[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
CHALLENGES FACING MULTIEMPLOYER
PENSION PLANS: REVIEWING THE
LATEST FINDINGS BY PBGC AND GAO
=======================================================================
HEARING
before the
SUBCOMMITTEE ON HEALTH,
EMPLOYMENT, LABOR, AND PENSIONS
COMMITTEE ON EDUCATION
AND THE WORKFORCE
U.S. House of Representatives
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD IN WASHINGTON, DC, MARCH 5, 2013
__________
Serial No. 113-8
__________
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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 Robert E. Andrews, New Jersey
Joe Wilson, South Carolina Robert C. ``Bobby'' Scott,
Virginia Foxx, North Carolina Virginia
Tom Price, Georgia Ruben Hinojosa, Texas
Kenny Marchant, Texas Carolyn McCarthy, New York
Duncan Hunter, California John F. Tierney, Massachusetts
David P. Roe, Tennessee Rush Holt, New Jersey
Glenn Thompson, Pennsylvania Susan A. Davis, California
Tim Walberg, Michigan Raul M. Grijalva, Arizona
Matt Salmon, Arizona Timothy H. Bishop, New York
Brett Guthrie, Kentucky David Loebsack, Iowa
Scott DesJarlais, Tennessee Joe Courtney, Connecticut
Todd Rokita, Indiana Marcia L. Fudge, Ohio
Larry Bucshon, Indiana Jared Polis, Colorado
Trey Gowdy, South Carolina Gregorio Kilili Camacho Sablan,
Lou Barletta, Pennsylvania Northern Mariana Islands
Martha Roby, Alabama John A. Yarmuth, Kentucky
Joseph J. Heck, Nevada Frederica S. Wilson, Florida
Susan W. Brooks, Indiana Suzanne Bonamici, Oregon
Richard Hudson, North Carolina
Luke Messer, Indiana
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,
Tom Price, Georgia Ranking Member
Kenny Marchant, Texas Rush Holt, New Jersey
Matt Salmon, Arizona David Loebsack, Iowa
Brett Guthrie, Kentucky Robert C. ``Bobby'' Scott,
Scott DesJarlais, Tennessee Virginia
Larry Bucshon, Indiana Ruben Hinojosa, Texas
Trey Gowdy, South Carolina John F. Tierney, Massachusetts
Lou Barletta, Pennsylvania Raul M. Grijalva, Arizona
Martha Roby, Alabama Joe Courtney, Connecticut
Joseph J. Heck, Nevada Jared Polis, Colorado
Susan W. Brooks, Indiana John A. Yarmuth, Kentucky
Luke Messer, Indiana Frederica S. Wilson, Florida
C O N T E N T S
----------
Page
Hearing held on March 5, 2013.................................... 1
Statement of Members:
Andrews, Hon. Robert E., ranking member, Subcommittee on
Health, Employment, Labor, and Pensions.................... 3
Roe, Hon. David P., Chairman, Subcommittee on Health,
Employment, Labor, and Pensions............................ 1
Prepared statement of.................................... 3
Statement of Witnesses:
Force, Harold F., PE, president, Force Construction Company,
Inc........................................................ 21
Prepared statement of.................................... 22
Gotbaum, Hon. Joshua, Director, Pension Benefit Guaranty
Corp....................................................... 6
Prepared statement of.................................... 7
Jeszeck, Charles, Director, Education, Workforce, and Income
Security, Government Accountability Office................. 15
Prepared statement of, Internet address to............... 17
Perrone, Anthony M., secretary-treasurer, the United Food and
Commercial Workers International Union..................... 17
Prepared statement of.................................... 19
Additional Submissions:
Director Gotbaum's response to questions submitted for the
record..................................................... 49
Chairman Roe:
The National Electrical Contractors Association, prepared
statement of........................................... 46
The U.S. Chamber of Commerce, prepared statement of...... 44
Questions submitted for the record....................... 48
Scott, Hon. Robert ``Bobby'' C., a Representative in Congress
from the State of Virginia, questions submitted for the
record..................................................... 48
CHALLENGES FACING MULTIEMPLOYER
PENSION PLANS: REVIEWING THE
LATEST FINDINGS BY PBGC AND GAO
----------
Tuesday, March 5, 2013
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 10:00 a.m., in
room 2175, Rayburn House Office Building, Hon. David P. Roe
[chairman of the subcommittee] presiding.
Present: Representatives Roe, Wilson, Guthrie, Brooks,
Messer, Andrews, Scott, Hinojosa, Tierney, and Wilson.
Also present: Representatives Kline and Miller.
Staff present: Andrew Banducci, Professional Staff Member;
Katherine Bathgate, Deputy Press Secretary; Casey Buboltz,
Coalitions and Member Services Coordinator; Ed Gilroy, Director
of Workforce Policy; Benjamin Hoog, Legislative Assistant;
Marvin Kaplan, Workforce Policy Counsel; Nancy Locke, Chief
Clerk/Assistant to the General Counsel; Brian Newell, Deputy
Communications Director; Krisann Pearce, General Counsel;
Nicole Sizemore, Deputy Press Secretary; Todd Spangler, Senior
Health Policy Advisor; Alissa Strawcutter, Deputy Clerk; Mary
Alfred, Minority Fellow, Labor; Tylease Alli, Minority Clerk/
Intern and Fellow Coordinator; John D'Elia, Minority Labor
Policy Associate; Daniel Foster, Minority Fellow, Labor;
Richard Miller, Minority Senior Labor Policy Advisor; Michele
Varnhagen, Minority Chief Policy Advisor/Labor Policy Director;
and Michael Zola, Minority Deputy Staff Director.
Chairman Roe. A quorum being present, the subcommittee on
Health, Employment, Labor and Pensions will come to order.
Good morning. I would like to welcome our guests and thank
our witnesses today for being here. This is the latest in a
series of hearings examining the multi-employer pension system,
and each time we have assembled a distinguished panel of
witnesses to offer their unique experience and expertise on
this very important topic. I am very pleased today is no
different.
I would like to also note that throughout our oversight of
multi-employer pensions, the committee has maintained a spirit
of bipartisan cooperation. We are addressing difficult issues
with no simple answers. As we continue examining the strengths
and weaknesses of the system's--nation's pension system and
begin discussing possible reforms, I hope we will do so with a
sincere commitment to working together and advancing reforms
that best serve the American people.
Since we last met, a number of headlines have announced key
developments involving multi-employer pensions. In late
January, the PBGC released three long-overdue reports that
together offer a very detailed examination of the system. The
facts they provide, however, are deeply troubling. Plans have
$757 billion in benefit liabilities and a staggering $391
billion in unfunded obligations.
The reports also reveal roughly one out of every four plans
is in ``red zone'' critical status, experiencing immediate and
significant funding problems. Only 39 percent of participants
are active employees, which confirms a disturbing demographic
trend we have discussed during previous hearings. Additionally,
there is a 90 percent chance the PBGC's multi-employer
insurance program will be insolvent in less than 20 years.
The second round of news to attract our attention was the
release by a report of a National Coordinating Committee of
Multiemployer Plans. For over a year, members of the NCCMP's
Retirement Security Review Commission worked diligently to try
and craft reforms that tackle the structural problems plaguing
the system and garner the support of both business and labor
leaders.
Their report, entitled ``Solutions, Not Bailouts'' is
further proof that there is no easy way to address the
challenges facing the multi-employer pension system. The report
also serves as an important reminder that common ground can be
found when stakeholders work together in good faith and make
tough choices. We will continue to carefully review their
recommendations in the weeks ahead.
Finally, today we will be making some news of our own. In
2011, Chairman Kline asked the nonpartisan Government
Accountability Office to examine the multi-employer pension
system, including the effects of legal changes enacted by
Congress in recent years.
While its report is not yet final, a representative from
GAO is with us today to discuss their preliminary findings. The
study provides an independent analysis of the PBGC's financial
challenges and an overview of various policy proposals intended
to prevent the future insolvencies of severely underfunded
plans.
The GAO report also outlines the difficult choices plan
trustees must confront as they try desperately to steer clear
of insolvency. Too often the only options available to plans,
such as steep increases in contributions employers pay or
reducing workers' future benefits, can't arrest the steady
decline of many plans.
Armed with the facts, we must begin charting a new and
better course. Thousands of employers who participate in multi-
employer pension plans are counting on us. Men and women
searching for work and hoping these employers create new jobs
are counting on us, and millions of workers and retirees who
rely upon the multi-employer pension system for their future
income security are counting on us
Again, I would like to thank our witnesses for being with
us. I will now recognize my distinguished colleague,
Representative Andrews, the senior Democratic member of the
subcommittee, for his opening remarks.
[The statement of Chairman Roe follows:]
Prepared Statement of Hon. David P. Roe, Chairman,
Subcommittee on Health, Employment, Labor and Pensions
Good morning. I would like to welcome our guests and thank our
witnesses for joining us today. This is the latest in a series of
hearings examining the multiemployer pension system, and each time we
have assembled a distinguished panel of witnesses to offer their unique
experience and expertise on this very important topic. I am pleased
today is no different.
I would also note that throughout our oversight of multiemployer
pensions, the committee has maintained a spirit of bipartisan
cooperation. We are addressing difficult issues with no simple answers.
As we continue examining the strengths and weaknesses of the nation's
pension system and begin discussing possible reforms, I hope we do so
with a sincere commitment to working together and advancing reforms
that best serve the American people.
Since we last met, a number of headlines have announced key
developments involving multiemployer pensions. In late January, the
PBGC released three long overdue reports that together offer a very
detailed examination of the system. The facts they provide, however,
are deeply troubling. Plans have $757 billion in benefit liabilities
and a staggering $391 billion in unfunded obligations.
The reports also reveal roughly one out of every four plans is in
``red zone'' critical status, experiencing immediate and significant
funding problems. Only 39 percent of participants are active employees,
which confirms a disturbing demographic trend we've discussed during
previous hearings. Additionally, there is a 90 percent chance the
PBGC's multiemployer insurance program will be insolvent in less than
twenty years.
The second round of news to attract our attention was the release
of a report by the National Coordinating Committee on Multiemployer
Plans. For over a year, members of the NCCMP's Retirement Security
Review Commission worked diligently to try and craft reforms that
tackle the structural problems plaguing the system and garner the
support of both business and labor leaders.
Their report, entitled Solutions, Not Bailouts, is further proof
that there is no easy way to address the challenges facing the
multiemployer pension system. The report also serves as an important
reminder that common ground can be found when stakeholders work
together in good faith and make tough choices. We will continue to
carefully review their recommendations in the weeks ahead.
Finally, today we will be making some news of our own. In 2011,
Chairman Kline asked the nonpartisan Government Accountability Office
to examine the multiemployer pension system, including the effects of
legal changes enacted by Congress in recent years. While its report is
not yet final, a representative from GAO is with us today to discuss
their preliminary findings. The study provides an independent analysis
of the PBGC's financial challenges and an overview of various policy
proposals intended to prevent the future insolvencies of severely
underfunded plans.
The GAO report also outlines the difficult choices plan trustees
must confront as they try desperately to steer clear of insolvency. Too
often the only options available to plans, such as steep increases in
contributions employers pay or reducing workers' future benefits, can't
arrest the steady decline of many plans.
Armed with the facts, we must begin charting a new and better
course. Thousands of employers who participate in multiemployer pension
plans are counting on us. Men and women searching for work and hoping
these employers create new jobs are counting on us. And millions of
workers and retirees who rely upon the multiemployer pension system for
their future income security are counting on us.
Again, I'd like to thank our witnesses for being with us. I will
now recognize my distinguished colleague, Representative Andrews, the
senior Democratic member of the subcommittee, for his opening remarks.
______
Mr. Andrews. Thank you. Good morning, Mr. Chairman.
Good morning, colleagues.
Good morning, members of the panel. Good morning, ladies
and gentlemen.
A few minutes ago the news came across that the Dow Jones
industrial average passed its highest level in history.
Chairman, perhaps the hearing is some cause and effect
there, I am not sure, but what I am sure of is that not all
Americans have shared in that prosperity.
Incomes for families have been flat or shrinking.
Pensioners are at risk. One of the challenges--the context in
which we meet this morning is to discern a way that we can
engender broad-based economic growth in our country so that
many benefit from economic growth and not just a few.
One of the ways we need to do that is to bring needed
improvements to the multiemployer pension plan system. A few
years ago, that system was in grave, grave disrepair and
trouble largely related to the financial crisis of 2008. There
has been improvement since then.
The chairman went through the meaning of the terms green
zone and yellow zone and red zone. As we meet this morning, we
will hear information that 774 of the plans are in the so-
called green zone, which means they are relatively healthy and
self-sustaining, 212 are in the yellow zone, which means they
need some help, but could go one way or the other, and then 319
are in the red zone, which means they are troubled and
certainly require the attention of the committee. But one of
the things I want to emphasize from the beginning is that the
vast majority of multiemployer pension plans are actually quite
healthy.
And the issue this morning is how to create a system where
all of them become healthy, where pensioners can depend on
those checks for the rest of their lives, where small
businesses cannot be strangled by rapidly escalating
contributions to those plans and/or withdrawal liability, which
is a major problem for a lot of small businesses, and where we
never reach the day, never reach the day where taxpayer
assistance would even be a relevant issue.
There is no legal guarantee that taxpayers stand behind the
Pension Benefit Guaranty Corporation, but I think recent years
have shown us that there are moral hazards. There are moral
suggestions that a widespread failure of financial institutions
tends to yield government response. I never want to see the day
when that becomes a relevant issue here in this space, and I
think that we can avoid that day where such bailouts would
never even have to be discussed.
In my mind, there are four elements to achieving that
result. The first is the committee does have to look at that
premium structure of the PBGC, and its ability to raise revenue
and reduce the $27 billion projected deficit that the chairman
mentioned.
Second, we have to look at creative but prudent financing
mechanisms where multiemployer pension plans can find a way to
amortize their existing obligations over a period of time and
minimize the short-term impact of those contributions.
Third, we have to look as the bipartisan group has looked
at, that the chairman mentioned, at very difficult, often
controversial changes within plans that make the plans
healthier through structural reform. This is a very difficult
thing to achieve, and I commended the stakeholders who come
together in this process and had a very important and I think
necessary discussion.
And then finally, something the chairman has mentioned
before that I don't want us to forget. We are all hopeful that
good times will once again return to our economy and to
multiemployer plans. Presently, ERISA plans have an artificial
ceiling on contributions they may receive in those good times,
and there were occasions in the late 1990s when both
multiemployer plans and single-employer plans were in a
position to make larger cash contributions in given years.
Because of these artificial ceilings, they were not
permitted to. I think, although it also involves the
jurisdiction of the Ways and Means Committee, I think one of
the issues we need to look at is removing those ceilings so
that in good times, plans that are well-managed can save for
the rainy-days event that ultimately come, and I think,
frankly, that this ability to contribute in good times above
and beyond the minimum and above and beyond the ceiling should
extend to all ERISA trusts, including health trusts as well as
pension trusts, so that an employer or group of employers can
be even healthier down the line.
This is a solvable problem. It is a solvable problem, and I
commend the chairman for approaching this in a very bipartisan,
fact-driven method, evidence-driven method. I am confident that
this morning's hearings will add to that record and I look
forward to hearing from the witnesses, and even more
importantly, working with the witnesses and the stakeholders
and my colleagues on the subcommittee to fashion a remedy that
will make pensioners more secure, employers more prosperous,
and taxpayers more immune from any problems of this problem in
the future. Thank you.
Chairman Roe. I thank the gentleman for yielding, and I
have never seen a pension plan complain about having too much
money. I agree with that.
So pursuant to Committee Rule 7-C, all members will be
permitted to submit their 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 our distinguished panel
of witnesses.
First, the Honorable Joshua Gotbaum is the director of the
Pension Benefit Guaranty Corporation, PBGC, where he has served
since 2010. As director, he is responsible for the agency's
management, personnel, organization, budget, and investments.
Welcome back, Director.
Mr. Charles Jeszeck is the director of Education,
Workforce, and Income Security Issues at the Government
Accountability Office in Washington, D.C. He has been
responsible for numerous GAO reports on government, on the
retirement issues including defined benefit and defined
contribution plans and PBGC. Welcome.
Mr. Anthony Mark Perrone is International Secretary
Treasurer of the United Food and Commercial Workers
International Union here in Washington. His responsibilities
include monitoring the finances of the International Union as
well as the stewardship of several pension plans.
Mr.--oh, okay. Okay.
Mr. Force is the president of Force Construction Company in
Columbus, Indiana. He will testify on behalf of the Associated
General Contractors of America and the Indiana Construction
Association. Welcome, Mr. Force.
Before I recognize you to provide your testimony, let me
briefly explain the lighting system. It is pretty simple. You
have 5 minutes to present your testimony. When you begin, the
light in front of you will turn green; 1 minute left, it will
turn amber. When your time has expired, the light will turn
red. At that point, I will ask you to wrap up your comments as
best you are able. After everyone has testified, members will
each have 5 minutes and as stated, the chair will try to limit
himself to 5 minutes.
Mr. Andrews. See, just like the pensions, no one should be
in the red zone. That is what he means. [Laughter.]
Chairman Roe [continuing]. Not in the red zone. Including
the members, I might add.
Mr. Gotbaum?
STATEMENT OF HON. JOSHUA GOTBAUM, DIRECTOR,
PENSION BENEFIT GUARANTY CORP. (PBGC)
Mr. Gotbaum. Why do I think that was aimed at me?
Mr. Chairman, Dr. Roe, Mr. Andrews, members of the
committee and subcommittee, thanks very much for holding this
hearing. Since unlike the last time I was before this
committee, you now have reports, testimony, other knowledgeable
witnesses, et cetera, I am just going to try to summarize a few
of the main points.
In many respects, multiemployer plans are just like other
pension plans. Like other pension plans, they suffered from the
downturns of the last decade. In the mid-90s, multiemployer
plans were funded better than 90 percent. After the 2008 crash,
the average was under 50 percent.
Also like other plans, since the crash, they have taken
actions to restore their finances. Fortunately, and this is
something of which this committee can be proud, Congress in the
Pension Protection Act recognized that plans were in differing
circumstances, that they needed flexibility, and you provided
it.
As a result, as both of you said, most plans report they
are recovering and will recover, but a minority are not. These
are plans that are deeply distressed. They have few active
employers left and cannot make up the underfunding for all
retirees with the contributions of the few. These plans are
asking Congress to provide even more flexibility than you did
in the Pension Protection Act.
Importantly, many of their arguments are supported by
healthier plans. They are supported by healthier plans because
they know that the failure of one plan could cause employers to
panic and withdraw from others.
The healthier plans are also asking for their own forms of
flexibility. They want to be able to offer new kinds of plans
to attract new employers and to keep the ones they have, and
they want flexibility in withdrawal liability rules that hold
the system together.
As always, primary responsibility for maintaining plans
rests with the plans, with their trustees, their
professionals--both management and labor--their unions, and
their businesses, but government can help plans help
themselves.
What can government do? Three things. First, as in 2006, we
can start with the proposals developed by plans themselves;
negotiated and thought through with their constituencies.
Second, again as in 2006, we can recognize that different
plans have different needs, that they need flexibility to meet
their own particular challenges.
Last, but as PBGC director, I hope not least, we can
preserve ERISA's safety net--the PBGC.
As this committee knows, I have enormous respect for the
professionalism, the knowledge, and the compassion of the
people of the PBGC, but that is not enough. PBGC's
multiemployer insurance program needs to be rethought. Since it
was developed more than 30 years ago, the world has changed,
but our program has not.
Unlike single-employer plans, PBGC generally cannot act
until a multiemployer plan has completely run out of money, has
become insolvent, and even then, we don't take over the plan,
we just pay the bills.
Now plans do come to PBGC before they are insolvent. They
propose partitions saying, PBGC: ``We would like you to be
responsible for orphan participants so that the active
employers will stay in our plan. Or they propose that PBGC
provide financial support for a merger so that the trustees of
a strong plan are willing to merge with the weaker one.''
However, PBGC's finances generally don't allow us to
provide such financial support even when doing so would
preserve plans. In fact, as both of you have noted, without
additional resources, PBGC won't even be able to preserve
ERISA's own safety net. As we reported in January, without
changes, the multiemployer program itself will likely become
insolvent within the next 10 to 15 years.
Now, these issues are complicated--pensions always are--but
they are solvable. In 2006, this committee, working with the
plans, with professionals, with business, with labor, with the
PBGC, and with the other ERISA agencies, you tackled them. The
next 2 years provides the opportunity to do it again.
As I told the committee in December--when I testified in
December--the reports that we finally delivered to you--
apologies for the delay--provide information, but not
recommendations. We think the starting point for action, as it
was in 2006, ought to be the proposals of the plans themselves.
Now that they are coming forward, we stand ready to join in
the effort to analyze, to react, to provide our expertise and
judgment, and to help preserve multiemployer plans for the
millions who depend on them.
In closing, let me thank you again very much for your
leadership. I look forward to hearing your views and answering
your questions.
[The statement of Mr. Gotbaum follows:]
Prepared Statement of Hon. Joshua Gotbaum, Director,
Pension Benefit Guaranty Corp.
Thank you for holding this hearing to continue discussions on
efforts to strengthen multiemployer plans.
On January 29, 2013, the three ERISA agencies sent Congress a
report required by the Pension Protection Act of 2006, P.L. 109-280
(PPA). The report provides information and analysis on the actions
taken by multiemployer plans under PPA to improve their funded status
and the effects of those actions on the plans' financial health.
Also that day, PBGC sent to Congress two statutory reports on the
agency's multiemployer insurance program, the Five-Year Multiemployer
Report on premium levels and the FY 2012 Exposure Report on PBGC's
potential exposure under the single-employer and multiemployer
programs.
We hope these reports will be useful as this Committee evaluates
the challenges that multiemployer plans face and the various options
and proposals to address them.
As expanded upon below, the multiemployer system was designed more
than a generation ago; the world has changed but the system has not.
The challenges facing the multiemployer system are complex and somewhat
different from those faced by single-employer defined benefit plans.
As with all pension plans, the last decade has seen many strains on
pension funds and most multiemployer plans became underfunded. PPA and
other legislation enacted since have provided much needed flexibility.
Most of those plans have responded, taken advantage of self-help
measures, and are on track to recover. This is, unfortunately, not true
for all plans. Unless significant changes are made allowing them to
take additional steps of self-help, a minority of multiemployer plans
will fail.
However, there is no silver bullet. Different plans are in
different circumstances, and they will need a diverse set of tools,
options and solutions and the flexibility of when and how to apply
them.
The PBGC, designed to be a safety net for failed plans, will also
need changes if it is to fulfill its mission. Absent reforms, PBGC will
continue to lack the tools to help plans improve and the resources to
continue paying benefits for those that do fail.
With the PPA sunset at the end of 2014, the next two years provide
an opportunity for multiemployer plans, their participants, businesses,
unions, and professionals to work together with Congress and the
Administration to develop approaches that are flexible and practical,
and that facilitate self-help. As it did in 2006, Congress can provide
the tools and authorities to help more than a thousand plans, hundreds
of thousands of small businesses, and millions of American workers
achieve a more secure retirement.
Why Multiemployer Plans are Important
Multiemployer defined benefit plans provide retirement security to
more than 10 million participants and their families. Multiemployer
plans help protect participants' retirement benefits. They provide
pension portability, allowing participants to accumulate benefits
earned for service with different employers throughout their careers.
They pool longevity risk, which provides much lower-cost annuities than
those available in the individual market, and they spread the risk of
any individual employer's failure across many firms.
Benefits to Employers
Multiemployer plans have provided retirement annuities to millions
of American workers for more than half a century. Among the advantages
of this type of plan is that assets are pooled among employers in a
single consolidated trust. Efficiencies of scale broaden and diversify
investment opportunities and lessen the administrative and investment
costs of operating a separate single-employer plan. Investment
professionals manage the plans' assets, helping to reduce risks for
contributing employers, employees, and retirees.
Importance to Small Businesses
Hundreds of thousands of small businesses--doing business in every
state--participate in multiemployer plans. Multiemployer plans enable
employers to provide retirement benefits to their employees without
imposing administrative burdens on any individual employer.
Employers generally need only to remit contributions set by
collective bargaining and are relieved from the responsibilities of
operating a plan, which are handled by an independent joint board of
trustees, consisting of equal representatives of labor and management.
Consequently, these plans have historically offered employers,
especially small businesses, an affordable way to provide pensions to
their employees, without the administrative burdens.
No Plan is ``Typical''
There is a wide variety of multiemployer plans, in a wide variety
of places, in a wide variety of industries, and in a wide variety of
conditions. Multiemployer plans help small and large businesses and
employees in many industries, including construction, transportation,
retail food, manufacturing and services. Multiemployer plans vary in
size from small local plans covering a few hundred participants to
large regional or national plans covering hundreds of thousands of
participants. There are businesses who contribute to multiemployer
plans and multiemployer plan participants in every state.\1\
---------------------------------------------------------------------------
\1\ The map below reflects the results of a survey by the National
Coordinating Committee for Multiemployer Plans (NCCMP) of 70 plans that
provided information on the zip codes of companies contributing to
their plans in 2011. These 70 plans received contributions from
approximately 53,000 companies.
The Past Decade Has Been Difficult for All Plans
In recent years, faltering markets and a weak economy exacerbated
the effects of underfunding. If a plan has a small employer base and
large accrued liabilities associated with a mature participant
population, it can be difficult to make up funding shortfalls. The cost
of contribution increases is borne by employers (through reductions to
profit margin) and employees (through reductions to current pay or
benefits). Finally, a plan's underfunding increases the contingent
liability of contributing employers should they withdraw from the plan,
which can affect their creditworthiness and discourage new employers
from joining the plan.
The funding levels and demographics of these plans have changed
dramatically over the years. Before the decade of the 2000s, single-
employer and multiemployer defined benefit plans enjoyed historically
high rates of return, which kept these plans well-funded without
requiring a large ongoing contribution commitment from employers.
Moreover, high investment returns financed benefit improvements: plans
increased benefit accrual rates and granted past service credits; they
adopted or continued early retirement subsidies, disability pensions,
death benefits for non-spouse beneficiaries, and five- and ten-year
certain and life guarantees.\2\ These new obligations compounded the
plans' liabilities during the 1990s.
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\2\ Because of maximum deductible limits, some plans increased
benefits during this period to avoid losing deductible treatment of
employer contributions, which also contributed to longer-term costs.
These limits were raised in the PPA.
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Like single-employer plans, multiemployer plans suffered
significant market losses during the 2000s, causing the value of plan
assets to plummet. Multiemployer plans that had been nearly fully-
funded often dropped to less than 50% funded. The average funded ratios
of these plans (which the agency defines as the market value of assets
divided by liabilities discounted using a standardized PBGC interest
factor) exceeded 90% in the 1990s, hovered in the mid-60% range in the
mid-2000s, and fell below 50% after the 2008 market crisis.\3\
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\3\ Many plans in certain industries, such as manufacturing and
retail trade and services, barely exceeded 50%.
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This unexpected surge in underfunding put huge pressures on funding
costs and contributions. Tightened PPA funding requirements had also
taken effect, requiring plans for the first time to publicly certify
their funding status. Employers and unions--which had come to depend on
relatively stable contribution rates--were now asked to accept huge
contribution rate increases, and plan trustees recommended benefit
reductions.
Employer contributions to multiemployer plans are generally based
on number of hours worked by actively employed participants. The 2000s
decade saw a decline in active participants as a percentage of total
participants. Thirty years ago, three-quarters of all participants were
active and only one-quarter were retired or waiting to retire. Today,
the situation is largely reversed: by 2010, 39% of participants were
active and 61% were inactive.
Contributing factors also include the relative decline in unionized
employment and competitive pressures in some industries from non-
unionized businesses, resulting in some employers with multiemployer
plans going out of business. Thus, the burden of the recent increase in
underfunding is borne by a smaller pool of employers and employees
supporting the liabilities of much larger inactive populations.
Plans Have Taken Advantage of PPA Funding Rules and Flexibility
When Congress enacted PPA in 2006, it anticipated the need for
different plans with differing situations to address underfunding and
other emerging problems in differing ways. Under PPA, plans were
required (i) to certify their funded status each year according to
statutory classifications of ``endangered'' or ``critical'' status (or
neither); (ii) to implement funding improvement or rehabilitation plans
that include contribution and benefit schedules designed actuarially to
improve the plan's funded status; and (iii) to achieve objective
funding targets within specified timeframes.\4\
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\4\ Endangered status is triggered if a plan has a funded
percentage of less than 80% or projects a funding deficiency within
seven years (if both triggers are met, the plan is in seriously
endangered status); the plan's target is to reduce the underfunding
percentage by 33% in a 10-year period and to avoid a funding deficiency
during the funding improvement period. Critical status is triggered if
a plan has a funded percentage equal to or less than 65% and projects a
funding deficiency within five years or insolvency within seven years;
or the plan projects insolvency within 5 years or a funding deficiency
within 4 years; or normal cost and interest on unfunded liabilities
exceeds contributions for the year, the present value of benefits for
inactive participants exceeds that for active participants, and the
plan projects a funding deficiency in 5 years. The plan's target is to
emerge from critical status using all reasonable measures in a 10-year
period (if unfeasible, to emerge at a later time or forestall
insolvency).
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For the first time, plans in critical status were allowed to reduce
certain previously earned benefits (e.g., early retirement benefits,
retirement-type subsidies, optional forms of payment) that would
otherwise be protected from such cutbacks by ERISA and the Internal
Revenue Code. Participants who started receiving benefits before the
plan's notice of critical status are generally exempted from these
``adjustable benefit'' reductions.\5\ Also, for the first time, plans
in critical status were constrained by law from increasing benefits and
from offering lump sum and similar benefit payments.
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\5\ Generally, reductions of adjustable benefits for active
participants arise from collective bargaining. The plan trustees
provide to the bargaining parties one or more schedules showing revised
benefit and/or contribution structures determined to be reasonably
necessary for the plan to emerge from critical status. One schedule
must be a default schedule, which assumes that benefits will be reduced
to the maximum extent permitted by law before contribution increases
are required. Although the default schedule is common in some critical
status plans, in other critical status plans very few bargaining
parties adopt the default schedule, choosing instead the preferred
schedule which emphasizes contribution increases with limited
reductions in benefits.
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After the 2008 financial crisis, when plans suffered investment
losses of 20 to 30%, nearly 1,000 plans, or two-thirds of all
multiemployer plans, were certified to be in endangered or critical
status. This loss in plan asset values caused a drop in the funded
percentage of many plans, and shortened the projected insolvency dates
of other plans. Possibly the most common trigger for endangered or
critical status was higher minimum required contributions, which
brought plans closer to a projected funding deficiency.
In December 2008, Congress enacted the Worker, Retiree, and
Employer Recovery Act of 2008, P.L. 110-458 (WRERA), to give plans
respite from the effect of losses experienced during the 2008 stock
market decline. The majority of multiemployer plans elected WRERA
funding relief in 2009--freezing their prior year's funding status and
deferring any actions under a funding improvement or rehabilitation
plan for one year.
Nevertheless, more than 100 critical status plans in 2009 adhered
to PPA strictures and reduced adjustable past benefits; plans reported
reducing a total of nearly $800 million in liabilities. In addition,
almost 200 plans in all status classifications in 2009 reduced future
benefits, such as future accrual rates (one-half of these plans were in
critical status).
Congress then enacted the Preservation of Access to Care for
Medicare Beneficiaries and Pension Relief Act of 2010, P.L. 111-192
(PRA 2010), to provide further funding relief from the significant
investment losses that occurred in and around 2008. Plans extensively
relied on PRA 2010 funding relief, which enabled them to decrease
minimum required contributions, increase credit balances, and improve
funded certification statuses, alleviating pressures on contribution
increases and benefit cuts.
Nevertheless, 149 critical status plans in 2010 applied PPA
provisions and reduced adjustable past benefits--including nearly 40%
of all critical status plans in that year; plans reported reducing more
than $2 billion in liabilities. In addition, more than 172 plans in all
status classifications reported reducing future benefits (over 50% of
these plans were in critical status).
Employer contributions have also increased as a consequence of the
financial turmoil of the 2000s and PPA's tightened funding
requirements. Contributions climbed from $8 billion in 2000 and $16
billion in 2005, to $20 billion in 2009 and $20.5 billion in 2010.
Average annual contributions per active participant rose $700 between
2008 and 2010 from $4,300 to $5,000.
Endangered status plans had the highest average contributions per
active participant ($7,500), while critical status plans had the lowest
($4,000). It is important to note, however, that contributions vary
significantly from plan to plan, even among plans in the same industry
(e.g., employers in one critical status plan reported contributions of
$17,000 per active participant).
Plans have also used the flexibility provided under PPA to relieve
excessive pressure on employers and unions that could jeopardize their
continued participation in the plan. For example, PPA eliminated the
excise tax assessed on employers by the IRS when a critical plan incurs
a funding deficiency.\6\ The intent of the tax was to induce employers
to contribute the required minimum to the plan.
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\6\ Multiemployer plans must maintain a funding standard account to
measure whether the funding requirements are met. If total charges to
the funding standard account (normal cost, and amortization of net
increase in unfunded past service liability, net experience loss or net
loss from changes in actuarial assumptions) exceed employer
contributions and total credits to the account (amortization of net
decrease in unfunded past service liability, net experience gain or net
gain from changes in actuarial assumptions), an accumulated funding
deficiency results.
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The tax has now been replaced by a PPA funding regime that makes
similar demands on the bargaining parties. Minimum required
contributions spiked after the asset losses of 2008, causing 90 plans
to report funding deficiencies in 2010--more than four times the annual
average over the decade prior to 2008. These plans avoided an excise
tax on funding deficiencies totaling nearly $2 billion in 2010.
A second example of flexibility granted to plans under PPA is
amortization extensions. To ensure pre-funding and require the
recognition of costs upfront, PPA shortened the amortization periods
for all types of unfunded liabilities to 15 years. However, plans also
needed a safety valve in the event of unforeseen costs that the
bargaining parties could not immediately afford. PPA permitted a plan
that met certain solvency requirements to automatically extend
amortization periods by five years if it projected a funding deficiency
in the next nine years.
This proved to be a popular form of relief: Whereas only six plans
were operating under amortization extensions for the 2005 plan year--
under strict statutory eligibility requirements requiring IRS
approval--by 2009 there were 125 plans operating under automatic five-
year extensions, and by 2010 nearly one-quarter of all critical and
seriously endangered status plans were operating under amortization
extensions (178 plans under automatic extensions and 12 plans under
approved extensions).
Today the Financial Condition of Plans Varies Widely
Most plans can recover from the market collapses of the past decade
on their own but, without changes, some severely distressed plans will
not.
Most Plans Are Recovering
Most plans appear to be recovering from the 2008 financial crisis
and subsequent recession. Aggregate assets for all multiemployer plans
have increased, from $327 billion at the beginning of the 2009 plan
year to nearly $400 billion at the end of the 2010 plan year (a level
last seen in 2006). By 2011, 60% of all plans certified they were in
non-distressed or ``green'' zone (i.e., neither endangered nor critical
status), an improvement from just 32% in 2009. Endangered status plans
fell from 34% to 16% of all plans between 2009 and 2011.
But the financial condition of multiemployer plans today varies
widely. Some have rebounded following the recovery in asset levels (and
with the aid of funding relief). Many other plans remain substantially
underfunded but are using the tools under PPA to gradually adjust
income and expenses. As of the 2011 plan year, 40% of all multiemployer
plans continued to be in endangered or critical status, thus subject to
additional funding rules under PPA. An initial review of 2012 PPA
certifications to IRS indicates a slight increase in the numbers of
plans in endangered or critical status for the 2012 plan year. PBGC
estimates that currently just over half of multiemployer participants
are in endangered or critical status plans.
Overall, most multiemployer plans appear sustainable in the long-
term, assuming they maintain a base of contributing employers able to
support the plan's unfunded liabilities and benefit disbursements and
avoid significant investment or other actuarial losses.
Challenges remain, however, in assessing the exact financial
condition of many plans. Funding relief under PRA 2010 often results in
plans overstating their financial health. Nearly 600 plans elected to
recognize 2008 investment losses over a period of ten years (rather
than the regular smoothing period of five years), but increasing a
plan's actuarial value of assets and funded percentage can cause the
plan to have a higher PPA funded status than is warranted.\7\ More than
550 plans elected to use 29-year amortization to pay down 2008
investment losses. These steps reduce a plan's annual charges and
minimum required contribution. This delays the date of a projected
funding deficiency, which can favorably impact the plan's status under
PPA. However, these steps do not reduce a plan's actual liabilities.
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\7\ PPA defines a plan's funded percentage for purposes of the
additional funding rules as the actuarial value of the plan's assets
divided by the plan's accrued liability. Because each plan uses its own
methods and assumptions for this purpose, rather than a market value of
assets or a standardized interest rate for measuring plan liabilities,
the funded percentage does not necessarily reflect the actual funded
status of the plan and two plans with the same market value of assets
and the same future benefit payments can appear to have different
funded percentages (making an accurate comparison difficult). PRA 2010
increased the disparity between the actuarial and market value of
assets, and lengthened certain amortization periods reducing required
contributions.
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In addition, aggregate underfunding remains significant, exceeding
$350 billion in 2010 (based on PBGC measurements). Most of the increase
in underfunding relates to asset declines. In addition, while some part
of the increase in underfunding over the last decade is attributable to
declines in the PBGC interest factor used to measure plan
liabilities,\8\ most of this increase relates to the doubling in
liabilities since 1999 that is independent of the decline in interest
rates.\9\
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\8\ The agency adjusts plans' reported vested liabilities using a
standardized interest factor that along with an assumed mortality table
reflects the cost to purchase an annuity at the beginning of the year.
\9\ Using a fixed PBGC interest factor of about 5.30%, liabilities
were valued at about $350 billion in 1999 and about $700 billion in
2010.
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Minority of Multiemployer Plans are Severely Distressed
While in the minority, a significant number of multiemployer plans
today are severely distressed. These are plans in declining or highly
competitive industries, often characterized by high rates of employer
bankruptcies and high ratios of non-sponsored or ``orphan''
participants.\10\
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\10\ PPA required plans to begin reporting orphan participants in
their annual report filings; plans reported a total of 1.3 million
orphan participants in 2010. In 27 endangered or critical status plans
each reporting 5,000 or more orphan participants, our research showed
that orphan participants averaged between 31% and 45% of total plan
participants.
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Some large plans have lost thousands of contributing employers over
the last two to three decades. These plans remain liable for the
benefits of participants whose employers have withdrawn or gone out of
business. In many cases, these orphan participants' benefits were
nearly fully funded in 1999 and 2000, but are now substantially
underfunded due to market losses.
These plans generally have many more retirees than active
participants--active participants may constitute only 10% to 15% of all
participants, while 50% or more participants may be retirees drawing
benefits. In contrast, in 2010, 39% of participants in all plans were
active and 33% were retired. Because the distressed plans have a weak
employer base (that is, few employers in relation to the plan's total
unfunded liabilities), it is difficult for them to make up funding
shortfalls. For these plans, investment losses can be devastating.
Severely distressed plans also pay out a large portion of their
asset base each year, which means that they have less time to recover.
In some of those situations, negative cash flows (benefit payments in
excess of contributions and investment income) erode a plan's asset
base year after year. Consequently, many of these plans project
insolvency over a 10- to 15-year horizon.
Pinpointing the exact number of severely distressed plans remains
elusive, though some multiemployer experts estimate they represent
roughly 25% of plans in critical (or seriously endangered) status--if
so, that would be about 80 to 85 plans in 2011. We are attempting to
identify them, in part, through their self-reporting: PPA
rehabilitation plans may reveal to us that, despite exhaustion of all
``reasonable measures,'' the plan cannot reasonably be expected to
emerge from critical status within 10 years, and is taking all
available reasonable measures steps to emerge at a later time or to
forestall possible insolvency. Plans, however, are not required to make
such disclosures to the government and some distressed plans are not
explicit about their circumstances and future prospects.
What Can Government Do?
Because multiemployer plans cover many industries and localities,
and have been affected by different factors, flexibility matters. The
challenges faced by these plans are often plan-specific issues that the
employers and employees in each industry and each plan must tackle
individually. They will need added flexibility to manage their finances
and extend their solvency.
In PPA, Congress gave plans both tools and flexibility for
improving their financial health. There were new requirements for
fiscal discipline and funding targets, but plans were given discretion
to develop their own strategies for solving their problems. And PPA
provided new tools to help plans with rebalancing their costs and
income and respond to market pressures.
As in PPA, discussions for further reforms should start with
consideration of proposals now being developed jointly by multiemployer
plans and their constituencies--including proposals to help distressed
plans avoid or forestall insolvency. Many of these proposals emphasize
additional flexibility in plan design, cost-sharing, as well as
funding. The Administration has not taken a position on these
proposals; it is too early to do that in advance of the specifics.
However, as in PPA, government should allow plans the flexibility
to solve their own problems.
This is not just an issue for the distressed multiemployer plans.
Because many plans have common employers--particularly large
employers--the failure of one plan and resulting imposition of
withdrawal liability on its contributing employers can have a ripple
effect on many other plans. Furthermore, the failure of plans in one
industry can affect the participation of other employers in other
industries. Thus a failure in one plan could be devastating for
thousands of employers and participants in many plans.
Last, we can preserve PBGC's ability to help. PBGC is not just a
potential (but underfunded) safety net; we also closely monitor plans
and their health and can offer assistance. A broader range of tools and
adequate funding would allow PBGC to both help preserve plans and
provide the safety net that ERISA intended.
PBGC's Multiemployer Insurance Program Needs to be Re-examined
PBGC's program and finances also should be re-examined. The
multiemployer insurance program that was established under ERISA in
1974 was revamped in 1980. However, it has been more than 30 years
since the fundamental structure of the program has been re-examined.
Unlike with single-employer plans, in most cases PBGC cannot step
in until a multiemployer plan has collapsed and run out of money. When
all contributing employers withdraw from a plan and the plan's assets
are exhausted,\11\ PBGC provides the plan financial assistance to pay
participants a statutorily guaranteed benefit for the rest of their
retirement lifetimes. (Unlike its insurance of single-employer plans,
PBGC does not take over the plan, or its assets and liabilities;
instead the agency funds the plan's guaranteed benefits and operating
costs, and audits to ensure they are reasonable.)
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\11\ In this context, exhaustion means the plan cannot pay
guaranteed benefit levels for the plan year. PBGC also pays financial
assistance to ongoing plans (in which contributing employers remain)
that exhaust assets.
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While the guarantee--up to about $13,000 per year for long-service
retirees--often does not cover a participant's full benefits, without
PBGC, participants would be left with nothing when a plan runs out of
money.
We lend our expertise to multiemployer plans on many issues.
Mergers between multiemployer plans, for example, can help plans
increase their ratio of active to inactive participants and save on
administrative and investment costs. We also provide flexibility in
handling withdrawal liability, where appropriate, to plans that request
alternative methods in order to retain and attract new employers.
However, we do not have the financial resources to help distressed
plans directly. For example, plans frequently request our financial
help to facilitate the merger of a weaker plan into a stronger one.
While PBGC has been able to assist in a few cases--where the weaker
plan is near-insolvent and the financial assistance involved is
generally small--PBGC has neither the authority nor the money to help
plans achieve these goals more broadly. Some plans have proposed that
they be partitioned so that active employers can support their own
employees, rather than the employees of companies that withdrew or went
out of business long ago. While we continue to explore use of this tool
(under statutory requirements that are difficult to meet), we do not
have the resources to assist plans and employers, even in circumstances
where a plan could be preserved if released from the unfunded
liabilities of non-sponsored participants.
PBGC is continuing to review its existing tools--which are
limited--to consider whether additional authority could be useful to
assist employers and plans in a variety of situations.
Without Changes, PBGC Faces Its Own Financial Shortfall
The agency paid $95 million in financial assistance for benefits
and plan expenses to participants in 49 insolvent multiemployer plans
in FY 2012. This allowed these plans to continue paying guaranteed
benefits to about 51,000 retirees; 21,000 additional participants will
receive benefits from those plans when they retire. There are 61 more
plans that have terminated and will run out of money in the next few
years, and there are some 46 ongoing plans that are projected to become
insolvent and apply for financial assistance over the next decade.
As of the end of FY 2012, the multiemployer insurance program had a
$5.2 billion deficit, with assets of $1.8 billion and booked
liabilities of $7.0 billion (relating to the plans described above).
In FY 2012, PBGC collected $92 million in premiums and paid $95
million to support failed multiemployer plans. In that year, Congress
raised PBGC premiums, but projected benefit payments will increase far
more. The number of plans that are projected to become insolvent has
more than doubled in the last decade. Financial assistance payments to
these plans are projected to rise rapidly over the next ten years--as
already terminated plans become insolvent and additional participants
retire. PBGC projects that its financial assistance payments to plans
booked as liabilities on PBGC's FY 2012 financial statements\12\ will
exceed $500 million annually within a decade, even without adding any
new obligations. Although the timing is highly uncertain and dependent
on many factors not yet known, PBGC projects that current premiums
ultimately will be inadequate to maintain current guarantee levels and
the multiemployer insurance program is likely to become insolvent
within the next 10-15 years, even before any new obligations are added.
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\12\ This includes plans currently receiving financial assistance,
terminated plans expected to require financial assistance, and ongoing
plans expected to require financial assistance in the next ten years.
---------------------------------------------------------------------------
Future additional obligations are likely. PBGC, in its audited
financial statements, estimates that it is reasonably possible that
other multiemployer plans will require approximately $27 billion in
future financial assistance. These ``reasonably possible'' liabilities
are not recorded on the corporation's financial statements because they
are not imminent liabilities.
PBGC has a variety of methodologies for estimating future
obligations. The most carefully documented is PBGC's Multiemployer
Pension Insurance Modeling System (ME-PIMS). Based on those
projections, and assuming no changes either in multiemployer plans or
in PBGC's multiemployer insurance program, there is about a 35%
probability that the assets of the insurance program will be exhausted
by 2022 and about a 90% probability of exhaustion by 2032. Like all
projections these estimates are dependent on many assumptions about the
future and on many factors, including investment returns and the
actions of trustees, employers, and unions dealing with individual
plans.
Premiums and Guarantee Levels Need to be Re-Examined
Of course, program insolvency can be avoided by changes in premiums
and/or in guarantee levels. Since multiemployer guarantee levels are
below those of single-employer guarantees, most observers analyze
increased premiums, rather than changes to guarantee levels.
Although the timing is uncertain, PBGC projects that current
premiums ultimately will be inadequate to maintain current guarantee
levels. Multiemployer plans currently pay a flat rate premium of $12
per participant per year (until 2006, the premium rate was only $2.60
per participant). Thus, the multiemployer insurance fund has
accumulated limited reserves.
Even substantial increases in premiums would amount to a negligible
percentage of contributions or costs for most plans. PBGC multiemployer
premiums ($93 million total in FY 2010) represented about 0.5% of total
plan contributions, and about 0.27% of total plan expenses (benefit
payments and administrative expenses).
Higher premiums, by themselves, are unlikely to put plans or
employers out of business. However, not all plans and all employers are
alike. They are in different circumstances. Some are in such dire
straits that they often cannot afford any increases in costs, either
the small fraction represented by PBGC premiums or other administrative
expenses, or the much larger portion represented by their benefit
payments.
For multiemployer plans, even with the Moving Ahead for Progress in
the 21st Century Act (MAP-21) increases, absent further changes, PBGC
premiums will eventually be insufficient to support the guarantee and
the multiemployer insurance program. Premium reforms are a necessary
part of any solution to the funding challenges facing PBGC and should
be analyzed as part of and in the context of the broader changes for
multiemployer plans.
The Administration is not putting forth any new premium proposal
now. As we noted in our most recent Five-Year Multiemployer Report to
Congress under ERISA Section 4022A(f)(1), we can't yet determine what
changes to PBGC premiums for multiemployer plans will be appropriate in
the future and are not requesting Congressional action now. We think
the best course is to raise and discuss the issues with the Congress
and the affected constituencies and develop an approach that sustains
PBGC as part of a broader review of multiemployer plans.
Next Steps
We hope the information provided in the multiemployer reports to
Congress can inform and assist a dialogue about critical multiemployer
funding issues and PBGC's program and finances.
As it did seven years ago in the Pension Protection Act, Congress
has an opportunity within the next two years to preserve and enhance
the multiemployer plans on which so many small businesses and workers
depend.
The next two years will require a thorough review of policy options
(including those developed by multiemployer plans stakeholders and
their constituencies) and, ultimately, action on practical steps that
will bring long-term stability to the multiemployer system. With
changes, multiemployer plans can and will continue to provide portable
lifetime retirement benefits for millions.
PBGC and the other ERISA agencies look forward to working with
Congress and the multiemployer community as this important dialogue
evolves. We are grateful for the opportunity this Committee has
provided on this important issue and look forward to hearing your views
and answering any questions you may have.
______
Chairman Roe. Thank you, director.
Mr. Jeszeck?
STATEMENT OF CHARLES JESZECK, DIRECTOR, EDUCATION, WORKFORCE,
AND INCOME SECURITY, GOVERNMENT ACCOUNTABILITY OFFICE
Mr. Jeszeck. Mr. Chairman and members of the committee,
thank you for inviting me here today to discuss multiemployer
pension plans and the financial challenges they currently face.
With about 1500 plans covering over 10 million workers and
retirees, they are an important component of our nation's
private pension system. Today I will focus on the recent
actions that the weakest multiemployer plans have taken to
improve their financial position and the current trends in the
PBGC multiemployer insurance fund.
Because this testimony is based on a report to be released
later this month, the findings presented here should be
regarded as preliminary.
To summarize, while the most distressed plans have taken
significant steps to address their funding problems, a
substantial number here have determined that they have no
reasonable options to do so and instead will seek to forestall
insolvency.
These existing and anticipated plan insolvencies threaten
to drive the PBGC's multiemployer insurance fund into
insolvency in or about 2023 with serious consequences for the
retirees who depend on that fund.
Under current law, multiemployer plans with inadequate
funding levels designated as either endangered, yellow zone, or
critical, red zone must develop and implement plans to improve
their financial condition. Our analysis of 107 red zone
rehabilitation plans found that a large majority took
substantial corrective action.
Eighty-one of these plans proposed both increased employer
contributions and reduced participant benefits to improve their
financial position. An additional 21 plans propose one or the
other of these actions. Many of these actions were significant,
amounting to changes of 20 percent or more in the first year
alone.
Many plan officials we spoke with viewed these changes as
painful but necessary. They said that in many cases,
contribution increases of this magnitude strained the
competitiveness of their employers. They also said that
eliminating benefits like early retirement subsidies was a very
difficult concession for workers, particularly for those in
physically demanding occupations.
These steps, coupled with improvements in financial markets
since 2008 are expected to make a difference for many plans. We
found that 79 of the 107 plans surveyed expected to exit red
zone status after an extended period of time.
However, 28 plans, despite their best efforts, still
projected that no realistic strategy of contribution increases
and benefit reductions would allow them to avoid insolvency.
This continued weakness of many plans has important
consequences for PBGC's multiemployer insurance fund. Already,
the total amount of financial assistance PBGC provides to
insolvent plans has increased markedly.
In 2012, PBGC provided $95 million in assistance to 49
insolvent plans, up from about $14 million to 29 plans in 2005.
PBGC now expects plan insolvencies to double by 2017, placing
even greater demands on the fund.
In addition, the liabilities to PBGC from these probable
insolvencies have increased considerably, reaching $7 billion
in 2012. In contrast, they funded only $1.8 billion in total
assets as of 2012.
PBGC now expects that future liabilities from probable plan
insolvencies will exhaust the multiemployer insurance fund in
or about 2023. It should be noted that these estimates do not
include the reasonably possible insolvency of two large
underfunded plans. Combined, these plans paid about $3.5
billion in benefits to over 300,000 beneficiaries in 2011.
Both of these plans are projecting insolvency in the next
10 to 20 years. Irrespective of the other plan insolvencies
expected to drain the fund in the next decade, PBGC estimates
that the insolvency of either of these plans would exhaust the
insurance fund in 2 to 3 years.
The exhaustion of PBGC's multiemployer insurance fund would
have severe consequences for its beneficiaries. Because there
would be no assets in the fund, all current and future benefit
guarantees would have to be financed from premium collections,
which totaled only $92 million in 2012.
Beneficiaries of the multiemployer insurance fund who are
already receiving reduced benefits at or below the
comparatively modest maximum fund guarantee of $13,000 per year
would see their benefits further reduced to a small fraction of
that total.
Our forthcoming report will explore these issues in greater
detail and identify actions that can address the potential loss
of retirement income facing workers and retirees in some of our
nation's most vital industries.
That concludes my statement, Mr. Chairman. I will be happy
to answer any questions you or the members may have.
[The statement of Mr. Jeszeck may be accessed at the
following Internet address:]
http://www.gao.gov/assets/660/652687.pdf
------
Chairman Roe. Thank you, Mr. Jeszeck.
Mr. Perrone?
STATEMENT OF ANTHONY M. PERRONE, INTERNATIONAL SECRETARY-
TREASURER, UNITED FOOD AND COMMERCIAL WORKERS INTERNATIONAL
UNION
Mr. Perrone. On behalf of the 1.3 million members of the
United Food and Commercial Workers International Union, I am
pleased to submit this testimony to the Education and
WorkforceWorkforce Pension Subcommittee.
Since 2004, I have served as International Secretary-
Treasurer of the UFCW and our union represents members in U.S.
and in Canada predominantly in retail food and food
manufacturing.
Through collective bargaining, the UFCW has over 60
multiemployer pension plans across America that we support
along with large major supermarket corporations like Kroger,
Safeway, Supervalu, Ahold USA.
These plans cover approximately 700,000 active workers and
an additional 700,000 retirees and terminated vested workers
with a right to a pension in the future, also part-time workers
as well.
As a part of my responsibilities, I serve as Chairman of
the largest UFCW pension fund, the UFCW Industry Fund, an
industry fund that represents about $5.2 billion worth of
assets that covers 92,000 active workers that are employed by
500 different employers.
In 2012, the Industry Fund paid out $268 million in
benefits to 62,000 retirees. Of that, which was full-time and
part-time, for an average benefit of around $500 a month. In
the past decade, the financial crises that we have experienced
have destabilized many of our funds.
Starting with the tech bubble in 2000 through 2002,
followed by the global financial crisis that took place in
2008, our plans have suffered two draw-downs that reduced
funding ratios and in some cases, threatened plan solvency.
Since 2008, trustees have continued with highly volatile
public markets, historically low interest rates, and the
Federal Reserve Bank's quantitative easing strategies have been
difficult if not unfriendly to pension plans.
Pension funding ratios today are more sensitive to
investment risk because plans have matured. Inactive benefit
liabilities are more than two times active liability and these
plans are now paying more in benefits than they are receiving
in contributions, resulting in negative cash flows.
Now the UFCW has supported and lobbied for the passage of
the PPA in 2006, and a number of our plans proactively
implemented funding improvement plans even before then. We
implemented prospective benefit reductions, contribution
increases even prior to 2008.
Many plans actively have reduced our investment risk in our
portfolios by further diversification of assets away from the
public markets, but the magnitude of the events that took place
in 2008 were overwhelming.
Multiemployer plans lost between 20 and 30 percent of their
assets in 2008 and that was when the PPA really came into
effect. The same year that the global financial crisis hit the
U.S. economy with the force of a category five hurricane, at
that same time, PPA dramatically recast the funding
requirements established by ERISA in 1974.
Labor and employer trustees on UFCW plans have worked with
their legal and their actuaries to comply with the PPA, and we
spread the pain in forms of either higher contributions or
lower benefits to our participants.
However, despite these efforts, the UFCW has at least five
plans that are deeply troubled and threatened by insolvency. We
believe that the additional tools that are for deeply troubled
plans that are recommended by the NCCMP Retirement Security
Review Commission would go a long way to help us with those
plans' survival.
In fact, the Joint Labor Management Committee of the Retail
Food Industry, which includes the UFCW, Kroger, Safeway,
Supervalu, and Ahold USA, just last week endorsed that plan and
that commission's report.
The UFCW has been proactive in our defense of our pension
plans and many of our plans remain green under the PPA through
managed discipline, funding policies, and taking active
measures to de-risk our investment programs.
However, the global financial crisis destroyed trillions of
dollars of retirement wealth. Boston College Center for
Retirement Research Retirement Risk Index suggests that over 50
percent of Americans today cannot support a decent standard of
living when they retire.
I urge the committee to support our efforts and take all
actions necessary to preserve and secure multiemployer pension
plans, which play a critical role in delivering retirement
income to so many Americans.
The NCCMP Retirement Security Review Commission Report is a
roadmap to help achieve those goals.
Thank you, Mr. Chairman.
[The statement of Mr. Perrone follows:]
Prepared Statement of Anthony M. Perrone, Secretary-Treasurer,
the United Food and Commercial Workers International Union
On behalf of the 1.3 million members of the United Food and
Commercial Workers International Union, I'm pleased to submit this
testimony to the Education and Workforce Pension Subcommittee. This
hearing is both timely and critical to the 10 million workers and
retirees who are accruing and receiving benefits from the multiemployer
pension system.
Since 2003, I've served as the International Secretary-Treasurer of
the UFCW International Union. The UFCW represents members in the U.S.
and Canada predominantly in the retail food and food manufacturing
industries. Through collective bargaining, the UFCW sponsors over 60
multiemployer pension plans across America along with large supermarket
chains like Kroger, Safeway, Supervalu, and Ahold USA. These plans
cover approximately 700,000 active workers and an additional 700,000
retirees and terminated workers with a right to a vested pension in the
future. UFCW multiemployer plans are especially unique in providing
pension coverage to part-time workers.
As part of my responsibilities, I serve as the Chairman of the
UFCW's largest multiemployer pension plan, the UFCW Industry Pension
Fund. The Industry Pension Fund is a $5.2 billion plan that covers
92,000 active workers employed by 500 different employers. In 2012, the
Industry Pension Fund paid $268 million in benefits to 62,000 retirees.
All of our multiemployer plans are defined benefit plans that pay
lifetime benefit annuities. The benefits are modest, averaging just
over $500 per month.
Multiemployer Plans are governed by the funding and fiduciary rules
established by ERISA. The Taft-Hartley Act requires that the Board of
Trustees of these plans consist of an equal number of labor and
management trustees. Neither labor nor management dominates the
governance of these Plans. Labor and Employers act as co-partners in
the management of these plans as it relates to administration, funding
policy, and investment policy.
The past decade of financial crises has destabilized many of our
multiemployer plans. Starting with the Tech Bubble in 2000-2002,
followed by the Global Financial Crisis in 2008, our plans have
suffered two major drawdowns that reduced funding ratios and in some
cases threatened plan solvency. The experience of the capital markets
in the past decade has been unprecedented and presents one of the most
adverse environments for institutional investors in the post-World War
II era. Since 2008 pension trustees have had to contend with highly
volatile financial markets alongside historically low interest rates.
The Federal Reserve Bank's quantitative easing strategies are
unfriendly to pension plans.
Pension plan funding ratios today are more sensitive to investment
risk because the plans have matured--inactive benefit liabilities are
more than two times active liability, the workforce has aged, and the
plans are now paying more in benefits than receiving in contributions
resulting in negative cash flow. As a result, investment returns are
critical. When returns fall below expected assumptions, the impact on
the funding ratio is dramatic. Because of the PPA's annual
certification process, a significant number of plans are one bad
investment year away from triggering red zone critical status.
The UFCW supported and lobbied for the passage of the Pension
Protection Act of 2006 (PPA). The UFCW and the Employers we bargain
with adopted many of the principles of PPA well before it was
legislated. A number of UFCW plans proactively implemented funding
improvement plans that implemented prospective benefit reductions and
contribution increases prior to 2008. Many plans actively reduced
investment risk in their portfolios through further diversification of
assets away from public equities. But the magnitude of events in the
financial markets in 2008-2009 was over-whelming. Multiemployer Plans
lost between 20-30 percent of their assets in 2008-2009. Added to these
losses were the expected returns of 7-8 percent that were not realized.
Five years later, plan assets have barely recovered to 2007 levels.
PPA became effective in 2008, the same year that the Global
Financial Crisis hit the U.S. economy with the force of a category 5
hurricane. Congress could have never anticipated 2008 and the
devastation it would incur on pension plans. At the same time, PPA
dramatically recast the funding rules first established by ERISA in
1974. Plan trustees were required to interpret and comply with PPA in
the midst of a funding crisis that they were not responsible for. The
regulatory agencies responsible for PPA continue to offer very little
guidance. For reasons unknown to me, Congress decided not to address
PPA complexity in technical corrections legislation. This is one of the
reasons why the UFCW endorses the NCCMP Retirement Security Review
Commission proposals.
In our experience, Labor and Employer trustees on UFCW plans have
worked tirelessly with their legal and actuarial advisors to comply
with PPA. Our red and yellow zone plans have adopted rehabilitation and
funding improvement plans that allow these plans to emerge as safe
green zone plans in 10-13 years as required by law. These efforts have
spread equal pain in the form of higher contribution for employers and
reduced benefits for participants. The UFCW has at least five plans
that are deeply troubled and threatened by insolvency and must utilize
the ``reasonable measures'' safe harbor provisions of PPA. We believe
that the additional tools for deeply troubled plans recommended by the
NCCMP Retirement Security Review Commission would help these plans
survive. In fact, the Joint Labor Management Committee for the Retail
Food Industry which includes the UFCW, Kroger, Safeway, Supervalu, and
Ahold USA endorsed the Commission Report.
The UFCW has been proactive in defense of its pension plans. The
Industry Pension Fund that I chair has successfully remained fully
funded and a safe green zone plan under PPA through managing a
disciplined funding policy and taking active measures to de-risk its
investment program. This was accomplished through a partnership between
the Union trustees, the Employer trustees and the respective bargaining
party stakeholders. Every two years the trustees reset the actuarial
cost of the benefits. The bargaining parties must adjust to this cost
reset or future benefits will be decreased. In addition, the trustees
reduced early retirement subsidies and require 10% of every
contribution dollar to be held in reserve to amortize any unfunded
liability. The plan's investment committee has taken a number of
sophisticated steps to control investment risk. As a result, the
Industry Pension Fund's losses in 2008 were half of the average losses
suffered by multiemployer plans.
In 2011, the UFCW and Kroger completed a novel pension transaction
that merged four red zone plans to create one fully funded green zone
plan. The new plan covers 180,000 participants. The 10 year agreement
that created this new fund set out an explicit arrangement to fully
fund the new plan and establish a new future service defined benefit
plan. In its first year of operation in 2012, Kroger contributed $1.0
billion into this plan bringing its funding ratio from 71% to 100%.
Kroger utilized today's low interest rates to borrow the necessary
contributions in the public debt markets to pre-fund this plan. This
partnership between the UFCW and Kroger sets an example for others to
ensure the pension security for their workers and retirees. Not all
companies have the credit worthiness of Kroger and its access to the
public debt markets. The U.S. Government could greatly enhance
retirement security by offering to guarantee corporate bonds or loans
dedicated to pre-fund pension plans.
The recent reports issued by the Pension Benefit Guaranty
Corporation (PBGC) paint a grim picture of the multiemployer pension
system. The global financial crisis destroyed trillions of dollars of
retirement wealth. The Boston College Center for Retirement Research
``Retirement Risk Index'' suggests that over 50% of Americans cannot
support a decent standard of living when they retire. We cannot afford
to allow existing pension plans to wither and die. Millions of American
workers and retirees and their families depend on multiemployer pension
plans. Pension leaders in the retail food industry have been proactive
and creative and through self-help have protected the retirement
security of hundreds of thousands of plan participants. I urge the
committee to support our efforts and take all actions necessary to
preserve and secure multiemployer pension plans which play a critical
role in delivering retirement income to so many Americans. The NCCMP
Retirement Security Review Commission Report is a roadmap to achieving
that goal.
______
Chairman Roe. Thank you, Mr. Perrone.
Mr. Force?
STATEMENT OF HAROLD FORCE, PRESIDENT, FORCE CONSTRUCTION CO.,
INC., TESTIFYING ON BEHALF OF THE ASSOCIATED GENERAL
CONTRACTORS OF AMERICA AND THE INDIANA CONSTRUCTION ASSOCIATION
Mr. Force. Thank you, Chairman Roe, Ranking Member Andrews,
and members of the subcommittee for the opportunity to testify
at this hearing.
My name is Harold Force, President of Force Construction
Company, Incorporated, founded in 1946 and headquartered in
Columbus, Indiana. My presence here today is in behalf of the
Associated General Contractors of America affiliated Indiana
Construction Association, and my company.
My company performs institutional, commercial, and
industrial building construction as well as the construction of
bridges, dams, and civil works. Our workforce includes 170
persons, the majority of them members of one of four
construction craft unions.
As an employer signatory to multiple craft agreements, we
find that the multiemployer pension plans are quite different
from single-employer and public employee defined benefit plans.
Previous legislation has failed to give trustees,
contractors, and union representatives the tools needed to deal
with the challenges of managing their plans.
There are nearly 3.9 million participants in construction
industry multiemployer plans. Our experience is that the plans
allow construction employers to adapt to a fluctuating
workforce and allow employers to share a pool of qualified
employees who may work for multiple employers and at multiple
sites over time, while giving them access to retirement
security without being tied to a particular employer.
Although they are currently considered as defined benefit
plans, this has not always been the case. The concept of
signing on for anything other than the hourly contribution was
not even a part of the discussion until the early 1980s. For
most contractors, it is only recently that they have come to
understand that such plans are defined benefit plans and not
defined contribution plans.
Together with the realization that the hourly contributions
being made may not cover the benefit liability accruing within
the plans, the issue of pension plan insolvency poses a dire
threat to companies large and small.
As recently as 2000, all of the plans to which our firm is
signatory were fully funded. Due to plan consolidations, the
number of plans to which our firm contributes has reduced from
approximately 25 to a total of six for the same geographic area
and for the same number of crafts.
All of these plans are in the red zone, meaning that they
are critically underfunded on a current basis. I believe that
the assessments and recommendations outlined in the report of
the National Coordinating Committee for Multiemployer Plans are
well-developed and necessary to consider.
Changes are needed to save the businesses of many
contributing employers and to protect the retirement security
of their hard-working employees. Contributions to these plans
are funded entirely by employers, not unions, and pension plan
relief need not be a union bailout. Without implementing the
recommendations, the failure of these plans may jeopardize
solvency of the PBGC.
In summary, number one, I am concerned that the status of
many plans will rapidly pass a tipping point where the issues
of the deficit plan, increasing retirements, reduced numbers of
new employees under the plan, and withdrawal of contractors
will occur on a coincident manner that will accelerate the
failure of many plans.
Such convergence of factors could precipitate failure of
the plans and financial failure of the contributing employers.
This prospect is made worse because of delays in plan
reporting.
Secondly, available data on the status of plans to which
our firm is signatory suggest the plans cannot be funded to a
healthy status--cannot be restored to a healthy status by
addressing only the funding side of the situation. We have
tried that. I would refer you to the table and graph attached
to the written testimony.
Thirdly, a central underlying assumption concerning funding
for construction plans, a relatively steady flow of
contractors, and employee beneficiaries is not taking place.
Prospective employees consider the high contribution rates
combined with minimal benefits accrual and conclude that the
plan provides a low benefit return for them.
Prospective employers may choose to stay out of such plans
to avoid the rapid accrual of an undefinable withdrawal
liability. Signatory contractors consider winding down and
closing their business rather than risk exposure to the
continuing growth of an unfunded liability. And employee
beneficiaries who are fully vested are taking early retirement
in record numbers out of fear that the plans may fail before
their normal retirement age and that benefits will be lost.
Number four, continuing efforts by the Treasury and Federal
Reserve to maintain low interest rates makes it more difficult
for fund earnings to reach the investment earning assumptions
which drive the calculation for retiree benefits.
And lastly, prospective signatory contractors may decide
not to sign union craft agreements with the result that their
employees may be denied access to skills training,
apprenticeship, and portability of benefits, all of which are
necessary to attract and retain a competent pool of employees
for our industry.
Thank you, and I would be pleased to answer any questions.
[The statement of Mr. Force follows:]
Prepared Statement of Harold F. Force, PE, President,
Force Construction Company, Inc.
Thank you, Chairman Roe, Ranking Member Andrews, and members of the
Subcommittee, for the opportunity to testify at this hearing on the
``Challenges Facing Multiemployer Pension Plans: Reviewing the Latest
Findings by PBGC and GAO.'' My Name is Harold Force and I am the
President of Force Construction Company, Inc., founded in 1946 and
headquartered in my hometown of Columbus, Indiana. My presence here
today is in behalf of The Associated General Contractors of America;
affiliated Indiana Construction Association; and my company. My company
performs institutional, commercial, and industrial building
construction, as well as the construction of bridges, dams, and civil
construction. Our activities are fairly evenly divided between private
and public work sectors, the latter of which may include elements of
local, state, and federal funding.
Although we have completed jobs in seven different states over the
last five years, the majority of our work is performed within the State
of Indiana. Depending upon the type, size, and location of our
projects, our direct employed manual workforce includes from 125 to 250
persons, nearly all of them members of one of four construction craft
unions. Our salaried non-union technical, administrative, and
supervisory personnel number approximately 35 persons.
I. Multiemployer Pension Plans and the Construction Industry
A. Background
Multiemployer plans were initiated in the early 1900s but remained
unregulated until 1947 when the Labor-Management Relations Act
(informally known as the Taft-Hartley Act) was enacted imposing a
number of procedural and substantive standards that unions and
employers must meet before they may use employer funds to provide
pensions and other employee benefits. The Employee Retirement Income
Security Act (ERISA) in 1974, the Multiemployer Pension Plan Amendments
(MPPA) in 1980, the Economic Growth and Tax Relief Recovery Act in
2001, the Pension Protection Act (PPA) in 2006 and subsequent relief
legislation all provide for distinct and strict funding rules for
multiemployer pension plans in recognition of the vastly different
nature of multiemployer plans from single employer and public employee
defined benefit plans. However, previous legislation has failed to give
plan trustees, signatory contractors, and union business
representatives all the tools they need to deal with the challenges of
managing multiemployer defined benefit plans.
Employers contributing to multiemployer plans are not allowed,
under any circumstances, to legally defer payments to their respective
pension trust funds, and many of the funding issues for Multiemployer
Pension Plans (MEPPs) are entirely out of the hands of individual
contributing employers. They are obligated by their labor contracts to
contribute a certain amount for each hour of work by a covered
employee. If an employer is delinquent in its contributions, the MEPP
trustees have a legal, fiduciary responsibility to take all reasonable
steps to collect the delinquent amount. Each MEPP is governed by a
board of trustees, with equal representation from management and labor,
as required by the Taft-Hartley Act. Trustees are fiduciaries required
by law to act in the best interests of the MEPP. They make plan
decisions based on sophisticated modeling and advice by plan
administrators, actuaries and investment advisors.
It is important to keep in mind that contractors signatory to
collective bargaining agreements requiring contributions to
multiemployer pension plans are firmly and legally bound to make the
pension contributions called for by their agreements, and cannot elect
to delay or modify such payments or use them for any other purpose
while obligated to the collective bargaining agreement.
B. Construction Industry
There are nearly 3.9 million participants in construction-industry
multiemployer plans, and most contributing employers to these plans are
small businesses. The construction industry is comprised of mostly
small employers. MEPPs offer these employers the ability to compete
with larger employers and to offer attractive benefits to maintain and
preserve a skilled workforce. MEPPs are also attractive to construction
employers because of the unique nature of the industry; MEPPs allow
construction employers to adapt to a fluctuating workforce from project
to project, and facilitate the construction employers' ability to share
a pool of qualified employees because the MEPPs offer employees that
may work for multiple employers in a region over the course of their
working lifetime, and often multiple employers in the same year, the
portability to have retirement security without being tied to a
particular employer.
Although MEPPs are currently considered as defined benefit plans,
this may not have been the case when many of the current plans were
first established. As far back as the mid-1950s, payments to the plans
were negotiated on a per-hour basis as part of a larger wage and
benefits package. The concept of ``signing on'' for anything other than
the hourly contribution was not even a part of the discussion or the
negotiation for such plans until the passage of ERISA in the early
1980s. For most contractor members of MEPPs, it is only in the recent
past they have come to understand such plans as defined benefit plans,
along with the realization that the hourly contributions being made may
not cover the liability accruing within the plans and for the benefit
of their employees and future (or current) retirees.
The construction industry is populated by firms of many different
sizes, with the number of employees who are beneficiaries of the MEPPs
varying from a handful to groups numbering in the thousands. The very
real and growing issue of pension plan insolvency affects companies
large and small.
Construction-industry employers are often represented by a local
employers' association that negotiates a multiemployer collective
bargaining agreement (CBA) with one or more unions on behalf of its
member-employers or other employers that have delegated bargaining
rights. For example, Force Construction is a member of Indiana
Contractor Association (ICA), a chapter of The Associated General
Contractors of America. ICA negotiates multiemployer CBAs with the
Carpenters, Cement Masons, Ironworkers, Laborers, Operating Engineers,
and Teamsters on behalf of many ICA member companies. While Force has
not assigned its bargaining rights to the ICA, and has negotiated
directly with some of the craft unions, the benefit provisions are
always the same as in the ICA agreements. These CBAs obligate us to
contribute to local and/or regional MEPPs. In addition, they obligate
us to contribute to other funds, such as multiemployer health and
welfare funds, training and apprenticeship funds, and, in some cases,
multiemployer defined contribution pension plans. Construction-industry
MEPPs often have hundreds or thousands of participating employers.
While 54% of all MEPPs are in the construction industry and 37% of
participants are in a construction industry plan. Construction industry
plans vary by asset value, number of participants, number of employers,
types of participants and funding status.
Seven months after the close of its plan year (ten and a half
months, with extension), every qualified pension plan must file a Form
5500 with the Internal Revenue Service (IRS) and the Department of
Labor (DOL). According to a report by the Mechanical Contractors
Association of America and Horizon Actuarial Services, LLC, Inventory
of Construction Industry Pension Plans, 2012 Edition, that analyzed the
most recent Form 5500 filings----there were 819 construction-industry
multiemployer defined benefit plans in the country, and approximately
20 MEPPs applicable to construction industry employers in the State of
Indiana.
The report shows MEPPs vary by asset value with a median asset
value of $56 million. Nine percent of the plans had assets above $500
million, 26% between $100 and $500 million and 67% less than $100
million.
MEPPs vary by number of participants with the median number of plan
participants being 1,183 (participants include inactive participants
with deferred vested benefits, retired participants, and
beneficiaries). About 8% of the plans had at least 10,000 participants.
About 46% of the plans had fewer than 1,000 participants and 24% had
fewer than 500 participants.
MEPPs vary by the number of employers with the median number of
participating employers being 64. About 19% of the plans had fewer than
25 employers and 61% had fewer than 100 employers and 78% had fewer
than 200 employers. About 4% of the plans had more than 1,000
employers.
MEPPs vary by the types of participants with the median number of
participants with deferred vested benefits increasing from 984 in 2001
to 1,152 in 2010 with most of the increase coming from inactive
participants. Overall, plan populations are growing larger with the
number of active participants declining while the number of inactive
participants getting larger. Five percent of plans had at least 4
inactive participants for every 1 actively working participants--very
unhealthy--while 5% of plans had almost 2 active participants for every
1 inactive participant. The median construction industry plan had 4
inactive participants to every 3 active participants.
Finally, MEPPs vary by funding status with median industry plan at
80% funded in 2010. Half of plans were within 71% and 88% funded, 5%
were 107% funded or better and 5% of plans were 50% funded or worse.
Using the PPA certification status: 57% were ``Green Zone'', 19% were
Endangered, 4% were Seriously Endangered and 20% were Critical.\1\
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\1\ Inventory of Construction Industry Pension Plans, 2012 Edition
http://www.horizonactuarial.com/blog/uploads/2012/08/MCAA--Horizon--
2012PensionInventory--web.pdf
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II. How did Construction Get to this Place
A. Pension Funding Rules
Employers contributing to MEPPs are often asked how did the plans
get into this situation. The stock market made a lot of money for quite
a few years. Why didn't plans bank returns in the big years to save for
the day when stock market returns were down? They were constrained by
federal tax policy.
Importantly, sponsors of single-employer plans could respond to
overfunding by simply suspending their contributions to plans.
Unfortunately, employers contributing to MEPPs were legally bound by
their collective bargaining agreements to continue to contribute to
MEPPs that became overfunded. Yet, when those contributions exceeded
the ``maximum deductible'' limit permitted by tax laws, the
contributing employers ran the risk of losing their current deduction
for the contributions and of being assessed an excise tax on top of the
contributions.
MEPP trustees, in actions that seemed to make sense at the time,
responded to such potential overfunding by making additional benefit
improvements. Stopping contributions entirely would have been much more
complicated because of the collective bargaining process that would
have required renegotiation of collective bargaining agreements to
accomplish it. And, after all, the MEPPs had not had significant
funding issues in the past
Tax law that imposed the maximum deductible limits focused on small
professional companies that might be inclined to shelter income. It was
not designed for construction employers who were bound by their
collective bargaining agreements to make the contributions and who
could in no way shelter income in the multiemployer plan to which they
were contributing.
The funding provisions of the PPA expire on December 31, 2014. The
PPA helped MEPPs in some respects, but it has also proven to be
inflexible and insufficient to meet today's demands.
On the positive side, the PPA requires timely and extensive
reporting so all employers know the status of funds and their
obligation--which, regrettably, was often not the case before the PPA.
The PPA has also allowed a MEPP needing corrective action to take 10 or
15 years to bring it to a better funded position; before the PPA,
employers could have been required to make up deficiencies in one year
andface IRS levies. The PPA has also permitted some reduction in
accrued benefits by plans in the worst shape.
B. Financial Crisis
The 2008 economic downturn highlighted the inherent risks that the
current system poses for contributing employers and the unpredictable
costs and risks for employers. The reduction in construction activity
meant since then has meant fewer hours are being worked, reducing
directly that amount of money being contributed to MEPPs. At the same
time, the loss of value in invested assets that occurred when the stock
markets plummeted reduced the funding position of the MEPPs as well.
The median construction-industry MEPP was 80% funded at the end of
2010. Even under the best of circumstances it would take 10 years or
more for plans to recover from the 25%-plus market losses in 2008.
The PPA continued to be inflexible while the events that resulted
in that underfunding played out. The PPA did not take into account the
market cycle or the equity market downturn, which the second historic
equity market plunge and industry downturn exposed.
C. Industry Demographics
Plans are facing a shrinking ratio of workers to retirees. Pension
plan demographics have steadily worsened over the past decade, with
sharp declines after 2008. Inactive participants (i.e., retirees in
payout status) now outnumber active participants, and that trend is
accelerating. It has become more difficult to improve plans' funding
status merely by increasing the employers' contribution rate or
decreasing the participants' future benefit accruals. In 2010, the
ratio was four inactive workers for every three active workers in
construction-industry MEPPs, and the number of retired participants
drawing benefits is growing.
D. Industry Downturn
As referenced earlier, construction-industry MEPPs are dependent on
hour-based contributions for active workers and on attracting new
employers into the system; however, both of those factors are
shrinking. The unprecedented downturn in construction demand in recent
years has left the hours of work significantly down and fewer active
participants performing work. Some construction-industry MEPPs are
being funded based on 40% fewer hours of work now. The industry has two
million fewer workers today compared with the start of the recession
and continues to have the highest industry unemployment rate of any
industry.
III. Force Construction Company Multiemployer Pension Plan
Contributions
For the State of Indiana, Force has records going back as far as
1984, at which time all plans were fully funded and with many plans
have funding ratios of 110% to 115% or more. As recently as 2000, all
of the plans to which our firm is signatory were fully funded, meaning
that there was no allocable unfunded vested liability or withdrawal
liability. Because of MEPP plan consolidation, the number of individual
plans to which our firm contributes has drastically reduced, from
approximately 25 plans 30 years ago; to approximately 15 plans 15 years
ago; to a total of 6 plans today (for the same geographic area and for
the same number of crafts). Those 6 plans are all currently underfunded
and in the PPA's red zone, meaning that these plans are critically
underfunded on a current basis.
Attached to this report is the most currently available information
on plan status for general construction trades in the State of Indiana.
IV. Impact on Construction Employers
Unfortunately, employers can be adversely affected by participating
in a multiemployer plan. When an employer participates in a MEPP it
expects that its contributions will fluctuate depending on the
employer's business conditions--and, particularly, that contributions
based on hours worked will decline as hours of work decline. But when a
plan experiences funding difficulties, contributions may still need to
rise--even though, and actually because, hours on which contributions
are made have dropped. In this respect, an employer participating in a
MEPP is subject to many of the same vagaries of the economy as a single
employer with a defined benefit plan. Small employers are often less
able to absorb fluctuating contribution rate increases than a large
employer. When companies bid for work, accounting for this can often
inflate a given company's bid costs, which, in turn makes that company
less competitive in a highly competitive market. Reduced work activity
thus reduces funding, but the overall funded status problem of MEPPs is
exacerbated by the fact that many participants are now ``orphans.''
That is, the employers for whom they worked are now out of business or
out of the MEPP, but the benefits accrued while the participants worked
for those employers were not fully funded by the former employers'
contributions. Employers are often astounded, and their plans often
thwarted, by extraordinary withdrawal liability created by such funding
shortfalls when they are ready to sell their business or change their
operations. The prospect of withdrawal liability can discourage a
potential buyer from acquiring a business when its current owners want
to sell and retire.
The higher pension contributions needed to work on eliminating the
underfunding are detrimental to the contributing employers in their
already competitive environment for signatory contractors, but they can
hurt employees too. Often in the construction industry, collective
bargaining parties negotiate over a wage-and-benefits package. In order
to alleviate pension underfunding, a greater portion of that package
must be allocated to pension plan contributions because it cannot be
passed along as a cost to the construction user. This leaves less money
available for wage increases and other benefits. In short, the total
amount of money available for wages and benefits is finite, so one
consequence of underfunded pension plans is that employee take-home pay
remains stagnant or, worse, is reduced.
V. Recommendations for Congress
Trustees of a plan must be given the flexibility to make changes.
New tools are needed to try to revolutionize the pension system and
save the defined benefit system--both for the directly interested
parties such as employers and participants, but also for the PBGC.
The PPA's current funding rules for multiemployer pension plans
sunset in 2014 which will create additional challenges for distressed
plans. A plan that is currently in the green zone but might face
funding problems after December 31, 2014, would not be able to use the
current PPA rules to improve its position. After December 31, 2014, a
plan that is in red status will continue to be in that status, a plan
that is in yellow or orange status will continue to remain in that
status, but a plan that is in green status will not be able to go into
red, orange or yellow status and take advantages of the tools that such
status now permits.
The Retirement Security Review Commission (the Commission) was a
labor-management, cross-industry group of stakeholders established by
the National Coordinating Committee of Multiemployer Plans to develop a
long-term solution to the multiemployer pension problems discussed
above. The Commission has developed recommendations for legislative
changes that Force Construction and the Associated General Contractors
of America support. These changes are needed to give plan trustees and
collective bargaining parties more tools to take prompt action to
correct funding shortfalls and avoid future shortfalls, to distribute
costs and risks more equitably among all stakeholders in the plan, and
to secure the retirement income of employee participants in
multiemployer plans.
A. Preservation: Proposals to Strengthen the Current System
Some of the Commission's proposals represent technical refinements
to the PPA, while others address shortcomings of the system outside of
the PPA. These recommendations are designed to provide additional
security for (a) the majority of plans that have successfully weathered
the recent economic crises; (b) those that are on the path to recovery
as measured against the objectives set forth in their funding
improvement and/or rehabilitation plans; and (c) those that, with
expanded access to tools provided in the PPA and subsequent relief
legislation, will be able to achieve their statutorily mandated funding
goals.
B. Remediation: Measures to Assist Deeply Troubled Plans
Under current law, a small minority of deeply troubled plans are
projected to become insolvent. For the limited number of plans that,
despite the adoption of all reasonable measures available to the plans'
settlors and fiduciaries, are projected to become insolvent, the
Commission recommends that limited authority be granted to plan
trustees to take early corrective actions, including the partial
suspension of accrued benefits for active and inactive vested
participants, and the partial suspension of benefits in pay status for
retirees. Such suspensions would be limited to the extent necessary to
prevent insolvency, but in no event could benefits go below 110% of the
Pension Benefit Guaranty Corporation (PBGC) guaranteed amounts. To
protect participants against potential abuse of these additional tools,
the Commission further recommends the adoption of special protections
for vulnerable populations including PBGC oversight and approval of any
proposed actions, taking into consideration certain specified criteria.
C. Innovation: New Structures to Foster Innovative Plan
Designs
To encourage innovative approaches that meet the evolving needs of
certain plans and industries, the Commission recommends the enactment
of statutory language and/or promulgation of regulations that will
facilitate the creation of new plan designs that will provide secure
lifetime retirement income for participants, while significantly
reducing or eliminating the financial exposure to contributing
employers. While the development of new flexible plan designs--
including, but not limited to, variable annuity and ``Target Benefit''
plans--would permit adjustment of accrued benefits, in order to protect
plan participants from this risk, these models would impose greater
funding discipline than is required under current defined benefit
rules. The adoption of such new models would be entirely voluntary and
subject to the collective bargaining process.
I believe that the assessments and recommendations outlined in the
Commission's report are well-developed and necessary to consider. The
condition of many, and perhaps most, plans is such that their recovery
is virtually impossible under current laws and rules. Something must be
done to avoid failure of the plans and the catastrophic consequences
which such failures would entail.
VI. Conclusion
In conclusion, the challenges confronting the sponsors of
multiemployer plans are unprecedented. Without bold, decisive action,
plan sponsors will no longer be able to provide these benefits,
construction company employers will be forced to recapitalize the plans
or the plans will be forced to become wards of the PBGC. Changes are
needed to save the businesses of many contributing employers and to
protect the retirement security of their hardworking employees.
Multiemployer pension plan relief is not a union bailout, as
contributions to these plans are funded entirely by employers, not
unions. Reform based on the Commission's recommendations will minimize
government risk and alleviate the financial challenges facing the
PBGC's multiemployer guaranty fund. Without implementing the
recommendations, the future failure of large plans will jeopardize the
PBGC's long-term viability and will put taxpayers on the hook. Enacting
reforms will take pressure off the government for financial exposure
while continuing to provide retirement security for participants.
I want to close with a few succinct points about the nature of the
problem:
1. I am concerned that the status of many MEPP plans will rapidly
pass a tipping point where the issues of a deficit plan, increasing
retirements, reduced numbers of new employees under the plan, and
withdrawal of employers will occur in a coincident manner that will
accelerate the failure of many plans. Such convergence of factors could
precipitate failure of the MEPPs and of the contributing employers. The
prospect is made worse because delays in plan reporting could prevent
trustees and employers from learning of the crisis, and result in
delays in trying to devise a comprehensive solution.
2. Available data on the status of plans to which our firm is
signatory suggest that the plans cannot be restored to a healthy status
by addressing only the funding side of the situation. We have tried
that.
3. One of the principal underlying assumptions concerning funding
for construction MEPPs, i.e. a relatively steady flow of contractors
and employees/beneficiaries, is simply not taking place. Prospective
employees consider the high contribution rate combined with minimal
benefit they accrue due to attempts to have an affordable plan, and
conclude that the MEPP provides a low benefit return for them.
Prospective employers who are not currently signatory to a plan are
electing to stay out of such plans to avoid the growing accrual of an
undefinable eventual withdrawal liability. Contractors who are
signatory to construction MEPPs are increasingly deciding to wind down
and close their business rather than continue the growth of an unfunded
liability and risk collapse or possible mass withdrawal from the plans.
Employees who are fully vested and have the opportunity to take early
retirement are doing so in record numbers, out of fear that plans may
fail before their normal retirement age and that their benefits will be
lost.
4. Continuing efforts by the Treasury Department and the Federal
Reserve system to maintain low interest rates exacerbate problems that
MEPP fund managers and trustees have, making it nearly impossible for
fund earnings to reach the investment earning assumptions which drive
the calculations for retiree benefits.
5. Because of employer liability issues associated with MEPPs,
potential signatory contractors avoid signing union craft agreements,
with the result that their employees are denied access to skills
training, apprenticeships, and portability of benefits, all of which
are necessary to attract and retain a competent pool of employees for
our industry.
I would be pleased to answer any question that the members of the
Subcommittee may have.
Thank you.
------
Chairman Roe. Thank you, Mr. Force.
And with the panel's uplifting testimony, now we can get
started, you all painted a pretty bleak picture, but there are
solutions to this, and I know certainly in a bipartisan way, we
are ready to do this.
Mr. Force, I think you laid it out very clearly and let me
just summarize especially in the crafts industry and the
contractor industry where you are, I know that certainly
attracting good people that the pension benefit is a huge plus
out there if a man or woman working for you and your business
can go to this job or that job or that job and realize they are
not losing their pension contribution, that is a huge benefit I
think.
Problem is we have a good many plans that are underfunded I
think because of several reasons. One you brought up; the
downturn in the market. Both--and people forget that the
market, and Mr. Perrone pointed out, in early 2000s we had a
recession then also followed by a much deeper recession in
2008.
We have a--I think we have a system where calculating the
benefits has been unrealistic. Some have calculated it at 7 to
7.5 to 8, 8.5 percent return every year without any downturns.
I think that was a mistake--I think you have done--that is
unrealistic.
I think certainly the economy, this particular recession
hit certain parts of the economy, for instance construction
housing market, much more severely than others.
Mr. Perrone, you are involved in a market where we all have
to do every day, which is eat, and you are in a very
fortunate--because we are going to buy food but we don't
necessarily have to buy a house and--or a new home or a new
business.
We may live--stay in the old building. So I think that is
why some plans have been able to survive and stay in the green
zone or relatively safe and others have been in the critical--
trucking, construction, other entities like that, so we have
had that problem.
And I think lastly, and Mr. Andrews and I were talking
about it, I think certainly one of the solutions that we have
to have is to be able to allow you because I went through this
when I was the mayor of a city and a defined benefit plan, when
things are going well your contributions may be 5, 6, 7 percent
of the person's income, but all of a sudden the market takes a
dive your actuaries say excuse me, you have got to donate--you
have got to put 20 percent away a year, and as an employer,
there is no margin to do that.
You can't invest in any new equipment or anything. I think
we have to have a way and we have to talk to Ways and Means
about this because it does affect taxes and we don't have any
jurisdiction over that, but to allow you during good years to
be able to continue those contributions so that in the bad
years they level out over time and I think that is going to be
one of the solutions.
I think another solution is going to be an increased PBGC
contribution. I don't know how much that will be. That can be
determined and you will have to obviously, with the unions, Mr.
Perrone, and you all have been very, very helpful in this is to
look at decreasing the contribution. We have millions of people
out there, working people every day that are retired now that
are relying on us to do our jobs so that they continue to get
their benefits that they have been promised and earned I might
add.
Mr. Jeszeck, I want to ask you if you could just discuss
just a little bit of the contagion effect how one plan that is
in trouble will affect another plan. If you hit your mic----
Mr. Jeszeck [continuing]. Mr. Congressman, and I think the
situation that Mr. Force--his company could potentially be an
example of that. He contributes to multiple multiemployer
plans. So if you have a company that is in a number of
different plans and goes bankrupt, not only does it affect the
financial status of the principal plan, but it would affect the
financial status of all of these other plans.
So if you have--these other plans could be in green status,
could be financially, you know, solid and yet if some--an
employer which is in--may only be in part of that plan but in
one of these other plans goes bankrupt, it would have an effect
on these and these other--and all of these plans.
An example of this that came to us when we did our work was
the Hostess company, which was in a considerable number of
multiemployer plans and essentially, the contagion spread to
their bankruptcy and one--and that really affected one plan
hurt a number of other plans as well.
Chairman Roe. My time is about expired, but Mr. Jeszeck,
you mentioned the ones that are in the red zone--do--and we
have a lot fortunately in the green zone because things have
gotten better. How much is that liability in the red zone and
this will go to Mr. Gotbaum also, how much do we have to bring
the PBGC rates up to make up or decrease the benefits in those
in the red zone right now?
Mr. Jeszeck. Well, I would have to defer to Mr. Gotbaum on
PBGC. They do projections of the changes in revenue that would
be necessary to pull out the--get these plans out of red zone
status.
Chairman Roe. Mr. Andrews?
Mr. Andrews. Thank you, Mr. Chairman. I appreciate the
panel. I think we have four problem solvers here this morning.
I really appreciate that.
Mr. Gotbaum, you have really shown the desire to lead your
agency and be a problem solver.
Mr. Jeszeck, the GAO is always a rich source of data and
understanding.
Mr. Force and Mr. Perrone, I again want to commend you for
participating in the negotiation of the joint committee that I
think is given a very solid place for us to begin.
Mr. Perrone, I think you have given us in particular a
compelling case study as to how we might solve this problem in
other places with the Kroger/UFCW agreement that you mentioned
in your testimony. Now we had a representative of Kroger before
the subcommittee a few hearings back who told exactly the same
story and I think it bears repeating.
My understanding is in 2011 there were four red zone plans
that--of people who worked at Kroger supermarkets, UFCW
employees. Is that right?
Mr. Perrone. Yes, Congressman Andrews.
Mr. Andrews. And my understanding is that you then
collectively bargained a solution of that, the union and the
management came together. Is that right?
Mr. Perrone. That is also correct.
Mr. Andrews. And there were 180,000 participants that were
distributed among those four red zone plans. My understanding
is that we now have one fully funded green zone plan. Is that
right?
Mr. Perrone. That is correct, and I believe that the person
that came before the committee was Scott Henderson, the
Treasurer of Kroger who sits on a fund--another fund with me
which we had a discussion about some potential resolutions of
other problems that could ultimately come up.
Mr. Andrews. Now my understanding is that one of the ways
that you got from 71 percent funding to 100 percent funding was
a credit facility where Kroger and the plan were able to borrow
a significant amount of money, take advantage of low interest
rates, and plug the gap. Is that how you did it?
Mr. Perrone. Basically what Kroger did, they went to the
capital markets. They arbitraged the interest rate to where
that they took the rate that they were able to get on the open
market, which was around 2 percent versus the 7.5 percent for
the fund. And they were able to save a considerable sum of
money on the contributions, which is the conversation the
treasurer and I had the other day, is whether or not there
might be some ability to go to investment banks for instance,
take the contributions that are coming in and use those
contributions as a vehicle to service the debt and reduce or
arbitrage the interest rates on that.
Mr. Andrews. Now in your testimony you mentioned I think it
is quite accurate that not all potential borrowers would have
the creditworthiness that Kroger has, and you indicated there
might be another mechanism where we could enhance that credit
perhaps through a guarantee system or what have you.
Mr. Gotbaum, not speaking authoritatively for your agency,
but just your first impression, if we were able to construct
proper protections against reckless borrowing, something that
Congress has not been terribly good at on our own I must admit,
but if we could protect proper governors and parameters around
those deals, do you think that some sort of credit enhancement
in the form of a public guarantee would be a useful tool in
achieving the result like we achieved in the Kroger/UFCW case?
What do you think about that?
Mr. Gotbaum. This is not something on which there is, as
far as I know, an administration position, so I am giving you
my personal reaction, my personal reaction.
Mr. Andrews. Yes, understood. This is just your opinion.
Yes.
Mr. Gotbaum. There is--I think it is a great thing that the
government thinks about all possible ways to be supportive of
multiemployer plans. I think you have put your finger on one of
the important issues as to how we do it.
This is a system that is not funded by taxpayers, and it is
a system that we want to keep not funded by taxpayers. The way
we think that is is to try as much as much possible to enable
plans to do self-help on their own, but to facilitate them so
my----
Mr. Andrews. You mentioned one other thing----
Mr. Gotbaum. So my reaction is be--I think this is
something which we can and should take a look at.
Mr. Andrews. One other thing that comes to my mind on this
is that the CBO would score such a guarantee as costing the
Treasury money, you could construct a system where there is a
fee that would have to be paid by the plan to the government
that would offset and make it deficit-neutral if you did such a
thing, where the fee would still be less in order to buy the
credit enhance--anyway, it is a way to approach the problem.
Thank you.
Chairman Roe. I thank the gentleman for yielding.
Chairman Kline?
Mr. Kline. Thank you. Thank you, Mr. Chairman.
Thanks to the panelists for being here today.
Director, always good to see you. Appreciate your testimony
and that of all of the members of the panel.
I think you said, Director, that it is complicated and just
listening to the conversation here today, we have got arbitrage
and interest rates and guarantees and all that sort of things
and it is complicated, but it being complicated doesn't mean
that we don't need to address it. And there was some testimony
today and some statements perhaps from some of my colleagues
about how it is really not all that bad that, you know, most of
the plans are sort of in green. We just have a few that are in
red, and at the same time I think some, over half of the plan
participants are in plans that are in yellow or red zones.
And you, Director Gotbaum, have said that there is a 90
percent likelihood of insolvency in this multi-employer
insurance program in the next 20 years. That is not very
encouraging, that there is a 90 percent likelihood of
insolvency.
So again, it spurs the activity of this committee and in
cooperation with you and others to do something about that. So
in view of that 90 percent likelihood of insolvency, what does
the PBGC do? How can you continue to pay promised benefits?
Mr. Gotbaum. Mr. Chairman, thank you for being here and for
asking the question. PBGC--our job is to be a safety net for
plans. In some respects, I think of the PBGC as the
multiemployer back up to multiemployer plans. And that means
that in the same way that we worry about the financial
soundness of the plans we have to worry about the financial
soundness of PBGC.
Now, for a very long time PBGC premiums were low, and in
the multiemployer program, they were enough. What has happened
since is that it has become clear that even though most plans
will not end up on the PBGC's door, enough will so that we
don't have our--the current resources.
So what we hope to do is to work with this committee, with
the Congress and others, to do two things. One is to figure out
what changes make sense for multiemployer plans. And then,
secondly, with those changes what does the PBGC need in order
to be the safety net that ERISA intended?
We think those discussions have to be done together because
if you say to me: ``How much money would you need to get--to
take care of all of the plans that might go insolvent?'' The
answer is: ``Too much.''
But if the question is: ``How much--what would PBGC need in
order to deal with the problems that will really occur after
you have done your work over the next 2 years?'' That, I have
got to say, I think is manageable, and that is what we look
forward to doing.
Mr. Kline. Without any changes to current law and we are
intent, I believe, on changing current law, but without any,
what would premiums have to go to, to allow you to continue to
pay the benefits. Have you looked at? Do you know what that
number is?
Mr. Gotbaum. To be honest, Mr. Chairman, that was a
sufficiently high number that I didn't run around and ask my
staff for a detailed estimate. [Laughter.]
Mr. Kline. I can easily imagine. We now have--I see my time
is about to run out--but we have the a report from the NCCMP
that is I think helpful. Are you or have you taken a position
on that that that is the way to go? Are there modifications to
it? Do you have a comment? I think you addressed that briefly
in your testimony, but where are you, having looked at that
input?
Mr. Gotbaum. As I said in my testimony, we feel very
strongly that because these situations are complicated, it is
important to start with the solutions that the industry
themselves figure out, but that doesn't mean we stop there.
What we have done since we received the report, we have got
the report a couple of weeks ago I think. Is we are starting to
analyze it. We are trying to figure out what the
recommendations mean. We are still some time away from
analyzing those. Once we do, then we can come back and give you
a sense of what are the implications.
Mr. Kline. And we will be looking for that. We also are
analyzing it. We appreciate the product and we appreciate your
testimony, and I yield back.
Chairman Roe. Thank the chairman for yielding.
Mr. Scott?
Mr. Scott. Thank you, Mr. Chairman.
Mr. Gotbaum, following up Mr. Andrews' suggestion, if there
was a guarantee, well really a guarantee in any way, how could
we possibly be any worse off with this suggestion? How could we
be any worse off if you adopted Mr. Andrews' suggestion because
if they didn't pay the loan, I mean, we are guaranteeing it
anyway, we couldn't possibly be any worse off, could we?
Mr. Gotbaum. One of the things that I have learned, Mr.
Scott, is that pensions--if as Mr. Kline said, if pensions are
complicated, multiemployer pensions are even more complicated.
Mr. Scott. Well, let me----
Mr. Gotbaum. And so my only point is I do think we need to
think carefully and well about what we can do, what we can do
to be helpful. What I hope is that especially when you do that,
you give the plans enough flexibility and enough range of tools
so that the plans can each solve their own set of problems.
Mr. Scott. Well, is withdrawal from plans by corporations a
problem now?
Mr. Gotbaum. Mr. Scott, withdrawal--the--withdrawal
liability is in some respects the glue that holds the
multiemployer system together. The way I think about the
multiemployer system is it is an agreement entered into by many
employers that in exchange for not having to go through the
hassle of worrying about individual administration of pensions,
they are bound together.
Now the issue is that if an employer can just walk away
without consequence, then employers are not bound together, and
so one of the fundamental issues we have is can you provide
flexibility without undoing the basic glue that holds----
Mr. Scott. But that is an issue. What is the present law?
Can somebody walk away without any kind of legacy liability?
Mr. Gotbaum. No. The way the law currently works is that if
an employer withdraws, there is withdrawal liability. They have
a proportional share of the ongoing obligation of the plan.
What plans have said to us and what employers have said to us
is: ``We don't think that is fair.''
Mr. Scott. Proportional share? They don't have to take the
whole weight--if they stay in, if things go south, they are
stuck holding the entire bag. If you are a little teeny company
and a big guy goes broke, you have now assumed his--that big
liability. Is that right?
Mr. Gotbaum. One of the issues that we do have is that with
the change in the employer makeup of some plans a lot of
employers, as Mr. Force said, who thought they were in
basically a defined contribution plan, that they didn't have to
worry once they wrote the check, now worry about residual
liability. And that is why we are trying to figure out--are
there ways to fairly and while protecting the integrity of the
plans allow flexibility to plans.
Mr. Scott. Okay, well if somebody goes bankrupt, their
liability goes to the other corporations ultimately to the
PBGC. What if they reorganize in bankruptcy and come right back
out? What happens to their liability?
Mr. Gotbaum. Generally, in bankruptcy, the obligations of
companies including their obligations to pensions are what the
lawyers would say is, ``discharged in bankruptcy.'' So they
have shed them.
Mr. Scott. So if they reorganize, they have shed themselves
of that entire liability.
Mr. Gotbaum. Yes, Mr. Scott.
Mr. Scott. You have indicated that the premiums have gone
up from $9 to $13 this year. Is there any thought of basing the
premiums on which zone you are in?
Mr. Gotbaum. We are in--Mr. Scott, we are in early days on
that exact question. One thing of which we are confident is
that we really do need to rethink our program. We need to
rethink how we charge because we want to preserve the PBGC as a
safety net.
Mr. Scott. Is that being thought of that you get charged by
the zone?
Mr. Gotbaum. It is clearly something which we should
consider, yes.
Mr. Scott. And now in calculating your annual contribution,
that can go up and down with what zone you are in, is there any
problem with the formula that kind of compounds the problem? Is
the formula about what you have to put in this year, is there
any problem with that formula?
Mr. Gotbaum. Mr. Scott, various plans have told us that
although the basic architecture that the Congress created in
2006 makes sense, that some of the ways we have implemented the
rules actually leaves them with uncertainty. And so they have
come back and suggested that there be more flexibility in terms
of zone certifications and the rules. That is something which
we think ought to be considered and thought through as part of
this review.
Chairman Roe. Thank you for yielding.
Mr. Messer?
Mr. Messer. I am a freshman here. It took me a second to
get the--my mic on.
I want to thank the panelists, you know, in a time where
Washington seems to not be able to agree about much of
anything, it is nice to see a group of people, that are coming
together and trying to work and solve problems. I want to
particularly thank Harold Force for being here today. He is a
constituent from Indiana's 6th Congressional District, the area
I represent.
The Force family has been a fixture and pillar of the
Bartholomew County community for many, many years and
appreciate the wisdom of his testimony today. We had an
opportunity yesterday to speak at some length about the
challenges that we face and I am going to ask you to expand a
little bit upon part of that conversation today.
You know, to the average citizen sitting out here watching
this discussion, one, if they are able to stay awake, which, it
is an important issue, but it is just a challenge, they would
ask the simple question well, wait a minute. If we don't have
enough money in these funds and we have got benefits to pay
out, why don't we just pay more and for the individual
contributors in the plan?
And if you could, Mr. Force, if you could expand a little
bit on the way that contributions have risen already in recent
years and how those have spiked, and then as you answer that
comment a little bit about whether that is a reasonable answer
moving forward.
Mr. Force. Thank you, Congressman Messer. This is a
complicated issue. You will find attached to my written
testimony a table and some graphs that I think in the Indiana
context define how the contributions have increased rather
rapidly over the past 15 years to the various multiemployer
plans of which we are part.
I would also clarify that each of these multiemployer plans
is inside of a larger collective bargaining agreement that
defines the results of a negotiation between contractors or a
contractor association and the respective building trades in
terms of what the wages, what the benefits, including pensions,
health and welfare, and other things might be. So we are
constrained by the specific terms of those collective
bargaining agreements.
We believe, certainly I believe, that the key piece that
has to be addressed is how the trustees, and trustees of the
plans include labor and management representatives as well as
the plan managers, these trustees need tools that they don't
currently have to be able to look at the entire setting of what
is going on--the number of retiree beneficiaries, the number of
pending beneficiaries, the number of future beneficiaries,
contributors to the plans through their employers, and the
assets of the plans themselves--to determine what kinds of
benefits can be provided, how those benefits can be best
protected to match the assumed rates of returns in those plans
to what can be achieved in the marketplace at an acceptable
level of risk.
Those tools are not out there, and that is what we need. I
am not here to suggest a bailout or a guarantee. What we need
is tools so that our trustees who are close to the action can
make decisions in the best interests of our employees and their
beneficiaries.
Mr. Messer. Yes, thank you. I will just follow up with this
additional question. You know, out where I live in Indiana's
6th Congressional District, 19 rural counties, strong
manufacturing base, the number one issue is jobs. Folks are--
want a healthy economy. They want the opportunities that will
come with that healthy economy and believe that we ought to be
able to go into work and try to create an environment with more
jobs.
Could you talk or comment just in a minute about how the
uncertainties connected with these plans have influenced your
business decisions at all over the course of the last several
years?
Mr. Force. Few things light a fire under your ambition like
the condition of these plans. I would say that, but quite
honestly, we have a terrific cadre of construction workers that
are part of our team. They are efficient, they are hard-
working, they are productive. They have their own families to
take care of and we are highly incented to do a good job for
our customers to be competitive, to get the jobs done timely.
And keep in mind that in the construction industry, from
the day that you start a project, the whole objective is to
work your way out of a job and that those employees in the back
of their mind are always thinking: ``Where is our next job?
What is next?''
So that goes to the fundamental reason for these plans
existing. Our people need to be able to take their skills and
their benefits package with them from employer to employer. So
in Indiana, where we are kind of a shirt sleeve society, we are
working hard to make sure that everyone gets their job done
efficiently. And we need a way to keep these programs viable so
that our people have a reason to be attracted into these plans
and that we as employers do not have this very black cloud
hanging over us.
Mr. Messer. Thank you.
Chairman Roe. Mr. Tierney?
Mr. Tierney. Thank you, Mr. Chairman. I am going to yield
my time to Mr. Scott.
Mr. Scott. Thank you, and I thank the gentleman for
yielding.
Mr. Gotbaum, when the market collapsed all the programs
suffered. The market has come back. Is there any reason why the
program--why the plans did not benefit from the stock market
recovery?
Mr. Gotbaum. Mr. Scott, plans--all plans suffered when the
market collapsed and it is true that the market has come back,
but what is not true is that it has come back so much that
plans aren't behind the eight ball. They are and so----
Mr. Scott. Are there any stocks that they could not invest
in, the pension-eligible investments where the market went up
but those--went up with stocks that the pensions were not able
to invest in?
Mr. Gotbaum. Mr. Scott, I am not aware that the particular
investment practices of multiemployer plans kept them from
participating in the recovery. I think the fact is that
although we have had a market recovery for which we are all
very grateful, it has not been yet a strong enough recovery so
that plans are in the situation where they had hoped to be 5
years ago.
Mr. Scott. Has there been any suggestion that plans invest
mostly in insurance products where the rate of return could be
more predictable and the vagaries of the market would be borne
by the insurance companies rather than the plans themselves? I
mean, they sell annuities all the time so this wouldn't be
anything new.
Mr. Gotbaum. Yes, Mr. Scott. There are some plans--I
don't--I can't tell you how many in the multiemployer universe
versus not. There are some plans which have decided that they
are better off, rather than taking all of the risks of
investing in the stock market to, in effect, dedicate some of
their resources and cap the risk by buying an insurance product
or staying with bonds or with something like that.
There are plans that do that. However if you do that, when
you are underfunded, in effect, you are locking in your
underfunding. And so the number of plans that have chosen to do
that so far is limited.
Mr. Scott. Well, you lock in underfunded. You also limit--
cap your risk. If you are still out there on a limb things
could get worse.
Mr. Gotbaum. They could, but I think to the credit of
plans, what we see is that plans want to get out. They want to
get whole. They are not trying to lock in losses and just come
to the doorsteps of the PBGC. They are trying to solve their
problems on their own.
Mr. Scott. What is the typical annual contribution? We are
talking about tax fees in the $9 going up to $13. What is the
typical contribution?
Mr. Gotbaum. Mr. Scott, the range of contributions is all
over the lot because there are, for example, the UFCW plans,
which are good plans, okay, are plans for workers who, frankly,
who earn less than some of the construction workers that work
for Mr. Force.
And so, the range of contributions you get depends in part
on what the industry can afford, et cetera, so there is a wide
range. If it would be helpful, I am happy to submit----
Mr. Scott. You are charging everybody the same thing and if
you are talking about $100 annual contribution, a $13 fee would
be overwhelming. If you are talking about a $2000 or $3000,
$5000 contribution, then the fees in this range wouldn't be
troublesome.
Mr. Gotbaum. Mr. Scott, you are absolutely right that as I
said before I think the PBGC program does need to be rethought.
It needs to be made fairer and it needs to be done in a way
that makes sure that the PBGC is always there as a safety net.
Mr. Scott. Is there any thought in limiting the liability
of small companies in a multiemployer plan so that if you are a
small company your liability can't be--your ultimate liability
can't be say more than twice your portion or something like
that? Rather than the small company being involved, getting
caught with a overwhelming debt that they just can't pay?
Mr. Gotbaum. Mr. Scott, I don't know. Let me--it is
certainly something worth thinking about. Let me circle back
for the record if I may on that one.
Mr. Scott. Thank you.
Chairman Roe. I thank the gentleman for yielding.
Mr. Hinojosa?
Mr. Hinojosa. Thank you, Mr. Chairman.
I have to agree with Rob that I am very impressed with our
witnesses and the knowledge that you have on these pension
plans and your willingness to try to work out something for the
benefit of the employees, and I compliment each and every one
of you.
My first question is to Josh Gotbaum. Mr. Gotbaum, in your
testimony, you indicated that Congress has an opportunity
within the next 2 years to preserve and enhance the
multiemployer plans on which so many small businesses and
workers depend.
Would increasing the premium paid to PBGC by the
multiemployer plans improve their liabilities? And if yes, how
much do you believe premiums could be increased without unduly
burdening employers and their plans?
Mr. Gotbaum. Mr. Hinojosa, thank you for asking that
important question and I am--we think that it is important,
just for the same reason that it is important that pension
plans be financially sound, that PBGC be financially sound so
that we can provide the safety net, so that we can help plans
in the ways that they have asked.
And that clearly is--would involve an increase in the level
of premiums. As Mr. Scott suggested, it probably ought to be
just not an across-the-board increase, that we ought to think
about what is fair and what makes sense based on individual
plans and individual workers, et cetera.
And we are not at a position to tell you yet what that
ought to be. We hope to work that out as part of your
discussion. What I will say is that, how much that is also
depends on what tools you give plans to avoid coming to the
PBGC.
If all of the plans that right now say they don't think
they can get out of red status, if all those plans come to the
PBGC, then I don't even want to mention how high that number is
going to be. Okay? But it is a very high number. It is a number
that is high enough so that we would say it is a problem for
plans.
However, what we have learned thus far is that if the plans
get--if some of the plans that are in distress get tools to
help solve their problems on their own to avoid coming to the
PBGC, then the resulting premium increase is less, ought to be
less, ought to be much less.
And so what we hope to do over the months ahead is to work
with you all and say if you agreed to the kinds of changes that
for example the panel has discussed and that NCCMP has
discussed, then it looks like what PBGC would need is this.
That is the discussion we hope to have with this committee
after we have had a chance to sharpen our pencils a bit.
Mr. Hinojosa. Thank you for your response. We will work
with you.
I would like to ask the next question to Director Jeszeck
and also to Mr. Perrone. See if you can respond.
If Congress permits plans to reduce certain retiree
benefits, what process should the plan have to follow? And
secondly, how do we make sure that the retirees are given an
opportunity to submit their views and receive fair
consideration?
Mr. Jeszeck. Well, Congressman, in the report which will be
released later this month, we do look at some of these issues.
I think in any case, any reforms that Congress chooses to
implement should take into account the interests of all the
stakeholders and certainly that would be retirees, it would be
current workers; that that would be the plans, the employers,
PBGC, the taxpayer.
So in all those cases, those interests should be taken into
account. Clearly, any change that would involve the reduction
of benefits would be a very significant one. It certainly, it
cuts to the heart of ERISA, so we would think that anything
that would happen in that case would have to have sufficient
protections, the potential for review, and input from the
affected parties.
Mr. Hinojosa. Do you--Mr. Perrone, can you make your
response short?
Mr. Perrone. I don't think that retiree benefits of people
that are already retired should be reduced; however, in some
plans that are in a position that are insolvent, if ultimately
they are going to be reduced and only in those cases would you
take a look at potentially having any reduction that would take
place at all.
Mr. Hinojosa. Thank you.
Thank you, Mr. Chairman.
Chairman Roe. Thank the gentleman for yielding.
I thank the panel for again a great discussion. We will
continue this discussion until we have the tools, Mr. Force, to
be able to help solve this problem.
I will now yield to our ranking member for his closing
comments.
Mr. Andrews?
Mr. Andrews. I, Mr. Chairman, share your praise for the
panel. Really, well done, very helpful to us.
Ultimately, this issue is about the small businesses and
middle-class retirees of the country. We are not going to have
a true and robust economic recovery if small businesses are not
generating jobs because they account for--people like Mr. Force
account for a majority of the jobs created in the private
sector of this country every year.
And we are not going to have a robust recovery if middle-
class retirees aren't buying automobiles and refrigerators and
taking their family to restaurants and do the things that
people can do when they have a decent pension, decent income.
Reconciling and aligning the interests of the employers who
need to be competitive to be prosperous, the retirees who
definitely need a guarantee of that income for the rest of
their lives, and the taxpayers who absolutely need immunity
from any responsibility to rescue these funds because that is
something we don't want to do, is an achievable goal, and I
think we have heard again, many of the aspects of how to
achieve that goal.
It involves looking at the PBGC's premium structure in a
fair and balanced way. It involves looking at financing
vehicles would help would help red zone plans, as those Kroger
plans did, climb to green zone status by taking advantage of
lower interest rates while they are still with us.
It involves painful but fair choices within plans to
restructure who gets benefits when and under what
circumstances. I also, by the way, believe it involves a
reconsideration of bankruptcy code and making sure that in
bankruptcy, plans are treated fairly in their status, which we
don't presently have.
And finally, I think it includes what you might call a
sunny day fund where plans that are prospering and wish to make
higher contributions than the present ceiling would allow are
in fact given that opportunity.
I can never think of a good reason why an ERISA trust
should not be able to put money away for the retirement or
health care of its members. I just think anytime somebody wants
to do it, we ought to encourage them to do that.
So this was very instructive.
I say to the chairman, we appreciate the spirit in which he
and Chairman Kline have approached this problem. We would like
to do what the stakeholders did in the coordinating committee,
which is to listen to each other, respect each other's various
points of view, and come to a good solution.
So I thank you for the hearing. I look forward to our
continued progress in this regard.
Chairman Roe. Thank you, Mr. Andrews.
And Mr. Gotbaum, I think laid out the ultimate Catch-22.
Director Gotbaum did when he talked about the problem that we
are looking at. The problem is it is too expensive to get out
and it is too expensive to stay in.
That is basically how you described that and I think so
that our viewers and listeners can understand it, I looked at
my own 401(k) 5 years ago when I ran for Congress and it is a
very conservatively run plan with mutual funds, index funds,
bonds, and cash. It is exactly where it was 5 years ago.
If--I mean, almost to the nickel of where it is 5 years
ago. I haven't touched it, haven't taken any money out of it,
but if I am a pension plan and I have to pay benefits out and I
don't have any money going in, I haven't paid any money back
into it, there is less money there to go up when the market
goes up.
And that is one of the reasons I think these plans are in
trouble is that they have decreased the amount of money that
they have even with the market returning. That is why the red
zone plans are going to have a very difficult time.
Second thing that happened is this particular recession as
severe as it was hit certain aspects of the workforce much
harder. For instance, Mr. Force, I saw that in my own community
where we were issuing small community of 600--I mean, 60,000
people, we were issuing $200 million a year in building permits
and I knew that our construction industry was doing very well
and then in 2008 or 2009, I talked to friends of mine that
haven't built a house in 2 or 3 years now.
So it affected them dramatically because the retirees that
are out there are still taking their money out, and I think
that pretty much lays it out--and Mr. Andrews did a very good
job of laying out, I think, the solutions for this, and Mr.
Perrone, you made a couple of great comments, I think, one
about the acts of the Federal Reserve. I think that is true,
what you said.
And secondly, I think we should strive in everything we do
to maintain current recipients their--I mean, you have to. They
are out there. They are 70 years old. They have worked 30 or 40
years in the trades. I think that ought to be the last thing
that we do and I think we can do that. I agree with you on
that.
The other thing that Mr. Andrews brought up is we haven't
voided the economic cycle. These ups and downs will come and
go. They have for the 200 and plus years this country has been
here. So we are going to have another recession sometime along
the way hopefully it is not nearly as severe as this one is. So
that is why you should be able to not over fund, but put some
rainy day money away so you have those funds available when the
market goes down.
I think I have a pretty clear idea about what we need to
do. It is not going to be easy and I think we will have a
consensus both sides of the aisle are very--we are very
committed to try to make this work and we have I think because
part of the Pension Protection Act is--some parts of it I think
are out in 2014, this Congress, the 113th, it is going to be on
our shoulders to do something.
So I want to thank you for being here. I have learned a lot
again from this, and I appreciate you taking your time to come
here.
With no further comments, the hearing is adjourned.
[Additional submissions of Chairman Roe follow:]
Prepared Statement of the U.S. Chamber of Commerce
The U.S. Chamber of Commerce would like to thank Chairman Roe,
Ranking Member Andrews, and members of the Subcommittee for the
opportunity to provide a statement for the record. The topic of today's
hearing--challenges facing multiemployer pension plans--is of
significant concern to our membership.
As sponsors of multiemployer defined benefit plans, a number of
Chamber members have a substantial interest in the viability of the
multiemployer plan system. Funding for multiemployer plans comes
entirely from employers, who are at financial risk when a plan faces
funding problems. Therefore, funding and accounting issues create
substantial challenges not just in maintaining the plan but also for
the employers' business.
While all defined benefit plans have been negatively impacted by
the financial crisis, certain multiemployer plans have been
particularly hard hit as the current financial crisis exacerbates long-
term funding problems resulting from shifting demographic trends and
financial problems within certain industries. While current law
requires insolvent employers to pay their share of liability upon
withdrawal from the plan, most bankrupt employers are unable to
realistically meet that liability. Therefore, the remaining employers
become financially responsible for the retirement liabilities of the
``orphaned'' retirees. This system results in untenable contribution
levels for the remaining employers, which can force them into
insolvency as well.
Moreover, in a multiemployer plan, there is joint and several
financial liability between all employers in the plan. Therefore, when
one employer goes bankrupt, the remaining employers in the plan are
responsible for paying the accrued benefits of the workers of the
bankrupt employer. Because of this liability, there is the fear of an
employer being ``the last man standing'' or the last remaining employer
in the multiemployer plan.
Reform of the Multiemployer Plan System is Necessary. The Chamber
supports multiemployer funding reform. Without such reform, many
employers--including many small, family-owned businesses--are in danger
of bankruptcy.
In April, the Chamber released a white paper entitled ``Private
Retirement Benefits in the 21st Century: A Path Forward.'' The paper
makes recommendations for all retirement plans and includes a special
section for multiemployer plans to address the unique challenges faced
by them. In that paper, we offered the solutions detailed below.
Withdrawal liability is a great burden that may force employers to
stay in multiemployer plans even when it is not economically feasible.
The Chamber feels that a comprehensive solution must be sought to allow
for a more robust multiemployer plan system and to maintain equity
among contributing employers.
Another problem arises from the nature of multiemployer plan
funding. Benefit increases are not anticipated in funding but are often
granted at contract renewal. These increases often apply not only to
active workers, but also to retirees. This practice may put the plan
into an underfunded situation because the benefit increases cause a
``loss'' for the year. This loss is generally funded over a long
amortization period, such as 20 years. While this additional expense
may be projected by the plan to be affordable for active employers that
are contributing a negotiated contribution rate (usually dollars per
hour or a percentage of pay), a withdrawing employer may be immediately
liable for its share of the underfunding.
In order to prevent bankruptcy among remaining employers in
multiemployer plans and unanticipated bankruptcy on withdrawing
employers, comprehensive funding reform should focus on allowing plans
to be financially solvent on an ongoing basis. Examples of such
provisions include, but are not limited to, additional tools for
trustees to maintain solvency, partitioning plans and promoting mergers
and acquisitions between certain plans.
Even for plans that are not at financial risk, changes could ensure
that they remain financially viable. For instance, the assumptions used
to determine withdrawal liability should be consistent with those used
to determine contribution requirements. They should not be more
conservative, forcing the withdrawing employer to subsidize active
employers. In addition, benefit increases should be moderated. In the
past, benefits were increased if the plan became overfunded and, as
noted above, granted even when the benefit increase would make the plan
underfunded. This prevented plans from being able to fall back on extra
contributions in later years. As a result, any future underfunding
would require additional contributions by current employers. Reform
efforts should focus on moderating benefit increases so that they are
not made simply because the plan is overfunded. One way to do this
would be to require disclosure of the amount of liability associated
with benefit increases--not just contribution increases.
Finally, the procedural rules that allow employers to arbitrate
disputes over the amount of withdrawal liability require change, at
least with respect to small employers. For example, the time frame for
requesting arbitration is very short, and a small employer, who may not
have significant administrative resources, is likely to miss it.
The suggestions above are just examples of steps that policymakers
can take. The Chamber is committed to addressing multiemployer funding
issues and is willing to discuss any viable ideas that allow
participating employers to remain financially solvent.
The Chamber Supports the Recommendations of the Retirement Review
Commission. On February 19, the Retirement Security Review Commission
of the National Coordinating Committee for Multiemployer Plans issued a
report entitled Solutions Not Bailouts. Several members of the Chamber
participated in the Commission and contributed to the findings of the
report. The proposals in the report go a long way in addressing certain
serious issues in the multiemployer plan system. As such, the Chamber
fully supports the recommendations and believes that the
recommendations can provide a critical foundation for reform of the
multiemployer pension system.
Multiemployer Pension Reform Should Include Limitations on
Withdrawal Liability. In addition to the recommendations from the
Retirement Review Commission, the Chamber believes that additional
reforms are needed to address employer concerns. For example, we
recommend that limitations be placed on the amount of withdrawal
liability that an employer can assume. There are many of our members
who have gotten estimates of withdrawal liability that exceed the net
worth of the company. Clearly, this is an outcome that was never
contemplated when withdrawal liability was implemented and should be
rectified.
Limiting withdrawal liability is one example of additional reforms
that will be needed. The Chamber anticipates that there will be
additional recommendations as we move forward with these discussions.
Reform of the Multiemployer System is NOT a Union Bailout. As
mentioned above, contributions to multiemployer plans are funded
entirely by employers, not unions. Therefore, it is employers at
financial risk, not unions. Moreover, reforms to multiemployer plans
have no financial impact on unions or their activities. Misleading
characterizations, such as this one, hinders progress that is essential
to implement much-needed reform.
Without a real reform to the multiemployer system and resolutions
to the underlying problems, more employers will be forced into
bankruptcy and more workers will be left without a secure retirement.
We stand ready to work with Congress and all interested parties to
resolve these issues as soon as possible. Thank you for your
consideration of this statement.
______
Prepared Statement of the National Electrical Contractors Association
The National Electrical Contractors Association (NECA) appreciates
the opportunity to submit a statement for the record ahead of the
Subcommittee on Health, Employment, Labor and Pensions of the House
Education and the Workforce Committee's hearing entitled ``Challenges
Facing Multiemployer Pension Plans: Reviewing the Latest Findings by
PBGC and GAO.'' NECA commends the Committee for holding a hearing on
this important subject to examine the health of the multiemployer
pension system, analyze the impact of the Pension Protection Act of
2006 and to discuss short term and long term strategies moving forward.
NECA is the nationally recognized voice of the electrical
construction industry, comprised of over 80,000 electrical contracting
firms, employing over 750,000 electrical workers and producing an
annual volume of over $125 billion in electrical construction. NECA
represents 119 U.S. chapters in addition to several affiliated
international chapters around the world and is signatory to 359 local
unions. NECA member companies contribute to both a national and local
pension plans.
The construction industry has a substantial stake in the health and
welfare of multiemployer pension plans. The industry comprises 54
percent of the total number of plans and provides coverage to 37
percent of the 10 million employees participating in multiemployer
plans.
As businesses around the country begin to recover from the
recession, the economic recovery in the construction industry remains
stagnant. We have been plagued with uncertainty in the marketplace,
high unemployment, an aging workforce, and unsustainable pension
contributions, coupled with the significant investment losses and
volatile equity markets. All of these forces have combined to create a
perfect storm that has put many multiemployer pension plans at risk. At
a time when competitive circumstances require NECA contractors to be
flexible in their cost and crew structure, their pension funding
challenges have a tremendous impact on the day-to-day decisions of NECA
members and their ability to stay in business.
According to its 2012 exposure draft, the PBGC paints a bleak
picture for multiemployer pension plans as their 10-year projections of
the multiemployer program nearly all result in declines. In fact,
according to its recent report to Congress dated January 22, 2013
entitled, ``PBGC Insurance of Multiemployer Pension Plans Report,'' the
agency states that it is ``at risk of not having the tools to help
sustain multiemployer plan or the funds to continue to pay benefits
beyond the next decade under the multiemployer insurance program.''
NECA is pleased to report to the Committee that the experience for the
vast majority of the electrical construction industry's pension plans
projects a decidedly different and positive story.
Since 1946, NECA contractors have contributed to the National
Electrical Benefit Fund (NEBF), a viable pension plan which benefits
participants, retirees and surviving spouses. This successful and well-
managed plan is the third largest Taft-Hartley Pension Plan in the
United States. It serves over 502,000 participating individuals, with
119,120 of those individuals receiving either a retirement or surviving
spouse benefit. The Plan has over 8,000 contributing employers,
resulting in approximately 370,000,000 hours worked annually in covered
employment. In 2010, NECA companies contributed approximately $370
million to the National Electrical Benefit Funds (NEBF) with total
assets over $11 billion. This total does not include contributions to
local pension plans whose aggregate value is in excess of $15 billion.
According to NECA's Defined Benefit Plans Study, the NEBF has remained
well-funded through the great recession of 2008 and since the inception
of the financial status zones under the Pension Protection Act of 2006,
the NEBF has and continues to be in the Green (Safe) Zone. The NEBF is
funded 84.7 percent of all accrued benefits which means that the plan
still carries a certain amount of unfunded vested liabilities. NECA
attributes the NEBF's current secure status to the conservative,
professional management of the plan and highest level of responsibility
for those they serve. More specifically, the NEBF has a ``benefits
policy'' that was put in place in the late 1980's that prohibits
increases in the benefit level if a withdrawal liability exists. This
rule has undoubtedly created a level of stability and security with the
plans funding levels.
Approximately 50 percent of NECA's member companies contribute to
112 local or regional defined benefit plans that exist in 165 local
areas throughout the country and cover more than 174,000 workers. Based
on current market values, 75 percent of the assets of all these plans
are held in plans that are in the green zone, and 70 percent of the
participants are covered by green plans.
As laid out in NECA's Defined Benefit Plan Study, the data
indicates that a serious but not overwhelming problem exists for our
local plans. However, permanent reform measures are needed to ensure
all employees of NECA contractors are secure in their retirement.
Comprehensive pension reform is NECA's top priority for the 113th
Congress, as the multiemployer funding rules contained in the Pension
Protection Act of 2006 (PPA) will sunset on December 31, 2014.
Accordingly, NECA has been preparing to address this issue for nearly
two years, discussing long term solutions with NECA members that serve
as trustees on local multiemployer pension plans. NECA has also entered
into a partnership sponsored by the National Coordinating Committee for
Multiemployer Plans (NCCMP), the Retirement Security Review Commission,
a broad coalition of labor and management stakeholders (which includes
NECA and the International Brotherhood of Electrical Workers), subject
matter experts, and actuaries tasked with crafting a realistic proposal
that provides significant recommendations for comprehensive pension
reform.
The NCCMP Retirement Security Review Commission Report presents
tools that will ensure these plans will have the tools available to
provide a reliable retirement benefit to the millions of Americans in
these plans while and enabling the employers who fund them to remain
strong contributors to the national economy. The proposal offers
recommendations that address the deeply troubled plans heading toward
insolvency, includes technical provisions that will improve the current
system and offers a new flexible plan design options aimed to reduce
employers risk and eliminate withdrawal liabilities.
Over the past decade, Congress has enacted legislation that
provided some relief to multiemployer pension plans and helped
companies recover losses incurred as a result of the financial crisis.
However, more changes are necessary to improve the health and viability
of these plans. NECA is thankful this Committee is providing a platform
for a meaningful discussion addressing the problems with the current
multiemployer pension system and the opportunity to tackle
comprehensive pension reform. NECA appreciates the opportunity to
submit this statement for the record in conjunction with this hearing
and looks forward to continuing to work with the Committee on this
important issue.
______
[Questions submitted for the record and their response
follows:]
U.S. Congress,
Washington, DC, April 17, 2013.
Hon. Joshua Gotbaum, Director,
Pension Benefit Guaranty Corporation, 1200 K Street, NW, Washington, DC
20005.
Dear Director Gotbaum: Thank you for testifying at the March 5,
2013 Subcommittee on Health, Employment, Labor, and Pensions hearing
entitled, ``Challenges Facing Multiemployer Pension Plans: Reviewing
the Latest Findings by PBGC and GAO.'' I appreciate your participation.
Enclosed are additional questions submitted by committee members
following the hearing. Please provide written responses no later than
May 1, 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. The Pension Benefit Guaranty Corporation's (PBGC) report on its
multiemployer insurance program states that its Pension Insurance
Modeling System will be modified in the future. Apparently, the current
model overestimates both the number of active participants and per-
capita contributions. So, the reality could be worse than the situation
you presented in your testimony. When and how will these projections be
revised?
2. The Employee Retirement Income Security Act of 1974 (ERISA)
requires the PBGC to examine whether premiums are sufficient to support
the benefits guarantee; if not, the PBGC is required to make
recommendations to Congress. The Pension Protection Act of 2006 (PPA)
also invited the administration to make recommendations in the context
of the PPA report on the multiemployer system. These reports were
submitted to Congress on January 29, 2013; however, neither contained
recommended changes. Do you expect PBGC to make suggestions in the
future?
3. Throughout your testimony, you acknowledge some multiemployer
plans face significant funding problems. You state that ``the failure
of one plan and resulting imposition of withdrawal liability on its
contributing employers can have a ripple effect on many other plans.''
How quickly could this ripple effect take hold, causing severe funding
problems for many more plans?
questions submitted by congressman robert c. ``bobby'' scott (d-va)
1. What recommendations do you have for limiting the ultimate
expense for an employer with a small portion of a multi-employer
pension plan fund in a scenario where an employer with a major portion
of that fund goes under?
2. What recommendations do you have regarding risk-based premiums,
where funds in the red zone pay higher premiums than those in the
yellow zone, and in the same way, funds in the yellow zone pay higher
premiums that those in the green zone?
3. What is the present limitation on what an employer contributes
to its multi-employer pension fund? What recommendations do you have
for a contribution amount in excess of what is required, in order to
offset funding challenges that a plan may face in the future?
______
Director Gotbaum's Response to Questions Submitted for the Record
QUESTIONS SUBMITTED BY CHAIRMAN ROE
1. The Pension Benefit Guaranty Corporation's (PBGC) report on its
multiemployer insurance program states that its Pension Insurance
Modeling System will be modified in the future. Apparently, the current
model overestimates both the number of active participants and per-
capita contributions. So, the reality could be worse than the situation
you presented in your testimony. When and how will these projections be
revised?
Like all models of complicated systems, PBGC's models are
projections--the actual results are never exactly what was projected.
Sometimes they turn out better and sometimes worse. At this point, we
cannot say for sure whether the actual developments will be better or
worse than our projections, but it is certainly true that there are
many reasons why they could be worse.
We believe that PBGC's pension insurance modeling systems--the
Single-Employer Pension Insurance Modeling System (SE-PIMS) and the
Multiemployer Pension Insurance Modeling System (ME-PIMS)--are the best
tools available by far for information and projections concerning the
defined benefit pension-plan universe. Furthermore--although the
results of those projections are disturbing--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 are doing so and will continue to do so.\1\ 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.\2\ 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
reviewing and incorporating the consultant's suggestions for
improvements. Some of the changes will be implemented in the coming
year and others in future years. We will continue to analyze the issues
using ME-PIMS throughout this process, as it remains the best tool for
doing so.
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\1\ Over the years, 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.
\2\ ME-PIMS was designed in 2007, before implementation of the
Pension Protection Act of 2006 (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.
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The Moving Ahead for Progress in the 21st Century Act (MAP-21)
requires an additional independent annual peer review of PBGC modeling
systems.\3\ 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.
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\3\ 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.''
2. The Employee Retirement Income Security Act of 1974 (ERISA)
requires the PBGC to examine whether premiums are sufficient to support
the benefits guarantee; if not, the PBGC is required to make
recommendations to Congress. The Pension Protection of Act of 2006
(PPA) also invited the administration to make recommendations in the
context of the PPA report on the multiemployer system. These reports
were submitted to Congress on January 29, 2013; however, neither
contained recommended changes. Do you expect PBGC to make suggestions
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in the future?
As I testified before the Committee, PBGC can and will suggest how
premiums could be reformed. However, since the future of PBGC's program
is tied so closely to other potential changes in the multiemployer
system, we think the right thing is to do so as part of the broader
review of potential changes for multiemployer plans as a whole.
Discussions for further reforms should start with consideration of the
compromise proposals now being developed jointly by the businesses and
unions that form the multiemployer system. PBGC and the other ERISA
agencies look forward to working with Congress and the multiemployer
community as this important dialogue evolves.
3. Throughout your testimony, you acknowledge some multiemployer
plans face significant funding problems. You state that ``the failure
of one plan and resulting imposition of withdrawal liability on its
contributing employers can have a ripple effect on many other plans.''
How quickly could this ripple effect take hold, causing severe funding
problems for many more plans?
Any possible ripple effect depends upon many factors. No one knows
how quickly employers might respond to troubles in severely distressed
plans by withdrawing from healthier ones. We do know that medium- and
large-sized employers often participate in many plans. If the
contribution burdens in one or more of these plans become so great that
they force an employer out of business, that employer's participation
in some plans may be significant enough to cause a mass withdrawal of
all employers from those plans. For these reasons, among others, it
would be better to address the problems facing the multiemployer system
sooner rather than later. [0]
QUESTIONS SUBMITTED BY REPRESENTATIVE SCOTT
1. What recommendations do you have for limiting the ultimate
expense for an employer with a small portion of a multiemployer pension
plan fund in a scenario where an employer with a major portion of that
fund goes under?
A contributing employer that remains in a plan after another
employer goes out of business may become responsible for the unfunded
benefit liabilities attributable to participants of the other employer.
This could, for example, increase the contributing employer's funding
costs under the plan. In addition, if the contributing employer later
withdraws from the plan, it could increase the employer's withdrawal
liability. However, this is subject to several limitations: de minimis
amounts are excused; annual withdrawal liability payments are limited
to the employer's highest contribution rate (and average contribution
units) in the prior 10-year period; and payments are owed for no more
than 20 years (unless there is a mass withdrawal).
The effects of the loss of a major employer may be offset by other
actions as well, such as the plan's merger with another plan that has a
stronger employer base. Current law also provides for the partition--or
payment by PBGC--of liabilities (up to the maximum guarantee)
attributable to employers that withdrew from the plan due to
bankruptcy. This tool has been rarely used and PBGC lacks the financial
resources to help many plans directly in this way.
2. What recommendations do you have regarding risk-based premiums,
where funds in the red zone pay higher premiums than those in the
yellow zone, and in the same way, funds in the yellow zone pay higher
premiums than those in the green zone?
Even with the premium increases under the Moving Ahead for Progress
in the 21st Century Act (MAP-21), PBGC projects that current PBGC
multiemployer plan premiums will eventually be insufficient to support
the guarantee and the multiemployer insurance program. Premium reforms
are a necessary part of any solution to both help preserve plans and
provide the safety net for failed plans that ERISA intended; they
should be analyzed as part of and in the context of the broader changes
for multiemployer plans.
3. What is the present limitation on what an employer contributes
to its multiemployer pension fund? What recommendations do you have for
a contribution amount in excess of what is required, in order to offset
funding challenges that a plan may face in the future?
These are issues on which PBGC regularly consults with the Treasury
Department for their expertise.
As background, we note that at the end of the 1990s, many plans
were considered ``fully funded'' so that no deductible contributions
were permitted. To protect the deductibility of negotiated
contributions, such plans were often compelled to increase benefits,
which diminished the cushion of overfunding (plans could also decrease
contributions, but this was less common). At that time, the limit on
deductible contributions was generally 100% of the accrued liability
determined under the plan's funding method (alternative determinations
limited even that maximum level).
Congress loosened the rules marginally in 2001, and raised the
deductible limit still further under the Pension Protection Act of 2006
(PPA), which allowed employers to make deductible contributions as long
as assets are less than 140% of current liability. (During the 2000s,
current liability, which is based on 30-year Treasury bond rates, has
been significantly higher than plans' accrued liability, which is
determined using higher assumed rates of return.) Increases in the
deductible limit in the 2000s decade came too late, however, as plan
underfunding levels increased rapidly. By 2010, overfunded plans
covered less than 1% of all multiemployer participants.
______
[Whereupon, at 11:17 a.m., the subcommittee was adjourned.]