termination liability 

upon the plan’s termination. 

By substituting ‘‘withdrawal liability’’ for ‘‘termination liability’’ in MPPAA, Congress sought to provide some measure of protection for companies remaining in multiemployer plans. The rationale for the change was that, if a company had to pay 

a fee upon withdrawal, remaining employers would be less exposed and less inclined 

to race to exit the plan. But the legislation had a perverse effect instead: by imposing an exit penalty upon withdrawing companies, MPPAA acted as a deterrent to 

new companies entering into multiemployer agreements. The impact was particularly dramatic in a contracting industry such as the freight carrier industry. 

As a result of the interplay of the two statutes, of the thousands of carriers in 

business in 1979, only a few are left to principally fund multiemployer pension plans 

today. This has created a crippling financial obligation that could lead to massive 

job losses and health care and pension benefits losses for hundreds of thousands of 

active and retired workers. To put the impact of the legislation in perspective, we 

have appended to our statement a list of the top 50 LTL carriers that were in business in 1979 and the handful left in business today, two of which are now part of 

YRCW and two of which have dropped out of the top 50. 

In short, as an unintended consequence of the 1980 legislation, YRCW now supports hundreds of thousands of workers who never worked for YRCW. In fact, we 

have contributed more than $3 billion towards their benefits. Employer bankruptcies and recent investment losses are crippling the multiemployer plans to 

which YRCW has been contributing. As a result, YRCW’s contribution burden has 

become unsustainable and many pension funds are headed for insolvency. 

Many plans have been forced to implement both benefit reductions and contribution increases as a result of the collapse in equities and the requirements of the 

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* Bold = Companies Still Operating on 10/01/2009 

Pension Protection Act. Many plans are ‘‘mature’’ plans in which retirees receiving 

benefits heavily outnumber participating active employees and where contributions 

already fall well short of paying benefits, requiring significant investment earnings 

each year to maintain their funding level. By themselves, these circumstances likely 

will require every multiemployer plan to make some kind of draconian adjustment 

for 2009 and beyond. Plans that are fully funded or nearly fully funded will likely 

be required to reduce the level of benefits they provide. Plans that are operating 

under an amortization extension, funding improvement plan or rehabilitation plan 

likely will be required to further reduce benefits or increase contributions or both 

for 2009 and beyond. 

The failure of a major employer, such as YRCW, will exacerbate these problems. 

When a contributing employer fails, the plan loses the contributions attributable to 

the employer both for the current year and for the purposes of its actuarial calculations. Only a small percentage of withdrawal liability—the amount the defunct contributors owe for prior year benefits—is ever recovered in bankruptcy. The plan suffers an immediate reduction in actives and often a substantial and immediate increase in retirees, increasing its annual benefit payments and making it more dependent on investment income. Required adjustments become correspondingly greater. Contributions will need to be higher. Cuts will need to be deeper. 

In a multiemployer plan, when one employer fails, the benefit obligations are 

shifted to the surviving employers, who must bear the burden not only for current 

participants but also for the new non-sponsored retirees. For members of the Teamsters, the remaining employers include not just industrial employers but also participating local unions and affiliated health and welfare and pension plans. At a 

minimum, these remaining employers will bear the added burden of the vested benefits of the failed employer’s employees. Depending on required adjustments, their 

employees may suffer reduced future accruals, and the employers will likely be required to pay even higher contributions. If the failure creates an immediate funding 

deficiency, the remaining employers, even if they have an existing collective bargaining agreement, will likely be required to pay an excise tax on top of the increased contributions. 

Higher contributions and reduced benefits may prompt other employers to leave 

the plan, further reducing the number of active members and the contribution base, 

increasing the number of retirees and terminated vested members, and making the 

plan even more dependent on future investment returns and more unstable. In some 

situations, higher contributions will likely force remaining employers into bankruptcy, resulting in even more lost jobs. In the worst case, the failure of the primary 

plan will have a domino effect, leading to the failure of other plans in which these 

employers contribute and even more job losses. 

Having made roughly $3 billion in contributions to fund the pension benefits of 

retirees not affiliated with YRCW, the Company can no longer afford to continue 

to serve in its role as an involuntary surrogate for the PBGC. Self-help measures 

will not be enough. For the sake of our Teamster employees and retirees, we need 

help from the Congress this year to address the challenges facing the company and 

the multiemployer plans to which we have long provided support. 

PROPOSED LEGISLATIVE SOLUTION

We very much appreciate the efforts of Members to address the challenges faced 

by multiemployer plans and companies such as YRCW. In drafting legislation this 

year, we urge the Health, Education, Labor, and Pensions Committee to: 

• Update the ‘‘partitioning rules’’ of current law so that the PBGC would assume 

the pension obligations for non-sponsored retirees while the plans continue to support the participants of current employers; and 

• Provide a ‘‘fresh start’’ for multiemployer pension plans suffering from recent 

investment losses. 

Thank you for your consideration. 

ATTACHMENT

TOP 50 LTL CARRIERS IN 1979* 

1. Roadway Express (now part of YRCW) 

2. Consolidated Freightways 

3. Yellow Freight System (now part of YRCW) 

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4. Ryder Truck Lines 

5. McLean Trucking 

6. PIE 

7. Spector Freight System 

8. Smith’s Transfer 

9. Transcon Lines 

10. East Texas Motor Freight 

11. Interstate Motor Freight 

12. Overnite Transportation (now UPS Freight) 

13. Arkansas Best Freight (now ABF Freight System) 

14. American Freight System 

15. Carolina Freight Carriers 

16. Hall’s Motor Transit 

17. Mason & Dixon Lines 

18. Lee Way Motor Freight 

19. TIME-DC Inc. 

20. Wilson Freight Co. 

21. Preston Trucking Co. 

22. IML Freight 

23. Associated Truck Lines 

24. Central Freight Lines (now no. 84) 

25. Jones Motor-Alleghany 

26. Gateway Transportation 

27. Bowman Transportation 

28. Delta Lines 

29. Garrett Freightlines 

30. Branch Motor Express 

31. Red Ball Motor Freight 

32. Pilot Freight Carriers 

33. Illinois-California Exp. 

34. Pacific Motor Trucking 

35. Central Transport (no longer in the top 100) 

36. Brown Transport 

37. St. Johnsbury Trucking 

38. Commercial Lovelace 

39. Gordons Transports 

40. CW Transport 

41. Johnson Motor Lines 

42. System 99 

43. Thurston Motor Lines 

44. Watkins Motor Lines (now part of FedEx Freight) 

45. Santa Fe Trail Transportation 

46. Jones Truck Lines 

47. Merchants Fast Motor Lines 

48. Murphy Motor Freight 

49. Maislin Transport 

50. Motor Freight Express 

U.S. SENATE, 

OCTOBER 29, 2009. 

BARBARA BOVBJERG, Director, 

Education, Workforce and Income Security, 

Government Accountability Office, 

441 G. Street, NW., 

Washington, DC 20548. 

DEAR BARBARA: Thank you for your recent testimony before the Senate Committee 

on Health, Education, Labor, and Pensions, titled, ‘‘Pensions in Peril: Helping Workers Preserve Retirement Security Through a Recession.’’ I regret that another commitment with the Judiciary Committee prevented my attendance, but have reviewed 

your testimony and would like to ask a few questions of you. 

You do an excellent job explaining how the PBGC is making both underpayments 

and overpayments when determining a final benefit for pension participants assigned to it. At the October 29th hearing, another witness, David Jury, provided a 

concrete example of an overpayment. 

Jury cites the case of Republic Technologies International (RTI), a firm that filed 

bankruptcy in 2001. On June 14, 2002, PBGC terminated the RTI pension plan, but 

a final determination benefit was not issued until May 2008. Consequently, for nearVerDate Nov 24 2008 09:28 Nov 04, 2011 Jkt 035165 PO 00000 Frm 00119 Fmt 6633 Sfmt 6621 S:\DOCS\53424.TXT DENISE
116 

ly 6 years RTI employees received benefits from PBGC based on estimated benefit 

determinations, only to find out in May 2008 that they had received benefits in excess of the benefits guaranteed by PBGC. Some retirees owed PBGC a few thousand 

dollars, others $60,000 or more. 

In light of testimony, it is curious that the GAO’s April 2009 Improper Payments 

report shows absolutely no improper payments for PBGC in either fiscal year 2008 

or 2007. While I understand that a mechanism is in place to allow PBGC to correct 

both under- and overpayments of this nature, these are clearly instances of improper payments. Can you please explain why GAO does not include these tallies 

in its annual improper payments report? Do you think that there should be a better 

accounting of the improper payments made by PBGC? 

Also related to the PBGC, you testified before the Senate Committee on Aging in 

May 2009 and commented on the status of outstanding audit recommendations 

given to PBGC. You stated that GAO had identified 130 outstanding recommendations for corrective action that have not yet been implemented, some of which were 

quite old. Has any progress been made on the part of PBGC over the last 5 months 

in implementing any of these outstanding recommendations. 

Thank you for your time and expertise. Please feel free to follow-up with my office 

if you have questions. 

Sincerely, 

TOM A. COBURN, M.D., 

U.S. Senate. 

[Whereupon, at 12:48 p.m., the hearing was adjourned.] 

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