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EXAMINING THE CHALLENGES FACING THE 

PENSION BENEFIT GUARANTY CORPORATION 

AND DEFINED BENEFIT PENSION PLANS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON HEALTH, 

EMPLOYMENT, LABOR AND PENSIONS 

COMMITTEE ON EDUCATION 

AND THE WORKFORCE 

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

HEARING HELD IN WASHINGTON, DC, FEBRUARY 2, 2012 

Serial No. 112–50 

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

( 

Available via the World Wide Web: 

www.gpo.gov/fdsys/browse/committee.action?chamber=house&committee=education 

or 

Committee address: http://edworkforce.house.gov 
(II) 

COMMITTEE ON EDUCATION AND THE WORKFORCE 

JOHN KLINE, Minnesota, Chairman 

Thomas E. Petri, Wisconsin 

Howard P. ‘‘Buck’’ McKeon, California 

Judy Biggert, Illinois 

Todd Russell Platts, Pennsylvania 

Joe Wilson, South Carolina 

Virginia Foxx, North Carolina 

Bob Goodlatte, Virginia 

Duncan Hunter, California 

David P. Roe, Tennessee 

Glenn Thompson, Pennsylvania 

Tim Walberg, Michigan 

Scott DesJarlais, Tennessee 

Richard L. Hanna, New York 

Todd Rokita, Indiana 

Larry Bucshon, Indiana 

Trey Gowdy, South Carolina 

Lou Barletta, Pennsylvania 

Kristi L. Noem, South Dakota 

Martha Roby, Alabama 

Joseph J. Heck, Nevada 

Dennis A. Ross, Florida 

Mike Kelly, Pennsylvania 

George Miller, California, 

Senior Democratic Member 

Dale E. Kildee, Michigan 

Donald M. Payne, New Jersey 

Robert E. Andrews, New Jersey 

Robert C. ‘‘Bobby’’ Scott, Virginia 

Lynn C. Woolsey, California 

Rube ́n Hinojosa, Texas 

Carolyn McCarthy, New York 

John F. Tierney, Massachusetts 

Dennis J. Kucinich, Ohio 

Rush D. Holt, New Jersey 

Susan A. Davis, California 

Rau ́l M. Grijalva, Arizona 

Timothy H. Bishop, New York 

David Loebsack, Iowa 

Mazie K. Hirono, Hawaii 

Jason Altmire, Pennsylvania 

Barrett Karr, Staff Director 

Jody Calemine, Minority Staff Director 

SUBCOMMITTEE ON HEALTH, EMPLOYMENT, LABOR AND PENSIONS 

DAVID P. ROE, Tennessee, Chairman 

Joe Wilson, South Carolina 

Glenn Thompson, Pennsylvania 

Tim Walberg, Michigan 

Scott DesJarlais, Tennessee 

Richard L. Hanna, New York 

Todd Rokita, Indiana 

Larry Bucshon, Indiana 

Lou Barletta, Pennsylvania 

Kristi L. Noem, South Dakota 

Martha Roby, Alabama 

Joseph J. Heck, Nevada 

Dennis A. Ross, Florida 

Robert E. Andrews, New Jersey 

Ranking Minority Member 

Dennis J. Kucinich, Ohio 

David Loebsack, Iowa 

Dale E. Kildee, Michigan 

Rube ́n Hinojosa, Texas 

Carolyn McCarthy, New York 

John F. Tierney, Massachusetts 

Rush D. Holt, New Jersey 

Robert C. ‘‘Bobby’’ Scott, Virginia 

Jason Altmire, Pennsylvania 
(III) 

C O N T E N T S 

Page 

Hearing held on February 2, 2012 ......................................................................... 1 

Statement of Members: 

Andrews, Hon. Robert E., ranking minority member, Subcommittee on 

Health, Employment, Labor and Pensions ................................................. 4 

Roe, Hon. David P., Chairman, Subcommittee on Health, Employment, 

Labor and Pensions ...................................................................................... 1 

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

Statement of Witnesses: 

DeFrehn, Randy G., executive director, National Coordinating Committee 

for Multiemployer Plans (NCCMP) ............................................................. 42 

Prepared statement of ............................................................................... 44 

Gotbaum, Joshua, Director, Pension Benefit Guaranty Corporation ........... 5 

Prepared statement of ............................................................................... 9 

Haggerty, Gretchen, chief financial officer, U.S. Steel .................................. 36 

Prepared statement of ............................................................................... 39 

McGowan, Dr. John R., Ph.D., CPA, CFE, college professor and author .... 48 

Prepared statement of ............................................................................... 49 

Porter, Kenneth W., founder and owner, Benefits Leadership International .......................................................................................................... 30 

Prepared statement of ............................................................................... 32 

Additional Submissions: 

Mr. Andrews: 

Letter, dated January 31, 2012, to Director Gotbaum from Mr. Miller ............................................................................................................ 57 

Letter, dated February 1, 2012, from Dana Thompson, SMACNA ....... 58 

Letter, dated November 30, 2011, to Secretaries Solis, Geithner and 

Bryson from Mr. Miller ......................................................................... 60 

Letter, dated January 18, 2012, to Secretaries Solis, Geithner and 

Bryson from Mr. Miller ......................................................................... 63 

Letter, dated January 11, 2012, from Secretary Solis to Mr. Miller .... 65 

Questions submitted for the record on behalf of Hon. Herb Kohl, 

a U.S. Senator from the State of Wisconsin ........................................ 90 

Mr. Gotbaum, response to questions submitted for the record ..................... 91 

Dr. McGowan: 

Letter, dated May 25, 2012 ...................................................................... 81 

Analysis: ‘‘The Financial Health of Defined Benefit Pension Plans’’ .... 82 

Roby, Hon. Martha, a Representative in Congress from the State of 

Alabama, questions submitted for the record ............................................. 89 

Chairman Roe: 

Letter, dated February 1, 2012, from Jeffrey D. Shoaf, on behalf 

of Associated General Contractors of America (AGC) ........................ 71 

Engler, Hon. John, president, Business Roundtable, prepared statement of .................................................................................................... 72 

The U.S. Chamber of Commerce, prepared statement of ...................... 74 

The Financial Services Roundtable, prepared statement of .................. 77 

Letter, dated February 2, 2012, to Director Gotbaum from Hon. Michael R. Turner, a Representative in Congress from the State 

of Ohio .................................................................................................... 78 

Mr. Turner, prepared statement of .......................................................... 79 

National Electrical Contractors Association (NECA), prepared statement of .................................................................................................... 81 

Questions submitted for the record ......................................................... 89 

(1) 

EXAMINING THE CHALLENGES FACING THE 

PENSION BENEFIT GUARANTY CORPORATION 

AND DEFINED BENEFIT PENSION PLANS 

Thursday, February 2, 2012 

U.S. House of Representatives 

Subcommittee on Health, Employment, Labor and Pensions 

Committee on Education and the Workforce 

Washington, DC 

The subcommittee met, pursuant to call, at 10:35 a.m., in room 

2175, Rayburn House Office Building, Hon. David P. Roe [chairman 

of the subcommittee] presiding. 

Present: Representatives Roe, Wilson, Heck, Andrews, Kucinich, 

Loebsack, Kildee, Hinojosa, Holt, Scott, and Altmire. 

Also present: Representatives Kline and Miller. 

Staff present: Andrew Banducci, Professional Staff Member; 

Katherine Bathgate, Press Assistant/New Media Coordinator; 

Casey Buboltz, Coalitions and Member Services Coordinator; Ed 

Gilroy, Director of Workforce Policy; Benjamin Hoog, Legislative 

Assistant; Barrett Karr, Staff Director; Ryan Kearney, Legislative 

Assistant; Brian Newell, Deputy Communications Director; 

Krisann Pearce, General Counsel; Molly McLaughlin Salmi, Deputy 

Director of Workforce Policy; Todd Spangler, Senior Health Policy 

Advisor; Linda Stevens, Chief Clerk/Assistant to the General Counsel; Alissa Strawcutter, Deputy Clerk; Kate Ahlgren, Minority Investigative Counsel; Aaron Albright, Minority Communications Director for Labor; Tylease Alli, Minority Clerk; Daniel Brown, Minority Policy Associate; Jody Calemine, Minority Staff Director; Tiffany Edwards, Minority Press Secretary for Education; Brian 

Levin, Minority New Media Press Assistant; Megan O’Reilly, Minority General Counsel; Julie Peller, Minority Deputy Staff Director; and Michele Varnhagen, Minority Chief Policy Advisor/Labor 

Policy Director 

Chairman ROE. Call the meeting to order. Thank you all for 

being here. I am sorry I am a little late, but you don’t get up and 

leave when the President is praying, I can tell you that. We just 

attended the prayer breakfast. 

A quorum being present, the Subcommittee on Health, Employment, Labor, and Pensions will come to order. Good morning, and 

welcome, to our witnesses. 

Director Gotbaum, it is good to see you. This hearing is our first 

opportunity to have you before the subcommittee in the 112th Con-
2 

gress and we appreciate you taking time out of your very busy 

schedule to be with us today. 

We are confronted today with two difficult realities. The first is 

the financial challenges facing the Pension Benefit Guaranty Corporation. 

For more than 35 years the PBGC has provided an important 

safety net to millions of workers in the event a defined benefit pension plan becomes insolvent or is terminated. The sheer size of the 

corporation’s responsibilities are quite remarkable and they continue to grow. 

In 2011 the PBGC paid benefits to more than 819,000 retirees 

at a cost of $5.3 billion. At the same time, the PBGC assumed responsibility for 152 terminated plans, increasing its obligations to 

more than 4,300 plans. While the number may pale in comparison 

to other federal programs like Social Security and Medicare, PBGC 

still provides a federal backstop for the defined benefit plan for approximately 43 million Americans. 

Unfortunately, the PBGC reports a deficit of $26 billion, and we 

learned just this week that the burden on the PBGC will continue 

to grow in the months ahead. The events surrounding American 

Airlines’ bankruptcy and its resultant decision to terminate the 

pension plans of 130,000 workers are deeply troubling. Hostess 

Brands and Eastman Kodak are also in the process of bankruptcy 

and we await word on whether they too, will fail to meet their pension obligations. 

The decision to declare bankruptcy and terminate a pension plan 

can involve more than a company’s balance sheets and actuarial 

projects. It can also involve broken promises and the additional 

struggles workers will face to achieve financial security during 

their retirement years. Employers have a responsibility to do everything they can to meet their commitments and help ensure the loss 

of a job is not exacerbated by the loss of their retirement benefits. 

This leads us to the second, more difficult reality we must confront: the state of the economy. Far too many employers are operating on thin margins where an unexpected burden can destroy 

their businesses. 

We all want to see the finances of the PBGC strengthened. However, we must closely examine and fully understand the uninsured 

consequences of our policy decisions. 

Excessive increases in premiums and unpredictable costs of defined benefit plans will have a direct impact on employers and job 

creation. At the same time, if we do not act appropriately we will 

undermine the financial standing of the PBGC and its ability to 

serve retirees. 

Congress must remain engaged, and that is why I am concerned 

about surrendering some of our authority in this area. The oversight and guidance of this committee should continue to play an 

important role in this debate. 

As we move forward, our task is a difficult one: Find a solution 

that can strengthen the PBGC without harming job creation or discouraging participation in our voluntary pension system. There will 

be no easy answers. However, I am confident that by working together we can find a responsible solution that protects the interests 

of employers, workers, retirees, and taxpayers. 
3 

Before I close, Director Gotbaum, let me add my voice to those 

who have raised concern with mismanagement of certain pension 

plans by the PBGC. The workers who receive benefits through the 

corporation are already coping with the devastating ordeal of an 

employer going out of business or choosing to sever ties with their 

workers’ pension plan. It is deeply unfortunate when this difficulty 

is compounded by poor management at PBGC. 

Recent reports by the PBGC’s inspector general that retirees may 

not have received proper benefits are disturbing, and I hope you 

can provide assurances to this committee and the nation’s workers 

that you are implementing a plan to fix these mistakes and prevent 

them from ever happening again. We stand ready to assist you in 

any way we can. 

Again, welcome, Director, and thank you for joining us. We look 

forward to your testimony. 

I will now recognize my distinguished colleague, Rob Andrews, 

the senior Democratic member of the subcommittee, for his opening 

remarks. 

[The statement of Chairman Roe follows:] 

Prepared Statement of Hon. David P. Roe, Chairman, 

Subcommittee on Health, Employment, Labor and Pensions 

Good morning and welcome to our witnesses. Director Gotbaum, it is good to see 

you. This hearing is our first opportunity to have you before the subcommittee in 

the 112th Congress, and we appreciate you taking time out of your busy schedule 

to be with us this morning. 

We are confronted today with two difficult realities. The first is the financial challenges facing the Pension Benefit Guaranty Corporation. For more than 35 years, 

PBGC has provided an important safety net to millions of workers in the event a 

defined benefit pension plan becomes insolvent or terminated. The sheer size of the 

corporation’s responsibilities are quite remarkable, and they continue to grow. 

In 2011, PBGC paid benefits to more than 819,000 retirees at a cost of $5.3 billion. At the same time, PBGC assumed responsibility for 152 terminated plans, increasing its obligations to more than 4,300 plans. While the number may pale in 

comparison to other federal programs like Social Security and Medicare, PBGC still 

provides a federal backstop for the defined benefit pension plans of roughly 43 million individuals. 

Unfortunately, PBGC reports a deficit of $26 billion—and we learned just this 

week that the burden on PBGC will continue to grow in the months ahead. The 

events surrounding American Airlines’ bankruptcy and its resultant decision to terminate the pension plans of 130,000 workers are deeply troubling. Hostess Brands 

and Eastman Kodak are also in the process of bankruptcy, and we await word on 

whether they too will fail to meet their pension obligations. 

The decision to declare bankruptcy and terminate a pension plan can involve 

more than a company’s balance sheets and actuarial projections. It can also involve 

broken promises and the additional struggle workers will face to achieve financial 

security during their retirement years. Employers have a responsibility to do everything they can to meet their commitments, and help ensure the loss of a job is not 

exacerbated by the loss of retirement benefits. 

This leads us to the second, more difficult reality we must confront: the state of 

the economy. Far too many employers are operating on thin margins where an unexpected burden can destroy their businesses. We all want to see the finances at 

PBGC strengthened. However, we must closely examine and fully understand the 

unintended consequences of our policy decisions. 

Excessive increases in premiums and unpredictable costs of defined benefits plans 

will have a direct impact on employers and job creation. At the same time, if we 

do not act appropriately we will undermine the financial standing of PBGC and its 

ability to serve retirees. Congress must remain engaged, and that is why I am concerned about surrendering some of our authority in this area. The oversight and 

guidance of this committee should continue to play an important role in this debate. 

As we move forward, our task is a difficult one: Find a solution that can strengthen PBGC without harming job creation or discouraging participation in our vol-
4 

untary pension system. There will be no easy answers. However, I am confident that 

by working together, we can find a responsible solution that protects the interests 

of employers, workers, retirees, and taxpayers. 

Before I close, Director Gotbaum, let me add my voice to those who have raised 

concerns with mismanagement of certain pension plans by PBGC. The workers who 

receive benefits through the corporation are already coping with the devastating ordeal of an employer going out of business or choosing to sever ties with their workers’ pension plan. It is deeply unfortunate when this difficulty is compounded by 

poor management at PBGC. Recent reports by PBGC’s Inspector General that retirees may not have received proper benefits are disturbing, and I hope you can provide assurances to this committee—and the nation’s workers—that you are implementing a plan to fix these mistakes and prevent them from happening again. We 

stand ready to assist you in any way we can. 

Again, welcome Director Gotbaum and thank you for joining us. We look forward 

to your testimony. I will now recognize my distinguished colleague Rob Andrews, 

the senior Democratic member of the subcommittee, for his opening remarks. 

Mr. ANDREWS. Mr. Chairman, and I appreciate you calling this 

hearing. 

Mr. Gotbaum, welcome to the committee, as we welcome the 

other witnesses as well. 

There are tens of millions of Americans who have gone to work 

every day and worked as hard as they can, and they have held up 

their end of the bargain. The end of the bargain that is coming to 

them is that they are guaranteed, in some cases, a pension check 

for the rest of their lives. 

That promise is nonnegotiable. A person who has gone out every 

day and done what he or she is supposed to do and relies on that 

pension check should never have to worry that their personal 

version of the American dream will be imperiled because the pension won’t be there. 

Now, I think the chairman is very right that the keeping of that 

promise, in the case of Americans who are enrolled in defined benefit plans, is somewhat in jeopardy. And he has correctly stated 

that it is our responsibility to try to remove that jeopardy and reignite and restore that promise that has been made to workers and 

retirees throughout the country. 

And I think to do that we have got to meet two principles that 

would at first seem to be in opposition to each other, but I think 

are, in fact, quite complementary to each other. The first is that 

we have to meet the principle that says that we don’t want to in 

any way burden our pensioners; we want to be sure that the solvency of the Pension Benefit Guaranty Corporation is established 

and maintained. We want to be sure that any—in instances where 

companies are no longer able and plans are no longer able to meet 

their obligations the PBGC is able to meet those obligations. 

The second principle is one I think just about everybody on this 

committee would agree with and most American taxpayers would 

agree, which is no more bailouts—no more bailouts of anybody. 

And in a sense, that is what this discussion is about. 

How do we be sure that this promise that has been made to 

American workers and retirees is honored in a way that would 

never require taxpayers to step in and make sure that promise is 

honored? Which is another way of saying, how can we be sure that 

the PBGC is managed in such a way it is self-financing, that the 

revenues are there to meet the PBGC’s obligations into the future? 
5 

This is a daunting problem because of the data the chairman 

cited, which that the PBGC presently projects a $26 billion when 

one compares its current assets versus its current obligations. 

Chairman is also right, though, that the solution to this problem 

is economic growth. And I think there is no better evidence of that 

if you look at the deficit of the PBGC in recent years. 

In 2008, before the financial meltdown hit the American economy, the PBGC’s deficit was $10.7 billion. By 2009 that had gone 

to $21 billion, so we essentially had a doubling of the PBGC’s deficit in 1 year as the economy was collapsing around the people of 

the United States. 

Now, there has still been growth in that deficit, but between 

2009 and 2011 it grew by about 25 percent. That is unacceptable, 

but it doubled in 1 year when the economy was cratering. 

So I do think the chairman is correct that the first order of business of the committee, of the Congress, of the country should be to 

reignite economic growth. And as we consider various remedies to 

cure the deficit of the PBGC we should look at each one of them 

through the prism of its impact on economic growth. 

The second point that I would make is that it is essential, 

though, that we come to a reasonable conclusion to this, that it is 

reflexive and well understood for people to say, ‘‘Well, whatever 

you do, don’t ever raise premiums on PBGC participants.’’ That is 

a very attractive option. But if there is a way that more revenue 

can come into the PBGC that does not retard economic growth, 

that promotes the fiscal soundness of the PBGC, then it is our obligation and our responsibility to take a look at that. 

Purpose of this morning’s hearing, and I agree with it, is to begin 

to explore the particulars of honoring this promise to American 

workers and American retirees. 

Mr. Chairman, I am glad to be a part of it and we look forward 

to the witnesses’ testimony. 

Chairman ROE. I thank you for your remarks. 

And pursuant to Committee Rule 7(c), all members will be permitted to submit written statements to be included in the permanent hearing record. And without objection, the hearing record will 

remain open for 14 days to allow such statements and other extraneous material referenced during the hearing to be submitted for 

the official hearing record. 

Now it is my pleasure to introduce our first distinguished panel. 

Joshua Gotbaum is the director of the Pension Benefit Guaranty 

Corporation, and—where he is responsible for the agency’s management, personnel organization, budget, and investments. 

And before we start—before we recognize you, let’s see—you 

know, you understand the system. You have been here before. But 

the light in front of you will turn green; when 1 minute is left it 

will turn yellow; and when your time is expired the light will turn 

red, at which point I will ask you to wrap up your remarks at that 

point. 

And with no further comments, Mr. Gotbaum? 

STATEMENT OF HON. JOSHUA GOTBAUM, DIRECTOR, 

PENSION BENEFIT GUARANTY CORPORATION (PBGC) 

Mr. GOTBAUM. We are on now. Sorry. 
6 

Mr. Chairman, Mr. Andrews, thank you very, very much for 

holding this hearing and for inviting us to testify. I want to start— 

because these issues are issues that go beyond PBGC. These are 

issues, as you pointed out, of economic growth, of economic security, retirement security, and we are grateful that you have asked 

us to talk about that. 

I want to start, to be blunt, by apologizing for the lateness of the 

submission of my testimony. There are a lot of cooks in the pension 

kitchen, and so it took us longer to get a testimony to you all than 

you would have liked on—especially on something that was as complicated as this, and so I hope the committee will accept that, and 

given the shortness of time—although I have asked to go a little 

beyond 5 minutes—I am just going to hit the high points, and I 

have every confidence that you will not let me get away with anything without some important questions. 

The reason that we think this hearing is so important is because 

retirement security is not only a—already a serious concern, it is 

getting to be more so. Last April the Gallup organization took a 

poll. They polled lots of folks, but the thing that hit me hardest 

was that the people who were far away from retirement—people 

who were 30 to 49 years of age—more than three-quarters of them 

were worried about their retirements—more than were worried 

about their paychecks or their health care. And it is not as if 

those—there isn’t a basis for those worries, because the trends are 

disturbing. 

The good news is we are living longer. Fifty years ago the average person, we think, retired at about age 62, lived to be about 

79—that is 17 years. Today the average person works a little 

longer already, maybe 63, lives to be 84—21 years. So in 50 years 

we have seen an increase in the average retirement, round numbers of about 25 percent. That is the good news. 

If you could do the first slide? 

The bad news is that pensions haven’t kept up. This admittedly 

hard-to-read slide shows the number of people who have an employer-based pension, whether defined benefit or defined contribution, for the last 30 years. 

And what you see in it is a couple of things. One is it is important to recognize that half of people who are working today don’t 

have an employer pension plan at all, and a third of them don’t 

even have access to one. 

Second is that most of the people who do—and that is the yellow 

part of the slide—have only a 401(k)-type plan. These were originally intended, as you all know, as supplements. They have become 

the main pension for most folks. And, as we also know, unfortunately, with the collapse in stock markets, they lost a lot of their 

value. 

People in DB plans—and those are the green folks—they feel 

more secure, they are more secure. But the fact is, the percentage 

of the workforce that has DB plans has been declining. Nonetheless, there are still some 70 million people in America who have 

them. 

The fundamental point is that since people are living longer, 

healthier lives retirement is going to have to cost more, not less. 
7 

This means people will have to save more and retirement plans are 

going to have to cost more. 

The other point is that there is no single solution to this, and it 

is the—some say the right things to do is to create new options; 

some people say the right thing to do is to preserve plans. We 

think the right thing to do is to do both. 

Now, why is the PBGC even raising these issues? Because our 

mandate from the day we were founded is to encourage voluntary 

private plans, not just DB plans. 

PBGC has been a safety net for 37 years. I want to be clear 

about what we do and what we don’t do. 

When companies can’t afford their plans we pay benefits. But 

first, we always try to see if the companies can afford to keep their 

plans because by law there are limits on our benefits. There are 

dollar limits on our pensions, we don’t pay for health care, and, to 

pick a case that is in the headlines immediately, that is what we 

are doing at American Airlines. We are trying to see if the company can be reorganized successfully without having to terminate 

the pension plans on 130,000 people. 

I want to say that this is a complicated task and by and large 

the PBGC does a very good job of it. We survey customer satisfaction in the same way that private businesses do, and I will tell you 

that PBGC’s customer satisfaction is among the very best in the 

federal government and better than a lot of businesses that I have 

been in, and I spent most of my career in business. 

But there are plenty of challenges, and I will mention some of 

them, and then I am sure you will raise additionals. One is, PBGC 

is now $100 billion financial institution but its finances are unsound. We are not looking for tax dollars. We are funded by premiums. We have never taken a dime of taxpayer money. 

However, unlike other government insurance programs in this 

nation, unlike pension insurance agencies in other nations, and unlike every private insurance company I have worked with in business, our premiums are not set by us, they are set by law. They 

are set too low and they are set in a way that punishes the majority of companies that sponsor plans. 

I want to be clear: We have got enough assets to pay benefits for 

the near future—we have got $81 billion in assets. But our obligations are greater. 

If I could have the slide? Okay. 

When you compare our assets to our obligations, as you, Mr. 

Chairman and Mr. Andrews, both mentioned, we have a lot of assets but our obligations are greater and they are not shrinking. 

Our current deficit is $26 billion. If the plans at American are terminated we estimate that deficit would increase to about $35 billion. 

This is not an immediate situation, but unless changes are made, 

ultimately the PBGC is either going to run out of money or have 

to come back for taxpayer bailout. That is not something we ever 

want to discuss. 

Our view of this is, Congress has time and again recognized this 

and bit the bullet and raised premiums. We think the time has 

come to consider it again. We propose to do it in a way that, A, 

we think encourages plans, and B, takes into account the fact that 
8 

we are in hard times right now, that defers it. So that is one challenge. 

Second challenge, which you also mentioned, Mr. Chairman, is 

that as pension plans got more complex and complicated we didn’t 

keep up. And as a result, on the pension plans—and I will name 

them; it is embarrassing, but I will name them—at United Airlines 

and at National Steel, when we were trying to track the assets to 

make sure that we did the benefits right the agency did a bad job. 

Even worse than that, we didn’t find the mistake; our inspector 

general did. 

When I got here a year and a half ago I said some things are 

going to have to change and they are. We are going back and we 

are going to do it right. If we have underpaid people we are going 

to pay them what we owe them with interest and an apology and 

we are making a bunch of changes to make sure it doesn’t happen 

again. 

PBGC has a really complicated job and I am not going to try to 

snow you. Nobody is perfect. But when we find a mistake we are 

going to fix it. 

Third challenge, multiemployer plans. You have witnesses speaking on this so I am just going to raise a couple of basic points because this is something that we pay a lot of attention to and care 

about. 

One is, multiemployer plans involve hundreds of thousands of 

small businesses all across the country and tens of millions of 

workers. Like most pensions, during the 1990s things went fine 

and in the last decade, unfortunately, things have not. 

The Congress 5 years ago gave multiemployer plans some tools 

to deal with underfunding and plans are using those tools. For 

probably most plans those tools and an economic recovery will be 

sufficient to get them out of the woods but it is pretty clear that 

there are some who are going to need more capabilities. 

And so when the Congress reconsiders PPA you are going to have 

to reconsider those issues. As in the past, it has got to involve both 

business and labor; it has got to be bipartisan. And we are working 

on some reports and some analysis to help in that regard. 

The last thing I will mention before we do questions is what I 

started with, which is the hardest challenge is to, how do you enhance voluntary retirement plans? And I was just going to mention 

three approaches that we do. 

One is to facilitate more options. There are folks who say, ‘‘I 

would like something that isn’t just a traditional defined benefit 

final average pay plan,’’ and there are folks who would say, ‘‘I 

would like something that is different from the traditional DC 

plan.’’ We ought to make clear that there are options and we ought 

to make those options available so that employers can use them. 

Second point—and I will wrap up—is we have to preserve the 

plans that we have by reducing administrative and regulatory burdens. 

The fact is, companies get out of the traditional defined benefit 

system for a lot of reasons but we shouldn’t encourage them out by 

regulating alone. And my last point is that we need to continue to 

help people understand their choices. 
9 

1Pew Research Center, ‘‘Baby Boomers Approach Age 65—Glumly,’’ December 2010 http:// 

pewresearch.org/pubs/1834/baby-boomers-old-age-downbeat-pessimism. 2These are PBGC calculations based on our own actuarial analysis of a 2011 Boston College 

study. 3 Bureau of Labor Statistics, DOL, ‘‘Employee Benefits in the United States—March 2011’’ 

(July 26, 2011). 

Everyone recognizes these issues are complicated, that there is 

no one solution, that the government can’t impose one, that it has 

got to be bipartisan, and that it has got to be deliberate. And that, 

frankly, is why we are so grateful that you are holding this hearing, and as you do this PBGC would obviously like to help, so—— 

[The statement of Mr. Gotbaum follows:] 

Prepared Statement of Joshua Gotbaum, Director, 

Pension Benefit Guaranty Corporation 

Thank you for holding this hearing and inviting me to speak about the PBGC and 

defined benefit pensions. I’ll be speaking to these concerns against the backdrop of 

retirement security more broadly. These retirement security issues are important to 

the nation, because it is clear that the retirement world is changing and that more 

needs to be done to strengthen our retirement system and help Americans achieve 

a secure retirement. 

Challenges to Retirement Security 

It’s no secret that people are concerned about retirement. Each day some 10,000 

baby boomers turn 65.1 Baby boomers are the largest generation that’s ever faced 

retirement. But the concern isn’t limited to baby boomers. According to a 2011 Gallup Poll, the number one financial concern for Americans is not having enough 

money for retirement. Gallup found that 77% of Americans age 30-49 are worried 

about not having enough money for retirement. 

Thanks to better health, better technology, and better lifestyles, today we’re living 

longer, healthier lives. 

That’s great news, but it also means that retirement costs more. Fifty years ago, 

by our estimates, the average person retired at age 62 and lived to be 79: about 

17 years. Today, after retirement at about 63, the average person can expect to live 

about 21 years—some 30% longer. And that’s just average life-spans; about a quarter of us will live into our 90s.2

Once we do the math, it’s clear that retirement is going to cost more, not less. 

Unfortunately, pensions haven’t kept up. 

• About one-third of American workers have no access to employer-provided retirement benefits; about one-half actually have such benefits.3

• Of those that do, the majority have only have a defined contribution (DC) plan, 

usually a 401(k). Many of these plans lost value during the recent economic downturn. 

• The tens of millions of Americans that have DB pension plans are better off, 

but employers have been turning away from such plans. 

An important trend has been the replacement of traditional DB plans with DC 

plans. DC plans provide portability benefits for those who change jobs frequently 

and allow people to set and invest their own savings. Unfortunately, DC plans also 

shift a number of investment and other risks onto the shoulders of American workers. Furthermore, we tend to forget about the chance that we’ll live longer than average and don’t buy annuities, so the chances of people running out of money are 

rising. 

Today, most people don’t think they have enough money to retire—and they’re 

right. The Administration is committed to do what we can to strengthen retirement 

security, which is an important priority not only for workers and retirees but also 

for our economy and our nation. 

PBGC: Safety Net and Preserver of Pensions 

PBGC was founded in 1974 to patch a hole in America’s retirement security system. We ensure that once a company makes a pension promise, it does not vanish: 

it’s protected up to legal limits. 

Today, PBGC guarantees payment of basic pension benefits earned by nearly 44 

million participants in more than 27,000 private-sector DB pension plans. 
10 

Working to Preserve Plans 

But the best outcome, for workers, retirees, their families, and our pension insurance programs, is for companies to be able to keep their own pension plans. 

When a company is in trouble, we try first to see whether it can reorganize successfully and still keep its pensions. We work with companies both before and during bankruptcy, so that they continue to keep their own pension promises after the 

sponsor reorganizes, or after a new owner assumes operations. Companies that continued their plans following bankruptcy in FY 2011 include Chemtura Corp. with 

15,000 participants and Visteon Corp. with 23,000 participants. 

Of course, we don’t always succeed, but PBGC would rather prevent pension 

losses than pick up the pieces. 

The Pension Safety Net 

When a plan cannot keep its pension commitments, we make sure the plan’s participants get their benefits, up to the limits of federal pension law, on time. When 

we take over a plan, we make sure that pension checks don’t stop, even while we’re 

figuring out people’s benefits. In fact, our 2006 study estimated that 84 percent of 

people receive their full pension benefits. 

And, we do it without taxpayer money. Our benefits are funded by premiums, by 

the assets of the plans we take over, investment earnings on our assets, and by recoveries in bankruptcy. 

Over the years we’ve become responsible for about 1.5 million people in more than 

4,300 failed plans. In FY 2011, 873,000 people received benefits from PBGC. Every 

month, on average, we pay benefits totaling $458 million. We are also responsible 

for future payments to about 628,000 people who have not yet retired. During FY 

2011, we assumed responsibility for more than 57,000 additional workers and retirees in 134 failed pension plans. 

Continuing Reforms to PBGC 

In the 37 years since ERISA became law, both the retirement landscape and 

PBGC have changed dramatically. When it started, the agency had fewer than 50 

personnel. Some 25 years later at the end of FY 1999, PBGC had just over 1,400 

personnel (some 750 federal employees and 680 contractors) and about a $7 billion 

surplus, with assets of $19 billion and liabilities of $12 billion. Today, the agency 

is operated with about 2,300 personnel, including some 980 federal employees as of 

the end of FY 2011. However, PBGC also now has a $26 billion deficit, with assets 

of $81 billion and liabilities of $107 billion. 

Congress has continually made changes, both in PBGC’s organization and programs, and in other parts of the law. For example, under the original ERISA structure, PBGC was required to assume responsibility for a plan even if the plan sponsor could afford to keep it. In 1986, Congress added a financial distress test. 

Furthermore, in the past Congress has recognized that PBGC premiums are too 

low, and has raised them repeatedly. As this Committee knows, we think it is again 

time to reconsider and reform premiums. 

PBGC’s Current Financial Position and Future Prospects 

PBGC is funded entirely through insurance premiums paid by plan sponsors, assets from failed plans, investment earnings on our assets, and recoveries in bankruptcy. The agency does not take even a dime of taxpayer funds. 

Each year, we report our financial position, as well as estimates of our future exposure. As one who has spent a lifetime in finance, I’m pleased to report that 

PBGC’s accounts have been approved and given a clean opinion by independent accountants and its Inspector General for two decades. 

Over the past twenty years, accounting for large financial institutions has become 

more realistic. Assets and liabilities are now marked to current market. We can no 

longer pretend that assets are worth their ‘‘average over the past three years.’’ Nor 

can we estimate our liabilities based on the average of past decades or on a hope 

that interest rates will rise. 

Long before this was required of other financial institutions, PBGC accounts were 

marked to market. The discount rates used to determine the agency’s liabilities are 

derived from market quotes for annuities—the same type of annuities that PBGC’s 

benefits provide. 

On this basis, PBGC reports a very substantial deficit (i.e., our liabilities exceeded 

our assets). This past year it increased to $26 billion, as of September 30, 2011. 

There are some who suggest that PBGC should use other methods to estimate its 

liabilities than the market test. We don’t agree. 

No matter how PBGC’s deficit is calculated, the agency’s liabilities exceed its assets. Some have suggested that we use corporate bond rates, like ongoing pension 
11 

4See AMR’s news release on filing bankruptcy: http://aa.mediaroom.com/ 

index.php?s=43&item=3397. 

plans; if we had, our FY 2011 deficit would still have been some $21 billion. If we 

had used the discount rate of private insurance companies, the deficit would be approximately $28B. 

It is important to emphasize that none of these deficit figures includes any exposure for future claims that we think could easily run into the tens of billions of dollars. But PBGC’s liabilities are paid out over decades, and we have sufficient funds 

to pay benefits for the near future. Nonetheless, our obligations are clearly greater 

than our resources. 

Premium Reform Proposal 

If PBGC’s finances aren’t reformed, the agency will eventually run out of money 

to pay benefits. We cannot ignore our own future financial condition any more than 

we would of the pension plans we insure. 

That is why, a year ago, the Administration proposed that Congress reform PBGC 

premiums. We think that doing so is necessary to the financial soundness of PBGC 

and important to encourage the preservation of responsible pension plans. 

Since the agency was founded, its premiums have been set by Congress. ERISA’s 

original annual premium was one dollar per participant for the single-employer program and 50 cents per participant for the multiemployer program. Congress has repeatedly raised premiums, and made other changes. 

Unfortunately, neither the level nor the form of premiums has kept up with 

changes in retirement plans. For some companies and plans, our premiums are far 

lower than any private insurance company would charge. American Airlines provided only the latest and most graphic example. American sought and received funding relief from Congress. Instead of funding their pensions, they set aside a cash 

pool of over $4 billion.4 Since their bankruptcy filing, they have made it clear that 

they would like to terminate their pension plans. Doing so would increase PBGC’s 

deficit by some $9 billion. For this insurance, American has paid a total over 37 

years of about $260 million in premiums. 

But what’s just as disturbing is that financially sound companies are asked to 

make up the difference. And if Congress were to increase those premiums just to 

cover the actions of other companies, it would make the situation worse. Think how 

hard it is to convince companies to keep their plans while you’re asking them to 

pay for the losses of others. 

We recognize that there are many issues involved in making PBGC responsible 

for establishing premiums that are both fair and financially sufficient. The Administration proposed a range of safeguards to allay the legitimate concerns of businesses 

and plans that rates might rise too quickly or unfairly. No increases at all would 

be permitted until after a year of consultation with the affected constituencies. No 

increases would be allowed without a vote of PBGC’s board. The increase on any 

individual company or plan would be strictly limited and all increases would be 

phased in over a period of years as the Board may determine. Furthermore, unlike 

the current variable rate premium, the Board would be charged, to the extent feasible, with setting premiums to minimize increases during times when the economy 

or markets are weak. 

It is not surprising that companies and plans would like to avoid increases in 

their premiums; all of us would. However, the arguments against doing so are weak. 

Some claim that allowing PBGC to set premiums this way would be ‘‘unprecedented’’—even though most other government insurance programs in our nation, 

every pension insurance agency in other nations, and every private insurance company in the world already does so. 

Some claim that PBGC doesn’t need the money yet. In one sense, that’s true: 

PBGC has sufficient current funds to meet its obligations for the near future. But 

deferring action now will necessitate more drastic actions in the future. Without the 

tools to set its financial house in order and to encourage responsible companies to 

keep their plans, PBGC’s may face, for the first time, the need for taxpayer funds. 

That’s a situation no one wants to face. 

PBGC Challenges 

PBGC is now a $100 billion financial institution, one that like other financial institutions operates in a changing and complicated environment. There are plenty of 

challenges; I’ll mention some of the more important ones. 
12 

Companies that Take Advantage of the Current System 

Termination of a pension is not something a company should do lightly. We work 

hard to make sure that terminations are necessary and that companies understand 

the consequences. However, there are some aspects of the current system that make 

it easier for companies to terminate plans. 

One, already mentioned, is that PBGC’s premiums are neither high enough nor 

individually calibrated to discourage terminations. There are other examples. Often 

when an investor buys a company in bankruptcy, it structures the transaction as 

a purchase of assets and refuses to assume the pension obligations. Unfortunately, 

there are also instances where investors that are already owners of bankrupt companies arrange to ‘‘sell the company to themselves’’ in order to avoid their pension 

commitments. 

In some cases, investment firms design transactions to avoid being part of a controlled group, so that, should a plan be terminated, the investment firm’s assets 

cannot be reached. The only real tool that PBGC has at that point is to go to court 

and threaten plan termination, which is far from optimal. 

Improving Service Quality 

When people first come in contact with PBGC, their lives have already been 

turned upside-down. They face the possibility of losing some pension benefits, and 

may have already lost the benefits PBGC does not guarantee, such as retiree health 

plans. All too often they have also lost their jobs. 

PBGC works hard to help them with compassion and professionalism. And I’m 

pleased to say that, by and large, the agency does so exceedingly well. For over a 

decade, PBGC has surveyed its customers using the same measures of service as 

private industry, the American Customer Satisfaction Index (ACSI). Our customer 

satisfaction scores are among the highest of any government agency and higher 

than many private companies. 

In 2011, retirees receiving benefits from PBGC scored us at 90. Participants who 

called us with questions rated us at 86. Our online tools for participants and plan 

administrator were scored 83 and 79, respectively. An ACSI score of 80 is considered 

excellent, whether for government or private business. 

But this doesn’t mean there isn’t plenty of room for improvement. Under ERISA, 

rather than offering a uniform benefit, like the Social Security Administration, we 

are required to calculate each person’s benefit under their own former plan, and 

then apply the intricate limits and provisions of the pension law. Getting those personalized calculations right is a core part of what we do. 

Correcting Our Mistakes. The benefit determination process is complex and, over 

time, as plans themselves got more complex, PBGC didn’t always keep up. The 

agency made mistakes. Even worse, PBGC didn’t catch them; our Inspector General 

did. 

When I joined PBGC a year and a half ago, it was clear that changes needed to 

be made. Over the years, PBGC had done a bad job on some parts of some benefit 

determinations (making sure we knew the values of the assets of the plans we took 

over). These affected benefits paid to people who worked at United Airlines, at National Steel, and other plans. As a result, some people have been overpaid, and others underpaid. 

We’re now going back and correcting our mistakes. If we underpaid a person, we’ll 

pay what we owe them with interest—and an apology. 

Equally important, we’ve made and are making changes so that similar mistakes 

don’t happen again. We changed the people who were tracking plan assets, we put 

reviewers on each plan processing team, and we’re training people more and more 

carefully. I also began a top-to-bottom review of the entire benefits operations, including processes, organization, and personnel. We have begun making changes, and 

will implement more in the coming year. 

Being More Responsive to Companies and Plans 

PBGC is acutely aware that this is a voluntary system and is taking steps to be 

more responsive. After complaints from industry that premium election procedures 

had confused them, PBGC has allowed some companies to correct their submissions. 

PBGC also provided relief from some premium penalties. 

PBGC is also being more responsive to companies and plans in enforcing ERISA 

section 4062(e)—a statutory provision that imposes liability in certain situations 

when plan sponsors downsize. In light of comments, the agency plans to issue a reproposed regulation on 4062(e). We have also begun to consider changes in how resources are directed within the 4062(e) enforcement program, in order to focus on 

the real threats to the retirement security of people in traditional pension plans. 
13 

Multiemployer Plans 

More than 10 million of America’s workers and retirees participate in and rely 

on multiemployer plans. Small businesses depend especially on these plans to provide retirement security to their employees. Some plans are in relatively good 

health—and have been for decades, even in the face of industry decline. But many 

are substantially underfunded; and for some, the traditional remedies of increasing 

funding or reducing future benefit accruals won’t be enough. 

We have been studying the challenges facing multiemployer plans and listening 

to stakeholders about possible approaches to address them. It is clear that as Congress considers multiemployer plans in the coming months, PBGC’s multiemployer 

program will also have to be reviewed and revised. We are working with Congress 

to begin to address these major challenges and will publish a Multiemployer Plan 

report soon to help advance the process. 

Improving Retirement Security 

Going forward, the challenge is not only to preserve the many valuable parts of 

our current retirement system, but also to rethink and enable new forms of retirement security. 

In December, PBGC held a forum on the future of retirement security. We invited 

leading thinkers from the pension community to discuss the present and future of 

retirement security, including the place of defined benefit plans. We structured the 

forum as an opportunity to begin a conversation and to listen. What we heard was 

illuminating. 

Some employers, who have seen overall benefit costs rise, are looking for ways to 

limit costs and risks, and share them with employees. Some who have shifted to DC 

plans are considering ways to get some of the benefits common in DB plans. For 

example, they are looking at auto-enrolling their workforce, so that workers participate by default. Some employers with DB plans have told us they would consider 

hybrid DB options with some features of DC plans as an alternative to freezing their 

plans. 

Retirement experts across the spectrum agreed that delivering pooled risk was a 

key to providing retirement security, whether that meant finding a way to build it 

into a DC plan or making DB plans more attractive. 

What Can Government Do? 

There are many approaches that government can take to encourage more secure 

retirements. Some of these options include finding ways to strengthen existing 

plans, facilitating new options, helping individuals understand their retirement 

choices, and reducing administrative and regulatory burdens. 

In the year and a half I’ve been at PBGC, I’ve learned a bit about the rhythm 

of pension policymaking. Pensions are so complicated that legislative consensus has 

taken years to develop. Legislative changes have been bipartisan and usually involved both the labor and tax committees of both houses. 

We all recognize that the Congress has many priorities this year. Nonetheless, it 

is significant that you are holding this hearing. America’s workers are already concerned about the adequacy of their retirement programs and hearings like this help 

advance the discussion we will need to respond to them. 

Those deliberations must involve all constituencies in a spirit of cooperation. They 

must be both far-sighted and practical. PBGC has broad expertise both in retirement programs and in business’s ability and willingness to provide them, and looks 

forward to assisting. 

Thanks very much for the opportunity to report on our agency and to raise some 

of the concerns about retirement security that we share. I would be happy to answer 

any questions. 

Chairman ROE. Thank you for your testimony. 

And I am going to start by injecting something a little personal. 

My father lost his job when he was 50, and this is prior to ERISA, 

and basically after almost 30 years post World War II ended up 

with, at 50 years old with a high school education and no retirement plan. 

Now, I think we have a solemn promise to people when you make 

those promises that we keep those promises, and I think when a 

person is out working—many of these very hard jobs, labor jobs— 

they plan on this retirement along with their Social Security and 
14 

whatever money they can save for their years. And what most 

Americans fear now, and you see it all the time when you talk 

about your seniors, is outliving your retirement plan. So these are 

very important. 

I think one of the things that—I was—served on our pension 

committee in my business in practice for almost 30 years and we, 

for the reason of expense, gave up a defined benefit plan in 1980. 

For a small business it was very hard to project—we figured 30 

years ago it was going to be very difficult for us to fund this so we 

went to a defined contribution plan at that point. 

Having said that, though, there are many Americans—over 40 

million—who have a defined benefit plan, they expect to get paid 

what they are told. And also, I wanted to ask, in the company you 

use to do your audits, it is a little bit disconcerting when people 

are already fearful that they have lost their pension plan. I can assure you there are a hundred and something thousand American 

Airlines workers right now that are worried to death: Am I going 

to get what I was promised? 

And then we find out that, through the I.G., that maybe we 

haven’t, in eight of the ten that the largest termination plans, and 

this same company was used that didn’t do it correctly, how do we 

know it is done correctly and how much is it going to cost to correct 

the mistakes? 

Mr. GOTBAUM. Very important. Let me say that we—for all of the 

reasons that we just said we think it is important to preserve the 

plans that people have. At PBGC it is also important that they not 

worry that they are getting the benefit they are entitled to. 

And the fact of the matter is you are absolutely right that the 

mistakes that the agency made some number of years ago undermines the security we want to offer to everybody. So let me tell you 

again what we did. 

One is, the company that was doing those so-called audits wasn’t 

an auditor. They weren’t a CPA firm. They are not doing audits for 

PBGC anymore; we have hired CPA firms to do the job. That is 

one. 

Two, for—we are starting on the ones where we know we made 

a mistake, which is United and National Steel, and we are then applying those lessons to the other plans, and—because we are going 

to find our mistakes and we are going to correct them—— 

Chairman ROE. Well, the reason this is very important is that 

trust is important because if I am a retiree out there and I have 

paid in I am now questioning, learning this, am I getting what I 

should be getting? And that is a very honest question on their 

part—am I getting paid what I should be getting paid? 

Let me go to another line of questioning. I know we just saw the 

American Airlines just yesterday, I guess it was, or day before yesterday, about pension. Do you see any companies that would be out 

there that would be using the bankruptcy, I guess, ability to shed 

their pension liability? We are looking at $8 billion here of liability 

that they won’t have, I think, is what I read, or more with—they 

have assets, obviously, but do you see that? 

Mr. GOTBAUM. Mr. Chairman, this one is a difficult question because, as you have said, we are trying to do several things at once 

here. One is, we want to. When a company cannot afford to pay its 
15 

pension we will step in, absolutely. But there are times—I ran an 

airline in bankruptcy so I have some experience in this—there are 

times when companies in bankruptcy ask for things they don’t really need, and so part of what we have to do is we have to say, ‘‘What 

are the facts? What can you really do? What choices do you really 

have? Do you have to, in order to succeed as a business, kill your 

employees’ pension plans?’’ 

We think it is important to do both, to be ready to pick up benefits if the plans need to be terminated, but first to see whether they 

can’t be saved. That is what we do every day, and I will tell you, 

having been—as a—I was across the table from PBGC when I ran 

Hawaiian Airlines. I will tell you, they are pretty good at it. 

Chairman ROE. So you will be looking, along with the bankruptcy judge, will make those decisions. Is that correct? 

Mr. GOTBAUM. Yes, sir. 

Chairman ROE. So that we won’t be—there won’t be a situation 

where they can walk away from this liability unscathed. 

Mr. GOTBAUM. No, sir. If either we believe that a company can’t 

afford its pension or the bankruptcy court believes then we take on 

the pension. 

Chairman ROE. Okay. 

Mr. Andrews? 

Mr. ANDREWS. Mr. Chairman, I am going to defer to Mr. Miller 

as our first questioner this morning. 

Mr. MILLER. Thank you very much, Mr. Andrews. 

And thank you, Mr. Chairman. 

I would like to continue where the chairman was going, Mr. 

Gotbaum. And thank you very much for your service. Thank you 

very much for your candor on the issue of the United Airlines. You 

inherited this mess; it is almost a decade old. But I appreciate the 

tenacity with which you are going after it and I hope that we will 

have good results for those employees that have missed the benefits of the proper appraisal of those assets. 

I wrote you a letter earlier and I am very concerned that we 

don’t repeat some of the downside of the United Airline, and American Airline obviously timed its filing and its pension contribution 

here together, so instead of paying $100 billion they decided—I 

mean, they—$100 million they decided they would pay 6.5—they 

would pay 6 percent of what they owed under the plan. 

The question is, do you have the ability or will you pursue the 

ability to go after that money in the bankruptcy court? I appreciate 

the rationale of bankruptcy why they did this. We all know why 

they did it; it was cleverly thought out. But are you going to pursue 

that additional—$90 million—in that payment? 

Mr. GOTBAUM. Yes, Mr. Miller, we are, but we are going to do 

it in two different ways. One is, the powers of PBGC are not infinite, but one thing that we can do is when a company doesn’t make 

a pension contribution that they are supposed to is we can go outside the bankruptcy process and file liens against those parts of the 

company that aren’t in bankruptcy—— 

Mr. MILLER. You will pursue that? 

Mr. GOTBAUM. Oh, we have already done so. 

Mr. MILLER. Thank you. 
16 

The other question is, PBGC gave up its right in the United case 

to restore the pension should United become profitable with some 

obligation for the pension. I assume we are not going to give up 

that right. United is now profitable and the taxpayers are still 

stuck and the workers are still stuck. I assume that that will not 

be given up in this effort without some negotiation or some benefit 

to the workers and to the taxpayers? 

Mr. GOTBAUM. As I said, Mr. Miller, as you know, first thing we 

are going to try to do is see if we can keep those plans in place. 

If there is termination the answer is yes, we are going to try to protect the interest of the retirees and of the PBGC, and that means 

being smart about getting the best recovery we can. 

Mr. MILLER. Well, the other lesson was that then on the morning 

that the bankruptcy determination was made the workers took 

their cuts, the taxpayers took the liability, and the executives of 

United Airline all got bonuses for steering United Airlines through 

bankruptcy. I assume there will be some challenge if that money 

is available for bonuses it might be available to lower the burden 

on the taxpayers of this country and on the workers who will lose 

a significant portion of their pensions should this happen and 

should they be entitled only to those payments under PBGC. 

Mr. GOTBAUM. Yes. Yes, Mr. Miller. One of the things—I can tell 

you from personal experience, because I have been on the other 

side of the table from PBGC, is the folks at PBGC are active creditors. They believe in getting the best that they—we possibly can for 

our recovery to protect ourselves, and, although nobody puts it 

quite that way, bankruptcy is about equity and we go for justice. 

Mr. MILLER. I guess I am a little bit suspect about how active 

they were in the United case, okay, and I think that taxpayers got 

screwed and I think the workers got screwed, okay? So I would just 

like to know that this PBGC, under your leadership, is going to be 

more active about conserving the taxpayer resources and conserving the workers’ resources in this plan. 

Mr. GOTBAUM. I hope—— 

Mr. MILLER. I don’t think United has been liable for workers or 

taxpayers. 

Mr. GOTBAUM. Mr. Miller, I hope that the actions of the PBGC 

over the last month have convinced you that the PBGC is going to 

be—— 

Mr. MILLER. I say that, as you read here, that this is going to 

be the largest, largest pension default in the history of the country. 

This is an airline that is into us for, I believe, $1 billion for the 

change in interest rates that the Senate changed in the minimum 

wage bill. Minimum wage workers got 75 cents and American Airlines got $1 billion in the same bill. 

So that $1 billion, I assume that must—is that beyond reach in 

the bankruptcy court? That is the—suggested that that has been 

the value of that change in interest rates. 

Mr. GOTBAUM. Yes. What that is is that over time American got 

funding relief that enabled them to avoid putting $1 billion into 

their pension plans—— 

Mr. MILLER. Right. 

Mr. GOTBAUM [continuing]. $1 billion that would have increased 

benefits if the plans are terminated—— 
17 

Mr. MILLER. And the fact is they are about to offload $1 billion 

onto the taxpayers after getting $1 billion in relief. So they are into 

us for $2 billion. 

And so they scheduled the payments and they got the Senate to 

change the amendment so that they could change their payments 

or their contributions to the pension plan and then they schedule 

their bankruptcy so they could minimize the payments. This is a 

hell of a deal. It is just not very good for taxpayers; it is not very 

good for workers. 

And, you know, we are really relying on you in this one. This is 

a test for other reasons of others that are falling. But if you can 

work it out, if you can get an early bailout and you can reschedule 

your payments, and then you can reschedule your payments in 

bankruptcy, there are 14 million homeowners who would like to 

have the same shot at that deal. 

So you have got a big load to carry. I have a lot of confidence 

in you, but this is—these are tough adversaries. 

Thank you very much. 

Chairman ROE. I thank the ranking member. 

Now, Dr. Heck? 

Mr. HECK. Thank you, Mr. Chairman. 

And thank you, Mr. Gotbaum, for being here this morning. I appreciated your testimony. 

The administration’s premium proposal calls for the PBGC to 

have the discretion to set variable rate premiums, including the authority to adjust premiums to account for risk as a private insurance company would. Of course, defined benefit plan sponsors are 

captive customers of the PBGC as they are required by law to pay 

the premiums and there is not a private market alternative. 

Can you explain why the power to essentially tax plan sponsors 

should be centralized with a government agency that may have an 

incentive to increase premiums to offset its own operational shortcomings but not to provide a competitive price to the consumers? 

This is just akin to the fox watching the hen house. 

Mr. GOTBAUM. Yes, Mr. Heck. That is a very important question 

because I spend a lot of time talking to my customers because my 

view is that the businesses that pay premiums to PBGC are 

PBGC’s customers too. 

And it is funny, but having been in business two-thirds of my 

life, none of us likes to have premiums go up. Doesn’t matter 

whether it is a government insurance agency or a private insurance 

agency, et cetera. 

The reason why we think it is important to move to a more business-like scheme is two-fold. One is that right now, because we 

have to wait until there is legislation, the PBGC’s deficit gets large 

enough so that some folks are getting nervous. But that is not the 

main reason, from my perspective. 

The main reason is that when you have premiums set by law you 

have to use a kind of one-size-fits-all approach. And let me take a 

specific case. 

You are going to hear from the panel—later on in the panel from 

U.S. Steel, a company with which I a long time ago did business. 

And U.S. Steel makes the point that they care about their pension 
18 

plans, they fund their pension plans, and they are responsible citizens, and they are. 

But right now the way premiums are determined, if we have to 

take on the pensions of American Airlines and our deficit goes up 

by $9 billion American isn’t going to pay those increases, U.S. Steel 

is going to. And so for that reason we think it makes more sense 

not to punish U.S. Steel for being a good citizen, for caring about 

pension plans and—but to say, ‘‘You deserve lower rates than the 

guys who are higher risk.’’ That is the reason we proposed it. 

Now, I want to be real clear: There are lots of issues about how 

do you make sure that PBGC doesn’t go off the reservation? How 

do you make sure that things don’t go—what the administration 

has done is proposed a starter proposal to the Congress in the 

hopes that we can have a discussion about how best to do this. 

We think it is important to do it. We don’t think that anybody 

has a monopoly on wisdom on how, but I would like to get to a system that I could explain as fair to solid customers like U.S. Steel. 

Mr. HECK. And I appreciate that, and as I would express, the 

concern would be not that PBGC would necessarily go off the reservation but that we start seeing changes in premiums because of 

internal difficulties that PBGC is having and not necessarily based 

upon the risk for a given policy, and that would be the concern. 

And I thank you, Mr. Chairman, and I yield back. 

Chairman ROE. Thank the gentleman for yielding. 

Mr. Andrews? 

Mr. ANDREWS. Thank you, Mr. Chairman. 

Mr. Gotbaum, thank you for your testimony. I wanted to explore 

your ideas about closing this $26 billion deficit. And, I mean, obviously what we all hope is that we would have economic growth that 

would make the assets that you hold more valuable. 

I mean, a quick back-of-the-envelope guess is if the Dow Jones 

were at 15,000 your assets are probably worth about $120 billion 

today and you wouldn’t have a deficit. But I don’t think that we 

can legislate that or hope for that. I mean, I am trying to pass a 

bill that says that we will win the lottery in my family but it hasn’t 

worked so far. 

So we do have to look at two other issues, and one is premium 

increases, and the other is the way that you calculate your deficit— 

the assumptions you are making in calculating your deficit. 

Let me say, with respect to premium increases, that—and I 

speak only for myself on this—that I share the concern of those 

who would create simply discretionary authority for you or anyone 

else to set these increases. I think Dr. Heck’s question is well 

founded. 

And again, without prejudice, how would you react to a thought 

that there would be two limitations on your premium authority— 

the first is that any premium increases would have to be completely dedicated to the assets of the PBGC, could not be sent to 

any other purpose in the federal government. In other words, we 

couldn’t raise the premiums and then drain the revenue for general 

purposes. 

And then the second would be that there would be some statutory ceiling with which you have to operate. You would have authority to increase your premiums up to X, and X could be tied to 
19 

some general economic metric rather than simply what the agency 

thinks. 

How would you react to that? 

Mr. GOTBAUM. I would say, Mr. Andrews, that you are talking 

about just the sorts of issues that we think must be talked about 

in order for the Congress to have comfort doing this. This is exactly 

the kind of discussion we hope to have. 

I will tell you two things in response to your specifics. One is, 

we agree that this has to be for PBGC. PBGC’s funds are not taxpayer funds. We are trying to make sure that we never ask for 

them. 

Mr. ANDREWS. Right. 

Mr. GOTBAUM. And so premiums are dedicated for that purpose. 

Secondly, last year we put a little flesh on the bones. We proposed that PBGC get the authority—that the PBGC’s board get the 

authority to raise rates, but some important things: One is, we proposed a dollar limit on the total amount of the increase. That is 

one. 

Secondly, we proposed that no matter how it was—got done, that 

nobody’s—no company’s premium could go up by a certain amount 

above where it was last year. And the reason we were doing that, 

sir, was to deal with exactly the issues that you talked about, 

which is we want to keep our customers. We want to keep companies in the DB system. We don’t want to scare them away. 

Mr. ANDREWS. Let me ask you about the valuation side of the 

equation. The assets are presently valued at around $90 billion. Is 

that right? 

Mr. GOTBAUM. A little over $80 billion, sir. 

Mr. ANDREWS. A little over $80 billion. Are most of them held in 

bonds? Where are the assets? 

Mr. GOTBAUM. Yes, sir. The investment policy of the PBGC has 

changed from time to time over the 37 years, but for most of its 

existence it looks like this: It is roughly a third in equities, a third 

in fixed income instruments, and about a third in treasuries. And 

that has been—it has bounced around. The GAO did a report—— 

Mr. ANDREWS. What assumption are you making about bond 

rates—— 

Mr. GOTBAUM. Okay, if I may, the way we evaluate our obligations is—and this has been the case for a very long time—is we 

mark them to market but we mark them to the annuity market because our obligations look like annuities—— 

Mr. ANDREWS. But I am asking about the assets, not the obligations. What are you assuming—— 

Mr. GOTBAUM. The assets are marked to market at current 

value, so in other words, whatever bonds trade at today. 

The liabilities, though—the liabilities are the hard part. That depends on what you think interest rates are. We—and our accountants have supported this for 20 years—we mark our liabilities to 

market by getting quotes for annuities, because our benefits are 

annuities. That works out to be—last time I looked it was a little 

under 5 percent as the implied discount rate in the—— 

Mr. ANDREWS. Are these all based upon a certain economic forecast? I mean, I think it is pretty broadly assumed that because of 

the artificially low short-term interest rates that we are now living 
20 

with that at some point in the near future interest rates are going 

to rise. Have you taken that into your consideration in stating the 

size of your deficit? 

Mr. GOTBAUM. Yes, Mr. Andrews, we have, but I have—there are 

a lot of folks, including some who are sitting behind me with whom 

I have had lots of discussions, who would say, ‘‘Why don’t you 

evaluate your liabilities based on the corporate bond rate?’’ The 

reason we don’t is because we think we should mark it to market 

and so we use a rate that is different. But if we use the corporate 

bond rate our deficit would be instead of $26 billion, $21 billion. 

Other people say, ‘‘You are an insurance company. Maybe you 

should use the discount rate that insurance companies use.’’ In 

that case our deficit would be $28 billion. 

If I may make one more point, which is, I don’t think the issue 

is by any means just the deficit, because what isn’t in our deficit 

is the plans that are coming in the future. For example, the $26 

billion which we announced in November, as at December—as at 

September 30th—doesn’t include American Airlines. If American 

Airlines comes in it is going to be—— 

Chairman ROE. You have got to finish up, Mr. Gotbaum. 

Mr. ANDREWS. Thank you, Mr. Gotbaum. 

Thank you, Mr. Chairman. 

Chairman ROE. Thank you, Mr. Andrews. 

Mr. Wilson? 

Mr. WILSON. Thank you, Chairman Roe, for holding this important hearing. 

And, Mr. Gotbaum, thank you for being here today. As you stated in your testimony, the PBGC has reported a $26 billion deficit 

at the end of the fiscal year. And again, it is going to look like Congressman Andrews and I are in lockstep on issues relative to asking a question, and it relates to our mutual interests in how you 

calculate the deficit. 

My understanding is that the deficit is calculated using interest 

rates that are even lower than today’s artificially low rates. Is that 

accurate? 

Mr. GOTBAUM. Our liabilities are calculated by going to insurance companies and getting quotes for annuities that mirror our 

obligations. This is what we have been doing. 

When you compare those to the current bond rates that are used 

by corporate pension plans they are lower by, last time I looked, 

about 75—by about 75 basis points. But the point that I think is, 

again, worth making is that even if we used the corporate bond 

rate our deficit would be over $20 billion, and that excludes if we 

end up holding pensions like American Airlines. It excludes future 

claims. 

Mr. WILSON. And people may be disagreeing on this because Ken 

Porter will be testifying in the second panel, and he believes that 

if normal pre-economic downturn interest rates were used that the 

PBGC would have no deficit. In other words, if we used interest 

rates in effect before the government began its concerted effort to 

keep interest rates low the PBGC would have no deficit. In this context, why is PBGC asking for $16 billion in additional 

premiums and why isn’t the PBGC publicly disclosing that the deficit is a product of the artificially low interest rates? 
21 

Mr. GOTBAUM. If I may, let me say a couple things. One is, I 

have a lot of respect for Ken Porter and for the folks he represents. 

PBGC is now a $100 billion financial institution, and one of the 

facts over the last decade is it has become clear that financial institutions need to be more accountable, not less. 

There are folks, like Ken, who would argue that we should go 

back to some of the tools that pension plans used to use of smoothing or average interest rate. Our view is that is not consistent with 

honest accounting and we don’t think we should change our accounts, and our auditors agree. 

Mr. WILSON. And I do have to tell you, when you mention mark 

to market, I am a former real estate attorney, and I was just startled by using mark to market that mortgages that I felt like had 

value somehow came back with no value. But I just raise that to 

you, that it is—we wish you the best and I am just so happy that 

Chairman Roe is working on this issue. 

So I would refer back to the chairman. 

Chairman ROE. I thank the gentleman. 

Mr. LOEBSACK. Thank you, Dr. Roe. 

Mr. Gotbaum, I do appreciate you being here today. Last week 

I was privileged to be able to take part in a field hearing held by 

Chairman Harkin from the Senate Health Committee, and much of 

that focused around helping to ensure the survival of the middle 

class. And I guess I can’t state strongly enough that for the sake 

of the middle class of America that we need to make the middle 

class a priority on this committee, and I think we really do need 

to focus on improving the retirement system for American workers. 

It is really critical for the American middle class, particularly the 

defined benefit programs, but as well, those defined contribution 

programs. 

So I am really happy we are having thing hearing today. And I 

think it is good that we are learning more about these issues. 

I do applaud you for standing up for the American Airlines workers. I appreciate that. I hope you continue to do so, as Mr. Miller 

mentioned. 

And also for thinking about the long-term solvency of the PBGC. 

There is simply no way around it. We have to do that. We have 

to figure out how we are going to really continue this process and 

continue the great work that the PBGC does. 

But I have concerns, like everyone here I think, about the longterm solvency issue of the fund, and I am concerned about ensuring 

adequate guarantees, of course, for hardworking Americans who 

were relying on their retirement funds. 

I want to just piggyback a little bit on what Mr. Andrews 

brought up as far as, you know, how you are going to fund this system in the future. Can you explain in particular how a risk-based 

system might affect already cash-strapped companies that are out 

there and pension plans and how that can be countered? Because 

there is certainly a fear, I think, that increased cost could drive 

some of these companies to a breaking point given the economic 

crisis that we have now. So can you answer that particular question? 

Mr. GOTBAUM. That, Mr. Loebsack, is a very important question 

and we have given it a lot of thought. It is, by the way, an issue 
22 

that other government insurance programs and other agencies, like 

the FDIC, which has risk-based premiums, like the flood insurance, 

like the crop insurance program has as well. 

What we think needs to happen is that we should take the facts 

of each company and plan into account but there ought to be limits 

and there ought to be a waiver process, there ought to be limits, 

and there ought to be enough consultation and care in putting this 

together so that—I may be loose when I say—going off the record— 

so that we don’t accidentally create a situation that is a problem. 

We are pretty comfortable that within the range of premiums that 

we are talking about we are not going to put anybody out of business. Premiums work out on a per-hour basis to be about three and 

a half cents an hour, so if you—you know, if you even triple them 

you would be talking an increase of seven cents an hour, which is, 

for the average industrial worker, a fairly small piece. 

But even though the numbers, we think, in practice would be 

small, we agree with you completely that there need to be safeguards to make sure that we don’t by accident create a situation 

that would get somebody out of the DB system, because that is not 

what we are trying to do. 

Mr. LOEBSACK. Right. I think that is a fear that a lot of companies have, and some labor unions, as well. 

Mr. GOTBAUM. It absolutely is. And that is why, by the way, we 

think that if we can get you all to consider this there are going to 

have to be safeguards. There are going to have to be limits and procedural safeguards, et cetera, so that you have some comfort that 

we do this in a way that actually enhances the system. 

Mr. LOEBSACK. What about some other ideas that might be out 

there, other ways to do this other than the system that you are 

thinking about? What else have you taken into account? 

Mr. GOTBAUM. We have heard only a limited number of alternatives. For example, a lot of folks have said, ‘‘Just don’t raise the 

premiums and wait until you really do run out of money.’’ We don’t 

think that is—we think that undermines security so we don’t think 

that is a responsible thing to do. 

Other folks have said, ‘‘Why don’t you just keep raising premiums the way you have in the past?’’ And the reason we don’t like 

that so much is because now half of our money comes in what is 

called the variable rate premium, and that premium base is based 

on how underfunded a plan is. And that means that when the economy goes down, when markets go down, when stock values go down 

pension plans become underfunded and their PBGC premiums go 

through the roof just at the time they can’t pay it. 

Mr. LOEBSACK. Right. 

Mr. GOTBAUM. So our view is, let’s not do it that way. Let’s find 

a way so that premiums don’t hit you hardest when you are least 

able to pay. 

Mr. LOEBSACK. All right. Thank you. I really do appreciate it. 

Thank you, Dr. Roe, for having this hearing. 

Chairman ROE. I thank the gentleman for yielding. 

Chairman Kline? 

Chairman KLINE. Thank you, Mr. Chairman. 

And thank you, Director Gotbaum, for being here and being so 

forthcoming in your answers. A lot of discussion today about ex-
23 

actly how much this deficit is it $26 billion—$22 billion sort of hike 

thing, but it is money. And now, just looking at this little chart and 

realizing that from the first day I arrived the PBGC—in Congress 

back in 2003—the PBGC has been operating at a deficit. I am feeling some personal responsibility here about that. 

But on a more serious note, we are concerned, clearly, about the 

health. We are interested in the request for premium increases. We 

are going to examine that here in this committee. I think the questions that Mr. Andrews, and Mr. Wilson, and Dr. Heck, and 

other—Dr. Loebsack asked are right on point. 

One of the things you mentioned as I was walking in late—and 

again, I apologize; I think it has probably been explained that there 

was a National Prayer Breakfast today, and incredibly, the traffic 

in Washington was tough, and so we were late getting back. But 

you mentioned very briefly as I was walking in some concerns 

about multiemployer plans, and that works a little bit differently 

in the PBGC than the single employer plans. 

And I am looking at a note here about the 2010 Annual Exposure 

Report that said it is possible for the multiemployer program to be 

insolvent in the next 10 to 20 years. Have you got an update on 

that? Is it better or worse? 

Mr. GOTBAUM. Oh, it is clearly getting more troubling, Mr. 

Chairman. The multiemployer universe is, as you know, very important, covers lots of small business, covers lots of people. It is 

also a part of the pension world about which we know less because 

we don’t get—in other words—for example, the folks at U.S. Steel, 

they are a public company so we know something about their economics, okay? 

We don’t know very much about all of the small businesses and 

large businesses that participate in multiemployer plans, so we are 

working in something which the very distinguished actuaries sitting behind me from PBGC would be offended if I called really educated guesses. But based on those models and projections, it does 

look like there are clearly some multiemployer plans that are going 

to get into trouble, and the way we do our accounts, if you will, is 

we kind of look forward 10 years. So when you have got a plan that 

might go insolvent 11 years from now it probably isn’t in our accounts; if it is going insolvent in 9 years it probably is. That is 

where we are about now. 

So we think this is a problem which is growing. We also think 

it is a problem that is important. 

Fortunately, as you can tell from the fact that I am talking 10 

years, this is something which this committee can consider in a 

reasoned and bipartisan fashion over the next couple of years, and 

we hope that is what you will do. And obviously we would like to 

help assist and provide advice on that. 

Chairman KLINE. Well, I thank you for that answer, and that is, 

of course, the answer that I expected. We do know that there are 

some pretty large multiemployer plans that are indeed in trouble, 

and we are watching those. 

And I was thinking back to a few years ago when we did the 

Pension Protection Act and we tried to grapple with the multiemployer plans, and sure enough, it is more complicated. It is not 

straightforward; there is not a single company. You have compa-
24 

nies coming and going, and they have to pay withdrawal liability, 

and it—grappling with it I thought that we made a decent effort 

at it—to get at it, but looking at it, there is going to be some more 

work that is going to be required not just because of the PBGC, but 

the structure needs to be looked at. 

Anyway, I want to thank you very much for your time here 

today. 

And, Mr. Chairman, I will yield back. 

Chairman ROE. Thank the chairman. 

Mr. Kildee? 

Mr. KILDEE. Thank you, Mr. Chairman. 

Mr. Gotbaum, what percentage of what the—they had expected 

from Delphi did the salaried Delphi employees receive from PBGC? 

Mr. GOTBAUM. Mr. Kildee, this is a good question, but unfortunately, because of some work I did before I joined the federal government—I was working with some institutions that became involved in Delphi—I am recused from discussions of Delphi. So if I 

may, can I have my staff, who is not recused, get back and answer 

those for the record—answer any of your questions on that subject 

for the record? It is very important that we answer them, but I am 

not allowed to do it personally. 

Mr. KILDEE. Can we do that at this time, or—— 

Mr. GOTBAUM. I think it would be better if we did it through the 

record process. I promise you we will answer those, because my 

view is, part of our job of providing retirement security has to be 

that we answer the questions of the folks whose pensions we take 

care of. 

Mr. KILDEE. Let me just ask you this—maybe you can—— 

Mr. GOTBAUM. Sure. 

Mr. KILDEE. Is this amount—what percentage they are getting 

from what they had expected from the corporation, getting from 

PBGC—is that determined by hard law or by some type of formula 

that is—— 

Mr. GOTBAUM. It is actually more complicated than that, Mr. Kildee. The rules are, we start with the pension plan that was terminated. So we figure out what benefit each person would get under 

that pension plan when it was terminated. 

We then have a separate—an additional set of rules—there are 

limits on how much we can pay—that we also. And unfortunately, 

this complicated process takes a long time. I wish it were different. 

I wish we were like Social Security, in which case we would just 

have a formula, but we don’t. 

So what I am sure we are doing now at Delphi is we are following the process that we have to follow, which is first figure out 

what their plan provides, then apply the limits that we have, and 

then tell folks about it. And if they disagree—and plenty of folks 

do—we have an appeals process and a review process to do that. 

But if you want to get more specific details I would be more than 

happy to make sure that we talk with you and your staff with folks 

who don’t have to be recused. 

Mr. KILDEE. I would appreciate that and I will defer until that 

time. 

Mr. GOTBAUM. Thank you very much. 

Mr. KILDEE. Thank you very much. 
25 

Chairman ROE. Mr. Hinojosa? 

Mr. HINOJOSA. Thank you, Mr. Chairman. 

Mr. Gotbaum, thank you for joining us today. Before I proceed 

with my questions I would like to underscore that retirement security is vitally important to millions of American workers, and as 

many of our colleagues here in our committee have stated, our nation must maintain its longstanding commitment to protect Social 

Security and Medicare guarantees and ensure that workers receive 

their promised pensions. 

My question to you, Director, is I understand that American Airlines is proposing to terminate their four pension plans. How do 

American Airline pension obligations compare to those of other airlines? 

Mr. GOTBAUM. That, Mr. Hinojosa, is one of the issues that we 

are trying to find out, because from our perspective, as I mentioned, we can’t say nobody should be allowed to terminate their 

pension if they really can’t afford it, and part of the issues in a 

competitive industry like the airline industry—and I worked in 

that industry—is you have to look at what you do versus other 

competitors. However, I will tell you that it is not just pension 

costs that go into this. It is the cost of all workers that go into this 

comparison so that, for example, I can tell you that last year American’s per employee pension costs were less than those of Delta by 

about 60 percent, okay? They were higher than those of United by 

a smaller percentage. 

That is the kind of information which we need to get in order to 

form a judgment about whether they need to terminate their pension plans. That is one piece of it. 

The other piece of it, so that I give you a full answer, is what 

other options do they have? Can they think about other ways of 

raising revenue? Can they think about other ways to cut costs besides killing their employees’ pension plans? 

Mr. HINOJOSA. So when you get that information that compares 

the airlines what can we in Congress do to improve the retirement 

security of defined contribution plans such as our own 401(k)? 

Mr. GOTBAUM. I am really glad you asked that question because 

from our perspective that is another important issue on retirement 

security. We understand that employers, for a lot of reasons, want 

to go into defined contribution. We also understand that people are 

unhappy with it. 

So what we are trying to do—my colleagues in the Treasury are 

leading the charge—is trying to make—excuse me—to allow 

changes in defined contribution plans that give workers more security. So we are trying to find ways to give them options that offer 

lifetime income streams. 

We are trying to find ways to give them options so that they 

don’t have to remember to sign up for the plan in order to be in 

the plan. Those are efforts that my colleague, Mike McKeever, at 

Treasury has been leading for some time. We think it is a really 

important question, and I have got to say, I am really glad that you 

asked it, and—— 

Mr. HINOJOSA. In looking at the chart that was given to us that 

came from your office there are three types—the defined benefit, 

the both defined benefit and defined contribution, and the last one, 
26 

the defined contribution only. Speak to us about the fundamental 

importance of the defined benefit plan for American workers. 

Mr. GOTBAUM. Throw me into the briar patch. Thank you. 

As you all know, pensions are really complicated. People don’t 

have time to do the math, they don’t have time and the skill to pick 

investments, et cetera, and that is all the reasons why the traditional defined benefit plan, in our view, provides better retirement 

security, because defined benefit plans don’t require us to become 

actuaries. They don’t require us to become investment experts. 

And they provide workers with a secured income for their entire 

life. They don’t require people to guess whether they are going to 

live to be 85, 90, or 95. So for all those reasons we think defined 

benefit pension plans are a better way to go. 

However—and this is important, too—it is also clear that because this is a voluntary system that there are a lot of companies 

who have said, we will not or we cannot take the effect of having 

a pension plan on our reported financials, or the expense, or whatever, et cetera. That is more than we will do. 

And so from our perspective, that is why it is important that we 

encourage, make available hybrid options that have some of the 

benefits of defined benefit but share some of the risk with employees. 

Mr. HINOJOSA. Thank you. 

Mr. GOTBAUM. From an employee’s perspective—— 

Mr. HINOJOSA. My time has run out. 

Thank you, Mr. Chairman. 

Chairman ROE. Thank you, Mr. Hinojosa. 

Mr. Scott? 

Mr. SCOTT. Thank you. Thank you, Mr. Chairman. 

Mr. Gotbaum, just a series of kind of quick questions. The state 

and local pension funds have been pointed out as a cause of concern. They are not under your jurisdiction at all. Is that right? 

Mr. GOTBAUM. No, Mr. Scott, they are not. 

Mr. SCOTT. The defined contribution plans that my colleague 

from Texas just talked about—this just shows the number of people 

covered by the defined contribution, it doesn’t show the size of the 

fund? 

Mr. GOTBAUM. That is right. This is the number of people in private industry. 

Mr. SCOTT. But most of those are woefully inadequate for any 

kind of meaningful retirement plan. Is that right? 

Mr. GOTBAUM. I would say it differently—— 

Mr. SCOTT. The median for the defined contribution is totally inadequate for any meaningful retirement plan. 

Mr. GOTBAUM. I would like to agree with you completely, Mr. 

Scott, but I think it is worth saying that I think the situation has 

some additional complications, which is there—if you look at the 

average defined contribution plan amount for people who are close 

to retirement, that is a much bigger number that we are talking 

about. 

Mr. SCOTT. The median, not—— 

Mr. GOTBAUM. Yes, yes. However, what happens is that if the 

markets go down just before somebody retires they are stuck. So 

if you had somebody who was counting on their 401(k) and was 
27 

going to retire in 2009, they ain’t going to be retiring. So that is 

why we think defined benefit is—— 

Mr. SCOTT. Well, that is an additional risk that the market may 

go down right when you need it. In addition to that, the median 

is somewhere in the $30,000 to $50,000 range. Is that—— 

Mr. GOTBAUM. Yes. That is with regard to all ages—— 

Mr. SCOTT. Which means that that is not going to be much of a 

retirement. Now, one of the things that I have noticed is the 

amount of money we are trying to collect with this deficit, you have 

about 40 million people covered at $25 each, that would be $1 billion, which is not enough to cover the gap. We need to be focusing 

on making sure that plans don’t fail as—rather than trying to raise 

enough money to cover them. 

Now, are these plans—the funds set aside for these plans, are 

they subject to bankruptcy? I mean, the company goes bankrupt, 

these plans are set aside and can’t be gobbled up by creditors; they 

are separate for the pensioners. Is that—— 

Mr. GOTBAUM. Yes, sir. That is right. 

Mr. SCOTT. Now, is the PBGC a priority creditor in bankruptcy 

or are you just in line with all the other unsecured creditors? 

Mr. GOTBAUM. For the vast majority of our claims we are another unsecured creditor. We are, to be fair, usually the largest unsecured creditor, and I am proud to say my colleagues at the PBGC 

are some of the most knowledgeable and smartest creditors any 

place, but yes, we are general—for the vast majority of our claims 

we are just an unsecured creditor. 

Mr. SCOTT. Is it a crime to fail to contribute to a plan as promised? 

Mr. GOTBAUM. It is not a crime, sir, no. 

Mr. SCOTT. So if you have promised plans, if you just sit around 

and don’t contribute to your plan that is just a civil offense, not a 

criminal offense? 

Mr. GOTBAUM. Yes. It means you get a discussion with us. 

Mr. SCOTT. Now, you have a fund—assets about $80 billion? 

Mr. GOTBAUM. Yes, sir. 

Mr. SCOTT. And you said you had one third, one third, and one 

third. Who manages that? Do you manage it internally or do you 

outsource the management? 

Mr. GOTBAUM. There is a team of people within PBGC who are 

responsible for oversight but the actual day-to-day provisions are 

done by private sector managers who we oversee. We interview 

them, we hold competitions to pick managers, and then we pick 

managers and then we hold them accountable. 

So there is a team of folks within PBGC who provide the oversight and—but the people who actually day by day—— 

Mr. SCOTT. Could you give us, for the record, a list of those and 

how many are women-owned and minority firms? 

Mr. GOTBAUM. Of course. 

Mr. SCOTT. Okay. We have talked about the growth rate that you 

assume in your planning for ascertaining whether you are solvent 

or not. I understand that the assumed growth rate is lower than 

the financial accounting standards for the FASB board number. Is 

that right? 
28 

Mr. GOTBAUM. I actually wouldn’t say it that way, sir. There is 

an accounting standard which we follow for how do you measure 

your obligations, technically liabilities. There are two ways you can 

do it. 

Most pension funds use the estimated return either on all of 

their assets or on bonds. PBGC, because what we do is we offer annuities, we do it by a market test. We get quotes from insurance 

companies for annuities and we add up those quotes to create a 

market price for our obligations. And we have been doing that for 

a long time. 

Mr. SCOTT. And that number is lower than the Financial Accounting Standards Board’s projected growth rate? 

Mr. GOTBAUM. It is lower than—slightly lower than the corporate 

bond rate, but as I mentioned before, if we took the corporate bond 

rate our deficit would be north of $20 billion, and that is before 

American Airlines. 

Chairman ROE. Okay. Thank you. 

Dr. Holt? 

Mr. HOLT. Thank you, Mr. Chairman. 

And thank you for your testimony. I would like to continue along 

the lines of questioning of my colleague from Virginia to get a 

sense of how serious the problem is for the defined contribution 

compared to defined benefits. 

I realize this is a defined benefit program and I realize that your 

financial liabilities deal with defined benefit programs. But you do 

have a responsibility for retirement programs in general, and I am 

not quite sure how you would quantify it. 

But if your deficit of some ten—depending on how you count it, 

some tens of billions—represents how insecure the retirement is for 

those people in defined benefit that you might have to pick up for 

their retirement, what would be a comparable way of calculating— 

what would be a comparable figure for how insecure—how unlikely 

it is that defined contribution people would have a similar standard 

of living in their retirement? Do you see what I am trying to get 

at—— 

Mr. GOTBAUM. Yes, Mr. Holt. I do—— 

Mr. HOLT [continuing]. To quantify the scale. Because we are 

spending a lot of time here talking about, you know, this serious 

problem defined benefit plan funding for 10 percent of retirees, and 

I really want to make sure that we have clear on the record how 

large the problem is for the defined contribution. 

Mr. GOTBAUM. And, Mr. Holt, with—I am going to answer your 

question as best I can, and with your permission I am going to 

send you all some further information afterwards for the record. 

You are right that we don’t ensure defined contribution plans but 

we do care about retirement security, and actually, the Congress 

has asked us to set up a missing participate list on defined contribution plans so we are paying attention to that part of the world, 

too. There is not the same quality of information that we have on 

the defined contribution side and the defined benefits side, so what 

I am going to mention now—and I will send you some more later— 

is some studies that were done by the Employee Benefits Research 

Institution, which is a nonpartisan, very well respected group. 
29 

They have estimated the effects on retirement income for both 

defined benefit plans and defined contribution plans, and what 

they say, which is, from my perspective, important, is that if you 

have a defined benefit plan the odds that you will end up being 

poor when you retire are cut dramatically, whereas if you have a 

defined contribution plan the odds that when you retire you will 

not have adequate income—and they have multiple tests for that— 

are actually disturbingly substantial. I would like, with your permission, to amplify that by sending you the—— 

Mr. HOLT. I will look forward to that. I hope we can cover that 

again, as we have somewhat in the past, in more detail at future 

hearings. 

With regard to the premium adjustments, or proposed premium 

adjustments, I don’t understand how the premium of the single employer relative to the multiemployer plans is determined. Forty 

years ago it was two-to-one roughly, I think. Now it is four-to-one. 

Can you explain that simply? 

And after the premium adjustment that you are looking for it 

would still be four-to-one, or three-to-one, or something like that, 

I think. If you can do that simply I would appreciate it. 

Mr. GOTBAUM. It is a good question. Let me start by pointing out 

the fact that the level of guarantee on the single employer program 

is a more generous level than the level of guarantee on the multiemployer program. 

In the multiemployer program the most I can pay for someone 

who works for 30 years is just under $13,000 a year—a little over 

$1,000 a month, okay? For the single employer universe, yes, it is 

about four times that. 

Now, I would like to tell you that the premiums were carefully 

calibrated based on both of those, but it wasn’t that scientific because, as I mentioned, the premiums have been done as part of recurrent pension or budget legislation and that is part of the reason 

why we would like to be responsible for doing it within some limits, 

because we would like for there to be a fair relationship between 

exposure. 

Mr. HOLT. Well, my time is about to expire. In your proposed adjustment in the premiums are you trying to readjust that or will 

the same imbalance remain? That should be a short answer because my time—— 

Mr. GOTBAUM. It is a fair question. We haven’t said yet—what 

we have asked for is the ability to makes some judgments, propose 

them publicly, discuss them with the community, and then put 

them out for comment. That would clearly be an issue when we do 

that. 

Chairman ROE. Thank you. 

And thank you, Mr. Gotbaum. It has been, obviously, very informative. We appreciate your time and being here and I will now 

ask the other—you are excused and I will ask the other panel to 

please step forward and we will introduce you. Thank you. 

Mr. GOTBAUM. Thank you very much, Mr. Chairman. 

Chairman ROE. I thank the second panel for being here. It is now 

my pleasure to introduce our second distinguished panel this morning. 
30 

First is Mr. Ken Porter. He is president of Benefits Leadership 

International, LLC. His firm provides actuarial and international 

benefits consulting services. 

Thank you for being here. 

And Gretchen Haggerty is the executive vice president and chief 

financial officer of the U.S. Steel. She is testifying on behalf of the 

ERISA Industry Committee. 

Randy DeFrehn is the executive director of the National Coordinating Committee on Multiemployer Plans. 

And John McGowan is a professor of accounting at Saint Louis 

University. And Dr. McGowan has been an active teacher in the 

areas of taxation and international accounting for over 15 years. 

I welcome the panel, and first I will explain—you have heard the 

lighting and we won’t go through that again. 

We will open with Mr. Porter? 

STATEMENT OF KENNETH W. PORTER, PRESIDENT, 

BENEFITS LEADERSHIP INTERNATIONAL, LLC 

Mr. PORTER. Mr. Chairman Roe, Ranking Member Andrews, and 

members of the subcommittee, thank you very much for this great 

opportunity to be here today. I must emphasize that I am here on 

my own behalf; I am not representing a company or any trade association. 

I will note that my prior experience included extensive experience for a multinational corporation where I was the global—I had 

global responsibility for insurance risks as well as was the global 

chief actuary. I am an actuary by background. 

I applaud the subcommittee for its extremely timely hearing that 

it is holding today. The historically low interest rate environment 

we are in is creating an artificial funding crisis for employers 

across the country. The crisis is diverting billions of dollars away 

from job retention and creation and away from economic recovery. 

Low rates are likely to cause pension plans to be vastly overfunded 

in a few years when the rates increase. 

In addition, today’s artificially low rates are costing the government billions of dollars by—because it must reimburse government 

contractors who are compelled to fund their plans in excess because 

of the lower interest rate environment. Measurement of pension liability is an inexact science. It requires a myriad of assumptions 

about economic future and long-term economic behavior. 

Current rules inadvertently mandate that the assumption that 

today’s difficult economy will remain unchanged for the next century. None of us wants that to happen. 

Certainly the Federal Reserve doesn’t believe it will. They clearly 

acknowledge their role in holding interest rates down as a means 

to stimulate the economy. I have no objection to that. 

They fully expect, however, that rates will start going up after 

they cease their control in 2014, or sometime shortly thereafter. 

Nevertheless, it is required by law that pensions be funded as if 

the economy will never improve. 

Frankly, the Pension Protection Act was predicated on a free 

market economy where interest rates would remain relatively in a 

normal range. There was no serious consideration about the pro-
31 

longed effect that a prolonged Federal Reserve activity would have 

on the implications for pension funding or on the PBGC liability. 

The problem is clear: It is inappropriate to require pension funding to assume economic distress will continue indefinitely. Similarly, the required presumption of perpetual economic distress creates the illusion of a PBGC deficit. The PBGC, however, is not as 

underfunded as it would appear. 

For example, the PBGC’s own reports say the bulk of their reported deficit is directly attributable to interest rate declines beginning in 2008 when the Federal Reserve began its economic stimulus activity. The return to more normal rates will therefore eradicate most of this deficit. 

In addition, it is reasonable to expect the PBGC investments will 

outperform the current historically low interest rate environment. 

In fact, the PBGC’s own investment returns have averaged about 

10 percent over the last 3 years. While we can’t guarantee that in 

perpetuity, these returns could certainly resolve the remainder of 

the reported deficit. 

In short, the PBGC’s deficit is based on assumptions even the 

Federal Reserve doesn’t think will happen. It is what is there. 

Accordingly, Congress should not use reported deficit as a basis 

for increasing the premiums. PBGC has asked for authority to set 

its premiums like an insurance company. Unfortunately, the insurance company analogy falls apart quickly. 

If it were a true insurance company it never would have insured 

many of the plans that it now has assumed. When a company goes 

to buy insurance the company decides what and how much insurance to buy, it enters into negotiations with the insurers of its 

choice, company can eliminate its coverage all together if it doesn’t 

like the deal. Meanwhile, commercial insurance companies are 

under strict supervision of insurance commissioners and must be 

competitive in cost and responsiveness to the needs of its customers. 

These factors help assure a fair and competitive insurance purchasing environment. None of this is present today with the PBGC. 

Plan sponsors are captive clients. There are no negotiations, no 

discussions of business need, no choice of coverage, and no choice 

of providers. Except for the oversight of the U.S. Congress there is 

no form of protection that we are aware of at this point that would 

be afforded to premium payers. 

Finally, I would like to discuss briefly an issue that is of great 

concern to the pension community. It is related to the ERISA Section 4062(e). 

In the summer of 2010 the PBGC issued proposed regulations 

dealing with liabilities attributable to the shutdown of a facility. 

The proposed regulations are inconsistent with our understanding 

of the statute, inconsistent with previously published PBGC guidance, and with the PBGC’s historical enforcement. The statute was 

not intended to do that. 

Finally, the PBGC has now correctly identified that the proposed 

regulation as needed—is needing review under the applicable executive order. Nonetheless, it is my understanding that the enforcement arm of the PBGC continues to enforce this rule as if it were 

formal and final guidance. This is having a detrimental effect on 
32 

ordinary business transactions that are posing no risk to the PBGC 

and are essential as companies work toward economic recovery. 

I thank you for the opportunity to testify and I look forward to 

your questions. 

[The statement of Mr. Porter follows:] 

Prepared Statement of Kenneth W. Porter, Founder and Owner, 

Benefits Leadership International; Retiree, the DuPont Co. 

Chairman Roe, Ranking Member Andrews, and Members of the Subcommittee, I 

am grateful for the opportunity to appear before you on the challenges facing PBGC 

and defined benefit pension plans. My name is Ken Porter, and I worked for 35 

years for The DuPont Company, from which I retired as the Finance Director for 

Corporate Insurance and Global Benefits Financial Planning. I also served as Global 

Risk Manager and Corporate Chief Actuary with responsibilities that included 

DuPont’s defined benefit pension plans covering more than 160,000 participants in 

the United States and with about $18 billion in U.S. defined benefit plan assets. 

I also had actuarial oversight responsibility for defined benefit pension plans in 

every other country where the company sponsored defined benefit plans. 

I am currently founder and owner of Benefits Leadership International, which 

provides consulting services. I formerly headed up the American Benefits Council’s 

international and actuarial groups, and served as director of the Council’s research 

and education affiliate, the American Benefits Institute. 

Today, I am testifying on my own behalf and am not representing any specific employer or association. 

I applaud this Subcommittee for holding this extremely timely hearing. The hearing is timely because there is one clear issue that is strangling the defined benefit 

system and causing job loss across the country. That issue is the application of today’s artificially low interest rates to defined benefit pension plans. 

Today’s historically low interest rates are creating an artificial funding crisis for 

employers across the country. This crisis will divert billions of dollars away from 

job retention and creation and away from economic recovery. Instead, those billions 

will cause pension plans to be vastly overfunded in a few years when interest rates 

return to normal. That is a sad waste of America’s resources. 

In addition, as I discuss below, today’s artificially low interest rates are costing 

the government billions of dollars because the same pension funding rules also 

apply to government contractors and the government must, in turn, reimburse the 

contractors for making these required contributions. Briefly, this is a shocking waste 

of government money. Moreover, correcting the problem will actually help both the 

government and the government contractors by preventing both from being required 

to waste resources. 

Measurement of pension liability is not an exact science. Rather, it requires a 

myriad of assumptions about future economic behavior. Current rules effectively, 

but inadvertently, mandate the illogical assumption that today’s economy will never 

improve. None of us wants that assumption to be true. Certainly, the Federal Reserve doesn’t believe it will since they clearly expect interest rates to go back up. 

Nevertheless, it is the law for pensions to be funded as if the economy will not improve. 

Similarly, the assumption that today’s artificially low interest rates will continue 

forever creates the illusion that the PBGC is underfunded. It is clearly not underfunded by any responsible measurement of what might happen in the future, as I 

discussed in detail in a recent article and as I will summarize that article here 

today. In this context, any increase in PBGC premiums is not a premium increase, 

but simply a further tax on those American businesses that tried to do the right 

thing by providing retirement security for their employees. 

Frankly, pension funding rules were promulgated without serious consideration 

that prolonged Federal Reserve activity aimed at stimulating the overall economy 

would have deleterious implications for pension funding and for the PBGC liability. 

The problems described above are clear. The solution is correspondingly clear: 

apply historically stable interest rates for funding purposes and for determining 

PBGC’s true longer-term economic status. 

Funding Crisis 

Background. As mentioned above, in order to address the critical challenges facing 

our economy, the government has made great efforts to keep interest rates at historically low levels. Within the last couple of weeks, the Federal Reserve signaled 

its intent to keep short-term interest rates at or near zero percent at least through 
33 

the end of 2014. These valid government efforts to stimulate the economy are significantly negated by the extraordinary pension funding impacts on those companies 

that sponsor large defined benefit pension plans. 

For pension funding purposes, plan liabilities are calculated by discounting projected future payments to a present value by using legally required interest rates 

based on corporate bonds: the lower the rate, the greater the liability. Thus, today’s 

artificially low rates, which are expected to last until at least the end of 2014, are 

triggering artificially high pension liabilities. The obvious implication of the statement from the Federal Reserve is that low interest rates will ultimately go away 

and be replaced by higher rates. When rates do go back up to more normal levels, 

the measured pension liabilities will go back down. 

For example, in the case of a typical pension plan, the effective interest rate required by law has dropped by approximately 70 basis points from 2011 to 2012, 

which increases liabilities by approximately 10%. Thus, a plan with $7 billion of liabilities a year ago would have $7.7 billion of liabilities today. That translates into 

an additional funding shortfall of $700 million. That in turn triggers a company obligation to make an additional contribution of approximately $119 million per year 

for seven years. That $119 million is not needed to pay benefits; that obligation is 

simply the result of artificially low interest rates that have no relationship to the 

plan’s ability to pay long-term benefits. However, this reflects only one year of the 

Federal Reserve action to artificially lower interest rates which began in 2008. Thus 

for this example, the true annual amount of unnecessary contributions might be 

multiples of this amount since this year’s amortization schedule is layered on top 

of similar amortization schedules from prior years. 

On a national basis, a study by the Society of Actuaries indicates that required 

pension funding contributions for 2012 and later years will be far greater than the 

amount required for prior years, unnecessarily diverting billions of dollars away 

from job retention and creation and from business investments. As discussed further 

below, reducing those pension contributions not only saves jobs, but increases tax 

revenue and decreases government spending by many billions of dollars. 

Recommendation. With respect to interest rates, we need to learn from the lessons 

of the last few years. Economic conditions can change quickly, and interest rates are 

often maintained at very low levels during difficult economic periods. Under the current funding rules, that will mean that when we encounter a downturn in the economy, interest rates may well fall, exacerbating the problems for pension plan sponsors and undermining any economic recovery by unnecessarily diverting assets away 

from business investments. Conversely, if interest rates were to temporarily return 

to the double-digit levels of the early 1980’s, pension liabilities could be slashed by, 

perhaps, two thirds. This does not make sense, especially since pension plan obligations are long-term obligations. 

We need to move to a sounder system for setting interest rates. Why should obligations due over 50 years be calculated based on interest rate movements that may 

be aberrational and/or attributable to governmental economic policy? It would make 

far more sense to base interest rates on a long-term average, such as 25 years, that 

is consistent with the long-term nature of pension liabilities. This one change would 

solve the short-term funding crisis and provide American businesses with the predictability and stability they need to make business plans and manage risk. 

Budget effects. As noted, this change in the law would have very positive budget 

effects in the billions of dollars. First, during this period of low interest rates, basing 

funding interest rates on historical averages will reduce funding. (Correspondingly, 

during periods of high interest rates, this will increase funding.) Decreasing funding 

has, over the years, had two positive budget effects. First, it increases tax revenues 

by decreasing deductible contributions to a tax-exempt trust. Second, decreasing 

funding creates negative outlays on the spending side by increasing the variable 

rate premiums paid to the PBGC. 

The proposal would also decrease government spending in a very significant manner. Generally, government contractors in the energy area are reimbursed for their 

pension contributions. In the defense area, new rules have just been adopted under 

which defense contractors will, subject to a phase-in period, generally be reimbursed 

for their full pension contributions. Thus, since the proposal reduces required funding contributions during this period of low interest rates, federal government spending would appear to be correspondingly reduced, likely by billions of dollars. 

Moreover, the government spending being reduced appears to be spending that is 

completely unnecessary in economic terms. There is widespread agreement that interest rates are being held artificially low to stimulate the economy at least through 

the end of 2014. In this context, if contributions are made to pension plans based 

on the artificially low interest rates, and the plans become fully funded or close to 

fully funded based on such rates, those same plans will be vastly overfunded when 
34 

interest rates return to normal levels. In fact, it is distinctly possible that many of 

the plans will be overfunded indefinitely, which means that the required contributions were wasteful. 

The solution to the government spending issue is not to reduce government reimbursements. That would simply mean the government does not believe those contributions will be necessary over the long term even though the law requires the 

contractors to make them. If the government believed otherwise, the contributions 

would need to be reimbursable. The solution, therefore, is to correct the interest 

rates being used so that no one has to make completely unnecessary payments. 

Conclusion. To maintain the current funding rules would be to ignore the painful 

lessons of the last few years. Interest rates are susceptible to artificial fluctuations 

that can hide the true value of pension liabilities. This can result in unnecessary 

expenditures by businesses and the government, slowing economic growth and leading to government waste. My recommendation would address this conflict by preventing artificially low interest rates from slowing any economic recovery or creating 

unnecessary spending. In addition, my recommendation would give American businesses the predictability they desperately need to make business plans. 

PBGC premiums 

The Pension Benefit Guaranty Corporation is charged with protecting the pension 

benefits of workers and retirees in the event a company sponsoring a defined benefit 

pension plan goes bankrupt. The PBGC is partially financed through premiums paid 

by the sponsors of defined benefit pension plans. Premiums paid to the PBGC would 

be increased under two recent proposals. Under the first proposal, the Administration’s proposal calls for PBGC to have the power to raise its own premiums, with 

the increase focused primarily or exclusively on plans maintained by ‘‘high-risk’’ 

companies’’. This proposal was estimated to raise $16 billion over the 10-year budget 

window. Under the second proposal, the House Budget Committee proposed raising 

premiums by $2.7 billion. 

These calls for increased premiums are premised on the belief that doing so is 

necessary to address concerns about the PBGC’s financial stability. But the PBGC 

is actually extremely stable financially. 

No deficit. Defenders of a premium increase point to the PBGC’s $26 billion deficit. Using historically normal interest rates, the PBGC has no deficit, according to 

a study I recently completed. 

• Almost 80% of the PBGC’s self-reported deficit is directly attributable to the 

Federal Reserve action beginning in 2008 to reduce interest rates to historically low 

levels. While this national policy is expected to help stimulate the economy, such 

action translates into a calculation of temporarily higher pension liabilities. Therefore, when interest rates rise in the future, that PBGC’s artificially created deficit 

will shrink, if not evaporate. 

• Much, if not all, of the remaining 20% of the deficit results from PBGC using 

an interest rate that is materially lower than the rates employer-sponsored plans 

are required to use by the Financial Accounting Standards Board (FASB) and pursuant to the Pension Protection Act of 2006. There is no logic for the government 

to use one rate, and to require private employers to use another. 

• Finally, current rules implicitly presume that yields on the investment of PBGC 

assets will perpetually match the current, artificially low interest rates. Thus, there 

is no recognition that these billions of dollars held by the PBGC are expected to outperform current, near zero interest rates over the long term. While this cannot be 

guaranteed, it is instructive to recognize that the PBGC annual reports show actual 

investment returns of 13.2%, 12.1% and 5.1% for fiscal years 2009, 2010 and 2011, 

respectively. Thus, it is fair to expect investment performance to also mitigate some 

of PBGC’s reported deficit. 

I have not been able to review the American Airlines plans and the effect on the 

PBGC if those plans were terminated. But based on the methodology used by PBGC 

to calculate its deficit, their estimates of the shortfalls in those plans could well be 

overstated. 

Tax, not a premium. If Congress were to raise PBGC premiums following a careful analysis of the true market value of the protection being provided by the PBGC, 

that could be rightly labeled a premium increase. If, however, Congress were to 

raise premiums without such a careful analysis, that would not constitute a premium increase; it would be a tax on defined benefit plan sponsors. At this point, 

there is no economic basis established for the Administration’s proposed increase. 

In that context, such a premium increase would simply be an additional tax increase 

on those employers that tried to do a good thing by maintaining a defined benefit 

plan. 
35 

According to PBGC itself, no bailout is foreseeable. Some argue that a premium 

increase is necessary now to avoid a taxpayer bailout. This is simply wrong. It is 

clear that the PBGC does not pose a risk to taxpayers for the foreseeable future. 

PBGC’s own annual report states: ‘‘Since our obligations are paid out over decades, 

we have more than sufficient funds to pay benefits for the foreseeable future.’’ This 

gives policymakers and the defined benefit plans most affected by a premium increase the opportunity to thoughtfully consider ways to strengthen the defined benefit pension system in a way that protects plan benefits and taxpayers but does not 

impose unwarranted increases in costs on plans and the participants they benefit. 

Moreover, on November 10, 2011, PBGC announced projections of its deficit in 

2020. The agency concluded, based on 5,000 simulations, that the chances of the single-employer insurance guaranty program running out of money in 2020 were zero. 

Moreover, in a majority of the 5,000 simulations, PBGC’s position improved over the 

next ten years. So even using its extremely unfavorable assumptions, PBGC concedes that the financial condition of its single-employer program will likely improve 

over the next decade. 

Administration’s proposal would undermine economic recovery. Congress should 

continue to reject calls to weaken its own authority to set PBGC premiums. The Administration’s budget proposal would give the PBGC Board the authority to set and 

adjust the level of premiums that a retirement plans sponsor would pay, taking into 

account an employer’s financial condition. This would require the government to 

evaluate the financial condition of private companies, including tax-exempt organizations, a very disturbing intrusion of the government into private business. 

Moreover, under the Administration’s proposal, per-participant premiums could 

quadruple for the companies in the worst financial condition, which could cost these 

struggling companies tens of millions of dollars annually. Accordingly, basing PBGC 

premiums on the plan sponsor’s financial condition could create a downward corporate spiral for companies that are facing financial difficulties, increasing their 

cash flow burden and potentially forcing unnecessary bankruptcies with devastating 

consequences for workers and our economy. 

The Administration’s proposal would also cause many companies to offer lump 

sums to former employees so as to potentially reduce their PBGC premiums by tens 

of millions of dollars annually. This would have serious policy implications and 

would dramatically shrink the PBGC’s premium base. 

In short, we should not use defined benefit plan sponsors as a revenue source in 

the attempt to tackle the budget, without a policy basis. The PBGC’s issues should 

be carefully studied before any new taxes or premium increases are imposed. 

Proponents of the proposal to allow the PBGC set its own premiums have pointed 

to the ability of commercial insurance companies to set their own premiums. This 

insurance company analogy collapses quickly on analysis. Sponsors of defined benefit pension plans already purchase commercial insurance for a variety of business 

purposes. In these commercial insurance situations, it is the purchaser who decides: 

(a) Whether to buy any insurance; (b) How much insurance to buy; (c) Which insurance company or companies to do business with, usually based on cost and quality 

considerations; and, (d) Whether to modify its insurance ‘‘wants’’ based on extant 

market conditions. Pension plan sponsors have no such rights with respect to benefits protected by the PBGC. 

Moreover, commercial insurance companies must: (a) Remain cost competitive or 

face loss of business to competitor insurers; (b) Work collaboratively with their customers to tailor insurance products to meet those customers’ needs; and, (c) meet 

rigid requirements imposed by various state insurance laws, as regulated by the respective state-level insurance commissioners. None of these consumer protections 

exists in the governance of the PBGC. 

In short, the ability of commercial insurance companies to set their own premiums 

does not provide sufficient precedent to justify granting similar authority to the 

PBGC. Since none of the above characteristics of commercial insurance exist relative 

to the PBGC, Congress must continue its significant oversight role. Only Congress 

is in a position to consider all aspects and assure that premiums charged by the 

PBGC remain at appropriate levels that are fair to all parties. 

Sales and Movements of Business Units 

I also want to mention briefly one PBGC regulatory issue that is causing great 

concern within the pension community. 

In the summer of 2010, the PBGC issued proposed regulations dealing with liabilities to the PBGC that arise under ERISA in connection with a shutdown of a facility. The proposed regulations were not consistent with the statute, previously published PBGC guidance, or PBGC’s historical enforcement practices. Under the statute, liability is triggered if ‘‘an employer ceases operations at a facility in any loca-
36 

tion’’. The statute was clearly intended to apply to situations where operations at 

a facility are shut down. Instead, under the proposed regulations, liability can be 

triggered where no operations are shut down, but rather operations are, for example, (1) transferred to another stable employer, (2) moved to another location, or (3) 

temporarily suspended for a few weeks to repair or improve a facility. 

Moreover, the liability created by the proposed regulations can be vastly out of 

proportion with the transactions that give rise to the liability. For example, in many 

cases, a de minimis routine business transaction affecting far less than 1% of an 

employer’s employees can trigger hundreds of millions of dollars of liability, even in 

situations where a plan poses no meaningful risk to the PBGC. 

The PBGC correctly identified the proposed section 4062(e) regulations as needing 

review pursuant to Executive Order 13563 on Improving Regulation and Regulatory 

Review. The PBGC stated: 

In light of industry comments, PBGC will also reconsider its 2010 proposed rule 

that would provide guidance on the applicability and enforcement of ERISA section 

4062(e). 

However, it is my understanding that PBGC personnel, in communications with 

plan sponsors, continue to refer to the proposed regulations as current law, and are 

enforcing them as such. It is inconsistent with the President’s Executive Order to 

announce a reconsideration of troublesome proposed regulations, while at the same 

time actively enforcing them as current law. 

This situation needs to be addressed. The PBGC’s enforcement practices are having a severely detrimental effect on business’ efforts to enter into business transactions that pose no meaningful risk to the PBGC and that are essential to a functioning business world where transactions can facilitate our economic recovery. 

Conclusion 

In conclusion, the use of today’s artificially low interest rates is: 

• Creating pension funding obligations that undermine job retention and economic recovery, 

• Resulting in billions of dollars of wasteful government spending, and 

• Creating an illusion that the PBGC has a deficit, triggering consideration of 

unneeded new taxes on defined benefit plan sponsors. 

These issues need to be fixed through the use of historically stable interest rates. 

Thank you for the opportunity to testify. I would be happy to answer any questions you may have. 

Chairman ROE. Thank you, Mr. Porter. 

Ms. Haggerty? 

STATEMENT OF GRETCHEN HAGGERTY, 

CHIEF FINANCIAL OFFICER, U.S. STEEL 

Ms. HAGGERTY. Thank you for the opportunity to testify on behalf of—I am sorry—thank you for the opportunity to testify on behalf of the ERISA Industry Committee and United States Steel 

Corporation. We believe pensions play a critical role in providing 

retirement income for millions of Americans and are valuable tools 

that allow employers to attract and retain highly qualified workers. 

I am the chief financial officer of U.S. Steel and my responsibilities include financing new investments, managing our cash flow, 

and ensuring we honor all of our obligations. I also serve as chairman of the U.S. Steel and Carnegie Pension Fund. U.S. Steel has 

managed a large domestic plan for over 100 years. 

We take a responsible, prudent approach to managing our longterm pension obligations. For many years we have been voluntarily 

contributing to our plan $140 million annually—over $1.3 billion 

since 2003—in order to smooth out our future annual funding requirements. 

The financial crisis hit our company particularly hard in 2009 and we lost $1.4 billion that year. We idled five of our eight steelmaking locations; we cut our capital budget by $300 million, or 40 
37 

percent. But we still made a $140 million voluntary pension contribution to our plan. 

Our last publicly released funding results from 2010 showed that 

our plan was over 100 percent funded; however, that would drop 

to 85 percent if we used today’s exceptionally low rates and—resulting from the Federal Reserve policy. 

The combination of such low rates and increased funding requirements arising under the PPA, the Pension Protection Act, are severely burdening companies, undermining the future of defined 

benefit plans, and threatening economic recovery. The PPA dictates 

the interest rate used to calculate pension liabilities and minimum 

funding requirements. The lower interest rates are, the higher liabilities and potential funding requirements. 

These interest rate rules were conceived and developed over a period of years long before the financial crisis. Since then the Fed has 

adopted a monetary policy to lower and maintain interest rates 

that are extraordinarily low by any historical standard. Last week 

they indicated that they intend to maintain these low levels of 

rates for years to come. 

This current interest rate environment is so much different than 

the environment and the historical perspective at the time the PPA 

was enacted that I believe if the interest rate rules had been developed in today’s environment they would be much different and 

more flexible than they are today. These actions by the Fed impose 

a significant near-term burden on sponsors of defined benefit pension plans, something that the Fed has acknowledged. 

Minimum funding amounts will be higher in the near term than 

necessary for a long-term obligation. This creates great economic 

inefficiency and impacts other important capital allocation decisions that can help the economy. 

U.S. Steel is pursuing a large capital investment program with 

spending in 2011 and 2012 approaching $1 billion a year. We are 

currently building new facilities in Pennsylvania, Indiana, and 

Ohio, and we are strongly considering new capital projects in Minnesota, Michigan, Alabama, and elsewhere. 

These planned investments will create thousands of construction 

jobs and hundreds of permanent jobs but they could take backstage 

to our pension funding demands under the current rules and in 

this low interest rate environment. Within the next few years the 

cash needed to fund our main plan could be significantly higher— 

perhaps multiples of our $140 million voluntary contribution that 

we have been making. 

With increased levels of cash outflow required to fund our main 

plan our capital expenditures will likely be impacted as one of our 

most significant, controllable cash outlays. If other companies also 

reduce such important and economically beneficial investments the 

economy will continue to disappoint and underperform. 

Therefore, on behalf of United States Steel Corporation and the 

ERISA Industry Committee I urge you to give serious consideration 

to the industry proposal on funding stabilization. This proposal 

would better align PPA funding rules with economic reality without 

deteriorating long-term solvency of pension funds or the PBGC. 

Simply stated, the proposal would stabilize discount rates and 

modestly lengthen amortization periods for the unfunded shortfall 
38 

within a framework that still requires all plans to be 80 percent 

funded within 7 years but allows plans whose funded status is 

within the 80 to 100 percent range to amortize over a 15-year period. If enacted soon, this important reform could be the most constructive legislation Congress could pass to help ensure continued 

economic recovery, especially among capital-intensive industries 

where we want to continue to encourage productive investment in 

new plants and equipment. 

Before concluding I would also say that the business community 

remains strongly opposed to any proposals that would dramatically 

increase PBGC insurance premiums or give broad powers to the 

PBGC to vary the amount of premiums based on their subjective 

view of a company’s credit worthiness. The best way to ensure a 

plan’s future is to increase its funded status by stable and predictable funding infusions, not by charging higher insurance premiums. 

The funding stabilization proposal offers the best path forward 

for the PBGC’s long-term viability, for plan sponsors who want to 

maintain their plans as long as the costs remain affordable, and for 

beneficiaries who are counting on those benefits in their retirement 

years. 

Thank you. That concludes my prepared remarks. 

[The statement of Ms. Haggerty follows:] 
39 

Fdwuory2.~12 

" ll.ulandnc I'en .• i"" S..., urity and EWllomic Gro .. ·tb" 

(;.-.Idl<n II. II ~U rty 

r"o<uti,,, Vice ...... i<l<'" and Crud"FilWlCiaI Off><a 

Uniled S ..... S,..I Corpnn\I;o. 

0.. bdWf "fthe ERISA Industry Comnllltet 

Hef.,... tho 11",11b, ~:.lLlCation, l ... bor oJ< P.",""", Suixomml_ 

Comminoe on r;duo::aliOft and tho Workf"",. 

G<><>d """"i08 .O<l 1"-'". you fo. III< """""unily Ie .... ify Oft IxhaIf oftlx ERISA Ind....-y 

Commiltet on on i.<5u, Ihal is """" ~ linked Ie tho «un<>mi< buill> and ... If"", uftho 

""'""~ thIIn mo" people ruJiz<. 

"" .. <ion, _. ",hether in the form of <kiinod """tribution '" <kfi.-...l benefil plans - ploy a 

crilieal rolo in JXO,>;!ing ~item<nl il><OlllO for million> nf Am.ric ..... PensiOl\ pi .... "'" 

oho ... I""hl. """. truol allow ... ~ Ie ........ and rtl.ln highly qu"lifi.d and .... I ... ble 

"""= 

Thi.l;nonminoo h.u the , .. poruibility ofbal_ina many compeling obj«liveo through )'tIUf 

.rrorh '" <m«Jllr3ie employe .. Ie orrer pensi"" be""li\<. w sareg...-d !hwc btufilS for .n 

bencficiarko, ond to """"" thai A"""';"",, won,,, "-,, .... molen' finarICi.1 reoow-.: .. from 

thri, pO",,, pe"'""'" and .. vingo '" carry thrm tIv-ough ralr<menl. The .mpl~ 

""",munity bas IonS ""'1""'1ed the: rol. Y"'-' pl. y in thi._no. 

A. (he: OIi<fFi""",iol om ..... of United S .... , Stool Corporalion, m~ primary mporuibility 

'" thr COffiI""Y and 0Uf "'=1101<1< .. i. '" ""''',,'' ""'"'" <..,.,.il13'" AOCCpt&bIe me ofrtl"m 

00 the capitol ",,,,,,-<l..J 10 .... by ,,"idinll- thr financi.1 .rr.i" of. very compl.,; KI<>Wl 

enterp<i... The company .. Ii .. upon my """"""" ..... lions andjudjlmUlllO fonar.te now 

inve>tmcnl>, "'"""'II< "'" """" n., .... ,.nd .,,,"'" we honor . 1l of 0Ilr ""ligations, ' mona otllet 

1111011 ..... 

Us._ 

__ ..... "'~ ___ "'_"""_"'''''''''''''111_~_"'''''''"., .... ~ AnkOooptod_ ...... _ ....... ool ........... .-_botool .--, _1O __ .... "'_ .. _...-_ ....... _ ... oigI'<n""'""""" ""-",,,_"lQ,O. ____ ("'..,,..,""" U,5._ __ .. _ ..... )""",...,_ ...... .......... _rioM _,.",."IiOg_" 

" Tho ... ER~_._ 

IM _..,.<:«rro._(D'tiC) .... ..

___ 

. """"""".-.....,"""""""'" "......., ... ·._,, _"'<I'" __ . ... tC""'~ · ........... 

_"""""""'" _"_"_01 _...- __ ..... 00.0, •. __ """ "III" """""'"" __ ... ~_ 

...... ___ _ .... __ [RIC ...... """_ ... ., .. ,..,.,..,.,.'-.IO ___ ,_""" ___ .K .... .. ....... ""-_ .. ., ... ....,.,.."..,....,..,,., 
40 

I a l'" ~ .. IhoOWIIIWI ofthc U. S. Sled oruI \Amc~i" l..."..iu"fWld. U.:;, S,odlw 

""""",'<>I a 1",,0 do~i" pen,ion pl.n fo< 01"..,.. os lon& .. w. haY< beftl in Iho _I 

bu<i"..,. W. Iuo •• we.ll~ many <COnOrIli. otonn. durina out 110 yeor hi""'l}" while 

proWli", pcruion brn<flts La hWlll.-. ... uf1housands of m i!WII and 1heir brn<fi<iori., duMa 

this ,ime. 

Tod.y, "'. conli",,,, La i>on<>< p"nsi ..... "",runi"""n" modo gr .. ,.,;ooo at;<> by ««:uti .... long 

'; nee reoiro:!. Oul IlIfe." ,~. d.fined """,,fi, pension pi.., (PI",,) 1m _im.ldy 18.000 

p.utidpon", ""'-'I of wborn arc rctiro:!. Thi. Plan wu olO<eCl La ""w .nrran .. in 1""" :roo) in 

.,..,Jo:, La "'""" ,be ;""'''' .. ""', nutk." 1egi. 1Mi .. and orhel nob oflho Plan to ou, carilOl 

stru<1Ure. N<rnethel .... "'~ <><pe<:' ro be poyin.a bo""fits ro mi~. from <>ur 1'1." fOl1l1easl 

50 yean fr<>m flOW. 0.., balf, «n'UI}" "110, my pnod<c ........ I.id the BrGWIdwork fOi rho 

biliioM of doUo .. of bo""r. .. !h01 WI: hi",. poid to "'" reoi .... by in"OSl;n, wi .. ly and 

fuD<lin~ .,,·n wh,," lh<y "",.. n<lI mjuiml La do JQ. and ,hat i. !be lepey I pllrllO kJv¢ fOr 

my~""'. 

w. lake • ,"'po>n>ibk. pruojC<l' awroach La IIWlIOgin, "'" !<>nil-ie"" f"OIUion obhgotiono .•. ", 

many y<:iOIS. we Iuo •• been ll!!!!!!!!tib: <ootribr.Jlin8 10 our Pllrl Sl~ millioo annually - S1.J 

billion .u..:. 2003 - in orde, to 8fIIMIh OU' our I\Jture. ..,n .. 1 "'Illiremon", "The financiol 

en,i, hi. 0 ... """'.,any particulatly han! in 2009 ond WI: 10" SI.4 billion. W. idled !i of"", I 

",ocl_.LOki"1 faoiliti.,., "'" mluced oornpensation fO< out leadership and we .ul our capilol 

bod&<, by SJOO ",illi"" or ","'ff 4(1%, but "'. still made . $140 million I'<)!unl>l}" pc .. i"" 

""",ribution La out !'lIln. Our w'l'"blidy rd ••• ed fWlding """I .. from 2010 """""'" rtu.t 

OW Plan .... 0'·« 101% funrlcd. I, xcm«l oIlho Ii"", thot our pnld<nt and OOl\mVOli .. 

• WMOh '" fund inr. hod poid off and that "'. hod wea,hered tit. fi """"iol .,.".", VOf)' ",~II , 

o",~_. if we hod 0$Cd tod.ay'. ,>«><ptionally ODd artifidoIly low in"""" rlt<J rtlr.Iltln8 

from ~·cdc:noI R""""" policy. thi. 1l<r<:erI1ai" would ha"" been abaul 8~%. 

1 unri<-r.12nd tha. rho '''Pic of pcnsioo tWlding rule. is Clot: lha. O<>rnOtlme1 •• u .... ye< 10 

glue uvu, .., I will do my best 10 avoid . lep! '" actuarial di""" .. iOfl of1he Pension 

1'ro1 .. ,ion A<I. I would 00"""""'", lik. ro ,,]>loin how 1) intOIal ,..". tho ..... 01 

unprer:.tden,ed I ....... le""u , ond 2) ,1>0 l"'<I"i"" fUMi", rulel.""oted undertho Pcn';on 

l'rot«,ion A<1 of2006 (P<ruion l'rot«Iion M!) are ....... Iy burdening compaNos. 

unr!ennin;nl\!h. f..u= of donned brn<frt Vi .... :and pot<:ntiolly lh=rtcnilll! "'" 1NJI<r naliooal <rO<>rlOmic rec:o""l}", 

lbc: I'rnl;ion PI<II«.icm Ao. =toUts the ux ufon int=" rat< yicld ..... "" (titbtt • full yield 

""ow. Of ..... ~ted by sbon, medium and \onge11onn jlCrincb) '" """"lop rho intcrost 

.... lllo:Ito <&kul ... ptn!ion li.bilineo ond minimum fundina ttqui~lI. Tho lower the 

inle,..,. ,., ... rho higher tbo !i..bilitia .u.i pot<:nlial fuodinj; rcQuirt,,,,,,,'" lbcae inl,",," rate 

rul .. "'= cOI",.iV«! and develoJl<ld 0",,' • pcl>OO of)"""rs . nd 10011 befolo the finanr:w 

erUio. Since the financial orio;" .... Fredtnt R<.ICfV<.1w tdopred • mOlltl11}" policy 10 lowe! 

and "",""lain inl.", .. ",l«" 1 •• tI, ""'I "'" cx_irwily krw by;my h.i'Wli",J >laDJ ..... II 

is cl .... from their "",io"" 01 the Fedoral Open Marlre' Commi,,,,,, meetina on 1011""'1' 2S tha. 

!hey in'tt'Id to maintain Ibe!oo l.w I_I, of inkrest "' ... for yean to """'c La ouJ'llXlfl . 

""""B<' """""",k: ",",Ov«y. old"",gh doe fcdcnJ fWld, rl'. t&tget i, aboul 4% 10_ rhan the 
41 

Fed', Wi<!Cd "". C""" the long'" run. lbi, CUl'<a1t ral • ..,vi"'"men! i,.., m..::b dilT .... '"t 

than !he in«rest m. CfIv'ronmcn1 . nd hi""",,,1 tale ~liv'" thai ""i<tod It ,he lime ,'''' 

PtMiM Prol«:liun ACi ...... <_10<1 U,., I believe the inloTUl ralo rules d ... lopt<! """,]d 

hav< \>OM much difk=l...:I "",'" nexible lhan Ihey.", """", They lIhouid be n:vi><d now, 

The .,,,",,," by Ihe Fed 10 """,(rol int ........ 1c> poIenli.lly put > . ignifocant ........ I<rm burdrn 

on "JIOII'DBofdcfinod be""f" pons;"" pia .... """,mina thai \he Fod 1= ><:koo,,1cdgcd 

Minimum fu.-.ling 0.,("",,, will be hiSh« in the ....... ·Iem> ibao "."<M'''Y f<ll'. 1<>11£ lonn 

oolipli<>n. which oreal .. if""' """nomi. in<ffioioncy and imp""" _ important "*Pital 

.1I""".ion tk>ci, iom 1"", CII" help lbe """""my, Tbe Pern.ion 1'm"",lion Act funha p:nol~ 

o""'l'I'"i .. like U, K S'~I who have pru&ntly ond volUtlwily funded oignifi<O/ll .m, .. m" by 

mj"iri", \be ,.,h.eli"" of 0<1001 pi, ........ hy nu' -=<Iii !>oJ""""" in dtltmlinina """ 

minimum f"""inaoonlribmioM. 

What the """,binotion of \be I'.D>ion • ."""",i"" Act f...di.8 1Il1 .. orwI """,,,,,,Ii"';ly lew 

int""'"'- .. Ie:! """"'" 10 ou' !ntsi,.,... or>d the eoonomy aI l~ .ould 01"" be ""y >.ignifltUl. 

U.S. S ... J i. p""uing a 1.ar);< capilli! in~1 JlIo&,am wi,h .,-....ling in 2011 and 2012 

opp", ... hing . bith.", 0 y...:, W. ate buildina new ..,king f .. ilin .. ill Pennsylvania and 

IndiorJa, and • new pi", mill • .-.1 •• ""lim .. ' ...... n .. ling fo<ilily ;" Ohi", We Nov< 01 ... 

1K'rivt<! 1111 Ihe penniIS n:quin:<! to ..-.p""d and "oOOcrni,,, on iron on: mi.., in MltIntSOIa and 

hove ><:..,ru <1<,0= _ proj«ou unde< ...... idorMion for f .. ilili .. in Mi.hipn. i\labomo 

...:lei""""", .. , n.... pl...-..d invalmcn!' ",ill ""' • .., chousltlds of oo",,,,,,,,'iMjoboo ond 

1wt.Jr<>.ls ufpermlUlOJU jobo, Silli"", in good. ond ""IVi.", will he boul(hl f",m 100>1 """ 

nol",nol ""1'1'''''''' We ",ill he in",!ling in pr<><Itx:u aM proc:eMeo i"lended to INk."" 

"'.bl. an<l compelilivc .oml'l'"Y Ioojj into 'he [ulure, 

S<lme of lh<>o i.""""",.IO, MWl:VU, ctnIld ,01:.. baoks1agc 10 0"" pe .. iQn f...:lina donWlds 

under the .""",,1 ",Ies aod lilU .~ir.<i.lI~ low i"'ere>! .. .., CIlvi""""",,-, Wi"'i. Ibt ""n 

rew years, ., these M. 1.",1 .. lhe caoh ...,."Jod 10 fond ow- main penSion plan <ould be 

';gniftcan~y high<r thon'''l'''fllap'' m"ltiples of .. the S 140 mH!iOl\ I"" y .... thai 'NO ha"" been 

",l..,larily fondinll for Y""'" """', With i",,,,-.d level< or co>h ouUlow roquir«l '0 fund 

QICt main plan, QICt """iW expendi1ures will li);oIy he i"'J'O<1«I ,in«' Ih>l i, CHI< ~f "'" """" 

. ignifioonl <""""liable oash "ul1ays. If other ""mpan;" lii e U, S, SI.':! hove '" raJ"". 

i",po><\ar>'...:1 e<A""""icall~ beocf,d.l inve,,,,,,,n .. like _'0 f"rod ,,&"iCOOO"' ino ...... in 

pmSiooWnlIi\oulioo> "" 0 resu ll ofll>:: p......,., I'rntrction h' OR:! .. "*",,i""';l~ low 

inl ..... ",.., Ihe """"""'Y will ""nlinuelo di_inl """ undo. pocform, Timiflil is 

''''''ylhing, That'.""" for tbe coooomy, "'" "".i ..... aM OUr "",,"ion pl.ns. 

Ther<f""" on behalf ofU, S, Stool .00 Ihc ERISA I.-.I""try CommiHce (~RIC), I W1l< )'0\110 

gil'<: x rioo:r oonsiocl8Uoo '" ,be "IrodUSl'y ?fOIIOSO-l on Furodin~ SUbili>;alioo." This 

_I """,Id hen .. . Iign Pcuion rrotedi<>n AOl foroling rule. wilh ~ rca!ily, 

withou! d<t<rionliflil loflil''''''" ""Iverxy of penSion fundo or Ihe PIRie, 

'I"""" "'" 'wn «ompnnenu to Ihe pr<>p<=I, no. f,rSt tonlponenl, and from 0." perspoCli"" 

""''' importan~ "wid JIobih", 0<gIDCI>1 disc"",,' ... \<0; an<l .. ix the err.,.,ive rare fur owoy 

pt.ns by ""'&Illy 120 basi. ]»in," <urrornly, Tbe i.-.lUSh)' proposal ulili_ !Ioor> fOf in=1 
42 

Chairman ROE. Thank you. 

Mr. DeFrehn? 

STATEMENT OF RANDY DeFREHN, EXECUTIVE DIRECTOR, NATIONAL COORDINATING COMMITTEE FOR MULTIEMPLOYER 

PLANS 

Mr. DEFREHN. Chairman Roe, Ranking Member Andrews, and 

members of the committee, I am pleased to appear here on behalf 

of the National Coordinating Committee of Multiemployer Plans, 

and advocacy organization for jointly managed health, pension, and 

other welfare benefits. We commend the committee on conducting 
43 

this hearing to examine the PBGC and defined benefit plans. For 

the tens of millions of Americans whose retirement security is provided through the defined benefit system your attention to preserving this system is critically important. 

Our detailed remarks are part of the record. This morning I 

would like to make a few brief points specific to the multiemployer 

community and look forward to your questions. 

For over 60 years multiemployer plans have provided a mechanism for tens of thousands of predominantly small employers in industries with very fluid employment patterns to provide modest 

but regular and dependable retirement income to their employees. 

According to the PBGC’s 2011 Annual Report, approximately 10.3 

million people are covered by the approximately 1,460 insured multiemployer defined benefit plans. 

While most often associated with the building and construction 

and trucking industries, multiemployer plans actually cut across 

the economy, and while sharing the common objective of providing 

a social safety net for the American workers whose defined benefit 

plans have failed, PBGC’s two insurance fundamental differences. 

Unlike the single employer system, which acts as an insurer of first 

resort, the multiemployer system presents much lower risk of 

claims, acting instead as insurer of last resort, stepping in only 

when all of these employers that contribute to a multiemployer 

plan are unable to meet their collective funding obligations. 

The differential risk characteristics of the two guaranty funds 

have been reflected since their inception in a much lower guarantee 

level and corresponding premium structures. That discussion was 

held earlier in your exchange with Mr. Gotbaum. My only comment 

to supplement that is that it should be noted that from 1982 until 

2002 that that fund maintained a surplus, even with those low premium rates. 

In relative terms, the number of plans that have received assistance from the guaranty fund has remained very low when compared with a single employer system. While the number of multiemployer plans has declined by nearly 700 since 1980, only about 

50 plans have ever received assistance from that fund. The remainder were merged into plans that were significantly larger or stronger. 

In its latest report the PBGC reported assistance was paid to a 

total of 49 plans totaling $115 million in 2011. In other words, 

when compared with the single-employer system the multiemployer 

system represents one of every four insured participants but only 

1 percent of the total number of plan failures, 2 percent of the total 

dollars paid out, and just 5 percent of the numbers of participants 

receiving benefits. 

It should also be noted that the benefit numbers for multiemployer plans includes all administrative costs since the agency 

doesn’t take over responsibility for administering any of the multiemployer plans. All in all, by having the pool of contributing employers reinsure each other for the risk of a failing contributor the 

agency gets the best of all worlds from multiemployer plans. 

In my remaining time I would just like to make three concluding 

points. First, as a rule, multiemployer plans have been very well 

funded. They would have been better funded but competing tax 
44 

1The NCCMP is the premier advocacy organization for multiemployer plans, representing 

their interests and explaining their issues to policy makers in Washington since enactment of 

ERISA in1974. 

policies prevented sponsors from funding them above 100 percent. 

Nevertheless, the new funding rules of the PPA and additional 

tools for plans to deal with their liabilities have imposed a level of 

discipline on plan sponsors that has caused them to take responsible actions that have allowed the majority of plans to begin to rebound from the recession, but for the continuing drag on plan contributions resulting from the depressed employment. 

After initial zone certifications that showed green zone plans represented nearly 80 percent of all plans before the recession, dipping 

to a low of 20 percent in 2009, trends remain positive, with a single 

company survey completed in January of 2011 showed approximately 66 percent have returned to the green zone. 

Second, we recognize that there are a limited number—two, actually—of major plans with severe funding difficulties resulting from 

unintended consequences of other public policy decisions made by 

Congress, specifically the deregulation of the trucking industry and 

the Clean Air Act, which these two plans will soon, as you have 

heard from Mr. Gotbaum, approach the PBGC for assistance. 

Proposals to limit the exposure of the PBGC and, to a lesser degree, contributing employers and plan participants have been proposed for consideration by Congress. We believe that some variation of those earlier proposals are worthy of consideration as you 

deliberate further on this issue. 

Finally, we appreciate the interest shown by the committee in 

better understanding the challenges created by the Pension Protection Act in anticipation of the sunset of the multiemployer funding 

rules at the end of 2014. As we have evaluated those challenges we 

have concluded that it may be time to address some additional 

structural issues of the underlying laws which can help ensure that 

multiemployer plan participants can continue to receive regular, reliable pension benefits, but which also can reduce the risk to employers that currently present an obstacle to new employers joining 

the system. 

To that end, we have convened more than 40 groups representing 

employers and employee representatives from the full range of industries that rely on the multiemployer model for providing retirement benefits to carefully evaluate the current system and all viable alternatives designed to address those objectives. We look forward to bringing the ideas of this Retirement Security Review 

Commission to you as a community in the near future and to working with you so that these plans can continue to provide the tens 

of thousands of small businesses and their employees with a sound 

retirement vehicle for another 60 years. 

Thank you very much for your attention. 

[The statement of Mr. DeFrehn follows:] 

Prepared Statement of Randy G. DeFrehn, Executive Director, 

National Coordinating Committee for Multiemployer Plans (NCCMP) 

Chairman Roe, Ranking Member Andrews 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 ad-
45 

2The median benefit paid to participants of plans surveyed was $908—See DeFrehn, Randy 

G. and Shapiro, Joshua, ‘‘The Road to Recovery: The 2010 Update to the NCCMP Survey of the 

Funded Position of Multiemployer Plans’’, The National Coordinating Committee for Multiemployer Plans, 2011. 3 Until 1980 the PBGC only provided assistance to 10 plans. 

vocacy corporation created in 1974 under Section 501(c)(4) of the Internal Revenue 

Code, and is the only such organization created for the exclusive purpose of representing the interests of multiemployer plans, their participants and sponsoring organizations. 

For over 60 years, multiemployer plans have provided a mechanism for employees 

of tens of thousands of predominantly small employers in industries with very fluid 

employment patterns to receive modest but regular and dependable retirement income.2 They are the product of collective bargaining between one or more unions 

and at least two unrelated employers that are obligated to contribute to a trust fund 

that is independent of either bargaining party whose benefits are distributed to participants and beneficiaries pursuant to a written plan of benefits. While most often 

associated with the building and construction and trucking industries, multiemployer plans are pervasive throughout the economy including the agricultural; airline; automobile sales, service and distribution; building, office and professional 

services; chemical, paper and nuclear energy; entertainment; food production, distribution and retail sales; health care; hospitality; longshore; manufacturing; maritime; mining; retail, wholesale and department store; steel; and textile and apparel 

production industries. These plans provide coverage on a local, regional, multiple 

state, or national basis and can cover groups of several hundred to several hundred 

thousand participants. By law, these plans must be jointly and equally managed by 

both employers and employee representatives. 

According to the PBGC’s 2011 Annual Report, approximately 10.3 million people 

are covered by the approximately 1459 insured multiemployer defined benefit pension plans. This represents a slight decline from the prior year’s report which 

showed 10.4 million participants in approximately 1500 plans. This decline is primarily a function of the impact of the recession on employment patterns, the magnitude of the market contractions and the sluggish nature of the recovery for many 

covered industries. It also reflects the fact that a few plans have had to avail themselves of the multiemployer guaranty fund of the PBGC. 

I would like to direct my comments today to an examination of that fund, the infrequent number of multiemployer plans that have had to take advantage of its protections since its inception, its importance to specific troubled industries, and the 

multiemployer community’s ongoing commitment to jointly address the evolutionary 

challenges that threaten the continuation of this system as evidenced by the recent 

creation of a ‘‘Retirement Security Review Commission.’’ 

The Multiemployer Guaranty Fund 

Unlike the single employer guaranty fund which became effective with the passage of the Employee Retirement Income Security Act (ERISA) in 1974, the implementation of the multiemployer guaranty fund was originally discretionary,3 becoming mandatory only with the enactment of the Multiemployer Pension Plans Amendments Act (MPPAA) in 1980. While sharing the common objective of providing retirement security for American workers whose employer based defined benefit plans 

have failed, these two funds have fundamental differences. First and foremost, the 

single employer system acts as the insurer of first resort, assuming responsibility 

to pay benefits when the corporate sponsor is no longer able to meet its obligations; 

whereas the multiemployer system presents a much lower risk of claims as the insurer of last resort, stepping in only when the all of the employers that contribute 

to a multiemployer plan are unable to meet their collective funding obligations. This 

risk is directly mitigated by the pooling of liabilities and by the existence of withdrawal liability (also a creation of MPPAA) which imposes an ‘‘exit fee’’ on employers that cease to participate or no longer have an obligation to participate in a multiemployer plan with unfunded vested benefits. This exit fee represents either the 

departing employer’s proportionate share of the overall plan underfunding, or, under 

certain methods, liabilities that are directly attributed to that employer. It was enacted to stem the departure of employers from plans who realized they could transfer their liabilities to their competitors without penalty in the period immediately 

following the passage of ERISA. 

The risk characteristics of the two guaranty funds was reflected from inception 

in much lower guarantee levels and corresponding premium structures for multiemployer plans. The adequacy of this structure for the multiemployer fund was evidenced by the fact that it operated at a surplus from 1982 until 2002, (cor-
46 

responding with the end of the first of the two ‘‘once-in-alifetime’’ market contractions in the past decade and the doubling of guaranteed benefits to their current 

levels) and the fact that only 23 plans had ever received funding assistance from 

the PBGC through that time. The increase in 2001 marked the only time benefits 

had been raised since the guaranty fund’s inception, bringing the maximum guaranty level to its current modest level. The current PBGC multiemployer plan benefit 

is a function of a formula based on the participant’s accrual rate and years of service, providing 100% of the first $11 of the accrual and 75% of the next $33. For a 

participant with 30 years of service, the maximum guarantee is $1,072.50 per 

month ($12,870 per year), or approximately one-fourth of the current single employer guaranteed amount. 

It is also important to note that unlike in a single employer plan failure, the 

PBGC does not assume the operation of a multiemployer fund; rather, the fund continues to operate as it had in the past, paying benefits and performing normal administrative functions until the plan becomes insolvent. At that time the plan is required to reduce benefits to the statutory guarantee levels and receives a ‘‘loan’’ 

from the agency to continue to make required benefit payments to remaining plan 

participants. 

In relative terms, the number of plans that have received assistance from the 

guaranty fund has remained low when compared with the single employer system. 

While the number of multiemployer plans has decreased from 2,244 in 1980 to the 

current level, the vast majority of plans that are no longer free-standing were 

merged into plans that were significantly larger or stronger (especially plans with 

5,000 or more participants), generally producing plans that are stronger, with an 

expanded contribution base of employers and reduced administrative overhead created through the greater economies of scale. Nevertheless, with the onset of the 

‘‘Great Recession’’ of 2008, many plans that had entered the year well funded (see 

below) were faced with significant funding challenges, with some passing beyond the 

point where they could be expected to recover. In the latest (2011) annual report, 

the PBGC deficit has increased from $1.4 to $2.8 billion with assistance being paid 

to 49 plans totaling $115 million in FY 2011. Furthermore, they forecast future liabilities for plans that are ‘‘reasonably probable’’ to need the assistance of the Guaranty Fund to reach $23 billion. While one might assume this large increase would 

imply widespread plan failures, the fact of the matter is that these liabilities are 

essentially attributable to two large plans that exist in industries that have been 

adversely affected by public policy decisions with unintended consequences that 

were severely impacted by the market failures. These plans and efforts to address 

their situation will be discussed in greater depth below. 

The Funded Position of Multiemployer Plans 

As a rule, multiemployer funds have been very well funded, in part in response 

to the parties’ desire to eliminate unfunded vested benefits that would result in assessment of withdrawal liability. Comparisons with the funded status of single employer plans often misinterpret that fact when observing that multiemployer plans 

had typically been funded at levels that were significantly lower than single employer plans. What is missed in drawing that conclusion is the fact that contributions to single employer plans are set by the employer and when they became overfunded (or even funded above the minimum funding requirements) as was common 

during the late 1980s and 90s, the employer simply made no further contributions. 

Conversely, multiemployer plans are funded as a result of contributions negotiated 

in binding collective bargaining agreements. In most cases, the plan fiduciaries that 

are responsible for determining benefit levels do not have the authority to waive or 

adjust the required contributions. Therefore, plans that reached their maximum deductible contribution levels had no alternative than to raise the plans’ benefit levels 

(and corresponding liabilities) in order to protect the current deductibility of the employers’ contributions. It has been estimated that upwards of 70% of all multiemployer plans were required to take that action in the years leading up to the millennium. 

This conflicting public policy objectives (ensuring adequate funding of pension 

plans, but preventing the tax sheltering of income above full funding) failed to recognize the underlying premise of long-term funding assumptions: that in order for 

a long-term assumption to work it is necessary to be able to set aside gains in years 

that exceed that assumption in order to make up for years in which the markets 

underperform. This shortcoming was addressed in the Pension Protection Act of 

2006 (PPA), but unfortunately, the action came too late for most plans. 

By the time the situation was corrected, many plans had taken on liabilities that, 

due to the anti-cutback provisions of ERISA, could not be rescinded and are now 

a part of the plans’ costs. While the market downturn that led to the passage of 
47 

4 Entering 2008, the average multiemployer plan was approximately 90% funded on both a 

market and actuarial value of assets basis. (See DeFrehn, Randy G. and Shapiro, Joshua; ‘‘Multiemployer Pension Plans: Main Street’s Invisible Victims of the Great Recession of 2008’’; National Coordinating Committee for Multiemployer Plans; April 2010; Page 18.) 5 Ibid, page 20. 

6See ‘‘Road to Recovery . . .’’, page 8. 

the Pension Protection Act of 2006 (PPA) resulted in significantly increased contributions and reduced future benefit accrual reductions in anticipation of its implementation, most plans entered 2008 well funded with an average market and actuarial value of assets of approximately 90%.4 When the first required ‘‘Zone Certifications’’ were completed at the beginning of 2008, 80% of all plans reported they 

were in the ‘‘Green’’ zone. One year later, their fortunes had reversed, with only 

20% reporting Green Zone status, direct casualties of market declines.5

In response to the uncertainty of the depth and duration of the recession, Congress passed limited relief in the form of the Worker, Retiree and Employer and Relief Act of 2008, followed by additional reforms in the Preservation of Access to 

Medicare and Pension Relief Act of 2010. These measures, coupled with direct action 

by plan sponsors (70% of which had increased contributions, approximately 35% had 

reduced future accruals, or adjustable benefits and over 40% that did both) enabled 

many plans to begin the climb back to the Green Zone. In 2010, approximately 

48% 6 had done so and by 2011, according to a survey by the Segal Company, that 

number had increased to approximately 66%. While certainly encouraging, and a 

sign of improving strength across the majority of plans, the sluggish recovery continues to depress contribution income, offsetting much of the strength of the investment returns of 2009 and 2010. 

Severely Troubled Plans 

While many plans were able to benefit from the relief, a few had suffered a fatal 

blow due to fraud (Madoff and other similar situations), or simply because the industry could no longer survive. As noted above, two specific plans requiring relief 

have suffered from unintended consequences of other public policy decisions: in one, 

the deregulation of the trucking industry in 1980 resulted in the decline and demise 

of virtually all of the major contributing commercial carriers; in the other, the Clean 

Air Act caused the cessation of a large portion of the bituminous coal mining industry that previously contributed to the plan, resulting in an active employee population that is a small fraction of the previous number and a retiree to active ratio 

of 12:1. In both instances, the plans had managed to remain well funded until the 

unprecedented market collapse imposed irrevocable harm on the plans’ investments. 

In response to demonstrations of the need for additional, targeted relief by the 

multiemployer community, companion proposals were introduced in both the House 

(the ‘‘Preserve Benefits and Jobs Act’’) and the Senate that would have provided 

much needed assistance to these severely troubled plans while preserving a portion 

of the plan that could remain viable for future participants, primarily by reducing 

the exposure of contributing employers and to the PBGC by modifying the existing 

rules governing partition; however, these particular provisions were not included in 

the final relief measures. 

Similarly, we had strongly advocated for extending the authority previously exercised by and acknowledged by the PBGC, to facilitate mergers of weaker plans into 

stronger ones in the same industry to achieve the same objectives of the hundreds 

of mergers which took place since 1980, but which have become more problematic 

under the current fiduciary constraints imposed by the Pension Protection Act. 

In looking to the future, we would encourage Congress to reconsider each of these 

measures as a way to reduce the potential financial exposure to all stakeholders and 

ensure that the safety net available through the multiemployer guaranty fund is 

preserved. 

Meeting Future Challenges 

The Pension Protection Act of 2006 contains funding provisions for multiemployer 

plans that are scheduled to sunset at the end of 2014. In our collective experience 

with the existing rules it has become apparent that they are not sufficiently adaptable to the level of volatility plans have experienced in recent years and that they 

will need to be modified going forward. We have welcomed the interest shown by 

your Committee staff and that of the other Committees of jurisdiction, as well as 

the regulatory agencies in learning how the Act could be modified to better meet 

the needs of plan participants, sponsors and the plans themselves. 

In the course of reviewing proposals for modifications, we have come to the conclusion that now is an appropriate time to consider taking a more fundamental assessment of the rules governing the multiemployer defined benefit system. We recognize 
48 

that the body of law and regulations that has evolved over the past 60 years has 

become unwieldy and in many ways runs counter to the original intent of providing 

affordable worker retirement security with predictable costs and minimal administrative burdens for the contributing employers. 

Retirement Security Review Commission 

In order to ensure that the interests of all stakeholders are reflected in this evaluation, the NCCMP has convened a ‘‘Retirement Security Review Commission’’ comprised of representatives from over 40 labor and management groups from the industries which rely on multiemployer plans to provide retirement security to their 

workers. The group began its deliberations in August and meets monthly to evaluate their collective experience with current laws and regulations. The group has 

adopted a methodology that reaches out to a variety of disciplines to systematically 

review current and potential plan design, funding, economic, investing and regulatory environments to identify what currently works and any statutory and regulatory impediments to achieving its objectives. 

The group has limited its objectives to two: 

1. Ensuring that any recommendations to modify the existing laws or regulations 

provide regular and reliable retirement income; and 

2. Reducing the risks to employers that provide an incentive to existing employers 

to withdraw from the system and present impediments to new contributing employers from joining. 

The Commission has established an ambitious time table for its deliberations with 

a target of developing legislative recommendations by this summer. We look forward 

to providing periodic briefings as the project evolves and to extensive collaboration 

to achieve needed modifications that will enable multiemployer plans to survive and 

provide affordable, reliable and secure retirement income to future generations of 

American workers and employers. 

Conclusion 

We appreciate this opportunity to share our comments with you on the future of 

multiemployer defined benefit pension plans and on the importance of preserving 

the existing safety net for participants of plans that can no longer provide such security on their own and look forward to your questions. 

Chairman ROE. Thank you. 

Dr. McGowan? 

STATEMENT OF JOHN McGOWAN, PROFESSOR, 

SAINT LOUIS UNIVERSITY 

Mr. MCGOWAN. Yes. Thank you. 

Honorable Chairman Roe, Member Andrews, member of the subcommittee, I am honored and appreciate the opportunity to be here. 

My interest is also in multiemployer plans. I have done some research, and I bring this into the classroom for the students and it 

is an amazing opportunity for me to hear from respected members 

of Congress about how you are dealing with these important problems. 

I looked at, in my study, Form 5500 data, and I see a slightly 

different pattern in Missouri. There is a steady, serious decline in 

the financial solvency of these multiemployer pensions. Admittedly, 

it is an anecdotal sample, but these are real pension plans that are 

going downhill. 

A little more detail about the state of PBGC with respect to multiemployer plans—Mr. DeFrehn talked about it, but a little more 

specificity, if you will. At the time of my 2008 report with respect 

to multiemployer plans there was $1.2 billion of assets and $2.1 billion of accrued liabilities—$700 million deficit. 

Okay, there seems like there has been a downward spiral for 

MDBP plans since then. September 2010 the deficit was $1.4 billion with respect to these plans. It doubled to $2.8 billion end of 
49 

2011, and it is projected in the recent PBGC report as going to $4.8 

billion. So it is going in the wrong direction. 

They talked about low interest rates and the PPA 2006 funding 

requirements. Maybe the committee could think about relaxing 

those. 

And one other idea I would toss out there is the withdrawal liability. Now, the idea was good at first, you know, when all of 

these employers exiting the plan to try to, you know, throw off the 

liability, but what is happening is new employers do not want to 

join—they want to have nothing to do with these plans because of 

the proposed withdrawal liability. They stay away from it like the 

plague. 

So maybe the thought is relaxing some of the withdrawal liability requirements for new entrants into the plan and make it less 

draconian and less obnoxious for new entrants to come in may be 

a way to change that dynamic with respect to withdrawal liabilities. 

Maybe modifying the partitioning rules. Central States was on 

ICU in May of 2010. Senator Harkin’s proposal, maybe changing 

some of the partition rules to deal with some of the weaker plans. 

And last, you know, there is a dynamic in the private sector, in 

either the assurance or banking industry, when you have major financial problems. In that case a guarantor is appointed by the 

state; they come in; they take charge of the assets, and then they 

do with—they consider the effects of all the claimants and do the 

best job they can to distribute those assets out to those claimants 

who have claims on those. 

At some point you might want to do that, because right now the 

unions themselves control all the pension assets and not the employers, which is a difference from the single-employer plan. 

Beyond that, I wish the committee all the luck in solving this 

very important dilemma. I appreciate you guys convening, and the 

remarks—I have been very impressed with them and I look forward to your results. Thank you. 

[The statement of Mr. McGowan follows:] 

Prepared Statement of Dr. John R. McGowan, Ph.D., CPA, CFE, 

College Professor and Author 

Honorable Chairman Roe, Ranking Member Andrews, and Members of the Subcommittee, I am honored and appreciate the opportunity to appear before you on 

the challenges facing PBGC and defined benefit pension plans. My name is John 

McGowan. I have been a professor at Saint Louis University for 25 years. My Ph.D. 

is in economics and I have a strong interest in retirement planning from both a 

writing and consulting perspective. My testimony today is offered on my own behalf, 

and not on behalf of any other organization. 

I honor the Subcommittee for holding this important timely hearing. The hearing 

is timely. The financial footing of MDBP plans continues to slip. My primary concern is the welfare of so many retirees depending on MDBP plans. In the same way 

I think it is important that taxpayers not pick up the bill because of poor planning 

by Congress. 

Presented next is an update to a study I originally performed in 2008. That study 

was based on 2006 data. My current study includes data through 2010. An overview 

of many MDBP pensions in Missouri paints a declining picture. 

Current retirement prospects for workers in US 

The primary focus of this report is the current and future prospects for defined 

benefit multiemployer pension (MDBP) plans in the US. The motivation for this report is to educate, inform and empower retirees involved generally in any type of 

retirement plan and specifically in MDBPs. More than at any other time in US his-
50 

tory, people should be actively involved in the planning and preparation of their retirement plans. 

It should be noted that challenges for retirees in the US are not limited to participants in multiemployer pensions. The US Census reports that the average retirement account for persons in the US is $50,000. Moreover, the median retirement 

fund is $2,000 and more than 43 percent of Americans have less than $10,000 saved 

for retirement.2 Nearly 1 in 4 Americans will rely on Social Security as their primary source of retirement. One major cause of retirement woes is the 20 percent 

decline of the S&P from 2000 to 2010. This decade long slide in the stock market 

has done little to brighten the retirement prospects for working Americans. 

On May 27, 2010, the GAO released a study entitled, ‘‘Long Standing Challenges 

Remain for Multiemployer Pension Plans.3 The report discusses in detail how multiemployer defined benefit pension (MDBP) plans face significant ongoing funding and 

demographic challenges. These challenges will lead to more plan failures and will 

increase the financial burden on the Pension Benefit Guarantee Corporation 

(PBGC). 

Multiemployer pension plans have a number of structural problems when compared with single employer pension plans. Such challenges include a continuing decline in the number of multiemployer pension plans and an aging participant base. 

A decline in collective bargaining in the United States has also left fewer opportunities for plans to attract new employers and workers. Consequently, the proportion 

of active participants paying into the fund has also been falling. 

The problems with MDBP plans are indicative of the overall structural economic 

breakdown of defined benefit plans in the US. Many companies have concluded that 

defined benefit pension plans are too rich and to costly to maintain after the economic crisis of 2008.4 Watson Wyatt documents the overall movement away from 

DB plans as part of their 2009 survey. They reported for the first time that Fortune 

100 companies began offering new employees only one type of retirement plan: a 

401(k) or similar ‘‘defined contribution’’ plan. Moreover, due to the financial strain 

on the PBGC uncertainty is growing with respect to the viability of failed single and 

multiemployer pension plans. 

In 1974 Congress attempted address the growing troubles brewing with employer 

provided pensions. They passed The Employee Retirement Income Security Act of 

1974 (ERISA). Congress thought they could regulate employee pensions and ensure 

their availability for retirees. Ironically, a good case can be made that these same 

rules are playing a major role in the decline and possibly ultimate collapse of these 

same pension plans. 

The first part of this report briefly discusses the unintended effects of ERISA. The 

second section looks at the current financial condition of the PBGC. Thirdly, a number of MDBP industry surveys are presented for the years 2008 thru 2011 to help 

assess recent performance of MDBP plans. In 2006 I examined Form 5500 data for 

a sample plans based largely in Missouri to gather anecdotal empirical evidence on 

the performance of MDB pensions. This study is updated and expanded in the 

fourth section of this report with data for 2007, 2008 and 2009. The following section reviews recent Congressional proposals to rescue certain MDP plans. This report concludes with a look at a couple of investment strategies for retirees and companies to consider in light of these challenging conditions. 

Current financial state of PBGC 

More than 10 million current workers and retirees rely on multiemployer plans. 

For decades, multiemployer plans were in reasonably good health, even in the face 

of industry decline. Unfortunately, for many multiemployer plans, that is no longer 

the case. Many are substantially underfunded; for some, the traditional remedies of 

increased funding or reduced future benefit accruals will not keep the plans afloat. 

At the time of my earlier report (McGowan 2008), PBGC assets supporting the 

multiemployer program had a value of $1.2 billion and accrued liabilities of $2.1 billion in the multiemployer insurance as of September 30, 2007. At that time the net 

deficit was $900 million. These liabilities represent the present value of future financial assistance for plans that PBGC has identified as ‘‘probables’’ for purposes 

of PBGC’s financial statements. A probable’’ plan is one that is currently receiving, 

or is projected to require, financial assistance. Thus, a ‘‘probable’’ plan is usually a 

terminated or insolvent multiemployer plan. Unfortunately, the downward spiral for 

MDBPs has accelerated since that time. By September 2010, the PBGC deficit related to MDBPs rose to $1.4 billion. By the end of September 2011, the MDBP related deficit at PBGC doubled to $2.8 billion. Similarly, the total PBCG deficit rose 

from $23 billion at the end of fiscal 2010 to $26 billion by the end of the 2011 fiscal 

year. 
51 

MDBP Surveys for 2008 thru 2011: Are They on the Road to Financial Recovery? 

A number of studies have been performed to assess the recent performance of 

MDBP plans. These results for these studies are shown chronologically in the next 

section. 

Financial Crisis of 2008 

The National Coordinating Committee for Multiemployer Plans (NCCMP) is an 

advocacy organization of multiemployer pension funds. Each year they perform a 

survey on the financial health of MDBP plans. This annual survey includes a major 

percentage of multiemployer pension plans. For the beginning of 2008 plan years 

the NCCPMP reported that over 75% of plans included in the survey were in the 

‘green zone’, indicating a strong financial position. During 2008 the financial crisis 

caused the average reported funded status to decline to 77% from 90% at the beginning of the year. Moreover, by the end of the year only 20% of MDBP respondents 

indicated their plans were still in the green zone. Similarly, 42% of plans in the survey identified themselves as critical status or ‘red zone’ plans. 

The plummeting financial status of defined benefit pension plans in 2008 was articulated in my earlier study (McGowan, 2008). That study analyzed certain 2006 

MDBP data and projected 2008 based on the plunging indexes of the stock market. 

At the time, a number of local trade unions were vigorously assaulting the study 

as flawed and inaccurate. However, a number of other studies described the same 

financial difficulties for 2008 multiemployer pension plans. For example, Watson 

Wyatt Worldwide observed that the top 100 multiemployer pensions were just 79 

percent funded.that the top 100 multiemployer pensions were just 79 percent funded.that the top 100 multiemployer pensions were just 79 percent funded.that the top 

100 multiemployer pensions were just 79 percent funded.that the top 100 multiemployer pensions were just 79 percent funded.that the top 100 multiemployer pensions were just 79 percent funded.that the top 100 multiemployer pensions were just 

79 percent funded. 

One major cause of this shift in MDBP plans can be traced to the investment results for 2008 where the median asset return was ¥22.1%. Moreover, the NCCMP 

report stated that the true impact of the crisis was even more dramatic than these 

figures indicated.8 The PPA funded percentage measure relies on the actuarial value 

of pension plan assets and typically recognizes investment gains and losses gradually over time. On a market value of assets basis, the average funded percentage 

was much worse. The average funded market value percentage declined from 89% 

to 65%. 

In addition to investment results, the financial impact on a plan is also a function 

of employment levels. When a plan becomes underfunded, it is important that there 

be a large population of active members with strong employment levels to create a 

contribution base capable of offsetting the shortfall. Unfortunately, an equally historic level of unemployment followed the historic market collapse of 2008. This unemployment level has also severely limited the ability of many plans to recover. 

Returns improve in 2009: high unemployment continues 

There was a high response rate for the 2009 NCCMP survey. Total plan participants numbered 6.3 million and represented 60 percent of the multiemployer plan 

population. Plans included in the NCCMP survey reported a median 2009 asset return of 16.6%. This figure however was not nearly enough to offset the devastating 

returns of the prior year. The International Foundation of Employee Benefit Plans 

(IFEBP) reported similar results in 2009 their survey of MDBP plans. As of August, 

nearly three-quarters of MDBP plans were less than 80 percent funded. The 2009 

IFEBP survey had a much smaller sample size (213 plans).9 Nevertheless, the results were proportionate and consistent with other surveys for that time period. The 

number of plans in the endangered or critical status had tripled from 2008. 

During 2009, participants and sponsors of multiemployer pensions responded by 

increasing contributions and reducing benefit accrual levels. Similarly, many plans 

in the IFEBP survey indicated that they were taking advantage of the temporary 

freeze option available to MDBP plans in 2009. 

Returns stable in 2010: unemployment shows little improvement 

Participants in the 2010 NCCMP survey declined to 3.6 million or approximately 

35 percent of multiemployer plans. For a second straight year, respondents reported 

strong investment returns in 2010. Consequently, these plans reported an increase 

in average fund status to over 82% from 77%. 

The 2010 strengthening for pensions was not confined to multiemployer plans. 

Milliman is among the world’s largest independent actuarial and consulting firms 

in the world. Their annual study covers 100 U.S. public companies with the largest 
52 

defined benefit pension plan assets for which an annual report (Form 10-K) is released by March 3 of the following year. Their study also reflected an overall improvement in funding status due to increased fund contributions. However, the improvement was somewhat curtailed by ongoing low interest rates. 

More specifically, the record cash contributions for these plans and investment 

gains (12.8% actual returns for 2010 fiscal year vs. 8.0% expected returns) were offset by the 7.7% increase in liabilities generated by the decrease in discount rates 

(5.43% for 2010, down from 5.82% in 2009 and 6.36% in 2008) used to measure pension plan liabilities. The lower discount rate coupled with record cash contributions 

culminated in a small improvement in the funding ratio for these plans in 2010. The 

average increased to 83.9% from 81.7%. 

Reasons for improved plan status in 2010 and 2009 

As noted in the NCCMP report, the number of plans in the green zone (more than 

80 percent funded under PPA 2006 rules) more than doubled from 20 to 48% by the 

end of 2010. Similarly, the number of plans in the red zone (critical status) declined 

from 42 to 32%. The report traced this improvement to three factors. First, there 

were strong investment returns. Second, the plans and sponsoring employers implemented a combination of contribution increases and benefit cuts to shore up their 

financial status. Thirdly, the funding relief provisions of the Preservation of Access 

to Care for Medicare Beneficiaries and Pension Relief Act of 2010 helped improve 

multiemployer funding status. 

Pension expense continues to rise for 2010 

Record levels of pension expense were recorded in 2010. A $30.0 billion charge 

was recorded for firms in the 2010 Milliman Pension Funding Study. There were 

11 companies with pension income (e.g., negative expense) in 2010, down from 16 

in 2008. Pension expense is projected to increase for 2011 as companies using asset 

smoothing are still reflecting the impact of losses in 2008. 

Accounting changes adopted by some companies 

A number of companies elected to recognize substantially all of their accumulated 

losses for 2010. This accounting change resulted in a significant charge to the yearend balance sheets for Honeywell, Verizon and AT&T. The elimination of this 

charge in 2010 will lead to a reduction of future years’ pension expense through the 

elimination of the annual charge to earnings for those losses. Milliman estimates 

that similar charge to earnings for the remaining 100 companies would have resulted in a $342 billion charge to their cumulative balance sheets and a reduction 

in their 2011 pension expense of about $19.9 billion. 

Proposed change to International Accounting Standards 

There is also a serious debate raging regarding whether International Accounting 

Standards should be converged with or adopted in place of U.S. GAAP. A proposed 

change to International Accounting Standards would eliminate the pension expense 

credit for Expected Return on Assets (8.0% for the Milliman 100 companies in 2010). 

Under this change, companies would have a pension expense equal to the discount 

rate on the excess of liabilities over assets (or a similar credit if the plan were more 

than 100% funded). If that change had been adopted for U.S. GAAP accounting in 

2010, the pension expense for the Milliman 100 companies (and the charge to corporate earnings) would have increased by about $30.0 billion. Such changes would 

have a commensurate effect on multiemployer pension plans. Therefore pension expenses would be pushed higher. 

Defined Benefit Plans in 2011 

A review of defined benefit plan performance in 2011 in Canada shows that things 

also took a turn for the worse. Towers Watson has kept a tracking index to represent defined benefit pension plans across the country for more than a decade. In 

2011, the index declined from 86 at the start of the year to 72 by the end. The index 

was at 100 in December 2000 and after a brief rise in 2001, has been on a steady 

decline ever since.10

Expected plan contributions expected for 2012 

CFO Magazine reports that big pension contributions are expected in 2012. According to a new report from Credit Suisse and accounting analyst David Zion, Companies in the S&P 500 will likely have to contribute $90 billion to fund pension plan 

gaps in 2012, up from $52 billion in 2011. 

A sample of Missouri based MDBP plans: an expansion and update 

My original 2008 study was also presented at a Senate Hearing on May 27, 

2010.11 The Senate Hearing was entitled: ‘‘Building a Secure Future for Multiem-
53 

ployer Pensions.’’ The purpose of this hearing was to address the structural problems of multiemployer pensions.12

The key findings of my 2008 report are: 

• The assumption of failing pensions by PBGC had led to an overall deficit of $955 million • By September 2007, the PBGC insured about 1,500 multiemployer (sometimes 

called union plans) plans and promised benefits to about to roughly 10 million participants • Multiemployer pensions problems were forcing fund managers to cut benefits • The other avenue to improve multiemployer fund status was to increase contributions • Central States required a withdrawal liability payment of $6 billion from UPS • Both employers and employees were encouraged to carefully consider the financial condition of multiemployer pension plans whether they were current or prospective participants 

Measuring the funding status of multiemployer plans 

The Pension Protection Act of 2006 places the task of computing the funded status 

of MDBP plans in the hands of the actuary. Various actuarial assumptions and 

methods are used to determine cost, liabilities, interest rates, and other funding factors. While these assumptions must be reasonable, they tend to make the actuarial 

value of the assets significantly higher than market value. For example, the actuarial value of the assets recognizes investment gains and losses gradually over time. 

The PPA 2006 directs actuaries to place MDBP plans in one of three separate 

zones: green for healthy (80% funded), yellow for endangered (65% funded) and red 

for critical (under 65% funded). Plans are in the green or healthy zone if they are 

more than 80 percent funded. Yellow zone or endangered plans are funded at least 

65 but less than 80 percent. Plans are also in the yellow zone if they have had a 

funding deficiency in the past 7 years. When a plan hits both conditions they are 

considered ‘‘seriously endangered.’’ According to Eli Greenblum, an actuary and senior VP of the Segal Co., ‘‘Yellow zone plans cannot cut protected or adjustable benefits, there is no official shelter from funding-deficiency penalties, and there are no 

employer surcharges.’’ 13 If a plan people covered by a traditional defined-benefit 

pension plan should receive a funding notice every year, which gives workers an 

idea of how well the plan is doing. However, people frequently do not have access 

to the funding notice. In these cases,FreeERISA.com.14 people can get a rough idea 

of how well their plan is doing by looking at Form 5500. Moreover, participants in 

private pension plans have the legal right to request the most recent Form 5500 

from their plan administrator. Participants can also find a less recent copy of the 

Form 5500 on a web site called 

Certain multiemployer pension administrators take such strong exception to the 

notion that people are able to get a rough idea of the financial solvency of their multiemployer pensions by looking at data on IRS form 5500. Then Pension Rights Center stands behind this notion and presents it clearly on their website.15 The Pension 

Rights Center encourages people to determine the funded status of their pension by 

dividing the current value of plan assets by the ‘‘RPA 94’’ current liability. The RPA 

94 (Retirement Protection Act of 1994) current liability is based on the present 

value of benefits accrued to date. This liability is discounted using a statutory interest rate assumption range that is tied to average long-term bond yields.16 Numerous 

studies have used this funding ratio as provided on Form 5500 as a proxy for the 

financial solvency of multiemployer or union pension plans.used this funding ratio 

as provided on Form 5500 as a proxy for the financial solvency of multiemployer 

or union pension plans.used this funding ratio as provided on Form 5500 as a proxy 

for the financial solvency of multiemployer or union pension plans. 

Sample of MDBPs in Missouri 

This study expands on the sample of Missouri based multiemployer pensions next. 

As can be seen from a casual review of the actuarial data presented here from Form 

5500s is that these plans are not doing well. • Serves Laborers’ International Union of North America Locals #42, #53, and 

#110. 

Congressional Efforts to ‘‘Rescue’’ Certain Underfunded MDBP Pension Plans 

In May 2010, Senator Casey introduced S. 3157 under the title of Create Jobs and 

Save Benefits Act of 2010. The bill mirrors legislative proposals introduced in 2009 

by Reps. Earl Pomeroy and Patrick Tiberi. Among other things, the bill proposes 

to transfer all pension liabilities of ‘‘orphan’’ retirees—those who had worked at the 

now-defunct trucking firms whose pensions are being funded by the surviving truckers to the PBGC. Senator Casey characterized the current dilemma as follows, ‘‘The 
54 

current costs of multi-employer pension compliance represent a huge, hidden tax on 

large and small business.’’ This characterization understates the problem. Michael 

H. Belzer, a professor at Wayne State University is one of the nation’s foremost experts on tru8cking labor law. He was correct when he recently said, ‘‘the multi-employer concept was ‘‘dumb’’ and an inconceivably great failure’’ of public policy. 

6. What is a realistic option for workers going forward? 

Congress should have the courage to address the real problems with MDBPs. The 

solution is not to write a blank check to fund these pensions. The private sector is 

reflecting modern economic reality when it comes to pension plans. There will be 

a continued migration away from DB plans and toward 401K plans, or perhaps 

some combination of DB and 401(K) plans, and possibly forced contributions from 

both employers and employees to retirement plans. 

REFERENCES

BNA, Pension Protection Act Center at http://subscript.bna.com/pic2/ppa.nsf/id/ 

BNAP-6ZKK7E?OpenDocument. 

Defrehn, R.G. and J. Shapiro, ‘‘The Road to Recovery, The 2010 Update to the 

NCCMP Survey of the Funded Status of Multiemployer Defined Benefit Plans,’’ 

See http://www.nccmp.org/. 

McGowan 2008, The Financial Health of Defined Benefit Pension Plans: An Analysis of Certain Trade Unions Pension Plans, U.S. Senate Committee on Health, 

Education Labor and Pensions. 

ENDNOTES

1 I would like to acknowledge the support of Associate Builders and Contractors. The views 

reflected in this study are my own and do not necessarily reflect those of Saint Louis University. 2 C. Sutton, CNN Money, March 2010. 

3Statement of Charles A. Jeszeck, Acting Director Education, Workforce, and Income Security 

Issues as part of Testimony Before the Committee on Health, Education, Labor and Pensions, 

U. S. Senate. 4S. Block, ‘‘Traditional Company Pensions are going away fast,’’ USA Today, May 22, 2009. 

5Leveson, I, Economic Security a Guide for an Age of Insecurity, iUniverse p. 18, April 29, 

2011. 6See, Moody’s: Growing Multiemployer Pension Funding Shortfall is an Increasing Credit 

Concern,’’ Sept. 10, 2009. 7See, Furtchgott-Roth D., and A. Brown, ‘‘Comparing Union-Sponsored and Private Pension 

Plans: How Safe are Workers Retirements?’’ Hudson Institute, September 2009. 8Defrehn, R.G. and J. Shapiro, 2010 Update to MCCMP Survey of Funded Status of Multiemployer Defined Benefit Plans, p. 1. 9See Wojcik, J., ‘‘73 percent of multiemployer pension plans underfunded: Study,’’ Business 

Insurance, Sept. 29, 2009. CBC News.CA, ‘‘Defined benefit pension plans had bleak 2011,’’ Jan. 

4, 2012. 11See summary at http://www.help.senate.gov/imo/media/doc/McGowan.pdf 12See http://www.help.senate.gov/imo/media/doc/McGowan.pdf. 13See comments by Eli Greenblum at March 21, 2007 at BNA sponsored pension conference. 

goes into the red zone or funding level below 65 percent, the trustees must adopt a rehabilitation plan. Pension trustees may reduce certain benefits under the rehabilitation plan. 14See:http://www.pensionrights.org/publications/fact-sheet/how-well-funded-your-pensionplan. 15http://www.pensionrights.org/publications/fact-sheet/how-well-funded-your-pension-plan. 16See: http://www.actuary.org/pdf/pension/moodys—march06.pdf Letter from D.J. Segal, VP 

of Pension Practice Counsel to American Academy of Actuaries March 1, 2006. 17See: Allen, S.G., R.L. Clark, and A.A. McDermed, ‘‘Post-Retirement Increases in Pensions 

in the 1980s: Did Plan Finances Matter?’’ National Bureau of Economic Research Working Paper 

#4413; D., Furchtgott-Roth, ‘‘Union vs. Private Pension Plans: How Secure Are Union Members’ 

Retirements?’’ Hudson Institute, Summer 2008, September 2009; Addoum, J.M., J.H. van 

Binsbergen, and M.W. Brandt, ‘‘Asset Allocation and Managerial Assumptions in Corporate Pension Plans,’’ Duke Working Paper 2010; McGowan, J.R., ‘‘The Financial Health of Multiemployer 

Pension Plans, PBGC and the Recent Government Bailout Proposal: Create Jobs and Save Benefits Act of 2010,’’ Report prepared for Senate Committee on Health, Education, Labor and Pensions: Building a Secure Future for Multiemployer Pension Plans, May 27, 2010, See: http:// 

help.senate.gov/hearings/hearing/?id=6a51d13d-5056-9502-5d61-e47c92a6a05f. 

Chairman ROE. Thank you, Dr. McGowan. 

I am going to just start by—with Ms. Haggerty, if you don’t 

mind, and want to thank you for making the investment in U.S. 

companies, for funding your pension plan. And I have got to ask 

you, how do we get out of this catch-22? 
55 

Let me go back 30 years. This would have been no problem—I 

remember the first home I bought was 15 percent interest—is still 

living in the same house. I Mastercharged the house. That is what 

the interest rates were in 1982. 

And when you plug these formulas in—and I, you know, refinanced it 50 times until they got down to a reasonable interest 

rate, but that is easy when you plug 10 percent return, or 15 percent. If you were to plug the same rules in your pension plan would 

have been overfunded forever if you looked at that and carried on, 

as Mr. Porter was saying. 

So how do we get out of when the Fed has something to do with 

monetary policy, holding it way down, which forces this liability? 

How do we get out of that? 

Ms. HAGGERTY. That really is the purpose of the industry stabilization proposal, or the funding stabilization proposal, because if 

you look at interest rates over a much longer period of time than 

the act now allows you to do, like 25 years, and if you take out the 

peak—so you would cut off the 15 percent, which would probably 

unfairly reduce the level of your liability—but you would also cut 

off the low interest rates and look at something that over time is 

much more realistic, if you do that and you do that for an extended 

period of time it has the effect of smoothing out the contributions 

for long periods of time, which makes it much easier for companies 

to plan what their funding is going to be and to keep up with it 

on a regular basis. 

Chairman ROE. What length of time are you speaking of? 

Ms. HAGGERTY. Well, our proposal is to—there are really two aspects to the proposal. One is to stabilize the discount rate by using 

these longer-term maybe 25-year rates and cutting off the extremes, okay? 

The other part of it that goes hand-in-hand with the proposal is 

to take any shortfall amortizations that you might have because of 

the volatility in the market or how you measure your obligation 

and amortize that over 7 years if your plan is less than 80 percent 

funded, which is, you know, what we are doing today. But if you 

are in the 80 to 100 percent funded, so you are a reasonably well 

funded plan and there are a lot of reasons why companies want to 

be in that zone instead of below 80 percent, you know, with the 

benefit restrictions and what have you, then you can amortize that 

shortfall over 15 years. So by stretching it out you are smoothing 

out how you fund your plan, and the—I can’t tell you how much 

effect this low interest rate is having on how people calculate what 

is going to happen just over the next couple of years, so it is important that we do something now. 

Chairman ROE. Here is the other thing that I want to ask you 

is that—before I came here, as I said, I was on my medical practice’s pension plan and worked on that, but secondly, I was mayor 

of the city—Johnson City, Tennessee. And in looking at that we 

looked at—from the time I went on there, the 6 years I was on the 

city commission, we went from paying 12 percent of an employee’s 

salary to 19 percent in making up that difference, and it became— 

it looked almost inconceivable that we kept going up. And as the 

market went down the taxpayer liability went up and up and up. 
56 

So what our city did was a promise made is a promise kept. If 

you are working for the city right now that is the plan you have; 

we are going to honor that plan. But going forward, you are going 

to have a defined contribution plan if you are a new hire to the city 

so you will have some idea—future taxpayers down the road won’t 

be on the hook for just what you are talking about. 

I agree. I think you have got to have a better way—a longer way 

to look at this, because your—I mean, I think I read in one of the 

testimonies this is a 50-year—many of these pensions—I think it 

was yours—is going to be—pay out over 50 years, not over 2 years, 

and—— 

Ms. HAGGERTY. Absolutely. 

Chairman ROE [continuing]. And what do you think? And I 

haven’t got much time left, but what do you think the future of the 

defined benefit plan is? 

Ms. HAGGERTY. Well, Mr. Chairman, I think that we have seen 

the future playing out before us and the defined benefit plans are 

being reduced, you know, in multiples every year. We, in fact, 

closed our defined benefit plan to new entrants in 2003 as a result 

of some of the risks that we saw on the horizon, and most of the 

participants in our current plan are current retirees but we expect 

to be continuing to pay for that for well over 50 years. 

But I think you are seeing people being driven out of defined 

benefit plans. I think that people were able to, as you did in the 

city, to create defined contribution plans that are quite valuable to 

their employees. 

You can make them competitive for employees. In this day and 

age they tend to move from company to company so it is much easier for them to take their retirement with them. They don’t have 

that option with a defined benefit plan; they may never get vested. 

So I think we have to be flexible with some of these structures 

but I think that we also need to encourage people that still have 

defined benefit plans to fund them in a reasonable way. 

Chairman ROE. Thank you. 

I yield now to Mr. Andrews? 

Mr. ANDREWS. Thank you, Mr. Chairman. I would like to begin 

by asking unanimous consent to enter into the record a letter from 

the ranking member, Mr. Miller, to Mr. Gotbaum; and a letter from 

Dana Thompson, of the Sheet Metal and Air Conditioning Contractors, to yourself and myself; and also to ask unanimous consent 

that some questions for the record be submitted to the witnesses, 

as well. 

[The information follows:] 
57 

COMMlneE ON EDUCATION 

AND THE WORKFORCE u. IIDUI5f: 01' ft[f'AESEHl ....... 

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58 

February 1, 2012. 

Hon. PHIL ROE, Chair; Hon. ROB ANDREWS, Ranking Member, 

Subcommittee on Health, Employment, Labor and Pensions, Committee on Education 

and the Workforce, U.S. House of Representatives, Washington, DC 20515. 

Re: Examining the Challenges Facing PBGC and Defined Benefit Plans 

DEAR CHAIRMAN ROE AND RANKING MEMBER ANDREWS: I am writing on behalf of 

the Sheet Metal and Air Conditioning Contractors’ National Association (SMACNA). 

SMACNA is supported by more than 4,500 construction firms supplying expertise 

in industrial, commercial, residential, architectural and specialty sheet metal and 

air conditioning construction throughout the United States. The majority of these 

contractors run small, family-owned businesses. Pension funding issues figure 

prominently in the day-to-day business decisions of SMACNA contractors. In 2010, 

SMACNA contractors contributed more than $315 million to the Sheet Metal Work-
59 

ers’ National Pension Fund (NPF) and many of the contractors also contribute to 

a local defined benefit pension fund. Overall, construction industry plans comprise 

approximately 54 percent of multiemployer defined benefit pension plans. 

SMACNA is pleased you are holding this hearing and believe it is a good beginning to a long process. Few in Congress fully understand how multiemployer pension plans work and the serious consequences of not addressing the issues facing 

the plans when the Pension Protection Act (PPA) sunsets in 2014. Labor and management have both recognized a need to improve the health of plans and are working jointly with each other and government to jointly develop solutions to ensure 

the plans and the system are sustainable. The current rules, the economic environment and the instability of the equity markets have all converged to put plans at 

risk which threatens the viability of contributing employers. The construction industry has been especially hard hit by the lingering economic recession. 

Taking a balanced view of the PPA, it is fair to say it helped employers and plans 

but has proved inflexible in the face of changing equity markets and depressed construction economic markets. The PPA has made positive changes. It: 

• Requires timely and extensive reporting so that all contractors are well-informed on the status of the fund and their fund obligations—problematic before PPA 

enactment; 

• Allows funds needing corrective action to take 10 or 15 years to bring the fund 

to a better funded position. Before PPA, contractors contributing to some funds were 

facing funding deficiencies, which had to be made up in full by employers in under 

one year. In addition, excise taxes of five and ten percent and higher could be levied 

by the IRS on the employer, benefitting the U.S. general treasury and not the fund; 

• Forces funding issues to be addressed; 

• Allows for reduction of some accrued benefits for plans in the worst shape; and 

• Maintains the integrity of the bargaining process. 

However, more reforms are needed. PPA proved inflexible for construction employers who operate on a very thin profit margin and must maintain positive cash-flow 

until the completion of a construction project. 

• A second historic equity market plunge occurred and investment returns for 

plans plummeted below the expected rate of return and into massive losses. 

• The construction market hit a long-term market cycle depression. 

• Congressional relief was hard to get and slow to come. 

• PPA did not take market cycle or another massive equity loss into account. 

Fund conditions worsened. PPA funding targets could not be met; 

• Employers continue to look at increased contributions, and workers face reduced 

wages and benefit accrual reductions at a time when it is a significant hardship fostering intergenerational conflict among workers in the industry. 

SMACNA employers know there are painful steps that must be taken and that 

structural reforms are needed. Life expectancy has increased and most Americans 

are unable to accumulate sufficient retirement income to live securely. SMACNA 

member firms take pride in the living wages and good benefits they provide their 

employees and they are committed to providing long-term retirement security to 

their workers as they simultaneously work to ensure the viability of their companies. We are willing to work with our union partners and Congress to enact reforms 

to create an environment where responsible construction employers working to do 

the right thing can continue to provide a long-term retirement that may look different than the current defined benefit system but will still provide retirement security for their workers. 

Respectfully, 

DANA THOMPSON, Assistant Director, 

Legislative Affairs, SMACNA, Inc., Capitol Hill Office. 
60 

COMMITTEE ON EDUCATION 

AND THE WORKFORCE U.S. IIOOSI! 01' _"'.nYU 1'0' IlAV"- _ OI"IO;I!.uI.DINC __ r .... II(: .,,1-4,ot 

Tho I~ Hilda L Soli, 

S<-.;n.'tO<} of'--

l .') Oq.nrneno: of ~ 

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1ht l1............,k Tim (".ci,""'" 

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I~ ......... ),...,;"A'· ...... N.W . .... _..-.nc 20.:!2O 

The lloo<>oabk: JolIn I!.llr}_ 

S«mar} ofCCIITorI<n:c 

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(PUG!"). I om .. n,;", 10 npre<-< "'Y _-., <OO<mt "' .. "'" fajl"", of PIj(lC 10 ......... a foi, and 

..,.,""' ...... counlina of"'" ",.....", rrnmi ... rIIIdc-,o ,hi><"U'"f,'" "men. m,t«>. ond ,lrei, 

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...... ""' ... -.J frt"""" ... 11 "'""'olho IItt\nCc _, ofpension hnlefits '" .. 'hdI rh<) ott 

~ .... 
61 

AddiliomoIl, . 0K1 ....... 1i""!Iao _ oflho [11"'1ed Air!i .... pboo.s.!<1[ _ .. r.iW.., __ "1 

oppIio<aN< prof""",,,,", !IIMdoNo. conWl><Ii nI),'ad oInious cm><S and ""',_ .. ".11 .. 

un",I'P"""" """"Iu ....... ~ Thi. """finn, "Iuot UIG h:aI ~\ IOIISIr "'I""",d to .,. IS Uwnn:.n. 

and " 'hich fI''''''plod ,t.< _ """~'" i"''eOI'Jlllion. Ih>t PllC""oC IIad 0<ttpI<d • .....ru",.o{ 

poor q,..!'ty III.!.....w.«><Idm ...uu. _"""" "ilh "" u .. <od Air!m., __ The: 011,', 

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)'''''. No'" .ha, tile)' ha,'. bee" ..... "'W<'<l. i, i, ,im< '" . Inn up ,"" .. fI'O<"""'" ~ hasL. 
62 

"""' ....... 10. :!OIl 

..... ' 

I btl""" Ihoo .......... ~~ ... imrn<.Iiao< i....,.-<1IliI>n. I "'" !hoi lOll .. uri: "jot. OK; """ rooc !O idootoufy oil III", .. ~ 'iI< ,a/...oon and """"n, .... 1cu~1OII wort ptffoonrd 011 .ht U!'Iioc-d Airl;1I<t J'I<"'"'" rl"". - "" ,,',11 ., _II "'"., rl"". hano;Jl,-d .j"". ,lie ''''''plioo o(]MRO', ,,~, ~ "" ,he>< 

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....... ,. 

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cc: TII<I~LI"><I"""'.,. 

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'.s~ <tlJu ..... 

I "" l""""""I • .kWI Klil'll: 

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Comm;"« "" I..!_IOII """ "'" It.....uo.w 
63 

COMMITIEE ON EDUCATION 

AND THE WORKFORCE u s ~ 01' II£PfIUO<TAl'M!1 ,.~ RO._ tIOUSE Off>CI __ 

_ TON.IIC ,,, ....... "" 

"Ib" lI..,......,bk Ihld> L. Soli, 

S«rc~' '" Labo< U.S. l)q>onmrnl uf l.abo< 

2OO(,,,,, .. ;.Won A,,, .• 'I."" 

\\~Il.LlO.!IO 

110c Honorable Tom 0.."",.. 

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64 

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65 

Chairman ROE. Without objection, so ordered. 

Mr. ANDREWS. Thank you. 

This has been a very edifying two panels. Thank you for your 

contributions to it. 

And, Dr. McGowan, we could use all the luck you can give us, 

so thanks for contributing in many ways. 

Mr. PORTER [continuing]. And Ms. Haggerty, you have complementary but not identical ideas about how to reduce the gap in 

PBGC’s projections and not kill the goose that laid the golden egg 

by not requiring employers to put more in than they are. 
66 

What argument would you make to a skeptical taxpayer who 

would say, ‘‘Well, if you make more generous interest rate assumptions from the point of view of the plan’s sponsor and things go 

wrong, as they have so often in the last couple years in American 

financial sector service—things go wrong, and therefore the plans 

aren’t as healthy as we thought they were going to be, and therefore the PBGC’s obligation is more likely to be invoked, and therefore some moral hazard to the taxpayer is likely to be invoked’’? 

What would you say to that skeptical taxpayer about each of your 

proposals? 

Mr. PORTER. First, I think I would step back for a moment. Mark 

to market—— 

Mr. ANDREWS. Skeptical taxpayers don’t let you do that, but—— 

Mr. PORTER. I understand. I hear you—apologize. 

Fundamental underpinning of mark to market accounting is a 

belief, in many sectors, that free market interest rates form the 

basis of proper accounting and proper measurement. Today’s interest rates are not free market. 

If it is true that free market interest rates are the proper way 

to measure liabilities what can we say about interest rates that are 

artificially constrained? They are not proper—— 

Mr. ANDREWS. Okay. 

Mr. PORTER [continuing]. Okay? 

We don’t know what the right number is; we don’t know what 

rates would have been had the market been allowed to operate 

freely. But what we do know is what we have is constrained. And 

it ripples through the corporate bond rates, and it ripples through 

the interest rates the PBGC is using, through the annuity purchase 

rates that it is quoted. 

Everything is operating in a constrained mode, not in free market mode for now, and will continue at least through 2014. What 

we are proposing, however it is done, is to find some way to back 

out the artificiality that is in the marketplace today and have 

something that more reasonably reflects the long-term market and 

where it would have been in a free market. 

Mr. ANDREWS. Would you agree that it should reasonably reflect 

the most responsible but pessimistic view of the free market in the 

long run to be conservative? In other words, I understand you are 

talking about substituting for the market some metrics that would 

drive the interest rate because we are looking over the long term. 

Don’t you think it would be prudent to take the most pessimistic 

credible forecast and use that? 

Mr. PORTER. I don’t know that I would agree with the most pessimistic because there are some people in this country who can be 

extremely pessimistic beyond reason. I would think that it needs 

to be—— 

Mr. ANDREWS. All of the United States Senate, on many occasions. [Laughter.] 

Mr. PORTER. I am not pointing fingers. 

I think a reasonable conservative view is appropriate. The most 

conservative, I think—you are always going to find somebody who 

would write—rather be more conservative than the next person. 

Mr. ANDREWS. Kind of ironic we are having this discussion this 

morning because on the House floor in a matter of minutes is going 
67 

to be a piece of legislation that would compel the CBO to do something called dynamic scoring on tax cuts, and it would write into 

law the supply side religion. And there is some evidence that supports that tax revenues do grow over time when rates are lower, 

but it really isn’t a compelling case, and the House is about to do— 

to write into law or try to write into law the most optimistic forecast about revenues, which I don’t think would serve us well. 

Ms. Haggerty, what do you think about this question? 

Ms. HAGGERTY. I guess I would just say that—I am sorry; I did 

turn it on—but I would just say that the risk of going too conservative is that you will have companies that are not investing in important things that need to be—that we need for this country. And 

I could just give you an example: In 2009, when things were so difficult for our company, we pushed off some significant capital investments in coke facilities that we needed—about $750 million of 

capital we delayed. 

Mr. ANDREWS. You don’t mean the Coke Brothers. You mean—— 

Ms. HAGGERTY. I mean coke for steel-making. So, but, you know, 

it is an important thing for us and it was actually a—it is something that was very significantly—a very significant cost reduction 

project for us. 

And so we—you know, we made less money in the years since 

then because we failed to make those investments. And the more 

profitable we are the better able we are to make the long-term contributions that we need to make. 

So there is a balance that has to be struck here. We have to hold 

up to our obligations but we still have to have a company that is 

profitable enough to do it over the long term. 

Mr. ANDREWS. I thank you. 

I would say to the chairman that this is a matter, I think, that 

calls for his surgical skills, because I think there is a way—empirically speaking, there is a way to write into the law or write into 

our policy at least forecasting practices that do not constrain business investment but are sufficiently conservative to protect taxpayers. I really do think that there is a way to do that. I am not 

sure that the two proposals before us do that, but I think that they 

are a good start. 

And there is also a way, I think, then, to give, perhaps as a trigger, that if things don’t turn out to be so rosy that there is some 

mechanism that lets the PBGC get more revenue in order to meet 

its obligations. Perhaps that is a way we should look at this. 

I thank you and I yield back. 

Chairman ROE. Mr. Scott? 

Mr. SCOTT. Thank you. Thank you, Mr. Chairman. 

Mr. Chairman, we have heard from many of the members the 

preference for the defined benefit plan over the defined contribution plan, but the corporate interests are much more aligned with 

the defined contribution because you make the contribution then 

you can forget about it. There is no more risk and there is no more 

concern. 

What can we do to encourage corporations to stay with the defined benefit plans that take the risk of the market fluctuation off 

of the employee? Are there any things—are there any market, for 

example, for insurance products that you could buy as you go along 
68 

to create the—to pay the defined benefit? Is there any market for 

those products? 

Ms. HAGGERTY. I think that Director Gotbaum maybe was trying 

to imply that there was, but I guess I would just say it this way, 

sir: The defined benefit plan, it is a great benefit for somebody that 

is going to stay at a company for a longer period of time. A defined 

contribution plan benefit may actually be better for someone who 

would prefer to change jobs periodically because they can take it 

with them. 

So I would say that a defined contribution can be an excellent 

benefit but for someone that stays at one—in one place, like myself—I have been at U.S. Steel for 35 years—a defined benefit plan 

is an excellent thing to have. 

As far as having a product, there is no magic bullet that will 

take your obligation and turn it into, you know, what your payment is going to be, you know, and everything is going to come out 

right. I think people try to argue for de-risking plans, and I think 

that works for some. But by de-risking plans you are, in all likelihood, investing the funds in your plan at a rate that is much more 

comparable to your discount rate. So therefore, you are not really 

earning anything above that discount rate over a long period of 

time. 

And I would just argue, if you look at our history, over 60 years 

in our plan we have paid out probably close to $30 billion in benefits, yet we have—that is maybe five times the amount of contributions that we have had to put in. So we have had great success investing for the long term, and I think that is better for defined benefit plans to have the flexibility. 

Mr. SCOTT. Well, the problem is what goes up might come down. 

Mr. DeFrehn, you indicated a tax policy that discourages overfunding in the good years. Could you describe what that problem 

is? 

Mr. DEFREHN. Yes. For many years we had a problem with the 

full funding limitations of the code, which said that if you continue 

to make contributions to a plan that was fully funded the employer 

couldn’t take a current deduction for those contributions. 

If you think about these plans as being a collection of collective 

bargaining agreements—sometimes thousands of collective bargaining agreements related to one plan—the idea of trying to open 

those agreements at the point where the plan became fully funded 

and cease contributions was impractical. And also, the boards of 

trustees who are the fiduciaries for those plans are often not the 

same people who negotiate the plans—the arrangements. 

So they had little choice but to increase the liabilities through 

benefit improvements in order to raise the cost of the plan high 

enough to keep the contributions deductible. It seems like a bizarre 

way to go about doing it but it was the only route that was available until we were able to successfully get that resolved in the Pension Protection Act. 

Mr. SCOTT. Can any of the panelists comment on whether or not 

programs that are insolvent—whether or not they should pay a 

higher premium—risk-based premium—and how that should work? 

If you are woefully underfunded should your premium not be higher than somebody that is 100 percent funded—— 
69 

Mr. PORTER. If you are talking about insolvent there is nothing 

for them to—— 

Mr. SCOTT. Under 80 percent funded. Should there be a premium 

addition? 

Mr. PORTER. I guess there is a question—right now the rules say 

the—yes, you pay more if you are underfunded. Other rules—proposals that the PBGC has put out—is that you don’t base it on 

underfunding as much as you base it on the ability of the company 

to survive. 

We have a situation right now because of the artifice of the interest rates where they are where a lot of companies find themselves 

below 80 percent but never have before and most likely won’t be 

once interest rates return to a normal range. Do we charge people 

more simply because of the aberration of the marketplace? That 

doesn’t seem—feel right at all. So I am not sure that an absolute 

on 80 percent is the right answer, either. 

Mr. PORTER. Mr. McGowan? 

Mr. MCGOWAN. The other potential problem with that is it hits 

the pension plans at their weakest moment. Their risks go up when 

they are least able to pay and so it sort of accelerates, possibly, 

that downward spiral. So you might want to, you know, factor that 

into consideration when you are considering the level of higher premiums associated with risk because that could accelerate that 

downward decline. 

Chairman ROE. Mr. Altmire? 

Mr. ALTMIRE. Thank you, Mr. Chairman. 

And welcome especially to Ms. Haggerty. I, as you know, am 

from the Pittsburgh area myself and am grateful that you took the 

time to come have this discussion before the committee. 

Same for all of the panelists. 

And I did want to ask, you mentioned, Ms. Haggerty, in the previous question, about $30 billion in benefits over the past 60 years. 

You are speaking specifically and only about pension benefits, 

right? Retirement—— 

Ms. HAGGERTY. Correct. That is correct. 

Mr. ALTMIRE [continuing]. Not the other benefits? 

Ms. HAGGERTY. Right. 

Mr. ALTMIRE. And you address this a little bit in your testimony, 

but that made me think about that 60-year period, which we all 

understand what that has meant for our region in western Pennsylvania and for the steel industry in the country. And I wonder 

if you could talk a little bit more about maybe especially 30 and 

40 years ago and the very difficult times that the industry went 

through, and the decisions that were made, and the impact that 

they are having today on current employees and on retirees, what 

the lessons that were learned, and maybe in retrospect, were there 

decisions that you wish, in your current position, had been made 

differently at that time? And what can we learn across all sectors 

from that experience? 

Ms. HAGGERTY. Thank you, Congressman Altmire. Appreciate 

the question. 

If you look back in—the situation that the congressman is referring to is in the late 1970s and 1980s in our region we had to undergo a significant amount of restructuring in our industry and we 
70 

cut—we closed many facilities, and as a result we have many retirees today. I have 78,000 retiree—I have 78,000 participants in my 

main pension plan and maybe 90 percent of those are retirees, 

many from the 1970s and 1980s and the early 1990s when we had 

such difficulty. 

I would say that the lessons that we learned are good lessons for 

people and it really—I really have my predecessors to thank for it. 

In the early 1950s we began managing our own pension plan and 

we have managed it in house—we are kind of unusual in that regard—we have managed it in house since that time. And we have 

taken a very long-term view to investing the funds that have been 

entrusted in that plan. 

But one of the things that my predecessors did was that they 

funded the plan in the 1950s and they invested it in ways that 

were very wise and long-term oriented, and we were therefore able 

to restructure our industry and our company in the 1970s and 

1980s and still honor all of the benefits to the employees that we 

had made—all the promises that we had made. So I think it really 

is a great success story for taking a long-term view to funding and 

investing in a defined benefit pension plan. 

Mr. ALTMIRE. Dr. McGowan, I wonder from an academic perspective if you could comment on international competitiveness and the 

decisions that we have to make regarding the PBGC and the future 

of these types of retirement plans and pensions and what impact 

that is going to have on American manufacturing, which is of great 

discussion in this Congress, and our industry—what other countries are doing and what is the competitive nature of this policy we 

are talking about. 

Mr. MCGOWAN. Right. I really appreciate that question. I was 

wanting to make that very point 3 or 4 minutes ago and it is like 

a student asking the perfect question so I really appreciate that. 

You know, and the point is that we do live in a global economy 

where we have an international economic marketplace and companies in the U.S., in a sense, have to compete with those global companies. And around the world this dynamic of defined benefit pension plans kind of being replaced, as Ms. Haggerty said at U.S. 

Steel 2003, is going on and on relentlessly. 

And so for our companies in this country to compete in the global 

marketplace we have to come up with some other options. Realistically, like Mr.—you know, the chairman of the PBGC said, there 

are other options, like a combination of defined benefit-defined contribution, or just defined contribution. You know, I have a defined 

contribution plan with the university and they have matched it 

over—throughout the years, and I am going to be okay, with, you 

know, other investing and planning. 

So, yes, that is a great question. That brings up a really important point about how U.S. companies have to compete in a global 

marketplace. 

Mr. ALTMIRE. Thank you to the entire panel. 

And thank you, Mr. Chairman. 

Chairman ROE. Thank you to the gentleman for yielding. 

Again, I want to thank the witnesses. This has been a great two 

panels. I would like to thank you all for taking your time to come 

and testify on this very important issue. 
71 

My medical license is still current if we need any antidepressants 

after this panel. We can take care of that. 

I will yield now to the ranking member for closing comments. 

Mr. ANDREWS. Well, again, I want to thank both panels and you, 

Mr. Chairman, and our colleagues. We frankly should have more 

hearings like this in the Congress. 

This was a serious and, I think, substantive discussion of a real 

problem, and it is one I believe we can solve. I really do think we 

can thread that needle of making sure there are never any bailouts—taxpayer-funded bailouts of the PBGC—but doing so in a 

way that strikes the proper balance between a more rational accounting of what the situation really is and then more rational 

flexibility to raise revenue if we need to. I really do think this is 

a problem with a solution. 

And I look forward to working with you on that solution in a 

way, as we have, frankly—Speaker Boehner sat in that chair in 

2006, and I think that we produced a piece of legislation together 

that has improved the situation, along with minor assistance from 

the Senate, and I think we certainly could do that as well here. So 

I thank you for this opportunity. 

Chairman ROE. I thank the gentleman for yielding. And I will 

finish by saying that this is almost a catch-22. I see companies, I 

see employees wanting to work together because one of the great 

uncertainties, as you see people go forward, is outliving their 

money, is how do you figure out how to have enough retirement 

savings—Social Security, your own retirement, your pension plan, 

whatever it may be—to not outlive your money? And I think I see 

both employees and employers sitting here today trying to figure 

out how you do that and how you make a promise and you keep 

the promise. 

So I thank you for being here and this subcommittee will continue to work on this. Obviously there needs to be some work done 

and I think a combination or a blend is something that we will 

come up with. And I thank you all for being here. 

With no further comments, the meeting is adjourned. 

[Additional submissions by Chairman Roe follow:] 

February 1, 2012. 

Hon. PHIL ROE, 

U.S. House of Representatives, Washington, DC 20515. 

Re: Examining the Challenges Facing PBGC and Defined Benefit Pension Plans 

DEAR REPRESENTATIVE ROE: On behalf of the Associated General Contractors of 

America (AGC), I want to thank you for holding a hearing ‘‘Examining the Challenges Facing PBGC and Defined Benefit Pension Plans.’’ Multiemployer pension 

plans are common in the unionized sector of the construction industry and provide 

employers the opportunity to provide their employees with a defined benefit plan 

that gives them ‘‘portability’’ to earn continuous benefits as they go from job to job 

within the same industry. Of the 10 million participants in multiemployer defined 

benefit plans, nearly 45 percent are construction industry workers and retirees. 

The majority of multiemployer plans suffered significant losses as a result of the 

financial crisis. Recently enacted relief legislation and some improvements in investment returns have helped some plans, but the current rules, long-term demographics, and market conditions continue to put at risk the viability of the plans 

and their contributing employers. This is particularly true for the construction industry, which has been affected by the economic recession to a far greater degree 

than most industries. In short, further legislative reform is needed and, with the 

Pension Protection Act nearing sunset, the process must begin now. 

AGC believes that Congress should enact reforms that will: 
72 

• Provide a reasonable and secure retirement benefit for employees through 

shared risk; 

• Preserve the flexibility and protection of the ‘‘construction industry exemption’’ 

while mitigating the long-term effects of the ‘‘last man standing rule’’; 

• Share the burden equitably through benefit reductions and continued employer 

contributions; 

• Transfer appropriate amount of risk from employers to employees by facilitating 

and incentivizing the option to transition from a defined benefit plan to a defined 

contribution or hybrid plan; 

• Provide predictable contribution rates for employers and more tools to allow employers to prepare for and weather economic downturns; 

• Create formal mechanisms for rolling back participants’ accrued benefits when 

a defined benefit plan comes under severe financial stress, as a way to moderate 

employers’ financial exposure and thus revive their interest in sponsoring defined 

benefit plans; and, 

• Allow for the ‘‘de-risking’’ of multiemployer pension plans by lowering the expected rate of return gradually over a number of years to a level that is conservative 

and sustainable. The increased actuarial liability associated with lowering the expected rate of return should be amortized over a long period of time. Only after a 

plan over achieves its expected rate of return, could it grant benefit increases. 

AGC appreciates your leadership in examining multiemployer plans and looks forward to working with you on these important issues. The reforms recommend by 

AGC should never be viewed as a ‘‘union bailout;’’ rather, they are needed to help 

the tens of thousands of small employers that contribute to the plans and to protect 

the retirement security of their hardworking employees. 

Sincerely, 

JEFFREY D. SHOAF, 

Senior Executive Director, Government Affairs. 

Prepared Statement of Hon. John Engler, President, 

Business Roundtable 

Chairman Roe, we commend you, Ranking Member Andrews, and the other members of this Subcommittee for holding this hearing. Pension plans and the companies that sponsor them are facing unprecedented challenges in the current economic 

climate. A thorough examination of the operations of the Pension Benefit Guaranty 

Corporation (PBGC) and the current issues faced by defined benefit plans and their 

sponsors is warranted and timely. 

Business Roundtable (BRT) is an association of chief executive officers of leading 

U.S. companies with over $6 trillion in annual revenues and more than 14 million 

employees. BRT member companies comprise nearly a third of the total value of the 

U.S. stock market and invest more than $150 billion annually in research and development—nearly half of all private U.S. R&D spending. Our companies pay $163 billion in dividends to shareholders and generate an estimated $420 billion in sales 

for small and medium-sized businesses annually. BRT member companies provide 

retirement and health benefits to their employees and their families, including pension plans benefiting millions of workers and retirees. 

We believe that the best way to protect retirement security is for Congress to sustain a retirement system for private-sector employers that is fair and stable. All 

pension plans should be systematically funded to ensure that benefits are paid when 

due, but funding rules should not impose volatile, unpredictable, and untimely contribution requirements on employers. Nor should employers that voluntarily maintain pension plans for the benefit of their employees be threatened with the massive 

and unjustified premium increases that are then used to fund unrelated federal 

spending. 

As outlined below, consideration of carefully tailored action to stabilize pension 

funding rules is warranted today based on the lessons learned since the economic 

downturn of late 2008 and the unprecedented interest rate situation we are facing 

today. On the other hand, the historically anomalous interest rates should not be 

used as a pretext to justify excessive and unwarranted PBGC premium increases 

or, conversely, to undermine the important long-term reforms enacted in the Pension Protection Act of 2006 (PPA). Fundamental changes in retirement policy should 

be undertaken only after careful study of the implications on retirement security 

and on the economy as a whole. 
73 

1Our testimony today focuses exclusively on the single employer pension plans and the 

PBGC’s single employer benefit guaranty program. contain limited provisions that reduce (or 

smooth) the impact of common interest rate variations on the plan sponsor’s immediate pension 

contribution requirements. But the PPA rules did not contemplate the sustained and extraordinary steps the Federal government has undertaken in recent years to drive and hold down 

interest rates in order to get the economy moving again. Unfortunately, the collateral damage 

from actions to hold down interest rates artificially is that those low interest rates are triggering 

artificially high pension liabilities and dramatically larger immediate funding obligations. 2 Research done at the request of the Business Roundtable in 2005 by Robert F. Wescott, PhD. 

confirms that the failure to appropriately smooth interest rates fluctuations would exaggerate 

economic downturns. Dr. Wescott is an economist who works on and pension savings issues who 

served as Chief Economist at the Council of Economic Advisers and as Special Assistant to the 

President for Economic Policy. The study was reviewed by Professor Deborah J. Lucas, Household International Professor of Finance, Department of Finance, J.L. Kellogg Graduate School 

of Management, Northwestern University, and Professor Stephen Zeldes, Benjamin Rosen Professor of Economics and Finance at Columbia University’s Graduate School of Business, and 

chair of the school’s Economics Subdivision. 

Interest rates and plan funding 

Under the PPA, a single employer pension plan’s1 funded level and the annual 

funding requirements are determined based on corporate bond interest rates. This 

conservative measure of liability remains the best measure to ensure the adequacy 

of pension funds for future retirees. However, short-term fluctuations in interest 

rates can temporarily distort the measurement of pension liabilities—liabilities that 

span decades. The PPA funding rules 

Without further action by Congress, resources that must be devoted to meet the 

unexpected new funding mandates will have to be diverted from increasing payrolls 

and will delay the business investments necessary to create jobs and spur the recovery. This is much more than a cash flow issue for employers that sponsor pension 

plans. It is about jobs and about the economic recovery, and will directly affect every 

American. Volatile and unpredictable pension funding requirements, like those employers face today, make it impossible for employers to plan, slowing the economy. 

Moreover, forcing larger pension contributions as the nation battles to emerge from 

the current economic downturn will divert resources from capital spending and exaggerate the economic cycle. As Business Roundtable has stated in the past, 

‘‘procyclical’’ pension funding requirements, like those we are facing today, result in 

an economy that overheats more during upturns and has deeper recessions during 

downturns.2

We urge you to consider appropriate adjustments in the plan funding rules that 

take into account the extraordinary interest rate environment we are experiencing, 

but that do not undermine the long-term objective of ensuring retirement plans are 

funded systematically over the long-term. Stabilizing the pension funding rules in 

a way that minimizes volatility would not only create jobs, but could also help reduce the PBGC’s deficit and strengthen our pension system. 

PBGC Deficits and Premiums. The PBGC’s own 2010 Annual Report states that: 

‘‘[s]ince our obligations are paid out over decades, we have more than sufficient 

funds to pay for benefits for the foreseeable future.’’ Nonetheless, the PBGC asserts 

that its reported long-term deficit justifies $16 billion or more in new taxes on defined benefit plans in the form of PBGC premium increases. We strongly disagree. 

A large portion of the PBGC’s reported deficit is the direct result of the Federal 

government’s actions to hold down interest rates. Moreover, serious questions exist 

regarding the methodology that the PBGC uses to calculate its deficits. As a start, 

no significant increases in premiums should even be considered until the PBGC 

fully discloses and justifies its methodology for calculating its deficit and the Congress and the public have the opportunity to review that methodology. Moreover, 

PBGC premium increases should not be adopted without a thorough investigation 

of the deficiencies in the benefits administration and payments identified in the last 

three fiscal reports issued by the agency’s inspector general. 

It is important to keep in mind that PBGC premiums for the single employer program were already increased substantially four times since 1986, mostly recently in 

2006. Since 2006, the PBGC per participant premium has been automatically increased for wage inflation, resulting in additional premium increases in 2007, 2008, 

2009, and 2010. Moreover, because the PGBC’s variable rate premium is based on 

a plan’s funded level, which as discussed above goes down when interest rates decline, PBGC variable rate premium (VRPs) collections have increased dramatically 

since 2008. As reflected in PBGC Annual Reports, overall, PBGC’s single employer 

program premium collections have been well in excess of $2 billion per year over 

the last three fiscal years (FY2009-FY2011), an increase of over 66% over the total 

premiums that were collected in FY2008 and earlier. Almost all of this new pre-
74 

mium revenue has been raised through the VRP, with the VRPs paid to the PBGC 

by single employer pension plan sponsors having increased by over 400% between 

FY2008 and FY2010. In light of those trends, it is difficult to see how even greater 

premium increases are warranted, especially in the current economic climate. 

In any event, further increases in PBGC premiums should only be considered 

after all the potential implications on the economic recovery and the defined benefit 

system are thoroughly considered. In particular, massive increases in premiums like 

those proposed by the PBGC could accelerate the exodus from the pension system, 

undermining retirement security and leaving the PBGC without plans to support it. 

We continue to believe that the best way to deal with any long-term financial problems at the PBGC is to keep more employers in the system, not to tax them out 

of the system. 

Mr. Chairman and members of the Subcommittee, we thank you for the opportunity to share our views. We look forward to working with the Committee on the 

challenges facing our pension system as well as proposals dealing with the PBGC. 

Prepared Statement of the U.S. Chamber of Commerce 

The U.S. Chamber of Commerce would like to thank Chairman Roe, Ranking 

Member Andrews, and members of the Subcommittee for the opportunity to provide 

a statement for the record. The topic of today’s hearing—challenges facing the Pension Benefit Guaranty Corporation (PBGC) and defined benefit plans—is of significant concern to our membership. 

As sponsors of defined benefit plans and professionals in the retirement plan 

arena, Chamber members have a vested interest in the ongoing viability of the 

PBGC. The PBGC is the final backstop for participants in the defined benefit plan 

system. The existence of the PBGC is important to plan sponsors because it maintains the credibility of the defined benefit system. Therefore, it is necessary to ensure that the PBGC remains a credible institution. 

Introduction 

In the last several years, the defined benefit plan system has faced several significant challenges—industry bankruptcies, an overhaul of the funding rules, demographic changes, and a financial crisis affecting every type of industry and investment. The Chamber believes that this is an appropriate time to review the governance, policies and practices of the PBGC to ensure that the PBGC and the defined 

benefit plan system are able to withstand additional challenges in the future. 

The Chamber recommends that Congress specifically consider the following four 

issues: the calculation of the PBGC’s deficit; increases to PBGC premiums; the governance of the PBGC; and regulatory burdens imposed by the PBGC. Each of these 

issues is discussed in further detail below. 

Discussion 

Overly-Conservative Assumptions Create a Misleading View of the PBGC’s Deficit. The business community has long questioned the accuracy of the PBGC’s deficit 

numbers. To start, a substantial portion of the deficit is due to historically low interest rates that are also plaguing defined benefit plans.1 The low interest rates are 

exacerbated by conservative discount rate assumptions used by the PBGC to calculate future liabilities and conservative assumptions on investment gains to calculate future assets.2 While there is some room for differences in these assumptions, 

the Chamber believes that the PBGC assumptions are unnecessarily conservative 

and should be reviewed by Congress, as well as other interested parties to determine if they accurately reflect expected investment and interest rate experiences. 

Since the establishment of the PBGC in 1974, it has most often operated at a deficit.3 This on going deficit has led to many concerns about whether the PBGC can 

continue as a viable entity on its own or if a federal bailout will be necessary in 

the future. However, the deficit is not an indicator of an immediate crisis. Even the 

PBGC acknowledges that there is not a crisis. In its 2011 annual report, the PBGC 

states ‘‘[s]ince our obligations are paid out over decades, we have more than sufficient funds to pay benefits for the foreseeable future.’’4 Moreover, in its 2010 Exposure Report, the PBGC states that ‘‘[i]n the 5,000 scenarios simulated in SE-PIMS, 

there are none in which PBGC assets are completely exhausted within the 10-year 

projection horizon.’’ 5

If the PBGC is able to meet its financial obligations for the foreseeable future, 

then there is not a crisis. Congress should review the deficit calculations used by 

the PBGC to determine whether the assumptions accurately reflect the future financial expectations of the agency. 
75 

PBGC Premium Payments Must Be Predictable. Discussions about the deficit 

then often lead to talk of the premiums. The debate over premiums generally hinges 

on whether the PBGC is viewed as purely an insurance agency, where premiums 

should be directly associated with risk, or if it is viewed as a quasi-insurance agency, where premiums are based on various considerations. In either case, both of 

these issues directly impact plan sponsors and can impact the way employers decide 

to structure their retirement plans. 

The business community has consistently opposed measures that increase PBGC 

premiums for the sole purpose of decreasing its deficit. For example, during the debate over the Pension Protection Act of 2006, the business community opposed proposals that would allow the PBGC to raise premiums without Congressional authorization. The Chamber continues to believe that it is important that Congress—as 

a neutral third party—determine whether premium increases are appropriate in the 

context of the defined benefit system as a whole and not just the PBGC deficit. As 

such, the Chamber believes that is important to have the conversation on premium 

increases in the context of the policy discussions mentioned in this statement and 

not as an independent issue. 

In the last couple of years, the Administration has put forth recommendations to 

restore the solvency of the PBGC. These recommendations include giving the PBGC 

Board the authority to adjust premiums over time and would allow the Board to 

take into account the credit worthiness of a company.6 Changes of this type and 

magnitude would undermine the private sector defined benefit pension system, 

hinder the economic recovery and could create an ill-advised precedent of government intrusion into normal business activities. 

Raising the PBGC premiums, without making contextual reforms to the agency 

or the defined benefit system, amounts to a tax on employers that have voluntarily 

decided to maintain defined benefit plans. Proposals, like those included in the 

President’s budget, that purport to raise $16 billion in additional PBGC premiums 

are flawed and, even if they were feasible, would result in an increase in PBGC premiums of almost 100 percent. Even less draconian PBGC premium increases, when 

added to the multi-billion dollar increases enacted in 2006, would divert critical resources from job creation and business investment. 

Furthermore, a creditworthiness test, like the one proposed by the Administration, would inevitably result in the PBGC becoming an entity that makes formal 

pronouncements about the financial status of American businesses. This role is inappropriate for a government agency. Leaving aside the question of whether the 

PBGC can establish accurate mechanisms for measuring and adjusting an employer’s credit risk across industries and across the country, even modest year-to-year 

changes in those government credit ratings could have implications well beyond 

PBGC premiums, potentially affecting stock prices or the company’s access to other 

credit sources. We understand the pressures to address the budget deficits, but massive increases in PBGC premiums are not the solution. 

Formal Procedures are Needed for the Governance of the PBGC. The PBGC’s 

Board does not currently have any formal, written procedures in place describing 

a governance strategy. The Board is not required to meet any certain number of 

times annually, and has met infrequently over the past three decades. According to 

a recent GAO report, the Board has met 18 times since 1980.7 In 2003, the board 

agreed to meet twice, although a review of meeting minutes indicates that there is 

generally not significant time spent on operational and strategic issues and the 

meetings usually only last about an hour.8 According to the report, the Board relies 

on the Inspector General and PBGC’s internal management committees to ensure 

the corporation is operating effectively.9

The PBGC’s corporate governance structure has recently come under scrutiny by 

the Inspector General for the PBGC and the GAO citing several perceived flaws in 

its current system of governance. A recent report issued by the GAO identifies these 

issues in detail and proposes significant changes to the PBGC’s current structure. 

The report details several recommendations for improvement to the PBGC’s governance structure, including the following: 

• more frequent board meetings; 

• the establishment of formal guidelines clarifying administrative authority, responsibility and oversight; 

• expanding the board of directors to include members with expertise in key areas 

relevant to the PBGC’s mission; 

• and establishing standing committees to deal effectively with issues facing the 

corporation.10

We are very concerned about the lack of formal guidance pertaining to the governance of the PBGC. In general, we support the recommendations laid out in the 2007 

GAO report. 
76 

Regulatory Requirements are Overly Burdensome. In general, greater regulation 

often leads to greater administrative complexities and burdens. Such regulatory burdens can often discourage plan sponsors from establishing and maintaining retirement plans. The following are examples of regulatory burdens imposed by the PBGC 

that are overwhelming. 

PBGC Rule on Cessation of Operations: In August of 2010, the PBGC published 

a proposed rule under ERISA section 4062(e) which provides for reporting the liabilities for certain substantial cessations of operations from employers that maintain 

single-employer plans. If an employer ceases operations at a facility in any location 

that causes job losses affecting more than 20% of participants in the employer’s 

qualified retirement plan, the PBGC can require an employer to put a certain 

amount in escrow or secure a bond to ensure against financial failure of the plan. 

These amounts can be quite substantial. 

The Chamber believes that the PBGC proposed rule goes beyond the intent of the 

statute and would create greater financial instability for plan sponsors. Furthermore, we are concerned that the proposed rule does not take into account the entirety of all circumstances but, rather, focuses on particular incidents in isolation. 

As such, the proposed rule would have the effect of creating greater financial instability for plan sponsors. 

The PBGC recently announced that it is reconsidering the proposed rule. However, we continue to hear from members that the proposed rule continues to be enforced. This type of uncertainty is an unnecessary burden on plan sponsors and discourages continued participation in the defined benefit plan system. 

Alternative Premium Funding Target Election: The PBGC’s regulations allow a 

plan to calculate its variable-rate premium (VRP) for plan years beginning after 

2007, using a method that is simpler and less burdensome than the ‘‘standard’’ 

method currently prescribed by statute. Use of this alternative premium funding 

target (APFT) was particularly advantageous in 2009 because related pension funding relief provided by the Internal Revenue Service served for many plans to eliminate or significantly reduce VRP liability under the APFT method. However, in both 

2008 and 2009, the PBGC determined that hundreds of plan administrators failed 

to correctly and timely elect the AFPT in their comprehensive premium filing to the 

PBGC, with the failures due primarily to clerical errors in filling out the form or 

administrative delays in meeting the deadline. 

In June of 2010, the PBGC responded to the concerns of plan sponsors by issuing 

Technical Update 10-2 which provides relief to certain plan sponsors who incorrectly 

filed. We appreciate the PBGC’s attention to this matter and its flexibility in responding to this situation. However, we are concerned that the relief provided does 

not capture all clerical errors or administrative errors that may have occurred and, 

therefore, some plan sponsors remain unfairly subject to what are substantial and 

entirely inappropriate penalties. As such, we believe that the rules established 

under the current regulation and the Technical Update should be considered a safe 

harbor. The regulation should be revised to state that if the safe harbor is not met, 

the PBGC will still allow use of the APFT if the filer can demonstrate, through appropriate documentation to the satisfaction of the PBGC, that a decision to use the 

APFT had been made on or before the VRP filing deadline. Proof of such a decision 

could be established, for example, by correspondence between the filer and the 

plan’s enrolled actuary making it clear that, on or before the VRP filing deadline, 

the filer had opted for the APFT. It is important that this regulatory change be 

made on a retroactive basis, so as to provide needed relief to filers for all post-PPA 

plan years. 

Conclusion 

Given the PBGC’s role and the greater emphasis being placed on retirement security generally, this is the perfect time to re-examine the role of the PBGC and to 

re-define its policy objectives. As mentioned above, a recalculation of the PBGC’s 

deficit, consistency in PBGC premiums, reformation of the PBGC’s governing structure, and a lessening of regulatory burdens would go a long way in securing the future viability of the PBGC and the defined benefit system. We look forward to working with this Committee and Congress to enact legislation that will further these 

goals. Thank you for your consideration of this statement. 

ENDNOTES

1 In the single-employer program, approximately $1 billion of the net loss was due to a reduction in interest rate factors. PBGC 2011 Annual Report, p. 21. 2See, Proposed PBGC Premium Changes—A Reality Check by Kenneth Porter, Bloomberg 

BNA, Pension and Benefits Daily, September 14, 2011. 
77 

3The exception is from 1996-2001 when the PBGC’s surplus ranged from $8 million to $9 billion. PBGC Insurance Data Book 2004, p. 26. 4 Id, p. iv. 

5 2010 PBGC Annual Exposure Report, p. 9, http://www.pbgc.gov/documents/2010-Exposure.pdf. 6See, The Moment of Truth: Report of the National Commission on Fiscal Responsibility and 

Reform which recommends that the PBGC’s board be given authority to raise the premium rate 

to restore solvency (p. 41), http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/ 

documents/TheMomentofTruth12—1—2010.pdf. 7Gov’t Accountability Office, Pension Benefit Guaranty Corporation: Governance Structure 

Needs Improvements to Ensure policy Direction and Oversight, 3. GAO-07-808 (2007). 8 Id. at 15. 

9 Id. at 3. 

10 Id. at 21-23. 

Prepared Statement of the Financial Services Roundtable 

The Financial Services Roundtable (‘‘Roundtable’’) respectfully offers this statement for the record to the U.S. House Education & Workforce Committee, Subcommittee on Health, Employment, Labor, and Pensions on ‘‘Examining the Challenges Facing PBGC and Defined Benefit Pension Plans.’’ 

The Financial Services Roundtable represents 100 of the largest integrated financial services companies providing banking, insurance, and investment products and 

services to the American consumer. Member companies participate through the 

Chief Executive Officer and other senior executives nominated by the CEO. Roundtable member companies provide fuel for America’s economic engine, accounting directly for $92.7 trillion in managed assets, $1.2 trillion in revenue, and 2.3 million 

jobs. 

The Roundtable Supports Retirement Security 

The Financial Services Roundtable supports increased incentives and opportunities for Americans to save and invest. It is our belief that providing these opportunities for Americans is important because savings increase domestic investment, encourage economic growth, and result in higher wages, financial freedom, and a better standard of living. We believe that most Americans should approach retirement 

with a comprehensive strategy that incorporates a number of retirement vehicles. 

Strengthening the retirement security of all Americans is a priority for the 

Roundtable. Employer-sponsored retirement plans are an important element for 

many Americans. However, the Roundtable opposes increasing the level of premiums paid by companies to the Pension Benefit Guaranty Corporation (PBGC) as 

request by President Obama. We believe that the Administration’s proposal, if enacted, would undermine the safety and soundness of the pension system. 

First, an increase in PBGC premiums similar to the one proposed in the President’s 2012 budget (and is expected to included on the 2013 budget) amounts to a 

tax on employers who maintain defined benefit plans. Furthermore, such a tax is 

unnecessary because the PBGC’s own annual report (2010) states that ‘‘[s]ince our 

obligations are paid out over decades, we have more than sufficient funds to pay 

benefits for the foreseeable future.’’ The PBGC is not in danger of being unable to 

perform its duties, nor are they in a position where they would need public funds 

for a bailout. The Roundtable urges the Subcommittee to examine the PBGC’s financial situation more carefully, including examining the actual nature of PBGC’s deficit. 

Next, giving the PBGC the authority to arbitrarily increase its premiums diminishes Congress’s oversight of the PBGC. Such a grant of authority would give the 

PBGC the ability to determine what its customers pay because by law all pension 

plans must pay the PBGC’s premiums. In essence, the PBGC would be able to raise 

rates anytime it wanted to for almost any reason, and defined benefit plan sponsors 

would have no choice but to pay it. 

Finally, there are almost 19 million people participating in about 48,000 privatesector defined benefit plans. The number of employers sponsoring pension plans 

goes down every year. Raising the PBGC’s premiums without also instituting broader industry reforms will only serve to undercut the industry and the PBGC’s goal 

of maintaining a robust fund to help cover the shortfalls in pension plans. If this 

proposal is implemented it will only quicken the trend of employers moving to defined contribution plans and away from sponsoring defined benefit plans. 

The Roundtable believes our nation’s current workplace retirement system has enhanced the retirement security of millions of American workers by increasing their 

retirement savings and the quality of life during their retirement years. The pension 

industry is aware of the challenges the Committee must confront. However, we firm-
78 

ly believe that increasing PBGC premiums will only serve to divert valuable pension 

resources that could be better spent on extending the longevity of pension plans. 

In closing, the Roundtable thanks the Subcommittee for the opportunity to comment. 

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81 

[Additional submissions by Dr. McGowan follow:] 

SAINT LOUIS UNIVERSITY, 

3674 LINDELL BLVD., 

St. Louis, MO 63108, May 25, 2012. 

Hon. PHIL ROE, Congressman, 

Tennessee 1st District, 419 Cannon Office Building, Washington DC 20515. 

DEAR CHAIRMAN ROE: Please be advised I have completed the study on multiemployer pensions and it is attached. The study was in process at the time of my testimony in February. Thanks for processing this study. 

Let me know if you have any questions. 

Cordially yours, 

JOHN R. MCGOWAN, PH.D., CPA, CFE, 

Professor of Accounting. 
82 

The Financial Health of Defined Benefit Pension Plans 

An Analysis of Certain Trade Unions Pension Plans: 2012 Update1

By JOHN R. MCGOWAN, Professor of Accounting 

Saint Louis University, 3674 Lindell Blvd., St. Louis, MO 63108 

CURRENT RETIREMENT PROSPECTS FOR WORKERS IN US

The primary focus of this report is the current and future prospects for defined 

benefit multiemployer pension (MEPP) plans in the US. The objective of this report 

is to educate, inform and empower retirees involved in any type of retirement plan 

and specifically in MEPPs. More than at any other time in US history, people 

should be actively involved in planning and preparation for retirement. 

Challenges for retirees in the US are not limited to participants in multiemployer 

pensions. The US Census reports that the average retirement account for persons 

in the US is $50,000. Moreover, the median retirement fund is $2,000 and more 

than 43 percent of Americans have less than $10,000 saved for retirement.2 Nearly 

1 in 4 Americans will rely on Social Security as their primary source of retirement. 

One major cause of retirement woes is the 20 percent decline of the S&P from 2000 

to 2010. This decade long slide in the stock market has done little to brighten the 

retirement prospects for working Americans. 

As outlined in the May 27, 2010 GAO study, ‘‘Long Standing Challenges Remain 

for Multiemployer Pension Plans,3 multiemployer (union) pension plans have a 

tough road to hoe. The report discusses in detail how MEPPs face significant ongoing funding and demographic challenges. The study documents how these challenges 

will lead to more plan failures and will increase the financial burden on the Pension 

Benefit Guarantee Corporation (PBGC). When compared with single employer plans, 

MEPPs have a number of more serious structural problems. Such problems include 

a continuing decline in the number of multiemployer pension plans and an aging 

participant base. A decline in collective bargaining in the United States has also left 

fewer opportunities for plans to attract new employers and workers. Consequently, 

the proportion of active participants paying into the fund has also been falling. 

The problems with MEPP plans are indicative of the overall structural economic 

breakdown of defined benefit plans in the US. Many companies have concluded that 

defined benefit pension plans are too rich and too costly to maintain after the economic crisis of 2008.4 Watson Wyatt documents the overall movement away from 

DB plans in their 2009 survey. In fact, they reported that for the first time Fortune 

100 companies started offering new employees only one type of retirement plan: a 

401(k) or similar ‘‘defined contribution’’ plan. Due to the financial strain on the 

PBGC uncertainty is growing with respect to both single and multiemployer pension 

plans. 

The first part of this report briefly discusses the current financial condition of the 

PBGC. Second, a number of MEPP industry surveys are presented for the years 

2008 thru 2011 to help assess recent performance of MEPP plans. These surveys 

send mixed signals. Some surveys suggest that MEPPs are on the way back after 

the 2008 financial crisis. Other surveys report that MEPPs are still having a tough 

time. 

In 2008 (McGowan) I examined Form 5500 data for a sample plans based largely 

in Missouri to gather anecdotal empirical evidence on the performance of MEPP 

pensions. That study is updated here and expanded in the third section of this report with data for 2007, 2008 and 2009. A review of the data for these MEPPs in 

Missouri points to the conclusion that these plans are continuing their decline. This 

report also reviews recent Congressional proposals to rescue certain MEPP plans. 

Evidence suggests that Congress has not lost its energy to rescue certain troubled 

MEPP plans. The final section of this report discusses investment options for both 

employers and retirees in light of these challenging conditions. 

CURRENT FINANCIAL STATE OF THE PBGC

At the time of my earlier report in 2008, PBGC assets supporting the multiemployer program had a value of $1.2 billion and accrued liabilities were $2.1 billion. 

These liabilities represent the present value of future financial assistance for plans 

that PBGC has identified as ‘‘probables’’ for purposes of PBGC’s financial statements. A probable’’ plan is one that is currently receiving, or is projected to require, 

financial assistance. Thus, a ‘‘probable’’ plan is usually a terminated or insolvent 

multiemployer plan. At that time the net deficit was $900 million. Unfortunately, 

the downward spiral for MEPPs has accelerated since that time. By September 

2010, the PBGC deficit related to MEPPs rose to $1.4 billion. Similarly, by the end 

of September 2011, the MEPP related deficit at PBGC doubled to $2.8 billion. 
83 

According to their most recent annual report, PBGC’s obligations for future financial assistance to multiemployer plans have increased to $4.48 billion. This represents a 48 percent increase in obligations from the previous year. These sharply 

increasing PBGC liabilities do not inspire confidence for the sustainability of the 

multiemployer system over the next decade. Similarly, the total PBCG deficit rose 

from $23 billion at the end of fiscal 2010 to $26 billion by the end of the 2011 fiscal 

year. 

MDBP SURVEYS FOR 2008 THRU 2011: 

ARE THEY ON THE ROAD TO FINANCIAL RECOVERY?

A number of studies have been performed to assess the recent performance of 

MDBP plans. These results for these studies are shown the next. 

FINANCIAL CRISIS OF 2008

The National Coordinating Committee for Multiemployer Plans (NCCMP) is an 

advocacy organization of multiemployer pension funds. Each year they perform a 

survey on the financial health of MEPP plans. The annual survey often includes a 

major percentage of multiemployer pension plans. For the plan years beginning in 

2008, the NCCPMP survey reported that over 75% plans were in the ‘green zone’, 

indicating a strong financial position. Next, during 2008, the financial crisis caused 

the average reported funded status to decline to 77% from 90% at the beginning of 

the year. Moreover, by the end of the year only 20% of MEPP respondents indicated 

their plans were still in the green zone. Similarly, 42% of plans in the survey reported their plans were in critical status or the ‘red zone.’ 

The plummeting financial status of defined benefit pension plans in 2008 was articulated in my earlier study (McGowan, 2008). That study analyzed certain 2006 

MDBP data and projected 2008 fund status for a number of plans based on plunging 

indexes in the stock market. At the time, a number of local trade unions vigorously 

assaulted the study as flawed and inaccurate. Coincidentally, a number of other 

studies described the same financial difficulties for 2008 multiemployer pension 

plans. For example, Watson Wyatt Worldwide observed that the top 100 multiemployer pensions were just 79 percent funded.5 Moody’s Investors service also published a study in 2009 citing growing concern about multiemployer pension funding 

shortfalls.6 The Hudson Institute also examined multiemployer pension data contained in Form 5500s. In their study,7 Furchtgott-Roth and Brown concluded that 

the risks of multiemployer pension plans exceeded those of private pension plans. 

One major cause of this shift in MEPP plans is the investment results for 2008 

where the median asset return was ¥22.1%. According to the NCCMP report, the 

true impact of the crisis was even more dramatic than these figures indicated.8 The 

PPA funded percentage measure relies on the actuarial value of pension plan assets 

and typically recognizes investment gains and losses gradually over time. On a market value of assets basis, the average funded percentage was much worse. The average funded market value percentage declined from 89% to 65%. 

In addition to investment results, the financial impact on a plan is also a function 

of employment levels. When a plan becomes underfunded, it is important that there 

be a large population of active members with strong employment levels to create a 

contribution base capable of offsetting the shortfall. Unfortunately, an equally historic level of unemployment followed the historic market collapse of 2008. This unemployment level has also severely limited the ability of many plans to recover. 

RETURNS IMPROVE IN 2009: HIGH UNEMPLOYMENT CONTINUES

There was a high response rate for the 2009 NCCMP survey. Total plan participants numbered 6.3 million and represented 60 percent of the multiemployer plan 

population. Plans included in the NCCMP survey reported a median 2009 asset return of 16.6%. This figure was not nearly enough to offset the devastating returns 

from the prior year. The International Foundation of Employee Benefit Plans 

(IFEBP) reported similar results in their 2009 survey of MEPP plans. As of August, 

nearly three-quarters of plans were less than 80 percent funded. The 2009 IFEBP 

survey had a much smaller sample size (213 plans).9 Nevertheless, the results were 

proportionate and consistent with other surveys for that time period. The number 

of plans in the endangered or critical status had tripled from 2008. 

During 2009, participants and sponsors of multiemployer pensions responded by 

increasing contributions and reducing benefit accrual levels. Similarly, many plans 

in the IFEBP survey indicated that they were taking advantage of the temporary 

freeze option available to MEPP plans in 2009. 
84 

RETURNS STABLE IN 2010: UNEMPLOYMENT SHOWS LITTLE IMPROVEMENT

Participants in the 2010 NCCMP survey declined to 3.6 million or approximately 

35 percent of multiemployer plans. For a second straight year, respondents reported 

strong investment returns in 2010. Consequently, these plans reported an increase 

in average fund status to over 82% from 77%. While these results seem promising, 

the small sample size raises questions about the validity of this sample. 

The 2010 strengthening for pension funds was not confined to multiemployer 

plans. Milliman is among the world’s largest independent actuarial and consulting 

firms in the world. Their annual study covers 100 U.S. public companies with the 

largest defined benefit pension plan assets for which an annual report (Form 10- 

K) is released. Their study also reflected an overall improvement in funding status 

due to increased fund contributions. However, the improvement was somewhat curtailed by ongoing low interest rates. 

More specifically, the record cash contributions for these plans and investment 

gains (12.8% actual returns for 2010 fiscal year vs. 8.0% expected returns) were offset by the 7.7% increase in liabilities generated by the decrease in discount rates 

(5.43% for 2010, down from 5.82% in 2009 and 6.36% in 2008) used to measure pension plan liabilities. The lower discount rate coupled with record cash contributions 

culminated in a small improvement in the funding ratio for these plans in 2010. The 

average increased to 83.9% from 81.7%. 

REASONS FOR IMPROVED PLAN STATUS IN 2010 AND 2009

As noted in the NCCMP report, the number of plans in the green zone (more than 

80 percent funded under PPA 2006 rules) more than doubled from 20 to 48% by the 

end of 2010. Similarly, the number of plans in the red zone (critical status) declined 

from 42 to 32%. The report traced this improvement to three factors. First, there 

were strong investment returns. Second, the plans and sponsoring employers implemented a combination of contribution increases and benefit cuts to shore up their 

financial status. Thirdly, the funding relief provisions of the Preservation of Access 

to Care for Medicare Beneficiaries and Pension Relief Act of 2010 helped improve 

multiemployer funding status. 

PENSION EXPENSE CONTINUES TO RISE FOR 2010

Record levels of pension expense were recorded in 2010. A $30.0 billion charge 

was recorded for firms in the 2010 Milliman Pension Funding Study. There were 

11 companies with pension income (e.g., negative expense) in 2010, down from 16 

in 2008. Pension expense is projected to increase for 2011 as companies using asset 

smoothing are still reflecting the impact of losses in 2008. 

ACCOUNTING CHANGES ADOPTED BY SOME COMPANIES

A number of companies elected to recognize substantially all of their accumulated 

losses for 2010. This accounting change resulted in a significant charge to the yearend balance sheets for Honeywell, Verizon and AT&T. The elimination of this 

charge in 2010 will lead to a reduction of future years’ pension expense through the 

elimination of the annual charge to earnings for those losses. Milliman estimates 

that similar charge to earnings for the remaining 100 companies would have resulted in a $342 billion charge to their cumulative balance sheets and a reduction 

in their 2011 pension expense of about $19.9 billion. 

PROPOSED CHANGE TO INTERNATIONAL ACCOUNTING STANDARDS

There is also a serious debate raging regarding whether International Accounting 

Standards should be converged with or adopted in place of U.S. GAAP. A proposed 

change to International Accounting Standards would eliminate the pension expense 

credit for Expected Return on Assets (8.0% for the Milliman 100 companies in 2010). 

Under this change, companies would have a pension expense equal to the discount 

rate on the excess of liabilities over assets (or a similar credit if the plan were more 

than 100% funded). If that change had been adopted for U.S. GAAP accounting in 

2010, the pension expense for the Milliman 100 companies (and the charge to corporate earnings) would have increased by about $30.0 billion. Such changes would 

have a commensurate effect on multiemployer pension plans. Therefore pension expenses would be pushed higher. 

DEFINED BENEFIT PLANS IN CANADA FOR 2011

A review of defined benefit plan performance in 2011 in Canada shows that things 

clearly took a turn for the worse. Towers Watson has kept a tracking index to rep-
85 

resent defined benefit pension plans across the country for more than a decade. In 

2011, the index declined from 86 at the start of the year to 72 by the end. The index 

was at 100 in December 2000 and after a brief rise in 2001, has been on a steady 

decline ever since.10 It is reasonable to conclude that pension plans in the US had 

similar experience for 2011. 

EXPECTED PLAN CONTRIBUTIONS EXPECTED FOR 2012

CFO Magazine reports that big pension contributions are expected in 2012. According to a new report from Credit Suisse and accounting analyst David Zion, Companies in the S&P 500 will likely have to contribute $90 billion to fund pension plan 

gaps in 2012, up from $52 billion in 2011. 

A SAMPLE OF MISSOURI BASED MDBP PLANS: AN EXPANSION AND UPDATE

My original 2008 study was presented at a Senate Hearing on May 27, 2010.11

The Senate Hearing was entitled: ‘‘Building a Secure Future for Multiemployer Pensions.’’ The purpose of this hearing was to address the structural problems of multiemployer pensions.12

The key findings of my 2008 report were: 

• The assumption of failing pensions by PBGC had led to an overall deficit of 

$955 million 

• By September 2007, the PBGC insured about 1,500 multiemployer (sometimes 

called union plans) plans and promised benefits to about to roughly 10 million participants 

• Multiemployer pensions problems were forcing fund managers to cut benefits 

• The other avenue to improve multiemployer fund status was to increase contributions 

• Central States required a withdrawal liability payment of $6 billion from UPS 

• Both employers and employees were encouraged to carefully consider the financial condition of multiemployer pension plans whether they were current or prospective participants 

MEASURING THE FUNDING STATUS OF MULTIEMPLOYER PLANS

The Pension Protection Act of 2006 places the task of computing the funded status 

of MDBP plans in the hands of the actuary. Various actuarial assumptions and 

methods are used to determine cost, liabilities, interest rates, and other funding factors. While these assumptions must be reasonable, they tend to make the actuarial 

value of the assets significantly higher than market value. For example, the actuarial value of the assets recognizes investment gains and losses gradually over time. 

The PPA 2006 directs actuaries to place MDBP plans in one of three separate 

zones: green for healthy (80% funded), yellow for endangered (65% funded) and red 

for critical (under 65% funded). Plans are in the green or healthy zone if they are 

more than 80 percent funded. Yellow zone or endangered plans are funded at least 

65 but less than 80 percent. Plans are also in the yellow zone if they have had a 

funding deficiency in the past 7 years. When a plan hits both conditions they are 

considered ‘‘seriously endangered.’’ According to Eli Greenblum, an actuary and senior VP of the Segal Co., ‘‘Yellow zone plans cannot cut protected or adjustable benefits, there is no official shelter from funding-deficiency penalties, and there are no 

employer surcharges.’’ 13 If a plan goes into the red zone or funding level below 65 

percent, the trustees must adopt a rehabilitation plan. Pension trustees may reduce 

certain benefits under the rehabilitation plan. 

People covered by a traditional defined-benefit pension plan should receive a funding notice every year, which gives workers an idea of how well the plan is doing. 

However, people frequently do not have access to the funding notice. In these 

cases,14 people can get a rough idea of how well their plan is doing by looking at 

Form 5500. Moreover, participants in private pension plans have the legal right to 

request the most recent Form 5500 from their plan administrator. Participants can 

also download copies of the Form 5500 on a web site called FreeERISA.com. 

Certain multiemployer pension administrators take such strong exception to the 

notion that people are able to get a rough idea of the financial solvency of their multiemployer pensions by looking at data on IRS form 5500. Then Pension Rights Center stands behind this notion and presents it clearly on their website.15 The Pension 

Rights Center encourages people to determine the funded status of their pension by 

dividing the current value of plan assets by the ‘‘RPA 94’’ current liability. The RPA 

94 (Retirement Protection Act of 1994) current liability is based on the present 

value of benefits accrued to date. This liability is discounted using a statutory interest rate assumption range that is tied to average long-term bond yields.16 Numerous 
86 

studies have used this funding ratio as provided on Form 5500 as a proxy for the 

financial solvency of multiemployer or union pension plans.17

SAMPLE OF MEPPS IN MISSOURI

This study expands on the sample of Missouri based multiemployer pensions next. 

As can be seen from a review of the actuarial data presented here from Form 5500s 

is that these plans continue their decline. It should also be noted that the Carpenters Trust Pension Fund of SL showed a modest improvement for 2010. This performance is reflective of the improved market conditions for 2010. Other pension 

funds would be likely to show similar results. That being said, the financial status 

of MEPPs are still far below the funding levels of 2006. 

Pension fund Year Current assets Total liabilities Percentage 

Carpenters Pension Trust of SL ............................................................. 2010 $1,462,055,006 $3,264,817,009 44.7% 

Carpenters Pension Trust of SL ............................................................. 2009 $1,176,145,761 $3,143,709,605 37.4% 

Carpenters Pension Trust of SL ............................................................. 2008 $1,611,931,135 $2,794,336,754 57.6% 

Carpenters Pension Trust of SL ............................................................. 2007 $1,589,538,148 $2,305,084,039 68.9% 

Carpenters Pension Trust of SL ............................................................. 2006 $1,435,159,165 $2,031,453,937 70.6% 

Construction Laborers of SL .................................................................. 2009 $361,501,014 $815,694,842 44.3% 

Construction Laborers of SL .................................................................. 2008 $458,876,011 $719,746,151 63.7% 

Construction Laborers of SL .................................................................. 2007 $437,851,451 $594,131,725 73.7% 

Construction Laborers of SL .................................................................. 2006 $391,340,770 $519,434,403 75.3% 

IBEW Local No 124 ................................................................................ 2009 $121,051,761 $254,496,469 47.6% 

Plumbers and Pipefitters: Misc. Local Chapters ................................... $79,631,277 $118,332,486 67.3% 

Sheet Metal Workers Local 36 ............................................................... 2008 $153,004,997 $262,235,832 58.3%

Sheet Metal Workers Local 36 ............................................................... 2007 $140,785,417 $212,424,703 66.2%

Sheet Metal Workers Local 36 ............................................................... 2006 $129,274,465 $201,574,482 64.1%

Roofers Local No 20 .............................................................................. 2009 $53,148,454 $93,805,474 53.8% 

MO-KAN Teamsters ................................................................................ 2010 $46,084,294 $120,499,797 38.2% 

Kansas City Cement Masons ................................................................. 2009 $35,269,314 $93,852,982 37.5% 

Painters District Council No 3 ............................................................... 2009 $68,471,488 $249,667,631 27.4% 

Operating Engineers Local 101 ............................................................. 2010 $497,389,413 $1,113,743,496 44.6% 

Insulators Local 27 ................................................................................ 2010 $22,761,378 $66,298,542 34.0% 

Iron Workers of St. Louis ....................................................................... 2009 $347,808,001 $847,967,614 41.0% 

Bricklayers Union Local No. 1 ............................................................... 2008 $66,319,296 $95,449,574 69.4% 

Carpenters District Council of Kansas City .......................................... 2009 $527,566,339 $1,312,230,524 40.2% 

*Serves Laborers’ International Union of North America Locals #42, #53, and #110. 

CONGRESSIONAL EFFORTS TO ‘‘RESCUE’’ CERTAIN UNDERFUNDED MDBP PENSION PLANS

In May 2010, Senator Casey introduced S. 3157 under the title of Create Jobs and 

Save Benefits Act of 2010. The bill mirrors legislative proposals introduced in 2009 

by Reps. Earl Pomeroy and Patrick Tiberi. Among other things, the bill proposed 

that the pension liabilities of all ‘‘orphan’’ retirees from the now-defunct trucking 

firms be transferred to the PBGC. Employers of the surviving trucking firms still 

in the multiemployer plan are now funding these pension liabilities. This proposal 

for the PBGC to take on new funding obligations generated a mixed reaction. 

Those parties who stood to benefit from a PBGC takeover or rescue of certain unfunded pension liabilities were supportive. For example, YRC, trucking companies, 

teamsters, all loved the idea. On the other side of the coin, Diana Furtchgott-Roth 

wrote in TCS daily in opposition to this bill. She referred to this action as a ‘‘bailout’’ of union pensions that would dramatically increase the burden on U.S. debt 

and American taxpayers. Supporters of funding for ‘‘troubled’’ multiemployer pensions argue that the term ‘‘bailout’’ is unfair and dishonest. They maintain that as 

long as PBGC does not use any taxpayer funds to fund failed pensions it is not a 

bailout. Furthermore, certain supporters argue that the only way to salvage certain 

failing pensions is to ‘‘partition’’ them off and transfer them to the PBGC. The problem with this plan is that the PBGC is on its way to running out of money. As discussed in the next section, Chairman Gotbaum of the PBGC testified that the PBGC 

may run out of money as soon as 9 years from now. Moreover, certain major pension 

defaults occurring in 2012 as American and Kodak may accelerate that timetable. 

PBGC FINANCES AND CHALLENGES TO MULTIEMPLOYER PENSIONS

On Feb. 2, 2012, the House Education and Workforce Subcommittee on Health, 

Employment, Labor and Pensions held a hearing entitled, ‘‘Examining the Chal-
87 

lenges Facing PBGC and Defined Benefit Pension Plans.’’ The hearing explored the 

financial and management challenges at the Pension Benefit Guaranty Corporation 

(PBGC), as well as policy proposals intended to strengthen the financial standing 

of the PBGC. 

PBGC Director Joshua Gotbaum spoke at the hearing and addressed the $26 billion deficit the PBGC currently faces. He stated that the PBGC is a $100 billion 

dollar financial institution but that it is also unsound financially. The value of the 

assets is around $80 billion. Gotbaum discussed several options that Congress could 

take to encourage more secure retirements. Once new policy proposed by Gotbaum 

was an increase in employer pension insurance premiums. Gotbaum also addressed 

multiemployer pension plans and stated that some of the plans are substantially underfunded and the traditional remedies won’t be enough. 

In other words, Gotbaum recognized that some pensions were too far gone to recover. Once pensions deteriorate past a certain point, one of two things must occur. 

Either benefits must be reduced or there must be an infusion of capital from another source. Time will tell if Congress will revive the proposed ‘‘rescue’’ solution 

for certain pension funds. 

The first two witnesses at the hearing emphasized the same two issues. Both Ken 

Porter, former chief actuary with DuPont and Gretchen Haggarty, CFO of U.S. Steel 

testified that low interest rates were a significant cause of current pension underfunding problems. Similarly, they both testified that the proposed increase in pension premiums would also be detrimental to economic growth. Thirdly, Randy 

DeFrehn of the NCCMP stated that while most multiemployer pensions are on the 

road to recovery, there are a sizeable group of pensions that still need to be rescued. 

He referred back to the 2010 proposal to ‘‘Preserve Jobs and Save Benefits Act’’ that 

rescues certain multiemployer pensions. He also suggested that weaker funds be allowed to merge into stronger ones. As the final witness, I highlighted the deteriorating nature of numerous multiemployer pensions in Missouri and suggested Congress reform certain provisions from the PPA of 2006. Specifically, the use of the 

withdrawal liability penalty is a harsh and unfair way to impose underfunded pension costs on new and existing employers. 

STRUCTURAL PROBLEMS WITH MULTIEMPLOYER PENSION PLANS

As noted in the GAO report18 from May 2010, the PBGC has paid $500 million 

in financial assistance to 62 insolvent plans. Major challenges exist for multiemployer plans. Such challenges include continuing decreases in the number of these 

plans and an aging participant base. Further, a decline in collective bargaining in 

the United States has left few opportunities for plans to attract new employers and 

workers. As a result, the proportion of active participants paying into the fund to 

others who are no longer paying into the fund has decreased, thereby increasing 

plan liabilities and the likelihood that PBGC will have to provide financial assistance in the future. 

While there has been some improvement in MEPPs since 2010, many of the market and regulatory conditions discussed in this report will make it very difficult for 

substantial turnarounds in performance for union pensions. The review of a sample 

of Missouri based union pension plans illustrates this point. 

What is a realistic option for workers going forward? 

The private sector is reflecting modern economic reality when it comes to pension 

plans. There will be a continued migration away from DB plans and toward 401K 

plans, or perhaps some combination of DB and 401(K) plans. Certain commentators 

have discussed the possibility of required retirement plan contributions from both 

employers and workers. That seems unlikely given past emphasis on individual liberty in the United States. 

The first thing workers should do is to increase their knowledge and understanding about their retirement. If they are part of a defined benefit pension plan 

they should investigate the financial solvency of that plan. Given the uncertain 

long-term stability of many defined benefit pension plans, individuals should also 

explore other retirement options that allow them more independence and control. 

Many employers match employee contributions to defined contribution plans. Over 

time these plans can grow into substantial sources of retirement income. There are 

also opportunities for individuals over the age of 50 to make ‘‘catch up’’ contributions with their existing retirement plans. Due to competitive pressures and demographic and economic changes, peoples’ retirement prospects are becoming more 

challenging all the time. The best think people can do is to clearly study their retirement options and plan ahead. 
88 

REFERENCES

BNA, Pension Protection Act Center at http://subscript.bna.com/pic2/ppa.nsf/id/ 

BNAP-6ZKK7E?OpenDocument. 

DeFrehn, R.G. and J. Shapiro, ‘‘The Road to Recovery, The 2010 Update to the 

NCCMP Survey of the Funded Status of Multiemployer Defined Benefit Plans,’’ 

See http://www.nccmp.org/. 

McGowan 2008, The Financial Health of Defined Benefit Pension Plans: An Analysis of Certain Trade Unions Pension Plans, U.S. Senate Committee on Health, 

Education Labor and Pensions. 

ENDNOTES

1 I would like to acknowledge the support of Associate Builders and Contractors. The views 

reflected in this study are my own and do not necessarily reflect those of Saint Louis University. 2 C. Sutton, CNN Money, March 2010. 

3Statement of Charles A. Jeszeck, Acting Director Education, Workforce, and Income Security 

Issues as part of Testimony Before the Committee on Health, Education, Labor and Pensions, 

U. S. Senate. 4S. Block, ‘‘Traditional Company Pensions are going away fast,’’ USA Today, May 22, 2009. 

5Leveson, I, Economic Security a Guide for an Age of Insecurity, iUniverse p. 18, April 29, 

2011. 6See, Moody’s: Growing Multiemployer Pension Funding Shortfall is an Increasing Credit 

Concern,’’ Sept. 10, 2009. 7See, Furtchgott-Roth D., and A. Brown, ‘‘Comparing Union-Sponsored and Private Pension 

Plans: How Safe are Workers Retirements?’’ Hudson Institute, September 2009. 8Defrehn, R.G. and J. Shapiro, 2010 Update to MCCMP Survey of Funded Status of Multiemployer Defined Benefit Plans, p. 1. 9See Wojcik, J., ‘‘73 percent of multiemployer pension plans underfunded: Study,’’ Business 

Insurance, Sept. 29, 2009. 10 CBC News.CA, ‘‘Defined benefit pension plans had bleak 2011,’’ Jan. 4, 2012. 11See summary at http://www.help.senate.gov/imo/media/doc/McGowan.pdf 12See http://www.help.senate.gov/imo/media/doc/McGowan.pdf. 13See comments by Eli Greenblum at March 21, 2007 at BNA sponsored pension conference. 14See:http://www.pensionrights.org/publications/fact-sheet/how-well-funded-your-pensionplan. 15http://www.pensionrights.org/publications/fact-sheet/how-well-funded-your-pension-plan. 16See: http://www.actuary.org/pdf/pension/moodys—march06.pdf Letter from D.J. Segal, VP 

of Pension Practice Counsel to American Academy of Actuaries March 1, 2006. 17See: Allen, S.G., R.L. Clark, and A.A. McDermed, ‘‘Post-Retirement Increases in Pensions 

in the 1980s: Did Plan Finances Matter?’’ National Bureau of Economic Research Working Paper 

#4413; D., Furchtgott-Roth, ‘‘Union vs. Private Pension Plans: How Secure Are Union Members’ 

Retirements?’’ Hudson Institute, Summer 2008, September 2009; Addoum, J.M., J.H. van 

Binsbergen, and M.W. Brandt, ‘‘Asset Allocation and Managerial Assumptions in Corporate Pension Plans,’’ Duke Working Paper 2010; McGowan, J.R., ‘‘The Financial Health of Multiemployer 

Pension Plans, PBGC and the Recent Government Bailout Proposal: Create Jobs and Save Benefits Act of 2010,’’ Report prepared for Senate Committee on Health, Education, Labor and Pensions: Building a Secure Future for Multiemployer Pension Plans, May 27, 2010, See: http:// 

help.senate.gov/hearings/hearing/?id=6a51d13d-5056-9502-5d61-e47c92a6a05f. 18 ‘‘Long-standing Challenges Remain for Multiemployer Pension Plans,’’ GAO-10-708T, May 

27, 2010. 

[Questions submitted for the record and their responses follow:] 

U.S. CONGRESS, 

Washington, DC, March 29, 2012. 

Hon. JOSHUA GOTBAUM, Director, 

Pension Benefit Guaranty Corporation (PBGC), 1200 K Street, NW, Washington, DC 

20005. 

DEAR DIRECTOR GOTBAUM: Thank you for testifying at the February 2, 2012, Subcommittee on Health, Employment, Labor, and Pensions hearing entitled, ‘‘Examining the Challenges Facing PBGC and Defined Benefit Pension Plans.’’ I appreciate 

your participation. 

Enclosed are additional questions submitted by Committee members following the 

hearing. Please provide written responses no later than April 16, 2012, for inclusion 

in the official hearing record. Responses should be sent to Benjamin Hoog of the 

Committee staff, who may be contacted at (202) 225-4527. 

Thank you again for your contribution to the work of the Committee. 

Sincerely, 

PHIL ROE, Chairman, 

Subcommittee on Health, Employment, Labor and Pensions. 
89 

QUESTIONS SUBMITTED BY CHAIRMAN PHIL ROE

1. As part of its ‘‘Plan for Regulatory Review,’’ the Pension Benefit Guaranty Corporation (PBGC) is reconsidering its proposed regulations regarding facility shutdown liability under Section 4062(e) of the Employee Retirement Income Security 

Act (ERISA). If finalized, the proposed regulation would impose significant burdens 

on plan sponsors. However, reports suggest PBGC officials are still referencing these 

proposed regulations as ‘‘the law’’ in their interactions with plan sponsors. Is PBGC 

enforcing these proposed regulations? Does PBGC intend to finalize new 4062(e) regulations; and if so, how will they address the concerns of plan sponsors who noted 

their potential for disproportionately huge liability? 

2. As part of last year’s appropriations process, PBGC was granted discretion to 

use funds for ‘‘extraordinary’’ administrative expenses relating to its multiemployer 

program, provided it notifies the appropriations committees. How does PBGC define 

‘‘extraordinary’’ in this context? Do we have your assurance that this power will not 

be used without notifying the congressional committees of jurisdiction, and used 

only as a last resort? How and under what circumstances do you intend to notify 

Congress regarding your use of this authority? 

3. Section 4010 of ERISA requires certain pension plan sponsors to submit information to PBGC relating to plan funding. PBGC is required annually to submit a 

report on this information to the congressional committees of jurisdiction. Why has 

this report not yet been issued, and when will PBGC submit this report to Congress? 

4. The PBGC’s 2010 Annual Exposure Report stated that the possible deterioration of two large plans could cause PBGC’s multiemployer program to run out of 

money. Has the status of those two plans improved? Have any new plans been 

added to the list of plans at substantial risk of insolvency that would materially affect PBGC? 

5. As you know, so-called ‘‘orphan’’ liabilities of employers who went out of business but whose employees are still plan participants are a huge burden for companies that participate in multiemployer plans. When PBGC models the potential risk 

of plans, does it take into account that these rising liabilities—and consequently 

higher required plan contributions—may drive companies from the plan or even out 

of business? If so, please explain how the models reflect the consequences of rising 

liabilities. 

6. Under ERISA Section 4005(c), PBGC is permitted to borrow up to $100 million 

from the U.S. Treasury. Under what circumstances would PBGC consider using this 

authority? Will you seek congressional approval prior to borrowing? 

7. Section 221 of the Pension Protection Act of 2006 (PPA) required a report to 

be issued studying the effect of PPA on multiemployer pension plans. Congress was 

to receive this report by December 31, 2011. When will this report be submitted to 

Congress? What key findings and recommendations do you expect it to include? 

QUESTIONS SUBMITTED BY REPRESENTATIVE MARTHA ROBY

1. As you know, the PBGC Inspector General has been extremely critical of the 

ways that plan asset valuation audits were conducted, particularly in the cases of 

United Airlines and National Steel. The IG noted that the contractor used in both 

of those audits has been used in eight of the 10 largest plan terminations in PBGC 

history. Are those other audits under review, and if so, will more irregularities come 

to light? 

2. How much will it cost to contract with outside firms to redo the work in the 

United Airlines and National Steel audits? Will that money come from premium 

contributions and the assets of terminate plans? 

3. Your Inspector General’s ‘‘Report on Internal Controls,’’ indicated that the Inspector General found that PBGC ‘‘did not exercise due professional care in the conduct and oversight of contracted audits of asset values;’’ and questioned whether 

PBGC personnel reviewed contractors’ work. How can we know that PBGC is properly overseeing its contractors, and how does PBGC hold those contractors accountable for errors? 

4. In a recent report on PBGC’s internal controls, the Inspector General noted 

that it had uncovered instances of incorrect benefits calculations. This is troubling 

because benefits calculation is a core function of PBGC, and retirees were not provided with the benefits they were entitled to under ERISA and the terms of the 

plan. What specific, concrete steps is the agency taking to enhance training for its 

professionals who calculate benefits? 
90 

QUESTIONS SUBMITTED BY REPRESENTATIVE ROBERT ANDREWS

ON BEHALF OF SENATOR HERB KOHL

1. In the GAO and PBGC Inspector General have written several reports emphasizing the need to reform the agency’s governance structure. Do you think that any 

change in premium structure should include provisions to bolster PBGC’s governance and oversight? 

2. The Pension Benefit Guaranty Corporation Governance Improvement Act of 

2009 (S. 1544 in the 111th Congress) would expand the board, require multiple 

board meetings, and create more efficient communication between the board, IG, advisory committee and professional staff. Do you support this legislation? 

3. The bill in the last Congress created a variety of requirements for the four new 

board members, but a draft version currently circulating just requires that two come 

from each party, one be a financial expert, and one have specific understanding of 

retirement plans. 

4. Do you have a problem with this proposed board makeup, or do you have suggestions on improving it? 

[Director Gotbaum’s response to questions submitted for the 

record follows:] 
91 

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~".;vJ 1M! 02 101) 

7'8 

I om herd>y 1nlnSII1;lti"i paGe Direaor JMhua Clotboum '. n::~ to queslions for tho reronl 

~bmjlte<l by \be Subcommillee OJ! Heallh, Empk'jomm" Labor, and Pensions folio,,"'ing up on 

\hal plU>Cl'i february 2, 2012, hearing emiliO<! "F-><amining the Challenges Facing raGe and 

Ddinod Ilenefil Plans," 

Please lei me know ify<lu have any q...,51iOlll. llIank you. 

~ DirectOl' 

Legi.l.tive Department 

E""losure 

..,: Miohel. Vamhagen. Chiefi'<>lioy OfficerlDiM:tot of Labor Poijcy, MillQrily SUI« 
92 

Qucstions (ur the Record 

Joshua Gothanm, Director 

PCllsion iltncfi t Guaranty Corlloration 

before the 

Health, EOlploymcot, Labor & I' ensio ~ Subcommill«: 

House Comminec on Education and the Workforce 

ob.,. ry 2. 201l 

~. li , Submitted by Cha irman Phil R Oil 

I. At P'" "f ito " I'Lan f"r 1I.er;ula. 0'1' Rn'i .... " lhe ru.l"n lIon,n, Gual"'llnty Corpol"'ll' iQn 

(I'U(;(;) b recon. iderinl it> "Np~"cI La'k>1U ~rdlal f.,llity , buldowo II. hlll.y 

... clo. &ori,,_ 4(l62 ) " fthe £ ... ph,y ... 1I. •• i • .,., •• 1I lo<om. SHurity At. (r.II.ISA). tr 

IIn. liz.d. lb. p",po>«r ntul. rio" .. o"ld impose 'Wom .. ". btlnIc •• 0" pion .......... n. 

1I .... ·n ·.r. "'porto ' PII(;<; . m.ilb a", .till ",f .. m olal r"_ p .... r-d <<11;., .......... ".ho I ... " in Ihd. i" ..... dio ..... 1l h pin ' PO"' ''''' b PUGe o"fO",I"& 

. h ••• p""fHl"'l rexu l. ,;on,! 1'- p nGe inltnd 10 lIuli .. a ... 41Ni2(e) rq.t. lio",,; omd 

i( 10. how will .h", . dd"" ~ <OD« . nO of pl." ..... " ....... II .. no •• d Iheir pol. ".lo l for 

""proportion •• ely hu~~ li. hlli.,·! 

ERISA ...:tion4062(e) req"I~""mpani •• to mo •• li'IO,,,,i. 1 .uu"""", whencvcrthe:y ccuc 

opcnIions II • facility "'JUllinilln n..."., rllon 20 """' .... of lhe ocli"" p<1I';on pI.n 

portici~ Iosin& tlM:i. jobs. TypiaJly financial assurance i. rMdc throuj;h Ndi(iona) 

P'OYIl><PlS,. kttor or crull!, or other rU>anCiai K-of fur,," pension conrri .... rioq, 

The pros;deot Mt: directed ogenciellO review and mhinl; currcnl ""oIa6ons. in 2010 

pR(;C fII"IPOK'I ~&uLaUO<ll oallMlllfll'licability and ""r.:...:Cmmi of 4062{c). The busi_ 

community kl. u.: ~ leiUllliOM imP<*d un~cd booloms on ,om~ies in 

circu ....... nccs where then: was lillle or "'" rut to pion pwticip;onia or pnce. Afl<r mcctina 

with the .... sil'lCSl CQIlununi.y and reviewing the ""'tior. we an: WVlking .o devel"". ",vi".,.. 

rroposal. 

We III'Illookin& •• foeuai". e"f"",emen! 011 circum!;!..,.".. whcre pen,ions "'" th"",Wl.w. 

JJi ~""l1y. tlU, requi"'"."". .... boca onf"","" rq""'l~ of the: financial booJ1b " r the: plan 

JPOIlSOf. Our re>4ew found 1110. fi .. ""ially""""" eomplUll" .. dy lermiMtcd 1IIeir 

pcnoions, <YOn iflhMe pi .... ~signifiClUllly~. Thb i. """y "",'n: Jooki". 

beyond measures .M. 1"«.IOIo:Iy on plan fundina "'""b aDd "'" ",aroining ............ of 

pI-_ r,....,., .. I_lilte._ widcly ._ I" rho""';".,.. <om"".";I)'. 

To 1<:11 rbi. new . pprooch. r n GC has.w-ty ;.,.w some _Klion 1011el> 10 """'" 

finandally .rroog co,n",,"i ... ond i. "",",inll on • 110""",1 11<1 of criteri. f", doi"i "". 0r>Ce we 110,,, enough c"p"'ionce to redc:lill" the "'8111,10<)' propo .. l. ",e will do 50. III (he 

intenn •. PB(iC i. no. u'ina the 2010 propo .. l. but illl<flmllly moinlaini 'llI ilS hi.,,,,ieal 

proctie ... 

P~l of 6 
93 

Ou, S""l I, to preserve IX""I\>II pia .... We cIo"" in ,wo _yo: filS!, by '.'Io\<o1i1l£ nil' effom. 

where pions are .... Uy I, rill;; sewnd. by t«Juclng UIlll<'C""!IIIr")" "",ul ... men,. on <om""nl", 

and plonsthJltare aound. The tClU!! w;1I be mo ... pl."" ""'lnl,,'ned and mo ... "",,"n: 

",11",menl>. 

1. AI p"n aflut y.ar·1 .P!'I"OI,riollon. ~ l'DGC ...... IV" nl«l d~'''''' 1<> u'"" ro..d. 

for fl n 'r:o. rdiu')'fl .d .. l .. b,r:o,lIIe .x ........ ""'illl'''''' m.II .... ploy .... l'"'V"m, 

pr .~ldtd It no.iroa .h • • ppt'"Opriolio ....... m",i_ " lI ow docs r UGC d. rla. 

·." .. onllu,),· in .h ...... nUI?" 

roo<: defi .... ' U/N>DI'di""'"Y .. wi,if'mpI"", fJrOJ:""" I"f:/afu/ upt:~.s· .. In other budjjtl 

and appropriations conlCxl>; ""IX''''' lhou "re .i",ili"",,1 enol rould 001 reasonably hi..., 

been pmlicled!he Y"Br befere. We lhink!he em"8<""~ .u boril~ iI Imporunt becau,. we 

know "".ell less ab<>ut the ~1"KI1t!o n of muJlienlj)loy<:t plans Ind the ... fo,e It 1< h:ardo, '0 ptllll 

..-.d budget for them. 

"1>0 .... h .. ~y ... r ... uno"<"I,b. ,~ iJ 1_· .... .. ~I 00' "" ".0<1 ,,'j,lIou, .otl!}-I .. , tho 

... 11, ........... 1 co ... mln .... ofj.rUdi(IIoII ..... ued lHIJy .. " Iu, """'" 

,~ 

" lIow .nd uad .. ,,'h • • d reun .. tan ... d oyau in' ent! to no.ify "~na rq(I.rdln, you • 

.... of lb;' n,horlly?" 

lrw. believe the...., "rlhinulilorily is nc:<:.,...ry, and ifOMB ~II"'~" lbcn W\: will send 

IcUorl In Ihc .J>Pn>priatw,,, commlll",," and commi.tee, 'If jltriilllicli"" "fthe H""", <I f 

Rcpl"I:II:ulativcs ond tho Scnale. 

J. Sect ..... 4011 of ERISA ft<j~I .... « ... in 1'." .. 10. plu . """ ..... 10 .~b .. i' iar ....... IIo • • o 

PI:IGC ..... illg '" plan Judill", rUG(;;' ft<j.in:d .uu. IJy .... " bnti . . ...... rt o. ,.;. 

.. ' ........ Ioa.o U .. ~~ ...... Io •• 1 wl'unltt .... ofJ" .... dlcfio •. "'''y h.lbi> rcptM1 ... yr. 

bet" iN" ..... ud ,,·hon .. 1II ~II(; C Iubmi! Ihis "pun 10 Cvu ..... 1 

'llIe n,porl "'lIStcI1'''' COI1greos "" AII8., .. 21. 2012; i. OIImmlrl"" 4010 data for roo,)"t"~ 

200S through 2011. Given the matke, Nrm"U since 2008 . .,.,., lhoujllllseYe",1 )"t"a .. of 

nrc,i"""" unde, the ""W pp" provisions would be "'"0 .... 1}' ror • meaningful analylillUld 

rerort. Our rq>On a)s""'SII"lro "'"Y' '" ""'"""ur"""!."'Y bunIeno from .he 4010 requimlltnll. 

• . Th. PRGC'. lOIIl A .... u. 1 £.\ ..... ~I"f: R. port ... ,"" .kallhc ..... Ib .. d.,.rioratioto 0'''''0 

larr pia ... ro,,1d "", uM l'1!GC'. m"lti ... ploy .. pree ....... ron "'" .. r ",on.,.. It u ,ho 

"" .... of"' .... tw .. plat .. llllp ... ·ed7 Have ony ...... plan. boo • • d<ltd 10 .h. 1;', o(pb ... 

• t .uhlt.nl l. , riok of In","· ... .,. tll.' ..... ld .... UrioUy .rr .. 1 r l:l(;(:"1 

~ fat" lIS "''' can !ell. ,1>0 coodi.ioo or Ihose t_ plat\J hli IIQI chan,,,,, JUbstttntially; we 

inc ... ","" the eslima", of ruoc·. expo""", f<lf them from Sl<I billion .. "fthe end of fise.1 

)'Ca, 20 W (0 $23 biliiOll tIS .. f tho end oftiscal )"t"lr 2011. 
94 

During (L<CaI year 2011, 21 ..,\all.nd mid_,ized Ians wen: IKldo<d Ii> tilc liS! of proIwIhJe 

;",......w, g that Ire likely to mjuire fonancial ... i,umce. OUr expo'ure k> thcx21 pl.", 

io $ I.1 billion. Additionally, II .... plano were added to lhe '-lu ... ""bly p<>J.ibleM liS!. 

il'K:lUSi.g our colimo.tW <,,~'" in thi ....... by an odditionaJ $9-19 miliiDfL 

~ cWsifialion or OftIIOina plano lJId !he list of """"""biy _ible cl.ims .... updaIed 

........uy • o(!he Md o( !he fItgd )'<2'. ood tbr PHGC will .pn report ill corotintan liabilities as partofi!s I'Y 2012 AMpai RcpQn in NO'"m'Oba. 

5- AI y .... knl>w, ",,"""11011 "orphon" li.bilitia or ompl. ,-• .., " 'ho .. t nt " .. l orb .. ,I" ... btlt 

,,·h .... omploy ...... . 1iI1 pll n parHrip. Du are. hug" bu rtl . .. for <amponlu Ihoc 

porlid p.l. in mum.mJlIO)·.r Jllan •. Wh'D I'IICC modtl. rhe ", r.nli 1 ri. k Orl'i.>II" 

doco it toke Into o«ounl rh.1 Ib,'~. ri, j"e lio bmt!.,- u d con'<Ij" <Dlly hi~h r 1"«J"lr 1 

pion ~nlribu iQD ' _ ",oy drive ron'"I.'" from Ih ~ plo D or ""u " ,,' orb".I . ... ? If, o, 

pit ... <splain how Ihe model, ",1Iec • • h. """'<qD. n ... of rl.l ~ lI. hilili ... 

plJOC does ...u rUina plan liIbolir;'" i_ ~ """"" pro.i«tin& tbc fill"", fInancial 

condititm of Dll>ltiemplo)'Of ........ H..--, pI.lm: ..., not required 10 repon "orphan~ 

iabilir~» we .... IIVmIlI plaa liIbWI;e. and other plao! dall .. a proxy. 

I>HOC _ • S!OdwIk IrimulOlion model. muUkmplore< PIMS \Mr"..ptMSj, to model 

pension 1'1""", Sine<; we ha-e limited infom\a!ion about !he individual tmployers witlun • 

plm.1ho IlI<lIk:I project, the clw>cc that all emp!oyers will Wilhdr"w fmm. plan, A!1\Mi the 

f.~tors thai the mode! rill .... Ioto IIOOOUnl i. lhe pr<>p<lrlion of i":O<I;'-'; pwliciporn" to ""live 

p;m;cipal\1S and plan "nde fund ln~, Other key oat~ III'c:od in dClcrminina the probability 

of cmployero wilhdro"";"i .R" (i) pl.llll ";tt. (ba.;ed on I'I rr iti~1 counl); (ii) IWC1S COInparod 

to di$bunerneo,u (..,.., locogev;ly), (Hi) COfItribulioru lJId income t:orn~ 10 diobursen>enu 

( ...... flow), and (iv) !be ("ndi,. Sland:ad aocounl (fSA) credi. balmc:e ~ to 

c""u,bWons(/'SA ~ily), 

6. U.dfr EJUSA Seedo .. 41)05(' )' rRC,c is ",""ill'" 10 ho. nw .. p 10 SIIMI .. illion rrum 

tho U.s. Tra.ury. lin d ... .-ho t <1"",,".,,_ would pRee <o n, I<I . . .... inK . h .. 

aUlhority! Will you ••• k ... 'n ~lo .. 1 approval prIor 10 b~ o .. ~7 

·1lIe authorilY was n:pealctlthll year in the Movi ng Ahead for ProKJU' In Ihc 21 - ee.,r",y 

Att (" MAP 21 ~) , 

7. St<tlo" III of .... P •• ,W. Pru ~lio" Ad ofloor. (r!'A) rnt uirod a "'pori 10 1><. "", .. cd 

.. .,dy; ", 1M .«.<1 of I' PA " " m.lde .. plaj·u p'''l lon pl ...... (; ~_ ...... III ~h'e Ihb 

"port by l)"rtmMr 31, 1011. Whn wiD III .. ",pen be I.bmll .. " 10 Cn,"",' Wh.1 

kf)' "ndlnp ... d ....,omnl<ndallotu do,... . ......... it 10 i.el.,d.' 

W. bovc bee> workin; on !he ~ f« quite some time. 1'be rq:.on __ designed to ..... 11 

(;""""" in developillll !qoiol.l ..... in .,n· ... c oflho IlIIIlet ofUw PPA', muh;'."",pioy-er 

"",vIoia ... at tho end of 21l1 . 11"",""", then: Itnve been » many ~han~ .. in the pa5I few 

)'I'm - i""luding changes in rolWlCi.l "' ..... ct. ond in the cundillon of cmptoycn - lhal il hM 

bee> dim~ul! to dcvclOJlA ~iable ." .. sment of the effocll orlhot< PPA pnwi,ionJ. 

FlI1hc""""" thi. "/CM. In MAP.2 1. C<lnj;r.:u .."ended muhi~mployer premium le ... l., 

Page l of 6 
95 

whiclI. will afT=t hoIh mullicmpJoYCf pI .... and PBGC'. mnh;'mploycr pr"l:f1lrTl. We ... "",,1 

10 ;",U<.IM oqx>tt b)I YUNnd. We Iuove, ofwurse, kepI our ..,,,,, .. in...,, ofj"ri";!iCli<H1 

JppriJOd of our work. 

Questions Submitt .... hy Ih p ...,nnla lh·e Marth~ Ruby 

I . N yo .. k_. I~~ ~ JGC 1"'.-1<'" G ........ I hJo. '-n ... ~ ... Iy ~riliatl oflb ... ·IOJ·s lh.l 

pl . .. .. , dval •• tio. oudhl ... ~ cond1ln<d. i<~la rly I .. tb. n>eO . f U.II<d Abil,,~ 

and Na,loul S,,,,,L Th. le"; .ol«llhi llb. to"I"'lor ~Kd 10 bolll fl~_ udlll b •• 

bNn uo«1ln ';~hl oflhe 10 1''1Ii,,1 pl.on to.,nlnlllo •• ' " rucc bioloT)'. An: Ih ..... o lher 

. udlll und ....... 1 .... , ud If .... "Ill more Irregularilies wme lu IIK1oI! 

Ves, thw:e olher aue. cv lu~tion. ~re be;"i ",vic""d. If.ne! when we find 0350' wb • .., 

poopl.·, benefits mi~llulVc boen oITcctcd, we Ire redo>;ns the .v.IUIO~un!, In Il'Y cue 

",here we find t!Ia1 pooplelll.'" been IINIerpaid, "Ie will wm!OCl the ",imk..., "'I'"Y people 

with inler<:$l. ..... ''''''''' "" opolOl)'. Tho cootraoclor who perionnc:d the original ...:nt II no 

km& .. cooducting evil""' ...... t« POOC. We'",.130 .... ki'" OIlIer cJ\anieS 10 ~ IIliJ 

new< happens opiD. 

2. 11 _ mu.~ ... 111 It _ liD .0dl ..... 1 .,.il h """ide limn ' " rtdo lb. wortr. in I~ U.II«I 

AlrHn .. ond Na.;"" •• S, .... I " ulll .. ? Will ,b •• money <orne from p~m um <onlribu ....... 

and rhe .. litis or lerml ... I«I pl.n.? 

'I"" worl: to redo pl.n uoct cv l"at o"".nd ~Iol.cl ""t" .. ';.1 work h!13 thl'S f.,C/l.<I 

appmxill\lloly $1.5 million. These oosu., li"".u PBQC roll' , Ire funded cn\i,dy from 

premiums, plan.....u. and f!;<;Ovcriu; tbete Ire DO tax!"'y .... funds in""I\IOIl. 

J. Your Itbp""lor C~~e .... l'. ~port on Inl.....,.1 C .... troh," indino ltd ,1101 die ..... .-Ior 

G ... e .... 1 fa.ad Ihll l'8GC "did .01 ne~ due pro'_Ioto,lnn i. Ih., .. tH!u<l ,.d 

ove,,;Pllof ••• lra<l«! .~dilS. .l&O! l ... 11I .. ; .. ud qun tlont<l ... he,h. r PRCC 

......... nd rn·It .. ·.d ..... 1 ... 10 .. ' .. ork. 110 .. 01 .. ,,'C IuIIIW .hol l'DCC iI rl'll ... ..,. 

• • ,.l"$H'Ing Iu ... M .......... ud huw d_ PIIGC hold th""" lonl ..... 'on lern"nl. hl. for 

. rnn? 

'" I t •• lir.ed befo~ the C"mmith,e. we~l!1"cd wilh the In"P"ctor G.:neral and ha~ made 

1tW1)' ohanges ,inc. Lbo.m. Til hnpr<)VC contnoClor ov.rs.igh~ "'e ,ncn:ucd ""inina. chanaed 

oor perfo""""",, SUrIdudJ. and rtt"<n~ ()\It ~~ ,.".,... .ITol1< are onJIOi"tl. Tu 

JKId .... the immodia!c iuoc of t;<Jtl!r-:I 0"""''''', new atandard op...-ati"i proccdureo f .... the 

m'ir.oo :md receipt of OOIlttxlOr deli>'el'lbles haYe born de..-elopcd and _ heine \UlOId. 

ror ;met nodUltiona, Ia$. JUI "'. XI up • m"hi .. ...,1 review 1"""""" that. emures IhII 

~I"""ov .. nrt ill _hnicall)' tICCUltIIIe MJd ~ c:<>nU1ItI rfqIIimncttts. 

To st,entlhcn .""tractor _CIUltabililY Kr;net'ally, .... 1II.'"e oxpilndod ""' .... ofpetfornw>ce. 

baaed ~<mllaC~ ..... incn:ucd our..., of performance W<')r\i: $IIl<:monlJ and qu.lilY 1AUnmtt: 

,urv.jIJance pia"". In oddition, we implcmCfltcd a ".,,,,,,,,io,, and debarment proanun and 

jeined the lnlO11O~oncy Suspension olld Oebarm<nt Council, W. are .1.., """" ""lively 

pmvidilli rasl perf~ InfomuuiOll on cur wnllaClOtI ttJ the CuollaCtor 1'<"Ifonnance 
96 

Anessmenl RolinS Sy,lem (CPAR.S). .., 1ha! <>th<r .. meiOll..., warned when we <1IOOWlI~f 

. ubstandard petfonnanc~. 

. In I • ..,enl '""!",Ii on PIIGC'. internol «Introll, Ihl ln, pt. 'OT Cenend dol .... 'h.' II hod 

un..,,·..-ed in.b DfeO ofln <"OlrTOdl>< •• r. .... It" I.liG ••. Thl. I, roubl!D ~ Mtlu .. l><aer.., 

noJ .... Uun if I «Ire f".<l1on of rUGe, •• d .... 11.-- .... ,.., ..... J> ....... 1<IecI " 'IIh ,he he •• fi" 

l~<)' .......... IIIkd , . .. ole. F.IUSA nol Ibe '.nu . flhe "'an. Wht ' r-ir"" ..,nerote 

II .... It tho .~.n<)' I~"ial: , ... boa« ..... ininc for III ""f""lo .. h ,,·b. nlt.' . I. 

l><nefi .. ! 

!k"dit delcrminalions are ... )'011 nute, IIW 00 .. of PIlGC'1 m;"';"" lind we t&ke o..m yay Kriowly. Spceifl<ally. we ... takinli!he fnllowin¥.Le ... : 

r,"lerui.'. traioing of UUf ""'''''fi ... Our aclU";es ¥o Ihtu"jIh n e"mprci,eruive tNlinine 

prognm shonly '~f \bey OOme ",,00ard . 1 P6OC. Thi, , ... Inina """",.. . .... ic ovavicw 

of defined Mmfi' plans. f'1SGC IImi1l1ions, lind !he _ alloulinm. A major $CI",."I 

(>f1hU trtinin& .... uira """",,"ito Ie>.....t .... lIIoclllll..., .. put of!he:ir in-c ..... 

u.ini",. This tnlinin, J"OII3'D .... been in pIxe fur . momher or)'eatS for newly hirul 

ICIUarics. This pili!. ,..,... !be lIenefi .. ,oAnin;m.,ioon and hymenl Dcpanmc:nt (IIAPI)) 

has impIemancd III ....... ntocIocluari .. tnlinina PfOII"IIIII for the ~ experimcod 

Kluarics 10 """" <:DIr1plu Kluarial issues in I:uoIet>d plio.... In additiOJ\, nAPO IIu also 

dtdicated ""' of;" nw>IlI'""' willi 11\ ocru.arial bK~ to Ie.od the OCI..nat ""inine: efro",. gAI'LJ IIaI 0"'0 impl ........ ted !he role of 1M Acl""";a! T..,hnic., Reviewe1" in 

...,h of lhe Tnm«.hip I'rococsailll; Divi3ionl to review and pmvide technical luidance 10 

\0""" gnodod IOC'....,.; ... Th. RAI'D actuaries 01"" participate in monthly ar.d q""rLerly 

1r<:lmicaJ rnootinlll ". m".n. "finf<>rn:Jal trainina and lIw-ina ofbesl pr&etices, 

Multiple clt«b durin, 1M po:occss. During oM oocluarial ""Iuotion ~ Ih«<: ... ..... y checl< pomto 10 cQSUte IhII ba\erltil an: hei"i ~uloIed propniy. A okIailod ", ... 

.wnmary is pn:porcd early in oM I"'""CC'" Iftd reviewod 10 ensure IhaI plan pnIVi .......... 

po-opetfy """'1"1 ..... ond in1Cfpmed. The JUmrnary is """"n ....... y ",vised II _ 

infotmatioa io obIaioOO. 0mupI 01 actuario< and a~ ..J<nu ""'"" 01 """""';n'1. 

lr.divid ... 1 benefil caku'.';ons ~ ",viewed by ItIIm «",,"en«<! lCluarics. Depmdins 

on lbe complexily or tbc: ""te, the od ... ti.l proaramm;nll il ",viewed 01 varioua $114:"" 

B.fo", "'" f,",,1 "en""i.1 cue "'pot! i.llC<q>lCd, il un.ltf¥DtJ • ,n")ti·I.,,,,1 review nf the 

caI~"I.tioM ~nd expl~MliOlll. 

An "";"""fIP"I'iI proeeu. In !he: paot S yean, tewerman ,% otourMmfil 

determinations ha"" """n _led and 0t(1)' abo\It)/1 0'" of 1% ha"" b=> chal'lgocl .. the 

..,..,11 of .pp!'alo.. 

The ealn.dal.io:uo we mUll malo ... compkJc _ \he inf"nnllion bonk""" """'p""ies lao"" 

behind CIItI be far from pct"r~~ bill WI: .... prouct thol, willt lCw."""pliom., PfIOC .........,. 

'" provide ben<:fi' delami .... t;"'" tho, ..., .. liable ODd 00.. II> willi • very hip dogmo of 

"","'m." .. li.fOCli ..... w •• ", """tin"ina to IO\:l<It 0tI funm ImpnlvmlenlS, boIh In ~ 

to ",""lions from our ID .OO .. po" oftheSlllllclic ",view 'nililled in 2011. 
97 

[Whereupon, at 12:37 p.m., the subcommittee was adjourned.] 

Æ