.

TABLE 6: REVERSION TRENDS AND
CONGRESSIONAL PROJECTION

BILLIONS OF DOLLARS

$60 c 7
$50
$40 F
$30 |
4
$20 F
S$10F-
$0
1982-1986 1987-1990 1991-1995 CONGRESSIONAL
NO EXCISE TAX 10% - 15% 20% - 50% PROJECTION
EXCISE TAX EXCISE TAX 1996-2000
0% - 6.5%
EXCISE TAX

SOURCE: PBGC CASE ADMINISTRATION SYSTEM, REVERSIONS OF $7 MILLION OR MORE
AND JOINT COMMITTEE ON TAXATION.

EFFECT ON PENSIONS AND THE PENSION INSURANCE SYSTEM

Allowing companies to remove assets from their pension plans could put
participants and the pension insurance system at risk.

A pension plan funded at 125 percent of current liability can be
underfunded on a termination basis. "Current liability" assumes that a plan will
be ongoing and pay benefits over time. "Termination liability" measures
exposure to the PBGC and participants; i.e., the risk should the pension plan fail.
The interest rate, mortality rate and expected retirement age assumptions used

9

01800000010429



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01800000010446



ITEM 10

BigeortoaronaZ

az

>
TOP 100 PLANS BY EXCESS ASSETS :
OVER 150% FUNDED
EXCESS
SPONSOR EINPIN RATIO ASSETS LIABILITIES EXCESS OVER 125%

AMERITECH CORP 63251481002 170% $6,162 $3,616 $2,546 $1,642
BELLSOUTH CORP 581533433005 164% $6,322 $3,865 $2,457 $1,491
PRUDENTIAL INS CO 221211670003 183% $5,259 $2,869 $2,390 $1,673
AMERITECH CORPORATION 363251481001 159% $5,719 $3,594 $2,125 $1,226
PACIFIC TELESIS GRP 942919931002 169% $4,690 $2,782 $1,908 $1,212
BELLSOUTH CORP §81533433008 150% $5,519 $3,673 $1,847 $928
STATE FARM MUTUAL AUTO INS 370533100001 194% $3,589 $1,850 $1,739 $1,277
NORTHROP CORP 951055798010 184% $3,542 $1,929 $1,614 $1,132
GTE SERVICE CORP 131675522002 194% $3,141 $1,617 $1,523 $1,119
MCDONNELL DOUGLAS 430400674001 154% $3,920 $2,549 $1,371 $734
GTE PRODUCTS CONNECTICUT 132884758001 243% $2,140 $882 $1,257 $1,037
KRAFT GENERAL FOODS 363083135150 174% $2,855 $1,641 $1,214 $804
GTE CALIFORNIA $50510200001 245% $1,484 $605 $879 $728
FLORIDA POWER & LIGHT 590247775001 214% $1,549 $725 $825 $644
GOODYEAR TIRE & RUBBER 340253240002 307% $1,116 $364 $752 $661

NATL RURAL ELECTRIC COOP = 530116145333 163% $1,893 $1,161 $733 $443
CITIBANK N A “ 135266470001 157% $2,025 $1,294 $731 $408
GEORGIA POWER 580257110001 216% $1,341 $621 $720 $565
DIGITAL EQUIPMENT ” 42226590001 203% $1,402 $690 $712 $540
SPRINT CORPORATION 480457967001 163% $1,559 $954 $605 $367
INTERNATIONAL PAPER 130872805105 197% $1,219 $617 $602 $447
SANDIA CORP 850097942006 171% $1,329 $778 $551 $356
CHEMICAL BANK 134994650001 171% $1,232 $721 $512 $332
ALABAMA POWER 630004250001 200% $1,014 $506 $508 $381

MARATHON OIL CO 251410539001 218% $882 $405 $477 $376
NCR CORPORATION 310387920001 151% $1,396 $923 $472 $242
GTE SERVICE CORP 131675522001 200% $920 $459 $461 $348
PENNSYLVANIA POWER & LIGHT 230959590001 198% $915 $464 $454 $339
CONSOLIDATED RAIL CORP 231989084001 186% $969 $521 $448 $318
TEXTRON INC §0315468076 151% $1,312 $869 $442 $225
ARMSTRONG WORLD INDS 230366390001 180% $985 $546 $439 $302
SAFEWAY INC 943019135001 199% $428 $422 $315
ABBOTT LABORATORIES 360698440001 156% $1,116 $715 $401 $223
NORTHERN STATES POWER 410448030001 153%. $1,157 $757 $400 $210
FIRST NATL BANK OF CHICAGO + = 360899825002 192% $831 $432 $399 $291

PFIZER INC 135315170001 153%  .$1,084 $707 $377 $200
CHEMICAL BANK 134994650005 248% $630 $254" $376 $312
ANHEUSER-BUSCH 431162835003 188% $778 $413 $365 $262
MELLON BANK N A 250659306001 201% $723 $360 $363 $273
CHEMICAL BANK 134994650006 225% $630 $281 $350 $279
TIMES MIRROR CO 951298980001 179% $789 $440 $349 $239
TELEDYNE 952282626100 201% $692 $345 $347 $261

KAISER PERMANENTE MEDCARE 946365467001 167% $856 $511 $345 $217
UNION OILCO OF CALIFORNIA = 951315450001 170% $832 $489 $343 $221
RROONNELLEY & SONS 361004130001 162% $890 $551 $339 $202
SOUTHERN NEW ENGLAND TELE 60542646005 164% $854 $521 $333 $203
GTE PRODUCTS CONNECTICUT 132884758036 213% $626 $294 $332 $259
NYS ELECTRIC & GAS 150398550001 186% $716 $384 $332 $236
GTE FLORIDA §90397520001 232% $572 $246 $326 $264
BELL COMMUNICATION RSCH 222478398002 160% $869 $544 $325 ~ $189
BROWN & WILLIAMSON TOBACCO 610144470001 225% $576 $255 $320 $257
CLEVELAND ELEC ILLUMINATING 340150020001 213% $589 $276 $313 $244
WESTVACO CORP 131466285002 229% $554 $242 $312 $251
GTE GOVERNMENT SYSTEMS 161190245002 211% $591 $280 $314 $241
GTE SOUTHWEST 750573444001 221% $562 $254 $308 $245
MAYO FOUNDATION 416011702001 155% $857 $552 $305 $167
RALSTON PURINA ~ 430470580011 164% $759 $462 $297 $182
PANHANDLE EASTERN “742150460001 174% $699 $402 $297 $196
NIAGARA MOHAWK POWER 150265555001 158% $797 $504 $293 $167

01800000010455



this excess by 40 percent, raising concerns about the further weakening of plan ,
funding as changes in interest rates or asset values from stock market fluctuations

occur,
TABLE 2: AGGREGATE OVERFUNDING 1978-1993
DOLLARS IN BILLIONS P8GC INTEREST RATE
$300 12%
$250 10%
$200 8%
$150 ox
$100 4%
$50 2%
0%
1078 1979 1980 1981 1982 1083 1984 1985 1086 1987 1988 1989 1000 1901 1902 1003
SOURCE: 1978-1087 FORM 6800 FILINGS FOR SINCLE-EMPLOYER PLANS WITH 100 OR MORE PARTICIPANTS:
1966-1903 COMPUSTAT PC-PLUS CORPORATE DATAGASE:
ALL DATA AS OF END OF YEAR, CONSTANT 1803 DOLLARS
UABILITIES USED TO CALCULATE OVERFUNDING ADJUSTED TO PBGC IMMEDUTE RATE

HISTORY OF REVERSIONS

Pension assets are held in trust for the exclusive benefit of plan participants
and their beneficiaries. Prior to the 1980's, "reversions" of assets to employers
were rare. Assets reverted to employers only upon plan termination after all
benefits to plan participants were satisfied.

01800000010423



$100 million was pulled out of the pension plan and retirees got executive life.  ~
annuities. Maxxam and Revlon did agree to make up the benefit loss, but hard- ~
working Americans shouldn’t be required to go on CNN and NBC to get the
pension they worked for. .

+ A&P: CORPORATE RAIDING

When the Tengelmann Group, a German company, took over A & P in 1982, it
immediately terminated A & P’s pension plan and stripped out over $270 million
in assets to pay for the takeover. The new foreign owners then down-sized the
company and ended the long-standing A & P practice of giving benefit increases
to retirees to protect them from inflation. This opened the way for corporate
raiders to use reversions to finance takeovers. In two thirds of the largest buyout
transactions in 1980’s pension funds were used.

01800000010467



* Endnotes
1. The PBGC also operates a multiemployer pension insurance program that insures the pensions of 9 million participants in 2,000
multiemployer pians, %
2. The PBGC guarantees up to $30,886.32 per year for a 65 year-old peasioner in a single-employer defined benefit plan. This
maximum is lower if payments begin before the peasioner reaches age 65 or spousal benefits are provided, Early retirement
supplements or benefit increases made within five years of plen termination are not fully guaranteed.

3. The agency guidelines enabled employers to effectively continue a plan while taking out assets. They did require annuitization
and notification of employees.

4. Study by the investor Respousibility Research Center.

13

01800000010433



Item 7
Overfunding in the private pension system has been declining steadily
since the mid 1980s. Data are year end, GAM-83 mortality and the

interest rate is the PBGC immediate rate for the appropriate year.

NOTE: these excess assets are not calculated on the same basis as

defined in the proposal, but are meant to show the drift in excess

.
.

assets only. a

1800000010451

Seotember 22. 1995 (REVISED)



Philip J, Bozelides : PO, dow N88
Corporate Hamon Resources Howton, Tones 77251-1185

Mr. Martin Slate

Executive Director

Pension Benefit Guaranty Corporation
1200 K Sureet N.W.
Washington, D.C. 20005-4026

Dear Mr. Slate:

Enron Corp. believes it is important to respond to the mischaracterization of our Retirement Plan data conveyed during
the Pension Benefit Guaranty Corporation (PBGC), the Department of Labor and Department of the Treasury press
conference on September 26, Any of our almost 7,000 employees who read the resulting press accounts of this news
conference were no doubt misled about the viability of our company's pension plan. We feel that we one it to our
employees to correct misconceptions about Enron’s pension plan relative to the PBGC’s method of compiling and
interpreting the plan data.

‘During the press conference, PBGC officials pointed to Enron Corp, as an example of a company that took an asset

Teversion from an overfunded pension plan, and now has an tmderfunded pension plan. A list distributed at the press

conference indicated that Enron took # reversion of $232,200,000 as of June 30, 1986 and, as a result, currently has an

underfunded vested liability of $82,500,000. 7

¢ Enzon, in fact, did not take an asset reversion, Instead the assets taken from the plan were rolled over into an
Employee Stock Ownership Plan (ESOP). This ESOP was set up in a “floor plan” arrangement with the
continuing pension plan so that the assets in the ESOP, as they were allocated to employee accounts, would
eliminate future pension accruals. When the ESOP was set up in late 1986, Enron stock was purchased at around
$38ashare. Today, afler splitting twice, the stock is at between $34 and $35 a share. Thus, it has almost
quadrupled in value in the eight years since the ESOP was established. ‘This has resulted in a tremendous benefit
for Enron’s employees and, duc to the “floor plan” arrangement, a great benefit for the PBGC.

‘The $82,500,000 unfunded vested benefit listed in the September 26, 1995 PEGC press release is as of

December 31, 1993. This unfunded vested benefit amount has been superceded by the data requested and received

by the PBGC on September 18, 1995, which shows Enron's unfunded vested benefit amount as of December 31,

1994 to be $44,848,000. The 1993 and 1994 data was provided to the PBGC on a voluntary basis. Also, in both

cases, the assumptions used by our plan's actuary were prescribed by the PBGC, are intentionally conservative to
" peflect a plan termination, and have no basis in law or regulation.

+ By law, Enron rust fund the plan on realistic assumptions for an ongoing plan as opposed to a vlan termination.
Reflecting this basis, the unfunded vested benefit obligation for the plan as of December 31, 1994 is $11,570,503.
A Sao A Se PRES Sma Sel EH EE

ZGEL PID
BAISOSY
1800000010414

v00R Wadd ODdd SOF OZS Coz Xvd By:¥T GHA S6/8T/0T



Item 4

And interest rates recently have shown significant volatility...

..for example, 100% of the current liability interest rate was 7.25 percent
in January 1995; 110% of this rate which can be used for purposes of
calculating excess assets, was 8.0 percent; but the spot 30-year Treasury
rate (a proxy for, the PBGC termination rate) was about 6.5 percent by July
1995; and Treasury 30-year interest rates have fluctuated between 8.5 and

6.0 percent since 1991.

* 01800000010444

September 22, 1995 (REVISED)



when calculating a plan's termination liability are different from those used for ,
valuing the liabilities of an ongoing plan. An analysis of ten large pension plans
insured by PBGC showed that, if funded at the 125 percent level specified by the
Committee on Ways and Means, their funding would be only 87 percent on a
termination basis, [See Table 7]

TABLE 7: An Analysis of the 125% Current Liability Cushion

The PBGC analyzed the current liability and termination liability of ten large pension plans to determine
the value on a termination basis of the 125% current liability cushion.

The ten plans were chosen from among the plans that had been analyzed for the Retirement Protection
Act minimum funding reforms. They included both salaried and hourly plans and both flat benefit and
compensation-based benefit plans. The analysis of the plans was performed using the Winklevoss
Projection System, the same actuarial forecasting and valuation model utilized for RPA.

The plans’ census, actuarial assumptions, and benefit structures were loaded into the model. The model
was first run to reproduce the current liability reported by the plans on their Form 5500, the annual report
to the intemal Revenue Service and Department of Labor. The model was then run based upon the
same census and benefit structure but with the PBGC's assumptions (i.e., interest, mortality, and
expected retirement age) replacing the plans’ actuarial assumptions.

The resulting termination liability was substantially larger than current liability for all ten plans. If the plans’
assets were 125% of current liability, the individual termination liability funded ratios among the ten plans
would range from a little over 80% to a little over 100%. In the aggregate, the plans’ termination liability
funded ratio would be less than 90%.

For the largest plan in this group, funding at 125 percent of current liability would leave It only 83 percent
funded for termination liabilities. This 42 percent difference between the two funded levels is based upon
differences in the assumptions used to calculate them—that is, the interest rate (22% of the difference),

mortality (12%) and expected retirement assumptions (8%).

Beyond that, a plan that is overfunded today can quickly become
underfunded. Changes in interest rates and asset values can cut funding levels.
A one percent drop in interest rates could lower a plan's funding level by over 15
percent. A reduction in the interest rate of one percentage point together with an
asset reduction of ten percent would cause a plan funded at 125 percent to
become underfunded. [Table 8] The thirty-year Treasury rate varied between
6.0 percent and 8.5 percent between 1991 and 1995, [Table 9]

10

01800000010430



@ Additionally, many companies that took reversions from one plan now
have significant amounts of underfunding in other plans that they
sponsor. Underfunding for vested benefits are calculated in 1994
using a 5.65% interest rate and the GAM-83 mortality assumption.

@ The facts about reversions and underfunded pension plans..
What we did:

= Looked at companies that had ever appeared on a Top 50 list and
that had ever taken a reversion Ore- or post-SEPPA) from any of
their pension plans.

TM@ Looked at companies that were reviewed during 1994 (candidates for
the December 13, 1994 Top 50 list) that had ever taken a reversion
(pre- or post-SEPPA) from any of their pension plans.

What we found:

TM@ =©Twenty (20) companies that have appeared on at least one of the Top
50 lists we have issued took a reversion in the 1980’s from one (or
more) of the plans that they sponsored. Generally, these are not the
same plans as the ones that are now underfunded.

m= Thirty-six (36) other companies with large underfunding in 1994, had
taken a reversion in the 1980’s from one (or more) of the plans that

they sponsored. Generally, these are not the same plans as the ones
that are now underfunded. 2

01800000010436

September 22, 1995 (REVISED)



This is of particular concern in light of a 1992 study ‘by the General
Accounting Office, "Pension Plans: Hidden Liabilities Increase Claims Against
Government Insurance Programs." The study demonstrates that the financial
condition of plans tends to deteriorate significantly prior to their termination.
Companies in financial difficulty may well have an incentive to avail themselves
of a liberalized Section 420 to strip as many assets as possible out of their pension
plans. A company could transfer assets under the Section 420 proposal, suffer
continuing difficulties, and terminate its plan with a funding level that has fallen
well below the immediate post-transfer level.

Finally, even healthy companies who have responsibly funded their plans
might take pension assets to avoid becoming a takeover target or to satisfy
stockholder demands.

CONCLUSION

Section 420 is now a limited provision. It has facilitated the transfer of
relatively modest sums for the retirement security of pensioners. The
Committee's proposal to expand Section 420 and lower the excise tax would
encourage corporations to take tens of billions of dollars out of their pension
plans potentially leaving them with assets insufficient to protect plan participants
or the pension insurance system. Removal of substantial assets from the
retirement system would impede the progress promised by the Retirement
Protection Act toward improved pension funding and a stronger pension
insurance system.

2

01800000010432


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0180000010445



CONGRESSIONAL RESPONSE

Congress took action to stem the tide of pension reversions. Beginning in
1986, Congress imposed a series of excises taxes: a 10 percent excise tax on the
amount of the reversion in the Tax Reform Act of 1986; a 15 percent excise tax in
the Technical and Miscellaneous Revenue Act of 1988; and, in the Omnibus
Reconciliation Act of 1990, a 20 percent tax when the employer established a
successor pension plan with similar benefits, or a 50 percent tax if no successor
plan was established.

The number and size of reversions fell substantially. As the excise tax went
up, reversions went down. In 1992, only $28 million was taken from retirement
plans — as compared to the record $6.67 billion in 1985, (See Table 6 on page 9.)

RE E HEALTH TRANSFE 420

OBRA 1990 also addressed the emerging problem of companies terminating
retiree health benefits for their pension plan participants. Section 420 was added
to the Internal Revenue Code to allow companies to transfer certain pension
assets to a health benefit account within the pension trust to pay current retiree
health benefits. These transfers were permitted without terminating the pension
plan and without including the transferred funds in the income of the company or
subjecting them to the OBRA 1990 excise taxes, The availability of transfers was
circumscribed to protect plan participants and the pension system: transfers
stayed with the pension plan; they were permitted only to pay the retiree health
expenses of plan participants; they were limited to one year's retiree health
payouts; and, only assets in excess of 125 percent of the plan's "current liability,"
as measured each year, could be transferred.

From 1991 to 1994 there were about 90 transfers, amounting to $2 billion.
Section 420 was to expire in 1994, but was extended to 1999 as part of last year's
GATT legislation. [Table 5]

TABLE 5: Withdrawals from Ongoing Pensions for Retiree Health, 1991-1994

z

01800000010427



B® Pension Beneiit Guaranty Corporation
FIBGE 1200 k Street, N.W., Washington, D.C. 20005-4026
(202) 326-4010

. Office of the Executive Director
September 27, 1995

The Honorable Robert B. Reich
Secretary of the Department of Labor
Chairman, PBGC Board of Directors
Washington, D. C. 20210

Dear Mr. Secretary:

You asked that the Pension Benefit Guaranty Corporation provide a
report on the impact of a measure reported by the House Committee on
Ways and Means that would substantially broaden Section 420 of the
Internal Revenue Code. This measure would allow employers to remove
assets from pension plans and use them for any purpose.

In the 1980's, over $20 billion was removed from the retirement
system. A series of excise taxes culminating in 1990 effectively brought an
end to this activity. The Joint Committee on Taxation has estimated that
the proposed amendment to lower the excise tax and expand the availability
of pension monies will allow employers to take $30 to $40 billion from
retirement plans in the next five years.

Our analysis shows that removal of these funds would leave many
pension plans With insufficient resources to protect retirees and the.PBGC.
These pension plans would not be adequately funded to pay all benefits
should they fail. This risk could grow with changes in interest rates and
asset values, or if companies experience financial difficulty.

The report follows. We look forward to your review.

Sincerely,
Walon, Sake,

Martin Slate
Executive Director

01800000010419



Item 3

The following chart illustrates the sensitivity of funding ratios to interest

rates and asset values.

For example, a reduction in interest rate of 1 percentage point together
with an asset reduction of 10% reduces the funding ratio from 125% to

96% in a typical plan.

* 1800000010442

September 22, 1995 (REVISED)



New York Times 47.2 1.56 12/385 -
NL Industries 33.3 150.00 5/1/86
Pennzoil Co. 17.4 71.00 8/30/86
Phillips Petroleum Co. $1.2 400.00 9/1/86
Reliance Electric Co. 41.6 120.00 7/1/87
Revere Copper 29.3 2.95. 12/13/85

| Products

| Revion Consumer 43.5 38.86 1228/85
Products
Rexnord 25.4 3.42 10/31/84
Sherwin Williams 79 107.20 8/1/86
Smith (A.0.) , 62.5 5.00 12/31/86
Timken 84.4 119.30 1/1/84 |
TRW Inc. 11.5 1.75 4/30/83
Union Camp Corp. 110.3 3.49 713/85,

: 8/4/85
01800000010439

September 22, 1995 (REVISED)



Washington, DC 20005-4026

@ | FACTS | ==.

PENSION REVERSION: REMOVING PENSION DOLLARS

BACKGROUND: The Congress is considering a proposal that could take us back a decade to the days when
pension plans were raided and public confidence in the private pension system was undermined.

During the 1980’s, when pension assets grew with the stock market, companies began to tap into the
pension funds set aside tax-free for their employees’ retirement. More and more, companies terminated
overfunded pension plans, purchased annuities for their employees, and pocketed the excess assets. Companies
took away more than $20 billion from over 2,000 pension plans, covering nearly 2.5 million workers and retirees,
until Congress stepped in and put a stop to the practice.

In 1990, except for certain limited transfers to cover retiree medical expenses, Congress imposed a 50
percent excise tax on any reversions of pension funds, or 20 percent if the companies replaced a pension plan
with anew plan. Congress made it costly for companies to take assets from their pension plans and the raids on
pension plan assets ceased almost entirely.

Pension underfunding of billions of dollars is concentrated in certain sections of heavy industry (airlines,
automobiles, steel, and tire). The Retirement Protection Act of 1994 (enacted as part of GATT) is improving
pension funding and strengthening the federal pension insurance agency.

Under a proposed change being considered by the Congress as a means to increase tax revenues,
companies would be allowed to take money away from pension plans that they say are more than 125 percent
funded and use the funds freely for any purpose, without informing their workers. There would be no excise tax
if they remove the money before next July and, after that, a penalty of 6.5% would be charged. Some 22,000
pension plans, covering about 11 million workers and 2 million retirees, have assets in excess of 125 percent of
current liability.

The Congressional Joint Committee on Taxation has stated that the proposal could take $30 to $40 billion
away from pensions ~ more than ever before — once again threatening retirement security and the pension
insurance program.

Interest rate, mortality and retirement assumptions are quite different in calculating the funding level
of an on-going plan and valuing a terminated plan. An analysis of 10 large pension plans insured
by the PBGC showed that, if funded at the 125 percent level, the funding level would fall to an
average 87% on a termination basis. This could significantly increase pension underfunding and the
exposure of the pension insurance system.

Areduction in the interestrate of 1 percentage point together with an asset reduction of 10% teduces

the funding level from 125% to 96%.
je fending Feysl ssn.) deee 2 1800000010416

(more)

—
Prepared by: Communications and Publle Affaire Department - (202) 326-4040 - FAX (202) 326-4042 - TTY-TDD (202) 326-4179
Prepared by; Cis tact sheet will be provided to sensory Tnaised individuals upor fab an =a


Mr. Martin Slate
2
October 2, 1995

. As slated above, the Enron Plan currently has unfunded vested benefit obligations of $11,570,503, ‘This unfunded
liability did not come from the accrual of additional benefits by active employees, nor did it comme from poor asset
performance (on the contrary, assets have retumed an anaual rate of 12.28 percent since 1987). Rather, this
unfunded Liability has come from plan amendments providing additional benefits to existing retired employees.
These amendments include the addition of a postretirement surviving spouse death benefit, an ad hoc increase ia
pension benefits to reflect cost-of-living changes, and special early retirement benefits, The gradual funding
created by plan amendments is a fundamental aspect of the law. In fact, under IRS rules, the liabilities created by
plan amendments cannot be funded more rapidly than over ten years,

In total, these benefit increases have a current value of approximately $45,000,000 ‘That only $11,570,503 remains
unfunded is an indication of Enson’s sound funding policy,

We believe the representation of the financial status of Earon's Retirement Plan was inaccurate and misleading based
‘on: (1) The most recent data requested by the PBGC, although in the hands of the PBGC, was not utilized; and @®
‘The mischaracterization of the use of the $232,000,000 in assets taken from the Retirement Plan in 1986.
‘Consequently, weeequest that you delete Enron Corp.'s name from any future example of companies which have taken
pension plan reversion and have significant unfunded pension plan liabilities. We would be pleased to discuss this
with you further,

Sincerely,
=a Resources

¢ The Honorable Bill Archer

01800000010415

iD $90 S206 6F-T 8T/0



TABLE 5: Withdrawals from Ongoing Pensions for Retiree Health, 1991-1994
(Dollars in Millions)

Year Number of Companies Amount
1991 - 30 $ 978
1992 16 $ 222
1993 16 $ 679
1994 3 $ 167
Total 92 $ 2,046

COMMITTEE ON WAYS AND MEANS PROPOSAL

On September, 19, 1995, the House Committee on Ways and Means, during
its consideration of the FY 1996 Budget Reconciliation Act, approved an
amendment that would substantially broaden the availability of transfers under
Section 420. Amounts reverted would leave the pension plan and could be used
by the employer for any purpose. Amounts reverted would be includable in the
gross income of the employer, but no excise tax would apply in the case of
reversions occurring before July 1, 1996. After that, a 6.5 percent excise tax
would apply. There would be no limit on the number of reversions. The only
limit on the amount of the reversion would be a requirement that the transfer not
be greater than the lesser of assets over 125 percent of the plan's current
liabilities as determined on January 1, 1995, or on the most recent valuation
preceding the reversion. The proposal would apply to reversions through the
year 2000.

The Committee proposal could affect about 22,000 pension plans covering
about 11 million workers and 2 million retirees. The Congressional Joint
Committee on Taxation has estimated that companies would use this provision to
take $30 to $40 billion of assets out of their pension plans. Nearly twice as much
could be taken from pension plans im the next five years as was taken out since
1982, [See Table 6]

01800000010428



12A+ FRIDAY, SEPTEMBER 22, 1995 + USA TODAY
'

Today's debate: PENSION PROTECTION

Attempt to trim deficit
puts pensions in danger

Opening pension million underfunded. If either company
surpluses to corpo- 8° Out of business, taxpayers will pick up.

rate ralds hurts pensioners, tax- "indeed, taxpayers are now lable for $71 ||

{

payers and the economy. billion from such underfunded plans. ‘A |!
coal op a a ae ee

Is your company’s pension plan solid? If ould up ‘on. |
80, it may soon be ripe for picking — by with taxpayers, a lot of once comfortable ||
your boss, Pensi be at i
1

E.
a
y
|
1:4
5
2

i 20 suppos- ii ion plans.
edly overfunded plan in 1988, It’s now $86 Now, the nation has little savings left
million underfunded. Enron Corp. took Congress should try to reverse the process,
out $232 million in 1986 and is now $82 not exacerbate it.

« 01800000010418



DRAFT

September 22, 1995 (REVISED)

.

ANALYSIS OF PROPOSED AMENDMENT TO IRC SECTION 420

Item 1 Withdrawing assets from currently well funded pension plans can
lead to future underfunding,

A. Plans that have been subjected to reversions in the past have
become underfunded over time.

B. Companies that have taken reversions in the past are now
sponsors of significantly. underfunded pension plans.

Item 2 An example of a major plan whose 125 percent current liab’

level*translates to an 83 percent "termination liability" level because
of differences in the assumptions used for interest, mortality, and

‘expected retirement age.

Item 3 Funding levels are sensitive to interest rates and investment
performance.

Item 4 Interest rates are already below the interest rate the bill sets for
calculating the amount that can be withdrawn from the plan.

Item 5 In the past the pension system has lost a lot of money due to asset
reversions.

Item 6 Under this proposal a lot of — haye assets that could be reverted,
and these possibly revertible assets amount to a great deal of money.

Item 7 Overfinding has declined steadily.

Item 8 This proposal allows pension plans to be used as tax free corporate
checking accounts.

Item 9 Analysis of Section 420 Retiree Health Transfers.
Item 10 Top underfunded plans with at least 150% funding ratios.

Item 11 Sensitivity of reversions to the excise tax.

‘ 01800000010434



ms Pension Benefit Guaranty Corporation

FIBISE 1200 K Street, N.W., Washington, D.C.

CONFIDENTIAL
To: Advisory Committee Members
From: Andrea Schneider, Chief Negotiator and Director, ; fd gS

Corporate Finance and Negotiations Department “

B
Subject: Update of Developments in Major Bankruptcies ALf O gf
October 15, 2001 to December 5, 2001

jor New i

Enron, 26,000 participants. Enron, the largest U.S. energy trading company, filed for
bankruptcy in New York in December 2001. The company’s headquarters are in
Houston, TX; 4,000 headquarters employees have lost their jobs. The underfunding
number is being updated.

[OUTSIDE SCOPE]

01200000001206


Item 1

Reversions in the 1980s fell with the introduction of excise taxes on
reversions. :

A 10 percent excise tax on reversions was introduced in the Tax
Reform Act of 1986;

The tax was increased to 15 percent in the Pension Changes
Under Technical and Miscellaneous Revenue Act of 1988;

.. and was again increased to a minimum of 20 percent and a

maximum of 50 percent in the Omnibus Budget Reconciliation
Act ef 1990.

1800000010457

September 22. 1995 (REVISED)



INTRODUCTION

The Pension Benefit Guaranty Corporation was established by the
Employee Retirement Income Security Act of 1974 to protect worker benefits,
When a defined benefit pension plan fails, PBGC steps in to pay benefits.

PBGC protects the retirement incomes of nearly 33 million American
workers - one of every four working persons - in about 56,000 single-employer
pension plans.’ Since 1974, PBGC has assumed responsibility for paying the
pension benefits of 370,000 people in 2,000 failed plans. PBGC pays the pensions
of former workers in such well-known companies as Eastern Airlines, Pan
American Airways and Wheeling-Pittsburgh Steel Corporation. Last year, the
agency paid out over, $720 million in benefits.

About 80 percent of all pensioners receive full benefits from the PBGC.
Others may have their benefits substantially reduced because the PBGC does not
guarantee all benefits. ?

TRENDS IN FUNDING LEVELS OF INSURED PLANS

Overall the defined benefit system is healthy, with assets of $904 billion and
liabilities of $891 billion in FY 1994. Over 75 percent of the plans insured by the
PBGC are adequately funded.

inde: in:

Pension underfunding in the balance of the plans insured by the PBGC
became a major concern in the past decade. Underfunding among these plans
climbed from $16 billion in 1984 to $71 billion in 1993 [Table 1]. About 8 million
workers and retirees are in underfunded plans. As companies with large plans
failed in bankruptcy or liquidation, PBGC accumulated a deficit of $1.2 billion.
To address the risk to workers and the pension insurance program, the
Administration proposed, and the Congress passed the Retirement Protection Act
of 1994, The Act promises to strengthen pension funding and shore up the
pension insurance system over the next 15 years,

01800000010421



Removing Pension Assets:
Risks to Retirees and
the Federal Pension
Insurance Program

rm

a — 1 =]

U.S. GOVERNMENTAGENCY

Pension Benefit Guaranty Corporation
1200 K Street, N.W.
Washington, DC 20005-4026

September 1995

01800000010420



Item 8

Plan sponsors could use their pension funds as essentially tax free

savings accounts.

Employers could:
- contribute and deduct the maximum allowed
- nomena tax free
+ pay no income tax (and only a 6.5% excise tax) if withdrawn in

tax loss year.

7 01800000010453

Sentemher 22. 1905 (REVISED)



. ” “
of.

INCREMENTAL COMPONENTS OF PBGC TERMINATION LIABILITY
FUNDED RATIOS FOR A MAJOR PLAN

EXPECTED
a RETIREMENT
. 8%
CURRENT LIABILITY a
125%
126% F a) INTEREST 22%
|_—
»
MORTALITY 12%
400% F-
en
SS
“otet
r Ree
ON
TERMINATION LIABILITY
75% 83%
50% a
26% .
i
0% :

01800000010441



zc66L «= L6G = OGGL )= GGL) B6L LOGE 2= 86 «= SBGL SSG )=EBGL «= Z86} SF B6L (8B

01800000010458

%0 o$
% 01
000'z$
%0Z
%0E 000'rS
%0v ;
000'9$
%0S
L29'9$ . 4
%09 000'8$
|, BIWY XVL SUVTIOG JO SNOMMIW

Z66}- 086} SHOW HO NOITIIW L$ JO SNOISHSATY
XVL NOISHSASY AHL AO SLOASS3S



Item 2
An Analysis of the 125% Current Liability Ctshion

The PBGC analyzed the current liability and termination liability of
ten large pension plans to determine the value on a termination basis of the
125% current liability cushion.

The ten plans were chosen from among the plans that had been
analyzed for the Retirement Protection Act ("RPA") minimum funding
reforms. .They included both salaried and hourly plans and both flat
benefit and compensation-based benefit plans. The analysis of the plans
was performed using the Winklevoss Projection System, the same actuarial
forecasting and valuation model utilized for RPA.

The plans’ census, actuarial assumptions, and benefit structures were
loaded into the model. The model was first run to reproduce the current
liability reported by the plans on their Form 5500, the annual report to the
IRS and DOL. The model was then run based upon the same census and
benefit structure but with the PBGC’s assumptions (i.e., interest, mortality,
and expected retirement age) replacing the plans’ actuarial assumptions.

The resulting termination liability was substantially larger than
current liability for all ten plans. If the plans’ assets were 125% of current
liability, the individual termination liability funded ratios among the ten
plans would range from a little over 80% to a little over 100%. In the
aggregate, the plans’ termination liability funded ratio would be less than
90%.

The accompanying graph shows the result for one large salary plan.
A transfer of assets from this plan funded at 125 percent of current liability
leaves the plan only 83 percent funded for termination liabilities. This
difference between the two funded levels is based upon differences in
assumptions used to calculate them--that is, the interest rate (22% of the
difference), mortality (12%) and expected retirement assumptions (8%).
These assumptions about the future are quite different between funding an
on-going plan (i.e., the current liability assumptions) and valuing a
terminated plan.

01800000010440

September 22, 1995 (REVISED)



Twenty companies that took money from overfunded plans subsequently appeared on one of
PBGC’s lists of 50 companies with the largest underfunded plans and 36 that missed the list’s
threshold last year also had taken reversions in the 1980's.

Enron Corporation took $232 million from a pension plan in 1986 which is now underfunded by
$82.5 million.

@ People can get hurt, 5
Pacific Lumber Company was taken over, in a leveraged buyout, by the Maxxam Group. Pacific
Lumber [wasa target for the takeover because it] had a well-funded pension plan. After the takeover,
Maxxam terminatéd the plan and took over $50 million, which helped to finance the costs of the
leveraged buyout. When the plan terminated, Maxxam purchased annuities from Executive Life
Insurance Company of California, which subsequently failed.

oc Seana ; ”

‘When a foreign company took over the A&P markets in 1982, it immediately terminated A&P’s
pension plan and stripped out over $270 million in assets, enough to repay it for the entire cost of
the acquisition. The foreign owners then down-sized the company and ended the long-standing
A&P practice of giving benefit increases to retirees to protect them from inflation. This opened the

way for corporate raiders to use reversions to finance takeovers. In two-thirds of the largest buyout
transactions in the 1980’s, pension funds were used.

CONCLUSION: The proposal allows pension plans to be used as tax-free corporate checking accounts. The
proposal would reduce the national savings rate, at a time when there is almost universal agreement that it is
already too low. Taking money away from pension plans would reverse the progress made to shore up pensions
and the federal insurance program. If companies remove pension assets and are later unable to fund promised
benefits, the government's Pension Benefit Guaranty Corporation would have to pay them. Taxpayers have
already paid a hefty price to bail out the savings and loan institutions.

01800000010417



TABLE 8: Funding Ratio of Plan Starting at 125% Funded

Change in Interest Rate
None Down 1% Down 2%
No Change in Assets 125% 107% 92%
Assets Down 10% 113% 96% 82%
Assets Down 20% 100% 86% 73%
Assets Down 30% 88% 75% 64%
Adjustments for Liabilities: Retiree liability 30% of total times 1.07 =
Active liability 70% of total times 1.21 =
* Assumes assets are 100% in stocks.

0.321
0.847
1.168

TABLE 9: 30 Year Trameury Yields

ll

01800000010431



RANK CASE

51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100

104674
113378
86525
139492
87410
93916
86977
86042
126480
82637
97614
98298
118338
109368
123140
86540
98486
107789
85754
93333
86133
86973
143631
86431
95392
94594
119409
101373
89307
91619
97364
87350
118207
128607
84661
102757
143666
91673
125192
94592
80519
86046
125837
85916
113389
131446
105567
84657
97488
143480

TOP 100 POST-SEPPA REVERSIONS

SPONSOR
SCWC CORP.
AMF
HUGHES TOOL - HOURLY
WICKS
SOUTHERN UNION
ALUMAX, INC.
FOSTER WHEELER
COMMERCIAL CREDIT
NORTH AMERICA COAL
EXXON COAL
UNITED BANKS OF CO.
FOOTE MINERAL
JEWISH FEDERATION OF
BARRY WRIGHT CORP.
MOHASCO- SALARIED
HUGHES TOOL - UNIFIE
CECOCORP ~
KENTUCKY FRIED CHICK
ALLIED MAINTENANCE
FEDERAL PACIFIC ELEC
BLUE CROSS - MINN.
REED TOOL CO
CLUETT PEABODY
OZARK AIR - PILOTS
GROUP HEALTH
INTERLAKE CORP.
JIM WALTER
ARO CORP.
REEVES BROTHERS
U.S. SUGAR
LUTHERON GEN. HEALTH
STACKPOLE CORP
LUCKY STORES
COLEMAN CO. HOURLY
BELOIT
MET. MUSEUM OF ART
MOORE COMPANY
MAGMA COPPER
METHODIST HOS. OF IN
INTERLAKE CO's.
EXXON
CROSSLAND SAVINGS

-WICKES

NACCO INDUSTRIES
MONARCH CAPITAL
KENDALL CO.

T ROWE PRICE
C.BREWER&CO, |
ONEIDA, LTD.
PEOPLES ORUG STORES

ITEM 5 -

DOPT REVERSION ASSETS BENEFITS

08-Feb-87
31-Aug-88
31-Aug-86
31-Oct-90
01-Oct-86
30-Apr-87
31-Jan-87
15-Dec-86
31-Dec-89
12-Aug-86
01-Sep-87
31-Aug-87
31-Dec-88
31-Jul-88
11-Jul-89
31-Aug-86
13-Nov-87
30-Jun-88
6
01-Jul-87
23-Dec-86
30-Nov-86
31-Dec-90
17-Nov-86
01-Jul-87
31-Dec-86
31-Dec-88
31-Oct-87
30-Nov-86
31-Jan-87
01-Sep-87
31-Dec-86
31-Dec-88
30-Jun-89
30-Jun-86
30-Jun-87
31-Dec-90
31-Dec-86
01-Sep-89
31-Dec-86
31-Mar-86
14-Nov-86
31-Jul-89
30-Nov-86
30-Dec-88
09-May-90
31-Jul-87
31-Aug-86
14-Sep-87
31-Dec-90

$26.50
$26.10
$26.00
$26.00
$26.00
$25.80
$25.20
$25.00
$24.00
$24.00
$23.50
$23.10
$22.90
$22.50
$22.10
$22.10
$22.00
$21.20
$21.20
$20.90
$20.70
$20.60
$20.40
$20.00
$20.00
$19.80
$19.70
$19.60

$19.40

$19.30
$18.80
$18.70
$18.00
$18.00
$18.00
$17.80
$17.70
$17.60
$17.40
$17.20
$17.00
$16.40
$16.40
$16.20
$16.20
$16.10
$15.70
$15.40
$15.40
$15.20

$95.00
$55.00
$42.60
$75.00
$54.00
$93.00
$70.10
$81.00
$44.20
$47.00
$27.50
$38.60
$50.40
$47.40
$86.10
$29.90
$74.00
$25.30
$41.00
$38.00
$35.70
$39.60
$61.10
$126.00
$34.60
$31.60
$91.50
$34.30
$36.10
$51.20
$26.20
$60.60
$126.00
$42.00
$53.00
$44.80
$45.60
$39.50
$126.10
$21.10
$21.00
$40.60
$45.90
$19.20
$87.30
$95.20
$37.70
$21.00
$80.50
$70.10

$68.50
$28.90
$16.60
$49.00
$28.00
$67.20
$44.90
$56.00
$20.20
$23.00

$4.00
$15.50
$27.50
$24.90

01800000010448



Item 6

~ Approximately 40% of pension plans (with about 43% of total

liabilities) have assets in excess of 125 percent of current liabilities.

The amount of excess assets that could be withdrawn depends on the
current liability interest rate used by the plan. 100% of the current
liability rate on January 1995 is 7.25%. But for purposes of
withdrawals, plans can use rates within 90 to 110 percent of this rate.
Use of the highest permissible rate yields the highest amount of excess
assets obtainable.

Estimates of Excess Assets above 125% Funding
Data source: * 1993 5500 tapes
Mortality: Plan assumption
Maximum obtainable excess:
Interest rate: 8.00% (110% of the current liability rate
for January 1995)
Estimate $104.8 billion
Alternative estimate: ‘ i
Interest rate: 7.25% (100% of the current liability rate
. for January 1995)
Estimate $75.6 billion

NOTE: These are estimates of excess assets as of January 1995, Actual excess assets available
may be different because of changes in asset values, pension accruals, benefit changes, and other
changes that may have occurred between January 1993 and January 1995. A review of stock
and bond returns in Ibbotson Associates 1995 Yearbook shows that asset returns during 1993
and 1994 were no more than 5% per annum on average; thus, no adjustment for extraordinary
asset gains is warranted. 7

“ 01800000010449

September 22, 1995 (REVISED)



‘

‘ Companies Appearing on at Least One Top 50 List That Took a Reversion
From One or More of Their Plans (Dollars in Millions) :

re - the reversion was en by

1994 - Vested Amount of Date of
Company Name | Underfunding Reversion(s) Reversion(s)
Anchor Glass 181.2. 4.75 7131/85
Container Corp.
ASI Holding 86.0 119.9 6/30/88
Bethlehem Steel 1,942.9 1.40 12/31/82
Budd Co. 189.6 1.30 8/6/85
Cooper 115.9 20.92 7118/83,
Industries 6/30/88
Goodyear Tire 388.4 400.00 6/30/88
& Rubber,
Harnischfeger 27.5 38.01 8/1/84
Lone Star 55.1 54.27 11/30/85
Technologies
LTV Corp. 2,189.9 2.090 5/1/85
Maxxam 3.4 50.00 3/31/86
New Valley 435.7 16.20 11/15/88
Corp. (Western -
Union)
Occidental 95.9 ‘181.90 6/1/83,
Petroleum ex . 3/15/88
Reynolds Metals 282.5 126.00 8/22/83 |
RJR Nabisco 23.2 2.00 6/30/88
Tenneco N/A 1.00 8/15/87
Continental 151.9 2.14 1/31/82

| Airlines
UAL Corp. 1,034.3 962.00 715/85 |
Uniroyal* 531.6 4.00 9/10/87
United Brands N/A 15.20 5/1/85
Varity Corp. 57.7 29.00 _ 12/31/86
c e

nderfunding relates to Uniroy:
its’ predecessor - Uniroyal Inc.

01800000010437



TooR

.

EY ae

Va a Pension Benefit Guaranty Corporation 2,

Es=—r=é 1200 K Street, N.W., Washington; D.C. 20005-4026 "
(202) 326-4080 Fax Number (202) 326-4085

Corporate Policy and Research Departme

i

FACSIMILE COVER SHEET
pars; JOT re
TO: fabri Kx Gar Baba
FAXNO: _° G22- 0256 —-

PHONE NUMBER: LeA%- AIS GF

FROM: Steerf swe
PHONE: (202) 326-4080 EXT: _9 Ue 3
_ NUMBER OF PAGES: Ss) (includes cover she

REMARKS/NOTES:

. hs. Ciscusse B

The following material Is intended only for the use of the individual to whom it is addressed, If you have

received this fax in error, please nolifyhe sender by telephone at the number given above and destroy the
material, .

01800000010413

File Name: IAWPSINCPRDWDMENEAX.
@idd 298d sgor os 20z XVa Ov: PT GaM S6/8T/0T



{TEM 10
TOP"100 PLANS BY EXCESS ASSETS ‘

OVER 150% FUNDED
EXCESS
RANK — SPONSOR EINPIN RATIO ASSETS LIABILITIES EXCESS OVER 125%
60 COASTAL CORPORATION 741734212002 168% $708 $422 $286 $184
61 ROHMAND HAAS CO 231028370002 178% $641 $360 $281 $191
62 BANK OF NEW YORK 132614959002 174% $643 $369 $275 $182
63 UPJOHN COMPANY 381123360001 163% $700 $430 $270 $163
64 WHIRLPOOL CORP 381490038002 190% $566 $298 $268 $194
65 BANKERS TRUST NEW YORK 136180473001 202% $522 $259 $263 $198
66 AMERICAN GENERAL CORP 740483432003 219% $480 $219 $261 $206
67 KRAFT GENERAL FOODS INC 130762680003 172% $619 $359 $260 $170
68 HEARST CORPORATION 130433120048 211% $478 $226 $252 $196
69 TEXTRON INC 50315468006 234% $436 $186 $250 $203
70 CONSOLIDATED NATURAL GAS 130596475001 169% $600 $355 $248 $157
71 TELEDYNE INC 952282626001 281% $379 $135 $244 $211
72 DELMARVA POWER & LIGHT: 510084283001 200% $477 $238 $239 $179
73 HARSCOCORPORATION 231483991219 483% $291 $60 $231 - $216
74 CBS INC 130590730001 159% $615 $387 $228 $1341
75 NORTHWESTERN MUTUAL LIFE 390509570002 258% $357 $138 $218 $184
76 HOUSEHOLD INTERNATIONAL = 363121988001 169% $533 $316 $218 $139
77 AMERICAN NATL RED CROSS 530196605001 170% $525 $308 $216 $139
78 LITTONINDUSTRIES INC .. 951775499004 313% $316 $104 $215 $190
79 GENERAL DYNAMICS 131673581002 381% $291 $77 $215 $196
80 BOY SCOUTS OF AMERICA 221576300001 165% $537 $326 $211 $130
81 GTE NORTH INC 9351703045002 210% $401 $191 $210 $162
82 WESTERN & SOUTHERN LIFE 310487145004 173% $495 $287 $208 $136
83 SCHERING CORPORATION 221261880001 161% $543 $337 $207 $123
84 FARMERS GROUP INC 950725935001 161% $545 $338 $206 $122
85 GTE HAWAIIAN TELEPHONE 990049500001 189% $436 $230 $205 $148
86 CHASE MANHATTAN BANK 132633612001 158% $558 $354 $204 $115
87 CONTEL CORP 430768559001 155% $566 $365 $202 $110
88 SAUDI ARABIAN OIL 980105730001 167% ~ $501 $300 $201 $126
89 BROOKLYN UNION GAS 110584613001 181% $446 $246 $200 $138
90 NATIONSBANK CORP 560906609001 165% $504 $306 $199 $122
91 BRIGGS & STRATTON 390182330001 152% $577 $379 $198 $103
92 ROHMAND HAAS CO 231028370004 256% $317 $124 $193 $162
93 OSCAR MAYER FOODS 222354725003 251% . $309 $123 $186 $155
94 ALCANCORP 341225551001 169% $454 $268 $186 $118
95 BANK OF NEW YORK 132614959005 174% , $433 $249 | $184 $122
96 GTE NORTHWEST 910466810001 212% $348 $164- $184 $143
97 CAROLINA POWER & LIGHT 560165465001 157% $489 $312 $177 $99
98 CARPENTER TECHNOLOGY 230458500010 156% $476 $305 $171 $94
99 ROCHESTERGAS&ELECTRIC 160612110003 159% $450 $283 $167 $97
100 MERCANTILE STORES 510032941002 240% $286 $119 $167 $137

NOTE: ALL DATA IS PRESENTED AS REPORTED ON THE 1993 FORM 5500 TAPES
LIABILITIES HAVE BEEN ADJUSTED TO 7.25%

01800000010456



Item 9

Analysis of Sec. 420 Retiree Health Transfers

Under the provisions Section 420 of the Internal Revenue Code, an
employer can transfer assets from a defined benefit pension plan to a
retiree health benefits account which is part of such plan. There are
several limitations placed on such transfers to protect the participants and
the pension system.

+

Transfers are for a limited purpose - to pay retiree health
expenses for participants in the pension plan.

The assets are transferred to the retiree health benefits account,
but stay in the pension plan until actually paid out to provide
health benefits for plan participants.

Transfers are limited to one year’s retiree health payouts (i.e.
an amount not to exceed what is reasonably estimated to be
paid out for retiree health benefits during the taxable year of
the transfer).

Only assets in excess of 125 percent of the plan’s "current
liability" as measured on an annual basis can be transferred.

These limitations prevent a sudden, massive removal of assets from
pension plans. They ensure that these pension assets continue to be used
for their intended purpose, the retirement security of plan participants.
Under Section 420 there have been relatively ral transfers as Teported

below:

Year

1991

1992
1993
1994

# of Companies Amount Transferred (in millions)
30 $ 978
16 $ 222
15 $ 679
31 $ 167

014800000010454

September 22, 1995 (REVISED)



As pension assets grew with the rising stock market in the 1980's,
corporations sought ways to revert "excess" pension funds. In 1982, when the
Tengelmann Group, a German company, took over the A&P grocery chain, it
immediately terminated A&P's pension plan, and stripped out $270 million in
assets. In 1983, the Government issued guidelines facilitating reversions. *

From 1982 to 1990, over $20 billion was taken from 2,000 retirement plans
covering 2.5 million workers and retirees. From 1982 to 1985 the size and
number of reversions grew rapidly: $404 million reverted in 1982 - $6.7 billion
reverted in 1985. The biggest reversion came in 1986 when Exxon took $1.6
billion out of its pensions. [Table 3]

TABLE 3: GROWTH IN REVERSIONS
REVERSIONS OF $1 MILLION OR MORE 1962-1985
MILLIONS OF DOLLARS

$2,000

01800000010424



.

TABLE 4: Companies Appearing on at Least One Top 50 List That Took a Reversion
From One or More of Their Plans (Dollars in Millions)

1994 - Vested Amount of
Compa le Underfunding Reversion(s) Date of Reversion(s)

Anchor Glass Container Corp. 181.2 4.75 7/31/85
ASI Holding 86.0 119.9 6/30/88
Bethlehem Steel 1,942.9 1.40 12/31/82
Budd Co. 189.6 1.30 8/6/85
Cooper Industries 115.9 20.92 7/18/83, 6/30/88
Goodyear Tire & Rubber 388.4 400,00 6/30/88
Hamischfeger 27.5 38.01 8/1/84
Lone Star Technologies 55.1 54.27 11/30/85
LTV Corp. 2,189.9 2.090 5/1/85
Maxxam “ 3.4 50.00 3/31/86
New Valley (Western Union) 435.7 16.20 11/15/88
Occidental Petroleum 95.9 181.90 6/1/83, 3/15/88
Reynolds Metals 282.5 126.00 8/22/83
RJR Nabisco 23.2 2.00 6/30/88
Tenneco N/A 1,00 8/15/87
Continental Airlines 151.9 _ 2.14 1/31/82
UAL Corp. 1,034.3 378.15 7/5185
Uniroyal* 531.6 4.00 9/10/87
United Brands N/A 15.20 5/1/85
Varity Corp. §7.7 29.00 12/31/86

* Underfunding relates to Uniroyal Goodrich Tire - the reversion was taken by its’ predecessor - Uniroyal Inc.

In some cases the same plans from which a reversion was taken are now
significantly underfunded. The Enron Corporation, a Houston oil and gas
company, removed $232 million from its pension plan in 1986. The plan was
most recently reported to be underfunded by $83 million. ASI Holding
Corporation, an air conditioning, plumbing and automotive products company
employing 37,800 workers that is headquartered in New Jersey, took $120 million
from a plan now underfunded by $86 million.

01800000010426



Mr. Philip J. Bazelides
Page 2

information on the unfunded termination liability of the plan. The PBGC has yet to
analyze and release information with respect to 1994 funding levels for the plans of all
companies.

Finally, you note that Enron is basing its plan funding decisions on ongoing plan
assumptions that show the plan currently has unfunded vested benefit obligations of only
$11.6 million. This amount significantly understates the Enron plan's benefit liabilities
were It to terminate for any reason. This is the very issue — the difference between the
“current liability" and the "termination ability" of pension plans — that the PBGC
focussed on in its report. For this reason, we do not use ongoing plan assumptions to
estimate the risk plan underfunding poses to workers and the federal pension insurance
system. ”

I trust this letter explains our views on this matter,

Sincerely,
WM are/
William Posner
Deputy Executive Director
and Chief Operating Officer

01800000010412

S008 @aidd O98d Seov ozs oz Xvi LbthT Gam s6/ST/OT



RANK CASE

WONAMDEWNH=

82642
108754
83596
112693
86549
86007
81065
122950
81256
94178
113644
79767
84331
108389
106031
101773
85812
115604
107005
82626
99363
90854
122123
80879
118485
94820
98997
101456
97756
138691
108749
141897
131387
107787
99297
84641
93665
94871
115337
113470
94589
86588
78803
86008
113321
94867
105340
89824
93217
112429

TOP 100 POST-SEPPA REVERSIONS

SPONSOR
EXXON CORP.
GOODYEAR TIRE
PHILLIPS PETROLEUM
MERRILL LYNCH
ENRON
ASHLAND OIL INC
N LINDUSTIRES
AMER. NAT. RED CROSS
DRESSER INDUSTRIES
RELIANCE ELECTRIC
AMERICAN STANDARD
TRANSCO
SHERWIN - WILLIAMS S
PS GROUP

OCCIDENJAL PETROLEUM

MORRISON KNUDSEN
PENNZOIL

PERALTA HOSPITAL
CABOT CORP

BAKER INTERNATIONAL
CBIINDUSTRIES
AMAX-SALARIED
TRIANGLE PUBLICATION
PACIFIC LUMBER

ST. VINCENT MEDICAL
ASAR CO.

EMERY AIR FREIGHT
JOY TECHNOLOGIES
41ST NAT.BANCORP OF T
DESOTO SALARIED
STANADYNE-SALARIED
JOHNSON CONTROLS
BABCOCK & WILCOX
AMINOIL

GUY F. ATKINSON CO.
BECOR WESTERN
AMCA INT'L

AMSTAR

FIGGIE

FISCHBACH

INTERLAKE CO's

BLUE CROSS - CA.
GATES LEARJET
ASHLAND OIL INC. SAL
NEW ORLEANS PUB.SERV
KELSEY-HAYES
PRESBYTERIAN HOSPITA
PIONEER

DOUBLE DAY & CO"
PRIMARK

ITEM 5 -

DOPT REVERSION ASSETS BENEFITS

12-Aug-86 $1,600.00

30-Jun-88
01-Sep-86
13-Dec-88
30-Jun-86
02-Jan-87
01-May-86

31-May-89 -

30-Apr-86

01-Jul-87
30-Jun-88
01-Mar-86
01-Aug-86
30-Jun-88
15-Mar-88
12-Dec-87
30-Aug-86
31-Dec-88
15-May-88
09-Jun-86
31-Dec-87
30-Apr-87
15-Feb-89
31-Mar-86
31-Mar-89
30-Jun-87
31-Oct-87
25-Sep-87
31-May-87
31-Dec-90

02-Jul-88
01-Dec-90
31-Dec-89
30-Jun-88
01-Dec-87
01-Sep-86
30-Jun-87
30-Jun-87
21-Nov-88
30-Nov-88
31-Dec-86
10-Dec-86
31-Jan-86
02-Jan-87
01-Oct-88
31-Dec-86
31-Dec-87
10-Dec-86
31-Dec-86
01-Sep-88

’

$400.00
$400.00
$242.50
$232.20
$165.00
$150.00
$128.00
$124.00
$120.00
$119.90
$115.20
$107.20
$105.60
$95.50
$81.80
$70.80
$66.60
$60.00
$56.30
$55.00
$54.00
$50.20
$50.00
$49.20
$49.00
$48.90
$47.00
$43.80
$43.00
$40.90
$40.80
$40.70
$40.50
$40.20
$40.10
$39.40
$39.00
$37.30
$35.00
$32.20
$31.50
$30.00
$30.00
$29.60
$29.00
$29.00
$28.60
$28.00
$27.00

$5,200.00 $3,600.00

$929.60
$1,090.00
$1,012.40
$254.10
$386.00
$300.00
$386.00
$580.00
$280.00
$625.00
$187.00
$309.30
$110.00
$382.00
$127.30
$288.60
$69.00
$61.20
$173.30
$91.00
$135.00
$115.20
$80.00
$85.70
$189.00
$58.80
$107.00
$65.40
$79.80
$101.90
$107.00
$153.70
$77.10
$68.80
$114.50
$115.70
$84.00
$121.30
$90.00
$48.70
$95.20
$55.00
$74.00
$122.70
$108.80
$31.20
$69.30
$92.00
$29.00

$529.60
$690.00
$769.90
$21.90
$221.00
$150.00
$258.00
$456.00
$160.00
$505.10
$71.80
$202.10
$4.40
$286.50
$45.50
$217.80
$2.40
$1.20
$117.00
$36.00
$81.00
$65.00
$30.00
$36.50
$140.00
$9.90
$60.00
$21.60
$36.80
$61.00
$66.20
$113.00
$36.60
$28.60
$74.40
$76.30
$45.00
$84.00
$55.00.
$16.50
$63.70
$25.00
$44.00
$93.10
$79.80
$2.20
$40.70
$64.00
$2.00

01800000010447



Item 1

@ Withdrawal of excess assets can lead to future underfunding...

mTM After taking a reversion of excess plan assets, many firms continue
providing the same benefits to plan participants under follow on
plans. Over time it is possible for the follow on plans to become
significantly underfunded. Some examples of firms whose follow on
plans were underfunded at the vested level in 1994 (using a 5.65%

interest rate and GAM-83 mortality assumption) are:

Dollars in Millions _
. Plan Vested Amount of Date of
Company Name | Underfunding | Reversion Reversion
ASI Holding 86.0 119.9 6/30/88
Corp.
Enron 82.5 232.2 6/30/86
Exxon Corp. 528.9 17.0 3/31/86
September 22, 1995 (REVISED)

01800000010435



oy Pension Benefit Guaranty Corporation
1200 K Street, N.W., Washington, D.C. 20005-4026
" (202) 326-4010

B

Office of the Executive Director
October 11, 1995

Mr, Philip J, Bazelides
Vice President .

Corporate Human Resources
P. O. Box 1188

Houston, Texas 77251-1188

Dear Mr. Bazeljides:

Recently the Pension Benefit Guaranty Corporation was called upon to provide
the PBGC Board of Directors and Members of Congress information on the impact of
an.amendment proposed by the House Committee on Ways and Means to broaden
Section 420 of the Internal Revenue Code. The amendment would make it significantly
easier for companies to take money out of defined benefit pension plans.

In response, the PBGC reviewed and reported on past instances of reversions
involving pension plans that are now underfunded. The PBGC cited the Enron
Corporation as a company that removed $232 million in assets from its pension plan in
1986 and noted that the plan was most recently reported as being underfunded by $83
million.

In your letter of October 2, you state that this does not accurately reflect Enron's
actions concerning its retirement plan. While your letter raises several interesting
points and provides considerable additional detail, the facts remain that: In 1986 the
Enron Corporation terminated its previous pension plan, and took a reversion of $232
million; and, in the most recent complete reporting of its financial condition, the Enron
Corporation pension plan was underfunded by $83 million.

Regarding the 1986 reversion, you note in your letter that ". . . the assets taken
from the plan were rolled over into an Employee Stock Ownership Plan." This ESOP
was set up in combination with a successor defined benefit plan in a "floor offset"
arrangement. While the increase to date in the value of Enron stock held by the ESOP
is good news for your employees and the federal pension insurance system, the
establishment of a floor offset arrangement puts Enron employees and the PBGC at
significant risk should the pension plan ever be terminated in a distress situation.
Congress addressed the risks created by floor offset arrangements in the Omnibus
Budget Reconciliation Act of 1987 by prohibiting the establishment of these floor offset
arrangements for the future,

Your letter agrees with the PBGC's report that, as of December 31, 1993, the
plan was underfunded by $82.5 million. This is the most recent publicly available
01800000010411

z00B : @SdD DEE Sgoy 9Ze Ot XVd OF'PT GH 96/9T/0T



9/21/95 - 1:28 p.m...

.

PENSION TALKING POINTS

Background

In the 1980’s, Republican Administration policy allowed employers to
remove excess assets from pension plans. Over $20 billion was removed. A 1990
law imposed a stiff excise tax, putting an end to these raids.

Meanwhile, in certain sections of heavy industry (air, auto steel, tire),
underfunding of pensions grew to $71 billion. The Administration’s Retirement
Protection Act (enacted as part of GATT) is aimed at eliminating pension
underfunding. ,° a

The proposed change would allow companies to take money away from
pension plans freely, for any purpose, without telling their workers.

it at Have Work
+ Once again it is open season on pensions.

+ This raid threatens unprecedented damage to pensions. Companies will
once more be able to take the money and run leaving retirees and
taxpayers holding the bag (or at risk).

4 The provision could take $30 to $40 billion’ away from pensions and the
retirement security of million’’of'workers.

4% This practice was allowed in the 1980’s when $20 billion left pensions. Now
companies would be able to take another $30 to $40 billion away from
pensions. That would reverse the progress that we have made to shore up
pensions and keep retirement security.

4 The pension system is already underfunded by $71 billion. This could add
billions more to pension underfunding.

1 This is the Joint Tax Committee figure. The Treasury Department thinks it
may be high, so we attribute the number to the Tax Committee.

01800000010459



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01800000010443



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01800000010452



‘ Companies Reviewed for the 12/13/94 Top 50 List That Took a Reversion .

From One or More of Their Plans
Dollars in Millions
[- ’ Vested Amount of Date of
Company Name Underfunding | Reversion(s) | Reversion(s)

Acme Cleveland 25.8 12.00 10/1/86
American Express Co. 5.5 90.00 4/30/85

| Ashland Oil 3.1 195.00 1/2/87
Del Monte Foods 92.3 1.00 6/30/88
Dresser Industries 77.7 194.21 6/10/85,

12/11/90
Enron 82.5 232.00 6/30/86
Ensearch ’ 94.9 35.39 13/3/85
Equitables Cos. Inc. 260.0 1.12 2/10/84
Exxon Corp. 528.9 1,641.00 3/31/86,
8/12/86

Federal Paperboard 476 18.33 213/84
FMC Corp. 2.2 726.00 11/30/85
General Refractories 4.0 6.19 10/31/83
Georgia-Pacific Corp. 54.5 1.31 12/30/83
Great Atlantic & 91 272.55 5/31/84
Pacific Tea Co. ‘ .
Interlake Corp. 4.0 90.80 12/31/86 !
IIT Corp, 200.4 4.55 12/3/84
Johnson Controls 25.7 41,00 12/1/90
Lamson & Sessions 26.8 $.56 9/30/84
Levi Strauss Assoc. 42.7 53.20 123u85 . |
Libbey Owens Ford 96.8 52.02 10/7/85 .
Lone Star Industries 55.2 42.00 5/3184 |
McDermott 26.1 40.70 12/31/89
International
National Gypsum 275 20.40 2/4/88

01800000010438

Sentomher 27 100¢ (DEVICENY


TABLE 1: AGGREGATE UNDERFUNDING 1984-1993

DOLLARS IN BILLIONS
$00

$40 [-

$20

1984 1965 1986 1987 1988 1989 1990 1991 1992 1993

SOURCE: 1978-1987 FORM 8500 FILINGS FOR SINGLE-EMPLOYER PLANS WITH 100 OR MORE PARTICIPANTS
1088-1003 COMPUSTAT PC-PLUS CORPORATE DATABASE

ALL DATA AS OF END OF YEAR, CONSTANT 1803 DOLLARS

LIABILITIES USED TO CALCULATE UNDERFUNDING ADJUSTED TO POGC IMMEDIATE RATE

QOverfunding -

Overfunding has fallen in recent years, in good part because of the decline
in interest rates. From a high of $228 billion in 1989, overfunding was reported
in 1993 at $84 billion [Table 2]. Projections show that recent interest rate
increases could result in overfunding rising to as much as $200 billion in 1994,
Assets in excess of the 125 percent current liability could make up half of this
amount.

Changing interest rates can quickly leave pension plans with lower levels of
assets to absorb the impact of corporate financial difficulties. Allowing
corporations to remove assets from pensions must be viewed in this context.
Proposals to allow companies to remove up to $40 billion over the next five years
from plans with assets in excess of 125 percent of current liability would deplete

01800000010422



4 The Savings and Loan situation taught us that we should keep government .
insurance risks under control. This change will only increase risk.

+ At a time when we need to increase national savings, this provision would
take money away from retirement savings. It seeks revenue not retirement
security. .

w "

Since 1989, the PBGC has issued a list of the 50 with the largest pension
underfunding. Many companies are on the list for more than one year. The
PBGC has identified twenty companies on the list at least one year that took large
reversions from an overfunded pension plan and let underfunding in another plan
persist.

An example is the Goodyear Tire and Rubber Company which took a $400
million reversion ix 1988 from it plan for salaried workers. Its pension plan for
rubber workers is now underfunded by $388 million. Goodyear could have used
these funds to improve the pensions of worker plans.

he les. .

¢ ENRON: TODAY'S OVERFUNDED PENSION PLAN CAN BECOME
TOMORROW’S UNDERFUNDED PENSION PLAN:

The Enron Corporation, a Houston oil and gas company, removed $232 million
from its pension plan in 1986. That plan is now underfunded by $83 million.

+ PB LUMB: ANY: P) .

Bill Hunsaker worked for the Pacific Lumber Company for 47 years. Pacific
Lumber was taken over in a leveraged buyout by the Maxxam group. Pacific
Lumber was a target for the takeover because it had a well-funded pension plan.
After the takeover, Maxxam terminated the pension plan Mr. Hunsaker was in,
taking over $50 million to pay financing costs of the leveraged buyout. When the
plan terminated, Maxxam purchased annuities from Executive Life Insurance
Company of California.

What did Bill Hunsaker get? An annuity from Executive Life -- which later
failed, reducing an annuity that was already much smaller than Hunsaker
expected from Pacific Lumber by 30%. Similar things happen at Revlon -- where

2

01800000010460



It has been reported‘ that pension funds were used in two-thirds of the
largest buyout transactions in the 1980's. The Tengelmann Group used the $270
million in pension money to finance its takeover of A&P. The takeover was
followed by a large downsizing and the end of A&P's longstanding practice of
giving retirees cost-of-living increases in their benefits. Some companies, such as
Union Carbide, which took $504 million from its pensions, took reversions to
avoid becoming the targets of hostile takeovers.

The spate of reversions resulted in immediate difficulties for some
pensioners. The Pacific Lumber Company, a family-owned forest products
company located in Northern California, was taken over in a leveraged buyout by
the Maxxam Group. Pacific Lumber was a takeover target in part because it had
a well-funded pension plan. After the takeover, Maxxam terminated the plan and
took a reversion of over $50 million to pay off debt associated with the leveraged
buyout, Maxxam purchased annuities for its participants in its terminated plan
from the Executive Life Insurance Company. Executive Life later failed, leaving
Pacific Lumber workers facing reduced annuities.

In many cases, companies took reversions from an "overfunded" plan while
allowing significant underfunding in another plan. Since 1989, PBGC has issued
a list of the 50 companies with the largest pension underfunding. Twenty
companies on the list for at least one year took large reversions from an
overfunded plan during the 1980's. For example, United Air Lines took a $378
million reversion in 1985. United's pension plans are now underfunded by over $1
billion. Another example is the Goodyear Tire and Rubber Company which took
a $400 million reversion in 1988 from its plan for salaried workers. Goodyear's
pension plan for tire and rubber workers is now underfunded by $388 million.

(Table 4]

01800000010425