```

[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]

 
   CHALLENGES FACING MULTIEMPLOYER PENSION PLANS: EVALUATING PBGC'S 
                               INSURANCE
                     PROGRAM AND FINANCIAL OUTLOOK
=======================================================================

                                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, DECEMBER 19, 2012

                               __________

                           Serial No. 112-70

                               __________

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

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                COMMITTEE ON EDUCATION AND THE WORKFORCE

                    JOHN KLINE, Minnesota, Chairman

Thomas E. Petri, Wisconsin           George Miller, California,
Howard P. ``Buck'' McKeon,             Senior Democratic Member
    California                       Dale E. Kildee, Michigan
Judy Biggert, Illinois               Robert E. Andrews, New Jersey
Todd Russell Platts, Pennsylvania    Robert C. ``Bobby'' Scott, 
Joe Wilson, South Carolina               Virginia
Virginia Foxx, North Carolina        Lynn C. Woolsey, California
Bob Goodlatte, Virginia              Ruben Hinojosa, Texas
Duncan Hunter, California            Carolyn McCarthy, New York
David P. Roe, Tennessee              John F. Tierney, Massachusetts
Glenn Thompson, Pennsylvania         Dennis J. Kucinich, Ohio
Tim Walberg, Michigan                Rush D. Holt, New Jersey
Scott DesJarlais, Tennessee          Susan A. Davis, California
Richard L. Hanna, New York           Raul M. Grijalva, Arizona
Todd Rokita, Indiana                 Timothy H. Bishop, New York
Larry Bucshon, Indiana               David Loebsack, Iowa
Trey Gowdy, South Carolina           Mazie K. Hirono, Hawaii
Lou Barletta, Pennsylvania           Jason Altmire, Pennsylvania
Kristi L. Noem, South Dakota         Marcia L. Fudge, Ohio
Martha Roby, Alabama
Joseph J. Heck, Nevada
Dennis A. Ross, Florida
Mike Kelly, 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           Robert E. Andrews, New Jersey
Glenn Thompson, Pennsylvania           Ranking Member
Tim Walberg, Michigan                Dennis J. Kucinich, Ohio
Scott DesJarlais, Tennessee          David Loebsack, Iowa
Richard L. Hanna, New York           Dale E. Kildee, Michigan
Todd Rokita, Indiana                 Ruben Hinojosa, Texas
Larry Bucshon, Indiana               Carolyn McCarthy, New York
Lou Barletta, Pennsylvania           John F. Tierney, Massachusetts
Kristi L. Noem, South Dakota         Rush D. Holt, New Jersey
Martha Roby, Alabama                 Robert C. ``Bobby'' Scott, 
Joseph J. Heck, Nevada                   Virginia
Dennis A. Ross, Florida              Jason Altmire, Pennsylvania

                            C O N T E N T S

                              ----------                              
                                                                   Page

Hearing held on December 19, 2012................................     1

Statement of Members:
    Andrews, Hon. Robert E., ranking 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:
    Gotbaum, Hon. Joshua, Director, Pension Benefit Guaranty 
      Corporation................................................     6
        Prepared statement of....................................     8

Additional Submissions:
    Mr. Gotbaum:
        Addendum, ``Pension Benefit Guaranty Corporation Annual 
          Report 2012,'' Internet address to.....................    15
        Response to questions submitted for the record...........    33
    Questions submitted for the record from:
        Kline, Hon. John, Chairman, Committee on Education and 
          the Workforce..........................................    32
        Chairman Roe.............................................    32
        Scott, Hon. Robert C. ``Bobby,'' a Representative in 
          Congress from the State of Virginia....................    33
        Tierney, Hon. John F., a Representative in Congress from 
          the State of Massachusetts.............................    32

                    CHALLENGES FACING MULTIEMPLOYER

                       PENSION PLANS: EVALUATING

                        PBGC'S INSURANCE PROGRAM

                         AND FINANCIAL OUTLOOK

                              ----------                              

                      Wednesday, December 19, 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 10:03 a.m., in 
room 2175, Rayburn House Office Building, Hon. Phil Roe 
[chairman of the subcommittee] presiding.
    Present: Representatives Roe, Wilson, Thompson, Walberg, 
DesJarlais, Hanna, Rokita, Bucshon, Barletta, Noem, Roby, 
Andrews, Kucinich, Hinojosa, Tierney, Holt, and Scott.
    Also Present: Representatives Kline and Miller of 
California.
    Staff Present: Andrew Banducci, Professional Staff Member; 
Katherine Bathgate, Deputy Press Secretary; Adam Bennot, Press 
Assistant; Casey Buboltz, Coalitions and Member Services 
Coordinator; Ed Gilroy, Director of Workforce Policy; Benjamin 
Hoog, Legislative Assistant; Marvin Kaplan, Workforce Policy 
Counsel; Barrett Karr, Staff Director; Brian Newell, Deputy 
Communications Director; Molly McLaughlin Salmi, Deputy 
Director of Workforce Policy; Todd Spangler, Senior Health 
Policy Advisor; Alissa Strawcutter, Deputy Clerk; Aaron 
Albright, Minority Communications Director for Labor; Tylease 
Alli, Minority Clerk; John D'Elia, Minority Staff Assistant; 
Daniel Foster, Minority Fellow, Labor; 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. A quorum being present, the Subcommittee on 
Health, Employment, Labor, and Pensions will come to order.
    Good morning, Director Gotbaum. And it is good to see you 
again. We appreciate your taking your time to be with us this 
morning.
    Before we begin, I would like to take a moment to extend my 
condolences to the people of Newtown, Connecticut. Last week, 
an unspeakable act of evil killed 20 innocent children and six 
amazing adults, changing our country and the community around 
Sandy Hook Elementary School forever. As a Nation, we continue 
to stand by the people of Newtown and lift them up in our 
prayers.
    And I now yield to my friend Congressman Andrews for any 
comments he may have.
    Mr. Andrews. Good morning, Chairman. Thank you for 
beginning our gathering with the appropriate memorial to those 
who suffered such a loss in Connecticut and across the country.
    This is the Committee on Education and Labor. And the idea 
that such an act of pure unadulterated evil could take place in 
a school in this country is not something we can easily 
process. Suffice it to say that there is unanimous feeling, I 
know, on this committee that our hearts and prayers go out to 
all those afflicted by this unspeakable loss.
    There is a higher purpose in life than politics. It is 
loving our children. And extending that love to those who 
suffered from this is something I certainly will join you in 
with a heavy heart but with a strong conviction.
    Chairman Roe. On behalf of the committee, I ask that we 
honor memories of those who died by observing a moment of 
silence while we please stand.
    You may be seated. Thank you for that privilege.
    And now let's turn to the issue before the subcommittee 
this morning. Today's hearing is our second opportunity in 
recent months to examine the multiemployer pension system. In 
June, we discussed broadly the politics governing the system 
and its structural challenges. Since that hearing, news reports 
have reminded us of the problems plaguing many pension plans 
and the need for reforms that will help promote a stronger 
system. Hostess Brands, an iconic American company for more 
than 80 years, decided in November to close its doors and lay 
off 18,500 workers. Hostess participates in 42 multiemployer 
pension plans, and its total withdrawal liability, the penalty 
a company pays when exiting a plan, could exceed $2 billion. 
Yet it is uncertain whether that money will be collected in 
bankruptcy. Those employers who remain in the plans will have 
to provide Hostess employees the retirement benefits they 
earned.
    Regrettably, the Hostess story is one that is becoming all 
too common in the multiemployer pension system. An employer 
withdraws from a pension plan leaving behind unfunded promises 
that then fall to the remaining employers. At times, this can 
drive even more employers out of the system, creating a domino 
effect that undermines the strength of the individual plan and 
the pension system as a whole.
    These events have a profound effect on workers, and they 
also impact the Pension Benefit Guaranty Corporation. The 
Federal agency provides financial assistance to multiemployer 
pension plans in distress, a responsibility that has grown 
significantly in recent years. According to its annual report, 
PBGC has obligations of $7 billion in future financial 
assistance and a 57 percent increase since 2011. The agency 
believes there is a 30 percent chance its multiemployer 
insurance program will be insolvent in less than 20 years. 
Meanwhile, its total deficit continues to grow and now stands 
at $34.4 billion.
    Maintaining the status quo is no longer possible. 
Provisions in the law governing multiemployer pensions will 
expire in 2 years, which means Congress has an important 
opportunity to study the system, assess its strengths and 
weaknesses, and pursue solutions that support workers without 
discouraging participation in the voluntary pension system.
    To do this successfully, we need the facts as quickly as 
possible. Unfortunately, the administration has a history of 
delaying the facts and slowing the work of this committee. For 
example, it took nearly 9 months to get answers to questions 
submitted by members of the committee, both Republican and 
Democrat, after our hearing with Director Gotbaum in February. 
Only now are we able to complete the hearing record.
    I am also troubled by two missing reports that were due 
last year. These reports should provide important details on 
multiemployer pensions, including the sufficiency of current 
premium levels and the impact of funding rules on small 
employers. The law requires the PBGC to finish these reports by 
the end of last year and yet we are still waiting. We are now 
told to expect the reports by the end of this year.
    Congress is ultimately responsible for legislating changes 
that will improve the long-term health and stability of the 
multiemployer pension system. We cannot do our work if the 
administration fails to do its job in a timely manner. Blaming 
changes to the law enacted 6 months after the reports were due 
is not an acceptable excuse.
    The success of the multiemployer pension system depends 
upon many factors, such as a strong economy, practical 
promises, and a diverse group of participating employers. It 
also requires policymakers working together on reforms that 
serve the interests of workers, employers, and retirees. 
Director Gotbaum, you play a vital role in that effort. I hope 
you will help us get the answers we need without unnecessary 
delay. And thank you for your service. And we look forward to 
working with you.
    I now recognize my distinguished colleague, Rob Andrews, 
the senior Democratic member of the subcommittee, for his 
remarks.
    [The statement of Chairman Roe follows:]

           Prepared Statement of Hon. David P. Roe, Chairman,
         Subcommittee on Health, Employment, Labor and Pensions

    Good morning. Director Gotbaum, it is good to see you. We 
appreciate you taking time to be with us this morning.
    Before we begin, I would like to take a moment to extend my 
condolences to the people of Newtown, Connecticut. Last week, an 
unspeakable act of evil killed 20 innocent children and six incredible 
adults, changing our country and the community around Sandy Hook 
Elementary School forever. As a nation, we continue to stand by the 
people of Newtown and lift them up in our prayers. I ask that we honor 
the memories of those who died by a observing a moment of silence.
    [Moment of silence.]
    Thank you.
    Now, let us turn to the issue before the subcommittee this morning.
    Today's hearing is our second opportunity in recent months to 
examine the multiemployer pension system. In June, we discussed broadly 
the policies governing the system and its structural challenges. Since 
that hearing, news reports have reminded us of the problems plaguing 
many pension plans and the need for reforms that will help promote a 
stronger system.
    Hostess Brands, an iconic American company for more than 80 years, 
decided in November to close its doors and lay off 18,500 workers. 
Hostess participates in 42 multiemployer pension plans and its total 
withdrawal liability--the penalty a company pays when exiting a plan--
could exceed $2 billion. Yet it is uncertain whether that money will be 
collected in bankruptcy. Those employers who remain in the plans will 
have to provide Hostess employees the retirement benefits they earned.
    Regretably, the Hostess story is one that is becoming all too 
common in the multiemployer pension system. An employer withdraws from 
a pension plan, leaving behind unfunded promises that then fall to the 
remaining employers. At times, this can drive even more employers out 
of the system, creating a domino effect that undermines the strength of 
the individual plan and the pension system as a whole.
    These events have a profound effect on workers, and they also 
impact the Pension Benefit Guaranty Corporation. The federal agency 
provides financial assistance to multiemployer pension plans in 
distress, a responsibility that has grown significantly in recent 
years.
    According to its annual report, PBGC has obligations of $7 billion 
in future financial assistance--a 57 percent increase since 2011. The 
agency believes there is a 30 percent chance its multiemployer 
insurance program will be insolvent in less than 20 years. Meanwhile, 
its total deficit continues to grow and now stands at $34.4 billion.
    Maintaining the status quo is no longer possible. Provisions in the 
law governing multiemployer pensions will expire in two years, which 
means Congress has an important opportunity to study the system, assess 
its strengths and weaknesses, and pursue solutions that support workers 
without discouraging participation in the voluntary pension system.
    To do this successfully, we need the facts as quickly as possible. 
Unfortunately, the administration has a history of delaying the facts 
and slowing the work of this committee. For example, it took nearly 
nine months to get answers to questions submitted by members of the 
committee--both Republican and Democrat--after our hearing with 
Director Gotbaum in February. Only now are we able to complete the 
hearing record.
    I am also troubled by two missing reports that were due last year. 
These reports should provide important details on multiemployer 
pensions, including the sufficiency of current premium levels and the 
impact of funding rules on small employers. The law requires PBGC to 
finish these reports by the end of last year and yet we are still 
waiting. We are now told to expect the reports by the end of this year.
    Congress is ultimately responsible for legislative changes that 
will improve the long-term health and stability of the multiemployer 
pension system. We cannot do our work if the administration fails to do 
its job in a timely manner. Blaming changes to the law enacted six 
months after the reports were due is not an acceptable excuse.
    The success of the multiemployer pension system depends upon many 
factors, such as a strong economy, practical promises, and a diverse 
group of participating employers. It also requires policymakers working 
together on reforms that serve the interests of workers, employers, and 
retirees.
    Director Gotbaum, you play a vital role in that effort. I hope you 
will help us get the answers we need without unnecessary delay. Thank 
you for your service and we look forward to working with you.
                                 ______
                                 
    Mr. Andrews. Thank you, Mr. Chairman. And good morning 
again.
    Mr. Gotbaum, thank you for being with us this morning and 
for your service to our country. You are running a very 
important agency, and I know you are very dedicated to that 
task. It is good that you are here this morning to answer the 
committee's questions.
    Ten million Americans benefit from a system that has served 
this country for many decades very well. And it is a system 
where pensions and other benefits are provided, where small 
business people, contractors, trucking companies, markets, 
supermarkets, and others get together and pool their resources 
and share costs in order to provide pensions and other employee 
benefits. This is what is known, as the chairman said, as the 
multiemployer system.
    The multiemployer system in all cases involves a collective 
bargaining agreement that sets the terms and conditions of the 
benefits that will be given. The system has worked 
extraordinarily well and it is the system that 10 million 
Americans rely upon for their pension. It is essentially and 
fundamentally sound, but there are some significant problems 
that we must deal with in order to assure its soundness.
    The graphs that are to my right tell the story of the last 
few years in this situation. Prior to the financial downturn of 
the first decade of the new century, by and large, 
multiemployer pension plans were exceedingly healthy. We then 
had the downturn of 2001, followed by the market crash of 2008 
and 2009. And if you look at the chart that is to my right, we 
are in a situation where only 32 percent of multiemployer plans 
were in the healthiest category in 2009. That number has now 
grown to 60 percent. So improvement in the economy and several 
steps taken by this committee--at that time under the 
leadership of our present Speaker John Boehner--helped us to 
give plan trustees the tools to improve the situation.
    Having said that, the disturbing element of that graph is 
the red category at the bottom which indicates that roughly a 
quarter of plans are in some significant financial distress. 
This distress flows from a variety of causes. Typically, the 
cause is that the employers--the trucking companies, the 
supermarket owners, the construction contractors--are in very 
difficult segments of our economy. You talk to any electrical 
contractor, air conditioning contractor, trucking company, they 
will tell you they have had very difficult times over the last 
5 or 6 years. So that manifests itself in less money coming 
into the business, fewer workers paying into the fund.
    The second problem we can all see in our own 401(k) 
accounts, or thrift accounts in the case of Federal employees, 
that as market values have tumbled, so have our retirement 
accounts. So the investments in many of these funds have not 
kept pace with the needs of employees.
    And then the third is a sort of demographic tidal wave that 
I have to take some responsibility for. I was born in 1957, so 
I am part of the baby boom generation. And as baby boomers 
begin to retire and relatively fewer workers are in place to 
pay into funds, you have more people drawing out and fewer 
people paying in, which is a problem we see in Medicare and 
Social Security, in single-employer plans, and certain of these 
plans as well.
    So the task that is before the committee is to think about 
ways that properly balance the health of the small businesses 
that make up these plans so they can continue to thrive and 
prosper, fairness to present retirees, and a system that 
protects taxpayers to the maximum extent so that the promises 
made by the Pension Benefit Guaranty Corporation that Mr. 
Gotbaum leads would never have to step in and reach into the 
Federal Treasury in order to help these plans, should that 
occur. Now I would hesitate to point out, there is no explicit 
guarantee from Federal taxpayers for these plans. But the last 
5 years have certainly showed us that moral hazard exists, and 
taxpayers are very often called upon to make good for promises 
they never explicitly made.
    Our goal as a subcommittee, which the chairman has pursued 
very diligently for the last year, is to make sure that the day 
never occurs when we are in a situation where the 10 million 
people who are in these pension plans would ever require any 
consideration of a taxpayer step in to help make that problem 
happen. So I am encouraged, Mr. Chairman, that this is the 
second hearing that we have had to delve into this issue. And I 
look forward to working with you in the new year to find 
constructive solutions so that we can ensure the continued 
vitality of the businesses that pay into these funds, the 
continued security of the 10 million Americans who rely on 
these funds. And I yield back.
    Chairman Roe. I thank the gentleman for yielding.
    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.
    It is now my pleasure to introduce Joshua Gotbaum, who is 
the director of the Pension Benefit Guaranty Corporation, where 
he has served since 2010. As director, he is responsible for 
the agency's management, personnel, organization, budget, and 
investments. Mr. Gotbaum holds degrees from Stanford, Harvard 
Law School, and from Harvard's Kennedy School of Government.
    And I understand, Mr. Gotbaum, that you have some family 
members here, and would appreciate you introducing your guests, 
if you would.
    Mr. Gotbaum. Thank you, Dr. Roe. I am accompanied this 
morning, in addition to by the very competent staff of the 
Pension Benefit Guaranty Corporation, by my mother-in-law, 
Carol Lougheed, who I will say, to evidence the bipartisanship 
with which I think pensions should be done, is a Republican.
    Mr. Andrews. Mr. Chairman, if I might, it is not necessary 
to swear in this witness because no one would fail to tell the 
truth in front of----
    Mr. Gotbaum. Their mother-in-law. Yes. And also my son 
Adam.
    Chairman Roe. Thank you for introducing your guests.
    Before recognize you to provide your testimony, let me 
briefly explain our lighting system. You have 5 minutes to 
present your testimony. When you begin, the light in front of 
you will turn green. When 1 minute is left, the light will turn 
yellow. And when your time has expired, the light will turn 
red, at which point I will ask you to wrap up your remarks as 
best able. After you have testified, members will each have 5 
minutes for questions. Now appreciate your testimony.

             STATEMENT OF JOSHUA GOTBAUM, DIRECTOR,
              PENSION BENEFIT GUARANTY CORPORATION

    Mr. Gotbaum. Dr. Roe, Mr. Andrews, Mr. Chairman, members of 
the subcommittee, thank you very much. Thank you very much for 
holding your prior hearing. Thank you very much for holding 
this hearing. With your permission, I will summarize the main 
points.
    I want to start with something which is basic, which is 
that multiemployer plans are important. I come from the 
business community. Employee benefit plans are complicated. And 
one of the real benefits of multiemployer plans is they permit 
several hundred thousand businesses--mostly small businesses--
in many different industries to provide retirement security 
without needing a big H.R. department, just by writing a check. 
That is a huge benefit.
    In addition, as Mr. Andrews noted, for more than 10 million 
people and their families, multiemployer plans give them a 
pension that is portable, that they can take with them from job 
to job, that doesn't require them to become an investment 
expert or an actuary, and that gives them an income they can 
depend on for the rest of their lives without worrying that 
they or their spouse might outlive the money in their 401(k). 
And as you can see from the map to your right and my left, 
multiemployer plans cover businesses and people in every State 
in the Union and, I daresay, virtually every congressional 
district.
    Like single-employer plans, the last decade was tough for 
multiemployer plans. Their investments shrank, but their 
commitments did not. So their contributions necessarily rose at 
a time when the businesses had less work and less ability to 
pay them. Six years ago, a bipartisan coalition in Congress, 
with the support of the business and labor community, passed 
the Pension Protection Act. That was an important piece of 
legislation. It recognized that not all multiemployer plans 
were alike, some plans are healthier than others, that 
different plans have different needs, that they need 
flexibility. Two years ago, a similar bipartisan coalition 
passed the Pension Relief Act, recognizing, again, that 
multiemployer plans, as well as single-employer plans, needed 
greater funding flexibility.
    So where are we today? After all the events of the past 
decade, the financial health of these plans varies widely. As 
you can see from the status graph, there is a wide range of 
financial conditions. Two years ago, about a third of all the 
participants were in plans that reported--a third of 10 million 
people--were in plans that reported they were in green status. 
Today about 60 percent do. Excuse me, that is not true. In the 
information we got, you know, a few months ago, as at the 
beginning of 2011, 60 percent do. So we think that is good 
news. What that means is that a majority of the participants 
are in plans that are recovering. They are recovering for a 
whole variety of reasons: In part because of their markets, in 
part because they were conservative, in part because they used 
the authorities that the Congress gave them under the Pension 
Protection Act, in part because of funding relief, and, let's 
be honest, in part because of luck.
    However, a minority of plans, maybe a couple of hundred, 
lack the necessary economic base. As you can see there, that is 
a smaller set of the population. It is not most plans. It is 
the minority of plans. But it is a significant number of plans. 
They lack the economic base. They have fewer active employees 
and contributing employers. And those that they do have may be 
unwilling or unable to cover the costs of retirees, 
particularly the orphan retirees of other companies that no 
longer contribute to the plan.
    Without changes, some of these plans will not be able to 
avoid insolvency. The reason I personally am encouraged, as in 
the past, multiemployer plans, their trustees, their employers, 
their unions, their professionals, and others are stepping 
forward, looking for solutions that everyone can endorse. They 
are changes to allow flexibility, changes to allow distressed 
plans more robust tools. One effort worth noting is the 
retirement commission sponsored by the National Coordinating 
Committee on Multiemployer Plans. We have not seen the result 
of their work. They have been very insistent that they keep 
government out. But they say they will come forward, and we 
look forward to hearing their results and commenting on and 
analyzing it.
    We think that is the right step, that what the Congress has 
always done is, working consensually with the many businesses, 
small businesses, and the unions that make up multiemployer 
plans, to figure out what works. And so we think the right step 
is to hear from the industry itself and then to respond and 
work with it.
    At the same time, PBGC's multiemployer insurance program 
also needs a fresh look. This is a program which has not been 
substantially modified in 30 years. PBGC does not have the same 
tools for multiemployer plans that it has for single-employer 
plans. PBGC pays lower benefits for multiemployer plans than it 
does for single-employer plans. And PBGC gets much lower 
premiums from multiemployer plans than it does from single-
employer plans. As a result, unless there are significant 
changes, both for plans and in PBGC's programs and finances, 
the agency will eventually end up without the tools and 
resources to help the plans improve and without the resources 
to continuing to pay benefits for those plans that do fail.
    I am, as one who spends his life working on fixing 
businesses, an optimist. The next 2 years provides an 
opportunity, an opportunity for multiemployer plans, their 
participants, their professionals, their businesses, and their 
unions to work together with the Congress and the 
administration to develop approaches that are flexible, 
practical, and facilitate self-help. And that is why we are 
enormously grateful for the committee's continuing interest. I 
look forward to hearing your comments, to answering your 
questions, to finally providing the reports that we have owed 
you for a year, for which I regret, and to working with you to 
preserve what is a really important form of retirement security 
for tens of millions of Americans.
    Chairman Roe. I thank you for your testimony.
    [The statement of Mr. Gotbaum follows:]

          Prepared Statement of Hon. Joshua Gotbaum, Director,
                  Pension Benefit Guaranty Corporation

    Thank you for holding this hearing on multiemployer plans and on 
PBGC's efforts to support them.\1\
---------------------------------------------------------------------------
    \1\ As the Committee knows, PBGC and the Board agencies are working 
to complete reports on both multiemployer plans and on PBGC's 
multiemployer program. As we explained in a letter to the Committee on 
this topic, we have not yet completed the reports in part to be able to 
present more current information than would otherwise have been 
available, in part to incorporate recent legislative changes, and for 
other reasons. We expect to complete the reports very soon. We regret 
the delay.
---------------------------------------------------------------------------
    Multiemployer plans are an important part of retirement security. 
They affect hundreds of thousands of businesses and more than ten 
million participants and their families. Unlike some other retirement 
or savings plans, multiemployer defined benefit plans offer lifetime 
retirement income.
    Multiemployer plans offer employers, especially small businesses, 
the opportunity to provide retirement benefits to their workers. They 
are an affordable way for businesses to provide a defined benefit 
pension without the administrative expenses and burdens of sponsoring a 
separate company retirement plan.
    There are about 1,340 ongoing multiemployer plans.\2\ They are not 
all alike. They cover a variety of industries, including construction, 
retail food, transportation, manufacturing, and services (e.g., hotel 
and restaurant industry). They vary in size from small local plans 
covering a few hundred participants to large regional or national plans 
covering hundreds of thousands.
    Together these plans held nearly $400 billion in assets at the end 
of 2010, making them an important factor in the U.S. economy and 
Americans' retirement security.\3\ Like single-employer plans, 
multiemployer plans were strongly affected by recent declines in the 
economy and the investment markets. Virtually all of these plans 
suffered massive asset losses, causing underfunding to soar and 
compelling increased contributions at a time of economic contraction.
---------------------------------------------------------------------------
    \2\ There are also about 110 terminated plans. These continue to 
pay benefits until assets are depleted, at which point PBGC funds 
benefits and administrative costs.
    \3\ Based on Form 5500 filings.
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    After all the events of the past decade, the financial health of 
these plans varies widely. The majority are recovering, in part by 
relying on the tools and authorities provided to plans under the 
Pension Protection Act of 2006 (PPA) and subsequent legislation, as the 
economy and the financial markets improve. Some plans, however, lack 
the necessary economic base and will not, absent changes, be able to 
avoid eventual insolvency.
    As a result, PBGC's multiemployer insurance program will need a 
fresh look. Although the timing is uncertain, currently PBGC is at risk 
of having neither sufficient tools to help multiemployer plans deal 
with their problems nor the funds to continue to pay benefits beyond 
the next decade under the multiemployer insurance program.
    In the past, multiemployer plans, the Congress, administrations of 
both parties, and others have worked together to preserve multiemployer 
plans, so they continue providing retirement security to more than 10 
million participants and their families. We understand that 
multiemployer plan trustees, employers, unions, and others have been 
discussing potential solutions and expect to make proposals to the 
Congress and the Administration sometime next year. PBGC looks forward 
to assisting in that process.
Why Multiemployer Plans Matter
    Multiemployer defined benefit plans offer a broad range of 
advantages:
     They provide lifetime participant and spousal annuities.
     They provide portability for employees who change 
employers frequently within an industry, such as in the construction 
trades.
     They ease employers' administrative burdens: joint boards 
of trustees administer these collectively bargained plans, retaining 
professional investment advisors and benefit managers, and minimizing 
employers' fiduciary obligations. The employer need only remit 
contributions to the plan in agreed-upon amounts.
     They reduce administrative and investment costs through 
economies of scale.
    Outside the multiemployer sector, many employers over the past 
several decades have turned to defined contribution plans (such as 
401(k) plans) to avoid the long-term liabilities, potential 
contribution volatility, and compliance complexities of defined benefit 
plans--and some have opted to offer no plan at all. This has also been 
occurring in the multiemployer sector. Unfortunately, the result is 
often that employees do not save enough for a secure retirement. 
Furthermore, defined contribution plans often lack lifetime income 
options, so many retirees are at risk of outliving their savings.
    For all these reasons, at a time of inadequate retirement savings 
and declining retirement security, it is important to explore ways to 
preserve the multiemployer model.
The Last Decade was Tough for All Pension Plans
    Until the 2000's, both single-employer and multiemployer defined 
benefit plans were generally adequately funded (plan assets were 
relatively high relative to liabilities). Strong investment returns 
provided asset growth with an affordable level of contribution effort 
by employers. Many plans also relied on excess investment returns to 
support benefit increases. However, the turmoil in the financial 
markets, both at the beginning and the end of the last decade, caused 
both single-employer and multiemployer plans to suffer dramatic losses. 
(Both kinds of plans had similar investment mixes.)
    The effect on multiemployer plans of a $50 billion loss in asset 
values following the 2001-2002 downturn and a $100 billion loss 
following the 2008 downturn was devastating. Underfunding, which had 
totaled less than $50 billion until 2000, increased eight-fold during 
the next decade, using PBGC measurements.
    Equally distressing to plans was the economic recession that 
followed the 2008 crash, which hurt the industries in which these plans 
operate. Contributions to multiemployer plans are generally based on 
hours worked: as active employees were laid off and work hours were 
reduced, plan contributions plummeted. At the same time, the 
significant underfunding in these plans put pressure on employers to 
increase contributions: Minimum required contributions, as calculated 
by plan actuaries, rose precipitously and there were fears that hourly 
contribution rates for some plans would have to triple or quadruple to 
avoid a funding deficiency or, beginning in 2008, to conform to 
benchmarks required by funding improvement plans or rehabilitation 
plans under PPA.
Congressional Support for Multiemployer Plans
    Congress has acted repeatedly to help reduce the strains on 
multiemployer plans and provide contribution flexibility: in 2004, 
certain plans were permitted to defer the charges related to one-time 
investment losses; in 2008, plans could elect to delay implementation 
of PPA requirements for one year; and in 2010, funding relief allowed 
many plans to lessen the impact of 2008 investment losses on their 
funded status and contribution requirements. Plans relied extensively 
on this relief as they tried to regain their footing.
PPA Tools Have Helped
    Most important, Congress in the Pension Protection Act of 2006 
recognized that different plans would require different combinations of 
authorities concerning benefits and contributions.
    PPA required annual plan certifications based on standardized 
funding and liquidity measures for determining the financial health of 
plans. Plans in serious financial distress are identified as in 
``critical'' (``red'') status, and plans experiencing some financial 
difficulty are identified as in ``endangered'' (``yellow'') status or 
``seriously endangered'' (``orange'') status.\4\ Plans not experiencing 
financial difficulty are categorized as non-distressed (``green'') 
status.
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    \4\ Critical status is triggered when a plan is less than 65% 
funded (on the plan's actuarial basis) and projects a funding 
deficiency within 5 years or projects insolvency within 7 years, or the 
plan has similar funding or insolvency characteristics; endangered 
status is triggered when a plan is less than 80% funded (on the plan's 
actuarial basis) or projects a funding deficiency within 7 years 
(including amortization extensions); seriously endangered status is 
triggered when a plan exhibits both endangered status triggers.
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    After the turbulence of 2008, PPA steered many plans to a more 
structured path towards improved funded status. Over the past few 
years, hundreds of plans in endangered or critical status were required 
to adopt funding improvement plans or rehabilitation plans to increase 
contributions and reduce costs. Between 2008 and 2010, average annual 
employer contributions to these plans increased from $4,300 per active 
participant to $5,000.
    In 2009 and 2010 combined, over 350 plans reported reducing future 
benefit accruals as a way to limit costs and liabilities. In addition, 
for participants who had not yet retired, PPA permitted plans in 
critical status to reduce certain past benefits such as early 
retirement subsidies that were adopted when plans appeared to have had 
a surplus. In 2009 and 2010, more than 250 plans reported making such 
past benefit reductions; those that provided information reported 
erasing nearly $3 billion in past benefit liabilities.
    The funding flexibility that multiemployer plans were given under 
PPA was particularly valuable to cushion the effects of financial 
market and economic disruptions. To accelerate plan funding, PPA 
shortens the amortization periods for all types of unfunded liabilities 
to 15 years. However, PPA also allows plans to extend their 
amortization periods by up to 5 years, without government approval, if 
they would otherwise face a funding deficiency in the future and they 
are on a path to funding improvement. By 2010, 178 multiemployer plans 
were operating under automatic amortization extensions, compared to 
only six plans using extensions in 2005 when IRS approval was required. 
In addition, PPA generally exempted plans from the excise tax assessed 
against employers for funding deficiencies, thus freeing up employer 
resources for the plan's rehabilitation program. For the 2010 plan 
year, 90 plans reported funding deficiencies totaling $1.9 billion for 
which an excise tax will not be owed.
PRA 2010 Funding Relief Also Helped
    In 2009, nearly 70% of all plans (covering 70% of all participants) 
were in moderate or serious financial distress under PPA standards--
endangered (yellow), seriously endangered (orange), or critical (red) 
status. By 2011, these numbers had dropped significantly: yellow, 
orange or red status plans represented only 40% of all plans and 
currently cover about 50% of all participants. This improvement in 
funded status is due in part to positive investment returns in 2009 and 
2010 and the steps plans took to improve their status.
    But it is also due to the funding relief in the Pension Relief Act 
of 2010 (PRA 2010). This relief allowed certain plans to amortize net 
investment losses incurred during the 2008 crisis over a 29-year 
period--rather than the shorter 15-year period that would otherwise 
apply--significantly reducing annual amortization charges and minimum 
required contributions. It also allowed plans to increase the actuarial 
value of their assets for funding purposes by recognizing 2008 
investment losses over 10 years rather than the regular smoothing 
period of five years.
    Plans relied extensively on PRA 2010 relief--more than 700 plans 
elected the relief. Form 5500 filings indicate that a decrease in 
amortization charges and an increase in amortization credits boosted 
these plans' aggregate credit balances by $2 billion over the amounts 
reported in the 2009 plan year.
    The special funding rules had an additional importance: increasing 
the actuarial value of assets had the effect of inflating a plan's 
funded percentage, and larger credit balances delayed the date of a 
future funding deficiency, both of which positively impacted plans' 
funded statuses under PPA. About 400 plans that elected the relief were 
in non-distressed (green) status in 2010.
    Notices from many of these plans explained that the relief provided 
a buffer against future adverse experience and made it easier to avoid 
endangered or critical status in future years.
    Given the lack of timely information available on multiemployer 
plans, it is not possible to fully quantify the effects of funding 
relief on plans' PPA funded statuses. Nonetheless, it seems clear that 
many plans enhanced their certified status as a result of the relief.
    Many plans certified as in endangered (yellow) and seriously 
endangered (orange) status for the 2010 plan year were re-certified to 
non-distressed (green) status as a result of the application of PRA 
2010 relief. About 170 critical (red) status plans (45% of red plans in 
2010) used PRA 2010 relief, stating that the plan was expected to 
either immediately move into endangered (yellow) or non-distressed 
(green) status or to emerge from critical status sooner as a result of 
the relief.
    For some plans, the deferral of recognition of obligations 
permitted by PRA 2010 may make funding of those obligations ultimately 
more difficult. The ratio of active (employed) participants to inactive 
participants in multiemployer plans as a whole has been steadily 
declining: 60% of participants were active participants in 1990, but 
only 40% of participants are active today. Plans reported about 1.3 
million non-sponsored (``orphan'') participants (whose employers have 
withdrawn) in 2010, whose underfunded benefits become the 
responsibility of employers other than their own. A smaller pool of 
participating employers and active employees reduces the funding 
available to meet plan obligations.
Multiemployer Plans Now in Varied Financial Situations
            For Most Plans Challenges Seem Manageable, but Future 
                    Flexibility Can Help
    Our research suggests that the majority of multiemployer plans, 
though currently substantially underfunded, will be able to recover 
over time as the economy improves, financial markets stabilize, and 
small and large businesses ramp up hiring and hours worked. This 
assumes that these plans will generally maintain a base of contributing 
employers able to sustain their liabilities and benefit disbursements, 
and will avoid investment losses that significantly erode their asset 
base. A diverse industrial base, broad geographical coverage, and 
careful management help position plans for the future.
    Generally, plans are using the tools and authorities provided under 
PPA to reduce costs, limit liabilities, and increase contributions 
steadily over time. They are using their new flexibility under PPA to 
respond to market fluctuations and to reduce excessive stress on 
employers and participants.
    Trustees and others associated with these plans have begun 
suggesting additional flexibility to address pressing issues, such as 
the need to attract new employers, to transition to new benefit 
formulas that reduce costs and minimize risks, and to adjust their 
liabilities to ensure sustainability.
Severely Distressed Plans Will Need More Help
    While a majority of plans appear primed for gradual recovery, a 
minority of plans will not be able to recover using the tools and 
authorities under PPA. Many critical status plans (and some seriously 
endangered status plans) are severely distressed and will need still 
further provisions to remain viable.
    At the beginning of the 2008 plan year, only 12% of all plans were 
in critical (red) or seriously endangered status (orange). That number 
spiked to 44% of all plans at the beginning of the 2009 plan year. In 
2010, nearly one-third of all plans, covering more than four million 
participants, continued to be in critical (red) or seriously endangered 
(orange) status. While the percentage of critical (red) and seriously 
endangered (orange) plans dropped slightly in 2011 to 26% (336 plans) 
of all plans, that percentage is likely understated due to the effect 
of PRA 2010 funding relief. A substratum of critical and seriously 
endangered status plans is beyond the point of recovery without 
significant changes in the rules that govern their operations.
    These plans' underlying fundamentals reveal why they are so 
distressed. They often operate in declining industries--such as 
furniture manufacturing, textiles, or typesetting, or in intensely 
competitive markets, from which large numbers of employers have gone 
out of business. Their participant populations are mature, with a large 
proportion of retirees and significant unfunded retiree liabilities. As 
a result, contributions coming into these plans on behalf of current 
workers are small compared to the outflow of benefit payments. 
Investment returns during the 2000s were unable to make up the 
difference, as those returns suffered due to the drop in the overall 
asset base. In the worst-case scenarios, these plans' negative cash 
flows each year further erode their asset base and the plans are faced 
with eventual insolvency.
    The severely distressed subset of plans includes several hundred 
plans. Some of these plans have already terminated and are expecting to 
receive financial assistance from PBGC. Others are ongoing plans that 
operate under PPA funding improvement or rehabilitation plans. The 
rehabilitation plans of critical status plans often signal that they 
have exhausted all ``reasonable measures'' for contribution increases 
and reductions in adjustable benefits and do not expect to emerge from 
critical status; they are merely striving to delay insolvency.
    In the case of some of these ongoing plans, further contribution 
increases may be needed: our research shows that critical status plans 
averaged lower contributions per active participant in 2010 than plans 
in other funded statuses--about $4,000 per participant as compared with 
about $5,500 per participant. On the other hand, we also know that some 
employers contribute substantially more and participate in numerous 
multiemployer plans--large employers in one critical status plan 
contributed $18,000 per active participant in 2011.
    Because benefits generally cannot be reduced after they are earned, 
there is also a natural limit to how much underfunding can be made up 
through reductions in benefits. Plans may reduce future benefit 
accruals for active workers and, under PPA, critical status plans may 
reduce certain previously earned benefits (known as ``adjustable 
benefits'')--such as early retirement benefits, early retirement 
subsidies, subsidized optional forms of benefit, and disability and 
death benefits (other than normal spousal death benefits)--for active 
workers and terminated vested participants (participants no longer 
earning benefits under the plan but not yet retired). However, where a 
majority--or close to a majority--in a plan are already retired 
participants whose benefits cannot be reduced, some employers and 
active workers will be reluctant to consent to contribution increases 
if the bulk of the money goes to retirees, while active workers' 
earnings and benefits deteriorate.
    If the bargaining parties cease to view the employer's contribution 
to a plan as valuable, they will negotiate for the employer's 
withdrawal from the plan. Such actions can ultimately lead to a mass 
withdrawal of all employers from the plan and the plan's ultimate 
insolvency. A mass withdrawal termination can result in withdrawal 
liability assessments that can be particularly onerous at today's high 
plan underfunding levels.
    Preserving severely distressed plans is important, not just to the 
employers and participants in those particular plans, but also to the 
health of other multiemployer plans. Many contributing employers, 
chiefly large employers, participate in numerous multiemployer plans, 
and the termination of one plan that produces withdrawal liability 
assessments for these employers could undermine the ability or 
willingness of those employers to contribute to other multiemployer 
plans. This, in turn, could result in multiple employer withdrawals and 
mass withdrawal terminations for other plans, damaging hundreds or 
thousands of businesses and hurting tens of thousands of workers along 
the way.
PBGC's Multiemployer Insurance Program
    PBGC helps to secure the retirement benefits of more than ten 
million workers and retirees in multiemployer plans by working with 
plans to retain and attract participating employers and by paying 
financial assistance to cover benefits earned by workers up to the 
maximum allowed by law when plans are no longer able.
Multiemployer Financial Assistance
    PBGC's multiemployer program is very different from its larger and 
better-known single-employer insurance program. Unlike the single-
employer program, when multiemployer plans are in distress, PBGC 
generally can take no action until the plans have entirely run out of 
money and are insolvent. Also unlike the single-employer program, when 
PBGC becomes responsible for a multiemployer plan, the agency does not 
take over the plan. Instead, the plan administrator remains in place 
while PBGC funds the administrative and benefit costs.
    PBGC multiemployer benefit levels are also very different. The 
maximum guarantee for a multiemployer participant with 30 years of 
service is $12,870 per year; it is not indexed for inflation. In 
contrast, the maximum guarantee set by law for single-employer 
participants at age 65 is $55,840 for the 2012 calendar year; the 
maximum guarantee is indexed for inflation for future plan 
terminations.
PBGC's Other Multiemployer Activities
    In addition to providing financial assistance to insolvent plans, 
PBGC has oversight authority for certain activities of multiemployer 
plans that are important to their financial well-being.
    Plans must notify PBGC when they propose to merge. PBGC evaluates a 
merger to determine whether the merged plan poses a risk of loss to 
PBGC or plan participants. Generally, this involves a confirmation that 
the plan's finances will not be weakened and the plan will have 
sufficient assets to pay benefits for a period of time. In some 
instances, mergers can reduce a plan's administration costs, improve 
future investment returns, and help expand the plan's ratio of active 
to inactive participants. PBGC can and does provide technical 
assistance, on request, to plans evaluating a merger option.
    In a few rare cases, PBGC has facilitated a merger of an insolvent 
(or near-insolvent) plan by providing financial assistance to the 
merged plan rather than to the insolvent plan. However, PBGC does not 
have the legal authority to provide financial assistance to facilitate 
a merger in the absence of insolvency, nor the financial resources to 
step in in such circumstances.
    Plans may also apply to PBGC for an order of partition, which 
permits a plan to transfer benefits of non-sponsored participants, 
whose sponsors no longer participate in the plan, to a partitioned 
portion of the plan that receives financial assistance from PBGC. The 
requirements necessary for a partition are strict, in part because 
retirees and participants in the partitioned plan incur an immediate 
reduction in their benefits to PBGC's guarantee levels. A partition 
requires a finding by PBGC that the plan has had a substantial 
reduction in contributions due to employer bankruptcies and is likely 
to become insolvent. PBGC has partitioned two plans; the second 
occurred in 2010 when PBGC partitioned a trucking plan. PBGC does not 
have the finances needed to undertake expanded partitioning activities, 
even though doing so would relieve employers of burdensome unfunded 
liabilities.
PBGC's Multiemployer Program Financial Status is Strained
    Another difference from PBGC's single-employer program is that 
multiemployer premiums are much lower, too. Historically, the program 
had very low premium rates: multiemployer plans paid an annual flat-
rate premium of $2.60 per participant per year until 2006, when 
Congress increased the rate to $8 per participant, indexed for 
inflation. Plans have paid $9 per participant per year since 2008, and 
multiemployer premiums to the insurance program totaled $92 million for 
FY 2012. Under the Moving Ahead for Progress in the 21st Century Act 
(MAP-21), multiemployer premiums will increase to $12 per participant 
in 2013 (indexed), generating about $120 million for the program. For 
single-employer plans, the per-participant flat rate premium under MAP-
21 for plan years beginning in 2013 is $42 (indexed) and these plans 
also pay a variable rate premium on their underfunding. For 
multiemployer plans, even with the MAP-21 increases, absent further 
changes, PBGC premiums will be insufficient to support the guarantee at 
some point in the future.
    Because PBGC does not trustee multiemployer plans, the 
multiemployer insurance program's assets consist only of premium income 
and investment income on the premiums. The multiemployer program has 
few assets: as of September 30, 2012, the program had total assets of 
$1.8 billion.
    As of the end of FY 2012, the multiemployer insurance program has 
$7.0 billion in booked liabilities. This represents the present value 
of all future financial assistance payments owed to participants in 148 
plans that are recorded as liabilities on our FY 2012 financial 
statements; these are plans currently receiving financial assistance, 
terminated plans not yet receiving financial assistance, and ongoing 
plans that are expected to receive financial assistance. Thus, our 
current deficit--the difference between the program's $7.0 billion in 
liabilities and $1.8 billion in assets--is $5.2 billion. We expect both 
our liabilities and our deficit to increase as more distressed plans 
terminate or approach insolvency in future years.
    PBGC pays financial assistance in the form of life annuities and 
administrative expenses. In 2012, PBGC paid $95 million in financial 
assistance to 49 insolvent plans that had run out of assets to pay 
benefits when due. Another 61 plans are terminated plans to which PBGC 
expects to begin paying financial assistance in the future. Based 
solely on our current inventory of booked plans as of September 30, 
2012, the amount of financial assistance PBGC will pay each year is 
projected to rise rapidly--with payments exceeding $500 million in 
2022. This does not take into account financial assistance payments to 
any plans that would be first recognized as liabilities of the program 
in FY 2013 or future years.
    Over the next decade or so, even before any new obligations are 
added, there is a substantial risk that, without significant change to 
the multiemployer system, the multiemployer program will become 
insolvent and not be able to pay financial assistance. If new claims 
are recognized and additional payments required, insolvency could occur 
within a shorter timeframe, particularly if a large plan became 
insolvent. However, the risk of program insolvency, while serious, is 
not immediate and its timing is uncertain. Timing is dependent on many 
factors, including investment returns and the actions of trustees, 
employers, and unions dealing with individual ongoing plans.
Next Steps
    For several years, multiemployer plans, participating employers, 
unions, actuaries, plan professionals and others have been discussing 
various changes to the multiemployer system that would preserve plans 
by providing them greater flexibility to address various challenges. 
Several are now planning to present proposals to both the Congress and 
the Administration in the coming months.
    The financial condition of multiemployer plans varies widely. Some 
plans will propose flexibility in benefit structures, or in 
contributions or withdrawal obligations. Severely distressed plans, on 
the other hand, will probably require broader changes.
    Historically, when necessary to preserve plans, Congress has worked 
in a bipartisan way with the executive agencies, plans, businesses, 
unions, and others. It was such a collaboration that resulted in the 
Pension Protection Act of 2006. Some of the provisions of that Act will 
sunset in 2014, which creates both the need and the opportunity to 
consider what changes are appropriate for the future. PBGC looks 
forward to working with Congress and the multiemployer community as 
this important dialogue evolves.
    PBGC's multiemployer program should also be reviewed as part of 
that discussion. The basic contours of the program have not been 
modified in more than 30 years. Some of the tools and authorities the 
statute provides that might be useful in certain circumstances are not 
useable in practice because of the agency's lack of financial 
resources. Both the program and PBGC's finances should be analyzed as 
part of and in the context of the broader changes for multiemployer 
plans generally.
    PBGC takes the support and preservation of multiemployer pension 
plans very seriously. Since I have been Director, I have doubled the 
size of multiemployer staff, am planning to add further resources and 
make further changes to strengthen PBGC's capabilities.
    PBGC staff has expertise and analytic ability in the area of 
multiemployer plans, as well as a dedication to multiemployer plans. We 
look forward to providing assistance in the deliberations, and to 
continuing to serve the millions that look to multiemployer plans for a 
secure retirement.
                  APPENDIX: PBGC FY 2012 ANNUAL REPORT

    [The report, ``Pension Benefit Guaranty Corporation Annual 
Report 2012,'' may be accessed at the following Internet 
address:]

          http://www.pbgc.gov/documents/2012-annual-report.pdf

                                ------                                

    Chairman Roe. And I really appreciate you being here a week 
before Christmas because I felt it was very important. And the 
reason for that was because that PPA sunsets in 2014. And I 
think both sides of the aisle understand that we have got a 
little bit of a timeline with this sunset to get moving. And I 
was afraid if we would put this off, we would be into February 
or later getting this done.
    I can certainly appreciate the multiemployer, the 
improvement there. And my question is, after reading your 
testimony, that improvement somewhat is an improvement in the 
economy but is it also the changes in the law that was made in 
2010? Because something happened in 2010 to allow you to 
amortize those liabilities over a different period of time. So 
how much of that is just due to amortizing instead of 15 years 
to 29 years? And I mean how much of it is due to the change in 
the law we passed in 2010?
    Mr. Gotbaum. Dr. Roe, you are unquestionably right that 
part of the improvement is due to the fact that the funding 
relief allowed plans to stretch out their required 
contributions and, as a result, the indicators of distress some 
plans no longer meet. Part of the improvement is clearly that. 
I think it is important to recognize that an important part of 
the improvement is also that the economy is recovering and that 
plans really are taking advantage of the authorities that this 
Congress gave them in the Pension Protection Act.
    Unfortunately, the quality of information that we have, the 
information that the Federal Government gets is a little old. 
And so the reason why you have 2011 is because that is the 
latest information we have. And so we don't have enough 
information for me to be able to tell you how much of this is 
funding relief and how much of this an economic recovery.
    Chairman Roe. Clearly it is part of both, I think. I was 
just hoping that it wasn't an accounting gimmick that we did. 
And understandably I certainly understand that in a downturn 
why companies need some relief, because they don't have the 
cash flow to make their pension obligations. And that is 
something we have to look at.
    I think the other question I wanted to ask was, in 
multiemployer plans versus single-employer plans, there is a 
difference in the premium. And I was reading the financial 
status is strained in your testimony where it is $9 per 
participant; and with a single-employer plan it is $42, I 
think. It looks like that very soon, at least last year, we 
paid out more in the multiemployer plans than we took in, in 
premiums. You obviously can't continue to do that. And by 2020, 
or 8 to 10 years from now, 10 years from now, you estimate we 
will be paying out $500 million in plans.
    And I guess the other thing that I have, the question, how 
do you propose to change that since you have the premiums only 
bringing in 20 percent of what we will be paying out? Although 
it is indexed for inflation. How do you propose to do that? 
What recommendations do you make for that?
    Mr. Gotbaum. That is an important question. Certain things 
we know and can say right now. One is that the situation, as it 
currently exists, cannot work forever. If we have the premiums 
as they currently are and we have the system as it currently 
is, eventually we will run out of money and can't pay benefits. 
However, and this is what we have been wrestling with, it is 
clear to us that because our program has not been rethought in 
30 years, that the changes that ought to be made, some of which 
will clearly involve higher premiums, I have to say, I am a 
finance person, and I don't believe in, you know, prevaricating 
about numbers, some of this resolution is going to clearly have 
to involve higher premiums, premiums that reflect the real cost 
of this.
    But, and this is the reason why we don't have a set of 
recommendations yet that are independent of what you all are 
going to do, part of the solution relates to what the plans 
themselves are allowed to do and can do to form self-help. If 
plans, using the tools that you have given them and the tools 
that the Congress might give them, as you consider changes, can 
continue that transformation to less and less red, then our 
situation is different. And so what we hope to do is, as part 
of your discussion over the next year or 2 as to how to change 
the multiemployer system in general, to work with the Congress 
to develop reforms in PBGC's program and finances.
    Chairman Roe. I think one of the other questions, and of 
course I would like to see what it would be if we had the 
previous accounting rules, and one of the recommendations, I 
guess, that we will see, is should we assume these accounting 
rules we passed in 2010 will be the new norm.
    The other question, and you don't have to answer it because 
my time has expired, is are these assumptions--and I have a 
list of questions I would like answered--assumed on a 7.5 
percent return? In other words, do you follow me that that is a 
pretty lofty assumption these days? I am going to not answer 
that question now.
    Mr. Andrews.
    Mr. Andrews. Thank you, Mr. Chairman.
    Thank you, Mr. Gotbaum. When do you think we would have 
results about 2012? I realize that you don't have those in your 
custody. They are reported by various plans. But when will we 
know the results for 2012?
    Mr. Gotbaum. We will know them towards the end of 2013.
    Mr. Andrews. Okay.
    Mr. Gotbaum. One of the issues, Mr. Andrews, is that the 
information requirements that we have are kind of from the 
typewriter and carbon paper days. And so we are in an era in 
which----
    Mr. Andrews. You may have to explain those references to 
the young staff that are sitting behind us here.
    Mr. Gotbaum. Oh, sorry, sorry, sorry. Yes. For Mr. 
Banducci's benefit, carbon paper is something that--anyway. 
Sorry. But we are in an era in which I can get and send 
information around the planet in a second and----
    Mr. Andrews. We ought to figure out a way to work on it.
    Let me ask you a couple. You have very wisely acknowledged 
and listened to a collaborative process that has begun among 
small businesses, unions, experts in this field. And I think 
that the chairman has done the same thing and it is a good 
thing to do. Without prejudging what those groups are going to 
recommend, let me ask a couple of conceptual questions that I 
carry as assumptions into this effort.
    The first is that, given the relatively low cost of 
obtaining money, that stretching payments out over amortization 
schemes has been pretty effective in the 2010 and 2006 laws in 
helping plans get to the green zone. Is that right?
    Mr. Gotbaum. It is very clear that funding relief is an 
important part of enabling plans to deal with their situation.
    Mr. Andrews. Is it also correct that if we were to put the 
hammer down on plans in the red zone and say, well, pay up 
right now to get current, it would in all likelihood seriously 
impair or kill a lot of these plans because we assume a lot of 
employers would just leave, and you got the problem of people 
abandoning and then the departure fee going up even more, that 
the way to kill the goose that is laying this golden egg is to 
insist that it pay up quicker. Do you think that is fair to 
say?
    Mr. Gotbaum. It is very clear, Mr. Andrews, that we can, if 
we demand that plans--let me step back one second, if I may. We 
are in a world in which financial markets vary a lot more than 
they used to. And so as a result, plans' financial statuses 
vary a lot more than they used to. And if we simultaneously, in 
a world in which plans' financial status is variable, if we 
demand that they fund up more and more rapidly, we are going to 
make it harder and harder for folks to do that.
    Mr. Andrews. Which has the perverse effect of actually 
increasing PBGC exposure. It actually makes the problem worse 
from your deficit point of view, right?
    Mr. Gotbaum. It clearly raises our risks.
    Mr. Andrews. Now, is it also true that many of these plans 
in the red zone would benefit from structural internal reform? 
Putting that in blunt English, lower benefits for some 
participants, higher contributions from some employers to 
improve their cash position. Is it empirically true that that 
is the case?
    Mr. Gotbaum. We don't know the details of the individual 
plans. What a number have come to us and said, we are in a box. 
The box is that if we keep on paying the benefits we have, we 
will pay those benefits for 5 years or 7 years, whatever, and 
then we will run out of money and then you, the PBGC, will owe 
them a smaller benefit. And they have said they would like an 
ability to think about whether or not there are ways to resolve 
that that are fairer to them.
    Mr. Andrews. Well, I think what we also conceptually----
    Mr. Gotbaum. But if I may, Mr. Andrews, I want to be clear.
    Mr. Andrews. Sure.
    Mr. Gotbaum. My view of this is, this is very sensitive. 
This gets to the guts, if you will, of the law regarding 
employee benefit plans.
    Mr. Andrews. It is a very hard question. And what I think 
we all have to start to contemplate conceptually is an 
arrangement where plans get access to these facilities that 
would help them extend their liability and deal with this in 
exchange for making some difficult internal decisions, which 
hopefully would have the result of a relatively smaller benefit 
reduction now, avoiding a much larger benefit reduction down 
the road if they are PBGC beneficiaries. I yield back.
    Chairman Roe. I thank the gentleman for yielding.
    I now yield to our chairman, Mr. Kline.
    Mr. Kline. Thank you, Mr. Chairman, for your indulgence in 
recognizing me.
    Thank you, Director, for being here for what many people in 
America think are the holidays. Some of us here in this 
building maybe not so much the holidays. But thank you very 
much and having your family here. I have a whole bunch of 
questions which, frankly, I am not going to ask. I just want to 
make it clear that, with or without the chart up there, we 
recognize that there are some multiemployer plans that are in 
real, real trouble and, therefore, hundreds of thousands of 
employees and retirees that are in trouble. And we also 
recognize that the PBGC has a relatively limited ability to 
help them. The benefit payments are relatively low, as you have 
testified, compared to single-employer plan.
    And so I very much appreciate Chairman Roe and Mr. Andrews' 
diligence in pursuing this. I am determined to keep after this 
because where we have some plans that are spectacularly in 
trouble--and Central States is not a secret name here, in that 
one multiemployer plan alone, you have employers that are in 
trouble because of these obligations and you have in that one 
plan alone hundreds of thousands of employees and retirees that 
are at jeopardy.
    So I am hoping that as we wrap up this Congress and move 
into the next Congress that we will be able to work with you 
and with those outside groups whose input we are eagerly 
awaiting to do something about this. I think that the work that 
we did under Chairman Boehner and ranking member then Miller in 
the Pension Protection Act was a pretty good step. But clearly, 
even though the 32 to 60 percent looks pretty nice up there, we 
know that there are some big, big problems in the multiemployer 
plans, and I am eager to get at it.
    I see Mr. Miller is here, and I know that he recognizes 
there is a problem as well. And I hope we are going to be able 
to come together and do something about this, because it is a 
multifaceted problem with the PBGC's limited capability and 
some plans that are in real, real trouble.
    So again, thank you very much for being here today and for 
your testimony and your willingness to work with us as we try 
to solve this problem.
    And Mr. Chairman, I yield back.
    Chairman Roe. I thank the gentleman for yielding.
    Mr. Scott.
    Mr. Scott. Thank you, Mr. Chairman.
    And thank you for being with us.
    Just a couple of quick questions first. When you say number 
of plans, would the number of people covered by the plans be 
essentially the same charts?
    Mr. Gotbaum. Yes, Mr. Scott. This may be because I am a 
nerd. What we have done here is we have showed you the 
percentage of participants. So this is the percent of 10-plus 
million people whose plans are in those segments.
    Mr. Scott. Okay. And how would those charts for single 
plans differ? Single plans, were they in trouble in 2009 and a 
little bit better now and still in the 60 percent range? These 
aren't any worse than single plans, are they?
    Mr. Gotbaum. Mr. Scott, rather than make a guess about the 
exact comparison, since the standards are actually different 
for single-employer plans and multiemployer plans, if I may, 
with your permission, let me come back with a chart for the 
record trying to do an apples-to-apples comparison.
    Mr. Scott. Okay. Now, when a company withdraws from a 
multicompany plan on a voluntary basis they are responsible for 
their proportionate share of the liability. That is not much of 
a problem for a solvent company, but when a company goes 
bankrupt, what happens?
    Mr. Gotbaum. Unfortunately, what happens in a lot of cases 
is that the bankrupt company, along with its other obligations, 
is allowed in the bankruptcy process to eliminate its 
obligation to its pension plan.
    Mr. Scott. So who picks it up?
    Mr. Gotbaum. In the multiemployer world, those obligations 
are picked up by the remaining employers.
    Mr. Scott. So if a company gets into one of these things, 
they are at risk of getting everybody else's liabilities dumped 
on them?
    Mr. Gotbaum. Yes. And that is one of the issues that the 
employers, the hundreds of thousands of employers, small 
businesses and large, have continually raised.
    Mr. Scott. They would argue that the pension fund really 
ought to pick up the bankrupt company's share of the 
liabilities.
    Mr. Gotbaum. Mr. Scott, I will say that over the years, it 
has repeatedly been suggested to the Pension Benefit Guaranty 
Corporation, you know, rather than having the remaining 
employers take the responsibility, why doesn't the PBGC take 
the responsibility? And the fact is, the PBGC does not have the 
resources to take on that responsibility. And the multiemployer 
plan, the multiemployer system designed 30 years ago, didn't 
anticipate that. And so part of the reason why I say that you 
need to rethink the PBGC's program in the context of how you 
rethink multiemployers is because a lot of the suggestions that 
we get and that I suspect you will get would lean towards 
saying, well, why don't you let the PBGC pay for it?
    Mr. Scott. So what you are suggesting is, if we want to do 
that, we would have to adjust the premium that they are paying 
because the coverage is different?
    Mr. Gotbaum. I don't think this is something which changing 
premiums alone is going to resolve. I spend a lot of time with 
both single and multiemployer plans and the sponsors of them 
and the businesses. And some of the rhetoric I get about your 
premiums are too high is just rhetoric. But some of it is the 
very legitimate concern of businesses all across the country 
that are trying to stay competitive, trying to control their 
costs, and saying, you have become too big a piece of my cost, 
I can't keep doing it.
    Mr. Scott. I want to get in a quick question before my time 
runs out. And that is, if you could respond to the chairman's 
comment about how you can chase a 7.5 percent return in today's 
market without unreasonable risk.
    Mr. Gotbaum. Mr. Scott, I don't have an answer for that. 
One of the things that we have learned over the last decade is 
that the assumptions that actuaries made--and by the way, it 
wasn't just actuaries, it was lots of folks, and it wasn't just 
multiemployer plans, it was single-employer plans, too--that 
people who went through the 1990s tended to think that pension 
funds could make 9 percent, 10 percent, or more. And it looked 
like it was going to last forever. And then for the last 10 
years, as you know, pension funds have not earned 9 percent, 10 
percent on average.
    And so we are now in a, frankly, in a difficult situation 
because I don't think there is anyone who knows for sure what 
you can count on. And so we don't have a particular 
recommendation for what a pension plan should do. We don't 
think we are smart enough to do that. But we do think that 
everybody recognizes the fact that the last 10 years have been 
tough and you are going to need to think about what you do for 
the future in the context of that.
    Chairman Roe. Thank the gentleman for yielding.
    Now yield to Mr. Walberg.
    Mr. Walberg. Thank you, Mr. Chairman.
    And thank you, Mr. Gotbaum, for being here. Last month, as 
we all know, Hostess decided to liquidate as a result of their 
bankruptcy. It had participated in, as I understand it, 42 
different multiemployer plans and, in fact, two of the 
company's largest creditors are multiemployer plans. The 
withdrawal from these plans may cost the company up to $2 
billion, with around $900 million going to the Confectionery 
Workers plan and more than $500 million going to the Central 
States plan. We know that they are very large contributors to 
these plans. And following up to an extent on what Mr. Scott 
was questioning, how will their bankruptcy affect these plans? 
And more specifically, does it threaten their solvency?
    Mr. Gotbaum. As you have said, sir, Hostess participates in 
more than 40--the numbers that I got from my staff say 41--but 
more than 40 multiemployer plans. In some of those plans, 
Hostess is a big dog. Hostess has been a big dog. In some of 
those plans, Hostess has been a more modest participant. For 
those plans where Hostess was the big dog, the fact that they 
are not going to contribute anymore and will be able to 
discharge their obligations in bankruptcy is going to put those 
plans in severely distressed status and some of those plans 
will probably run out of money. Other plans where they are 
either stronger or Hostess is a smaller percentage participant 
will continue on, but the employers in those plans will say, I 
am picking up, I am paying part of the cost that Hostess 
avoided.
    Mr. Walberg. But the larger ones, insolvency is the outcome 
ultimately?
    Mr. Gotbaum. No. As it happens, sir, the plans for which 
insolvency is a real risk as a result of Hostess are relatively 
smaller plans. Depending on how you count and how conservative 
you want to be, there are four, five, six plans. They are not 
the larger plans. These are smaller plans. And they are plans 
that, because their larger employer, one of their largest 
employers is no longer participating, are going to be in severe 
financial distress. The largest plans in which Hostess 
participated, they are a relatively small percentage of the 
total. And so what I consider the Hostess tragedy is not going 
to affect them particularly substantially.
    Mr. Walberg. In fiscal year 2008, the deficit in the 
multiemployer program was $473 million. However, over the past 
4 years we have seen that deficit expand to $5.2 billion in 
fiscal year 2012. How have demographic trends created this 
increase? And what involvement is demographic trends?
    Mr. Gotbaum. The fact that people are living longer means 
that pensions, all pensions are necessarily more expensive. It 
is a fact of life. And as a result, the plans that are 
sufficiently likely on the multiemployer side that we have 
already put them on their books, what that means is that as 
people live longer, we are going to end up paying a little more 
for it.
    In the broad scheme of things, I think demographics, partly 
because it is slow and partly because it is long, is less of an 
immediate concern to the integrity of the Pension Benefit 
Guaranty Corporation than the immediate financial or the near-
term financial, within the next, decade circumstance of the 
severely distressed plans. Now, partly my reaction is, should I 
be distressed that people are living longer, healthier lives, 
and that it costs a little bit more? I don't think so. I think 
that is something we should celebrate. It is one of the great 
things about the Nation. I think the more immediate concern 
is----
    Chairman Roe. I have some sensitivity to that, too. The 
gentleman's time is yield.
    Mr. Tierney.
    Mr. Tierney. Thank you, Doctor.
    Thank you, Mr. Gotbaum. I just want to follow up on 
something Mr. Scott started--actually, the chairman started, 
Mr. Scott followed on. When you say you can't determine what 
the rate of return should be and what the risk is going to be 
on that, what bothers me a little bit is, don't you think we 
ought to be a little more conservative in approach on that as 
opposed to just accepting 7.5 percent return given history and 
given the facts that we have to deal with?
    Mr. Gotbaum. I think it is pretty clear, sir, that people 
whose expectations were set in the 1990s need to reset those 
expectations based on the experience we have had in the last 
decade. The reason why I was saying to be cautious about it is, 
there is a risk of overreacting on the downside in the same way 
that we may have overreacted on the upside.
    Mr. Tierney. But we pay people a lot of attention, they are 
supposed to be smart enough to make those sorts of adjustments 
and those calculations. So I guess as far as the PBGC is 
concerned, you will be making more modest projections in all 
your calculations?
    Mr. Gotbaum. We actually are not in the business of making 
projections. And the way we do our books is, we use--excuse my 
dropping back into the jargon of the accounting community--we 
mark to market. So the way we do our liabilities is we actually 
get quotes from insurance companies about what they would 
charge in order to pay benefits on the stream that we do, and 
that is how we do it. We are actually not in the business of 
forecasting rates.
    Mr. Tierney. But you are in the business of accepting some 
of those quotes and rejecting others.
    Mr. Gotbaum. I'm sorry?
    Mr. Tierney. You are in the business of rejecting some of 
those quotes and accepting others when you make your 
determination.
    Mr. Gotbaum. Yes.
    Mr. Tierney. So I am assuming that you are going to accept 
those that come on the more modest side than those that are 
more enthusiastic, given the history that we have seen here.
    Mr. Gotbaum. Yes, sir.
    Mr. Tierney. The other question I have is about the Hostess 
debacle on that. What enforcement provisions or what role does 
PBGC play or can it play when a company like Hostess takes 
money from union employees meant for contribution to their 
pension plan and doesn't make that contribution as well as not 
making their own company contributions to the plan?
    Mr. Gotbaum. This is, sir, a very tough situation. I have 
spent my life working in distressed businesses. I have been on 
the management side. I have represented unions. I have been all 
around distressed companies for a long time. And I have learned 
a couple of things. One is that when companies are in distress, 
they take a whole series of actions to conserve cash, if they 
are legal, and in the case of bankruptcy, you can go to the 
court and say, I am not going to make my contributions, and get 
court approval for not making the contributions.
    Mr. Tierney. Did Hostess do that? Or did they stop making 
their contribution before they went to court?
    Mr. Gotbaum. I can't say that I know the facts in Hostess 
and I am happy to come back.
    Mr. Tierney. Well, let's assume for a moment that they 
stopped making those contributions before they got permission 
from the bankruptcy court. What responsibility does PBGC have? 
Or is it only the trustees of the plan that have the 
responsibility to monitor that situation?
    Mr. Gotbaum. I think you have got it exactly right, which 
is the trustees of the 41 plans in which Hostess participates, 
they are creditors. Now, as it happens, Hostess has a single-
employer plan, too. So we are creditors too. But on the 
multiemployer side, we are not the creditors. We are a step 
removed from it.
    Mr. Tierney. Did they stop making their contributions to 
the single-payer plan as well?
    Mr. Gotbaum. I don't know. Let me find out.
    Mr. Tierney. If they did, what responsibility would accrue 
to you to do something about it?
    Mr. Gotbaum. That depends on what their legal obligations 
are in bankruptcy.
    Mr. Tierney. What about before they get to bankruptcy, if 
they stopped making the payments?
    Mr. Gotbaum. If they fail to make contributions 
beforehand----
    Mr. Tierney. If they are under contractual obligation to 
people in the union to pay what the union has designated as $4 
and some change per hour of their pay in there plus not making 
their employer contributions, what obligation is it of PBGC or 
the trustees, for that matter, of the multiemployer plans to 
step in and do some enforcement, to do something about that 
before things go belly up?
    Mr. Gotbaum. Let me step back. Okay. When under bankruptcy, 
companies----
    Mr. Tierney. They are not in bankruptcy yet.
    Mr. Gotbaum. Pardon?
    Mr. Tierney. I am going to back you up a bit if you don't 
mind. Before they are in bankruptcy.
    Mr. Gotbaum. Hostess has been in bankruptcy multiple times 
in the last 5 years.
    Mr. Tierney. Right. But there were times that they were not 
in bankruptcy, allegedly, when they were not making their 
contributions before they went back to the bankruptcy court. So 
they just took it upon themselves to take the money from the 
employees that was designated for the plan, not put that money 
into the plan, plus not make their own contribution to the 
plan. When that is happening, what obligation to PBGC, what 
obligation to the trustees to do something about that in that 
period of time?
    Mr. Gotbaum. The trustees of a plan----
    Mr. Tierney. And PBGC on the single-payer plan.
    Mr. Gotbaum. Right. We can act before bankruptcy, and we 
do. We can go to court and put liens on property in order to 
ensure that contributions are made if they are not made.
    Mr. Tierney. That was not done in this situation, in the 
Hostess situation.
    Mr. Gotbaum. Rather than speculate, why don't I get the 
facts and circle back.
    Mr. Tierney. I would appreciate that, if you would. Thank 
you.
    Chairman Roe. Thank you Mr. Tierney.
    I now yield to Mr. Thompson.
    Mr. Thompson. Thank you, Chairman.
    Mr. Gotbaum, thanks for being here. Thanks for your 
testimony and your leadership in this area.
    I wanted to first of all, with the report that you issued 
in addition to your testimony, the graph that is on the third 
page that talks about future retiree worries, I found that very 
interesting actually and just wanted to affirm. There has been, 
since 1979, based on that graph, obviously significant growth 
in sole direct contributions programs and a corresponding 
decrease in defined benefits. And it was the kind of gray area 
in between--although it is not gray, it is kind of green on the 
graph--which is where companies that have both. It seems like 
that has been pretty stable since 1979 proportionally, where a 
company offers both direct benefits and direct contributions. 
Is there anything--it is like the third page--there you go.
    Mr. Gotbaum. You talking about this one?
    Mr. Thompson. That is it. I was just curious, is there any 
inside information, is there any proportional changes within 
those where companies hold both plans, where there has been 
kind of a movement towards heavier weighting of direct 
contributions versus defined benefits? Is that a movement you 
are seeing?
    Mr. Gotbaum. We continue to see that many employers are 
deciding that rather than keeping responsibility for the 
traditional defined benefit plan, that they instead would 
rather pass that responsibility off to their employees. They do 
it in a whole variety of ways. One way that has happened 
recently is that employers will say to their employees, I know 
I owe you $1,000 a month in perpetuity, but would you rather 
have a check for the full amount instead? So people go out of 
the defined benefit system by lump sums. They do it in other 
ways.
    From my perspective, one of the real challenges, and it is 
not just a challenge in the multiemployer system, one of the 
real challenges as the Congress thinks about retirement 
security is how to balance the obligations you put on employers 
with the obligations that employers are willing to take.
    Mr. Thompson. Right. I experienced that before coming here 
4 years ago in my health care career. The first part of that, 
almost 30 years, was in a defined benefits, and, quite frankly, 
that was putting us on a path of insolvency as an institution. 
And I don't remember even the details. But there was a 
transition plan, as you described one option, into a defined 
contribution plan.
    In your testimony, you said that any critical status plans 
and some seriously endangered status plans are severely 
distressed and will need still further provisions to remain 
viable. What are some options to forestall their insolvency 
without exposing taxpayers to potential liability?
    Mr. Gotbaum. To be honest, Mr. Thompson, their first 
reaction is, well, why doesn't the PBGC take it over? And they 
ignore the fact that we don't have the resources to do so. So 
that is in my view a kind of back door way of trying to get to 
the taxpayers.
    They are talking among themselves, and what we expect is 
that some combination of stretching out obligations, expanding 
the authorities that the Congress already gave them in 2006 in 
the Pension Protection Act, that with a broader pallet of tools 
and authorities, that more of them will be able to do self-
help. We haven't seen the specific proposals, and this is one 
where the devil actually is in the details. So we are looking 
forward to receiving proposals, as I know this committee is. 
And so at that point, then we can talk about what the puts and 
takes are.
    Mr. Thompson. Thank you, Chairman.
    Chairman Roe. I thank the gentleman for yielding.
    Dr. DesJarlais.
    Mr. DesJarlais. Thank you, Chairman.
    And thank you, Mr. Gotbaum, to you and your family and 
staff, for attending here today. I would like to yield the 
balance of my time back to our chairman so he can finish his 
line of questioning.
    Chairman Roe. Okay. I thank the gentleman for yielding. I 
don't have too many. But, you know, and what Mr. Thompson was 
saying and also Mr. Tierney, both, I would like to comment on 
that.
    Because of the uncertainty, I guess, in these plans, and I 
have a real interest in this, my father was a union member who 
lost his job in 1973 when I was in the Army overseas. His 
company went out of the country to another country, so he lost 
his job and he lost his pension plan. Fifty old, first World 
War II, had a buyout, like you were talking about, of $10,000 
which was nothing after 30 years there. So I understand the 
plight of people who have been promised something and it 
doesn't occur. I mean, you have made your plans based on your 
thinking that you are going to have a secure retirement.
    We have a real obligation to get this right because there 
are 10 million people out there and their families, many of 
them who are retired, that are very, I am sure, very uneasy 
right now about, am I going to continue to get my benefits? So 
I think both sides of the aisle understand this very well. 
Probably not a lot of people in this Congress understand the 
size of this problem.
    And I know I didn't until I started sat in this chair 2 
years ago and began to understand that. So I saw one of the 
liability estimates was $27 billion. How in the world are we 
going to fund that? The current obligations are $5 billion 
under water, the PBGC is. So how do we get to $27 billion? How 
do we fix that problem? We have talked about premiums. Mr. 
Tierney and I both mentioned assumptions. I made the assumption 
when I retired that 5 percent would be what I would withdraw. 
That was a little more generous than I probably should have 
picked. So your answer.
    Mr. Gotbaum. The $27 billion number is an estimate of plans 
that might, under current law, in current circumstances, might 
fail over the course of the next decade or so. That is an 
estimate. Part of the reason why, frankly, your committee's 
deliberations, why this hearing matters and why the next 
matters, et cetera, is that there is no one who thinks that it 
is written in stone that all these red plans have to fail. We 
don't think that.
    And so what, in my view, matters is that the Congress do 
what it did in 2006 and what you are talking about doing here, 
which is roll up your sleeves, work with the businesses and the 
unions and the plans, and figure out what kinds of steps they 
can take to do this.
    One of the things you did in the PPA is you gave plans the 
ability to do self-help. And can't tell you exactly how many 
have done it, but a lot of them have. It is very clear that 
some plans are going to need more, and that is why they are 
going to come and suggest it.
    I am a long-run optimist about this. Now, partly it is 
because, with the committee's permission, a year ago, a small 
business based in Dallas, Texas--American Airlines--filed for 
bankruptcy, and on the day they filed for bankruptcy, they 
said, we are going to have to terminate our pension plans.
    These were single-employer plans, but it was a business, it 
was in bankruptcy; they said, we have got to terminate them. 
And we sharpened our pencils, we rolled up our sleeves. The 
very competent staff of the PBGC worked with American Airlines, 
with its unions, and with the other ERISA agencies, and today, 
a year later, those plans have not been terminated. So people 
were able to find ways to solve their problems without plans 
failing. That same willingness to roll up their sleeves, I 
think, can take a lot of red-zone plans and keep them from 
becoming PBGC obligations.
    Chairman Roe. I think having been in the operating room 
thousands of times, I always planned on a train wreck and hoped 
I would go on a train ride, and what we need to do is plan--
this is a train wreck. We need to plan the train ride I think 
is what we need to do here.
    Mr. Hinojosa.
    Mr. Hinojosa. Thank you, Mr. Chairman. I am sorry that I 
had to leave for a few minutes.
    Chairman Roe and Ranking Member Andrews, retirement 
security is an issue of great importance to millions of 
Americans, including me, so I thank you for having this hearing 
on the challenges facing multiemployer pension plans.
    Director Gotbaum, in your testimony you indicated that 
multiemployer plans, like the single-employer plans, have been 
affected by the recent declines in the economy and the 
investment markets, as we saw starting in 2007 through 2010. 
Could you elaborate and tell me about the problem of orphan 
participants, which are the participants for whom there is no 
longer an employer; are they a significant problem for many of 
these multiemployer plans, and do you have any thoughts on 
solutions?
    Mr. Gotbaum. I can describe the problem. I can't tell you 
that there is a standard solution, Mr. Hinojosa.
    In a single-employer plan, you have one company that is 
setting aside money to pay benefits for that company's 
employees, and that plan is limited to their employees so that 
if the stock market goes down, and, as a result, the plan's 
assets are insufficient, the company knows they are going to 
have to put more in, and they are going to know that it is for 
their employees.
    In the multiemployer world you have hundreds of thousands 
of businesses, small businesses, that are contributing to a 
common pool. Now, there are some very important benefits from 
that. One of them is that as a result their employees have 
benefits that stay constant when they move from job to job. 
That is a huge benefit. Another benefit is, speaking as a 
person who has also worked in small business, you can be a 
member of a multiemployer plan without having a huge HR 
department, so it works better for a lot of small businesses.
    So there are benefits to the multiemployer model, but there 
are costs. One of the costs of the multiemployer model is that 
everybody is in it together, and so if a plan gets underfunded, 
then the existing employers are the ones who make up the 
difference. The issue is that since you have many employers--
and, as we know, some small businesses don't make it, and some 
industries--a lot of small businesses don't make it--the result 
is that in some multiemployer plans, the bill, if you will, is 
being presented to companies who know that most of the 
employees are not their employees, and so they say, we don't 
like that, that doesn't seem fair to us.
    Now, does that get taken--do they take into account at that 
moment that they have for, in some cases, decades and decades 
gotten the benefits of the multiemployer model? No, obviously 
not. But that is the crux of the concern, that businesses feel 
that it is unfair that they pay for the obligations of 
employees that were not theirs, even though, let us be clear, 
they have been sharing those obligations in some cases for 
decades and decades.
    This is not an easy issue by any means. I find it a lot 
easier to describe what the problem is than I can to tell you 
some fair and decent way to resolve it.
    Mr. Hinojosa. Time is running out, and I wanted to--thank 
you for that explanation--but I wanted to ask you about, you 
know, getting in the shoes of the employee who does not have to 
go through the human resources committee or department, but yet 
whatever money is being set aside for them, a fee is paid for 
those who are investing that money, and oftentimes that fee can 
be very expensive, and the employee doesn't know just how 
expensive it is.
    Number two, there is administration costs, and the employee 
again doesn't know how much is being subtracted out of every 
dollar that is invested each year for his retirement.
    How do you handle that, and how do you manage it so that it 
is--such as Federal employees using a thrift savings plan have 
a negotiated cost for the investing, for the investors, and it 
is very, very low. It is a fraction of 1 percent per year. That 
is good. But what about these groups?
    Mr. Gotbaum. Let me answer as I can, and then with your 
permission, Mr. Hinojosa, I would like to come back with a more 
detailed response.
    From our perspective one of the benefits of multiemployer 
plans is that many, many employers can hire, pay for a 
centralized professional management, a management that can 
drive hard bargains with investment firms, a management that 
can get the economies of scale that you get from having many 
people processed without having hundreds of separate HR 
departments. So we think there is an important benefit from 
that.
    What I can't tell you and don't know is what disclosure 
there is to the various participants of the costs of those 
plans. So with your permission, sir, let me come back and 
report on that for the record.
    Mr. Hinojosa. Thank you.
    Chairman Roe. Thank the gentleman for yielding.
    Mr. Rokita.
    Mr. Rokita. I thank the chair for holding this hearing. I 
found it very educational, and if you look on the map there, 
you can see that Indiana is very much affected by this issue 
and these multiemployer plans. And I hear about it quite 
frequently as I travel the State and as folks from Indiana 
visit out here.
    Some of this has already been touched on, but at the risk 
of reiteration, I would like you to drill into it a little bit 
more just so we are very clear for the record, okay?
    So, number one, I am reading about the Central States 
Pension Fund with liabilities of $14 billion, and if I notice 
from your testimony, or from I forgot where, maybe this book, I 
saw that your assets are $1.8 billion. Okay. So that concerns 
me. What happens when Central--if and when Central States, 
something terrible happens there, insolvency, how many more 
insolvencies can we sustain before you become insolvent?
    Mr. Gotbaum. Part of the reason why I say that I think the 
PBGC's own program has to be rethought is the issue that you 
raised. It is clear that if, because we have got a couple of 
billion dollars in assets, and our premiums are, round numbers, 
$100 million a year, it is bumped up a little bit, it is going 
to be 120-next year, et cetera, that if we start becoming 
responsible for several billion dollars a year in pension 
payments, that we are going to run out of money. However, and 
this is the important part, those plans--and it is not just the 
Central States plan. There are--in that red zone there, there 
are probably 200 plans, plans all across the country, not just 
on the border of Indiana, not just in Indiana, et cetera, and 
what we are hearing from them is they don't want to run out of 
money, they don't want to become the wards of the PBGC, they 
don't want to bankrupt the PBGC. They would like to have the 
ability to work out their own self-help measures.
    Mr. Rokita. Yet the number of orphan retirees only 
increases. The number of orphan retirees only increases. I 
mean, there is an insolvency issue, then there is the orphan 
retirees, and that is kind of where I want to go as well.
    To make a loose analogy to Social Security, when Mr. 
Roosevelt started, there were 100 workers for every retiree. 
Now there is 3, going to 2 in 15 years, and it seems to me that 
these legacy orphan retirees, you know, how many do we have in 
the system? Do you even know? And is it becoming harder and 
harder to support these retirees obviously with less companies 
paying into the system?
    Mr. Gotbaum. In general, as I don't think we put in the 
testimony, but it is in our annual report, systemwide the 
average is about 1\1/2\ people who are not active, retirees and 
what we call deferred vested, per active worker in the system. 
So 1\1/2\ to 1 is the ratio. There are plans where that ratio 
is 10 to 1. Those plans obviously cannot just turn to the 
active employees and say, okay, you are going to increase your 
contributions by a factor of five and go in. There something is 
going to have to give.
    I don't think that anyone can be definitive and say, oh, 
there is a particular measure that you can legislate that will 
work for all of the different kinds of plans that are there. 
And that is a point that I should have made, and I am grateful 
for you for enabling me to make it. Part of the reason why we 
think flexibility matters, why the flexibility you gave in 2006 
mattered, and why whatever you do prospectively matters, is 
that the circumstance of the folks who are green is very 
different from the folks who are in the red, and we don't want 
to force one into the shoes of the other.
    Mr. Rokita. Okay. Thank you, Chairman. I yield. Thank you.
    Chairman Roe. Thank the gentleman for yielding.
    Mr. Hanna.
    Mr. Hanna. Thank you for being here, sir.
    The last 10 years haven't been very good, have they, in the 
market? You can see that. But you can also see that in the 
last--from 2009 to 2011, you went from 32 to 60 and from 34 to 
24. We also know that for about 100 years the markets returned 
an average of someplace between 9 and 11 percent, depending 
on--and as was mentioned, the fees are critical to that.
    What I am looking at is something that has a positive side 
to it, too, and that is that the actuarial tables that were 
built to guarantee these defined-benefit plans were built 
around long-held assumptions that that have broken down in the 
last 10 years.
    Just in your mind or with your understanding of all this--
and this year looks like the market may be up 9 or 10 percent--
how many years out into the future would it take to take 90 
percent of the people out of the red and put them back in the 
green? What has historically--because there is nothing 
fundamentally wrong with the assumptions they made based on the 
knowledge they had. We are looking at the 10-year slot, and we 
are saying, this is horrible, which, of course, it is, and 
plans are going broke, but this may not last forever either. 
Hopefully it won't with so many people unemployed, et cetera, 
et cetera. Looking forward, what do you see?
    Mr. Gotbaum. Let me talk in general now, and, if I may, 
especially after we get you the reports we owe you all, I would 
like to answer in more detail.
    There are clearly some plans who, even if you think they 
will get the long-term average equity return, because the 
experience of the last 10 years has been so bad, they are in 
trouble, and they will be in trouble, and just praying for the 
stock market by itself won't help. It will help some, but it 
probably won't be sufficient. There are some plans.
    There are other plans for whom the recovery of the stock 
market, if it gets back to the long-term average, will enable 
them, along with other things, to recover. So we know there is 
some in some and some in the other.
    If I may, since this is in part the guts of the reports 
that we are working to send you all, if I can, after we have 
done those reports, come back and give you a little more 
detailed statement of how many we think are in one versus the 
other, I would appreciate the opportunity to do that.
    Mr. Hanna. Defined-benefit plans are great. People are 
being told that they have to invest for themselves from a much 
younger age. As you said, it was 34 to 1 when Roosevelt 
developed Social Security. Now it is different. But that is 
still not a--that is always going to be the new model, isn't 
it? And a lot of people, a lot of companies are getting away 
from defined-benefit plans simply based on the assumptions of 
the last 10 years, and things like Mr. Madoff, those kinds of 
things. It is not a bad model, but it is also true that 
defined-benefit plans are really what works best for families 
in the long run.
    Mr. Gotbaum. I could not say it any better. Thank you for 
saying it.
    Mr. Hanna. Thank you. I am all done here. Thank you.
    Chairman Roe. I thank the gentleman for yielding. I would 
like again to thank Director Gotbaum for taking your time to 
testify before the committee today, and I recognize closing 
remarks from our ranking member Mr. Andrews.
    Mr. Andrews. Thank you, Mr. Chairman. I thank our 
colleagues, and I thank Mr. Gotbaum and his family for 
attending and doing such a good job here today.
    This is a problem I think we have set out on the right path 
to solve, which is to collect a range of views from a series of 
people with expertise on this problem and learn from them. And, 
Mr. Chairman, I am confident that if we continue down this 
path, we will find a solution that achieves the goals of 
helping small businesses that pay into these plans prosper and 
grow, that assures the maximum degree of security for pension 
payments for families who depend on them, and improves the 
fiscal health of the PBGC so we further minimize the 
possibility that the PBGC would ever have to call upon the 
Federal Treasury to make good its obligations.
    What I have learned so far in listening to today's 
questions and answers and the prior hearing is that the credit 
facilities that the 2006 and 2010 laws made available have 
contributed substantially to the growth of the green zone from 
32 percent to 60 percent. Certainly demographic trends and 
economic growth have contributed, but the availability of those 
facilities has had a positive impact.
    And I have also--will approach the rest of the discussions 
with a premise that we should further facilitate those credit 
facilities to multiemployer plans in a variety of ways, but we 
should attach conditions depending upon the status of the plan. 
I think relatively healthy plans should have the opportunity to 
take advantage of such a facility, but I think that unhealthy 
plans, frankly, should have something more in the nature of an 
obligation to take advantage of them, and when they do, I think 
that those plans should have a concurrent obligation to make 
internal structural changes, however unpopular or difficult, 
that will improve their health and, with it, improve the fiscal 
health of the PBGC.
    This is not a problem that--for which the solution will be 
painless, easy, or uncontroversial, but if we take the path 
that is too often taken here in Washington and just hope that 
it gets better, which is emphatically not what the chairman is 
doing, then I think it for sure will get worse.
    There are 10 million people depending upon us, there are 
hundreds of thousands of employers depending upon us, and I do 
think that we have taken two very good steps toward a sober, 
well-considered, and mature approach to solving this problem.
    I look forward to working with you, Mr. Chairman, and our 
colleagues, and, Mr. Gotbaum, you and your colleagues, and in 
listening to people around the country with a stake in this 
problem to solve it, and I appreciate your opportunity to be 
with us today.
    Chairman Roe. I thank the gentleman for yielding and his 
comments. From the chair, I am absolutely committed, and this 
subcommittee is absolutely committed, to helping solve this 
problem, and it is imperative that we do that. I think the eyes 
of the country are on us. There are many pension plans not only 
in the multiemployer plan, but I think there are many pension 
plans in States and others that are in extremis now and 
certainly would be looking at us for guidance about how we 
manage through this morass that we are in right now.
    So I think that they--you made the comment in your 
testimony that the PBGC is at risk for having neither 
sufficient tools to help multiemployer plans deal with their 
problem, nor the funds to continue to pay benefits beyond the 
next decade under the multiemployer insurance plan. That is a 
pretty sobering statement, and I think we can together 
certainly work on the tools you need to do your job, and we can 
certainly do that.
    I had several thoughts up here today, and just to bring 
them up, no solutions, but we have the assumptions problem 
about the assumptions that we make. Is it possible in these 
plans to segregate?
    I think the ``last man standing rule'' creates some issues 
for the stronger plans. For instance, UPS decided to get out. 
They wrote a check for $6 billion and got out so they would 
limit their future liabilities, and with credit being as low as 
it is, what is to keep a strong company out there that has a 
pretty good financial balance sheet to look at the 
multiemployer plans and look, as Mr. Rokita, I think, 
mentioned, the Central States plan with a $14 billion potential 
liability, and clearly the money is going to run out at some 
time, to walk.
    I think that is a real issue for multiemployer plans, which 
would further weaken them. And as Mr. Hanna has clearly stated, 
the certainty of these plans for families is essential, 
certainly the ones getting the benefits. You are limited now 
because people who currently are receiving benefits cannot be 
cut, but then, as you stated in your testimony, you are going 
to go back to current employees and companies and say, hey, you 
need to pony up some more money that you may never get.
    So I think that is an issue, and I think another issue is 
where the PBGC lines up in bankruptcy. I think the Hostess 
situation is clear, that you are not at the front of the line. 
Those employees that have worked there for decades are not at 
the front of the line. They may be getting a much--could be 
potentially getting a much-reduced benefit. It doesn't mean 
that they will.
    So I think a lot of those things are just questions, not 
particularly solutions, but things that we have to work on, and 
we don't have a lot of time to do it. So this subcommittee is 
going to be very active in coming up with legislation to help, 
and I am interested in knowing how much of the green has been 
improved by our accounting that we changed and the assumptions, 
because I think the 7\1/2\ percent, even though I do understand 
what Mr. Hanna said, the historic assumptions have not occurred 
in the last 10, 12-plus years.
    The city that I was mayor, I started this discussion in 
2003. It took 10 years to get--almost 10 years to get there, 
but one was that we looked at our future liability. As the 
market went down when I first became mayor, we were--I think 
about 10, 11 percent of how much someone's salary was going 
into their pension plan for defined benefit. As the economy got 
worse, it was up at 18 or 19 percent of their income, which was 
really straining the city budget.
    So we started a discussion that new hirees would not--you 
kept your promise to current employees, but new hirees would 
come in under a defined-contribution plan. I think a lot of 
businesses are having to look at that simply because of this, 
and I think what we end up doing here, if we do this right, 
might encourage other businesses to stay with the defined-
benefit plan for employees. So I think we have a huge 
obligation.
    I will finish by saying we will miss Don Payne, who passed 
during this past year, that served many years on this committee 
and did so with great dignity; and Dale Kildee and Dennis 
Kucinich, who won't be with us on the subcommittee. Mr. Kildee 
is retiring, and Mr. Kucinich is going on into private life. 
Judy Biggert will not be here. It has been a great pleasure to 
serve with all of those Members, and they have done a great 
job, and I wanted to pass my congratulations on to them, to 
wish everyone a merry Christmas.
    Mr. Andrews. And Jason Altmire.
    Chairman Roe. And Jason Altmire--I forgot my friend Jason 
from Pennsylvania--also served with great distinction. He was 
on and then off, and then back on, but he did serve here. We 
appreciate his service.
    I wish everyone a merry Christmas.
    Mr. Andrews. Ms. Hirono.
    Chairman Roe. And we could go on and on. Ms. Hirono is a 
Senator now.
    Anyway, we may have to get a whole list to read.
    But anyway, merry Christmas. We are adjourned.
    [Questions submitted for the record follow:]
                                             U.S. Congress,
                                     Washington, DC, March 4, 2013.
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 December 19, 
2012 Subcommittee on Health, Employment, Labor, and Pensions hearing 
entitled, ``Challenges Facing Multiemployer Pension Plans: Evaluating 
PBGC's Insurance Program and Financial Outlook.'' I appreciate your 
participation.
    Enclosed are additional questions submitted by committee members 
following the hearing. Please provide written responses no later than 
March 18, 2013, for inclusion in the official hearing record. Responses 
should be sent to Benjamin Hoog of the committee staff, who can 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.
                  questions submitted by chairman roe
    1. For plan funding purposes, multiemployer plans calculate their 
expected assets using a hypothetical, yet actuarially ``reasonable'' 
rate of return. Please contrast this method with PBGC's valuation 
methodology, and explain whether the plan funding rules appropriately 
reflect plan assets and liabilities.
                 questions submitted by chairman kline
    1. Press reports regarding a speech you gave at the 58th Annual 
Employee Benefits Conference of the International Foundation of 
Employee Benefit Plans indicate that you called for new regulations on 
the standard of care for multiemployer plans. Can you elaborate, and 
describe how these new regulations would affect PBGC's future 
sustainability?
    2. In 2012, PBGC's Inspector General criticized the quality of the 
information fed into your Pension Insurance Modeling System. What steps 
have you taken to rectify this problem, and what remains to be done?
               questions submitted by congressman tierney
    1. Did Hostess stop making contributions to its single and/or 
multi-employer pension plans prior to filing for bankruptcy?
    2. Please detail the enforcement action(s) the PBGC can take to 
require a company to continue making contributions to its pension plans 
if it has stopped doing so. Is such enforcement action the same for 
both single and multi-employer plans? If not, please explain.
    3. When Hostess stopped making contributions to its single and/or 
multi-employer pension plans, did the PBGC utilize all of the 
enforcement authority available to them under the law? If not, why not?
    4. Does the PBGC believe it has sufficient enforcement authority to 
effectively deter and/or appropriately remedy future cases where a 
company stops making contributions to its pension plans? If not, please 
elaborate and provide specific recommendations (including technical 
assistance, if available) for amending the relevant statute(s).
                questions submitted by congressman scott
    1. If a company in a multiemployer plan files for bankruptcy, do 
the other companies in the plan inherit the full responsibility for 
paying the withdrawn company's obligations in the pension fund? If so, 
is there any relief for a small company which represents only a minor 
portion of a large plan and which may be financially unable to pay the 
additional costs?
    2. Do many multiemployer plans approach a ``tipping point,'' where 
insolvent companies are leaving and the surviving companies are having 
so much trouble paying the increasing obligations of the departing 
companies that others become insolvent, resulting in a cascade of 
insolvencies and ultimate total failure of the plan?
    3. What premium adjustment or statutory change would be necessary 
in order for PBGC to be obligated to pay the proportional liability of 
any single employer in a multiemployer plan that leaves a plan due to 
bankruptcy?
    4. If a company in a multiemployer plan goes bankrupt, and then 
reorganizes and becomes solvent again, are its past pension obligations 
revived?
    5. What happened to the pension obligations of the automobile 
companies that received assistance through the federal bailout?
    6. How much risk could be mitigated if companies in multiemployer 
plans were required to invest a significant proportion of their 
investment assets in insurance products, where the risk of the vagaries 
of the stock market would be borne by the private insurance and not the 
plan itself?
                                 ______
                                 
    [Response to questions submitted follow:]
    
    
      Mr. Gotbaum's Response to Questions Submitted for the Record

                  questions submitted by chairman roe
    1. For plan funding purposes, multiemployer plans calculate their 
expected assets using a hypothetical, yet actuarially ``reasonable'' 
rate of return. Please contrast this method with PBGC's valuation 
methodology, and explain whether the plan funding rules appropriately 
reflect plan assets and liabilities.

    Current law supplies multiemployer plans with more actuarial 
discretion in measuring assets and liabilities for funding purposes 
than single-employer plans. The methods of measurement used by PBGC are 
different from either multiemployer or single-employer plans.
    Multiemployer Return Assumptions Most multiemployer plans with more 
than $1 billion in liabilities used an assumed rate of return between 
7.5% and 8.5% for the 2010 plan year.\1\ The average assumed rate of 
return for all multiemployer plans was 7.5%. These assumptions have 
been the subject of some criticism because returns in the past decade 
have been much lower and consensus forecasts for the next decade are 
also below 7.5%. However, the 7.5%-8.5% range is consistent with market 
returns in previous decades and with historical returns over longer 
periods of time.\2\
---------------------------------------------------------------------------
    \1\ Actuarial discretion for multiemployer funding purposes 
generally continued under the Pension Protection Act of 2006 (PPA). In 
single-employer plans, the actuary's assumed interest rate (and 
mortality table) has been historically more closely regulated by 
statute. PPA specified the interest rate that all single-employer plans 
must use, based on average segment rates on the corporate bond yield 
curve for the preceding 24 months; the Moving Ahead for Progress in the 
21st Century Act (MAP-21) funding relief allowed the segment rates to 
be adjusted if they are below or above certain percentages of the 
average of the rates for the preceding 25 years.
    \2\ Based on a 60%-40% allocation of equities to bonds, average 
returns exceeded 8% for the 85-year period preceding 2012; topped 14% 
for the 20-year period preceding 2000; but barely broke 1% for the 
2000s decade.
---------------------------------------------------------------------------
    Multiemployer Asset Valuations Multiemployer plans also have more 
discretion in valuing assets for actuarial purposes than single-
employer plans. Actuarial valuations are generally not based on current 
market values, but instead use a ``smoothed'' value of assets, 
recognizing market value gains and losses over five years (10 years for 
2008-9 losses under PRA 2010 funding relief).
    Actuarial discretion in plans' methods and assumptions (e.g., the 
interest rate used for measuring liabilities and the smoothing period 
for measuring assets) has an effect on the funded percentage and has 
reduced the effect of mandatory funding requirements. In addition, it 
affects plans' certified status as endangered or critical. While plans 
must also separately disclose to participants the market value of 
assets, they need not disclose the market value of their liabilities.
    PBGC Asset and Liability Valuation Both PBGC's assets and 
liabilities are reported at current market levels and are not 
``smoothed'' or subject to actuarial discretion. The interest rate used 
to determine PBGC's liabilities is derived from a survey of market 
quotes for comparable annuities. PBGC and its independent auditors 
believe this approach fairly and accurately represents the financial 
situation of PBGC.
                 questions submitted by chairman kline
    1. Press reports regarding a speech you gave at the 58th Annual 
Employee Benefits Conference of the International Foundation of 
Employee Benefit Plans indicate that you called for new regulations on 
the standard of care for multiemployer plans. Can you elaborate, and 
describe how these new regulations would affect PBGC's future 
sustainability?

    What I said was that plans need less burdensome regulation and more 
flexibility. Employers will only be willing to sponsor defined benefit 
plans if there is more flexibility in plan design, cost-sharing, and 
funding for these plans. For example, the single-employer and 
multiemployer plan communities are discussing new hybrid plan designs 
that minimize contribution volatility and underfunding risk. Innovative 
changes in law and regulation will be needed to allow these new plan 
designs to work and to encourage companies to continue to provide 
retirement plans to their employees.
    Clearly, preserving pension plans is necessary to the preservation 
of PBGC, but it's not enough. As I testified before the subcommittee, 
PBGC's financial situation is unsound and its resources and authorities 
are inadequate to help distressed plans avoid insolvency and fund the 
benefits of plans that fail.

    2. In 2012, PBGC's Inspector General criticized the quality of the 
information fed into your Pension Insurance Modeling System. What steps 
have you taken to rectify this problem, and what remains to be done?

    As detailed in the Inspector General's report, in preparing several 
reports, the staff of our Policy, Research and Analysis Department 
(PRAD) made careless errors (generally in copying numbers from one 
place to another) and did not check their own work. They compounded 
these errors by not keeping their work papers. Our IG found these 
errors, and also noted that PRAD's procedures weren't adequately 
documented. We immediately made the changes recommended by the IG and 
are making additional process improvements as appropriate. All reports 
are now separately reviewed by others and procedures are being more 
carefully documented.
    Although issues documented by the IG arose in reports that used our 
pension insurance modeling systems (PIMS), the Inspector General was 
careful to note that her staff was not expressing an opinion on the 
quality of those models themselves. We believe that PBGC's pension 
insurance modeling systems are the best tools available by far for 
information and projections concerning the defined-benefit pension-plan 
universe. Most analysts in the actuarial and economic communities agree 
that PBGC's models remain the best tools available.
    That does not mean that we cannot and will not review them to make 
them even better. We do.\3\ We will continue to work to improve them as 
we better understand trends in the economy and in pension practices and 
as our information improves. The Moving Ahead for Progress in the 21st 
Century Act (MAP-21) requires an additional independent annual peer 
review of PBGC modeling systems.\4\ PBGC responded by contracting for a 
review by the Social Security Administration and outside consultants. 
We will incorporate the results of those reviews in future 
improvements. Nonetheless, it would be wrong to conclude that the 
financial unsoundness of PBGC or of some multiemployer plans is the 
artifact of modeling error.
---------------------------------------------------------------------------
    \3\ Over the years, PBGC's Single-Employer Pension Insurance 
Modeling System (SE-PIMS) has been reviewed and discussed in published 
reports. Several years ago, PBGC provided the model to the Society of 
Actuaries, which reviewed it and has begun using it in their own 
published reports.
    The Multiemployer Pension Insurance Modeling System (ME-PIMS), 
which is newer than SE-PIMS, was designed in 2007, before 
implementation of the PPA changes for multiemployer plans. PBGC is 
revisiting certain ME-PIMS assumptions to better reflect current 
experience under PPA as a basis for ME-PIMS projections, but the ERISA 
agencies obtain information about how plans are responding to PPA only 
gradually. PBGC commissioned an external review of ME-PIMS by an 
outside consulting firm with substantial multiemployer experience and 
received recommendations for changes in September 2012. We are now in 
the process of reviewing and incorporating the consultant's suggestions 
for improvements.
    \4\ MAP-21, sec. 40233(a), states: ``The Pension Benefit Guaranty 
Corporation shall contract with a capable agency or organization that 
is independent from the Corporation, such as the Social Security 
Administration, to conduct an annual peer review of the Corporation's 
Single-Employer Pension Insurance Modeling System and the Corporation's 
Multiemployer Pension Insurance Modeling System. The board of directors 
of the Corporation shall designate the agency or organization with 
which any such contract is entered into. The first of such annual peer 
reviews shall be initiated no later than 3 months after the date of 
enactment of this Act.''
---------------------------------------------------------------------------
             questions submitted by representative tierney
    1. Did Hostess stop making contributions to its single and/or 
multi-employer pension plans prior to filing for bankruptcy?

    Hostess Brands made required contributions to its single-employer 
plan until it filed for reorganization under Chapter 11 in January 
2012. Hostess stopped making those required contributions once it 
entered bankruptcy.
    Hostess stopped making annual contributions to multiemployer plans 
in August 2011, a few months before it filed for bankruptcy.
    In November 2012, a bankruptcy judge approved Hostess' request to 
shut down its operations and liquidate its business. Hostess' 
withdrawal from 41 multiemployer plans in which it participates 
triggered an obligation under ERISA for Hostess to pay its share of the 
plans' underfunding. These obligations total nearly $2 billion. Only a 
tiny fraction of that amount will be recovered and paid to the plans.

    2. Please detail the enforcement action(s) the PBGC can take to 
require a company to continue making contributions to its pension plans 
if it has stopped doing so. Is such enforcement action the same for 
both single and multi-employer plans? If not, please explain.

    PBGC's enforcement authorities are very different for single-
employer plans and multiemployer plans.
    For single-employer plans, PBGC has the authority to file liens 
against the sponsor and its non-debtor controlled group members if 
missed contributions exceed $1 million. However, once a company files a 
Chapter 11 petition, the situation changes. Under bankruptcy law, PBGC 
cannot file liens against companies for contributions missed during 
bankruptcy.
    For multiemployer plans, PBGC has no authority to require employers 
to make contributions. That authority is held only by plan trustees. 
Plan trustees lack PBGC's ability to file liens for non-payment of 
required contributions. Trustees must first obtain a judgment in 
federal court for the unpaid contributions, but by the time such a 
judgment is obtained, the employer may have entered bankruptcy, 
preventing the trustees from filing a lien.
    The plan trustees are also responsible for collecting withdrawal 
liability from employers that leave the plan. (PBGC has no enforcement 
authority with respect to such collections.) Because a bankrupt 
company's withdrawal liability is generally discharged in bankruptcy 
and is generally an unsecured general claim that enjoys no priority, 
plans usually collect only a tiny fraction of the obligation of 
bankrupt withdrawn employers.

    3. When Hostess stopped making contributions to its single and/or 
multi-employer pension plans, did the PBGC utilize all of the 
enforcement authority available to them under the law? If not, why not?

    Once Hostess stopped making contributions to its multiemployer 
plans and, after filing, its single-employer plan, PBGC had no 
authority to change Hostess's actions.
    Hostess' single-employer plan will terminate and be trusteed by 
PBGC. PBGC can and will pursue claims for contributions missed during 
bankruptcy and plan underfunding of $62 million in bankruptcy. However, 
because PBGC's claims are generally treated as unsecured claims in 
bankruptcy, the recoveries are generally only a small fraction of the 
plan's obligations.

    4. Does the PBGC believe it has sufficient enforcement authority to 
effectively deter and/or appropriately remedy future cases where a 
company stops making contributions to its pension plans? If not, please 
elaborate and provide specific recommend actions (including technical 
assistance, if available) for amending the relevant statute(s).

    PBGC does not have authority to require company contributions to 
pension plans. With such authority under the single-employer program, 
the agency would be better able to protect pensions, particularly 
during the bankruptcy process.
    Furthermore, ongoing pension contributions, unlike other ongoing 
employee costs, are generally not considered a priority expense in 
bankruptcy.
              questions submitted by representative scott
    1. a. If a company in a multiemployer plan files for bankruptcy, do 
the other companies in the plan inherit the full responsibility for 
paying the withdrawn company's obligations in the pension fund?

    Yes. When a contributing employer to a multiemployer plan files for 
bankruptcy or otherwise fails to pay assessed withdrawal liability, the 
remaining employers in the plan become responsible for the benefits 
earned with that employer. If the plan is underfunded, the benefits 
must be funded by the remaining employers.
    Even if the plan is well-funded in the year of an employer's 
bankruptcy or withdrawal, the plan could later incur a substantial loss 
in assets (e.g., due to investment losses) resulting in the 
underfunding of plan benefits. In these circumstances, plans attempt to 
preserve the plan by increasing contributions from current employers 
and/or reducing future benefit accruals for current employees.
    Problems arise when there has been a significant drop in the number 
of contributing employers in a plan, and the number of inactive 
participants (many of whose employers have left the plan) greatly 
exceeds the number of active participants. If such a plan becomes 
significantly underfunded, steep increases in plan costs can put 
enormous pressures on a small pool of employers and employees to 
support the liabilities of a much larger group of inactive 
participants.

    b. If so, is there any relief for a small company which represents 
only a minor portion of a large plan and which may be financially 
unable to pay the additional costs?

    Yes. Withdrawal liability is calculated based on a company's level 
of contributions to a plan, so a small company with small contributions 
will face a smaller liability if it chooses to withdraw. Also, in some 
cases, plan trustees provide the bargaining parties with alternative 
schedules of varying contribution rates and benefit reductions, 
enabling small employers to negotiate less onerous contribution terms 
with commensurately lower benefits for their employees.
    Nonetheless, some plans and employers report that their 
circumstances are such that these measures, by themselves, are 
insufficient, that some companies will choose to withdraw or be forced 
to declare bankruptcy, and that the risk to plans is that other 
employers will follow and cause mass withdrawal from a plan.

    2. Do many multiemployer plans approach a ``tipping point,'' where 
insolvent companies are leaving and the surviving companies are having 
so much trouble paying the increasing obligations of the departing 
companies that others become insolvent, resulting in a cascade of 
insolvencies and ultimate total failure of the plan?

    We don't have enough current information to be sure, but we don't 
think that most of the more than 1,300 ongoing plans are or will be at 
such a point. Nonetheless, some plans clearly will be. These generally 
are plans that are both seriously underfunded and for which the base of 
active employers is too small for that underfunding to be remedied by 
increased contributions and/or reduced future accruals. Such plans are 
often found in industries that have undergone major transformation 
involving multiple bankruptcies, such as textiles, furniture-making, or 
printing, but there are severely distressed plans in other industries 
as well.

    3. What premium adjustment or statutory change would be necessary 
in order for PBGC to be obligated to pay the proportional liability of 
any single employer in a multiemployer plan that leaves a plan due to 
bankruptcy?

    In order for PBGC to be able to pay the obligations of employers 
that become bankrupt, PBGC would need much greater financial resources. 
At present, we cannot say with any confidence what increase in premiums 
would be necessary. We are undertaking analyses to try and develop 
estimates.
    ERISA allows a plan to apply to PBGC for a plan ``partition,'' 
transferring to PBGC the liabilities attributable to service with 
employers that withdrew from the plan as a result of bankruptcy. The 
purpose is to keep the plan viable for the remaining employers by 
relieving them of the significant unfunded liabilities left behind by 
bankrupt employers. However, this tool has been rarely used, as 
partition is limited only to those participants that are ``orphaned'' 
as a result of formal bankruptcy proceedings and not for other cases. 
Furthermore PBGC currently lacks the financial resources to fund 
partitions. We are currently working to quantify the number of plans 
that would be helped by a partition-type solution and what the 
associated costs might be.

    4. If a company in a multiemployer plan goes bankrupt, and then 
reorganizes and becomes solvent again, are its past pension obligations 
revived?

    Generally not. If pension commitments are extinguished in 
bankruptcy, then bankruptcy law acts to prevent any restoration after 
emergence from Chapter 11. Some companies in bankruptcy will negotiate 
with the union to remain as a contributing employer to the plan after 
reorganization. In those cases, pension obligations remain in place.

    5. What happened to the pension obligations of the automobile 
companies that received assistance through the federal bailout?

    General Motors (GM), Chrysler, and Ally Financial (formerly GMAC 
and still partially owned by GM in 2008) received assistance through 
the Automotive Industry Financing Program (AIFP) under the U.S. 
``Troubled Assets Relief Program'' (TARP).
    GM currently sponsors pension plans for its hourly and salaried 
employees. However, in 2012 GM announced that it was eliminating its 
obligations to salaried employees and retirees in several ways: (a) 
certain retirees in the salaried plan were offered a one-time lump-sum 
payment instead of receiving their pensions, (b) the pension 
obligations of those retirees who chose not to take the lump-sum 
payment were transferred by GM to the Prudential Insurance Company, and 
(c) active participants and those retiring after December 1, 2011, were 
moved to a new salaried pension plan with a lump-sum payment option 
available at retirement (note that GM froze this new salaried plan in 
late 2012). GM terminated the old salaried plan as well as a cash 
balance plan where the employees were offered the choice between 
receiving an annuity and a lump sum.
    Chrysler currently sponsors pension plans for its hourly and 
salaried employees. In 2009, PBGC obtained an agreement from Daimler 
AG, then a Chrysler plan sponsor, to contribute $600 million to the 
Chrysler pension plans. In 2012, Chrysler terminated a small cash 
balance plan that was fully funded. In June 2013, Chrysler announced 
that it would freeze its U.S. defined benefit plans for salaried 
employees effective December 31, 2013. (Note that these plans were 
closed to new hires effective December 31, 2003. Salaried employees 
hired on or after January 1, 2004, were eligible for a 401(k) plan.) 
The freeze affects about 8,000 employees, who will now receive 
contributions from Chrysler in the 401(k) plan.
    In 2012, Ally Financial offered terminated vested participants in 
its pension plan a lump-sum payment in lieu of an annuity.

    6. How much risk could be mitigated if companies in multiemployer 
plans were required to invest a significant proportion of their 
investment assets in insurance products, where the risk of the vagaries 
of the stock market would be borne by the private insurance and not the 
plan itself?

    Federal law has never required pension plans to invest in any 
particular form of investment. For those plans that are significantly 
underfunded, investment in the vast majority of insurance or fixed 
income products does not mitigate or exacerbate insolvency risk. 
Investment policy and the mitigation and diversification of risk are 
significant issues for multiemployer plans.
                                 ______
                                 
    [Whereupon, at 11:28 a.m., the subcommittee was adjourned.]

                                 

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